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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | | | | | | | |
| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the quarterly period ended | September 30, 2023 |
or
| | | | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
Commission File Number: 000-06217
INTEL CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
| Delaware | | | 94-1672743 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
2200 Mission College Boulevard, | Santa Clara, | California | | 95054-1549 |
(Address of principal executive offices) | | (Zip Code) |
(408) 765-8080
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common stock, $0.001 par value | INTC | Nasdaq Global Select Market |
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 ☑ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ 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 | | Accelerated filer | | Non-accelerated filer | | Smaller reporting company | Emerging growth 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 ☑
As of October 20, 2023, the registrant had outstanding 4,216 million shares of common stock.
Table of Contents
Organization of Our Form 10-Q
The order and presentation of content in our Form 10-Q differs from the traditional SEC Form 10-Q format. Our format is designed to improve readability and better present 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 SEC Form 10-Q format.
We have defined certain terms and abbreviations used throughout our Form 10-Q in "Key Terms" within the Consolidated Condensed Financial Statements and Supplemental Details.
The preparation of our Consolidated Condensed Financial Statements is in conformity with US GAAP. Our Form 10-Q includes key metrics that we use to measure our business, some of which are non-GAAP measures. See "Non-GAAP Financial Measures" within MD&A for an explanation of these measures and why management uses them and believes they provide investors with useful supplemental information. | | | | | | | | | | | |
| | | Page |
Forward-Looking Statements | |
Availability of Company Information | |
A Quarter in Review | |
Consolidated Condensed Financial Statements and Supplemental Details | |
| Consolidated Condensed Statements of Income | |
| Consolidated Condensed Statements of Comprehensive Income | |
| Consolidated Condensed Balance Sheets | |
| Consolidated Condensed Statements of Cash Flows | |
| Consolidated Condensed Statements of Stockholders' Equity | |
| Notes to Consolidated Condensed Financial Statements | |
| Key Terms | |
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Management's Discussion and Analysis (MD&A) | |
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| Segment Trends and Results | |
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| Consolidated Condensed Results of Operations | |
| Liquidity and Capital Resources | |
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| Non-GAAP Financial Measures | |
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Other Key Information | |
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| Form 8-K Disclosable Events | |
| Quantitative and Qualitative Disclosures About Market Risk | |
| Risk Factors | |
| Controls and Procedures | |
| | |
| Issuer Purchases of Equity Securities | |
| Rule 10b5-1 Trading Arrangements | |
| Disclosure Pursuant to Section 13(r) of the Securities Exchange Act of 1934 | |
| Exhibits | |
| Form 10-Q Cross-Reference Index | |
Forward-Looking Statements
This Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as "accelerate", "achieve", "aim", "ambitions", "anticipate", "believe", "committed", "continue", "could", "designed", "estimate", "expect", "forecast", "future", "goals", "grow", "guidance", "intend", "likely", "may", "might", "milestones", "next generation", "objective", "on track", "opportunity", "outlook", "pending", "plan", "position", "potential", "possible", "predict", "progress", "ramp", "roadmap", "seeks", "should", "strive", "targets", "to be", "upcoming", "will", "would", and variations of such words and similar expressions are intended to identify such forward-looking statements, which may include statements regarding:
•our business plans and strategy and anticipated benefits therefrom, including with respect to our IDM 2.0 strategy, our partnership with Brookfield, the transition to an internal foundry model, updates to our reporting structure and our AI strategy;
•projections of our future financial performance, including future revenue, gross margins, capital expenditures, and cash flows;
•projected costs and yield trends;
•future cash requirements and the availability, uses, sufficiency, and cost of capital resources, and sources of funding, including future capital and R&D investments, credit rating expectations, and expected returns to stockholders, such as stock repurchases and dividends;
•future products, services and technologies, and the expected goals, timeline, ramps, progress, availability, production, regulation and benefits of such products, services and technologies, including future process nodes and packaging technology, product roadmaps, schedules, future product architectures, expectations regarding process performance, per-watt parity, and metrics and expectations regarding product and process leadership;
•investment plans, and impacts of investment plans, including in the US and abroad;
•internal and external manufacturing plans, including future internal manufacturing volumes, manufacturing expansion plans and the financing therefor, and external foundry usage;
•future production capacity and product supply;
•supply expectations, including regarding constraints, limitations, pricing, and industry shortages;
•plans and goals related to Intel’s foundry business, including with respect to anticipated customers, future manufacturing capacity and service, technology and IP offerings;
•expected timing and impact of acquisitions, divestitures, and other significant transactions, including the sale of our NAND memory business;
•expected completion and impacts of restructuring activities and cost-saving or efficiency initiatives, including those related to the 2022 Restructuring Program;
•future social and environmental performance goals, measures, strategies and results;
•our anticipated growth, future market share, and trends in our businesses and operations;
•projected growth and trends in markets relevant to our businesses;
•anticipated trends and impacts related to industry component, substrate, and foundry capacity utilization, shortages and constraints;
•expectations regarding government incentives;
•future technology trends and developments, such as AI;
•future macro environmental and economic conditions;
•future responses to and effects of COVID-19;
•geopolitical conditions;
•tax- and accounting-related expectations;
•expectations regarding our relationships with certain sanctioned parties; and
•other characterizations of future events or circumstances.
