Intel Corporation — Q3 2013 Form 10-Q
Business context and reporting period. The quarter ended September 28, 2013; comparisons are with the quarter ended September 29, 2012, and the first nine months of 2013 versus the first nine months of 2012. Intel’s results were led by PC Client and Data Center products, while it increased investment in smartphone and tablet products amid continued pressure on traditional PC demand.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Revenue | $13.483B | $13.457B | $38.874B | $39.864B |
| Gross margin | $8.414B; 62.4% | $8.515B; 63.3% | $22.950B; 59.0% | $25.334B; 63.6% |
| Operating income | $3.504B | $3.841B | $8.742B | $11.483B |
| Net income | $2.950B | $2.972B | $6.995B | $8.537B |
| Diluted EPS | $0.58 | $0.58 | $1.37 | $1.65 |
| Operating cash flow | Not separately stated in the supplied quarterly cash-flow statement | Not separately stated | $14.738B | $12.858B |
- For the first nine months, capital expenditures were $7.763B; investing cash outflow was $14.152B and financing cash outflow was $4.176B.
- At September 28, cash and cash equivalents were $4.881B; short-term investments were $6.492B and trading assets were $7.773B. Intel reported $19.146B of cash, short-term investments and marketable debt instruments in trading assets, plus $1.733B of other long-term investments and certain reverse repurchase agreements.
- Total short- and long-term debt was $13.507B; debt was 24.4% of stockholders’ equity. Total current assets were $31.350B and current liabilities $13.875B.
- Q3 revenue increased 5% sequentially from Q2, and gross margin rose 4.1 percentage points sequentially to 62.4%.
Material changes versus comparable periods
- Q3 revenue was nearly unchanged year over year, but first-nine-month revenue declined 2%, mainly from lower PC, netbook and mobile communications unit sales. Q3 PC Client revenue fell 3%; Data Center revenue rose 12% year over year, supported by cloud and high-performance computing demand.
- First-nine-month gross margin fell 4.6 percentage points and operating income declined 24%, reflecting higher factory start-up costs—primarily for 14nm technology—lower PC-related revenue and excess-capacity charges.
- Q3 net income was close to the prior-year quarter despite lower operating income, in part because net gains on equity investments rose to $452M from $53M. The 2013 amount included a $439M gain on sales of Clearwire-related investments.
- First-nine-month effective tax rate declined to 22.8% from 26.8%, largely due to recognition of the U.S. R&D tax credit, including its retroactive 2012 effect.
Outlook, management commentary and risks
- Management forecast Q4 2013 revenue of $13.7B, plus or minus $500M, approximately 2% above Q3; expected Q4 gross margin percentage was 1 percentage point below Q3. The filing does not provide a clear full-year numeric outlook in the supplied text.
- Management attributed sequential Q3 improvement to higher platform unit sales and average selling prices, lower unit costs and improved factory utilization. It expected customer inventory to remain lean and noted continuing uncertainty and weakness in the traditional PC market as ultra-mobile devices grow.
- Intel said Broadwell production was expected to begin in Q1 2014, with launch in the second half of 2014—about one quarter later than previously anticipated. It was increasing factory spending on 14nm technology.
- A Q3 restructuring recorded $124M of charges, including severance affecting approximately 1,900 employees and asset impairments. Intel estimated gross annual savings of about $155M, with most savings expected to be realized by Q1 2015; further restructuring charges could occur. A Massachusetts 200mm wafer facility was expected to cease production by the end of 2014.
- Intel stated it had liquidity to meet business requirements over the next 12 months. However, $10.8B of its cash, short-term investments and marketable debt instruments was held by non-U.S. subsidiaries; most of that amount was indefinitely reinvested abroad and could incur additional taxes if repatriated.
- Material contingencies include competition matters, U.S. class actions, an employee antitrust class action certified in October 2013, and a Lehman-related lawsuit seeking up to $312M under alleged damages theories. Intel said it could not reasonably estimate potential losses in several matters; unfavorable outcomes could materially affect the company.
- Market risk includes concentration in ASML Holding, which represented 94% of Intel’s marketable equity portfolio ($6.2B). Intel estimated a 30% market-price decline could reduce the portfolio’s value by about $2.0B after hedges and offsets. A new stated risk was potential harm from a prolonged U.S. government shutdown or U.S. default.
Important facts for investors to verify
- Whether PC demand, customer inventory levels and Q4 revenue develop in line with management’s forecast.
- How quickly 14nm start-up costs decline, and whether Broadwell’s revised schedule and expected gross-margin outlook hold.
- Whether smartphone and tablet investments improve results in the Other Intel Architecture segments, which reported a $606M Q3 operating loss.
- The sustainability of earnings excluding the $439M Clearwire-related gain and the effect of the lower tax rate and R&D tax credit.
- Restructuring execution, estimated savings, additional charges and the timing of the Massachusetts facility wind-down.
- Developments and potential financial exposure in legal proceedings, and the value and concentration risk of Intel’s equity investments.
- Cash available for U.S. use, capital spending, dividends and repurchases; also note that nine-month operating cash flow benefited from working-capital changes.