10Q Document 6.28.2014
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 June 28, 2014. |
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| | | | | | |
Large accelerated filer þ | | Accelerated filer ¨ | | Non-accelerated filer ¨ | | Smaller reporting company ¨ |
| | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Shares outstanding of the Registrant’s common stock:
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| | |
Class | | Outstanding as of July 18, 2014 |
Common stock, $0.001 par value | | 4,951 million |
PART I – FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS |
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
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| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In Millions, Except Per Share Amounts) | | Jun 28, 2014 | | Jun 29, 2013 | | Jun 28, 2014 | | Jun 29, 2013 |
Net revenue | | $ | 13,831 |
| | $ | 12,811 |
| | $ | 26,595 |
| | $ | 25,391 |
|
Cost of sales | | 4,914 |
| | 5,341 |
| | 10,065 |
| | 10,855 |
|
Gross margin | | 8,917 |
| | 7,470 |
| | 16,530 |
| | 14,536 |
|
Research and development | | 2,859 |
| | 2,516 |
| | 5,705 |
| | 5,043 |
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Marketing, general and administrative | | 2,061 |
| | 2,165 |
| | 4,108 |
| | 4,112 |
|
Restructuring and asset impairment charges | | 81 |
| | — |
| | 218 |
| | — |
|
Amortization of acquisition-related intangibles | | 72 |
| | 70 |
| | 145 |
| | 143 |
|
Operating expenses | | 5,073 |
| | 4,751 |
| | 10,176 |
| | 9,298 |
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Operating income | | 3,844 |
| | 2,719 |
| | 6,354 |
| | 5,238 |
|
Gains (losses) on equity investments, net | | 95 |
| | 11 |
| | 143 |
| | (15 | ) |
Interest and other, net | | (17 | ) | | (37 | ) | | 95 |
| | (87 | ) |
Income before taxes | | 3,922 |
| | 2,693 |
| | 6,592 |
| | 5,136 |
|
Provision for taxes | | 1,126 |
| | 693 |
| | 1,866 |
| | 1,091 |
|
Net income | | $ | 2,796 |
| | $ | 2,000 |
| | $ | 4,726 |
| | $ | 4,045 |
|
Basic earnings per common share | | $ | 0.56 |
| | $ | 0.40 |
| | $ | 0.95 |
| | $ | 0.82 |
|
Diluted earnings per common share | | $ | 0.55 |
| | $ | 0.39 |
| | $ | 0.92 |
| | $ | 0.79 |
|
Cash dividends declared per common share | | $ | — |
| | $ | — |
| | $ | 0.45 |
| | $ | 0.45 |
|
Weighted average common shares outstanding: | | | | | | | | |
Basic | | 4,981 |
| | 4,978 |
| | 4,977 |
| | 4,963 |
|
Diluted | | 5,123 |
| | 5,106 |
| | 5,120 |
| | 5,093 |
|
See accompanying notes.
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
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| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In Millions) | | Jun 28, 2014 | | Jun 29, 2013 | | Jun 28, 2014 | | Jun 29, 2013 |
Net income | | $ | 2,796 |
| | $ | 2,000 |
| | $ | 4,726 |
| | $ | 4,045 |
|
Other comprehensive income, net of tax: | | | | | | | | |
Change in net unrealized holding gains (losses) on available-for-sale investments | | (9 | ) | | 434 |
| | (86 | ) | | 607 |
|
Change in net deferred tax asset valuation allowance | | (2 | ) | | — |
| | (4 | ) | | — |
|
Change in net unrealized holding gains (losses) on derivatives | | (3 | ) | | 49 |
| | 11 |
| | (107 | ) |
Change in net prior service costs | | (1 | ) | | 1 |
| | (43 | ) | | 2 |
|
Change in actuarial valuation | | 7 |
| | 36 |
| | 5 |
| | 70 |
|
Change in net foreign currency translation adjustment | | (28 | ) | | 35 |
| | (6 | ) | | (28 | ) |
Other comprehensive income (loss) | | (36 | ) | | 555 |
| | (123 | ) | | 544 |
|
Total comprehensive income | | $ | 2,760 |
| | $ | 2,555 |
| | $ | 4,603 |
| | $ | 4,589 |
|
See accompanying notes.
INTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
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| | | | | | | | |
(In Millions) | | Jun 28, 2014 | | Dec 28, 2013 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 3,049 |
| | $ | 5,674 |
|
Short-term investments | | 4,491 |
| | 5,972 |
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Trading assets | | 9,771 |
| | 8,441 |
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Accounts receivable, net | | 3,489 |
| | 3,582 |
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Inventories | | 3,943 |
| | 4,172 |
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Deferred tax assets | | 2,255 |
| | 2,594 |
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Other current assets | | 2,008 |
| | 1,649 |
|
Total current assets | | 29,006 |
| | 32,084 |
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| | | | |
Property, plant and equipment, net of accumulated depreciation of $44,030 ($41,988 as of December 28, 2013) | | 33,115 |
| | 31,428 |
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Marketable equity securities | | 6,044 |
| | 6,221 |
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Other long-term investments | | 2,184 |
| | 1,473 |
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Goodwill | | 10,621 |
| | 10,513 |
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Identified intangible assets, net | | 4,697 |
| | 5,150 |
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Other long-term assets | | 6,126 |
| | 5,489 |
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Total assets | | $ | 91,793 |
| | $ | 92,358 |
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| | | | |
Liabilities and stockholders’ equity | | | | |
Current liabilities: | | | | |
Short-term debt | | $ | 14 |
| | $ | 281 |
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Accounts payable | | 2,960 |
| | 2,969 |
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Accrued compensation and benefits | | 2,409 |
| | 3,123 |
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Accrued advertising | | 1,067 |
| | 1,021 |
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Deferred income | | 2,171 |
| | 2,096 |
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Other accrued liabilities | | 3,630 |
| | 4,078 |
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Total current liabilities |
| 12,251 |
| | 13,568 |
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| | | | |
Long-term debt | | 13,180 |
| | 13,165 |
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Long-term deferred tax liabilities | | 4,187 |
| | 4,397 |
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Other long-term liabilities | | 2,928 |
| | 2,972 |
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Contingencies (Note 21) | |
| |
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Stockholders’ equity: | | | | |
Preferred stock | | — |
| | — |
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Common stock and capital in excess of par value, 4,948 shares issued and outstanding (4,967 as of December 28, 2013) | | 22,475 |
| | 21,536 |
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Accumulated other comprehensive income (loss) | | 1,120 |
| | 1,243 |
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Retained earnings | | 35,652 |
| | 35,477 |
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Total stockholders’ equity | | 59,247 |
| | 58,256 |
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Total liabilities and stockholders’ equity | | $ | 91,793 |
| | $ | 92,358 |
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See accompanying notes.
