INTEL CORP
10-Ks and 10-Qs
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 26, 2015.
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Or
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File Number
000-06217
INTEL CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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94-1672743
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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2200 Mission College Boulevard, Santa Clara, California
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95054-1549
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(Address of principal executive offices)
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(Zip Code)
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(408) 765-8080
(Registrant’s 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.
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Large accelerated filer
þ
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Accelerated filer
¨
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Non-accelerated filer
¨
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Smaller reporting company
¨
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
þ
Shares outstanding of the Registrant’s common stock:
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Class
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Outstanding as of October 16, 2015
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Common stock, $0.001 par value
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4,719 million
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ITEM 1.
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FINANCIAL STATEMENTS
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INTEL CORPORATION
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Three Months Ended
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Nine Months Ended
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||||||||||||||
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(In Millions, Except Per Share Amounts)
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Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
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Net revenue
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$
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14,465
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$
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14,554
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$
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40,441
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$
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41,149
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Cost of sales
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5,354
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5,096
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15,352
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15,161
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Gross margin
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9,111
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9,458
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25,089
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25,988
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Research and development
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2,927
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2,842
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9,009
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8,547
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Marketing, general and administrative
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1,910
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1,979
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5,812
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6,087
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Restructuring and asset impairment charges
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14
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20
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367
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238
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Amortization of acquisition-related intangibles
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68
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77
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198
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222
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Operating expenses
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4,919
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4,918
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15,386
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15,094
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Operating income
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4,192
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4,540
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9,703
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10,894
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Gains (losses) on equity investments, net
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165
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35
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297
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178
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Interest and other, net
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(104
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)
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(25
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)
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(91
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)
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70
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Income before taxes
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4,253
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4,550
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9,909
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11,142
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Provision for taxes
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1,144
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1,233
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2,102
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3,099
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Net income
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$
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3,109
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$
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3,317
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$
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7,807
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$
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8,043
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Basic earnings per share of common stock
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$
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0.65
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$
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0.68
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$
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1.64
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$
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1.63
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Diluted earnings per share of common stock
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$
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0.64
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$
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0.66
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$
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1.59
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$
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1.58
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Cash dividends declared per share of common stock
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$
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0.48
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$
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0.45
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$
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0.96
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$
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0.90
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Weighted average shares of common stock outstanding:
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Basic
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4,747
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4,880
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4,749
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4,945
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Diluted
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4,876
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5,045
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4,900
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5,095
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See accompanying notes.
2
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
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Three Months Ended
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Nine Months Ended
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(In Millions)
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Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
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Net income
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$
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3,109
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$
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3,317
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$
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7,807
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$
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8,043
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Other comprehensive income, net of tax:
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Change in net unrealized holding gains (losses) on available-for-sale investments
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(1,029
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303
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(943
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)
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217
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Change in deferred tax asset valuation allowance
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(5
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(26
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(13
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(30
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)
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Change in net unrealized holding gains (losses) on derivatives
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42
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(184
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89
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(173
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)
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Change in net prior service (costs) credits
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2
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2
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6
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(41
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Change in actuarial valuation
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11
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(148
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30
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(143
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Change in net foreign currency translation adjustment
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(1
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(121
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(170
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(127
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Other comprehensive income (loss)
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(980
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(174
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(1,001
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(297
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)
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Total comprehensive income
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$
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2,129
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$
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3,143
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$
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6,806
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$
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7,746
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See accompanying notes.
3
INTEL CORPORATION
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(In Millions)
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Sep 26,
2015 |
Dec 27,
2014 |
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Assets
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Current assets:
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Cash and cash equivalents
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$
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7,065
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$
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2,561
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Short-term investments
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7,119
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2,430
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Trading assets
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6,659
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9,063
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Accounts receivable, net
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4,101
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4,427
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Inventories
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4,965
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4,273
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Deferred tax assets
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1,992
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1,958
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Other current assets
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4,304
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3,018
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Total current assets
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36,205
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27,730
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Property, plant and equipment, net of accumulated depreciation of $51,405 ($46,471 as of December 27, 2014)
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31,597
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33,238
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Marketable equity securities
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5,618
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7,097
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Other long-term investments
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1,829
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2,023
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Goodwill
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11,026
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10,861
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Identified intangible assets, net
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4,022
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4,446
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Other long-term assets
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8,255
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6,505
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Total assets
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$
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98,552
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$
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91,900
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Liabilities, temporary equity, and stockholders’ equity
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Current liabilities:
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Short-term debt
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$
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1,129
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$
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1,596
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Accounts payable
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2,449
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2,748
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Accrued compensation and benefits
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2,732
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3,475
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Accrued advertising
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1,028
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1,092
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Deferred income
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2,160
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2,205
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Other accrued liabilities
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5,582
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4,895
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Total current liabilities
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15,080
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16,011
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Long-term debt
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20,059
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12,059
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Long-term deferred tax liabilities
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2,502
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3,775
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Other long-term liabilities
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2,909
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3,278
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Contingencies (Note 21)
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Temporary equity
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905
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912
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Stockholders’ equity:
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Preferred stock
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—
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—
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Common stock and capital in excess of par value, 4,731 issued and 4,730 outstanding (4,752 issued and 4,748 outstanding as of December 27, 2014)
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23,001
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21,781
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Accumulated other comprehensive income (loss)
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(335
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)
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666
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Retained earnings
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34,431
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33,418
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Total stockholders’ equity
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57,097
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55,865
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Total liabilities, temporary equity, and stockholders’ equity
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$
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98,552
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$
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91,900
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|
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See accompanying notes.
4
INTEL CORPORATION
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Nine Months Ended
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(In Millions)
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Sep 26,
2015 |
Sep 27,
2014 |
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Cash and cash equivalents, beginning of period
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$
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2,561
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$
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5,674
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Cash flows provided by (used for) operating activities:
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Net income
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7,807
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8,043
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation
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5,885
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5,491
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Share-based compensation
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1,009
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867
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Restructuring and asset impairment charges
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367
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238
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Excess tax benefit from share-based payment arrangements
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(139
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)
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(109
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)
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Amortization of intangibles
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680
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884
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(Gains) losses on equity investments, net
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(245
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)
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(124
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)
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Deferred taxes
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(1,093
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)
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(347
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)
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Changes in assets and liabilities:
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Accounts receivable
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332
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(76
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)
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Inventories
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(640
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)
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59
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Accounts payable
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(86
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)
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(292
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)
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Accrued compensation and benefits
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(1,217
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)
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(408
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)
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Income taxes payable and receivable
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774
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(190
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)
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Other assets and liabilities
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156
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611
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Total adjustments
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5,783
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6,604
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Net cash provided by operating activities
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13,590
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14,647
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Cash flows provided by (used for) investing activities:
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Additions to property, plant and equipment
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(4,998
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)
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(7,962
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)
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Acquisitions, net of cash acquired
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(538
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)
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(193
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)
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Purchases of available-for-sale investments
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(7,522
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)
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(6,077
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)
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Sales of available-for-sale investments
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1,040
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786
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Maturities of available-for-sale investments
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2,153
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7,396
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Purchases of trading assets
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(7,943
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)
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(10,347
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)
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Maturities and sales of trading assets
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10,465
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9,541
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Investments in loans receivable and reverse repurchase agreements
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(2,550
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(150
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)
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Collection of loans receivable and reverse repurchase agreements
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466
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117
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Investments in non-marketable equity investments
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(1,864
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)
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(1,330
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)
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Other investing
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380
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218
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Net cash used for investing activities
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(10,911
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)
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(8,001
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)
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Cash flows provided by (used for) financing activities:
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Increase (decrease) in short-term debt, net
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(473
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)
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(202
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)
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Excess tax benefit from share-based payment arrangements
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139
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109
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Issuance of long-term debt, net of issuance costs
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7,986
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—
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Proceeds from sales of common stock through employee equity incentive plans
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696
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1,566
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Repurchase of common stock
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(2,476
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)
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(6,792
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)
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Restricted stock unit withholdings
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(416
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)
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(314
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)
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Payment of dividends to stockholders
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(3,423
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)
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(3,340
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)
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Collateral associated with repurchase of common stock
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325
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—
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||||
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Decrease in liability due to return of collateral associated with repurchase of common stock
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(325
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)
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—
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|
||||
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Other financing
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(209
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)
|
(199
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)
|
||||
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Net cash provided by (used for) financing activities
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1,824
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(9,172
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)
|
||||
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Effect of exchange rate fluctuations on cash and cash equivalents
|
1
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(5
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)
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||||
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Net increase (decrease) in cash and cash equivalents
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4,504
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(2,531
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)
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||||
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Cash and cash equivalents, end of period
|
$
|
7,065
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$
|
3,143
|
|
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Supplemental disclosures of cash flow information:
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||||||||
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Cash paid during the period for:
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||||||||
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Interest, net of capitalized interest
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$
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60
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$
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59
|
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Income taxes, net of refunds
|
$
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2,301
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$
|
3,579
|
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5
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited
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 27, 2014
and Form 8-K filed with the U.S. Securities and Exchange Commission (SEC) on June 5, 2015. We have reclassified certain prior period amounts to conform to current period presentation.
We have a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal year 2016 is a 53-week fiscal year, and the first quarter of 2016 will be a 14-week quarter.
As a result of our integration of McAfee Inc. (McAfee) in the third quarter of 2015, the functional currency for operations previously acquired from McAfee was changed to U.S. dollar, making U.S. dollar the functional currency for Intel and our subsidiaries.
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 27, 2014
and as updated by the Form 8-K filed with the SEC on June 5, 2015.
In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015, the FASB agreed to delay the effective date by one year. In accordance with the agreed upon delay, the new standard is effective for us beginning in the first quarter of 2018 and we expect to adopt it at that time. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method nor have we determined the impact of the new standard on our consolidated condensed financial statements.
In the third quarter of 2015, we adopted an amended standard simplifying the presentation of debt issuance costs as a direct deduction from the carrying value of the debt liability rather than showing the debt issuance costs as an asset. We have applied the amendment retrospectively to the comparable period presented and it did not have a significant impact on our financial statements.
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 are measured and recorded at fair value, except for cost method investments, cost method loans receivable, equity method investments, grants receivable, and reverse repurchase agreements with original maturities greater than approximately three months.
Substantially all
of our liabilities are not measured and recorded at fair value.
6
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
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 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.
7
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Assets and liabilities measured and recorded at fair value on a recurring basis at the end of each period were as follows:
|
September 26, 2015
|
December 27, 2014
|
|||||||||||||||||||||||||||||||
|
Fair Value Measured and Recorded at Reporting Date Using
|
|
Fair Value Measured and Recorded at Reporting Date Using
|
|
|||||||||||||||||||||||||||||
|
(In Millions)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Cash equivalents:
|
||||||||||||||||||||||||||||||||
|
Corporate debt
|
$
|
—
|
|
$
|
3,607
|
|
$
|
—
|
|
$
|
3,607
|
|
$
|
—
|
|
$
|
48
|
|
$
|
—
|
|
$
|
48
|
|
||||||||
|
Financial institution instruments
|
100
|
|
1,756
|
|
—
|
|
1,856
|
|
321
|
|
1,119
|
|
—
|
|
1,440
|
|
||||||||||||||||
|
Government debt
|
6
|
|
187
|
|
—
|
|
193
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||||||||
|
Reverse repurchase agreements
|
—
|
|
668
|
|
—
|
|
668
|
|
—
|
|
268
|
|
—
|
|
268
|
|
||||||||||||||||
|
Short-term investments:
|
||||||||||||||||||||||||||||||||
|
Corporate debt
|
263
|
|
1,960
|
|
30
|
|
2,253
|
|
363
|
|
412
|
|
31
|
|
806
|
|
||||||||||||||||
|
Financial institution instruments
|
105
|
|
2,341
|
|
—
|
|
2,446
|
|
149
|
|
1,050
|
|
—
|
|
1,199
|
|
||||||||||||||||
|
Government debt
|
81
|
|
2,339
|
|
—
|
|
2,420
|
|
252
|
|
173
|
|
—
|
|
425
|
|
||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||||||||||
|
Asset-backed securities
|
—
|
|
384
|
|
55
|
|
439
|
|
—
|
|
766
|
|
58
|
|
824
|
|
||||||||||||||||
|
Corporate debt
|
1,626
|
|
569
|
|
—
|
|
2,195
|
|
2,625
|
|
339
|
|
—
|
|
2,964
|
|
||||||||||||||||
|
Financial institution instruments
|
964
|
|
541
|
|
—
|
|
1,505
|
|
1,146
|
|
613
|
|
—
|
|
1,759
|
|
||||||||||||||||
|
Government debt
|
974
|
|
1,546
|
|
—
|
|
2,520
|
|
1,295
|
|
2,221
|
|
—
|
|
3,516
|
|
||||||||||||||||
|
Other current assets:
|
||||||||||||||||||||||||||||||||
|
Derivative assets
|
—
|
|
437
|
|
1
|
|
438
|
|
—
|
|
559
|
|
2
|
|
561
|
|
||||||||||||||||
|
Loans receivable
|
—
|
|
140
|
|
—
|
|
140
|
|
—
|
|
505
|
|
—
|
|
505
|
|
||||||||||||||||
|
Marketable equity securities
|
5,498
|
|
120
|
|
—
|
|
5,618
|
|
7,097
|
|
—
|
|
—
|
|
7,097
|
|
||||||||||||||||
|
Other long-term investments:
|
||||||||||||||||||||||||||||||||
|
Asset-backed securities
|
—
|
|
1
|
|
4
|
|
5
|
|
—
|
|
2
|
|
4
|
|
6
|
|
||||||||||||||||
|
Corporate debt
|
339
|
|
941
|
|
3
|
|
1,283
|
|
453
|
|
728
|
|
13
|
|
1,194
|
|
||||||||||||||||
|
Financial institution instruments
|
88
|
|
320
|
|
—
|
|
408
|
|
189
|
|
319
|
|
—
|
|
508
|
|
||||||||||||||||
|
Government debt
|
84
|
|
49
|
|
—
|
|
133
|
|
75
|
|
240
|
|
—
|
|
315
|
|
||||||||||||||||
|
Other long-term assets:
|
||||||||||||||||||||||||||||||||
|
Derivative assets
|
—
|
|
33
|
|
15
|
|
48
|
|
—
|
|
35
|
|
22
|
|
57
|
|
||||||||||||||||
|
Loans receivable
|
—
|
|
350
|
|
—
|
|
350
|
|
—
|
|
216
|
|
—
|
|
216
|
|
||||||||||||||||
|
Total assets measured and recorded at fair value
|
10,128
|
|
18,289
|
|
108
|
|
28,525
|
|
13,965
|
|
9,613
|
|
130
|
|
23,708
|
|
||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Other accrued liabilities:
|
||||||||||||||||||||||||||||||||
|
Derivative liabilities
|
—
|
|
276
|
|
7
|
|
283
|
|
—
|
|
563
|
|
—
|
|
563
|
|
||||||||||||||||
|
Other long-term liabilities:
|
||||||||||||||||||||||||||||||||
|
Derivative liabilities
|
—
|
|
17
|
|
—
|
|
17
|
|
—
|
|
17
|
|
—
|
|
17
|
|
||||||||||||||||
|
Total liabilities measured and recorded at fair value
|
$
|
—
|
|
$
|
293
|
|
$
|
7
|
|
$
|
300
|
|
$
|
—
|
|
$
|
580
|
|
$
|
—
|
|
$
|
580
|
|
||||||||
Government debt includes instruments such as non-U.S. government bonds and U.S. agency securities. Financial institution instruments include instruments issued or managed by financial institutions in various forms such as commercial paper, fixed and floating rate bonds, money market fund deposits, and time deposits.
8
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
During the
first nine months
of
2015
, we transferred corporate debt, financial institution instruments, government debt, and marketable equity securities of approximately
$821 million
from Level 1 to Level 2 of the fair value hierarchy and approximately
$148 million
of corporate debt and financial institution instruments from Level 2 to Level 1 (
$230 million
of corporate debt, financial institution instruments, and government debt from Level 1 to Level 2 and
$400 million
from Level 2 to Level 1 during the
first nine months
of
2014
). These transfers were based on changes in market activity for the underlying securities. Our policy is to reflect transfers between the fair value hierarchy levels at the beginning of the quarter in which a change in circumstances resulted in the transfer.
Investments in Debt Instruments
Debt instruments reflected in the preceding table include investments such as asset-backed securities, corporate debt, financial institution instruments, government debt, and reverse repurchase agreements classified as cash equivalents. We classify our debt instruments as Level 2 when we use observable market prices for identical securities that are traded in less active markets. When observable market prices for identical securities are not available, we price the debt instruments using our own models, such as a discounted cash flow model, or non-binding market consensus prices 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 instruments; and the internal assumptions of pricing providers or brokers that use observable market inputs and unobservable market inputs that we consider to be not significant. When we use non-binding market consensus prices, we corroborate them with quoted market prices for similar instruments or compare them to output from internally-developed pricing models such as a discounted cash flow model. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. All significant inputs are derived from or corroborated with observable market data.
The fair values of debt instruments classified as Level 3
are generally derived from discounted cash flow models, performed either by us or our pricing providers, using inputs that we are unable to corroborate with observable market data. We monitor and review the inputs and results of these valuation models to help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.
Fair Value Option for Loans Receivable
We elected the fair value option for loans receivable when the interest rate or currency exchange rate risk was hedged at inception with a related derivative instrument. As of
September 26, 2015
, 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. 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 gains or losses on 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; these gains and losses were
insignificant
during all periods presented. We did not elect the fair value option for loans receivable when the interest rate or currency exchange rate risk was not hedged at inception with a related derivative instrument. Loans receivable not measured and recorded at fair value are included in the following "Financial Instruments Not Recorded at Fair Value on a Recurring Basis" section.
Assets Measured and Recorded at Fair Value on a Non-Recurring Basis
Our non-marketable equity investments, marketable equity method investments, and non-financial assets, such as intangible assets and property, plant and equipment, are recorded at fair value only if an impairment is recognized.
Some of our non-marketable equity investments have been 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 impairments. We classified these investments as Level 3 because the valuations used unobservable inputs that were significant to the fair value measurements and required management judgment due to the absence of quoted market prices. Impairments recognized on non-marketable equity investments held as of
September 26, 2015
were
$27 million
during the
third
quarter of
2015
and
$100 million
during the
first nine months
of
2015
(
$28 million
during the
third
quarter of
2014
and
$93 million
during the
first nine months
of
2014
on non-marketable equity investments held as of
September 27, 2014
).
