UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| | þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For the quarterly period ended March 31,September 29, 2018. |
Or
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| | |
| | ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For the transition period from to |
Commission File Number 000-06217
INTEL CORPORATION
(Exact name of registrant as specified in its charter)
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| | |
| Delaware | | 94-1672743 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| 2200 Mission College Boulevard, Santa Clara, California | | 95054-1549 |
| (Address of principal executive offices) | | (Zip Code) |
(408) 765-8080
(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | | | |
Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | Emerging growth company ¨ |
| | (Do not check if a smaller reporting company) | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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: |
| | |
| Class | | Outstanding as of March 31,September 29, 2018 |
| Common stock, $0.001 par value | | 4,6604,564 million |
TABLE OF CONTENTS
CHANGES TOTHE ORGANIZATION OF OUR QUARTERLY REPORT ON FORM 10-Q
To improve readability and better present how we organize and manage our business, we have changed theThe order and presentation of content in our Quarterly Report on Form 10-Q (Form 10-Q). differs from the traditional U.S. Securities and Exchange Commission (SEC) Form 10-Q format. We believe this format improves readability and better presents how we organize and manage our business. See "Form 10-Q Cross-Reference Index" within Other Key Information for a cross-reference index to the traditional U.S. Securities and Exchange Commission (SEC)SEC Form 10-Q format.
We have included key metrics that we use to measure our business, some of which are non-GAAP measures. See these "Non-GAAP Financial Measures" within Other Key Information.
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| FORWARD-LOOKING STATEMENTS | | FORWARD-LOOKING STATEMENTS |
| A QUARTER IN REVIEW | |
| CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND SUPPLEMENTAL DETAILS | |
| Consolidated Condensed Statements of Income | |
| | IndexConsolidated Condensed Statements of Comprehensive Income | |
| Consolidated Condensed Balance Sheets | |
| Consolidated Condensed Statements of Cash Flows | |
| Notes to Consolidated Condensed Financial Statements and Supplemental Details |
| | Consolidated Condensed Financial Statements |
| | Notes to the Consolidated Condensed Financial Statements |
| | | | |
| MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) - RESULTS OF OPERATIONS | |
| Overview | | | Overview |
| | Revenue, Gross Margin, and Operating Expenses |
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| | Business Unit Trends and Results |
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| | Other Consolidated Results of Operations |
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| | Liquidity and Capital Resources |
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| | Quantitative and Qualitative Disclosures about Market Risk | |
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| OTHER KEY INFORMATION | |
| | Risk Factors |
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| | Controls and Procedures |
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| | Non-GAAP Financial Measures |
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| | Issuer Purchases of Equity Securities |
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| | Exhibits |
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| | Form 10-Q Cross-Reference Index | |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains 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," "would," "should," "could," 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, projected growth of markets relevant to our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management's expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Annual Report on Form 10-K for the year ended December 30, 2017, particularly the "Risk Factors" sections of such reports. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of April 26, 2018.the date of this filing. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, including expectations based on third-party information and projections that management believes to be reputable, and Intel does not undertake, and expressly disclaims any duty, to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law.
INTEL UNIQUE TERMS
We use specific terms throughout this document to describe our business and results. Below are key terms and how we define them:
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| PLATFORM PRODUCTS | | A microprocessor (processor or central processing unit (CPU)) and chipset, a stand-alone System-on-Chip (SoC), or a multichip package. Platform products, or platforms, are primarily used in solutions sold through Client Computing Group (CCG), Data Center Group (DCG), and Internet of Things Group (IOTG) segments. |
| | | |
| ADJACENT PRODUCTS | | All of our non-platform products, for CCG, DCG, and IOTG like modem, ethernet and silicon photonics, as well as Non-Volatile Memory Solutions Group (NSG), Programmable Solutions Group (PSG), and Mobileye products. Combined with our platform products, adjacent products form comprehensive platform solutions to meet customer needs. |
| | | |
| PC-CENTRIC BUSINESS | | Is made up of our CCG business, both platform and adjacent products. |
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| DATA-CENTRIC BUSINESSES | | Includes our DCG, IOTG, NSG, PSG, and all other businesses.businesses, which includes Mobileye |
Intel, the Intel logo, Intel Core, Intel Inside, Intel Optane, Intel Core, Xeon, and 3D XPoint 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.
Q1 2018The third quarter was a record first quarter in revenue, operating income, and exceedednet income, driven by strong customer demand for the expectations we set in January 2018. Our transformation to a data-centric company accelerated with the revenueperformance of our data-centric businesses up 25% overleadership products across the business. Data Center Group (DCG), Client Computing Group (CCG), Internet of Things Group (IOTG), Non-Volatile Memory Solutions Group (NSG), and Mobileye each achieved record revenue. Strong business performance, operating margin leverage, and lower tax rate resulted in net income of $6.4 billion in the third quarter. From a capital allocation perspective, in the first quarter of last year excluding Intel Security Group (ISecG). Collectively, these businesses now account for 49% of revenue and are on track to cross over 50% of revenue this year — an important milestone for our company. CCG continued to execute well, producing revenue growth within a declining PC market.
Wenine months we generated $6.3$22.5 billion of cash flow from operations and returned $3.3$12.6 billion to shareholders. We received prepayments of $1.7shareholders, including $4.2 billion associated with NAND strategic customer supply agreements.in dividends and $8.5 billion in buybacks.
| | | REVENUE | REVENUE | | OPERATING INCOME | | DILUTED EPS | REVENUE | | OPERATING INCOME | | DILUTED EPS |
| $16.1B | | | $4.5B | | $4.8B | | $0.93 | | $0.87 | |
| $19.2B | | | | $7.3B | | $7.6B | | $1.38 | | $1.40 |
| GAAP | | | GAAP | | non-GAAP1 | | GAAP | | non-GAAP1 | | | GAAP | | non-GAAP1 | | GAAP | | non-GAAP1 |
| up $1.3B or 9% from Q1 2017; up 13% excluding ISecG | | up $838M or 23% from Q1 2017 | | up $836M or 21% from Q1 2017 | | up $0.32 or 53% from Q1 2017 | | up $0.21 or 32% from Q1 2017 | |
| up $3.0B or 19% from Q3 2017 | | up $3.0B or 19% from Q3 2017 | | up $2.2B or 43% from Q3 2017 | | up $2.0B or 36% from Q3 2017 | | up $0.44 or 47% from Q3 2017 | | up $0.39 or 39% from Q3 2017 |
| | | | | | | | | | | |
| Strong results from data-centric businesses driven by double-digit growth across DCG, IOTG, NSG, and PSG | | Higher ASP and volume with lower spending, offset by 10nm transition costs | | Data-centric growth, strong operating margin leverage, lower tax rate from Tax Reform2, and mark to market gains in GAAP results | |
| Strong performance across all businesses and record revenue from DCG, CCG, IOTG, NSG, and Mobileye | | Strong performance across all businesses and record revenue from DCG, CCG, IOTG, NSG, and Mobileye | | Demand for leadership product and continued operating margin leverage while investing in key opportunities such as artificial intelligence and autonomous driving | | Growing demand for higher performance products, growth in adjacent businesses, lower tax rate, and lower share outstanding |
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■ Data-centric $B | | ■ PC-centric $B | | ■ GAAP $B | | ■ Non-GAAP $B | | ■ GAAP | | ■ Non-GAAP | | ■ PC-centric $B | | ■ GAAP $B | | ■ Non-GAAP $B | | ■ GAAP | | ■ Non-GAAP |
BUSINESS SUMMARY
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| • | Data-centric investmentsFive years ago, we set a course to transform to a data-centric company. Today our strategy, products, and employees are building momentum. Customersdelivering on that ambition with strong growth, record results, and new opportunities. We are accelerating adoption of Intelgaining share in an expanded total addressable market (TAM) opportunity, which is now expected to be over $300 billion® Xeon®2 Scalable processors andas our field-programmable gate arrays (FPGAs) are winning data-center designs.transformation accelerates.
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| • | We announcedOur data-centric businesses collectively grew 22% led by the growth in the cloud and communication service provider market segments. To extend the growth momentum, we are now shipping Intel® Optane™ data center persistent memory, which combines the speed of traditional memory with the capacity and native persistence of storage.
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| • | Our focus on performance leadership and differentiation in client computing is producing outstanding results. In addition, we expect modest PC TAM2 growth this year and continued share gain in modems. To extend product leadership and to deliver more value to customers, we launched new products including the high performance 8th9th Gen Intel® Core™ i9 processor for mobile and the Intel® Optane™ SSD 800P, the latest addition toprocessors, targeting the growing Intel Optane technology family of products.gaming market segment. |
Mobileye won a high-volume design for EyeQ*5. We also began operating autonomous vehicle test cars in Israel with plansThe return to expand the fleetPC TAM growth put pressure on our factory network. In addition to other geographies.
We are sharpening the focus of IOTG toward growth opportunities that align to our data-centric strategy. We entered into an agreement to divest Wind River Systems, Inc. (Wind River), currently reported under IOTG. The assets and liabilities of Wind River are classified as held for sale and we expect the transaction to close by the end of Q2 this year.
We continue to make 14nm process optimizations and architectural innovations in both data-center and client products that will be coming this year. Intel is currently shipping low volume 10nm product and now expects 10nm volumeprioritizing production to shift to 2019.
The security of our products is one of our most important priorities. We have released microcode updates for Intel products launched in the past nine years that require protection against the side-channel method vulnerabilities referred to as "Spectre"serve server and "Meltdown." In addition,high-performance PC market segments, we are investing additional capital expenditure to increase our supply, working with customers to align demand with available supply, and making changesgood progress to improve 10nm yields.
30 years ago, in September, 1988, Gordon Moore helped establish the Intel Foundation, a public charity funded by our future hardware designcompany. From investing in science, technology, engineering, and mathematics (STEM) programs, providing disaster relief, and amplifying the philanthropy of Intel employees, the Intel Foundation has been committed to address certain of these side-channel variants.
improving lives around the world.
1 See "Non-GAAP Financial Measures" within Other Key Information.
2 Tax Reform refers to the U.S. Tax CutsSource: Intel calculated 2022 TAM and Jobs Act enacted in December 2017.current year PC TAM derived from industry analyst reports and internal estimates.
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS | Page |
Consolidated Condensed Statements of Income | |
Consolidated Condensed Statements of Comprehensive Income | |
Consolidated Condensed Balance Sheets | |
Consolidated Condensed Statements of Cash Flows | |
| |
Notes to Consolidated Condensed Financial Statements | |
| |
Basis | |
Note 1: Basis of Presentation | |
Note 2: Recent Accounting Standards and Accounting Policies | |
Performance & Operations | |
Note 3: Operating Segments | |
Note 4: Earnings Per Share | |
Note 5: Contract Liabilities | |
Note 6: Other Financial Statement Details | |
Note 7: Income Taxes | |
Investments, Long-term Assets & Debt | |
Note 8: Investments | |
Note 9: Identified Intangible Assets | |
Note 10: Other Long-Term Assets | |
Note 11: Fair Value | |
Risk Management & Other | |
Note 12: Other Comprehensive Income (Loss) | |
Note 13: Derivative Financial Instruments | |
Note 14: Employee Equity Incentive Plans | |
Note 15: Contingencies | |
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INTEL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME |
| | | | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| (In Millions, Except Per Share Amounts; Unaudited) | | Mar 31,
2018 | | Apr 1,
2017 | | Sep 29,
2018 | | Sep 30,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Net revenue | | $ | 16,066 |
| | $ | 14,796 |
| | $ | 19,163 |
| | $ | 16,149 |
| | $ | 52,191 |
| | $ | 45,708 |
|
| Cost of sales | | 6,335 |
| | 5,636 |
| | 6,803 |
| | 6,085 |
| | 19,681 |
| | 17,388 |
|
| Gross margin | | 9,731 |
| | 9,160 |
| | 12,360 |
| | 10,064 |
| | 32,510 |
| | 28,320 |
|
| Research and development | | 3,311 |
| | 3,311 |
| | 3,428 |
| | 3,209 |
| | 10,110 |
| | 9,782 |
|
| Marketing, general and administrative | | 1,900 |
| | 2,099 |
| | 1,605 |
| | 1,661 |
| | 5,230 |
| | 5,610 |
|
| Restructuring and other charges | | — |
| | 80 |
| | (72 | ) | | 4 |
| | (72 | ) | | 189 |
|
| Amortization of acquisition-related intangibles | | 50 |
| | 38 |
| | 50 |
| | 49 |
| | 150 |
| | 124 |
|
| Operating expenses | | 5,261 |
| | 5,528 |
| | 5,011 |
| | 4,923 |
| | 15,418 |
| | 15,705 |
|
| Operating income | | 4,470 |
| | 3,632 |
| | 7,349 |
| | 5,141 |
| | 17,092 |
| | 12,615 |
|
| Gains (losses) on equity investments, net | | 643 |
| | 252 |
| | (75 | ) | | 846 |
| | 365 |
| | 1,440 |
|
| Interest and other, net | | (102 | ) | | (69 | ) | | (132 | ) | | (57 | ) | | 225 |
| | 262 |
|
| Income before taxes | | 5,011 |
| | 3,815 |
| | 7,142 |
| | 5,930 |
| | 17,682 |
| | 14,317 |
|
| Provision for taxes | | 557 |
| | 851 |
| | 744 |
| | 1,414 |
| | 1,824 |
| | 4,029 |
|
| Net income | | $ | 4,454 |
| | $ | 2,964 |
| | $ | 6,398 |
| | $ | 4,516 |
| | $ | 15,858 |
| | $ | 10,288 |
|
| Earnings per share – Basic | | $ | 0.95 |
| | $ | 0.63 |
| | $ | 1.40 |
| | $ | 0.96 |
| | $ | 3.42 |
| | $ | 2.19 |
|
| Earnings per share – Diluted | | $ | 0.93 |
| | $ | 0.61 |
| | $ | 1.38 |
| | $ | 0.94 |
| | $ | 3.35 |
| | $ | 2.12 |
|
| Cash dividends declared per share of common stock | | $ | 0.60 |
| | $ | 0.5325 |
| | $ | 0.60 |
| | $ | 0.5450 |
| | $ | 1.20 |
| | $ | 1.0775 |
|
| Weighted average shares of common stock outstanding: | | | | | | | | | | | | |
| Basic | | 4,674 |
| | 4,723 |
| | 4,574 |
| | 4,688 |
| | 4,632 |
| | 4,707 |
|
| Diluted | | 4,790 |
| | 4,881 |
| | 4,648 |
| | 4,821 |
| | 4,728 |
| | 4,849 |
|
See accompanying notes.
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| FINANCIAL STATEMENTS | Consolidated Condensed Statements of Income | 43 |
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INTEL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME |
| | | | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| (In Millions; Unaudited) | | Mar 31,
2018 | | Apr 1,
2017 | | Sep 29,
2018 | | Sep 30,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Net income | | $ | 4,454 |
| | $ | 2,964 |
| | $ | 6,398 |
| | $ | 4,516 |
| | $ | 15,858 |
| | $ | 10,288 |
|
| Changes in other comprehensive income, net of tax: | | | | | | | | | | | | |
| Net unrealized holding gains (losses) on available-for-sale equity investments | | — |
| | 543 |
| | — |
| | 399 |
| | — |
| | 408 |
|
| Net unrealized holding gains (losses) on derivatives | | 119 |
| | 195 |
| | (25 | ) | | 19 |
| | (199 | ) | | 350 |
|
| Actuarial valuation and other pension benefits (expenses), net | | 148 |
| | 18 |
| | 13 |
| | 13 |
| | 39 |
| | 233 |
|
| Translation adjustments and other | | (22 | ) | | 1 |
| | (2 | ) | | 5 |
| | (15 | ) | | 513 |
|
| Other comprehensive income (loss) | | 245 |
| | 757 |
| | (14 | ) | | 436 |
| | (175 | ) | | 1,504 |
|
| Total comprehensive income | | $ | 4,699 |
| | $ | 3,721 |
| | $ | 6,384 |
| | $ | 4,952 |
| | $ | 15,683 |
| | $ | 11,792 |
|
See accompanying notes.
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| FINANCIAL STATEMENTS | Consolidated Condensed Statements of Comprehensive Income | 54 |
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INTEL CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS |
| | | (In Millions) | | Mar 31,
2018 | | Dec 30,
2017 | | Sep 29,
2018 | | Dec 30,
2017 |
| | | (unaudited) | | | | (unaudited) | | |
| Assets | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 3,554 |
| | $ | 3,433 |
| | $ | 3,407 |
| | $ | 3,433 |
|
| Short-term investments | | 2,020 |
| | 1,814 |
| | 2,641 |
| | 1,814 |
|
| Trading assets | | 10,623 |
| | 8,755 |
| | 7,138 |
| | 8,755 |
|
| Accounts receivable | | 4,879 |
| | 5,607 |
| | 5,457 |
| | 5,607 |
|
| Inventories | | 7,146 |
| | 6,983 |
| | 7,401 |
| | 6,983 |
|
| Other current assets | | 3,408 |
| | 2,908 |
| | 3,546 |
| | 2,908 |
|
| Total current assets | | 31,630 |
| | 29,500 |
| | 29,590 |
| | 29,500 |
|
| Property, plant and equipment, net of accumulated depreciation of $60,665 ($59,286 as of December 30, 2017) | | 43,735 |
| | 41,109 |
| |
| Property, plant and equipment, net of accumulated depreciation of $63,684 ($59,286 as of December 30, 2017) | | | 47,071 |
| | 41,109 |
|
| Equity investments | | 9,481 |
| | 8,579 |
| | 7,551 |
| | 8,579 |
|
| Other long-term investments | | 3,435 |
| | 3,712 |
| | 3,562 |
| | 3,712 |
|
| Goodwill | | 24,346 |
| | 24,389 |
| | 24,506 |
| | 24,389 |
|
| Identified intangible assets, net | | 12,355 |
| | 12,745 |
| | 12,007 |
| | 12,745 |
|
| Other long-term assets | | 3,614 |
| | 3,215 |
| | 3,955 |
| | 3,215 |
|
| Total assets | | $ | 128,596 |
| | $ | 123,249 |
| | $ | 128,242 |
| | $ | 123,249 |
|
| Liabilities, temporary equity, and stockholders’ equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Short-term debt | | $ | 3,842 |
| | $ | 1,776 |
| | $ | 3,051 |
| | $ | 1,776 |
|
| Accounts payable | | 4,415 |
| | 2,928 |
| | 3,593 |
| | 2,928 |
|
| Accrued compensation and benefits | | 2,118 |
| | 3,526 |
| | 3,095 |
| | 3,526 |
|
| Deferred income | | — |
| | 1,656 |
| | — |
| | 1,656 |
|
| Other accrued liabilities | | 9,586 |
| | 7,535 |
| | 9,835 |
| | 7,535 |
|
| Total current liabilities |
| 19,961 |
| | 17,421 |
|
| 19,574 |
| | 17,421 |
|
| Debt | | 24,770 |
| | 25,037 |
| | 24,823 |
| | 25,037 |
|
| Contract liabilities | | 2,479 |
| | — |
| | 2,220 |
| | — |
|
| Income taxes payable, non-current | | 5,774 |
| | 4,069 |
| | 4,879 |
| | 4,069 |
|
| Deferred income taxes | | 1,564 |
| | 3,046 |
| | 1,485 |
| | 3,046 |
|
| Other long-term liabilities | | 3,082 |
| | 3,791 |
| | 3,263 |
| | 3,791 |
|
| Contingencies (Note 15) | |
| |
| |
| Contingencies (Note 16) | | |
| |
|
| Temporary equity | | 801 |
| | 866 |
| | 515 |
| | 866 |
|
| Stockholders’ equity: | | | | | | | | |
| Preferred stock | | — |
| | — |
| | — |
| | — |
|
| Common stock and capital in excess of par value, 4,660 issued and outstanding (4,687 issued and outstanding as of December 30, 2017) | | 26,430 |
| | 26,074 |
| |
| Common stock and capital in excess of par value, 4,564 issued and outstanding (4,687 issued and outstanding as of December 30, 2017) | | | 25,492 |
| | 26,074 |
|
| Accumulated other comprehensive income (loss) | | (683 | ) | | 862 |
| | (1,103 | ) | | 862 |
|
| Retained earnings | | 44,418 |
| | 42,083 |
| | 47,094 |
| | 42,083 |
|
| Total stockholders’ equity | | 70,165 |
| | 69,019 |
| | 71,483 |
| | 69,019 |
|
| Total liabilities, temporary equity, and stockholders’ equity | | $ | 128,596 |
| | $ | 123,249 |
| | $ | 128,242 |
| | $ | 123,249 |
|
See accompanying notes.
