INTEL CORP
10-Qs and 10-Ks
PROXIES
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 April 2, 2016.
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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
¨
No
þ
Shares outstanding of the Registrant’s common stock:
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Class
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Outstanding as of April 22, 2016
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Common stock, $0.001 par value
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4,722 million
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PART I – FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL STATEMENTS
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INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
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Three Months Ended
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|||||||
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(In Millions, Except Per Share Amounts)
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Apr 2,
2016 |
Mar 28,
2015 |
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Net revenue
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$
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13,702
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$
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12,781
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Cost of sales
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5,572
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5,051
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Gross margin
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8,130
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7,730
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Research and development
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3,246
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2,995
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Marketing, general and administrative
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2,226
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1,953
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Restructuring and asset impairment charges
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—
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105
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Amortization of acquisition-related intangibles
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90
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62
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Operating expenses
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5,562
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5,115
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Operating income
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2,568
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2,615
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Gains (losses) on equity investments, net
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22
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32
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Interest and other, net
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(82
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)
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26
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Income before taxes
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2,508
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2,673
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Provision for taxes
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462
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681
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Net income
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$
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2,046
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$
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1,992
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Basic earnings per share of common stock
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$
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0.43
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$
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0.42
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Diluted earnings per share of common stock
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$
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0.42
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$
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0.41
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Cash dividends declared per share of common stock
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$
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0.52
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$
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0.48
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Weighted average shares of common stock outstanding:
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||||||||
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Basic
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4,722
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4,741
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Diluted
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4,875
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4,914
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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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||||||||
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(In Millions)
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Apr 2,
2016 |
Mar 28,
2015 |
||||||
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Net income
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$
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2,046
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$
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1,992
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Other comprehensive income, net of tax:
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||||||||
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Change in net unrealized holding gains (losses) on available-for-sale investments
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291
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(342
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)
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Change in deferred tax asset valuation allowance
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(1
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)
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(3
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)
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Change in net unrealized holding gains (losses) on derivatives
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187
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(89
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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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Change in actuarial valuation
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19
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12
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Change in net foreign currency translation adjustment
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2
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(178
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)
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Other comprehensive income (loss)
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500
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(598
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)
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Total comprehensive income
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$
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2,546
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$
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1,394
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See accompanying notes.
3
INTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
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(In Millions)
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Apr 2,
2016 |
Dec 26,
2015 |
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Assets
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||||||||
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Current assets:
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||||||||
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Cash and cash equivalents
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$
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3,061
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$
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15,308
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Short-term investments
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2,927
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2,682
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Trading assets
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9,103
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7,323
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Accounts receivable, net
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4,216
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4,787
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Inventories
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5,751
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5,167
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Other current assets
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2,339
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3,053
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Total current assets
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27,397
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38,320
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Property, plant and equipment, net of accumulated depreciation of $52,199 ($51,538 as of December 26, 2015)
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32,644
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31,858
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Marketable equity securities
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6,377
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5,960
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Other long-term investments
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3,097
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1,891
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Goodwill
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16,942
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11,332
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Identified intangible assets, net
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11,140
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3,933
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Other long-term assets
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7,870
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8,165
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Total assets
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$
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105,467
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$
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101,459
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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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3,594
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$
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2,634
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Accounts payable
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3,163
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2,063
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Accrued compensation and benefits
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1,834
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3,138
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Accrued advertising
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820
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960
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Deferred income
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2,632
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2,188
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Other accrued liabilities
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5,483
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4,663
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Total current liabilities
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17,526
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15,646
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Long-term debt
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21,775
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20,036
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Long-term deferred tax liabilities
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1,247
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954
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Other long-term liabilities
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2,851
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2,841
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Contingencies (Note 21)
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||||||
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Temporary equity
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894
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897
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||||
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Stockholders’ equity:
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||||||||
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Preferred stock
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—
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—
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||||
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Common stock and capital in excess of par value, 4,717 issued and 4,716 outstanding (4,725 issued and outstanding as of December 26, 2015)
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24,088
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23,411
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Accumulated other comprehensive income (loss)
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560
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60
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||||
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Retained earnings
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36,526
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37,614
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||||
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Total stockholders’ equity
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61,174
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61,085
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||||
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Total liabilities, temporary equity, and stockholders’ equity
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$
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105,467
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$
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101,459
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See accompanying notes.
4
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
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Three Months Ended
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|||||||
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(In Millions)
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Apr 2,
2016 |
Mar 28,
2015 |
||||||
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Cash and cash equivalents, beginning of period
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$
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15,308
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$
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2,561
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Cash flows provided by (used for) operating activities:
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||||||||
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Net income
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2,046
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1,992
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|
||||
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Adjustments to reconcile net income to net cash provided by operating activities:
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||||||||
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Depreciation
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1,619
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|
1,848
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||||
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Share-based compensation
|
448
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|
368
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|
||||
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Restructuring and asset impairment charges
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—
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|
105
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|
||||
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Excess tax benefit from share-based payment arrangements
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(13
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)
|
(22
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)
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||||
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Amortization of intangibles
|
396
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|
251
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|
||||
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(Gains) losses on equity investments, net
|
(22
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)
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(32
|
)
|
||||
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Deferred taxes
|
(43
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)
|
(171
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)
|
||||
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Changes in assets and liabilities:
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||||||||
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Accounts receivable
|
942
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|
1,167
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|
||||
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Inventories
|
(57
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)
|
(137
|
)
|
||||
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Accounts payable
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434
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(71
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)
|
||||
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Accrued compensation and benefits
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(1,307
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)
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(1,659
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)
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||||
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Income taxes payable and receivable
|
497
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|
221
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|
||||
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Other assets and liabilities
|
(885
|
)
|
555
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|
||||
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Total adjustments
|
2,009
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|
2,423
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|
||||
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Net cash provided by operating activities
|
4,055
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|
4,415
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|
||||
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Cash flows provided by (used for) investing activities:
|
||||||||
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Additions to property, plant and equipment
|
(1,346
|
)
|
(2,025
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)
|
||||
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Acquisitions, net of cash acquired
|
(14,569
|
)
|
(57
|
)
|
||||
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Purchases of available-for-sale investments
|
(2,847
|
)
|
(139
|
)
|
||||
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Sales of available-for-sale investments
|
2,810
|
|
43
|
|
||||
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Maturities of available-for-sale investments
|
1,359
|
|
1,079
|
|
||||
|
Purchases of trading assets
|
(4,533
|
)
|
(2,475
|
)
|
||||
|
Maturities and sales of trading assets
|
3,138
|
|
3,398
|
|
||||
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Investments in loans receivable and reverse repurchase agreements
|
(223
|
)
|
—
|
|
||||
|
Collection of loans receivable and reverse repurchase agreements
|
650
|
|
—
|
|
||||
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Investments in non-marketable equity investments
|
(182
|
)
|
(278
|
)
|
||||
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Other investing
|
223
|
|
5
|
|
||||
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Net cash used for investing activities
|
(15,520
|
)
|
(449
|
)
|
||||
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Cash flows provided by (used for) financing activities:
|
||||||||
|
Increase (decrease) in short-term debt, net
|
956
|
|
(486
|
)
|
||||
|
Excess tax benefit from share-based payment arrangements
|
13
|
|
22
|
|
||||
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Proceeds from sales of common stock through employee equity incentive plans
|
343
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|
341
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|
||||
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Repurchase of common stock
|
(793
|
)
|
(750
|
)
|
||||
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Restricted stock unit withholdings
|
(63
|
)
|
(51
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)
|
||||
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Payment of dividends to stockholders
|
(1,228
|
)
|
(1,137
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)
|
||||
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Collateral associated with repurchase of common stock
|
—
|
|
325
|
|
||||
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Decrease in liability due to return of collateral associated with repurchase of common stock
|
—
|
|
(325
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)
|
||||
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Other financing
|
(10
|
)
|
(213
|
)
|
||||
|
Net cash used for financing activities
|
(782
|
)
|
(2,274
|
)
|
||||
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Effect of exchange rate fluctuations on cash and cash equivalents
|
—
|
|
(9
|
)
|
||||
|
Net increase (decrease) in cash and cash equivalents
|
(12,247
|
)
|
1,683
|
|
||||
|
Cash and cash equivalents, end of period
|
$
|
3,061
|
|
$
|
4,244
|
|
||
|
Supplemental disclosures of cash flow information:
|
||||||||
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Cash paid (received) during the period for:
|
||||||||
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Interest, net of capitalized interest
|
$
|
254
|
|
$
|
—
|
|
||
|
Income taxes, net of refunds
|
$
|
(72
|
)
|
$
|
596
|
|
||
5
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited
Note 1: Basis of Presentation
We prepared our interim consolidated condensed financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles, consistent in all material respects with those applied in our Annual Report on Form 10-K for the fiscal year ended
December 26, 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 2015 was a 52-week year. Fiscal year 2016 is a 53-week fiscal year, and the first quarter of 2016 was a 14-week quarter.
In the first quarter of 2016, we completed the acquisition of Altera Corporation. For further information, see "
Note 8: Acquisitions
."
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 26, 2015
.
Note 2: Change in Accounting Estimate
During our 2015 annual assessment of the useful lives of our property, plant, and equipment, we determined that the useful lives of machinery and equipment in our wafer fabrication facilities should be increased from
4
to
5
years. This change in estimate was applied prospectively, effective at the beginning of the first quarter of 2016. For the period ended
April 2, 2016
, this change increased our operating income by approximately
$200 million
, our net income by approximately
$150 million
, and our diluted earnings per share by approximately
$0.03
.
Note 3: Recent Accounting Standards
Accounting Standards Adopted
Deferred Tax Classification.
In the first quarter of 2016, we elected to early adopt an amended standard requiring that we classify all deferred tax assets and liabilities as non-current on the consolidated condensed balance sheet instead of separating deferred taxes into current and non-current. The amended standard was adopted on a retrospective basis. As a result of the adoption, we made the following adjustments to the consolidated condensed 2015 balance sheet: a
$2.0 billion
decrease to current deferred tax assets, a
$430 million
increase to non-current deferred tax assets, a
$21 million
decrease to current deferred tax liabilities, and a decrease of
$1.6 billion
to non-current deferred tax liabilities.
Business Combinations.
In the first quarter of 2016, we adopted an amended standard requiring that we recognize the effect on earnings of any adjustments identified during the measurement period after an acquisition in the same period the adjustment is identified, as opposed to the prior standard which required material adjustments be retrospectively adjusted. The standard did not have a significant impact on our consolidated condensed financial statements.
6
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Accounting Standards Not Yet Adopted
Revenue Recognition.
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; accordingly, 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.
Financial Instruments.
In January 2016, the FASB issued changes to the accounting for financial instruments that primarily affect equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements. This standard is effective for us beginning in the first quarter of 2018; certain provisions allow for early adoption and we are evaluating whether we will do so. The new standard should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with certain exceptions. We have not yet determined the impact of the new standard on our consolidated condensed financial statements.
Leases.
In February 2016, the FASB issued a new lease accounting standard requiring that we recognize lease assets and liabilities on the balance sheet. This standard is effective for us beginning in the first quarter of 2019; early adoption is permitted and we are evaluating whether we will do so. The new standard must be adopted using a modified retrospective transition which includes certain practical expedients. We have not yet determined the impact of the new standard on our consolidated condensed financial statements.
Shared-Based Compensation.
In March 2016, the FASB issued an accounting standard update aimed at simplifying the accounting for share-based payment transactions. Included in the update are modifications to the accounting for income taxes upon vesting or settlement of awards, employer tax withholding on shared-based compensation, forfeitures, and financial statement presentation of excess tax benefits. This standard is effective for us beginning in the first quarter of 2017; early adoption is permitted and we are evaluating whether we will do so. We have not yet determined the impact of the update on our consolidated condensed financial statements.
Note 4: 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.
