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Notes to Consolidated Condensed Financial Statements | |
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Note 1 : | Basis of Presentation |
We prepared our interim Consolidated Condensed Financial Statements that accompany these notes in conformity with US GAAP, consistent in all material respects with those applied in our 2022 Form 10-K.
We have a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal year 2023 is a 52-week fiscal year; fiscal 2022 was a 53-week fiscal year, with the extra week included in the first quarter of 2022.
We have made estimates and judgments affecting the amounts reported in our Consolidated Condensed Financial Statements and the accompanying notes. The actual results that we experience may differ materially from our estimates. The interim financial information is unaudited, and reflects all normal adjustments that are, in our opinion, necessary to provide a fair statement of results for the interim periods presented. This report should be read in conjunction with the Consolidated Financial Statements in our 2022 Form 10-K where we include additional information on our critical accounting estimates, policies, and the methods and assumptions used in our estimates.
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Note 2 : | Operating Segments |
We previously announced the organizational change to integrate AXG into CCG and DCAI. This change is intended to drive a more effective go-to-market capability and to accelerate the scale of these businesses, while also reducing costs. As a result, we modified our segment reporting in the first quarter of 2023 to align to this and certain other business reorganizations. All prior-period segment data has been retrospectively adjusted to reflect the way our CODM internally receives information and manages and monitors our operating segment performance starting in fiscal year 2023.
We now manage our business through the following operating segments:
▪Client Computing (CCG)
▪Data Center and AI (DCAI)
▪Network and Edge (NEX)
▪Mobileye
▪Intel Foundry Services (IFS)
We derive a substantial majority of our revenue from our principal products that incorporate various components and technologies, including a microprocessor and chipset, a stand-alone SoC, or a multichip package, which is based on Intel® architecture.
CCG, DCAI and NEX are our reportable operating segments. Mobileye and IFS do not qualify as reportable operating segments; however, we have elected to disclose the results of these non-reportable operating segments. When we enter into federal contracts, they are aligned to the sponsoring operating segment.
We have sales and marketing, manufacturing, engineering, finance, and administration groups. Expenses for these groups are generally allocated to the operating segments.
We have an "all other" category that includes revenue, expenses, and charges such as:
▪results of operations from non-reportable segments not otherwise presented, and from start-up businesses that support our initiatives;
▪historical results of operations from divested businesses;
▪amounts included within restructuring and other charges;
▪employee benefits, compensation, impairment charges, and other expenses not allocated to the operating segments; and
▪acquisition-related costs, including amortization and any impairment of acquisition-related intangibles and goodwill.
The CODM, who is our CEO, allocates resources to and assesses the performance of each operating segment using information about the operating segment's revenue and operating income (loss). The CODM does not evaluate operating segments using discrete asset information, and we do not identify or allocate assets by operating segments. Based on the interchangeable nature of our manufacturing and assembly and test assets, most of the related depreciation expense is not directly identifiable within our operating segments, as it is included in overhead cost pools and subsequently absorbed into inventory as each product passes through our manufacturing process. Because our products are then sold across multiple operating segments, it is impracticable to determine the total depreciation expense included as a component of each operating segment's operating income (loss) results. We do not allocate gains and losses from equity investments, interest and other income, share-based compensation, or taxes to our operating segments. Although the CODM uses operating income (loss) to evaluate the segments, operating costs included in one segment may benefit other segments. The accounting policies for segment reporting are the same as for Intel as a whole. There have been no changes to our segment accounting policies disclosed in our 2022 Form 10-K except for the organizational change described above.
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| Financial Statements | Notes to Financial Statements | 9 |
Net revenue and operating income (loss) for each period were as follows:
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| | Three Months Ended | |
(In Millions) | | Apr 1, 2023 | | Apr 2, 2022 | |
Net revenue: | | | | | |
Client Computing | | | | | |
Desktop | | $ | 1,879 | | | $ | 2,641 | | |
Notebook | | 3,407 | | | 5,959 | | |
Other | | 481 | | | 722 | | |
| | 5,767 | | | 9,322 | | |
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Data Center and AI | | 3,718 | | | 6,074 | | |
Network and Edge | | 1,489 | | | 2,139 | | |
Mobileye | | 458 | | | 394 | | |
Intel Foundry Services | | 118 | | | 156 | | |
All other | | 165 | | | 268 | | |
Total net revenue | | $ | 11,715 | | | $ | 18,353 | | |
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Operating income (loss): | | | | | |
Client Computing | | $ | 520 | | | $ | 2,722 | | |
Data Center and AI | | (518) | | | 1,393 | | |
Network and Edge | | (300) | | | 416 | | |
Mobileye | | 123 | | | 148 | | |
Intel Foundry Services | | (140) | | | (23) | | |
All other | | (1,153) | | | (315) | | |
Total operating income (loss) | | $ | (1,468) | | | $ | 4,341 | | |
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Note 3 : | Non-Controlling Interests |
Semiconductor Co-Investment Program
In 2022, we closed a transaction with Brookfield Asset Management (Brookfield) resulting in the formation of Arizona Fab LLC (Arizona Fab), a VIE for which we and Brookfield own 51% and 49%, respectively. Because we are the primary beneficiary of the VIE, we fully consolidate the results of Arizona Fab into our consolidated financial statements. Generally, contributions will be made to, and distributions will be received from, Arizona Fab based on both parties’ proportional ownership. We will be the sole operator and majority owner of two new chip factories that will be constructed by Arizona Fab, and we will have the right to purchase 100% of the related factory output. Once production commences, we will be required to operate Arizona Fab at minimum production levels measured in wafer starts per week and will be required to limit excess inventory held on site or we will be subject to certain penalties.
