Intel Corporation — FY2009 Form 10-K
Business context and reporting period. Intel designs and manufactures semiconductor products, principally microprocessors and chipsets. This annual report covers the fiscal year ended December 26, 2009; fiscal 2009 and 2008 were each 52 weeks. The fourth quarter ended December 26, 2009. Intel reorganized its operating segments at year-end, with prior-period segment figures retrospectively adjusted.
Key financial metrics
| Metric | FY2009 | FY2008 |
|---|---|---|
| Net revenue | $35.127 billion | $37.586 billion |
| Gross margin | $19.561 billion; 55.7% | $20.844 billion; 55.5% |
| Operating income | $5.711 billion; 16.3% of revenue | $8.954 billion; 23.8% |
| Net income | $4.369 billion | $5.292 billion |
| Diluted EPS | $0.77 | $0.92 |
| Cash from operating activities | $11.170 billion | $10.926 billion |
| Capital expenditures | $4.515 billion | $5.197 billion |
Fourth-quarter revenue was $10.569 billion, up 13% sequentially and 28% year over year. Gross margin was $6.840 billion, or 64.7%; operating income was $2.497 billion and net income was $2.282 billion. Management attributed the sequential improvement to stronger demand across regions and product categories, higher microprocessor average selling prices and unit sales, lower inventory write-offs, improving unit costs, and no excess-capacity charges.
At year-end, cash, cash equivalents, trading debt instruments, and short-term investments totaled $13.920 billion; loans receivable and other long-term investments were $4.528 billion. Short- and long-term debt totaled $2.221 billion, versus $1.287 billion in 2008; debt was 5.3% of stockholders’ equity. Total assets were $53.095 billion and stockholders’ equity was $41.704 billion. The filing states that Intel believed it had adequate resources for business requirements over the next 12 months.
Material changes versus the prior comparable period
- Revenue declined 7% year over year. Lower average selling prices for microprocessors and chipsets were partly offset by higher unit sales, including growth in Atom products. Revenue from NOR flash and communications products fell by $740 million, primarily because of divestitures.
- Gross margin dollars fell 6%, while gross margin percentage edged up from 55.5% to 55.7%. Operating income fell 36% and net income fell 17%.
- PC Client Group revenue declined 6% and operating income declined 19%, reflecting lower notebook and desktop pricing, lower desktop unit sales, and about $810 million of higher factory underutilization charges. Data Center Group revenue declined 2%, while operating income rose 8%.
- Cash from operations increased $244 million despite lower net income. Capital spending decreased from $5.197 billion to $4.515 billion. Intel issued $2.0 billion of convertible debt and repurchased $1.762 billion of stock, compared with $7.195 billion of repurchases in 2008. Dividends paid were approximately $3.1 billion in each year.
- Operating expenses included a $1.447 billion European Commission fine and a $1.25 billion AMD settlement charge. These charges were significant contributors to the increase in marketing, general and administrative expense.
Outlook, commentary, risks, and unusual items
- 2010 outlook: gross margin percentage of 61%, plus or minus 3 percentage points; R&D plus marketing, general and administrative spending of approximately $11.8 billion, plus or minus $100 million; R&D spending of approximately $6.2 billion; capital spending of approximately $4.8 billion, plus or minus $100 million; depreciation of approximately $4.4 billion, plus or minus $100 million; and an estimated tax rate of approximately 30%.
- Management expected gross margin to improve primarily through lower manufacturing period costs, especially reduced underutilization charges, lower unit costs, and higher unit sales, partly offset by lower average selling prices. It expected first-quarter 2010 gross margin to decline from Q4 because of 32nm ramp costs, seasonally lower unit sales, and lower average selling prices.
- Intel paid the $1.447 billion EC fine in 2009 and appealed the decision. The company settled outstanding litigation with AMD for $1.25 billion and entered a new five-year cross-license agreement. The New York Attorney General and FTC filed antitrust actions; consumer class actions and other proceedings also remained. Intel said it intended to defend the claims. Outcomes in many matters were not reasonably estimable.
- Other identified risks include volatile demand and pricing, intense competition and rapid technology change, manufacturing capacity and supply disruptions, product defects, customer concentration, investment impairments, foreign-exchange and tax exposures, environmental requirements, and intellectual-property litigation. HP represented 21% and Dell 17% of 2009 revenue; the two largest customers together accounted for 38%.
- Intel completed its Wind River Systems acquisition in 2009. It also disclosed a January 2010 cybersecurity incident and a February 2010 agreement for Micron to acquire Numonyx in an all-stock transaction. Intel had guaranteed up to $275 million, plus related interest and costs, of Numonyx credit-facility obligations; the facility was expected to be repaid after the transaction closed.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Track whether the 2010 gross-margin target and reduced operating-spending outlook were achieved, particularly as 32nm manufacturing ramped.
- Assess the final outcomes and potential financial or operational effects of the EC appeal, FTC and New York proceedings, consumer class actions, and other contingencies.
- Reconcile reported earnings with the $1.447 billion EC fine, $1.25 billion AMD settlement, and any subsequent unusual charges or recoveries.
- Monitor revenue concentration and demand, pricing, and margins in PC Client and Data Center products, as well as the growth and profitability of Atom and other newer businesses.
- Check debt, investment-portfolio liquidity and valuation, capital spending, and the status of the Numonyx transaction and Intel’s related guarantee.