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:
|
April 2, 2016
|
December 26, 2015
|
|||||||||||||||||||||||||||||||
|
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
|
$
|
—
|
|
$
|
288
|
|
$
|
—
|
|
$
|
288
|
|
$
|
—
|
|
$
|
1,829
|
|
$
|
—
|
|
$
|
1,829
|
|
||||||||
|
Financial institution instruments
|
440
|
|
1,017
|
|
—
|
|
1,457
|
|
8,238
|
|
1,277
|
|
—
|
|
9,515
|
|
||||||||||||||||
|
Government debt
|
—
|
|
23
|
|
—
|
|
23
|
|
—
|
|
130
|
|
—
|
|
130
|
|
||||||||||||||||
|
Reverse repurchase agreements
|
—
|
|
418
|
|
—
|
|
418
|
|
—
|
|
2,368
|
|
—
|
|
2,368
|
|
||||||||||||||||
|
Short-term investments:
|
||||||||||||||||||||||||||||||||
|
Corporate debt
|
292
|
|
909
|
|
21
|
|
1,222
|
|
336
|
|
764
|
|
20
|
|
1,120
|
|
||||||||||||||||
|
Financial institution instruments
|
141
|
|
1,332
|
|
—
|
|
1,473
|
|
145
|
|
927
|
|
—
|
|
1,072
|
|
||||||||||||||||
|
Government debt
|
74
|
|
158
|
|
—
|
|
232
|
|
65
|
|
425
|
|
—
|
|
490
|
|
||||||||||||||||
|
Trading assets:
|
||||||||||||||||||||||||||||||||
|
Asset-backed securities
|
—
|
|
226
|
|
29
|
|
255
|
|
—
|
|
275
|
|
94
|
|
369
|
|
||||||||||||||||
|
Corporate debt
|
2,117
|
|
688
|
|
—
|
|
2,805
|
|
1,744
|
|
564
|
|
—
|
|
2,308
|
|
||||||||||||||||
|
Financial institution instruments
|
971
|
|
719
|
|
—
|
|
1,690
|
|
930
|
|
701
|
|
—
|
|
1,631
|
|
||||||||||||||||
|
Government debt
|
1,979
|
|
2,374
|
|
—
|
|
4,353
|
|
1,107
|
|
1,908
|
|
—
|
|
3,015
|
|
||||||||||||||||
|
Other current assets:
|
||||||||||||||||||||||||||||||||
|
Derivative assets
|
—
|
|
406
|
|
1
|
|
407
|
|
32
|
|
412
|
|
1
|
|
445
|
|
||||||||||||||||
|
Loans receivable
|
—
|
|
268
|
|
—
|
|
268
|
|
—
|
|
137
|
|
—
|
|
137
|
|
||||||||||||||||
|
Marketable equity securities
|
6,318
|
|
59
|
|
—
|
|
6,377
|
|
5,891
|
|
69
|
|
—
|
|
5,960
|
|
||||||||||||||||
|
Other long-term investments:
|
||||||||||||||||||||||||||||||||
|
Asset-backed securities
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4
|
|
4
|
|
||||||||||||||||
|
Corporate debt
|
436
|
|
1,183
|
|
—
|
|
1,619
|
|
407
|
|
801
|
|
—
|
|
1,208
|
|
||||||||||||||||
|
Financial institution instruments
|
424
|
|
842
|
|
—
|
|
1,266
|
|
171
|
|
381
|
|
—
|
|
552
|
|
||||||||||||||||
|
Government debt
|
115
|
|
97
|
|
—
|
|
212
|
|
79
|
|
48
|
|
—
|
|
127
|
|
||||||||||||||||
|
Other long-term assets:
|
||||||||||||||||||||||||||||||||
|
Derivative assets
|
—
|
|
153
|
|
56
|
|
209
|
|
—
|
|
30
|
|
10
|
|
40
|
|
||||||||||||||||
|
Loans receivable
|
—
|
|
455
|
|
—
|
|
455
|
|
—
|
|
342
|
|
—
|
|
342
|
|
||||||||||||||||
|
Total assets measured and recorded at fair value
|
$
|
13,307
|
|
$
|
11,615
|
|
$
|
107
|
|
$
|
25,029
|
|
$
|
19,145
|
|
$
|
13,388
|
|
$
|
129
|
|
$
|
32,662
|
|
||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Other accrued liabilities:
|
||||||||||||||||||||||||||||||||
|
Derivative liabilities
|
—
|
|
324
|
|
—
|
|
324
|
|
2
|
|
210
|
|
—
|
|
212
|
|
||||||||||||||||
|
Other long-term liabilities:
|
||||||||||||||||||||||||||||||||
|
Derivative liabilities
|
—
|
|
15
|
|
—
|
|
15
|
|
—
|
|
33
|
|
—
|
|
33
|
|
||||||||||||||||
|
Total liabilities measured and recorded at fair value
|
$
|
—
|
|
$
|
339
|
|
$
|
—
|
|
$
|
339
|
|
$
|
2
|
|
$
|
243
|
|
$
|
—
|
|
$
|
245
|
|
||||||||
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 three months
of
2016
, we transferred corporate debt, financial institution instruments, and government debt of approximately
$622 million
from Level 1 to Level 2 of the fair value hierarchy and approximately
$233 million
of corporate debt, government debt, and financial institution instruments from Level 2 to Level 1 (
$494 million
of corporate debt, government debt, and financial institution instruments from Level 1 to Level 2 and
$398 million
from Level 2 to Level 1 during the
first three months
of
2015
). These transfers were based on changes in market activity for the underlying instruments. Our policy is to reflect transfers between the fair value hierarchy levels at the beginning of the period.
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 instruments that are traded in less active markets. When observable market prices for identical instruments 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
April 2, 2016
and
December 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
April 2, 2016
and
March 28, 2015
were insignificant.
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 applicable hedge adjustments; 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:
|
April 2, 2016
|
||||||||||||||||||||
|
(In Millions)
|
Carrying
Amount
|
Fair Value Measured Using
|
Fair Value
|
|||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||||||||
|
Grants receivable
|
$
|
591
|
|
$
|
—
|
|
$
|
594
|
|
$
|
—
|
|
$
|
594
|
|
|||||
|
Loans receivable
|
$
|
315
|
|
$
|
—
|
|
$
|
315
|
|
$
|
—
|
|
$
|
315
|
|
|||||
|
Non-marketable cost method investments
|
$
|
2,933
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,704
|
|
$
|
3,704
|
|
|||||
|
Reverse repurchase agreements
|
$
|
350
|
|
$
|
—
|
|
$
|
350
|
|
$
|
—
|
|
$
|
350
|
|
|||||
|
Short-term debt
|
$
|
3,519
|
|
$
|
1,511
|
|
$
|
2,583
|
|
$
|
—
|
|
$
|
4,094
|
|
|||||
|
Long-term debt
|
$
|
21,775
|
|
$
|
15,084
|
|
$
|
8,424
|
|
$
|
—
|
|
$
|
23,508
|
|
|||||
|
December 26, 2015
|
||||||||||||||||||||
|
(In Millions)
|
Carrying
Amount
|
Fair Value Measured Using
|
Fair Value
|
|||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||||||||
|
Grants receivable
|
$
|
593
|
|
$
|
—
|
|
$
|
600
|
|
$
|
—
|
|
$
|
600
|
|
|||||
|
Loans receivable
|
$
|
315
|
|
$
|
—
|
|
$
|
315
|
|
$
|
—
|
|
$
|
315
|
|
|||||
|
Non-marketable cost method investments
|
$
|
2,933
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,904
|
|
$
|
3,904
|
|
|||||
|
Reverse repurchase agreements
|
$
|
1,000
|
|
$
|
—
|
|
$
|
1,000
|
|
$
|
—
|
|
$
|
1,000
|
|
|||||
|
Short-term debt
|
$
|
2,593
|
|
$
|
1,513
|
|
$
|
1,563
|
|
$
|
—
|
|
$
|
3,076
|
|
|||||
|
Long-term debt
|
$
|
20,036
|
|
$
|
14,058
|
|
$
|
6,835
|
|
$
|
—
|
|
$
|
20,893
|
|
|||||
|
NVIDIA Corporation cross-license agreement liability
|
$
|
199
|
|
$
|
—
|
|
$
|
200
|
|
$
|
—
|
|
$
|
200
|
|
|||||
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
April 2, 2016
and
December 26, 2015
, 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 fair value on a recurring basis. 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/A2
for
substantially all
of our loans receivable and reverse repurchase agreements as of
April 2, 2016
.
As of
April 2, 2016
and
December 26, 2015
, 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.
10
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
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), our 2011 senior notes due 2016, and any commercial paper outstanding. During the
first
quarter of
2016
, the 2009 debentures were classified as short-term debt on the consolidated condensed balance sheets and convertible at the option of the holder during the
second
quarter of
2016
. 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 26, 2015
. Our long-term debt recognized at amortized cost is composed of our senior notes and our convertible debentures. The fair value of our senior notes is 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; it 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. The carrying amount of the liability arising from the agreement was classified within other accrued liabilities as of December 26, 2015 and the final
$200 million
was paid in January 2016 and treated as cash used for financing activities.
Note 5: Cash and Investments
Cash and investments at the end of each period were as follows:
|
(In Millions)
|
Apr 2,
2016 |
Dec 26,
2015 |
||||||
|
Available-for-sale investments
|
$
|
14,169
|
|
$
|
22,007
|
|
||
|
Cash
|
875
|
|
1,466
|
|
||||
|
Equity method investments
|
1,593
|
|
1,590
|
|
||||
|
Loans receivable
|
1,038
|
|
794
|
|
||||
|
Non-marketable cost method investments
|
2,933
|
|
2,933
|
|
||||
|
Reverse repurchase agreements
|
768
|
|
3,368
|
|
||||
|
Trading assets
|
9,103
|
|
7,323
|
|
||||
|
Total cash and investments
|
$
|
30,479
|
|
$
|
39,481
|
|
||
Available-for-Sale Investments
Available-for-sale investments at the end of each period were as follows:
|
April 2, 2016
|
December 26, 2015
|
|||||||||||||||||||||||||||||||
|
(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
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5
|
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
4
|
|
||||||||
|
Corporate debt
|
3,133
|
|
5
|
|
(9
|
)
|
3,129
|
|
4,164
|
|
3
|
|
(10
|
)
|
4,157
|
|
||||||||||||||||
|
Financial institution instruments
|
4,196
|
|
3
|
|
(3
|
)
|
4,196
|
|
11,140
|
|
1
|
|
(2
|
)
|
11,139
|
|
||||||||||||||||
|
Government debt
|
467
|
|
—
|
|
—
|
|
467
|
|
748
|
|
—
|
|
(1
|
)
|
747
|
|
||||||||||||||||
|
Marketable equity securities
|
3,230
|
|
3,148
|
|
(1
|
)
|
6,377
|
|
3,254
|
|
2,706
|
|
—
|
|
5,960
|
|
||||||||||||||||
|
Total available-for-sale investments
|
$
|
11,026
|
|
$
|
3,156
|
|
$
|
(13
|
)
|
$
|
14,169
|
|
$
|
19,311
|
|
$
|
2,710
|
|
$
|
(14
|
)
|
$
|
22,007
|
|
||||||||
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
April 2, 2016
and
December 26, 2015
.
11
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
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
first three months
of
2016
, we sold available-for-sale investments for proceeds of
$2.9 billion
, of which $
127 million
related to sales of cash and cash equivalents (
$43 million
in the
first three months
of
2015
,
none
of which was related to sales of cash and cash equivalents). The gross realized gains on sales of available-for-sale investments were
$86 million
in the
first three months
of
2016
(
$43 million
in the
first three months
of
2015
).
The amortized cost and fair value of available-for-sale debt investments, by contractual maturity, as of
April 2, 2016
, were as follows:
|
(In Millions)
|
Cost
|
Fair Value
|
||||||
|
Due in 1 year or less
|
$
|
4,230
|
|
$
|
4,229
|
|
||
|
Due in 1–2 years
|
1,835
|
|
1,834
|
|
||||
|
Due in 2–5 years
|
1,266
|
|
1,264
|
|
||||
|
Instruments not due at a single maturity date
|
465
|
|
465
|
|
||||
|
Total
|
$
|
7,796
|
|
$
|
7,792
|
|
||
Equity Method Investments
IM Flash Technologies, LLC
Since the inception of IM Flash Technologies, LLC (IMFT) in 2006, Micron Technology, Inc. (Micron) and Intel have jointly developed NAND flash memory and, most recently, 3D XPoint™ technology products. Intel also purchases jointly developed products directly from Micron under certain supply agreements.
The IMFT operating agreement, most recently amended in January 2016, continues through 2024 unless earlier terminated under certain terms and conditions and provides for certain buy-sell rights of the joint venture. Intel has the right to cause Micron to buy our interest in IMFT. If we exercise this right, Micron would set the closing date of the transaction within two years following such election and could elect to receive financing from us for one to two years. Subsequent to our put right, and commencing in January 2019, Micron has the right to call our interest in IMFT with the closing date to be effective within one year.
As of
April 2, 2016
, we own a
49%
interest in IMFT. The carrying value of our investment was
$872 million
as of
April 2, 2016
(
$872 million
as of
December 26, 2015
) and is classified within other long-term assets.
IMFT is a variable interest entity and all costs of IMFT are passed on to Micron and Intel through sale of products or services in proportional share of ownership. Intel's portion of IMFT costs, primarily related to product purchases and production-related services, was approximately
$100 million
in the
first three months
of
2016
(approximately
$95 million
in the
first three months
of
2015
). The amount due to IMFT for product purchases and services provided was approximately
$50 million
as of
April 2, 2016
(approximately
$20 million
as of
December 26, 2015
).
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
April 2, 2016
. Except for the amount due to IMFT for product purchases and production-related 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
April 2, 2016
. 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.
12
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Cloudera, Inc.
During 2014, we invested in Cloudera, Inc. (Cloudera). Our fully diluted ownership interest in Cloudera is
17%
as of
April 2, 2016
. Our investment is accounted for under the equity and cost methods of accounting based on the rights associated with different instruments we own, and is classified within other long-term assets. The carrying value of our equity method investment was
$250 million
and of our cost method investment was
$454 million
as of
April 2, 2016
(
$256 million
for our equity method investment and
$454 million
for our cost method investment as of
December 26, 2015
).