|
| | |
| FINANCIAL STATEMENTS | Consolidated Condensed Balance Sheets | 65 |
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INTEL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS |
|
| | | | | | | | |
| | | Nine Months Ended |
| (In Millions; Unaudited) | | Sep 29,
2018 | | Sep 30,
2017 |
| Cash and cash equivalents, beginning of period | | $ | 3,433 |
| | $ | 5,560 |
|
| Cash flows provided by (used for) operating activities: | | | | |
| Net income | | 15,858 |
| | 10,288 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Depreciation | | 5,420 |
| | 4,990 |
|
| Share-based compensation | | 1,203 |
| | 1,051 |
|
| Amortization of intangibles | | 1,172 |
| | 999 |
|
| (Gains) losses on equity investments, net | | (329 | ) | | (1,372 | ) |
| (Gains) losses on divestitures | | (497 | ) | | (387 | ) |
| Loss on debt conversion and extinguishment | | 211 |
| | — |
|
| Deferred taxes | | 18 |
| | 570 |
|
| Changes in assets and liabilities: | | | | |
| Accounts receivable | | (449 | ) | | (1,128 | ) |
| Inventories | | (362 | ) | | (1,245 | ) |
| Accounts payable | | 430 |
| | 171 |
|
| Accrued compensation and benefits | | (801 | ) | | (362 | ) |
| Customer deposits and prepaid supply agreements | | 1,472 |
| | — |
|
| Income taxes payable and receivable | | (1,075 | ) | | 979 |
|
| Other assets and liabilities | | 261 |
| | 315 |
|
| Total adjustments | | 6,674 |
| | 4,581 |
|
| Net cash provided by operating activities | | 22,532 |
| | 14,869 |
|
| Cash flows provided by (used for) investing activities: | | | | |
| Additions to property, plant and equipment | | (11,291 | ) | | (7,709 | ) |
| Acquisitions, net of cash acquired | | (183 | ) | | (14,499 | ) |
| Purchases of available-for-sale debt investments | | (3,090 | ) | | (1,959 | ) |
| Sales of available-for-sale debt investments | | 135 |
| | 1,511 |
|
| Maturities of available-for-sale debt investments | | 2,232 |
| | 3,488 |
|
| Purchases of trading assets | | (8,316 | ) | | (9,792 | ) |
| Maturities and sales of trading assets | | 9,705 |
| | 11,806 |
|
| Purchases of equity investments | | (667 | ) | | (744 | ) |
| Sales of equity investments | | 1,646 |
| | 3,173 |
|
| Proceeds from divestitures | | 548 |
| | 3,124 |
|
| Other investing | | (138 | ) | | 1,069 |
|
| Net cash used for investing activities | | (9,419 | ) | | (10,532 | ) |
| Cash flows provided by (used for) financing activities: | | | | |
| Increase (decrease) in short-term debt, net | | 1,707 |
| | (5 | ) |
| Issuance of long-term debt, net of issuance costs | | 423 |
| | 7,716 |
|
| Repayment of debt and debt conversion | | (1,928 | ) | | (1,502 | ) |
| Proceeds from sales of common stock through employee equity incentive plans | | 545 |
| | 637 |
|
| Repurchase of common stock | | (8,464 | ) | | (3,611 | ) |
| Restricted stock unit withholdings | | (492 | ) | | (424 | ) |
| Payment of dividends to stockholders | | (4,173 | ) | | (3,794 | ) |
| Other financing | | (757 | ) | | 161 |
|
| Net cash provided by (used for) financing activities | | (13,139 | ) | | (822 | ) |
| Net increase (decrease) in cash and cash equivalents | | (26 | ) | | 3,515 |
|
| Cash and cash equivalents, end of period | | $ | 3,407 |
| | $ | 9,075 |
|
| | | | | |
| Supplemental disclosures of noncash investing activities and cash flow information: | | | | |
| Acquisition of property, plant, and equipment included in accounts payable and accrued liabilities | | $ | 1,988 |
| | $ | 1,736 |
|
| Non-marketable equity investment in McAfee from divestiture | | $ | — |
| | $ | 1,078 |
|
| Cash paid during the period for: | | | | |
| Interest, net of capitalized interest | | $ | 316 |
| | $ | 386 |
|
| Income taxes, net of refunds | | $ | 2,854 |
| | $ | 2,328 |
|
|
| | | | | | | | |
| | | Three Months Ended |
| (In Millions; Unaudited) | | Mar 31,
2018 | | Apr 1,
2017 |
| Cash and cash equivalents, beginning of period | | $ | 3,433 |
| | $ | 5,560 |
|
| Cash flows provided by (used for) operating activities: | | | | |
| Net income | | 4,454 |
| | 2,964 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Depreciation | | 1,806 |
| | 1,625 |
|
| Share-based compensation | | 433 |
| | 397 |
|
| Restructuring and other charges | | — |
| | 80 |
|
| Amortization of intangibles | | 390 |
| | 321 |
|
| (Gains) losses on equity investments, net | | (643 | ) | | (250 | ) |
| Deferred taxes | | 1 |
| | 212 |
|
| Changes in assets and liabilities: | | | | |
| Accounts receivable | | 102 |
| | (105 | ) |
| Inventories | | (96 | ) | | (232 | ) |
| Accounts payable | | 73 |
| | 188 |
|
| Accrued compensation and benefits | | (1,307 | ) | | (1,277 | ) |
| Customer deposits and prepaid supply agreements | | 1,599 |
| | — |
|
| Income taxes payable and receivable | | 294 |
| | 427 |
|
| Other assets and liabilities | | (822 | ) | | (452 | ) |
| Total adjustments | | 1,830 |
| | 934 |
|
| Net cash provided by operating activities | | 6,284 |
| | 3,898 |
|
| Cash flows provided by (used for) investing activities: | | | | |
| Additions to property, plant and equipment | | (2,910 | ) | | (1,952 | ) |
| Purchases of available-for-sale debt investments | | (859 | ) | | (1,746 | ) |
| Maturities of available-for-sale debt investments | | 893 |
| | 1,508 |
|
| Purchases of trading assets | | (5,398 | ) | | (3,075 | ) |
| Maturities and sales of trading assets | | 3,760 |
| | 2,433 |
|
| Other investing | | (277 | ) | | 54 |
|
| Net cash used for investing activities | | (4,791 | ) | | (2,778 | ) |
| Cash flows provided by (used for) financing activities: | | | | |
| Increase (decrease) in short-term debt, net | | 2,142 |
| | 435 |
|
| Repayment of debt and debt conversion | | (327 | ) | | — |
|
| Proceeds from sales of common stock through employee equity incentive plans | | 289 |
| | 329 |
|
| Repurchase of common stock | | (1,914 | ) | | (1,242 | ) |
| Payment of dividends to stockholders | | (1,400 | ) | | (1,229 | ) |
| Other financing | | (162 | ) | | (39 | ) |
| Net cash provided by (used for) financing activities | | (1,372 | ) | | (1,746 | ) |
| Net increase (decrease) in cash and cash equivalents | | 121 |
| | (626 | ) |
| Cash and cash equivalents, end of period | | $ | 3,554 |
| | $ | 4,934 |
|
| | | | | |
| Supplemental disclosures of noncash investing activities and cash flow information: | | | | |
| Acquisition of property, plant, and equipment included in accounts payable and accrued liabilities | | $ | 2,904 |
| | $ | 1,448 |
|
| Cash paid during the period for: | | | | |
| Interest, net of capitalized interest and interest rate swap payments/receipts | | $ | 60 |
| | $ | 97 |
|
| Income taxes, net of refunds | | $ | 228 |
| | $ | 171 |
|
See accompanying notes.
|
| | |
| FINANCIAL STATEMENTS | Consolidated Condensed Statements of Cash Flows | 76 |
|
|
INTEL CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS |
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 30, 2017 (2017 Form 10-K), except for changes associated with recent accounting standards for retirement benefits, revenue recognition, and financial instruments as detailed in "Note 2: Recent Accounting Standards and Accounting Policies." We have reclassified certain prior period amounts to conform to current period presentation.
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 report should be read in conjunction with the consolidated financial statements in our 2017 Form 10-K.
NOTE 2: RECENT ACCOUNTING STANDARDS AND ACCOUNTING POLICIES
We assess the adoption impacts of recently issued accounting standards by the Financial Accounting Standards Board on our financial statements. The sections below describe impacts from newly adopted standards as well as material updates to our previous assessments, if any, from our 2017 Form 10-K.
ACCOUNTING STANDARDS ADOPTED
Compensation - Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
Standard/Description: This amended standard was issued to provide additional guidance on the presentation of net periodic benefit cost in the income statement and on the components eligible for capitalization in assets. In accordance with the revised standard, we have separated the different components of net periodic benefit cost, presenting service cost components within operating income and other non-service components separately outside of operating income on the income statement. In addition, only service costs are now eligible for inventory capitalization.
Effective Date and Adoption Considerations: Effective in the first quarter of 2018. Changes to the presentation of benefit costs were required to be adopted retrospectively, while changes to the capitalization of service costs into inventories arewere required to be adopted prospectively. The standard permits, as a practical expedient, use of the amounts disclosed in the Retirement Benefit Plans footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation requirement.
Effect on Financial Statements or Other Significant Matters: Adoption of the amended standard resulted in the reclassification of approximately $114 million of non-service net periodic benefit costs from line items within operating income to interest and other, net, for the year ended December 30, 2017 ($259 million for the year ended December 31, 2016).
Revenue Recognition - Contracts with Customers
Standard/Description: This standard was issued to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by all companies. 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 companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
Effective Date and Adoption Considerations: Effective in the first quarter of 2018.This2018. This standard was adopted using a modified retrospective approach through a cumulative adjustment to retained earnings for the fiscal year beginning December 31, 2017.
Effect on Financial Statements or Other Significant Matters: Our adoption assessments identified a change in revenue recognition timing on our component sales made to distributors. Under the new standard we now recognize revenue when we deliver to the distributor rather than deferring recognition until the distributor sells the components.
On the date of initial application, we removed the deferred income and related receivables on component sales made to distributors through a cumulative adjustment to retained earnings. The revenue deferral that was historically recognized in the following period is expected to be primarily offset by the acceleration of revenue recognition in the current period as control of the product transfers to our customer.
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 87 |
Our assessment also identified a change in expense recognition timing related to payments we make to our customers for distinct services they perform as part of cooperative advertising programs, which were previously recorded as operating expenses. We now recognize the expense for cooperative advertising in the period the marketing activities occur. Previously we recognized the expense in the period the customer was entitled to participate in the program, which coincided with the period of sale. On the date of initial adoption, we capitalized the expense of cooperative advertising not performed through a cumulative adjustment to retained earnings.
We have completed our adoption and implemented policies, processes, and controls to support the standard's measurement and disclosure requirements. Refer to the tables below, which summarize the impacts of the changes discussed above to Intel'sour financial statements recorded as an adjustment to opening balances for the fiscal year beginning December 31, 2017, and also provide comparative reporting of the impacts of adopting the standard.
Accounting Policy Updates: We recognize net product revenue when we satisfy performance obligations as evidenced by the transfer of control of our products or services to customers. Substantially all of our revenue is derived from product sales. In accordance with contract terms, revenue for product sales is recognized at the time of product shipment from our facilities or delivery to the customer location, as determined by the agreed upon shipping terms. We include shipping charges billed to customers in net revenue, and include the related shipping costs in cost of sales.
We measure revenue based on the amount of consideration we expect to be entitled to in exchange for products or services. Any variable consideration is recognized as a reduction of net revenue at the time of revenue recognition. We determine variable consideration, which consists primarily of sales price concessions, by estimating the most likely amount of consideration we expect to receive from the customer based on historical analysis of customer purchase volumes. The impacts of distributor sales price reductions resulting from price protection agreements are also estimated based on historical analysis of such activity and are reflected as a reduction in net revenue.
We make payments to our customers through cooperative advertising programs, such as our Intel Inside® program, for marketing activities for certain of our products. We accrue cooperative advertising obligations andgenerally record the costspayment as a reduction in revenue atin the same timeperiod that the related revenue is recognized.earned, unless the payment is for a distinct service, which we record as expense when the marketing activities occur.
Financial Instruments - Recognition and Measurement
Standard/Description: Requires changes to the accounting for financial instruments that primarily affect equity investments,securities, financial liabilities measured using the fair value option, and the presentation and disclosure requirements for such instruments.
Effective Date and Adoption Considerations: Effective in the first quarter of 2018. Changes to our marketable equity securities were required to be adopted using a modified retrospective approach through a cumulative effect adjustment to retained earnings for the fiscal year beginning December 31, 2017. Since management has elected to apply the measurement alternative to non-marketable equity securities, changes to these securities were adopted prospectively.
Effect on Financial Statements or Other Significant Matters: Marketable equity securities previously classified as available-for-sale equity investments are now measured and recorded at fair value with changes in fair value recorded through the income statement.
All non-marketable equity securities formerly classified as cost method investments are measured and recorded using the measurement alternative. Equity securities measured and recorded using the measurement alternative are recorded at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. Adjustments resulting from impairments and qualifying observable price changes are recorded in the income statement.
Beginning in the first quarter of 2018, in accordance with the standard, recurring fair value disclosures are no longer provided for equity securities measured using the measurement alternative. In addition, the existing impairment model has been replaced with a new one-step qualitative impairment model. No initial adoption adjustment was recorded for these instruments since the standard iswas required to be applied prospectively for securities measured using the measurement alternative.
We have completed our adoption and implemented policies, processes, and controls to support the standard's measurement and disclosure requirements. Refer to the table below, which summarizes impacts, net of tax, of the changes discussed above to Intel'sour financial statements. This reflects an adjustment to opening balances for the fiscal year beginning December 31, 2017.
Accounting Policy Updates: We regularly invest in equity securities of public and private companies to promote business and strategic objectives. Equity investments are measured and recorded as follows:
Marketable equity securities are equity securities with readily determinable fair value (RDFV) that are measured and recorded at fair value. Prior to fiscal 2018, these securities were measured and recorded at fair value and classified as available-for-sale securities.
Non-marketable equity securities are equity securities without RDFV that are measured and recorded using a measurement alternative which measures the securities at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. These securities were previously accounted for using the cost method of accounting, measured at cost less other-than-temporary impairment.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 9 |
Equity method investments are equity securities in investees we do not control but over which we have the ability to exercise significant influence. Equity method investments are measured at cost minus impairment, if any, plus or minus our share of equity method investee income or loss. Our proportionate share of the income or loss from equity method investments is recognized on a one-quarter lag and is recorded in gains (losses) on equity investments, net.lag.
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 8 |
Realized and unrealized gains or losses resulting from changes in value and sale of our equity investments are recorded in gains (losses) on equity investments, net. We previously recorded unrealized gains and losses through other comprehensive income (loss) and realized gains and losses on the sale, exchange or impairment of these equity investments through gains (losses) on equity investments, net.
The carrying value of our portfolio of non-marketable equity securities totaled $2.8$2.9 billion as of March 31,September 29, 2018 ($2.6 billion as of December 30, 2017). The carrying value of our non-marketable equity securities is adjusted for qualifying observable price changes resulting from the issuance of similar or identical securities by the same issuer. Determining whether an observed transaction is similar to a security within our portfolio requires judgment based on the rights and preferences of the securities. Recording upward and downward adjustments to the carrying value of our equity securities as a result of observable price changes requires quantitative assessments of the fair value of our securities using various valuation methodologies and involves the use of estimates.
Non-marketable equity securities and equity method investments are also subject to periodic impairment reviews. Our quarterly impairment analysis considers both qualitative and quantitative factors that may have a significant impact on the investee's fair value. Qualitative factors considered include industry and market conditions, the financial performance and near-term prospects of the investee, and other relevant events and factors affecting the investee. When indicators of impairment exist, we prepare quantitative assessments of the fair value of our equity investments using both the market and income approaches which require judgment and the use of estimates, including discount rates, investee revenues and costs, and comparable market data of private and public companies, among others. Prior to fiscal 2018, non-marketable equity securities were tested for impairment using the other-than-temporary impairment model which considered the severity and duration of a decline in fair value below cost and our ability and intent to hold the investment for a sufficient period of time to allow for recovery. Impairments of non-marketable equity securitiesinvestments were $16$372 million in the first quarternine months of 2018 ($46and $613 million in the first quarternine months of 2017).2017.