9
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
On a quarterly basis, we measure the fair value of our grants receivable, cost method loans receivable, non-marketable cost method investments, reverse repurchase agreements with original maturities greater than approximately three months, and indebtedness carried at amortized cost plus hedge adjustments when applicable; however, the assets are recorded at fair value only when an impairment is recognized. The carrying amounts and fair values of financial instruments not recorded at fair value on a recurring basis at the end of each period were as follows:
|
September 26, 2015
|
||||||||||||||||||||
|
(In Millions)
|
Carrying
Amount
|
Fair Value Measured Using
|
Fair Value
|
|||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||||||||
|
Grants receivable
|
$
|
749
|
|
$
|
—
|
|
$
|
756
|
|
$
|
—
|
|
$
|
756
|
|
|||||
|
Loans receivable
|
$
|
310
|
|
$
|
—
|
|
$
|
310
|
|
$
|
—
|
|
$
|
310
|
|
|||||
|
Non-marketable cost method investments
|
$
|
3,003
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,938
|
|
$
|
3,938
|
|
|||||
|
Reverse repurchase agreements
|
$
|
2,650
|
|
$
|
—
|
|
$
|
2,650
|
|
$
|
—
|
|
$
|
2,650
|
|
|||||
|
Short-term debt
|
$
|
1,088
|
|
$
|
—
|
|
$
|
1,554
|
|
$
|
—
|
|
$
|
1,554
|
|
|||||
|
Long-term debt
|
$
|
20,059
|
|
$
|
13,192
|
|
$
|
7,508
|
|
$
|
—
|
|
$
|
20,700
|
|
|||||
|
NVIDIA Corporation cross-license agreement liability
|
$
|
198
|
|
$
|
—
|
|
$
|
200
|
|
$
|
—
|
|
$
|
200
|
|
|||||
|
December 27, 2014
|
||||||||||||||||||||
|
(In Millions)
|
Carrying
Amount
|
Fair Value Measured Using
|
Fair Value
|
|||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||||||||
|
Grants receivable
|
$
|
676
|
|
$
|
—
|
|
$
|
679
|
|
$
|
—
|
|
$
|
679
|
|
|||||
|
Loans receivable
|
$
|
250
|
|
$
|
—
|
|
$
|
250
|
|
$
|
—
|
|
$
|
250
|
|
|||||
|
Non-marketable cost method investments
|
$
|
1,769
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,599
|
|
$
|
2,599
|
|
|||||
|
Reverse repurchase agreements
|
$
|
450
|
|
$
|
—
|
|
$
|
450
|
|
$
|
—
|
|
$
|
450
|
|
|||||
|
Short-term debt
|
$
|
1,580
|
|
$
|
—
|
|
$
|
2,145
|
|
$
|
—
|
|
$
|
2,145
|
|
|||||
|
Long-term debt
|
$
|
12,059
|
|
$
|
11,467
|
|
$
|
1,309
|
|
$
|
—
|
|
$
|
12,776
|
|
|||||
|
NVIDIA Corporation cross-license agreement liability
|
$
|
395
|
|
$
|
—
|
|
$
|
399
|
|
$
|
—
|
|
$
|
399
|
|
|||||
The fair value of our grants receivable is determined using a discounted cash flow model, which discounts future cash flows using an appropriate yield curve. As of
September 26, 2015
and
December 27, 2014
, the carrying amount of our grants receivable was classified within other current assets and other long-term assets, as applicable.
The carrying amount and fair value of loans receivable exclude loans measured and recorded at a fair value of
$490 million
as of
September 26, 2015
(
$721 million
as of
December 27, 2014
). The fair value of our loans receivable and reverse repurchase agreements, including those held at fair value, is determined using a discounted cash flow model. All significant inputs in the models are 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 these assets remains high, with credit ratings of
A+/A1
for
most
of our loans receivable and the substantial majority of our reverse repurchase agreements as of
September 26, 2015
.
10
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
As of
September 26, 2015
and
December 27, 2014
, the unrealized loss position of our non-marketable cost method investments was
insignificant
. Our non-marketable cost method investments are valued using a qualitative and quantitative analysis of events or circumstances that impact the fair value of the investment. Qualitative analysis of our investments involves understanding our investee’s revenue and earnings trends relative to pre-defined milestones and overall business prospects; the technological feasibility of our investee’s products and technologies; the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes; and the management and governance structure of the investee. Quantitative assessments of the fair value of our investments are developed using the market and income approaches. The market approach includes the use of financial metrics and ratios of comparable public companies, such as revenue, earnings, comparable performance multiples, recent financing rounds, the terms of the investees’ issued interests, and the level of marketability of the investments. The selection of comparable companies requires management judgment and is based on a number of factors, including comparable companies’ sizes, growth rates, industries, and development stages. The income approach includes the use of a discounted cash flow model, which requires significant estimates regarding investees’ revenue, costs, and discount rates based on the risk profile of comparable companies. Estimates of revenue and costs are developed using available market, historical, and forecast data. We measure the fair value of our non-marketable cost method investments as close to the end of the period as feasible.
The carrying amount and fair value of short-term debt exclude drafts payable. Our short-term debt recognized at amortized cost includes our 2009 junior subordinated convertible debentures due 2039 (2009 debentures). During the
third
quarter of
2015
, the 2009 debentures were classified as short-term debt on the consolidated condensed balance sheets and are convertible at the option of the holder during the
fourth
quarter of
2015
. For further information, see the "Borrowings" note in Part II, Item 8 of our Annual Report on Form 10-K for the year ended
December 27, 2014
and Form 8-K filed with the SEC on June 5, 2015. 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 are classified as Level 1 when we use quoted prices in active markets and Level 2 when the quoted prices are from less active markets or when other observable inputs are used to determine fair value. The fair value of our 2009 and 2005 convertible debentures is determined using discounted cash flow models with observable market inputs, and takes into consideration variables such as interest rate changes, comparable instruments, subordination discount, and credit-rating changes, and is therefore classified as Level 2.
The NVIDIA Corporation (NVIDIA) 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, pursuant to which we agreed to make payments to NVIDIA over six years. As of
September 26, 2015
the carrying amount of the liability arising from the agreement was classified within other accrued liabilities based on the expected timing of the underlying payments (
$200 million
in January 2016 treated as cash used for financing activities). As of
December 27, 2014
, the carrying amount of the liability arising from the agreement was classified within other accrued liabilities and other long-term liabilities, based on the expected timing of the underlying payments (
$200 million
in each of January 2015 and 2016 treated as cash used for financing activities). The fair value is determined using a discounted cash flow model, which discounts future cash flows using our incremental borrowing rates.
11
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Cash and investments at the end of each period were as follows:
|
(In Millions)
|
Sep 26,
2015 |
Dec 27,
2014 |
||||||
|
Available-for-sale investments
|
$
|
20,222
|
|
$
|
13,038
|
|
||
|
Cash
|
741
|
|
805
|
|
||||
|
Equity method investments
|
1,577
|
|
1,446
|
|
||||
|
Loans receivable
|
800
|
|
971
|
|
||||
|
Non-marketable cost method investments
|
3,003
|
|
1,769
|
|
||||
|
Reverse repurchase agreements
|
3,318
|
|
718
|
|
||||
|
Trading assets
|
6,659
|
|
9,063
|
|
||||
|
Total cash and investments
|
$
|
36,320
|
|
$
|
27,810
|
|
||
Available-for-Sale Investments
Available-for-sale investments at the end of each period were as follows:
|
September 26, 2015
|
December 27, 2014
|
|||||||||||||||||||||||||||||||
|
(In Millions)
|
Adjusted Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
Adjusted Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Fair Value
|
||||||||||||||||||||||||
|
Asset-backed securities
|
$
|
7
|
|
$
|
—
|
|
$
|
(2
|
)
|
$
|
5
|
|
$
|
8
|
|
$
|
—
|
|
$
|
(2
|
)
|
$
|
6
|
|
||||||||
|
Corporate debt
|
7,139
|
|
11
|
|
(7
|
)
|
7,143
|
|
2,040
|
|
13
|
|
(5
|
)
|
2,048
|
|
||||||||||||||||
|
Financial institution instruments
|
4,709
|
|
2
|
|
(1
|
)
|
4,710
|
|
3,146
|
|
2
|
|
(1
|
)
|
3,147
|
|
||||||||||||||||
|
Government debt
|
2,747
|
|
—
|
|
(1
|
)
|
2,746
|
|
741
|
|
—
|
|
(1
|
)
|
740
|
|
||||||||||||||||
|
Marketable equity securities
|
3,287
|
|
2,342
|
|
(11
|
)
|
5,618
|
|
3,318
|
|
3,779
|
|
—
|
|
7,097
|
|
||||||||||||||||
|
Total available-for-sale investments
|
$
|
17,889
|
|
$
|
2,355
|
|
$
|
(22
|
)
|
$
|
20,222
|
|
$
|
9,253
|
|
$
|
3,794
|
|
$
|
(9
|
)
|
$
|
13,038
|
|
||||||||
Government debt includes instruments such as non-U.S. government bonds and U.S. agency securities. Financial institution instruments include instruments issued or managed by financial institutions in various forms such as commercial paper, fixed and floating rate bonds, money market fund deposits, and time deposits.
Substantially all time deposits were issued by institutions outside the U.S. as of
September 26, 2015
and
December 27, 2014
.
For information on the unrealized holding gains (losses) on available-for-sale investments reclassified out of accumulated other comprehensive income (loss) into the consolidated condensed statements of income, see "
Note 20: Other Comprehensive Income (Loss)
."
During the
third
quarter of
2015
, we sold available-for-sale investments for proceeds of $
1.1 billion
, of which $
134 million
related to sales of cash and cash equivalents ($
373 million
in the
third
quarter of
2014
, of which $
82 million
related to sales of cash and cash equivalents). During the
first nine months
of
2015
, we sold available-for-sale investments for proceeds of
$1.2 billion
, of which $
134 million
related to sales of cash and cash equivalents (
$1.2 billion
in the
first nine months
of
2014
of which
$459 million
related to sales of cash and cash equivalents). The gross realized gains on sales of available-for-sale investments were
$12 million
in the
third
quarter of
2015
and
$97 million
in the
first nine months
of
2015
(
none
in the
third
quarter of
2014
and
$136 million
in the
first nine months
of
2014
).
12
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
The amortized cost and fair value of available-for-sale debt investments, by contractual maturity, as of
September 26, 2015
, were as follows:
|
(In Millions)
|
Cost
|
Fair Value
|
||||||
|
Due in 1 year or less
|
$
|
12,643
|
|
$
|
12,651
|
|
||
|
Due in 1–2 years
|
1,166
|
|
1,164
|
|
||||
|
Due in 2–5 years
|
661
|
|
660
|
|
||||
|
Instruments not due at a single maturity date
|
132
|
|
129
|
|
||||
|
Total
|
$
|
14,602
|
|
$
|
14,604
|
|
||
Equity Method Investments
IM Flash Technologies, LLC
Micron Technology, Inc. (Micron) and Intel formed IM Flash Technologies, LLC (IMFT) in 2006 to manufacture NAND flash memory products for Micron and Intel. During 2012, we amended the operating agreement for IMFT and entered into agreements with Micron that modified our joint venture relationship. Additionally, we have certain supply agreements with Micron to provide us with jointly developed flash memory products.
The amended operating agreement extended the term of IMFT to 2024, unless earlier terminated under certain terms and conditions. The amended agreement provides for certain buy-sell rights. Intel has the ability to cause Micron to buy our interest in IMFT. If we exercise this put right, Micron would set the closing date of the transaction within two years following such election and could elect to receive financing from us for one to two years. Subsequent to our put right, and commencing in January 2018, Micron has the right to call our interest in IMFT with the closing date to be effective within one year. The IMFT operating agreements provide that IMFT may manufacture jointly developed NAND flash memory and 3D XPoint
™
technology products.
As of
September 26, 2015
, we own a
49%
interest in IMFT. The carrying value of our investment was
$872 million
as of
September 26, 2015
(
$713 million
as of
December 27, 2014
) and is classified within other long-term assets.
IMFT is a variable interest entity. All costs of the IMFT joint venture will be passed on to Micron and Intel pursuant to our purchase agreements. Intel's portion of IMFT costs, primarily related to product purchases and production-related services, was approximately
$115 million
in the
third
quarter of
2015
and approximately
$315 million
in the
first nine months
of
2015
(approximately
$100 million
in the
third
quarter of
2014
and approximately
$305 million
in the
first nine months
of
2014
). The amount due to IMFT for product purchases and services provided was approximately
$20 million
as of
September 26, 2015
(approximately
$60 million
as of
December 27, 2014
).
IMFT depends on Micron and Intel for any additional cash needs. Our known maximum exposure to loss approximated the carrying value of our investment balance in IMFT, which was
$872 million
as of
September 26, 2015
. 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 this joint venture as of
September 26, 2015
. 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. In addition, because we are currently committed to purchasing
49%
of IMFT’s production output and production-related services, we may be required to purchase products at a cost in excess of realizable value.
We have determined that we do not have the characteristics of a consolidating investor in the variable interest entity and, therefore, we account for our interest in IMFT using the equity method of accounting.
Cloudera, Inc.
During 2014, we invested in Cloudera, Inc. (Cloudera). Our fully-diluted ownership interest in Cloudera is
17%
as of
September 26, 2015
. Our investment is accounted for under the equity and cost methods of accounting based on the rights associated with different securities we own, and is classified within other long-term assets. The carrying value of our equity method investment was
$263 million
and of our cost method investment was
$454 million
as of
September 26, 2015
(
$280 million
for our equity method investment and
$454 million
for our cost method investment as of
December 27, 2014
).
13
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Non-marketable Cost Method Investments
Investment in Beijing UniSpreadtrum Technology Ltd.
During
2014
, we entered into a series of agreements with Tsinghua Unigroup Ltd. (Tsinghua Unigroup), an operating subsidiary of Tsinghua Holdings Co. Ltd., to, among other things, jointly develop Intel
®
architecture- and communications-based solutions for smartphones. We have also agreed to invest up to
9.0 billion
Chinese yuan (approximately
$1.5 billion
as of the date of the agreement) for a minority stake of approximately
20%
of Beijing UniSpreadtrum Technology Ltd. (UniSpreadtrum), a holding company under Tsinghua Unigroup. During
the
third
quarter of
2015
,
we invested
$966 million
to complete the first phase of the equity investment.
We have determined we will not have significant influence over the company and, therefore, we will account for our interest using the cost method of accounting.
Subject to regulatory approvals and other closing conditions, the second phase of the investment will require additional funding of approximately
$
500 million
.
Trading Assets
As of
September 26, 2015
and
December 27, 2014
,
substantially all
of our trading assets were marketable debt instruments. Net
losses
related to trading assets still held at the reporting date were
$88 million
in the
third
quarter of
2015
and net
losses
were
$151 million
in the
first nine months
of
2015
(net
losses
of
$283 million
in the
third
quarter of
2014
and
$254 million
in the
first nine months
of
2014
). Net
gains
on the related derivatives were
$72 million
in the
third
quarter of
2015
and net
gains
were
$138 million
in the
first nine months
of
2015
(net
gains
of
$278 million
in the
third
quarter of
2014
and
$252 million
in the
first nine months
of
2014
).
We compute inventory cost on a first-in, first-out basis. Costs incurred to manufacture our products are included in the valuation of inventory beginning in the quarter in which a product meets the technical criteria to qualify for sale to customers. Prior to qualification for sale, costs that do not meet the criteria for research and development (R&D) are included in cost of sales in the period incurred. Inventories at the end of each period were as follows:
|
(In Millions)
|
Sep 26,
2015 |
Dec 27,
2014 |
||||||
|
Raw materials
|
$
|
557
|
|
$
|
462
|
|
||
|
Work in process
|
2,690
|
|
2,375
|
|
||||
|
Finished goods
|
1,718
|
|
1,436
|
|
||||
|
Total inventories
|
$
|
4,965
|
|
$
|
4,273
|
|
||
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, commodity price risk, and credit risk. When possible, we enter into master netting arrangements with counterparties 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. Generally, our master netting agreements allow for net settlement in case of certain triggering events such as bankruptcy or default of one of the counterparties to the transaction. We may also elect to exchange cash collateral with certain of our counterparties on a regular basis. For presentation on our consolidated condensed balance sheets, we do not offset fair value amounts recognized for derivative instruments under master netting arrangements. Our derivative financial instruments are recorded at fair value and are included in other current assets, other long-term assets, other accrued liabilities, or other long-term liabilities.
14
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
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 is incurred in or exposed to other currencies,
primarily the euro, the Japanese yen, the Chinese Yuan and the Israeli shekel
. We have established balance sheet and forecasted transaction currency risk management programs to protect against fluctuations in the 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. We may also hedge currency risk arising from funding foreign currency denominated forecasted investments. These programs reduce, but do not 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.
Most of 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 we 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 are recognized at fair value.
The substantial majority of these instruments generally 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 the fair value 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.
|
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. We may elect to swap fixed coupon payments on our debt issuances for floating rate coupon payments. 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.
15
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
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 we 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 with fair value hedge accounting designation
that utilize interest rate swap agreements to hedge against changes in fair value on certain fixed rate debt due to changes in the benchmark interest rate. For these derivatives, we recognize gains and losses in interest and other, net, along with the offsetting losses and gains attributable to the changes in the benchmark interest rate on the underlying hedged items.
|
|
•
|
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 generally reset on a quarterly basis. Changes in fair value of the debt instruments classified as trading assets and loans receivable recognized at fair value are generally offset by changes in the fair value of the related derivatives, both of which are recorded in interest and other, net.
|
Equity Market Risk
Our investments include marketable equity securities and equity derivative instruments. We typically do not attempt to reduce or eliminate our equity market exposure through hedging activities at the inception of our investments. Before we enter into hedge arrangements, we evaluate legal, market, and economic factors, as well as the expected timing of disposal to determine whether hedging is appropriate. Our equity market risk management program may include equity derivatives with or 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 losses and gains on the related liabilities
, both of which are recorded in cost of sales and operating expenses.
Volume of Derivative Activity
Total gross notional amounts for outstanding derivatives (recorded at fair value) at the end of each period were as follows:
|
(In Millions)
|
Sep 26,
2015 |
Dec 27,
2014 |
Sep 27,
2014 |
|||||||||
|
Currency forwards
|
$
|
12,395
|
|
$
|
15,578
|
|
$
|
13,896
|
|
|||
|
Currency interest rate swaps
|
4,966
|
|
5,446
|
|
5,015
|
|
||||||
|
Embedded debt derivatives
|
3,600
|
|
3,600
|
|
3,600
|
|
||||||
|
Interest rate swaps
|
1,740
|
|
1,347
|
|
1,259
|
|
||||||
|
Total return swaps
|
1,020
|
|
1,056
|
|
1,032
|
|
||||||
|
Other
|
64
|
|
49
|
|
53
|
|
||||||
|
Total
|
$
|
23,785
|
|
$
|
27,076
|
|
$
|
24,855
|
|
|||
The gross notional amounts for currency forwards and currency interest rate swaps (presented by currency) at the end of each period were as follows:
|
(In Millions)
|
Sep 26,
2015 |
Dec 27,
2014 |
Sep 27,
2014 |
|||||||||
|
Chinese yuan
|
$
|
2,650
|
|
$
|
3,097
|
|
$
|
1,420
|
|
|||
|
Euro
|
6,546
|
|
7,486
|
|
6,973
|
|
||||||
|
Israeli shekel
|
1,938
|
|
2,489
|
|
2,170
|
|
||||||
|
Japanese yen
|
2,733
|
|
3,779
|
|
4,223
|
|
||||||
|
Other
|
3,494
|
|
4,173
|
|
4,125
|
|
||||||
|
Total
|
$
|
17,361
|
|
$
|
21,024
|
|
$
|
18,911
|
|
|||
16
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
During the fourth quarter of 2014, we entered into
$1.5 billion
of forward contracts to hedge our anticipated equity funding of the UniSpreadtrum investment. The hedges were designated as cash flow hedges and the related gains and losses attributable to changes in the spot rates were recognized in accumulated other comprehensive income (loss). Hedge gains and losses attributable to changes in the forward rates were recognized in interest and other, net. During the second quarter of 2015, we discontinued cash flow hedge accounting treatment for
$478 million
of forward contracts since we could no longer assert that funding is probable to occur within the initially specified timeline. Hedge losses accumulated in other comprehensive income related to these de-designated forward contracts were insignificant.
