intel corporation€¦ · intel corporation’s business is in the semiconductor industry: they...

Intel Corporation FINANCIAL STATEMENT ANALYSIS

Brandy Conrad | Understanding Financial Statements | April 2018

Introduction

Financial statements are used by creditors and investors to determine if a company is a

credit risk. Creditors will evaluate the company’s assets and debts when deciding to

extend credit to the business. If the company already has extensive debt, the creditor will

want to ensure that they will be able to repay any new debt before approving a loan or

note. Investors look at financial statements to determine if a company meets their criteria

for investing. Ideally, a company should be low risk and have a history of good returns in

order for an investor to approve the investment.

Financial statements are also used by the management and the stockholders of the

business. Management depends on financial statement analysis to know where they need

to improve to bring in more profit. Shareholders want to know that their investment in

the company will have a good Earnings per Share and that they will be paid Dividends.

The financial statements for Intel Corporation were analyzed for the period of 2011 – 2013.

The financial statements were acquired, along with the Annual Report and 10-K Report,

from Intel’s public records. An analysis of Intel’s Management’s Discussion & Analysis,

Letters from the CEO and Chairman, Balance Sheet, Statement of Equity, Income

Statement, Statement of Cash Flows, liquidity, leverage, operating efficiency, profitability

and market measures can be found in this analysis.

Intel Corporation’s 2013 10-K and Annual Report

Intel Corporation’s business is in the semiconductor industry: they design and make

microprocessors or single-circuit computer processors which process data from computer

input with information from its memory to provide an output to the user. The

microprocessors are sold to other equipment manufacturers for use in electronic devices

such as cell phones, tablets, laptops, desktop computers, servers and automobiles. Intel’s

10-K report also states that they develop and sell security and technology integration

software and support.

As the usage of the internet has grown, Intel Corporation has also been directing its

business into making computer hardware and software that makes accessing the internet

on a variety of devices easier. They are expanding into markets that use System-On-Chip

(SoC) technology like smartphones and tablets. Intel provides semi-custom and fully

custom services for customers as well.

Letters from the CEO and Chairman

The letters from management need to be read carefully because some information may be

misleading. After reading the letters from the CEO and the chairman, the following items

should be reviewed and/or investigated by the analyst:

(1) The scales of the Financial Results graphs are different: Graphs for the Net

Revenue, Diluted Earnings per Share, Dividends per Share Paid, and Cash from

Operations are presented with the letters from the CEO and Chairman. The four graphs

are presented to look similar but two of the graphs are presented in billions of dollars and

two are presented in dollars. The scales are also different. If not closely examined it may

look as if each of the graphs is comparative.

(2) The CEO states, “We are refocusing our efforts to reignite growth by driving

Intel innovation to market faster.” The analyst should carefully consider this statement

that was reiterated by the Chairman. If the products are moving to the market faster, will

this increase the potential for faulty products that may be returned or sent in for repair

under warranty agreements?

(3) The CEO gives the Earnings per Share (EPS) of $1.89. This seems like a good

indicator of the profitability of the company but the number of common shares is not

described. The Diluted Earnings per Share has also increased over the three years covered

in the MD&A. The analyst should consider how many shares of Preferred and Common

Stock are outstanding to determine how much capital was needed to generate the Net

Income used to calculate the EPS. Also, were there any earnings manipulations that may

affect the calculation?

(4) The Net Income was $9.6 billion after delivered revenue of $52.7 billion. The

analyst should carefully review the expenses and losses to determine where the $43.1

billion is being used. Does Intel have expenses that may seem extensive and could

become an issue if the market demand changes negatively? What types of losses might

Intel face?

(5) Client computing products generated $33 billion in revenue and the datacenter

business revenue grew to more than $11 million. As Intel moves into the mobile

computing niche, how will this affect their revenue and expenses?

(6) Both the CEO and Chairman mention Moore’s Law. It is difficult to imagine

what the limit for size and capability may be but innovations have far outdone current

expectations. Will this potential continue far into the future?

(7) The CEO states that corporate responsibility is a value Intel holds dear. Intel

has worked for over five years to manufacture microprocessors that are conflict-free. In

order to continue well into the future, how will they ensure that they can maintain this

goal?

(8) The Chairman states that the people who work for Intel share the public’s

concerns about safety, security, privacy and sustainability. This should lead the analyst to

consider what Intel’s culture is like: Are employees satisfied with their position in the

company? Does Intel have a steady workforce or is there high turn-over in employees that

may affect the amount Intel spends for recruiting and training? What employee benefits

are offered and are those benefits a large expense that may change over time?

(9) Intel spent $2.1 billion to repurchase shares. How likely is it that Intel will need

to reissue the shares in the future? Will they be able to repurchase shares up to the limit

that was set by the Board or are there too many unknown factors that can prevent this

from occurring?

(10) The Dividends paid to stockholders in 2013 was $4.5 billion. Based on industry

trends and potential of Intel’s new technology, will Intel be able to maintain the amount

of dividends paid well into the future? How inviting is the company to new investors?

Report of Independent Public Accounting Firm

The audit opinion given for the financial statements can be found in the Auditor’s Report.

In the opinion of Ernst & Young, LLP, the financial statements of 2012 and 2013 were

presented the financial position of Intel Corporation fairly. Ernst & Young, LLP, also

audited the internal control over financial reporting and expressed an unqualified opinion

on this matter. The unqualified opinion supports the fact that the auditing firm feels

Intel’s financial statements were reported in compliance to GAAP and that the cash

inflows and outflows were reported correctly.

The auditing group of Ernst & Young, LLC stated the standards that were used during

their auditing process. They conducted their audit following the Public Company

Accounting Oversight Board standards. They thoroughly defined what the standards

required in relation to the auditing process.

Ernst & Young’s report addressed how they assessed the accounting principles that were

used by the company and the overall financial statement presentation. They also

described what a company should do to maintain internal control over financial reporting.

Management’s Discussion and Analysis

There are seven items that should be discussed in the Management’s Discussion and

Analysis (MD&A) section of the annual report. Intel’s Annual Report addresses each of

these items.

(1) Internal and external sources of liquidity: According to the MD&A, cash

generated by operations is the primary source of liquidity for Intel Corporation. Changes

in working capital and lower Net Income resulted in an overall increase in cash from

operating activities of $1.9 billion in 2013. Other changes included lower income taxes

payable and receivable and lower inventories from selling older-generation products.

Hewlett-Packard, Dell and Lenovo accounted for 44% of the Net Revenue for 2013. Cash

and Cash Equivalents, Short-term Investments and Marketable Debt Instruments included

in Trading Assets totaled $20.1 billion. The Board of Directors has authorized the use of

commercial paper up to $300 million and they also have Long-term investments and

reverse repurchase agreements.

(2) Material deficiencies in liquidity and how they will be remedied: The report

states that Intel does not believe they have any deficiencies in liquidity. Page 43 of the

MD&A states, “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, acquisitions, and strategic investments.” Intel’s

position in the semiconductor market is quite strong and continues to grow with each

new platform Intel expands into.

(3) Commitments for capital expenditures, the purpose of such commitments, and

expected sources of funding: Intel has many production facilities in the United States and

other countries. As of the 2013 close date, Intel was building a development fabrication

facility in Oregon and had completed construction of a large-scale fabrication facility in

Arizona. The report does not give detail as to the amount Intel plans to spend in the

upcoming year for investments in Property, Plant and Equipment nor did they specify how

they would pay for these items.

(4) Anticipated changes in the mix and cost of financing resources: Intel

anticipates that their Revenue and Gross Margins will remain flat in 2014 but will see

future growth with product innovations. The Board has given permission for the company

to buy back a limited amount of stock and they did repurchase $2.1 billion of Common

Stock in 2013. They did see an increase in cash for financing activities in 2013 due to Long-

term Debt and less stock buyback compared to 2012. They do anticipate increased profits

with the move into mobile technology platforms.

(5) Unusual or infrequent transactions that affect income from continuing

operations: Intel does expect to have expenses related to loss contingencies. They are

uncertain as to the amount of legal and administrative proceedings and asserted and

potential claims that may arise during the course of business. They are also uncertain of

the number of issues that may occur with their products and the warranty claims that may

occur. The legal actions are considered to be infrequent and unusual but are potential

events.

(6) Events that cause material changes in the relationship between costs and

revenues (such as future labor or materials price increases or inventory adjustments): The

MD&A states that some restructuring had occurred during 2013. There were some

workforce reductions and closure of facilities due to closing down production of the

200mm wafer. They have estimated that they would save approximately $400 million in

employee severance and benefits. The R&D will reap some of the benefits of the savings.

Intel does expect that additional charges for employee severance and benefits and other

potential exit activities will occur.

(7) A breakdown of sales increases into price and volume components: Intel has

begun expanding into mobile computing such as smartphones and tablets. The MD&A

details the changes from sales declining in the desktop computer platform to the increases

in the laptop and notebook platforms. The report did mention that some prices did

decline but volume increased as a result. As Intel expands into the mobile computing

market, the sales and volumes of each platform will adjust once again.

The future prospects of Intel look promising overall. The CEO and Chairman described

upcoming platforms that Intel can expand into and other areas of expansion will show

themselves as faster, smaller and less expensive innovations come about.

As Intel strives to move products to the market faster, a concern for an increase in loss

contingencies does arise. Intel has processes in place for quality control and assurance, as

any manufacturing company should, but to move products faster will require a

compromise in the system. Will Intel perform skip lot quality control testing, develop

faster manufacturing equipment with the potential for more mistakes in manufacturing or

open more facilities to meet this goal?

Another concern is the idea that there is no limit to Moore’s Law. Theoretically, the idea

that there is no limit to the smallness of the computing device makes sense. In reality, the

human world is limited in capability. Each new innovation has allowed for smaller

computing devices and, at the time of the 2013 financial statements, Intel was

manufacturing 14nm process technology. How will Intel be able to continue to use

Moore’s Law as their driving force? This concept will be interesting to follow as the years

pass.

Lastly, there is a concern for sustainability of materials used in manufacturing. The earth

does have a limited amount of resources and each passing year sees fewer readily available

resources. Has Intel looked into using materials other than silicon, tantalum, tin,

tungsten and gold? How likely is it that they can continue to avoid using “conflict

materials”? This may be an area into which R&D may need to expand which could

potentially be a large expense.

Balance Sheet Analysis

The Common-size Balance Sheet and Growth Analysis Balance Sheet for Intel Corporation

are shown in Tables 1 and 2. The Common-size Balance Sheet allows the analyst to

compare individual assets, liabilities and equity accounts against the Total Assets for the

year. The % Total Assets for 2013 and 2012 were calculated for each account. The Growth

Analysis shows how accounts change per year. The $ Change and % Change are included

for the Balance Sheet accounts.

Intel owns a variety of assets. These include: Cash and Cash Equivalents; Short-term

Investment;, Trading Assets; Accounts Receivable; Inventories; Deferred Tax Assets; Other

Current Assets; Property, Plant & Equipment; Marketable Equity Securities; Other Long-

term Investments; Goodwill and Other Long-term Assets. The Cash and Cash Equivalents

and all Investment accounts will be analyzed in a later section.

Accounts Receivable

The Accounts Receivable (AR) was shown net of Allowance for Doubtful Accounts (ADA)

in the Balance Sheet. The ADA per Total AR and the ADA per Net Sales was calculated (as

seen above). It appears that Intel estimates the ADA based on Net Sales. The AR total

decreased by 6.5% from 2012 to 2013. This may indicate that Intel is either losing business

(sales decreasing) or they were able to collect more AR during 2013. Since Net Sales

decreased by 1.2%, it looks as though Intel did not sell as much during 2013. Intel noted

that they projected their Revenue and Gross Margins to remain flat in 2014 so it is quite

possible that they predicted a similar outcome for 2013. The analyst should review the

2012 financial statements and notes to determine Intel’s projected outcome for 2013. If

this had been the case, it would seem reasonable to not increase the ADA.

