INTEL CORP annual report, FY2012

Intel Corporation — FY2012 Form 10-K

Business context and reporting period. Intel designs and manufactures semiconductor platforms and related software and services for PC, data-center, mobile, embedded, and other markets. This 10-K covers the 52-week fiscal year ended December 29, 2012; fiscal 2011 had 53 weeks. Fourth-quarter figures below are for the quarter ended December 29, 2012.

Financial performance and position

Amounts are in U.S. dollars; financial statement amounts are in billions unless stated otherwise.

Metric	FY2012	FY2011
Revenue	$53.341	$53.999
Gross profit / margin	$33.151 / 62.1%	$33.757 / 62.5%
Operating income / margin	$14.638 / 27.4%	$17.477 / 32.4%
Net income / net margin	$11.005 / 20.6%	$12.942 / 24.0%
Diluted EPS	$2.13	$2.39
Cash from operations	$18.884	$20.963
Capital expenditures	$11.027	$10.764
Dividends paid	$4.350	$4.127

• Revenue declined 1% year over year; operating income fell $2.839 billion and net income fell $1.937 billion. The 2012 year had one fewer week than 2011.
• R&D spending rose 22% to $10.148 billion, while R&D plus marketing, general and administrative expense increased to 34.1% of revenue from 29.7%.
• Fourth-quarter revenue was $13.477 billion, gross margin was 58.0%, operating income was $3.155 billion, and net income was $2.468 billion. Revenue was nearly flat sequentially; gross margin fell from 63.3% in Q3, primarily due to excess capacity charges and inventory reserves.
• Cash and cash equivalents, short-term investments, and marketable debt instruments in trading assets totaled $18.162 billion at year-end, versus $14.837 billion in 2011. Short- and long-term debt totaled $13.448 billion, versus $7.331 billion; debt was 26.3% of equity, up from 16.0%.
• Total assets were $84.351 billion and stockholders’ equity was $51.203 billion. Inventory increased to $4.734 billion from $4.096 billion.
• Intel repurchased $4.8 billion of common stock under its buyback authorization in 2012 and had $5.3 billion remaining available at year-end. The company declared $0.87 per share in dividends for 2012.

Material changes and operating drivers

• PC Client Group revenue fell 3% to $34.274 billion; management cited tablet growth competing with PC purchases and weaker PC demand. Segment operating income declined 12% to $13.053 billion.
• Data Center Group revenue increased 6% to $10.741 billion, supported by richer product mix and cloud growth, partly offset by enterprise weakness. Operating income was nearly unchanged at $5.073 billion.
• Other Intel architecture revenue declined 13% to $4.378 billion, and its operating loss widened to $1.377 billion, reflecting lower mobile communications pricing, weaker netbook sales, and higher expenses.
• Software and services revenue increased to $2.381 billion, including $469 million of additional McAfee revenue from having a full year of ownership; the segment reported an $11 million operating loss.
• Annual gross margin was affected by approximately $490 million of excess-capacity charges and higher platform unit costs. These were partly offset by approximately $645 million of lower start-up costs and the absence of the 2011 Intel 6 Series chipset design-issue charges.
• Intel generated $18.9 billion of operating cash flow and spent $11.0 billion on property, plant and equipment. The company issued $6.2 billion of senior notes in Q4 and purchased $3.2 billion of ASML equity securities during the year.

Outlook, commentary, risks, and unusual items

• Management expected 2013 revenue growth in the low single digits, with particular strength in servers; it also expected to launch 22nm SoCs for smartphones and tablets. Capital expenditures were expected to increase, primarily due to a 450mm development facility; no precise 2013 revenue or capex figure is provided in the filing text summarized here.
• Management attributed 2012 softness to lower-than-expected worldwide GDP growth and tablet competition with PCs. For Q4, it cited weak PC demand and customers reducing older-generation inventory. It redirected capital toward 14nm process technology.
• Intel reported a $480 million Q4 excess-capacity charge; charges in each of the prior 11 quarters had been below $50 million. Higher inventory reserves related to next-generation Haswell products also affected Q4 margin.
• Intel’s $4.0 billion ASML holding represented 90% of its marketable equity portfolio at year-end. A modeled 35% decline in market prices could reduce the portfolio’s value by approximately $1.6 billion after hedges and offsets.
• Material risks include cyclical and unpredictable product demand, PC-market contraction, intense competition in smartphones and tablets, product-transition and manufacturing-yield challenges, reliance on suppliers and manufacturing sites, customer concentration, cybersecurity and privacy threats, IP disputes, tax uncertainty, and environmental regulation.
• Competition-related proceedings included Intel’s appeal of the European Commission’s 2009 decision and fine, already paid, of €1.06 billion; the appeal decision was expected in mid-to-late 2013. The filing says potential losses for certain class actions and other proceedings could not be reasonably estimated. Intel stated that adverse outcomes could include substantial damages or conduct restrictions.
• CEO Paul Otellini planned to retire in May 2013; the Board was selecting a successor. Intel also disclosed a significant 2012 impairment charge of $104 million on non-marketable equity investments and a $21 million impairment of acquired in-process R&D.
• The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor concluded internal controls were effective at year-end.

Important facts for investors to verify

• Whether the expected low-single-digit 2013 growth materialized, particularly in the server segment, and how PC, tablet, and smartphone demand evolved.
• Whether gross margin recovered from Q4’s 58.0%, including the effects of excess capacity, inventory reserves, product mix, and 14nm/22nm production costs.
• Actual 2013 capital spending and progress, cost, and commitments for 450mm and EUV development with ASML.
• Performance and valuation of the concentrated ASML investment and any related impairment exposure.
• Changes in total debt, liquidity, buybacks, dividends, and the terms and use of the $6.2 billion 2012 note issuance.
• Developments in the European Commission appeal, U.S. antitrust class actions, and other disclosed litigation, including any material rulings, settlements, or revised loss estimates.
• CEO succession and execution of Intel’s transition into mobile markets, where the Other Intel architecture segment reported a $1.377 billion operating loss in 2012.