I. Financial Planning and Funding Policy

Financial planning models use pro forma financial statements that summarize the financial outlook of the corporation[1]. The causality in the financial planning model runs from sales to assets and from assets to funding. The relationship between sales expansion and assets arises from the needs to expand net working capital and fixed assets to fund higher sales. With the growth of assets, liabilities and equity determines how to fund the growth.

The financial planning model utilizes the percentage of sales approach to generate pro forma financial statements, where every item on the income statement increases at the same rate as sales, and some items of the balance sheet expand in proportion to their initial ratio to sales. We construct a financial planning model that includes the income statement and balance sheet and determine the items that change directly autonomously with sales and those that do not. By assuming a sales forecast at a given level, we derive the balance sheet and determine the funding needed to support the sales evolution.

The income statement is constructed on the basis of the most recent growth performance record and by assuming, say, a 10% prospective sales growth going forward. We generate the pro forma income statement by assuming that the relation of each item of the income statement to sales remains at the same ratio that prevailed in the base year.

Next, we address the dividend payout ratio which is determined by the company's Board of Directors. The dividend payout ratio=Cash dividends/Net income, and the addition to the retained earnings = Net income - Dividend payout.

To construct a pro forma balance sheet we begin with the most recent statement by observing that some of the items usually change directly or autonomously with sales, whereas others do not. For instance, if the ratio of assets/sales in the base year is 2, the amount of assets required to sustain a change in sales by $1 is $2 of assets. The ratio of assets/sales is defined as the capital intensity ratio, which is assumed to stay constant throughout the pro forma period.

On the liability side, some items vary directly with sales while others do not. For instance, accounts payable vary directly with sales and as sales expand the company is expected to procure more inputs from its vendors. The change in account payable with sales is therefore assumed to be autonomous, whereas other accounts, such as long-term debt and common stock wouldn't autonomously change with sales.

Upon completion of the pro forma income statement and balance sheet (we are likely to realize (depending on the assumed capacity utilization rate) that the projected assets exceed liabilities and equity, thus constituting a funding gap that is defined as External Funding Needs ("EFN"). The EFN could be funded through several methods, including an expansion of debt or equity or a combination of both. The specific funding approach of the EFN has significant implications on the firm's leverage that would be determined by the BOD.

Alternatively, instead of deriving pro forma financials and determining the EFN, a formulary approach is suggested instead as follows:

EFN=A/S x DS- (Autonomous Liabilities/Sales) x D Sales-Profit Margin (PM) X Projected Sales x (1-dividend payout ratio)

The variables in the above equation are as follows: A=assets, S=sales, D= change

EFN and growth are related so that higher growth induces greater need for funded assets and external funding granting, however, that the company operates at full capacity utilization. With sales growth and excess capacity the need for investment in productive assets diminishes and likewise the need for external funding. There is a nexus between internal growth and financial policy that is reflected by the dividend policy and the share of net income that is retained, or the plowback, and defined as b, as follows:

Internal Growth Rate= ROA x b/ (1- ROA x b)

B=the plow in or the retention ratio

The growth rate above the internal growth is referred to as sustainable growth rate and the maximum rate of growth that a company can maintain without modifying its financial leverage is formulated as follows:

Sustainable growth rate = ROE x b/ (1-ROE x b)[2]

In addressing the EFN, the BOD was cognizant of the debt structure of major firms, as shown in Exhibit 2.

II. Intel's Business[3]

Intel Corporation ("Intel" or "The Company") is a world leader in the design and manufacturing of essential technologies that power the cloud and connect the world. It offers computing, networking, data storage, and communications solutions to a broad set of customers spanning multiple industries. In 1968, Intel was incorporated in California (reincorporated in Delaware in 1989) and its technology has been at the heart of computing breakthroughs ever since.

Intel's platforms are used in notebooks, systems, and desktops; cloud, enterprise, and communication infrastructure market segments; and retail, automotive, industrial, and various other embedded applications. It serves original equipment manufacturers, original design manufacturers, industrial and communication equipment manufacturers, and cloud service providers. Intel Corporation has a collaboration with Telefonaktiebolaget LM Ericsson (publ) to develop software defined infrastructure for network functions virtualization, distributed cloud, and 5G applications. The company was founded in 1968 and is based in Santa Clara, California.

Intel is in the midst of a corporate transformation that began five years ago--as the company grows beyond its traditional PC and server businesses into data-rich markets, addressing the explosive demands to process, analyze, store, and transfer data. Over the last five years, the company made key investments and decisions to enter data-rich markets and deploy IP and manufacturing technologies to redefine and expand the target market. It evolved from a PC-centric company with a server business, to a data-centric company with an expanding portfolio of technology solutions that address customer needs across platform, storage, connectivity, and software.

MAKE THE WORLD'S BEST SEMICONDUCTORS

Intel made significant investments and innovations in silicon manufacturing technologies and platforms. Proprietary technologies make it possible to integrate products and platforms that address evolving customer needs and expand the markets served. Innovation strategy includes investments in advanced manufacturing processes and packaging, architecture, interconnects, and embedded security features, as part of the efforts to be the leading end-to-end platform provider. Realizing the economics of Moore's Law[4] has been and will continue to be a strategic priority, making possible the innovation of new high-performance products and improving user experience at exponential rates while balancing performance, cost, and power to meet customers' needs.