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
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| | | | | | | | |
| | Six Months Ended |
(In Millions) | | Jun 28, 2014 | | Jun 29, 2013 |
Cash and cash equivalents, beginning of period | | $ | 5,674 |
| | $ | 8,478 |
|
Cash flows provided by (used for) operating activities: | | | | |
Net income | | 4,726 |
| | 4,045 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation | | 3,600 |
| | 3,394 |
|
Share-based compensation | | 586 |
| | 587 |
|
Restructuring and asset impairment charges | | 218 |
| | — |
|
Excess tax benefit from share-based payment arrangements | | (65 | ) | | (38 | ) |
Amortization of intangibles | | 577 |
| | 661 |
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(Gains) losses on equity investments, net | | (90 | ) | | 60 |
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Deferred taxes | | (206 | ) | | (351 | ) |
Changes in assets and liabilities: | | | | |
Accounts receivable | | 89 |
| | 368 |
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Inventories | | 235 |
| | 195 |
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Accounts payable | | (103 | ) | | 184 |
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Accrued compensation and benefits | | (813 | ) | | (787 | ) |
Income taxes payable and receivable | | 88 |
| | 296 |
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Other assets and liabilities | | 112 |
| | 393 |
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Total adjustments | | 4,228 |
| | 4,962 |
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Net cash provided by operating activities | | 8,954 |
| | 9,007 |
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| | | | |
Cash flows provided by (used for) investing activities: | | | | |
Additions to property, plant and equipment | | (5,517 | ) | | (4,897 | ) |
Acquisitions, net of cash acquired | | (137 | ) | | (384 | ) |
Purchases of available-for-sale investments | | (5,113 | ) | | (7,322 | ) |
Sales of available-for-sale investments | | 409 |
| | 598 |
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Maturities of available-for-sale investments | | 5,555 |
| | 2,961 |
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Purchases of trading assets | | (6,825 | ) | | (9,616 | ) |
Maturities and sales of trading assets | | 5,544 |
| | 7,758 |
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Collection of loans receivable | | 17 |
| | 116 |
|
Origination of loans receivable | | — |
| | (100 | ) |
Investments in non-marketable equity investments | | (1,115 | ) | | (125 | ) |
Other investing | | 167 |
| | 182 |
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Net cash used for investing activities | | (7,015 | ) | | (10,829 | ) |
| | | | |
Cash flows provided by (used for) financing activities: | | | | |
Increase (decrease) in short-term debt, net | | (267 | ) | | (49 | ) |
Excess tax benefit from share-based payment arrangements | | 65 |
| | 38 |
|
Proceeds from sales of shares through employee equity incentive plans | | 1,005 |
| | 1,040 |
|
Repurchase of common stock | | (2,924 | ) | | (1,355 | ) |
Payment of dividends to stockholders | | (2,245 | ) | | (2,237 | ) |
Other financing | | (199 | ) | | (307 | ) |
Net cash used for financing activities | | (4,565 | ) | | (2,870 | ) |
| | | | |
Effect of exchange rate fluctuations on cash and cash equivalents | | 1 |
| | (8 | ) |
| | | | |
Net increase (decrease) in cash and cash equivalents | | (2,625 | ) | | (4,700 | ) |
| | | | |
Cash and cash equivalents, end of period | | $ | 3,049 |
| | $ | 3,778 |
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| | | | |
Supplemental disclosures of cash flow information: | | | | |
Cash paid during the period for: | | | | |
Interest, net of capitalized interest | | $ | 90 |
| | $ | 115 |
|
Income taxes, net of refunds | | $ | 1,935 |
| | $ | 1,134 |
|
See accompanying notes.
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited
Note 1: Basis of Presentation
We prepared our interim consolidated condensed financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles, consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended December 28, 2013. 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 interim information should be read in conjunction with the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 28, 2013.
Note 2: Recent Accounting Standards
In May 2014, the Financial Accounting Standards Board issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective for us beginning in the first quarter of 2017; early adoption is prohibited. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method nor have we determined the impact of the new standard on our consolidated condensed financial statements.
Note 3: Fair Value
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability. Our financial assets are measured and recorded at fair value, except for equity method investments, cost method investments, cost method loans receivable, and reverse repurchase agreements with original maturities greater than approximately three months. Most of our liabilities are not measured and recorded at fair value.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in less active markets, or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.
Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data.
