Intel Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter ended June 29, 2013; comparisons are with the quarter ended June 30, 2012, and the first six months of 2013 versus the first six months of 2012. Figures are unaudited and in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First six months 2013 | First six months 2012 |
|---|---|---|---|---|
| Revenue | $12,811 | $13,501 | $25,391 | $26,407 |
| Gross margin | $7,470; 58.3% | $8,554; 63.4% | $14,536; 57.2% | $16,819; 63.7% |
| Operating income | $2,719 | $3,832 | $5,238 | $7,642 |
| Net income | $2,000 | $2,827 | $4,045 | $5,565 |
| Diluted EPS | $0.39 | $0.54 | $0.79 | $1.07 |
| Operating cash flow | $4.7 billion | Not stated for quarter | $9.007 billion | $7.711 billion |
Q2 revenue declined 5% year over year, while revenue rose 2% from Q1 2013. First-half revenue declined 4%. Lower traditional PC demand and lower PC Client Group (PCCG) volume were key factors. Intel attributed lower gross margin chiefly to weaker PCCG results, lower platform revenue, and higher costs associated with ramping its next-generation 14nm process. First-half 14nm start-up costs were $949 million; excess-capacity charges were $238 million higher than in the prior-year period.
Q2 operating margin was 21.2%, versus 28.4% a year earlier; first-half operating margin was 20.6%, versus 28.9%. The first-half effective tax rate was 21.2%, down from 28.2%, primarily reflecting the U.S. R&D tax credit enacted in 2013, including its retroactive 2012 benefit.
Segments and material changes
- PCCG: Q2 revenue was $8.1 billion, down 7%; operating income was $2.659 billion, down 23%. First-half revenue fell 7% and operating income fell 25%.
- Data Center Group: Q2 revenue was $2.743 billion, approximately flat, while operating income fell 10% to $1.230 billion. First-half revenue rose 4%, but operating income fell 8%. Cloud and high-performance-computing demand supported unit sales; enterprise sales were weaker.
- Other Intel architecture segments: Q2 revenue fell 15% to $942 million and operating loss widened to $608 million, reflecting lower mobile-communications and netbook revenue and increased phone and tablet R&D investment.
- Q2 R&D and marketing, general and administrative expenses together equaled 37% of revenue, compared with 34% a year earlier. Intel said R&D investment was focused in part on smartphones and tablets.
Liquidity, debt, and capital allocation
- At June 29, 2013, cash and cash equivalents were $3.778 billion; short-term investments were $6.214 billion; trading assets were $7.358 billion. Intel reported $17.350 billion of cash, short-term investments, and marketable debt instruments in trading assets, down from $18.162 billion at year-end 2012.
- Total short- and long-term debt was $13.413 billion; debt equaled 24.9% of stockholders’ equity. Total stockholders’ equity was $53.840 billion.
- First-half capital expenditures were $4.897 billion. Intel reduced its 2013 capital-expenditure expectation by $1 billion to $11 billion.
- First-half dividends paid were $2.237 billion; share repurchases were $1.355 billion. Intel repurchased 48.5 million shares for $1.1 billion under its authorization during the first half. In July, the board declared a $0.225-per-share dividend payable in September.
- Intel said it believed available financial resources were sufficient for business needs over the next 12 months. Of $10.3 billion in relevant cash and investments held by non-U.S. subsidiaries, approximately $1.9 billion was available for U.S. use without additional U.S. income taxes beyond amounts already accrued; the remainder was designated indefinitely reinvested abroad.
Outlook, commentary, and risks
- Intel expected full-year 2013 revenue to be approximately flat with 2012, citing slower-than-anticipated macroeconomic recovery, pressure on PCs from ultra-mobile devices, and customer uncertainty around market and technology transitions.
- Intel expected Q3 2013 gross margin percentage to be three percentage points higher than Q2, citing anticipated Bay Trail qualification, higher platform volume, sales of previously non-qualified units, and lower factory start-up costs. These are forward-looking expectations, not results.
- Intel launched its fourth-generation Core processor family and described planned second-half launches including Atom-based Bay Trail and Merrifield products, Avoton microserver processors, and Xeon products on 22nm. It expected to begin manufacturing platforms on 14nm by year-end 2013.
- Brian Krzanich became CEO in Q2, succeeding Paul Otellini. Management reorganized leadership and redirected resources toward Atom products and system-on-chip integration.
- In July 2013, Intel sold its Clearwire LLC interest and Clearwire Corporation shares; it expected $470 million in proceeds and a $439 million gain in Q3.
- Contingencies include competition proceedings and class actions, an appeal of the McAfee shareholder litigation, an appeal involving X2Y patent claims, and a Lehman-related dispute that could seek up to $312 million plus interest. Intel said it could not reasonably estimate potential losses in these matters; adverse outcomes could materially affect results or operations.
- Intel identified market, currency, and interest-rate exposures. Its marketable equity portfolio was $5.4 billion, with ASML representing $5.0 billion, or 92%; a modeled 35% market-price decline implied an approximately $1.9 billion reduction after hedges and offsets.
Important facts for investors to verify
- Whether PC demand, ultra-mobile device growth, and the expected product launches support Intel’s flat-revenue full-year outlook.
- Whether Q3 gross-margin improvement and the $11 billion 2013 capital-spending plan are achieved, including the impact of 14nm start-up costs and product qualification timing.
- How PCCG weakness and losses in other Intel architecture segments evolve relative to Data Center Group performance.
- Whether the Clearwire sale proceeds and expected gain are recognized as anticipated, and how the concentrated ASML investment affects portfolio risk.
- Developments in competition, class-action, Lehman, McAfee, and X2Y proceedings; the filing does not provide clear potential-loss estimates for several matters.