UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012.
Or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-06217
INTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
94-1672743 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
2200 Mission College Boulevard, Santa Clara, California |
95054-1549 | |
(Address of principal executive offices) | (Zip Code) |
(408) 765-8080
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Shares outstanding of the Registrants common stock:
Class | Outstanding as of April 27, 2012 | |
Common stock, $0.001 par value | 5,031 million |
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Three Months Ended | ||||||||
(In Millions, Except Per Share Amounts) |
March 31, 2012 |
April 2, 2011 |
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Net revenue |
$ | 12,906 | $ | 12,847 | ||||
Cost of sales |
4,641 | 4,962 | ||||||
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Gross margin |
8,265 | 7,885 | ||||||
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Research and development |
2,401 | 1,916 | ||||||
Marketing, general and administrative |
1,973 | 1,775 | ||||||
Amortization of acquisition-related intangibles |
81 | 36 | ||||||
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Operating expenses |
4,455 | 3,727 | ||||||
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Operating income |
3,810 | 4,158 | ||||||
Gains (losses) on equity investments, net |
(19 | ) | 28 | |||||
Interest and other, net |
23 | 185 | ||||||
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Income before taxes |
3,814 | 4,371 | ||||||
Provision for taxes |
1,076 | 1,211 | ||||||
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Net income |
$ | 2,738 | $ | 3,160 | ||||
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Basic earnings per common share |
$ | 0.55 | $ | 0.58 | ||||
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Diluted earnings per common share |
$ | 0.53 | $ | 0.56 | ||||
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Cash dividends declared per common share |
$ | 0.42 | $ | 0.3624 | ||||
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Weighted average common shares outstanding: |
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Basic |
4,999 | 5,452 | ||||||
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Diluted |
5,192 | 5,606 | ||||||
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See accompanying notes.
2
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended | ||||||||
March 31, | April 2, | |||||||
(In Millions) |
2012 | 2011 | ||||||
Net income |
$ | 2,738 | $ | 3,160 | ||||
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Other comprehensive income, net of tax: |
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Change in net unrealized holding gain (loss) on available-for-sale investments |
166 | (5 | ) | |||||
Change in net deferred tax asset valuation allowance |
| (15 | ) | |||||
Change in net unrealized holding gain (loss) on derivatives |
(34 | ) | 112 | |||||
Change in net prior service costs |
1 | | ||||||
Change in net actuarial losses |
16 | (7 | ) | |||||
Change in net foreign currency translation adjustment |
28 | 63 | ||||||
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Other comprehensive income |
177 | 148 | ||||||
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Total comprehensive income |
$ | 2,915 | $ | 3,308 | ||||
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See accompanying notes.
3
INTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(In Millions) |
March 31, 2012 |
Dec. 31, 2011 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ | 4,429 | $ | 5,065 | ||||
Short-term investments |
5,012 | 5,181 | ||||||
Trading assets |
4,312 | 4,591 | ||||||
Accounts receivable, net |
4,037 | 3,650 | ||||||
Inventories |
4,489 | 4,096 | ||||||
Deferred tax assets |
1,794 | 1,700 | ||||||
Other current assets |
1,348 | 1,589 | ||||||
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Total current assets |
25,421 | 25,872 | ||||||
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Property, plant and equipment, net of accumulated depreciation of $35,575 ($34,446 as of December 31, 2011) |
25,027 | 23,627 | ||||||
Marketable equity securities |
819 | 562 | ||||||
Other long-term investments |
498 | 889 | ||||||
Goodwill |
9,388 | 9,254 | ||||||
Identified intangible assets, net |
6,064 | 6,267 | ||||||
Other long-term assets |
4,600 | 4,648 | ||||||
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Total assets |
$ | 71,817 | $ | 71,119 | ||||
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Liabilities and stockholders equity |
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Current liabilities: |
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Short-term debt |
$ | 362 | $ | 247 | ||||
Accounts payable |
2,993 | 2,956 | ||||||
Accrued compensation and benefits |
1,498 | 2,948 | ||||||
Accrued advertising |
1,095 | 1,134 | ||||||
Deferred income |
2,001 | 1,929 | ||||||
Other accrued liabilities |
3,992 | 2,814 | ||||||
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Total current liabilities |
11,941 | 12,028 | ||||||
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Long-term debt |
7,088 | 7,084 | ||||||
Long-term deferred tax liabilities |
2,793 | 2,617 | ||||||
Other long-term liabilities |
3,235 | 3,479 | ||||||
Contingencies (Note 20) |
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Stockholders equity: |
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Preferred stock |
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Common stock and capital in excess of par value, 5,006 shares issued and outstanding (5,000 as of December 31, 2011) |
18,381 | 17,036 | ||||||
Accumulated other comprehensive income (loss) |
(604 | ) | (781 | ) | ||||
Retained earnings |
28,983 | 29,656 | ||||||
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Total stockholders equity |
46,760 | 45,911 | ||||||
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Total liabilities and stockholders equity |
$ | 71,817 | $ | 71,119 | ||||
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See accompanying notes.
4
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended | ||||||||
(In Millions) |
March 31, 2012 |
April 2, 2011 |
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Cash and cash equivalents, beginning of period |
$ | 5,065 | $ | 5,498 | ||||
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Cash flows provided by (used for) operating activities: |
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Net income |
2,738 | 3,160 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
1,519 | 1,287 | ||||||
Share-based compensation |
274 | 300 | ||||||
Excess tax benefit from share-based payment arrangements |
(19 | ) | (1 | ) | ||||
Amortization of intangibles |
266 | 155 | ||||||
(Gains) losses on equity investments, net |
19 | (28 | ) | |||||
(Gains) losses on divestitures |
| (164 | ) | |||||
Deferred taxes |
(45 | ) | (109 | ) | ||||
Changes in assets and liabilities: |
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Accounts receivable |
(387 | ) | (504 | ) | ||||
Inventories |
(381 | ) | (251 | ) | ||||
Accounts payable |
37 | 404 | ||||||
Accrued compensation and benefits |
(1,450 | ) | (1,401 | ) | ||||
Income taxes payable and receivable |
760 | 1,032 | ||||||
Other assets and liabilities |
(359 | ) | 133 | |||||
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Total adjustments |
234 | 853 | ||||||
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Net cash provided by operating activities |
2,972 | 4,013 | ||||||
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Cash flows provided by (used for) investing activities: |
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Additions to property, plant and equipment |
(2,974 | ) | (2,723 | ) | ||||
Acquisitions, net of cash acquired |
(176 | ) | (8,216 | ) | ||||
Purchases of available-for-sale investments |
(1,529 | ) | (3,569 | ) | ||||
Sales of available-for-sale investments |
333 | 7,594 | ||||||
Maturities of available-for-sale investments |
1,827 | 5,172 | ||||||
Purchases of trading assets |
(4,303 | ) | (1,540 | ) | ||||
Maturities and sales of trading assets |
4,567 | 2,578 | ||||||
Collection of loans receivable |
133 | | ||||||
Investments in non-marketable equity investments |
(116 | ) | (147 | ) | ||||
Return of equity method investments |
67 | 24 | ||||||
Proceeds from divestitures |
| 50 | ||||||
Other investing |
60 | 133 | ||||||
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Net cash used for investing activities |
(2,111 | ) | (644 | ) | ||||
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Cash flows provided by (used for) financing activities: |
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Increase (decrease) in short-term debt, net |
115 | 16 | ||||||
Proceeds from government grants |
| 56 | ||||||
Excess tax benefit from share-based payment arrangements |
19 | 1 | ||||||
Proceeds from sales of shares through employee equity incentive plans |
1,244 | 239 | ||||||
Repurchase of common stock |
(1,519 | ) | (4,006 | ) | ||||
Payment of dividends to stockholders |
(1,049 | ) | (994 | ) | ||||
Other financing |
(305 | ) | | |||||
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Net cash used for financing activities |
(1,495 | ) | (4,688 | ) | ||||
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Effect of exchange rate fluctuations on cash and cash equivalents |
(2 | ) | 9 | |||||
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Net increase (decrease) in cash and cash equivalents |
(636 | ) | (1,310 | ) | ||||
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Cash and cash equivalents, end of period |
$ | 4,429 | $ | 4,188 | ||||
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest, net of amounts capitalized |
$ | | $ | | ||||
Income taxes, net of refunds |
$ | 376 | $ | 269 |
See accompanying notes.
5
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited
Note 1: Basis of Presentation
We prepared our interim consolidated condensed financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles, consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended December 31, 2011.
We have a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal year 2012 is a 52-week fiscal year, and the first quarter of 2012 was a 13-week quarter. Fiscal year 2011 was a 53-week fiscal year, and the first quarter of 2011 was a 14-week quarter.
We have made estimates and judgments affecting the amounts reported in our consolidated condensed financial statements and the accompanying notes. The actual results that we experience may differ materially from our estimates. The interim financial information is unaudited, but reflects all normal adjustments that are, in our opinion, necessary to provide a fair statement of results for the interim periods presented. This interim information should be read in conjunction with the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2011.
Note 2: Accounting Changes
In the first quarter of 2012, we adopted amended standards that increase the prominence of items reported in other comprehensive income. These amended standards eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders equity and require that all changes in stockholders equityexcept investments by, and distributions to, ownersbe presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The adoption of these amended standards did impact the presentation of other comprehensive income, as we have elected to present two separate but consecutive statements, but did not have an impact on our financial position or results of operations.
6
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 3: Fair Value
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability. Our financial assets and liabilities are measured and recorded at fair value, except for equity method investments, cost method investments, cost method loans receivable, and most of our liabilities.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.
Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data.
Our policy is to reflect transfers between levels at the beginning of the quarter in which a change in circumstances resulted in the transfer.
Marketable Debt Instruments
Marketable debt instruments include instruments such as commercial paper, corporate bonds, government bonds, bank deposits, asset-backed securities, municipal bonds, and money market fund deposits. When we use observable market prices for identical securities that are traded in less active markets, we classify our marketable debt instruments as Level 2. When observable market prices for identical securities are not available, we price our marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs. We corroborate non-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings.
Our marketable debt instruments that are classified as Level 3 are classified as such due to the lack of observable market data to corroborate either the non-binding market consensus prices or the non-binding broker quotes. When observable market data is not available, we corroborate our fair value measurements using non-binding market consensus prices and non-binding broker quotes from a second source.
