Intel Corporation — Q1 2011 Form 10-Q
Reporting period: Quarter ended April 2, 2011. Intel’s fiscal Q1 was 14 weeks, compared with 13 weeks in Q1 2010; year-over-year comparisons therefore include an extra week in 2011. Financial amounts below are U.S. dollars.
Business context and results
Intel reported record quarterly revenue and earnings per share, driven by higher microprocessor sales and selling prices, strong enterprise demand, and contributions from acquisitions. Management cited strong consumer sales in emerging markets but soft consumer demand in the U.S. and Western Europe. The quarter included the acquisitions of McAfee and Infineon’s Wireless Solutions business, now Intel Mobile Communications.
- Revenue: $12.847 billion, up 25% from $10.299 billion; acquired businesses contributed $496 million.
- Gross profit and margin: $7.885 billion, up 21%; gross margin was 61.4%, down from 63.4% year over year and 64.6% in Q4 2010.
- Operating income and margin: $4.158 billion, up from $3.448 billion; operating margin was 32.4% versus 33.5%.
- Net income and EPS: $3.160 billion versus $2.442 billion; diluted EPS was $0.56 versus $0.43. The effective tax rate was 27.7%, compared with 29.1%.
- Cash flow: Operating cash flow was $4.013 billion versus $4.079 billion. Investing activities used $644 million and financing activities used $4.688 billion. Cash and cash equivalents ended at $4.188 billion.
- Liquidity and debt: Intel’s defined portfolio of cash, short-term investments, and marketable debt in trading assets was $11.458 billion, down from $21.497 billion at year-end, principally reflecting the McAfee acquisition. Short- and long-term debt totaled $2.137 billion; debt was 4.5% of stockholders’ equity.
- Capital returns and investment: Capital expenditures were $2.723 billion; Intel repurchased $4.006 billion of shares and paid $994 million in dividends. The declared dividend was $0.3624 per share.
Material changes and notable items
- PC Client Group revenue increased 17% to $8.621 billion; operating income rose to $3.543 billion. Data Center Group revenue increased 32% to $2.464 billion; operating income rose to $1.222 billion.
- Other Intel architecture revenue rose 70% to $1.149 billion, largely from the Infineon business, but the segment moved to a $36 million operating loss. Software and services revenue rose to $240 million, while its operating loss widened to $52 million.
- Intel completed McAfee for $6.7 billion, net of acquired cash, and four other acquisitions for $1.6 billion in total consideration, including the Infineon wireless business. Acquisitions contributed about $500 million of revenue and reduced net income by about $70 million, primarily due to acquired-intangible amortization. Purchase-price allocations remained preliminary.
- The Intel 6 Series Express Chipset design issue generated a further $343 million Q1 charge. Estimated total repair-and-replacement costs were $654 million, with $483 million remaining accrued at April 2; Intel was negotiating customer reimbursements.
- A new NVIDIA patent cross-license required $1.5 billion of payments over six years. Intel recorded $1.3 billion as licensed technology in Q1, amortized through cost of sales over an estimated 17-year life; the remaining liability was $1.1 billion.
- Intel recorded a $164 million gain upon formation of the Intel-GE Care Innovations joint venture. This materially contributed to the increase in “interest and other, net.”
Outlook, commentary, and risks
Management said it expected full-year 2011 revenue growth above 20% and double-digit earnings growth. It highlighted the ramp of second-generation Intel Core products, tablet initiatives, and plans to begin production of 22nm process technology products by year-end. Management raised its 2011 capital-spending outlook to $10.2 billion, plus or minus $400 million, to support 22nm and 14nm capacity.
- Q2 2011 guidance: Revenue of $12.8 billion, plus or minus $500 million; gross margin of 61%, plus or minus a couple of percentage points; R&D plus marketing, general and administrative expense of about $3.9 billion; depreciation of about $1.2 billion; acquisition-related intangible amortization of about $75 million; and net gains of about $50 million from equity-method investments, other equity investments, and interest and other.
- Full-year 2011 guidance: Gross margin of 63%, plus or minus a few percentage points; R&D plus marketing, general and administrative expense of about $15.7 billion, plus or minus $200 million; depreciation of $5.0 billion, plus or minus $100 million; acquisition-related intangible amortization of about $260 million; and an estimated tax rate of about 29% for Q2–Q4. Fiscal 2011 has 53 weeks.
- Risks and contingencies: Intel cited volatile demand, pricing and product mix, execution and manufacturing risks, supply-chain disruption including potential effects from Japan’s disaster, product defects, acquisitions and integration, investment impairments, currency and tax uncertainty, and substantial competition and intellectual-property litigation. The filing describes the European Commission antitrust fine of $1.447 billion as paid, with Intel’s appeal pending; it also discusses U.S. and other proceedings for which outcomes or loss ranges were not estimable. Lehman had demanded at least $417 million in connection with a disputed 2008 transaction; Intel said it intended to defend any claim.
- Management stated it believed available resources were sufficient for business requirements over the next 12 months. It also cautioned that actual results could differ materially from forward-looking expectations.
Most important facts for investors to verify
- Whether revenue growth and margins persist after accounting for the extra fiscal week, acquisitions, and the chipset charge.
- Actual repair and replacement costs and customer reimbursements for the chipset issue, compared with the $654 million estimate and $483 million accrual.
- Acquisition integration, final purchase-price allocations, and the continuing impact of acquired-intangible amortization on earnings and margins.
- Cash and investment levels after acquisition spending, capital expenditure, repurchases, and dividends; and whether full-year capital spending tracks guidance.
- Developments in antitrust, class-action, and Lehman matters, including any material change in exposure or outcome estimates.
- Progress against Q2 and full-year guidance, including demand trends, gross margin, and the planned 22nm production schedule.