The Valuation and Qualifying Accounts schedule does add more insight into the figures in

the table above. The balance at the beginning of 2011 was $28 million. They estimated $8

million in ADA but did not actually write off any Bad Debts. The ending 2011 balance and

beginning 2012 balance was therefore $36 million. Since they had overestimated the ADA

for 2011, they made a correction in 2012 by estimating $3 million in ADA. Only $1 million

was actually deducted, so again, there was an overestimation. The ending balance for

2012/ beginning balance for 2013 was increased to $38 million in the ADA. The ADA

account had grown by $10 million over two years and the estimation for 2013 should have

corrected this further but Intel shows an estimation of $5 million. Although they did

actually deduct $5 million in Bad Debt, the balance is still $10 million higher than it was at

the beginning of 2014. This does cause some concern since Net Sales and Accounts

Receivable are both decreasing. The ADA amount should follow the same trend,

especially if the Net Sales were projected to remain flat in 2013. It is also concerning that

the Bad Debt written off each year is increasing since Intel’s MD&A lists three significant

customers accounting for the majority of their sales (44% of Net Revenue). The analyst

would be wise to review the financial statements of Dell, Hewlett-Packard and Lenovo for

2013 2012 % Change

Net Sales 52,708$ 53,341$ (1.2)

Accounts Receivable (net) 3,582 3,833 (6.5)

Allowance for Doubtful Accounts 38 38 -

Accounts Receivable (total) 3,620$ 3,871$ (6.5)

ADA/Total AR (%) 1.05 0.98

ADA/Net Sales (%) 0.07 0.07

any indication of financial trouble. The Notes to the Financial Statements do not provide

any further details regarding the ADA account or Bad Debts account. The lack of

additional information causes suspicion of management manipulation.

Inventories

The inventory cost at Intel is computed on a first-in, first-out (FIFO) basis. This method

of inventory costing will give the highest value of ending inventory (over LIFO or average

cost). The most recently purchased inventory items would remain in inventory longer.

Older inventory, which was potentially purchased at a lower cost, would be sold first

resulting in more profit.

The FIFO inventory costing method would affect the Cost of Goods Sold account on the

Income Statement, making it lower than if using a different cost method. FIFO would also

affect the Inventory value, making it higher than other costing methods. The Notes to the

Financial Statements state that Intel uses the lower of cost or market valuation of

inventory, which shows they are conservative in their approach. They base their inventory

values on assumptions of future demands and market conditions. The use of FIFO would

show lower earnings during times of falling prices, which happens frequently in Intel’s

industry as newer technology is developed.

The Common-size Balance Sheet shows that Inventory decreased by 11.9% from 2012 to

2013. The Notes to the Financial Statements, page 59, show that Intel saw a decrease in

raw materials, work in process, and finished goods. These changes can be a result of

multiple factors. First, Intel is shifting from desktops to smaller computing devices. The

smaller devices may not require as many components when manufacturing. Second, Intel

is moving into cloud computing which requires even fewer components. Third, as Intel

continues to strive for smaller and smaller components as they use Moore’s Law as a

driving force, they will reduce the amount of materials they maintain. Fourth, Intel may

have sold off some of their old or obsolete inventory at discounted prices. The MD&A

states that inventory valuation also requires that Intel estimates obsolete and excess

inventory as well as inventory that is not of saleable quality.

Deferred Tax Asset/Liability

Temporary differences in recognition of revenue and expenses incurred are created due to

Intel’s policy of recognizing revenue after the delivery and acceptance by customers of

their products. Page 96 of the Notes to the Financial Statements shows a breakdown of

the Deferred Tax Assets and Liabilities for Intel. The Total Deferred Tax Assets have

remained fairly stable from 2012 to 2013. Deferred Tax Liabilities increased from $4,441

million in 2012 to $4,961 million in 2013. These deferred tax values gave a Net Deferred Tax

Liability of $937 million in 2012 and $1,369 million in 2013.

Horizontal analysis shows an increase of 22.9% in the Deferred Tax Assets and a 28.9%

increase in Deferred Tax Liabilities. A greater increase in the Deferred Tax Liabilities does

not cause great concern because it shows that Intel is selling more inventory and has

delayed recognizing the revenue until the customer has approved and then sold the

inventory, as described in the Revenue Recognition section of the Notes to the Financial

Statements.

Property, Plant, and Equipment, Net

Property, Plant and Equipment (PPE) listed by Intel includes: Land and buildings;

machinery and equipment; and construction in progress.

Overall, Intel saw an 11.2% increase in gross PPE. The category that changed the most was

construction in progress. There has been an increase of 12.3% in net PPE between 2012

and 2013. This does not seem like a significant change considering Intel is constructing

new facilities to manufacture newer technologies and to maintain its competitiveness in

the industry. Fixed Assets represent 34% of Intel’s Total Assets. This seems reasonable

considering Intel is a manufacturer. Intel plans on pursuing different niches in their

industry and is in the process of opening new manufacturing facilities.

Intel uses the straight-line depreciation method. This allows Intel to depreciate PPE

evenly over time. They do note in the MD&A that “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.” The amount that was determined

for impairments and accelerated depreciation for 2013 was $172 million.

The increase in net PPE from 2009 through 2013 is 82.46%. The percent change in Total

Assets during the same time period was 73.95%. The PPE became a greater portion of the

Total Assets over the years as Intel decreased the Cash & Cash Equivalents account and

invested in building their niche in the industry.

The Commitments for Capital Expenditures (Capital Assets) described in the MD&A does

give further information regarding the increase in the net PPE. As of the Balance Sheet

date, Intel was building a development fabrication facility in Oregon and had completed

construction of a large-scale fabrication facility in Arizona. Intel also has contractual

2013 2012 % Change

Land and buildings 21,098$ 18,807$ 12.2

Machinery and equipment 40,540 39,033 3.9

Construction in progress 11,778 8,206 43.5

Total Property, Plant & Equipment 73,416$ 66,046$ 11.2

2013 2009 $ Change % Change

PPE, net 31,428$ 17,225$ 14,203$ 82.46

Total assets 92,358$ 53,095$ 39,263$ 73.95

purchase obligations for construction or purchase of Property, Plant and Equipment of

$5,503 million over the next five years (from Balance Sheet date). The Notes to the

Financial Statements do not provide any additional information as to the increase in PPE.

There have been some significant changes to the asset structure from 2012 to 2013. The

Total Current Assets dropped from 37.2% of Total Assets to 34.7% of Total Assets while

the Long-term Assets and Investments have increased. The greatest change in Short-term

Assets was seen in the Cash & Cash Equivalents which changed from 10.0% in 2012 to 6.1%

in 2013. Short-term Investments and Trading Assets did increase so it appears that Intel is

moving into accounts which will give a higher return than having cash and/or cash

equivalents on hand but still have the liquidity, if needed. They are also shifting into

investing in more Long-term Assets which shows that Intel plans to be around well into

the future and they are looking on benefitting from the investments. This includes the

growth in the PPE as detailed above.

The Current Liabilities have increased between 2012 and 2013 by 5.2% but the distribution

of the Current Liabilities has shifted. The increase does not create any concern after

analyzing the changes in the distribution of the liabilities. The Short-term Debt has

decreased by 9.9% showing that Intel is able to pay liabilities with their liquid assets.

Accounts Payable has also decreased, by 1.8%, showing again that they are using Current

Assets to pay for items more, rather than using Long-term Debt to finance their

obligations. Their Accrued Compensation and Benefits have increased by 5.1%. The Notes

to the Financial Statements explain this increase as a result of targeted workforce

reductions due to the wind down of the 200 mm wafer fabrication facility in

Massachusetts. Accrued Advertising has remained stable.

Deferred Income increased by 8.5% which is further explained in the Notes to the

Financial Statements. The Revenue Recognition section on page 60 of the notes states

that Intel recognizes net product revenue when the earnings process is complete including

customer acceptance. The note further states, “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.” Since Intel has

acquired McAfee, which includes service and support agreements for security software,

“deferred revenue is recognized ratably over the performance period.” Software licenses,

maintenance and support also contribute to this increase. Other accrued liabilities

increased by 11.9% from 2012 to 2013. These other accrued liabilities are from warranty

obligations and other losses.

Long-term Debt

Intel’s Long-term Debt is reported as one line on the Balance Sheet. Long-term debts can

include long-term notes payable, mortgages, debentures, bonds payable, convertible

debts, warranty expenses and capital lease obligations. The Long-term Debt is a small

percentage of Total Assets (14.7% in 2013, 15.3% in 2012) in comparison to other accounts.

This shows that Intel is responsible and meets their obligations for debts spanning over

more than one year. Long-term Debt increased by 0.2% from 2012 to 2013, which is not

very significant when considering they are restructuring their Massachusetts plant and

building new factories in Oregon and Arizona.

Since the Long-term Debt is a lower percentage of Total Assets in 2013 this shows that

their total assets, in general, are increasing more than debt.

The percentage change in Long-term Debt from 2009 through 2013 does seem astounding

when looking at the value alone. However, many changes have occurred for Intel over the

course of those years. Intel’s business has grown noticeably as indicated by the increase of

Net Revenue in 2009 of $35,127 million to $52,708 million in 2013. They have expanded

into new hardware, software and security fields and have needed to invest in additional

Property, Plant and Equipment. Intel has also acquired other businesses such as McAfee

and Wireless Solutions so their debt would be added to Intel’s debt. The increase in Long-

term Debt from 2009 to 2013 does not create any concerns because it shows that Intel is

growing and, since the long-term debt obligations are decreasing, Intel is able to meet

their obligations.

There was no additional information that would impact the analysis of the Long-term

Debts in the Notes to the Financial Statements nor in the MD&A.

Other Long-term Liabilities

Intel’s Annual Report and 10-K report state there are many components to the Other

Long-term Liabilities category. Intel has uncertain tax positions like Long-term Income

Taxes Payable. They also have derivative liabilities (discussed in Commitments and

Contingencies), non-current income from software and services operating segments and

pension benefits in the U.S. and outside of the U.S.

This account shows an overall decrease of 19.7%. This amount would increase as Intel

signs contracts to buy or sell assets in the future and as Intel reduces its workforce with

the closing of plants like the one in Massachusetts. Intel’s uncertain tax positions most

likely had the biggest impact on this account.

The vertical analysis of the Current versus Long-term Liabilities shows that the liability

structure of Intel has not changed significantly. Current Liabilities, Long-term Debt and

Other Long-term Liabilities have decreased by small percentages (of Total Assets) and the

Deferred Tax Liability has increased slightly as previously described. The Total Liabilities

decreased from 39.3% in 2012 to 36.9% in 2013.