7
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following types of instruments as of March 31, 2012 and December 31, 2011:
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
Fair Value Measured and Recorded at Reporting Date Using |
Fair Value Measured and Recorded at Reporting Date Using |
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(In Millions) |
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
Assets |
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Cash equivalents: |
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Commercial paper |
$ | | $ | 2,203 | $ | | $ | 2,203 | $ | | $ | 2,408 | $ | | $ | 2,408 | ||||||||||||||||
Bank deposits |
| 880 | | 880 | | 795 | | 795 | ||||||||||||||||||||||||
Money market fund deposits |
471 | | | 471 | 546 | | | 546 | ||||||||||||||||||||||||
Government bonds |
| 100 | | 100 | 650 | | | 650 | ||||||||||||||||||||||||
Short-term investments: |
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Government bonds |
2,850 | 398 | | 3,248 | 2,690 | 310 | | 3,000 | ||||||||||||||||||||||||
Commercial paper |
| 958 | | 958 | | 1,409 | | 1,409 | ||||||||||||||||||||||||
Corporate bonds |
78 | 375 | 35 | 488 | 120 | 428 | 28 | 576 | ||||||||||||||||||||||||
Bank deposits |
| 318 | | 318 | | 196 | | 196 | ||||||||||||||||||||||||
Trading assets: |
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Government bonds |
1,729 | 1,338 | | 3,067 | 1,698 | 1,317 | | 3,015 | ||||||||||||||||||||||||
Corporate bonds |
216 | 383 | | 599 | 202 | 486 | | 688 | ||||||||||||||||||||||||
Municipal bonds |
| 260 | | 260 | | 284 | | 284 | ||||||||||||||||||||||||
Bank deposits |
| 140 | | 140 | | 135 | | 135 | ||||||||||||||||||||||||
Commercial paper |
| 124 | | 124 | | 305 | | 305 | ||||||||||||||||||||||||
Asset-backed securities |
| | 101 | 101 | | | 115 | 115 | ||||||||||||||||||||||||
Money market fund deposits |
21 | | | 21 | 49 | | | 49 | ||||||||||||||||||||||||
Other current assets: |
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Derivative assets |
| 108 | 5 | 113 | | 159 | 7 | 166 | ||||||||||||||||||||||||
Loans receivable |
| 33 | | 33 | | 33 | | 33 | ||||||||||||||||||||||||
Marketable equity securities |
694 | 125 | | 819 | 522 | 40 | | 562 | ||||||||||||||||||||||||
Other long-term investments: |
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Corporate bonds |
| 237 | 30 | 267 | | 282 | 39 | 321 | ||||||||||||||||||||||||
Government bonds |
| 161 | | 161 | 177 | 300 | | 477 | ||||||||||||||||||||||||
Bank deposits |
| 55 | | 55 | | 55 | | 55 | ||||||||||||||||||||||||
Asset-backed securities |
| | 15 | 15 | | | 36 | 36 | ||||||||||||||||||||||||
Other long-term assets: |
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Loans receivable |
| 747 | | 747 | | 715 | | 715 | ||||||||||||||||||||||||
Derivative assets |
| 24 | 28 | 52 | | 34 | 29 | 63 | ||||||||||||||||||||||||
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Total assets measured and recorded at fair value |
$ | 6,059 | $ | 8,967 | $ | 214 | $ | 15,240 | $ | 6,654 | $ | 9,691 | $ | 254 | $ | 16,599 | ||||||||||||||||
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Liabilities |
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Other accrued liabilities: |
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Derivative liabilities |
$ | | $ | 275 | $ | 9 | $ | 284 | $ | | $ | 280 | $ | 8 | $ | 288 | ||||||||||||||||
Long-term debt |
| | 128 | 128 | | | 131 | 131 | ||||||||||||||||||||||||
Other long-term liabilities: |
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Derivative liabilities |
| 40 | | 40 | | 27 | | 27 | ||||||||||||||||||||||||
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Total liabilities measured and recorded at fair value |
$ | | $ | 315 | $ | 137 | $ | 452 | $ | | $ | 307 | $ | 139 | $ | 446 | ||||||||||||||||
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Government bonds include bonds issued or deemed to be guaranteed by government entities. Government bonds include instruments such as non-U.S. government bonds, U.S. Treasury securities, and U.S. agency securities.
8
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Fair Value Option for Financial Assets/Liabilities
We elected the fair value option for loans made to third parties when the interest rate or foreign exchange rate risk was hedged at inception with a related derivative instrument. As of March 31, 2012, the fair value of our loans receivable for which we elected the fair value option did not significantly differ from the contractual principal balance based on the contractual currency. These loans receivable are classified within other current assets and other long-term assets. Fair value is determined using a discounted cash flow model with all significant inputs derived from or corroborated with observable market data. Gains and losses from changes in fair value on the loans receivable and related derivative instruments, as well as interest income, are recorded in interest and other, net. During all periods presented, changes in the fair value of our loans receivable were largely offset by changes in the related derivative instruments, resulting in an insignificant net impact on our consolidated condensed statements of income. Gains and losses attributable to changes in credit risk are determined using observable credit default spreads for the issuer or comparable companies and were insignificant during all periods presented. We did not elect the fair value option for loans when the interest rate or foreign exchange rate risk was not hedged at inception with a related derivative instrument.
We elected the fair value option for the bonds issued in 2007 by the Industrial Development Authority of the City of Chandler, Arizona (2007 Arizona bonds). In connection with the 2007 Arizona bonds, we entered into a total return swap agreement that effectively converts the fixed-rate obligation on the bonds to a floating U.S.-dollar LIBOR-based rate. As a result, changes in the fair value of this debt are largely offset by changes in the fair value of the total return swap agreement, without the need to apply hedge accounting provisions. The 2007 Arizona bonds are included in long-term debt. As of March 31, 2012 and December 31, 2011, no other instruments were similar to the 2007 Arizona bonds for which we elected fair value treatment.
As of March 31, 2012, the fair value of the 2007 Arizona bonds did not significantly differ from the contractual principal balance. The fair value of the 2007 Arizona bonds was determined using inputs that are observable in the market or that can be derived from or corroborated with observable market data, as well as unobservable inputs that were significant to the fair value. Gains and losses on the 2007 Arizona bonds and the related total return swap are recorded in interest and other, net. We capitalize a portion of the interest associated with the 2007 Arizona bonds. We add capitalized interest to the cost of qualified assets and amortize it over the estimated useful lives of the assets. The remaining interest associated with the 2007 Arizona bonds is recorded as interest expense in interest and other, net.
Assets Measured and Recorded at Fair Value on a Non-Recurring Basis
Our non-marketable equity investments (non-marketable equity method and cost method investments) and non-financial assets, such as intangible assets and property, plant and equipment, are recorded at fair value only if an impairment charge is recognized. During the first quarter of 2012, we recognized $59 million of impairment charges on non-marketable equity investments held as of March 31, 2012 ($14 million of impairment charges during first quarter of 2011 for non-marketable equity investments held as of April 2, 2011). The fair value of these non-marketable equity investments at the time of impairment recognition was $11 million during the first quarter of 2012 ($19 million during the first quarter of 2011). All of these assets were categorized as Level 3 in the fair value hierarchy.
A portion of our non-marketable equity investments was measured and recorded at fair value due to events or circumstances that significantly impacted the fair value of those investments, resulting in other-than-temporary impairment charges. We classified these measurements as Level 3, as we used unobservable inputs to the valuation methodologies that were significant to the fair value measurements, and the valuations required management judgment due to the absence of quoted market prices.
9
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
We measure the fair value of our non-marketable cost method investments, indebtedness carried at amortized cost, and cost method loans receivable quarterly for disclosure purposes; however, the assets are recorded at fair value only when an impairment charge is recognized. The carrying amounts and fair values of financial instruments not recorded at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 were as follows:
March 31, 2012 | ||||||||||||||||||||
(In Millions) |
Carrying Amount |
Fair Value Measured Using | Total Fair Value |
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Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Non-marketable cost method investments |
$ | 1,116 | $ | | $ | | $ | 1,697 | $ | 1,697 | ||||||||||
Long-term debt |
$ | 6,960 | $ | 5,190 | $ | 2,653 | $ | | $ | 7,843 | ||||||||||
Short-term debt |
$ | 273 | $ | | $ | 273 | $ | | $ | 273 | ||||||||||
NVIDIA Corporation cross-license agreement liability |
$ | 861 | $ | | $ | 881 | $ | | $ | 881 | ||||||||||
December 31, 2011 | ||||||||||||||||||||
(In Millions) |
Carrying Amount |
Fair Value Measured Using | Total | |||||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||||||
Non-marketable cost method investments |
$ | 1,129 | $ | | $ | | $ | 1,861 | $ | 1,861 | ||||||||||
Loans receivable |
$ | 132 | $ | | $ | 132 | $ | | $ | 132 | ||||||||||
Long-term debt |
$ | 6,953 | $ | 5,287 | $ | 2,448 | $ | | $ | 7,735 | ||||||||||
Short-term debt |
$ | 200 | $ | | $ | 200 | $ | | $ | 200 | ||||||||||
NVIDIA Corporation cross-license agreement liability |
$ | 1,156 | $ | | $ | 1,174 | $ | | $ | 1,174 |
As of March 31, 2012 and December 31, 2011, the unrealized loss position of our non-marketable cost method investments was not significant.
Our non-marketable equity investments are valued using the market and income approaches. The market approach includes the use of financial metrics and ratios of comparable public companies. The selection of comparable companies requires management judgment and is based on a number of factors, including comparable companies sizes, growth rates, industries, development stages, and other relevant factors. The income approach includes the use of a discounted cash flow model, which requires the following significant estimates for the investee: revenue, costs, and discount rates based on the risk profile of comparable companies. Estimates of revenues and costs are developed using available market, historical, and forecast data. The valuation of these non-marketable cost method investments also takes into account variables such as conditions reflected in the capital markets, recent financing activities by the investees, the investees capital structure, the terms of the investees issued interests, and the lack of marketability of the investments.
The carrying amount and fair value of loans receivable exclude loans measured and recorded at a fair value of $780 million as of March 31, 2012 ($748 million as of December 31, 2011). The carrying amount and fair value of long-term debt exclude long-term debt measured and recorded at a fair value of $128 million as of March 31, 2012 ($131 million as of December 31, 2011). Short-term debt includes our commercial paper outstanding as of March 31, 2012 and December 31, 2011, and the carrying amount and fair value exclude drafts payable.
The fair value of our loans receivable, including those held at fair value, is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. The credit quality of our loans receivable remains high, with credit ratings of A+/A1 or better as of March 31, 2012. Our long-term debt recognized at amortized cost is comprised of our senior notes and our convertible debentures. The fair value of our senior notes is determined using active market prices, and is thereby classified as Level 1. The fair value of our convertible long-term debt is determined using discounted cash flow models with observable market inputs and takes into consideration variables such as risk-free rate, comparable securities, subordination discount, credit-rating changes and interest rate changes.
The NVIDIA Corporation cross-license agreement liability in the preceding table was incurred as a result of entering into a long-term patent cross-license agreement with NVIDIA in January 2011. We agreed to make payments to NVIDIA over six years. As of March 31, 2012 and December 31, 2011, the carrying amount of the liability arising from the agreement was classified within other accrued liabilities and other long-term liabilities, as applicable. The fair value is determined using a discounted cash flow model which discounts future cash flows using our incremental borrowing rates.
10
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 4: Trading Assets
As of March 31, 2012 and December 31, 2011, trading assets were comprised of marketable debt instruments. Net losses related to trading assets still held at the reporting date were $20 million in the first quarter of 2012 (net gains of $61 million in the first quarter of 2011). Net gains on the related derivatives were $28 million in the first quarter of 2012 (net losses of $50 million in the first quarter of 2011).
Net gains on marketable equity securities classified as trading assets still held at April 2, 2011, excluding the impacts of the related derivatives, were $144 million in the first quarter of 2011.
Note 5: Available-for-Sale Investments
Available-for-sale investments as of March 31, 2012 and December 31, 2011 were as follows:
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
(In Millions) |
Adjusted Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
Adjusted Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||||||||||||||
Government bonds |
$ | 3,510 | $ | 1 | $ | (2 | ) | $ | 3,509 | $ | 4,131 | $ | | $ | (4 | ) | $ | 4,127 | ||||||||||||||
Commercial paper |
3,162 | | (1 | ) | 3,161 | 3,820 | | (3 | ) | 3,817 | ||||||||||||||||||||||
Bank deposits |
1,252 | 1 | | 1,253 | 1,046 | 1 | (1 | ) | 1,046 | |||||||||||||||||||||||
Marketable equity securities |
208 | 613 | (2 | ) | 819 | 189 | 385 | (12 | ) | 562 | ||||||||||||||||||||||
Corporate bonds |
746 | 13 | (4 | ) | 755 | 892 | 14 | (9 | ) | 897 | ||||||||||||||||||||||
Money market fund deposits |
471 | | | 471 | 546 | | | 546 | ||||||||||||||||||||||||
Asset-backed securities |
18 | | (3 | ) | 15 | 48 | | (12 | ) | 36 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total available-for-sale investments |
$ | 9,367 | $ | 628 | $ | (12 | ) | $ | 9,983 | $ | 10,672 | $ | 400 | $ | (41 | ) | $ | 11,031 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the preceding table, government bonds include bonds issued or deemed to be guaranteed by government entities. Government bonds include instruments such as U.S. Treasury securities, non-U.S. government bonds, and U.S. agency securities as of March 31, 2012 and December 31, 2011.