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Assets and liabilities measured and recorded at fair value on a recurring basis at the end of each period were as follows:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 28, 2014 | | December 28, 2013 |
| | Fair Value Measured and Recorded at Reporting Date Using | | | | Fair Value Measured and Recorded at Reporting Date Using | | |
(In Millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | | | | | | | |
Corporate debt | | $ | 40 |
| | $ | 685 |
| | $ | — |
| | $ | 725 |
| | $ | 154 |
| | $ | 1,920 |
| | $ | — |
| | $ | 2,074 |
|
Financial institution instruments | | 97 |
| | 1,134 |
| | — |
| | 1,231 |
| | 887 |
| | 1,190 |
| | — |
| | 2,077 |
|
Government debt | | — |
| | 197 |
| | — |
| | 197 |
| | — |
| | 269 |
| | — |
| | 269 |
|
Reverse repurchase agreements | | — |
| | 168 |
| | — |
| | 168 |
| | — |
| | 400 |
| | — |
| | 400 |
|
Short-term investments: | | | | | | | | | | | | | | | | |
Corporate debt | | 218 |
| | 907 |
| | 31 |
| | 1,156 |
| | 274 |
| | 1,374 |
| | 19 |
| | 1,667 |
|
Financial institution instruments | | 195 |
| | 2,162 |
| | — |
| | 2,357 |
| | 194 |
| | 2,895 |
| | — |
| | 3,089 |
|
Government debt | | 227 |
| | 751 |
| | — |
| | 978 |
| | 183 |
| | 1,033 |
| | — |
| | 1,216 |
|
Trading assets: | | | | | | | | | | | | | | | | |
Asset-backed securities | | — |
| | 948 |
| | 75 |
| | 1,023 |
| | — |
| | 684 |
| | 4 |
| | 688 |
|
Corporate debt | | 2,315 |
| | 829 |
| | — |
| | 3,144 |
| | 2,161 |
| | 628 |
| | — |
| | 2,789 |
|
Financial institution instruments | | 1,133 |
| | 903 |
| | — |
| | 2,036 |
| | 1,188 |
| | 418 |
| | — |
| | 1,606 |
|
Government debt | | 1,708 |
| | 1,860 |
| | — |
| | 3,568 |
| | 1,625 |
| | 1,733 |
| | — |
| | 3,358 |
|
Other current assets: | | | | | | | | | | | | | | | | |
Derivative assets | | — |
| | 171 |
| | — |
| | 171 |
| | 48 |
| | 309 |
| | — |
| | 357 |
|
Loans receivable | | — |
| | 631 |
| | — |
| | 631 |
| | — |
| | 103 |
| | — |
| | 103 |
|
Marketable equity securities | | 5,927 |
| | 117 |
| | — |
| | 6,044 |
| | 6,221 |
| | — |
| | — |
| | 6,221 |
|
Other long-term investments: | | | | | | | | | | | | | | | | |
Asset-backed securities | | — |
| | — |
| | 8 |
| | 8 |
| | — |
| | — |
| | 9 |
| | 9 |
|
Corporate debt | | 868 |
| | 282 |
| | 19 |
| | 1,169 |
| | 228 |
| | 270 |
| | 27 |
| | 525 |
|
Financial institution instruments | | 273 |
| | 349 |
| | — |
| | 622 |
| | 90 |
| | 402 |
| | — |
| | 492 |
|
Government debt | | 215 |
| | 170 |
| | — |
| | 385 |
| | 259 |
| | 188 |
| | — |
| | 447 |
|
Other long-term assets: | | | | | | | | | | | | | | | | |
Derivative assets | | — |
| | 8 |
| | 30 |
| | 38 |
| | — |
| | 7 |
| | 29 |
| | 36 |
|
Loans receivable | | — |
| | 171 |
| | — |
| | 171 |
| | — |
| | 702 |
| | — |
| | 702 |
|
Total assets measured and recorded at fair value | | $ | 13,216 |
| | $ | 12,443 |
| | $ | 163 |
| | $ | 25,822 |
| | $ | 13,512 |
| | $ | 14,525 |
| | $ | 88 |
| | $ | 28,125 |
|
Liabilities | | | | | | | | | | | | | | | | |
Other accrued liabilities: | | | | | | | | | | | | | | | | |
Derivative liabilities | | $ | — |
| | $ | 283 |
| | $ | — |
| | $ | 283 |
| | $ | — |
| | $ | 372 |
| | $ | — |
| | $ | 372 |
|
Other long-term liabilities: | | | | | | | | | | | | | | | | |
Derivative liabilities | | — |
| | 13 |
| | — |
| | 13 |
| | — |
| | 50 |
| | — |
| | 50 |
|
Total liabilities measured and recorded at fair value | | $ | — |
| | $ | 296 |
| | $ | — |
| | $ | 296 |
| | $ | — |
| | $ | 422 |
| | $ | — |
| | $ | 422 |
|
Government debt includes instruments such as non-U.S. government bonds, U.S. agency securities, and U.S. Treasury securities. Financial institution instruments include instruments such as commercial paper, floating and fixed rate bonds, money market fund deposits, and time deposits.
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
During the first six months of 2014, we transferred approximately $365 million of corporate debt, financial institution instruments, government debt, and marketable equity securities from Level 1 to Level 2 of the fair value hierarchy, primarily based on reduced market activity for the underlying securities. During the first six months of 2014, we transferred approximately $345 million of corporate debt, government debt, and financial institution instruments from Level 2 to Level 1 of the fair value hierarchy, primarily based on greater market activity for the underlying securities ($255 million of corporate debt, financial institution instruments, and government debt during the first six months of 2013). Our policy is to reflect transfers between the fair value hierarchy levels at the beginning of the quarter in which a change in circumstances resulted in the transfer.
Investments in Debt Instruments
Debt instruments reflected in the preceding table include investments such as asset-backed securities, corporate debt, financial institution instruments, government debt, and reverse repurchase agreements classified as cash equivalents. We classify our debt instruments as Level 2 when we use observable market prices for identical securities that are traded in less active markets. When observable market prices for identical securities are not available, we price the debt investments using our own models, such as a discounted cash flow model, or non-binding market consensus prices based on the proprietary valuation models of pricing providers or brokers. We corroborate non-binding market consensus prices with observable market data using statistical models when observable market data exists, quoted market prices for similar instruments, or pricing models such as a discounted cash flow model. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and unobservable market inputs that we consider to be not significant. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. All significant inputs are derived from or corroborated with observable market data.
The fair values of debt instruments classified as Level 3 are generally derived from discounted cash flow models, performed either by us or our pricing providers, using inputs that we are unable to corroborate with observable market data. We monitor and review the inputs and results of these valuation models to ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.
Fair Value Option for Loans Receivable
We elected the fair value option for loans receivable when the interest rate or currency exchange rate risk was hedged at inception with a related derivative instrument. As of June 28, 2014, the fair value of our loans receivable for which we elected the fair value option did not significantly differ from the contractual principal balance based on the contractual currency. Loans receivable are classified within other current assets and other long-term assets. Fair value is determined using a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Gains and losses from changes in fair value on the loans receivable and related derivative instruments, as well as interest income, are recorded in interest and other, net. During all periods presented, changes in the fair value of our loans receivable were largely offset by changes in the related derivative instruments, resulting in an insignificant net impact on our consolidated condensed statements of income. Gains and losses attributable to changes in credit risk are determined using observable credit default spreads for the issuer or comparable companies; these gains and losses were insignificant during all periods presented. We did not elect the fair value option for loans receivable when the interest rate or currency exchange rate risk was not hedged at inception with a related derivative instrument. Loans receivable not measured and recorded at fair value are included in the "Financial Instruments Not Recorded at Fair Value on a Recurring Basis" section that follows.
Assets Measured and Recorded at Fair Value on a Non-Recurring Basis
Our non-marketable equity investments, marketable equity method investments, and non-financial assets, such as intangible assets and property, plant and equipment, are recorded at fair value only if an impairment charge is recognized.
