UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
Date of Report: July 19, 2006
(Date of earliest event reported)
INTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-06217 94-1672743
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(State of (Commission (IRS Employer
incorporation) File Number) Identification No.)
2200 Mission College Blvd., Santa Clara, California 95054-1549
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(Address of principal executive offices) (Zip Code)
(408) 765-8080
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(Registrant's telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4c))
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Item 2.02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Attached hereto as Exhibit 99.1 and incorporated by reference herein
is financial information for Intel Corporation for the quarter ended
July 1, 2006 and forward-looking statements relating to 2006 and the
third quarter of 2006 as presented in a press release of July 19,
2006. The information in this report shall be deemed incorporated by
reference into any registration statement heretofore or hereafter
filed under the Securities Act of 1933, as amended, except to the
extent that such information is superseded by information as of a
subsequent date that is included in or incorporated by reference into
such registration statement. The information in this report shall not
be treated as filed for purposes of the Securities Exchange Act of
1934, as amended.
In addition to disclosing financial results calculated in accordance
with United States (U.S.) generally accepted accounting principles
(GAAP), the company's earnings release contains non-GAAP financial
measures that exclude the effects of share-based compensation and the
requirements of Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" (SFAS No. 123(R)). The non-GAAP
financial measures used by management and disclosed by the company
exclude the income statement effects of all forms of share-based
compensation and the effects of SFAS No. 123(R) upon the number of
diluted common shares used in calculating non-GAAP earnings per share.
The non-GAAP financial measures disclosed by the company should not be
considered a substitute for, or superior to, financial measures
calculated in accordance with GAAP, and the financial results
calculated in accordance with GAAP and reconciliations to those
financial statements should be carefully evaluated. The non-GAAP
financial measures used by the company may be calculated differently
from, and therefore may not be comparable to, similarly titled
measures used by other companies. The company has provided
reconciliations of the non-GAAP financial measures to the most
directly comparable GAAP financial measures. The company applied the
modified prospective method of adoption of SFAS No. 123(R), under
which the effects of SFAS No. 123(R) are reflected in the company's
GAAP financial statement presentations for and after the first quarter
2006, but are not reflected in results for prior periods.
In managing the company's business on a consolidated basis, consistent
with how we managed the business prior to implementation of FAS
123(R), management develops an annual budget that includes all
components of the income statement, exclusive of share-based
compensation. Gross margin, expenses (research and development and
marketing, general and administrative), operating income, income
taxes, net income and diluted earnings per share (EPS) are the primary
consolidated financial measures management uses for planning and
forecasting future periods that are affected by shared-based
compensation. The company's budget and planning process commences with
a segment-level evaluation which excludes share-based compensation,
and culminates with the preparation of a consolidated annual and/or
quarterly budget that includes these non-GAAP financial measures. This
budget, once finalized and approved, serves as the basis for the
allocation of resources and management of operations. The number of
full-time equivalent employees working in manufacturing, research and
development and marketing, general and administrative related roles is
determined through the budgeting process exclusive of share-based
compensation. Segment managers are not held accountable for
share-based compensation charges and therefore the budget and planning
process, which involves headcount planning, excludes the effects of
share-based compensation. In addition, our tax strategies are
determined on a consolidated basis exclusive of the expenses and
related tax benefit relating to share-based compensation. The
accounting expense impact of share-based compensation is not discussed
nor considered when assessing and determining the appropriate level of
budgeted expenses for gross margin, research and development,
marketing, general and administrative expenses. Accordingly, such
amounts are also excluded from the budgeted operating income, net
income and earnings per share. GAAP-basis financial statements which
include the effects of share-based compensation are only reviewed and
analyzed for purposes of external reporting where GAAP-basis financial
statements are necessary.
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Under our budget and planning process, consistent with prior to the
adoption of FAS 123(R), when we seek to reduce unit costs with the
goal of increasing gross margin, management does not consider the
effects of share-based compensation. When assessing the level of R&D
effort currently or prospectively, consistent with prior to the
adoption of FAS 123(R), management does not consider the effects of
share-based compensation. When making decisions about project
spending, administrative budgets, or marketing programs, management
does not consider the effects of share-based compensation.