The amortized cost and fair value of available-for-sale debt investments as of March 31, 2012, by contractual maturity, were as follows:
(In Millions) |
Cost | Fair Value | ||||||
Due in 1 year or less |
$ | 8,187 | $ | 8,194 | ||||
Due in 12 years |
218 | 223 | ||||||
Due in 25 years |
262 | 259 | ||||||
Due after 5 years |
3 | 2 | ||||||
Instruments not due at a single maturity date |
489 | 486 | ||||||
|
|
|
|
|||||
Total |
$ | 9,159 | $ | 9,164 | ||||
|
|
|
|
Instruments not due at a single maturity date in the preceding table include asset-backed securities and money market fund deposits.
In the first quarter of 2012, we sold available-for-sale investments for proceeds of $333 million ($7.6 billion in the first quarter of 2011). The gross realized gains on sales of available-for-sale investments were insignificant in the first quarter of 2012 ($28 million in the first quarter of 2011) and were primarily related to our sales of marketable equity securities. We determine the cost of an investment sold on an average cost basis at the individual security level.
11
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
The before-tax net unrealized holding gains (losses) on available-for-sale investments that have been included in other comprehensive income (loss) and the before-tax net gains (losses) reclassified from accumulated other comprehensive income (loss) into earnings were as follows:
Three Months Ended | ||||||||
(In Millions) |
March 31, 2012 |
April 2, 2011 |
||||||
Net unrealized holding gains (losses) included in other comprehensive income (loss) |
$ | 252 | $ | 36 | ||||
Net gains (losses) reclassified from accumulated other comprehensive income (loss) into earnings |
$ | (5 | ) | $ | 44 |
Note 6: Inventories
Inventories at the end of each period were as follows:
(In Millions) |
March 31, 2012 |
Dec. 31, 2011 |
||||||
Raw materials |
$ | 646 | $ | 644 | ||||
Work in process |
2,048 | 1,680 | ||||||
Finished goods |
1,795 | 1,772 | ||||||
|
|
|
|
|||||
Total inventories |
$ | 4,489 | $ | 4,096 | ||||
|
|
|
|
Note 7: Derivative Financial Instruments
Our primary objective for holding derivative financial instruments is to manage currency exchange rate risk and interest rate risk, and, to a lesser extent, equity market risk and commodity price risk. We currently do not hold derivative instruments for the purpose of managing credit risk since we limit the amount of credit exposure to any one counterparty and generally enter into derivative transactions with high-credit-quality counterparties. We also enter into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow counterparties to net settle amounts owed to each other as a result of multiple, separate derivative transactions. For presentation on our consolidated condensed balance sheets, we do not offset fair value amounts recognized for derivative instruments under master netting arrangements.
Currency Exchange Rate Risk
We are exposed to currency exchange rate risk and generally hedge our exposures with currency forward contracts, currency interest rate swaps, or currency options. Substantially all of our revenue is transacted in U.S. dollars. However, a significant amount of our operating expenditures and capital purchases are incurred in or exposed to other currencies, primarily the Japanese yen, the euro, and the Israeli shekel. We have established balance sheet and forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatility of the functional currency equivalent of future cash flows caused by changes in exchange rates. Our non-U.S.-dollar-denominated investments in debt instruments and loans receivable are generally hedged with offsetting currency forward contracts or currency interest rate swaps. These programs reduce, but do not entirely eliminate, the impact of currency exchange movements.
Our currency risk management programs include:
| Currency derivatives with cash flow hedge accounting designation that utilize currency forward contracts and currency options to hedge exposures to the variability in the U.S.-dollar equivalent of anticipated non-U.S.-dollar-denominated cash flows. These instruments generally mature within 12 months. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) and reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated condensed statements of income as the impact of the hedged transaction. |
| Currency derivatives without hedge accounting designation that utilize currency forward contracts or currency interest rate swaps to economically hedge the functional currency equivalent cash flows of recognized monetary assets and liabilities, non-U.S.-dollar-denominated debt instruments classified as trading assets, and hedges of non-U.S.-dollar-denominated loans receivable recognized at fair value. The majority of these instruments mature within 12 months. Changes in the functional currency equivalent cash flows of the underlying assets and liabilities are approximately offset by the changes in fair values of the related derivatives. We record net gains or losses in the line item on the consolidated condensed statements of income most closely associated with the related exposures, primarily in interest and other, net, except for equity-related gains or losses, which we primarily record in gains (losses) on equity investments, net. |
12
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Interest Rate Risk
Our primary objective for holding investments in debt instruments is to preserve principal while maximizing yields. We generally swap the returns on our investments in fixed-rate debt instruments with remaining maturities longer than six months into U.S.-dollar three-month LIBOR-based returns, unless management specifically approves otherwise. These swaps are settled at various interest payment times involving cash payments at each interest and principal payment date, with the majority of the contracts having quarterly payments.
Our interest rate risk management programs include:
| Interest rate derivatives with cash flow hedge accounting designation that utilize interest rate swap agreements to modify the interest characteristics of debt instruments. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) and reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated condensed statements of income as the impact of the hedged transaction. |
| Interest rate derivatives without hedge accounting designation that utilize interest rate swaps and currency interest rate swaps in economic hedging transactions, including hedges of non-U.S.-dollar-denominated debt instruments classified as trading assets, and hedges of non-U.S.-dollar-denominated loans receivable recognized at fair value. Floating interest rates on the swaps are reset on a quarterly basis. Changes in fair value of the debt instruments classified as trading assets and hedges of loans receivable recognized at fair value are generally offset by changes in fair value of the related derivatives, both of which are recorded in interest and other, net. |
Equity Market Risk
Our marketable investments include marketable equity securities and equity derivative instruments. To the extent that our marketable equity securities have strategic value, we typically do not attempt to reduce or eliminate our equity market exposure through hedging activities. We may enter into transactions to reduce or eliminate the equity market risks for our investments in strategic equity derivative instruments. For securities that we no longer consider strategic, we evaluate legal, market, and economic factors in our decision on the timing of disposal and whether it is possible and appropriate to hedge the equity market risk. Our equity market risk management program includes equity derivatives without hedge accounting designation that utilize warrants, equity options, or other equity derivatives. We recognize changes in the fair value of such derivatives in gains (losses) on equity investments, net. We also utilize total return swaps to offset changes in liabilities related to the equity market risks of certain deferred compensation arrangements. Gains and losses from changes in fair value of these total return swaps are generally offset by the gains and losses on the related liabilities, both of which are recorded in cost of sales and operating expenses.
Commodity Price Risk
We operate facilities that consume commodities, and have established forecasted transaction risk management programs to protect against fluctuations in fair value and the volatility of future cash flows caused by changes in commodity prices, such as those for natural gas. These programs reduce, but do not always entirely eliminate, the impact of commodity price movements.
Our commodity price risk management program includes commodity derivatives with cash flow hedge accounting designation that utilize commodity swap contracts to hedge future cash flow exposures to the variability in commodity prices. These instruments generally mature within 12 months. For these derivatives, we report the after-tax gain (loss) from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) and reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated condensed statements of income as the impact of the hedged transaction.
13
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Volume of Derivative Activity
Total gross notional amounts for outstanding derivatives (recorded at fair value) were as follows:
(In Millions) |
March 31, 2012 |
Dec. 31, 2011 |
April 2, 2011 |
|||||||||
Currency forwards |
$ | 11,116 | $ | 11,203 | $ | 8,123 | ||||||
Embedded debt derivatives |
3,600 | 3,600 | 3,600 | |||||||||
Currency interest rate swaps |
1,812 | 1,650 | 1,690 | |||||||||
Interest rate swaps |
1,689 | 1,837 | 2,159 | |||||||||
Total return swaps |
821 | 761 | 649 | |||||||||
Equity options |
50 | 54 | 496 | |||||||||
Other |
101 | 128 | 128 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 19,189 | $ | 19,233 | $ | 16,845 | ||||||
|
|
|
|
|
|
The gross notional amounts for currency forwards and currency interest rate swaps (presented by currency) were as follows:
(In Millions) |
March 31, 2012 |
Dec. 31, 2011 |
April 2, 2011 |
|||||||||
Japanese yen |
$ | 4,040 | $ | 3,477 | $ | 3,047 | ||||||
Euro |
3,553 | 3,904 | 4,035 | |||||||||
Israeli shekel |
1,823 | 2,168 | 1,199 | |||||||||
Malaysian ringgit |
914 | 805 | 336 | |||||||||
Chinese yuan |
803 | 688 | 341 | |||||||||
British pound sterling |
523 | 459 | 317 | |||||||||
Other |
1,272 | 1,352 | 538 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 12,928 | $ | 12,853 | $ | 9,813 | ||||||
|
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|
|
|
Fair Values of Derivative Instruments in the Consolidated Condensed Balance Sheets
The fair values of our derivative instruments as of March 31, 2012 and December 31, 2011 were as follows:
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
(In Millions) |
Other Current Assets |
Other Long-Term Assets |
Other Accrued Liabilities |
Other Long-Term Liabilities |
Other Current Assets |
Other Long-Term Assets |
Other Accrued Liabilities |
Other Long-Term Liabilities |
||||||||||||||||||||||||
Derivatives designated as |
||||||||||||||||||||||||||||||||
Currency forwards |
$ | 26 | $ | 1 | $ | 183 | $ | 17 | $ | 61 | $ | | $ | 170 | $ | 7 | ||||||||||||||||
Other |
| | 1 | | | | 1 | | ||||||||||||||||||||||||
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|||||||||||||||||
Total derivatives designated as hedging instruments |
$ | 26 | $ | 1 | $ | 184 | $ | 17 | $ | 61 | $ | | $ | 171 | $ | 7 | ||||||||||||||||
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|||||||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||||||||||||||||||
Currency forwards |
$ | 55 | $ | | $ | 29 | $ | | $ | 54 | $ | | $ | 34 | $ | | ||||||||||||||||
Interest rate swaps |
| | 54 | | 3 | | 63 | | ||||||||||||||||||||||||
Currency interest rate swaps |
27 | 23 | 8 | 13 | 41 | 33 | 11 | 10 | ||||||||||||||||||||||||
Embedded debt derivatives |
| | | 10 | | | | 10 | ||||||||||||||||||||||||
Total return swaps |
5 | | | | 7 | | | | ||||||||||||||||||||||||
Equity options |
| 6 | 9 | | | 6 | 9 | | ||||||||||||||||||||||||
Other |
| 22 | | | | 24 | | | ||||||||||||||||||||||||
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|
|||||||||||||||||
Total derivatives not designated as hedging instruments |
$ | 87 | $ | 51 | $ | 100 | $ | 23 | $ | 105 | $ | 63 | $ | 117 | $ | 20 | ||||||||||||||||
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|
|||||||||||||||||
Total derivatives |
$ | 113 | $ | 52 | $ | 284 | $ | 40 | $ | 166 | $ | 63 | $ | 288 | $ | 27 | ||||||||||||||||
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14
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Derivatives in Cash Flow Hedging Relationships
The before-tax effects of derivative instruments in cash flow hedging relationships for the three months ended March 31, 2012 and April 2, 2011 were as follows:
Gains
(Losses) Recognized in OCI on Derivatives (Effective Portion) |
Gains (Losses) Reclassified from
Accumulated OCI into Income by Derivative Instrument Type (Effective Portion) |
|||||||||||||||||||
(In Millions) |
Q1 2012 | Q1 2011 | Location | Q1 2012 | Q1 2011 | |||||||||||||||
Currency forwards |
$ | (74 | ) | $ | 201 | Cost of sales | $ | 15 | $ | 34 | ||||||||||
Research and development | (21 | ) | 8 | |||||||||||||||||
Marketing, general and administrative | (5 | ) | 5 | |||||||||||||||||
Other |
| 3 | Cost of sales | (1 | ) | 1 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | (74 | ) | $ | 204 | $ | (12 | ) | $ | 48 | ||||||||||
|
|
|
|
|
|
|
|
Gains and losses on derivative instruments in cash flow hedging relationships related to hedge ineffectiveness and amounts excluded from effectiveness testing were insignificant during all periods presented in the preceding tables. We estimate that we will reclassify approximately $55 million (before taxes) of net derivative losses included in accumulated other comprehensive income (loss) into earnings within the next 12 months. For all periods presented, there was an insignificant impact on results of operations from discontinued cash flow hedges as a result of forecasted transactions that were not probable to occur.