Long-term Debt 13,165$ 2,049$ 11,116$ 542.51

Vertical analysis of the Total Liabilities versus Total Equities shows that the structure has

not changed significantly. The Total Stockholders’ Equity increased to accommodate the

decrease in Total Liabilities. The Equity was 60.7% in 2012 and 63.1% in 2013. The most

noticeable change was in the Accumulated Other Comprehensive Income which was

detailed in the Notes. Gains on Sales were shown to include a gain of $439 million from

selling their interest in Clearwire LLC and their shares of Clearwire Corporation during

2013. Intel also paid $46 million in Dividends in 2013.

Intel’s commitments were described in Note 18. The Note states that certain capital

equipment and certain facilities are under operating leases. Portions of their real property

are under leases that expire between time of the Balance Statement and 2062. Intel’s

Rental Expense was $270 million in 2013 and $214 million in 2012. Intel also has

commitments for construction or purchase of PPE totaling $5.5 billion as of December

2013, most of which is due in the following year. There are also agreements to purchase

goods and services, payments for licenses and non-contingent funding obligations (fund

projects of other companies). Intel is also funding R&D in 450 mm wafer technology and

extreme ultraviolet lithography.

The Contingencies of Intel were described in the Note 26 on pages 100 – 104 of the Notes

to the Financial Statements. As of the time of writing of the Notes, Intel was involved in

numerous legal proceedings. The uncertainty of the final outcome could harm their

results of operations, cash flow, and overall public perception of the company. Some of

the legal proceedings listed include:

(1) Government Competition Matters and Related Consumer Class Actions

Intel was accused of unfair business practices to get customers to buy their

microprocessors. The European Commission (EC) decided that Intel had

violated Article 82 by offering conditional rebates and payments. Intel paid

$1.447 billion in fines in 2009.

The Korea Fair Trade Commission (KFTC) accused Intel of violating

Korea’s Monopoly Regulation and Fair Trade Act. Intel paid a fine of $20

million for providing discounts to Samsung Electronics Co., Ltd. and

TriGem Computer Inc.

The U.S. has seen at least 82 class-action lawsuits filed against Intel stating

that Intel violated the Sherman Act by providing discounts and rebates to

customers.

(2) In re High Tech Employee Antitrust Litigation

Employees of various parties filed antitrust class action lawsuits in 2011.

They claimed their employers had conspired to suppress employee

compensation.

(3) Lehman Brothers Holdings Inc. and Lehman Brothers OTC Derivatives v. Intel

In 2013, Lehman Brothers filed an adversary complaint based on a previous

contract with Intel to sell back Intel Common Stock. The adversary

complaint was made because Lehman Brothers stated that Intel had

withheld part of the $1.0 billion cash collateral and therefore was in breach

of contract. Intel was unable to make a reasonable estimation of the losses.

(4) McAfee, Inc. Shareholder Litigation

Intel announced they were purchasing all of McAfee’s Common Stock in

2010. Four McAfee shareholders filed class-action lawsuits in California.

Intel was unable to make a reasonable estimation of the losses.

(5) X2Y Attenuators, LLC v. Intel et al

In 2011, X2Y Attenuators filed a patent infringement lawsuit against Intel,

Hewlett-Packard and Apple. They claimed five patent infringements. Intel

was unable to make a reasonable estimation of the losses.

Deferred Taxes are listed under multiple classifications according to the Note of Deferred

and Current Income Taxes on page 96 of the Notes to the Financial Statements. Deferred

Tax Assets are listed for both Current and Long-term Assets. These include: Accrued

Compensation and Other Benefits; Share-based Compensation; Deferred Income;

Inventory; Unrealized Losses on Investments and Derivatives; State Credits and Net

Operating Losses and other categories. Deferred Tax Liabilities are listed for Long-term

Liabilities. These include: PPE; Licenses and Intangibles; Convertible Debt; Unrealized

Gains on Investments and Derivatives; Investment in Non-U.S. Subsidiaries and other

categories. The most significant component of the deferred taxes is the Non-current

Deferred Tax Liabilities of $4,397 million in 2013 and $3,412 million in 2012.

The equity accounts listed on the Balance Sheet include: Preferred Stock (which had a

zero balance); Common Stock; Accumulated Other Comprehensive Income and Retained

Earnings.

Income Statement Analysis

Intel’s Common-size Income Statement and Growth Analysis Income Statement were

prepared and are presented in Tables 3 and 4.

Net Sales

Analysis of the Net Revenue (Net Sales) shows a decrease of 1.2% going from 2011 to 2012

and the same decrease again going into 2013. The decrease from 2012 to 2013 was

described in the Management’s Discussion & Analysis (MD&A) as a result in volume and

price changes from different segments of the company.

The PC Client Group (PCGC), which is 62.7% of Total Revenues for the company, had a

4% drop in Net Revenue based on volume between 2012 and 2013. There were fewer

notebook and desktop unit sales although the prices were 6% higher for desktops and 4%

lower for notebooks than 2012. For the years 2011-2012, there was a 3% decrease in Net

Revenue for this group. The increase in tablets unit sales along with a decrease in price

competed with the sales of desktops. The desktop prices increased by 4% but there was a

5% decrease in the volume sold. The notebooks were 6% lower in price and there was a

2% increase in volume sold.

The Data Center Group (DCG), which is 21.3% of Total Revenues for the company, had

higher volumes due to the increase of internet cloud computing and high performance

computing. The MD&A explained that the Net Revenue increased by 7% in 2013 over 2012.

The average selling prices and volume were up. The difference from 2011 to 2012 was an

increase by 6%. There was a 6% higher average selling price but a decrease of 1% in sales

volume. The MD&A states that “the growth in cloud computing and high performance

computing segments were offset by a weakness in the enterprise server market segment.”

The segment named “Other Intel Architecture Operating Segments” included ISG, Multi-

Comm, the Tablet Group, the Phone Group, the Service Provider Group, the Netbook

Group, and the New Devices Group (Intel’s Annual Report Management’s Discussion &

Analysis, page 36). This segment includes items used in the internet, mobile

communications, tablet, smartphone, service provider, network, and ultra-low power

market segments (Intel’s Annual Report & 10-K, page 7). The years of 2012 to 2013 showed

a decrease of 7% which was due to lower volume sales of netbooks, phone components

and Multi-Comm units. The Multi-Comm units also had a lower selling price while ISG

had a higher average selling price. Net Revenue decreased by 13% in 2012 compared to

2011. There were lower netbook volume sales and prices, lower Multi-Comm prices, and

higher ISG prices.

The fourth segment was named the Software and Services Operating Segment (SSG) and

included McAfee, the Wind River Software Group, and the Software and Services Group.

From 2012 to 2013, there was an increase of $121 million due to revenue from McAfee. The

McAfee revenue also contributed greatly after the company was acquired by Intel in 2012.

There was an astronomical increase in revenue, $511 million, due to acquisition in February

2011.

Net Sales CPI Adjusted

The Consumer Price Index (CPI) was retrieved from the US Inflation Calculator website

(http://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-

percent-changes-from-1913-to-2008/) and verified on the U.S. Bureau of Labor Statistics

website. The CPI annual average was 232.96 in 2011, 229.59 in 2012, and 224.94 in 2013.

This data was used to calculate the CPI Adjusted Net Sales below.

http://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/

http://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/

The inflation ratio was determined by dividing the current year’s CPI by the previous

year’s CPI. The year of 2012 showed a 2% inflation from 2011 and 2013 showed just over a

1% inflation from 2012. The inflation rates were multiplied by the Net Revenue from the

previous year and the Adjusted Net Revenue value was used in a horizontal analysis.

The reported decrease in Net Sales of 1.2% for each of the two years reported was actually

understated. After adjusting the Net Sales values for inflation, the decrease in Net Sales

was 3.22% in 2012 and 2.62% in 2013. The changes in Net Sales are nominal.

Cost of Goods Sold and Gross Profit

The Cost of Goods Sold (COGS) has a large effect on the Net Sales of a company. COGS

and Net Sales are directly related: as Net Revenue increases, we would expect the COGS

to increase by the same percentage if the increase in Net Sales was due to selling greater

volumes. In Intel’s case, this would not be completely accurate: there were both volume

and price changes in the various groups within the company. The COGS was close to a

zero percentage change from 2011 to 2012 but had a 5% increase from 2012 to 2013. The

MD&A gives insight into what contributed to the increase for 2013.

Intel produced new technologies in 2013 that would influence the COGS. These new

technologies were the fourth generation Intel Core processor family, the Intel Xeon 22 nm

processors, and the Intel Atom microarchitecture platforms. Producing these new

technologies would most likely require an increase in materials and/or parts to build the

new components.

Year

Current

Year CPI

Previous

Year CPI

Inflation

Ratio

2013 232.96 229.59 1.01

2012 229.59 224.94 1.02

2011 224.94

Year

Inflation

Ratio

Sales

Revenue

Prior

Sales

Revenue

Prior (adj)

2013 1.01 53,341$ 54,124$

2012 1.02 53,999 55,115

2013 2012 (adj) $ Change % Change 2012 2011 (adj) $ Change % Change

Net sales 52,708$ 54,124$ (1,416)$ (2.62) 53,341$ 55,115$ (1,774)$ (3.22)

The COGS percentage (COGS/Net Sales) from the vertical analysis shows a small

percentage increase from 2011 to 2012 of 37.5% to 37.9%. From 2012 to 2013, COGS

percentage increased from 37.9% to 40.2%. This information would indicate that Costs of

Goods increased. This 2.3% increase in the COGS was not covered by the increase in the

price. Since COGS percentage is a complement of Gross Profit Margin, the increase from

2012 to 2013 would also lead to the conclusion that Gross Profit Margin decreased in that

time period. Gross Profit Margins are known to change drastically in the high tech

industry, so the change seen for Intel is not concerning.

The inventory cost at Intel is computed on a first-in, first-out (FIFO) basis. This method

of inventory costing will give the highest value of ending inventory (over LIFO or average

cost). The most recently purchased inventory items would remain in inventory longer.

Older inventory, which was potentially purchased at a lower cost, would be sold first

resulting in more profit unless that inventory becomes obsolete. This obsolete inventory

may need to be sold at a discount or written-off. The MD&A states that inventory

valuation requires that Intel estimates obsolete and excess inventory as well as inventory

that is not of saleable quality.

The FIFO inventory costing method would affect the Cost of Goods Sold account making

it lower than if using a different cost method. FIFO would also affect the inventory value,

making it higher than other costing methods. The Notes to the Financial Statements state

that Intel uses the lower of cost or market valuation of inventory, which shows they are

conservative in their approach. They base their inventory values on assumptions of future

demands and market conditions which can be tricky with new technology platform

uncertainty. The use of FIFO would show lower earnings during times of falling prices,

which happens frequently in Intel’s industry as newer technology is developed.

Research & Development (R&D) Expense

R&D is a critical business activity for Intel as they innovate new technologies and expand

into other markets. The R&D growth from 2012 to 2013 was 4.6% although Net Sales

decreased. The R&D growth from 2011 to 2012 was 21.5% although Net Sales decreased.

These changes were discussed in the MD&A. The increase from 2012 to 2013 was due to

greater investment in smartphones and tablets as that market segment grew. The increase

from 2011 to 2012 was due to investments in smartphones, tablets, Ultrabook devices, data

centers, process development of the 14 nm process technology, and development of the

450 mm wafer technology. Intel was focused on creating new technology and improving

existing technology as sales for desktops were decreasing.

R&D was a higher portion of Net Sales for Intel than other companies in this industry

because Intel does a majority of their R&D in-house whereas other companies do not. In

2011, Intel spent 15.5% of Net Sales on R&D; in 2012 they spent 19.0% of Net Sales on R&D;

and in 2013 they spent 20.1% of Net Sales on R&D. Pages 9 - 11 of Intel’s 10-K explains

further: “One of our important competitive advantages is the combination of our network

of manufacturing, assembly and test facilities with our global architecture design teams.

