Purpose: To improve our understanding of accounting concepts and become familiar with the contents of a company’s annual report (Form 10-k), and the proxy statement (DEF 14A) which are both filed with the Securities and Exchange Commission (SEC). Scope: The team shall lead a class discussion for Intel Corporation 2010, with an analysis of Intel’s profitability. In addition to the presentation, a written report will be submitted onto Blackboard by May 2, 2011. The report shall contain the answers to the questions in the project handout. Conclusion:
Through our analysis of Intel’s financial documents, there have been a number of specific items that have expanded our experience in understanding the concepts of accounting principles using a real world example. To elaborate, details of Intel’s supply chain has helped us understand the complexity of profitability and the multiple layers of risks involved based on environment, politics, natural, cultural, and technological factors. In addition, real world usage of financial and accounting forms including the 10-k, SEC Form DEF14A (Securities and Exchange Commission) help identify a granular level of the financial situation of said company.
Furthermore, the multi level complexity of assets, liabilities, and stockholder’s equity deduce the day-to-day transactions of one of the largest companies in the world into understandable and workable means. Finally, the analysis of Intel’s financial statements gives us an expanded understanding and detailed interpretation of accounting concepts learned in class. ? I. Background information a. Name of the company? The name of the company is Intel Corporation. (Intel Annual Report 2010, Cover Page) b. Fiscal year covered by the annual report? The fiscal year covered by the annual report is year 2010. Intel Annual Report 2010, Cover Page) c. Stock exchange where shares are traded and stock ticker symbol? Intel’s Symbol is INTC. The stock exchange for Intel is NASDAQ. (Intel Annual Report 2010, 107) d. State of incorporation? Intel was incorporated in California in 1968 and reincorporated in Delaware in 1989. (Intel Annual Report 2010, 1) e. Describe the company’s business e. g. , types of products manufactured? Intel manufactures the following types of products: microprocessors, chipsets, wired and wireless connection products, and motherboards. Microprocessors are known as the central processing unit of the computer. It processes data on all platforms such as laptops, desktops, phones, Video games consoles etc. •Chipsets are like the nerves of the computer, it is the passage way for signals from your devices such as keyboards and mice to the CPU or Central Processing Unit (Microprocessor). •The Mother board is the component where the CPU and Chipset reside on. This part of the computer is also where you connect other devices to such as CD/DVD ROMs, memory, video cards, audio cards, etc. It’s basically the body of the PC or device. Intel Annual Report 2010, 2, 4) f. What are the Company’s major corporate values? Intel is the world’s largest semiconductor chip maker based on its sales worldwide. Intel strives to bring customer value and satisfaction through its unique architecture that goes into its products, thus providing customers with a satisfying and pleasant experience when using technology with the Intel logo. (Intel Annual Report 2010, 1) II. Audit Report a. Who are the company’s auditors? Ernst & Young LLP is Intel’s independent registered public accounting firm. (Intel Proxy Statement 2011, 46) b.
What opinion did the auditors issue? The auditors mentioned that all the financial statements are fair and in conformity with GAAP (Generally Accepted Accounting Principles). (Intel Annual Report 2010, 105) c. Did the auditors examine all the evidence supporting the amounts and disclosures in all of the financial statements? Explain. The auditors examined all the financial statements that include the balance sheet, statement of owner’s equity, and income statement. They reviewed each and gave notes on the consolidation process for each, and gave a final review at the end of what they found as a report. Intel Annual Report 2010, 47-101) d. What is the auditor’s responsibility for the financial statements? The auditor’s responsibilities are to audit annual financial statements and internal controls over financial reporting, and reports from the 10-Q quarterly reports. The auditor must also advice on new accounting pronouncements, and consolidating financial statements. (Intel Proxy Statement 2011, 48) Also they must review any information in regards to amounts and disclosures in the accounting statements. (Intel Annual Report 2010, 105) e. What is management’s responsibility?