We have an unrecognized commitment to fund our respective share of the total construction costs of Arizona Fab of $29.0 billion.
As of April 1, 2023, a substantial majority of the assets of Arizona Fab consisted of property, plant and equipment. The assets held by Arizona Fab, which can be used only to settle obligations of the VIE and are not available to us, were $2.7 billion as of April 1, 2023 ($1.8 billion as of December 31, 2022).
Non-controlling interest in Arizona Fab was $1.3 billion as of April 1, 2023 ($874 million as of December 31, 2022). Net loss attributable to non-controlling interest in Arizona Fab was $5 million in the first three months of 2023; there was no net income (loss) attributable to non-controlling interest in the first three months of 2022.
Mobileye
In October 2022, Mobileye completed its IPO and certain other equity financing transactions that resulted in net proceeds of $1.0 billion. As of April 1, 2023, Intel held approximately 94% (94% as of December 31, 2022) of the outstanding equity interest in Mobileye. Non-controlling interest in Mobileye was $1.0 billion as of April 1, 2023 ($1.0 billion as of December 31, 2022). Net loss attributable to non-controlling interest in Mobileye was $5 million in the first three months of 2023; there was no net income (loss) attributable to non-controlling interest in the first three months of 2022.
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| Financial Statements | Notes to Financial Statements | 10 |
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Note 4 : | Earnings (Loss) Per Share |
We computed basic earnings (loss) per share of common stock based on the weighted average number of shares of common stock outstanding during the period. We computed diluted earnings (loss) per share of common stock based on the weighted average number of shares of common stock outstanding plus potentially dilutive shares of common stock outstanding during the period.
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| | Three Months Ended |
(In Millions, Except Per Share Amounts) | | Apr 1, 2023 | | Apr 2, 2022 |
Net income (loss) | | $ | (2,768) | | | $ | 8,113 | |
Less: Net income (loss) attributable to non-controlling interests | | (10) | | | — | |
Net income (loss) attributable to Intel | | (2,758) | | | 8,113 | |
Weighted average shares of common stock outstanding—basic | | 4,154 | | | 4,079 | |
Dilutive effect of employee equity incentive plans | | — | | | 28 | |
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Weighted average shares of common stock outstanding—diluted | | 4,154 | | | 4,107 | |
Earnings (loss) per share attributable to Intel—basic
| | $ | (0.66) | | | $ | 1.99 | |
Earnings (loss) per share attributable to Intel—diluted
| | $ | (0.66) | | | $ | 1.98 | |
Potentially dilutive shares of common stock from employee equity incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding RSUs, and the assumed issuance of common stock under the stock purchase plan. Due to our net loss in the first three months of 2023, the assumed exercise of outstanding stock options, the assumed vesting of outstanding RSUs, and the assumed issuance of common stock under the stock purchase plan had an antidilutive effect on diluted earnings per share.
Securities which were anti-dilutive were insignificant and were excluded from the computation of diluted earnings per share in all periods presented.
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Note 5 : | Other Financial Statement Details |
Accounts Receivable
We sell certain of our accounts receivable on a non-recourse basis to third-party financial institutions. We record these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the Consolidated Condensed Statements of Cash Flows. Accounts receivable sold under non-recourse factoring arrangements were $500 million during the first three months of 2023, and we did not factor accounts receivable during the first three months of 2022. After the sale of our accounts receivable, we will collect payment from the customers and remit it to the third-party financial institution.
Inventories
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(In Millions) | | Apr 1, 2023 | | Dec 31, 2022 |
Raw materials | | $ | 1,358 | | | $ | 1,517 | |
Work in process | | 7,415 | | | 7,565 | |
Finished goods | | 4,220 | | | 4,142 | |
Total inventories | | $ | 12,993 | | | $ | 13,224 | |
Interest and Other, Net | | | | | | | | | | | | | | |
| | Three Months Ended |
(In Millions) | | Apr 1, 2023 | | Apr 2, 2022 |
Interest income | | $ | 334 | | | $ | 47 | |
Interest expense | | (193) | | | (124) | |
Other, net | | — | | | 1,074 | |
Total interest and other, net | | $ | 141 | | | $ | 997 | |
Interest expense is net of $363 million of interest capitalized in the first three months of 2023 ($142 million in the first three months of 2022). Other, net includes a gain in 2022 of $1.0 billion resulting from the first closing of the divestiture of our NAND memory business.
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| Financial Statements | Notes to Financial Statements | 11 |
Property, Plant and Equipment
Effective January 2023, we increased the estimated useful life of certain production machinery and equipment from 5 years to 8 years. We estimate this change resulted in an approximate $360 million increase to gross margin, an approximate $100 million decrease in R&D expenses, and an approximate $525 million decrease in ending inventory values in Q1 2023 when compared to what the impact would have been using the estimated useful life in place prior to this change.
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Note 6 : | Restructuring and Other Charges |
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| | Three Months Ended | | |
(In Millions) | | Apr 1, 2023 | | Apr 2, 2022 | | | | |
Employee severance and benefit arrangements | | $ | (39) | | | $ | 5 | | | | | |
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Litigation charges and other | | 77 | | | (1,216) | | | | | |
Asset impairment charges | | 26 | | | — | | | | | |
Total restructuring and other charges | | $ | 64 | | | $ | (1,211) | | | | | |
The 2022 Restructuring Program was approved in the third quarter of 2022 to rebalance our workforce and operations to create efficiencies and improve our product execution in alignment with our strategy. We expect these actions to be substantially completed by the end of 2023, but this is subject to change. Any changes to the estimates or timing of executing the 2022 Restructuring Program will be reflected in our results of operations.