Intel-GE Care Innovations, LLC
During the first three months of 2016, we gained control of Care Innovations LLC (Care Innovations), our joint venture with General Electric Company. Care Innovations has been included in our consolidated condensed financial statements as of
April 2, 2016
.
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 phones. We 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
2015,
we invested
$966 million
to complete the first phase of the equity investment.
We have determined we do not have significant influence over the company and, therefore, we 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
April 2, 2016
and
December 26, 2015
,
substantially all
of our trading assets were marketable debt instruments. Net
gains
related to trading assets still held at the reporting date were
$243 million
in the
first three months
of
2016
(net
losses
of
$200 million
in the
first three months
of
2015
). Net
losses
on the related derivatives were
$234 million
in the
first three months
of
2016
(net
gains
of
$194 million
in the
first three months
of
2015
).
Note 6: Inventories
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)
|
Apr 2,
2016 |
Dec 26,
2015 |
||||||
|
Raw materials
|
$
|
628
|
|
$
|
532
|
|
||
|
Work in process
|
2,980
|
|
2,893
|
|
||||
|
Finished goods
|
2,143
|
|
1,742
|
|
||||
|
Total inventories
|
$
|
5,751
|
|
$
|
5,167
|
|
||
13
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 7: Derivative Financial Instruments
Our primary objective for holding derivative financial instruments is to manage currency exchange rate risk and interest rate risk, and, to a lesser extent, equity market risk, 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.
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 portion
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, loans receivable and indebtedness 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.
The substantial majority of these instruments 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. We utilize currency interest rate swaps to hedge exposures to the variability in the U.S.-dollar equivalent of coupon and principal payments associated with our non-U.S.-dollar-denominated indebtedness
.
|
|
•
|
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 non-U.S.-dollar-denominated loans receivable recognized at fair value.
The majority of these instruments mature within
12 months
. Changes in the functional currency equivalent cash flows of the underlying assets and liabilities are approximately offset by the changes in 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. We also utilize interest rate or currency interest rate swaps to modify cash flows related to our existing indebtedness. We may enter into treasury rate lock agreements to lock in a fixed rate for future debt issuances.
14
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 or treasury rate lock agreements to lock in a fixed rate for future debt issuances. 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 fluctuations in the benchmark interest rate. For these derivatives, we recognize gains and losses in interest and other, net, along with the offsetting gains and losses 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 the 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)
|
Apr 2,
2016 |
Dec 26,
2015 |
Mar 28,
2015 |
|||||||||
|
Currency forwards
|
$
|
10,744
|
|
$
|
11,212
|
|
$
|
16,192
|
|
|||
|
Currency interest rate swaps
|
6,776
|
|
5,509
|
|
5,094
|
|
||||||
|
Embedded debt derivatives
|
3,600
|
|
3,600
|
|
3,600
|
|
||||||
|
Interest rate swaps
|
6,440
|
|
5,212
|
|
1,128
|
|
||||||
|
Total return swaps
|
1,129
|
|
1,061
|
|
1,106
|
|
||||||
|
Treasury rate lock agreements
|
1,500
|
|
—
|
|
—
|
|
||||||
|
Other
|
81
|
|
61
|
|
72
|
|
||||||
|
Total
|
$
|
30,270
|
|
$
|
26,655
|
|
$
|
27,192
|
|
|||
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)
|
Apr 2,
2016 |
Dec 26,
2015 |
Mar 28,
2015 |
|||||||||
|
Chinese yuan
|
$
|
2,231
|
|
$
|
2,231
|
|
$
|
4,079
|
|
|||
|
Euro
|
5,496
|
|
6,084
|
|
7,332
|
|
||||||
|
Israeli shekel
|
1,852
|
|
1,674
|
|
2,010
|
|
||||||
|
Japanese yen
|
3,314
|
|
2,663
|
|
4,206
|
|
||||||
|
Other
|
4,627
|
|
4,069
|
|
3,659
|
|
||||||
|
Total
|
$
|
17,520
|
|
$
|
16,721
|
|
$
|
21,286
|
|
|||
15
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
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:
|
|
April 2, 2016
|
December 26, 2015
|
||||||||||||||||||||||||||||||
|
(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
|
$
|
181
|
|
$
|
4
|
|
$
|
10
|
|
$
|
—
|
|
$
|
20
|
|
$
|
3
|
|
$
|
83
|
|
$
|
2
|
|
||||||||
|
Interest rate swaps
|
—
|
|
149
|
|
—
|
|
—
|
|
—
|
|
1
|
|
—
|
|
14
|
|
||||||||||||||||
|
Currency interest rate swaps
|
—
|
|
34
|
|
—
|
|
—
|
|
—
|
|
7
|
|
—
|
|
—
|
|
||||||||||||||||
|
Other
|
—
|
|
—
|
|
13
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||||||||
|
Total derivatives designated as hedging instruments
|
181
|
|
187
|
|
23
|
|
—
|
|
20
|
|
11
|
|
83
|
|
16
|
|
||||||||||||||||
|
Derivatives not designated as hedging instruments:
|
||||||||||||||||||||||||||||||||
|
Currency forwards
|
29
|
|
1
|
|
68
|
|
—
|
|
20
|
|
—
|
|
63
|
|
—
|
|
||||||||||||||||
|
Currency interest rate swaps
|
194
|
|
10
|
|
215
|
|
2
|
|
370
|
|
18
|
|
52
|
|
—
|
|
||||||||||||||||
|
Embedded debt derivatives
|
—
|
|
—
|
|
—
|
|
13
|
|
—
|
|
—
|
|
—
|
|
17
|
|
||||||||||||||||
|
Interest rate swaps
|
2
|
|
—
|
|
18
|
|
—
|
|
2
|
|
—
|
|
12
|
|
—
|
|
||||||||||||||||
|
Total return swaps
|
—
|
|
—
|
|
—
|
|
—
|
|
32
|
|
—
|
|
2
|
|
—
|
|
||||||||||||||||
|
Other
|
1
|
|
11
|
|
—
|
|
—
|
|
1
|
|
11
|
|
—
|
|
—
|
|
||||||||||||||||
|
Total derivatives not designated as hedging instruments
|
226
|
|
22
|
|
301
|
|
15
|
|
425
|
|
29
|
|
129
|
|
17
|
|
||||||||||||||||
|
Total derivatives
|
$
|
407
|
|
$
|
209
|
|
$
|
324
|
|
$
|
15
|
|
$
|
445
|
|
$
|
40
|
|
$
|
212
|
|
$
|
33
|
|
||||||||
16
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:
|
April 2, 2016
|
||||||||||||||||||||||||
|
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
|
$
|
595
|
|
$
|
—
|
|
$
|
595
|
|
$
|
(267
|
)
|
$
|
(232
|
)
|
$
|
96
|
|
||||||
|
Reverse repurchase agreements
|
768
|
|
—
|
|
768
|
|
—
|
|
(768
|
)
|
—
|
|
||||||||||||
|
Total assets
|
1,363
|
|
—
|
|
1,363
|
|
(267
|
)
|
(1,000
|
)
|
96
|
|
||||||||||||
|
Liabilities:
|
||||||||||||||||||||||||
|
Derivative liabilities subject to master netting arrangements
|
338
|
|
—
|
|
338
|
|
(267
|
)
|
(71
|
)
|
—
|
|
||||||||||||
|
Total liabilities
|
$
|
338
|
|
$
|
—
|
|
$
|
338
|
|
$
|
(267
|
)
|
$
|
(71
|
)
|
$
|
—
|
|
||||||
|
December 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
|
$
|
482
|
|
$
|
—
|
|
$
|
482
|
|
$
|
(201
|
)
|
$
|
(188
|
)
|
$
|
93
|
|
||||||
|
Reverse repurchase agreements
|
3,368
|
|
—
|
|
3,368
|
|
—
|
|
(3,368
|
)
|
—
|
|
||||||||||||
|
Total assets
|
3,850
|
|
—
|
|
3,850
|
|
(201
|
)
|
(3,556
|
)
|
93
|
|
||||||||||||
|
Liabilities:
|
||||||||||||||||||||||||
|
Derivative liabilities subject to master netting arrangements
|
242
|
|
—
|
|
242
|
|
(201
|
)
|
(27
|
)
|
14
|
|
||||||||||||
|
Total liabilities
|
$
|
242
|
|
$
|
—
|
|
$
|
242
|
|
$
|
(201
|
)
|
$
|
(27
|
)
|
$
|
14
|
|
||||||
We obtain and secure available collateral from counterparties against obligations, including securities lending transactions and reverse repurchase agreements, when we deem it appropriate.
17
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
|
||||||||
|
(In Millions)
|
Apr 2,
2016 |
Mar 28,
2015 |
||||||
|
Currency forwards
|
$
|
229
|
|
$
|
(229
|
)
|
||
|
Currency interest rate swaps and other
|
14
|
|
—
|
|
||||
|
Total
|
$
|
243
|
|
$
|
(229
|
)
|
||
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 table. Additionally, for all periods presented, there was an
insignificant
impact on results of operations from discontinued cash flow hedges, 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
|
||||||||
|
(In Millions)
|
Apr 2,
2016 |
Mar 28,
2015 |
||||||
|
Interest rate swap
|
$
|
162
|
|
$
|
—
|
|
||
|
Hedged item
|
(162
|
)
|
—
|
|
||||
|
Total
|
$
|
—
|
|
$
|
—
|
|
||
There was
no
ineffectiveness during all periods presented in the preceding table.
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
|
||||||||
|
(In Millions)
|
Location of Gains (Losses)
Recognized in Income on Derivatives
|
Apr 2,
2016 |
Mar 28,
2015 |
|||||||
|
Currency forwards
|
Interest and other, net
|
$
|
(45
|
)
|
$
|
(18
|
)
|
|||
|
Currency interest rate swaps
|
Interest and other, net
|
(193
|
)
|
253
|
|
|||||
|
Interest rate swaps
|
Interest and other, net
|
(7
|
)
|
(6
|
)
|
|||||
|
Total return swaps
|
Various
|
8
|
|
31
|
|
|||||
|
Other
|
Gains (losses) on equity investments, net
|
(1
|
)
|
(9
|
)
|
|||||
|
Other
|
Interest and other, net
|
4
|
|
—
|
|
|||||
|
Total
|
$
|
(234
|
)
|
$
|
251
|
|
||||
18
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 8: Acquisitions
Altera Corporation
On December 28, 2015, we completed the acquisition of Altera Corporation (Altera), a global semiconductor company that designs and sells programmable semiconductors and related products. We acquired all outstanding shares 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 in exchange for cash. The acquired company will operate as the Programmable Solutions Group (PSG) and continue to design and sell programmable logic devices (PLDs), which incorporate field-programmable gate arrays (FPGAs) and complex programmable logic devices (CPLDs), and highly integrated System-on-Chip (SoC) devices. This acquisition is expected to expand our reach within the compute continuum, as the combination of our leading-edge products and manufacturing process with Altera's leading FPGA technology is expected to enable new classes of platforms that meet customer needs in the data center and Internet of Things market segments. As we develop future platforms, the integration of PLDs into our platform solutions is expected to improve the overall performance and lower the cost of ownership for our customers. For further information, see "
Note 22: Operating Segments Information
."
Total consideration to acquire Altera was
$14.5 billion
(net of
$2.0 billion
of cash and cash equivalents acquired) and comprised the following:
|
(In Millions)
|
||||
|
Cash, net of cash acquired
|
$
|
14,401
|
|
|
|
Share-based awards assumed
|
50
|
|
||
|
Total
|
$
|
14,451
|
|
|
The preliminary fair values of the assets acquired and liabilities assumed by major class in the acquisition of Altera were recognized as follows:
|
(In Millions)
|
||||
|
Short-term investments
|
$
|
182
|
|
|
|
Receivables
|
368
|
|
||
|
Inventory
|
555
|
|
||
|
Other current assets
|
123
|
|
||
|
Property, plant & equipment
|
312
|
|
||
|
Goodwill
|
5,433
|
|
||
|
Identified intangible assets
|
7,566
|
|
||
|
Other long-term investments and assets
|
2,495
|
|
||
|
Deferred income
|
(336
|
)
|
||
|
Other liabilities
|
(263
|
)
|
||
|
Long-term debt
|
(1,535
|
)
|
||
|
Deferred tax liabilities
|
(449
|
)
|
||
|
Total
|
$
|
14,451
|
|
|
The allocation of purchase consideration to assets and liabilities is not yet finalized. The preliminary allocation of the purchase price was based upon preliminary estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized are certain tax matters, identification of contingencies, and goodwill.
The preliminary goodwill of
$5.4 billion
arising from the acquisition is attributed to the expected synergies and other benefits that will be generated by combining Intel and Altera. Substantially all of the goodwill recognized is not expected to be deductible for tax purposes. For further information on the assignment of preliminary goodwill for the acquisition, see “
Note 9: Goodwill
.”