Intel’s management is responsible for keeping control over its financial reporting internally by maintaining accurate records that keep track of transactions and dispositions of assets, keeping true to GAAP principles when recording transactions needed to prepare financial statements and also making sure recipes and expenditures are authorized by management when made. Finally management must also report any unauthorized misuse of company assets or acquisition of assets that might affect the financial statements in any way; this must be prevented or detected. (Intel Annual Report 2010, 106) f.
Under the Sarbanes-Oxley Act of 2002, reports on internal control are required. Did the company’s management acknowledge its responsibility for establishing and maintaining adequate internal control over financial reporting? What is the auditor’s opinion on the effectiveness of the company’s internal controls? •Intel acknowledged its responsibilities in regards to establishing good internal control in regards to its reporting’s. This can be found on page 114 of its annual report where it states that they follow rules 13a-15(f) and 15d-15(f) under the Exchange Act. Intel Annual Report 2010, 108) •The auditor’s opinion is that Intel maintained effective internal control over its reports for the year 2010 ending in December. (Intel Annual Report 2010, 106) g. What was their internal control system designed to do? It’s designed to provide reasonable financial information used for its report creation and consolidation of financial statements in relations to GAAP in the U. S (Intel Annual Report 2010, 108) h. In accordance with what standards did the auditors conduct the audit? The auditors used the standards of the Public Company Accounting Oversight Board. Intel Annual Report 2010, 105) III. Profitability a. What is the net income for the year covered by the report? How does net income compare to previous years? Why did net income increase or decrease? The net income for 2010 is $16,045 in Millions before taxes. The net income for 2010 after taxes is $11,464 in Millions. (Intel Annual Report 2010, 48) As compared to other years: •2006 - $5,044 in Millions (after taxes) •2007 - $6,976 in Millions (after taxes) •2008 - $5,292 in Millions (after taxes) •2009 - $4,369 in Millions (after taxes)
The net income increased mainly because of the growth in the consumer PC segment of the market in relationship to business and personal computing. Net income also increased because Intel had lower factory underutilization charges and because they were able to sell processors and chipsets for higher prices. (Intel Annual Report 2010, 23) b. When is revenue recognized? Revenue is recorded when the net earnings process is complete. (Intel Annual Report 2010, 56) c. What effective income tax rate is the company experiencing? $4,581 (in millions) was the tax on income for 2010, at 28. 6%. Intel Annual Report 2010, 95) How are customer coupons, discounts, and rebates treated in the financial statements? Customer discounts, and allowances are recorded when Intel recognizes revenue as a reduction to accounts receivable and net revenue. (Intel Annual Report 2010, 56) d. Is their business seasonal? Intel’s business is continuous but Intel experiences seasonal trends on sale amounts. It is usually higher in the second half of the year due to holiday sales and back-to-school demand. (Intel Annual Report 2010, 8) e. How does their supply chain strategy impact the financial statements?
Intel relies on global operations for their supply chain. Most of Intel’s suppliers and fabrication plants are located overseas outside the United States. Due to having to ship their products from one location to another they incur a lot of transportation costs, including many risks that can hinder their sales or revenue if they are not able to produce their products due to conditions in the countries where they are located. Factors that can affect the supply chain include natural disasters, cultural views, government regulations, health issues, security issues due to civil wars, terrorist activities, or armed conflict.
If situations like this occur then the financial statements will record a loss of revenue and a heavy increase in expenses because Intel will not meet the customer demands and sale goals. If this is the case then the Income statement will record a low number for Net Income. This in turn would then carry over to the statement of owner’s equity affecting their capital making it less. Finally the Balance sheet would also show lower numbers meaning that the financial position of Intel would be in a really bad status. (Intel Annual Report 2010, 15) IV. Assets a. What is the company’s largest current asset?