Such statements involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied, including:
•changes in demand for our products;
•changes in product mix;
•the complexity and fixed cost nature of our manufacturing operations;
•the high level of competition and rapid technological change in our industry;
•the significant upfront investments in R&D and our business, products, technologies, and manufacturing capabilities;
•vulnerability to new product development and manufacturing-related risks, including product defects or errata, particularly as we develop next generation products and implement next generation process technologies;
•risks associated with a highly complex global supply chain, including from disruptions, delays, trade tensions, or shortages;
•sales-related risks, including customer concentration and the use of distributors and other third parties;
•potential security vulnerabilities in our products;
•cybersecurity and privacy risks;
•investment and transaction risk;
•IP risks and risks associated with litigation and regulatory proceedings;
•evolving regulatory and legal requirements across many jurisdictions;
•geopolitical and international trade conditions, including the impacts of Russia's war on Ukraine, recent events in Israel and rising tensions between the US and China;
•our debt obligations and our ability to access sources of capital;
•risks of large scale global operations;
•macroeconomic conditions, including regional or global downturns or recessions;
•impacts of the COVID-19 or similar such pandemic;
•other risks and uncertainties described in this report, our 2022 Form 10-K and our other filings with the SEC.
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 SEC that disclose risks and uncertainties that may affect our business.
Unless specifically indicated otherwise, 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 have not been completed as of the date of this filing. In addition, the forward-looking statements in this Form 10-Q are based on management's expectations as of the date of this filing, unless an earlier date is specified, including expectations based on third-party information and projections that management believes to be reputable. We do not undertake, and expressly disclaim 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.
Availability of Company Information
We use our Investor Relations website, www.intc.com, as a routine channel for distribution of important, and often material, information about us, including our quarterly and annual earnings results and presentations, press releases, announcements, information about upcoming webcasts, analyst presentations, and investor days, archives of these events, financial information, corporate governance practices, and corporate responsibility information. We do not distribute our financial results via a news wire service. All such information is available on our Investor Relations website free of charge. Our Investor Relations website allows interested persons to sign up to automatically receive e-mail alerts when we post financial information and issue press releases, and to receive information about upcoming events. We encourage interested persons to follow our Investor Relations website in addition to our filings with the SEC to timely receive information about the company.
Intel, the Intel logo, Intel Core, and Intel Optane are trademarks of Intel Corporation or its subsidiaries in the US and/or other countries.
* Other names and brands may be claimed as the property of others.
Total revenue of $14.2 billion was down $1.2 billion or 8% from Q3 2022, as CCG revenue decreased 3%, DCAI revenue decreased 10%, and NEX revenue decreased 32%. CCG revenue decreased due to lower desktop volume from lower demand across business market segments and lower notebook ASPs due to a higher mix of small core products combined with a higher mix of older generation products. This was partially offset by higher notebook volume, as customer inventory levels began to normalize and higher desktop ASPs due to an increased mix of product sales to the commercial and gaming market segments. DCAI revenue decreased due to lower server volume resulting from a softening CPU data center market, partially offset by higher ASPs from a lower mix of hyperscale customer-related revenue and a higher mix of high core count products. NEX revenue decreased as customers tempered purchases to reduce inventories and adjust to a lower demand environment across product lines.