Opening Balance Adjustments
The following table summarizes the effects of adopting Revenue Recognition - Contracts with Customers, Financial Instruments - Recognition and Measurement, and other accounting standards on our financial statements for the fiscal year beginning December 31, 2017 as an adjustment to the opening balance:
| | | | | | | Adjustments from | | | | | | Adjustments from | | |
(In Millions) | | Balance as of
Dec 30, 2017 | | Revenue Standard | | Financial Instruments Update | | Other1 | | Opening Balance as of
Dec 31, 2017 | | Balance as of
Dec 30, 2017 | | Revenue Standard | | Financial Instruments Standard | | Other1 | | Opening Balance as of
Dec 31, 2017 |
| Assets: | | | | | | | | | | | | | | | | | | | | |
| Accounts receivable | | $ | 5,607 |
| | $ | (530 | ) | | $ | — |
| | $ | — |
| | $ | 5,077 |
| | $ | 5,607 |
| | $ | (530 | ) | | $ | — |
| | $ | — |
| | $ | 5,077 |
|
| Inventories | | $ | 6,983 |
| | $ | 47 |
| | $ | — |
| | $ | — |
| | $ | 7,030 |
| | $ | 6,983 |
| | $ | 47 |
| | $ | — |
| | $ | — |
| | $ | 7,030 |
|
| Other current assets | | $ | 2,908 |
| | $ | 64 |
| | $ | — |
| | $ | (8 | ) | | $ | 2,964 |
| | $ | 2,908 |
| | $ | 64 |
| | $ | — |
| | $ | (8 | ) | | $ | 2,964 |
|
| Equity investments | | $ | — |
| | $ | — |
| | $ | 8,579 |
| | $ | — |
| | $ | 8,579 |
| | $ | — |
| | $ | — |
| | $ | 8,579 |
| | $ | — |
| | $ | 8,579 |
|
| Marketable equity securities | | $ | 4,192 |
| | $ | — |
| | $ | (4,192 | ) | | $ | — |
| | $ | — |
| | $ | 4,192 |
| | $ | — |
| | $ | (4,192 | ) | | $ | — |
| | $ | — |
|
| Other long-term assets | | $ | 7,602 |
| | $ | — |
| | $ | (4,387 | ) | | $ | (43 | ) | | $ | 3,172 |
| | $ | 7,602 |
| | $ | — |
| | $ | (4,387 | ) | | $ | (43 | ) | | $ | 3,172 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deferred income | | $ | 1,656 |
| | $ | (1,356 | ) | | $ | — |
| | $ | — |
| | $ | 300 |
| | $ | 1,656 |
| | $ | (1,356 | ) | | $ | — |
| | $ | — |
| | $ | 300 |
|
| Other accrued liabilities | | $ | 7,535 |
| | $ | 81 |
| | $ | — |
| | $ | — |
| | $ | 7,616 |
| | $ | 7,535 |
| | $ | 81 |
| | $ | — |
| | $ | — |
| | $ | 7,616 |
|
| Deferred income taxes | | $ | 3,046 |
| | $ | 191 |
| | $ | — |
| | $ | (20 | ) | | $ | 3,217 |
| | $ | 3,046 |
| | $ | 191 |
| | $ | — |
| | $ | (20 | ) | | $ | 3,217 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Stockholders' equity: | | | | | | | | | | | | | | | | | | | | |
| Accumulated other comprehensive income (loss) | | $ | 862 |
| | $ | — |
| | $ | (1,745 | ) | | $ | (45 | ) | | $ | (928 | ) | | $ | 862 |
| | $ | — |
| | $ | (1,745 | ) | | $ | (45 | ) | | $ | (928 | ) |
| Retained earnings | | $ | 42,083 |
| | $ | 665 |
| | $ | 1,745 |
| | $ | 14 |
| | $ | 44,507 |
| | $ | 42,083 |
| | $ | 665 |
| | $ | 1,745 |
| | $ | 14 |
| | $ | 44,507 |
|
| |
1 | Includes adjustments from adoption of "Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory" and "Income Statement—Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." |
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 109 |
The following table summarizes the impacts of adopting the new revenue standard on our consolidated condensed statementstatements of income and balance sheet:sheets:
| | | | | For the period ended March 31, 2018 | | Three Months Ended September 29, 2018 | | Nine Months Ended September 29, 2018 |
| (In Millions) | | As reported | | Adjustments | | Without new revenue standard | | As reported | | Adjustments | | Without new revenue standard | | As reported | | Adjustments | | Without new revenue standard |
| Income Statement | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net revenue | | $ | 16,066 |
| | $ | (462 | ) | | $ | 15,604 |
| | $ | 19,163 |
| | $ | 118 |
| | $ | 19,281 |
| | $ | 52,191 |
| | $ | (266 | ) | | $ | 51,925 |
|
| Cost of sales | | 6,335 |
| | (156 | ) | | 6,179 |
| | 6,803 |
| | 46 |
| | 6,849 |
| | 19,681 |
| | (136 | ) | | 19,545 |
|
| Gross margin | | 9,731 |
| | (306 | ) | | 9,425 |
| | 12,360 |
| | 72 |
| | 12,432 |
| | 32,510 |
| | (130 | ) | | 32,380 |
|
| Marketing, general and administrative | | 1,900 |
| | (52 | ) | | 1,848 |
| | 1,605 |
| | — |
| | 1,605 |
| | 5,230 |
| | (70 | ) | | 5,160 |
|
| Operating income | | 4,470 |
| | (254 | ) | | 4,216 |
| | 7,349 |
| | 72 |
| | 7,421 |
| | 17,092 |
| | (60 | ) | | 17,032 |
|
| Income before taxes | | 5,011 |
| | (254 | ) | | 4,757 |
| | 7,142 |
| | 72 |
| | 7,214 |
| | 17,682 |
| | (60 | ) | | 17,622 |
|
| Provision for taxes | | 557 |
| | (47 | ) | | 510 |
| | 744 |
| | 20 |
| | 764 |
| | 1,824 |
| | (4 | ) | | 1,820 |
|
| Net income | | $ | 4,454 |
| | $ | (207 | ) | | $ | 4,247 |
| | $ | 6,398 |
| | $ | 52 |
| | $ | 6,450 |
| | $ | 15,858 |
| | $ | (56 | ) | | $ | 15,802 |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | As of September 29, 2018 |
| (In Millions) | | | | | | | | | As reported | | Adjustments | | Without new revenue standard |
| Balance Sheet | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | |
| Accounts receivable | | $ | 4,879 |
| | $ | 346 |
| | $ | 5,225 |
| | | | | | | | $ | 5,457 |
| | $ | 446 |
| | $ | 5,903 |
|
| Inventories | | $ | 7,146 |
| | $ | 51 |
| | $ | 7,197 |
| | | | | | | | $ | 7,401 |
| | $ | 23 |
| | $ | 7,424 |
|
| Other current assets | | $ | 3,408 |
| | $ | (14 | ) | | $ | 3,394 |
| | | | | | | | $ | 3,546 |
| | $ | 4 |
| | $ | 3,550 |
|
| | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | |
| Deferred income | | $ | — |
| | $ | 1,670 |
| | $ | 1,670 |
| | | | | | | | $ | — |
| | $ | 1,668 |
| | $ | 1,668 |
|
| Other accrued liabilities | | $ | 9,586 |
| | $ | (181 | ) | | $ | 9,405 |
| | | | | | | | $ | 9,835 |
| | $ | (334 | ) | | $ | 9,501 |
|
| Deferred income taxes | | $ | 1,564 |
| | $ | (229 | ) | | $ | 1,335 |
| | | | | | | | $ | 1,485 |
| | $ | (140 | ) | | $ | 1,345 |
|
| | | | | | | | | | | | | | | | | | | |
| Equity: | | | | | | | | | | | | | | | | | | |
| Retained earnings | | $ | 44,418 |
| | $ | (877 | ) | | $ | 43,541 |
| | | | | | | | $ | 47,094 |
| | $ | (721 | ) | | $ | 46,373 |
|
ACCOUNTING STANDARDS NOT YET ADOPTED
Leases
Standard/Description: This new lease accounting standard requires that we recognize leased assets and corresponding liabilities on the balance sheet and provide enhanced disclosure of lease activity.
Effective Date and Adoption Considerations: Effective in the first quarter of 2019. The standard requires a modified retrospective adoption. We can choose to apply the provisions at the beginning of the earliest comparative period presented in the financial statements or at the beginning of the period of adoption. We have elected to apply the guidance at the beginning of the period of adoption.
Effect on Financial Statements or Other Significant Matters: We expect the valuation of our right-of-use assets and lease liabilities, previously described as operating leases, to approximate the present value of our forecasted future lease commitments. We are currently implementing processes to comply with the measurement and disclosure requirements.
Cloud Computing Implementation Costs
Standard/Description: The standard requires implementation costs incurred in cloud computing (i.e. hosting) arrangements that are service contracts to be assessed under existing guidance to determine which costs to capitalize as assets or expense as incurred.
Effective Date and Adoption Considerations: Effective in the first quarter of 2020. The standard requires adoption either retrospectively or prospectively.
Effect on Financial Statements or Other Significant Matters: We have not yet determined the impact of this standard on our financial statements.
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 10 |
NOTE 3: OPERATING SEGMENTS
We manage our business through the following operating segments:
Client Computing Group (CCG)
Data Center Group (DCG)
Internet of Things Group (IOTG)
Non-Volatile Memory Solutions Group (NSG)
Programmable Solutions Group (PSG)
All Other
During the third quarter of 2018, we made an organizational change to combine our artificial intelligence investments in edge computing with IOTG; accordingly, approximately $480 million of goodwill was reallocated from "all other" to the IOTG operating segment.
We offer platform products that incorporate various components and technologies, including a microprocessor and chipset, a stand-alone System-on-Chip (SoC), or a multichip package. A platform product may be enhanced by additional hardware, software, and services offered by Intel. Platform products are used in various form factors across our CCG, DCG, and IOTG operating segments. We derive a substantial majority of our revenue from platform products, which are our principal products and considered as one class of product.
CCG and DCG are our reportable operating segments. IOTG, NSG, and PSG do not meet the quantitative thresholds to qualify as reportable operating segments; however, we have elected to disclose the results of these non-reportable operating segments.
The “all other” category includes revenue, expenses, and charges such as:
results of operations from non-reportable segments not otherwise presented, including Mobileye results;
historical results of operations from divested businesses;businesses, including Intel Security Group (ISecG) results;
results of operations of start-up businesses that support our initiatives, including our foundry business;
amounts included within restructuring and other charges;
a portion of employee benefits, compensation, and other expenses not allocated to the operating segments; and
acquisition-related costs, including amortization and any impairment of acquisition-related intangibles and goodwill.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 11 |
The Chief Operating Decision Maker (CODM), which is our interim Chief Executive Officer, (CEO), does not evaluate operating segments using discrete asset information. Operating segments do not record inter-segment revenue. We do not allocate gains and losses from equity investments, interest and other income, or taxes to operating segments. Although the CODM uses operating income to evaluate the segments, operating costs included in one segment may benefit other segments. Except for these differences, the accounting policies for segment reporting are the same as for Intel as a whole.
Net revenue and operating income (loss) for each period were as follows:
|
| | | | | | | | |
| | | Three Months Ended |
| (In Millions) | | Mar 31,
2018 | | Apr 1,
2017 |
| Net revenue: | | | | |
| Client Computing Group | | | | |
| Platform | | $ | 7,615 |
| | $ | 7,397 |
|
| Adjacent | | 605 |
| | 579 |
|
| | | 8,220 |
| | 7,976 |
|
| Data Center Group | | | | |
| Platform | | 4,824 |
| | 3,879 |
|
| Adjacent | | 410 |
| | 353 |
|
| | | 5,234 |
| | 4,232 |
|
| Internet of Things Group | | | | |
| Platform | | 719 |
| | 632 |
|
| Adjacent | | 121 |
| | 89 |
|
| | | 840 |
| | 721 |
|
| Non-Volatile Memory Solutions Group | | 1,040 |
| | 866 |
|
| Programmable Solutions Group | | 498 |
| | 425 |
|
| All other | | 234 |
| | 576 |
|
| Total net revenue | | $ | 16,066 |
| | $ | 14,796 |
|
| | | | | |
| Operating income (loss): | | | | |
| Client Computing Group | | $ | 2,791 |
| | $ | 3,031 |
|
| Data Center Group | | 2,602 |
| | 1,487 |
|
| Internet of Things Group | | 227 |
| | 105 |
|
| Non-Volatile Memory Solutions Group | | (81 | ) | | (129 | ) |
| Programmable Solutions Group | | 97 |
| | 92 |
|
| All other | | (1,166 | ) | | (954 | ) |
| Total operating income | | $ | 4,470 |
| | $ | 3,632 |
|
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 1211 |
Net revenue and operating income (loss) for each period were as follows:
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| (In Millions) | | Sep 29,
2018 | | Sep 30,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Net revenue: | | | | | | | | |
| Client Computing Group | | | | | | | | |
| Platform | | $ | 9,023 |
| | $ | 8,132 |
| | $ | 24,703 |
| | $ | 23,163 |
|
| Adjacent | | 1,211 |
| | 728 |
| | 2,479 |
| | 1,886 |
|
| | | 10,234 |
| | 8,860 |
| | 27,182 |
| | 25,049 |
|
| Data Center Group | | | | | | | | |
| Platform | | 5,637 |
| | 4,439 |
| | 15,561 |
| | 12,344 |
|
| Adjacent | | 502 |
| | 439 |
| | 1,361 |
| | 1,138 |
|
| | | 6,139 |
| | 4,878 |
| | 16,922 |
| | 13,482 |
|
| Internet of Things Group | | | | | | | | |
| Platform | | 855 |
| | 680 |
| | 2,319 |
| | 1,926 |
|
| Adjacent | | 64 |
| | 169 |
| | 320 |
| | 364 |
|
| | | 919 |
| | 849 |
| | 2,639 |
| | 2,290 |
|
| Non-Volatile Memory Solutions Group | | 1,081 |
| | 891 |
| | 3,200 |
| | 2,631 |
|
| Programmable Solutions Group | | 496 |
| | 469 |
| | 1,511 |
| | 1,334 |
|
| All other | | 294 |
| | 202 |
| | 737 |
| | 922 |
|
| Total net revenue | | $ | 19,163 |
| | $ | 16,149 |
| | $ | 52,191 |
| | $ | 45,708 |
|
| | | | | | | | | |
| Operating income (loss): | | | | | | | | |
| Client Computing Group | | $ | 4,532 |
| | $ | 3,600 |
| | $ | 10,557 |
| | $ | 9,656 |
|
| Data Center Group | | 3,082 |
| | 2,255 |
| | 8,421 |
| | 5,403 |
|
| Internet of Things Group | | 321 |
| | 146 |
| | 791 |
| | 390 |
|
| Non-Volatile Memory Solutions Group | | 160 |
| | (52 | ) | | 14 |
| | (291 | ) |
| Programmable Solutions Group | | 106 |
| | 113 |
| | 304 |
| | 302 |
|
| All other | | (852 | ) | | (921 | ) | | (2,995 | ) | | (2,845 | ) |
| Total operating income | | $ | 7,349 |
| | $ | 5,141 |
| | $ | 17,092 |
| | $ | 12,615 |
|
Disaggregated net revenue for each period was as follows:
| | | | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| (In Millions) | | Mar 31,
2018 | | Apr 1,
2017 | | Sep 29,
2018 | | Sep 30,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Platform revenue | | | | | | | | | | | | |
| Desktop platform | | $ | 2,907 |
| | $ | 2,855 |
| | $ | 3,225 |
| | $ | 2,967 |
| | $ | 9,087 |
| | $ | 8,598 |
|
| Notebook platform | | 4,689 |
| | 4,498 |
| | 5,774 |
| | 5,123 |
| | 15,549 |
| | 14,437 |
|
| DCG platform | | 4,824 |
| | 3,879 |
| | 5,637 |
| | 4,439 |
| | 15,561 |
| | 12,344 |
|
Other platform1 | | 738 |
| | 676 |
| | 879 |
| | 722 |
| | 2,386 |
| | 2,054 |
|
| | | 13,158 |
| | 11,908 |
| | 15,515 |
| | 13,251 |
| | 42,583 |
| | 37,433 |
|
| | | | | | | | | | | | | |
Adjacent revenue2 | | 2,908 |
| | 2,354 |
| | 3,648 |
| | 2,898 |
| | 9,608 |
| | 7,741 |
|
| ISecG divested business | | — |
| | 534 |
| | — |
| | — |
| | — |
| | 534 |
|
| Total revenue | | $ | 16,066 |
| | $ | 14,796 |
| | $ | 19,163 |
| | $ | 16,149 |
| | $ | 52,191 |
| | $ | 45,708 |
|
| |
1 | Includes our tablet, service provider, and IOTG platform revenue. |
| |
2 | Includes all of our non-platform products for CCG, DCG, and IOTG like modem, ethernet, and silicon photonic,photonics, as well as NSG, PSG, and Mobileye products. |
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 12 |
NOTE 4: EARNINGS PER SHARE
We computed basic earnings per share of common stock based on the weighted average number of shares of common stock outstanding during the period. We computed diluted earnings per share of common stock based on the weighted average number of shares of common stock outstanding plus potentially dilutive shares of common stock outstanding during the period. | | | | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| (In Millions, Except Per Share Amounts) | | Mar 31,
2018 | | Apr 1,
2017 | | Sep 29,
2018 | | Sep 30,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Net income available to common stockholders | | $ | 4,454 |
| | $ | 2,964 |
| | $ | 6,398 |
| | $ | 4,516 |
| | $ | 15,858 |
| | $ | 10,288 |
|
| Weighted average shares of common stock outstanding – basic | | 4,674 |
| | 4,723 |
| | 4,574 |
| | 4,688 |
| | 4,632 |
| | 4,707 |
|
| Dilutive effect of employee equity incentive plans | | 65 |
| | 58 |
| | 40 |
| | 34 |
| | 52 |
| | 43 |
|
| Dilutive effect of convertible debt | | 51 |
| | 100 |
| | 34 |
| | 99 |
| | 44 |
| | 99 |
|
| Weighted average shares of common stock outstanding – diluted | | 4,790 |
| | 4,881 |
| | 4,648 |
| | 4,821 |
| | 4,728 |
| | 4,849 |
|
| Earnings per share – Basic | | $ | 0.95 |
| | $ | 0.63 |
| | $ | 1.40 |
| | $ | 0.96 |
| | $ | 3.42 |
| | $ | 2.19 |
|
| Earnings per share – Diluted | | $ | 0.93 |
| | $ | 0.61 |
| | $ | 1.38 |
| | $ | 0.94 |
| | $ | 3.35 |
| | $ | 2.12 |
|
Potentially dilutive shares of common stock from employee equity incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding restricted stock units (RSUs), and the assumed issuance of common stock under the stock purchase plan. In December 2017, we paid cash to satisfy the conversion of our 2035 debentures, which we excluded from our dilutive earnings per share computation starting in the fourth quarter of 2017 and are no longer dilutive. Our 2039 debentures require settlement of the principal amount of the debt in cash upon conversion. Since the conversion premium is paid in cash or stock at our option, we determined the potentially dilutive shares of common stock by applying the treasury stock method. For the nine months ended September 29, 2018, we paid cash to satisfy the conversion of a portion of our 2039 debentures. The potentially dilutive shares associated with the converted portion are excluded from our diluted earnings per share computation in 2018 as they are no longer dilutive.
In all periods presented, potentially dilutive outstanding securities which would have been antidilutive are insignificant and are excluded from the computation of diluted earnings per share. In all periods presented, we included our outstanding 2039 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 2039 debentures in the future if the average market price is below the conversion price.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 13 |
NOTE 5: CONTRACT LIABILITIES
| | | (In Millions) | | Mar 31,
2018 | | Opening Balance as of Dec 31, 2017 | | Sep 29,
2018 | | Opening Balance as of Dec 31, 2017 |
Contract liabilities from prepaid supply agreements
| | $ | 2,723 |
| | $ | 105 |
| | $ | 2,692 |
| | $ | 105 |
|
| Contract liabilities from software, services and other | | 115 |
| | 195 |
| | 93 |
| | 195 |
|
| Total contract liabilities | | $ | 2,838 |
| | $ | 300 |
| | $ | 2,785 |
| | $ | 300 |
|
Contract liabilities are primarily related to partial prepayments received from customers on long termlong-term supply agreements towards future NSG product delivery. As new prepaid supply agreements are entered into and performance obligations are negotiated, this component of the contract liability balance will increase, and as customers purchase product and utilize their prepaid balances, the balance will decrease. The short-term portion of prepayments from supply agreements is reported on the consolidated condensed balance sheetsheets within other accrued liabilities.
The following table shows the changes in contract liability balances relating to prepaid supply agreements during the first threenine months of 2018: | | | (In Millions) | | | | |
| Prepaid supply agreements balance as of Dec 31, 2017 | | $ | 105 |
| |
| Prepaid supply agreements balance as of December 31, 2017 | | | $ | 105 |
|
Additions and adjustments
| | 2,692 |
| | 2,753 |
|
| Revenue recognized | | (74 | ) | | (166 | ) |
| Prepaid supply agreements balance as of Mar 31, 2018 | | $ | 2,723 |
| |
| Prepaid supply agreements balance as of September 29, 2018 | | | $ | 2,692 |
|
Additions and adjustments in the first threenine months of 2018 include a $1.0$1.0 billion reclassification from customer deposits previously included in other long-term liabilities. The long-term supply agreements represent $5.3$4.8 billion in future anticipated revenues with 5%2% expected to be recognized during the currentfourth quarter of the year and the remainder ratably over the next 5five years.
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 13 |
NOTE 6: OTHER FINANCIAL STATEMENT DETAILS
INVENTORIES
| | | (In Millions) | | Mar 31,
2018 | | Dec 30,
2017 | | Sep 29,
2018 | | Dec 30,
2017 |
| Raw materials | | $ | 1,242 |
| | $ | 1,098 |
| | $ | 932 |
| | $ | 738 |
|
| Work in process | | 3,750 |
| | 3,893 |
| | 4,507 |
| | 4,213 |
|
| Finished goods | | 2,154 |
| | 1,992 |
| | 1,962 |
| | 2,032 |
|
| Total inventories | | $ | 7,146 |
| | $ | 6,983 |
| | $ | 7,401 |
| | $ | 6,983 |
|
INTEREST AND OTHER, NET
The components of interest and other, net for each period were as follows: | | | | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| (In Millions) | | Mar 31,
2018 | | Apr 1,
2017 | | Sep 29,
2018 | | Sep 30,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Interest income | | $ | 91 |
| | $ | 76 |
| | $ | 109 |
| | $ | 137 |
| | $ | 308 |
| | $ | 349 |
|
| Interest expense | | (112 | ) | | (146 | ) | | (109 | ) | | (191 | ) | | (337 | ) | | (493 | ) |
| Other, net | | (81 | ) | | 1 |
| | (132 | ) | | (3 | ) | | 254 |
| | 406 |
|
| Total interest and other, net | | $ | (102 | ) | | $ | (69 | ) | | $ | (132 | ) | | $ | (57 | ) | | $ | 225 |
| | $ | 262 |
|
Interest expense in the preceding table is net of $113$142 million of interest capitalized in the firstthird quarter of 2018 ($67and $381 million in the first nine months of 2018 ($77 million in the third quarter of 2017 and $212 million in the first nine months of 2017).
