IntelResults of operations. Intel broke a record in net revenues in 1995, for theninth consecutive year, rising by 41% from 1994 to 1995 and by 31% from 1993 to1994. Higher volumes of the rapidly raising Pentium microprocessor family,partially offset by lower prices, and increased sales of related board-levelproducts were responsible for most of the growth in revenues in 1994 and 1995.Revenues from the Intel486 microprocessor family declined substantially in 1995due to a shift in market demand toward the Company’s Pentium microprocessors andlower Intel486 microprocessor prices.Higher volumes of flash memory and chipset products also contributed toward theincrease in revenues from 1993 to 1995 and also helped enable the successfulPentium microprocessor ramp.
Sales of system platforms, embedded controlproducts, and networking and communications products also grew.Cost of sales increased by 40% from 1994 to 1995 and by 71% from 1993 to 1994.The growth in cost of sales from 1993 to 1995 was driven by Pentiummicroprocessor and board-level unit volume growth, new factories coming intoproduction, shifts in process and product mix, and in the fourth quarter of 1995,by costs associated with unusually high reserves related to inventories ofcertain purchased components. Gross margin for the fourth quarter of 1994included the impact of a $475 million charge, primarily to cost of sales, tocover replacement costs, replacement material and an inventory record related toa divide problem in the floating point unit of the Pentium microprocessor. As aresult of the above factors, the gross margin percentage was 52% in 1995 and1994, compared to 63% in 1993.
Quarterly unit shipments of the Pentium microprocessor family passed those ofthe Intel486 microprocessor family during the third quarter of 1995. The Companyhelped accelerate this transition by offering chipsets and motherboards toenable computer manufacturers to bring their products to market faster. Sales ofthe Pentium microprocessor family comprised a majority of the Company’s revenuesand a substantial majority of its gross margin during 1995. During 1995, theIntel486 microprocessor family represented a significant but rapidly decliningportion of the Company’s revenues and gross margins. The Intel486 microprocessorfamily comprised a majority of the Company’s revenues and a substantial majorityof its gross margin during 1993 and 1994.
Research and development spending grew by 17% from 1994 to 1995, as the Companycontinued to invest in strategic programs, particularly for the internaldevelopment of microprocessor products and related manufacturing technology.Increased spending for marketing programs, including media merchandising and theCompany’s Intel Inside cooperative advertising program, drove the 27% increasein marketing, general and administrative expenses from 1994 to 1995.The $28 million decrease in interest expense from 1994 to 1995 was mainly due tolower average borrowing balances in addition to higher interest capitalizationresulting from increased facility construction programs. The increase ininterest expense from 1993 to 1994 was primarily due to higher average interestrates on borrowings, partially offset by higher interest capitalization.The Company utilizes investments and corresponding interest rate swaps topreserve principal while enhancing the yield on its investment portfolio withoutsignificantly increasing risk, and uses forward contracts, options and swaps tohedge currency, market and interest rate exposures.
Gains and losses on theseinstruments are generally offset by those on the underlying hedged transactions;as a result, there was no material net impact on the Company’s financial resultsduring the 1993-1995 period.The Company’s effective income tax rate increased to 36.8% in 1995 compared to36.5% and 35.
0% in 1994 and 1993, respectively. The increases in rate from 1993to 1995 resulted from the fact that tax credits have not grown as rapidly asoverall pretax income.Financial conditionThe Company’s financial condition remains very strong. As of December 30, 1995,total cash and short- and long-term investments totaled $4.11 billion, down from$4.54 billion at December 31, 1994. Cash generated from operating activitiesrose to $4.
03 billion in 1995, compared to $2.98 billion and $2.80 billion in1994 and 1993, respectively.
Investing activities consumed $2.69 billion in cash during 1995, compared to$2.90 billion during 1994 and $3.
34 billion during 1993. Capital expendituresincreased substantially in both 1994 and 1995, as the Company continued toinvest in the property, plant and equipment needed for future businessrequirements, including manufacturing capacity. The Company expects to spendapproximately $4.1 billion for capital additions in 1996 and had committedapproximately $1.
47 billion for the construction or purchase of property, plantand equipment as of December 30, 1995.Inventory levels, particularly raw materials and finished goods, increasedsignificantly in 1995. This increase was primarily attributable to the increasedlevel of business and, to a lesser extent, to an unusually low level ofinventory at the end of 1994 because of a report of inventories in the fourthquarter of 1994 in connection with the divide problem in the floating point unitof the Pentium processor. The increase in accounts receivable in 1995 was mainlydue to revenue growth, including the growth of non-domestic sales that havelonger payment terms. During 1995, the Company experienced an increase in itsconcentration of credit risk due to increasing trade receivables from sales tomanufacturers of microcomputer systems. The Company’s five largest customersaccounted for approximately 33% of net revenues for 1995.
