Intel Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 29, 2012; year-to-date figures cover the first nine months of 2012. Unless noted, amounts are in U.S. dollars and millions. Comparisons are with the corresponding 2011 period; the nine-month comparison is affected by 2011 having one additional week.
Business context
Intel develops and sells semiconductor products and related software and services. Its largest businesses are PC Client and Data Center; the filing describes weaker consumer and enterprise demand, while cloud infrastructure supported server demand. Intel also continued investments in mobile products and next-generation manufacturing technologies.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First 9 months 2012 | First 9 months 2011 |
|---|---|---|---|---|
| Revenue | $13,457 | $14,233 | $39,864 | $40,112 |
| Gross margin | $8,515 | $9,018 | $25,334 | $24,805 |
| Gross margin percentage | 63.3% | 63.4% | 63.6% | 61.8% |
| Operating income | $3,841 | $4,785 | $11,483 | $12,878 |
| Net income | $2,972 | $3,468 | $8,537 | $9,582 |
| Diluted EPS | $0.58 | $0.65 | $1.65 | $1.75 |
| Operating cash flow | $5,100 approximately | Not stated here | $12,858 | $14,333 |
Q3 revenue fell 5% year over year and net income fell about 14%. PC Client Group revenue declined 8% to $8,633; Data Center Group revenue rose 6% to $2,654; Other Intel Architecture revenue fell 14% to $1,177 and its operating loss widened to $235. Software and services revenue increased to $588, but operating income declined to $4. R&D rose 22% year over year to $2,605, driven by 14nm and 450mm wafer development, staffing and mobile investment. Q3 effective tax rate was 24.2%, versus 29.1%.
For the first nine months, revenue was down 1%, operating income down 11%, and net income down 11%. Higher year-to-date gross margin percentage reflected lower process-technology costs, the absence of the prior-year $422 million chipset repair and replacement charge, and additional McAfee contribution; higher operating expenses partly offset those benefits. YTD R&D and marketing, general and administrative expenses together increased to 34% of revenue from 29%.
Financial position, cash flow and capital allocation
- At September 29, cash and cash equivalents were $3,520; short-term investments $2,483; and trading assets $4,462. Intel reported $10,465 of cash, short-term investments and marketable debt instruments in trading assets, down from $14,837 at year-end 2011, largely due to the ASML equity purchase.
- Total current assets were $23,014 and current liabilities $11,953. Inventories increased to $5,319 from $4,096, including increases in work in process and finished goods.
- Short- and long-term debt totaled $7,156, compared with $7,331 at year-end; debt was 14.5% of stockholders’ equity. Stockholders’ equity was $49,269.
- YTD operating cash flow of $12,858 was below $14,333 in 2011. Investing activities used $8,728, including $8,523 of property and equipment additions; financing activities used $5,675. Cash and cash equivalents declined $1,545 to $3,520.
- Intel repurchased $3,830 of common stock and paid $3,231 in dividends during the first nine months. Q3 repurchases were $1,200 and dividends paid were $1,100. The September-declared dividend was $0.225 per share, payable in December.
- Management said operating cash generation and other resources were sufficient for expected business needs over the next 12 months. The commercial-paper program allows borrowing up to $3.0 billion; none was outstanding at quarter-end.
Outlook, notable actions and risks
- Q4 outlook: Revenue forecast to increase 1% from Q3, below seasonal growth. Intel expected gross margin percentage to decline approximately six percentage points from Q3’s 63.3%.
- About two-thirds of the expected Q4 margin decline was attributed to approximately $500 million of excess-capacity charges as factory loadings are reduced to match demand and lower inventory. Intel also expected a 1.5-point margin effect from reserving Haswell pre-qualification inventory.
- Lower factory loadings enabled equipment and space to be redirected to 14nm, reducing forecast 2012 capital expenditures by $1.2 billion. Management cited cautious customer ordering, macroeconomic uncertainty, softness in mature-market consumer demand and a slowing enterprise market.
- Intel invested $3.2 billion in ASML equity, held a 13% interest at quarter-end, and agreed to provide approximately $1.0 billion of R&D funding over five years plus advance tool-purchase commitments. The ASML investment represented 86% of Intel’s marketable equity portfolio. A 35% market-price decline scenario implied an approximately $1.4 billion portfolio value decrease after hedges and offsets.
- Intel modified its Micron flash-memory joint venture arrangements, sold its IM Flash Singapore interest and certain IM Flash Technologies assets for $605 million, and retained a 49% interest in IMFT. Intel noted potential exposure beyond the investment carrying value through future operating obligations, cash calls or required purchases at costs exceeding realizable value.
- Legal matters include competition proceedings and consumer class actions, the Lehman estate’s previously asserted claim of at least $417 million, McAfee shareholder litigation and an ITC patent proceeding that seeks possible import restrictions. Intel said it could not reasonably estimate potential losses for several matters; unfavorable outcomes could materially affect results or operations.
- Intel identified investment-loss risk, particularly from ASML concentration and non-marketable investments. It also cited demand, customer inventory, product acceptance, competition, product-launch timing, manufacturing ramps, capacity utilization and product mix as factors that could affect revenue and margins. Management stated disclosure controls were effective; no material change in internal control was reported.
Most important facts for investors to verify
- Whether Q4 revenue and gross-margin guidance was achieved, including the expected capacity charges and Haswell inventory reserve.
- Whether PC demand, customer inventory levels and enterprise spending stabilized, and whether Data Center growth continued.
- Inventory levels, manufacturing utilization and capital expenditure trends, particularly the transition toward 14nm.
- ASML investment valuation, related funding and purchase commitments, and the effect of any share-price decline.
- Cash generation, shareholder distributions, debt levels and any material developments in the disclosed legal proceedings or Micron joint-venture exposure.