In the second quarter of 2018, we completed the divestiture of Wind River Systems, Inc. and recognized a pre-tax gain of $494 million. For the first nine months of 2018, we have settled conversion requests for our 2039 convertible debentures totaling $793 million in principal, resulting in a cumulative loss of $211 million.
NOTE 7: INCOME TAXES
During the third quarter of 2018, we adjusted our provisional tax estimates related to the U.S. Tax Cuts and Jobs Act (Tax Reform) that we recorded in the fourth quarter of 2017 to reflect the impact of additional analysis related to the transition tax liability and the refinement of our measurement of deferred income taxes. Our estimated annual effective tax rate for the first nine months of 2018 includes provisional tax estimates for certain Tax Reform provisions related to foreign-derived intangible income and low-taxed intangible income. Our accounting remains incomplete as of the third quarter of 2018. We could receive additional data and regulatory guidance during the fourth quarter of 2018 that may impact our provisional estimates.
Our effective income tax rate was 10.3% in the first nine months of 2018 compared to 28.1% in the first nine months of 2017. Tax Reform reduced the U.S. statutory federal tax rate from 35.0% to 21.0%, which favorably impacted our effective tax rate in the first nine months of 2018 by approximately nine percentage points. Further, the Tax Reform provisions related to foreign-derived intangible income favorably impacted our effective tax rate by approximately four percentage points, and the provision related to low-taxed intangible income and the repeal of the domestic manufacturing deduction each unfavorably impacted our effective tax rate by approximately one percentage point. The decrease in the first nine months of 2018 was also driven by non-recurring items, primarily our divestiture of ISecG in the second quarter of 2017, which increased our effective tax rate in the first nine months of 2017 by approximately five percentage points, and the adjustment to our provisional estimates for Tax Reform in the first nine months of 2018, which reduced our effective tax rate by approximately two percentage points.
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 14 |
NOTE 7: INCOME TAXES
We have not adjusted our provisional tax estimates related to the U.S. Tax Cuts and Jobs Act (Tax Reform) that we recorded in the fourth quarter of 2017. Our accounting remains incomplete as of the first three months of 2018 and will be refined throughout 2018 based on our ongoing analysis of data and tax positions along with new guidance from regulators and interpretation of the law. Our estimated annual effective tax rate for the first three months of 2018 includes provisional tax estimates for certain Tax Reform provisions related to foreign-derived intangible income and low-taxed intangible income. We expect that these provisions will be clarified by additional analysis and regulatory guidance, and the clarification could impact our estimated annual effective tax rate.
Our effective income tax rate was 11.1% in the first three months of 2018 compared to 22.3% in the first three months of 2017. The reduction from Tax Reform of the U.S. statutory federal tax rate from 35.0% to 21.0% favorably impacted our effective tax rate by approximately nine percentage points. Further, the new Tax Reform provisions related to foreign-derived intangible income favorably impacted our effective tax rate by approximately two percentage points, and the provision related to low-taxed intangible income and the repeal of the domestic manufacturing deduction each unfavorably impacted our effective tax rate by approximately one percentage point. In addition, our effective tax rate in the first three months of 2018 was favorably impacted by one-time items unrelated to Tax Reform.
NOTE 8: INVESTMENTS
DEBT SECURITIESINVESTMENTS
Trading Assets
Net gains related to tradingTrading assets still held at the reporting date were $175incurred net losses of $4 million in the third quarter of 2018 and net losses of $169 million in the first threenine months of 2018 ($217(net gains of $81 million in the third quarter of 2017 and net gains in the first three months of 2017). Net losses on the related derivatives were $149$433 million in the first threenine months of 2017). Related derivatives incurred net losses of $11 million in the third quarter of 2018 and net gains of $159 million in the first nine months of 2018 ($186(net losses of $75 million in the third quarter of 2017 and net losses of $402 million in the first threenine months of 2017).
Available-for-Sale Debt Investments | | | | | March 31, 2018 | | December 30, 2017 | | September 29, 2018 | | December 30, 2017 |
| (In Millions) | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Corporate debt | | $ | 2,440 |
| | $ | 2 |
| | $ | (27 | ) | | $ | 2,415 |
| | $ | 2,294 |
| | $ | 4 |
| | $ | (13 | ) | | $ | 2,285 |
| | $ | 2,647 |
| | $ | 2 |
| | $ | (29 | ) | | $ | 2,620 |
| | $ | 2,294 |
| | $ | 4 |
| | $ | (13 | ) | | $ | 2,285 |
|
| Financial institution instruments | | 3,303 |
| | 3 |
| | (17 | ) | | 3,289 |
| | 3,387 |
| | 3 |
| | (9 | ) | | 3,381 |
| | 3,647 |
| | 3 |
| | (18 | ) | | 3,632 |
| | 3,387 |
| | 3 |
| | (9 | ) | | 3,381 |
|
| Government debt | | 956 |
| | — |
| | (12 | ) | | 944 |
| | 961 |
| | — |
| | (6 | ) | | 955 |
| | 940 |
| | — |
| | (14 | ) | | 926 |
| | 961 |
| | — |
| | (6 | ) | | 955 |
|
| Total available-for-sale debt investments | | $ | 6,699 |
| | $ | 5 |
| | $ | (56 | ) | | $ | 6,648 |
| | $ | 6,642 |
| | $ | 7 |
| | $ | (28 | ) | | $ | 6,621 |
| | $ | 7,234 |
| | $ | 5 |
| | $ | (61 | ) | | $ | 7,178 |
| | $ | 6,642 |
| | $ | 7 |
| | $ | (28 | ) | | $ | 6,621 |
|
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 March 31,September 29, 2018 and as of December 30, 2017.
The fair value of available-for-sale debt investments, by contractual maturity, as of March 31,September 29, 2018, werewas as follows: | | | (In Millions) | | Fair Value | | Fair Value |
| Due in 1 year or less | | $ | 2,823 |
| | $ | 3,138 |
|
| Due in 1–2 years | | 1,715 |
| | 782 |
|
| Due in 2–5 years | | 1,651 |
| | 2,662 |
|
| Due after 5 years | | 69 |
| | 118 |
|
| Instruments not due at a single maturity date | | 390 |
| | 478 |
|
| Total | | $ | 6,648 |
| | $ | 7,178 |
|
EQUITY INVESTMENTS
|
| | | | | | | | |
| (In Millions) | | Sep 29,
2018 | | Dec 30,
2017 |
| Marketable equity securities | | $ | 3,039 |
| | $ | 4,192 |
|
| Non-marketable equity securities | | 2,878 |
| | 2,613 |
|
| Equity method investments | | 1,634 |
| | 1,774 |
|
| Total | | $ | 7,551 |
|
| $ | 8,579 |
|
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 15 |
EQUITY INVESTMENTS
|
| | | | | | | | |
| (In Millions) | | Mar 31,
2018 | | Dec 30,
2017 |
| Marketable equity securities | | $ | 4,653 |
| | $ | 4,192 |
|
| Non-marketable equity securities | | 2,823 |
| | 2,613 |
|
| Equity method investments | | 2,005 |
| | 1,774 |
|
| Total | | $ | 9,481 |
|
| $ | 8,579 |
|
The components of gains (losses) on equity investments, net for each period were as follows: | | | | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| (In Millions) | | Mar 31,
2018 | | Apr 1,
2017 | | Sep 29,
2018 | | Sep 30,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
Mark to market adjustments on marketable equity securities1 | | $ | 606 |
| | $ | — |
| |
Gains (losses) on sales1 | | 10 |
| | 274 |
| |
Observable price adjustments on non-marketable equity securities1 | | 124 |
| | — |
| |
Initial mark to market adjustments on marketable equity securities1 2 | | | $ | — |
| | $ | — |
| | $ | 46 |
| | $ | — |
|
Ongoing mark to market adjustments on marketable equity securities1 2 | | | 8 |
| | — |
| | 379 |
| | — |
|
Gains (losses) on sales2 | | | 57 |
| | 944 |
| | 68 |
| | 2,020 |
|
Observable price adjustments on non-marketable equity securities2 | | | 43 |
| | — |
| | 191 |
| | — |
|
| Impairments | | (17 | ) | | (48 | ) | | (328 | ) | | (10 | ) | | (372 | ) | | (613 | ) |
| Share of equity method investee gains (losses) | | (82 | ) | | (11 | ) | | — |
| | (110 | ) | | (152 | ) | | (129 | ) |
| Dividends | | | 1 |
| | — |
| | 39 |
| | 68 |
|
| Other | | 2 |
| | 37 |
| | 144 |
| | 22 |
| | 166 |
| | 94 |
|
| Total gains (losses) on equity investments, net | | $ | 643 |
| | $ | 252 |
| | $ | (75 | ) | | $ | 846 |
| | $ | 365 |
| | $ | 1,440 |
|
| |
1 | Mark to market and observable price adjustments relate to the new financial instruments standard adopted in the first quarter of 2018, and are not applicable in prior periods. Gains (losses) on sales includes realized gains (losses) on sales of non-marketable equity securities and equity method investments, and in 2017 also includes realized gains (losses) on sales of available-for-sale equity securities which are now reflected inInitial mark to market adjustments onrefers to the fair value adjustment recorded upon a security becoming marketable, equity securities.generally as a result of an initial public offering (IPO), whereas ongoing mark to market adjustments refers to all post-IPO mark to market adjustments. |
2 Both initial and ongoing mark to market adjustments and observable price adjustments relate to the new financial instruments standard adopted in the first quarter of 2018, and are not applicable in prior periods. Gains (losses) on sales includes realized gains (losses) on sales of non-marketable equity securities and equity method investments, and in 2017 also includes realized gains (losses) on sales of available-for-sale equity securities which are now reflected in ongoing mark to market adjustments on marketable equity securities.
| | | | | | | Three Months Ended | | Nine Months Ended |
| (In Millions) | | Mar 31,
2018 | | Sep 29,
2018 | | Sep 29,
2018 |
| Net gains (losses) recognized during the period on equity securities | | $ | 724 |
| | $ | (75 | ) | | $ | 518 |
|
| Less: Net gains and losses recognized during the period on equity securities sold during the period | | (11 | ) | |
| Less: Net (gains) losses recognized during the period on equity securities sold during the period | | | (225 | ) | | (463 | ) |
| Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date | | $ | 713 |
| | $ | (300 | ) | | $ | 55 |
|
Cloudera, Inc.
On April 28, 2017, Cloudera, Inc. (Cloudera) completed its initial public offering and we designated our previous equity and cost method investments in Cloudera as available-for-sale. During the second quarter of 2017, we determined we had an other-than-temporary decline in the fair value of our investment and recognized an impairment charge of $278 million.
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., a holding company under Tsinghua Unigroup. During 2015, we invested $966 million to complete the first phase of the equity investment and accounted for our interest using the cost method of accounting. During 2017, we reduced our expectation of the company's future operating performance due to competitive pressures, which resulted in an other-than-temporary impairment charge of $308 million.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 16 |
IM Flash Technologies, LLC
Since the inception of IMIntel-Micron Flash Technologies LLC (IMFT) was formed in 2006 by Micron Technology, Inc. (Micron) and Intel haveto jointly developeddevelop NAND flash memory and 3D XPoint™ technology products. IMFT is an unconsolidated variable interest entity and all costs of IMFT are passed on to Micron and Intel also purchases jointly developedthrough sale of products directly from Micron under certain supply agreements.
or services in proportional share of ownership. As of March 31,September 29, 2018, we own a 49% interest in IMFT. Our portion of IMFT costs was approximately $97 million in the third quarter of 2018 and approximately $324 million in the first nine months of 2018 (approximately $115 million in the third quarter of 2017 and approximately $350 million in the first nine months of 2017).
IMFT depends on Micron and Intel for any additional cash needs to be provided in the form of cash calls or member debt financing (MDF). The carrying valueMDF balance may be converted to a capital contribution at our request, or may be repaid upon availability of our investment was $1.8 billion as of March 31, 2018 ($1.5 billion as of December 30, 2017) which is classified as an equity method investment.
funds. The IMFT operating agreement continues through 2024 unless terminated earlier, and provides for certain buy-sell rights of the joint venture. Intel has the right to cause Micron to buy our interest in IMFT and, if exercised, Micron could elect to receive financing from us for one to two years. Commencing in January 2019, Micron has the right to call our interest in IMFT withIMFT.
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 16 |
On July 16, 2018, Intel and Micron announced that they agreed to complete joint development for the second generation of 3D XPoint technology, which is expected to occur in the first half of 2019. Technology development beyond the second generation of 3D XPoint technology will be pursued independently by the two companies in order to optimize the technology for their respective product and business needs. Intel continues to purchase jointly developed products from Micron under certain supply agreements.
On October 18, 2018, Micron publicly announced their intent to exercise the right to call our interest in IMFT. The timeline to close the transaction is between six and twelve months after the date Micron exercises the call. Following the closing date, we will continue to be effective withinreceive supply for a period of one year.
IMFT is a variable interest entity and all costs We recognized an impairment charge of IMFT are passed on to Micron and Intel through sale of products or services in proportional share of ownership. Our portion of IMFT costs was approximately $83$290 million induring the first three months of 2018 (approximately $130 million in the first three months of 2017). In the event that IMFT has excess cash, IMFT will make payments to Micron and Intel in the form of dividends.
IMFT depends on Micron and Intel for any additional cash needs. During the firstthird quarter of 2018, we extended $319 million in member debt financing (MDF) to IMFT to fund the ramp of 3D XPoint technology. The MDF balance may be converted to a capital contribution at our request, or may be repaid upon availability of funds. Our known maximum exposure to loss approximated2018. This reduced the carrying value of our equity method investment balance in IMFT. Our potentialIMFT to $1.6 billion in line with our expectation of future losses could be higher than the carrying amount of our investment, as Intelcash flows and Micron are liable for other future operating costs or obligations of IMFT and future cash calls. 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 costexercising the call 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.January.
NOTE 9: IDENTIFIED INTANGIBLE ASSETS
| | | | | March 31, 2018 | | September 29, 2018 |
| (In Millions) | | Gross Assets | | Accumulated
Amortization | | Net | | Gross Assets | | Accumulated
Amortization | | Net |
| Acquisition-related developed technology | | $ | 9,513 |
| | $ | (2,197 | ) | | $ | 7,316 |
| | $ | 9,611 |
| | $ | (2,742 | ) | | $ | 6,869 |
|
| Acquisition-related customer relationships | | 2,036 |
| | (343 | ) | | 1,693 |
| | 2,036 |
| | (433 | ) | | 1,603 |
|
| Acquisition-related brands | | 143 |
| | (34 | ) | | 109 |
| | 143 |
| | (44 | ) | | 99 |
|
| Licensed technology and patents | | 3,104 |
| | (1,434 | ) | | 1,670 |
| | 3,052 |
| | (1,505 | ) | | 1,547 |
|
| Identified intangible assets subject to amortization | | 14,796 |
| | (4,008 | ) | | 10,788 |
| | 14,842 |
| | (4,724 | ) | | 10,118 |
|
| In-process research and development | | 1,567 |
| | — |
| | 1,567 |
| | 1,497 |
| | — |
| | 1,497 |
|
| Other intangible assets | | | 392 |
| | — |
| | 392 |
|
| Identified intangible assets not subject to amortization | | 1,567 |
| | — |
| | 1,567 |
| | 1,889 |
| | — |
| | 1,889 |
|
| Total identified intangible assets | | $ | 16,363 |
| | $ | (4,008 | ) | | $ | 12,355 |
| | $ | 16,731 |
| | $ | (4,724 | ) | | $ | 12,007 |
|
|
| | | | | | | | | | | | |
| | | December 30, 2017 |
| (In Millions) | | Gross Assets | | Accumulated
Amortization | | Net |
| Acquisition-related developed technology | | $ | 8,912 |
| | $ | (1,922 | ) | | $ | 6,990 |
|
| Acquisition-related customer relationships | | 2,052 |
| | (313 | ) | | 1,739 |
|
| Acquisition-related brands | | 143 |
| | (29 | ) | | 114 |
|
| Licensed technology and patents | | 3,104 |
| | (1,370 | ) | | 1,734 |
|
| Identified intangible assets subject to amortization | | 14,211 |
| | (3,634 | ) | | 10,577 |
|
| In-process research and development | | 2,168 |
| | — |
| | 2,168 |
|
| Identified intangible assets not subject to amortization | | 2,168 |
| | — |
| | 2,168 |
|
| Total identified intangible assets | | $ | 16,379 |
| | $ | (3,634 | ) | | $ | 12,745 |
|
Amortization expenses recorded in the consolidated condensed statements of income for each period were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | Nine Months Ended |
| (In Millions) | | Location | | Sep 29,
2018 | | Sep 30,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Acquisition-related developed technology | | Cost of sales | | $ | 276 |
| | $ | 243 |
| | $ | 826 |
| | $ | 650 |
|
| Acquisition-related customer relationships | | Amortization of acquisition-related intangibles | | 45 |
| | 45 |
| | 135 |
| | 113 |
|
| Acquisition-related brands | | Amortization of acquisition-related intangibles | | 5 |
| | 4 |
| | 15 |
| | 11 |
|
| Licensed technology and patents | | Cost of sales | | 64 |
| | 73 |
| | 196 |
| | 225 |
|
| Total amortization expenses | | | | $ | 390 |
| | $ | 365 |
| | $ | 1,172 |
| | $ | 999 |
|
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 17 |
Amortization expenses recorded in the consolidated condensed statements of income for each period were as follows:
|
| | | | | | | | | | |
| | | | | Three Months Ended |
| (In Millions) | | Location | | Mar 31,
2018 | | Apr 1,
2017 |
| Acquisition-related developed technology | | Cost of sales | | $ | 275 |
| | $ | 209 |
|
| Acquisition-related customer relationships | | Amortization of acquisition-related intangibles | | 45 |
| | 35 |
|
| Acquisition-related brands | | Amortization of acquisition-related intangibles | | 5 |
| | 3 |
|
| Licensed technology and patents | | Cost of sales | | 65 |
| | 74 |
|
| Total amortization expenses | | | | $ | 390 |
| | $ | 321 |
|
We expect future amortization expenses for the next five years to be as follows:
| | | (In Millions) | | Remainder of 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Remainder of 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| Acquisition-related developed technology | | $ | 824 |
| | $ | 1,097 |
| | $ | 1,066 |
| | $ | 1,030 |
| | $ | 991 |
| | $ | 279 |
| | $ | 1,114 |
| | $ | 1,082 |
| | $ | 1,047 |
| | $ | 1,008 |
|
| Acquisition-related customer relationships | | 136 |
| | 180 |
| | 179 |
| | 179 |
| | 171 |
| | 45 |
| | 180 |
| | 179 |
| | 179 |
| | 171 |
|
| Acquisition-related brands | | 15 |
| | 20 |
| | 20 |
| | 20 |
| | 6 |
| | 5 |
| | 20 |
| | 20 |
| | 20 |
| | 6 |
|
| Licensed technology and patents | | 195 |
| | 246 |
| | 214 |
| | 195 |
| | 190 |
| | 64 |
| | 241 |
| | 210 |
| | 198 |
| | 193 |
|
| Total future amortization expenses | | $ | 1,170 |
| | $ | 1,543 |
| | $ | 1,479 |
| | $ | 1,424 |
| | $ | 1,358 |
| | $ | 393 |
| | $ | 1,555 |
| | $ | 1,491 |
| | $ | 1,444 |
| | $ | 1,378 |
|
NOTE 10: OTHER LONG-TERM ASSETS
| | | (In Millions) | | Mar 31,
2018 | | Dec 30,
2017 | | Sep 29,
2018 | | Dec 30,
2017 |
| Non-current deferred tax assets | | $ | 982 |
| | $ | 840 |
| | $ | 1,011 |
| | $ | 840 |
|
| Pre-payments for property, plant and equipment | | 1,145 |
| | 714 |
| | 1,383 |
| | 714 |
|
| Loans receivable | | 744 |
| | 860 |
| | 544 |
| | 860 |
|
| Other | | 743 |
| | 801 |
| | 1,017 |
| | 801 |
|
| Total other long-term assets | | $ | 3,614 |
| | $ | 3,215 |
| | $ | 3,955 |
| | $ | 3,215 |
|
NOTE 11: BORROWINGS
For the first nine months of 2018, we paid $1.9 billion to satisfy conversion obligations for $793 million of our $2.0 billion 3.25% junior subordinated 2039 convertible debentures. We recognized a loss of $211 million in interest and other, net and a reduction of $1.3 billion in stockholders' equity related to the conversion feature.