We have made significant capital and research and development (R&D) investments into

this integrated manufacturing network, which enables us to have more direct control over

our processes, quality control, product cost, production timing, performance, power

consumption, and manufacturing yield.” They further state, “As part of our R&D efforts,

we plan to introduce a new Intel Core microarchitecture for desktops, notebooks, and

Intel Xeon processors approximately every two years and ramp the next generation of

silicon process technology in the intervening years.” Without knowing that Intel has an

internal R&D department and is on a two year plan to increase technology, one might

think that their R&D expense is too high. Intel also recognizes that there are few third-

party facilities that their competitors can use and they have opened up their company to

that segment of the industry. The Notes to the Financial Statements do not include any

additional information.

Marketing, General, and Administrative (MG&A) Expense

Marketing is not a critical business activity for Intel because they sell their components

mostly to original equipment manufacturers and original design manufacturers. They also

sell indirectly to systems builders through distributors. The 10-K states that they market

through television, print, Internet, social media, trade events, and industry

communications.

Horizontal analysis shows that MG&A expenses increased by 5% from 2011 to 2012 but

increased by only 0.4% from 2012 to 2013. The percentages are quite different in

comparison. Since General and Administrative Expenses are probably fixed costs, this

leads the analyst to question what caused the change. Was the change due to less

marketing in 2013 or were there some one-time General and Administrative Expenses in

2012 that resulted in the bigger percentage increase? This question cannot be answered

without speaking to management or further investigating the Notes and MD&A.

The vertical analysis shows that MG&A was 14.2% of Net Sales in 2011, 15.1% of Net Sales in

2012, and 15.3% of Net Sales in 2013. The percentages were fairly stable over the three year

period with the largest variance seen from 2011 to 2012. After further reviewing the

MD&A, the reason for the increase in 2012 compared to 2011 was due to acquiring McAfee,

hiring employees, and annual salary increases.

Since this category encompasses salaries and compensations at facilities around the world,

it does seem to be reasonable amounts in the horizontal and vertical changes for a

company in this industry. Educated and trained employees in the high technology fields

demand higher salaries and benefits. As the company expands they will need to continue

to add to their workforce as well.

The Notes to the Financial Statements do briefly add that Intel participates in cooperative

advertising programs in which they reimburse customers for marketing activities subject

to defined criteria. These costs are expensed when related revenue is recognized under

the MG&A category. This may or may not be an expense unique to Intel but this is an

unknown that would need to be determined on a case by case basis.

Operating Profit

The Operating Profit is a way of looking at the efficiency of a company. It is calculated by

subtracting the Costs of Goods Sold, labor, and day-to-day expenses from the Net Revenue

of a company. Intel has seen a decrease in Net Revenue with increases in Costs of Goods

Sold, labor and expenses. Consequently, Operating Profit decreased by 16.2% from 2011 to

2012 and decreased by another 16.0% from 2012 to 2013. The Operating Profit Margin also

shows a decline: In 2011, Operating Profit Margin was 32.4%; in 2012, it was 27.4%; and in

2013, it was 23.3%. Both horizontal and vertical analysis support a negative trend in the

Operating Profit of Intel.

Effective Tax Rate

Page 95 of the Notes to the Financial Statements lists Intel’s federal income tax rate and

their Effective Tax Rates for the three years in the Annual Report and 10-K. The Effective

Tax Rate is calculated by dividing the Income Taxes on the Income Statement by the

Earnings before Taxes. The following table shows the calculation of the Effective Tax Rate

for the three years reported:

The Effective Tax Rate shows a decreasing but positive trend. Income before Taxes has

decreased which has reduced the taxes since taxes are calculated as a percentage of

income. Intel has a 35% statutory federal income tax rate but their Effective Tax Rates are

lower, as seen above. Horizontal and vertical analysis support this trend. Vertical analysis

shows the Income before Taxes at 32.9% in 2011, 27.9% in 2013 and 23.9% in 2013. The

Provision for Taxes consequently decreased from 9.0% in 2011 to 7.3% in 2012 and 5.7% in

2013. Horizontal analysis shows Income before Taxes decreased 16.4% from 2011 to 2012

and decreased again 15.2% from 2012 to 2013. The Provision for Taxes decreased 20.1%

from 2011 to 2012 and decreased again from 2012 to 2013 by 22.7%.

Net Earnings (Net Profit Margin)

The Net Earnings on the Income Statement is the amount calculated after all expenses

have been deducted from Net Sales. Intel’s Net Earnings have shown a decreasing trend in

the three years reported. Vertical analysis shows that Net Income was 24.0% of Net Sales

in 2011, 20.6% of Net Sales in 2012, and 18.3% of Net Sales in 2013. Horizontal analysis

shows a decrease of 15.0% from 2011 to 2012 and a decrease of 12.6% from 2012 to 2013.

2013 2012 2011

Total Income before Taxes 12,611$ 14,873$ 17,781$

Total Provision for Taxes 2,991$ 3,868$ 4,839$

Effective Tax Rate (%) 23.7 26.0 27.2

Net Profit Margin is calculated by dividing Net Profit by Sales. Net Profit as a percentage

of Net Sales decreased from 2011 to 2013. In 2011, the Operating Profit Margin was 24.0% of

Net Sales. In 2012, it dropped to 20.6% and in 2013 it was 18.3%. The horizontal analysis

shows a decreasing trend as well: Net Profit Margin decreased 15.0% from 2011 to 2012 and

decreased again 12.6% from 2012 to 2013. Since the Net Profit Margin takes all operating

and non-operating revenues and expenses into consideration, this negative trend is

expected. Intel saw an increase in Research & Development; Marketing, General &

Administrative Expenses; and Cost of Sales so a decrease in the Net Profit is expected until

they can start seeing revenue from their new technology of 2013.

Earnings per Common Share

The Earnings per Common Share has seen a steady decrease from 2011 to 2013. From 2011

to 2012, the Earnings per Share decreased by 10.5% and from 2012 to 2013 it decreased by

12.1%. Intel did see a decrease of approximately 5% in average common shares

outstanding in 2012 but showed only 0.5% decrease in 2013.

Comprehensive Income

The most significant item included in the Comprehensive Income was the change in Net

Unrealized Holding Gains on Available-for-Sale Investments. This item changed

significantly over the three years from a loss of S170 million in 2011 to a gain of $470

million in 2012 and a gain of $1,181 million in 2013. This was a change of approximately

340% from 2011 to 2012 and another approximate 150% increase from 2012 to 2013. This

item increased Total Comprehensive Income. The increase resulted in a positive trend

monetarily but this also means they had to sell some of their Available-for-Sale

investments. Analysis of the table on page 67 of the Notes to the Financial Statements

shows that their Marketable Equity Securities were the biggest contributing factor for

both 2012 and 2013. They further explain that in 2013 they sold their shares in Clearwire

Corporation which explains the gain in Marketable Equity Securities for that year.

Segment Analysis

Intel has four operating segments in their business: the PC Client Group, the Data Center

Group, Other Intel Architecture Operating Segments, and the Software and Services

Operating Segment. Intel also includes an “All Other” segment which encompasses

revenue, expenses, and charges from the Non-Volatile Memory Solutions Group,

restructuring and asset impairment changes, start-up businesses, and acquisition related

expenses. The MD&A and the Notes to the Financial Statements provide the Net Revenue

and Operating Income (Loss) for each segment. The Cost of Sales per segment was not

given so Gross Margin could not be calculated. The Net Revenue per segment was

calculated as a percentage of Total Net Revenue and horizontal analysis per segment are

shown below.

The PC Client Group and the Other Intel Architecture Operating Segments have

decreased in their percentage of Net Revenue over the three years. The changes in

desktop sales, lower netbook platform, feature and entry phone components, and Multi-

Comm unit sales contributed to these decreases, as previously discussed. Intel should

shift their focus to areas that are seeing a positive growth. The Data Center Group,

Software and Services Operating Segments, and the All Other segment increased in their

percentage of Net Revenue over the three years.

Intel should focus their efforts on the segment that will provide them with the best growth

in Net Income over the years to come. The PC Client Group has been their biggest

percentage of Net Revenue, but the Data Center Group has seen a positive change over the

years reported. The Data Center Group is moving toward increasing revenues. The

technology included in the Data Center Group includes the 22nm technology and the Intel

Xeon Phi coprocessors which Intel is focusing on. The supercomputers being used in

other industries are the perfect business sector for Intel to focus on for current growth.

The Software and Services Operating segment is another area that Intel can work on. It

has been increasing when compared to Net Revenue but has had great variability when

comparing year to year. The large increase in 2012 over 2011 is due to acquiring McAfee

but there was still a positive trend when comparing 2012 to 2013. The ability to enable

platforms to work across multiple operating systems and ensuring a secure online

experience will continue to be important aspects of the technology that Intel offers in the

years to come.

Statement of Stockholders’ Equity Analysis

The Common-size Statements of Equity and Growth Analysis Statements of Equity can be

found in Tables 5 and 6. Net Income as a percentage of the total decreased from 2011 at

Net Revenue (in millions) 2013

% Net

Revenue 2012

% Net

Revenue 2011

% Net

Revenue

PC Client Group 33,039$ 62.7 34,504$ 64.7 35,624$ 66.0

Data Center Group 11,238 21.3 10,511 19.7 9,911 18.4

Other Intel Architecture Operating Segments 4,092 7.8 4,378 8.2 5,005 9.3

Software and Services Operating Segments 2,502 4.7 2,381 4.5 1,870 3.5

All Other 1,837 3.5 1,567 2.9 1,589 2.9

Total Net Revenue 52,708$ 100.0 53,341$ 100.0 53,999$ 100.0

Net Revenue per Segment (in millions) 2013 2012 $ Change % Change 2012 2011 $ Change % Change

PC Client Group 33,039$ 34,504$ (1,465)$ (4.2) 34,504$ 35,624$ (1,120)$ (3.1)

Data Center Group 11,238 10,511 727 6.9 10,511 9,911 600 6.1

Other Intel Architecture Operating Segments 4,092 4,378 (286) (6.5) 4,378 5,005 (627) (12.5)

Software and Services Operating Segments 2,502 2,381 121 5.1 2,381 1,870 511 27.3

All Other 1,837 1,567 270 17.2 1,567 1,589 (22) (1.4)

Total Net Revenue 52,708$ 53,341$ (633)$ (1.2) 53,341$ 53,999$ (658)$ (1.2)

28.2% to 21.5% in 2012 and then to 16.5% in 2013. Net Income was a smaller portion of the

Total Equity each year as sales for various segments decreased or as the price for goods

increased as new technologies were developed. This negative trend was also evident in

the horizontal analysis where Net Income changed by dropping 15% from 2011 to 2012 and

dropped 12.6% from 2012 to 2013. This was further discussed in the Net Earnings (Net

Profit Margin) section above.

Other Comprehensive Income became a larger portion of the Total Equity over the three

years discussed. In 2011, this line item was reported as a 2.4% decrease in the Total Equity

but it became 0.7% increase of Total Equity in 2012 and 2.8% increase of Total Equity in

2013. The horizontal analysis shows from 2011 to 2012, this change was a loss of 135% but

from 2012 to 2013, this change was a growth of 330%! From the previous analysis of the

Comprehensive Income, the biggest changes were seen in the Change in Net Unrealized

Holding Gains on Available-for-Sale Investments and the change in actuarial valuation.

Total Comprehensive Income was the combined effects of Net Income and Other

Comprehensive Income. Overall, there was a negative trend. In 2011, the Total

Comprehensive Income was 25.8% of Total Equity but it decreased to 22.2% in 2012 and

decreased again to 19.3% in 2013. This was a horizontal decrease of 3.7% from 2011 to 2012

and a 1.1% decrease from 2012 to 2013.

