Intel Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 27, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and results
Intel reported record quarterly revenue and earnings per share. Results were led by PC Client Group (PCCG) and Data Center Group (DCG), while Mobile and Communications Group (MCG) remained loss-making. The company continued launching products on its 14-nanometer process and investing in mobile, tablets, and Internet of Things markets.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | First 9 months 2014 | First 9 months 2013 |
|---|---|---|---|---|
| Revenue | $14,554 | $13,483 | $41,149 | $38,874 |
| Gross margin | $9,458; 65.0% | $8,414; 62.4% | $25,988; 63.2% | $22,950; 59.0% |
| Operating income | $4,540 | $3,504 | $10,894 | $8,742 |
| Net income | $3,317 | $2,950 | $8,043 | $6,995 |
| Diluted EPS | $0.66 | $0.58 | $1.58 | $1.37 |
| Operating cash flow | Q3: $5.7 billion | Not stated for comparable quarter | $14,647 | $14,738 |
For the first nine months, capital expenditures were $7.962 billion. Cash and cash equivalents, short-term investments, and trading assets totaled $15.594 billion at quarter-end, down from $20.087 billion at December 28, 2013. Total debt was $13.267 billion, compared with $13.446 billion at year-end; debt was 23.7% of stockholders’ equity. Current assets were $27.509 billion and current liabilities were $14.904 billion.
Intel returned substantial cash to shareholders: first-nine-month cash dividends were $3.340 billion and cash-flow-statement share repurchases were $7.106 billion. The company separately reported $6.8 billion of repurchases under its authorized program during the period. The board added $20 billion to the repurchase authorization in July; $16.4 billion remained available at quarter-end.
Material changes versus comparable periods
- Q3 revenue rose 8%, and nine-month revenue rose 6%. PCCG and DCG platform unit sales increased, supported by strength in traditional PCs and data center demand.
- Q3 gross margin increased to 65.0% from 62.4%; nine-month gross margin increased to 63.2% from 59.0%. Lower platform unit costs and lower factory start-up costs were important contributors, partly offset by 14nm production costs and tablet-related customer consideration.
- DCG Q3 revenue increased 16% to $3.7 billion. PCCG revenue increased 9% to $9.2 billion. MCG Q3 revenue was $1 million versus $353 million, and its operating loss widened to $1.043 billion from $810 million.
- Nine-month gains on equity investments fell to $178 million from $437 million, largely because Q3 2013 included $439 million of gains from Clearwire transactions. The 2014 period included a gain from the Intel Media divestiture; Intel received $150 million in net cash proceeds.
- The effective tax rate increased to 27.8% for the first nine months from 22.8%, primarily reflecting the expiration of the U.S. R&D tax credit for 2014.
Outlook, management commentary, and risks
- For Q4 2014, Intel forecast revenue of approximately $14.7 billion and gross margin of 64%. Management cited higher platform unit costs and factory start-up costs as pressures on gross margin, partly offset by lower 14nm production costs.
- Management said the PC supply chain appeared healthy, with inventory levels appropriate ahead of the fourth-quarter retail cycle. Intel remained on track for its 40 million tablet-unit sales goal for fiscal 2014.
- Management expected restructuring-related gross annual savings of approximately $500 million, with full savings expected beginning in Q2 2015. Nine-month 2014 restructuring charges were $238 million; actions affected approximately 2,800 employees during the period.
- MCG results faced significant customer incentives associated with integrating tablet and phone platforms and lower phone-component sales. Intel also reported higher R&D costs, including investment in 10nm process development.
- The 2009 convertible debentures, with a $1.085 billion carrying amount, were reclassified to short-term debt because holders could elect conversion in Q4 2014. Holders had not yet been reported as exercising that right in the filing.
- Intel agreed, subject to approvals and other conditions, to invest up to approximately $1.5 billion for an approximately 20% stake in a Tsinghua Unigroup holding company. The commitment was not recognized on the quarter-end balance sheet.
- Litigation remained a contingency risk. Intel appealed the European Commission competition decision after the General Court rejected its appeal; the original €1.06 billion fine had already been paid. Potential losses in several other proceedings could not be reasonably estimated. The high-tech employee antitrust settlement lacked preliminary court approval.
- Intel’s marketable equity portfolio was concentrated in ASML, valued at approximately $6.3 billion. The company estimated that a 30% market-price decline could reduce the portfolio’s aggregate value by approximately $2.0 billion after hedges and offsets.
Most important facts for investors to verify
- Whether Q4 revenue and gross-margin guidance was achieved, and how 14nm production costs and factory start-up costs evolved.
- Whether PC and data-center demand remained strong, and whether tablet sales reached the 40 million-unit goal.
- Whether MCG losses and customer incentives declined, and how the planned mobile investment translated into revenue.
- The pace of share repurchases, dividend payments, capital spending, and the resulting cash and debt balances.
- The conversion or repayment outcome for the 2009 debentures, and the status and financial terms of the proposed Tsinghua investment.
- Developments in competition and other litigation, including any material change to loss estimates or settlement status.