| | | | | | | | | | | | | | | | | | | | |
Revenue | | Gross Margin | | Diluted EPS attributable to Intel | | Cash Flows |
■ GAAP $B | | ■ GAAP ■ Non-GAAP | | ■ GAAP ■ Non-GAAP | | ■ Operating Cash Flow $B ■ Adjusted Free Cash Flow $B |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
$14.2B | | 42.5% | | 45.8% | | $0.07 | | $0.41 | | $6.8B | | $(10.5)B |
GAAP | | GAAP | | non-GAAP1 | | GAAP | | non-GAAP1 | | GAAP | | non-GAAP1 |
Revenue down $1.2B or 8% from Q3 2022 | | Gross margin down 0.1 ppt from Q3 2022 | | Gross margin down 0.1 ppt from Q3 2022 | | Diluted EPS attributable to Intel down $0.18 or 72% from Q3 2022 | | Diluted EPS attributable to Intel up $0.04 or 11% from Q3 2022 | | Operating cash flow down $0.9B or 12% from Q3 2022 | | Adjusted free cash flow down $3.4B or 48% from Q3 2022 |
| | | | | | | | | | | | |
Lower revenue in CCG, DCAI, and NEX. | | Lower GAAP gross margin from lower revenue, higher unit cost, partially offset by a decrease in period charges. | | Lower GAAP EPS attributable to Intel primarily from a lower tax benefit, partially offset by reduced operating expenses. | | Lower operating cash flow driven primarily by a net operating loss, partially offset by favorable changes in working capital and other adjustments. |
Key Developments
▪Our Ireland fab began high-volume production of Intel 4 technology. This is the first use of extreme ultraviolet (EUV) technology in high-volume manufacturing in Europe.
▪We announced our upcoming Intel® Core™ Ultra processors, featuring our first integrated neural processing unit, for power-efficient AI acceleration and local inference on the PC, which is expected to launch in Q4 2023.
▪We mutually agreed with Tower to terminate the agreement we entered into during the first quarter of 2022 to acquire Tower, due to our inability to obtain regulatory approval in a timely manner.
▪We announced a commercial agreement with Tower, where we will provide foundry services and manufacturing capacity through our New Mexico facility for 300mm advanced analog processing.
▪We received a $600 million grant from the State of Ohio to support the ongoing construction of our two chip factories in the state.
1 See "Non-GAAP Financial Measures" within MD&A.
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Consolidated Condensed Statements of Income | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Millions, Except Per Share Amounts; Unaudited) | | Sep 30, 2023 | | Oct 1, 2022 | | Sep 30, 2023 | | Oct 1, 2022 |
Net revenue | | $ | 14,158 | | | $ | 15,338 | | | $ | 38,822 | | | $ | 49,012 | |
Cost of sales | | 8,140 | | | 8,803 | | | 24,158 | | | 27,646 | |
Gross margin | | 6,018 | | | 6,535 | | | 14,664 | | | 21,366 | |
Research and development | | 3,870 | | | 4,302 | | | 12,059 | | | 13,064 | |
Marketing, general, and administrative | | 1,340 | | | 1,744 | | | 4,017 | | | 5,296 | |
Restructuring and other charges | | 816 | | | 664 | | | 1,080 | | | (460) | |
Operating expenses | | 6,026 | | | 6,710 | | | 17,156 | | | 17,900 | |
Operating income (loss) | | (8) | | | (175) | | | (2,492) | | | 3,466 | |
Gains (losses) on equity investments, net | | (191) | | | (151) | | | (46) | | | 4,082 | |
Interest and other, net | | 147 | | | 138 | | | 512 | | | 1,016 | |
Income (loss) before taxes | | (52) | | | (188) | | | (2,026) | | | 8,564 | |
Provision for (benefit from) taxes | | (362) | | | (1,207) | | | (1,041) | | | (114) | |
Net income (loss) | | 310 | | | 1,019 | | | (985) | | | 8,678 | |
Less: Net income (loss) attributable to non-controlling interests | | 13 | | | — | | | (5) | | | — | |
Net income (loss) attributable to Intel | | $ | 297 | | | $ | 1,019 | | | $ | (980) | | | $ | 8,678 | |
Earnings (loss) per share attributable to Intel—basic | | $ | 0.07 | | | $ | 0.25 | | | $ | (0.23) | | | $ | 2.11 | |
Earnings (loss) per share attributable to Intel—diluted | | $ | 0.07 | | | $ | 0.25 | | | $ | (0.23) | | | $ | 2.10 | |
| | | | | | | | |
Weighted average shares of common stock outstanding: | | | | | | | | |
Basic | | 4,202 | | | 4,118 | | | 4,180 | | | 4,104 | |
Diluted | | 4,229 | | | 4,125 | | | 4,180 | | | 4,123 | |
See accompanying notes.