The proceeds from sales of shares through Employee Equity Incentive Plans, Net Tax

Deficiency, and Other was 4.4% of Total Equity in both 2011 and 2012 but decreased to

2.7% of Total Equity in 2013. This was an 11.8% change from 2011 to 2012 but there was a

corresponding change in Total Net Equity to maintain the percentage of total. From 2012

to 2103, there was a decrease of 29.4%. The MD&A states that they had $13 million in

unrecognized share-based compensation costs related to the rights to acquire Common

Stock under their stock purchase plan. They were expecting to recognize those costs over

a period of one and a half months.

Share-based Compensation was indicated in the Notes to the Financial Statements as $1.1

billion for all three years reported. Since the Total Equity increased, the percentage of

Total Equity decreased from 2.3% in 2011 to 2.2% in 2012 and 1.9% in 2013. The growth was

determined to be 5.2% from 2011 to 2012 but only 0.8% from 2012 to 2013.

The repurchase of Common Stock was authorized by the Board of Directors of Intel in

October 2005. The Notes to the Financial Statements stated that Intel repurchased 94.1

million shares of Common Stock in 2013, 191.0 million shares of Common Stock in 2012,

and 642.3 million shares of Common Stock in 2011. Vertical analysis above shows the

decreasing trend of Repurchase of Common Stock as a decrease in Total Sales over the

three years. The horizontal analysis also supports the decrease in Repurchase of Common

Stock from 2012 to 2013 compared to 2011 to 2012. An increase in Common Stock numbers

would indicate more Common Stock outstanding and a decrease would mean less

outstanding shares. The Number of Shares of Outstanding Common Stock decreased

from 2010 to 2012 and decreased from 2012 to 2013.

The Retained Earnings account is affected by Net Income and Dividends Paid. Net

Income decreased from 2011 to 2013. The Dividends Paid increased as a percentage of Net

Revenue over the years. There was a 5.4% increase from 2011 to 2012 and a 3.0% increase

from 2012 to 2013. Intel’s management was hiding the decrease in Net Income by paying

out increased Dividends to keep the stockholders happy. The value per share decreased as

the total Net Revenue decreased so the increases from year to year are deceiving. The

Basic Earnings per Common Share was $2.46 in 2011, $2.20 in 2012, and $1.94 in 2013.


There were a few facts that can now be verified after analyzing the Income Statement and

Statement of Stockholders’ Equity. The CEO and Chairman stated that the Earnings per

Share of $1.89 was a good return. They did not state that the company had been steadily

repurchasing Common Stock and that the price per share had also been decreasing over

the last three years. They still have the ability to repurchase more stock, up to the limit

set by the Board of Directors, but will they be able to continue the repurchases if their

overall Net Revenue is decreasing over time?

The analysis also revealed that Intel spends a great deal of money on R&D for new

technology which may or may not pay off in revenue. There is no way to predict if Intel’s

new technology will be profitable in the long run. These expenses do not seem

unreasonable at the time of this analysis but technology from other companies may be

developed that out-performs Intel or gives Intel a great amount of competition. Intel is

already seeing the decline of the PC Client Group as desktops become obsolete.

Management tried to emphasize that the Intel’s Net Income was at $9.6 billion with a

Revenue of $52.7 billion with $21 billion in Cash from Operations. They gave these dollar

values without breaking down the operation profits per business segment and they did not

describe where the $43.1 billion difference was being expensed. They also did not mention

that Net Sales had decreased overall. It is important for an analyst and the public to know

how the market changes will effect Intel’s future.

There were many facts that could not be determined from analyzing the financial

statements. Most of these facts were qualitative in nature and therefore did not correlate

to any quantification in the statements. The CEO stated that Intel was trying to reignite

growth by driving innovation to market faster. The only way to analyze the success of this

is to look at the times involved and the quality of the output. Another example is that the

Chairman stated that the people who work for Intel shared the public’s concerns about

safety, security, privacy and sustainability. This could only be verified by polling Intel’s

workforce and the general public for comparison.

Statement of Cash Flow Analysis

Cash Provided (Used) by Operating Activities

Depreciation

Depreciation is subtracted from Net Income and would therefore be added back to Net

Income to arrive at Operating Cash. Operating Cash would be greater than Net Income as

a result. The amount of Depreciation Expense for Intel has increased from $5,141 million

in 2011 to $6,357 million in 2012 (increase of 23.7%) to $6,790 million in 2013 (increase of

6.8%). Each increase in Depreciation would further increase the Operating Cash.

Intel saw a large increase in Depreciation Expense from 2011 to 2012. This large increase in

Depreciation Expense coincides with Intel’s acquisition of McAfee and the Wireless

Solutions business of Infineon Technologies AG. Further research and analysis of Intel’s

2011 financial reports is warranted to determine if the acquisitions were the direct cause of

the large percentage increase in Depreciation Expense from 2011 to 2012. Intel may have

added buildings, equipment or machinery to its assets as a result of these acquisitions.

The Depreciation increase from 2012 to 2013 of 6.8% may be attributed to the growth of

Intel. Page 59 of Intel’s Notes to the Financial Statements shows the increases in land and

buildings, machinery and equipment, and construction in progress from 2012 to 2013.

Intel is moving into other sectors of the computing business and therefore must expand

these assets in order to accommodate the growth. The Notes state that buildings are

depreciated over 10 to 25 years and machinery/equipment is depreciated over 2 to 4 years,

depending on each asset’s useful life. The buildings that are under construction will add

to Depreciation Expense once the buildings are completed and are used for Intel’s

business operations.

Depreciation will likely continue on as a positive trend in future years. Current

depreciable assets will continue to be depreciated until the end of their useful lives and

then will be replaced by other depreciable assets. As Intel continues to grow and expand

into other areas of the industry, they will likely add more buildings and machinery to

accommodate the growth. The computer and technology industry is fairly young so it is

likely that Intel will see growth for quite some time.

Share-based Compensation

Share-based Compensation includes the Employee Equity Incentive Plans. The Share-

based Compensation is added back to Net Income to arrive at Operating Cash. This

would increase the Operating Cash. According to Note 19 in the Notes to the Financial

Statements, stockholders have approved additional shares of stock for issuance in 2011 and

2013. Intel also acquired the Equity Incentive Plan of McAfee upon acquisition of the

company in 2011. The Equity Incentive Plans vest over a period of three to four years.

Intel uses a straight-line attribution method to recognize the Share-based Compensation

over the service period of the award.

Share-based Compensation increased by 4.7% from 2011 to 2012, likely due to acquisition

of other companies and expansion into other market segments. It increased by 1.5% from

2012 to 2013, which is a reasonable growth rate based on the additional shares authorized

for sale and Intel’s growth in the number of employees. The MD&A, page 39, states that

Intel has $1.7 billion in Unrecognized Share-based Compensation costs that they expect to

recognize over the next 1.1 – 1.2 years. Share-based Compensation will most likely

continue on a positive trend as Intel expands into other market segments and the price of

Intel’s stock increases. Employees will see the benefit of investing in Intel, which in turn,

will continue to add to their job satisfaction.

Amortization of Intangibles

Amortization of Intangibles would be added back to Net Income, similar to Depreciation,

to obtain Operating Cash. Therefore, Operating Cash would be greater than Net Income.

The Intangibles listed by Intel are Goodwill, Licensed Technology and Patents. Goodwill

is assessed for impairment during the fourth quarter of each year, as stated in the Notes to

the Financial Statements. The licensed technology and patents are “generally amortized

on a straight-line basis over the periods of benefit.” All acquisition-related intangibles are

amortized over their useful life.

Amortization of Intangibles increased significantly from 2011 to 2012, by 26.2%. As with

Depreciation, this coincided with the acquisition of McAfee and the Wireless Solutions

(WLS) business of Infineon Technologies AG. The 2011 acquisitions were described on

pages 74-75 of the Notes to the Financial Statements. Intel acquired $4,299 million in

Goodwill and $3,552 million in Identified Intangible Assets from McAfee and $517 million

of Goodwill and $1,409 million in Identified Intangible Assets from WLS. The increase in

Amortization of Intangibles was 6.6% from 2012 to 2013. This is due to development of

new technologies and the associated patents and licensed technologies. Both years’

increases would be added back to Net Income and would have increased Operating Cash.

Amortization of Intangibles is a positive trend which will continue to add to Operating

Cash in future years. Intel’s growth into new markets will result in new licensed

technologies and patents. There is still much to be discovered in this industry and Intel’s

management is determined to continue growth far into the future.

Operating Cash Analysis

The current year change in Operating Cash is positive. Cash Provided by Operations

increased by 10.0% from 2012 to 2013. It is difficult to determine if the positive trend will

continue. The Cash Provided by Operations was an decrease of 9.9% when comparing

2011 to 2012. Ideally Intel would want to generate cash from operations to use in other

activities rather than having to rely on increasing debt activities.

Operating Cash has increased as a percentage of cash inflows over the three years

presented. Operating Cash was 38.9% of cash inflows in 2011, 43.3% of cash inflow in 2012,

and 47.0% of cash inflows in 2013. The Summary Analysis shows a positive trend

indicating that Operating Cash is strong.

Cash Provided (Used) by Investing Activities

Additions to Property, Plant and Equipment

At the end of 2011, Intel reported that they had an outflow of $10,764 million for Property,

Plant and Equipment (PPE). This was double the amount reported for 2010 in the Selected

Financial Data of the 10-K report. Intel saw an increase in outflow of 2.4% for PPE during

2012 but sold off 2.9% of PPE during 2013. The Notes to the Financial Statements, Note 13

in particular, states that management had approved restructuring and exit of some

businesses and facilities in 2013 due to the current business environment.

Intel’s summary report shows that PPE was 17.5% of total outflows in 2011, 22.7% of total

outflows in 2012, and 22.0% of total outflows in 2013. The change from 2011 to 2012 is

significant (2.4% increase in outflow) and the analyst would need to investigate to find out

why there was such a large outflow for PPE in 2012. The Notes to the Financial Statements

show the amount of PPE owned during 2012 and 2013 but do not show 2011 for comparison.

It is unknown if the outflows in 2012 were due to an increase in land and buildings,

machinery and equipment or construction in progress.

The changes from 2012 to 2013 do not seem significant considering Intel owns properties

around the world for manufacturing components. In 2013, Intel owned 46.6 million

square feet of buildings and leased another 8.3 million square feet. It is expected that

Intel’s market will see fluctuations with each change in technology and the associated

needs for PPE. It will most likely be a positive trend that will continue to be an outflow

for the company.

Acquisitions, Net of Cash Acquired

Acquisitions were a very large part of total cash outflows in 2011. Note 8 of Intel’s Notes to

the Financial Statements describes the acquisitions for each of the three years reported.

Intel was able to secure some large investments with the acquisition of other companies.

McAfee was acquired in 2011 and the Notes state that the acquisition total consideration

was $6.7 billion, consisting of $6,652 million in cash and $48 million in share-based awards

assumed. Intel acquired an additional 13 business combinations in 2011 for a total of $2.1

billion. The summary report combines the acquisitions with Other Investment Activities.

These Other Investment Activities totaled 52.4 % of total cash outflows in 2011.

There was a significant drop of 92.7% in acquisitions in 2012 compared to 2011. Intel

acquired 15 business combinations which totaled $638 million. Total investment activities

remained high at 57.0% of total cash outflow, even with this drop in acquisitions. The

year of 2013 saw an increase in acquisitions over 2012 of 45.0%. This significant amount

included 12 acquisitions in exchange for $925 million. Total investment activities

increased to 63.1% of total cash outflows in 2013.