19
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
The identified intangible assets assumed in the acquisition of Altera were recognized as follows based upon their fair values as of December 28, 2015:
|
Fair Value
(In Millions)
|
Weighted Average Estimated Useful Life
(In Years)
|
|||||
|
Developed technology
|
$
|
5,757
|
|
9
|
||
|
Customer relationships
|
1,121
|
|
12
|
|||
|
Brands
|
87
|
|
6
|
|||
|
Identified intangible assets subject to amortization
|
$
|
6,965
|
|
|||
|
In-process research and development
|
601
|
|
||||
|
Identified intangible assets not subject to amortization
|
601
|
|
||||
|
Total identified intangible assets
|
$
|
7,566
|
|
|||
Acquired developed technology represents the fair value of Altera products that have reached technological feasibility and are a part of Altera’s product offerings, as opposed to in-process research and development which represents the fair value of products that have not reached technological feasibility. Customer relationships represent the fair values of the underlying relationships and agreements with Altera’s customers. Brands represent the fair value of Altera's master brand and product brand names.
Other First Quarter 2016 Acquisitions
During the
first three months
of
2016
, in addition to the Altera acquisition, we completed
three
acquisitions qualifying as a business combination in exchange for aggregate consideration (net of cash acquired) of
$180 million
,
most
of which was
cash
.
Substantially all
of the consideration was allocated to goodwill and identifiable intangible assets. For information on goodwill by operating segment, see “
Note 9: Goodwill
” and for information on the classification of intangible assets, see "
Note 10: Identified Intangible Assets
." These acquisitions, both individually and in aggregate, were not significant to our operations.
Actual and Pro Forma Results of Acquirees
Net revenue and net income attributable to all acquisitions completed during the first quarter of 2016 have been included in our consolidated condensed statements of income from their respective acquisition dates to the period ending
April 2, 2016
. The Altera acquisition was significant to our consolidated condensed results of operations, and these results are reported as the Programmable Solutions Group in "
Note 22: Operating Segments Information
."
The unaudited pro forma financial results combine the first quarter historical results of Intel and Altera for 2016 and 2015 along with the first quarter historical results of other businesses acquired during 2016. The results include the effects of pro forma adjustments as if all businesses acquired in 2016 were acquired at the beginning of Intel's 2015 fiscal year. The pro forma results for the
three months ended
March 28, 2015
include non-recurring adjustments of
$226 million
for the inventory valuation adjustment,
$64 million
for deferred income (net of the impact of cost of goods sold) and
$94 million
for other acquisition-related transaction costs, all of which reduce pro forma net income.
The pro forma financial results presented below do not include any anticipated synergies or other expected benefits of the acquisitions. This is presented for informational purposes only and is not indicative of future operations or results that would have been achieved had the acquisitions been completed as of the beginning of our 2015 fiscal year.
|
Three Months Ended
|
||||||||
|
(In Millions, Except Per Share Amounts)
|
Apr 2,
2016 |
Mar 28,
2015 |
||||||
|
Net revenue
|
$
|
13,801
|
|
$
|
13,118
|
|
||
|
Net income
|
$
|
2,398
|
|
$
|
1,599
|
|
||
|
Diluted earnings per share
|
$
|
0.49
|
|
$
|
0.33
|
|
||
20
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 9: Goodwill
Goodwill activity for the
first three months
of
2016
was as follows:
|
(In Millions)
|
Dec 26,
2015 |
Acquisitions
|
Transfers
|
Other
|
Apr 2,
2016 |
|||||||||||||||
|
Client Computing Group
|
$
|
4,078
|
|
$
|
12
|
|
$
|
213
|
|
$
|
—
|
|
$
|
4,303
|
|
|||||
|
Data Center Group
|
2,404
|
|
2,438
|
|
177
|
|
—
|
|
5,019
|
|
||||||||||
|
Internet of Things Group
|
428
|
|
534
|
|
36
|
|
—
|
|
998
|
|
||||||||||
|
Non-Volatile Memory Solutions Group
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||
|
Intel Security Group
|
3,599
|
|
—
|
|
—
|
|
1
|
|
3,600
|
|
||||||||||
|
Software and Services Group
|
441
|
|
—
|
|
(441
|
)
|
—
|
|
—
|
|
||||||||||
|
Programmable Solutions Group
|
—
|
|
2,474
|
|
—
|
|
1
|
|
2,475
|
|
||||||||||
|
All other
|
382
|
|
150
|
|
15
|
|
—
|
|
547
|
|
||||||||||
|
Total
|
$
|
11,332
|
|
$
|
5,608
|
|
$
|
—
|
|
$
|
2
|
|
$
|
16,942
|
|
|||||
During the first quarter of 2016, we completed the acquisition of Altera and formed PSG. The goodwill recognized from this acquisition was allocated among DCG, IOTG, and PSG based on the relative fair value provided by the acquisition, which reflected the estimated synergistic value generated within DCG and IOTG by incorporating Altera's intellectual property into Intel's future process technology and products. For further information, see "
Note 8: Acquisitions
."
We previously disclosed the goodwill for Intel Security Group (ISecG) and Software and Services Group (SSG) as part of the aggregated software and services operating segments. During the first quarter of 2016, we elected to separately disclose the results of ISecG and determined SSG is no longer an operating segment; accordingly, its goodwill was re-allocated to other operating segments based on the relative fair value. Additionally, we formed the New Technology Group (NTG), which includes products designed for wearables, cameras, and other market segments (including drones). The substantially majority of goodwill under "all other" is attributable to NTG, the remainder of which is unallocated from recent acquisitions in the first quarter of 2016. For further information, see "
Note 22: Operating Segments Information
."
21
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 10: Identified Intangible Assets
Identified intangible assets at the end of each period were as follows:
|
|
April 2, 2016
|
|||||||||||
|
(In Millions)
|
Gross Assets
|
Accumulated
Amortization |
Net
|
|||||||||
|
Acquisition-related developed technology
|
$
|
8,646
|
|
$
|
(2,430
|
)
|
$
|
6,216
|
|
|||
|
Acquisition-related customer relationships
|
2,842
|
|
(1,291
|
)
|
1,551
|
|
||||||
|
Acquisition-related brands
|
146
|
|
(62
|
)
|
84
|
|
||||||
|
Licensed technology and patents
|
3,001
|
|
(1,254
|
)
|
1,747
|
|
||||||
|
Identified intangible assets subject to amortization
|
14,635
|
|
(5,037
|
)
|
9,598
|
|
||||||
|
Acquisition-related brands
|
767
|
|
—
|
|
767
|
|
||||||
|
Other intangible assets
|
775
|
|
—
|
|
775
|
|
||||||
|
Identified intangible assets not subject to amortization
|
1,542
|
|
—
|
|
1,542
|
|
||||||
|
Total identified intangible assets
|
$
|
16,177
|
|
$
|
(5,037
|
)
|
$
|
11,140
|
|
|||
|
|
December 26, 2015
|
|||||||||||
|
(In Millions)
|
Gross Assets
|
Accumulated
Amortization |
Net
|
|||||||||
|
Acquisition-related developed technology
|
$
|
2,928
|
|
$
|
(2,276
|
)
|
$
|
652
|
|
|||
|
Acquisition-related customer relationships
|
1,738
|
|
(1,219
|
)
|
519
|
|
||||||
|
Acquisition-related brands
|
59
|
|
(55
|
)
|
4
|
|
||||||
|
Licensed technology and patents
|
3,017
|
|
(1,200
|
)
|
1,817
|
|
||||||
|
Identified intangible assets subject to amortization
|
7,742
|
|
(4,750
|
)
|
2,992
|
|
||||||
|
Acquisition-related brands
|
767
|
|
—
|
|
767
|
|
||||||
|
Other intangible assets
|
174
|
|
—
|
|
174
|
|
||||||
|
Identified intangible assets not subject to amortization
|
941
|
|
—
|
|
941
|
|
||||||
|
Total identified intangible assets
|
$
|
8,683
|
|
$
|
(4,750
|
)
|
$
|
3,933
|
|
|||
As a result of our acquisition of Altera during the first quarter of 2016, we recorded
$7.6 billion
of identified intangible assets. For further information about identified intangible assets recorded as a result of the acquisition during the first quarter of 2016, see "
Note 8: Acquisitions
."
Amortization expenses, with presentation location on the consolidated condensed statements of income, for each period were as follows:
|
Three Months Ended
|
||||||||||
|
(In Millions)
|
Location
|
Apr 2,
2016 |
Mar 28,
2015 |
|||||||
|
Acquisition-related developed technology
|
Cost of sales
|
$
|
235
|
|
$
|
120
|
|
|||
|
Acquisition-related customer relationships
|
Amortization of acquisition-related intangibles
|
83
|
|
60
|
|
|||||
|
Acquisition-related brands
|
Amortization of acquisition-related intangibles
|
7
|
|
2
|
|
|||||
|
Licensed technology and patents
|
Cost of sales
|
71
|
|
69
|
|
|||||
|
Total amortization expenses
|
$
|
396
|
|
$
|
251
|
|
||||
22
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Based on identified intangible assets that are subject to amortization as of
April 2, 2016
, we expect future amortization expenses for each period to be as follows:
|
(In Millions)
|
Remainder of 2016
|
2017
|
2018
|
2019
|
2020
|
|||||||||||||||
|
Acquisition-related developed technology
|
$
|
702
|
|
$
|
792
|
|
$
|
779
|
|
$
|
776
|
|
$
|
742
|
|
|||||
|
Acquisition-related customer relationships
|
245
|
|
241
|
|
141
|
|
124
|
|
121
|
|
||||||||||
|
Acquisition-related brands
|
17
|
|
13
|
|
13
|
|
13
|
|
13
|
|
||||||||||
|
Licensed technology and patents
|
210
|
|
239
|
|
187
|
|
186
|
|
174
|
|
||||||||||
|
Total future amortization expenses
|
$
|
1,174
|
|
$
|
1,285
|
|
$
|
1,120
|
|
$
|
1,099
|
|
$
|
1,050
|
|
|||||
Note 11: Other Long-Term Assets
Other long-term assets at the end of each period were as follows:
|
(In Millions)
|
Apr 2,
2016 |
Dec 26,
2015 |
||||||
|
Equity method investments
|
$
|
1,593
|
|
$
|
1,590
|
|
||
|
Non-marketable cost method investments
|
2,933
|
|
2,933
|
|
||||
|
Non-current deferred tax assets
|
682
|
|
1,052
|
|
||||
|
Pre-payments for property, plant and equipment
|
487
|
|
623
|
|
||||
|
Loans receivable
|
755
|
|
642
|
|
||||
|
Grants receivable
|
323
|
|
318
|
|
||||
|
Reverse repurchase agreements
|
250
|
|
350
|
|
||||
|
Other
|
847
|
|
657
|
|
||||
|
Total other long-term assets
|
$
|
7,870
|
|
$
|
8,165
|
|
||
During the
first three months
of
2016
, we received and transferred
$132 million
of equipment from pre-payments for property, plant and equipment to property, plant and equipment.
Substantially all
of the equipment was prepaid in
2013 and 2014
. 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.
Note 12: Restructuring and Asset Impairment Charges
We had
no
restructuring and asset impairment charges in the
first three months
of
2016
due to the completion of our 2013 and 2015 restructuring programs. As of
April 2, 2016
, the remaining liability associated with both programs is
$37 million
(
$70 million
as of
December 26, 2015
). A substantial majority of this liability is expected to be paid within the next 12 months and was recorded as a current liability. For more information about these programs, please refer to our Annual Report on Form 10-K for the year ended
December 26, 2015
.
2016 Restructuring Program
On April 19, 2016, subsequent to the end of first quarter of 2016, we announced the 2016 Restructuring Program, designed to align our operations with evolving business needs and improve efficiencies. Under this program, we intend to close certain facilities and reduce up to
twelve thousand
positions globally. Accordingly, we expect to incur charges of approximately
$1.2 billion
in the second quarter of 2016. The actions associated with this program are expected to be fully completed by the second quarter of 2017.
23
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 13: Deferred Income
Deferred income at the end of each period was as follows:
|
(In Millions)
|
Apr 2,
2016 |
Dec 26,
2015 |
||||||
|
Deferred income on shipments of components to distributors
|
$
|
1,318
|
|
$
|
920
|
|
||
|
Deferred income from software, services and other
|
1,314
|
|
1,268
|
|
||||
|
Current deferred income
|
2,632
|
|
|
2,188
|
|
|||
|
Non-current deferred income from software, services and other
|
482
|
|
530
|
|
||||
|
Total deferred income
|
$
|
3,114
|
|
|
$
|
2,718
|
|
|
We classify non-current deferred income from software, services and other within other long-term liabilities on the consolidated condensed balance sheets.