Intel’s largest current assets are government bond short-term investments at Level 1 and 2. Level 1 was recorded at $4,890 and $1,320 for a total of $6,210 in millions. Government bonds include bonds issued or deemed to be guaranteed by U. S. Treasury securities, non-U. S. governments, U. S. agency securities, and Federal Deposit Insurance Corporation insured corporate bonds. (Form 10-K, 60) b. What items are classified as cash equivalents? The items that are classified as cash equivalents for Intel are Commercial paper, Government bonds, Bank Deposits, and Money market fund deposits.
Commercial paper total $2,600, government bonds total $1,784, bank deposits total $858, and money market fund deposits total $34 in millions. (Form 10-k, 60) c. What is trade vs. nontrade accounts receivables? Trade receivables are current assets that come from selling merchandise or providing services to customers on credit. Non trade receivables include loans receivable, non-current deferred tax assets, and other receivables. (Form 10-k, 71) d. What were the balances at year end for Allowance for Doubtful Accounts for trade accounts receivables and for nontrade accounts receivables?
The balance at year end for 2010 for doubtful trade receivables totaled $28 million. The balance at year end for 2010 for doubtful non trade receivables for deferred tax assets totaled $252 million. (Form 10-k, 111) e. What categories of inventory does the company report on its balance sheet? What inventory accounting method(s) does the company utilize? Intel includes raw materials, work in progress, and finished goods as the categories of inventory. Total inventories for year end 2010 are $3,757 million. Intel computes their inventory cost on a currently adjusted standard basis.
This estimates the actual cost on a first-in, first-out basis. (Form 10-k, 55) f. What are the company’s depreciable assets? What method(s) of depreciation does the company use? Intel’s depreciable assets include land and buildings, machinery and equipment, and construction in progress. Total gross property, plant and equipment equal $50,481 million. Total net amount after depreciation equals $17,899 million. Intel calculates depreciation using the straight-line method. The estimated useful life of machinery and equipment is 2 to 4 years.
The estimated useful life of buildings is 4 to 40 years. (Form 10-k, 55) g. What kinds of intangible assets does the company have? Intel has identified their intangible assets primarily as intellectual property assets. This represents the rights acquired under technology licenses which are amortized on a straight-line basis over the periods of benefit. This period ranges from 3 to 17 years. Intel also indentifies acquisition-related in-process research and development as intangible assets. (Form 10-k, 56 and 76) h. How much goodwill is on the balance sheet and how is it defined?
Intel’s balance sheet identifies Goodwill with $4,531 million for year ending 2010. (Form 10-k, 49) Intel’s goodwill is defined when the purchase price of an acquisition surpasses the fair value of the net tangible and intangible assets as of the date of the acquisition. Therefore, goodwill is assigned to their applicable reporting units based on the relative expected fair value provided by the acquisition. (Form 10-k, 56) V. Liabilities a. What are the company’s major liabilities? Intel’s major liabilities come in the form of accrued compensation and enefits, accounts payable, and other accrued liabilities. (Form 10-k, 49) Compensation and benefits include: U. S. Pension Benefits, Non-U. S. Pension Benefits, U. S. Postretirement Medical Benefits, and Funding Policy. (Form 10-k, 82) Accounts payable comes in the form of operating lease obligations, capital purchase obligations, other purchase obligations and commitments, long-term debt obligations, and other long-term liabilities. (Form 10-k, 43) b. How much does the company owe within the next fiscal year? Intel owes $9,327 in millions.
This is the total current liabilities ending December 25, 2010. (Form 10-k, 49) c. How much long-term debt is due and payable? How much of the long-term debt is due within the next fiscal year? Intel has $2,077 million in long term debt. (Form 10-k, 79) Intel has $119 million in long-term debt obligations within the next year in contractual obligations. (Form 10-k, 43) VI. Stockholders’ equity a. What are the different classes of stock issued by the company? Intel offers preferred stock and common stock. (Form 10-k, 49) b. How many shares of common stock were issued?
What is the par value of the stock? 10,000 shared were authorized for issuance and 5,581 were issued. The par value of the stock is $. 001 per share. (Form 10-k, 49) c. What were the number of shares and cost of the treasury stock held by the company at year-end? d. Were cash dividends paid? When? Who makes these decisions? Cash dividends were declared at $. 63 per common share for a total of $3. 5 billion in distribution. Cash dividends are paid each quarter. The Board of Directors determines the cash value and when to distribute. (Form 10-k, 41) e.
