Intel Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter ended June 28, 2014; comparisons are with Q2 2013 unless noted. Intel reported as a semiconductor and technology company, with major businesses in PC, data-center, Internet of Things, mobile and communications, and software and services.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First six months 2014 | First six months 2013 |
|---|---|---|---|---|
| Revenue | $13.831 billion | $12.811 billion | $26.595 billion | $25.391 billion |
| Gross margin | $8.917 billion; 64.5% | $7.470 billion; 58.3% | $16.530 billion; 62.2% | $14.536 billion; 57.2% |
| Operating income | $3.844 billion | $2.719 billion | $6.354 billion | $5.238 billion |
| Net income | $2.796 billion | $2.000 billion | $4.726 billion | $4.045 billion |
| Diluted EPS | $0.55 | $0.39 | $0.92 | $0.79 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $8.954 billion | $9.007 billion |
- Q2 revenue rose 8% year over year. Gross margin increased as platform unit costs and 14-nanometer factory start-up costs declined; higher tablet-related customer consideration partially offset the improvement.
- Q2 research and development expense rose 14% to $2.859 billion, including higher 10-nanometer development and compensation costs. Marketing, general and administrative expense fell 5% to $2.061 billion.
- For the first six months, capital expenditures were $5.517 billion, dividends paid were $2.245 billion, and common-stock repurchases were $2.924 billion. Cash and cash equivalents ended the period at $3.049 billion.
- At June 28, cash, short-term investments, and trading assets totaled $17.311 billion, compared with $20.087 billion at year-end. Short- and long-term debt totaled $13.194 billion; debt was 22.3% of stockholders’ equity. Total current assets were $29.006 billion and current liabilities were $12.251 billion.
Material changes and business drivers
- PC Client Group revenue increased 6% in Q2; Data Center Group revenue rose 19% and reached a record $3.509 billion. Internet of Things Group revenue increased 24% to a record $539 million.
- Mobile and Communications Group revenue fell 83% to $51 million, while its operating loss widened to $1.124 billion, primarily reflecting customer consideration and tablet-platform costs, as well as weaker phone-component sales.
- First-half revenue increased 5%, but operating cash flow was slightly lower year over year. Higher net income and non-cash adjustments were offset by working-capital changes.
- First-half gains on equity investments were $143 million versus a $15 million loss a year earlier. Interest and other, net was income of $95 million, including a gain from the Intel Media divestiture.
Outlook, risks and unusual items
- Management forecast Q3 2014 revenue of approximately $14.4 billion and gross margin of 66%. Full-year 2014 revenue growth was expected to be approximately 5%, versus the earlier expectation of approximately flat growth; full-year gross margin guidance was 63%, plus or minus a couple of percentage points.
- Intel said it was on track for 40 million tablet unit sales in 2014, expected 14-nanometer processor-based systems for the holiday season, and anticipated a next-generation Xeon E5 platform launch in Q3. These are forward-looking expectations, not reported results.
- Management planned increased repurchases and expected cash balances to decline. In July, the board authorized a $20 billion increase to the repurchase program; Intel also contracted to repurchase $4 billion of shares in Q3. A $0.225-per-share dividend was declared for payment in September.
- Restructuring charges were $218 million in the first half, including severance affecting about 3,500 employees. Since Q3 2013, total restructuring charges were $458 million; management estimated approximately $600 million in annual gross savings when fully realized, expected beginning in Q2 2015. Additional charges may occur.
- Legal matters include the European Commission competition decision, for which Intel’s appeal was rejected in June 2014, with a further appeal deadline in August; U.S. consumer class actions whose potential losses Intel said it could not reasonably estimate; and other litigation. Intel stated that unfavorable outcomes could materially affect the business, despite management’s view that the proceedings were not expected to materially harm the company overall.
- Intel cited equity-market exposure, including a $5.8 billion ASML investment; a 25% market-price decline could reduce the value of its marketable equity portfolio by about $1.5 billion after hedges. It also noted that much of its overseas cash was indefinitely reinvested and repatriation could trigger additional taxes.
Most important facts to verify
- Whether PC and data-center demand, tablet sales, and the 5% full-year revenue-growth outlook were sustained in subsequent filings.
- Whether gross-margin improvements continued as 14-nanometer production ramped and tablet customer incentives and costs evolved.
- Whether Mobile and Communications losses narrowed, and whether restructuring savings were achieved without further material charges.
- How buybacks, dividends, capital expenditures, and lower cash balances affected liquidity and debt over the following quarters.
- Developments and any financial exposure from competition, employee-antitrust, and other legal proceedings, including the European appeal.