Note 14: Borrowings
Short-Term Debt
Our short-term debt at the end of each period was as follows:
|
(In Millions)
|
Apr 2,
2016 |
Dec 26,
2015 |
||||||
|
Drafts payable
|
$
|
75
|
|
$
|
41
|
|
||
|
Commercial paper
|
921
|
|
—
|
|
||||
|
Current portion of long-term debt
|
2,606
|
|
2,602
|
|
||||
|
Less: debt issuance costs associated with the current portion of long-term debt
|
(8
|
)
|
(9
|
)
|
||||
|
Total short-term debt
|
$
|
3,594
|
|
$
|
2,634
|
|
||
We have an ongoing authorization from our Board of Directors to borrow up to
$5.0 billion
under our commercial paper program. Maximum borrowings under our commercial paper program in the
first three months
of
2016
were
$3.0 billion
(
$900 million
in the
first three months
2015
). We had
$921 million
outstanding commercial paper as of
April 2, 2016
(
none
outstanding as of
December 26, 2015
). Our commercial paper was rated
A-1+
by Standard & Poor’s and
P-1
by Moody’s as of
April 2, 2016
.
On December 21, 2015, we entered into a short-term credit facility to borrow up to
$5.0 billion
in order to facilitate the settlement of our acquisition of Altera. Under this credit facility, we borrowed
$4.0 billion
and the facility was closed in January 2016.
2009 Debentures
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
first
quarter of
2016
, the closing stock price conversion right condition of the 2009 debentures continued to be met and the debentures will be convertible at the option of the holders during the
second
quarter of
2016
. As a result, the
$1.1 billion
carrying amount of the 2009 debentures was classified as short-term debt on our consolidated condensed balance sheet as of
April 2, 2016
(
$1.1 billion
as of
December 26, 2015
). The excess of the amount of cash payable if converted over the carrying amount of the 2009 debentures of
$894 million
has been classified as temporary equity on our consolidated condensed balance sheet as of
April 2, 2016
(
$897 million
as of
December 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 the temporary equity would be reclassified to stockholders’ equity on our consolidated condensed balance sheet.
24
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Long-Term Debt
Our indebtedness is carried at amortized cost plus applicable hedge adjustments. Our long-term debt at the end of each period was as follows:
|
(In Millions)
|
Maturity Date
|
Stated Interest Rate
|
Apr 2,
2016 |
Dec 26,
2015 |
||||||||
|
First quarter 2016 acquired Altera debt of $1.5 billion
|
||||||||||||
|
Senior notes
|
May 2017
|
1.75%
|
$
|
501
|
|
$
|
—
|
|
||||
|
Senior notes
|
November 2018
|
2.50%
|
606
|
|
—
|
|
||||||
|
Senior notes
|
November 2023
|
4.10%
|
426
|
|
—
|
|
||||||
|
Fourth quarter 2015 debt issuance of $915 million
|
||||||||||||
|
Senior notes
|
December 2045
|
4.70%
|
939
|
|
908
|
|
||||||
|
Fourth quarter 2015 Australian dollar-denominated debt issuance of A$800 million
|
||||||||||||
|
Senior notes
1
|
December 2019
|
3.25%
|
191
|
|
181
|
|
||||||
|
Senior notes
1
|
December 2022
|
4.00%
|
421
|
|
397
|
|
||||||
|
Third quarter 2015 debt issuance of $1.0 billion
|
||||||||||||
|
Senior notes
|
August 2045
|
4.90%
|
1,028
|
|
1,009
|
|
||||||
|
Third quarter 2015 debt issuance of $7.0 billion
|
||||||||||||
|
Senior notes
|
July 2020
|
2.45%
|
1,749
|
|
1,748
|
|
||||||
|
Senior notes
|
July 2022
|
3.10%
|
1,030
|
|
996
|
|
||||||
|
Senior notes
|
July 2025
|
3.70%
|
2,269
|
|
2,247
|
|
||||||
|
Senior notes
|
July 2045
|
4.90%
|
1,999
|
|
1,998
|
|
||||||
|
2012 debt issuance of $6.2 billion
|
||||||||||||
|
Senior notes
|
December 2017
|
1.35%
|
2,999
|
|
2,999
|
|
||||||
|
Senior notes
|
December 2022
|
2.70%
|
1,548
|
|
1,492
|
|
||||||
|
Senior notes
|
December 2032
|
4.00%
|
744
|
|
744
|
|
||||||
|
Senior notes
|
December 2042
|
4.25%
|
925
|
|
924
|
|
||||||
|
2011 debt issuance of $5.0 billion
|
||||||||||||
|
Senior notes
|
October 2016
|
1.95%
|
1,500
|
|
1,499
|
|
||||||
|
Senior notes
|
October 2021
|
3.30%
|
1,998
|
|
1,997
|
|
||||||
|
Senior notes
|
October 2041
|
4.80%
|
1,491
|
|
1,490
|
|
||||||
|
2009 debt issuance of $2.0 billion
|
||||||||||||
|
Junior subordinated convertible debentures
|
August 2039
|
3.25%
|
1,106
|
|
1,103
|
|
||||||
|
2005 debt issuance of $1.6 billion
|
||||||||||||
|
Junior subordinated convertible debentures
|
December 2035
|
2.95%
|
979
|
|
975
|
|
||||||
|
Long-term debt
|
24,449
|
|
22,707
|
|
||||||||
|
Less: current portion of long-term debt
|
(2,606
|
)
|
(2,602
|
)
|
||||||||
|
Less: debt issuance costs
|
(68
|
)
|
(69
|
)
|
||||||||
|
Total long-term debt
|
$
|
21,775
|
|
$
|
20,036
|
|
||||||
|
1
|
To manage foreign currency risk associated with the Australian-dollar-denominated notes issued in 2015, we entered into currency interest rate swaps with an aggregate notional amount of
$577 million
, which effectively converted these notes to U.S.-dollar-denominated notes. For further discussion on our currency interest rate swaps, see "
Note 7: Derivative Financial Instruments
."
|
25
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
During the first quarter of 2016, in connection with our completed acquisition of Altera, we acquired a total of
$1.5 billion
aggregate principal amount of senior unsecured notes. The senior notes pay a fixed rate of interest semiannually. We may redeem the notes prior to their maturity at our option at specified redemption prices and subject to certain restrictions. The obligations under these 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.
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 26, 2015
.
Note 15: Employee Equity Incentive Plans
Our equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.
In connection with our completed acquisition of Altera, we assumed two of their equity incentive plans with outstanding unvested stock options and restricted stock units. The assumed stock options and restricted stock units generally retained the terms and conditions under which they were originally granted. We will not grant additional shares under these assumed plans.
As of
April 2, 2016
,
252 million
shares of common stock remained available for future grant under the 2006 Equity Incentive Plan through June 2018.
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
April 2, 2016
,
172 million
shares of common stock remained available for issuance under the 2006 Stock Purchase Plan through August 2021.
Share-Based Compensation
Share-based compensation expense recognized in the
first three months
of
2016
was
$448 million
(
$368 million
in the
first three months
of
2015
).
R
estricted Stock Unit Awards
Restricted stock unit (RSU) activity in the
first three months
of
2016
was as follows:
|
Number of
RSUs
(In Millions)
|
Weighted Average
Grant-Date
Fair Value
|
||||||
|
December 26, 2015
|
107.4
|
|
$
|
26.93
|
|
||
|
Granted
|
8.3
|
|
$
|
32.39
|
|
||
|
Assumed in acquisition
|
7.3
|
|
$
|
33.79
|
|
||
|
Vested
|
(5.3
|
)
|
$
|
28.89
|
|
||
|
Forfeited
|
(1.8
|
)
|
$
|
27.47
|
|
||
|
April 2, 2016
|
115.9
|
|
$
|
27.66
|
|
||
The aggregate fair value of awards that vested in the
first three months
of
2016
was
$165 million
, which represents the market value of our common stock on the date that the RSUs vested. The grant-date fair value of awards that vested in
first three months
of
2016
was
$153 million
. The number of RSUs vested includes shares of common stock that we withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements. RSUs that are expected to vest are net of estimated future forfeitures.
As of
April 2, 2016
,
6.9 million
of the outstanding RSUs were market-based RSUs.
Stock Purchase Plan
Employees purchased
9.2 million
shares of common stock in the
first three months
of
2016
for
$227 million
(
8.1 million
shares of common stock in the
first three months
of
2015
for
$234 million
) under the 2006 Stock Purchase Plan.
26
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 16: 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
$65.0 billion
in shares of our common stock in open market or negotiated transactions.
As of
April 2, 2016
,
$8.6 billion
remained available for repurchase under the existing repurchase authorization limit.
During the
first three months
of
2016
, we repurchased
26.8 million
shares of common stock at a cost of
$800 million
(
21.3 million
shares of common stock at a cost of
$750 million
in the
first three months
of
2015
). We have repurchased
4.8 billion
shares of common stock at a cost of
$105.7 billion
since the program began in 1990.
Note 17: Gains (Losses) on Equity Investments, Net
The components of gains (losses) on equity investments, net for each period were as follows:
|
|
Three Months Ended
|
|||||||
|
(In Millions)
|
Apr 2,
2016 |
Mar 28,
2015 |
||||||
|
Share of equity method investee losses, net
|
$
|
(8
|
)
|
$
|
(48
|
)
|
||
|
Impairments
|
(29
|
)
|
(38
|
)
|
||||
|
Gains on sales, net
|
96
|
|
46
|
|
||||
|
Other, net
|
(37
|
)
|
72
|
|
||||
|
Total gains (losses) on equity investments, net
|
$
|
22
|
|
$
|
32
|
|
||
Note 18: Interest and Other, Net
The components of interest and other, net for each period were as follows:
|
|
Three Months Ended
|
|||||||
|
(In Millions)
|
Apr 2,
2016 |
Mar 28,
2015 |
||||||
|
Interest income
|
$
|
52
|
|
$
|
32
|
|
||
|
Interest expense
|
(208
|
)
|
(42
|
)
|
||||
|
Other, net
|
74
|
|
36
|
|
||||
|
Total interest and other, net
|
$
|
(82
|
)
|
$
|
26
|
|
||
Interest expense in the preceding table is net of
$22 million
of interest capitalized in the
first three months
of
2016
(
$81 million
in the
first three months
of
2015
).
During the
first three months
of
2016
, we recognized an interest and other, net loss primarily due to higher interest expense related to the 2015 issuances of our
$9.5 billion
aggregate principal amount of senior unsecured notes. For further information on these transactions, see "
Note 14: Borrowings
."
27
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 19: Earnings Per Share
We computed our basic and diluted earnings per common share for each period as follows:
|
|
Three Months Ended
|
|||||||
|
(In Millions, Except Per Share Amounts)
|
Apr 2,
2016 |
Mar 28,
2015 |
||||||
|
Net income available to common stockholders
|
$
|
2,046
|
|
$
|
1,992
|
|
||
|
Weighted average shares of common stock outstanding—basic
|
4,722
|
|
4,741
|
|
||||
|
Dilutive effect of employee equity incentive plans
|
66
|
|
82
|
|
||||
|
Dilutive effect of convertible debt
|
87
|
|
91
|
|
||||
|
Weighted average shares of common stock outstanding—diluted
|
4,875
|
|
4,914
|
|
||||
|
Basic earnings per share of common stock
|
$
|
0.43
|
|
$
|
0.42
|
|
||
|
Diluted earnings per share of common stock
|
$
|
0.42
|
|
$
|
0.41
|
|
||
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.
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 RSUs, 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.
Stock options and RSUs 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
first three months
of
2016
,
no
outstanding stock options and RSUs were excluded from the computation of diluted earnings per share of common stock (
3 million
for the
first three months
of
2015
because these shares of common stock would have been antidilutive).
During the
first three months
of
2016
and
2015
, 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.
28
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 20: Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component and related tax effects in the
first three months
of
2016
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 26, 2015
|
$
|
1,749
|
|
$
|
8
|
|
$
|
(266
|
)
|
$
|
(40
|
)
|
$
|
(876
|
)
|
$
|
(515
|
)
|
$
|
60
|
|
|||||||
|
Other comprehensive income (loss) before reclassifications
|
532
|
|
—
|
|
243
|
|
—
|
|
6
|
|
2
|
|
783
|
|
||||||||||||||
|
Amounts reclassified out of accumulated other comprehensive income (loss)
|
(85
|
)
|
—
|
|
22
|
|
2
|
|
12
|
|
—
|
|
(49
|
)
|
||||||||||||||
|
Tax effects
|
(156
|
)
|
(1
|
)
|
(78
|
)
|
—
|
|
1
|
|
—
|
|
(234
|
)
|
||||||||||||||
|
Other comprehensive income (loss)
|
291
|
|
(1
|
)
|
187
|
|
2
|
|
19
|
|
2
|
|
500
|
|
||||||||||||||
|
April 2, 2016
|
$
|
2,040
|
|
$
|
7
|
|
$
|
(79
|
)
|
$
|
(38
|
)
|
$
|
(857
|
)
|
$
|
(513
|
)
|
$
|
560
|
|
|||||||
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
|
||||||||||
|
Comprehensive Income Components
|
Apr 2,
2016 |
Mar 28,
2015 |
Location
|
|||||||
|
Unrealized holding gains (losses) on available-for-sale investments:
|
||||||||||
|
$
|
(1
|
)
|
$
|
—
|
|
Interest and other, net
|
||||
|
86
|
|
54
|
|
Gains (losses) on equity investments, net
|
||||||
|
85
|
|
54
|
|
|||||||
|
Unrealized holding gains (losses) on derivatives:
|
||||||||||
|
Currency forwards
|
(42
|
)
|
(43
|
)
|
Cost of sales
|
|||||
|
(10
|
)
|
(47
|
)
|
Research and development
|
||||||
|
(4
|
)
|
(9
|
)
|
Marketing, general and administrative
|
||||||
|
Other instruments
|
34
|
|
—
|
|
Interest and other, net
|
|||||
|
(22
|
)
|
(99
|
)
|
|||||||
|
Amortization of pension and postretirement benefit components:
|
||||||||||
|
Prior service credits (costs)
|
(2
|
)
|
(2
|
)
|
||||||
|
Actuarial gains (losses)
|
(12
|
)
|
(14
|
)
|
||||||
|
(14
|
)
|
(16
|
)
|
|||||||
|
Total amounts reclassified out of accumulated other comprehensive income (loss)
|
$
|
49
|
|
$
|
(61
|
)
|
||||
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 26, 2015
.
