A Financial Analysis ofThe Intel Corporation

By: Craig Cannon

Executive Summary

We were given the task of selecting a public manufacturing company in the business environment or related industry. We chose the Intel Corporation as our company. Our task was to conduct a financial

review and explain in detail what options the company should consider when looking at Make or Buy decisions and Activity Based Costing solutions. This report provides a brief background history of Intel as well as its industry. The report includes a financial analysis of the company while citing common financial ratios often used when evaluating a company’s performance. After considering these ratios we identified all trends that became apparent while giving examples of the causes of these trends and how they affect the company overall.

Company History

Intel Corporation is the inventor of the x86 series of microprocessors, the processors found in most personal computers. Intel is one of the world's largest semiconductor chip maker. Intel was founded in 1968, as Integrated Electronics Corporation and is based in California. Intel also makes motherboard chipsets, network interface controllers, integrated circuits, flash memory, graphic chips, embedded processors, and other devices related to communications and computing. Founded by semiconductor pioneers Robert Noyce and Gordon Moore, Intel combines advanced chip design capability with a leading-edge manufacturing capability.

Industry

Intel develops advanced integrated digital technology products primarily integrated circuits for both the computing and communications industry. Integrated circuits are semiconductor chips etched with interconnected electronic switches. Intel also develops platforms defined as integrated suites of digital computing technologies that are designed to optimize user computing solution. Intel has one main goal to become the preeminent provider of semiconductor chips and platforms worldwide for the global digital economy.

Financial Analysis

Financial Statements are found in a company’s annual report. There are usually four main financial statements that give an overall view of where a company’s money came from, where it went, and where it is now. These four statements are the balance sheets, the income

statements, the cash flow statements, and statements of shareholder’s equity. Each of these statements provide detail information on a assets, liabilities, equity, revenue, earnings, expenses, cash flows, investing activities, and financing activities, respectively.

Our task was to review each of these statements and look for trends that may cite possible problems. Once these have been identified we were to come up with responses to address these findings. Other things we considered were the various financial ratios. These ratios gave us some indication as to why certain trends may have occurred. Certain ratios such as the Quick Ratio, The Current Ratio, and the Long Term Debt/Equity ratio all paint a clear picture of the financial strength of the company. Other ratios that measure a company’s operational efficiency would involve the Asset Turnover Ratio, Inventory Turnover Ratio, and the Return on Assets. These numbers when taken all together would allow us to make accurate informed decisions when considering certain strategies to implement that may help the company increase its bottom line.

We started with Intel’s Balance Statement. Balance sheets show what a company owns and what it owes at a given point in time. It provides detail information about a company’s assets, liabilities, and shareholder’s equity. Intel has a number of tangible physical assets such as plants, trucks, equipment, and inventory. Some of its intangible assets include its patents and trademarks. Other assets are cash and investments. According to this statement, Intel has total assets of 50.4 billion dollars in 2008 and 53.0 billion in 2009. This accounts for an increase of about 3 billion dollars in total assets in a year alone. What caused such a dramatic increase in assets? Did Intel purchase more equipment or build new factories? Did Intel sell of some of its older equipment at a profit ? Did Intel invest in some other investments. These are questions we asked ourselves. Based on our findings Intel largest increases came in trading assets and long term investments. These two alone accounted for 2.7 billion dollars worth of increase in assets.

Next, we turned our attention to Intel’s liabilities which accounts for the money that a company owes to others like obligations, money borrowed from a bank to launch a new product, rent for a building, or money owed to suppliers for materials, payroll for employees, environmental cleanup, costs, or taxes owed to the government. Intel’s

current liabilities actually dropped by $227,000 which meant that it owes that much less at this point in time. This is a good point because it shows that Intel is diligently working to reduce its debts. The largest debt reduction came in the area of accounts payable. This finding alone shows that Intel pays its bills and therefore has good credit with its creditors.

Finally, we looked at the stockholder’s equity which is the amount owners invested in the company’s stock plus or minus the company’s earnings or loses since inception. Sometimes companies distribute earnings instead of retaining them. These distributions are called dividends. For Intel, the Total Stockholders’ equity actually increased by 2.623 billion. For shareholders this is great news because it simply means that if Intel sold all of its assets and paid off all its debts, the money that would be left over is over 41 billion dollars which is the company’s capital or net worth. This is an increase of over 2.623 billion dollars from the previous year. This concludes our analysis of the balance statement found in Intel’s 2009 Annual Report.

Intel’s revenue was 35.13B dollars in 2009. Over 14% of that amount approximately 5.65B was spent in Research and Development alone. Intel’s earnings per share was .77 which means if they gave every stockholder a portion of all their net earnings for 2009 each shareholder would get $0.77 per share owned. This would be the shareholders dividend if they were given out for that year.