During the third quarter of 2018, we remarketed $423 million principal of bonds issued by the Industrial Development Authority of the City of Chandler, Arizona (the Arizona bonds) and the State of Oregon Business Development Commission (the Oregon bonds). The bonds are our unsecured general obligations in accordance with loan agreements we entered into with the Industrial Development Authority of the City of Chandler, Arizona and the State of Oregon Business Development Commission. The bonds mature between 2035 and 2040 and carry interest rates of 2.4% - 2.7%. Each series of the Arizona bonds and the Oregon bonds are subject to mandatory tender in August 2023, at which time we can re-market the bonds as either fixed-rate bonds for a specified period or as variable-rate bonds until another fixed rate period is selected or until their final maturity date.
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 18 |
NOTE 11:12: FAIR VALUE
For information about our fair value policies, and methods and assumptions used in estimating the fair value of our financial assets and liabilities, see "Note 2: Accounting Policies" and "Note 15: Fair Value" in our 2017 Form 10-K.
ASSETS AND LIABILITIES MEASURED AND RECORDED AT FAIR VALUE ON A RECURRING BASIS
| | | | | March 31, 2018 | | December 30, 2017 | | September 29, 2018 | | December 30, 2017 |
| | | Fair Value Measured and Recorded at Reporting Date Using | | | Fair Value Measured and Recorded at Reporting Date Using | | | 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 | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash equivalents: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate debt | | $ | — |
| | $ | 347 |
| | $ | — |
| | $ | 347 |
| | $ | — |
| | $ | 30 |
| | $ | — |
| | $ | 30 |
| | $ | — |
| | $ | 179 |
| | $ | — |
| | $ | 179 |
| | $ | — |
| | $ | 30 |
| | $ | — |
| | $ | 30 |
|
Financial institution instruments 1 | | 390 |
| | 422 |
| | — |
| | 812 |
| | 335 |
| | 640 |
| | — |
| | 975 |
| | 478 |
| | 318 |
| | — |
| | 796 |
| | 335 |
| | 640 |
| | — |
| | 975 |
|
Government debt 2 | | — |
| | 34 |
| | — |
| | 34 |
| | — |
| | 90 |
| | — |
| | 90 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 90 |
| | — |
| | 90 |
|
| Reverse repurchase agreements | | — |
| | 1,399 |
| | — |
| | 1,399 |
| | — |
| | 1,399 |
| | — |
| | 1,399 |
| | — |
| | 1,949 |
| | — |
| | 1,949 |
| | — |
| | 1,399 |
| | — |
| | 1,399 |
|
| Short-term investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate debt | | — |
| | 631 |
| | — |
| | 631 |
| | — |
| | 672 |
| | 3 |
| | 675 |
| | — |
| | 573 |
| | — |
| | 573 |
| | — |
| | 672 |
| | 3 |
| | 675 |
|
Financial institution instruments 1 | | — |
| | 1,184 |
| | — |
| | 1,184 |
| | — |
| | 1,009 |
| | — |
| | 1,009 |
| | — |
| | 1,740 |
| | — |
| | 1,740 |
| | — |
| | 1,009 |
| | — |
| | 1,009 |
|
Government debt 2 | | — |
| | 205 |
| | — |
| | 205 |
| | — |
| | 130 |
| | — |
| | 130 |
| | — |
| | 328 |
| | — |
| | 328 |
| | — |
| | 130 |
| | — |
| | 130 |
|
| Trading assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset-backed securities | | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Corporate debt | | — |
| | 3,195 |
| | — |
| | 3,195 |
| | — |
| | 2,842 |
| | — |
| | 2,842 |
| | — |
| | 2,562 |
| | — |
| | 2,562 |
| | — |
| | 2,842 |
| | — |
| | 2,842 |
|
Financial institution instruments 1 | | 12 |
| | 1,920 |
| | — |
| | 1,932 |
| | 59 |
| | 1,064 |
| | — |
| | 1,123 |
| | 29 |
| | 1,299 |
| | — |
| | 1,328 |
| | 59 |
| | 1,064 |
| | — |
| | 1,123 |
|
Government debt 2 | | 29 |
| | 5,467 |
| | — |
| | 5,496 |
| | 30 |
| | 4,758 |
| | — |
| | 4,788 |
| | 28 |
| | 3,220 |
| | — |
| | 3,248 |
| | 30 |
| | 4,758 |
| | — |
| | 4,788 |
|
| Other current assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative assets | | — |
| | 362 |
| | — |
| | 362 |
| | 2 |
| | 277 |
| | — |
| | 279 |
| | — |
| | 150 |
| | — |
| | 150 |
| | — |
| | 279 |
| | — |
| | 279 |
|
| Loans receivable | | — |
| | 166 |
| | — |
| | 166 |
| | — |
| | 30 |
| | — |
| | 30 |
| |
Loans receivable 3 | | | — |
| | 304 |
| | — |
| | 304 |
| | — |
| | 30 |
| | — |
| | 30 |
|
| Marketable equity securities | | 4,578 |
| | 75 |
| | — |
| | 4,653 |
| | 4,148 |
| | 44 |
| | — |
| | 4,192 |
| | 3,039 |
| | — |
| | — |
| | 3,039 |
| | 4,148 |
| | 44 |
| | — |
| | 4,192 |
|
| Other long-term investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate debt | | — |
| | 1,437 |
| | — |
| | 1,437 |
| | — |
| | 1,576 |
| | 4 |
| | 1,580 |
| | — |
| | 1,868 |
| | — |
| | 1,868 |
| | — |
| | 1,576 |
| | 4 |
| | 1,580 |
|
Financial institution instruments 1 | | — |
| | 1,293 |
| | — |
| | 1,293 |
| | — |
| | 1,397 |
| | — |
| | 1,397 |
| | — |
| | 1,096 |
| | — |
| | 1,096 |
| | — |
| | 1,397 |
| | — |
| | 1,397 |
|
Government debt 2 | | — |
| | 705 |
| | — |
| | 705 |
| | — |
| | 735 |
| | — |
| | 735 |
| | — |
| | 598 |
| | — |
| | 598 |
| | — |
| | 735 |
| | — |
| | 735 |
|
| Other long-term assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative assets | | — |
| | 96 |
| | — |
| | 96 |
| | — |
| | 77 |
| | 7 |
| | 84 |
| | — |
| | 47 |
| | — |
| | 47 |
| | — |
| | 77 |
| | 7 |
| | 84 |
|
| Loans receivable | | — |
| | 494 |
| | — |
| | 494 |
| | — |
| | 610 |
| | — |
| | 610 |
| |
Loans receivable 3 | | | — |
| | 294 |
| | — |
| | 294 |
| | — |
| | 610 |
| | — |
| | 610 |
|
| Total assets measured and recorded at fair value | | 5,009 |
| | 19,432 |
| | — |
| | 24,441 |
| | 4,574 |
| | 17,382 |
| | 14 |
| | 21,970 |
| | 3,574 |
| | 16,525 |
| | — |
| | 20,099 |
| | 4,572 |
| | 17,384 |
| | 14 |
| | 21,970 |
|
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other accrued liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative liabilities | | — |
| | 555 |
| | — |
| | 555 |
| | — |
| | 454 |
| | — |
| | 454 |
| | — |
| | 464 |
| | — |
| | 464 |
| | — |
| | 454 |
| | — |
| | 454 |
|
| Other long-term liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative liabilities | | — |
| | 530 |
| | 61 |
| | 591 |
| | — |
| | 297 |
| | 6 |
| | 303 |
| | — |
| | 761 |
| | 106 |
| | 867 |
| | — |
| | 297 |
| | 6 |
| | 303 |
|
| Total liabilities measured and recorded at fair value | | $ | — |
| | $ | 1,085 |
| | $ | 61 |
| | $ | 1,146 |
| | $ | — |
| | $ | 751 |
| | $ | 6 |
| | $ | 757 |
| | $ | — |
| | $ | 1,225 |
| | $ | 106 |
| | $ | 1,331 |
| | $ | — |
| | $ | 751 |
| | $ | 6 |
| | $ | 757 |
|
| |
1 | Level 1 investments consist of money market funds. Level 2 investments consist primarily of commercial paper, certificates of deposit, time deposits, and notes and bonds issued by financial institutions. |
| |
2 | Level 1 investments consist primarily of U.S. Treasury securities. Level 2 investments consist primarily of U.S. Agency notes and non-U.S. government debt. |
| |
3 | 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. |
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 19 |
FAIR VALUE OPTION FOR LOANS RECEIVABLE
As of March 31, 2018 and December 30, 2017, 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.
ASSETS MEASURED AND RECORDED AT FAIR VALUE ON A NON-RECURRING BASIS
Our non-marketable equity securities, equity method investments, and certain non-financial assets, such as intangible assets and property, plant and equipment, are recorded at fair value only if an impairment or observable price adjustment is recognized in the current period. If an observable price adjustment or impairment is recognized on our non-marketable equity securities during the period, we classify these assets as Level 3 within the fair value hierarchy based on the nature of the fair value inputs.
FINANCIAL INSTRUMENTS NOT RECORDED AT FAIR VALUE ON A RECURRING BASIS
Financial instruments not recorded at fair value on a recurring basis include non-marketable equity securities (that have not been re-measured or impaired in the current period), equity method investments, grants receivable, loans receivable, reverse repurchase agreements and our short-term and long-term debt.
Prior to the adoption of the new financial instrument standard, our non-marketable cost method investments were not recordeddisclosed at fair value on a recurring basis and the carrying amount and fair value as of December 30, 2017 was $2.6 billion and $3.6 billion, respectively. These assets were classified as Level 3 within the fair value hierarchy based on the nature of the fair value inputs.
As of March 31,September 29, 2018, the aggregate carrying value of grants receivable, loans receivable, and reverse repurchase agreements was $815 million$1.1 billion (the aggregate carrying amount as of December 30, 2017 was $935 million). The estimated fair value of these financial instruments approximates their carrying value and is categorized as Level 2 within the fair value hierarchy based on the nature of the fair value inputs.
As of March 31,September 29, 2018, the fair value of short and long-term debt (excluding drafts payable) was $30.329.3 billion (the fair value as of December 30, 2017 was $29.4 billion). These liabilities are classified as Level 2 within the fair value hierarchy based on the nature of the fair value inputs.
NOTE 12:13: OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive income (loss) by component and related tax effects in the first threenine months of 2018 were as follows:
| | | (In Millions) | | Unrealized Holding Gains (Losses) on Available-for-Sale Equity Investments | | Unrealized Holding Gains (Losses) on Derivatives | | Actuarial Valuation and Other Pension Expenses | | Translation adjustments and other | | Total | | Unrealized Holding Gains (Losses) on Available-for-Sale Equity Investments | | Unrealized Holding Gains (Losses) on Derivatives | | Actuarial Valuation and Other Pension Expenses | | Translation adjustments and other | | Total |
| Balance as of December 30, 2017 | | $ | 1,745 |
| | $ | 106 |
| | $ | (963 | ) | | $ | (26 | ) | | $ | 862 |
| | $ | 1,745 |
| | $ | 106 |
| | $ | (963 | ) | | $ | (26 | ) | | $ | 862 |
|
| Impact of change in accounting principle | | (1,745 | ) | | 24 |
| | (65 | ) | | (4 | ) | | (1,790 | ) | |
| Impact of change in accounting standards | | | (1,745 | ) | | 24 |
| | (65 | ) | | (4 | ) | | (1,790 | ) |
Opening Balance as of December 31, 2017
| | $ | — |
| | $ | 130 |
| | $ | (1,028 | ) | | $ | (30 | ) | | $ | (928 | ) | | $ | — |
| | $ | 130 |
| | $ | (1,028 | ) | | $ | (30 | ) | | $ | (928 | ) |
| Other comprehensive income (loss) before reclassifications | | — |
| | 203 |
| | 140 |
| | (29 | ) | | 314 |
| | — |
| | (203 | ) | | 3 |
| | (31 | ) | | (231 | ) |
| Amounts reclassified out of accumulated other comprehensive income | | — |
| | (53 | ) | | 45 |
| | (1 | ) | | (9 | ) | |
| Amounts reclassified out of accumulated other comprehensive income (loss) | | | — |
| | (55 | ) | | 48 |
| | 8 |
| | 1 |
|
| Tax effects | | — |
| | (31 | ) | | (37 | ) | | 8 |
| | (60 | ) | | — |
| | 59 |
| | (12 | ) | | 8 |
| | 55 |
|
| Other comprehensive income (loss) | | — |
| | 119 |
| | 148 |
| | (22 | ) | | 245 |
| | — |
| | (199 | ) | | 39 |
| | (15 | ) | | (175 | ) |
| Balance as of March 31, 2018 | | $ | — |
| | $ | 249 |
| | $ | (880 | ) | | $ | (52 | ) | | $ | (683 | ) | |
| Balance as of September 29, 2018 | | | $ | — |
| | $ | (69 | ) | | $ | (989 | ) | | $ | (45 | ) | | $ | (1,103 | ) |
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 20 |
The amounts reclassified out of accumulated other comprehensive income (loss) into the consolidated condensed statements of income for each period were as follows: | | | | | Income Before Taxes Impact
(In Millions) | | Income Before Taxes Impact
(In Millions) |
| | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| Comprehensive Income Components | | Location | | Mar 31,
2018 | | Apr 1,
2017 | | Location | | Sep 29,
2018 | | Sep 30,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Unrealized holding gains (losses) on available-for-sale equity investments: | | | | | | | | | | | | |
| | | Gains (losses) on equity investments, net | | $ | — |
| | $ | 263 |
| | Gains (losses) on equity investments, net | | $ | — |
| | $ | 916 |
| | $ | — |
| | $ | 1,962 |
|
| | | — |
| | 263 |
| | — |
| | 916 |
| | — |
| | 1,962 |
|
| Unrealized holding gains (losses) on derivatives: | | | | | | | | | | | | |
| Foreign currency contracts | | Cost of sales | | 8 |
| | (20 | ) | | Cost of sales | | (14 | ) | | (13 | ) | | 5 |
| | (60 | ) |
| | | Research and development | | 41 |
| | (16 | ) | | Research and development | | (11 | ) | | 24 |
| | 60 |
| | 10 |
|
| | | Marketing, general and administrative | | 14 |
| | (5 | ) | | Marketing, general and administrative | | (1 | ) | | 4 |
| | 31 |
| | (2 | ) |
| | | Gains (losses) on equity investments, net | | — |
| | 4 |
| | Gains (losses) on equity investments, net | | — |
| | 12 |
| | — |
| | 28 |
|
| | | Interest and other, net | | (10 | ) | | 38 |
| | Interest and other, net | | (6 | ) | | 17 |
| | (41 | ) | | 52 |
|
| | | 53 |
| | 1 |
| | (32 | ) | | 44 |
| | 55 |
| | 28 |
|
| Amortization of pension and postretirement benefit components: | | | | | | | | | | | | |
| Actuarial valuation and other pension expenses | | (45 | ) | | (24 | ) | | — |
| | (18 | ) | | (48 | ) | | (46 | ) |
| | | (45 | ) | | (24 | ) | | — |
| | (18 | ) | | (48 | ) | | (46 | ) |
| Translation adjustments and other | | Interest and other, net | | 1 |
| | — |
| | Interest and other, net | | (2 | ) | | — |
| | (8 | ) | | (507 | ) |
| Total amounts reclassified out of accumulated other comprehensive income (loss) | | $ | 9 |
| | $ | 240 |
| | $ | (34 | ) | | $ | 942 |
| | $ | (1 | ) | | $ | 1,437 |
|
The amortization of pension and postretirement benefit components is included in the computation of net periodic benefit cost. For more information, see "Note 18: Retirement Benefit Plans" in our 2017 Form 10-K.
We estimate that we will reclassify approximately $122$143 million (before taxes) of net derivative gainslosses included in accumulated other comprehensive income (loss) into earnings within the next 12 months.
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 21 |
NOTE 13:14: DERIVATIVE FINANCIAL INSTRUMENTS
For further information on our derivative policies, see "Note 2: Accounting Policies" in our 2017 Form 10-K.
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) | | Mar 31,
2018 | | Dec 30,
2017 | | Apr 1,
2017 | | Sep 29,
2018 | | Dec 30,
2017 |
| Foreign currency contracts | | $ | 22,020 |
| | $ | 19,958 |
| | $ | 18,575 |
| | $ | 19,179 |
| | $ | 19,958 |
|
| Interest rate contracts | | 20,905 |
| | 16,823 |
| | 14,815 |
| | 22,936 |
| | 16,823 |
|
| Other | | 2,154 |
| | 1,636 |
| | 1,357 |
| | 1,539 |
| | 1,636 |
|
| Total | | $ | 45,079 |
| | $ | 38,417 |
| | $ | 34,747 |
| | $ | 43,654 |
| | $ | 38,417 |
|
FAIR VALUE OF DERIVATIVE INSTRUMENTS IN THE CONSOLIDATED CONDENSED BALANCE SHEETS
| | | | | March 31, 2018 | | December 30, 2017 | | September 29, 2018 | | December 30, 2017 |
| (In Millions) | | Assets 1 | | Liabilities 2 | | Assets 1 | | Liabilities 2 | | Assets 1 | | Liabilities 2 | | Assets 1 | | Liabilities 2 |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | |
Foreign currency contracts 3 | | $ | 303 |
| | $ | 9 |
| | $ | 283 |
| | $ | 32 |
| | $ | 59 |
| | $ | 221 |
| | $ | 283 |
| | $ | 32 |
|
| Interest rate contracts | | 30 |
| | 540 |
| | 1 |
| | 254 |
| | — |
| | 853 |
| | 1 |
| | 254 |
|
| Total derivatives designated as hedging instruments | | 333 |
| | 549 |
| | 284 |
| | 286 |
| | 59 |
| | 1,074 |
| | 284 |
| | 286 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
Foreign currency contracts 3 | | 94 |
| | 575 |
| | 52 |
| | 447 |
| | 105 |
| | 236 |
| | 52 |
| | 447 |
|
| Interest rate contracts | | 31 |
| | 22 |
| | 18 |
| | 24 |
| | 31 |
| | 21 |
| | 18 |
| | 24 |
|
| Other | | — |
| | — |
| | 9 |
| | — |
| | 2 |
| | — |
| | 9 |
| | — |
|
| Total derivatives not designated as hedging instruments | | 125 |
| | 597 |
| | 79 |
| | 471 |
| | 138 |
| | 257 |
| | 79 |
| | 471 |
|
| Total derivatives | | $ | 458 |
| | $ | 1,146 |
| | $ | 363 |
| | $ | 757 |
| | $ | 197 |
| | $ | 1,331 |
| | $ | 363 |
| | $ | 757 |
|
| |
1 | Derivative assets are recorded as other assets, current and non-current. |
| |
2 | Derivative liabilities are recorded as other liabilities, current and non-current. |
| |
3 | The majority of these instruments mature within 12 months. |
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 22 |
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:
| | | | | March 31, 2018 | | September 29, 2018 |
| | | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | | | | | | | | | 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 | | 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 | | $ | 440 |
| | $ | — |
| | $ | 440 |
| | $ | (327 | ) | | $ | (61 | ) | | $ | 52 |
| | $ | 193 |
| | $ | — |
| | $ | 193 |
| | $ | (133 | ) | | $ | (60 | ) | | $ | — |
|
| Reverse repurchase agreements | | 1,649 |
| | — |
| | 1,649 |
| | — |
| | (1,649 | ) | | — |
| | 2,199 |
| | — |
| | 2,199 |
| | — |
| | (2,099 | ) | | 100 |
|
| Total assets | | 2,089 |
| | — |
| | 2,089 |
| | (327 | ) | | (1,710 | ) | | 52 |
| | 2,392 |
| | — |
| | 2,392 |
| | (133 | ) | | (2,159 | ) | | 100 |
|
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative liabilities subject to master netting arrangements | | 1,133 |
| | — |
| | 1,133 |
| | (327 | ) | | (753 | ) | | 53 |
| | 1,315 |
| | — |
| | 1,315 |
| | (133 | ) | | (1,038 | ) | | 144 |
|
| Total liabilities | | $ | 1,133 |
| | $ | — |
| | $ | 1,133 |
| | $ | (327 | ) | | $ | (753 | ) | | $ | 53 |
| | $ | 1,315 |
| | $ | — |
| | $ | 1,315 |
| | $ | (133 | ) | | $ | (1,038 | ) | | $ | 144 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 30, 2017 |
| | | | | | | | | 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 | | $ | 350 |
| | $ | — |
| | $ | 350 |
| | $ | (206 | ) | | $ | (130 | ) | | $ | 14 |
|
| Reverse repurchase agreements | | 1,649 |
| | — |
| | 1,649 |
| | — |
| | (1,649 | ) | | — |
|
| Total assets | | 1,999 |
| | — |
| | 1,999 |
| | (206 | ) | | (1,779 | ) | | 14 |
|
| Liabilities: | | | | | | | | | | | | |
| Derivative liabilities subject to master netting arrangements | | 745 |
| | — |
| | 745 |
| | (206 | ) | | (504 | ) | | 35 |
|
| Total liabilities | | $ | 745 |
| | $ | — |
| | $ | 745 |
| | $ | (206 | ) | | $ | (504 | ) | | $ | 35 |
|
We obtain and secure available collateral from counterparties against obligations, including securities lending transactions and reverse repurchase agreements, when we deem it appropriate.
