Intel Corporation — Q3 2011 Form 10-Q
Business context and period. Unaudited results cover the quarter ended October 1, 2011, and the first nine months of fiscal 2011. Intel’s 2011 fiscal year has 53 weeks; the first nine months included 40 weeks versus 39 in the comparable 2010 period. Intel cited demand growth in emerging markets and enterprise, partly offset by slower growth in mature-market consumers. McAfee and Intel Mobile Communications (the acquired Infineon wireless business) contributed to reported growth.
Key financial results
| Metric | Q3 2011 | Q3 2010 | First 9 months 2011 | First 9 months 2010 |
|---|---|---|---|---|
| Revenue | $14.233 billion | $11.102 billion | $40.112 billion | $32.166 billion |
| Gross margin | $9.018 billion; 63.4% | $7.321 billion; 65.9% | $24.805 billion; 61.8% | $21.085 billion; 65.6% |
| Operating income | $4.785 billion | $4.136 billion | $12.878 billion | $11.565 billion |
| Net income | $3.468 billion | $2.955 billion | $9.582 billion | $8.284 billion |
| Diluted EPS | $0.65 | $0.52 | $1.75 | $1.45 |
| Operating cash flow | Not clearly provided for the quarter in the filing text | — | $14.333 billion | $11.142 billion |
- Q3 revenue rose 28% year over year; nine-month revenue rose 25%. Q3 was a record for revenue, gross-margin dollars, operating income, net income, and EPS, according to management.
- Gross-margin percentage declined year over year despite higher revenue. Management attributed pressure to higher start-up and platform costs, acquired-intangible amortization, and, for the first nine months, the $422 million 2011 charge for the chipset design issue.
- For the first nine months, capital expenditures were $7.920 billion. Cash and cash equivalents increased to $7.057 billion from $5.498 billion at December 25, 2010.
- At October 1, cash, short-term investments, and marketable debt securities in trading assets totaled $15.192 billion, down from $21.497 billion at year-end. Short- and long-term debt totaled $7.142 billion, versus $2.115 billion; debt was 15.5% of stockholders’ equity, compared with 4.3%.
- Current assets were $26.698 billion and current liabilities $11.909 billion. The filing states management believed resources were adequate for business requirements over the next 12 months.
Material changes and notable items
- Acquisitions: Intel completed McAfee for $6.7 billion of total consideration, net of $943 million cash acquired, and acquired the Infineon wireless solutions business; it also completed other acquisitions. Acquired businesses contributed approximately $1.1 billion of Q3 and $2.7 billion of nine-month revenue, while reducing net income by approximately $35 million and $155 million, respectively, including acquired-intangible amortization.
- Q3 PC Client Group revenue increased 22% and Data Center Group revenue increased 15% year over year. Other Intel architecture revenue rose 68%, but that group recorded a $140 million operating loss versus $92 million operating income a year earlier. Software and services revenue rose to $541 million, primarily from McAfee.
- Intel issued $5.0 billion of senior notes in Q3, primarily to fund share repurchases and for general corporate purposes. Nine-month repurchases were $10.187 billion; dividends paid were $3.057 billion. The board raised the repurchase authorization by $10 billion, with $14.2 billion remaining as of October 1, and declared a Q4 dividend of $0.21 per share.
- The Intel 6 Series chipset design issue was estimated to cost $733 million in total. Intel had recognized $733 million in charges through Q2 2011; the remaining accrual was $144 million at October 1. Management did not expect significant further estimate adjustments.
- A patent cross-license agreement with NVIDIA requires $1.5 billion of payments over six years; the remaining recorded liability was $1.2 billion. Intel recognized $1.3 billion of licensed technology in Q1, to be amortized over an estimated 17-year useful life.
Outlook, commentary, and risks
- Q4 2011 guidance: revenue of $14.7 billion, plus or minus $500 million; gross-margin percentage of 65%, plus or minus a couple of percentage points; R&D plus marketing, general and administrative spending of approximately $4.3 billion; and depreciation of approximately $1.4 billion.
- Full-year 2011: capital spending forecast at $10.5 billion, plus or minus $300 million. Management expected Q4 revenue below seasonal trends, citing macroeconomic uncertainty and mature-market consumer growth, particularly in Europe, customer supply-chain management, and lower Intel Mobile Communications revenue during customer transitions.
- Management expected Q4 gross margin to improve with higher platform volume, lower unit costs, and lower start-up costs; the outlook assumed late-quarter qualification for sale of 22nm Ivy Bridge processors. Volume production had begun, with launch anticipated in early 2012.
- Risks highlighted include demand and pricing volatility, competition and rapid technology shifts, manufacturing and supply-chain execution, product defects, acquisitions and integration, investment impairments, currency and tax exposure, cybersecurity, and litigation. Intel said it could not reasonably estimate potential losses, if any, in significant New York antitrust and class-action matters and a dispute involving the Lehman Brothers estate. It also disclosed ongoing competition proceedings; the EU fine of $1.447 billion had already been paid and was under appeal.
Important facts for investors to verify
- Whether Q4 revenue and 65% gross-margin guidance were achieved, particularly given the cited macroeconomic and customer-transition risks.
- How much of growth and future profitability reflects acquired businesses, and the final McAfee purchase-price allocation and goodwill assignment.
- Whether manufacturing start-up costs, 22nm ramp execution, and the chipset accrual evolve as management expected.
- The effect of $5.0 billion of new notes, planned buybacks and dividends, and reduced investment balances on future liquidity and capital allocation.
- Developments and potential financial exposure in antitrust, class-action, and Lehman-related proceedings; the filing provides no clear estimate for certain matters.