During the third quarter of 2015,
$1.0 billion
of forward contracts were utilized to fund our investment in UniSpreadtrum. Hedge losses attributable to changes in the spot rates accumulated in other comprehensive income (loss) for these forward contracts will remain deferred in accumulated other comprehensive income (loss) until the UniSpreadtrum shares are either disposed of or impaired. As the shares are disposed of or impaired, we will reclassify the gains or losses from accumulated other comprehensive income (loss) to gains (losses) on equity investments, net as an offset to the gain or loss recognized for the share disposal or impairment.
During the third quarter of 2015, we entered into
$1.0 billion
interest rate swap agreement to hedge against changes in fair value attributable to the benchmark interest rate for our
$1.0 billion
face value 2015 senior notes due
2045
at
4.90%
. The hedge was designated as a fair value hedge.
Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets
The fair value of our derivative instruments at the end of each period were as follows:
|
|
September 26, 2015
|
December 27, 2014
|
||||||||||||||||||||||||||||||
|
(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 hedging instruments:
|
||||||||||||||||||||||||||||||||
|
Currency forwards
|
$
|
31
|
|
$
|
6
|
|
$
|
156
|
|
$
|
1
|
|
$
|
6
|
|
$
|
1
|
|
$
|
497
|
|
$
|
9
|
|
||||||||
|
Interest rate swaps
|
—
|
|
3
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||||||||
|
Total derivatives designated as hedging instruments
|
31
|
|
9
|
|
156
|
|
1
|
|
6
|
|
1
|
|
497
|
|
9
|
|
||||||||||||||||
|
Derivatives not designated as hedging instruments:
|
||||||||||||||||||||||||||||||||
|
Currency forwards
|
40
|
|
—
|
|
78
|
|
—
|
|
207
|
|
—
|
|
44
|
|
—
|
|
||||||||||||||||
|
Currency interest rate swaps
|
365
|
|
24
|
|
36
|
|
—
|
|
344
|
|
34
|
|
7
|
|
—
|
|
||||||||||||||||
|
Embedded debt derivatives
|
—
|
|
—
|
|
—
|
|
16
|
|
—
|
|
—
|
|
4
|
|
8
|
|
||||||||||||||||
|
Interest rate swaps
|
—
|
|
—
|
|
5
|
|
—
|
|
3
|
|
—
|
|
11
|
|
—
|
|
||||||||||||||||
|
Other
|
2
|
|
15
|
|
8
|
|
—
|
|
1
|
|
22
|
|
—
|
|
—
|
|
||||||||||||||||
|
Total derivatives not designated as hedging instruments
|
407
|
|
39
|
|
127
|
|
16
|
|
555
|
|
56
|
|
66
|
|
8
|
|
||||||||||||||||
|
Total derivatives
|
$
|
438
|
|
$
|
48
|
|
$
|
283
|
|
$
|
17
|
|
$
|
561
|
|
$
|
57
|
|
$
|
563
|
|
$
|
17
|
|
||||||||
17
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Amounts Offset in the Consolidated Condensed Balance Sheets
The gross amounts of our derivative instruments and reverse repurchase agreements subject to master netting arrangements with various counterparties and cash and non-cash collateral posted under such agreements at the end of each period were as follows:
|
September 26, 2015
|
||||||||||||||||||||||||
|
Gross Amounts Not Offset in the Balance Sheet
|
||||||||||||||||||||||||
|
(In Millions)
|
Gross Amounts Recognized
|
Gross Amounts Offset in the Balance Sheet
|
Net Amounts Presented in the Balance Sheet
|
Financial Instruments
|
Cash and Non-Cash Collateral Received or Pledged
|
Net Amount
|
||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Derivative assets subject to master netting arrangements
|
$
|
475
|
|
$
|
—
|
|
$
|
475
|
|
$
|
(206
|
)
|
$
|
(127
|
)
|
$
|
142
|
|
||||||
|
Reverse repurchase agreements
|
3,318
|
|
—
|
|
3,318
|
|
—
|
|
(3,318
|
)
|
—
|
|
||||||||||||
|
Total assets
|
3,793
|
|
—
|
|
3,793
|
|
(206
|
)
|
(3,445
|
)
|
142
|
|
||||||||||||
|
Liabilities:
|
||||||||||||||||||||||||
|
Derivative liabilities subject to master netting arrangements
|
298
|
|
—
|
|
298
|
|
(206
|
)
|
(15
|
)
|
77
|
|
||||||||||||
|
Total liabilities
|
$
|
298
|
|
$
|
—
|
|
$
|
298
|
|
$
|
(206
|
)
|
$
|
(15
|
)
|
$
|
77
|
|
||||||
|
December 27, 2014
|
||||||||||||||||||||||||
|
Gross Amounts Not Offset in the Balance Sheet
|
||||||||||||||||||||||||
|
(In Millions)
|
Gross Amounts Recognized
|
Gross Amounts Offset in the Balance Sheet
|
Net Amounts Presented in the Balance Sheet
|
Financial Instruments
|
Cash and Non-Cash Collateral Received or Pledged
|
Net Amount
|
||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Derivative assets subject to master netting arrangements
|
$
|
559
|
|
$
|
—
|
|
$
|
559
|
|
$
|
(365
|
)
|
$
|
(78
|
)
|
$
|
116
|
|
||||||
|
Reverse repurchase agreements
|
718
|
|
—
|
|
718
|
|
—
|
|
(718
|
)
|
—
|
|
||||||||||||
|
Total assets
|
1,277
|
|
—
|
|
1,277
|
|
(365
|
)
|
(796
|
)
|
116
|
|
||||||||||||
|
Liabilities:
|
||||||||||||||||||||||||
|
Derivative liabilities subject to master netting arrangements
|
559
|
|
—
|
|
559
|
|
(365
|
)
|
(80
|
)
|
114
|
|
||||||||||||
|
Total liabilities
|
$
|
559
|
|
$
|
—
|
|
$
|
559
|
|
$
|
(365
|
)
|
$
|
(80
|
)
|
$
|
114
|
|
||||||
We obtain and secure available collateral from counterparties against obligations, including securities lending transactions and reverse repurchase agreements, when we deem it appropriate.
18
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Derivatives in Cash Flow Hedging Relationships
The before-tax gains (losses), attributed to the effective portion of cash flow hedges, recognized in other comprehensive income (loss) for each period were as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(In Millions)
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
||||||||||||
|
Currency forwards
|
$
|
(68
|
)
|
$
|
(241
|
)
|
$
|
(268
|
)
|
$
|
(201
|
)
|
||||
|
Other
|
—
|
|
—
|
|
—
|
|
(3
|
)
|
||||||||
|
Total
|
$
|
(68
|
)
|
$
|
(241
|
)
|
$
|
(268
|
)
|
$
|
(204
|
)
|
||||
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. There was
no
impact on results of operations from discontinued cash flow hedges during the third quarter of 2015 and the impact was
insignificant
during the first nine months of 2015, which arises when forecasted transactions are probable of not occurring.
For information on the unrealized holding gains (losses) on derivatives reclassified out of accumulated other comprehensive income into the consolidated condensed statements of income, see "
Note 20: Other Comprehensive Income (Loss)
."
Derivatives in Fair Value Hedging Relationships
The effects of derivative instruments designated as fair value hedges, recognized in interest and other, net for each period were as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(In Millions)
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
||||||||||||
|
Interest rate swap
|
$
|
3
|
|
$
|
—
|
|
$
|
3
|
|
$
|
—
|
|
||||
|
Hedged item
|
(3
|
)
|
—
|
|
(3
|
)
|
—
|
|
||||||||
|
Total
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
||||
There was
no
hedge ineffectiveness during all periods presented in the preceding tables.
Derivatives Not Designated as Hedging Instruments
The effects of derivative instruments not designated as hedging instruments on the consolidated condensed statements of income for each period were as follows:
|
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(In Millions)
|
Location of Gains (Losses)
Recognized in Income on Derivatives
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
|||||||||||||
|
Currency forwards
|
Interest and other, net
|
$
|
(19
|
)
|
$
|
62
|
|
$
|
(33
|
)
|
$
|
40
|
|
|||||
|
Currency interest rate swaps
|
Interest and other, net
|
80
|
|
221
|
|
283
|
|
193
|
|
|||||||||
|
Interest rate swaps
|
Interest and other, net
|
(3
|
)
|
1
|
|
(8
|
)
|
(3
|
)
|
|||||||||
|
Total return swaps
|
Various
|
(90
|
)
|
(7
|
)
|
(48
|
)
|
51
|
|
|||||||||
|
Other
|
Various
|
(3
|
)
|
(3
|
)
|
(17
|
)
|
(1
|
)
|
|||||||||
|
Total
|
$
|
(35
|
)
|
$
|
274
|
|
$
|
177
|
|
$
|
280
|
|
||||||
19
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 7: Acquisitions
During the
first nine months
of
2015
, we completed
five
acquisitions qualifying as business combinations in exchange for acquisition date consideration of
$591 million
,
most
of which was
cash consideration
.
Substantially all
of the consideration was allocated to goodwill, acquisition-related developed technology, and acquisition-related customer relationships. Included in these acquisitions is our acquisition of Lantiq Semiconductor (Lantiq), intended to extend Intel's success in cable home gateways into DSL and fiber markets. We acquired Lantiq in the second quarter of 2015 for acquisition date cash consideration of
$383 million
,
most
of which was allocated to goodwill, acquisition-related developed technology, and acquisition-related customer relationships. The operating results of Lantiq are included in our Client Computing Group operating segment.
The completed acquisitions in the
first nine months
of
2015
, both individually and in the aggregate, were not significant to our results of operations. For information on goodwill by operating segment, see “
Note 8: Goodwill
” and for information on the classification of intangible assets, see "
Note 9: Identified Intangible Assets
."
Pending Acquisition of Altera Corporation
During
the second quarter of
2015,
we entered into a definitive agreement to acquire Altera Corporation (Altera) in an all-cash transaction expected to close within six to nine months from the date of the agreement.
Upon completion of the acquisition, each outstanding share of Altera common stock and, subject to certain exceptions, each share of Altera common stock underlying vested stock option awards, restricted stock unit awards and performance-based restricted stock unit awards will be converted into the right to receive
$54.00
per share in cash, without interest. As of the date we entered into the agreement, the transaction had an approximate value of
$16.7 billion
. This transaction is subject to certain regulatory approvals and customary closing conditions.
Goodwill activity for the
first nine months
of
2015
was as follows:
|
(In Millions)
|
Dec 27,
2014 |
Acquisitions
|
Currency Exchange and Other
|
Sep 26,
2015 |
||||||||||||
|
Client Computing Group
|
$
|
3,708
|
|
$
|
150
|
|
$
|
—
|
|
$
|
3,858
|
|
||||
|
Data Center Group
|
2,376
|
|
—
|
|
—
|
|
2,376
|
|
||||||||
|
Internet of Things Group
|
428
|
|
—
|
|
—
|
|
428
|
|
||||||||
|
Software and services operating segments
|
4,236
|
|
10
|
|
(182
|
)
|
4,064
|
|
||||||||
|
All other
|
113
|
|
187
|
|
—
|
|
300
|
|
||||||||
|
Total
|
$
|
10,861
|
|
$
|
347
|
|
$
|
(182
|
)
|
$
|
11,026
|
|
||||
During the first quarter of 2015, we combined the PC Client Group and the Mobile and Communications Group to create the Client Computing Group. All prior-period amounts have been retrospectively adjusted to reflect our new organizational structure. For further information, see "
Note 22: Operating Segments Information
."
20
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Identified intangible assets at the end of each period were as follows:
|
|
September 26, 2015
|
|||||||||||
|
(In Millions)
|
Gross Assets
|
Accumulated
Amortization |
Net
|
|||||||||
|
Acquisition-related developed technology
|
$
|
2,846
|
|
$
|
(2,202
|
)
|
$
|
644
|
|
|||
|
Acquisition-related customer relationships
|
1,733
|
|
(1,154
|
)
|
579
|
|
||||||
|
Acquisition-related trade names
|
59
|
|
(53
|
)
|
6
|
|
||||||
|
Licensed technology and patents
|
3,106
|
|
(1,283
|
)
|
1,823
|
|
||||||
|
Identified intangible assets subject to amortization
|
7,744
|
|
(4,692
|
)
|
3,052
|
|
||||||
|
Acquisition-related trade names
|
767
|
|
—
|
|
767
|
|
||||||
|
Other intangible assets
|
203
|
|
—
|
|
203
|
|
||||||
|
Identified intangible assets not subject to amortization
|
970
|
|
—
|
|
970
|
|
||||||
|
Total identified intangible assets
|
$
|
8,714
|
|
$
|
(4,692
|
)
|
$
|
4,022
|
|
|||
|
|
December 27, 2014
|
|||||||||||
|
(In Millions)
|
Gross Assets
|
Accumulated
Amortization |
Net
|
|||||||||
|
Acquisition-related developed technology
|
$
|
3,009
|
|
$
|
(2,192
|
)
|
$
|
817
|
|
|||
|
Acquisition-related customer relationships
|
1,698
|
|
(1,001
|
)
|
697
|
|
||||||
|
Acquisition-related trade names
|
61
|
|
(49
|
)
|
12
|
|
||||||
|
Licensed technology and patents
|
3,153
|
|
(1,224
|
)
|
1,929
|
|
||||||
|
Identified intangible assets subject to amortization
|
7,921
|
|
(4,466
|
)
|
3,455
|
|
||||||
|
Acquisition-related trade names
|
788
|
|
—
|
|
788
|
|
||||||
|
Other intangible assets
|
203
|
|
—
|
|
203
|
|
||||||
|
Identified intangible assets not subject to amortization
|
991
|
|
—
|
|
991
|
|
||||||
|
Total identified intangible assets
|
$
|
8,912
|
|
$
|
(4,466
|
)
|
$
|
4,446
|
|
|||
Amortization expenses, with presentation location on the consolidated condensed statements of income, for each period were as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||
|
(In Millions)
|
Location
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
|||||||||||||
|
Acquisition-related developed technology
|
Cost of sales
|
$
|
76
|
|
$
|
161
|
|
$
|
271
|
|
$
|
454
|
|
|||||
|
Acquisition-related customer relationships
|
Amortization of acquisition-related intangibles
|
66
|
|
75
|
|
192
|
|
214
|
|
|||||||||
|
Acquisition-related trade names
|
Amortization of acquisition-related intangibles
|
2
|
|
2
|
|
6
|
|
8
|
|
|||||||||
|
Licensed technology and patents
|
Cost of sales
|
71
|
|
69
|
|
211
|
|
208
|
|
|||||||||
|
Total amortization expenses
|
$
|
215
|
|
$
|
307
|
|
$
|
680
|
|
$
|
884
|
|
||||||
21
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Based on identified intangible assets that are subject to amortization as of
September 26, 2015
, we expect future amortization expenses for each period to be as follows:
|
(In Millions)
|
Remainder of 2015
|
2016
|
2017
|
2018
|
2019
|
|||||||||||||||
|
Acquisition-related developed technology
|
$
|
72
|
|
$
|
251
|
|
$
|
105
|
|
$
|
86
|
|
$
|
77
|
|
|||||
|
Acquisition-related customer relationships
|
66
|
|
236
|
|
149
|
|
45
|
|
27
|
|
||||||||||
|
Acquisition-related trade names
|
3
|
|
3
|
|
—
|
|
—
|
|
—
|
|
||||||||||
|
Licensed technology and patents
|
67
|
|
268
|
|
225
|
|
182
|
|
182
|
|
||||||||||
|
Total future amortization expenses
|
$
|
208
|
|
$
|
758
|
|
$
|
479
|
|
$
|
313
|
|
$
|
286
|
|
|||||
Other long-term assets at the end of each period were as follows:
|
(In Millions)
|
Sep 26,
2015 |
Dec 27,
2014 |
||||||
|
Equity method investments
|
$
|
1,577
|
|
$
|
1,446
|
|
||
|
Non-marketable cost method investments
|
3,003
|
|
1,769
|
|
||||
|
Non-current deferred tax assets
|
640
|
|
622
|
|
||||
|
Pre-payments for property, plant and equipment
|
551
|
|
636
|
|
||||
|
Loans receivable
|
650
|
|
416
|
|
||||
|
Grants receivable
|
490
|
|
312
|
|
||||
|
Reverse repurchase agreements
|
350
|
|
350
|
|
||||
|
Other
|
994
|
|
954
|
|
||||
|
Total other long-term assets
|
$
|
8,255
|
|
$
|
6,505
|
|
||
As of
September 26, 2015
, the carrying amount of our non-marketable cost method investments includes $
966 million
related to our investment in UniSpreadtrum. For further information, see "Note 4: Cash and Investments."
During the
first nine months
of
2015
, we received and transferred
$201 million
of equipment from other long-term assets to property, plant and equipment.
Substantially all
of the equipment was prepaid in
2012 and 2013
. We recognized the pre-payments within operating activities in the consolidated condensed statement of cash flows when we paid for the equipment, and the receipt of the equipment is reflected as a non-cash transaction in the current period.
22
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Restructuring and asset impairment charges by program for each period were as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(In Millions)
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
||||||||||||
|
2015 restructuring program
|
$
|
22
|
|
$
|
—
|
|
$
|
272
|
|
$
|
—
|
|
||||
|
2013 restructuring program
|
(8
|
)
|
20
|
|
95
|
|
238
|
|
||||||||
|
Total restructuring and asset impairment charges
|
$
|
14
|
|
$
|
20
|
|
$
|
367
|
|
$
|
238
|
|
||||
2015 Restructuring Program
Beginning in the second quarter of 2015,
management approved and commenced implementation of restructuring actions, primarily targeted workforce reductions, as we adjusted resources from areas of disinvestment to areas of investment.
We expect these actions to be substantially complete by the end of
2015
.
Restructuring and asset impairment charges for the 2015 restructuring program for each period were as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(In Millions)
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
||||||||||||
|
Employee severance and benefit arrangements
|
$
|
20
|
|
$
|
—
|
|
$
|
270
|
|
$
|
—
|
|
||||
|
Asset impairments and other restructuring charges
|
2
|
|
—
|
|
2
|
|
—
|
|
||||||||
|
Total restructuring and asset impairment charges
|
$
|
22
|
|
$
|
—
|
|
$
|
272
|
|
$
|
—
|
|
||||
Restructuring and asset impairment activity for the 2015 restructuring program for the
first nine months
of
2015
was as follows:
|
(In Millions)
|
Employee Severance and Benefits
|
Asset Impairments and Other
|
Total
|
|||||||||
|
Accrued restructuring balance as of December 27, 2014
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
Additional accruals
|
283
|
|
2
|
|
285
|
|
||||||
|
Adjustments
|
(13
|
)
|
—
|
|
(13
|
)
|
||||||
|
Cash payments
|
(178
|
)
|
—
|
|
(178
|
)
|
||||||
|
Non-cash settlements
|
—
|
|
(1
|
)
|
(1
|
)
|
||||||
|
Accrued restructuring balance as of September 26, 2015
|
$
|
92
|
|
$
|
1
|
|
$
|
93
|
|
|||
We recorded the additional accruals as restructuring and asset impairment charges in the consolidated condensed statements of income and within the “all other” operating segments category.
Substantially all
of the accrued restructuring balance as of
September 26, 2015
is expected to be paid within the next 12 months and was recorded as a current liability within accrued compensation and benefits on the consolidated condensed balance sheets.
