Intel Corporation (10-Q) — Quarter ended September 26, 2009
Business context: Intel designs and manufactures semiconductor products, principally microprocessors, chipsets and flash memory. This unaudited filing covers the third quarter and first nine months of fiscal 2009, compared with the corresponding 2008 periods. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $9,389 | $10,217 | $24,558 | $29,360 |
| Gross margin | $5,404; 57.6% | $6,019; 58.9% | $12,721; 51.8% | $16,475; 56.1% |
| Operating income | $2,579; 27.5% | $3,098; 30.3% | $3,214; 13.1% | $7,415; 25.3% |
| Net income | $1,856; 19.8% | $2,014; 19.7% | $2,087; 8.5% | $5,058; 17.2% |
| Diluted EPS | $0.33 | $0.35 | $0.37 | $0.87 |
| Operating cash flow | Not stated separately | Not stated separately | $7,765 | $8,330 |
- Compared with Q3 2008, Q3 revenue fell 8%, operating income fell 17% and net income fell 8%. Revenue nevertheless rose 17% sequentially from Q2 2009; Q2 reported an operating loss of $12 million and net loss of $398 million.
- For the first nine months, revenue declined 16% and net income declined 59%. The gross margin rate contracted 4.3 percentage points.
- At September 26, cash and cash equivalents were $4.109 billion; short-term investments were $5.150 billion and trading assets were $3.671 billion. Intel reported $12.930 billion in cash, short-term investments and debt instruments in trading assets, against $2.224 billion of short- and long-term debt. Debt was 5.7% of stockholders’ equity.
- Total assets were $50.996 billion and stockholders’ equity was $39.033 billion. Current assets were $19.247 billion and current liabilities $7.749 billion.
- Nine-month investing cash outflow was $5.196 billion, including $3.434 billion of property, plant and equipment additions and $853 million net cash paid for acquisitions. Financing cash outflow was $1.810 billion. Cash increased $759 million from year-end 2008.
- Intel paid $2.334 billion in dividends and repurchased $1.752 billion of common stock during the first nine months. The Board declared a $0.14-per-share dividend for payment in December.
Material changes and operating drivers
- Management attributed the sequential recovery to stronger-than-expected microprocessor and chipset demand, consumer spending and supply-chain inventory replenishment. Notebook products were a major growth driver; product mix and lower average selling prices partly offset unit growth.
- Year-over-year declines reflected weaker unit sales across many products, lower selling prices, reduced factory utilization and lower revenue in several regions. Nine-month revenue also included approximately $660 million less from NOR flash and communications products, primarily following business divestitures.
- Q3 Digital Enterprise Group revenue was $4.913 billion and operating income $1.512 billion, down 8% and 14%, respectively, year over year. Mobility Group revenue was $4.131 billion and operating income $1.350 billion, down 12% and 27%.
- Inventory declined to $2.490 billion from $3.744 billion at year-end 2008. Management said inventory was down approximately $1.3 billion and did not expect shortages to affect its outlook.
- Intel completed the Wind River acquisition for $885 million net of cash acquired; $489 million was allocated to goodwill. The company also issued $2.0 billion of 3.25% junior subordinated convertible debentures due 2039 and used most proceeds for share repurchases.
- Q3 gross margin improved from Q2 as sales volume and unit costs improved and factory underutilization and startup costs declined. Inventory write-offs on 32nm products not yet qualified for sale partially offset those benefits. Intel began volume production using its 32nm process in Q3.
Outlook, risks and contingencies
- Q4 2009 guidance: Revenue of $10.1 billion, plus or minus $400 million; gross margin percentage of 62%, plus or minus 3 points; depreciation of approximately $1.2 billion; R&D plus marketing, general and administrative expenses of approximately $2.9 billion; restructuring and asset impairment charges of approximately $40 million; and acquisition-related amortization of approximately $20 million. Management expected approximately zero for combined equity investment gains or losses and interest and other, and a tax rate of approximately 26%.
- Full-year capital spending: Approximately $4.5 billion, plus or minus $100 million. Management said it expected 2009 capital expenditures to be below depreciation.
- The $1.447 billion European Commission antitrust fine was recorded in Q2, paid in Q3, and was not tax deductible. It significantly increased the nine-month effective tax rate to 32.9%, versus 30.9% in 2008. Intel appealed the decision and disputed the findings.
- Intel faced AMD antitrust litigation, consumer class actions and U.S. and foreign regulatory investigations. The AMD federal case was scheduled for trial in March 2010; potential outcomes could include damages or restrictions on sales. Management said outcomes were uncertain and generally not reasonably estimable.
- Intel guaranteed 50% of Numonyx’s credit-facility obligations, with maximum future payments of $275 million plus interest, expenses and penalties; the recorded guarantee liability was $79 million. Intel also disclosed possible additional exposure from its IMFT and IMFS flash-memory joint ventures, including future operating costs, cash calls and purchases that could exceed realizable value.
- Key operating and financial risks include volatile semiconductor demand, pricing and product mix; factory underutilization and inventory write-offs; execution and yield risks in new manufacturing processes; investment impairments; foreign exchange and market volatility; and litigation, tax and restructuring uncertainties. Intel stated it expected adequate financial resources for the next 12 months.
- A 2009 restructuring plan involving manufacturing and assembly/test closures included $205 million of employee severance charges for approximately 6,500 employees. Management estimated gross annual savings of approximately $330 million; further restructuring charges were possible.
Important facts for investors to verify
- Whether Q4 revenue and the guided 62% gross margin were achieved, including the contribution from 32nm product qualification and seasonal demand.
- Whether the recovery in demand and inventory replenishment persisted, and how average selling prices, product mix and factory utilization affected margins.
- The treatment and potential consequences of the EC fine appeal, AMD litigation, class actions and ongoing regulatory investigations.
- The performance and impairment risk of flash-memory investments and joint ventures, and potential exposure under the Numonyx guarantee.
- Actual capital spending, cash generation, debt and shareholder returns relative to management’s outlook.