Intel 1998 Annual Report Download - page 60

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and $5.3 billion during 1996. Capital expenditures totaled $3.6 billion in 1998, as the Company continued to invest in property, plant and
equipment, primarily for additional microprocessor manufacturing capacity and the transition of manufacturing technology. The Company also
purchased the semiconductor manufacturing operations of Digital Equipment Corporation for $585 million, including $475 million in capital
assets. The Company had committed approximately $2.1 billion for the purchase or construction of property, plant and equipment as of
December 26, 1998. See "Outlook" for a discussion of capital expenditure expectations in 1999. In addition, during 1998 the Company used
$321 million in cash to purchase C&T and $500 million to acquire a non-voting equity interest in Micron Technology, Inc.
Inventory levels in total decreased in 1998, with a decrease in raw materials and work-in-process inventory, partially offset by an increase in
finished goods inventory. The increase in accounts receivable in 1998 was mainly due to the higher level of revenues. The Company's five
largest customers accounted for approximately 42% of net revenues for 1998. One customer accounted for 13% of revenues and another
accounted for 11% in 1998. One customer accounted for 12% of revenues in 1997 and no customer accounted for more than 10% of revenues
in 1996. At December 26, 1998, the five largest customers accounted for approximately 39% of net accounts receivable.
The Company used $4.7 billion for financing activities in 1998, compared to $3.2 billion and $773 million in 1997 and 1996, respectively. The
major financing applications of cash in 1998 were for repurchase of 161.7 million shares of Common Stock, adjusted for the stock split
declared in January 1999, for $6.8 billion (including $1.2 billion for exercised put warrants). The major financing applications of cash in 1997
and 1996 were for stock repurchases totaling $3.4 billion and $1.3 billion (including $108 million for exercised put warrants), respectively, as
well as for a $300 million repayment in 1997 under a private reverse repurchase arrangement. Financing sources of cash during 1998 included
$507 million in proceeds from the sale of shares, primarily pursuant to employee stock plans ($317 million in 1997 and $257 million in 1996)
and $1.6 billion in proceeds from the exercise of 1998 Step-Up Warrants ($40 million in 1997 and $4 million in 1996). Financing sources in
1996 also included $300 million under the private reverse repurchase arrangement.
As part of its authorized stock repurchase program, the Company had outstanding put warrants at the end of 1998, with the potential obligation
to buy back 5 million shares of its Common Stock at an aggregate price of $201 million. The exercise price of these warrants ranged from $40
to $41 per share, with an average exercise price of $40 per share as of December 26, 1998.
Other sources of liquidity include authorized commercial paper borrowings of $700 million. 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 shelf registration
statements.
In October 1998, the Company announced that it had entered into a definitive agreement to acquire Shiva Corporation ("Shiva"). Intel expects
that the total cash required to complete the transaction will be approximately $185 million, before consideration of any cash to be acquired.
The Company believes that it has the financial resources needed to meet business requirements in the foreseeable future, including the
acquisition of Shiva, capital expenditures for the expansion or upgrading of worldwide manufacturing capacity, working capital requirements,
the potential put warrant obligation and the dividend program.
Financial market risks
The Company is exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and marketable equity
security prices. To mitigate these risks, the Company utilizes derivative financial instruments. The Company does not use derivative financial
instruments for speculative or trading purposes. All of the potential changes noted below are based on sensitivity analyses performed on the
Company's financial positions at December 26, 1998 and December 27, 1997. Actual results may differ materially.
The primary objective of the Company's investment activities is to preserve principal while at the same time maximizing yields, without
significantly increasing risk. To achieve this objective, the returns on a substantial majority of the Company's marketable Investments in long-
term fixed rate debt and certain equity securities, excluding equity investments entered into for strategic purposes, are swapped to U.S. dollar
LIBOR-based returns. A hypothetical 60 basis point increase in interest rates would result in an approximate $30 million decrease (less than
0.3%) in the fair value of the Company's available-for-sale securities as of the end of 1998 ($18 million as of the end of 1997).
The Company hedges currency risks of investments denominated in foreign currencies with foreign currency borrowings, currency forward
contracts and currency interest rate swaps. Gains and losses on these foreign currency investments would generally be offset by corresponding
losses and gains on the related hedging instruments, resulting in negligible net exposure to the Company.
A substantial majority of the Company's revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, the
Company does enter into these transactions in other foreign currencies, primarily Japanese yen and certain other Asian and European
currencies. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, the
Company has established revenue, expense and balance sheet hedging programs. Currency forward contracts and currency options are utilized
in these hedging programs. The Company's hedging programs reduce, but do not always entirely eliminate, the impact of foreign currency
exchange rate movements. For example, an adverse change in exchange rates (defined as 20% in certain Asian currencies and 10% in all other
currencies) would result in an