Some of our non-marketable equity investments have been measured and recorded at fair value due to events or circumstances that significantly impacted the fair value of those investments, resulting in other-than-temporary impairment charges. We classified these investments as Level 3 because the valuations used unobservable inputs that were significant to the fair value measurements and required management judgment due to the absence of quoted market prices. Impairment charges recognized on non-marketable equity investments held as of June 28, 2014, were $37 million during the second quarter of 2014 and $75 million during the first six months of 2014 ($60
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
million during the second quarter of 2013 and $74 million during the first six months of 2013 on non-marketable equity investments held as of June 29, 2013).
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
On a quarterly basis, we measure the fair value of our grants receivable, cost method loans receivable, non-marketable cost method investments, reverse repurchase agreements with original maturities greater than approximately three months, and indebtedness carried at amortized cost; however, the assets are recorded at fair value only when an impairment charge is recognized. The carrying amounts and fair values of financial instruments not recorded at fair value on a recurring basis at the end of each period were as follows: |
| | | | | | | | | | | | | | | | | | | | |
| | June 28, 2014 |
(In Millions) | | Carrying Amount | | Fair Value Measured Using | | Fair Value |
Level 1 | | Level 2 | | Level 3 | |
Grants receivable | | $ | 680 |
| | $ | — |
| | $ | 688 |
| | $ | — |
| | $ | 688 |
|
Loans receivable | | $ | 250 |
| | $ | — |
| | $ | 250 |
| | $ | — |
| | $ | 250 |
|
Non-marketable cost method investments | | $ | 1,781 |
| | $ | — |
| | $ | — |
| | $ | 2,639 |
| | $ | 2,639 |
|
Reverse repurchase agreements | | $ | 385 |
| | $ | — |
| | $ | 385 |
| | $ | — |
| | $ | 385 |
|
Long-term debt | | $ | 13,180 |
| | $ | 11,344 |
| | $ | 2,800 |
| | $ | — |
| | $ | 14,144 |
|
NVIDIA Corporation cross-license agreement liability | | $ | 391 |
| | $ | — |
| | $ | 398 |
| | $ | — |
| | $ | 398 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | December 28, 2013 |
(In Millions) | | Carrying Amount | | Fair Value Measured Using | | Fair Value |
Level 1 | | Level 2 | | Level 3 | |
Grants receivable | | $ | 416 |
| | $ | — |
| | $ | 481 |
| | $ | — |
| | $ | 481 |
|
Loans receivable | | $ | 267 |
| | $ | — |
| | $ | 250 |
| | $ | 17 |
| | $ | 267 |
|
Non-marketable cost method investments | | $ | 1,270 |
| | $ | — |
| | $ | — |
| | $ | 2,105 |
| | $ | 2,105 |
|
Reverse repurchase agreements | | $ | 400 |
| | $ | — |
| | $ | 400 |
| | $ | — |
| | $ | 400 |
|
Short-term debt | | $ | 24 |
| | $ | — |
| | $ | 24 |
| | $ | — |
| | $ | 24 |
|
Long-term debt | | $ | 13,165 |
| | $ | 10,937 |
| | $ | 2,601 |
| | $ | — |
| | $ | 13,538 |
|
NVIDIA Corporation cross-license agreement liability | | $ | 587 |
| | $ | — |
| | $ | 597 |
| | $ | — |
| | $ | 597 |
|
The fair value of our grants receivable is determined using a discounted cash flow model, which discounts future cash flows using an appropriate yield curve. As of June 28, 2014 and December 28, 2013, the carrying amount of our grants receivable was classified within other current assets and other long-term assets, as applicable.
The carrying amount and fair value of loans receivable exclude loans measured and recorded at a fair value of $802 million as of June 28, 2014 ($805 million as of December 28, 2013). The fair value of our loans receivable and reverse repurchase agreements, including those held at fair value, is determined using a discounted cash flow model. All significant inputs in the models are derived from or corroborated with observable market data, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. The credit quality of these assets remains high, with credit ratings of A+/A1 or better for the substantial majority of our loans receivable and the majority of our reverse repurchase agreements as of June 28, 2014.
As of June 28, 2014 and December 28, 2013, the unrealized loss position of our non-marketable cost method investments was insignificant. Our non-marketable cost method investments are valued using the market and income approaches. The market approach includes the use of financial metrics and ratios of comparable public companies. The selection of comparable companies requires management judgment and is based on a number of factors, including comparable companies’ sizes, growth rates, industries, and development stages. The income approach includes the use of a discounted cash flow model, which requires significant estimates regarding investees’ revenue, costs, and discount rates based on the risk profile of comparable companies. Estimates of revenue and costs are developed using available market, historical, and forecast data. The valuation of these non-marketable cost method investments also takes into account variables such as conditions reflected in the capital markets, recent financing activities by the investees, the investees’ capital structure, the terms of the investees’ issued interests, and the level of marketability of the investments.
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
The carrying amount and fair value of short-term debt exclude drafts payable.
Our long-term debt recognized at amortized cost is comprised of our senior notes and our convertible debentures. The fair value of our senior notes is determined using active market prices, and is therefore classified as Level 1. The fair value of our convertible debentures is determined using discounted cash flow models with observable market inputs, and takes into consideration variables such as interest rate changes, comparable securities, subordination discount, and credit-rating changes, and is therefore classified as Level 2.
The NVIDIA Corporation (NVIDIA) cross-license agreement liability in the preceding table was incurred as a result of entering into a long-term patent cross-license agreement with NVIDIA in January 2011. We agreed to make payments to NVIDIA over six years. As of June 28, 2014 and December 28, 2013, the carrying amount of the liability arising from the agreement was classified within other accrued liabilities and other long-term liabilities, as applicable. The fair value is determined using a discounted cash flow model, which discounts future cash flows using our incremental borrowing rates.
