Intel Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended July 2, 2011; amounts are unaudited. Intel’s 2011 fiscal year has 53 weeks, and the first half comprised 27 weeks versus 26 weeks in the prior-year period. Unless stated otherwise, figures are U.S. dollars.
Business context and reporting period
Intel reported record quarterly revenue, supported by demand in server and enterprise markets, higher platform average selling prices, and revenue from the McAfee and Intel Mobile Communications acquisitions. Management cited continued weakness in mature-market consumer demand. The quarter also included the continuing costs of a chipset design issue and manufacturing start-up costs.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $13.032B | $10.765B | $25.879B | $21.064B |
| Gross margin | $7.902B; 60.6% | $7.235B; 67.2% | $15.787B; 61.0% | $13.764B; 65.3% |
| Operating income | $3.935B | $3.981B | $8.093B | $7.429B |
| Net income | $2.954B | $2.887B | $6.114B | $5.329B |
| Diluted EPS | $0.54 | $0.51 | $1.11 | $0.94 |
- Q2 revenue increased 21% year over year; first-half revenue increased 23%, though the first half had an extra week. Q2 net income rose about 2% and diluted EPS about 6%; first-half net income rose about 15% and diluted EPS about 18%.
- Gross margin percentage fell 6.6 percentage points year over year in Q2 and 4.3 points for the first half. Higher start-up costs, platform unit costs, and acquisition-related amortization weighed on margin; first-half results also included $422 million of chipset-related charges.
- Q2 segment revenue: PC Client Group $8.321B, up 11%; Data Center Group $2.436B, up 15%; other Intel architecture $1.389B, up 84%, largely reflecting the mobile communications acquisition; software and services $511M, primarily reflecting McAfee. Other Intel architecture recorded a $33M operating loss versus $76M income a year earlier.
- Operating cash flow was $7.984B for the first half, versus $7.565B. Investing activities used $1.427B and financing activities used $7.433B. Capital expenditures were $5.207B; acquisitions used $8.291B of net cash.
- At July 2, cash and cash equivalents were $4.635B; short-term investments, $3.106B; and trading assets, $3.806B. Management’s investment-portfolio measure, including cash, short-term investments and marketable debt in trading assets, was $11.537B, down from $21.497B at year-end, primarily because of the McAfee acquisition.
- Total debt was $2.161B ($71M short-term and $2.090B long-term), equal to 4.4% of stockholders’ equity. Total assets were $66.089B and stockholders’ equity was $48.723B.
- Intel repurchased $6.0B of stock in the first half and paid $1.955B in dividends. The board declared a Q3 dividend of $0.21 per share, a 16% increase from the Q2 dividend.
Material changes and unusual items
- Intel completed the $6.7B McAfee acquisition (net of cash acquired) and acquired Infineon’s Wireless Solutions business, among other transactions. Acquired businesses contributed approximately $1.5B of first-half revenue and reduced first-half net income by approximately $120M, substantially due to McAfee and Intel Mobile Communications, including acquired-intangible amortization.
- Goodwill increased to $9.141B from $4.531B at year-end, largely from acquisitions; identified intangible assets increased to $6.700B from $860M.
- The Intel 6 Series Express Chipset issue generated $422M of charges in the first half. Intel estimated total repair and replacement costs of $733M; the remaining accrual was $346M at July 2. Management said it did not expect significant further estimate adjustments.
- A new NVIDIA patent cross-license agreement requires $1.5B of payments over six years. Intel recorded licensed technology and reported a remaining liability of $1.1B at July 2. A $164M gain from forming the Intel-GE Care Innovations joint venture was included in first-half interest and other income.
- Q2 effective tax rate was 24.9% versus 31.0%; the first-half rate was 26.4% versus 30.2%. Intel attributed the lower rates primarily to a greater share of profits in lower-tax jurisdictions, a reversal of previously accrued taxes, and the reinstated U.S. R&D tax credit.
Outlook, management commentary, and risks
- Management expected full-year 2011 revenue growth above 20%. Q3 revenue guidance was $14.0B, plus or minus $500M.
- Q3 gross margin guidance was 64%, plus or minus approximately 2 percentage points; full-year guidance was 63%, plus or minus approximately 2 points. Management expected Q3 margin improvement from seasonal volume, lower 22nm start-up costs, lower platform unit costs, and no further chipset-issue charges.
- Full-year R&D plus marketing, general and administrative spending was forecast at $16.2B, plus or minus $200M, and capital spending at $10.5B, plus or minus $400M. Both spending expectations were increased; management cited investment in new PC designs, servers, tablets and smartphones, and process technology. Full-year depreciation guidance was $5.2B, plus or minus $100M.
- Management said operating cash generation remained strong and believed available resources would meet business needs for the next 12 months. It cited server strength, enterprise and emerging-market demand, and the ramp of second-generation Intel Core processors, while noting mature-market consumer weakness.
- Key risks include volatile demand and product mix, pricing and competition, manufacturing execution and capacity utilization, inventory or excess-capacity charges, product defects, acquisition integration, investment impairments, foreign exchange and tax-rate changes, and significant legal and regulatory proceedings.
- Intel disclosed ongoing competition-related proceedings, including its appeal of the European Commission decision and fine already paid, New York litigation, and consumer class actions. The company said potential losses in several matters could not be reasonably estimated. A Lehman Brothers estate representative had demanded at least $417M; no complaint had been filed and Intel said it could not estimate potential loss.
Most important facts for investors to verify
- Whether revenue growth and the full-year outlook are comparable after accounting for the extra first-half week and acquired businesses.
- Whether gross margins recover as guided, and how start-up costs, platform costs, and acquisition-related amortization affect margins.
- The final cost and settlement of the chipset repair program, including use of the remaining $346M accrual.
- McAfee and mobile communications integration, profitability, and the final allocation of acquisition purchase prices and goodwill.
- Cash and investment levels after acquisitions, capital spending, buybacks, and dividends; and execution against the $10.5B capital-spending outlook.
- Developments in competition litigation and the Lehman dispute, where the filing notes potentially material outcomes but does not provide clear loss estimates.