29
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
We estimate that we will reclassify approximately
$7 million
(before taxes) of net derivative
gains
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.
Government Competition Matters and 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
€1.1 billion
(
$1.4 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. In November 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 and issue its decision in 2016.
30
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
At least 82 separate class-action lawsuits were 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.
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 July 2010, the Special Master denied the MDL plaintiffs' motion to certify a class of members who purchased certain personal computers containing products sold by us. 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, we 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 were consolidated in the Superior Court of California in Santa Clara County. In March 2008, the plaintiffs in the California actions moved for class certification, which we opposed. In February 2015, the court granted plaintiffs' request for leave to retain a new expert and to amend their previous motion for class certification. In March 2016, the court denied plaintiffs’ amended class certification motion, and plaintiffs filed a motion for reconsideration, which is scheduled for hearing in May 2016. 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.
Shareholder Derivative Litigation regarding In re High Tech Employee Antitrust Litigation
In March 2014, the Police Retirement System of St. Louis (PRSSL) 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, purported antitrust violations, which were alleged in a now-settled antitrust class action lawsuit captioned
In re High Tech Employee Antitrust Litigation
claiming that
Intel, Adobe Systems Incorporated, Apple Inc., Google Inc., Intuit Inc., Lucasfilm Ltd., and Pixar conspired to suppress their employees’ compensation. 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 November 2015, plaintiffs PRSSL and Templeton appealed the court's decision.
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 the
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 pending further developments in the California case. In March 2016, Intel and IBEW entered into a stipulated dismissal pursuant to which IBEW dismissed its complaint but may re-file upon the withdrawal or final resolution of the appeal in the California shareholder derivative litigation.
31
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
In April 2016, John Esposito filed a shareholder derivative action in the Superior Court of California in Santa Clara County against Intel, current members of our Board, and certain former officers and employees. Esposito made a demand on our Board in 2013 to investigate whether our officers or directors should be sued for their participation in the events described in In re High Tech Employee Antitrust Litigation. In November 2015, our Board decided not to take further action on Esposito’s demand based on the recommendation of the Audit Committee of the Board after its investigation of relevant facts and circumstances. Esposito seeks to set aside such decision, and alleges that the Board was not disinterested in making that decision and that the investigation was inadequate.
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
.
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.
32
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 22: Operating Segments Information
Our operating segments in effect as of
April 2, 2016
include:
|
•
Client Computing Group (CCG)
|
•
Intel Security Group (ISecG)
|
|
|
•
Data Center Group (DCG)
|
•
Programmable Solutions Group (PSG)
|
|
|
•
Internet of Things Group (IOTG)
|
•
All other
|
|
|
•
Non-Volatile Memory Solutions Group (NSG)
|
•
New Technology Group (NTG)
|
|
During the first quarter of 2016, we formed PSG as a result of our acquisition of Altera. For further information, see "
Note 8: Acquisitions
." Additionally, we formed NTG, which includes products designed for wearables, cameras, and other market segments (including drones), and determined Software and Services Group is no longer an operating segment.
All prior-period amounts have been retrospectively adjusted to reflect the way we internally manage and monitor segment performance starting in fiscal year 2016 and include 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 DCG are our reportable operating segments. IOTG, NSG, ISecG, and PSG 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 separately disclose the results of these non-reportable operating segments. Our NTG operating segment does not meet the quantitative thresholds to qualify as a reportable segment and its results are included within the “all other” category.
Revenue for our reportable and non-reportable operating segments is primarily related to the following product lines:
|
•
|
Client Computing Group
.
Includes platforms designed for notebooks (including Ultrabook™ devices), 2 in 1 systems, desktops (including all-in-ones and high-end enthusiast PCs), tablets, phones, wireless and wired connectivity products, and mobile communication components.
|
|
•
|
Data Center Group.
Includes platforms designed for the enterprise, cloud, communications infrastructure, and technical computing segments.
|
|
•
|
Internet of Things Group.
Includes platforms designed for Internet of Things market segments, including retail, transportation, industrial, and buildings and home use, along with a broad range of other market segments.
|
|
•
|
Non-Volatile Memory Solutions Group.
Includes NAND flash memory products primarily used in solid-state drives.
|
|
•
|
Intel Security Group.
Includes security software products designed to deliver innovative solutions that secure computers, mobile devices, and networks around the world from the latest malware and emerging online threats.
|
|
•
|
Programmable Solutions Group.
Includes programmable semiconductors (primary field-programmable gate array) and related products for a broad range of market segments, including communications, networking and storage, industrial, military, and automotive.
|
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 New Technology 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.
33
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Net revenue and operating income (loss) for each period were as follows:
|
Three Months Ended
|
||||||||
|
(In Millions)
|
Apr 2,
2016 |
Mar 28,
2015 |
||||||
|
Net revenue:
|
||||||||
|
Client Computing Group
|
||||||||
|
Platform
|
$
|
7,188
|
|
$
|
7,049
|
|
||
|
Other
|
361
|
|
371
|
|
||||
|
7,549
|
|
7,420
|
|
|||||
|
Data Center Group
|
||||||||
|
Platform
|
3,718
|
|
3,419
|
|
||||
|
Other
|
281
|
|
262
|
|
||||
|
3,999
|
|
3,681
|
|
|||||
|
Internet of Things Group
|
||||||||
|
Platform
|
571
|
|
462
|
|
||||
|
Other
|
80
|
|
71
|
|
||||
|
651
|
|
533
|
|
|||||
|
Non-Volatile Memory Solutions Group
|
557
|
|
592
|
|
||||
|
Intel Security Group
|
537
|
|
479
|
|
||||
|
Programmable Solutions Group
|
359
|
|
—
|
|
||||
|
All other
|
50
|
|
76
|
|
||||
|
Total net revenue
|
$
|
13,702
|
|
$
|
12,781
|
|
||
|
Operating income (loss):
|
||||||||
|
Client Computing Group
|
$
|
1,885
|
|
$
|
1,411
|
|
||
|
Data Center Group
|
1,764
|
|
1,699
|
|
||||
|
Internet of Things Group
|
123
|
|
87
|
|
||||
|
Non-Volatile Memory Solutions Group
|
(95
|
)
|
72
|
|
||||
|
Intel Security Group
|
85
|
|
15
|
|
||||
|
Programmable Solutions Group
|
(200
|
)
|
—
|
|
||||
|
All other
|
(994
|
)
|
(669
|
)
|
||||
|
Total operating income
|
$
|
2,568
|
|
$
|
2,615
|
|
||
34
|
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 months ended
April 2, 2016
to the
three months ended
March 28, 2015
.
|
|
•
|
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 26, 2015
.
|
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 26, 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 that had not been completed as of
May 2, 2016
.
35
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)
|
Q1 2016
|
Q4 2015
|
Change
|
Q1 2016
|
Q1 2015
|
Change
|
||||||||||||||||||
|
Net revenue
|
$
|
13,702
|
|
$
|
14,914
|
|
$
|
(1,212
|
)
|
$
|
13,702
|
|
$
|
12,781
|
|
$
|
921
|
|
||||||
|
Gross margin
|
$
|
8,130
|
|
$
|
9,590
|
|
$
|
(1,460
|
)
|
$
|
8,130
|
|
$
|
7,730
|
|
$
|
400
|
|
||||||
|
Gross margin percentage
|
59.3
|
%
|
64.3
|
%
|
(5.0
|
)%
|
59.3
|
%
|
60.5
|
%
|
(1.2
|
)%
|
||||||||||||
|
Operating income
|
$
|
2,568
|
|
$
|
4,299
|
|
$
|
(1,731
|
)
|
$
|
2,568
|
|
$
|
2,615
|
|
$
|
(47
|
)
|
||||||
|
Net income
|
$
|
2,046
|
|
$
|
3,613
|
|
$
|
(1,567
|
)
|
$
|
2,046
|
|
$
|
1,992
|
|
$
|
54
|
|
||||||
|
Diluted earnings per common share
|
$
|
0.42
|
|
$
|
0.74
|
|
$
|
(0.32
|
)
|
$
|
0.42
|
|
$
|
0.41
|
|
$
|
0.01
|
|
||||||
|
Effective tax rate
|
18.4
|
%
|
16.0
|
%
|
2.4
|
%
|
18.4
|
%
|
25.5
|
%
|
(7.1
|
)%
|
||||||||||||
Our
Q1 2016
net revenue of
$13.7 billion
, was
up 7%
from
Q1 2015
and in the low end of the range of our Business Outlook provided in January 2016. The Q1 2016 results reflected an extra workweek and results from the newly created Programmable Solutions Group (PSG), formerly Altera Corporation (Altera). We saw strong growth in Data Center Group (DCG), Internet of Things Group (IOTG), and PSG, which was partially offset by challenging macro-economic conditions and a weaker PC market.
Gross margin of 59.3% for Q1 2016 includes approximately 2.5 pts of Altera and other non-cash acquisition-related adjustments and is 1.3 pts above the midpoint of our previous Business Outlook of 58.0%. Compared to
Q1 2015
, operating income of
$2.6 billion
was down
2%
, net income of
$2.0 billion
was
up 3%
, effective tax rate of 18.4% was down 7.1 pts, and earnings per share of
$0.42
was up one cent.
Compared to Q1 2015, Client Computing Group (CCG) revenue was up 2% and operating income increased 34%. DCG revenue was up 9% and operating income was up 4%. IOTG achieved revenue was up 22% and operating income was up 41%. PSG recognized $359 million in revenue, which does not include $99 million of revenue as a result of acquisition-related adjustments. The Non-Volatile Memory Solutions Group (NSG) revenue was down 6%. The first quarter results represent our ongoing transformation from a PC company to one that powers the cloud and billions of smart and connected computing devices. As Intel's business model evolves and we execute to our strategy, the data center and Internet of Things businesses are the primary growth engines, which combined with our memory and field-programmable gate arrays (FPGAs) businesses form and fuel a virtuous cycle of growth.
Our business continues to generate significant cash with
$4.1 billion
of cash from operations in
Q1 2016
. During
Q1 2016
, we purchased
$1.3 billion
in capital assets and returned cash to stockholders by paying
$1.2 billion
in dividends and repurchasing
$800 million
of common stock through our stock repurchase program. Additionally, our Board of Directors declared a quarterly cash dividend in March 2016 of $0.26 per share of common stock to be paid in June 2016. We ended
Q1 2016
with
$15.1 billion
of cash and cash equivalents, short-term investments, and trading assets, which represented a $10.2 billion decrease compared to Q4 2015, primarily driven by the acquisition of Altera. Total debt is $25.4 billion, consistent with our prior commentary on the financing plan for the acquisition of Altera.
We are building on our strong position in client computing and are investing for growth in the data center, Internet of Things market segments, and disruptive differentiated memory technology. In order to accelerate the execution, in Q2 we announced the 2016 Restructuring Program. Under this program we intend to close certain facilities and reduce up to twelve thousand positions globally. Accordingly, we expect to incur charges of approximately
$1.2 billion
in the second quarter of 2016. The actions associated with the program are expected to be fully completed by the second quarter of 2017 and result in annual savings of approximately
$1.4 billion
once it is fully implemented.
Our Business Outlook for
Q2 2016
and full-year
2016
includes, where applicable, our current expectations for revenue, gross margin percentage, spending (research and development (R&D) plus marketing, general, and administrative (MG&A), restructuring, 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.
36
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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
June 17, 2016
unless updated earlier or except as specifically noted otherwise in the Business Outlook. From the close of business on
June 17, 2016
until our quarterly earnings release is published, currently scheduled for
July 20, 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
April 19, 2016
, 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.