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Restructuring activity for the 2022 Restructuring Program during the first three months of 2023 was as follows: |
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(In Millions) | | | | | | |
Accrued restructuring balance as of December 31, 2022 | | $ | 873 | | | | | |
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Adjustments | | (41) | | | | | |
Cash payments | | (487) | | | | | |
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Accrued restructuring balance as of April 1, 2023 | | $ | 345 | | | | | |
The accrued restructuring balance as of April 1, 2023, was recorded as a current liability within accrued compensation and benefits on the Consolidated Condensed Balance Sheets.
Litigation charges and other includes a $1.2 billion benefit in the first three months of 2022 from the annulled penalty related to an EC fine that was recorded and paid in 2009. Refer to "Note 12: Contingencies" within the Notes to Consolidated Condensed Financial Statements for further information on legal proceedings related to the EC fine.
Short-term Investments
Short-term investments include marketable debt investments in corporate debt, government debt, and financial institution instruments. Government debt includes instruments such as non-US government bonds and US agency securities. Financial institution instruments include instruments issued or managed by financial institutions in various forms, such as commercial paper, fixed- and floating-rate bonds, money market fund deposits, and time deposits. As of April 1, 2023, and December 31, 2022, substantially all time deposits were issued by institutions outside the US.
For certain of our marketable debt investments, we economically hedge market risks at inception with a related derivative instrument or the marketable debt investment itself is used to economically hedge currency exchange rate risk from remeasurement. These hedged investments are reported at fair value with gains or losses from the investments and the related derivative instruments recorded in interest and other, net. The fair value of our hedged investments was $18.2 billion as of April 1, 2023 ($16.2 billion as of December 31, 2022). For hedged investments still held at the reporting date, we recorded net gains of $90 million in the first three months of 2023 ($411 million of net losses in the first three months of 2022). We recorded net losses on the related derivatives of $102 million in the first three months of 2023 ($377 million of net gains in the first three months of 2022).
Our remaining unhedged marketable debt investments are reported at fair value, with unrealized gains or losses, net of tax, recorded in accumulated other comprehensive income (loss). The adjusted cost of our unhedged investments was $7.0 billion as of April 1, 2023 ($10.2 billion as of December 31, 2022), which approximated the fair value for these periods.
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| Financial Statements | Notes to Financial Statements | 12 |
The fair value of marketable debt investments, by contractual maturity, as of April 1, 2023, was as follows:
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(In Millions) | | Fair Value |
Due in 1 year or less | | $ | 15,874 | |
Due in 1–2 years | | 1,805 | |
Due in 2–5 years | | 4,850 | |
Due after 5 years | | 734 | |
Instruments not due at a single maturity date1 | | 1,947 | |
Total | | $ | 25,210 | |
1 Instruments not due at a single maturity date is comprised of money market fund deposits, which are classified as either short-term investments or cash and cash equivalents.
Equity Investments
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(In Millions) | | Apr 1, 2023 | | Dec 31, 2022 |
Marketable equity securities1 | | $ | 1,421 | | | $ | 1,341 | |
Non-marketable equity securities | | 4,598 | | | 4,561 | |
Equity method investments | | 10 | | | 10 | |
Total | | $ | 6,029 | | | $ | 5,912 | |
1 Over 90% of our marketable equity securities are subject to trading-volume or market-based restrictions, which limit the number of shares we may sell in a specified period of time, impacting our ability to liquidate these investments. The trading volume restrictions generally apply for as long as we own more than 1% of the outstanding shares. Market-based restrictions result from the rules of the respective exchange.
The components of gains (losses) on equity investments, net for each period were as follows:
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| | Three Months Ended | | | | | |
(In Millions) | | Apr 1, 2023 | | Apr 2, 2022 | | | | | | | | |
Ongoing mark-to-market adjustments on marketable equity securities | | $ | 188 | | | $ | (430) | | | | | | | | | |
Observable price adjustments on non-marketable equity securities | | 10 | | | 71 | | | | | | | | | |
Impairment charges | | (36) | | | (23) | | | | | | | | | |
Sale of equity investments and other1 | | 7 | | | 4,705 | | | | | | | | | |
Total gains (losses) on equity investments, net | | $ | 169 | | | $ | 4,323 | | | | | | | | | |
1 Sale of equity investments and other includes initial fair value adjustments recorded upon a security becoming marketable, realized gains (losses) on sales of non-marketable equity investments and equity method investments, and our share of equity method investee gains (losses) and distributions.
Net unrealized gains and losses for our marketable and non-marketable equity securities for each period were as follows:
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| | Three Months Ended | | | | |
(In Millions) | | Apr 1, 2023 | | Apr 2, 2022 | | | | | | |
Net unrealized gains (losses) recognized during the period on equity securities | | $ | 166 | | | $ | (244) | | | | | | | |
Less: Net (gains) losses recognized during the period on equity securities sold during the period | | (3) | | | (17) | | | | | | | |
Net unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date | | $ | 163 | | | $ | (261) | | | | | | | |
McAfee Corp.
During the first quarter of 2022, the sale of the McAfee consumer business was completed and we received $4.6 billion in cash for the sale of our remaining share of McAfee, recognizing a $4.6 billion gain in sale of equity investments and other.
