Intel Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Intel designs and sells computing and related technology products. Its principal businesses include Client Computing (CCG), Data Center (DCG), Internet of Things (IOTG), Non-Volatile Memory (NSG), and Programmable Solutions (PSG). In Q3, Intel completed its tender offer for Mobileye, acquiring 97.3% of its outstanding shares. Intel also completed the divestiture of Intel Security Group (ISecG) in Q2 and retained a 49% interest in McAfee.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $16,149 | $15,778 | $45,708 | $43,013 |
| Gross margin | $10,057 | $9,983 | $28,302 | $26,086 |
| Gross margin percentage | 62.3% | 63.3% | 61.9% | 60.6% |
| Operating income | $5,115 | $4,462 | $12,541 | $8,348 |
| Net income | $4,516 | $3,378 | $10,288 | $6,754 |
| Diluted EPS | $0.94 | $0.69 | $2.12 | $1.39 |
| Operating cash flow | $6.3 billion | Not stated here | $14,869 | $13,658 |
Q3 revenue rose 2% year over year; excluding divested ISecG, management reported 6% growth. Q3 operating income increased 15% and net income 34%. Nine-month revenue increased 6%, with the filing noting the prior-year comparison included an extra workweek. Q3 gross margin percentage declined one percentage point, while the nine-month rate improved 1.3 points.
Q3 diluted EPS growth reflected higher platform revenue, adjacent-business growth, lower restructuring charges, and gains from sales of part of Intel’s ASML interest. Q3 net income also included $846 million of net equity-investment gains; nine-month gains were $1.44 billion, including $2.0 billion of gains on sales, partly offset by $613 million of investment impairments and equity-method losses. These items make reported earnings sensitive to investment transactions and valuations.
Q3 revenue by segment: CCG $8.86 billion, essentially flat; DCG $4.88 billion, up 7%; IOTG $849 million, up 23%; NSG $891 million, up 37%; and PSG $469 million, up 10%. DCG, IOTG, and NSG reported record quarterly revenue. NSG remained loss-making, with a $52 million Q3 operating loss; IOTG operating income fell 24% to $146 million. CCG and DCG operating income rose 8% and 7%, respectively.
Cash, liquidity, and debt
At September 30, 2017, cash, cash equivalents, short-term investments, and trading assets totaled $17.504 billion, versus $17.099 billion at December 31, 2016. Total debt was $31.640 billion, up from $25.283 billion; debt was 44.6% of permanent stockholders’ equity, versus 38.2% at year-end. The balance sheet reported current assets of $33.154 billion and current liabilities of $20.689 billion.
For the first nine months, operating cash flow was $14.869 billion; investing activities used $10.532 billion and financing activities used $822 million. Capital expenditures were $7.709 billion. Intel paid $3.794 billion in dividends and repurchased $3.611 billion of stock. Mobileye consideration was $14.5 billion, net of acquired cash. Intel stated it had sufficient financial resources for business needs over the next 12 months. Of $17.5 billion in cash and specified investments, $10.0 billion was held by non-U.S. subsidiaries; approximately $4.9 billion was available for U.S. use without additional U.S. income taxes beyond amounts already accrued. The remainder was indefinitely reinvested abroad.
Material changes, outlook, and risks
- Mobileye’s preliminary purchase accounting included $10.3 billion of goodwill and $4.5 billion of identified intangible assets. The allocation remained subject to adjustment, including for tax matters, contingencies, and goodwill.
- ISecG divestiture consideration totaled $4.2 billion: $924 million cash, a 49% McAfee interest, and $2.2 billion of promissory notes, repaid in Q3. Intel recorded a $387 million pretax gain and an $822 million tax expense related to the transaction. The nine-month effective tax rate rose to 28.1% from 20.5%, with the divestiture tax expense a principal factor.
- Q3 R&D and marketing, general and administrative expense totaled $4.9 billion, down 4% year over year. Restructuring and other charges fell to $4 million from $372 million; the 2016 restructuring program was substantially completed in Q2 2017.
- Management described PC supply-chain inventory as healthy and noted a typical pre-holiday inventory build. It highlighted new 8th-generation Core processors and progress in artificial intelligence. The filing provides no specific quantitative forward revenue or earnings guidance.
- Risks include competition and market demand, manufacturing and technology execution (including 10nm ramp costs), foreign exchange and interest-rate exposure, investment valuation, and the risks described in Intel’s 2016 Form 10-K. Intel warned that forward-looking statements are subject to risks and actual outcomes may differ.
- Legal matters include the European Commission antitrust case: the Court of Justice set aside the prior judgment and remanded the matter for further review; the previously paid fine remains with the Commission pending a final decision. A McAfee shareholder appeal was pending, and Intel said it could not reasonably estimate potential loss, if any. Future Link patent claims were confidentially settled with no material financial impact.
Important facts for investors to verify
- How much reported earnings growth reflects core operating performance versus ASML and other investment gains, impairments, and divestiture-related items.
- Mobileye’s final purchase-price allocation, ongoing costs, and evidence of expected strategic benefits.
- Cash available for U.S. operations versus funds indefinitely reinvested overseas, and the implications of any change in repatriation plans.
- Debt growth, upcoming maturities, capital spending, dividends, and repurchases relative to operating cash generation.
- Developments in the EC antitrust remand and McAfee shareholder litigation, including any potential financial or operational consequences.