Derivatives Not Designated as Hedging Instruments
The effects of derivative instruments not designated as hedging instruments on the consolidated condensed statements of income were as follows:
Three Months Ended | ||||||||||
(In Millions) |
Location of Gains (Losses) Recognized in Income on Derivatives |
March 31, 2012 |
April 2, 2011 |
|||||||
Currency forwards |
Interest and other, net | $ | 15 | $ | 14 | |||||
Interest rate swaps |
Interest and other, net | 30 | (1 | ) | ||||||
Currency interest rate swaps |
Interest and other, net | (56 | ) | (110 | ) | |||||
Total return swaps |
Various | 59 | 23 | |||||||
Equity options |
Gains (losses) on equity investments, net | | (117 | ) | ||||||
Other |
Gains (losses) on equity investments, net | (2 | ) | 2 | ||||||
|
|
|
|
|||||||
Total |
$ | 46 | $ | (189 | ) | |||||
|
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|
Note 8: Other Long-Term Assets
Other long-term assets at the end of each period were as follows:
March 31, | Dec. 31, | |||||||
(In Millions) |
2012 | 2011 | ||||||
Equity method investments |
$ | 1,602 | $ | 1,669 | ||||
Non-marketable cost method investments |
1,116 | 1,129 | ||||||
Non-current deferred tax assets |
314 | 335 | ||||||
Loans receivable |
747 | 715 | ||||||
Other |
821 | 800 | ||||||
|
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|
|
|||||
Total other long-term assets |
$ | 4,600 | $ | 4,648 | ||||
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15
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 9: Equity Method Investments
IMFT/IMFS
Micron Technology, Inc. and Intel formed IM Flash Technologies, LLC (IMFT) and IM Flash Singapore, LLP (IMFS) to manufacture NAND flash memory products for Micron and Intel. As of March 31, 2012, we owned a 49% interest in IMFT and an 18% interest in IMFS. The carrying value of our investment in IMFT/IMFS was $1.3 billion as of March 31, 2012 ($1.3 billion as of December 31, 2011) and is classified within other long-term assets.
These joint ventures are variable interest entities. All costs of the joint ventures are passed on to Micron and Intel through our purchase agreements. The joint ventures are dependent upon Micron and Intel for any additional cash requirements. Our portion of IMFT/IMFS costs, primarily related to product purchases and production-related services, was approximately $240 million during the first quarter of 2012 (approximately $220 million during the first quarter of 2011). The amount due to IMFT/IMFS for product purchases and services provided was approximately $95 million as of March 31, 2012 (approximately $125 million as of December 31, 2011). Finally, $67 million was returned to Intel by IMFT/IMFS during the first quarter of 2012, which is reflected as a return of equity method investment within investing activities on the consolidated condensed statements of cash flows ($24 million during the first quarter of 2011).
Subsequent to the end of the first quarter of 2012, we completed agreements with Micron to expand our joint venture relationship. Under the new structure, we own a 49% interest in the remaining assets held by IMFT and no longer hold an ownership interest in IMFS. We also entered into an amended operating agreement for IMFT, which extends the term of IMFT to 2024, unless earlier terminated under certain terms and conditions, and provides that IMFT may manufacture certain emerging memory technologies in addition to NAND flash memory. These agreements include a NAND Flash supply agreement for Micron to supply us NAND products. Additionally, we received approximately $600 million from the sale of assets of IMFS and certain assets of IMFT to Micron. We provided approximately $365 million to Micron, which we expect will primarily be applied to future product purchases under the supply agreement with Micron. Additionally, the agreements extend Intel and Microns NAND joint development program and expand it to include emerging memory technologies. Finally, the amended agreement also provides for certain buy-sell rights, beginning in 2015, under which we may elect to sell to Micron, or Micron may elect to purchase from us, our interest in IMFT. If Intel elects to exercise this right, Micron would set the closing date of the transaction within two years following such election and could elect to receive financing from Intel for one to two years.
We expect the closing of the joint venture expansion to have an insignificant impact on our consolidated condensed statements of income for the second quarter of 2012.
Subsequent to the closing of the transaction in the second quarter of 2012, our known maximum exposure to loss is $656 million, which approximated the carrying value of our investment balance in IMFT. Except for the amount due to IMFT for product purchases and services, we did not have any additional liabilities recognized on our consolidated condensed balance sheets in connection with our interests in these joint ventures as of March 31, 2012. In addition, our potential future losses could be higher than the carrying amount of our investment, as Intel and Micron are liable for other future operating costs or obligations of IMFT. Future cash calls could also increase our investment balance and the related exposure to loss. Finally, as we are currently committed to purchasing 49% of IMFTs production output and production-related services, we may be required to purchase products at a cost in excess of realizable value.
Under the accounting standards for consolidating variable interest entities, the consolidating investor is the entity with the power to direct the activities of the venture that most significantly impact the ventures economic performance and with the obligation to absorb losses or the right to receive benefits from the venture that could potentially be significant to the venture. We have determined that we do not have both of these characteristics and, therefore, we account for our interest in IMFT and our previous interest in IMFS using the equity method of accounting.
16
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 10: Gains (Losses) on Equity Investments, Net
Gains (losses) on equity investments, net included:
Three Months Ended | ||||||||
(In Millions) |
March 31, 2012 |
April 2, 2011 |
||||||
Share of equity method investee losses, net |
$ | (19 | ) | $ | (62 | ) | ||
Impairment charges |
(59 | ) | (14 | ) | ||||
Gains on sales, net |
30 | 45 | ||||||
Other, net |
29 | 59 | ||||||
|
|
|
|
|||||
Total gains (losses) on equity investments, net |
$ | (19 | ) | $ | 28 | |||
|
|
|
|
Note 11: Interest and Other, Net
The components of interest and other, net were as follows:
Three Months Ended | ||||||||
(In Millions) |
March 31, 2012 |
April
2, 2011 |
||||||
Interest income |
$ | 28 | $ | 28 | ||||
Interest expense |
(31 | ) | (6 | ) | ||||
Other, net |
26 | 163 | ||||||
|
|
|
|
|||||
Total interest and other, net |
$ | 23 | $ | 185 | ||||
|
|
|
|
Interest expense in the preceding table is net of $50 million of interest capitalized in the first quarter of 2012 ($44 million in the first quarter of 2011).
Note 12: Acquisitions
During the first quarter of 2012, we completed four acquisitions qualifying as business combinations in exchange for aggregate net cash consideration of $176 million. Substantially all of the consideration was allocated to goodwill and intangibles.
Note 13: Goodwill
Goodwill activity for the first quarter of 2012 was as follows:
(In Millions) |
PC Client Group |
Data Center Group |
Other Intel Architecture Operating Segments |
Software
and Services Operating Segments |
Unallocated | Total | ||||||||||||||||||
December 31, 2011 |
$ | 2,918 | $ | 1,553 | $ | 844 | $ | 3,939 | $ | | $ | 9,254 | ||||||||||||
Additions due to acquisitions |
12 | 90 | | 5 | 7 | 114 | ||||||||||||||||||
Effect of exchange rate fluctuations |
| | | 20 | | 20 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
March 31, 2012 |
$ | 2,930 | $ | 1,643 | $ | 844 | $ | 3,964 | $ | 7 | $ | 9,388 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
No goodwill was impaired during the first quarter of 2012 and 2011, and the accumulated impairment losses as of March 31, 2012 and December 31, 2011 were $713 million: $341 million associated with our PC Client Group, $279 million associated with our Data Center Group, and $93 million associated with other Intel architecture operating segments.
17
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 14: Identified Intangible Assets
Identified intangible assets at the end of each period were as follows:
March 31, 2012 | ||||||||||||
(In Millions) |
Gross Assets | Accumulated Amortization |
Net | |||||||||
Acquisition-related developed technology |
$ | 2,633 | $ | (693 | ) | $ | 1,940 | |||||
Acquisition-related customer relationships |
1,714 | (331 | ) | 1,383 | ||||||||
Acquisition-related trade names |
68 | (24 | ) | 44 | ||||||||
Licensed technology |
2,398 | (755 | ) | 1,643 | ||||||||
|
|
|
|
|
|
|||||||
Identified intangible assets subject to amortization |
$ | 6,813 | $ | (1,803 | ) | $ | 5,010 | |||||
Acquisition-related trade names |
810 | | 810 | |||||||||
Other intangible assets |
244 | | 244 | |||||||||
|
|
|
|
|
|
|||||||
Identified intangible assets not subject to amortization |
$ | 1,054 | $ | | $ | 1,054 | ||||||
|
|
|
|
|
|
|||||||
Total identified intangible assets |
$ | 7,867 | $ | (1,803 | ) | $ | 6,064 | |||||
|
|
|
|
|
|
December 31, 2011 | ||||||||||||
(In Millions) |
Gross Assets | Accumulated Amortization |
Net | |||||||||
Acquisition-related developed technology |
$ | 2,615 | $ | (570 | ) | $ | 2,045 | |||||
Acquisition-related customer relationships |
1,714 | (254 | ) | 1,460 | ||||||||
Acquisition-related trade names |
68 | (21 | ) | 47 | ||||||||
Licensed technology |
2,395 | (707 | ) | 1,688 | ||||||||
|
|
|
|
|
|
|||||||
Identified intangible assets subject to amortization |
$ | 6,792 | $ | (1,552 | ) | $ | 5,240 | |||||
Acquisition-related trade names |
806 | | 806 | |||||||||
Other intangible assets |
221 | | 221 | |||||||||
|
|
|
|
|
|
|||||||
Identified intangible assets not subject to amortization |
$ | 1,027 | $ | | $ | 1,027 | ||||||
|
|
|
|
|
|
|||||||
Total identified intangible assets |
$ | 7,819 | $ | (1,552 | ) | $ | 6,267 | |||||
|
|
|
|
|
|
For identified intangible assets that are subject to amortization, we recorded amortization expense on the consolidated condensed statements of income as follows: substantially all amortization of acquisition-related developed technology and licensed technology is included in cost of sales, and amortization of acquisition-related customer relationships and trade names is included in amortization of acquisition-related intangibles.
Amortization expenses for the periods indicated were as follows:
Three Months Ended | ||||||||
(In Millions) |
March 31, 2012 |
April 2, 2011 |
||||||
Acquisition-related developed technology |
$ | 137 | $ | 73 | ||||
Acquisition-related customer relationships |
$ | 78 | $ | 34 | ||||
Acquisition-related trade names |
$ | 3 | $ | 2 | ||||
Licensed technology |
$ | 48 | $ | 46 |
Based on the identified intangible assets that are subject to amortization as of March 31, 2012, we expect future amortization expense to be as follows:
Remainder | ||||||||||||||||||||
(In Millions) |
of 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||
Acquisition-related developed technology |
$ | 410 | $ | 534 | $ | 512 | $ | 242 | $ | 155 | ||||||||||
Acquisition-related customer relationships |
$ | 220 | $ | 275 | $ | 262 | $ | 244 | $ | 226 | ||||||||||
Acquisition-related trade names |
$ | 9 | $ | 11 | $ | 10 | $ | 10 | $ | 4 | ||||||||||
Licensed technology |
$ | 134 | $ | 165 | $ | 154 | $ | 136 | $ | 121 |
18
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 15: Deferred Income
Deferred income at the end of each period was as follows:
(In Millions) |
March 31, 2012 |
Dec. 31, 2011 |
||||||
Deferred income on shipments of components to distributors |
$ | 814 | $ | 751 | ||||
Deferred income from software and services operating segments |
1,187 | 1,178 | ||||||
|
|
|
|
|||||
Current deferred income |
$ | 2,001 | $ | 1,929 | ||||
Non-current deferred income from software and services operating segments |
436 | 460 | ||||||
|
|
|
|
|||||
Total deferred income |
$ | 2,437 | $ | 2,389 | ||||
|
|
|
|
We classify non-current deferred income from the software and services operating segments in other long-term liabilities.