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS
The before-tax net gains or losses attributed to the effective portion of cash flow hedges, recognized in other comprehensive income (loss), were $69 million net losses in the third quarter of 2018 and were $203 million net losses in the first nine months of 2018 ($83 million net gains in the third quarter of 2017 and $528 million net gains in the first three months of 2018 ($266 million net gains in the first threenine months of 2017). Substantially all of our cash flow hedges were foreign currency contracts for the first three months of 2018 and 2017.all periods presented.
During the first threenine months of 2018 and 2017, the amounts excluded from effectiveness testing were insignificant.insignificant.
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 12:13: Other Comprehensive Income (Loss)."
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 23 |
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 | | Three Months Ended | | Nine Months Ended |
| (In Millions) | | Mar 31,
2018 | | Apr 1,
2017 | | Sep 29,
2018 | | Sep 30,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Interest rate contracts | | $ | (258 | ) | | $ | (14 | ) | | $ | (230 | ) | | $ | (15 | ) | | $ | (601 | ) | | $ | 67 |
|
| Hedged items | | 258 |
| | 14 |
| | 230 |
| | 15 |
| | 601 |
| | (67 | ) |
| Total | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
The amounts recorded on the consolidated condensed balance sheetsheets related to cumulative basis adjustments for fair value hedges for each period were as follows: |
| | | | | | | | | | | | | | | | |
| Line Item in the Consolidated Condensed Balance Sheet in Which the Hedged Item Is Included | | Carrying Amount of the Hedged Item Asset/(Liabilities) | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount Assets/(Liabilities) |
Years Ended
(In Millions) | | Mar 31,
2018 | | Dec 30,
2017 | | Mar 31,
2018 | | Dec 30,
2017 |
| Long-Term Debt | | $ | (16,612 | ) | | $ | (12,653 | ) | | $ | 510 |
| | $ | 252 |
|
|
| | | | | | | | | | | | | | | | |
| Line Item in the Consolidated Condensed Balance Sheet in Which the Hedged Item is Included | | Carrying Amount of the Hedged Item Asset/(Liabilities) | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount Assets/(Liabilities) |
Years Ended
(In Millions) | | Sep 29,
2018 | | Dec 30,
2017 | | Sep 29,
2018 | | Dec 30,
2017 |
| Long-term debt | | $ | (19,159 | ) | | $ | (12,653 | ) | | $ | 853 |
| | $ | 252 |
|
As of March 31,September 29, 2018 and December 30, 2017, the total notional amount of pay variable/receive fixed-interest rate swaps was $17.1$20.0 billion and $12.9 billion, respectively.
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 | | | | Three Months Ended | | Nine Months Ended |
| (In Millions) | | Location of Gains (Losses) Recognized in Income on Derivatives | | Mar 31,
2018 | | Apr 1,
2017 | | Location of Gains (Losses) Recognized in Income on Derivatives | | Sep 29,
2018 | | Sep 30,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Foreign currency contracts | | Interest and other, net | | $ | (170 | ) | | $ | (160 | ) | | Interest and other, net | | $ | (1 | ) | | $ | (91 | ) | | $ | 268 |
| | $ | (521 | ) |
| Interest rate contracts | | Interest and other, net | | 14 |
| | (2 | ) | | Interest and other, net | | 3 |
| | (3 | ) | | 22 |
| | (4 | ) |
| Other | | Various | | (31 | ) | | 58 |
| | Various | | 53 |
| | 40 |
| | 49 |
| | 135 |
|
| Total | | $ | (187 | ) | | $ | (104 | ) | | $ | 55 |
| | $ | (54 | ) | | $ | 339 |
| | $ | (390 | ) |
NOTE 14:15: 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. Our plans include our 2006 Equity Incentive Plan and our 2006 Stock Purchase Plan. The 2006 Equity Incentive Plan had 208187 million shares of common stock available through June 2020 for future grants.
SHARE-BASED COMPENSATION
Share-based compensation expense recognized was $433$383 million in the third quarter of 2018 and $1.2 billion in the first threenine months of 2018 ($397 million in the third quarter of 2017 and $1.1 billion in the first threenine months of 2017).
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 24 |
RESTRICTED STOCK UNIT AWARDS
Restricted stock unit activity in the first threenine months of 2018 was as follows:
| | | | | Number of RSUs (In Millions) | | Weighted Average Grant-Date Fair Value | | Number of RSUs (In Millions) | | Weighted Average Grant-Date Fair Value |
| December 30, 2017 | | 100.4 |
| | $ | 32.36 |
| | 100.4 |
| | $ | 32.36 |
|
| Granted | | 8.1 |
| | $ | 49.03 |
| | 33.7 |
| | $ | 49.33 |
|
| Vested | | (4.0 | ) | | $ | 39.18 |
| | (36.4 | ) | | $ | 31.07 |
|
| Forfeited | | (1.8 | ) | | $ | 32.09 |
| | (6.2 | ) | | $ | 35.60 |
|
| March 31, 2018 | | 102.7 |
| | $ | 33.41 |
| |
| September 29, 2018 | | | 91.5 |
| | $ | 38.90 |
|
The aggregate fair value of awards that vested in the first threenine months of 2018 was $204 million,$1.9 billion, 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 the first threenine months of 2018 was $157 million.$1.1 billion. 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.
STOCK PURCHASE PLAN
The 2006 Stock Purchase Plan allows eligible employees to purchase shares of our common stock at 85% of the value of our common stock on specific dates. Rights to purchase shares of common stock are granted during the first and third quarters of each year. The 2006 Stock Purchase Plan had 142137 million shares of common stock remaining through August 2021 for issuance.
Employees purchased 8.214 million shares of common stock in the first threenine months of 2018 for $249$468 million (8.0(15 million shares of common stock in the first threenine months of 2017 for $235$432 million) under the 2006 Stock Purchase Plan.
NOTE 15:16: 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.
European Commission Competition Matter
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.
|
| | |
| FINANCIAL STATEMENTS | Notes to Financial Statements | 25 |
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 held oral argument in June 2016. In October 2016, Advocate General Wahl, an advisor to the Court of Justice, issued a non-binding advisory opinion that favored Intel on a number of grounds. The Court of Justice issued its decision in September 2017, setting aside the judgment of the General Court and sending the case back to the General Court to examine whether the rebates at issue were capable of restricting competition. The General Court has appointed a panel of five judges to consider our appeal of the EC’s 2009 decision in light of the Court of Justice’s clarifications of the law. In November 2017, the parties filed initial “Observations” about the Court of Justice’s decision and the appeal, and were invited by the General Court to offer supplemental comments to each other’s “Observations,” which the parties submitted in March 2018. Responses to other questions posed by the General Court were filed in May and June 2018. We are now awaiting notice whether the General Court will hold a management conference before it conducts oral argument, at some future date. Pending the final decision in this matter, the fine paid by Intel has been placed by the EC in commercial bank accounts where it accrues interest.
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 former officers. The complaint alleges that the defendants breached their duties to the company by participating in, or allowing, purported antitrust violations that 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.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. The appeal was withdrawn in September 2018, and the case is fully briefed, and we are waiting on a hearing date from the appellate court.over.
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 former officers. The lawsuit makes allegations substantially similar to those in the California shareholder derivative litigation described above, but additionally alleges breach of the duty of disclosure with respect to In re High Tech Employee Antitrust Litigation and that Intel's 2013 and 2014 proxy statements 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 PRSSL California shareholder derivative litigation.
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 of Directors, 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. In November 2016, the court granted Intel’s motion to dismiss the case, without leave to amend. In March 2017, plaintiff filed a motion for fees. The court denied plaintiff’s fee motion in May 2017, and entered final judgment in this matter in June 2017. In August 2017, Esposito appealed the final judgment.prejudice.
McAfee, Inc. Shareholder Litigation
On August 19, 2010, we announced that we had agreed to acquire all of the common stock of McAfee, Inc. (McAfee) for $48.00 per share. Four McAfee shareholders filed putative class-action lawsuits in Santa Clara County, California Superior Court challenging the proposed transaction. The cases were ordered consolidated in September 2010. Plaintiffs filed an amended complaint that named former McAfee board members, McAfee, and Intel as defendants, and alleged that the McAfee board members breached their fiduciary duties and that McAfee and Intel aided and abetted those breaches of duty. The complaint requested rescission of the merger agreement, such other equitable relief as the court may deem proper, and an award of damages in an unspecified amount. In June 2012, the plaintiffs’ damages expert asserted that the value of a McAfee share for the purposes of assessing damages should be $62.08.
|
| | |
FINANCIAL STATEMENTS | Notes to Financial Statements | 26 |
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. The California Court of Appeal heard oral argument in October 2017, and in November 2017, affirmed the judgment as to McAfee's nine outside directors, reversed the judgment as to former McAfee director and chief executive officer David DeWalt, Intel, and McAfee, and affirmed the trial court's ruling that the plaintiffs are not entitled to a jury trial. No benchAt a June 2018 case management conference following remand, the Superior Court set an October hearing date for any additional summary judgment motions that may be filed, and set trial date has been set.to begin in December 2018. In July 2018, plaintiffs filed a motion for leave to amend the complaint which the court denied in September 2018. Also in July 2018, McAfee and Intel filed a motion for summary judgment on the aiding and abetting claims asserted against them; in October 2018, the court granted the motion as to McAfee and denied the motion as to Intel. Because the resolution of pretrial motions may materially impact the scope and nature of the proceeding, and because of uncertainties regarding the disposition of theories that may be asserted at trial following the appellate court's remand of only certain claims in the proceeding and the extent of Intel's responsibility, if any, with respect to such claims, 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.
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| FINANCIAL STATEMENTS | Notes to Financial Statements | 26 |
Litigation related to Security Vulnerabilities
In June 2017, a Google research team notified us and other companies that it had identified security vulnerabilities (now commonly referred to as “Spectre” and “Meltdown”) that affect many types of microprocessors, including our products. As is standard when findings like these are presented, we worked together with other companies in the industry to verify the research and develop and validate software and firmware updates for impacted technologies. On January 3, 2018, information on the security vulnerabilities was publicly reported, before software and firmware updates to address the vulnerabilities were made widely available. Numerous lawsuits have been filed against Intel and, in certain cases, our executives and directors, in U.S. federal and state courts and in certain courts in other countries relating to the Spectre and Meltdown security vulnerabilities.vulnerabilities, as well as another variant of these vulnerabilities (“Foreshadow”) that has since been identified.
As of April 25,October 24, 2018, 42 customer47 consumer class action lawsuits and three securities class action lawsuits have been filed. The customerconsumer class action plaintiffs, who purport to represent various classes of end users of our products, generally claim to have been harmed by Intel's actions and/or omissions in connection with the security vulnerabilities and assert a variety of common law and statutory claims seeking monetary damages and equitable relief. Of the customerconsumer class action lawsuits, 3943 have been filed in the United States, two in Canada, and onetwo in Israel. In April 2018, the United States Judicial Panel on Multidistrict Litigation ordered the U.S. customerconsumer class action lawsuits consolidated for pretrial proceedings in the United States District Court for the District of Oregon. Intel filed a motion to dismiss that consolidated action in October 2018, and a hearing on that motion has been scheduled for February 2019. There has been no activity in the case pending in the Superior Court of Justice of Ontario, and in October 2018 the Superior Court of Justice of Quebec entered an order staying the case pending in that court for one year. In Israel, both consumer class action lawsuits were filed in the District Court of Haifa. The Supreme Court of Israel stayed the first case pending disposition of an appeal by one of Intel’s co-defendants of an order by the District Court of Haifa. Intel filed a motion to stay the second case, which is scheduled for hearing in November 2018. In the securities class action litigation, the lead securities class action plaintiffs, who purport to represent classes of acquirers of Intel stock between JulyOctober 27, 2017 and January 4,9, 2018, generally allege that Intel and certain officers violated securities laws by making statements about Intel's products and internal controls that were revealed to be false or misleading by the disclosure of the security vulnerabilities. The securities class actions have been consolidated and are pending in the United States District Court for the Northern District of California. Defendants moved to dismiss those actions on various grounds, and a hearing on that motion has been scheduled for November 2018. Additional lawsuits and claims may be asserted on behalf of customers and shareholders seeking monetary damages or other related relief. We dispute the claims described above and intend to defend the lawsuits vigorously. Given the procedural posture and the nature of these cases, including that the proceedings are in the early stages, that alleged damages have not been specified, that uncertainty exists as to the likelihood of a class or classes being certified or the ultimate size of any class or classes if certified, and that there are significant factual and legal issues to be resolved, we are unable to make a reasonable estimate of the potential loss or range of losses, if any, that might arise from these matters.
In addition to these lawsuits, Intel stockholders have filed seven shareholder derivative lawsuits since January 2018 against certain current and former members of our Board of Directors and certain officers. In Januarycurrent and April 2018, Joseph Tola, Joanne Bicknese, Michael Kellogg, and Jeffrey Lockwood each filed a shareholder derivative action in the Superior Court of the State of California in San Mateo Countyformer officers, alleging that the defendants breached their duties to Intel in connection with the disclosure of the security vulnerabilities and the failure to take action in relation to alleged insider trading. The complaints seek to recover damages from the defendants on behalf of Intel. In March and April 2018, Joseph Lipovich, Martin Salsberg, and Margaret Birch, et al. each filed substantially similar shareholderThree of the derivative actions were filed in the United States District Court for the Northern District of California and all were assigned to the same judge. The Lipovich and Salsberg actions werehave been consolidated, and defendants movedthe other four were filed in the Superior Court of the State of California in San Mateo County and have been consolidated. In August 2018, the federal court granted defendants' motion to dismiss those actionsthe consolidated complaint on the ground that plaintiffs’ failureplaintiffs failed to makeplead facts sufficient to show they were excused from making a pre-lawsuit demand on the Board was not excused.Board. The hearingfederal court granted plaintiffs leave to amend their complaint, but in September 2018, plaintiffs instead requested that the action be voluntarily dismissed. Defendants and plaintiffs disagree whether the dismissal should be with or without prejudice, and are awaiting the court’s decision on that motion is scheduled for May 2018. Defendants also filed aissue. In August 2018, the California Superior Court granted defendants' motion to consolidate, stay, or dismiss the Birchconsolidated complaint in the action on the groundsground that plaintiffs’ failureplaintiffs failed to makeplead facts sufficient to show they were excused from making a pre-lawsuit demand on the Board was not excused,Board. The state court granted plaintiffs leave to amend their complaint, and the parties have stipulated that plaintiffs must file any amended complaint by February 2019. The state court plaintiffs have also moved to intervene in the lawsuit is redundantfederal action to argue against the dismissal of the Lipovich and Salsberg actions. The hearing onfederal case with prejudice; defendants are opposing that motion is scheduled for June 2018. Defendants have not yet responded to the Tola, Bicknese, Kellogg, or Lockwood complaints.motion.
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| FINANCIAL STATEMENTS | Notes to Financial Statements | 27 |
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|
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) - RESULTS OF OPERATIONS |
Q1 2018The third quarter was a record first quarter in revenue, operating income, and exceedednet income, driven by strong customer demand for the expectations we set in January 2018. Our transformation to a data-centric company accelerated with the revenueperformance of our data-centric businesses up 25% overleadership products across the business. Data Center Group (DCG), Client Computing Group (CCG), Internet of Things Group (IOTG), Non-Volatile Memory Solutions Group (NSG), and Mobileye each achieved record revenue. Strong business performance, operating margin leverage, and lower tax rate resulted in net income of $6.4 billion in the third quarter. From a capital allocation perspective, in the first quarternine months we generated $22.5 billion of last year excluding Intel Security Group (ISecG). Collectively, these businesses now account for 49% of revenuecash flow from operations and are on trackreturned $12.6 billion to cross over 50% of revenue this year — an important milestone for our company. CCG continued to execute well, producing revenue growth within a declining PC market.shareholders, including $4.2 billion in dividends and $8.5 billion in buybacks. For a more comprehensive overview of the results of our operations, see "A Quarter in Review."
| | | | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
| | | Q1 2018 | | Q1 2017 | | Q3 2018 | | Q3 2017 | | YTD 2018 | | YTD 2017 |
| (Dollars in Millions, Except Per Share Amounts) | | Dollars | | % of Net
Revenue | | Dollars | | % of Net
Revenue | | Dollars | | % of Net
Revenue | | Dollars | | % of Net
Revenue | | Dollars | | % of Net
Revenue | | Dollars | | % of Net
Revenue |
| Net revenue | | $ | 16,066 |
| | 100.0 | % | | $ | 14,796 |
| | 100.0 | % | | $ | 19,163 |
| | 100.0 | % | | $ | 16,149 |
| | 100.0 | % | | $ | 52,191 |
| | 100.0 | % | | $ | 45,708 |
| | 100.0 | % |
| Cost of sales | | 6,335 |
| | 39.4 | % | | 5,636 |
| | 38.1 | % | | 6,803 |
| | 35.5 | % | | 6,085 |
| | 37.7 | % | | 19,681 |
| | 37.7 | % | | 17,388 |
| | 38.0 | % |
| Gross margin | | 9,731 |
| | 60.6 | % | | 9,160 |
| | 61.9 | % | | 12,360 |
| | 64.5 | % | | 10,064 |
| | 62.3 | % | | 32,510 |
| | 62.3 | % | | 28,320 |
| | 62.0 | % |
| Research and development | | 3,311 |
| | 20.6 | % | | 3,311 |
| | 22.4 | % | | 3,428 |
| | 17.9 | % | | 3,209 |
| | 19.9 | % | | 10,110 |
| | 19.4 | % | | 9,782 |
| | 21.4 | % |
| Marketing, general and administrative | | 1,900 |
| | 11.8 | % | | 2,099 |
| | 14.2 | % | | 1,605 |
| | 8.4 | % | | 1,661 |
| | 10.3 | % | | 5,230 |
| | 10.0 | % | | 5,610 |
| | 12.3 | % |
| Restructuring and other charges | | — |
| | — | % | | 80 |
| | 0.5 | % | | (72 | ) | | (0.4 | )% | | 4 |
| | — | % | | (72 | ) | | (0.1 | )% | | 189 |
| | 0.4 | % |
| Amortization of acquisition-related intangibles | | 50 |
| | 0.3 | % | | 38 |
| | 0.3 | % | | 50 |
| | 0.3 | % | | 49 |
| | 0.3 | % | | 150 |
| | 0.3 | % | | 124 |
| | 0.3 | % |
| Operating income | | 4,470 |
| | 27.8 | % | | 3,632 |
| | 24.5 | % | | 7,349 |
| | 38.3 | % | | 5,141 |
| | 31.8 | % | | 17,092 |
| | 32.7 | % | | 12,615 |
| | 27.6 | % |
| Gains (losses) on equity investments, net | | 643 |
| | 4.0 | % | | 252 |
| | 1.8 | % | | (75 | ) | | (0.4 | )% | | 846 |
| | 5.2 | % | | 365 |
| | 0.7 | % | | 1,440 |
| | 3.2 | % |
| Interest and other, net | | (102 | ) | | (0.6 | )% | | (69 | ) | | (0.5 | )% | | (132 | ) | | (0.7 | )% | | (57 | ) | | (0.4 | )% | | 225 |
| | 0.4 | % | | 262 |
| | 0.6 | % |
| Income before taxes | | 5,011 |
| | 31.2 | % | | 3,815 |
| | 25.8 | % | | 7,142 |
| | 37.3 | % | | 5,930 |
| | 36.7 | % | | 17,682 |
| | 33.9 | % | | 14,317 |
| | 31.3 | % |
| Provision for taxes | | 557 |
| | 3.5 | % | | 851 |
| | 5.8 | % | | 744 |
| | 3.9 | % | | 1,414 |
| | 8.8 | % | | 1,824 |
| | 3.5 | % | | 4,029 |
| | 8.8 | % |
| Net income | | $ | 4,454 |
| | 27.7 | % | | $ | 2,964 |
| | 20.0 | % | | $ | 6,398 |
| | 33.4 | % | | $ | 4,516 |
| | 28.0 | % | | $ | 15,858 |
| | 30.4 | % | | $ | 10,288 |
| | 22.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings per share – Diluted | | $ | 0.93 |
| | | | $ | 0.61 |
| | | | $ | 1.38 |
| | | | $ | 0.94 |
| | | | $ | 3.35 |
| | | | $ | 2.12 |
| | |
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| MD&A - RESULTS OF OPERATIONS | Consolidated Results & Analysis | 28 |
REVENUE
(Dollars in charts are shown in billions)
|
| | | |
| | SEGMENT REVENUE WALKWALKS |
| Q3 2018 vs. Q3 2017 | | YTD 2018 vs. YTD 2017 |
Our Q1Q3 2018 revenue was $16.1$19.2 billion, up $1.3$3.0 billion, or 9%19%, from Q1Q3 2017. After adjusting for the Q1 2017 results of the of Intel Security Group (ISecG), which we divested in Q2 2017, revenue grew 13%. The increase in revenue was primarily driven by strong performance across all businesses. Our data-centric businesses collectively grew 22% year over year and our PC-centric business also grew 16%.
Our YTD 2018 revenue was $52.2 billion, up $6.5 billion, or 14% from YTD 2017. We are executing to our strategy of growing data-centric businesses, which collectively grew 25% year over year after adjusting for ISecG. Mobileye, which we acquired revenue by 21% in Q3 2017, recognized $151 million in revenue, contributingthe first nine months of 2018 compared to the growth first nine months of our data-centric businesses. The2017. Our PC-centric business also grew 3%, despite a declining PC market.9%.
GROSS MARGIN
(Dollars in chart are shown in billions; percentages indicate gross margin as a percentage of total revenue)
We derived most of our overall gross margin dollars from the sale of platform products in the CCG and DCG operating segments. Our overall gross margin dollars in Q1Q3 2018 increased by $571 million, or 6.2%$2.3 billion compared to Q1Q3 2017.
|
| | | | |
| (In Millions) | | Gross Margin Walk |
| $ | 9,731 |
| | Q1 2018 Gross Margin |
| 1,145 |
| | Higher gross margin from platform revenue |
| 240 |
| | Lower factory start-up costs, primarily associated with our 10nm process technology |
| (445 | ) | | Impact of the ISecG divestiture and lower gross margin from adjacent businesses |
| (270 | ) | | Period charges primarily associated with engineering samples and higher initial production costs from our 10nm products |
| (99 | ) | | Other |
| $ | 9,160 |
| | Q1 2017 Gross Margin |
|
| | |
| MD&A - RESULTS OF OPERATIONS | Consolidated Results & Analysis | 29 |
|
| | | | |
| (In Millions) | | Gross Margin Walk |
| $ | 12,360 |
| | Q3 2018 Gross Margin |
| 2,100 |
| | Higher gross margin from platform revenue |
| 315 |
| | Higher gross margin from adjacent businesses primarily from memory and modem |
| 305 |
| | Higher margin primarily from sell-through of previously reserved and non-qualified platform products |
| (390 | ) | | Higher platform unit costs, primarily from increased mix to performance products |
| (34 | ) | | Other |
| $ | 10,064 |
| | Q3 2017 Gross Margin |
| | | |
| $ | 32,510 |
| | YTD 2018 Gross Margin |
| 4,800 |
| | Higher gross margin from platform revenue |
| 230 |
| | Higher margin primarily from sell-through of previously reserved and non-qualified platform products |
| (835 | ) | | Higher platform unit cost primarily from increased mix to performance products |
| (5 | ) | | Other |
| $ | 28,320 |
| | YTD 2017 Gross Margin |
|
| | |
| MD&A - RESULTS OF OPERATIONS | Consolidated Results & Analysis | 30 |
OPERATING EXPENSES
(Dollars in charts are shown in billions; percentages indicate expenses as a percentage of total revenue)
|
| | | |
| | RESEARCH AND DEVELOPMENT | | MARKETING, GENERAL AND ADMINISTRATIVE |
Total research and development (R&D) and marketing, general and administrative (MG&A) expenses for Q1Q3 2018 were $5.2$5.0 billion, down 3.7%up 3% from Q1Q3 2017, and were $15.3 billion for YTD 2018, flat from YTD 2017. These expenses represent 32.4%26.3% of revenue for Q1Q3 2018 and 36.6%30.2% of revenue for Q1Q3 2017, and 29.4% of revenue in the first nine months of 2018 and 33.7% of revenue in the first nine months of 2017.
Research and Development
R&D was flatincreased by $219 million, or 6.8%, in Q1Q3 2018 compared to Q1Q3 2017, driven by the following:
- Lower expenses due to the ISecG divestiture
+ Higher investments in data-centric businesses
+ Higher profit-dependent compensation due to an increase in net income
- Lower expenses due to the Wind River Systems, Inc. (Wind River) divestiture
R&D increased by $328 million, or 3.4%, in the first nine months of 2018 compared to the first nine months of 2017, driven by the following:
+ Higher investments in data-centric businesses
+ Higher investments in 10nm process technology
+ Higher profit-dependent compensation due to an increase in net income
- Lower expenses due to the Intel Security Group (ISecG) divestiture
Marketing, General and Administrative
MG&A decreased by $199$56 million, or 9.5%3.4%, in Q1Q3 2018 compared to Q1 2017. This decrease wasQ3 2017, driven by the following:
- Lower acquisition costs due to Q3 2017 Mobileye acquisition
- Lower expenses due to the Wind River divestiture
+ Higher profit-dependent compensation due to an increase in net income
MG&A decreased by $380 million, or 6.8%, in the first nine months of 2018 compared to the first nine months of 2017, driven by the following:
- Lower acquisition costs due to Q3 2017 Mobileye acquisition
- Lower expenses due to the ISecG divestiture
- Change to the Intel Inside program
+ Higher profit-dependent compensation due to an increase in net income
|
| | |
| MD&A - RESULTS OF OPERATIONS | Consolidated Results & Analysis | 3031 |
CLIENT COMPUTING GROUP (CCG)
(Dollars in charts are shown in billions)
Overview
CCG is responsible for all aspects of the client computing continuum, which includes platforms designed for end-user form factors, focusing on high growth segments of 2-in-1, thin-and-light, commercial and gaming, and growing adjacencies as well as connectivity technologies.
|
| | | |
| | CCG REVENUE | | CCG OPERATING INCOME |
CCG Revenue Summary
Our revenue year over yearin Q3 2018 and in YTD 2018 increased fromdue to strong demand in commercial and gaming market segment demandsegments, and higher demand for our high-performance processors in desktop which more than offset the volume decline. Overall market conditions continued to improve in the quarter and we expect modest growth in the PC total addressable market (TAM) this year for the first time since 20111.
|
| | | | |
| (In Millions) | | CCG Revenue Walk |
| $ | 8,220 |
| | Q1 2018 CCG Revenue |
| 180 |
| | Desktop platform ASP |
| 167 |
| | Notebook platform volume |
| (128 | ) | | Desktop platform volume |
| 25 |
| | Other |
| $ | 7,976 |
| | Q1 2017 CCG Revenue |
|
| | | | |
| (In Millions) | | CCG Revenue Walk |
| $ | 10,234 |
| | Q3 2018 CCG Revenue |
| 483 |
| | Higher adjacent revenue, primarily from modem products |
| 430 |
| | Higher notebook platform volume |
| 300 |
| | Higher desktop platform ASP |
| 221 |
| | Higher notebook platform ASP |
| (60 | ) | | Other |
| $ | 8,860 |
| | Q3 2017 CCG Revenue |
| | | |
| $ | 27,182 |
| | YTD 2018 CCG Revenue |
| 805 |
| | Higher desktop platform ASP |
| 755 |
| | Higher notebook platform volume |
| 593 |
| | Higher adjacent revenue, primarily from modem products |
| 357 |
| | Higher notebook platform ASP |
| (316 | ) | | Lower desktop platform volume |
| (60 | ) | | Other |
| $ | 25,049 |
| | YTD 2017 CCG Revenue |
|
| | | | |
Key Revenue Metrics | | |
| | | Q1 2018 vs. Q1 2017 |
Desktop Platform | | | |
| Volume | | down | (6)% |
| ASP | | up | 7% |
| | | | |
Notebook Platform | | | |
| Volume | | up | 4% |
| ASP | | up | 1% |
| | | | |
Adjacent Products | | | |
| Revenue | | up | 4% |
1 Source: Intel calculated PC TAM derived from industry analyst reports and internal estimates.
|
| | |
| MD&A - RESULTS OF OPERATIONS | Segment Results & Analysis | 3132 |
|
| | | | |
| (In Millions) | | CCG Operating Income Walk |
| $ | 2,791 |
| | Q1 2018 CCG Operating Income |
| (420 | ) | | Period charges primarily associated with engineering samples and higher initial production costs from our 10nm products |
| (115 | ) | | Lower gross margin from adjacent businesses, primarily due to initial production costs of our new modem product |
| 245 |
| | Higher gross margin from CCG platform revenue |
| 50 |
| | Other |
| $ | 3,031 |
| | Q1 2017 CCG Operating Income |
|
| | | | | | | |
| Key Revenue Metrics | | | | |
| | | | Q3 2018 vs. Q3 2017 | | YTD 2018 vs. YTD 2017 |
| Desktop Platform | | | | | | |
| | Volume | | up | 1% | | down | (5)% |
| | ASP | | up | 10% | | up | 10% |
| | | | | | | | |
| Notebook Platform | | | | | | |
| | Volume | | up | 8% | | up | 5% |
| | ASP | | up | 4% | | up | 2% |
| | | | | | | | |
| Adjacent Products | | | | | | |
| | Revenue | | up | 66% | | up | 31% |
|
| | | | |
| (In Millions) | | CCG Operating Income Walk |
| $ | 4,532 |
| | Q3 2018 CCG Operating Income |
| 840 |
| | Higher gross margin from CCG platform revenue |
| 240 |
| | Higher margin primarily from sell-through of previously reserved and non-qualified platform products |
| 205 |
| | Higher CCG adjacent product margin, primarily from sell-through of previously non-qualified modem |
| (215 | ) | | Higher CCG platform unit cost primarily from increased mix to performance products |
| (140 | ) | | Higher period charges primarily associated with factory startup costs as we continue to ramp 10nm process technology |
| 2 |
| | Other |
| $ | 3,600 |
| | Q3 2017 CCG Operating Income |
| | | |
| $ | 10,557 |
| | YTD 2018 CCG Operating Income |
| 1,540 |
| | Higher gross margin from CCG platform revenue |
| (505 | ) | | Higher CCG platform unit cost due to increased mix to performance products |
| (400 | ) | | Higher period charges primarily associated with factory startup costs and engineering samples as we continue to ramp 10nm process technology |
| 266 |
| | Other |
| $ | 9,656 |
| | YTD 2017 CCG Operating Income |
DATA CENTER GROUP (DCG)
(Dollars in charts are shown in billions)
Overview
DCG develops workload-optimized platforms for compute, storage, network, and related functions, which are designed for and sold into the enterprise and government, cloud, and communications service providers market segments.
|
| | | |
| | DCG REVENUE | | DCG OPERATING INCOME |
|
| | |
| MD&A - RESULTS OF OPERATIONS | Segment Results & Analysis | 33 |
DCG Revenue Summary
Our revenue grew year over yearin Q3 2018 and in YTD 2018 due to strength from strength across allcloud and communication service provider market segments and adoption of 14nm Intel® Xeon® Scalable processors, which drove ASP up. We had strong volumeheightened demand for data intensive workloads and macroeconomic momentum in cloud, improved market conditions in enterprise and government, and increased market segment share inwith communication service provider.providers.
| | | (In Millions) | (In Millions) | | DCG Revenue Walk | (In Millions) | | DCG Revenue Walk |
| $ | 5,234 |
| | Q1 2018 DCG Revenue | 6,139 |
| | Q3 2018 DCG Revenue |
| 614 |
| | DCG platform volume | |
| 331 |
| | DCG platform ASP | |
| 57 |
| | Other | |
| 673 | | 673 |
| | Higher DCG platform volume |
| 525 | | 525 |
| | Higher DCG platform ASP |
| 63 | | 63 |
| | Adjacent revenue |
| $ | 4,232 |
| | Q1 2017 DCG Revenue | 4,878 |
| | Q3 2017 DCG Revenue |
| | | | |
| $ | | 16,922 |
| | YTD 2018 DCG Revenue |
| 1,854 | | 1,854 |
| | Higher DCG platform volume |
| 1,363 | | 1,363 |
| | Higher DCG platform ASP |
| 223 | | 223 |
| | Adjacent revenue |
| $ | | 13,482 |
| | YTD 2017 DCG Revenue |
| | Markets Segment Revenue Growth1 | | Q1 2018 vs. Q1 2017 | | Key Revenue Metrics | | Q1 2018 vs. Q1 2017 | | Q3 2018 vs. Q3 2017 | | Key Revenue Metrics | | Q3 2018 vs. Q3 2017 | | YTD 2018 vs. YTD 2017 |
| Cloud service provider | | up | 45% | | DCG Platform | | | up | 50% | | DCG Platform | |
| Enterprise and government | | up | 3% | | Volume | | up | 16% | | up | 1% | | Volume | | up | 15% | | up | 15% |
| Communication service provider | | up | 33% | | ASP | | up | 7% | | up | 30% | | ASP | | up | 10% | | up | 10% |
| | | | |
1 DCG platform products are sold across all three market segments. | 1 DCG platform products are sold across all three market segments. | | Adjacent Products | | | 1 DCG platform products are sold across all three market segments. | | Adjacent Products | | | |
| | | Revenue | | up | 16% | | | Revenue | | up | 14% | | up | 20% |
|
| | | | |
| (In Millions) | | DCG Operating Income Walk |
| $ | 3,082 |
| | Q3 2018 DCG Operating Income |
| 1,120 |
| | Higher gross margin from DCG platform revenue |
| (145 | ) | | Higher DCG platform unit cost |
| (130 | ) | | Higher DCG operating expenses |
| (18 | ) | | Other |
| $ | 2,255 |
| | Q3 2017 DCG Operating Income |
| | | |
| $ | 8,421 |
| | YTD 2018 DCG Operating Income |
| 2,995 |
| | Higher gross margin from DCG platform revenue |
| 230 |
| | Lower factory start-up costs, primarily associated with our 10nm process technology |
| (320 | ) | | Higher DCG platform unit cost |
| 113 |
| | Other |
| $ | 5,403 |
| | YTD 2017 DCG Operating Income |
|
| | |
| MD&A - RESULTS OF OPERATIONS | Segment Results & Analysis | 3234 |
|
| | | | |
| (In Millions) | | DCG Operating Income Walk |
| $ | 2,602 |
| | Q1 2018 DCG Operating Income |
| 870 |
| | Higher gross margin from DCG platform revenue |
| 115 |
| | Lower factory start-up costs, primarily associated with our 10nm process technology |
| 130 |
| | Other |
| $ | 1,487 |
| | Q1 2017 DCG Operating Income |
INTERNET OF THINGS GROUP (IOTG)
(Dollars in charts are shown in billions)
Overview
IOTG develops and sells high-performance Internet of Things compute solutions for retail, automotive, industrial, and video surveillance market segments, along with a broad range of other embedded applications. These market-driven solutions utilize silicon and software assets from our data center and client businesses to expand our compute footprint into Internet of Things market segments.
|
| | | |
| | IOTG REVENUE | | IOTG OPERATING INCOME |
Revenue and Operating Income Summary
Net revenue increased $119was $919 million, up $70 million, driven primarily by $257$167 million higher IOTG platform unit sales due to broad business strength. The increase in revenue was partially offset by $105 million lower adjacent revenue primarily due to our divestiture of Wind River in Q2 2018, which negatively impacted the revenue comparison by approximately $75 million. Operating income was $321 million, up $175 million, primarily driven by higher revenue.
Net revenue was $2.6 billion, up $349 million, driven primarily by $612 million higher IOTG platform unit sales, partially offset by $170$219 million lower IOTG platform ASPs. Revenue grew due to strength across the retail, industrial, and videoother market segments. Operating income increased $122was $791 million, up $401 million driven by higher revenue lower costs from the mix of our processors, and lower spending as autonomous driving investment shifted to Mobileye.other businesses.
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| | |
| MD&A - RESULTS OF OPERATIONS | Segment Results & Analysis | 3335 |
NON-VOLATILE MEMORY SOLUTIONS GROUP (NSG)
(Dollars in charts are shown in billions)
Overview
NSG offers lntel® Optane™ and lntel® 3D NAND technologies, which drive innovation in solid-state drives (SSDs). and other memory products. The primary customers are enterprise and cloud-based data centers, users of business and consumer desktops and laptops, and a variety of embedded and Internet of Things application providers.
|
| | | |
| | NSG REVENUE | | NSG OPERATING INCOME |
Revenue and Operating Income Summary
Net revenue increased $174was $1.1 billion, up $190 million, driven by $619$686 million higher unit sales due to strong demand in data center and the growth of component and Intel Optane technology products, offset by $445$497 million lower ASP due to market condition and mix of products. NSG had operating income of $160 million in Q3 2018, up $212 million, due to the continued ramp of our triple-level cell (TLC) NAND and 64-Layer product lines, which drove higher unit sales and lower unit cost more than offsetting the decline in ASP, and a total of $160 million earned government grants benefiting Q3 2018.
Net revenue was $3.2 billion, up $569 million, driven by $1.9 billion higher unit sales due to continued demand in data center and the growth of component and Intel Optane technology products, offset by $1.4 billion lower ASP due to market condition and mix of products. Operating loss decreased $48income was $14 million, up $305 million, as our triple-level cell (TLC) NAND and 64-Layer product lines continued to ramp, driving higher unit sales and lower unit cost, which outpacedmore than offset the decline in ASP. In addition, we had a total of $160 million earned government grants benefiting Q3 2018. We now expect NSG operating income to be approximately break-even for the full year.
