Intel Corporation — Form 10-Q Summary
Business context and reporting period
Quarter ended June 27, 2009; the filing also reports results for the six months ended that date. Intel designs and manufactures semiconductor products, principally microprocessors, chipsets and flash memory. Results reflected a weak, uncertain global economy, with management noting improved sequential demand and customer inventory rebuilding in Q2. Financial statements are unaudited.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Revenue | $8.024 billion | $9.470 billion | $15.169 billion | $19.143 billion |
| Gross margin | $4.079 billion; 50.8% | $5.249 billion; 55.4% | $7.317 billion; 48.2% | $10.456 billion; 54.6% |
| Operating income (loss) | ($12 million) | $2.255 billion | $635 million | $4.317 billion |
| Net income (loss) | ($398 million) | $1.601 billion | $231 million | $3.044 billion |
| Diluted EPS | ($0.07) | $0.28 | $0.04 | $0.52 |
| Operating cash flow | Not separately stated in the supplied filing text | Not separately stated | $3.762 billion | $5.043 billion |
At June 27, cash and cash equivalents were $3.826 billion; short-term investments were $5.195 billion; and trading assets were $2.603 billion. Intel reported $11.305 billion of cash, short-term investments and debt instruments in trading assets combined, against $1.198 billion of short- and long-term debt. Debt was 3.1% of stockholders’ equity. Total current assets were $18.467 billion and current liabilities $7.079 billion; stockholders’ equity was $39.047 billion.
For the first half, investing activities used $1.816 billion, including $2.490 billion of capital expenditures; financing activities used $1.470 billion. Cash and cash equivalents increased $476 million to $3.826 billion. Dividends paid were $1.563 billion. Intel made no repurchases under its authorized buyback plan during the first half.
Material changes versus comparable periods
- Q2 revenue fell 15% year over year but rose 12% sequentially from Q1 2009. First-half revenue declined 21% year over year.
- Q2 gross margin percentage fell to 50.8% from 55.4%; first-half margin fell to 48.2% from 54.6%. Management cited lower sales, factory underutilization and start-up costs, with product pricing and mix also affecting margins.
- The $1.447 billion European Commission fine was recorded in Q2 marketing, general and administrative expense. Excluding context for this charge, Q2 operating results were still affected by weaker revenue and margins; the filing does not provide a formal adjusted earnings measure.
- Q2 operating loss was $12 million versus $2.255 billion of operating income a year earlier; first-half operating income declined to $635 million from $4.317 billion.
- Digital Enterprise Group Q2 revenue decreased 20% to $4.304 billion and operating income fell 46% to $917 million. Mobility Group revenue decreased 8% to $3.481 billion and operating income fell 36% to $803 million.
- First-half operating cash flow fell $1.281 billion year over year, primarily due to lower net income and working-capital changes. Inventory declined to $2.805 billion from $3.744 billion at year-end 2008.
Guidance, management commentary, risks and unusual items
- Management said Q2 results were better than expected, while warning that the global economic environment remained volatile and demand uncertain. Higher sales volume and lower factory underutilization charges helped Q2 gross margin sequentially; lower average selling prices and 32nm start-up costs offset some of the benefit.
- Q3 2009 outlook: revenue of $8.5 billion, plus or minus $400 million; gross margin of 53%, plus or minus a couple of percentage points; depreciation of approximately $1.2 billion; R&D plus marketing, general and administrative expense of approximately $2.8 billion; and restructuring and asset impairment charges of approximately $40 million.
- Full-year 2009 outlook: capital spending of approximately $4.7 billion, plus or minus $200 million; depreciation of approximately $4.8 billion, plus or minus $100 million; and R&D plus marketing, general and administrative expense of $12.05–$12.25 billion, including the EC fine. The estimated tax rate for Q3 and Q4 was approximately 23%.
- The EC fine was €1.06 billion, recorded as a $1.447 billion expense; the June 27 liability was $1.483 billion, and Intel expected to pay it in Q3. The fine was not tax deductible, so Intel recorded a $348 million tax provision despite a Q2 pre-tax loss of $50 million. Intel appealed the decision.
- A 2009 restructuring program included closing assembly and test facilities in Malaysia, the Philippines and China, and ending or stopping production at two 200mm wafer facilities in the United States. First-half charges were $149 million and covered approximately 6,900 employees; management estimated gross annual savings of approximately $350 million. Intel expected further restructuring charges.
- Subsequent to quarter-end, Intel completed its $884 million acquisition of Wind River Systems and issued $2.0 billion of 3.25% convertible debentures due 2039, using most of the proceeds to repurchase shares. These are post-period events, not included in June 27 balances.
- Key risks include volatile demand and pricing, fixed manufacturing costs and underutilization, potential inventory write-offs, investment valuation and impairment, currency exposure, and legal proceedings. Major matters include AMD-related antitrust litigation and investigations, including the U.S. FTC investigation, as well as intellectual-property claims. Management cautioned that adverse legal outcomes could materially affect the business; outcomes were generally not reasonably estimable.
- Intel stated it expected to have adequate resources for business needs over the next 12 months and did not anticipate liquidity constraints. It also disclosed exposure to investment fair-value changes and noted that key estimates include inventory valuation, investment impairment, long-lived assets and taxes.
Important facts for investors to verify
- Review the EC fine appeal, payment timing and any subsequent developments, including the effect of the non-deductible charge on taxes and cash flow.
- Compare actual Q3 results with the stated revenue, gross-margin, expense and restructuring outlook, especially given management’s demand uncertainty.
- Track whether restructuring savings materialize and whether additional factory underutilization or inventory write-offs affect margins.
- Assess post-quarter financing and share repurchases, including the convertible debentures’ effective interest rate and potential dilution or settlement terms.
- Monitor AMD-related and other legal proceedings, investment impairments and exposures to joint ventures, including the stated maximum remaining IMFS commitment of approximately $1.3 billion and Numonyx guarantee of up to $275 million plus related amounts.