Note 4: Cash and Investments
Cash and investments at the end of each period were as follows: |
| | | | | | | | |
(In Millions) | | Jun 28, 2014 | | Dec 28, 2013 |
Available-for-sale investments | | $ | 14,872 |
| | $ | 18,086 |
|
Cash | | 728 |
| | 854 |
|
Equity method investments | | 1,489 |
| | 1,038 |
|
Loans receivable | | 1,052 |
| | 1,072 |
|
Non-marketable cost method investments | | 1,781 |
| | 1,270 |
|
Reverse repurchase agreements | | 553 |
| | 800 |
|
Trading assets | | 9,771 |
| | 8,441 |
|
Total cash and investments | | $ | 30,246 |
| | $ | 31,561 |
|
Available-for-Sale Investments
Available-for-sale investments at the end of each period were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 28, 2014 | | December 28, 2013 |
(In Millions) | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Asset-backed securities | | $ | 10 |
| | $ | — |
| | $ | (2 | ) | | $ | 8 |
| | $ | 11 |
| | $ | — |
| | $ | (2 | ) | | $ | 9 |
|
Corporate debt | | 3,034 |
| | 18 |
| | (2 | ) | | 3,050 |
| | 4,254 |
| | 15 |
| | (3 | ) | | 4,266 |
|
Financial institution instruments | | 4,206 |
| | 5 |
| | (1 | ) | | 4,210 |
| | 5,654 |
| | 5 |
| | (1 | ) | | 5,658 |
|
Government debt | | 1,561 |
| | — |
| | (1 | ) | | 1,560 |
| | 1,932 |
| | 1 |
| | (1 | ) | | 1,932 |
|
Marketable equity securities | | 3,296 |
| | 2,748 |
| | — |
| | 6,044 |
| | 3,340 |
| | 2,881 |
| | — |
| | 6,221 |
|
Total available-for-sale investments | | $ | 12,107 |
| | $ | 2,771 |
| | $ | (6 | ) | | $ | 14,872 |
| | $ | 15,191 |
| | $ | 2,902 |
| | $ | (7 | ) | | $ | 18,086 |
|
Government debt includes instruments such as non-U.S. government bonds, U.S. agency securities, and U.S. Treasury securities. Financial institution instruments include instruments such as commercial paper, floating and fixed rate bonds, money market fund deposits, and time deposits. Time deposits were primarily issued by institutions outside the U.S. as of June 28, 2014 and December 28, 2013.
For information on the unrealized holding gains (losses) on available-for-sale investments reclassified out of accumulated other comprehensive income (loss) into the consolidated condensed statements of income, see "Note 20: Other Comprehensive Income (Loss)."
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
We sold available-for-sale investments for proceeds of $322 million in the second quarter of 2014 and $496 million in the first six months of 2014 ($294 million in the second quarter of 2013 and $598 million in the first six months of 2013). The gross realized gains on sales of available-for-sale investments were $69 million in the second quarter of 2014 and $136 million in the first six months of 2014.
The amortized cost and fair value of available-for-sale debt investments, by contractual maturity, as of June 28, 2014, were as follows: |
| | | | | | | | |
(In Millions) | | Cost | | Fair Value |
Due in 1 year or less | | $ | 6,293 |
| | $ | 6,313 |
|
Due in 1–2 years | | 1,266 |
| | 1,265 |
|
Due in 2–5 years | | 884 |
| | 885 |
|
Instruments not due at a single maturity date | | 368 |
| | 365 |
|
Total | | $ | 8,811 |
| | $ | 8,828 |
|
Instruments not due at a single maturity date in the preceding table primarily include corporate debt, financial institution instruments, and government debt.
Equity Method Investments
IM Flash Technologies, LLC
Micron Technology, Inc. (Micron) and Intel formed IM Flash Technologies, LLC (IMFT) in 2007 to manufacture NAND flash memory products for Micron and Intel. During 2012, we amended the operating agreement for IMFT and entered into agreements with Micron that modified our joint venture relationship. The amended operating agreement extended the term of IMFT to 2024, unless earlier terminated under certain terms and conditions, and provides that IMFT may manufacture certain emerging memory technologies in addition to NAND flash memory. Additionally, the amended agreement provides for certain rights that, beginning in 2015, will enable us to sell to Micron, or enable Micron to purchase from us, our interest in IMFT. If Intel exercises this right, Micron would set the closing date of the transaction within two years following such election and could elect to receive financing from Intel for one to two years. The agreements with Micron include a supply agreement for Micron to supply us with NAND flash memory products. The agreements also extend and expand our NAND joint development program with Micron to include emerging memory technologies.
As of June 28, 2014, we own a 49% interest in IMFT. The carrying value of our investment was $699 million as of June 28, 2014 ($646 million as of December 28, 2013) and is classified within other long-term assets.
IMFT is a variable interest entity. All costs of the IMFT joint venture will be passed on to Micron and Intel pursuant to our purchase agreements. Intel's portion of IMFT costs, primarily related to product purchases and production-related services, was approximately $100 million in the second quarter of 2014 and approximately $205 million in the first six months of 2014 (approximately $100 million in the second quarter of 2013 and approximately $200 million in the first six months of 2013). The amount due to IMFT for product purchases and services provided was approximately $95 million as of June 28, 2014 (approximately $75 million as of December 28, 2013).
IMFT depends on Micron and Intel for any additional cash needs. Our known maximum exposure to loss approximated the carrying value of our investment balance in IMFT, which was $699 million as of June 28, 2014. Except for the amount due to IMFT for product purchases and services, we did not have any additional liabilities recognized on our consolidated condensed balance sheets in connection with our interests in this joint venture as of June 28, 2014. Our potential future losses could be higher than the carrying amount of our investment, as Intel and Micron are liable for other future operating costs or obligations of IMFT. Future cash calls could also increase our investment balance and the related exposure to loss. In addition, because we are currently committed to purchasing 49% of IMFT’s production output and production-related services, we may be required to purchase products at a cost in excess of realizable value.
We have determined that we do not have the characteristics of a consolidating investor in the variable interest entity and, therefore, we account for our interest in IMFT using the equity method of accounting.
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Cloudera, Inc.
During the second quarter of 2014, we invested in Cloudera, Inc. (Cloudera). Our fully-diluted ownership interest in Cloudera is 18% as of June 28, 2014. Our investment is accounted for under the equity and cost methods of accounting and is classified within other long-term assets. As of June 28, 2014, the carrying value of our equity method investment was $288 million and of our cost method investment was $454 million.
Trading Assets
As of June 28, 2014 and December 28, 2013, all of our trading assets were marketable debt instruments. Net losses related to trading assets still held at the reporting date were $11 million in the second quarter of 2014 and net gains were $54 million in the first six months of 2014 (net gains of $50 million in the second quarter of 2013 and net losses of $32 million in the first six months of 2013). Net gains on the related derivatives were $9 million in the second quarter of 2014 and net losses of $56 million in the first six months of 2014 (net losses of $50 million in the second quarter of 2013 and net gains of $34 million in the first six months of 2013).