For the current period, what does the Statement of Stockholders’ Equity tell you about Retained Earnings and Treasury Stock? Retained earnings are at $32,919 in millions for the current period. In 2007, retained earnings were $30,848 in millions. 2008 and 2009 showed a dip in retained earnings. Therefore it can be concluded that Intel has recovered over the year ending 2010. (Intel Annual Report, 51). VII. Earnings per Share a. What is the amount of earnings per share (EPS) being reported? Earnings per share to $2. 01, Source: 2010 Financial Result Report (Intel Annual Report 2010, 2) b.
Have EPS increase since the prior year? Yes, from $0. 77 to $2. 01, Source: 2010 Financial Result Report (Intel Annual Report 2010, 2) VIII. Business Segments a. How many business segments does the company have? •PC Client Group (PCCG) •Data Center Group (DCG) •Other Intel Architecture Operating Segments: oEmbedded and Communications Group oDigital Home Group oUltra-Mobility Group •Other Operation Segments: oNAND Solutions Group oWind River Software Group oSoftware and Services Group oDigital Health Group (2010 SEC Form 10-k, 3) b. What are the revenues for the largest business segment?
PC Client Group (PCCG): $ 31,598,000,000. 00 (2010 SEC Form 10-k, 103) c. What is the income of the smallest segment? Other Intel Architecture Operating Segments: Loss of 60,000,000. 00 (2010 SEC Form 10-k, 33) IX. Cash flows a. How much cash was provided by operating activities? $16,692,000,000. 00 (2010 SEC Form 10K, 40) b. What major investing activities occurred during the period? Investing cash flows consist primarily of capital expenditures, net investment purchases, maturities, disposals, and cash used for acquisitions. (2010 SEC Form 10-k, 41) c.
What major financing activities occurred during the period? Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, issuance and repayment of long-term debt, and proceeds from the sale of shares through employee equity incentive plans. (2010 SEC Form 10-k, 41) d. What was the net change in cash during the period? $ 5,498,000,000. 00 (2010 SEC Form 10-k, 50) X. Proxy Statement a. Briefly describe the issues that the stockholders voted on at the annual meeting of the shareholders. On the agenda for discussion, the agenda items issues are: Elect the 10 director nominees named in the proxy statement •Ratify Ernst & Young LLP as our independent registered public accounting firm •Amend and extend the 2006 Equity Incentive Plan •Amend and extend the 2006 Stock Purchase Plan •Hold an advisory vote on executive compensation •Hold an advisory vote on the frequency of holding future advisory votes on executive compensation •Transact other business that may properly come before the annual meetings (including adjournments and postponements) (Proxy Statement 2010, Notice of 2011 Annual Stockholders’ Meeting) b.
What are the standing committees of the Board of Directors? The standing committees are: Audit Committee, Compensation Committee, Compliance Committee, Corporate Governance and Nominating Committee, Executive Committee, and Finance Committee. (Proxy Statement 2010, 13-14) c. How often are Directors elected and what is their term of office? Each director’s term runs from the date of his or her election until the next annual stockholders’, or until his or her successor, if any, is elected or appointed. (Proxy Statement 2010, 6) d. What were the audit fees charged by the outside audit firm? What were the other non-audit fees?
Audit fees charged amounted to $14,437,000. Tax services plus all other services totaled $162,000. Total fees charged amounted to $14,599,000 in 2010. (Proxy Statement 2010, 54) e. What was the total compensation of the highest paid executive? What was included in the compensation? Total compensation of the highest paid executive totals $15,652,500 for Paul S. Otellini. Total compensation includes: salary, bonus, stock awards, option awards, non-equity incentive plan compensation, pension value and non-qualified deferred compensation earnings, and all other compensation. (Proxy Statement 2010, 39)