Restructuring actions related to this program that were approved in 2015 impacted approximately
3,800
employees.
2013 Restructuring Program
Beginning in the third quarter of 2013,
management approved and commenced implementation of several restructuring actions, including targeted workforce reductions and the exit of certain businesses and facilities. These actions include the wind down of our 200
millimeter
wafer fabrication facility in Massachusetts, which ceased production in
the first quarter of 2015
, and the closure of our assembly and test facility in Costa Rica, which ceased production
in the fourth quarter of 2014
. These targeted reductions will enable us to better align our resources in areas providing the greatest benefit in the current business environment. We expect these actions to be substantially complete by the end of
2015
.
23
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Restructuring and asset impairment charges for the 2013 restructuring program for each period were as follows
:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(In Millions)
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
||||||||||||
|
Employee severance and benefit arrangements
|
$
|
(9
|
)
|
$
|
9
|
|
$
|
87
|
|
$
|
218
|
|
||||
|
Asset impairments and other restructuring charges
|
1
|
|
11
|
|
8
|
|
20
|
|
||||||||
|
Total restructuring and asset impairment charges
|
$
|
(8
|
)
|
$
|
20
|
|
$
|
95
|
|
$
|
238
|
|
||||
Restructuring and asset impairment activity for the 2013 restructuring program for
the
first nine months
of
2015
was as follows:
|
(In Millions)
|
Employee Severance and Benefits
|
Asset Impairments and Other
|
Total
|
|||||||||
|
Accrued restructuring balance as of December 27, 2014
|
$
|
121
|
|
$
|
11
|
|
$
|
132
|
|
|||
|
Additional accruals
|
100
|
|
9
|
|
109
|
|
||||||
|
Adjustments
|
(13
|
)
|
(1
|
)
|
(14
|
)
|
||||||
|
Cash payments
|
(156
|
)
|
(14
|
)
|
(170
|
)
|
||||||
|
Non-cash settlements
|
—
|
|
(3
|
)
|
(3
|
)
|
||||||
|
Accrued restructuring balance as of September 26, 2015
|
$
|
52
|
|
$
|
2
|
|
$
|
54
|
|
|||
We recorded the additional accruals and adjustments as restructuring and asset impairment charges in the consolidated condensed statements of income and within the “all other” operating segments category.
Substantially all
of the accrued restructuring balance as of
September 26, 2015
is expected to be paid by the end of 2015 and was recorded as a current liability within accrued compensation and benefits on the consolidated condensed balance sheets.
Restructuring actions related to this program that were approved in 2015 impacted approximately
1,100
employees.
Since
the third quarter of
2013, we have incurred a total of
$630 million
in restructuring and asset impairment charges related to this program. These charges included a total of
$553 million
related to employee severance and benefit arrangements for approximately
8,700
employees, and
$77 million
in asset impairment charges and other restructuring charges.
Deferred income at the end of each period was as follows:
|
(In Millions)
|
Sep 26,
2015 |
Dec 27,
2014 |
||||||
|
Deferred income on shipments of components to distributors
|
$
|
918
|
|
$
|
944
|
|
||
|
Deferred income from software and services
|
1,242
|
|
1,261
|
|
||||
|
Current deferred income
|
2,160
|
|
2,205
|
|
||||
|
Non-current deferred income from software and services
|
448
|
|
483
|
|
||||
|
Total deferred income
|
$
|
2,608
|
|
$
|
2,688
|
|
||
We classify non-current deferred income from software and services within other long-term liabilities on the consolidated condensed balance sheets.
24
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 13: Borrowings
Our short-term debt at the end of each period was as follows:
|
(In Millions)
|
Sep 26,
2015 |
Dec 27,
2014 |
||||||
|
Drafts payable
|
$
|
41
|
|
$
|
16
|
|
||
|
Commercial paper
|
—
|
|
500
|
|
||||
|
Current portion of long-term debt
|
1,096
|
|
1,088
|
|
||||
|
Less: debt issuance costs associated with the current portion of long-term debt
|
(8
|
)
|
(8
|
)
|
||||
|
Total short-term debt
|
$
|
1,129
|
|
$
|
1,596
|
|
||
The 2009 debentures are convertible, subject to certain conditions. Holders can surrender the 2009 debentures for conversion if the closing price of Intel common stock has been at least
130%
of the conversion price then in effect for at least
20
trading days during the
30
consecutive trading-day period ending on the last trading day of the preceding fiscal quarter.
During the
third
quarter of
2015
, the closing stock price conversion right condition of the 2009 debentures was met and the debentures will be convertible at the option of the holders during the
fourth
quarter of
2015
. As a result of the conversion period during the
fourth
quarter of
2015
, the
$1.1 billion
carrying amount of the 2009 debentures remained classified as short-term debt on our consolidated condensed balance sheet as of
September 26, 2015
. The excess of the amount of cash payable if converted over the carrying amount of the 2009 debentures of
$905 million
remained classified as temporary equity on our consolidated condensed balance sheet as of
September 26, 2015
. In future periods, if the closing stock price conversion right condition is no longer met, all outstanding 2009 debentures would be reclassified to long-term debt and temporary equity would be reclassified to stockholders’ equity on our consolidated condensed balance sheet.
25
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Long-Term Debt
Our long-term debt at the end of each period was as follows:
|
(In Millions)
|
Maturity Date
|
Stated Interest Rate
|
Sep 26,
2015 |
Dec 27,
2014 |
|||||||
|
2015 Senior notes
|
July 2020
|
2.45%
|
$
|
1,748
|
|
$
|
—
|
|
|||
|
2015 Senior notes
|
July 2022
|
3.10%
|
1,000
|
|
—
|
|
|||||
|
2015 Senior notes
|
July 2025
|
3.70%
|
2,247
|
|
—
|
|
|||||
|
2015 Senior notes
|
July 2045
|
4.90%
|
1,998
|
|
—
|
|
|||||
|
2015 Senior notes
|
August 2045
|
4.90%
|
1,010
|
|
—
|
|
|||||
|
2012 Senior notes
|
December 2017
|
1.35%
|
2,998
|
|
2,998
|
|
|||||
|
2012 Senior notes
|
December 2022
|
2.70%
|
1,495
|
|
1,495
|
|
|||||
|
2012 Senior notes
|
December 2032
|
4.00%
|
744
|
|
744
|
|
|||||
|
2012 Senior notes
|
December 2042
|
4.25%
|
924
|
|
924
|
|
|||||
|
2011 Senior notes
|
October 2016
|
1.95%
|
1,500
|
|
1,499
|
|
|||||
|
2011 Senior notes
|
October 2021
|
3.30%
|
1,997
|
|
1,997
|
|
|||||
|
2011 Senior notes
|
October 2041
|
4.80%
|
1,490
|
|
1,490
|
|
|||||
|
2009 Junior subordinated convertible debentures
|
August 2039
|
3.25%
|
1,096
|
|
1,088
|
|
|||||
|
2005 Junior subordinated convertible debentures
|
December 2035
|
2.95%
|
975
|
|
960
|
|
|||||
|
Long-term debt
|
$
|
21,222
|
|
$
|
13,195
|
|
|||||
|
Less: current portion of long-term debt
|
(1,096
|
)
|
(1,088
|
)
|
|||||||
|
Less: debt issuance costs
|
(67
|
)
|
(48
|
)
|
|||||||
|
Total long-term debt
|
$
|
20,059
|
|
$
|
12,059
|
|
|||||
During the third quarter of 2015, we issued a total of $
8.0 billion
aggregate principal amount of senior unsecured notes. In July of 2015, we issued an aggregate of $
7.0 billion
of principal amount of notes due in
2020
,
2022
,
2025
, and
2045
. In August of 2015, we issued $
1.0 billion
of principal amount of notes due in
2045
. We will pay interest on these notes
semi-annually
. We may redeem the notes prior to their maturity at our option at specified redemption prices and subject to certain restrictions. The notes rank equally in right of payment with all of our other existing and future senior unsecured indebtedness and will effectively rank junior to all liabilities of our subsidiaries.
We intend to use the net proceeds of these offerings to fund a portion of the cash consideration for our pending acquisition of Altera. If the Altera acquisition does not close for any reason, the net proceeds of the offering will be used for general corporate purposes, which may include refinancing of indebtedness, with the exception of the $
2.25 billion
principal amount of
2025
notes and $
2.0 billion
of principal amount of
2045
notes, which are subject to special mandatory redemption at a redemption price of
101%
of the principal amount thereof plus accrued and unpaid interest in the event that our acquisition of Altera is not consummated by, or the merger agreement is terminated before,
December 31, 2016
.
For further information on our debt instruments, see the "Borrowings" note in Part II, Item 8 of our Annual Report on Form 10-K for the year ended
December 27, 2014
and Form 8-K filed with the SEC on June 5, 2015.
Our equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.
During May 2015, stockholders approved an extension of the expiration date of the 2006 Equity Incentive Plan to June 2018 and approved an additional
34 million
shares for issuance. As of
September 26, 2015
,
258 million
shares of common stock remained available for future grant under the 2006 Equity Incentive Plan through June 2018.
During May 2015, stockholders approved an extension of the expiration date of the 2006 Stock Purchase Plan to August 2021. 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 of common stock are granted during the first and third quarters of each year. As of
September 26, 2015
,
181 million
shares of common stock remained available for issuance under the 2006 Stock Purchase Plan through August 2021.
26
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Share-Based Compensation
Share-based compensation expense was
$309 million
in the
third
quarter of
2015
and
$1.0 billion
in the
first nine months
of
2015
(
$281 million
in the
third
quarter of
2014
and
$867 million
in the
first nine months
of
2014
).
R
estricted Stock Unit Awards
We estimate the fair value of restricted stock unit awards with time-based vesting using the value of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our shares of common stock prior to vesting. We estimate the fair value of market-based restricted stock units using a Monte Carlo simulation model on the date of grant (
no
market-based restricted stock units were granted in the
third
quarter of
2015
). We based the weighted average estimated value of restricted stock unit grants, as well as the weighted average assumptions that we used in calculating the fair value, on estimates at the date of grant, for each period as follows:
|
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
||||||||||||
|
Estimated values
|
$
|
26.62
|
|
$
|
32.93
|
|
$
|
31.64
|
|
$
|
25.12
|
|
||||
|
Risk-free interest rate
|
0.6
|
%
|
0.5
|
%
|
0.6
|
%
|
0.5
|
%
|
||||||||
|
Dividend yield
|
3.4
|
%
|
2.6
|
%
|
2.9
|
%
|
3.4
|
%
|
||||||||
|
Volatility
|
n/a
|
|
23
|
%
|
27
|
%
|
23
|
%
|
||||||||
Restricted stock unit activity in the
first nine months
of
2015
was as follows:
|
Number of
RSUs
(In Millions)
|
Weighted Average
Grant-Date
Fair Value
|
||||||
|
December 27, 2014
|
119.4
|
|
$
|
23.89
|
|
||
|
Granted
|
41.4
|
|
$
|
31.64
|
|
||
|
Vested
|
(44.1
|
)
|
$
|
23.44
|
|
||
|
Forfeited
|
(6.1
|
)
|
$
|
25.40
|
|
||
|
September 26, 2015
|
110.6
|
|
$
|
26.89
|
|
||
The aggregate fair value of awards that vested in the
first nine months
of
2015
was
$1.4 billion
, which represents the market value of our common stock on the date that the restricted stock units vested. The grant-date fair value of awards that vested in
first nine months
of
2015
was
$1.0 billion
. The number of restricted stock units vested includes shares of common stock that we withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements. Restricted stock units that are expected to vest are net of estimated future forfeitures.
As of
September 26, 2015
,
4.7 million
of the outstanding restricted stock units were market-based restricted stock units.
27
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Stock Option Awards
Stock option activity in the
first nine months
of
2015
was as follows:
|
Number of
Options
(In Millions)
|
Weighted Average
Exercise Price
|
||||||
|
December 27, 2014
|
77.3
|
|
$
|
21.30
|
|
||
|
Exercised
|
(13.4
|
)
|
$
|
20.58
|
|
||
|
Cancelled and forfeited
|
(1.0
|
)
|
$
|
23.27
|
|
||
|
Expired
|
(0.1
|
)
|
$
|
21.72
|
|
||
|
September 26, 2015
|
62.8
|
|
$
|
21.42
|
|
||
|
Options exercisable as of:
|
|||||||
|
December 27, 2014
|
54.7
|
|
$
|
20.29
|
|
||
|
September 26, 2015
|
52.1
|
|
$
|
20.88
|
|
||
During the
first nine months
of
2015
, the aggregate intrinsic value of stock option exercises was
$168 million
, which represents the difference between the exercise price and the value of our common stock at the time of exercise.
No
stock options were granted during the
first nine months
of
2015
.
Stock Purchase Plan
Employees purchased
15.8 million
shares of common stock in the
first nine months
of
2015
for
$421 million
(
19.4 million
shares of common stock in the
first nine months
of
2014
for
$393 million
) under the 2006 Stock Purchase Plan.
Note 15: Common Stock Repurchases
Common Stock Repurchase Program
We have an ongoing authorization, originally approved by our Board of Directors in 2005, and subsequently amended, to repurchase up to
$65 billion
in shares of our common stock in open market or negotiated transactions.
As of
September 26, 2015
,
$9.9 billion
remained available for repurchase under the existing repurchase authorization limit.
During the
third
quarter of
2015
, we repurchased
34.8 million
shares of common stock at a cost of
$1.0 billion
(
119.5 million
shares of common stock at a cost of
$4.1 billion
during the
third
quarter of
2014
). During the
first nine months
of
2015
, we repurchased
79.7 million
shares of common stock at a cost of
$2.5 billion
(
217.4 million
shares of common stock at a cost of
$6.8 billion
in the
first nine months
of
2014
). We have repurchased
4.8 billion
shares of common stock at a cost of
$104 billion
since the program began in 1990.
Restricted Stock Unit Withholdings
We issue restricted stock units as part of our equity incentive plans. For the majority of restricted stock units granted, the number of shares of common stock 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.
In our consolidated condensed financial statements, we also treat shares of common stock withheld for tax purposes on behalf of our employees in connection with the vesting of restricted stock units as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. These withheld shares of common stock are not considered common stock repurchases under our authorized common stock repurchase plan
. During the
first nine months
of
2015
, we withheld
12.8 million
shares of common stock to satisfy
$416 million
(
11.7 million
shares of common stock to satisfy
$314 million
during the
first nine months
of
2014
) of employees’ tax obligations.
28
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
The components of gains (losses) on equity investments, net for each period were as follows:
|
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(In Millions)
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
||||||||||||
|
Share of equity method investee losses, net
|
$
|
(22
|
)
|
$
|
(17
|
)
|
$
|
(81
|
)
|
$
|
(42
|
)
|
||||
|
Impairments
|
(28
|
)
|
(33
|
)
|
(107
|
)
|
(108
|
)
|
||||||||
|
Gains on sales, net
|
11
|
|
—
|
|
110
|
|
147
|
|
||||||||
|
Dividends
|
5
|
|
1
|
|
52
|
|
54
|
|
||||||||
|
Other, net
|
199
|
|
84
|
|
323
|
|
127
|
|
||||||||
|
Total gains (losses) on equity investments, net
|
$
|
165
|
|
$
|
35
|
|
$
|
297
|
|
$
|
178
|
|
||||
The components of interest and other, net for each period were as follows:
|
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(In Millions)
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
||||||||||||
|
Interest income
|
$
|
31
|
|
$
|
35
|
|
$
|
91
|
|
$
|
108
|
|
||||
|
Interest expense
|
(116
|
)
|
(53
|
)
|
(211
|
)
|
(139
|
)
|
||||||||
|
Other, net
|
(19
|
)
|
(7
|
)
|
29
|
|
101
|
|
||||||||
|
Total interest and other, net
|
$
|
(104
|
)
|
$
|
(25
|
)
|
$
|
(91
|
)
|
$
|
70
|
|
||||
Interest expense in the preceding table is net of
$52 million
of interest capitalized in the
third
quarter of
2015
and
$202 million
of interest capitalized in the
first nine months
of
2015
(
$63 million
in the
third
quarter of
2014
and
$203 million
in the
first nine months
of
2014
). During the first quarter of 2014, we completed the divestiture of our Intel Media assets. As a result of the transaction, we recognized a gain within "Other, net" in the preceding table.
We computed our basic and diluted earnings per common share for each period as follows:
|
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(In Millions, Except Per Share Amounts)
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
||||||||||||
|
Net income available to common stockholders
|
$
|
3,109
|
|
$
|
3,317
|
|
$
|
7,807
|
|
$
|
8,043
|
|
||||
|
Weighted average shares of common stock outstanding—basic
|
4,747
|
|
4,880
|
|
4,749
|
|
4,945
|
|
||||||||
|
Dilutive effect of employee equity incentive plans
|
48
|
|
76
|
|
64
|
|
73
|
|
||||||||
|
Dilutive effect of convertible debt
|
81
|
|
89
|
|
87
|
|
77
|
|
||||||||
|
Weighted average shares of common stock outstanding—diluted
|
4,876
|
|
5,045
|
|
4,900
|
|
5,095
|
|
||||||||
|
Basic earnings per share of common stock
|
$
|
0.65
|
|
$
|
0.68
|
|
$
|
1.64
|
|
$
|
1.63
|
|
||||
|
Diluted earnings per share of common stock
|
$
|
0.64
|
|
$
|
0.66
|
|
$
|
1.59
|
|
$
|
1.58
|
|
||||
We computed basic earnings per share of common stock using net income available to common stockholders and the weighted average number of shares of common stock outstanding during the period. We computed diluted earnings per share of common stock using net income available to common stockholders and the weighted average number of shares of common stock outstanding plus potentially dilutive shares of common stock outstanding during the period. Net income available to participating securities was
insignificant
for all periods presented.
29
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Potentially dilutive shares of common stock 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 shares of common stock for our 2005 debentures are determined by applying the if-converted method. 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 shares of common stock are determined by applying the treasury stock method.
During the
third
quarter of
2015
, we excluded on average
4 million
outstanding stock options and restricted stock units from the computation of diluted earnings per common share because these would have been antidilutive (
no
outstanding stock options and restricted stock units were excluded for the
third
quarter of
2014
). During the
first nine months
of
2015
, we excluded on average
2 million
outstanding stock options and restricted stock units from the computation of diluted earnings per share of common stock because these shares of common stock would have been antidilutive (
14 million
for the
first nine months
of
2014
). These options could potentially be included in the diluted earnings per share of common stock calculation in the future if the average market value of the shares of common stock increases and is greater than the exercise price of these options.
During the
third
quarter of
2015
and
2014
, we
included
our 2009 debentures in the calculation of diluted earnings per share of common stock because the average market price was above the conversion price. We could potentially exclude the 2009 debentures in the future if the average market price is below the conversion price.
Our effective income tax rate was
21.2%
in the
first nine months
of
2015
compared to
27.8%
in the
first nine months
of
2014
. The effective rate was positively impacted by the settlement of a one-time refund claim involving asset tax basis resulting in the recognition of a
$320 million
tax benefit and our decision to indefinitely reinvest certain prior years' non-U.S. earnings resulting in the release of
$185 million
previously accrued U.S. deferred taxes in the second quarter of
2015
. In addition, a higher proportion of our income from lower taxed jurisdictions positively impacted our effective income tax rate from the comparable period.
Our ending gross unrecognized tax benefits as of
September 26, 2015
was
$302 million
(
$577 million
as of
December 27, 2014
).