At December 30, 1995,these customers accounted for approximately 34% of net accounts receivable. Aportion of the receivable balance from one of its five largest customers hasbeen converted into a loan. The total amount receivable from this customer wasapproximately $400 million at December 30, 1995.
The Company used $1.06 billion and $557 million for financing activities in 1995and 1994, respectively, while $352 million was provided in 1993. The majorfinancing application of cash in 1995 was for stock repurchases totaling $1.03billion. Financing applications of cash in 1994 included stock repurchases of$658 million and the early retirement of the Company’s 8 1/8% debt. Sources offinancing in 1993 included the Company’s public offering of the 1998 Step-UpWarrants, which resulted in proceeds of $287 million.
As part of its authorized stock repurchase program, the Company had outstandingput warrants at the end of 1995, with the potential obligation to buy back 12million shares of its Common Stock at an aggregate price of $725 million. Theexercise price of these warrants ranges from $38 to $68 per share, with anaverage exercise price of $60 per share.Other sources of liquidity include combined credit lines and authorizedcommercial paper borrowings of $1.86 billion, $57 million of which wasoutstanding at December 30, 1995.
The Company also maintains the ability toissue an aggregate of approximately $1.4 billion in debt, equity and othersecurities under Securities and Exchange Commission shelf registrationstatements. The Company believes that it has the financial resources needed tomeet business requirements in the foreseeable future, including capitalexpenditures for the recently announced expansion of international manufacturingsites, working capital requirements, the potential put warrant obligation andthe dividend program.Outlook. The statements contained in this Outlook are based on currentexpectations. These statements are forward looking, and actual results maydiffer materially. Intel expects that the total number of personal computersusing Intel’s Pentium microprocessors and other semiconductor components soldworldwide will continue to grow in 1996.
Intel has expanded manufacturingcapacity over the last few years and continues to expand capacity to be able tomeet the potential increase in demand. Intel’s financial results are to a largeextent dependent on this market segment. Revenue is also a function of thedistribution of microprocessor speed and performance levels, which is difficultto forecast. Because of the large price difference between components for thehighest and lowest performance computers, this distribution affects the averageprice Intel will realize and has a large impact on Intel’s revenues.
Intel’s strategy has been, and continues to be, to introduce ever higherperformance microprocessors and work with the software industry to developcompelling applications that can take advantage of this higher performance, thusdriving demand toward the newer products. Capacity has been planned based on theassumed continued success of the Company’s strategy. In line with this strategy,the Company has recently announced higher speed members of the Pentium Promicroprocessor family. If the market demand does not continue to grow and moverapidly toward higher performance products, revenue growth may be impacted, themanufacturing capacity installed might be under-utilized and capital spendingmay be slowed.
The Company may continue to reduce microprocessor pricesaggressively and systematically to bring its technology to market.The Company’s gross margin percentage is a sensitive function of the product mixsold in any period. Because the percentage of motherboards that Intel’scustomers purchase changes with maturity of the product cycle, and motherboardsgenerally have lower gross margin percentages than microprocessors, Intel’sgross margin percentage varies depending on the mix of microprocessors andrelated motherboards within a product family. Various other factors, includingunit volumes and costs and yield issues associated with initiating production atnew factories or on new processes, also will continue to affect the amount ofcost of sales and the variability of gross margin percentages in future quarters.
From time to time the Company may forecast a range of gross margin percentagesfor the coming quarter. Actual results may differ. Longer term gross marginpercentages are even more difficult to predict.
To implement its strategy, Intel continues to build capacity to produce high-performance microprocessors and other products. The Company expects that capitalspending will increase to approximately $4.1 billion in 1996. This spending planis dependent upon delivery times of various machines and construction schedulesfor new facilities. Based on this forecast, depreciation for 1996 is expected tobe approximately $1.9 billion, an increase of approximately $500 million from1995.
Most of this increased depreciation will be included in cost of sales andresearch and development spending.The industry in which Intel operates is characterized by very short product lifecycles. Intel considers it imperative to maintain a strong research anddevelopment program to continue to succeed. Accordingly, research anddevelopment spending is expected to grow in 1996 to approximately $1.6 billion.
The Company will also continue spending to promote its products and to increasethe value of its product brands. Based on current forecasts, spending formarketing and general and administrative expenses is expected to increase in1996.Intel believes that it has the product offerings, facilities, personnel, andcompetitive and financial resources for continued business success, but futurerevenues, costs, margins, product mix and profits are all influenced by a numberof factors, as discussed above.