Note 5: Inventories
We compute inventory cost on a first-in, first-out basis. Costs incurred to manufacture our products are included in the valuation of inventory beginning in the quarter in which a product meets the technical criteria to qualify for sale to customers. Prior to qualification for sale, costs that do not meet the criteria for research and development are included in cost of sales in the period incurred. Inventories at the end of each period were as follows:
|
| | | | | | | | |
(In Millions) | | Jun 28, 2014 | | Dec 28, 2013 |
Raw materials | | $ | 503 |
| | $ | 458 |
|
Work in process | | 2,071 |
| | 1,998 |
|
Finished goods | | 1,369 |
| | 1,716 |
|
Total inventories | | $ | 3,943 |
| | $ | 4,172 |
|
Note 6: Derivative Financial Instruments
Our primary objective for holding derivative financial instruments is to manage currency exchange rate risk and interest rate risk, and, to a lesser extent, equity market risk, commodity price risk, and credit risk. We also enter into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow counterparties to net settle amounts owed to each other as a result of multiple, separate derivative transactions. Generally our master netting agreements allow for net settlement in case of certain triggering events such as bankruptcy or default of one of the counterparties to the transaction. We may also elect to exchange cash collateral with certain of our counterparties on a regular basis. For presentation on our consolidated condensed balance sheets, we do not offset fair value amounts recognized for derivative instruments under master netting arrangements.
Currency Exchange Rate Risk
We are exposed to currency exchange rate risk and generally hedge our exposures with currency forward contracts, currency interest rate swaps, or currency options. Substantially all of our revenue is transacted in U.S. dollars. However, a significant amount of our operating expenditures and capital purchases is incurred in or exposed to other currencies, primarily the euro, the Japanese yen, the Israeli shekel, and the Chinese yuan. We have established balance sheet and forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatility of the functional currency equivalent of future cash flows caused by changes in exchange rates. Our non-U.S.-dollar-denominated investments in debt instruments and loans receivable are generally hedged with offsetting currency forward contracts or currency interest rate swaps. We may also hedge currency risk arising from funding foreign currency denominated forecasted investments. These programs reduce, but do not eliminate, the impact of currency exchange movements.
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Our currency risk management programs include:
| |
• | Currency derivatives with cash flow hedge accounting designation that utilize currency forward contracts and currency options to hedge exposures to the variability in the U.S.-dollar equivalent of anticipated non-U.S.-dollar-denominated cash flows. These instruments generally mature within 12 months. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated condensed statements of income as the impact of the hedged transaction. |
| |
• | Currency derivatives without hedge accounting designation that utilize currency forward contracts or currency interest rate swaps to economically hedge the functional currency equivalent cash flows of recognized monetary assets and liabilities, non-U.S.-dollar-denominated debt instruments classified as trading assets, and hedges of non-U.S.-dollar-denominated loans receivable recognized at fair value. The majority of these instruments mature within 12 months. Changes in the functional currency equivalent cash flows of the underlying assets and liabilities are approximately offset by the changes in fair value of the related derivatives. We record net gains or losses in the line item on the consolidated condensed statements of income most closely associated with the related exposures, primarily in interest and other, net, except for equity-related gains or losses, which we primarily record in gains (losses) on equity investments, net. |
Interest Rate Risk
Our primary objective for holding investments in debt instruments is to preserve principal while maximizing yields. We generally swap the returns on our investments in fixed-rate debt instruments with remaining maturities longer than six months into U.S. dollar three-month LIBOR-based returns, unless management specifically approves otherwise. These swaps are settled at various interest payment times involving cash payments at each interest and principal payment date, with the majority of the contracts having quarterly payments.
Our interest rate risk management programs include:
| |
• | Interest rate derivatives with cash flow hedge accounting designation that utilize interest rate swap agreements to modify the interest characteristics of debt instruments. For these derivatives, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss), and we reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated condensed statements of income as the impact of the hedged transaction. |
| |
• | Interest rate derivatives without hedge accounting designation that utilize interest rate swaps and currency interest rate swaps in economic hedging transactions, including hedges of non-U.S.-dollar-denominated debt instruments classified as trading assets and hedges of non-U.S.-dollar-denominated loans receivable recognized at fair value. Floating interest rates on the swaps generally reset on a quarterly basis. Changes in fair value of the debt instruments classified as trading assets and loans receivable recognized at fair value are generally offset by changes in fair value of the related derivatives, both of which are recorded in interest and other, net. |
Equity Market Risk
Our investments include marketable equity securities and equity derivative instruments. We typically do not attempt to reduce or eliminate our equity market exposure through hedging activities at the inception of our investments. Before we enter into hedge arrangements, we evaluate legal, market, and economic factors, as well as the expected timing of disposal to determine whether hedging is appropriate. Our equity market risk management program may include equity derivatives with or without hedge accounting designation that utilize warrants, equity options, or other equity derivatives. We recognize changes in the fair value of such derivatives in gains (losses) on equity investments, net. We also utilize total return swaps to offset changes in liabilities related to the equity market risks of certain deferred compensation arrangements. Gains and losses from changes in fair value of these total return swaps are generally offset by the losses and gains on the related liabilities, both of which are recorded in cost of sales and operating expenses.
Commodity Price Risk
We operate facilities that consume commodities, and have established forecasted transaction risk management programs to protect against fluctuations in fair value and the volatility of future cash flows caused by changes in commodity prices, such as those for natural gas. These programs reduce, but do not always eliminate, the impact of commodity price movements.
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Our commodity price risk management program includes commodity derivatives with cash flow hedge accounting designation that utilize commodity swap contracts to hedge future cash flow exposures to the variability in commodity prices. These instruments generally mature within 12 months. For these derivatives, we report the after-tax gain (loss) from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) and reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and in the same line item on the consolidated condensed statements of income as the impact of the hedged transaction.
