Intel Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 26, 2015 (52 weeks); Q4 ended the same date. The filing was signed February 12, 2016. Intel designs and manufactures semiconductor platforms and related software and services. Its principal reportable businesses are Client Computing Group (CCG) and Data Center Group (DCG), alongside Internet of Things, software and services, memory, and other activities.
Financial performance and position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $55.36 billion | $55.87 billion | Down 1% |
| Gross margin | $34.68 billion; 62.6% | $35.61 billion; 63.7% | Down $0.93 billion; 1.1 percentage points |
| Operating income | $14.00 billion; 25.3% of revenue | $15.35 billion; 27.5% | Down 9% |
| Net income | $11.42 billion | $11.70 billion | Down 2% |
| Diluted EPS | $2.33 | $2.31 | Up 1% |
| Cash from operations | $19.02 billion | $20.42 billion | Down $1.40 billion |
| Capital expenditures | $7.33 billion | $10.11 billion | Down $2.78 billion |
- Q4 revenue was a record $14.91 billion, up 1% year over year; net income was $3.61 billion and diluted EPS was $0.74, unchanged from Q4 2014.
- FY2015 segment revenue and operating income: CCG $32.22 billion and $8.17 billion; DCG $15.98 billion and $7.84 billion; IoT $2.30 billion and $0.52 billion; software and services $2.17 billion and $0.21 billion.
- Cash, cash equivalents, short-term investments, and trading assets totaled $25.31 billion at year-end, versus $14.05 billion a year earlier. Total assets were $103.07 billion; total debt was $22.67 billion, up from $13.66 billion. Stockholders’ equity was $61.09 billion.
- Intel paid $4.56 billion in dividends and repurchased $3.00 billion of stock in 2015. The annual dividend was increased by $0.08 to $1.04 per share for 2016.
Material changes versus the prior year
- CCG revenue fell 8% to $32.22 billion and operating income fell 21% to $8.17 billion. CCG platform unit sales declined 11%; management attributed weakness to macroeconomic conditions and comparison with 2014’s Windows XP replacement cycle.
- DCG revenue rose 11% to $15.98 billion and operating income rose 6% to $7.84 billion, supported chiefly by cloud demand. Platform unit sales rose 8% and average selling prices rose 3%.
- IoT revenue increased 7% to $2.30 billion, while operating income decreased 12% to $515 million as Intel continued investing in product development.
- Overall platform unit sales fell 9%, while average selling prices rose 8%, reflecting a richer mix, particularly in DCG. Gross margin pressure primarily reflected higher 14nm platform costs and lower unit sales.
- R&D expense increased 5% to $12.13 billion; R&D and marketing, general and administrative expense together rose to 36.2% of revenue from 35.2%.
Outlook, management commentary, risks and unusual items
- Management emphasized growth in data center, IoT, and memory, which together represented nearly 40% of revenue and more than 60% of operating profit in 2015. Management described PC supply-chain inventory as healthy.
- Intel acquired Altera on December 28, 2015, after fiscal year-end. The approximately $16.7 billion transaction value was funded in part by $9.5 billion of debt issued in 2015 and $4.0 billion borrowed under a short-term facility in Q1 2016. Intel expected the combination to support data-center and IoT offerings; Altera results were to be included from the acquisition close date.
- Management changed the estimated useful life of wafer-fabrication machinery and equipment from four to five years, effective Q1 2016. It estimated approximately $1.5 billion lower depreciation expense in 2016; this is an accounting estimate change, not a cash-flow improvement of the same amount.
- Intel’s January 2016 earnings release contained Q1 and FY2016 Business Outlook, but the 10-K text does not provide the outlook’s numerical estimates. Fiscal 2016 is a 53-week year, with a 14-week first quarter.
- Principal risks include intense competition and mobile-market challenges; PC demand and product-mix volatility; high fixed manufacturing costs, process-transition costs and yield risks; supply-chain disruption; cybersecurity and privacy threats; and substantial international exposure. Approximately 80% of 2015 revenue was outside the U.S.; three customers accounted for 46% of revenue and 49% of year-end receivables.
- Legal matters include an appeal of the European Commission’s competition ruling and remaining U.S. class-action and shareholder litigation. Intel said it could not reasonably estimate potential losses, if any, for the California consumer class actions. Management stated that ultimate outcomes of the proceedings were not expected to materially harm the company, while acknowledging adverse outcomes could be material.
- The 2015 effective tax rate fell to 19.6% from 25.9%, due largely to one-time items, a higher share of income from lower-tax jurisdictions, and indefinitely reinvested foreign earnings. The company reported $26.9 billion of undistributed foreign earnings for which it had not recognized U.S. deferred taxes.
Most important facts for investors to verify
- Whether DCG and IoT growth can offset continued weakness or mix pressure in CCG, and whether the 14nm cost ramp improves as management expects.
- The realized economics and integration costs of the Altera acquisition, including the effects of acquisition financing, assumed debt, and purchase-price allocation.
- Whether the estimated $1.5 billion 2016 depreciation benefit and restructuring savings translate into sustainable operating improvement rather than primarily timing or accounting effects.
- Cash generation, capital spending, debt and liquidity after closing Altera, alongside dividend and repurchase commitments.
- Developments in competition litigation, tax examinations, customer concentration, and manufacturing or supply-chain risks.