37
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations –
First
Quarter of
2016
Compared to
First
Quarter of
2015
The following table sets forth certain consolidated condensed statements of income data as a percentage of net revenue for each period as follows:
|
|
Q1 2016
|
Q1 2015
|
||||||||||||
|
(Dollars in Millions, Except Per Share Amounts)
|
Dollars
|
% of Net
Revenue |
Dollars
|
% of Net
Revenue |
||||||||||
|
Net revenue
|
$
|
13,702
|
|
100.0
|
%
|
$
|
12,781
|
|
100.0
|
%
|
||||
|
Cost of sales
|
5,572
|
|
40.7
|
%
|
5,051
|
|
39.5
|
%
|
||||||
|
Gross margin
|
8,130
|
|
59.3
|
%
|
7,730
|
|
60.5
|
%
|
||||||
|
Research and development
|
3,246
|
|
23.7
|
%
|
2,995
|
|
23.4
|
%
|
||||||
|
Marketing, general and administrative
|
2,226
|
|
16.2
|
%
|
1,953
|
|
15.3
|
%
|
||||||
|
Restructuring and asset impairment charges
|
—
|
|
—
|
%
|
105
|
|
0.8
|
%
|
||||||
|
Amortization of acquisition-related intangibles
|
90
|
|
0.7
|
%
|
62
|
|
0.5
|
%
|
||||||
|
Operating income
|
2,568
|
|
18.7
|
%
|
2,615
|
|
20.5
|
%
|
||||||
|
Gains (losses) on equity investments, net
|
22
|
|
0.2
|
%
|
32
|
|
0.2
|
%
|
||||||
|
Interest and other, net
|
(82
|
)
|
(0.6
|
)%
|
26
|
|
0.2
|
%
|
||||||
|
Income before taxes
|
2,508
|
|
18.3
|
%
|
2,673
|
|
20.9
|
%
|
||||||
|
Provision for taxes
|
462
|
|
3.4
|
%
|
681
|
|
5.3
|
%
|
||||||
|
Net income
|
$
|
2,046
|
|
14.9
|
%
|
$
|
1,992
|
|
15.6
|
%
|
||||
|
Diluted earnings per common share
|
$
|
0.42
|
|
$
|
0.41
|
|
||||||||
Our net revenue in
Q1 2016
increased
by
$921 million
, or
7%
, compared to
Q1 2015
. Our
Q1 2016
results reflected an extra workweek as compared to
Q1 2015
. The higher revenue is driven by higher platform average selling prices,
up
17%
due to a lower mix of phone and tablet platform units sales and a higher mix of DCG platform unit sales, and inclusion of operating results from the newly created PSG. These increases in revenue were partially offset by lower platform unit sales of
11%
, which were driven by lower phone and tablet platform unit sales.
Our overall gross margin percentage was
59.3%
in
Q1 2016
, down from
60.5%
in
Q1 2015
. The decrease in gross margin percentage was primarily driven by Altera and other acquisition-related charges, higher platform unit costs, lower platform unit sales, and NSG ramp
.
The decrease in gross margin percentage was partially offset by higher platform average selling prices.
We derived most of our overall gross margin dollars for
Q1 2016
and
Q1 2015
from the sale of platforms in the CCG and DCG operating segments. Our overall gross margin dollars in
Q1 2016
increased
by
$400 million
, or
5.2%
, compared to
Q1 2015
. The following results drove the change in gross margin in
Q1 2016
compared to
Q1 2015
by approximately the amounts indicated:
|
(In Millions)
|
Gross Margin Reconciliation (Q1 2016 compared to Q1 2015):
|
|||
|
$
|
815
|
|
Higher gross margin from platform revenue
1
|
|
|
(350
|
)
|
Altera and other acquisition-related costs
|
||
|
(210
|
)
|
Higher platform unit costs, primarily on 14nm process technology
|
||
|
145
|
|
Other
|
||
|
$
|
400
|
|
||
|
1
|
Higher gross margin from platform revenue was driven by higher platform average selling prices, which were partially offset by lower platform unit sales. The increase in platform average selling prices was due to a shift in market segment mix from phone and tablet platforms to DCG platform.
|
38
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:
|
(Dollars in Millions)
|
Q1 2016
|
Q1 2015
|
Change
|
% Change
|
|||||||||||
|
Platform revenue
|
$
|
7,188
|
|
$
|
7,049
|
|
$
|
139
|
|
2
|
%
|
||||
|
Other revenue
|
361
|
|
371
|
|
(10
|
)
|
(3
|
)%
|
|||||||
|
Net revenue
|
$
|
7,549
|
|
$
|
7,420
|
|
$
|
129
|
|
2
|
%
|
||||
|
Operating income
|
$
|
1,885
|
|
$
|
1,411
|
|
$
|
474
|
|
34
|
%
|
||||
|
CCG platform unit sales
|
(15
|
)%
|
|||||||||||||
|
CCG platform average selling prices
|
19
|
%
|
|||||||||||||
Within the CCG operating segment, the following results, drove the change in revenue in
Q1 2016
compared to
Q1 2015
.
|
(In Millions)
|
Revenue Reconciliation (Q1 2016 compared to Q1 2015):
|
|||
|
$
|
180
|
|
Higher desktop platform average selling prices, up 6%
|
|
|
162
|
|
Primarily driven by the reduction of cash consideration paid to customers on our mobile platforms
|
||
|
(102
|
)
|
Lower notebook platform unit sales, down 2%
|
||
|
(111
|
)
|
Other
|
||
|
$
|
129
|
|
||
The following results, drove the change in CCG operating income in
Q1 2016
compared to
Q1 2015
by approximately the amounts indicated:
|
(In Millions)
|
Operating Income Reconciliation (Q1 2016 compared to Q1 2015):
|
|||
|
$
|
450
|
|
Higher CCG platform revenue
1
|
|
|
110
|
|
Lower CCG operating expense
|
||
|
(160
|
)
|
Higher CCG platform unit cost
|
||
|
74
|
|
Other
|
||
|
$
|
474
|
|
||
|
1
|
Higher gross margin from higher CCG platform revenue was driven by higher CCG platform average selling prices, partially offset by lower CCG platform unit sales. CCG platform average selling prices increased due to a market segment mix from phone and tablet platforms and higher average selling prices on desktop platform.
|
39
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Data Center Group
The revenue and operating income for the DCG operating segment for each period were as follows:
|
(Dollars in Millions)
|
Q1 2016
|
Q1 2015
|
Change
|
% Change
|
|||||||||||
|
Platform revenue
|
$
|
3,718
|
|
$
|
3,419
|
|
$
|
299
|
|
9
|
%
|
||||
|
Other revenue
|
281
|
|
262
|
|
19
|
|
7
|
%
|
|||||||
|
Net revenue
|
$
|
3,999
|
|
$
|
3,681
|
|
$
|
318
|
|
9
|
%
|
||||
|
Operating income
|
$
|
1,764
|
|
$
|
1,699
|
|
$
|
65
|
|
4
|
%
|
||||
|
DCG platform unit sales
|
13
|
%
|
|||||||||||||
|
DCG platform average selling prices
|
(3
|
)%
|
|||||||||||||
Our DCG platform revenue
increased
primarily due to strong growth in the cloud and communication service provider market segments
.
The following results, drove the change in DCG revenue in
Q1 2016
compared to
Q1 2015
.
|
(In Millions)
|
Revenue Reconciliation (Q1 2016 compared to Q1 2015):
|
|||
|
$
|
441
|
|
Higher DCG platform unit sales, up 13%
|
|
|
(142
|
)
|
Lower DCG platform average selling prices, down 3%
|
||
|
19
|
|
Other
|
||
|
$
|
318
|
|
||
The following results, drove the change in DCG operating income in
Q1 2016
compared to
Q1 2015
by approximately the amounts indicated:
|
(In Millions)
|
Operating Income Reconciliation (Q1 2016 compared to Q1 2015):
|
|||
|
$
|
260
|
|
Higher DCG platform revenue
|
|
|
(125
|
)
|
Higher DCG operating expense
|
||
|
(70
|
)
|
Other
|
||
|
$
|
65
|
|
||
Internet of Things Group
The revenue and operating income for the IOTG operating segment for each period were as follows:
|
(Dollars in Millions)
|
Q1 2016
|
Q1 2015
|
Change
|
% Change
|
|||||||||||
|
Platform revenue
|
$
|
571
|
|
$
|
462
|
|
$
|
109
|
|
24
|
%
|
||||
|
Other revenue
|
80
|
|
71
|
|
9
|
|
13
|
%
|
|||||||
|
Net revenue
|
$
|
651
|
|
$
|
533
|
|
$
|
118
|
|
22
|
%
|
||||
|
Operating income
|
$
|
123
|
|
$
|
87
|
|
$
|
36
|
|
41
|
%
|
||||
Net revenue for the IOTG operating segment
increased
in
Q1 2016
compared to
Q1 2015
, primarily due to higher IOTG platform unit sales based on strength in both the retail and video display market segments.
Operating income for the IOTG operating segment
increased
in
Q1 2016
compared to
Q1 2015
, driven by higher IOTG platform revenue partially offset by higher operating expense.
40
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Non-Volatile Memory Solutions Group
The revenue and operating income for the NSG operating segment for each period were as follows:
|
(Dollars in Millions)
|
Q1 2016
|
Q1 2015
|
Change
|
% Change
|
|||||||||||
|
Net revenue
|
$
|
557
|
|
$
|
592
|
|
$
|
(35
|
)
|
(6
|
)%
|
||||
|
Operating income
|
$
|
(95
|
)
|
$
|
72
|
|
$
|
(167
|
)
|
n/m
|
|
||||
Operating income for the NSG operating segment
decreased
in
Q1 2016
compared to
Q1 2015
, driven by competitive pricing pressures, higher startup costs on the ramp of our 3D NAND flash memory in our Dalian, China facility, and higher spending on 3D XPoint
TM
technology.
Intel Security Group
The revenue and operating income for the Intel Security Group (ISecG) operating segment for each period were as follows:
|
(Dollars in Millions)
|
Q1 2016
|
Q1 2015
|
Change
|
% Change
|
|||||||||||
|
Net revenue
|
$
|
537
|
|
$
|
479
|
|
$
|
58
|
|
12
|
%
|
||||
|
Operating income
|
$
|
85
|
|
$
|
15
|
|
$
|
70
|
|
n/m
|
|
||||
Operating income for the ISecG operating segment
increased
in
Q1 2016
compared to
Q1 2015
, driven by
$42 million
of
lower
operating expense.
Programmable Solutions Group
The revenue and operating income for the PSG operating segment for each period were as follows:
|
(Dollars in Millions)
|
Q1 2016
|
Q1 2015
|
Change
|
|||||||||
|
Net revenue
|
$
|
359
|
|
$
|
—
|
|
$
|
359
|
|
|||
|
Operating income (loss)
|
$
|
(200
|
)
|
$
|
—
|
|
$
|
(200
|
)
|
|||
Net revenue in
Q1 2016
is due to the revenue from the acquisition of Altera. The net revenue results are impacted by acquisition-related adjustments regarding the revaluation of deferred revenue to fair value. We have excluded approximately
$99 million
of revenue that would have been reported in
Q1 2016
if PSG’s deferred revenue not been written down to fair value.
Operating loss for PSG in
Q1 2016
is due to the acquisition of Altera. The operating loss for PSG is impacted by acquisition-related adjustments, primarily deferred revenue write down and inventory valuation adjustment. Due to the revaluation of deferred revenue to fair value, we excluded revenue and associated costs that would have created
$64 million
of operating income in
Q1 2016
. Additionally, we incurred approximately
$226 million
of additional cost of sales charges during the period that would have been excluded from
Q1 2016
if the acquired inventory not been remeasured to fair value and then sold through to end customers resulting in zero margin for the period.
41
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Expenses
Operating expenses for each period were as follows:
|
(Dollars in Millions)
|
Q1 2016
|
Q1 2015
|
||||||
|
Research and development (R&D)
|
$
|
3,246
|
|
$
|
2,995
|
|
||
|
Marketing, general and administrative (MG&A)
|
$
|
2,226
|
|
$
|
1,953
|
|
||
|
R&D and MG&A as percentage of net revenue
|
40
|
%
|
39
|
%
|
||||
|
Restructuring and asset impairment charges
|
$
|
—
|
|
$
|
105
|
|
||
|
Amortization of acquisition-related intangibles
|
$
|
90
|
|
$
|
62
|
|
||
Research and Development
R&D
increased
by
$251 million
, or
8%
, in
Q1 2016
compared to
Q1 2015
. The
increase
was driven by PSG expenses, an extra workweek in
Q1 2016
as compared to
Q1 2015
, and higher investment in our products, primarily Internet of Things, memory, new devices, and server. This increase was partially offset by lower depreciation expense in
Q1 2016
due to a change in the estimated useful life of our machinery and equipment in our wafer fabrication facilities.
Marketing, General and Administrative
MG&A
increased
by
$273 million
, or
14%
, in
Q1 2016
compared to
Q1 2015
. This
increase
was driven by PSG expenses, acquisition-related charges, as well as an extra workweek in
Q1 2016
as compared to
Q1 2015
and higher marketing expenses.
Restructuring and Asset Impairment Charges
We had no restructuring charges in
Q1 2016
due to the completion of our 2013 and 2015 restructuring programs.