In addition to using the budget process for planning and resource
allocation, on a quarterly basis we analyze the performance of our
business on a consolidated basis by comparing our gross margin,
expenses (research and development and marketing, general and
administrative), operating income, net income and diluted earnings per
share, each excluding share-based compensation, to the prior period
and forecasted amounts developed during the budget and planning
process, also excluding share-based compensation. We use these
quarterly assessments to evaluate the performance of the business
against prior periods and budget and to develop our business outlook
which we communicate to investors.
Consistent with prior to the adoption of FAS 123(R), the company's
share-based compensation programs are established and managed on a
company-wide basis, including specification of grant types and amount
ranges for employees by category and grade. Our philosophy relative to
share-based compensation programs is built on the principle that
equity compensation should seek to align employees' actions and
behaviors with stockholders' interest; be market competitive; be able
to attract, motivate and retain the best employees; and support
Intel's belief in a broad-based approach. Share based compensation
granted to employees is in addition to, not in lieu of, cash
compensation. Accordingly, our share-based compensation program is
evaluated separately from the cost of other compensation programs.
Specifically, our share-based compensation programs are carefully
evaluated from the perspective of the resulting dilution and other
metrics, and not from the resulting expense to be recorded. For
example, our goal has been to keep the potential incremental dilution
related to our equity incentive programs (stock options and restricted
stock units) to a long-term average of less than 2% annually. The
dilution percentage is calculated using the new equity-based awards,
net of equity-based awards cancelled due to employees leaving the
company and expired stock options, divided by the total outstanding
shares at the beginning of the year. Further, as noted above, segment
managers are not held accountable for share-based compensation
charges, and these charges do not impact their business unit's
operating income (loss). Accordingly, share-based compensation charges
also are excluded from the company's measure of segment profitability
(operating income). Therefore, when evaluating segment and operating
income, management and the Board of Directors exclude share-based
compensation.
3
Operating income and net income, both on a per-share basis, are
calculated excluding share-based compensation for purposes of
evaluating profit-dependent cash incentive compensation paid to
employees, including senior management. For example, for 2006 the
executive compensation cash incentive plan formula measures EPS as the
greater of (x) Intel's operating income or (y) Intel's net income (in
both cases excluding the effect of share-based compensation), divided
by Intel's weighted average diluted common shares outstanding,
excluding the effects of share-based compensation. The calculation of
diluted common shares outstanding, excluding the effects of
share-based compensation, excludes the proceeds from the remaining
unamortized share-based compensation, and adjusts the proceeds from
tax benefits by excluding the effects of share-based compensation. The
calculation of diluted common shares outstanding, excluding the
effects of share-based compensation is similar to the calculation of
diluted common shares outstanding, as reported, prior to the adoption
of SFAS 123(R). Accordingly, when budgeting for the company's
profit-dependent cash incentives, the company applies the formula
above to calculate earnings per share excluding share-based
compensation so as to be able to factor the appropriate amount of
profit dependent cash incentive into the budget.
The company discloses this non-GAAP information to the public to
enable investors who wish to more easily assess the company's
performance on the same basis applied by management and to ease
comparison on both a GAAP and non-GAAP basis to our prior period
results. In particular, as the company begins to apply SFAS No.
123(R), the company believes that it is useful to investors to
understand how the expenses and other adjustments associated with the
application of SFAS No. 123(R) are being reflected on the company's
income statements. Management believes gross margin, excluding
share-based compensation, R&D, excluding share-based compensation, and
marketing, general, and administrative, excluding share-based
compensation, are useful information for investors because the GAAP
measure when compared in isolation with last year would indicate a
level of increase in those expenses inconsistent with actual
performance. We believe that the non-GAAP measures serve to provide a
baseline for investors in this first year of adoption to compare
actual results for the current year, excluding share-based
compensation to the prior year GAAP amounts which exclude share-based
compensation. We believe this comparison also is useful to allow
investors to more easily evaluate our results from a period-to-period
comparability perspective.
Management believes operating income and net income, excluding
share-based compensation, is useful information to investors because
it assists investors in evaluating operating income and net income
consistent with how management evaluates performance and to understand
the basis for the company's profit dependent cash incentive plan.
Especially in this first year of applying the provisions of FAS
123(R), we believe operating and net income as reported in our income
statement are not comparable to prior year period amounts, and may
lead the investor to believing business has declined more
significantly than would be caused by actual changes in the business
(as opposed to changes in accounting treatment between years). When
presenting net income, excluding share-based compensation, we believe
it appropriate to exclude the related tax benefit recognized in the
financial statements for purposes of presenting net income or EPS,
excluding share-based compensation. Providing diluted earnings per
share, excluding share-based compensation assists investors in
evaluating diluted earnings per share compared to prior periods.
