Intel Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 25, 2021; comparisons are with the quarter ended September 26, 2020. Year-to-date (YTD) figures cover nine months. Amounts are in U.S. dollars.
Business context and results
Intel designs and manufactures semiconductor products. Its largest businesses are Client Computing Group (CCG) and Data Center Group (DCG); it also reports Internet of Things, Mobileye, NAND memory (NSG), and programmable solutions (PSG). The company cited industry component and substrate shortages and continued investment in manufacturing capacity and research and development.
| Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Revenue | $19.192B | $18.333B | $58.496B | $57.889B |
| Gross margin | $10.746B (56.0%) | $9.741B (53.1%) | $32.806B (56.1%) | $32.264B (55.7%) |
| Operating income | $5.227B (27.2%) | $5.059B (27.6%) | $14.467B (24.7%) | $17.794B (30.7%) |
| Net income | $6.823B | $4.276B | $15.245B | $15.042B |
| Diluted EPS | $1.67 | $1.02 | $3.73 | $3.52 |
Cash flow, liquidity, and debt
- YTD operating cash flow was $24.194B, down from $25.494B. Capital expenditures were $11.579B; reported free cash flow, a non-GAAP measure excluding those expenditures, was $12.615B versus $15.102B.
- Cash and cash equivalents were $7.870B at September 25, 2021. Intel’s broader non-GAAP total cash and investments measure was $35.840B, up from $27.034B at December 26, 2020.
- Total debt was $40.304B, compared with $36.401B at year-end 2020. Intel issued $5.0B of senior notes in Q3 and had no outstanding borrowings under its $5.0B revolving credit facility.
- YTD investing cash outflow was $20.133B, including $11.579B of property, plant and equipment additions and $1.118B of additions to held-for-sale NAND property. YTD dividends paid were $4.231B; share repurchases were $2.415B.
Material changes and segment performance
- Q3 revenue rose 4.7% year over year. DCG revenue increased 10%, supported by enterprise and government recovery, higher volume, and stronger product mix; CCG revenue declined 2%, mainly from lower consumer and education notebook volume and lower adjacent revenue. IOTG and Mobileye grew with recovering demand; NSG revenue declined 4%.
- YTD revenue increased about 1%, but operating income fell about 19%. Higher R&D and other operating expenses, process-transition charges, and a $2.2B VLSI litigation accrual weighed on results.
- Q3 gross margin improved to 56.0% from 53.1%. Q3 operating income rose about 3%, while operating margin edged down from 27.6% to 27.2%. YTD operating margin fell to 24.7% from 30.7%.
- Q3 GAAP EPS benefited from a lower effective tax rate and investment-related gains. Non-GAAP Q3 EPS was $1.71 versus $1.08; non-GAAP operating income was $5.202B versus $5.251B. Non-GAAP measures exclude specified items and are not substitutes for GAAP results.
Outlook, risks, and unusual items
- Management expected gross margin of approximately 51%–53% for the next two or three years, before improving, as it accelerates manufacturing-capacity and R&D investment. The long-term range is non-GAAP and assumes the first closing of the NAND divestiture.
- Intel forecast 2022 capital expenditures of approximately $25B–$28B, with potential for further growth in subsequent years. It expected strong operating cash flow but near-term pressure on free cash flow, and said it had sufficient funding for business requirements over the next 12 months.
- Management expected component and substrate constraints to continue; DCG also faced supply constraints and softness in China, including cloud customers adapting to regulatory changes, with trends expected to continue into Q4 2021.
- The Q3 effective tax rate was 0.5%, versus 15.2% a year earlier, reflecting one-time tax benefits from restructuring certain non-U.S. subsidiaries and deferred tax asset recognition.
- Q3 equity-investment gains were $1.707B, including a $1.1B McAfee special dividend and gains associated with companies becoming publicly traded. YTD restructuring and other charges totaled $2.597B, including the $2.2B VLSI litigation accrual and impairment charges related to two businesses.
- The proposed NAND business sale to SK hynix is valued at $9.0B in two closings, subject to conditions and approvals; the first closing was not to occur before November 1, 2021. The NAND business had $6.398B of assets held for sale at quarter-end.
- VLSI litigation remains a significant contingency: a 2021 jury awarded $2.175B in one case, with Intel’s post-trial challenges pending at the reporting date. Other legal matters, including patent and securities cases, have uncertain outcomes; Intel said it could not estimate potential losses for several matters.
Important facts for investors to verify
- Whether supply constraints, China demand conditions, and CCG notebook softness affect subsequent-quarter revenue and margins.
- Actual manufacturing investment, capital expenditures, and free-cash-flow trajectory relative to management’s outlook.
- Progress, approvals, timing, and cash proceeds from the SK hynix NAND divestiture.
- Developments in VLSI litigation and other legal contingencies, including potential cash impacts beyond amounts accrued.
- How much reported earnings growth is attributable to one-time investment gains and tax benefits versus operating performance; compare GAAP and non-GAAP measures.