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) | | Jun 28, 2014 | | Dec 28, 2013 | | Jun 29, 2013 |
Currency forwards | | $ | 12,212 |
| | $ | 13,404 |
| | $ | 12,105 |
|
Currency interest rate swaps | | 4,908 |
| | 4,377 |
| | 3,632 |
|
Embedded debt derivatives | | 3,600 |
| | 3,600 |
| | 3,600 |
|
Interest rate swaps | | 1,318 |
| | 1,377 |
| | 1,257 |
|
Total return swaps | | 1,040 |
| | 914 |
| | 817 |
|
Other | | 61 |
| | 67 |
| | 77 |
|
Total | | $ | 23,139 |
| | $ | 23,739 |
| | $ | 21,488 |
|
The gross notional amounts for currency forwards and currency interest rate swaps (presented by currency) at the end of each period were as follows:
|
| | | | | | | | | | | | |
(In Millions) | | Jun 28, 2014 | | Dec 28, 2013 | | Jun 29, 2013 |
British pound sterling | | $ | 505 |
| | $ | 549 |
| | $ | 428 |
|
Chinese yuan | | 1,498 |
| | 1,116 |
| | 547 |
|
Euro | | 5,942 |
| | 6,874 |
| | 6,291 |
|
Israeli shekel | | 1,995 |
| | 2,244 |
| | 1,886 |
|
Japanese yen | | 3,188 |
| | 4,116 |
| | 3,771 |
|
Malaysian ringgit | | 844 |
| | 506 |
| | 422 |
|
Swiss franc | | 1,460 |
| | 1,189 |
| | 1,206 |
|
Other | | 1,688 |
| | 1,187 |
| | 1,186 |
|
Total | | $ | 17,120 |
| | $ | 17,781 |
| | $ | 15,737 |
|
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets
The fair value of our derivative instruments at the end of each period were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 28, 2014 | | December 28, 2013 |
(In Millions) | | Other Current Assets | | Other Long-Term Assets | | Other Accrued Liabilities | | Other Long-Term Liabilities | | Other Current Assets | | Other Long-Term Assets | | Other Accrued Liabilities | | Other Long-Term Liabilities |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | |
Currency forwards | | $ | 51 |
| | $ | — |
| | $ | 32 |
| | $ | 5 |
| | $ | 114 |
| | $ | 1 |
| | $ | 118 |
| | $ | 2 |
|
Other | | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total derivatives designated as hedging instruments | | $ | 51 |
| | $ | — |
| | $ | 34 |
| | $ | 5 |
| | $ | 114 |
| | $ | 1 |
| | $ | 118 |
| | $ | 2 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
Currency forwards | | $ | 25 |
| | $ | — |
| | $ | 55 |
| | $ | — |
| | $ | 66 |
| | $ | — |
| | $ | 63 |
| | $ | — |
|
Currency interest rate swaps | | 93 |
| | 8 |
| | 174 |
| | — |
| | 124 |
| | 6 |
| | 163 |
| | 29 |
|
Interest rate swaps | | 2 |
| | — |
| | 20 |
| | — |
| | 5 |
| | — |
| | 28 |
| | — |
|
Total return swaps | | — |
| | — |
| | — |
| | — |
| | 48 |
| | — |
| | — |
| | — |
|
Other | | — |
| | 30 |
| | — |
| | 8 |
| | — |
| | 29 |
| | — |
| | 19 |
|
Total derivatives not designated as hedging instruments | | $ | 120 |
| | $ | 38 |
| | $ | 249 |
| | $ | 8 |
| | $ | 243 |
| | $ | 35 |
| | $ | 254 |
| | $ | 48 |
|
Total derivatives | | $ | 171 |
| | $ | 38 |
| | $ | 283 |
| | $ | 13 |
| | $ | 357 |
| | $ | 36 |
| | $ | 372 |
| | $ | 50 |
|
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Amounts Offset in the Consolidated Condensed Balance Sheets
The gross amounts of our derivative instruments and reverse repurchase agreements subject to master netting arrangements with various counterparties and cash and non-cash collateral posted under such agreements at the end of each period were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 28, 2014 |
| | | | | | | | Gross Amounts Not Offset in the Balance Sheet | | |
(In Millions) | | Gross Amounts Recognized | | Gross Amounts Offset in the Balance Sheet | | Net Amounts Presented in the Balance Sheet | | Financial Instruments | | Cash and Non-Cash Collateral Received or Pledged | | Net Amount |
Assets: | | | | | | | | | | | | |
Derivative assets subject to master netting arrangements | | $ | 157 |
| | $ | — |
| | $ | 157 |
| | $ | (112 | ) | | $ | (8 | ) | | $ | 37 |
|
Reverse repurchase agreements | | 553 |
| | — |
| | 553 |
| | — |
| | (553 | ) | | — |
|
Total assets | | $ | 710 |
| | $ | — |
| | $ | 710 |
| | $ | (112 | ) | | $ | (561 | ) | | $ | 37 |
|
Liabilities: | | | | | | | | | | | | |
Derivative liabilities subject to master netting arrangements | | $ | 280 |
| | $ | — |
| | $ | 280 |
| | $ | (112 | ) | | $ | (142 | ) | | $ | 26 |
|
Total liabilities | | $ | 280 |
| | $ | — |
| | $ | 280 |
| | $ | (112 | ) | | $ | (142 | ) | | $ | 26 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 28, 2013 |
| | | | | | | | 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 | | $ | 325 |
| | $ | — |
| | $ | 325 |
| | $ | (158 | ) | | $ | (3 | ) | | $ | 164 |
|
Reverse repurchase agreements | | 800 |
| | — |
| | 800 |
| | — |
| | (800 | ) | | — |
|
Total assets | | $ | 1,125 |
| | $ | — |
| | $ | 1,125 |
| | $ | (158 | ) | | $ | (803 | ) | | $ | 164 |
|
Liabilities: | | | | | | | | | | | | |
Derivative liabilities subject to master netting arrangements | | $ | 401 |
| | $ | — |
| | $ | 401 |
| | $ | (158 | ) | | $ | (32 | ) | | $ | 211 |
|
Total liabilities | | $ | 401 |
| | $ | — |
| | $ | 401 |
| | $ | (158 | ) | | $ | (32 | ) | | $ | 211 |
|
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Derivatives in Cash Flow Hedging Relationships
The before-tax gains (losses), attributed to the effective portion of cash flow hedges, recognized in other comprehensive income (loss) for each period were as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In Millions) | | Jun 28, 2014 | | Jun 29, 2013 | | Jun 28, 2014 | | Jun 29, 2013 |
Currency forwards | | $ | 5 |
| | $ | 47 |
| | $ | 40 |
| | $ | (189 | ) |
Other | | (1 | ) | | — |
| | (3 | ) | | 1 |
|
Total | | $ | 4 |
| | $ | 47 |
| | $ | 37 |
| | $ | (188 | ) |
Gains and losses on derivative instruments in cash flow hedging relationships related to hedge ineffectiveness and amounts excluded from effectiveness testing, were insignificant during all periods presented in the preceding tables. Additionally, for all periods presented, there was an insignificant impact on results of operations from discontinued cash flow hedges, which arises when forecasted transactions are probable of not occurring.