Unlike many semiconductor companies, the company develops and manufactures its products in its own facilities using proprietary process technologies. Intel has the scale and expertise necessary to enable deep engagement with customers, which provides a competitive advantage. Manufacturing capital enables us to optimize performance, shorten time-to-market for new product introduction, and control essential elements of supply chain. Sharing architectural innovation and IP enables to spread investments over a large manufacturing base of products, which reduces costs and increases return on capital.

LEAD THE AI AND AUTONOMOUS REVOLUTION

Intel is positioned to be a driving force of the AI and autonomous revolution. By striving to build the world's best AI platform, the strategy is to meet the needs of most innovative customers, to advance and accelerate the AI industry's open software stacks, to deliver the best AI products, and to seed and drive the AI ecosystem. Mobileye's EyeQ* family of SoCs is already the automobile industry's leading solution for advanced driver assistance systems (ADAS). Mobileye is building on that leadership as the industry pursues higher levels of autonomy, developing Road Experience Management for real-time crowdsourced mapping, and the Responsibility Sensitive Safety model for autonomous vehicle safety. Customers use Intel Xeon processors for workloads such as image recognition, enhanced public security, and natural language processing, the foundation of the AI revolution. Intel Nervana Neural Network Processors and Intel Movidius Myriad Vision Processing Units (VPUs) provide a comprehensive suite of hardware and software technologies that deliver broad capabilities and support diverse approaches for AI, enabling customers to infuse AI into everything they do.

OUR CAPITAL

Intel deploys various forms of capital to execute transformation strategy in a way that seeks to reflect corporate values, delight customers, and create value for stockholders. Its commitment to corporate responsibility creates value for Intel and stockholders by helping mitigate risks, reduce costs, build brand value, and identify new market opportunities. The company sets ambitious goals and makes strategic investments to advance progress in the areas of environmental sustainability, supply chain responsibility, diversity and inclusion, and social impact that benefit the environment and society. It empowers and invests in attracting and retaining talented employees who enable the development of solutions and enhance intellectual and manufactured capital.

FINANCIAL CAPITAL

Intel's financial capital allocation strategy focuses on building stockholder value by investing in growing capabilities, strategic investment and acquisitions.

INVEST IN THE BUSINESS

The first priority is to invest in R&D and capital spending at approximately 20% of revenue.

The second priority is to invest in companies around the world that will complement its strategic objectives and stimulate growth of data-centric opportunities. In 2018, the company completed various small acquisitions, while leveraging Altera and Movidius to partner with customers and expand the markets it serves. Mobileye achieved record revenue, various design wins, and announced the ability to retrofit existing vehicles to deliver full autonomy. The third financial capital allocation priority is to return cash to stockholders through dividend and share repurchase programs. During 2018, the company paid $5.5 billion in dividends and repurchase of $10.7 billion in shares.

DISCUSSION AND ANALYSIS (MD&A)

The 2018 results serve as a strong proof point that the strategy is working and transformation is well underway. The company achieved record revenue and earnings per share (EPS), driven by strong business performance, continued operating leverage, and a lower tax rate. Revenue from data centric businesses collectively increased by double digits. PC-centric business grew above expectations and continued to be a source of profit, cash flow, scale, and intellectual property (IP). Intel expanded beyond PC and server businesses with significant growth in adjacent products.

RESEARCH AND DEVELOPMENT

During 2017 - 2018, R&D spending increased by $508 million, or 4%, driven by the following:

+ Investments in data-centric businesses, and

+ Investments in process technology.

Appendix I contains Intel's financial data that include the income statement, balance sheet and cash flow.

III. The Assignment

Ms. Lisa Chen. MBA and CPA, joined PWC in 2010 as Managing Director and Partner of corporate financial consulting. She earned an MBA in finance from Rutgers Business School, and previously attended NYU Stern School of Business, where she majored in finance and accounting. At PWC Ms. Chen is responsible for high-tech companies, including Intel, and managed a staff of over 30 partners, senior managers and CPAs, and traveled on business in the U.S. and abroad approximately 30-40% of her time.

PWC was asked to assist Intel Corporation ("Intel" or "The Company") in creating a financial model designed to project their funding needs. Ms. Chen and her deputy called on the Company's CFO and his senior staff for a discussion, which lasted a couple of hours. Following the meeting, Ms. Chen reviewed Intel's Form 10K (which can be found at https://www.sec.gov/edgar/browse/?CIK=50863&owner=exclude) and internal financial documents, and assigned the task to a couple of partners and asked to see their Intel's analysis in two weeks. which can be found at https://www.sec.gov/edgar/browse/?CIK=50863&owner=exclude

1. Assume that Intel is to expand in 2022 through 2026 at the same trend that it experienced during 2015 through 2019. Derive the income statement and balance sheet for 2022 through 2026 by utilizing the percent of sales approach[5].

2. Derive the external funding needs[6] (EFN) for both 2022 and 2023 based on the pro forma financials in question #1 above.

3. Discuss your recommended funding strategy for the EFNs?

4. Assess the implications of your recommended EFNs funding on Intel's capitalization structure.

5. Recalculate question #2 above under the assumptions that the Company operates at 75% capacity utilization.