Purchases of Available-for-Sale investments

Intel purchased a significant amount of Available-for-Sale (AFS) Investments during 2011

through 2013. Available-for-Sale securities are one type of debt security that is purchased

and held for an unspecified amount of time. Most AFSs are sold before maturity and they

act as a quick way for a company to obtain cash when it is needed.

The cash outflow for purchases of Available-for-Sale Investments was $11,230 million in

2011, $8,694 million in 2012 and $12,493 million in 2013. These values are a very significant

portion of the Other Investment Activities seen on the Summary Analysis. Purchases of

AFSs decreased by 22.6% from 2011 to 2012 but increased from 2012 to 2013 by 43.7%.

Sales of Available-for-Sale Investments

Sales of Available-for-Sale (AFS) Investments was a large source of cash inflow for the

years 2011 – 2013. The largest cash inflow was in 2011 at an amount of $9,076 million. The

cash inflows from sales of AFSs in 2011 were from sales of debt investments which Intel

used to fund the large of McAfee. Cash inflows from Sales of AFSs dropped by 74.9% in

2012 as compared to 2011 and then dropped 59.1% in 2013 as compared to 2012. These

decreases in Sales of AFSs indicated that Intel did not need to sell these investments to

generate cash in 2012 and 2013.

Note 5 in the Notes to the Financial Statements shows the AFS investments include asset-

backed securities, bank deposits, commercial paper, corporate bonds, government bonds,

marketable equity securities and money market fund deposits. The Notes present a table

to show the adjusted cost, gross unrealized gains or losses and the fair value of each type

of AFS investment for the years of 2012 and 2013. The Note states that Intel sold AFS

investments for proceeds of $934 million in 2013 as compared to $2.3 billion in 2012 and

$9.1 billion in 2011.

Maturities of Available-for-Sale Investments

Intel classifies its AFS Investments according to their maturity dates. Some of the

investments have maturity dates less than three months, some are between three months

and one year, and some others have maturity dates beyond one year. They report all AFS

Investments at fair value.

When the AFS Investments reached their maturity dates, Intel was paid the principal or

face amount of the AFS. Intel had large cash inflows from maturity of AFSs. In 2011, the

cash inflow from maturity of AFSs was $11,029 million. This cash inflow dropped by 51.3%

in 2012 to $5,369 million but the increased by 55.3% in 2013 to $8,336 million. Intel

receives the same, if not more, cash inflow by waiting for their AFSs to mature rather than

selling before maturity. Ideally, it would be more beneficial for Intel to sale the AFSs

before maturity if they can gain on the sale.

Purchases of Trading Assets

Trading Assets are typically bought for the purpose of selling them again in the near

future to make a short-term profit. Intel’s Notes to the Financial Statements list the

following as Trading Assets: asset-back securities, bank deposits, commercial paper,

corporate and government bonds, money market funds deposits and municipal bonds.

Intel values all Trading Assets at fair value.

The Growth Analysis report shows that Intel’s purchases of Trading Assets increased by

49.3% in 2012 over 2011 but then decreased by 1.0% in 2013. Intel’s Notes state that as of

the end of 2012 and 2013, all of their Trading Assets were in the form of marketable debt

instruments. They had a net loss of $71 million in 2011, a net gain of $16 million in 2012 and

a net loss of $70 million in 2013 related to Trading Assets. No other information is given

considering the Purchases of Trading Assets.

Maturities and Sales of Trading Assets

The Trading Asset Maturity and Sales provided a great deal of cash inflow for Intel. In

2011, Intel saw an inflow of $11, 771 million which increased to $15,786 in 2012 (34.1%

increase). Intel then had a decrease in inflow to $13,677 million in 2013, which was a

decrease of 13.4%. No other information was given in Intel’s financial statements or Notes

to the Financial Statements regarding the Maturities and Sales of Trading Assets.

Investing Activities Analysis

The Summary Analysis shows a significant change in the percentage of cash outflow for

purchases of Property, Plant and Equipment (PPE) from 2011 to 2012 (17.5% to 22.7% of

total outflows) but there is no significant change from 2012 to 2013 (22.7% to 22.0% of total

outflows). The increase from 2011 to 2012 can potentially be attributed to commitments

Intel made for construction or purchases of Property, Plant and Equipment. The analyst

should investigate further to determine where the cash outflow was being used.

Growth Analysis shows that PPE increased by 2.4% of Total Assets from 2011 to 2012. From

2012 to 2013 there was a decrease in PPE by 2.9%. This is not a significant change when

compared to the amount of total assets that Intel owns and when the industry conditions

are examined. Technology is a very fast changing industry and Intel is continually

changing the products and services they offer, which in turn, effects the amount of PPE

Intel needs each year.

The Summary Analysis shows that investment activities are a very large part of total cash

inflows and outflows for Intel. Intel had cash inflows for investment activities that were

60.7% of total inflows in 2011, 56.6% of total inflows in 2013, and 53.0% of cash inflows in

2013. Cash outflows from other investment activities were 52.4% of total outflows in 2011,

57.0% of total outflows in 2012, and 63.1% of total outflows in 2013. These values indicate

that Intel has a large amount of investments that they can access for cash when needed.

They sold off some of their investments during 2011 – 2013 for cash to be used in acquiring

other companies, which in turn decreased their total inflows from other investment

activities.

Growth Analysis shows that acquisitions and Available-for-Sale Investments had the

biggest changes over the three years. Intel’s acquisition of McAfee was a tremendous cash

outflow in 2011 but the benefits of owning McAfee will be seen for years to come.

Available-for-Sale Investments are a good use of excess cash for Intel because they can buy

and sale them easily. Intel maintains a large amount of Available-for-Sale Investments.

Overall, the negative amount seen for Investing Activities is acceptable.

Cash Provided (Used) by Financing Activities

Issuance of Long-term Debt, Net of Issuance Costs

Intel makes loans to third parties and some are classified as Long-term Assets. The loans

are accounted for under Loans Receivable on Intel’s financial statements. No information

was given regarding to whom Intel had issued loans, if collateral was used, nor how Intel

determined the credit risk involved with issuing Long-term Debt.

Intel had cash inflow of $4,962 million in 2011 from issuing Long-term Debt. There was a

23.4% increase in 2012 to $6,124 million. Intel did not need to issue any Long-term Debt in

2013.

Proceeds from Sales of Shares through Employee Equity Incentive Plans

Intel allows their employees to purchase Intel stock as part of the Employee Equity

Incentive Plan. Intel had created a Stock Purchase Plan in 2006 that allowed eligible

employees to purchase Common Stock shares at 85% of the value on certain dates.

Stockholders approved an extension of this Stock Purchase Plan in 2011 and extended the

expiration of the 2006 plan to August 2016. As of May 2013, 719 million shares were

authorized and 216 million shares were available for issuance as of December 28, 2013.

Proceeds from the sale of Common Stock shares under this plan were $2,045 in 2011, $2,111

in 2012 and $1,588 in 2013. The cash inflow increased in 2012 by 3.2% but decreased in 2013

by 24.8%. Intel’s Notes do not specify why the cash inflow decreased but the analyst may

conclude that this activity is entirely up to the employees and employees were not

investing as much in Intel Common Stock shares.

Repurchase of Common Stock

Intel’s Board of Directors has given ongoing permission for Intel to repurchase a given

amount of Common Stock as Treasury Stock each year. Note 20 states that Intel has been

authorized to repurchase $45 billion in Common Stock shares from the open market or in

negotiated transactions. Since the beginning of the repurchase program in 1990, Intel has

repurchased 4.4 billion shares.

In 2011, Intel saw a cash outflow of $14,340 million for Common Stock repurchases. This

cash outflow decreased by 64.4% in 2012 to $5,110 million. In 2013, Intel decreased their

Repurchase of Common Stock again by 52.3% to $2,440 million. The MD&A states that

Intel bases the level of repurchases on internal cash management decisions. More specific

reasons for the decline in repurchases were not provided.

Payment of Dividends to Stockholders

Most businesses will continue to pay stockholders dividends to keep them happy even if

the company has to acquire more debt to pay them. Intel’s cash flow statement shows

that they had a cash outflow of $4,127 million (6.7% of total outflows) in 2011, an outflow of

$4,350 million (8.9% of total outflows) in 2012 and an outflow of $4,479 million (9.2% of

total outflows) in 2013 for payment of dividends. Since Intel’s Cash Flow from Operations

is decreasing and is not a larger inflow than investing and financing inflows, it is likely

that Intel had to sale Available-for Sale Investments to fund their Dividend payments.

The large negative amounts seen for Financing Activities is acceptable.

Change in Cash and Cash Equivalents

The Growth Analysis report shows that the change in Cash and Cash Equivalents was an

increase of $3,413 million (67.4%) from 2011 to 2012. The Cash and Cash Equivalents was a

decrease of 33.1%, or $2,804 million, from 2012 to 2013. The Operating Activities, Investing

Activities, and Financing Activities for Intel change so much from year to year that it is

difficult to state whether there will be a negative or positive trend in the Cash and Cash

Equivalents. Intel is a well-established company so negative amounts in Investing and

Financing Activities are acceptable. Intel has a strong Operating cash flow. If Intel

continues to expand by acquiring other companies and moving into other technology

niches, it is likely that their Cash from Operations will increase.

Other Cash Flow Issues

There was one concern in the Notes to the Financial Statements that would impact

analysis of cash flow issues. Note 27 shows that Net Revenue had decreased from 2011 –

2013 and two of the operating segments, Other Intel Architecture Operating segment and

All Other segment, have been losing money for the three years listed. This causes a steady

decrease in the Total Operating Income. The Software and Services Operating segment

has begun earning money after two years of losing money and the PC Client Group

segment is starting to decline with the phase out of PCs. Each operating segment should

be watched closely to determine if those operating segments need to be terminated,

especially the two that are losing money.

The MD&A stated that Intel did have a “strong cash generation from operations”, which

was supported by the analysis, but Intel did not expect Revenue and Gross Margin to

increase during 2014. They are optimistic that their focus on new innovative products will

allow future growth in multiple market segments.

Management did state that Operating Cash is their primary source of liquidity. Intel’s

Operating Cash was shown to have great fluctuations during 2011 – 2013, but it was still a

significant percentage of total cash inflows. Intel’s management would be wise to

carefully watch the fluctuations in Operating Cash for a change to a negative trend in the

upcoming years.


The analysis of the Cash Flow Statements allowed for verification of items that were

mentioned in the letters of the CEO and Chairman. The CEO mentioned that the Net

Income was $9.6 billion after delivered revenue of $52.7 billion. It is now more evident

where the excess $43.1 billion was being used. Intel uses much of that cash for other

investing activities and to continue to repurchase Common Stock shares. Intel has not yet

had to reissue any shares. The Earnings per Share will increase as the number of

outstanding shares decreases. This will continue to please shareholders. The continual

payment of dividends will also please shareholders and Intel’s new technology will allow

them to continue to maintain these actions.

Management did only present positive cash flow figures in the letters. The CEO

specifically mentioned that Cash Flow from Operations was “almost $21 billion”. There

was no mention as to whether the cash flow was a positive or negative trend, nor if there

was an overall inflow or outflow of cash for the year. Based on the cash flow analysis, it

appears that Intel had to sell investments to pay dividends and repurchase shares of

Common Stock. They are fortunate that they have that ability but it would be beneficial

for Intel to increase operations to fund these financing events.

Ratio Analysis

Ratio analysis was performed for Intel for 2012 and 2013 and against industry averages.

Ratios can be analyzed to compare short-run solvency, liquidity of current assets, asset

management and amount of debt owed, coverage of debt, profit margins and returns. The

ratios are shown in Table 7.