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| Financial Statements | Notes to Financial Statements | 13 |
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Note 8 : | Acquisitions and Divestitures |
Acquisitions
Acquisition of Tower Semiconductor
During the first quarter of 2022, we entered into a definitive agreement to acquire Tower Semiconductor Ltd. (Tower) in a cash-for-stock transaction. Tower is a leading foundry for analog semiconductor solutions. The acquisition is expected to advance our IDM 2.0 strategy by accelerating our global end-to-end foundry business. Upon completion of the acquisition, each issued and outstanding ordinary share of Tower will be converted into the right to receive $53 per share in cash, representing a total enterprise value of approximately $5.4 billion as of the agreement date. We continue to work to close the transaction, which is subject to certain regulatory approvals and customary closing conditions. If regulatory approvals are not received prior to August 15, 2023, and the agreement is terminated by either party, we may be obligated to pay Tower a termination fee of $353 million. Tower will be included in our IFS operating segment.
Divestitures
NAND Memory Business
On December 29, 2021, we closed the first phase of our agreement with SK hynix Inc. (SK hynix) to divest our NAND memory business for $9.0 billion in cash. Our NAND memory business includes our NAND memory technology and manufacturing business (the NAND OpCo Business), of which we deconsolidated our ongoing interests in as part of the sale. The transaction will be completed in two closings and upon first closing in the first three months 2022, SK hynix paid $7.0 billion of consideration and we recognized a pre-tax gain of $1.0 billion within interest and other, net, and tax expense of $495 million. We recorded a receivable in other long-term assets for the remaining proceeds of $1.9 billion which remains outstanding as of April 1, 2023, and will be received upon the second closing of the transaction, expected to be no earlier than March 2025.
The wafer manufacturing and sale agreement includes incentives and penalties that are contingent on the cost of operation and output of the NAND OpCo Business. These incentives and penalties present a maximum exposure of up to $500 million annually, and $1.5 billion in the aggregate. We are currently in negotiations with SK hynix to update the operating plan of the NAND OpCo Business in light of the current business environment and projections, which may impact the metrics associated with the incentives and penalties and our expectations of the performance of the NAND OpCo Business against those metrics.
As of April 1, 2023, we also have a receivable due from the NAND OpCo Business, a deconsolidated entity, of $184 million recorded within other current assets on the Consolidated Condensed Balance Sheets. We will be reimbursed for costs of approximately $35 million per quarter in 2023 for corporate function services, which include human resources, information technology, finance, supply chain, and other compliance requirements associated with being wholly owned subsidiaries.
In the first quarter of 2023, we issued a total of $11.0 billion aggregate principal amount of senior notes. We also amended both our 5-year $5.0 billion revolving credit facility agreement, extending the maturity date by one year to March 2028, and our 364-day credit facility agreement, extending the maturity date to March 2024. The revolving credit facilities had no borrowings outstanding as of April 1, 2023.
We have an ongoing authorization from our Board of Directors to borrow up to $10.0 billion under our commercial paper program. In the first quarter of 2023, we settled in cash $2.9 billion of our commercial paper and had $1.0 billion outstanding as of April 1, 2023.
Our senior fixed rate notes pay interest semiannually. We may redeem the fixed rate notes prior to their maturity at our option at specified redemption prices and subject to certain restrictions. The obligations under our senior fixed rate notes rank equally in the right of payment with all of our other existing and future senior unsecured indebtedness and effectively rank junior to all liabilities of our subsidiaries.
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| Financial Statements | Notes to Financial Statements | 14 |
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
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| | Apr 1, 2023 | | Dec 31, 2022 | | |
| | Fair Value Measured and Recorded at Reporting Date Using | | | | Fair Value Measured and Recorded at Reporting Date Using | | | | |
(In Millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | |
Assets | | | | | | | | | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | | | | | | | | | |
Corporate debt | | $ | — | | | $ | 1,395 | | | $ | — | | | $ | 1,395 | | | $ | — | | | $ | 856 | | | $ | — | | | $ | 856 | | | |
Financial institution instruments¹ | | 1,806 | | | 2,177 | | | — | | | 3,983 | | | 6,899 | | | 1,474 | | | — | | | 8,373 | | | |
Government debt² | | 233 | | | 297 | | | — | | | 530 | | | — | | | — | | | — | | | — | | | |
Reverse repurchase agreements | | — | | | 1,700 | | | — | | | 1,700 | | | — | | | 1,301 | | | — | | | 1,301 | | | |
Short-term investments: | | | | | | | | | | | | | | | | | | |
Corporate debt | | — | | | 5,441 | | | — | | | 5,441 | | | — | | | 5,381 | | | — | | | 5,381 | | | |
Financial institution instruments¹ | | 141 | | | 5,019 | | | — | | | 5,160 | | | 196 | | | 4,729 | | | — | | | 4,925 | | | |
Government debt² | | 49 | | | 8,652 | | | — | | | 8,701 | | | 48 | | | 6,840 | | | — | | | 6,888 | | | |
Other current assets: | | | | | | | | | | | | | | | | | | |
Derivative assets | | 78 | | | 959 | | | — | | | 1,037 | | | — | | | 1,264 | | | — | | | 1,264 | | | |
Loans receivable³ | | — | | | 54 | | | — | | | 54 | | | — | | | 53 | | | — | | | 53 | | | |
Marketable equity securities | | 1,421 | | | — | | | — | | | 1,421 | | | 1,341 | | | — | | | — | | | 1,341 | | | |
Other long-term assets: | | | | | | | | | | | | | | | | | | |
Derivative assets | | — | | | 5 | | | — | | | 5 | | | — | | | 10 | | | — | | | 10 | | | |
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Total assets measured and recorded at fair value | | $ | 3,728 | | | $ | 25,699 | | | $ | — | | | $ | 29,427 | | | $ | 8,484 | | | $ | 21,908 | | | $ | — | | | $ | 30,392 | | | |
Liabilities | | | | | | | | | | | | | | | | | | |
Other accrued liabilities: | | | | | | | | | | | | | | | | | | |
Derivative liabilities | | $ | 8 | | | $ | 350 | | | $ | 81 | | | $ | 439 | | | $ | 111 | | | $ | 485 | | | $ | 89 | | | $ | 685 | | | |
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Other long-term liabilities: | | | | | | | | | | | | | | | | | | |
Derivative liabilities | | — | | | 515 | | | — | | | 515 | | | — | | | 699 | | | — | | | 699 | | | |
Total liabilities measured and recorded at fair value | | $ | 8 | | | $ | 865 | | | $ | 81 | | | $ | 954 | | | $ | 111 | | | $ | 1,184 | | | $ | 89 | | | $ | 1,384 | | | |
1Level 1 investments consist of money market funds. Level 2 investments consist primarily of commercial paper, certificates of deposit, time deposits, and notes and bonds issued by financial institutions.