Note 16: Employee Equity Incentive Plans
Our equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.
Under the 2006 Equity Incentive Plan (the 2006 Plan), 596 million shares of common stock have been made available for issuance as equity awards to employees and non-employee directors. A maximum of 394 million of these shares can be awarded as non-vested shares (restricted stock) or non-vested share units (restricted stock units). As of March 31, 2012, 300 million shares remained available for future grant under the 2006 Plan.
The 2006 Stock Purchase Plan allows eligible employees to purchase shares of our common stock at 85% of the value of our common stock on specific dates. Rights to purchase shares are granted during the first and third quarters of each year. Under the 2006 Stock Purchase Plan, we made 373 million shares of common stock available for issuance through August 2016. As of March 31, 2012, 244 million shares were available for issuance under the 2006 Stock Purchase Plan.
Restricted Stock Unit Awards
Activity with respect to outstanding restricted stock units (RSUs) for the first quarter of 2012 was as follows:
(In Millions, Except Per RSU Amounts) |
Number of RSUs |
Weighted Average Grant-Date Fair Value |
||||||
December 31, 2011 |
107.0 | $ | 19.18 | |||||
Granted |
4.6 | $ | 27.36 | |||||
Vested |
(2.7 | ) | $ | 19.96 | ||||
Forfeited |
(1.3 | ) | $ | 19.26 | ||||
|
|
|||||||
March 31, 2012 |
107.6 | $ | 19.51 | |||||
|
|
As of March 31, 2012, 5 million of the outstanding restricted stock units were market-based restricted stock units.
19
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Stock Option Awards
Activity with respect to outstanding stock options for the first quarter of 2012 was as follows:
(In Millions, Except Per Option Amounts) |
Number of Options |
Weighted Average Exercise Price |
||||||
December 31, 2011 |
298.3 | $ | 20.12 | |||||
Granted |
3.8 | $ | 26.79 | |||||
Exercised |
(50.1 | ) | $ | 20.90 | ||||
Cancelled and forfeited |
(1.4 | ) | $ | 21.34 | ||||
Expired |
(0.9 | ) | $ | 30.01 | ||||
|
|
|||||||
March 31, 2012 |
249.7 | $ | 20.02 | |||||
|
|
|||||||
Options exercisable as of: |
||||||||
December 31, 2011 |
203.6 | $ | 20.44 | |||||
March 31, 2012 |
155.5 | $ | 20.21 |
Stock Purchase Plan
Employees purchased 10.3 million shares in the first quarter of 2012 (10.3 million shares in the first quarter of 2011) for $197 million ($181 million in the first quarter of 2011) under the 2006 Stock Purchase Plan.
Note 17: Common Stock Repurchases
Common Stock Repurchase Program
We have an ongoing authorization, since October 2005, as amended, from our Board of Directors to repurchase up to $45 billion in shares of our common stock in open market or negotiated transactions. As of March 31, 2012, $8.6 billion remained available for repurchase under the existing repurchase authorization limit. During the first quarter of 2012, we repurchased 56.9 million shares of common stock at a cost of $1.5 billion. During the first quarter of 2011, we repurchased 189.1 million shares of common stock at a cost of $4.0 billion. We have repurchased 4.1 billion shares at a cost of $86 billion since the program began in 1990.
Note 18: Earnings Per Share
We computed our basic and diluted earnings per common share as follows:
Three Months Ended | ||||||||
(In Millions, Except Per Share Amounts) |
March 31, 2012 |
April 2, 2011 |
||||||
Net income available to common stockholders |
$ | 2,738 | $ | 3,160 | ||||
Weighted average common shares outstanding basic |
4,999 | 5,452 | ||||||
Dilutive effect of employee equity incentive plans |
126 | 102 | ||||||
Dilutive effect of convertible debt |
67 | 52 | ||||||
|
|
|
|
|||||
Weighted average common shares outstanding diluted |
5,192 | 5,606 | ||||||
|
|
|
|
|||||
Basic earnings per common share |
$ | 0.55 | $ | 0.58 | ||||
|
|
|
|
|||||
Diluted earnings per common share |
$ | 0.53 | $ | 0.56 | ||||
|
|
|
|
We computed our basic earnings per common share using net income available to common stockholders and the weighted average number of common shares outstanding during the period. We computed diluted earnings per common share using net income available to common stockholders and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. Net income available to participating securities was insignificant for all periods presented.
20
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Potentially dilutive common shares from employee incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding restricted stock units, and the assumed issuance of common stock under the stock purchase plan. Potentially dilutive common shares are determined by applying the if-converted method for our 2005 debentures. However, as our 2009 debentures require settlement of the principal amount of the debt in cash upon conversion, with the conversion premium paid in cash or stock at our option, potentially dilutive common shares are determined by applying the treasury stock method.
For the first quarter of 2012, we excluded 19 million outstanding weighted average stock options (125 million for the first quarter of 2011) from the calculation of diluted earnings per common share because the exercise prices of these stock options were greater than or equal to the average market value of the common shares. These options could be included in the calculation in the future if the average market value of the common shares increases and is greater than the exercise price of these options. In the first quarter of 2012, we included our 2009 debentures in the calculation of diluted earnings per common share because the average market price was above the conversion price. In the first quarter of 2011, we excluded the 2009 debentures from the calculation of diluted earnings per common share because the conversion option of the debentures was anti-dilutive, and we could potentially exclude the 2009 debentures again in the future if the average market price is below the conversion price.
Note 19: Comprehensive Income
The components of accumulated other comprehensive income, net of tax, at the end of each period, as well as the activity, were as follows:
(In Millions) |
Dec. 31, 2011 |
Other Comprehensive Income |
March 31, 2012 |
|||||||||
Accumulated net unrealized holding gain (loss) on available-for-sale investments |
$ | 231 | $ | 166 | $ | 397 | ||||||
Accumulated net deferred tax asset valuation allowance |
104 | | 104 | |||||||||
Accumulated net unrealized holding gain (loss) on derivatives |
8 | (34 | ) | (26 | ) | |||||||
Accumulated net prior service costs |
(32 | ) | 1 | (31 | ) | |||||||
Accumulated net actuarial losses |
(950 | ) | 16 | (934 | ) | |||||||
Accumulated net foreign currency translation adjustment |
(142 | ) | 28 | (114 | ) | |||||||
|
|
|
|
|
|
|||||||
Total accumulated other comprehensive income (loss) |
$ | (781 | ) | $ | 177 | $ | (604 | ) | ||||
|
|
|
|
|
|
Note 20: Contingencies
Legal Proceedings
We are currently a party to various legal proceedings, including those noted in this section. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm the companys financial position, results of operations, cash flows, or overall trends, legal proceedings and related government investigations are subject to inherent uncertainties, and unfavorable rulings or other events could occur. Unfavorable resolutions could include substantial monetary damages, and in matters for which injunctive relief or other conduct remedies are sought, an injunction or other order prohibiting us from selling one or more products at all or in particular ways, precluding particular business practices, or requiring other remedies such as compulsory licensing of intellectual property rights (IP). Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on our business, results of operations, financial position, and overall trends. It is also possible that we could conclude it is in the best interests of our stockholders, employees, and customers to settle one or more such matters, and any such settlement could include substantial payments; however, we have not reached this conclusion with respect to any particular matter at this time.
21
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
A number of proceedings generally have challenged and continue to challenge certain of our competitive practices. The allegations in these proceedings vary and are described in more detail in the following paragraphs, but in general contend that we improperly condition price rebates and other discounts on our microprocessors on exclusive or near-exclusive dealing by some of our customers; claim that our software compiler business unfairly prefers Intel microprocessors over competing microprocessors and that, through the use of our compiler and other means, we have caused inaccurate and misleading benchmark results concerning our microprocessors to be disseminated; allege that we unfairly controlled the content and timing of release of various standard computer interfaces developed by Intel in cooperation with other industry participants; and accuse us of engaging in various acts of improper competitive activity in competing against what is referred to as general-purpose graphics processing units, including certain licensing practices and our actions in connection with developing and disclosing potentially competitive technology.
We believe that we compete lawfully and that our marketing, business, IP, and other challenged practices benefit our customers and our stockholders, and we will continue to conduct a vigorous defense in these proceedings. While we have settled some of these matters, the distractions caused by challenges to our conduct from the remaining matters are undesirable, and the legal and other costs associated with defending and resolving our position have been and continue to be significant. We assume that these challenges could continue for a number of years and may require the investment of substantial additional management time and substantial financial resources to explain and defend our position.
Government Competition Matters and Related Consumer Class Actions
In 2001, the European Commission (EC) commenced an investigation regarding claims by Advanced Micro Devices, Inc. (AMD) that we used unfair business practices to persuade customers to buy our microprocessors. We have received numerous requests for information and documents from the EC, and we have responded to each of those requests. The EC issued a Statement of Objections in July 2007 and held a hearing on that Statement in March 2008. The EC issued a Supplemental Statement of Objections in July 2008.
In May 2009, the EC issued a decision finding that we had violated Article 82 of the EC Treaty and Article 54 of the European Economic Area Agreement. In general, the EC found that we violated Article 82 (later renumbered as Article 102 by a new treaty) by offering alleged conditional rebates and payments that required our customers to purchase all or most of their x86 microprocessors from us. The EC also found that we violated Article 82 by making alleged payments to prevent sales of specific rival products. The EC imposed a fine in the amount of 1.06 billion ($1.447 billion as of May 2009), which we subsequently paid during the third quarter of 2009, and also ordered us to immediately bring to an end the infringement referred to in the EC decision. In the second quarter of 2009, we recorded the related charge within marketing, general and administrative. We strongly disagree with the ECs decision, and we appealed the decision to the Court of First Instance (which has been renamed the General Court) in July 2009. A hearing of Intels appeal has been set to commence in July 2012. The courts decision, after oral argument, is expected in late 2012 or early 2013.
The EC decision exceeds 500 pages and does not contain specific direction on whether or how we should modify our business practices. Instead, the decision states that we should cease and desist from further conduct that, in the ECs opinion, would violate applicable law. We have taken steps, which are subject to the ECs ongoing review, to comply with that decision pending appeal. We opened discussions with the EC to better understand the decision and to explain changes to our business practices. Based on our current understanding and expectations, we do not believe that any such changes will be material to our financial position, results, or cash flows.
In June 2005, we received an inquiry from the Korea Fair Trade Commission (KFTC) requesting documents from our Korean subsidiary related to marketing and rebate programs that we entered into with Korean PC manufacturers. In February 2006, the KFTC initiated an inspection of documents at our offices in Korea. In September 2007, the KFTC served on us an Examination Report alleging that sales to two customers during parts of 20022005 violated Koreas Monopoly Regulation and Fair Trade Act. In December 2007, we submitted our written response to the KFTC. In February 2008, the KFTCs examiner submitted a written reply to our response. In March 2008, we submitted a further response. In April 2008, we participated in a pre-hearing conference before the KFTC, and we participated in formal hearings in May and June 2008. In June 2008, the KFTC announced its intent to fine us approximately $25 million for providing discounts to Samsung Electronics Co., Ltd. and TriGem Computer Inc. In November 2008, the KFTC issued a final written decision concluding that our discounts had violated Korean antitrust law and imposing a fine on us of approximately $20 million, which we paid in January 2009. In December 2008, we appealed this decision by filing a lawsuit in the Seoul High Court seeking to overturn the KFTCs decision. We expect a decision from the court in 2012.
