Intel Corporation — Q1 2016 Form 10-Q
Reporting period: Quarter ended April 2, 2016. The quarter comprised 14 weeks, versus 13 weeks in the prior-year comparison. Financial statements are unaudited. Intel completed its Altera acquisition during the quarter; results include Altera from the acquisition date.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $13.702 billion | $12.781 billion | Up 7% |
| Gross margin | $8.130 billion; 59.3% | $7.730 billion; 60.5% | Dollars up 5.2%; margin down 1.2 percentage points |
| Operating income | $2.568 billion | $2.615 billion | Down 2% |
| Net income | $2.046 billion | $1.992 billion | Up 3% |
| Diluted EPS | $0.42 | $0.41 | Up $0.01 |
| Operating cash flow | $4.055 billion | $4.415 billion | Down $360 million |
| Capital expenditures | $1.346 billion | $2.025 billion | Down $679 million |
Revenue growth reflected the extra workweek, higher platform average selling prices and Altera-related revenue, partly offset by lower platform unit sales and a weaker PC market. Gross margin was affected by acquisition-related charges, higher platform unit costs, lower platform sales and the memory ramp. A change in estimated useful lives for wafer-fabrication equipment increased operating income by about $200 million, net income by about $150 million and diluted EPS by about $0.03.
Segments and material changes
- Client Computing Group: Revenue $7.549 billion, up 2%; operating income $1.885 billion, up 34%. Platform unit sales fell 15%, while average selling prices rose 19%.
- Data Center Group: Revenue $3.999 billion, up 9%; operating income $1.764 billion, up 4%. Management cited strength in cloud and communications service providers.
- Internet of Things Group: Revenue $651 million, up 22%; operating income $123 million, up 41%.
- Non-Volatile Memory Solutions Group: Revenue $557 million, down 6%; operating loss $95 million versus operating income of $72 million. Intel cited competitive pricing, 3D NAND start-up costs and higher 3D XPoint spending.
- Intel Security Group: Revenue $537 million, up 12%; operating income $85 million versus $15 million.
- Programmable Solutions Group: Revenue $359 million and operating loss $200 million, reflecting the Altera acquisition and purchase-accounting adjustments. Intel said reported revenue excluded about $99 million due to deferred-revenue revaluation; acquisition-related inventory charges also weighed on results.
The effective tax rate declined to 18.4% from 25.5%, primarily due to a one-time tax benefit from a divestiture, a greater proportion of income in lower-tax jurisdictions and reinstatement of the U.S. R&D tax credit. Higher interest expense—primarily related to 2015 debt issuance—turned interest and other, net from income of $26 million to a loss of $82 million.
Cash, liquidity and debt
- Cash and cash equivalents were $3.061 billion at April 2, compared with $15.308 billion at December 26, 2015. Cash, short-term investments and trading assets totaled $15.091 billion, down from $25.313 billion, primarily due to the Altera acquisition.
- Operating cash flow was $4.055 billion. Investing activities used $15.520 billion, including $14.569 billion for acquisitions, net of cash acquired. Financing activities used $782 million.
- Intel returned $1.228 billion through dividends and repurchased $793 million of common stock. The declared quarterly dividend was $0.26 per share, payable in June 2016.
- Total short- and long-term debt was $25.369 billion, versus $22.670 billion at year-end 2015. Debt represented 41.5% of permanent stockholders’ equity, up from 37.1%.
- Intel reported $15.1 billion in cash, short-term investments and trading assets, plus other investments and receivables, as liquidity sources. It said it expected available resources to meet business needs over the next 12 months. Most of the $14.0 billion held by non-U.S. subsidiaries was designated indefinitely reinvested; repatriation could incur additional taxes.
Outlook, commentary and risks
Management characterized Q1 revenue as at the low end of its January Business Outlook and gross margin as 1.3 percentage points above its prior outlook midpoint, despite approximately 2.5 points of Altera and other non-cash acquisition-related adjustments. It described data center and IoT as primary growth engines amid a weaker PC market, and framed the business as transforming beyond PCs. The filing refers readers to Intel’s April 19, 2016 earnings release for Q2 and full-year 2016 outlook; specific revenue, margin and spending guidance is not provided in the filing text presented here.
On April 19, after quarter-end, Intel announced a restructuring program to close certain facilities and reduce up to 12,000 positions globally. It expected approximately $1.2 billion of charges in Q2 2016, completion by Q2 2017 and annual savings of approximately $1.4 billion once fully implemented. Execution, labor-law processes, cost assumptions, demand and expected savings are identified as factors that could affect results.
Other notable exposures include ongoing competition-related proceedings and shareholder litigation; Intel said outcomes could involve substantial damages or conduct remedies and that it could not reasonably estimate potential losses for certain matters. Equity investments are concentrated in ASML, and a modeled 30% market-price decline could reduce marketable equity investment value by approximately $2.0 billion after hedges and offsets. The company also notes currency, interest-rate and investment risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much Q1 growth reflects the extra workweek and acquired Altera revenue, versus underlying organic demand.
- Whether PC-market conditions, platform unit trends and gross-margin pressures persist, and how memory investments affect segment profitability.
- How the announced restructuring’s charges, execution timeline and anticipated annual savings compare with subsequent results.
- Debt servicing and liquidity after the acquisition, including the amount and potential tax cost of any future repatriation of overseas funds.
- The final Altera purchase-price allocation, acquisition-related amortization and the resulting impact on reported earnings and margins.
- Developments in competition and shareholder litigation, and changes in the value or liquidity of concentrated and non-marketable investments.