The changes in accumulated other comprehensive income (loss) by component and related tax effects in the
first nine months
of
2015
were as follows:
|
(In Millions)
|
Unrealized Holding Gains (Losses) on Available-for-Sale Investments
|
Deferred Tax Asset Valuation Allowance
|
Unrealized Holding Gains (Losses) on Derivatives
|
Prior Service Credits (Costs)
|
Actuarial Gains (Losses)
|
Foreign Currency Translation Adjustment
|
Total
|
|||||||||||||||||||||
|
December 27, 2014
|
$
|
2,459
|
|
$
|
26
|
|
$
|
(423
|
)
|
$
|
(47
|
)
|
$
|
(1,004
|
)
|
$
|
(345
|
)
|
$
|
666
|
|
|||||||
|
Other comprehensive income (loss) before reclassifications
|
(1,365
|
)
|
—
|
|
(268
|
)
|
—
|
|
—
|
|
(187
|
)
|
(1,820
|
)
|
||||||||||||||
|
Amounts reclassified out of accumulated other comprehensive income (loss)
|
(86
|
)
|
—
|
|
400
|
|
6
|
|
43
|
|
—
|
|
363
|
|
||||||||||||||
|
Tax effects
|
508
|
|
(13
|
)
|
(43
|
)
|
—
|
|
(13
|
)
|
17
|
|
456
|
|
||||||||||||||
|
Other comprehensive income (loss)
|
(943
|
)
|
(13
|
)
|
89
|
|
6
|
|
30
|
|
(170
|
)
|
(1,001
|
)
|
||||||||||||||
|
September 26, 2015
|
$
|
1,516
|
|
$
|
13
|
|
$
|
(334
|
)
|
$
|
(41
|
)
|
$
|
(974
|
)
|
$
|
(515
|
)
|
$
|
(335
|
)
|
|||||||
30
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
The amounts reclassified out of accumulated other comprehensive income (loss) into the consolidated condensed statements of income, with presentation location, for each period were as follows:
|
Income Before Taxes Impact
(In Millions) |
||||||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||
|
Comprehensive Income Components
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
Location
|
|||||||||||||
|
Unrealized holding gains (losses) on available-for-sale investments:
|
||||||||||||||||||
|
$
|
1
|
|
$
|
9
|
|
$
|
1
|
|
$
|
7
|
|
Interest and other, net
|
||||||
|
11
|
|
9
|
|
85
|
|
132
|
|
Gains (losses) on equity investments, net
|
||||||||||
|
12
|
|
18
|
|
86
|
|
139
|
|
|||||||||||
|
Unrealized holding gains (losses) on derivatives:
|
||||||||||||||||||
|
Currency forwards
|
(81
|
)
|
(5
|
)
|
(217
|
)
|
(10
|
)
|
Cost of sales
|
|||||||||
|
(50
|
)
|
8
|
|
(145
|
)
|
26
|
|
Research and development
|
||||||||||
|
(16
|
)
|
2
|
|
(38
|
)
|
7
|
|
Marketing, general and administrative
|
||||||||||
|
Other instruments
|
—
|
|
(2
|
)
|
—
|
|
(2
|
)
|
Cost of sales
|
|||||||||
|
(147
|
)
|
3
|
|
(400
|
)
|
21
|
|
|||||||||||
|
Amortization of pension and postretirement benefit components:
|
||||||||||||||||||
|
Prior service credits (costs)
|
(2
|
)
|
(2
|
)
|
(6
|
)
|
(4
|
)
|
||||||||||
|
Actuarial gains (losses)
|
(15
|
)
|
(10
|
)
|
(43
|
)
|
(29
|
)
|
||||||||||
|
(17
|
)
|
(12
|
)
|
(49
|
)
|
(33
|
)
|
|||||||||||
|
Total amounts reclassified out of accumulated other comprehensive income (loss)
|
$
|
(152
|
)
|
$
|
9
|
|
$
|
(363
|
)
|
$
|
127
|
|
||||||
The amortization of pension and postretirement benefit components are included in the computation of net periodic benefit cost. For further information, see the "Retirement Benefit Plans" note in Part II, Item 8 of our Annual Report on Form 10-K for the year ended
December 27, 2014
and Form 8-K filed with the SEC on June 5, 2015.
We estimate that we will reclassify approximately
$241 million
(before taxes) of net derivative
losses
included in accumulated other comprehensive income (loss) into earnings within the next 12 months.
Note 21: Contingencies
Legal Proceedings
We are a party to various legal proceedings, including those noted in this section. Although management at present believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our 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. In addition, in matters for which injunctive relief or other conduct remedies are sought, unfavorable resolutions could include 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. An unfavorable outcome may result in a material adverse impact on our business, results of operations, financial position, and overall trends. We might also conclude that settling one or more such matters is in the best interests of our stockholders, employees and customers, and any such settlement could include substantial payments. Except as specifically described below, we have not concluded that settlement of any of the legal proceedings noted in this section is appropriate at this time.
31
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Government Competition Matters and Related Consumer Class Actions
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. In general, they contend that we improperly conditioned price rebates and other discounts on our microprocessors on exclusive or near-exclusive dealing by some of our customers; and they allege that our software compiler business unfairly preferred Intel
®
microprocessors over competing microprocessors and that, through the use of our compilers and other means, we have caused the dissemination of inaccurate and misleading benchmark results concerning our microprocessors. Based on the procedural posture of the various remaining competition matters, which we describe in the following paragraphs, our investment of resources to explain and defend our position has declined as compared to the period 2005-2011. Nonetheless, certain of the matters remain active, and these challenges could continue for a number of years, potentially requiring us to invest additional resources. We believe that we compete lawfully and that our marketing, business, intellectual property, and other challenged practices benefit our customers and our stockholders, and we will continue to conduct a vigorous defense in the remaining proceedings.
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 received numerous requests for information and documents from the EC and we 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 ordered us to "immediately bring to an end the infringement referred to in" the EC decision.
The EC decision contained no specific direction on whether or how we should modify our business practices. Instead, the decision stated that we should "cease and desist" from further conduct that, in the EC's opinion, would violate applicable law. We took steps, which are subject to the EC's ongoing review, to comply with that decision pending appeal. We had discussions with the EC to better understand the decision and to explain changes to our business practices.
We appealed the EC decision to the Court of First Instance (which has been renamed the General Court) in July 2009. The hearing of our appeal took place in July 2012. In June 2014, the General Court rejected our appeal in its entirety. In August 2014, we filed an appeal with the European Court of Justice. On November 11, 2014, Intervener Association for Competitive Technologies filed comments in support of Intel’s grounds of appeal. The EC and interveners filed briefs in November 2014, we filed a reply in February 2015, and the EC filed a rejoinder in April 2015. The Court of Justice is likely to hold oral argument in late 2015 and issue its decision in 2016.
At least 82 separate class-action lawsuits 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 us 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 lawsuits allege that we 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 dealing that allegedly unfairly interfered with AMD's ability to sell its microprocessors; interfering with certain AMD product launches; and interfering with AMD's 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 these class-action claims and intend to defend the lawsuits vigorously.
32
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
All of the federal and state class actions other than the California class actions were 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 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 personal computers containing products sold by us. In July 2010, the Special Master issued a Report and Recommendation (Report) denying the motion to certify a class. The MDL plaintiffs filed objections to the Special Master's Report, and a hearing on those objections was held before the district court in July 2013. In July 2014, the district court affirmed the Special Master's ruling and issued an order denying the MDL plaintiffs' motion for class certification. In August 2014, plaintiffs filed a petition for interlocutory appeal of the district court's decision with the U.S. Court of Appeals for the Third Circuit, which the Third Circuit denied in October 2014. In December 2014, Intel filed a motion for summary judgment on the claims of the remaining individual plaintiffs. We subsequently negotiated a settlement of the claims and the case was dismissed in September 2015.
All California class actions have been consolidated in the Superior Court of California in Santa Clara County. The plaintiffs in the California actions moved for class certification, which we are in the process of opposing. At our request, the court in the California actions agreed to delay ruling on this motion until after the Delaware district court ruled on the similar motion in the MDL proceedings. The plaintiffs asked the court for leave to retain a new expert and to amend their previous motion for class certification. The court granted plaintiffs’ request in February 2015 and the hearing on plaintiffs’ amended class certification motion is, scheduled to take place in December 2015. Given the procedural posture and the nature of these cases, we are unable to make a reasonable estimate of the potential loss or range of losses, if any, arising from these matters.
In re High Tech Employee Antitrust Litigation
Between May and July 2011, former employees of Intel, Adobe Systems Incorporated, Apple Inc., Google Inc., Intuit Inc., Lucasfilm Ltd., and Pixar filed antitrust class action lawsuits in the California Superior Courts alleging that these companies had entered into a conspiracy to suppress the compensation of their employees. The lawsuits were removed to the United States District Court for the Northern District of California, and in September 2011 the plaintiffs filed a consolidated amended complaint, captioned
In re High Tech Employee Antitrust Litigation
. The plaintiffs’ allegations reference the 2009 and 2010 investigation by the Department of Justice (DOJ) into employment practices in the technology industry, as well as the DOJ’s complaints and subsequent stipulated final judgments with the seven companies named as defendants in the lawsuits. The plaintiffs allege that the defendants entered into certain unlawful agreements not to cold call employees of particular other defendants and that there was an overarching conspiracy among the defendants. Plaintiffs assert one such agreement specific to Intel, namely that Intel and Google entered into an agreement starting in 2005, not to cold call each other's employees. Plaintiffs
assert claims under Section 1 of the Sherman Antitrust Act and Section 4 of the Clayton Antitrust Act and seek a declaration that the defendants’ alleged actions violated the antitrust laws, damages trebled as provided for by law under the Sherman Act or Clayton Act, restitution and disgorgement, and attorneys’ fees and costs.
In October 2013, the district court certified a class consisting of approximately
65,000
current or former employees of the seven defendants and set the matter for trial in late May 2014. The so-called "technical class" consists of a group of current and former technical, creative, and R&D employees at each of the defendants. In January 2014, Intel filed a motion for summary judgment, which the court denied in March 2014.
In April 2014, Intel, Adobe, Apple, and Google reached an agreement with plaintiffs to settle this lawsuit, but in August 2014, the district court denied preliminary approval of the settlement. In September 2014, defendants filed a petition for writ of mandamus asking the U.S. Court of Appeals for the Ninth Circuit to reverse the district court’s decision. The Ninth Circuit ordered briefing and scheduled a March 2015 hearing date on the writ petition. Defendants have withdrawn the petition for writ of mandamus in light of the settlement agreement discussed below.
In January 2015, Intel, Adobe, Apple, and Google reached a second agreement with plaintiffs to settle this lawsuit, which the court preliminarily approved in March 2015. The court held a final fairness hearing in July 2015, and, in September 2015, gave its final approval of the settlement and entered final judgment in the lawsuit. We made our settlement payment in October 2015, which we accrued for in our operating expenses for 2014. Although we disputed the plaintiffs’ claims, we agreed to settle the lawsuit to avoid the uncertainties, expenses, and diversion of resources from continued litigation.
33
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Shareholder Derivative Litigation regarding High Tech Employee Antitrust Litigation
In March 2014, the Police Retirement System of St. Louis filed a shareholder derivative action in the Superior Court of California in Santa Clara County against Intel, certain current and former members of our Board of Directors, and a current officer. The complaint alleges that the defendants breached their duties to the company by participating in, or allowing, alleged antitrust violations, as described in In re High Tech Employee Antitrust Litigation. In March 2014, a second plaintiff, Barbara Templeton, filed a substantially similar derivative suit in the same court. In May 2014, a third shareholder, Robert Achermann, filed a substantially similar derivative action in the same court. The court consolidated the three actions into one, which is captioned In re Intel Corporation Shareholder Derivative Litigation. Plaintiffs filed a consolidated complaint in July 2014. In August 2015, the court granted our motion to dismiss the consolidated complaint. The plaintiffs thereafter filed a motion for reconsideration and a motion for new trial, both of which the court denied in October 2015.
In June 2015, the International Brotherhood of Electrical Workers (IBEW) filed a shareholder derivative action in the Chancery Court in Delaware against Intel, certain current and former members of our Board of Directors, and a current officer. The lawsuit makes allegations that are substantially similar to those in the California shareholder derivative litigation described above, but contain additional allegations regarding breach of the duty of disclosure surrounding In re High Tech Employee Antitrust Litigation and that the Intel 2013 and 2014 proxy statements were false and misleading in that they misrepresented the effectiveness of the Board’s oversight of compliance issues at Intel and the Board’s compliance with Intel’s Code of Conduct and Board of Director Guidelines on Significant Corporate Governance Issues. In October 2015, the court stayed the IBEW lawsuit for six months while the California case is on appeal.
Lehman Brothers Holdings Inc. and Lehman Brothers OTC Derivatives Inc. v. Intel
In May 2013, Lehman Brothers OTC Derivatives Inc. (LOTC) and Lehman Brothers Holdings Inc. (LBHI) filed an adversary complaint in the United States Bankruptcy Court in the Southern District of New York asserting claims against us arising from a 2008 contract between Intel and LOTC. Under the terms of the 2008 contract, we prepaid
$1.0 billion
to LOTC, in exchange for which LOTC was required to deliver to us on or before September 29, 2008, quantities of Intel common stock and cash determined by a formula set forth in the contract. LOTC's 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 Intel common stock or cash, and we exercised our right of setoff against the
$1.0 billion
collateral. LOTC and LBHI acknowledge in their complaint that we were entitled to set off our losses against the collateral, but they assert that we withheld collateral in excess of our losses that should have been returned to LOTC. The complaint asserts a claim for breach of contract, a claim for turnover under section 542(a) of the Bankruptcy Code, and a claim for violation of the automatic stay under section 362(a)(3) of the Bankruptcy Code. The complaint does not expressly quantify the amount of damages claimed but does assert multiple theories of damages that impliedly seek up to
$312 million
of alleged excess collateral, plus interest at LIBOR plus
13.5%
, compounded daily. In June 2013, we filed a motion to dismiss plaintiffs' bankruptcy claims and for a determination that the breach of contract claim is "non-core" under the Bankruptcy Code. The bankruptcy court granted our motion in its entirety in December 2013. In May 2014, the United States District Court for the Southern District of New York denied our request that it withdraw its reference of plaintiffs' adversary complaint to the bankruptcy court. In January 2015, Intel and the plaintiffs filed competing motions for summary judgment. Plaintiffs' motion requested judgment against Intel "in the amount of no less than"
$129 million
, plus interest. In September 2015, the bankruptcy court ruled in favor of Intel and issued proposed findings of fact and conclusions of law recommending that the district court deny plaintiffs’ motion for summary judgment and grant Intel’s motion for summary judgment. In October 2015, plaintiffs voluntarily dismissed the lawsuit with prejudice.
McAfee, Inc. Shareholder Litigation
On August 19, 2010, we announced that we had agreed to acquire all of the common stock of McAfee, Inc. (McAfee) for
$48.00
per share. Four McAfee shareholders filed putative class-action lawsuits in Santa Clara County, California Superior Court challenging the proposed transaction. The cases were ordered consolidated in September 2010. Plaintiffs filed an amended complaint that named former McAfee board members, McAfee and Intel as defendants, and alleged that the McAfee board members breached their fiduciary duties and that McAfee and Intel aided and abetted those breaches of duty. The complaint requested rescission of the merger agreement, such other equitable relief as the court may deem proper, and an award of damages in an unspecified amount. In June 2012, the plaintiffs’ damages expert asserted that the value of a McAfee share for the purposes of assessing damages should be
$62.08
.
34
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
In January 2012, the court certified the action as a class action, appointed the Central Pension Laborers’ Fund to act as the class representative, and scheduled trial to begin in January 2013. In March 2012, defendants filed a petition with the California Court of Appeal for a writ of mandate to reverse the class certification order; the petition was denied in June 2012. In March 2012, at defendants’ request, the court held that plaintiffs were not entitled to a jury trial, and ordered a bench trial. In April 2012, plaintiffs filed a petition with the California Court of Appeal for a writ of mandate to reverse that order, which the court of appeal denied in July 2012. In August 2012, defendants filed a motion for summary judgment. The trial court granted that motion in November 2012, and entered final judgment in the case in February 2013. In April 2013, plaintiffs appealed the final judgment. Intel, McAfee, and McAfee’s board of directors filed an opposition to plaintiff’s appeal in December 2014. Because the resolution of the appeal may materially impact the scope and nature of the proceeding, we are unable to make a reasonable estimate of the potential loss or range of losses, if any, arising from this matter. We dispute the class-action claims and intend to continue to defend the lawsuit vigorously.
Our operating segments in effect as of
September 26, 2015
include:
|
• Client Computing Group
|
• All other
|
|
|
• Data Center Group
|
• Non-Volatile Memory Solutions Group
|
|
|
• Internet of Things Group
|
• New Devices Group
|
|
|
• Software and services operating segments
|
||
|
• McAfee
|
||
|
• Software and Services Group
|
||
During the first quarter of 2015, we combined the PC Client Group and Mobile and Communications Group to create the Client Computing Group (CCG). This change in our organizational structure reflects our strategy to address all aspects of the client computing market segment and utilize our intellectual property to offer compelling customer solutions. All prior-period amounts have been retrospectively adjusted to reflect the way we internally manage and monitor segment performance starting in fiscal year 2015 and includes other minor reorganizations.
The Chief Operating Decision Maker (CODM) is our CEO. The CODM allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss).
We manage our business activities primarily based on a product segmentation basis. CCG and Data Center Group are our reportable operating segments. Internet of Things Group and the aggregated “software and services operating segments” as shown in the preceding operating segment list, do not meet the quantitative thresholds to qualify as reportable operating segments; however, we have elected to disclose the results of these non-reportable operating segments. Our Non-Volatile Memory Solutions Group and New Devices Group operating segments do not meet the quantitative thresholds to qualify as reportable segments and their combined results are included within the “all other” category.
Revenue for our reportable and aggregated non-reportable operating segments is primarily related to the following product lines:
|
•
|
Client Computing Group
.
Includes platforms designed for the notebook (including Ultrabook™ devices), 2 in 1 systems, the desktop (including all-in-ones and high-end enthusiast PCs), tablets, and smartphones; wireless and wired connectivity products; as well as mobile communication components.
|
|
•
|
Data Center Group.
Includes server, network, and storage platforms designed for enterprise, cloud, communications infrastructure, and technical computing segments.
|
|
•
|
Internet of Things Group.
Includes platforms designed for embedded market segments including retail, transportation, industrial, and buildings and home, along with a broad range of other market segments.
|
|
•
|
Software and services operating segments.
Includes software and hardware products for endpoint security, network and content security, risk and compliance, and consumer and mobile security from our McAfee business, and software products and services that promote Intel architecture as the platform of choice for software development.
|
35
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
We have sales and marketing, manufacturing, engineering, finance, and administration groups. Expenses for these groups are generally allocated to the operating segments, and the expenses are included in the following operating results.
The “all other” category includes revenue, expenses, and charges such as:
|
•
|
results of operations from our Non-Volatile Memory Solutions Group and New Devices Group;
|
|
•
|
amounts included within restructuring and asset impairment charges;
|
|
•
|
a portion of profit-dependent compensation and other expenses not allocated to the operating segments;
|
|
•
|
divested businesses for which discrete operating results are not regularly reviewed by our CODM;
|
|
•
|
results of operations of start-up businesses that support our initiatives, including our foundry business; 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.
