Intel Corporation — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 30, 2013, compared with the three months ended March 31, 2012. Intel reported softness in traditional PC demand and lower PC-channel inventories, while data-center demand grew. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $12.580 billion | $12.906 billion | Down 3% |
| Gross margin | $7.066 billion; 56.2% | $8.265 billion; 64.0% | Down $1.199 billion; 7.8 percentage points |
| Operating income | $2.519 billion; 20.0% of revenue | $3.810 billion; 29.5% | Down $1.291 billion |
| Net income | $2.045 billion | $2.738 billion | Down $693 million |
| Diluted EPS | $0.40 | $0.53 | Down $0.13 |
| Operating cash flow | $4.285 billion | $2.972 billion | Up $1.313 billion |
| Capital expenditures | $2.174 billion | $2.974 billion | Down $800 million |
The effective tax rate was 16.3%, versus 28.2%, primarily reflecting recognition in Q1 of the retroactively reenacted U.S. R&D tax credit for 2012 and Q1 2013. Interest and other, net was a $50 million expense, compared with $23 million of income, partly due to interest on senior notes issued in Q4 2012. Cash dividends declared were $0.45 per share, versus $0.42.
Balance sheet and liquidity
- At March 30, 2013, cash and cash equivalents were $5.698 billion; short-term investments, $4.323 billion; and trading assets, $7.052 billion. Intel’s defined liquid portfolio total was $17.073 billion, down from $18.162 billion at year-end.
- Total debt was $13.231 billion ($88 million short-term and $13.143 billion long-term), versus $13.448 billion at year-end. Debt was 25.8% of stockholders’ equity. Stockholders’ equity was $51.194 billion.
- Operating cash flow was $4.285 billion; investing cash outflow was $5.317 billion; and financing cash outflow was $1.738 billion. Cash and cash equivalents fell $2.780 billion to $5.698 billion.
- Intel stated that operating cash generation was its primary liquidity source and that it expected sufficient resources for the next 12 months. Its $3.0 billion commercial paper authorization was unused during the quarter.
Material changes and operating performance
- Overall revenue fell 3%, as PC Client Group (PCCG) and Data Center Group (DCG) platform volume declined 6%, principally due to traditional PC weakness; higher average selling prices partly offset the volume decline.
- PCCG revenue declined 6% to $7.992 billion and operating income fell $978 million to $2.513 billion. PC platform unit sales were down 7%.
- DCG revenue rose 7% to $2.585 billion, supported by 6% higher unit sales and 2% higher average selling prices, including growth in cloud and high-performance computing. Operating income declined 5% to $1.079 billion.
- Other Intel architecture segment revenue declined 9% to $978 million; its operating loss widened to $611 million from $312 million. Software and services revenue rose 3% to $588 million, while the segment reported a $24 million operating loss.
- Gross margin pressure reflected approximately $410 million of higher 14nm process start-up costs, approximately $225 million of higher excess-capacity charges, lower PCCG/DCG revenue, and higher unit costs. R&D spending increased 5% to $2.527 billion, primarily from investment in smartphone and tablet products.
Outlook, management commentary, and risks
- For Q2 2013, management forecast revenue growth of 3% from Q1, slightly above normal seasonality, and gross margin percentage approximately two percentage points higher than Q1. The revenue forecast assumed expected PC-channel inventory replenishment and product launches.
- Management cited planned launches including Haswell in Q2; Clover Trail+ for smartphones and tablets; and Bay Trail and Merrifield in the second half of 2013. It expected to begin manufacturing on 14nm in the second half of 2013 and said equipment reuse and redirection reduced its 2013 capital expenditure forecast by $1.0 billion. The filing does not provide a clear numerical full-year revenue or margin forecast in the text supplied.
- Management noted older-generation factory underutilization and channel inventory reductions. It expected Q2 lower inventory write-offs and excess-capacity charges to be partly offset by higher start-up costs.
- Market exposure includes equity-price, currency, and interest-rate risks. The ASML Holding investment represented 89% of Intel’s $4.7 billion marketable equity portfolio; a modeled 35% market-price decline could reduce that portfolio’s value by approximately $1.7 billion after hedges and offsets.
- Legal matters include continuing competition proceedings and consumer class actions, an unresolved Lehman-related claim, appeals in the McAfee shareholder litigation and X2Y patent matter, and other proceedings. Intel said it could not reasonably estimate potential losses for specified matters; adverse outcomes could include substantial damages or injunctive relief.
- Intel’s 49% interest in IM Flash Technologies had a carrying value of $629 million. Intel disclosed potential exposure beyond that amount from future operating obligations or cash calls, and risk of purchasing output at costs above realizable value.
Most important facts for investors to verify
- Whether Q2 revenue and gross-margin forecasts were achieved, and whether PC-channel inventory replenishment and Haswell launches drove the expected recovery.
- Whether start-up costs, excess capacity, and 14nm investment continue to weigh on margins, and whether the lower 2013 capital expenditure forecast is maintained.
- How much of the lower Q1 tax rate reflects the retroactive R&D credit and whether the rate is representative of future periods.
- Changes in PCCG demand, DCG growth, and losses in other Intel architecture businesses.
- Developments in the disclosed legal proceedings, IMFT exposure, and the concentration and valuation risk of the ASML investment.