Higher volumes of flash memory and chipset products also contributed toward the increase in revenues from 1994 to 1996 and also helped enable the successful Pentium and Pentium Pro microprocessor ramps. Revenues from embedded control products and networking and communications products also grew over this period.
Intel posted record net revenues in 1996, for the tenth consecutive year, rising by 29% from 1995 to 1996 and by 41% from 1994 to 1995. Higher volumes of the rapidly ramping Pentium(R) microprocessor family, partially offset by lower processor prices and decreased revenues from sales of related board-level products, were responsible for most of the growth in revenues from 1995 to 1996. The Pentium(R) Pro microprocessor family, introduced in late 1995, also contributed to the growth in revenues from 1995 to 1996. The growth in revenues from 1994 to 1995 was driven primarily by higher volumes of the Pentium processor family and related board-level products, which surpassed sales of the Intel486(TM) microprocessor family in the third quarter of 1995. Revenues from the Intel486 microprocessor family declined substantially in 1995 and 1996, primarily due to this shift in market demand toward the Company's more advanced microprocessors.
Cost of sales increased by 17% from 1995 to 1996 and by 40% from 1994 to 1995. The overall growth in cost of sales from 1994 to 1996 was driven by unit volume growth in Pentium microprocessor and related board-level products, new factories commencing production, manufacturing process conversions and shifts in product mix. While revenues increased substantially from 1995 to 1996, growth in cost of sales was significantly less. Cost of sales in the first half of 1996 and the fourth quarter of 1995 were negatively impacted by unusually high reserves related to inventories of certain purchased components. The second half of 1996 was favorably impacted by factory efficiencies from higher volumes, as well as relatively lower new factory startup costs. In addition, in the second half of 1996 the Company sold significantly more processor products than in the second half of 1995.
The gross margin percentage was 56% in 1996, compared to 52% in 1995 and 1994. However, as a result of all of the revenue and cost factors discussed above, the gross margin percentage in the second half of 1996 was 60% (63% in the fourth quarter), compared to 50% in the second half of 1995 (48% in the fourth quarter). Gross margin for the fourth quarter of 1994 included the impact of a $475 million charge, primarily to cost of sales, related to a divide problem in the floating point unit of the Pentium microprocessor. See "Outlook" for a discussion of gross margin expectations.
Sales of Pentium microprocessors and related board-level products comprised a majority of the Company's revenues and a substantial majority of its gross margin during 1995 and 1996. During 1996 Pentium Pro microprocessors and related board-level products became an increasing portion of the Company's revenues and gross margin. The Intel486 microprocessor family contributed negligible revenues and gross margin during 1996. During 1995, the Intel486 microprocessor family represented a significant but rapidly declining portion of the Company's revenues and gross margin, while it comprised a majority of the Company's revenues and a substantial majority of its gross margin during 1994.
Research and development spending grew by 40% from 1995 to 1996 and 17% from 1994 to 1995, as the Company substantially increased its investments over this time period in strategic programs, particularly for the internal development of microprocessor products and related manufacturing technology. Increased spending for marketing programs, including media merchandising and the Company's Intel Inside(R) cooperative advertising program, and other revenue-dependent expenses drove the 26% and 27% increases in marketing, general and administrative expenses from 1995 to 1996 and from 1994 to 1995, respectively.
The $4 million decrease in interest expense from 1995 to 1996 was mainly due to lower average borrowing balances and interest rates in 1996, partially offset by lower interest capitalization. The decrease in interest expense from 1994 to 1995 was primarily due to lower average borrowing balances in 1995 in addition to higher interest capitalization resulting from increased facility construction programs.
Although the Company had higher average investment balances in 1996, interest and other income decreased by $9 million from 1995 to 1996, primarily due to the offsetting effect of $118 million in unusual gains in 1995. Interest and other income increased by $142 million from 1994 to 1995, mainly due to the previously noted gains in 1995, in addition to higher average interest rates on investments in 1995.