22
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
At least 82 separate class actions have been filed in the U.S. District Courts for the Northern District of California, Southern District of California, District of Idaho, District of Nebraska, District of New Mexico, District of Maine, and District of Delaware, as well as in various California, Kansas, and Tennessee state courts. These actions generally repeat the allegations made in a now-settled lawsuit filed against Intel by AMD in June 2005 in the U.S. District Court for the District of Delaware (AMD litigation). Like the AMD litigation, these class-action suits allege that Intel engaged in various actions in violation of the Sherman Act and other laws by, among other things, providing discounts and rebates to our manufacturer and distributor customers conditioned on exclusive or near-exclusive dealings that allegedly unfairly interfered with AMDs ability to sell its microprocessors, interfering with certain AMD product launches, and interfering with AMDs participation in certain industry standards-setting groups. The class actions allege various consumer injuries, including that consumers in various states have been injured by paying higher prices for computers containing our microprocessors. We dispute the class-action claims and intend to defend the lawsuits vigorously.
All of the federal class actions and the Kansas and Tennessee state court class actions have been transferred by the Multidistrict Litigation Panel to the U.S. District Court in Delaware for all pre-trial proceedings and discovery (MDL proceedings). The Delaware district court has appointed a Special Master to address issues in the MDL proceedings, as assigned by the court. In January 2010, the plaintiffs in the Delaware action filed a motion for sanctions for our alleged failure to preserve evidence. This motion largely copies a motion previously filed by AMD in the AMD litigation, which has settled. The plaintiffs in the MDL proceedings also moved for certification of a class of members who purchased certain PCs containing products sold by Intel. In July 2010, the Special Master issued a Report and Recommendation (Class Report) denying the motion to certify a class. The MDL plaintiffs filed objections to the Special Masters Class Report, and a hearing on these objections was held in March 2011. The Delaware district court has not yet ruled on those objections. All California class actions have been consolidated in the Superior Court of California in Santa Clara County. The plaintiffs in the California actions have moved for class certification, which we are in the process of opposing. At our request, the court in the California actions has agreed to delay ruling on this motion until after the Delaware district court rules on the similar motion in the MDL proceedings. Based on the procedural posture and the nature of the cases, including, but not limited to, the fact that the Special Masters Class Report is on review in the Delaware district court, we are unable to make a reasonable estimate of the potential loss or range of losses, if any, arising from these matters.
Lehman Matter
In November 2009, representatives of the Lehman Brothers OTC Derivatives Inc. (LOTC) bankruptcy estate advised us informally that the estate was considering a claim against us arising from a 2008 contract between Intel and LOTC. Under the terms of the 2008 contract, Intel prepaid $1.0 billion to LOTC, in exchange for which LOTC was required to purchase and deliver to Intel the number of shares of Intel common stock that could be purchased for $1.0 billion at the discounted volume-weighted average price specified in the contract for the period September 2, 2008 to September 26, 2008. LOTCs performance under the contract was secured by $1.0 billion of cash collateral. Under the terms of the contract, LOTC was obligated to deliver approximately 50 million shares of our common stock to us on September 29, 2008. LOTC failed to deliver any shares of our common stock, and we exercised our right to setoff against the $1.0 billion collateral. LOTC has not initiated any action against us to date, but in February 2010, LOTC served a subpoena on us in connection with this transaction. In October 2010, LOTC demanded that Intel pay it at least $417 million. In September 2010, we entered into an agreement with LOTC that tolled any applicable statutes of limitations for 90 days and precluded the parties from commencing any formal proceedings to prosecute any claims against each other in any forum during that period. The tolling agreement with LOTC was extended several times, but lapsed in June 2011. We continue to believe that we acted appropriately under our agreement with LOTC, and we intend to defend any claim to the contrary. No complaint has been filed and we are in the early stages of evaluating this dispute, and accordingly are unable to make a reasonable estimate of the potential loss or range of losses, if any, arising from this matter.
23
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Note 21: Operating Segment Information
Our operating segments in effect as of March 31, 2012 include:
PC Client Group |
Software and services operating segments | |
Data Center Group |
McAfee | |
Other Intel architecture operating segments |
Wind River Software Group | |
Intel Mobile Communications |
Software and Services Group | |
Intelligent Systems Group |
All Other | |
Netbook and Tablet Group |
Non-Volatile Memory Solutions Group | |
Ultra-Mobility Group |
We are reorganizing our smartphone, tablet, and mobile communication businesses within other Intel architecture operating segments to enable us to move faster and with greater collaboration and synergies in the market segment for mobile devices. The other Intel architecture operating segments will also continue to include our embedded and netbook businesses. We are currently in the process of making these changes to our organization and our systems. Given the scope of the business lines being impacted, this reorganization is expected to be completed in the second quarter of 2012 and reported in our earnings release Form 8-K for the quarter ended June 30, 2012.
The Chief Operating Decision Maker (CODM) is our President and Chief Executive Officer. The CODM allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss).
Our PC Client Group and our Data Center Group are reportable operating segments. We also aggregate and disclose the financial results of our non-reportable operating segments within other Intel architecture operating segments and software and services operating segments as shown in the above operating segments list. Each of these aggregated operating segments does not meet the quantitative thresholds to qualify as reportable operating segments; however, we have elected to disclose the aggregation of these non-reportable operating segments. Revenue for our reportable and aggregated non-reportable operating segments is primarily related to the following product lines:
| PC Client Group. Includes platforms designed for the notebook and desktop (including high-end enthusiast PCs) market segments; and wireless connectivity products. |
| Data Center Group. Includes platforms designed for the server, workstation, and storage computing market segments; and wired network connectivity products. |
| Other Intel architecture operating segments. Includes mobile phone components such as baseband processors, radio frequency transceivers, and power management chips; platforms designed for embedded applications; platforms for the netbook and tablet market segments; and products designed for the smartphone market segment. |
| Software and services operating segments. Includes software products for endpoint security, network and content security, risk and compliance, and consumer and mobile security from our McAfee business; software optimized products for the embedded and mobile market segments; and software products and services that promote Intel® architecture as the platform of choice for software development. |
We have sales and marketing, manufacturing, finance, and administration groups. Expenses for these groups are generally allocated to the operating segments, and the expenses are included in the operating results reported below.
The All other category includes revenue, expenses, and charges such as:
| results of operations from our Non-Volatile Memory Solutions Group that includes NAND flash memory products for use in a variety of devices; |
| a portion of profit-dependent compensation and other expenses not allocated to the operating segments; |
| results of operations of seed businesses that support our initiatives; and |
| acquisition-related costs, including amortization and any impairment of acquisition-related intangibles and goodwill. |
The CODM does not evaluate operating segments using discrete asset information. Operating segments do not record inter-segment revenue. We do not allocate gains and losses from equity investments, interest and other income, or taxes to operating segments. Although the CODM uses operating income to evaluate the segments, operating costs included in one segment may benefit other segments. Except for these differences, the accounting policies for segment reporting are the same as for Intel as a whole.
24
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Unaudited (Continued)
Segment information is summarized as follows:
Three Months Ended | ||||||||
(In Millions) |
March 31, 2012 |
April 2, 2011 |
||||||
Net revenue |
||||||||
PC Client Group |
$ | 8,451 | $ | 8,621 | ||||
Data Center Group |
2,453 | 2,464 | ||||||
Other Intel architecture operating segments |
1,075 | 1,149 | ||||||
Software and services operating segments |
571 | 240 | ||||||
All other |
356 | 373 | ||||||
|
|
|
|
|||||
Total net revenue |
$ | 12,906 | $ | 12,847 | ||||
|
|
|
|
|||||
Operating income (loss) |
||||||||
PC Client Group |
$ | 3,483 | $ | 3,543 | ||||
Data Center Group |
1,143 | 1,222 | ||||||
Other Intel architecture operating segments |
(312 | ) | (36 | ) | ||||
Software and services operating segments |
7 | (52 | ) | |||||
All other |
(511 | ) | (519 | ) | ||||
|
|
|
|
|||||
Total operating income |
$ | 3,810 | $ | 4,158 | ||||
|
|
|
|
25
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated condensed financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
| Overview. Discussion of our business and overall analysis of financial and other highlights affecting the company in order to provide context for the remainder of MD&A. |
| Results of Operations. An analysis of our financial results comparing the three months ended March 31, 2012 to the three months ended April 2, 2011. |
| Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition and potential sources of liquidity. |
| Fair Value of Financial Instruments. Discussion of the methodologies used in the valuation of our financial instruments. |
This interim MD&A should be read in conjunction with the MD&A in our Annual Report on Form 10-K for the year ended December 31, 2011. The various sections of this MD&A contain a number of forward-looking statements. Words such as expects, goals, plans, believes, continues, may, will, and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in Risk Factors in Part I, Item 1A of our Form 10-K, as updated in this Form 10-Q. In particular (i) our gross margin percentage could vary significantly from expectations based on a number of factors including capacity utilization, variations in inventory valuation, changes in revenue levels, segment product mix and the timing and execution of the manufacturing ramp and associated costs, (ii) demand could be different from expectations due to factors including changes in business and economic conditions, including supply constraints, customer acceptance of products, changes in customer order patterns and changes in the level of inventory at customers and (iii) our revenue and gross margin percentage are affected by factors such as the timing of our product introductions and the demand for and market acceptance of our products, actions taken by our competitors and our ability to respond quickly to technological developments. Our actual results may differ materially, and these forward-looking statements do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of May 4, 2012.
Overview
Our results of operations were as follows:
(Dollars in Millions) |
Q1 2012 | Q4 2011 | Q1 2011 | |||||||||
Net revenue |
$ | 12,906 | $ | 13,887 | $ | 12,847 | ||||||
Gross margin |
$ | 8,265 | $ | 8,952 | $ | 7,885 | ||||||
Gross margin percentage |
64.0 | % | 64.5 | % | 61.4 | % | ||||||
Operating income |
$ | 3,810 | $ | 4,599 | $ | 4,158 | ||||||
Net income |
$ | 2,738 | $ | 3,360 | $ | 3,160 | ||||||
Diluted earnings per common share |
$ | 0.53 | $ | 0.64 | $ | 0.56 |
Revenue in the first quarter of 2012 was slightly above the midpoint of the Business Outlook we provided in January and down 7% from the fourth quarter of 2011 as the floods in Thailand and the resulting disk drive supply shortage continued to negatively impact our results. We believe that the hard disk drive supply situation improved as we progressed through the first quarter and we do not expect it to have a negative impact on our business going forward. We expect our second quarter revenue to exceed normal seasonal trends as customer inventory levels begin to recover from the disk drive supply shortage. Looking to the second half of 2012, we expect the PC supply chain to refill and the trends of strength in emerging markets, the data center, and enterprise that drove our results in 2011 continue.
Our first quarter 2012 gross margin percentage declined from the fourth quarter of 2011 as higher platform unit costs and lower platform volume were partially offset by a decline in start-up costs. In the first quarter of 2012, we increased inventory by $393 million, primarily due to the ramp of our 3rd generation Intel® Core processor family (formerly code named Ivy Bridge) partially offset by a significant reduction in older generation products. As we sell this higher cost Ivy Bridge product inventory and continue to ramp production of these products in three factories with a fourth factory ramping in the second half of the year, we expect our gross margin percentage will decline by 2 percentage points in the second quarter based on the mid-point of our Business Outlook. We expect the gross margin percentage to increase in the second half of 2012 as that ramp brings unit costs down the cost curve.
26
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
We continue to extend our process technology leadership and are in the midst of refreshing our product lines across our segments. In April of 2012, we launched our first Ivy Bridge products, which are based on our 22nm process technology. Products based on this technology utilize three-dimensional Tri-Gate transistor technology, which improves performance and energy efficiency compared to prior generation products. We expect these products to help accelerate the ramp of Ultrabook systems; we are increasing our marketing expense in the second quarter of 2012 as we start a significant Ultrabook system marketing campaign. With the launch of our Intel® Xeon® Processor E5-2600 Series (formerly code named Romley) in the first quarter of 2012, we are also refreshing products in our data center market segment. This product family significantly increases performance and energy efficiency from the prior generation. We also continue to focus on our strategy for the smartphone market segment and announced in April of 2012 that Lava International Ltd., an India based mobile handset company, is offering the first Intel architecture based smartphone.
