Intel Corporation — Q2 2012 Form 10-Q
Reporting period: 13 weeks ended June 30, 2012; comparative quarter ended July 2, 2011. First-half 2012 covers 26 weeks, versus 27 weeks in first-half 2011. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and results
Intel’s principal businesses include PC and data-center platforms, other Intel architecture products, and software and services. PC Client and Data Center were the largest reported operating segments. Q2 revenue rose 4% year over year, with enterprise and emerging-market strength offset partly by weakness in mature-market consumer demand and lower mobile communications pricing.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $13,501 | $13,032 | $26,407 | $25,879 |
| Gross margin | $8,554 | $7,902 | $16,819 | $15,787 |
| Gross margin percentage | 63.4% | 60.6% | 63.7% | 61.0% |
| Operating income | $3,832 | $3,935 | $7,642 | $8,093 |
| Net income | $2,827 | $2,954 | $5,565 | $6,114 |
| Diluted EPS | $0.54 | $0.54 | $1.07 | $1.11 |
| Operating cash flow | Not separately stated | Not separately stated | $7,711 | $7,984 |
Financial position, cash flow and capital allocation
- At June 30, cash and cash equivalents were $5.223 billion; short-term investments, $3.981 billion; and trading assets, $4.444 billion. Intel reported this combined portfolio at $13.648 billion, down from $14.837 billion at year-end 2011.
- Total current assets were $25.785 billion and current liabilities $10.538 billion. Total assets were $72.352 billion; stockholders’ equity was $48.779 billion.
- Short-term and long-term debt totaled $7.185 billion, compared with $7.331 billion at year-end. Debt was 14.7% of equity, versus 16.0%. Intel stated it had sufficient resources for business needs over the next 12 months.
- First-half investing cash use was $3.876 billion, including $5.636 billion of capital expenditures and $458 million for acquisitions; financing cash use was $3.671 billion. Cash and cash equivalents increased $158 million to $5.223 billion.
- First-half dividends paid were $2.106 billion and share repurchases were $2.915 billion. The board declared a $0.225-per-share dividend in July, payable in September, a 7% increase from the Q2 dividend.
Changes versus comparable periods
- Q2 revenue increased $469 million, while net income declined $127 million. Gross margin percentage improved 2.8 percentage points, but operating income fell $103 million as operating expenses rose.
- Q2 R&D increased 27% to $2.513 billion; marketing, general and administrative expense increased 12% to $2.131 billion. Together these expenses were 34% of revenue, versus 30% a year earlier.
- First-half revenue increased 2%, but net income declined $549 million and diluted EPS fell from $1.11 to $1.07. Operating expenses increased substantially, including higher R&D for next-generation 14nm and 450mm-wafer work.
- Higher gross margin partly reflected lower manufacturing start-up costs and the absence of the prior-year Intel 6 Series chipset repair-and-replacement charge ($79 million in Q2 2011; $422 million in first-half 2011). The prior-year period also had one additional week in the first quarter.
- Segment trends diverged: Q2 PC Client revenue rose 4%; Data Center revenue rose 15%; Other Intel architecture revenue fell 20% and its operating loss widened to $335 million. Software and services revenue increased to $586 million and returned to $14 million operating income.
Outlook, commentary and significant matters
- Management reduced its 2012 revenue growth expectation to 3%–5% over 2011, from prior high-single-digit growth. It cited softer NAND flash sales, slower consumer-market recovery in Western Europe and North America, moderating growth in emerging markets, low customer inventories, and Windows 8 launch timing.
- For Q3, Intel expected revenue growth to be at the lower end of its historical seasonal range and gross margin percentage approximately flat with Q2. The filing refers investors to the company’s Business Outlook for further expectations; the text provided does not give clear numerical Q3 revenue, spending, or capital-expenditure guidance.
- Product developments included 22nm 3rd-generation Intel Core processors, Xeon E5-2600 products, and launches of Intel-architecture smartphones. Management highlighted continued investment in process technology and manufacturing.
- After quarter-end, Intel agreed to ASML commitments including approximately $1.0 billion in R&D funding over five years, approximately $3.1 billion in equity investment commitments, and advance tool purchase orders. The agreements were subject to regulatory and other approvals and an ASML shareholder vote.
- Intel modified its Micron flash-memory joint venture arrangements, sold its IM Flash Singapore interest and certain IMFT assets for $605 million, and retained a 49% interest in IMFT. Intel disclosed exposure to future joint-venture costs and the possibility of purchasing output at a cost exceeding realizable value.
- Contingencies include competition-related proceedings and class actions, the Lehman-related matter, McAfee shareholder litigation, and X2Y patent litigation. Intel said it could not reasonably estimate potential losses for several matters; unfavorable outcomes could materially affect the business. Management believed the ultimate outcome of proceedings would not materially harm the company, but noted inherent uncertainty.
- Intel identified increasing and increasingly sophisticated cybersecurity attacks as a risk. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether full-year revenue growth of 3%–5% and Q3 lower-end seasonal growth assumptions were achieved, and how customer inventories and end-market demand evolved.
- Whether gross margin held near Q2 levels as manufacturing start-up costs, 22nm ramp costs, product mix, and unit costs changed.
- Whether Other Intel architecture losses and mobile communications pricing pressure improved, and whether Data Center growth remained strong.
- Execution, approval status, cash requirements, and expected returns for the ASML commitments, alongside capital expenditure and shareholder-return plans.
- Developments in competition, patent, and shareholder litigation, including any material change in estimated exposure or remedies.
- Inventory growth, customer concentration (two customers represented 31% of first-half revenue), and the associated effect on cash conversion and demand risk.