The Company utilizes investments and corresponding interest rate swaps to preserve principal while enhancing the yield on its investment portfolio without significantly increasing risk, and uses forward contracts, options and swaps to hedge foreign currency, equity and interest rate market exposures of underlying assets, liabilities and other obligations. Gains and losses on these instruments are generally offset by those on the underlying hedged transactions; as a result, there was no material net impact on the Company's financial results during the 1994 to 1996 period.
The Company's effective income tax rate decreased to 35.0% in 1996 compared to 36.8% and 36.5% in 1995 and 1994, respectively.
The Company's financial condition remains very strong. As of December 28, 1996, total cash and short- and long-term investments totaled $9.3 billion, up from $4.1 billion at December 30, 1995. Cash generated from operating activities rose to $8.7 billion in 1996, compared to $4.0 billion and $2.9 billion in 1995 and 1994, respectively.
Investing activities consumed $5.3 billion in cash during 1996, compared to $2.7 billion during 1995 and $2.9 billion during 1994, as operating activities generated significantly more cash during 1996. Capital expenditures totaled $3.0 billion in 1996, as the Company continued to invest in property, plant and equipment, primarily for microprocessor manufacturing capacity. The Company had committed approximately $1.6 billion for the construction or purchase of property, plant and equipment as of December 28, 1996. See "Outlook" for a discussion of capital expenditure expectations in 1997.
Inventory levels, particularly raw materials and finished goods, decreased significantly in 1996. This decrease was primarily attributable to the sell-through of purchased parts inventory and lower costs of manufacturing. The increase in accounts receivable in 1996 was mainly due to revenue growth, offset somewhat by improved receivable collections. During 1995, the Company experienced an increase in its concentration of credit risk due to increasing trade receivables from sales to manufacturers of microcomputer systems. Although the financial exposure to individual customers has increased with the growth in revenues, the concentration of credit among the largest customers has decreased slightly in 1996. The Company's five largest customers accounted for approximately 30% of net revenues for 1996. At December 28, 1996, these customers accounted for approximately 25% of net accounts receivable.
The Company used $773 million for financing activities in 1996, compared to $1.1 billion and $557 million in 1995 and 1994, respectively. The major financing applications of cash in 1996 and 1995 were for stock repurchases totaling $1.3 billion for 16.8 million shares (including $108 million for exercised put warrants) and $1.0 billion for 18.9 million shares, respectively. Financing applications of cash in 1994 included stock repurchases of $658 million and the early retirement of the Company's 8 1/8% debt. Financing sources of cash during 1996 included $300 million under a private reverse repurchase arrangement and $261 million in proceeds from the sale of shares primarily pursuant to employee stock plans ($192 million in 1995 and $150 million in 1994).
As part of its authorized stock repurchase program, the Company had outstanding put warrants at the end of 1996, with the potential obligation to buy back 4.5 million shares of its Common Stock at an aggregate price of $275 million. The exercise price of these warrants ranged from $56 to $69 per share, with an average exercise price of $61 per share as of December 28, 1996.
Other sources of liquidity include combined credit lines and authorized commercial paper borrowings of $1.8 billion, $30 million of which was outstanding at December 28, 1996. The Company also maintains the ability to issue an aggregate of approximately $1.4 billion in debt, equity and other securities under Securities and Exchange Commission (SEC) shelf registration statements. The Company believes that it has the financial resources needed to meet business requirements in the foreseeable future, including capital expenditures for the expansion of worldwide manufacturing capacity, working capital requirements, the potential put warrant obligation and the dividend program.
The outlook section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially.
Intel expects that the total number of personal computers using Intel's Pentium and Pentium Pro microprocessors and other semiconductor components sold worldwide will continue to grow in 1997. Intel has expanded manufacturing capacity over the last few years and continues to expand capacity. Intel's financial results are substantially dependent on this market segment. Revenue is also a function of the mix of microprocessors and related motherboards and the mix of microprocessor types and speed, all of which are difficult to forecast. Because of the large price difference between types of microprocessors, this mix affects the average price Intel will realize and has a large impact on Intel's revenues.