From a financial condition perspective, we ended the first quarter of 2012 with an investment portfolio of $13.8 billion (consisting of cash and cash equivalents, short-term investments, and trading assets) down $1.1 billion from the fourth quarter of 2011. During the first quarter of 2012, we generated $3.0 billion in cash from operations, received $1.2 billion on employees exercise of stock option awards, purchased $3.0 billion in capital assets, repurchased $1.5 billion of common stock through our common stock repurchase program, and returned $1.0 billion to stockholders through dividends. In March, our Board of Directors declared a dividend of $0.21 per common share to be paid in June.
Our Business Outlook for the second quarter and full-year 2012 includes, where applicable, our current expectations for revenue, gross margin percentage, spending (R&D plus MG&A), and capital expenditures. We will keep our most current Business Outlook publicly available on our Investor Relations web site at www.intc.com. This Business Outlook is not incorporated by reference into this Form 10-Q. We expect that our corporate representatives will, from time to time, meet publicly or privately with investors and others, and may reiterate the forward-looking statements contained in Business Outlook or in this Form 10-Q. The public can continue to rely on the Business Outlook published on the web site as representing our current expectations on matters covered, unless we publish a notice stating otherwise. The statements in Business Outlook and forward-looking statements in this Form 10-Q are subject to revision during the course of the year in our quarterly earnings releases and SEC filings and at other times.
The forward-looking statements in Business Outlook will be effective through the close of business on June 15, 2012 unless updated earlier. From the close of business on June 15, 2012 until our quarterly earnings release is published, presently scheduled for July 17, 2012, we will observe a quiet period. During the quiet period, Business Outlook and other forward-looking statements first published in our Form 8-K filed on April 17, 2012, and other forward-looking statements disclosed in the companys news releases and filings with the SEC, as reiterated or updated as applicable in this Form 10-Q, should be considered historical, speaking as of prior to the quiet period only and not subject to update. During the quiet period, our representatives will not comment on our Business Outlook or our financial results or expectations. The exact timing and duration of the routine quiet period, and any others that we utilize from time to time, may vary at our discretion.
27
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations First Quarter of 2012 Compared to First Quarter of 2011
The following table sets forth certain consolidated condensed statements of income data as a percentage of net revenue for the periods indicated:
Q1 2012 | Q1 2011 | |||||||||||||||
(Dollars in Millions, Except Per Share Amounts) |
Dollars | % of
Net Revenue |
Dollars | % of
Net Revenue |
||||||||||||
Net revenue |
$ | 12,906 | 100.0 | % | $ |
12,847 |
|
100.0 | % | |||||||
Cost of sales |
4,641 | 36.0 | % | 4,962 | 38.6 | % | ||||||||||
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|
|
|
|
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Gross margin |
8,265 | 64.0 | % | 7,885 | 61.4 | % | ||||||||||
Research and development |
2,401 | 18.6 | % | 1,916 | 14.9 | % | ||||||||||
Marketing, general and administrative |
1,973 | 15.3 | % | 1,775 | 13.8 | % | ||||||||||
Amortization of acquisition-related intangibles |
81 | 0.6 | % | 36 | 0.3 | % | ||||||||||
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|
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Operating income |
3,810 | 29.5 | % | 4,158 | 32.4 | % | ||||||||||
Gains (losses) on equity investments, net |
(19 | ) | (0.1) | % | 28 | 0.2 | % | |||||||||
Interest and other, net |
23 | 0.2 | % | 185 | 1.4 | % | ||||||||||
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Income before taxes |
3,814 | 29.6 | % | 4,371 | 34.0 | % | ||||||||||
Provision for taxes |
1,076 | 8.4 | % | 1,211 | 9.4 | % | ||||||||||
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Net income |
$ | 2,738 | 21.2 | % | $ | 3,160 | 24.6 | % | ||||||||
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|
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Diluted earnings per common share |
$ | 0.53 | $ | 0.56 | ||||||||||||
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|
The following table sets forth information of geographic regions for the periods indicated:
Q1 2012 | Q1 2011 | |||||||||||||||
(Dollars In Millions) |
Revenue | % of Total | Revenue | % of Total | ||||||||||||
Asia-Pacific |
$ | 7,368 | 57 | % | $ | 7,262 | 56 | % | ||||||||
Americas |
2,553 | 20 | % | 2,715 | 21 | % | ||||||||||
Europe |
1,778 | 14 | % | 1,645 | 13 | % | ||||||||||
Japan |
1,207 | 9 | % | 1,225 | 10 | % | ||||||||||
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|
|
|
|
|
|
|||||||||
Total |
$ | 12,906 | 100 | % | $ | 12,847 | 100 | % | ||||||||
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|
Our net revenue for Q1 2012, which was a 13 week quarter, increased $59 million compared to Q1 2011, which was a 14 week quarter. Q1 2012 included a full quarter of revenue from the acquisitions of the Wireless Solutions (WLS) business of Infineon Technologies AG (now Intel Mobile Communications) and McAfee, Inc. The WLS business of Infineon was acquired at the end of January 2011 and McAfee was acquired at the end of February 2011. Slightly higher platform (microprocessor and chipset) average selling prices also contributed to the increase. These increases were offset by slightly lower platform unit sales. Revenue in the Europe and Asia-Pacific regions increased by 8% and 1%, respectively, while revenue in the Americas and Japan regions decreased by 6% and 1%, respectively, compared to Q1 2011.
Our overall gross margin dollars for Q1 2012 increased $380 million, or 5%, compared to Q1 2011. The increase was primarily due to a $343 million charge recorded in the first quarter of 2011 to repair and replace materials and systems impacted by a design issue related to our Intel® 6 Series Express Chipset Family. Additionally, we had lower start-up costs compared to Q1 2011 as we transition from manufacturing start-up costs related to our 22nm process technology to R&D of our next-generation 14nm process technology. These increases to our gross margin dollars were partially offset by higher inventory write-offs. The amortization of acquisition-related intangibles resulted in a $137 million reduction to our overall gross margin dollars in Q1 2012, compared to $73 million in Q1 2011, primarily due to the acquisitions of McAfee and the WLS business of Infineon Technologies.
Our overall gross margin percentage increased to 64.0% in Q1 2012 from 61.4% in Q1 2011. The increase in the gross margin percentage was primarily attributable to the gross margin percentage increase in the PC Client Group. We derived a substantial majority of our overall gross margin dollars in Q1 2012 and Q1 2011, from the sale of platforms in the PC Client Group and Data Center Group operating segments.
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
PC Client Group
The revenue and operating income for the PC Client Group (PCCG) operating segment for Q1 2012 and Q1 2011 were as follows:
(In Millions) |
Q1 2012 | Q1 2011 | ||||||
Net revenue |
$ | 8,451 | $ | 8,621 | ||||
Operating income |
$ | 3,483 | $ | 3,543 |
Net revenue for the PCCG operating segment decreased by $170 million, or 2%, in Q1 2012 compared to Q1 2011. Platforms within PCCG include those designed for the notebook and desktop computing market segments. The decrease in revenue was due to slightly lower notebook platform average selling prices.
Operating income decreased by $60 million in Q1 2012 compared to Q1 2011. The decrease in operating income was due to higher operating expenses, lower revenue, and higher inventory write-offs compared to Q1 2011. These decreases were partially offset by a $343 million charge recorded in the first quarter of 2011 to repair and replace materials and systems impacted by a design issue related to our Intel® 6 Series Express Chipset Family. Additionally, start-up costs in Q1 2012 were approximately $225 million lower compared to Q1 2011.
Data Center Group
The revenue and operating income for the Data Center Group (DCG) operating segment for Q1 2012 and Q1 2011 were as follows:
(In Millions) |
Q1 2012 | Q1 2011 | ||||||
Net revenue |
$ | 2,453 | $ | 2,464 | ||||
Operating income |
$ | 1,143 | $ | 1,222 |
Net revenue for the DCG operating segment decreased by $11 million in Q1 2012 compared to Q1 2011. The decrease in revenue was primarily due to lower server platform unit sales, mostly offset by higher server platform average selling prices.
Operating income decreased by $79 million in Q1 2012 compared to Q1 2011. The decrease in operating income was primarily due to higher operating expenses.
Other Intel Architecture Operating Segments
The revenue and operating income (loss) for the other Intel architecture (Other IA) operating segments, including Intel Mobile Communications (IMC), the Intelligent Systems Group (ISG), the Netbook and Tablet Group (NTG), and the Ultra-Mobility Group (UMG), for Q1 2012 and Q1 2011 were as follows:
(In Millions) |
Q1 2012 | Q1 2011 | ||||||
Net revenue |
$ | 1,075 | $ | 1,149 | ||||
Operating income (loss) |
$ | (312 | ) | $ | (36 | ) |
Net revenue for the Other IA operating segments decreased by $74 million, or 6%, in Q1 2012 compared to Q1 2011. The decrease was primarily due to significantly lower netbook platform unit sales and average selling prices within NTG. Q1 2012 included a full quarter of IMC revenue. The WLS business of Infineon was acquired at the end of January 2011.
Operating loss for the Other IA operating segments increased by $276 million in Q1 2012 compared to Q1 2011. The increase in operating loss was driven by significantly lower netbook revenue within NTG and a full quarter of IMC operating results.
29
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Software and Services Operating Segments
The revenue and operating income (loss) for the software and services operating segments, including McAfee, the Wind River Software Group, and the Software and Services Group, for Q1 2012 and Q1 2011 were as follows:
(In Millions) |
Q1 2012 | Q1 2011 | ||||||
Net revenue |
$ | 571 | $ | 240 | ||||
Operating income (loss) |
$ | 7 | $ | (52 | ) |
Net revenue and operating results for the software and services operating segments improved by $331 million and $59 million, respectively, in Q1 2012 compared to Q1 2011. Q1 2012 included a full quarter of McAfee revenue and operating income. McAfee was acquired at the end of February 2011.
Operating Expenses
Operating expenses for Q1 2012 and Q1 2011 were as follows:
(In Millions) |
Q1 2012 | Q1 2011 | ||||||
Research and development |
$ | 2,401 | $ | 1,916 | ||||
Marketing, general and administrative |
$ | 1,973 | $ | 1,775 | ||||
Amortization of acquisition-related intangibles |
$ | 81 | $ | 36 |
Research and Development. R&D spending increased by $485 million, or 25%, in Q1 2012 compared to Q1 2011. The increase was primarily due to higher compensation expenses based on an increase in employees, higher process development costs due to R&D of our next-generation 14nm process technology, and the full quarter expenses of McAfee and IMC, both acquired in Q1 2011. These increases were partially offset by an extra work week in Q1 2011.
Marketing, General and Administrative. Marketing, general and administrative expenses increased $198 million, or 11%, in Q1 2012 compared to Q1 2011. The increase was primarily due to the full quarter expenses of McAfee and IMC, both acquired in Q1 2011, and higher compensation expenses based on an increase in employees. These increases were partially offset by an extra work week in Q1 2011.
R&D, combined with marketing, general and administrative expenses, were 34% of net revenue in Q1 2012 (29% of net revenue in Q1 2011).
Amortization of acquisition-related intangibles. The increase of $45 million was primarily due to a full quarter of amortization of intangibles in the first quarter of 2012, compared to a partial quarter of amortization in the first quarter of 2011, related to the acquisitions of McAfee and the WLS business of Infineon, both completed in the first quarter of 2011.
Gains (Losses) on Equity Investments and Interest and Other
Gains (losses) on equity investments, net and interest and other, net were as follows:
(In Millions) |
Q1 2012 | Q1 2011 | ||||||
Gains (losses) on equity investments, net |
$ | (19 | ) | $ | 28 | |||
Interest and other, net |
$ | 23 | $ | 185 |
We recognized net losses on equity investments in Q1 2012 compared to net gains in Q1 2011. We recognized higher impairments and lower gains on other equity transactions in Q1 2012 compared to Q1 2011. This was partially offset by lower equity method losses in Q1 2012 compared to Q1 2011. Our share of equity method investee losses in Q1 2011 were primarily related to Clearwire Communications LLC (Clearwire LLC) ($49 million). Our share of equity method investee losses recognized in 2011 reduced our carrying value in Clearwire LLC to zero. We do not expect to recognize additional equity method losses for Clearwire LLC in the future.
