Intel Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter ended October 1, 2016; comparisons are with the quarter ended September 26, 2015. Year-to-date (YTD) figures cover the first nine months. Intel’s 2016 fiscal year has 53 weeks, and its first quarter had an extra week, affecting YTD comparisons.
Financial performance
| Metric | Q3 2016 | Q3 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Revenue | $15.78B | $14.47B | $43.01B | $40.44B |
| Gross margin | $9.98B; 63.3% | $9.11B; 63.0% | $26.09B; 60.6% | $25.09B; 62.0% |
| Operating income | $4.46B | $4.19B | $8.35B | $9.70B |
| Net income | $3.38B | $3.11B | $6.75B | $7.81B |
| Diluted EPS | $0.69 | $0.64 | $1.39 | $1.59 |
| Operating cash flow | $5.8B | Not stated by quarter in the comparative cash-flow table | $13.66B | $13.59B |
- Q3 revenue rose 9%, and management described it as a record. Higher average selling prices, CCG growth, and Altera-derived PSG revenue contributed; platform unit sales overall fell 2% year over year.
- Q3 gross margin increased 0.3 percentage points year over year. Lower platform unit costs and higher selling prices were partly offset by 10nm factory start-up costs, weaker NSG results, and acquisition-related amortization.
- YTD operating income fell 14% and net income fell 13%, despite 6% revenue growth. Restructuring charges, acquisition-related costs, lower NSG profitability, and a lower gross-margin rate were important factors.
- Depreciation expense was reduced by a useful-life estimate change for wafer-fabrication machinery. Intel said this raised operating income by about $425M and net income by $300M in Q3; YTD operating income by $925M and net income by $650M, or diluted EPS by $0.13.
Cash, debt, and capital allocation
- At October 1, cash and cash equivalents were $4.75B; short-term investments were $3.27B and trading assets $9.75B. Intel’s stated combined balance for these three categories was $17.77B, down from $25.31B at year-end 2015, primarily reflecting the Altera acquisition.
- Total debt was $27.62B, compared with $22.67B at December 26, 2015. Current assets were $36.22B and current liabilities $20.09B. YTD investing cash use was $22.37B, including $15.15B for acquisitions and $6.10B for capital expenditures.
- YTD financing cash use was $1.84B, including $3.69B of dividends and $2.05B of share repurchases. The quarterly dividend declared was $0.52 per share, up from $0.48.
- Intel reported sufficient resources for business requirements over the next 12 months. However, $15.2B of the $17.8B cash, short-term investments, and trading assets was held by non-U.S. subsidiaries; most of that amount was indefinitely reinvested and could incur additional taxes if repatriated.
Business changes, outlook, and risks
- Segments: Q3 CCG revenue rose 5% and operating income 37%; DCG revenue rose 10% while operating income was down 1%; IOTG revenue rose 19%; NSG revenue fell 1% and recorded a $134M operating loss. PSG, created following the Altera acquisition, reported $425M revenue and $78M operating income in Q3.
- Altera: Intel acquired Altera in December 2015 for approximately $14.5B net of cash acquired. YTD PSG results include purchase-accounting effects, including a $387M inventory valuation charge and deferred-revenue adjustments.
- Restructuring: The 2016 program affected approximately 15,000 employees and generated $1.76B of charges YTD. Intel estimated approximately $1.6B in annual net savings, expected to be fully realized by mid-2017; actions were expected to be substantially complete by Q2 2017.
- Intel Security divestiture: Intel agreed to transfer certain security assets and liabilities to a jointly owned company with TPG, expected to close in Q2 2017. The transaction was valued at about $4.2B; Intel expected about $3.1B consideration and a 49% ownership interest, and planned to finance about $2.2B until refinancing.
- Guidance: Management said Q3 revenue exceeded its revised Business Outlook and gross margin was above the original expectation. The filing refers investors to the separate earnings-release outlook for Q4 and full-year 2016; it does not provide a clear set of numerical forward guidance values in the filing text.
- Risks and contingencies: NSG faced competitive pricing pressure and costs from ramping 3D NAND and 3D XPoint. Intel also identified currency, interest-rate, and equity-price exposure; its marketable equity portfolio was concentrated largely in ASML, valued at about $6.0B. Major customers accounted for 39% of YTD revenue. The European Commission competition appeal remained pending; Intel stated that adverse legal outcomes could involve substantial damages or business restrictions, although management did not then expect the disclosed proceedings to materially harm overall results.
Investor verification priorities
- Review the separate Q4 and full-year 2016 Business Outlook and compare subsequent results with management’s expectations.
- Track whether the projected $1.6B annual restructuring savings are achieved, alongside the associated charges and execution effects.
- Assess debt, accessible U.S. liquidity, and cash requirements after the Altera acquisition and planned Intel Security transaction.
- Examine ongoing NSG pricing, 3D NAND/3D XPoint ramp costs, and DCG investment needs for effects on margins.
- Verify Altera integration and purchase-accounting impacts, Intel Security divestiture terms and timing, and material developments in disclosed legal proceedings.