2Level 1 investments consist primarily of US Treasury securities. Level 2 investments consist primarily of non-US government debt.
3The fair value of our loans receivable for which we elected the fair value option did not significantly differ from the contractual principal balance.
Assets Measured and Recorded at Fair Value on a Non-Recurring Basis
Our non-marketable equity securities, equity method investments, and certain non-financial assets, such as intangible assets and property, plant and equipment, are recorded at fair value only if an impairment or observable price adjustment is recognized in the current period. If an observable price adjustment or impairment is recognized on our non-marketable equity securities during the period, we classify these assets as Level 3.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
Financial instruments not recorded at fair value on a recurring basis include non-marketable equity securities and equity method investments that have not been remeasured or impaired in the current period, grants receivable, reverse repurchase agreements with original maturities greater than three months, and issued debt.
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| Financial Statements | Notes to Financial Statements | 15 |
We classify the fair value of grants receivable and reverse repurchase agreements with original maturities greater than three months as Level 2. The estimated fair value of these financial instruments approximates their carrying value. The aggregate carrying value of grants receivable as of April 1, 2023 was $459 million (the aggregate carrying value as of December 31, 2022 was $437 million). The aggregate carrying value of reverse repurchase agreements with original maturities greater than three months as of April 1, 2023 was $0 million (the aggregate carrying value as of December 31, 2022 was $400 million).
We classify the fair value of issued debt (excluding any commercial paper) as Level 2. The fair value of our issued debt was $45.9 billion as of April 1, 2023 ($34.3 billion as of December 31, 2022).
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Note 11 : | Derivative Financial Instruments |
Volume of Derivative Activity
Total gross notional amounts for outstanding derivatives (recorded at fair value) at the end of each period were as follows:
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(In Millions) | | Apr 1, 2023 | | Dec 31, 2022 | | |
Foreign currency contracts | | $ | 30,847 | | | $ | 31,603 | | | |
Interest rate contracts | | 16,590 | | | 16,011 | | | |
Other | | 2,058 | | | 2,094 | | | |
Total | | $ | 49,495 | | | $ | 49,708 | | | |
Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets
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| | Apr 1, 2023 | | Dec 31, 2022 |
(In Millions) | | Assets1 | | Liabilities2 | | Assets1 | | Liabilities2 |
Derivatives designated as hedging instruments: | | | | | | | | |
Foreign currency contracts3 | | $ | 187 | | | $ | 185 | | | $ | 142 | | | $ | 290 | |
Interest rate contracts | | — | | | 585 | | | — | | | 777 | |
Total derivatives designated as hedging instruments | | 187 | | | 770 | | | 142 | | | 1,067 | |
Derivatives not designated as hedging instruments: | | | | | | | | |
Foreign currency contracts3 | | 537 | | | 156 | | | 866 | | | 194 | |
Interest rate contracts | | 240 | | | 20 | | | 266 | | | 12 | |
Equity contracts | | 78 | | | 8 | | | — | | | 111 | |
Total derivatives not designated as hedging instruments | | 855 | | | 184 | | | 1,132 | | | 317 | |
Total derivatives | | $ | 1,042 | | | $ | 954 | | | $ | 1,274 | | | $ | 1,384 | |
1Derivative assets are recorded as other assets, current and long-term.
2Derivative liabilities are recorded as other liabilities, current and long-term.
3The substantial majority of these instruments mature within 12 months.
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| Financial Statements | Notes to Financial Statements | 16 |
Amounts Offset in the Consolidated Condensed Balance Sheets
Agreements subject to master netting arrangements with various counterparties, and cash and non-cash collateral posted under such agreements at the end of each period were as follows:
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| | Apr 1, 2023 | | | | |
| | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | | | | | |
(In Millions) | | Gross Amounts Recognized | | Gross Amounts Offset in the Balance Sheet | | Net Amounts Presented in the Balance Sheet | | Financial Instruments | | Cash and Non-Cash Collateral Received or Pledged | | Net Amount | | | | |
Assets: | | | | | | | | | | | | | | | | |
Derivative assets subject to master netting arrangements | | $ | 966 | | | $ | — | | | $ | 966 | | | $ | (471) | | | $ | (495) | | | $ | — | | | | | |
Reverse repurchase agreements | | 1,700 | | | — | | | 1,700 | | | — | | | (1,700) | | | — | | | | | |
Total assets | | 2,666 | | | — | | | 2,666 | | | (471) | | | (2,195) | | | — | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Derivative liabilities subject to master netting arrangements | | 935 | | | — | | | 935 | | | (471) | | | (392) | | | 72 | | | | | |
Total liabilities | | $ | 935 | | | $ | — | | | $ | 935 | | | $ | (471) | | | $ | (392) | | | $ | 72 | | | | | |
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| | Dec 31, 2022 |
| | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | |
(In Millions) | | Gross Amounts Recognized | | Gross Amounts Offset in the Balance Sheet | | Net Amounts Presented in the Balance Sheet | | Financial Instruments | | Cash and Non-Cash Collateral Received or Pledged | | Net Amount |
Assets: | | | | | | | | | | | | |
Derivative assets subject to master netting arrangements | | $ | 1,231 | | | $ | — | | | $ | 1,231 | | | $ | (546) | | | $ | (682) | | | $ | 3 | |
Reverse repurchase agreements | | 1,701 | | | — | | | 1,701 | | | — | | | (1,701) | | | — | |
Total assets | | 2,932 | | | — | | | 2,932 | | | (546) | | | (2,383) | | | 3 | |
Liabilities: | | | | | | | | | | | | |
Derivative liabilities subject to master netting arrangements | | 1,337 | | | — | | | 1,337 | | | (546) | | | (712) | | | 79 | |
Total liabilities | | $ | 1,337 | | | $ | — | | | $ | 1,337 | | | $ | (546) | | | $ | (712) | | | $ | 79 | |
We obtain and secure available collateral from counterparties against obligations, including securities lending transactions and reverse repurchase agreements, when we deem it appropriate.