Interest and other, net decreased in Q1 2012 compared to Q1 2011, primarily due to a $164 million gain recognized upon formation of the Intel-GE Care Innovations, LLC joint venture during Q1 2011.
30
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Provision for Taxes
Our provision for taxes and effective tax rate were as follows:
(Dollars in Millions) |
Q1 2012 | Q1 2011 | ||||||
Income before taxes |
$ | 3,814 | $ | 4,371 | ||||
Provision for taxes |
$ | 1,076 | $ | 1,211 | ||||
Effective tax rate |
28.2 | % | 27.7 | % |
The Q1 2012 effective tax rate does not include the U.S. research and development tax credit that has not been reinstated in 2012.
Liquidity and Capital Resources
March 31, | Dec. 31, | |||||||
(Dollars in Millions) |
2012 | 2011 | ||||||
Cash and cash equivalents, short-term investments, and marketable debt instruments included in trading assets |
$ | 13,753 | $ | 14,837 | ||||
Loans receivable and other long-term investments |
$ | 1,278 | $ | 1,769 | ||||
Short-term and long-term debt |
$ | 7,450 | $ | 7,331 | ||||
Debt as % of stockholders equity |
15.9 | % | 16.0 | % |
In summary, our cash flows were as follows:
Three Months Ended |
||||||||
March 31, | April 2, | |||||||
(In Millions) |
2012 | 2011 | ||||||
Net cash provided by operating activities |
$ | 2,972 | $ | 4,013 | ||||
Net cash used for investing activities |
(2,111 | ) | (644 | ) | ||||
Net cash used for financing activities |
(1,495 | ) | (4,688 | ) | ||||
Effect of exchange rate fluctuations on cash and cash equivalents |
(2 | ) | 9 | |||||
|
|
|
|
|||||
Net increase (decrease) in cash and cash equivalents |
$ | (636 | ) | $ | (1,310 | ) | ||
|
|
|
|
Operating Activities
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities.
Cash from operations for the first quarter of 2012 was $3.0 billion, a decrease of $1.0 billion compared to the first quarter of 2011, primarily due to changes in our working capital and lower net income, partially offset by adjustments for non-cash items. The adjustments for non-cash items were higher primarily due to higher depreciation and amortization of intangibles in the first quarter of 2012 as compared to the first quarter of 2011, as well as the gain recognized upon the formation of the Intel-GE Innovations, LLC joint venture in the first quarter of 2011.
Changes in assets and liabilities as of March 31, 2012 compared to December 31, 2011 included the following:
| Accrued compensation and benefits decreased due to the payout of 2011 profit-dependent compensation. |
| Accounts receivable increased due to a higher proportion of sales at the end of the first quarter of 2012 and lower cash receipts as a percentage of revenue in the first quarter of 2012. |
| Inventories increased primarily due to the ramp of 3rd generation Intel® Core processor family products, partially offset by a significant reduction in older generation products. |
| Income taxes payable increased as our U.S. federal estimated income tax payment for the first quarter of 2012 is paid in the second quarter. |
For the first quarter of 2012, our two largest customers accounted for 32% of net revenue (34% for the first quarter of 2011) with one of those customers accounting for 18% of our net revenue, and another customer accounting for 14% of our net revenue. These two largest customers accounted for 35% of net accounts receivable at March 31, 2012 (32% at December 31, 2011).
31
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Investing Activities
The increase in cash used for investing activities in the first quarter of 2012, compared to the first quarter of 2011, was primarily due to a decrease in net sales and maturities of available-for-sale investments and trading assets, mostly offset by a decrease in cash paid for acquisitions.
Financing Activities
The decrease in cash used for financing activities in the first quarter of 2012, compared to the first quarter of 2011, was primarily due to lower repurchases of common stock under our authorized common stock repurchase program and higher proceeds from the sale of shares through employee equity incentive plans.
Liquidity
Cash generated by operations is our primary source of liquidity. We maintain a diverse portfolio that we continuously analyze based on issuer, industry, and country. As of March 31, 2012, cash and cash equivalents, short-term investments, and marketable debt instruments included in trading assets totaled $13.8 billion ($14.8 billion as of December 31, 2011). In addition to the $13.8 billion, we have $1.3 billion in loans receivable and other long-term investments that we include when assessing our investment portfolio. Substantially all of our investments in debt instruments are with A/A2 or better rated issuers, and a majority of the issuers are rated AA-/Aa3 or better.
Our commercial paper program provides another potential source of liquidity. We have an ongoing authorization from our Board of Directors to borrow up to $3.0 billion, including through the issuance of commercial paper. Maximum borrowings under our commercial paper program during the first quarter of 2012 were $500 million, and $250 million of commercial paper remained outstanding as of March 31, 2012. Our commercial paper was rated A-1+ by Standard & Poors and P-1 by Moodys as of March 31, 2012. We also have an automatic shelf registration statement on file with the SEC, pursuant to which we may offer an unspecified amount of debt, equity, and other securities.
We believe that we have the financial resources needed to meet business requirements for the next 12 months, including capital expenditures for worldwide manufacturing and assembly and test; working capital requirements; and potential dividends, common stock repurchases, and acquisitions or strategic investments.
Fair Value of Financial Instruments
When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability. For further information, see Note 3: Fair Value in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q.
Credit risk is factored into the valuation of financial instruments that we measure and record at fair value. When fair value is determined using pricing models, such as a discounted cash flow model, the obligors credit risk is factored into the calculation of the fair value, as appropriate.
32
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Marketable Debt Instruments
As of March 31, 2012, our assets measured and recorded at fair value on a recurring basis included $13.5 billion of marketable debt instruments. Of these instruments, $5.4 billion was classified as Level 1, $7.9 billion as Level 2, and $181 million as Level 3.
Our balance of marketable debt instruments that are measured and recorded at fair value on a recurring basis and classified as Level 1 was classified as such due to the use of observable market prices for identical securities that are traded in active markets. Management judgment was required to determine the levels for the frequency of transactions that should be met for a market to be considered active. Our assessment of an active market for our marketable debt instruments generally takes into consideration the number of days each individual instrument trades over a specified period.
Of the $7.9 billion balance of marketable debt instruments measured and recorded at fair value on a recurring basis and classified as Level 2, approximately 60% of the balance was classified as Level 2 due to the use of a discounted cash flow model and approximately 40% due to the use of non-binding market consensus prices that were corroborated with observable market data.
Our marketable debt instruments that are measured and recorded at fair value on a recurring basis and classified as Level 3 were classified as such due to the lack of observable market data to corroborate either the non-binding market consensus prices or the non-binding broker quotes. When observable market data is not available, we corroborate our fair value measurements using non-binding market consensus prices and non-binding broker quotes from a second source.
Loans Receivable
As of March 31, 2012, our assets measured and recorded at fair value on a recurring basis included $780 million of loans receivable. All of these loans were classified as Level 2, as the fair value is determined using a discounted cash flow model with all significant inputs derived from or corroborated with observable market data.
Marketable Equity Securities
As of March 31, 2012, our assets measured and recorded at fair value on a recurring basis included $819 million of marketable equity securities. A substantial majority of these securities were classified as Level 1 because the valuations were based on quoted prices for identical securities in active markets. Our assessment of an active market for our marketable equity securities generally takes into consideration the number of days that each individual equity security trades over a specified period.
33
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are directly and indirectly affected by changes in equity prices, non-U.S. currency exchange rates, and interest rates. Our market risk profile has not changed materially during the first three months of 2012. Please refer to the discussion about market risk and sensitivity analysis in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2011.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Based on managements evaluation (with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO)), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in U.S. Securities and Exchange Commission rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2012, we implemented new cost and inventory software. This is part of our ongoing process to replace software to support our evolving needs. We believe this software strengthens our internal control environment through improved automation, integration with manufacturing flows, and scalability. There were no other changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
34
PART II OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
For a discussion of legal proceedings, see Note 20: Contingencies in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q.
ITEM 1A. | RISK FACTORS |
The risks described in Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2011, could materially and adversely affect our business, financial condition and results of operations. These risk factors do not identify all risks that we faceour operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. The Risk Factors section of our 2011 Annual Report on Form10-K remains current with the exception of the revised risk factor below.
Changes in the mix of products sold may harm our financial results.
Because of the wide price differences of platform average selling prices among our data center, PC client, and other Intel architecture platforms, a change in the mix of platforms among these market segments may impact our revenue and gross margin. For example, our PC client platforms that are incorporated into notebook and desktop computers tend to have lower average selling prices and gross margin than our data center platforms that are incorporated into servers, workstations and storage products. Therefore, if there is less demand for our data center platforms, and a resulting mix shift to our PC client platforms, our gross margins and revenue would decrease. Also, more recently introduced products tend to have higher costs because of initial development costs and lower production volumes relative to the previous product generation which can impact gross margin.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Issuer Purchases of Equity Securities
We have an ongoing authorization, since October 2005, as amended, from our Board of Directors to repurchase up to $45 billion in shares of our common stock in open market or negotiated transactions. As of March 31, 2012, $8.6 billion remained available for repurchase under the existing repurchase authorization limit.
Common stock repurchase activity under our authorized, publicly announced plan during the first quarter of 2012 was as follows (in millions, except per share amounts):
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Dollar Value of Shares that May Yet Be Purchased Under the Plan |
|||||||||
January 1, 2012-January 28, 2012 |
28.3 | $ | 25.66 | $ | 9,372 | |||||||
January 29, 2012-February 25, 2012 |
11.4 | $ | 26.66 | $ | 9,068 | |||||||
February 26, 2012-March 31, 2012 |
17.2 | $ | 27.32 | $ | 8,598 | |||||||
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|
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Total |
56.9 | $ | 26.36 | |||||||||
|
|
For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. Although these withheld shares are not issued or considered common stock repurchases under our authorized plan and are not included in the common stock repurchase totals in the preceding table, they are treated as common stock repurchases in our financial statements, as they reduce the number of shares that would have been issued upon vesting.
35
ITEM 6. | EXHIBITS |
Incorporated by Reference | ||||||||||||||||||||||
Exhibit Number |
Exhibit Description |
Form | File Number | Exhibit | Filing Date |
Filed or Furnished Herewith |
||||||||||||||||
3.1 | Intel Corporation Third Restated Certificate of Incorporation of Intel Corporation dated May 17, 2006 | 8-K | 000-06217 | 3.1 | 5/22/2006 | |||||||||||||||||
3.2 | Intel Corporation Bylaws, as amended and restated on July 26, 2011 | 8-K | 000-06217 | 3.1 | 7/27/2011 | |||||||||||||||||
10.1** | Terms and Conditions of Success Equity Award (CEO performance based RSUs) | X | ||||||||||||||||||||
12.1 | Statement Setting Forth the Computation of Ratios of Earnings to Fixed Charges | X | ||||||||||||||||||||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act) | X | ||||||||||||||||||||
31.2 | Certification of Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(a) of the Exchange Act | X | ||||||||||||||||||||
32.1 | Certification of the Chief Executive Officer and the Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | ||||||||||||||||||||
101.INS | XBRL Instance Document | X | ||||||||||||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X |
Intel, Intel Core, Intel logo, Intel Xeon, and Ultrabook are trademarks of Intel Corporation in the U.S. and/or other countries.
* Other names and brands may be claimed as the property of others.
** Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTEL CORPORATION (Registrant) | ||||
Date: May 4, 2012 | By: | /s/ Stacy J. Smith | ||
Stacy J. Smith | ||||
Senior Vice President, Chief Financial Officer, and | ||||
Principal Accounting Officer |
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