Liquidity

Intel’s Current Ratio has stayed around 2.4 for both 2012 and 2013. The Current Ratio

shows that Intel has 2.4 times more Current Assets than Current Liabilities and shows that

they have the ability to meet their debts in the short-term by selling Current Assets. Intel

has a better Current Ratio than the industry average of 2.2 so they are more liquid than

most businesses in the industry. The Current Ratio does not take into account the types

of Current Assets that Intel owns so the analyst would need to closely review Intel’s

Current Assets to determine Intel’s true short-term liquidity.

The Quick Ratio is used to determine the immediate liquidity of a business by removing

Inventory from the Current Assets before dividing by Current Liabilities. Inventory may

not be readily saleable and Intel does have Inventory that may be considered obsolete and

may never be sold. Intel classifies products under Inventory “beginning in the quarter in

which a product meets the technical criteria to qualify for sale to customers.” (Intel’s

Notes to Consolidated Financial Statements, 59). Intel’s Quick Ratio has stayed the same

from 2012 to 2013 at 2.1. The industry average is 1.2 so Intel has twice as much immediate

liquidity than other companies in the industry.

Intel has done very well with collection of Accounts Receivable over 2012 and 2013. In

2012, their Average Collection Period was 26 days and they reduced to 25 days in 2013.

This is well below the industry average of 46 days and shows that Intel is much better at

collecting from customers than other businesses in the industry. Intel may have more

restrictive credit policies than other businesses. It would be beneficial for Intel to review

the payment terms with their customer contracts to ensure they are being met.

In 2012, Intel had an average of 86 Days Inventory Held. They were able to greatly

improve in 2013 by reducing the number of days their inventory was held to 72 days. It is

not described how Intel reduced the Days Inventory Held but it may be because they were

able to get rid of older or obsolete inventory. The industry average is 70 days, so Intel is in

line with the rest of the industry in 2013.

The Days Payable Outstanding shows a businesses’ relationship with their vendors. The

Days Payable Outstanding for Intel was 55 days in 2012 and 51 days in 2013. The industry

average was 44 days. Intel has a good relationship with their vendors since they stretched

their Days Payable Outstanding on average of 10 days above the industry.

The Cash Conversion Cycle is a calculation of the Average Collection Period plus the Days

Inventory Held minus the Days Payable Outstanding. This calculation shows where cash

flow has changed. Intel’s Cash Conversion Cycle was 57 in 2012 and 46 in 2013. The

industry average was 72. Intel has improved their Cash Conversion Cycle by improving

collection of Accounts Receivable, reducing the Days Inventory Held and having a longer

Days Payable Outstanding. Their cash is coming in from customers faster than they are

paying their suppliers, which is an ideal cash flow situation.

Operating Efficiency

Operating efficiency is a measure of how well a business manages its assets. Three

of the Asset Management ratios are complements of ratios dealing with liquidity.

Those three ratios are Accounts Receivable Turnover, Inventory Turnover, and

Accounts Payable Turnover.

The Accounts Receivable Turnover is a complement of the Average Collection

Period. This ratio calculates the number of times the company collects receivables

during the period in question. Intel had an Accounts Receivable Turnover of 13.9

in 2012 and 14.7 in 2013. The industry average was 8.0. This again shows that Intel

is able to collect from their customers better than other businesses in the industry.

The Inventory Turnover is a complement of the Days Inventory Held. Intel

improved their Inventory Turnover from 2012 to 2013. In 2012 Intel had an

Inventory Turnover of 4.3 and in 2013 it was 5.1. The industry average was 5.2 so

Intel was right at the industry average in 2013. Intel would like to see faster

Inventory Turnover so there is less cash tied up in inventory that might become

obsolete.

The Accounts Payable Turnover is a complement of the Days Payable Outstanding.

Intel’s Days Payable Outstanding was longer than industry average and therefore

their Accounts Payable Turnover was less than industry average. The industry

average for 2013 was 8.3 but Intel had an Accounts Payable Turnover of 6.7 in 2012

and 7.1 in 2013. Intel was able to take longer to pay their vendors so they had fewer

times than industry average for Accounts Payable Turnover.

Fixed Asset Turnover and Total Asset Turnover show how efficiently the company

uses their various assets to generate sales. The Fixed Asset Turnover is expected to

be high for manufacturers because the calculation is performed using only

Property, Plant and Equipment. The industry average for Fixed Asset Turnover is

15.2 times but Intel had 1.9 times in 2012 and 1.7 times in 2013. Total Asset

Turnover followed the same trends: industry average was 1.5 times but Intel had

0.6 times in 2012 and 2013. The lower Fixed Asset Turnover and Total Asset

Turnover for Intel is likely due to the fact that Intel has large amounts of

Marketable Securities and Long-term Investments that are included in Non-

operating Revenue rather than in Net Sales.

Profitability

Margins

Gross Profit is calculated by subtracting the Cost of Sales from the Net Sales. The Gross

Profit Margin shows the percentage of each dollar of sales that goes into Net Income. The

Gross Profit Margin for Intel was 62.15% in 2012 and 59.80% in 2013. Although they saw a

decrease in their Gross Profit Margin, Intel is more than double the average margin of

other businesses in the industry at 28.7%.

Operating Income is calculated by subtracting Operating Expenses from the Gross

Margin. Intel had Operating Profit Margin of 27.44% in 2012 and 23.32% in 2013. The

industry average was 1.6%. Intel has an enormous advantage over other companies in the

industry with a large amount of Operating Cash left after paying for variable costs during

operations. This ensures that Intel will be able to pay non-operating costs.

Intel’s profitability margins above show that Intel is hugely successful compared to others

in the industry. Creditors and investors look at profitability margins to determine the

earning power of a company. Intel would be favorable to both creditors and investors.

Profitability also reflects on management’s operating effectiveness and Intel’s

management seems to be managing effectively.

Returns

The Returns on Assets (ROA) calculation shows how well a company’s assets contribute to

Revenue generation. This value is useful when comparing companies within the same

industry. Intel’s ROA for 2012 was 13.05% and for 2013 it was 10.42%. The industry average

was not available so IBM’s 2013 ROA was used. IBM had an ROA of 13.43%. This shows

that Intel is not as good as IBM at managing their assets and in producing a return to their

shareholders as IBM was in 2013 but they did improve from 2012 to 2013.

The Return on Equity (ROE) shows the profitability from the viewpoint of the stockholder

by looking at the company returns to common stockholders. Intel had an ROE of 21.49%

in 2012 and an ROE of 16.51% in 2013. Again, the industry average was not available so

IBM’s ROE was used. IBM had an ROE of 79.15%. Intel was on the lower end for returns

when compared to IBM. Also, since the ROE was higher than the ROA, it is clear that

Intel used outside financing to pay stockholders’ returns.

Market Measures

The Earnings per Share (EPS) is a measure of the amount of Net Income earned for each

share of Common Stock outstanding. This value can vary drastically from one year to the

next due to the changes in Net Income and the number of outstanding shares. The Basic

Number of Outstanding Common Stock was used for the calculation. Intel’s EPS in 2012

was $2.20 and in 2013 was $1.94. Industry average was not available so IBM’s EPS for 2013

was used for comparison. IBM’s EPS was $15.06. IBM definitely had an advantage in this

ratio. The analyst would need to review IBM’s financial statements to determine if the

difference was due to increased Net Income or fewer shares outstanding compared to

Intel.

The Price to Earnings ratio is calculated by dividing the market price for each share of

Common Stock by the EPS. This ratio gives an idea of how investors feel about the

company’s future earnings. The market price for Intel stock was retrieved from page 109

of Intel’s 10-K report. The high value at year end was used. Intel’s Common Stock market

price for 2012 was $22.84 per share and for 2013 it was $25.70 per share. Intel’s Price to

Earnings ratio for 2012 was 10.38 and for 2013 it was 13.25. IBM’s Price to Earnings was 11.58

in 2013. Intel had a higher Price to Earnings in 2013 showing that the market places a

higher value on Intel’s stock.

Leverage

The leverage of a company deals with how well the company will be able to cover

their debt payments for the long term. Creditors want to know that interest and

principle payments will be covered on outstanding debts.

The Debt to Assets ratio determines how much leverage a company has when it

comes to paying their debts. It gives an approximation of how much of the

company’s assets it can lose but still pay debts. Intel’s Debt to Assets ratio was

39.3% in 2012 and 36.9% in 2013. The industry average was higher at 49.7%. Intel

does not have as much leverage when it comes to paying debts as most other

companies in the industry.

The Debt to Equity ratio is used by creditors to determine if the equity within a

company is sufficient to pay interest and principle payments if assets cannot cover

the payments. Creditors would like to see low values for this ratio. Intel had a

Debt to Equity ratio of 1.7 in 2012 and 1.6 in 2013. They are higher than the industry

average of 1.1 so Intel may have a slight disadvantage if they wanted to obtain debt

financing.

The Times Interest Earned ratio determines how well a company will be able to

pay interest payments as they are due. Ideally a company would want to have a

high ratio to ensure they can meet these debts. The industry average for Times

Interest Earned was 8.2 whereas Intel had a Times Interest Earned of 155.7 in 2012

and 81.4 in 2013. Intel is in a very good position to be able to cover their interest

payments.

Conclusion

Financial statement analysis of Intel Corporation shows a company that is well-established

and mature. Intel has an ideal cash flow situation because they are generating the

majority of the cash inflows from operations. Intel also has many investments that allow

Intel to continue to get benefits from the interest they receive on the investments and the

maturity of the investments.

Financial ratio analysis shows that Intel is more liquid than other companies in the

industry. They are more profitable and have better leverage than competitors. Intel is

better at collecting from their customers and Intel takes longer to pay their vendors than

others in the industry. Their operating efficiency is on par with or better than industry

average. Intel does show room for improvement in the Earnings per Share and in the

Return on Equity. At the time, Intel had lower Earnings per Share and Returns on Equity

than IBM. Increasing these two ratios would ensure that shareholders are kept happy and

other investors are attracted to Intel. The Price to Earnings ratio shows that Intel’s

investors do feel confident in Intel’s future. Intel’s Price to Earnings was also higher than

IBM’s in 2013 showing that Intel was a strong force in the market. Intel is following the

trend in updated technology and their involvement in other computing fields will allow

them to continue to see growth for many years to come.

