Intel Corporation (10-Q) — Q3 2020
Reporting period: Quarter ended September 26, 2020; year-to-date (YTD) results cover the first nine months of 2020. Unaudited interim financial statements are prepared under U.S. GAAP.
Financial performance
| Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Revenue | $18.333B | $19.190B | $57.889B | $51.756B |
| Gross margin | $9.741B; 53.1% | $11.295B; 58.9% | $32.264B; 55.7% | $30.262B; 58.5% |
| Operating income | $5.059B; 27.6% | $6.447B; 33.6% | $17.794B; 30.7% | $15.238B; 29.4% |
| Net income | $4.276B | $5.990B | $15.042B | $14.143B |
| Diluted EPS | $1.02 | $1.35 | $3.52 | $3.14 |
- Q3 revenue fell 4% year over year; data-centric businesses declined 10%, partly offset by 1% growth in the PC-centric business. Q3 diluted EPS on a non-GAAP basis was $1.11, versus $1.42 a year earlier.
- YTD operating cash flow was $25.494B, compared with $23.257B. Capital expenditures were $10.392B, producing free cash flow of $15.102B, up from $11.710B.
- YTD cash returned to stockholders was approximately $18.4B: $4.215B in cash dividends and $14.2B in buybacks, including the Q3 accelerated share repurchase (ASR). The ASR had $2.0B remaining to settle by year-end.
- At quarter-end, cash, short-term investments and trading assets totaled $18.253B; total debt was $36.563B, up from $29.001B at December 28, 2019. Current assets were $36.785B and current liabilities $22.112B. The company reported no commercial paper outstanding.
Material changes and business trends
- Q3 declines reflected COVID-related demand weakness in DCG enterprise and government, IOTG and NSG, alongside lower DCG average selling prices from product mix shifts toward cloud providers. DCG revenue declined 7%; its operating income fell 39% to $1.903B.
- CCG revenue increased 1% in Q3, supported by notebook demand, but CCG operating income declined 17% to $3.554B. Notebook strength was partly offset by lower desktop demand and notebook pricing.
- Higher 10nm product mix and unit costs, platform reserves and weaker sell-through of previously reserved products contributed to lower Q3 gross margin. The reported gross margin rate fell 5.8 percentage points year over year.
- NSG Q3 revenue declined 11% to $1.153B, but operating income improved to $29M from a $499M loss, reflecting better NAND pricing and unit costs. YTD NSG operating income improved to $285M from a $1.080B loss.
- YTD revenue rose 12%, led by data-center platform volume and PC notebook demand; YTD operating income increased despite lower gross margin percentage.
Outlook, risks and unusual items
- Management expected COVID-related weakness to further affect data-centric demand in Q4, with cloud service provider demand moderating; it expected continued strength in consumer notebooks. The filing provides no clear numerical Q4 guidance.
- On October 19, 2020, Intel agreed to sell its NAND memory business to SK hynix for $9.0B cash, subject to approvals and other conditions. The first closing is not expected before November 1, 2021, with $7.0B payable at that closing; the remaining $2.0B is expected no earlier than March 2025. Intel’s Optane business is excluded. Intel expects to use proceeds for long-term growth priorities.
- Intel issued $10.3B of senior notes during the first nine months. Debt increased while the company funded capital needs and shareholder returns. Management stated it believed resources were sufficient for business requirements over the next 12 months.
- Intel issued a termination notification to its largest prepaid-supply customer, associated with a $1.6B contract liability. The timing and amount of future revenue or any liability reversal remained subject to negotiations.
- Significant disclosed litigation includes VLSI patent cases, with VLSI seeking billions in damages in U.S. cases, and consumer litigation related to processor security vulnerabilities. Intel said it could not reasonably estimate potential losses for these matters. The company also disclosed the continuing European Commission competition matter and Chinese patent cases.
- YTD tax expense was affected by a higher effective tax rate (14.5% versus 11.6%), including lower tax benefits and one-time tax charges. Intel also recorded $233M of YTD impairment charges on non-marketable equity investments.
Key investor verification points
- Track whether data-center, IOTG and other data-centric demand stabilized or weakened further, and whether cloud-provider demand moderated as anticipated.
- Monitor gross margin, 10nm product costs and reserves, and the effects of product mix and ASP changes.
- Verify completion conditions and timing for the SK hynix transaction, including the staged cash proceeds and continuing NAND wafer supply arrangement.
- Follow negotiations and accounting outcomes for the $1.6B prepaid-supply customer contract termination.
- Assess debt growth, cash generation, capital spending and the final settlement of the $10B ASR, alongside planned dividends and remaining buybacks.
- Monitor developments in VLSI, security-vulnerability, competition and patent litigation; the filing does not quantify potential losses for key matters.