Intel Corporation — Form 10-Q Summary
Reporting period: Third quarter ended September 26, 2015; comparisons include the quarter and first nine months of 2014. Amounts are in U.S. dollars.
Business context and results
Intel reported essentially flat third-quarter revenue amid a weak PC market. Data Center, Internet of Things, and Non-Volatile Memory businesses provided growth, partly offsetting lower Client Computing Group sales. Intel began shipping its sixth-generation Core processor family and said its 3D XPoint memory technology was in production.
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Revenue | $14.465B | $14.554B | $40.441B | $41.149B |
| Gross margin | $9.111B; 63.0% | $9.458B; 65.0% | $25.089B; 62.0% | $25.988B; 63.2% |
| Operating income | $4.192B | $4.540B | $9.703B | $10.894B |
| Net income | $3.109B | $3.317B | $7.807B | $8.043B |
| Diluted EPS | $0.64 | $0.66 | $1.59 | $1.58 |
| Operating cash flow | $5.7B | Not stated in the filing text for the quarter | $13.590B | $14.647B |
Financial position and cash flows
- At September 26, cash and cash equivalents were $7.065B. Cash, cash equivalents, short-term investments, and trading assets totaled $20.843B, versus $14.054B at year-end 2014.
- Short- and long-term debt totaled $21.188B, up from $13.655B at December 27, 2014. Stockholders’ equity was $57.097B; debt was 37.1% of permanent stockholders’ equity, versus 24.4% at year-end.
- For the first nine months, operating cash flow was $13.590B, investing cash outflow $10.911B, and financing cash inflow $1.824B. Capital expenditures were $4.998B; dividends paid were $3.423B; share repurchases were $2.476B.
- Intel issued $8.0B of senior notes in Q3, primarily to help finance the pending Altera acquisition. The filing says it believed available resources were sufficient for business requirements over the next 12 months.
Material changes and management commentary
- Q3 revenue was down 1% year over year, while operating income fell 8%, net income fell 6%, and diluted EPS declined by $0.02. Gross margin contracted by 2 percentage points, mainly reflecting higher platform unit costs, including the 14nm product transition.
- Client Computing Group revenue fell 7% in Q3 and 10% for the first nine months. Data Center Group revenue rose 12% in Q3 and 13% year to date; its Q3 revenue was a record. Q3 Internet of Things revenue rose 10%.
- Management cited weaker-than-expected macroeconomic growth and enterprise-market weakness, partly offset by stronger cloud demand. It said PC-market conditions showed signs of stabilizing.
- The first-nine-month effective tax rate was 21.2%, versus 27.8% in 2014, aided by a $320M one-time tax refund benefit and release of $185M in previously accrued U.S. deferred taxes, as well as a greater share of income from lower-tax jurisdictions.
- Intel recorded $367M of restructuring and asset impairment charges year to date, including a 2015 program affecting approximately 3,800 employees. Management estimated approximately $400M of gross annual savings from that program, expected to be fully realized beginning in Q1 2016.
Outlook, commitments, and risks
- Q4 2015 revenue midpoint guidance was $14.8B, approximately 2% above Q3; gross margin midpoint was 62%, down 1 percentage point from Q3. Full-year 2015 capital spending midpoint was reduced to $7.3B from $7.7B.
- Management lowered its full-year Data Center Group growth expectation to the low double digits from approximately 15%, citing weaker macroeconomic growth. It expected Data Center and IoT to grow, but more slowly than initially anticipated.
- The proposed all-cash Altera acquisition was valued at approximately $16.7B and remained subject to regulatory approval and customary closing conditions. Intel planned to use $7B–$9B of long-term debt, with the balance from commercial paper and cash and investments. Certain $4.25B of the 2025 and 2045 notes are subject to special mandatory redemption if the deal is not completed by, or the agreement is terminated before, December 31, 2016.
- Intel invested $966M in UniSpreadtrum in Q3 and could fund approximately $500M more, subject to approvals and other closing conditions.
- Intel described ongoing competition-related proceedings, class actions, and other litigation. It said outcomes are inherently uncertain and unfavorable resolutions could materially affect the company; it could not reasonably estimate potential losses for certain matters. The filing also identifies exposure to equity-price, interest-rate, and currency movements. Its $5.6B marketable equity portfolio was concentrated largely in ASML, and a modeled 40% equity-price decline could reduce portfolio value by approximately $2.3B after hedges and offsets.
Important facts for investors to verify
- Whether PC demand, platform unit costs, and 14nm manufacturing yields support the guided gross-margin recovery.
- Whether Data Center, IoT, and memory growth offsets continued weakness in Client Computing and the broader PC market.
- Altera transaction timing, regulatory approvals, final financing requirements, and the effect of added debt and interest expense.
- Realization and timing of restructuring savings, alongside execution of the workforce reductions.
- Developments in competition and other legal matters, and changes in the value of the concentrated ASML holding and other investments.
- The durability of the lower effective tax rate, given the disclosed one-time tax benefits and earnings mix effects.