Intel Corporation — FY2010 Form 10-K
Business context and reporting period. Intel designs and manufactures semiconductors and computing platforms, with its business concentrated in PC processors and data-center products. This 10-K covers the 52-week fiscal year ended December 25, 2010; quarterly figures below refer to the fourth quarter ended that date. The company described 2010 as a record year, citing PC-market growth, data-center investment, product strength, and improved costs.
Financial results
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Revenue | $43.623 billion | $35.127 billion | +24% |
| Gross margin | $28.491 billion; 65.3% | $19.561 billion; 55.7% | Margin +9.6 percentage points |
| Operating income | $15.588 billion | $5.711 billion | +173% |
| Net income | $11.464 billion | $4.369 billion | +162% |
| Diluted EPS | $2.01 | $0.77 | +$1.24 |
| Operating cash flow | $16.692 billion | $11.170 billion | +$5.522 billion |
| Capital expenditures | $5.207 billion | $4.515 billion | +$692 million |
Fourth quarter: Revenue was $11.457 billion, gross margin $7.406 billion (64.6% of revenue), operating income $4.023 billion, net income $3.180 billion, and diluted EPS $0.56. Revenue and net income increased sequentially from the third quarter; gross-margin percentage declined from 65.9%.
Segment performance: PC Client Group revenue rose 21% to $31.598 billion, with operating income of $13.304 billion. Data Center Group revenue rose 35% to $8.693 billion, with operating income of $4.395 billion. Other Intel architecture segment revenue increased 27% to $1.784 billion, while the group recorded a $60 million operating loss.
Cash, liquidity, and debt: Year-end cash, cash equivalents, short-term investments, and trading debt instruments totaled $21.497 billion, versus $13.920 billion a year earlier; loans receivable and other long-term investments added $3.876 billion. Total assets were $63.186 billion and stockholders’ equity $49.430 billion. Short- and long-term debt totaled $2.115 billion, or 4.3% of equity. Cash from operations was $16.692 billion; cash used in investing and financing was $10.539 billion and $4.642 billion, respectively. Intel paid $3.503 billion in dividends. It reported $4.2 billion of remaining capacity under its prior $25 billion repurchase authorization; the board added $10 billion of authorization in January 2011.
Material changes and unusual items
- Revenue growth reflected higher processor and chipset unit sales and higher microprocessor average selling prices. Gross-margin improvement was attributed mainly to lower factory underutilization charges, better platform costs, and higher sales and prices.
- Results benefited from the absence of 2009’s $1.447 billion European Commission fine and $1.25 billion AMD settlement charge, both included in marketing, general and administrative expenses in 2009.
- In January 2011, Intel disclosed a design issue affecting its 6 Series Express Chipset. It recorded a $311 million charge in Q4 2010 and estimated total repair-and-replacement costs of about $660 million, including approximately $350 million expected in Q1 2011. Updated chipsets began shipping in February 2011.
- Intel completed the Infineon wireless-solutions acquisition in Q1 2011 for estimated net cash consideration of $1.4 billion. The announced McAfee acquisition, valued at approximately $7.68 billion, remained subject to closing conditions and was expected in Q1 2011.
- A January 2011 NVIDIA patent cross-license settled existing litigation and requires $1.5 billion of payments over six years. Intel recorded $100 million of expense in Q4 2010; most of the remaining amount was to be recognized as an intangible asset and amortized in future periods.
- The effective tax rate was 28.6%, compared with 23.4% in 2009, reflecting a greater share of profits in higher-tax jurisdictions. The 2009 rate was affected by tax settlements and the nondeductible EC fine.
Outlook, commentary, and risks
For 2011, management expected revenue growth in the mid- to high-teens and gross margin of 63%, plus or minus a few percentage points. It forecast R&D plus marketing, general and administrative spending of about $15.7 billion (±$200 million), including approximately $8.2 billion of R&D; capital spending of $9.0 billion (±$300 million); depreciation of about $5.0 billion (±$100 million); and an effective tax rate of approximately 29%. Management linked investment increases principally to development and manufacturing capacity for 22nm technology, for which production was expected to begin in the second half of 2011. The outlook incorporated the Infineon business and anticipated McAfee acquisition, and was subject to uncertainty from the chipset issue and acquisition integration.
Principal risks include cyclical and difficult-to-forecast demand, pricing and product-mix pressure, high fixed manufacturing and R&D costs, execution and yield risks in process transitions, reliance on key suppliers, and intense competition—particularly in mobile and tablet markets. Two customers represented 38% of 2010 revenue (21% and 17% individually). Intel also disclosed continuing competition-related litigation and regulatory matters; management said outcomes were uncertain and not reasonably estimable in many matters. A separate Lehman-related dispute included a demand for at least $417 million, which Intel disputed. The filing states that the financial statements received an unqualified audit opinion and that internal control over financial reporting was effective.
Important facts for investors to verify
- Whether 2011 revenue and gross-margin guidance were achieved, and how much the chipset repair program ultimately cost.
- Actual capital spending, 22nm manufacturing ramp, and resulting depreciation and factory-cost effects.
- McAfee acquisition completion, integration costs, and contribution; and the operating results and strategic impact of the Infineon wireless business.
- Customer concentration, competitive developments in mobile and server markets, and outcomes or financial exposure from outstanding legal matters.
- Cash returned to shareholders, including the distinction between repurchases under the authorization and total repurchase-related cash-flow amounts.