PROGRAMMABLE SOLUTIONS GROUP (PSG)
(Dollars in charts are shown in billions)
Overview
PSG offers programmable semiconductors, primarily field-programmable gate arrays (FPGAs) and related products for a broad range of market segments, including communications, data center, industrial, military, and automotive.
|
| | | |
| | PSG REVENUE | | PSG OPERATING INCOME |
Revenue and Operating Income Summary
PSG revenue was $498 million, up $73 million year over year, driven by strength in data center and embedded market segments as well as last-time buys of our legacy products and growth of our advanced products, based on 28nm, 20nm, and 14nm process technologies, which grew over 40% in the quarter. Operating income was $97 million, up $5 million year over year. 
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| | |
| MD&A - RESULTS OF OPERATIONS | Segment Results & Analysis | 3436 |
Revenue and Operating Income Summary
PSG revenue was $496 million, up $27 million, driven by strength in the data center and communications market segments and growth of our advanced products (28nm, 20nm, and 14nm process technologies), which collectively grew roughly 55% in the quarter. Operating income was $106 million, down $7 million.
PSG revenue was $1.5 billion, up $177 million, driven by strength in the data center and embedded market segments as well as last-time buys of our legacy products and growth of our advanced products. Operating income was $304 million, roughly flat year over year.
GAINS (LOSSES) ON EQUITY INVESTMENTS AND INTEREST AND OTHER, NET
| | | (In Millions) | | Q1 2018 | | Q1 2017 | | Q3 2018 | | Q3 2017 | | YTD 2018 | | YTD 2017 |
| Gains (losses) on equity investments, net | | $ | 643 |
| | $ | 252 |
| | $ | (75 | ) | | $ | 846 |
| | $ | 365 |
| | $ | 1,440 |
|
| Interest and other, net | | $ | (102 | ) | | $ | (69 | ) | | $ | (132 | ) | | $ | (57 | ) | | $ | 225 |
| | $ | 262 |
|
Gains (losses) on equity investments, net
We recognized ongoing mark to market net gains on our marketable equity securities of $606$8 million in Q1Q3 2018 and $379 million in the first nine months of 2018, primarily related to changes in value of our interests inASML Holding N.V. (ASML) and Cloudera, Inc. In Q1 2017, weGains and losses on equity investments, net in Q3 2018 were primarily driven by an impairment charge of $290 million to our equity method investment in Intel-Micron Flash Technologies (IMFT). We recognized $235$944 million of net realized gains on sales in Q3 2017 and $2.0 billion in the first nine months of 2017, primarily related to sales of a portion of our interest in ASML. The net realized gains were partially offset by $613 million of impairment charges and our share of equity method investee losses for the first nine months of 2017.
Interest and other, net
We recognized a net gain for the first nine months of 2018 primarily due to a $494 million gain on the divestiture of Wind River in Q2 2018. We recognized a net gain for the first nine months of 2017 primarily due to a $387 million gain on the divestiture of ISecG in Q2 2017.
We recognized a loss of $211 million in interest and other, net in the first nine months of 2018 as a result of satisfying conversion obligations for a portion of our $2.0 billion 3.25% junior subordinated 2039 convertible debentures.
PROVISION FOR TAXES
| | | (Dollars in Millions) | | Q1 2018 | | Q1 2017 | | Q3 2018 | | Q3 2017 | | YTD 2018 | | YTD 2017 |
| Income before taxes | | $ | 5,011 |
| | $ | 3,815 |
| | $ | 7,142 |
| | $ | 5,930 |
| | $ | 17,682 |
| | $ | 14,317 |
|
| Provision for taxes | | $ | 557 |
| | $ | 851 |
| | $ | 744 |
| | $ | 1,414 |
| | $ | 1,824 |
| | $ | 4,029 |
|
| Effective tax rate | | 11.1 | % | | 22.3 | % | | 10.4 | % | | 23.8 | % | | 10.3 | % | | 28.1 | % |
Our effective tax rate was 10.4% in was 11.1% in Q1Q3 2018 compared to 22.3%23.8% in Q1Q3 2017. The reduction fromdecrease was primarily driven by the U.S. Tax Cuts and Jobs Act (Tax Reform) of, which reduced the U.S. statutory federal tax rate from 35%35.0% to 21%21.0%.
Our effective income tax rate was 10.3% in the first nine months of 2018 compared to 28.1% in the first nine months of 2017. Tax Reform reduced the U.S. statutory federal tax rate from 35.0% to 21.0%, which favorably impacted our effective tax rate in the first nine months of 2018 by approximately nine percentage points. Further, the new Tax Reform provisions related to foreign-derived intangible income favorably impacted our effective tax rate by approximately twofour percentage points, and the provision related to low-taxed intangible income and the repeal of the domestic manufacturing deduction each unfavorably impacted our effective tax rate by approximately one percentage point. In addition,The decrease in the first nine months of 2018 was also driven by non-recurring items, primarily our divestiture of ISecG in the second quarter of 2017 which increased our effective tax rate decrease was favorably impacted in Q1the first nine months of 2017 by approximately five percentage points and the adjustment to our provisional estimates for Tax Reform in the first nine months of 2018 which reduced our effective tax rate by one-time items unrelated to Tax Reform.approximately two percentage points.
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| MD&A - RESULTS OF OPERATIONS | Segment Results & Analysis | 37 |
LIQUIDITY AND CAPITAL RESOURCES
We consider the following when assessing our liquidity and capital resources:
| | | (Dollars in Millions) | | Mar 31,
2018 | | Dec 30,
2017 | | Sep 29,
2018 | | Dec 30,
2017 |
| Cash and cash equivalents, short-term investments, and trading assets | | $ | 16,197 |
| | $ | 14,002 |
| | $ | 13,186 |
| | $ | 14,002 |
|
| Other long-term investments | | $ | 3,435 |
| | $ | 3,712 |
| | $ | 3,562 |
| | $ | 3,712 |
|
| Loans receivable and other | | $ | 1,105 |
| | $ | 1,097 |
| | $ | 1,404 |
| | $ | 1,097 |
|
| Reverse repurchase agreements with original maturities greater than three months | | $ | 250 |
| | $ | 250 |
| | $ | 250 |
| | $ | 250 |
|
| Total debt | | $ | 28,612 |
| | $ | 26,813 |
| | $ | 27,874 |
| | $ | 26,813 |
|
| Temporary equity | | $ | 801 |
| | $ | 866 |
| | $ | 515 |
| | $ | 866 |
|
| Debt as percentage of permanent stockholders’ equity | | 40.8 | % | | 38.8 | % | | 39.0 | % | | 38.8 | % |
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. When assessing our sources of liquidity we include investments as shown in the preceding table. Substantially all of our investments in debt instruments and financing receivables are in investment-grade securities.
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 $10.0 billion. As of March 31,September 29, 2018, $2.2$1.7 billion of commercial paper remained outstanding.
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.
|
| | |
MD&A - RESULTS OF OPERATIONS | Consolidated Results & Analysis | 35 |
|
| | | | | |
| | CASH FROM OPERATIONS $B | | CAPITAL EXPENDITURES $B | | CASH TO STOCKHOLDERS $B |
| | | | | Three Months Ended | | Nine Months Ended |
| (In Millions) | | Mar 31,
2018 | | Apr 1,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Net cash provided by operating activities | | $ | 6,284 |
| | $ | 3,898 |
| | $ | 22,532 |
| | $ | 14,869 |
|
| Net cash used for investing activities | | (4,791 | ) | | (2,778 | ) | | (9,419 | ) | | (10,532 | ) |
| Net cash provided by (used for) financing activities | | (1,372 | ) | | (1,746 | ) | | (13,139 | ) | | (822 | ) |
| Net increase (decrease) in cash and cash equivalents | | $ | 121 |
| | $ | (626 | ) | | $ | (26 | ) | | $ | 3,515 |
|
Operating Activities
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.
For Q1the first nine months of 2018 compared to Q1the first nine months of 2017, the $2.4$7.7 billion increase in cash provided by operations was primarily due to higher net income and changes in working capital, which benefited from receipts of customer deposits and prepaid supply agreements. These increases were partiallyagreements, offset by adjustments to net income for non-cash items, primarily driven by gains on equity investments.increased tax payments.
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| | |
| MD&A - RESULTS OF OPERATIONS | Consolidated Results & Analysis | 38 |
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 higherlower for Q1the first nine months of 2018 compared to Q1the first nine months of 2017 primarily due to lower cash paid on acquisitions. This was partially offset by increased capital expenditures and decreased proceeds from divestitures, decreased sales of equity investments (substantially all from ASML sales), and increased net purchases of trading assets and higher capital expenditures.available-for-sale debt investments.
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 lowerhigher in Q1the first nine months of 2018 compared to Q1the first nine months of 2017 primarily due to thedecreased long-term debt issuance and increased repurchases of commercial paper in Q1 2018. Thiscommon stock. The cash used for financing activities was partially offset by increased repurchases of common stock, repayment of debt, and dividends to stockholders.increases in commercial paper.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are affected by changes in currency exchange and interest rates, as well as equity and commodity prices. For discussion about market risk and sensitivity analysis related to changes in currency exchange rates, interest rates, equity prices, and commodity prices refer to Quantitative"Quantitative and Qualitative Disclosures About Market RiskRisk" within MD"MD&A - Results of Operations," in our 2017 Form 10-K.
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| | |
| MD&A - RESULTS OF OPERATIONS | Consolidated Results & Analysis | 3639 |
RISK FACTORS
The risks described in "Risk Factors" within "Other Key Information" in our 2017 Form 10-K and our Q2 2018 Form 10-Q 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 in our 2017 Form 10-K, as updated by our Q2 2018 Form 10-Q, remains current in all material respects.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on management’s evaluation (with the participation of our Chief Executive Officer (CEO)principal executive officer and Chief Financial Officer (CFO))principal financial officer), as of the end of the period covered by this report, our CEOprincipal executive officer and CFO haveprincipal financial officer has 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
We implemented controls relating to adoption of the new revenue recognition and financial instruments accounting standards that were adopted in fiscal year 2018 to ensure that the necessary revenue contracts, equity investments, and related policies and process flows were sufficiently reviewed to identify adoption impacts. 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 March 31,September 29, 2018 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 CEOprincipal executive officer and CFO,principal financial officer, 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.
NON-GAAP FINANCIAL MEASURES
In addition to disclosing financial results in accordance with GAAP, this document contains references to the non-GAAP financial measures described below. We believe these non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable comparison of financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business and measuring our performance.
Our non-GAAP operating income and diluted earnings per share reflect adjustments for the following items, as well as the related income tax effects. Income tax effects have been calculated using an appropriate tax rate for each adjustment. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations from these results should be carefully evaluated.
Acquisition-related adjustments:adjustments
The non-GAAP financial measures disclosed by the company exclude certain business combination accounting adjustments and certain expenses related to acquisitions.
Inventory valuation adjustments: Business combination accounting principles require us to measure acquired inventory at fair value. The fair value of inventory reflects the acquired company's cost of manufacturing plus a portion of the expected profit margin. The non-GAAP adjustments to our cost of sales exclude the expected profit margin component that is recorded under business combination accounting principles associated with our acquisition of Mobileye. We believe the adjustments are useful to investors as an additional means to reflect cost of sales and gross margin trends of our business.
Amortization of acquisition-related intangible assets: Amortization of acquisition-related intangible assets consists of amortization of intangible assets such as developed technology, brands, and customer relationships acquired in connection with business combinations. We record charges related to the amortization of these intangibles within both cost of sales and operating expenses in our GAAP financial statements. Amortization charges for our acquisition-related intangible assets are inconsistent in size and are significantly impacted by the timing and valuation of our acquisitions. Consequently, our non-GAAP adjustments exclude these charges to facilitate an evaluation of our current operating performance and comparisons to our past operating performance.
Other acquisition-related charges: Other acquisition-related charges exclude the impact of other charges associated with the acquisition of Mobileye. These charges primarily include bankers' fees, compensation-related costs, and valuation charges for stock-based compensation incurred related to the acquisition. We believe these adjustments are useful to investors as an additional means to reflect the spending trends of our business.
Restructuring and other charges:charges
Restructuring charges are costs associated with a formal restructuring plan and are primarily related to employee severance and benefit arrangements. Other charges include asset impairments, pension charges, and costs associated with the Intel Security GroupISecG divestiture. We exclude restructuring and other charges, including any adjustments to charges recorded in prior periods, for purposes of calculating certain non-GAAP measures. We believe that these costs do not reflect our current operating performance. Consequently, our non-GAAP adjustments exclude these charges to facilitate an evaluation of our current operating performance and comparisons to our past operating performance.
MarkOngoing mark to market on marketable equity securities:securities
We exclude gains and losses resulting from ongoing mark to market adjustments of our marketable equity securities when calculating certain non-GAAP measures, as we do not believe thethis volatility generally associated with these securities correlates to our core operational performance. Consequently, our non-GAAP earnings per share figures exclude these impacts to facilitate an evaluation of our current performance and comparisons to our past operating performance.
Planned Divestiture of Wind River:Tax Reform adjustment
We recognized a tax provision adjustment in the first quarter ofDuring 2018, duewe made adjustments to our planned divestiture of Wind River Systems, Inc. (Wind River). Consequently, ourTax Reform provisional tax estimates that we recorded in Q4 2017. We exclude these provisional tax adjustments when calculating certain non-GAAP earnings per share figures excludemeasures. We believe making this impact to facilitate anadjustment facilitates a better evaluation of our current operating performance and comparisons to our past performance.operating results.
Following are the reconciliations of our most comparable GAAP measures to our non-GAAP measures presented: | | | | | | | | Three Months Ended |
| (In Millions) | | Mar 31,
2018 | | Apr 1,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Operating income | | $ | 4,470 |
| | $ | 3,632 |
| | $ | 7,349 |
| | $ | 5,141 |
|
| Amortization of acquisition-related intangibles | | 325 |
| | 247 |
| |
| Inventory valuation adjustments | | | — |
| | 27 |
|
| Amortization of acquisition-related intangible assets | | | 326 |
| | 292 |
|
| Other acquisition-related charges | | | — |
| | 113 |
|
| Restructuring and other charges | | — |
| | 80 |
| | (72 | ) | | 4 |
|
| Non-GAAP operating income | | $ | 4,795 |
| | $ | 3,959 |
| |
| Non-GAAP Operating income | | | $ | 7,603 |
| | $ | 5,577 |
|
| | | | | | | | Three Months Ended |
| | | Mar 31,
2018 | | Apr 1,
2017 | | Sep 29,
2018 | | Sep 30,
2017 |
| Earnings per share - Diluted | | $ | 0.93 |
| | $ | 0.61 |
| | $ | 1.38 |
| | $ | 0.94 |
|
| Amortization of acquisition-related intangibles | | 0.07 |
| | 0.05 |
| |
| Inventory valuation adjustments | | | — |
| | 0.01 |
|
| Amortization of acquisition-related intangible assets | | | 0.07 |
| | 0.06 |
|
| Restructuring and other charges | | — |
| | 0.01 |
| | (0.02 | ) | | — |
|
| Mark to market on marketable equity securities | | (0.13 | ) | | — |
| |
Income tax effect (2018 includes $.01 tax impact from Wind River planned divestiture) | | — |
| | (0.01 | ) | |
| Other acquisition-related charges | | | — |
| | 0.02 |
|
| Ongoing mark to market on marketable equity securities | | | — |
| | — |
|
| Tax Reform | | | (0.02 | ) | | — |
|
| Income tax effect | | | (0.01 | ) | | (0.02 | ) |
| Non-GAAP Earnings per share - Diluted | | $ | 0.87 |
| | $ | 0.66 |
| | $ | 1.40 |
| | $ | 1.01 |
|
|
| | |
| OTHER KEY INFORMATION | | 3841 |
ISSUER PURCHASES OF EQUITY SECURITIES
We have an ongoing authorization, originally approved by our Board of Directors in 2005 and subsequently amended, to repurchase shares of our common stock in open market or negotiated transactions. As of March 31,September 29, 2018, we were authorized to repurchase up to $75.0 billion, of which $11.2$4.7 billion remained available.
Common stock repurchase activity under our publicly announced stock repurchase plan during the firstthird quarter of 2018 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
Under the Plans
(In Millions) |
| December 31, 2017 - January 27, 2018 | | 18.2 |
| | $ | 44.55 |
| | $ | 12,379 |
|
| January 28, 2018 - February 24, 2018 | | 3.1 |
| | $ | 48.33 |
| | $ | 12,228 |
|
| February 25, 2018 - March 31, 2018 | | 19.4 |
| | $ | 51.04 |
| | $ | 11,237 |
|
| Total | | 40.8 |
| | $ | 47.93 |
| | |
|
| | | | | | | | | | | |
| Period | | Total Number
of Shares
Purchased
(In Millions) | | Average Price
Paid Per Share | | Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
(In Millions) |
| July 1, 2018 - July 28, 2018 | | 19.6 |
| | $ | 50.86 |
| | $ | 6,228 |
|
| July 29, 2018 - August 25, 2018 | | 30.5 |
| | $ | 49.17 |
| | $ | 4,728 |
|
| August 26, 2018 - September 29, 2018 | | — |
| | $ | — |
| | $ | 4,728 |
|
| Total | | 50.1 |
| | $ | 49.83 |
| | |
We issue RSUs as part of our equity incentive plans. 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 RSUs 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.
|
| | |
| OTHER KEY INFORMATION | | 3942 |
EXHIBITS
|
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Filing Date | | Filed or Furnished Herewith |
| 3.1 | | | | 8-K | | 000-06217 | | 3.1 | | 5/22/2006 | | |
| 3.2 | | | | 8-K | | 000-06217 | | 3.2 | | 3/19/2018 | | |
| 12.1 | | | | | | | | | | | | X |
| 31.1 | | | | | | | | | | | | X |
| 31.2 | | | | | | | | | | | | X |
| 32.1 | | | | | | | | | | | | 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 |
|
| | | | | | | | | | | | |
| | | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | File Number | | Exhibit | | Filing Date | | Filed or Furnished Herewith |
| 3.1 | | | | 8-K | | 000-06217 | | 3.1 | | 5/22/2006 | | |
| 3.2 | | | | 8-K | | 000-06217 | | 3.2 | | 3/19/2018 | | |
10.1† | | | | | | | | | | | | X |
10.2† | | | | | | | | | | | | X |
10.3† | | | | | | | | | | | | X |
| 12.1 | | | | | | | | | | | | X |
| 31.1 | | | | | | | | | | | | X |
| 32.1 | | | | | | | | | | | | 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 |
| |
† | Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate. |
|
| | |
| OTHER KEY INFORMATION | | 4043 |
FORM 10-Q CROSS-REFERENCE INDEX
|
| | |
| Item Number | Item | |
| Part I - Financial Information | |
| Item 1. | Financial Statements | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations: | |
| | Results of operations | |
| | Liquidity and capital resources | |
| | Off balanceOff-balance sheet arrangements | (a) |
| | Contractual obligations | (b) |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
| Item 4. | Controls and Procedures | |
| | | |
| Part II - Other Information | |
| Item 1. | Legal Proceedings | |
| Item 1A. | Risk Factors | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
| Item 3. | Defaults Upon Senior Securities | Not applicable |
| Item 4. | Mine Safety Disclosures | Not applicable |
| Item 5. | Other Information | Not applicable |
| Item 6. | Exhibits | |
| | | |
| Signatures | | |
| |
| (a) | As of March 31,September 29, 2018, we did not have any significant off-balance-sheetoff-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. |
| |
| (b) | There were no material changes to our significant contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 30, 2017. |
|
| | |
| OTHER KEY INFORMATION | | 4144 |
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: | April 26,October 25, 2018 | | By: | | /s/ ROBERT H. SWAN |
| | | | | | Robert H. Swan |
| | | | | | Interim Chief Executive Officer and Principal Executive Officer; Executive Vice President, Chief Financial Officer and Principal Financial Officer |
| | | | | | |
| Date: | April 26,October 25, 2018 | | By: | | /s/ KEVIN T. MCBRIDE |
| | | | | | Kevin T. McBride |
| | | | | | Vice President of Finance, Corporate Controller and Principal Accounting Officer |