Intel's strategy has been, and continues to be, to introduce ever higher performance microprocessors. To implement this strategy, the Company plans to cultivate new businesses and continue to work with the software industry to develop compelling applications that can take advantage of this higher performance, thus driving demand toward the newer products. In line with this strategy, the Company has recently announced higher performance members of the Pentium microprocessor family, including the Pentium processor with MMX(TM) technology. Capacity has been planned based on the assumed continued success of the Company's strategy. If the market demand does not continue to grow and move rapidly toward higher performance products, revenues and gross margin may be impacted, the manufacturing capacity installed might be under-utilized and capital spending may be slowed. The Company may continue to reduce microprocessor prices aggressively and systematically to bring its technology to market.
The Company's gross margin percentage is a sensitive function of the product mixes sold in any period. Because the percentage of motherboards that Intel's customers purchase changes with the maturity of the product cycle, and motherboards generally have lower gross margin percentages than microprocessors, Intel's gross margin percentage varies depending on the mix of microprocessors and related motherboards within a product family and the mix of types of microprocessors. Various other factors, including unit volumes and costs, and yield issues associated with production at factories, processor speed mix and mix of shipments of other semiconductors, will also continue to affect the amount of cost of sales and the variability of gross margin percentages in future quarters. The Company's goal continues to be to grow gross margin dollars. Intel's current gross margin expectation for 1997 is 60% plus or minus a few points. However, the Company believes that over the long-term the gross margin percentage will be 50% plus or minus a few points, as the Company introduces higher performance products and costs continue to increase. In addition, from time to time the Company may forecast a range of gross margin percentages for the coming quarter. Actual results may differ from these estimates.
To implement its strategy, Intel continues to build capacity to produce high-performance microprocessors and other products. The Company expects that capital spending will increase to approximately $4.5 billion in 1997 to support significant expansion of worldwide manufacturing capacity. This spending plan is dependent upon changes in manufacturing efficiencies, delivery times of various machines and construction schedules for new facilities. Depreciation for 1997 is expected to be approximately $2.5 billion, an increase of approximately $600 million from 1996. Most of this increased depreciation would be included in cost of sales and research and development spending.
The industry in which Intel operates is characterized by very short product life cycles. Intel considers it imperative to maintain a strong research and development program to continue to succeed. The Company will also continue spending to promote its products and to increase the value of its product brands. Based on current forecasts, spending for marketing and general and administrative expenses is expected to increase in 1997.
The Company currently expects its tax rate to increase to 35.5% for 1997. This estimate is based on current tax law and current estimate of earnings, and is subject to change.
The Company's future results of operations and the other forward-looking statements contained in this outlook, in particular the statements regarding growth in the personal computer industry, gross margin, capital spending, depreciation, research and development, and marketing and general and administrative expenses, involve a number of risks and uncertainties. In addition to the factors discussed above, among the other factors that could cause actual results to differ materially are the following: business conditions and growth in the computing industry and in the general economy; changes in customer order patterns, including timing of delivery and changes in seasonal fluctuations in PC buying patterns; competitive factors, such as rival chip architectures, competing software-compatible microprocessors, acceptance of new products and price pressures; risk of inventory obsolescence due to shifts in market demand; variations in inventory valuation; timing of software industry product introductions; continued success in technological advances and their implementation, including the manufacturing ramp; shortage of manufacturing capacity; risks associated with foreign operations; changes in product mixes; and litigation involving intellectual property and consumer issues.
Intel believes that it has the product offerings, facilities, personnel, and competitive and financial resources for continued business success, but future revenues, costs, margins and profits are all influenced by a number of factors, including those discussed above, all of which are inherently difficult to forecast.
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Content published April 8, 1997.