Intel Corporation 10-Q Summary: Quarter Ended September 26, 1998
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 26, 1998, and the nine-month period ended on that date. Intel Corporation, a Delaware corporation, is the world's leading manufacturer of microprocessors and chipsets. The filing includes unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations.
Key Financial Metrics
| Metric | Q3 1998 | Q3 1997 | 9 Months 1998 | 9 Months 1997 |
|---|---|---|---|---|
| Net Revenues ($ millions) | $6,731 | $6,155 | $18,659 | $18,563 |
| Net Income ($ millions) | $1,559 | $1,574 | $4,004 | $5,202 |
| Diluted EPS ($) | $0.89 | $0.88 | $2.27 | $2.89 |
| Operating Income ($ millions) | $2,156 | $2,289 | $5,543 | $7,494 |
| Gross Margin (%) | 53% | 58% | 52% | 61% |
| Cash from Operations ($ millions) | N/A | N/A | $5,461 | $6,533 |
| Cash & Equivalents ($ millions) | $2,900 | N/A | N/A | N/A |
| Total Investments ($ millions) | $7,308 | N/A | N/A | N/A |
| Short-term Debt ($ millions) | $162 | N/A | N/A | N/A |
| Long-term Debt ($ millions) | $583 | N/A | N/A | N/A |
Note: Total Investments includes Short-term investments ($5,519M), Trading assets ($268M), and Long-term investments ($1,789M) as of Sept 26, 1998.
Material Changes vs. Prior Period
- Revenue Growth: Q3 1998 revenues increased 9% year-over-year, driven by higher processor volumes and a shift in mix toward P6 micro-architecture products (Pentium II, Celeron). Nine-month revenues were essentially flat due to lower processor prices offsetting volume gains.
- Margin Compression: Gross margins declined to 53% in Q3 1998 from 58% in Q3 1997. This was primarily due to the cost of purchased components in the Single Edge Contact (SEC) cartridge for Pentium II processors, partially offset by cost reduction efforts.
- Operating Expenses: Operating expenses rose 10% in Q3 and 9% for the nine months, driven by increased R&D spending and marketing costs (Intel Inside). A one-time charge of $165 million for purchased in-process R&D related to the Chips and Technologies acquisition impacted the nine-month period.
- Acquisitions: Intel acquired Chips and Technologies, Inc. for approximately $430 million and Digital Equipment Corporation's semiconductor operations for approximately $625 million during the first nine months of 1998.
- Share Repurchases: The company repurchased 64.4 million shares of common stock for $5.2 billion during the first nine months of 1998.
Guidance, Outlook, and Risks
- Q4 1998 Guidance: Management expects Q4 1998 revenues to be up approximately 8% to 10% from Q3 1998 ($6.7 billion). Gross margin is expected to increase a couple of points from the Q3 level of 53%.
- Capital Expenditures: Full-year 1998 capital expenditures are expected to be approximately $4.2 billion, down from the previous guidance of $4.5 to $4.7 billion, due to facilities realignment.
- Year 2000 (Y2K) Issues: Intel estimates total Y2K program costs will not exceed $250 million. Approximately 85% of critical manufacturing systems are Y2K capable. The company notes that the greatest risks lie with third-party infrastructure and suppliers rather than internal systems.
- Legal Proceedings: Intergraph Corporation has filed suit alleging patent infringement and antitrust violations, claiming potential damages in the billions. Intel disputes these claims and intends to defend vigorously. Management does not currently believe the outcome will have a material adverse effect.
- Future Acquisitions: Intel announced a definitive agreement to acquire Shiva Corporation for approximately $185 million and a $500 million minority investment in Micron Technology, Inc.
Investor Verification Checklist
- Verify the impact of the SEC cartridge costs on future gross margins as product mix shifts.
- Monitor the status of the Intergraph litigation and potential financial exposure.
- Assess the progress of Y2K remediation for critical suppliers and infrastructure dependencies.
- Review the integration of Chips and Technologies and Digital Equipment Corporation assets.
- Track the execution of the $4.2 billion capital expenditure plan and its effect on manufacturing capacity.