Financial Strength Ratios

When looking at financial strength of Intel we found the Quick Ratio at 1.50, the Current Ratio at 2.70 and the Long Term Debt Ratio at 5.00.

Liquidity is a company's capacity to pay off current obligations immediately. In the case with Intel the Quick Ratio of 1.5:1 means that Intel is in a great position. As a convention, generally, a quick ratio of "one to one" (1:1) is considered to be satisfactory. In this case (1.5:1) is more than satisfactory.

Intel’s Current Ratio of (2.70:1) also places Intel in a great position. A ratio equal to or near 2:1 is considered as a standard or normal or satisfactory. In this case 2.7:1 is more than normal it’s much better. Also based on our analysis this ratio increased by .25 from the previous year. This increase represents improvement in the liquidity position.

Finally, the long term debt ratio of 5.00 is not a good figure for Intel. It means that for every $5 worth of creditor’s investment the shareholders have only invested $1. This tells us that the majority of Intel’s assets are financed through debt. This poses a substantial risk to Intel if its creditors decided to call in its loans due to unhealthy economic conditions.

When all three of these ratios are considered together, we see that Intel has a strong financial strength when it comes to liquidity but is heavily leveraged when it comes to its long term debt. One possible way we see we can make a strong impact on Intel’s bottom line is to figure out a way to decrease its long term debt on its assets thereby reducing its risk significantly. One way of doing this is to to turn our attention to the area of Intel’s efficiency ratios.

Efficiency Ratios

When looking at the efficiency of Intel we found the Asset Turnover at .70, the Inventory Turnover at 3.50, and the Return on Assets at 11.10.

Efficiency is how well a company is able to manage it’s inventory, assets, and other resources to get the best use out of them. For instance, Intel has an Asset Turnover of .70. Asset Turnover is a measure of how well assets are being used to produce revenue. This ratio is useful to determine the amount of sales that are generated from each dollar of assets. Usually, companies with low profit margins tend to have high asset turnover while those with high profit margins have low asset turnover. Intel's asset turnover seems to be relatively low, meaning that it makes a high profit margin on its products.

Inventory turnover ratio measures the velocity of conversion of stock into sales. Intel’s Inventory Turnover of 3.50 indicates that an average one dollar invested in stock will turn into 3.5 times in sales. This high inventory turnover speed indicates efficient management of inventory because the more frequently the products are sold; the lesser amount of money is required to finance the inventory thereby signifying more profit.

Return on Assets tells an investor how much profit a company generated for each $1 in assets. Return on assets measures a company’s earnings in relation to all of the resources it had at its disposal. Intel’s (ROA) of 11.10 means that it generated $11.10 profit for each $1 invested in assets. This ratio also gauges the asset intensity of a business. Companies that are very asset-intensive require big, expensive machinery or equipment to generate a profit.

Companies that are asset-light don’t require as much to make a profit. As a general rule, anything below 5% is asset-heavy while anything above 20% is asset-light. Intel is neither and therefore is very balanced which helps its bottom line profit margin overall.

Trend Analysis

From 2008 to 2009 Intel’s current assets increased while current liabilities decreased indicating that the overall financial standing of the company is sound.Total inventories actually decreased indicating that the inventory turnover rate was being executed efficiently.

Intel’s Hypothetical Situation Involving Make/Buy Decisions and/or Activity Based Costing

Intel is organized into nine major product groups called operating segments. These segments allow Intel to better align its business goals around its core operations. Out of these nine the PC Client Group and The Data Center group account for most of its revenue. Both of these would be considered the “bread and butter” of the entire corporation. The PC Client group focus on microprocessors for notebooks, netbooks, and desktop computers. The Data Center group focuses on servers, storage, and workstation microprocessors. As one can see the manufacturing of these products in and efficient competitive manner are vital to the core business of Intel. Competition from companies such as AMD, NVIDIA, IBM, and SUN Microsystems has become even more fierce over the years. Competitors are selling their chips at much lower prices and thereby impacting Intel’s market share. Intel has to respond in order to stay competitive. Raw Materials and Direct labor cost for making these microprocessors has become more and more expensive. These cost have to be reduced in order to improve Intel’s bottom line profit. One possible Make or Buy decision may involve decide weather to produce a part internally or buy it from an outside vendor. Things that must be considered are its quantitative and qualitative factors. Another thing that Intel could look at is the cost associated with each activity in the assembly line of those microprocessor products. Some of these costs could possibly be lowered or eliminated from the process overall through updated equipment and automation. This in turn would allow the products price to be reduced overall making it more competitive in the marketplace.

References

http://www.intc.comhttp://beginnersinvest.about.com/od/incomestatementanalysis/a/

return-on-assets-roa-income-statement.htmhttp://www.investopedia.com/university/ratios/assetturnover.asp

http://www.sec.gov/investor/pubs/begfinstmtguide.htmhttp://www.bizwiz.ca/financial_ratios_formulas_and_explanations.html