Intel Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Intel’s fiscal Q1 2012 was 13 weeks; the comparable Q1 2011 was 14 weeks. Financial statements are unaudited.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $12.906 billion | $12.847 billion | +0.5% |
| Gross margin | $8.265 billion; 64.0% | $7.885 billion; 61.4% | +4.8% in dollars; +2.6 percentage points |
| Operating income | $3.810 billion; 29.5% of revenue | $4.158 billion; 32.4% | -8.4% |
| Net income | $2.738 billion; 21.2% of revenue | $3.160 billion; 24.6% | -13.4% |
| Diluted EPS | $0.53 | $0.56 | -5.4% |
| Operating cash flow | $2.972 billion | $4.013 billion | -26% |
| Capital expenditures | $2.974 billion | $2.723 billion | +$251 million |
Operating cash flow less capital expenditures was approximately negative $2 million, calculated from the reported amounts. Intel declared dividends of $0.42 per share in Q1, versus $0.3624 in Q1 2011.
Financial position and liquidity
- At March 31, 2012, cash, short-term investments and marketable debt instruments in trading assets totaled $13.753 billion, down from $14.837 billion at year-end 2011.
- Total short- and long-term debt was $7.450 billion, versus $7.331 billion at year-end; debt was 15.9% of stockholders’ equity. Stockholders’ equity was $46.760 billion.
- Current assets were $25.421 billion and current liabilities $11.941 billion. Inventories rose to $4.489 billion from $4.096 billion.
- Q1 financing included $1.519 billion of share repurchases and $1.049 billion of dividends paid. Intel repurchased 56.9 million shares and had $8.6 billion remaining under its authorization.
- Management said operating cash generation and other resources should meet business requirements for the next 12 months. The commercial-paper program had $250 million outstanding at quarter-end.
Material changes and business context
- Revenue was slightly above the midpoint of January guidance, but was down 7% sequentially. Management attributed ongoing pressure to the Thailand floods and resulting hard-disk-drive shortage; it said the supply situation improved during the quarter and was not expected to weigh on future business.
- Despite slightly higher revenue year over year, operating income and net income declined. Q1 2012 had one fewer week than Q1 2011; the 2012 quarter also included full-quarter results from McAfee and Intel Mobile Communications, acquired in Q1 2011.
- Gross margin improved year over year partly because Q1 2011 included a $343 million charge for the Intel 6 Series chipset design issue, and because start-up costs were lower. Higher R&D, marketing and administrative costs, acquisition-related amortization, and increased inventory write-offs pressured results.
- PC Client revenue was $8.451 billion (-2%); Data Center revenue was $2.453 billion (slightly lower); Other Intel Architecture revenue was $1.075 billion (-6%), with its operating loss widening to $312 million from $36 million. Software and services revenue rose to $571 million from $240 million, including a full quarter of McAfee.
- R&D increased 25% to $2.401 billion, chiefly due to employee costs, 14nm process development and full-quarter acquired-business expenses. Marketing, general and administrative expense increased 11% to $1.973 billion.
- Intel launched its first 22nm Ivy Bridge products in April and introduced Xeon E5-2600 products in Q1. Inventory increased by $393 million, primarily from the Ivy Bridge ramp.
Outlook, risks and contingencies
- Management expected Q2 revenue to exceed normal seasonal trends as customer inventories recovered. No clear numerical Q2 revenue value is provided in the filing text.
- Management expected Q2 gross margin percentage to decline by about 2 percentage points, based on the midpoint of its outlook, as higher-cost Ivy Bridge inventory is sold and production ramps. It expected margin to improve in the second half as manufacturing costs declined. A significant Ultrabook marketing campaign was planned for Q2.
- Key risks include changes in demand, customer order and inventory patterns, product mix, manufacturing utilization and ramp costs, product acceptance, competition and product-introduction timing. Intel specifically warned that a shift from higher-margin data-center products toward PC-client products could reduce revenue and gross margin.
- Two customers represented 32% of Q1 revenue; one contributed 18% and another 14%. The same two accounted for 35% of accounts receivable at quarter-end.
- Intel described continuing competition-related legal proceedings. It had paid the European Commission’s €1.06 billion fine and appealed the decision; the appeal hearing was scheduled to begin in July 2012. Intel said it could not reasonably estimate potential losses from U.S. consumer class actions or a disputed Lehman estate claim, which had demanded at least $417 million. Management said adverse legal outcomes could materially affect results, despite its belief that the aggregate outcome would not materially harm the company.
- After quarter-end, Intel and Micron completed agreements to restructure and expand their NAND joint venture. Intel reported receiving approximately $600 million from asset sales and providing approximately $365 million to Micron, expected primarily to support future product purchases. Intel’s stated maximum known exposure to loss after closing was $656 million; future obligations could increase exposure.
Important facts for investors to verify
- Whether Q2 revenue and gross-margin outcomes matched management’s seasonal recovery and Ivy Bridge ramp expectations.
- Whether inventory growth converts into sales and manufacturing cost reductions, and whether customer inventories and hard-drive supply normalize as expected.
- Performance and losses in Other Intel Architecture, including mobile and netbook/tablet businesses, alongside the contribution from acquired businesses.
- Developments and potential financial effects of the EC appeal, consumer class actions, Lehman dispute, and Micron joint-venture restructuring.
- Cash conversion, capital spending, dividends and repurchases relative to the company’s substantial manufacturing investment needs.