Net revenue and operating income (loss) for each period were as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
(In Millions)
|
Sep 26,
2015 |
Sep 27,
2014 |
Sep 26,
2015 |
Sep 27,
2014 |
||||||||||||
|
Net revenue:
|
||||||||||||||||
|
Client Computing Group
|
||||||||||||||||
|
Platform
|
$
|
8,089
|
|
$
|
8,749
|
|
$
|
22,262
|
|
$
|
24,744
|
|
||||
|
Other
|
417
|
|
442
|
|
1,201
|
|
1,262
|
|
||||||||
|
8,506
|
|
9,191
|
|
23,463
|
|
26,006
|
|
|||||||||
|
Data Center Group
|
||||||||||||||||
|
Platform
|
3,863
|
|
3,439
|
|
10,861
|
|
9,543
|
|
||||||||
|
Other
|
277
|
|
261
|
|
808
|
|
753
|
|
||||||||
|
4,140
|
|
3,700
|
|
11,669
|
|
10,296
|
|
|||||||||
|
Internet of Things Group
|
||||||||||||||||
|
Platform
|
501
|
|
456
|
|
1,450
|
|
1,320
|
|
||||||||
|
Other
|
80
|
|
74
|
|
223
|
|
231
|
|
||||||||
|
581
|
|
530
|
|
1,673
|
|
1,551
|
|
|||||||||
|
Software and services operating segments
|
556
|
|
558
|
|
1,624
|
|
1,659
|
|
||||||||
|
All other
|
682
|
|
575
|
|
2,012
|
|
1,637
|
|
||||||||
|
Total net revenue
|
$
|
14,465
|
|
$
|
14,554
|
|
$
|
40,441
|
|
$
|
41,149
|
|
||||
|
Operating income (loss):
|
||||||||||||||||
|
Client Computing Group
|
$
|
2,433
|
|
$
|
3,053
|
|
$
|
5,445
|
|
$
|
7,486
|
|
||||
|
Data Center Group
|
2,127
|
|
1,946
|
|
5,671
|
|
5,124
|
|
||||||||
|
Internet of Things Group
|
151
|
|
145
|
|
383
|
|
406
|
|
||||||||
|
Software and services operating segments
|
102
|
|
29
|
|
119
|
|
56
|
|
||||||||
|
All other
|
(621
|
)
|
(633
|
)
|
(1,915
|
)
|
(2,178
|
)
|
||||||||
|
Total operating income
|
$
|
4,192
|
|
$
|
4,540
|
|
$
|
9,703
|
|
$
|
10,894
|
|
||||
36
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Our Management’s 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
. Analysis of our financial results comparing the three and
nine months ended
September 26, 2015
to the three and
nine months ended
September 27, 2014
.
|
|
•
|
Liquidity and Capital Resources
. 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.
|
|
•
|
Contractual Obligations.
Material changes, outside our ordinary course of business, to our significant contractual obligations as of
December 27, 2014
.
|
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 27, 2014
and Form 8-K filed with the U.S. Securities and Exchange Commission (SEC) on June 5, 2015. The various sections of this MD&A contain a number of forward-looking statements that involve a number of risks and uncertainties.
Words such as "anticipates," "expects," "intends," "goals," "plans," "believes," "seeks," "estimates," "continues," "may," "will," "should," 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, uncertain events or assumptions, 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 Annual Report on Form 10-K, and as may be updated in our subsequent Quarterly Reports on Form 10-Q. 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, including our definitive agreement with Altera Corporation (Altera) as discussed in “
Note 7: Acquisitions
” in the Notes to the Consolidated Condensed Financial Statements of this Form 10-Q, that had not been completed as of
October 28, 2015
.
37
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Overview
Our results of operations for each period were as follows:
|
(Dollars in Millions, Except Per Share Amounts)
|
Q3 2015
|
Q2 2015
|
Change
|
Q3 2015
|
Q3 2014
|
Change
|
||||||||||||||||||
|
Net revenue
|
$
|
14,465
|
|
$
|
13,195
|
|
$
|
1,270
|
|
$
|
14,465
|
|
$
|
14,554
|
|
$
|
(89
|
)
|
||||||
|
Gross margin
|
$
|
9,111
|
|
$
|
8,248
|
|
$
|
863
|
|
$
|
9,111
|
|
$
|
9,458
|
|
$
|
(347
|
)
|
||||||
|
Gross margin percentage
|
63.0
|
%
|
62.5
|
%
|
0.5
|
%
|
63.0
|
%
|
65.0
|
%
|
(2.0
|
)%
|
||||||||||||
|
Operating income
|
$
|
4,192
|
|
$
|
2,896
|
|
$
|
1,296
|
|
$
|
4,192
|
|
$
|
4,540
|
|
$
|
(348
|
)
|
||||||
|
Net income
|
$
|
3,109
|
|
$
|
2,706
|
|
$
|
403
|
|
$
|
3,109
|
|
$
|
3,317
|
|
$
|
(208
|
)
|
||||||
|
Diluted earnings per common share
|
$
|
0.64
|
|
$
|
0.55
|
|
$
|
0.09
|
|
$
|
0.64
|
|
$
|
0.66
|
|
$
|
(0.02
|
)
|
||||||
|
Effective tax rate
|
26.9
|
%
|
9.3
|
%
|
17.6
|
%
|
26.9
|
%
|
27.1
|
%
|
(0.2
|
)%
|
||||||||||||
Our
Q3 2015
net revenue of
$14.5 billion
was
flat
from
Q3 2014
and above the midpoint of the Business Outlook provided in July 2015. While net revenue was flat, Client Computing Group (CCG) unit sales decreased, primarily on lower desktop and notebook platforms unit sales, offset by higher CCG average selling price, Data Center Group (DCG) platform revenue, and Non-Volatile Memory Solutions Group revenue. Continued weakness in the macroeconomic environment and the overall PC market drove lower demand in the non-consumer segment and emerging markets. Despite this trend, we continue to invigorate our performance product lines, resulting in higher demand and consequently higher average selling prices. We are seeing signs of a stabilizing PC market and our strategy to offer complete and connected computing solutions is delivering growth which is largely offsetting the lower demand of the traditional PC business. DCG posted record net revenue and Non-Volatile Memory Solutions Group and Internet of Things Group (IOTG) net revenue all grew double digit year-over-year.
Gross margin decreased by 2% points from
Q3 2014
and in-line with our previous Business Outlook of 63%. The decrease from
Q3 2014
was primarily due to higher platform unit costs and lower platform unit sales. These decreases were partially offset by higher platform average selling prices and lower production costs on 14nm which were treated as a period charge in Q3 2014. As compared to
Q3 2014
, operating income of
$4.2 billion
was down
8%
, net income of
$3.1 billion
was
down 6%
, and earnings per share of
$0.64
was down 2 cents.
In
Q3 2015
, we started shipping our 6th generation Intel
®
Core
™
processor family, formerly code-named "Skylake". We see our partners in the industry are combining our 6th generation Intel Core processor and Microsoft Windows 10* to drive innovation, creating new user experiences and providing more secure computing. The new 6th generation Intel Core processor is also enabling thinner designs, faster startup time, and better battery life. We introduced 3D XPoint
™
technology in July 2015, a non-volatile memory that has the potential to revolutionize devices, applications or services that benefits from fast access to large sets of data, which was jointly developed with Micron Technology, Inc. Now in production, 3D XPoint technology combines the performance, density, power, non-volatility and cost advantages of existing NAND and conventional memories like DRAM technologies on the market today.
In Q2 2015, we entered into a definitive agreement to acquire Altera. As of the date we entered into the agreement, the transaction had an approximate value of
$16.7 billion
. While we expect to close this transaction within six to nine months from the date of the agreement, , it is subject to certain regulatory approvals and customary closing conditions. For further information, see "
Note 7: Acquisitions
" in the Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
Our business continues to generate significant cash with
$5.7 billion
of cash from operations in
Q3 2015
. During
Q3 2015
, we purchased
$1.2 billion
in capital assets and returned cash to stockholders by both paying
$1.1 billion
in dividends and repurchasing
$1.0 billion
of common stock through our stock repurchase program. Additionally, our Board of Directors declared a quarterly cash dividend in September 2015 of $0.24 per share of common stock to be paid in December 2015. We ended
Q3 2015
with
$20.8 billion
of cash and cash equivalents, short-term investments, and trading assets, which represented a $7.0 billion increase compared to Q2 2015, primarily driven by new long-term debt issued during Q3 2015 as part of our plan to finance our pending acquisition of Altera. For further information, see "Note 13: Borrowings" in the Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
38
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
For
Q4 2015
, we are forecasting a revenue midpoint of
$14.8 billion
,
up
2%
from
Q3 2015
. This forecast is in-line with the average seasonal increase for the fourth quarter. We are forecasting
Q4 2015
gross margin midpoint of
62%
, down 1% from
Q3 2015
as we continue to transition to 14nm process technology. We are now expecting the midpoint of our capital spending for full year 2015 to be $7.3 billion, down $400 million from the midpoint of our previous Business Outlook of $7.7 billion. For the full year 2015, DCG and IOTG will exhibit strong growth but the annual growth rate for these businesses will be lower than our expectations at the beginning of the year as a result of weaker-than-expected macroeconomic growth. We now expect DCG business to grow in the low double digits versus the prior forecast of approximately fifteen percent. Relative to our forecast at the beginning of the year, we are seeing weakness in the enterprise market segment being partially offset by a stronger than expected cloud market segment.
Our Business Outlook for
Q4 2015
and full-year
2015
includes, where applicable, our current expectations for revenue, gross margin percentage, spending (research and development (R&D) plus marketing, general, and administrative (MG&A)), and capital expenditures. We publish our Business Outlook in our quarterly earnings release. Our Business Outlook and any updates thereto are publicly available on our Investor Relations web site www.intc.com. This Business Outlook is not incorporated by reference in 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 the Business Outlook or in this Form 10-Q.
The statements in the 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 filings with the SEC and at other times. The forward-looking statements in the Business Outlook and reiterated or updated in this Form 10-Q will be effective through the close of business on
December 11, 2015
unless updated earlier or except as specifically noted otherwise in the Business Outlook. From the close of business on
December 11, 2015
until our quarterly earnings release is published, currently scheduled for
January 14, 2016
, we will observe a “quiet period.”
During the quiet period, the Business Outlook and other forward-looking statements first published in our Form 8-K filed on
October 13, 2015
, and other forward-looking statements disclosed in the company's news releases and filings with the SEC, as reiterated or updated as applicable in this Form 10-Q, should be considered historical, speaking 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.
39
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations –
Third
Quarter of
2015
Compared to
Third
Quarter of
2014
The following table sets forth certain consolidated condensed statements of income data as a percentage of net revenue for each period as follows:
|
|
Q3 2015
|
Q3 2014
|
||||||||||||
|
(Dollars in Millions, Except Per Share Amounts)
|
Dollars
|
% of Net
Revenue |
Dollars
|
% of Net
Revenue |
||||||||||
|
Net revenue
|
$
|
14,465
|
|
100.0
|
%
|
$
|
14,554
|
|
100.0
|
%
|
||||
|
Cost of sales
|
5,354
|
|
37.0
|
%
|
5,096
|
|
35.0
|
%
|
||||||
|
Gross margin
|
9,111
|
|
63.0
|
%
|
9,458
|
|
65.0
|
%
|
||||||
|
Research and development
|
2,927
|
|
20.2
|
%
|
2,842
|
|
19.5
|
%
|
||||||
|
Marketing, general and administrative
|
1,910
|
|
13.2
|
%
|
1,979
|
|
13.6
|
%
|
||||||
|
Restructuring and asset impairment charges
|
14
|
|
0.1
|
%
|
20
|
|
0.1
|
%
|
||||||
|
Amortization of acquisition-related intangibles
|
68
|
|
0.5
|
%
|
77
|
|
0.5
|
%
|
||||||
|
Operating income
|
4,192
|
|
29.0
|
%
|
4,540
|
|
31.3
|
%
|
||||||
|
Gains (losses) on equity investments, net
|
165
|
|
1.1
|
%
|
35
|
|
0.2
|
%
|
||||||
|
Interest and other, net
|
(104
|
)
|
(0.7
|
)%
|
(25
|
)
|
(0.2
|
)%
|
||||||
|
Income before taxes
|
4,253
|
|
29.4
|
%
|
4,550
|
|
31.3
|
%
|
||||||
|
Provision for taxes
|
1,144
|
|
7.9
|
%
|
1,233
|
|
8.5
|
%
|
||||||
|
Net income
|
$
|
3,109
|
|
21.5
|
%
|
$
|
3,317
|
|
22.8
|
%
|
||||
|
Diluted earnings per common share
|
$
|
0.64
|
|
$
|
0.66
|
|
||||||||
Note: We have updated our presentation to reflect platforms sold through the Client Computing Group, the Data Center Group, and the Internet of Things Group (platform).
Our net revenue for
Q3 2015
was flat compared to
Q3 2014
. Total platform unit sales decreased by
17%
, driven by the challenging macroeconomic conditions in the current period. In addition,
Q3 2014
included higher PC demand driven by Microsoft Windows* XP refresh and higher tablet volume as we ramped the tablet platform business. Most of this decrease was offset by higher platform average selling prices of
19%
. The increase in platform average selling prices was driven by a higher proportion of unit sales from DCG platforms, a lower proportion of tablet and phone platform unit sales (which has a lower average selling price), as well as higher average selling prices for the desktop, DCG, and notebook platforms. To a lesser extent, higher Non-Volatile Memory Solutions Group revenue partially offset the decrease in revenue driven by lower total platform unit sales.
Our overall gross margin dollars for
Q3 2015
decreased
by
$347 million
, or
4%
, compared to
Q3 2014
. This decrease was due to
$930 million
of higher platform unit costs as our 14nm products constituted a higher proportion of our platform unit sales. The decrease in gross margin was partially offset by higher platform revenue which impacted gross margin by approximately
$265 million
as well as approximately
$155 million
of lower production costs on our 14nm products which were treated as a period charge in Q3 2014.
Our overall gross margin percentage decreased to
63.0%
in
Q3 2015
from
65.0%
in
Q3 2014
. The
decrease
in gross margin percentage was primarily due to the gross margin decrease in the CCG operating segment. We derived a substantial majority of our overall gross margin dollars in
Q3 2015
and
Q3 2014
from the sale of platforms in the CCG and DCG operating segments.
40
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Client Computing Group
The revenue and operating income for the CCG operating segment for each period were as follows:
|
(In Millions)
|
Q3 2015
|
Q3 2014
|
||||||
|
Platform revenue
|
$
|
8,089
|
|
$
|
8,749
|
|
||
|
Other revenue
|
417
|
|
442
|
|
||||
|
Net revenue
|
$
|
8,506
|
|
$
|
9,191
|
|
||
|
Operating income
|
$
|
2,433
|
|
$
|
3,053
|
|
||
Net revenue for the CCG operating segment
decreased
by
$685 million
, or
7%
, in
Q3 2015
compared to
Q3 2014
. CCG platform unit sales were
down
19%
and CCG platform average selling prices were
up
15%
.
The decrease in revenue was primarily driven by
$722 million
of lower notebook platform unit sales, which were
down
14%
, and
$604 million
of lower desktop platform unit sales, which were down
15%
. These decreases were partially offset by
$255 million
of higher desktop average selling prices, which were
up
8%
, and
$196 million
of higher notebook average selling prices, which were
up
4%
.
Operating income
decreased
by
$620 million
, or
20%
, in
Q3 2015
compared to
Q3 2014
, which was driven by
$780 million
of
lower
gross margin
, partially offset by
$160 million
of
lower
operating expenses. Gross margin decreased by approximately
$915 million
on higher CCG platform unit costs. To a lesser extent, the impact to gross margin on lower CCG platform revenue was approximately
$225 million
. Lower CCG platform revenue was driven by lower CCG platform unit sales. Lower CCG platform revenue was partially offset by higher CCG platform average selling prices driven by the benefit of lower tablet and phone platform unit sales (which have a lower average selling price) and higher desktop and notebook platform average selling prices. The decrease in gross margin was partially offset by approximately
$215 million
of lower production costs primarily on our 14nm products which were treated as period charges in Q3 2014.
Data Center Group
The revenue and operating income for the DCG operating segment for each period were as follows:
|
(In Millions)
|
Q3 2015
|
Q3 2014
|
||||||
|
Platform revenue
|
$
|
3,863
|
|
$
|
3,439
|
|
||
|
Other revenue
|
277
|
|
261
|
|
||||
|
Net revenue
|
$
|
4,140
|
|
$
|
3,700
|
|
||
|
Operating income
|
$
|
2,127
|
|
$
|
1,946
|
|
||
Net revenue for the DCG operating segment
increased
by
$440 million
, or
12%
, in
Q3 2015
compared to
Q3 2014
. DCG platform average selling prices and unit sales were both up
6%
driven by continued growth in the Internet cloud computing market segment. To a lesser extent, growth in the communications infrastructure market segment contributed to the increase.
Operating income
increased
by
$181 million
, or
9%
, in
Q3 2015
compared to
Q3 2014
, which was driven by
$287 million
of
higher
gross margin
, partially offset by
$106 million
of
higher
operating expenses. Gross margin increased by approximately
$400 million
due to higher DCG platform revenue.
Internet of Things Group
The revenue and operating income for the IOTG operating segment for each period were as follows:
|
(In Millions)
|
Q3 2015
|
Q3 2014
|
||||||
|
Platform revenue
|
$
|
501
|
|
$
|
456
|
|
||
|
Other revenue
|
80
|
|
74
|
|
||||
|
Net revenue
|
$
|
581
|
|
$
|
530
|
|
||
|
Operating income
|
$
|
151
|
|
$
|
145
|
|
||
Net reven
ue for the IOTG operating segment
increased
by
$51 million
, or
10%
, in
Q3 2015
compared to
Q3 2014
.
41
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating income for the IOTG operating segment
increased
by
$6 million
, or
4%
, in
Q3 2015
compared to
Q3 2014
.
Software and Services Operating Segments
The revenue and operating income for the software and services (SSG) operating segments, including McAfee and the Software and Services Group, for each period were as follows:
|
(In Millions)
|
Q3 2015
|
Q3 2014
|
||||||
|
Net revenue
|
$
|
556
|
|
$
|
558
|
|
||
|
Operating income
|
$
|
102
|
|
$
|
29
|
|
||
Net revenue for the SSG operating segments
decreased
by
$2 million
in
Q3 2015
compared to
Q3 2014
.
The operating results for the SSG operating segments
increased
by
$73 million
in
Q3 2015
compared to
Q3 2014
, which was driven by
$22 million
of
higher
gross margin
and
$51 million
of
lower
operating expenses.
Operating Expenses
Operating expenses for each period were as follows:
|
(Dollars in Millions)
|
Q3 2015
|
Q3 2014
|
||||||
|
Research and development (R&D)
|
$
|
2,927
|
|
$
|
2,842
|
|
||
|
Marketing, general and administrative (MG&A)
|
$
|
1,910
|
|
$
|
1,979
|
|
||
|
R&D and MG&A as percentage of net revenue
|
33
|
%
|
33
|
%
|
||||
|
Restructuring and asset impairment charges
|
$
|
14
|
|
$
|
20
|
|
||
|
Amortization of acquisition-related intangibles
|
$
|
68
|
|
$
|
77
|
|
||
Research and Development
R&D
increased
by
$85 million
, or
3%
, in
Q3 2015
compared to
Q3 2014
. This
increase
was driven by expenses of newly acquired entities and higher product development, primarily in DCG, IOTG, and within the "all other" operating segment category, partially offset by lower profit-dependent compensation.
