Intel Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 28, 2013 (52 weeks). Intel designs and manufactures semiconductor platforms and also sells software and services. This annual filing includes fourth-quarter results; it is not a standalone quarterly filing.
Financial performance
Amounts are in U.S. dollars; billions unless otherwise noted.
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $52.708B | $53.341B | Down 1% |
| Gross margin | $31.521B; 59.8% | $33.151B; 62.1% | Down $1.630B; 2.3 percentage points |
| Operating income | $12.291B | $14.638B | Down $2.347B |
| Net income | $9.620B | $11.005B | Down $1.385B |
| Diluted EPS | $1.89 | $2.13 | Down $0.24 |
| Cash from operations | $20.776B | $18.884B | Up $1.892B |
| Capital expenditures | $10.711B | $11.027B | Down $0.316B |
Fourth quarter: Revenue was $13.834B, versus $13.477B in Q4 2012 and $13.483B in Q3 2013. Net income was $2.625B, versus $2.468B in Q4 2012; diluted EPS was $0.51 versus $0.48. Q4 gross margin was 62.0%.
Liquidity and capital: Cash, cash equivalents, short-term investments and marketable debt instruments in trading assets totaled $20.087B at year-end, up from $18.162B. Intel also reported $1.873B of other long-term investments and reverse repurchase agreements for liquidity assessment. Short- and long-term debt totaled $13.446B; debt was 23.1% of stockholders’ equity. Total assets were $92.358B and stockholders’ equity was $58.256B. Intel paid $4.479B in dividends and repurchased $2.440B of stock (the MD&A separately describes $2.1B of repurchases under the authorized program).
Segment results: PC Client Group revenue fell 4% to $33.039B and operating income fell 10% to $11.827B. Data Center Group revenue rose 7% to $11.238B and operating income rose 3% to $5.164B. Other Intel architecture revenue declined 7% to $4.092B, while its operating loss widened to $2.445B. Software and services revenue increased to $2.502B; operating income was approximately breakeven at $1M.
Material changes and drivers
- Management attributed the annual gross-margin decline principally to $1.8B of higher factory start-up costs, mainly for the next-generation 14nm process. Gross margin was also affected by weaker PC and Other IA revenue; lower platform unit costs and $221M lower excess-capacity charges partly offset the pressure.
- PC Client Group platform units were down 3%, amid softness in traditional PC demand, particularly during the first nine months. The filing said the PC market showed signs of stabilization in the second half.
- Data Center Group benefited from cloud computing and high-performance-computing demand, with platform units up 3% and average selling prices up 4%.
- Other IA operating losses increased as Intel raised smartphone and tablet R&D investment and incurred higher costs ramping its tablet business.
- R&D increased 5% to $10.611B; R&D plus marketing, general and administrative expense rose to 35.5% of revenue from 34.1%.
- Operating cash flow increased despite lower net income, with management citing working-capital changes. Investing cash use was $18.073B and financing cash use was $5.498B; cash and cash equivalents decreased $2.804B.
Outlook, risks and unusual items
- 2014 outlook: Management expected revenue and gross margin to remain flat, and planned to hold spending flat while prioritizing tablets, low-power SoCs and the data center. Intel expected 14nm Broadwell production to begin in Q1 2014 and product launch in the second half of 2014. These are forward-looking expectations, not guarantees.
- Restructuring: Intel recorded $240M in restructuring and asset-impairment charges, including $201M for severance and benefits affecting approximately 3,900 employees. It estimated about $400M in gross annual savings, expected to be fully realized by Q1 2015. Plans included winding down the Massachusetts 200mm facility by the end of 2014; further charges remained possible.
- Investment gain: Net gains on equity investments were $471M, including $439M from sales of Intel’s Clearwire interests. This helped offset weaker operating results; interest and other was a $151M net expense, versus $94M of net income in 2012.
- Competitive and demand risks: Intel cited the shift toward tablets and smartphones, ARM-based competition, changing customer demand, pricing and product-mix pressure, and the risk that new products or investments may not succeed. Its large fixed manufacturing and R&D costs can amplify demand shortfalls.
- Manufacturing and investment exposure: Process transitions, factory utilization, product yields, supply disruptions and substantial capital requirements could affect costs and margins. Capital purchase obligations were $5.503B, mostly due within one year. A further ASML funding/tool commitment of approximately €738M ($1.0B) was contingent on milestones and excluded from the contractual-obligations table.
- Legal matters: Intel disclosed competition, employee-antitrust, shareholder and patent disputes, among others. It stated that it could not reasonably estimate potential losses for several matters. The EU antitrust fine of €1.06B had already been paid; Intel’s appeal was pending, with a decision expected in 2014. The filing cautioned that adverse rulings or settlements could materially affect results.
- Concentration and tax: HP, Dell and Lenovo generated 44% of FY 2013 revenue. Intel held $11.3B of its cash and cash-equivalent, short-term investment and trading-debt balances outside the U.S.; most was designated indefinitely reinvested and repatriation could trigger taxes. The effective tax rate was 23.7%, versus 26.0% in 2012, in part because the U.S. R&D tax credit was reenacted retroactively.
- Audit and controls: The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether PC demand stabilization and data-center growth persisted, and whether Intel gained meaningful smartphone and tablet adoption.
- Whether 14nm production and Broadwell launches met the stated timetable, and how factory start-up costs affected gross margin.
- Whether the projected $400M annual restructuring savings were achieved and whether additional exit charges followed.
- How much of the $20.1B reported liquidity was readily available for U.S. needs, and how the offshore cash tax position evolved.
- Developments in the EU appeal and other litigation, including matters with no estimable loss range.
- The sustainability of cash generation, capital spending, dividends and buybacks given debt obligations and large manufacturing commitments.