Intel's annual report overview and analysis

Investments may be classified into the following categories: Trading assets, Available-for-sale investments and Non-marketable equity securities and other investments. Certain marketable debt and equity securities are considered trading assets. They are subject to exchange rate and interest rate modifications, so the generated risk is mitigated through the use of derivative instruments.

The 'available-for-sale' includes another category of marketable debt and equity securities. These investments are reported at fair value on the balance sheet with unrealized gains and losses recorded in stockholders' equity, net of tax. If the securities are sold, their cost is calculated using a specific identification method. The gains and losses incurred as a result of selling debt securities are recorded in interest and other (net value). Should the available-for-sale investments be equity securities, they would be recorded in gains (losses) on equity securities. However, every decrease of the value of such securities (stocks) has to be considered permanent in order to be included in this category. The Intel 2001 report provides the criteria for making such a decision: "Marketable equity securities are presumed to be impaired if the fair value is less than the cost basis for six months, absent compelling evidence to the contrary."

Short-term investments is the technical term used to indicate debt securities with original maturities greater than three months and remaining maturities less than one year. Debt securities with remaining maturities greater than one year are included in other long-term investments. The importance of short-term investments is rather large, since companies could use this type of securities to create an additional profit, should the available amount of cash exceed the sums the company needs for growth. The technology sector is well-known for preferring not to pay dividends and for gathering huge amounts of cash. Microsoft and Cisco are excellent examples. Although Intel has a tradition of paying some dividends, it still likes to have a cash reserve. Short-term securities have a very high liquidity, because of their short maturity, and are often used the same way cash is. This is why cash and short-term investments are often analyzed together. The unfavorable economic background of 2001 has made strong companies take advantage of their situation: "In perilous times, it doesn't pay to be timid. McKinsey [consultants, Palo Alto, CA] is urging high-tech firms to take advantage of their weakened competitors. Slash product prices. Extend markets by buying out aggressive, but cash starved innovators. Pump up spending on R& D. And capital expenditures.

Some companies are able to take at least some of these steps. In semiconductors, Micron Technology Inc., Boise, ID; Intel Corp., Santa Clara; and LSI Logic Corp., Milpitas, continue to boost their spending on capital expenditures. Solectron used its badly bruised stock to buy up Centennial Technologies Inc., Boston. The move, announced in January and closed in May, puts Solectron deeper into the manufacture of memory modules and cards."

The safety degree such very liquid reserves provide and the possibilities that a company has to finance its short- and long-term activities increase the appeal of cash and short-term investments. In an article published in the second half of 2001, praising companies who managed to obtain and keep these reserves, Intel is presented as a top player: "The deeper the pockets, the better. Among the companies with deep pockets are such granddaddies of the tech industry as Intel and IBM Corp. Ranked No. 11 on ELECTRoNic Business' EB300 list, page 18, Intel has more than $10 billion in cash and short-term investments. "We put money away for rainy days," says Howard High, a senior spokesman for Intel. Hence, Intel's ability to spend $4.2 billion on R& D. And $7.5 billion on capital expenditures this year as it pursues its mission of becoming the building block supplier for the Internet, according to company documents. That compares with $3.9 billion and $6.7 billion, respectively, for 2000."

The objectives that Intel wanted to achieve, respectively to provide the necessary equipment for connecting large networks and to contribute to the expansion of the Internet, under the "building block supplier for the Internet" slogan, made large amounts of cash and short maturity debt and equity securities extremely necessary. Although the company could pay more dividends, for instance, its managers decided that investing in growth is the right thing to do. After all, the 2001 company report starts with a comparison between the Internet sector and the rail and steel industries, which have, at their time, experienced similar stages in their development (birth, turbulence, growth). Intel believed that the time of growth has come and that all the company's resources have to be mobilized in that direction. This is why cash and short-term-investments have been used to fund, for example, its research and development activity.

The same article presents the objectives Intel wants to achieve by gathering all the cash and short-term investments: "Such spending will enable Intel to acquire others, develop smaller geometries on bigger wafers and exploit exotic new technologies such as extreme ultraviolet for lithography. "When the recovery happens, we'll be ready to move while others may have to pull factories out of mothballs," says High."

However, although Intel is known for using such a policy, it is worth mentioning that the purchase of available-for-sale investments in 2001 has been moderate, compared to the same activity in 2000. The 2001 Intel company report shows that only $7,141 million have been spent on available-for-sale investments, compared to $17,188 million in 2000. This proves that Intel has tempered its accumulation policy. Still, the revenues included under 'Maturities and sale of available-for-sale investments' have a similar value to the one from 2000: $15,398 million, compared with $17,124 million. The cash-flow deficit registered in 2001 is much smaller than the one in 2000: $195 million compared to $10,035 million. Although Intel has spent a lot on research & development or capital expenditures, it would seem that its cash management was prudent, in comparison to the one conducted during the previous year.

Intel's investment technique is quite aggressive, according to an article on this subject: "Intel is not a passive investor, so it provides more than cash to those it chooses to invest in. It typically sets up linkages between the companies it invests in and the business units those companies can help, and vice versa. It provides the companies with technology and marketing assistance where needed, and equally importantly it fosters cooperative relationships between the companies in the portfolio so that they will in turn help one another."