Marketing, General and Administrative
MG&A
decreased
by
$69 million
, or
3%
, in
Q3 2015
compared to
Q3 2014
. This
decrease
was driven by lower marketing expenses.
42
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Restructuring and Asset Impairment Charges
Restructuring and asset impairment charges by program for each period were as follows:
|
(In Millions)
|
Q3 2015
|
Q3 2014
|
||||||
|
2015 restructuring program
|
$
|
22
|
|
$
|
—
|
|
||
|
2013 restructuring program
|
(8
|
)
|
20
|
|
||||
|
Total restructuring and asset impairment charges
|
$
|
14
|
|
$
|
20
|
|
||
2015 Restructuring Program
Restructuring and asset impairment charges for the 2015 restructuring program for each period were as follows:
|
(In Millions)
|
Q3 2015
|
Q3 2014
|
||||||
|
Employee severance and benefit arrangements
|
$
|
20
|
|
$
|
—
|
|
||
|
Asset impairments and other restructuring charges
|
2
|
|
—
|
|
||||
|
Total restructuring and asset impairment charges
|
$
|
22
|
|
$
|
—
|
|
||
2013 Restructuring Program
Restructuring and asset impairment charges for the 2013 restructuring program for each period were as follows
:
|
(In Millions)
|
Q3 2015
|
Q3 2014
|
||||||
|
Employee severance and benefit arrangements
|
$
|
(9
|
)
|
$
|
9
|
|
||
|
Asset impairments and other restructuring charges
|
1
|
|
11
|
|
||||
|
Total restructuring and asset impairment charges
|
$
|
(8
|
)
|
$
|
20
|
|
||
For further discussion, see "Results of Operations –
First Nine Months
of
2015
Compared to
First Nine Months
of
2014
."
Gains (Losses) on Equity Investments and Interest and Other, Net
Gains (losses) on equity investments and interest and other, net for each period were as follows:
|
(In Millions)
|
Q3 2015
|
Q3 2014
|
||||||
|
Gains (losses) on equity investments, net
|
$
|
165
|
|
$
|
35
|
|
||
|
Interest and other, net
|
$
|
(104
|
)
|
$
|
(25
|
)
|
||
We recognized higher net gains on equity investments in
Q3 2015
compared to
Q3 2014
due to higher gains primarily on third-party merger transactions.
We recognized higher interest and other net loss in
Q3 2015
compared to
Q3 2014
primarily due to an increase in interest expense related to the issuance of our $
8.0 billion
aggregate principal amount of senior unsecured notes in
Q3 2015
. For further information, see "
Note 13: Borrowings
."
Provision for Taxes
Our provision for taxes and effective tax rate for each period were as follows:
|
(Dollars in Millions)
|
Q3 2015
|
Q3 2014
|
||||||
|
Income before taxes
|
$
|
4,253
|
|
$
|
4,550
|
|
||
|
Provision for taxes
|
$
|
1,144
|
|
$
|
1,233
|
|
||
|
Effective tax rate
|
26.9
|
%
|
27.1
|
%
|
||||
The change in our effective tax rate between
Q3 2015
and
Q3 2014
was primarily driven by a higher percentage of our profits generated in lower tax jurisdictions.
43
Results of Operations –
First Nine Months
of
2015
Compared to
First Nine Months
of
2014
Certain consolidated condensed statements of income data as a percentage of net revenue for each period were as follows:
|
|
YTD 2015
|
YTD 2014
|
||||||||||||
|
(Dollars in Millions, Except Per Share Amounts)
|
Dollars
|
% of Net
Revenue |
Dollars
|
% of Net
Revenue |
||||||||||
|
Net revenue
|
$
|
40,441
|
|
100.0
|
%
|
$
|
41,149
|
|
100.0
|
%
|
||||
|
Cost of sales
|
15,352
|
|
38.0
|
%
|
15,161
|
|
36.8
|
%
|
||||||
|
Gross margin
|
25,089
|
|
62.0
|
%
|
25,988
|
|
63.2
|
%
|
||||||
|
Research and development
|
9,009
|
|
22.3
|
%
|
8,547
|
|
20.8
|
%
|
||||||
|
Marketing, general and administrative
|
5,812
|
|
14.4
|
%
|
6,087
|
|
14.8
|
%
|
||||||
|
Restructuring and asset impairment charges
|
367
|
|
0.8
|
%
|
238
|
|
0.6
|
%
|
||||||
|
Amortization of acquisition-related intangibles
|
198
|
|
0.5
|
%
|
222
|
|
0.5
|
%
|
||||||
|
Operating income
|
9,703
|
|
24.0
|
%
|
10,894
|
|
26.5
|
%
|
||||||
|
Gains (losses) on equity investments, net
|
297
|
|
0.7
|
%
|
178
|
|
0.4
|
%
|
||||||
|
Interest and other, net
|
(91
|
)
|
(0.2
|
)%
|
70
|
|
0.2
|
%
|
||||||
|
Income before taxes
|
9,909
|
|
24.5
|
%
|
11,142
|
|
27.1
|
%
|
||||||
|
Provision for taxes
|
2,102
|
|
5.2
|
%
|
3,099
|
|
7.6
|
%
|
||||||
|
Net income
|
$
|
7,807
|
|
19.3
|
%
|
$
|
8,043
|
|
19.5
|
%
|
||||
|
Diluted earnings per common share
|
$
|
1.59
|
|
$
|
1.58
|
|
||||||||
Our net revenue for the
first nine months
of
2015
decreased
by
$708 million
, or
2%
, compared to the
first nine months
of
2014
.
Total platform unit sales decreased by
7%
, driven by the challenging macroeconomic conditions in the current period. In addition, the
first nine months
of
2014
included higher PC demand due to the Microsoft Windows* XP refresh. The decrease was partially offset by higher platform average selling prices of
5%
. The higher platform average selling price was driven by a higher proportion of DCG platform unit sales and higher average selling prices for both desktop and DCG platforms, offset by a higher proportion of phone platform unit sales (which have a lower average selling price). The decrease in revenue was also partially offset by higher Non-Volatile Memory Solutions Group revenue.
Our overall gross margin dollars for the
first nine months
of
2015
decreased
by
$899 million
, or
3%
, compared to the
first nine months
of
2014
. The decrease was primarily due to approximately
$1.1 billion
of higher platform unit costs. To a lesser extent lower platform revenue, primarily in the CCG operating segment, also contributed to the decrease. This decrease was partially offset by approximately
$385 million
lower factory start-up costs, primarily on our next-generation 14nm process technology.
Our overall gross margin percentage
decrease
d to
62.0%
in the
first nine months
of
2015
from
63.2%
in the
first nine months
of
2014
. The
decrease
in gross margin percentage was primarily due to the gross margin decrease in CCG operating segment, partially offset by the gross margin increase in DCG. We derived a substantial majority of our overall gross margin dollars for the
first nine months
of
2015
and the
first nine months
of
2014
from the sale of platforms in the CCG and DCG operating segments.
44
Client Computing Group
The revenue and operating income for the CCG operating segment for each period were as follows:
|
(In Millions)
|
YTD 2015
|
YTD 2014
|
||||||
|
Platform revenue
|
$
|
22,262
|
|
$
|
24,744
|
|
||
|
Other revenue
|
1,201
|
|
1,262
|
|
||||
|
Net revenue
|
$
|
23,463
|
|
$
|
26,006
|
|
||
|
Operating income
|
$
|
5,445
|
|
$
|
7,486
|
|
||
Net revenue for the CCG operating segment
decreased
by
$2.5 billion
, or
10%
,
in the
first nine months
of
2015
compared to the
first nine months
of
2014
. CCG platform unit sales were
down
9%
, while CCG platform average selling prices were flat.
The decrease in revenue was primarily driven by
$2.1 billion
of lower desktop platform unit sales, which were down
18%
. To a lesser extent,
$1.1 billion
of lower notebook platform unit sales, which were down
8%
, also contributed to the decrease. These decreases were partially offset by
$483 million
of higher desktop platform average selling prices, which were
up
6%
and
$199 million
of higher tablet average selling prices.
Operating income
decreased
by
$2.0 billion
, or
27%
, in the
first nine months
of
2015
compared to the
first nine months
of
2014
, which was driven by
$2.3 billion
of
lower
gross margin
, partially offset by
$304 million
of
lower
operating expenses. Gross margin decreased by approximately
$1.8 billion
due to lower CCG platform revenue, primarily driven by the decrease in desktop and notebook platform unit sales. To a lesser extent, approximately
$1.3 billion
of higher CCG platform unit costs also contributed to the decrease in gross margin. These decreases were partially offset by approximately
$385 million
of lower factory start-up costs, primarily driven by the ramp of our 14nm process technology.
Data Center Group
The revenue and operating income for the DCG operating segment for each period were as follows:
|
(In Millions)
|
YTD 2015
|
YTD 2014
|
||||||
|
Platform revenue
|
$
|
10,861
|
|
$
|
9,543
|
|
||
|
Other revenue
|
808
|
|
753
|
|
||||
|
Net revenue
|
$
|
11,669
|
|
$
|
10,296
|
|
||
|
Operating income
|
$
|
5,671
|
|
$
|
5,124
|
|
||
Net revenue for the DCG operating segment
increased
by
$1.4 billion
, or
13%
, in the
first nine months
of
2015
compared to the
first nine months
of
2014
. DCG platform unit sales and average selling prices were up
9%
and
5%
, respectively.
The increase in revenue was driven by continued growth in the Internet cloud computing market segment. To a lesser extent, growth in the communications infrastructure market segment contributed to the increase.
Operating income
increased
by
$547 million
, or
11%
, in the
first nine months
of
2015
compared to the
first nine months
of
2014
with
$1.1 billion
of
higher
gross margin
, partially offset by
$541 million
of
higher
operating expenses. The increase in operating expenses was primarily driven by higher product development costs. Gross margin increased by approximately
$1.2 billion
due to higher DCG platform revenue.
45
Internet of Things Group
The revenue and operating income for the IOTG operating segment for each period were as follows:
|
(In Millions)
|
YTD 2015
|
YTD 2014
|
||||||
|
Platform revenue
|
$
|
1,450
|
|
$
|
1,320
|
|
||
|
Other revenue
|
223
|
|
231
|
|
||||
|
Net revenue
|
$
|
1,673
|
|
$
|
1,551
|
|
||
|
Operating income
|
$
|
383
|
|
$
|
406
|
|
||
Net revenue for the IOTG operating segment
increased
by
$122 million
, or
8%
, in the
first nine months
of
2015
compared to the
first nine months
of
2014
. The increase was primarily due to higher IOTG platform unit sales based on strength in the retail market segment.
Operating income for the IOTG operating segment
decreased
by
$23 million
, or
6%
, in the
first nine months
of
2015
compared to the
first nine months
of
2014
. The decrease in operating income was driven by continued investment in product development across our operating segments including the Internet of Things market segment. This decrease was partially offset by lower costs related to product transition and higher IOTG platform revenue.
Software and Services Operating Segments
The revenue and operating income for the SSG operating segments, including McAfee and the Software and Services Group, for each period were as follows:
|
(In Millions)
|
YTD 2015
|
YTD 2014
|
||||||
|
Net revenue
|
$
|
1,624
|
|
$
|
1,659
|
|
||
|
Operating income
|
$
|
119
|
|
$
|
56
|
|
||
Net revenue for the SSG operating segments
decreased
by
$35 million
in the
first nine months
of
2015
compared to the
first nine months
of
2014
.
The operating results for the SSG operating segments
increased
by
$63 million
in the
first nine months
of
2015
compared to the
first nine months
of
2014
, which was driven by
$66 million
of
lower
operating expenses.
Operating Expenses
Operating expenses for each period were as follows:
|
(Dollars in Millions)
|
YTD 2015
|
YTD 2014
|
||||||
|
Research and development (R&D)
|
$
|
9,009
|
|
$
|
8,547
|
|
||
|
Marketing, general and administrative (MG&A)
|
$
|
5,812
|
|
$
|
6,087
|
|
||
|
R&D and MG&A as percentage of net revenue
|
37
|
%
|
36
|
%
|
||||
|
Restructuring and asset impairment charges
|
$
|
367
|
|
$
|
238
|
|
||
|
Amortization of acquisition-related intangibles
|
$
|
198
|
|
$
|
222
|
|
||
Research and Development
R&D
increased
by
$462 million
, or
5%
, in the
first nine months
of
2015
compared to the
first nine months
of
2014
. This
increase
was driven by higher product development, primarily in DCG, IOTG, and within the "all other" operating segment category, higher process development costs for our 10nm process technology, and expenses of newly acquired entities. These increases were partially offset by lower profit-dependent compensation.
Marketing, General and Administrative
MG&A
decreased
by
$275 million
, or
5%
, in the
first nine months
of
2015
compared to the
first nine months
of
2014
. This
decrease
was driven by lower marketing expenses.
46
Restructuring and Asset Impairment Charges
Restructuring and asset impairment charges by program for each period were as follows:
|
(In Millions)
|
YTD 2015
|
YTD 2014
|
||||||
|
2015 restructuring program
|
$
|
272
|
|
$
|
—
|
|
||
|
2013 restructuring program
|
95
|
|
238
|
|
||||
|
Total restructuring and asset impairment charges
|
$
|
367
|
|
$
|
238
|
|
||
2015 Restructuring Program
Beginning in Q2 2015,
management approved and commenced implementation of restructuring actions, primarily targeted workforce reductions, as we adjusted resources from areas of disinvestment to areas of investment.
We expect these actions to be substantially complete by the end of
2015
.
Restructuring and asset impairment charges for the 2015 restructuring program for each period were as follows:
|
(In Millions)
|
YTD 2015
|
YTD 2014
|
||||||
|
Employee severance and benefit arrangements
|
$
|
270
|
|
$
|
—
|
|
||
|
Asset impairments and other restructuring charges
|
2
|
|
—
|
|
||||
|
Total restructuring and asset impairment charges
|
$
|
272
|
|
$
|
—
|
|
||
Restructuring and asset impairment activity for the 2015 restructuring program for the
first nine months
of
2015
was as follows:
|
(In Millions)
|
Employee Severance and Benefits
|
Asset Impairments and Other
|
Total
|
|||||||||
|
Accrued restructuring balance as of December 27, 2014
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
Additional accruals
|
283
|
|
2
|
|
285
|
|
||||||
|
Adjustments
|
(13
|
)
|
—
|
|
(13
|
)
|
||||||
|
Cash payments
|
(178
|
)
|
—
|
|
(178
|
)
|
||||||
|
Non-cash settlements
|
—
|
|
(1
|
)
|
(1
|
)
|
||||||
|
Accrued restructuring balance as of September 26, 2015
|
$
|
92
|
|
$
|
1
|
|
$
|
93
|
|
|||
We recorded the additional accruals as restructuring and asset impairment charges in the consolidated condensed statements of income and within the “all other” operating segments category.
Substantially all
of the accrued restructuring balance as of
September 26, 2015
is expected to be paid within the next 12 months and was recorded as a current liability within accrued compensation and benefits on the consolidated condensed balance sheets.
Restructuring actions related to this program that were approved in 2015 impacted approximately
3,800
employees.
We estimate that employee severance and benefit charges incurred to date as part of the 2015 restructuring program will result in gross annual savings of approximately
$400 million
, which will be realized within
R&D, cost of sales and MG&A
. We began to realize these savings in Q2 2015 and now expect to fully realize these savings beginning in
Q1 2016
.
2013 Restructuring Program
Beginning in Q3 2013,
management approved and commenced implementation of several restructuring actions, including targeted workforce reductions and the exit of certain businesses and facilities. These actions include the wind down of our 200
millimeter
wafer fabrication facility in Massachusetts, which ceased production in
Q1 2015
, and the closure of our assembly and test facility in Costa Rica, which ceased production
in Q4 2014
. These targeted reductions will enable us to better align our resources in areas providing the greatest benefit in the current business environment. We expect these actions to be substantially complete by the end of
2015
.
47
Restructuring and asset impairment charges for the 2013 restructuring program for each period were as follows
:
|
(In Millions)
|
YTD 2015
|
YTD 2014
|
||||||
|
Employee severance and benefit arrangements
|
$
|
87
|
|
$
|
218
|
|
||
|
Asset impairments and other restructuring charges
|
8
|
|
20
|
|
||||
|
Total restructuring and asset impairment charges
|
$
|
95
|
|
$
|
238
|
|
||
Restructuring and asset impairment activity for the 2013 restructuring program for
the
first nine months
of
2015
was as follows:
|
(In Millions)
|
Employee Severance and Benefits
|
Asset Impairments and Other
|
Total
|
|||||||||
|
Accrued restructuring balance as of December 27, 2014
|
$
|
121
|
|
$
|
11
|
|
$
|
132
|
|
|||
|
Additional accruals
|
100
|
|
9
|
|
109
|
|
||||||
|
Adjustments
|
(13
|
)
|
(1
|
)
|
(14
|
)
|
||||||
|
Cash payments
|
(156
|
)
|
(14
|
)
|
(170
|
)
|
||||||
|
Non-cash settlements
|
—
|
|
(3
|
)
|
(3
|
)
|
||||||
|
Accrued restructuring balance as of September 26, 2015
|
$
|
52
|
|
$
|
2
|
|
$
|
54
|
|
|||
We recorded the additional accruals and adjustments as restructuring and asset impairment charges in the consolidated condensed statements of income and within the “all other” operating segments category.
Substantially all
of the accrued restructuring balance as of
September 26, 2015
is expected to be paid by the end of 2015 and was recorded as a current liability within accrued compensation and benefits on the consolidated condensed balance sheets.
Restructuring actions related to this program that were approved in 2015 impacted approximately
1,100
employees.
Since
Q3
2013, we have incurred a total of
$630 million
in restructuring and asset impairment charges related to this program. These charges included a total of
$553 million
related to employee severance and benefit arrangements for approximately
8,700
employees, and
$77 million
in asset impairment charges and other restructuring charges.
We estimate that employee severance and benefit charges incurred to date as part of the 2013 restructuring program will result in gross annual savings of approximately
$600 million
, which will be realized in
R&D, MG&A and cost of sales
. We began to realize these savings in Q4 2013 and now expect to fully realize these savings beginning in
Q1 2016
.
Gains (Losses) on Equity Investments and Interest and Other, Net
Gains (losses) on equity investments and interest and other, net for each period were as follows:
|
(In Millions)
|
YTD 2015
|
YTD 2014
|
||||||
|
Gains (losses) on equity investments, net
|
$
|
297
|
|
$
|
178
|
|
||
|
Interest and other, net
|
$
|
(91
|
)
|
$
|
70
|
|
||
We recognized higher net gains on equity investments in the
first nine months
of
2015
compared to the
first nine months
of
2014
primarily due to higher gains on third-party merger transactions offset by higher equity method losses and lower gains on exits.
We recognized an interest and other, net loss in the
first nine months
of
2015
compared to a net gain in the
first nine months
of
2014
. We recognized a net loss in the
first nine months
of
2015
primarily due to interest expense which now includes the
Q3 2015
issuance of our $
8.0 billion
aggregate principal amount of senior unsecured notes. For further information, see "
Note 13: Borrowings
." We recognized a net gain in the
first nine months
of
2014
primarily due to a gain recognized on the divestiture of our Intel Media assets in Q1 2014.