Derivatives in Cash Flow Hedging Relationships
The before-tax net gains or losses attributed to cash flow hedges recognized in other comprehensive income (loss) were $53 million net gains in the first three months of 2023 ($115 million net losses in the first three months of 2022). Substantially all of our cash flow hedges were foreign currency contracts for all periods presented.
During the first three months of 2023 and 2022, the amounts excluded from effectiveness testing were insignificant.
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| Financial Statements | Notes to Financial Statements | 17 |
Derivatives in Fair Value Hedging Relationships
The effects of derivative instruments designated as fair value hedges, recognized in interest and other, net for each period were as follows: | | | | | | | | | | | | | | | | | | | | | | |
| | Gains (Losses) Recognized in Consolidated Condensed Statements of Income on Derivatives | | | | | | | | |
| | Three Months Ended | | | | |
(In Millions) | | Apr 1, 2023 | | Apr 2, 2022 | | | | | | | | |
Interest rate contracts | | $ | 192 | | | $ | (711) | | | | | | | | | |
Hedged items | | (192) | | | 711 | | | | | | | | | |
Total | | $ | — | | | $ | — | | | | | | | | | |
The amounts recorded on the Consolidated Condensed Balance Sheets related to cumulative basis adjustments for fair value hedges for each period were as follows:
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Line Item in the Consolidated Condensed Balance Sheets in Which the Hedged Item is Included | | Carrying Amount of the Hedged Item Asset/(Liabilities) | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount Assets/(Liabilities) | |
(In Millions) | | Apr 1, 2023 | | Dec 31, 2022 | | Apr 1, 2023 | | Dec 31, 2022 | |
Long-term debt | | $ | (11,413) | | | $ | (11,221) | | | $ | 584 | | | $ | 776 | | |
The total notional amount of pay-variable and receive-fixed interest rate swaps was $12.0 billion as of April 1, 2023 and $12.0 billion as of December 31, 2022.
Derivatives Not Designated as Hedging Instruments
The effects of derivative instruments not designated as hedging instruments on the Consolidated Condensed Statements of Income for each period were as follows:
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| | | | Three Months Ended | | |
(In Millions) | | Location of Gains (Losses) Recognized in Income on Derivatives | | Apr 1, 2023 | | Apr 2, 2022 | | |
Foreign currency contracts | | Interest and other, net | | $ | 1 | | | $ | 158 | | | | | |
Interest rate contracts | | Interest and other, net | | (34) | | | 94 | | | | | |
Other | | Various | | 115 | | | (134) | | | | | |
Total | | | | $ | 82 | | | $ | 118 | | | | | |
Legal Proceedings
We are regularly party to various ongoing claims, litigation, and other proceedings, including those noted in this section. We have accrued a charge of $2.2 billion related to litigation involving VLSI, described below. Excluding the VLSI claims described below, management at present believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, results of operations, cash flows, or overall trends; however, legal proceedings and related government investigations are subject to inherent uncertainties, and unfavorable rulings, excessive verdicts, or other events could occur. Unfavorable resolutions could include substantial monetary damages, fines, or penalties. Certain of these outstanding matters include speculative, substantial, or indeterminate monetary awards. In addition, in matters for which injunctive relief or other conduct remedies are sought, unfavorable resolutions could include an injunction or other order prohibiting us from selling one or more products at all or in particular ways, precluding particular business practices, or requiring other remedies. An unfavorable outcome may result in a material adverse impact on our business, results of operations, financial position, and overall trends. We might also conclude that settling one or more such matters is in the best interests of our stockholders, employees, and customers, and any such settlement could include substantial payments. Except as specifically described below, we have not concluded that settlement of any of the legal proceedings noted in this section is appropriate at this time.
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| Financial Statements | Notes to Financial Statements | 18 |
European Commission Competition Matter
In 2009, the European Commission (EC) found that Intel had used unfair business practices to persuade customers to buy microprocessors in violation of Article 82 of the EC Treaty (later renumbered Article 102) and Article 54 of the European Economic Area Agreement. In general, the EC found that we violated Article 82 by offering alleged “conditional rebates and payments” that required customers to purchase all or most of their x86 microprocessors from us and by making alleged “payments to prevent sales of specific rival products.” The EC ordered us to end the alleged infringement referred to in its decision and imposed a €1.1 billion fine, which we paid in the third quarter of 2009.
We appealed the EC decision to the European Court of Justice in 2014, after the General Court (then called the Court of First Instance) rejected our appeal of the EC decision in its entirety. In September 2017, the Court of Justice sent the case back to the General Court to examine whether the rebates at issue were capable of restricting competition.