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| Financial Statements | Consolidated Condensed Statements of Income | 4 |
| | | | | |
Consolidated Condensed Statements of Comprehensive Income | |
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| | Three Months Ended | | Nine Months Ended |
(In Millions; Unaudited) | | Sep 30, 2023 | | Oct 1, 2022 | | Sep 30, 2023 | | Oct 1, 2022 |
Net income (loss) | | $ | 310 | | | $ | 1,019 | | | $ | (985) | | | $ | 8,678 | |
Changes in other comprehensive income (loss), net of tax: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net unrealized holding gains (losses) on derivatives | | (320) | | | (436) | | | (310) | | | (1,178) | |
Actuarial valuation and other pension benefits (expenses), net | | 2 | | | 10 | | | 5 | | | 37 | |
Translation adjustments and other | | 1 | | | — | | | 6 | | | (30) | |
Other comprehensive income (loss) | | (317) | | | (426) | | | (299) | | | (1,171) | |
Total comprehensive income (loss) | | (7) | | | 593 | | | (1,284) | | | 7,507 | |
Less: comprehensive income (loss) attributable to non-controlling interests | | 13 | | | — | | | (5) | | | — | |
Total comprehensive income (loss) attributable to Intel | | $ | (20) | | | $ | 593 | | | $ | (1,279) | | | $ | 7,507 | |
See accompanying notes.
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| Financial Statements | Consolidated Condensed Statements of Comprehensive Income | 5 |
| | | | | |
Consolidated Condensed Balance Sheets | |
| |
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(In Millions; Unaudited) | | Sep 30, 2023 | | Dec 31, 2022 |
| | | | |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 7,621 | | | $ | 11,144 | |
Short-term investments | | 17,409 | | | 17,194 | |
| | | | |
Accounts receivable, net | | 2,843 | | | 4,133 | |
Inventories | | 11,466 | | | 13,224 | |
| | | | |
Other current assets | | 4,472 | | | 4,712 | |
Total current assets | | 43,811 | | | 50,407 | |
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Property, plant, and equipment, net of accumulated depreciation of $97,122 ($93,386 as of December 31, 2022) | | 93,352 | | | 80,860 | |
Equity investments | | 5,700 | | | 5,912 | |
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Goodwill | | 27,591 | | | 27,591 | |
Identified intangible assets, net | | 4,970 | | | 6,018 | |
Other long-term assets | | 13,413 | | | 11,315 | |
Total assets | | $ | 188,837 | | | $ | 182,103 | |
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Liabilities and stockholders’ equity | | | | |
Current liabilities: | | | | |
Short-term debt | | $ | 2,288 | | | $ | 4,367 | |
Accounts payable | | 8,669 | | | 9,595 | |
Accrued compensation and benefits | | 3,115 | | | 4,084 | |
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Income taxes payable | | 2,112 | | | 2,251 | |
Other accrued liabilities | | 12,430 | | | 11,858 | |
Total current liabilities | | 28,614 | | | 32,155 | |
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Debt | | 46,591 | | | 37,684 | |
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Other long-term liabilities | | 7,946 | | | 8,978 | |
Contingencies (Note 13) | | | | |
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Stockholders’ equity: | | | | |
| | | | |
Common stock and capital in excess of par value, 4,216 issued and outstanding (4,137 issued and outstanding as of December 31, 2022) | | 35,653 | | | 31,580 | |
Accumulated other comprehensive income (loss) | | (861) | | | (562) | |
Retained earnings | | 67,021 | | | 70,405 | |
Total Intel stockholders' equity | | 101,813 | | | 101,423 | |
Non-controlling interests | | 3,873 | | | 1,863 | |
Total stockholders' equity | | 105,686 | | | 103,286 | |
Total liabilities and stockholders’ equity | | $ | 188,837 | | | $ | 182,103 | |
See accompanying notes.