For information on the unrealized holding gains (losses) on derivatives reclassified out of accumulated other comprehensive income into the consolidated condensed statements of income, see "Note 20: Other Comprehensive Income (Loss)."
Derivatives 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 | | Six Months Ended |
(In Millions) | | Location of Gains (Losses) Recognized in Income on Derivatives | | Jun 28, 2014 | | Jun 29, 2013 | | Jun 28, 2014 | | Jun 29, 2013 |
Currency forwards | | Interest and other, net | | $ | (7 | ) | | $ | (6 | ) | | $ | (22 | ) | | $ | 50 |
|
Currency interest rate swaps | | Interest and other, net | | 26 |
| | (44 | ) | | (28 | ) | | 56 |
|
Interest rate swaps | | Interest and other, net | | (4 | ) | | 3 |
| | (4 | ) | | 3 |
|
Total return swaps | | Various | | 45 |
| | (19 | ) | | 58 |
| | 29 |
|
Other | | Gains (losses) on equity investments, net | | 1 |
| | 5 |
| | 2 |
| | 7 |
|
Total | | | | $ | 61 |
| | $ | (61 | ) | | $ | 6 |
| | $ | 145 |
|
Note 7: Acquisitions
During the first six months of 2014, we completed four acquisitions qualifying as business combinations in exchange for aggregate net cash consideration of $137 million, most of which was allocated to goodwill. For information on the assignment of goodwill to our operating segments, see “Note 9: Goodwill.” The completed acquisitions in the first six months of 2014, both individually and in the aggregate, were not significant to our results of operations.
Note 8: Divestitures
During the first quarter of 2014, we completed the divestiture of our Intel Media assets, a business division dedicated to the development of cloud TV products and services, to Verizon Communications Inc. As a result of the transaction, we received aggregate net cash consideration of $150 million, presented within investing activities on the consolidated condensed statements of cash flows, and recognized a gain within interest and other, net on the consolidated condensed statements of income.
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 9: Goodwill
Goodwill activity for the first six months of 2014 was as follows:
|
| | | | | | | | | | | | | | | | | | | | |
(In Millions) | | Dec 28, 2013 | | Additions Due to Acquisitions | | Transfers | | Effect of Exchange Rate Fluctuations and Other | | Jun 28, 2014 |
PC Client Group | | $ | 3,058 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,058 |
|
Data Center Group | | 1,831 |
| | 8 |
| | 138 |
| | — |
| | 1,977 |
|
Internet of Things Group | | — |
| | — |
| | 428 |
| | — |
| | 428 |
|
Mobile and Communications Group | | — |
| | 19 |
| | 631 |
| | — |
| | 650 |
|
Other Intel architecture operating segments | | 1,075 |
| | — |
| | (1,075 | ) | | — |
| | — |
|
Software and services operating segments | | 4,549 |
| | — |
| | (140 | ) | | (2 | ) | | 4,407 |
|
All other | | — |
| | 101 |
| | 18 |
| | (18 | ) | | 101 |
|
Total | | $ | 10,513 |
| | $ | 128 |
| | $ | — |
| | $ | (20 | ) | | $ | 10,621 |
|
In the first quarter of 2014, we formed the Internet of Things Group and we changed our organizational structure to align with our critical objectives, which included the addition of Mobile and Communication Group as a reportable operating segment. For further information, see "Note 22: Operating Segments Information." Due to this reorganization, goodwill was allocated from our prior reporting units to our new reporting units, as shown in the preceding table within "transfers." The allocation was based on the fair value of each business group within its original reporting unit relative to the fair value of that reporting unit.
INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)
Note 10: Identified Intangible Assets
Identified intangible assets at the end of each period were as follows:
|
| | | | | | | | | | | | |
| | June 28, 2014 |
(In Millions) | | Gross Assets | | Accumulated Amortization | | Net |
Acquisition-related developed technology | | $ | 2,924 |
| | $ | (1,982 | ) | | $ | 942 |
|
Acquisition-related customer relationships | | 1,759 |
| | (966 | ) | | 793 |
|
Acquisition-related trade names | | 65 |
| | (50 | ) | | 15 |
|
Licensed technology and patents | | 3,088 |
| | (1,088 | ) | | 2,000 |
|
Identified intangible assets subject to amortization | | 7,836 |
| | (4,086 | ) | | 3,750 |
|
Acquisition-related trade names | | 817 |
| | — |
| | 817 |
|
Other intangible assets | | 130 |
| | — |
| | 130 |
|
Identified intangible assets not subject to amortization | | 947 |
| | — |
| | 947 |
|
Total identified intangible assets | | $ | 8,783 |
| | $ | (4,086 | ) | | $ | 4,697 |
|
|
| | | | | | | | | | | | |
| | December 28, 2013 |
(In Millions) | | Gross Assets | | Accumulated Amortization | | Net |
Acquisition-related developed technology | | $ | 2,922 |
| | $ | (1,691 | ) | | $ | 1,231 |
|
Acquisition-related customer relationships | | 1,760 |
| | (828 | ) | | 932 |
|
Acquisition-related trade names | | 65 |
| | (44 | ) | | 21 |
|
Licensed technology and patents | | 3,093 |
| | (974 | ) | | 2,119 |
|
Identified intangible assets subject to amortization | | 7,840 |
| | (3,537 | ) | | 4,303 |
|
Acquisition-related trade names | | 818 |
| | — |
| | 818 |
|
Other intangible assets | | 29 |
| | — |
| | 29 |
|
Identified intangible assets not subject to amortization | | 847 |
| | — |
| | 847 |
|
Total identified intangible assets | | $ | 8,687 |
| | $ | (3,537 | ) | | $ | 5,150 |
|
For identified intangible assets that are subject to amortization, we recorded amortization expense on the consolidated condensed statements of income as follows: amortization of acquisition-related developed technology and licensed technology and patents is included in cost of sales, amortization of acquisition-related customer relationships and trade names is included in amortization of acquisition-related intangibles, and amortization of other intangible assets is recorded as a reduction of revenue.
Amortization expenses for each period were as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In Millions) | | Jun 28, 2014 | | Jun 29, 2013 | | Jun 28, 2014 | | Jun 29, 2013 |
Acquisition-related developed technology | | $ | 147 |
| | $ | 140 |
| | $ | 293 |
| | $ | 280 |
|
Acquisition-related customer relationships | | 69 |
| | 68 |
| | 139 |
| | 138 |
|
Acquisition-related trade names | | 3 |
| | 2 |
| | 6 |
| | 5 |
|
|