In January 2022, the General Court annulled the EC’s 2009 findings against Intel regarding rebates, as well as the fine imposed on Intel, which was returned to us in February 2022. In April 2022, the EC appealed the General Court’s decision to the Court of Justice. A hearing date on the appeal has not been scheduled. The General Court’s January 2022 decision did not annul the EC’s 2009 finding that Intel made payments to prevent sales of specific rival products, and in January 2023 the EC reopened its administrative procedure to determine a fine against Intel based on that alleged conduct. Given the procedural posture and the nature of this proceeding, we are unable to make a reasonable estimate of the potential loss or range of losses, if any, that might arise from this matter.
In a related matter, in April 2022 we filed applications with the General Court seeking an order requiring the EC to pay Intel approximately €593 million in default interest, which applications have been stayed pending the EC’s appeal of the General Court’s January 2022 decision.
Litigation Related to Security Vulnerabilities
In June 2017, a Google research team notified Intel and other companies that it had identified security vulnerabilities, now commonly referred to as “Spectre” and “Meltdown,” that affect many types of microprocessors, including our products. As is standard when findings like these are presented, we worked together with other companies in the industry to verify the research and develop and validate software and firmware updates for impacted technologies. In January 2018, information on the security vulnerabilities was publicly reported before software and firmware updates to address the vulnerabilities were made widely available.
Numerous lawsuits have been filed against Intel relating to Spectre, Meltdown, and other variants of the security vulnerabilities that have been identified since 2018. As of January 25, 2023, consumer class action lawsuits against Intel were pending in the United States, Canada, and Argentina. The plaintiffs, who purport to represent various classes of purchasers of our products, generally claim to have been harmed by Intel's actions and/or omissions in connection with the security vulnerabilities and assert a variety of common law and statutory claims seeking monetary damages and equitable relief. In the United States, class action suits filed in various jurisdictions were consolidated for all pretrial proceedings in the US District Court for the District of Oregon, which entered final judgment in favor of Intel in July 2022 based on plaintiffs’ failure to plead a viable claim. Plaintiffs have appealed that decision to the Ninth Circuit Court of Appeals. In Canada, an initial status conference has not yet been scheduled in one case pending in the Superior Court of Justice of Ontario, and a stay of a second case pending in the Superior Court of Justice of Quebec is in effect. In Argentina, Intel Argentina was served with, and responded to, a class action complaint in June 2022. Additional lawsuits and claims may be asserted seeking monetary damages or other related relief. We dispute the pending claims described above and intend to defend those lawsuits vigorously. Given the procedural posture and the nature of those cases, including that the pending proceedings are in the early stages, that alleged damages have not been specified, that uncertainty exists as to the likelihood of a class or classes being certified or the ultimate size of any class or classes if certified, and that there are significant factual and legal issues to be resolved, we are unable to make a reasonable estimate of the potential loss or range of losses, if any, that might arise from those matters.
Litigation Related to 7nm Product Delay Announcement
Multiple securities class action lawsuits were filed in the US District Court for the Northern District of California against Intel and certain officers following Intel’s July 2020 announcement of 7nm product delays. The court consolidated the lawsuits and appointed lead plaintiffs in October 2020, and in January 2021 plaintiffs filed a consolidated complaint. Plaintiffs purport to represent all persons who purchased or otherwise acquired Intel common stock from October 25, 2019 through October 23, 2020, and they generally allege that defendants violated the federal securities laws by making false or misleading statements about the timeline for 7nm products. In March 2023, the court granted defendants’ motion to dismiss the consolidated complaint, with leave to amend. Given the procedural posture and the nature of the case, including that it is in the early stages, that alleged damages have not been specified, that uncertainty exists as to the likelihood of a class being certified or the ultimate size of any class if certified, and that there are significant factual and legal issues to be resolved, we are unable to make a reasonable estimate of the potential loss or range of losses, if any, that might arise from the matter. In July 2021, Intel introduced a new process node naming structure, and the 7nm process is now called Intel 4.
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| Financial Statements | Notes to Financial Statements | 19 |
Litigation Related to Patent and IP Claims
We have had IP infringement lawsuits filed against us, including but not limited to those discussed below. Most involve claims that certain of our products, services, and technologies infringe others' IP rights. Adverse results in these lawsuits may include awards of substantial fines and penalties, costly royalty or licensing agreements, or orders preventing us from offering certain features, functionalities, products, or services. As a result, we may have to change our business practices, and develop non-infringing products or technologies, which could result in a loss of revenue for us and otherwise harm our business. In addition, certain agreements with our customers require us to indemnify them against certain IP infringement claims, which can increase our costs as a result of defending such claims, and may require that we pay significant damages, accept product returns, or supply our customers with non-infringing products if there were an adverse ruling in any such claims. In addition, our customers and partners may discontinue the use of our products, services, and technologies, as a result of injunctions or otherwise, which could result in loss of revenue and adversely affect our business.
VLSI Technology LLC v. Intel
In October 2017, VLSI Technology LLC (VLSI) filed a complaint against Intel in the US District Court for the Northern District of California alleging that various Intel FPGA and processor products infringe eight patents that VLSI acquired from NXP Semiconductors, N.V. (NXP). Four patents remain at issue in the case, and VLSI estimates its damages to be approximately $900 million, and seeks enhanced damages, future royalties, attorneys’ fees, costs, and interest. Intel filed Inter Partes Review (IPR) petitions with the Patent Trial and Appeal Board (PTAB) in 2018 challenging patentability, and the parties stipulated to stay the district court action pending the PTAB's review. The PTAB subsequently found all claims of two patents, and some claims of two other patents, to be unpatentable. The district court lifted the stay in September 2021 and scheduled trial for March 2024 on the claims that were found patentable by the PTAB.