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| Financial Statements | Consolidated Condensed Balance Sheets | 6 |
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Consolidated Condensed Statements of Cash Flows | |
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| | Nine Months Ended |
(In Millions; Unaudited) | | Sep 30, 2023 | | Oct 1, 2022 |
| | | | |
Cash and cash equivalents, beginning of period | | $ | 11,144 | | | $ | 4,827 | |
Cash flows provided by (used for) operating activities: | | | | |
Net income (loss) | | (985) | | | 8,678 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Depreciation | | 5,753 | | | 8,309 | |
Share-based compensation | | 2,433 | | | 2,392 | |
| | | | |
Restructuring and other charges | | 718 | | | 665 | |
Amortization of intangibles | | 1,336 | | | 1,439 | |
(Gains) losses on equity investments, net | | 47 | | | (4,075) | |
(Gains) losses on divestitures | | — | | | (1,072) | |
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Changes in assets and liabilities: | | | | |
Accounts receivable | | 1,290 | | | 1,991 | |
Inventories | | 1,758 | | | (2,043) | |
Accounts payable | | (1,082) | | | (485) | |
Accrued compensation and benefits | | (1,171) | | | (1,912) | |
| | | | |
Income taxes | | (2,676) | | | (4,062) | |
Other assets and liabilities | | (574) | | | (2,095) | |
Total adjustments | | 7,832 | | | (948) | |
Net cash provided by (used for) operating activities | | 6,847 | | | 7,730 | |
Cash flows provided by (used for) investing activities: | | | | |
Additions to property, plant, and equipment | | (19,054) | | | (19,145) | |
| | | | |
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Purchases of short-term investments | | (37,287) | | | (31,669) | |
Maturities and sales of short-term investments | | 36,725 | | | 35,129 | |
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Sales of equity investments | | 375 | | | 4,880 | |
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Proceeds from divestitures | | — | | | 6,579 | |
Other investing | | 518 | | | (2,764) | |
Net cash used for investing activities | | (18,723) | | | (6,990) | |
Cash flows provided by (used for) financing activities: | | | | |
Repayment of commercial paper | | (3,944) | | | — | |
| | | | |
| | | | |
Payments on finance leases | | (96) | | | (341) | |
Partner contributions | | 1,106 | | | — | |
Proceeds from sales of subsidiary shares | | 2,423 | | | — | |
Issuance of long-term debt, net of issuance costs | | 11,391 | | | 6,103 | |
Repayment of debt | | (423) | | | (3,088) | |
| | | | |
| | | | |
| | | | |
| | | | |
Payment of dividends to stockholders | | (2,561) | | | (4,488) | |
| | | | |
| | | | |
| | | | |
Other financing | | 457 | | | 776 | |
Net cash provided by (used for) financing activities | | 8,353 | | | (1,038) | |
| | | | |
Net increase (decrease) in cash and cash equivalents | | (3,523) | | | (298) | |
Cash and cash equivalents, end of period | | $ | 7,621 | | | $ | 4,529 | |
| | | | |
Supplemental disclosures: | | | | |
Acquisition of property, plant, and equipment included in accounts payable and accrued liabilities | | $ | 5,234 | | | $ | 3,386 | |
| | | | |
| | | | |
Cash paid during the period for: | | | | |
Interest, net of capitalized interest | | $ | 968 | | | $ | 315 | |
Income taxes, net of refunds | | $ | 1,649 | | | $ | 3,960 | |
| | | | |
| | | | |
| | | | |
See accompanying notes.