Especially in this first year of applying the provisions of FAS
123(R), we believe diluted earnings per share as reported in our
income statement is not comparable to prior year amounts.
4
The basis for the company's decision to use these non-GAAP measures
excluding share-based compensation is that management has determined
in this first year of adoption of FAS 123(R) to continue to evaluate
the business on the same basis as prior to the implementation of FAS
123(R) until there is greater familiarity with its effects and until
the second year after adoption of FAS 123(R) when financial
information is prepared and presented on a consistent basis with the
prior year. Share-based compensation represents: 0.8 points of gross
margin, $126 million of research and development expenses, $140
million of marketing, general and administrative expenses, $332
million reduction in total operating income, $239 million reduction in
total net income, and a $0.04 reduction in diluted earnings per share
for the quarter ended July 1, 2006, compared to zero for all such
measures in the quarter ended July 2, 2005. Share-based compensation
represents: 1 point of gross margin, $135 million of research and
development expenses, $153 million of marketing, general and
administrative expenses, $374 million reduction in total operating
income, $264 million reduction in total net income, and a $0.04
reduction in diluted earnings per share for the quarter ended April 1,
2006.
Unlike other forms of compensation, share-based compensation was not
recognized prior to January 1, 2006 when we adopted the provisions of
SFAS No. 123(R). Additionally, when management determines the annual
merit and promotional budget for compensation, the expense effects of
share-based compensation are not considered. Rather share-based awards
are generally granted via a fixed formula depending on position and
level of the employee. In addition, segment managers are held
accountable for other forms of compensation, and as such those
compensation charges are included in the segments' results and in the
budget and planning processes of our reporting segments.
A material limitation associated with the use of these measures as
compared to the related GAAP measures is that they may reduce
comparability with other companies who may use different types of
equity incentive awards, or whose compensation structures may use
share-based compensation to a greater or lesser extent as part of
their overall compensation. These differences may cause our non-GAAP
measures excluding share-based compensation to not be comparable to
other companies' non-GAAP measures excluding share-based compensation.
Other material limitations associated with the use of these measures
as compared to the GAAP comparable measure include: gross margin,
excluding share-based compensation does not include all costs related
to the cost of inventory sold during the period; research and
development, excluding share-based compensation does not include all
costs related to the research and development needed to bring new
products to the market; marketing, general and administrative expenses
excluding share-based compensation does not include all costs related
to the marketing, general and administrative efforts required to
manage our company and sell our products. A material limitation with
using operating income excluding share-based compensation, net income
excluding share-based compensation and diluted earnings per share,
excluding share-based compensation is that they do not include all
costs typically included in the presentation of the comparable GAAP
measure, and they may not include all costs related to hiring and
retaining qualified employees.
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Although these non-GAAP financial measures adjust cost, expenses and
diluted share items to exclude the accounting treatment of share-based
compensation, they should not be viewed as a pro forma presentation
reflecting the elimination of the underlying share-based compensation
programs. Thus, our non-GAAP presentations are not intended to
present, and should not be used, as a basis for assessing what our
operating results might be if we were to eliminate our share-based
compensation programs. Our equity incentive programs are an important
element of the company's compensation structure and generally accepted
accounting principles indicate that all forms of share-based payments
should be valued and included as appropriate in results of operations.
Because of the foregoing limitations, management does not intend to
use the non-GAAP financial measures when assessing the company's
performance against that of other companies. The company manages its
share-based programs in the aggregate against certain metrics rather
than reviewing financial statement impacts by financial statement line
item. Specifically, our goal has been to keep the potential
incremental dilution related to our equity incentive programs (stock
options and restricted stock units) to a long-term average of less
than 2% annually. The dilution percentage is calculated using the new
equity-based awards, net of equity-based awards cancelled due to
employees leaving the company and expired stock options, divided by
the total outstanding shares at the beginning of the year.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTEL CORPORATION
(Registrant)
Date: July 19, 2006 By: /s/ Andy D. Bryant
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Andy D. Bryant
Executive Vice President,
Chief Financial and Enterprise Services
Officer and Principal Accounting Officer
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