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)
|
Q1 2016
|
Q1 2015
|
||||||
|
Gains (losses) on equity investments, net
|
$
|
22
|
|
$
|
32
|
|
||
|
Interest and other, net
|
$
|
(82
|
)
|
$
|
26
|
|
||
We recognized interest and other net loss in
Q1 2016
compared to net gain in
Q1 2015
primarily due to higher interest expense related to the 2015 issuances of
$9.5 billion
aggregate principal amount of senior unsecured notes. For further information on these transactions, see "
Note 14: Borrowings
."
Provision for Taxes
Our provision for taxes and effective tax rate for each period were as follows:
|
(Dollars in Millions)
|
Q1 2016
|
Q1 2015
|
||||||
|
Income before taxes
|
$
|
2,508
|
|
$
|
2,673
|
|
||
|
Provision for taxes
|
$
|
462
|
|
$
|
681
|
|
||
|
Effective tax rate
|
18.4
|
%
|
25.5
|
%
|
||||
Most
of the decrease in our effective tax rate in
Q1 2016
compared to
Q1 2015
was primarily driven by our one-time tax benefit from a divestiture, higher proportion of income in lower tax jurisdictions, and the permanent reinstatement of the U.S. R&D tax credit in
Q1 2016
as compared to
Q1 2015
.
42
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
|
(Dollars in Millions)
|
Apr 2,
2016 |
Dec 26,
2015 |
||||||
|
Cash and cash equivalents, short-term investments, and trading assets
|
$
|
15,091
|
|
$
|
25,313
|
|
||
|
Other long-term investments
|
$
|
3,097
|
|
$
|
1,891
|
|
||
|
Loans receivable and other
|
$
|
1,466
|
|
$
|
1,170
|
|
||
|
Reverse repurchase agreements with original maturities greater than approximately three months
|
$
|
350
|
|
$
|
1,000
|
|
||
|
Unsettled trade liabilities and other
|
$
|
52
|
|
$
|
99
|
|
||
|
Short-term and long-term debt
|
$
|
25,369
|
|
$
|
22,670
|
|
||
|
Temporary equity
|
$
|
894
|
|
$
|
897
|
|
||
|
Debt as percentage of permanent stockholders’ equity
|
41.5
|
%
|
37.1
|
%
|
||||
In summary, our cash flows for each period were as follows:
|
(In Millions)
|
Q1 2016
|
Q1 2015
|
||||||
|
Net cash provided by operating activities
|
$
|
4,055
|
|
$
|
4,415
|
|
||
|
Net cash used for investing activities
|
(15,520
|
)
|
(449
|
)
|
||||
|
Net cash used for financing activities
|
(782
|
)
|
(2,274
|
)
|
||||
|
Effect of exchange rate fluctuations on cash and cash equivalents
|
—
|
|
(9
|
)
|
||||
|
Net increase (decrease) in cash and cash equivalents
|
$
|
(12,247
|
)
|
$
|
1,683
|
|
||
Operating Activities
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.
For
Q1 2016
compared to
Q1 2015
, the
$360 million
decrease
in cash provided by operations was due to changes in working capital, partially offset by higher net income and adjustments to net income for non-cash items.
Changes in assets and liabilities as of
April 2, 2016
, compared to
December 26, 2015
, included a decrease in accrued compensation and benefits due to the payout of 2015 profit-dependent compensation and a decrease in accounts receivable due to lower revenue in the first three months of 2016.
For
Q1 2016
, our three largest customers accounted for
38%
of net revenue with Dell Inc. (Dell) accounting for
17%
of our net revenue, Lenovo Group Limited (Lenovo) accounting for
12%
of our net revenue, and HP Inc. accounting for
9%
of our net revenue. These three customers accounted for
37%
of net accounts receivable as of
April 2, 2016
.
For
Q1 2015
, our three largest customers accounted for
42%
of net revenue with Hewlett-Packard Company accounting for
17%
of our net revenue, Dell accounting for
14%
of our net revenue, and Lenovo accounting for
11%
of our net revenue. These three customers accounted for
49%
of net accounts receivable as of
December 26, 2015
.
Investing Activities
Investing cash flows consist primarily of capital expenditures; investment purchases, sales, maturities, and disposals; and proceeds from divestitures and cash used for acquisitions.
Cash used for investing activities was higher for
Q1 2016
compared to
Q1 2015
. The cash used for investing activities
increase
was primarily due to the acquisition of Altera and net trading assets activity (which was a use of cash in Q1 2016 compared to a source of cash in Q1 2015). These decreases were partially offset by a higher collections of loans receivable and reverse repurchase agreements and a net increase in available-for-sale activity.
43
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 used for financing activities was lower in
Q1 2016
compared to
Q1 2015
, primarily due to the issuance of commercial paper during
Q1 2016
Liquidity
During 2015, we entered into a definitive agreement to acquire Altera in an all-cash transaction. The transaction closed on December 28, 2015, during Q1 2016. The transaction had an approximate value of
$16.7 billion
. We financed a portion of the acquisition by issuing
$9.5 billion
in long-term debt during 2015 and borrowing
$4.0 billion
against our short-term credit facility during
Q1 2016
. We funded the remainder of the acquisition with issuances of commercial paper and existing cash and investments. For information on our indebtedness, see "
Note 14: Borrowings
."
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
April 2, 2016
, cash and cash equivalents, short-term investments, and trading assets totaled
$15.1 billion
(
$25.3 billion
as of
December 26, 2015
). The decreased balance compared to December 26, 2015 was primarily related to the cash consideration paid for our acquisition of Altera, which closed on December 28, 2015. In addition to the
$15.1 billion
, we have
$3.1 billion
of other long-term investments,
$1.5 billion
of loans receivable and other investments, and
$350 million
of reverse repurchase agreements with original maturities greater than approximately three months that we include when assessing our sources of liquidity.
Most
of our investments in debt instruments are in
A/A2
or better rated issuances, and the
majority
of the issuances are rated
AA-/Aa3
or better.
Other potential sources of liquidity include our commercial paper program and our automatic shelf registration statement on file with the SEC, pursuant to which we may offer an unspecified amount of debt, equity, and other securities. Under our commercial paper program, we have an ongoing authorization from our Board of Directors to borrow up to
$5.0 billion
. Maximum borrowings under our commercial paper program were
$3.0 billion
during
Q1 2016
and
$921 million
commercial paper remained outstanding as of
April 2, 2016
. Our commercial paper was rated
A-1+
by Standard & Poor’s and
P-1
by Moody’s as of
April 2, 2016
. On December 21, 2015, we entered into a short-term credit facility to borrow up to
$5.0 billion
to facilitate the settlement of our acquisition of Altera. Under this credit facility we borrowed
$4.0 billion
, and the facility was closed in January 2016.
As of
April 2, 2016
,
$14.0 billion
of our
$15.1 billion
of cash and cash equivalents, short-term investments, and trading assets was held by our non-U.S. subsidiaries. Of the
$14.0 billion
held by our non-U.S. subsidiaries, approximately
$953 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
April 2, 2016
. 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. 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.
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 4: Fair Value
” in the Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
44
INTEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Marketable Debt Instruments
As of
April 2, 2016
, our assets measured and recorded at fair value on a recurring basis included
$16.9 billion
of marketable debt instruments. Of these instruments,
$7.0 billion
was classified as Level 1,
$9.9 billion
as Level 2, and
$50 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 instruments that are traded in active markets. We evaluate instrument-specific market data when determining whether the market for a debt instrument is active.
Of the
$9.9 billion
of marketable debt instruments measured and recorded at fair value on a recurring basis and classified as Level 2, approximately
40%
was classified as Level 2 due to the use of a discounted cash flow model performed by us and approximately
60%
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
April 2, 2016
, our assets measured and recorded at fair value on a recurring basis included
$723 million
of loans receivable and
$418 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
April 2, 2016
, our assets measured and recorded at fair value on a recurring basis included
$6.4 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.
Contractual Obligations
During Q1 2016, we acquired
$1.5 billion
of senior unsecured notes as a result of our Altera acquisition. Our total cash payments (including anticipated interest payments that are not recorded on the consolidated condensed balance sheets) over the life of this long-term debt obligation are expected to be approximately
$1.7 billion
. For further information, see “
Note 14: Borrowings
” in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q.
45
|
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 and interest 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 26, 2015
. All of the following potential changes are based on sensitivity analyses performed on our financial positions as of
April 2, 2016
and
December 26, 2015
. Actual results may differ materially.
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
April 2, 2016
, the fair value of our marketable equity investments and our equity derivative instruments, including hedging positions, was
$6.4 billion
(
$6.0 billion
as of
December 26, 2015
).
Substantially all
of our marketable equity investments portfolio as of
April 2, 2016
, was concentrated in our investment in ASML Holding N.V. of
$6.3 billion
(
$5.7 billion
as of
December 26, 2015
). 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
30%
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
$2.0 billion
, based on the value as of
April 2, 2016
(a decrease in value of approximately
$1.8 billion
, based on the value as of
December 26, 2015
using an assumed decline of
30%
).
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
$2.9 billion
as of
April 2, 2016
(
$2.9 billion
as of
December 26, 2015
) and included our Beijing UniSpreadtrum Technology Ltd. (UniSpreadtrum) and Cloudera, Inc. (Cloudera) investments of
$966 million
and
$454 million
, respectively (
$966 million
and
$454 million
for UniSpreadtrum and Cloudera, respectively, as of
December 26, 2015
). The carrying amount of our non-marketable equity method investments was
$1.6 billion
as of
April 2, 2016
(
$1.6 billion
as of
December 26, 2015
).
A majority
of our non-marketable equity method investments balance as of
April 2, 2016
was concentrated in our IM Flash Technologies, LLC (IMFT) and Cloudera investments of
$872 million
and
$250 million
, respectively (
$872 million
and $
256 million
for IMFT and Cloudera, respectively, as of
December 26, 2015
).
46
|
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
April 2, 2016
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 and procedures 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.
47
PART II – OTHER INFORMATION
|
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 26, 2015
, 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
2015
Annual Report on Form 10-K remains current in all material respects with the exception of the additional risk factor below.
Changes in our announced restructuring plan, and other factors, could affect our results of operations and financial condition.
Factors that could cause actual results to differ materially from our expectations with regard to our announced 2016 Restructuring Program include:
|
•
|
timing and execution of plans and programs that may be subject to local labor law requirements, including consultation with appropriate works councils;
|
|
•
|
assumptions related to severance, post-retirement, and relocation costs;
|
|
•
|
future acquisitions, dispositions, or investments;
|
|
•
|
new business initiatives and changes in product roadmap, development, and manufacturing; and/or
|
|
•
|
assumptions related to cost savings, product demand, operating efficiencies.
|
|
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
$65.0 billion
in shares of our common stock in open market or negotiated transactions.
As of
April 2, 2016
,
$8.6 billion
remained available for repurchase under the existing repurchase authorization limit.
Common stock repurchase activity under our repurchase plan during the
first three months
of
2016
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) |
||||||||
|
December 27, 2015 – January 30, 2016
|
2.9
|
|
$
|
30.10
|
|
$
|
9,304
|
|
|||
|
January 31, 2016 – February 27, 2016
|
16.8
|
|
29.14
|
|
8,814
|
|
|||||
|
February 28, 2016 – April 2, 2016
|
7.1
|
|
31.24
|
|
$
|
8,592
|
|
||||
|
Total
|
26.8
|
|
$
|
29.80
|
|
||||||
In our consolidated condensed financial statements, we 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 16: Common Stock Repurchases
" in the Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
48
|
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 January 21, 2016
|
8-K
|
000-06217
|
3.2
|
1/26/2016
|
|||||||
|
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, 3D XPoint, and Ultrabook are trademarks of Intel Corporation or its subsidiaries in the U.S. and/or other countries.
* Other names and brands may be claimed as the property of others.
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
INTEL CORPORATION
(Registrant) |
||||
|
Date:
|
May 2, 2016
|
|
By:
|
|
/s/ S
TACY
J. S
MITH
|
|
|
|
Stacy J. Smith
|
|||
|
|
|
Executive Vice President, Chief Financial Officer, and Principal Accounting Officer
|
|||
50
TABLE OF CONTENTS
Part I Financial InformationprintItem 1. Financial StatementsprintNote 1: Basis Of PresentationprintNote 8: AcquisitionsprintNote 2: Change in Accounting EstimateprintNote 3: Recent Accounting StandardsprintNote 4: Fair ValueprintNote 5: Cash and InvestmentsprintNote 20: Other Comprehensive Income (loss)printNote 6: InventoriesprintNote 7: Derivative Financial InstrumentsprintNote 22: Operating Segments InformationprintNote 9: GoodwillprintNote 10: Identified Intangible AssetsprintNote 11: Other Long-term AssetsprintNote 12: Restructuring and Asset Impairment ChargesprintNote 13: Deferred IncomeprintNote 14: BorrowingsprintNote 15: Employee Equity Incentive PlansprintNote 16: Common Stock RepurchasesprintNote 17: Gains (losses) on Equity Investments, NetprintNote 18: Interest and Other, NetprintNote 19: Earnings Per ShareprintNote 21: ContingenciesprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6. Exhibitsprint