In June 2018, VLSI filed a second suit against Intel, in US District Court for the District of Delaware, seeking $4.4 billion in damages for the alleged infringement by various Intel processors of five additional patents that VLSI acquired from NXP. In December 2022, VLSI stipulated to dismiss with prejudice its claims, for which Intel paid nothing. The court dismissed the case in January 2023.
In April 2019, VLSI filed three infringement suits against Intel in the US District Court for the Western District of Texas accusing various Intel processors of infringement of eight additional patents it had acquired from NXP. The first Texas case went to trial in February 2021, and the jury awarded VLSI $1.5 billion for literal infringement of one patent and $675 million for infringement of another patent under the doctrine of equivalents. In April 2022, the court entered final judgment, awarding VLSI $2.2 billion in damages and approximately $162.3 million in pre-judgment and post-judgment interest. Intel has appealed the judgment to the Federal Circuit Court of Appeals, including its claim to have a license from Fortress Investment Group’s acquisition of Finjan. In December 2021 and January 2022, the PTAB instituted IPRs on the claims found to have been infringed in the first Texas case, but it has not yet issued a final written decision on either petition.
The second Texas case went to trial in April 2021, and the jury found that Intel does not infringe the asserted patents. VLSI had sought approximately $3.0 billion for alleged infringement, plus enhanced damages for willful infringement. The court has not yet entered final judgment following the second trial in Texas. The third Texas case went to trial in November 2022, with VLSI asserting one remaining patent. The jury found the patent valid and infringed, and awarded VLSI approximately $949 million in damages, plus a running royalty. The court has not yet entered final judgment following the third trial in Texas. In February 2023, Intel filed motions for a new trial and for judgment as a matter of law notwithstanding the verdict on various grounds. Further appeals are possible.
In May 2019, VLSI filed a case in Shenzhen Intermediate People’s Court against Intel, Intel (China) Co., Ltd., Intel Trading (Shanghai) Co., Ltd., and Intel Products (Chengdu) Co., Ltd. VLSI asserts one patent against certain Intel Core processors. Defendants filed an invalidation petition in October 2019 with the China National Intellectual Property Administration (CNIPA), which held a hearing in September 2021. CNIPA has not yet issued a decision. The Shenzhen court held trial proceedings in July 2021 and stated that further trial proceedings were needed but would be stayed pending the outcome of defendants’ invalidity challenge at the CNIPA. VLSI seeks an injunction as well as RMB 1.3 million in costs and expenses, but no damages.
In May 2019, VLSI filed a case in Shanghai Intellectual Property Court against Intel (China) Co., Ltd., Intel Trading (Shanghai) Co., Ltd., and Intel Products (Chengdu) Co., Ltd. asserting one patent against certain Intel core processors. The court held a trial hearing in December 2020, where VLSI requested expenses (RMB 300 thousand) and an injunction. The court held a second trial hearing in May 2022, but has yet to issue its final decision. In December 2022, Intel filed a second petition to invalidate the patent at issue.
Intel has accrued a charge of approximately $2.2 billion related to the VLSI litigation. While we dispute VLSI’s claims and intend to vigorously defend against them, we are unable to make a reasonable estimate of losses in excess of recorded amounts given recent developments and future proceedings.
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| Financial Statements | Notes to Financial Statements | 20 |
We use terms throughout our document that are specific to Intel or that are abbreviations that may not be commonly known or used. Below is a list of these terms used in our document.
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Term | | Definition |
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5G | | The fifth-generation mobile network, which brings dramatic improvements in network speeds and latency, and which we view as a transformative technology and opportunity for many industries |
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ADAS | | Advanced driver-assistance systems |
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ASP | | Average selling price |
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AXG | | Advanced Computing and Graphics operating segment |
CCG | | Client Computing Group operating segment |
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CODM | | Chief operating decision maker |
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CPU | | Processor or central processing unit |
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DCAI | | Data Center and Artificial Intelligence operating segment |
EC | | European Commission |
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EPS | | Earnings per share | | |
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Form 10-K | | Annual Report on Form 10-K for the year ended December 31, 2022 |
Form 10-Q | | Quarterly Report on Form 10-Q for the quarter ended April 1, 2023 |
FPGA | | Field-programmable gate array |
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GPU | | Graphics processing unit |
IDM | | Integrated device manufacturer, a semiconductor company that both designs and builds chips |
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IFS | | Intel Foundry Services operating segment |
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IP | | Intellectual property |
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IPO | | Initial public offering | | |
MD&A | | Management's Discussion and Analysis |
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MG&A | | Marketing, general, and administrative |
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MNC | | Multinational corporation | | |
NAND | | NAND flash memory |
Network Xeon | | Part of the Intel Xeon processor family designed for network and edge solutions |
NEX | | Networking and Edge operating segment |
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nm | | Nanometer |
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ODM | | Original design manufacturer |
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R&D | | Research and development |
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RSU | | Restricted stock unit |
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SEC | | US Securities and Exchange Commission |
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SoC | | A system on a chip, which integrates most of the components of a computer or other electronic system into a single silicon chip. We offer a range of SoC products in CCG, DCAI, and NEX. In our DCAI and NEX businesses, we offer SoCs across many market segments for a variety of applications, including products targeted for 5G base stations and network infrastructure |
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SSD | | Solid-state drive |
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US | | United States | | |
US GAAP | | US Generally Accepted Accounting Principles |
VIE | | Variable interest entity |
VLSI | | VLSI Technology LLC |
vRAN | | Virtualized radio access network | | |
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| Financial Statements | Notes to Financial Statements | 21 |