48
Provision for Taxes
Our provision for taxes and effective tax rate for each period were as follows:
|
(Dollars in Millions)
|
YTD 2015
|
YTD 2014
|
||||||
|
Income before taxes
|
$
|
9,909
|
|
$
|
11,142
|
|
||
|
Provision for taxes
|
$
|
2,102
|
|
$
|
3,099
|
|
||
|
Effective tax rate
|
21.2
|
%
|
27.8
|
%
|
||||
Most
of the
decrease
in our effective tax rate between the
first nine months
of
2015
and the
first nine months
of
2014
was driven by the following Q2 2015 events: the settlement of a one-time refund claim involving asset tax basis resulting in the recognition of a $320 million tax benefit and our decision during
2015
to indefinitely reinvest certain prior years' non-U.S. earnings resulting in the release of $185 million previously accrued U.S. deferred taxes. In addition, a higher proportion of our income from lower taxed jurisdictions positively impacted our effective income tax rate.
Liquidity and Capital Resources
|
(Dollars in Millions)
|
Sep 26,
2015 |
Dec 27,
2014 |
||||||
|
Cash and cash equivalents, short-term investments, and trading assets
|
$
|
20,843
|
|
$
|
14,054
|
|
||
|
Other long-term investments
|
$
|
1,829
|
|
$
|
2,023
|
|
||
|
Loans receivable and other
|
$
|
1,191
|
|
$
|
1,335
|
|
||
|
Reverse repurchase agreements with original maturities greater than approximately three months
|
$
|
2,650
|
|
$
|
450
|
|
||
|
Unsettled trade liabilities and other
|
$
|
200
|
|
$
|
77
|
|
||
|
Short-term and long-term debt
|
$
|
21,188
|
|
$
|
13,655
|
|
||
|
Temporary equity
|
$
|
905
|
|
$
|
912
|
|
||
|
Debt as percentage of permanent stockholders’ equity
|
37.1
|
%
|
24.4
|
%
|
||||
In summary, our cash flows for each period were as follows:
|
(In Millions)
|
YTD 2015
|
YTD 2014
|
||||||
|
Net cash provided by operating activities
|
$
|
13,590
|
|
$
|
14,647
|
|
||
|
Net cash used for investing activities
|
(10,911
|
)
|
(8,001
|
)
|
||||
|
Net cash provided by (used for) financing activities
|
1,824
|
|
(9,172
|
)
|
||||
|
Effect of exchange rate fluctuations on cash and cash equivalents
|
1
|
|
(5
|
)
|
||||
|
Net increase (decrease) in cash and cash equivalents
|
$
|
4,504
|
|
$
|
(2,531
|
)
|
||
Operating Activities
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.
For the
first nine months
of
2015
compared to the
first nine months
of
2014
, the
$1.1 billion
decrease
in cash provided by operations was due to adjustments to net income for non-cash items and changes in working capital. The adjustments to net income were lower due to deferred taxes, partially offset by higher depreciation.
Changes in assets and liabilities as of
September 26, 2015
, compared to
December 27, 2014
, included a decrease in accrued compensation and benefits due to the payout of
2014
profit-dependent compensation and an increase in inventories due to the ramp of our 5th generation Intel Core processor family of products, partially offset by an income taxes net payable resulting from income tax payments made in 2014.
49
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
For the
first nine months
of
2015
, our three largest customers accounted for
46%
of net revenue (
46%
for the
first nine months
of
2014
) with Hewlett-Packard Company accounting for
18%
of our net revenue (
18%
for the
first nine months
of
2014
), Dell Inc. accounting for
15%
of our net revenue (
16%
for the
first nine months
of
2014
), and Lenovo Group Limited accounting for
13%
of our net revenue (
12%
for the
first nine months
of
2014
). These three customers accounted for
43%
of net accounts receivable as of
September 26, 2015
(
43%
as of
December 27, 2014
).
Investing Activities
Investing cash flows consist primarily of capital expenditures; investment purchases, sales, maturities, and disposals; as well as proceeds from divestitures and cash used for acquisitions.
Cash used for investing activities was higher for the
first nine months
of
2015
compared to the
first nine months
of
2014
. Cash used for investing activities
increase
d primarily due to lower maturities of available-for-sale investments, higher originations of loans receivable and reverse repurchase agreements, and higher purchases of available-for-sale investments. This increase was partially offset by lower additions to property, plant and equipment, lower purchases of trading assets, and higher maturities and sales of trading assets.
Financing Activities
Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, and proceeds from the sale of shares of common stock through employee equity incentive plans.
Cash was provided by financing activities for the
first nine months
of
2015
compared to cash used by financing activities for the
first nine months
of
2014
, primarily due to the issuance of long-term debt and fewer repurchases of common stock in 2015.
Liquidity
Cash generated by operations is our primary source of liquidity. We maintain a diverse investment portfolio that we continually analyze based on issuer, industry, and country. As of
September 26, 2015
, cash and cash equivalents, short-term investments, and trading assets totaled
$20.8 billion
(
$14.1 billion
as of
December 27, 2014
). In addition to the
$20.8 billion
, we have
$2.7 billion
of reverse repurchase agreements with original maturities greater than approximately three months,
$1.8 billion
of other long-term investments, and
$1.2 billion
of loans receivable and other investments, that we include when assessing our sources of liquidity.
Most
of our investments in debt instruments are in
A/A2
rated issuances, and the
majority
of the issuances are rated
AA-/Aa3
.
Another potential source of liquidity is an
ongoing authorization from our Board of Directors to borrow up to
$5.0 billion
, which our Board of Directors increased from $
3.0 billion
during
Q2 2015
.
This ongoing authorization includes borrowings under our commercial paper program. Maximum borrowings under our commercial paper program were
$900 million
during the
first nine months
of
2015
and
no
commercial paper remained outstanding as of
September 26, 2015
.
Our commercial paper was rated
A-1+
by Standard & Poor’s and
P-1
by Moody’s as of
September 26, 2015
. 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. In
Q3 2015
, we utilized this shelf registration statement and issued $
8.0 billion
aggregate principal amount of senior unsecured notes. These notes were issued primarily to fund a portion of the cash consideration for our pending acquisition of Altera. For further information on the terms of the notes, see “
Note 13: Borrowings
” in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q.
As of
September 26, 2015
,
$10.1 billion
of our
$20.8 billion
of cash and cash equivalents, short-term investments, and trading assets was held by our non-U.S. subsidiaries. Of the
$10.1 billion
held by our non-U.S. subsidiaries, approximately
$434 million
was available for use in the U.S. without incurring additional U.S. income taxes in excess of the amounts already accrued in our financial statements as of
September 26, 2015
. The remaining amount of non-U.S. cash and cash equivalents, short-term investments, and trading assets has been indefinitely reinvested and, therefore, no U.S. current or deferred taxes have been accrued and this amount is earmarked for near-term investment in our operations outside the U.S. and future acquisitions of non-U.S. entities. We believe our U.S. sources of cash and liquidity are sufficient to meet our business needs in the U.S. and do not expect that we will need to repatriate the funds we have designated as indefinitely reinvested outside the U.S. Under current tax laws, should our plans change and we were to choose to repatriate some or all of the funds we have designated as indefinitely reinvested outside the U.S., such amounts would be subject to U.S. income taxes and applicable non-U.S. income and withholding taxes.
50
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
During Q2 2015, we entered into a definitive agreement to acquire Altera in an all-cash transaction expected to close within six to nine months from the date of the agreement. As of the date we entered into the agreement, the transaction had an approximate value of $
16.7 billion
.
We intend to finance the acquisition through a combination of
$
7.0 billion
to $
9.0 billion
in long-term debt, including the notes issued during Q3 2015, described in Note 13: Borrowings, and the remainder with commercial paper and cash and investments.
The timing, amount and terms of any additional debt financing are subject to market and other conditions.
We believe we have sufficient financial resources to meet our business requirements in the next 12 months, including capital expenditures for worldwide manufacturing and assembly and test; working capital requirements; and potential dividends, common stock repurchases, acquisitions, and 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, such as an obligor’s credit risk, 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 in this Form 10-Q.
Marketable Debt Instruments
As of
September 26, 2015
, our assets measured and recorded at fair value on a recurring basis included
$21.3 billion
of marketable debt instruments. Of these instruments,
$4.6 billion
was classified as Level 1,
$16.5 billion
as Level 2, and
$92 million
as Level 3.
Our marketable debt instruments that are measured and recorded at fair value on a recurring basis and classified as Level 1 were classified as such due to the use of observable market prices for identical securities that are traded in active markets. We evaluate security-specific market data when determining whether the market for a debt security is active.
Of the
$16.5 billion
of marketable debt instruments measured and recorded at fair value on a recurring basis and classified as Level 2, approximately
70%
was classified as Level 2 due to the use of a discounted cash flow model performed by us and approximately
30%
was classified as such 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 are classified as such because the fair values
are generally derived from discounted cash flow models, performed either by us or our pricing providers, using inputs that we are unable to corroborate with observable market data. We monitor and review the inputs and results of these valuation models to help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.
Loans Receivable and Reverse Repurchase Agreements
As of
September 26, 2015
, our assets measured and recorded at fair value on a recurring basis included
$490 million
of loans receivable and
$668 million
of reverse repurchase agreements.
All
of these investments 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
September 26, 2015
, our assets measured and recorded at fair value on a recurring basis included
$5.6 billion
of marketable equity securities.
Substantially all
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.
51
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Contractual Obligations
Pending Acquisition of Altera Corporation
During
Q2
2015, we entered into a definitive agreement to acquire Altera in an all-cash transaction expected to close within six to nine months from the date of the agreement. The acquisition will couple Intel’s leading-edge products and manufacturing process with Altera’s leading field-programmable gate array technology. The combination is expected to enable new classes of products that meet customer needs in the data center and Internet of Things market segments.
Upon completion of the acquisition, each outstanding share of Altera common stock and, subject to certain exceptions, each share of Altera common stock underlying vested stock option awards, restricted stock unit awards and performance-based restricted stock unit awards will be converted into the right to receive
$54.00
per share in cash, without interest. As of the date we entered into the agreement, the transaction had an approximate value of
$16.7 billion
. This transaction is subject to certain regulatory approvals and customary closing conditions.
We intend to finance the acquisition through a combination of
$
7.0 billion
to $
9.0 billion
in long-term debt, including the notes issued during Q3 2015, described in Note 13: Borrowings, and the remainder with commercial paper and cash and investments.
The timing, amount and terms of any additional debt financing are subject to market and other conditions.
Investment in Beijing UniSpreadtrum Technology Ltd.
During 2014, we entered into a series of agreements with Tsinghua Unigroup Ltd. (Tsinghua Unigroup), an operating subsidiary of Tsinghua Holdings Co. Ltd., to, among other things, jointly develop Intel
®
architecture- and communications-based solutions for smartphones. We have also agreed to invest up to
9.0 billion
Chinese yuan (approximately
$1.5 billion
as of the date of the agreement) for a minority stake of approximately
20%
of Beijing UniSpreadtrum Technology Ltd. (UniSpreadtrum), a holding company under Tsinghua Unigroup. During
Q3 2015,
we invested
$966 million
to complete the first phase of the equity investment.
Subject to regulatory approvals and other closing conditions, the second phase of the investment will require additional funding of approximately
$500 million
.
52
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We are affected by changes in currency exchange rates, interest rates, and equity prices. The information in this section should be read in conjunction with the discussion about market risk and sensitivity analysis related to changes in currency exchange rates 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 27, 2014
. All of the following potential changes are based on sensitivity analyses performed on our financial positions as of
September 26, 2015
and
December 27, 2014
. Actual results may differ materially.
Interest Rates
We generally hedge interest rate risks of fixed-rate debt instruments with interest rate swaps. Gains and losses on these investments are generally offset by corresponding losses and gains on the related hedging instruments.
We are exposed to interest rate risk related to our investment portfolio and indebtedness. Our indebtedness includes our debt issuances and the liability associated with a long-term patent cross-license agreement with NVIDIA Corporation. The primary objective of our investments in debt instruments is to preserve principal while maximizing yields, which generally track the U.S. dollar three-month LIBOR. A hypothetical decrease in interest rates of up to
1.0%
would have resulted in an increase in the fair value of our indebtedness of approximately $
1.7 billion
as of
September 26, 2015
(an increase of approximately $
1.0 billion
as of
December 27, 2014
). The increase from
December 27, 2014
was primarily driven by the inclusion of $8.0 billion of senior unsecured notes issued in Q3 2015. A hypothetical decrease in benchmark interest rates of up to
1.0%
, after taking into account investment hedges, would have resulted in an increase in the fair value of our investment portfolio of approximately $
15 million
as of
September 26, 2015
(an increase of approximately $
10 million
as of
December 27, 2014
). The fluctuations in fair value of our investment portfolio and indebtedness reflect only the direct impact of the change in interest rates. Other economic variables, such as equity market fluctuations and changes in relative credit risk, could result in a significantly higher decline in the fair value of our net investment position. For further information on how credit risk is factored into the valuation of our investment portfolio and debt issuances, see "
Note 3: Fair Value
" in Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
Equity Prices
Our investments include marketable equity securities and equity derivative instruments. We typically do not attempt to reduce or eliminate our equity market exposure through hedging activities at the inception of our investments. Before we enter into hedge arrangements, we evaluate legal, market, and economic factors, as well as the expected timing of disposal to determine whether hedging is appropriate. Our equity market risk management program may include equity derivatives with or without hedge accounting designation that utilize warrants, equity options, or other equity derivatives.
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 losses and gains on the related liabilities
.
As of
September 26, 2015
, the fair value of our marketable equity investments and our equity derivative instruments, including hedging positions, was
$5.6 billion
(
$7.1 billion
as of
December 27, 2014
).
Substantially all
of our marketable equity investments portfolio as of
September 26, 2015
, was concentrated in our investment in ASML Holding N.V. of
$5.4 billion
(
$6.9 billion
as of
December 27, 2014
). Our marketable equity method investments are excluded from our analysis, as the carrying value does not fluctuate based on market price changes unless an other-than-temporary impairment is deemed necessary. To determine reasonably possible decreases in the market value of our marketable equity investments, we have analyzed the historical market price sensitivity of our marketable equity investment portfolio. Assuming a decline of
40%
in market prices, and after reflecting the impact of hedges and offsetting positions, the aggregate value of our marketable equity investments could decrease by approximately
$2.3 billion
, based on the value as of
September 26, 2015
(a decrease in value of approximately
$2.1 billion
, based on the value as of
December 27, 2014
using an assumed decline of
30%
).
53
Many of the same factors that could result in an adverse movement of equity market prices affect our non-marketable equity investments, although we cannot always quantify the impact directly. Financial markets are volatile, which could negatively affect the prospects of the companies we invest in, their ability to raise additional capital, and the likelihood of our ability to realize value in our investments through liquidity events such as initial public offerings, mergers, and private sales. These types of investments involve a great deal of risk, and there can be no assurance that any specific company will grow or become successful; consequently, we could lose all or part of our investment. Our non-marketable cost method equity investments had a carrying amount of
$3.0 billion
as of
September 26, 2015
(
$1.8 billion
as of
December 27, 2014
) and includes our UniSpreadtrum and Cloudera, Inc. (Cloudera) investments of $
966 million
and $
454 million
, respectively ($
454 million
for Cloudera as of
December 27, 2014
). The carrying amount of our non-marketable equity method investments was
$1.2 billion
as of
September 26, 2015
(
$1.4 billion
as of
December 27, 2014
).
Most
of our non-marketable equity method investments balance as of
September 26, 2015
was concentrated in our IM Flash Technologies, LLC (IMFT) and Cloudera investments of
$872 million
and
$263 million
, respectively (
$713 million
and $
280 million
for IMFT and Cloudera, respectively, as of
December 27, 2014
).
54
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
Based on management’s 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 SEC 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
There were no 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 quarter ended
September 26, 2015
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 errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s 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.
55
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
For a discussion of legal proceedings, see “
Note 21: Contingencies
” in the Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
|
ITEM 1A.
|
RISK FACTORS
|
The risks described in Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended
December 27, 2014
, could materially and adversely affect our business, financial condition and results of operations, and the trading price of our common stock could decline. These risk factors do not identify all risks that we face - our 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. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. The Risk Factors section of our
2014
Annual Report on Form 10-K remains current in all material respects.
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
Issuer Purchases of Equity Securities
We have an ongoing authorization, originally approved by our Board of Directors in 2005, and subsequently amended, to repurchase up to
$65 billion
in shares of our common stock in open market or negotiated transactions.
As of
September 26, 2015
,
$9.9 billion
remained available for repurchase under the existing repurchase authorization limit.
Common stock repurchase activity under our publicly announced stock repurchase plan during the
third
quarter of
2015
was as follows:
|
Period
|
Total Number
of Shares Purchased (In Millions) |
Average Price
Paid Per Share |
Dollar Value of
Shares That May Yet Be Purchased (In Millions) |
||||||||
|
June 28, 2015 – July 25, 2015
|
0.9
|
|
$
|
28.33
|
|
$
|
10,868
|
|
|||
|
July 26, 2015 – August 22, 2015
|
16.5
|
|
28.81
|
|
10,393
|
|
|||||
|
August 23, 2015 – September 26, 2015
|
17.4
|
|
28.78
|
|
$
|
9,892
|
|
||||
|
Total
|
34.8
|
|
$
|
28.78
|
|
||||||
In our consolidated condensed financial statements, we also treat shares of common stock withheld for tax purposes on behalf of our employees in connection with the vesting of restricted stock units as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. These withheld shares of common stock are not considered common stock repurchases under our authorized common stock repurchase plan
and accordingly are not included in the common stock repurchase totals in the preceding table.
For further discussion, see "
Note 15: Common Stock Repurchases
" in the Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
56
|
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
|
|||||||
|
4.1
|
Fifth Supplemental Indenture, dated as of July
29, 2015, between Intel Corporation and Wells
Fargo Bank, National Association, as successor
trustee
|
8-K
|
000-06217
|
4.1
|
7/29/2015
|
|||||||
|
4.2
|
Sixth Supplemental Indenture, dated as of
August 11, 2015, among Intel Corporation, Wells
Fargo Bank, National Association, as successor
trustee, and Elavon Financial Services Limited,
UK Branch, as paying agent
|
8-K
|
000-06217
|
4.1
|
8/11/2015
|
|||||||
|
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, the Intel logo, Intel Core, 3D XPoint, 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.
57
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:
|
October 28, 2015
|
|
By:
|
|
/s/ S
TACY
J. S
MITH
|
|
|
|
Stacy J. Smith
|
|||
|
|
|
Executive Vice President, Chief Financial Officer, and Principal Accounting Officer
|
|||
58
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1: Basis Of PresentationNote 2: Recent Accounting StandardsNote 3: Fair ValueNote 4: Cash and InvestmentsNote 20: Other Comprehensive Income (loss)Note 5: InventoriesNote 6: Derivative Financial InstrumentsNote 7: AcquisitionsNote 8: GoodwillNote 9: Identified Intangible AssetsNote 22: Operating Segments InformationNote 10: Other Long-term AssetsNote 11: Restructuring and Asset Impairment ChargesNote 12: Deferred IncomeNote 13: BorrowingsNote 14: Employee Equity Incentive PlansNote 15: Common Stock RepurchasesNote 16: Gains (losses) on Equity Investments, NetNote 17: Interest and Other, NetNote 18: Earnings Per ShareNote 19: Income TaxesNote 21: ContingenciesItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits