Intel Corporation — Q2 2010 Form 10-Q
Business context and reporting period
Intel reported the unaudited quarter and six months ended June 26, 2010, comparing results with the corresponding 2009 periods. Its principal businesses include PC and data-center processors, chipsets, and other semiconductor and software products. Management attributed the strong quarter to product mix, the ramp of 32-nanometer products, and continued unit-cost declines.
Key financial metrics
Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $10,765 | $8,024 | $21,064 | $15,169 |
| Gross margin | $7,235 | $4,079 | $13,764 | $7,317 |
| Gross margin percentage | 67.2% | 50.8% | 65.3% | 48.2% |
| Operating income (loss) | $3,981 | $(12) | $7,429 | $635 |
| Net income (loss) | $2,887 | $(398) | $5,329 | $231 |
| Diluted EPS | $0.51 | $(0.07) | $0.94 | $0.04 |
| Operating cash flow | Not separately presented in the supplied cash flow statement | $7,565 | $3,762 |
Q2 revenue rose 34% year over year and 5% sequentially; first-half revenue rose 39%. Q2 operating margin was 37.0%, versus a loss-making prior-year quarter. R&D was $1,666 million in Q2 and $3,230 million in the first half; marketing, general and administrative expense was $1,584 million and $3,098 million, respectively. The 2010 periods had no restructuring charges, compared with $91 million in Q2 2009 and $165 million in the first half of 2009. The Q2 2010 effective tax rate was 31.0%; the first-half rate was 30.2%.
At June 26, cash and cash equivalents were $5.514 billion, short-term investments $6.715 billion, and trading assets $6.074 billion. Management’s defined liquid investment portfolio—cash, short-term investments, and marketable debt instruments in trading assets—totaled $17.772 billion, compared with $13.920 billion at year-end 2009. Total assets were $57.691 billion; stockholders’ equity was $45.841 billion. Short- and long-term debt totaled $2.273 billion, or 5.0% of equity. Current assets were $26.464 billion and current liabilities $7.937 billion. Operating cash flow was $7.565 billion; investing activities used $4.642 billion and financing activities used $1.396 billion. Cash increased $1.527 billion to $5.514 billion. First-half capital expenditures were $1.976 billion; dividends paid were $1.747 billion.
Material changes and notable items
- PC Client Group Q2 revenue increased 31% to $7.839 billion and operating income rose to $3.428 billion from $1.297 billion. Data Center Group revenue increased 42% to $2.114 billion and operating income rose to $1.064 billion from $434 million. Management cited higher processor sales, stronger mix and lower unit costs.
- Gross margin benefited from higher sales, lower platform unit costs, and the absence of substantial prior-year excess-capacity charges. R&D increased 28% in Q2, primarily from process-development costs and profit-dependent compensation.
- The 2009 EC antitrust fine of $1.447 billion was recorded in Q2 2009 SG&A, was not tax deductible, and was paid in Q3 2009. It materially distorts prior-period expense, earnings, and tax comparisons.
- Intel sold its Numonyx ownership interest to Micron in Q2, recording a $91 million equity-method gain and receiving Micron shares. The shares were classified as trading assets; Intel said it had options economically hedging about two-thirds of shares received or expected. A further approximately 2.3 million Micron shares were received after quarter-end. A separate post-quarter sale of SMART Technologies shares was expected to generate an approximately $175 million gain in Q3.
- Inventory increased to $3.345 billion from $2.935 billion at year-end, as Intel built inventory ahead of anticipated second-half demand and the 32-nanometer ramp. Management said it was comfortable with supply-chain inventory levels.
- Intel raised its 2010 capital-spending outlook by $400 million to support the accelerated 32-nanometer factory ramp and anticipated Sandy Bridge product demand.
- Cash dividends declared were $0.315 per share for the first half. In July, the board declared a $0.1575-per-share dividend payable in September. No purchases were made under the authorized stock-repurchase plan in the first half; the $219 million reported as repurchases reflected shares withheld for employee tax obligations.
Guidance, management commentary and risks
For Q3 2010, Intel forecast revenue of $11.6 billion, plus or minus $400 million; gross margin of 67%, plus or minus a couple of percentage points; depreciation of approximately $1.1 billion; R&D plus SG&A of approximately $3.2 billion; and a net gain of approximately $175 million from equity-method and other equity investments and interest and other items.
For full-year 2010, Intel forecast gross margin of 66%, plus or minus a couple of percentage points; depreciation of approximately $4.4 billion, plus or minus $100 million; R&D plus SG&A of $12.7 billion, plus or minus $100 million; R&D spending of approximately $6.6 billion; capital spending of $5.2 billion, plus or minus $200 million; and a tax rate of approximately 32% for Q3 and Q4. Management expected Q3 gross margin to be approximately flat with Q2, with higher write-offs on processors not yet qualified for sale partly offset by higher platform revenue.
Key uncertainties include demand and pricing, product mix and acceptance, manufacturing yields and capacity utilization, inventory obsolescence, rapid technology change, investment impairments, foreign exchange and market exposures, taxes, and legal and regulatory outcomes. Intel said it believed it had sufficient resources for the next 12 months. It reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Intel faced continuing competition-related proceedings, including its appeal of the EC decision and fine, a Korean antitrust appeal, a New York antitrust suit, an FTC administrative complaint, and consumer class actions. Intel said outcomes were uncertain and generally not reasonably estimable; adverse rulings could involve damages, injunctions, or other remedies and could materially harm the business. The FTC matter had been withdrawn from adjudication temporarily while the parties negotiated a proposed consent agreement, subject to approval. Intel also disclosed a potential Lehman bankruptcy-estate claim, with Lehman reportedly asserting damages of $130–$380 million; no action had been filed as of the report.
Important facts for investors to verify
- Whether the Q3 and full-year outlook was achieved, particularly revenue, gross margin, capital spending, and tax-rate assumptions.
- How much of the earnings rebound reflects operating performance versus prior-year EC-fine and excess-capacity comparisons, and Q2 equity-investment gains.
- Whether inventory growth and the 32-nanometer ramp translated into sales without material write-offs, excess-capacity costs, or yield issues.
- Developments and potential financial consequences in the EC, FTC, New York, Korean, and consumer antitrust proceedings, and the Lehman matter.
- The realization, volatility, and hedging effects of Micron and other equity holdings, including the anticipated SMART gain and Intel’s exposure to IMFT/IMFS and other non-marketable investments.