Table 1. Common-size Balance Sheet


Assets

Current Assets:

Cash and Cash Equivalents 5,674$ 8,478$ (2,804)$ (33.1)

Short-term Investments 5,972 3,999 1,973 49.3

Trading Assets 8,441 5,695 2,746 48.2

Accounts Receivable, Net of Allowance for Doubtful

Accounts of $38 ($38 in 2012) 3,582 3,833 (251) (6.5)

Inventories 4,172 4,734 (562) (11.9)

Deferred Tax Assets 2,594 2,117 477 22.5

Other Current Assets 1,649 2,512 (863) (34.4)

Total Current Assets 32,084 31,368 716 2.3

Property, Plant and Equipment, Net 31,428 27,983 3,445 12.3

Marketable Equity Securities 6,221 4,424 1,797 40.6

Other Long-term Investments 1,473 493 980 198.8

Goodwill 10,513 9,710 803 8.3

Identified Intangible Assets, Net 5,150 6,235 (1,085) (17.4)

Other Long-term Assets 5,489 4,148 1,341 32.3

Total Assets 92,358$ 84,361$ 7,997 9.5

Liabilities and Stockholders' Equity

Current Liabilities:

Short-term Debt 281.00 312.00 (31) (9.9)

Accounts Payable 2,969 3,023 (54) (1.8)

Accrued Compensation and Benefits 3,123 2,972 151 5.1

Accrued Advertising 1,021 1,015 6 0.6

Deferred Income 2,096 1,932 164 8.5

Other Accrued Liabilities 4,078 3,644 434 11.9

Total Current Liabilities 13,568 12,898 670 5.2

Long-term Debt 13,165 13,136 29 0.2

Long-term Deferred Tax Liabilities 4,397 3,412 985 28.9

Other Long-term Liabilities 2,972 3,702 (730) (19.7)

Total Liabilities 34,102 33,148 954 2.9

Commitments and Contingencies

Stockholders' Equity:

Preferred Stock - - - -

Common Stock 21,536 19,464 2,072 10.6

Accumulated Other Comprehensive Income (loss) 1,243 (399) 1,642 (411.5)

Retained Earnings 35,477 32,138 3,339 10.4

Total Stockholders' Equity 58,256 51,203 7,053.00 13.8

Total Liabilities and Stockholders' Equity 92,358$ 117,499$ (25,141)$ (21.4)

Intel CorporationConsolidated Balance Sheet

December 28, 2013 and December 29, 2012(In Millions, Except Par Value)

Table 2. Growth Analysis Balance Sheet

2013 % Total Assets 2102 % Total Assets

Assets

Current Assets:

Cash and Cash Equivalents 5,674$ 6.1 8,478$ 10.0

Short-term Investments 5,972 6.5 3,999 4.7

Trading Assets 8,441 9.1 5,695 6.8

Accounts Receivable, Net of Allowance for Doubtful Accounts

of $38 ($38 in 2012) 3,582 3.9 3,833 4.5

Inventories 4,172 4.5 4,734 5.6

Deferred Tax Assets 2,594 2.8 2,117 2.5

Other Current Assets 1,649 1.8 2,512 3.0

Total Current Assets 32,084 34.7 31,368 37.2

Property, Plant and Equipment, Net 31,428 34.0 27,983 33.2

Marketable Equity Securities 6,221 6.7 4,424 5.2

Other Long-term Investments 1,473 1.6 493 0.6

Goodwill 10,513 11.4 9,710 11.5

Identified Intangible Assets, Net 5,150 5.6 6,235 7.4

Other Long-term Assets 5,489 5.9 4,148 4.9

Total Assets 92,358$ 100.0 84,361$ 100.0

Liabilities and Stockholders' Equity

Current Liabilities:

Short-term Debt 281 0.3 312 0.4

Accounts Payable 2,969 3.2 3,023 3.6

Accrued Compensation and Benefits 3,123 3.4 2,972 3.5

Accrued Advertising 1,021 1.1 1,015 1.2

Deferred Income 2,096 2.3 1,932 2.3

Other Accrued Liabilities 4,078 4.4 3,644 4.3

Total Current Liabilities 13,568 14.7 12,898 15.3

Long-term Debt 13,165 14.3 13,136 15.6

Long-term Deferred Tax Liabilities 4,397 4.8 3,412 4.0

Other Long-term Liabilities 2,972 3.2 3,702 4.4

Total Liabilities 34,102 36.9 33,148 39.3

Commitments and Contingencies

Stockholders' Equity:

Preferred Stock - - - -

Common Stock 21,536 23.3 19,464 23.1

Accumulated Other Comprehensive Income (loss) 1,243 1.3 (399) (0.5)

Retained Earnings 35,477 38.4 32,138 38.1

Total Stockholders' Equity 58,256 63.1 51,203 60.7

Total Liabilities and Stockholders' Equity 92,358$ 100.0 84,351$ 100.0

Intel CorporationConsolidated Balance Sheet

December 28, 2013 and December 29, 2012(In Millions, Except Par Value)

Table 3. Common-size Income Statement

Table 4. Growth Analysis Income Statement

2013 % Net Sales 2012 % Net Sales 2011 % Net Sales

Net Revenue 52,708$ 100.0 53,341$ 100.0 53,999$ 100.0

Cost of Sales 21,187 40.2 20,190 37.9 20,242 37.5

Gross Margin 31,521 59.8 33,151 62.1 33,757 62.5

Research and Development 10,611 20.1 10,148 19.0 8,350 15.5

Marketing, General and Administrative 8,088 15.3 8,057 15.1 7,670 14.2

Restructuring and Asset Impairment Changes 240 0.5 - 0.0 - 0.0

Amortization of Acquisition-related Intangibles 291 0.6 308 0.6 260 0.5

Operating Expenses 19,230 36.5 18,513 34.7 16,280 30.1

Operating Income 12,291 23.3 14,638 27.4 17,477 32.4

Gains (losses) on Equity Investments, Net 471 0.9 141 0.3 112 0.2

Interest and Other, Net (151) (0.3) 94 0.2 192 0.4

Income before Taxes 12,611 23.9 14,873 27.9 17,781 32.9

Provision for Taxes 2,991 5.7 3,868 7.3 4,839 9.0

Net Income 9,620$ 18.3 11,005$ 20.6 12,942$ 24.0

Basic Earnings per Common Share 1.94$ 2.20$ 2.46$

Diluted Earnings per Common Share 1.89$ 0.75$ 2.39$

Weighted Average Common Shares Outstanding

Basic 4,970 4,996 5,256

Diluted 5,097 5,160 5,411

Intel CorporationConsolidated Statements of Income

Three Years Ended December 28, 2013(In Millions, Except Per Share Amounts)

2013 2012 $ Change % Change 2012 2011 $ Change % Change

Net Revenue 52,708$ 53,341$ (633)$ (1.2) 53,341$ 53,999$ (658)$ (1.2)

Cost of Sales 21,187 20,190 997 4.9 20,190 20,242 (52) (0.3)

Gross Margin 31,521 33,151 (1,630) (4.9) 33,151 33,757 (606) (1.8)

Research and Development 10,611 10,148 463 4.6 10,148 8,350 1,798 21.5

Marketing, General and Administrative 8,088 8,057 31 0.4 8,057 7,670 387 5.0

Restructuring and Asset Impairment Changes 240 - 240 - - - -

Amortization of Acquisition-related Intangibles 291 308 (17) (5.5) 308 260 48 18.5

Operating Expenses 19,230 18,513 717 3.9 18,513 16,280 2,233 13.7

Operating Income 12,291 14,638 (2,347) (16.0) 14,638 17,477 (2,839) (16.2)

Gains (losses) on Equity Investments, Net 471 141 330 234.0 141 112 29 25.9

Interest and Other, Net (151) 94 (245) (260.6) 94 192 (98) (51.0)

Income before Taxes 12,611 14,873 (2,262) (15.2) 14,873 17,781 (2,908) (16.4)

Provision for Taxes 2,991 3,868 (877) (22.7) 3,868 4,839 (971) (20.1)

Net Income 9,620$ 11,005$ (1,385)$ (12.6) 11,005$ 12,942$ (1,937)$ (15.0)

Basic Earnings per Common Share 1.94$ 2.20$ (0.27)$ (12.1) 2.20$ 2.46$ (0)$ (10.5)

Diluted Earnings per Common Share 1.89$ 0.75$ 1.14$ 151.8 0.75$ 2.39$ (2)$ (68.7)

Weighted Average Common Shares Outstanding

Basic 4,970 4,996 (26) (0.5) 4,996 5,256 (260) (4.9)

Diluted 5,097 5,160 (63) (1.2) 5,160 5,411 (251) (4.6)

Intel CorporationConsolidated Statements of Income


Table 5. Common-size Statement of Equity

Table 6. Growth Analysis Statement of Equity

2013 % Total 2012 % Total 2011 % Total

Components of Comprehensive Income, Net of Tax:

Net Income 9,620$ 16.5 11,005$ 21.5 12,942$ 28.2

Other Comprehensive Income (Loss) 1,642 2.8 382 0.7 (1,114) (2.4)

Total Comprehensive Income 11,262 19.3 11,387 22.2 11,828 25.8

Proceeds from Sales of Shares through Employee Equity

Incentive Plans, Net Tax Deficiency, and Other 1,593 2.7 2,257 4.4 2,019 4.4

Assumption of Equity Awards in Connection with Acquisitions - - 48 0.1

Share-based Compensation 1,117 1.9 1,108 2.2 1,053 2.3

Repurchase of Common Stock (2,440) (4.2) (5,110) (10.0) (14,340) (31.2)

Cash Dividends Declared ($0.7824 per common share) (4,479) (7.7) (4,350) (8.5) (4,127) (9.0)

Total 58,256$ 100.0 51,203$ 100.0 45,911$ 100.0

Intel CorporationCommon-size Statement of Stockholders' Equity


2013 2012 $ Change % Change 2012 2011 $ Change % Change

Components of Comprehensive Income, Net of Tax:

Net Income 9,620$ 11,005$ (1,385)$ (12.6) 11,005$ 12,942$ (1,937)$ (15.0)

Other Comprehensive Income (Loss) 1,642 382 1,260.0 329.8 382 (1,114) 1,496 (134.3)

Total Comprehensive Income 11,262 11,387 (125.0) (1.1) 11,387 11,828 (441) (3.7) Proceeds from Sales of Shares through Employee Equity

Incentive Plans, Net Tax Deficiency, and Other 1,593 2,257 (664.0) (29.4) 2,257 2,019 238 11.8

Assumption of Equity Awards in Connection with Acquisitions - 48 (48) (100.0)

Share-based Compensation 1,117 1,108 9.0 0.8 1,108 1,053 55 5.2

Repurchase of Common Stock (2,440) (5,110) 2,670.0 (52.3) (5,110) (14,340) 9,230 (64.4)

Cash Dividends Declared ($0.7824 per common share) (4,479) (4,350) (129.0) 3.0 (4,350) (4,127) (223) 5.4

Total 58,256$ 51,203$ 7,053$ 13.8 51,203$ 45,911$ 5,292$ 11.5

Intel CorporationHorizontal Analysis of Statement of Stockholders' Equity


Table 7. Ratio Analysis

Industry2013 2012

Ratio:

Liquidity

Current Ratio 2.4 2.4 2.2

Quick Ratio 2.1 2.1 1.2

Avg. Collection Period 25 26 46

Days Inventory Held 72 86 70

Days Payable Outstanding 51 55 44

Cash Conversion Cycle 46 57 72

Operating Efficiency

Accounts Receivable Turnover 15 14 8

Inventory Turnover 5.1 4.3 5.2

Accounts Payable Turnover 7.1 6.7 8.3

Fixed Asset Turnover 1.7 1.9 15.2

Total Asset Turnover 0.6 0.6 1.5

Return on Total Assets (%) 10.41 13.05 13.43

Profitablility

Gross Profit Margin (%) 59.80 62.15 28.70

Operating Profit Margin (%) 23.32 27.44 1.6

Returns on Total Assets (%) 10.42 13.05 13.43

Return on Equity (%) 16.51 21.49 79.15

Earnings per Share 1.94 2.20 15.06

Price to Earnings 13.25 10.38 11.58

Leverage

Debt to Assets (%) 36.9 39.3 49.7

Debt to Equity 1.6 1.7 1.1

Times Interest Earned 81.4 155.7 8.2

Intel

Intel CorporationRatio Analysis

Two Years Ending December 28, 2013

References

Fraser, L. M., & Ormiston, A. (2016). Understanding Financial Statements, Eleventh Edition.

Boston: Pearson.

Intel Corporation. (2013). Intel Corporation 2013 Annual Report. Retrieved from Intel

Corporation.

intel corporation€¦ · intel corporation’s business is in the semiconductor industry: they...

Documents