INTC

Intel Corporation 10-Q Summary: Period Ended June 27, 1998

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 27, 1998, and the six-month period ended on that date. Intel Corporation, a Delaware corporation, is a leading manufacturer of microprocessors and related semiconductor products. The filing includes unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations.

Key Financial Metrics

Note: Total Debt includes short-term debt and long-term debt redeemable within one year plus long-term debt. Q2 cash flow figures are not explicitly provided in the cash flow statement, which reports six-month totals.

Material Changes vs. Prior Period

• Revenue: Q2 1998 revenues were essentially flat compared to Q2 1997. For the first half of 1998, revenues decreased 4% year-over-year. This was driven by lower processor prices and declining revenues from board-level products, flash memory, and embedded control products, partially offset by increased unit volumes and growth in networking and graphics products.
• Profitability: Gross margins declined significantly (from 61% to 49% in Q2) due to lower processor prices, the cost of purchased components for the Pentium II Single Edge Contact (SEC) cartridge, inventory write-downs, and higher fixed costs. Operating income dropped 31% in Q2 and 35% for the first half.
• Acquisitions: Intel acquired Chips and Technologies, Inc. for approximately $430 million and Digital Equipment Corporation's semiconductor operations for $625 million. A one-time charge of $165 million was recorded for purchased in-process research and development related to the Chips and Technologies acquisition.
• Share Repurchases: The company repurchased 44.3 million shares of common stock for $3.5 billion during the first half of 1998.

Guidance, Outlook, and Risks

• Revenue Outlook: Management expects Q3 1998 revenue to be flat to slightly up from Q2's $5.9 billion. Second-half 1998 revenue is expected to exceed the first half.
• Margin Outlook: Gross margin is expected to increase by a couple of points in Q3 from the Q2 level of 49%. The full-year 1998 gross margin target remains 52% plus or minus a few points.
• Capital Expenditures: Full-year 1998 capital spending is projected at $4.5 to $4.7 billion, slightly down from previous guidance of $5.0 billion, due to the acceleration of 0.18 micron technology in 1999.
• Legal Proceedings: Intergraph Corporation has sued Intel alleging patent infringement and antitrust violations, claiming potential damages of "several billion dollars." Intel disputes these claims and intends to defend vigorously. Management does not currently believe the outcome will have a material adverse effect on financial position, though litigation risks remain.
• Year 2000 Issues: Intel is undertaking a comprehensive program to ensure internal systems and products are Year 2000 capable. Estimated total costs are expected not to exceed $250 million. All Intel processors are deemed "Year 2000 Capable."
• Product Delays: Production of the Merced (IA-64) processor has been delayed, with sample volumes now expected in 1999 and production volumes moving to mid-2000.

Investor Verification Checklist

• Verify the impact of the SEC cartridge on future gross margins as the product mix shifts further toward Pentium II processors.
• Monitor the status of the Intergraph litigation and any potential financial impact from the claimed damages.
• Assess the execution of the delayed Merced processor launch and its effect on the high-performance server market strategy.
• Review the effectiveness of the $3.5 billion share repurchase program in offsetting dilution from stock options and warrants.
• Confirm the timeline and cost containment of the Year 2000 remediation efforts for both internal systems and supply chain.