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| Financial Statements | Consolidated Condensed Statements of Cash Flows | 7 |
| | | | | |
Consolidated Condensed Statements of Stockholders' Equity | |
| |
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(In Millions, Except Per Share Amounts; Unaudited) | | Common Stock and Capital in Excess of Par Value | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Non-Controlling Interests | | Total |
| Shares | | Amount | | | | |
Three Months Ended | | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance as of July 1, 2023 | | 4,188 | | | $ | 34,330 | | | $ | (544) | | | $ | 67,231 | | | $ | 3,454 | | | $ | 104,471 | |
| | | | | | | | | | | | |
Net income (loss) | | — | | | — | | | — | | | 297 | | | 13 | | | 310 | |
Other comprehensive income (loss) | | — | | | — | | | (317) | | | — | | | — | | | (317) | |
Net proceeds from sales of subsidiary shares and partner contributions | | — | | | 388 | | | — | | | — | | | 371 | | | 759 | |
Employee equity incentive plans and other | | 33 | | | 372 | | | — | | | — | | | — | | | 372 | |
Share-based compensation | | — | | | 737 | | | — | | | — | | | 35 | | | 772 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Restricted stock unit withholdings | | (5) | | | (174) | | | — | | | 18 | | | — | | | (156) | |
Cash dividends declared ($0.13 per share) | | — | | | — | | | — | | | (525) | | | — | | | (525) | |
Balance as of September 30, 2023 | | 4,216 | | | $ | 35,653 | | | $ | (861) | | | $ | 67,021 | | | $ | 3,873 | | | $ | 105,686 | |
| | | | | | | | | | | | |
Balance as of July 2, 2022 | | 4,106 | | | $ | 29,858 | | | $ | (1,625) | | | $ | 72,985 | | | $ | — | | | $ | 101,218 | |
| | | | | | | | | | | | |
Net income (loss) | | — | | | — | | | — | | | 1,019 | | | — | | | 1,019 | |
Other comprehensive income (loss) | | — | | | — | | | (426) | | | — | | | — | | | (426) | |
| | | | | | | | | | | | |
Employee equity incentive plans and other | | 24 | | | 399 | | | — | | | — | | | — | | | 399 | |
Share-based compensation | | — | | | 793 | | | — | | | — | | | — | | | 793 | |
Restricted stock unit withholdings | | (3) | | | (138) | | | — | | | 32 | | | — | | | (106) | |
Cash dividends declared ($0.73 per share) | | — | | | — | | | — | | | (3,012) | | | — | | | (3,012) | |
Balance as of October 1, 2022 | | 4,127 | | | $ | 30,912 | | | $ | (2,051) | | | $ | 71,024 | | | $ | — | | | $ | 99,885 | |
| | | | | | | | | | | | |
Nine Months Ended | | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance as of December 31, 2022 | | 4,137 | | | $ | 31,580 | | | $ | (562) | | | $ | 70,405 | | | $ | 1,863 | | | $ | 103,286 | |
| | | | | | | | | | | | |
Net income (loss) | | — | | | — | | | — | | | (980) | | | (5) | | | (985) | |
Other comprehensive income (loss) | | — | | | — | | | (299) | | | — | | | — | | | (299) | |
Net proceeds from sales of subsidiary shares and partner contributions | | — | | | 1,254 | | | — | | | — | | | 1,912 | | | 3,166 | |
Employee equity incentive plans and other | | 91 | | | 1,037 | | | — | | | — | | | — | | | 1,037 | |
Share-based compensation | | — | | | 2,330 | | | — | | | — | | | 103 | | | 2,433 | |
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Restricted stock unit withholdings | | (12) | | | (548) | | | — | | | 157 | | | — | | | (391) | |
Cash dividends declared ($0.62 per share) | | — | | | — | | | — | | | (2,561) | | | — | | | (2,561) | |
Balance as of September 30, 2023 | | 4,216 | | | $ | 35,653 | | | $ | (861) | | | $ | 67,021 | | | $ | 3,873 | | | $ | 105,686 | |
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Balance as of December 25, 2021 | | 4,070 | | | $ | 28,006 | | | $ | (880) | | | $ | 68,265 | | | $ | — | | | $ | 95,391 | |
| | | | | | | | | | | | |
Net income (loss) | | — | | | — | | | — | | | 8,678 | | | — | | | 8,678 | |
Other comprehensive income (loss) | | — | | | — | | | (1,171) | | | — | | | — | | | (1,171) | |
Employee equity incentive plans and other | | 66 | | | 1,000 | | | — | | | — | | | — | | | 1,000 | |
Share-based compensation | | — | | | 2,392 | | | — | | | — | | | — | | | 2,392 | |
Restricted stock unit withholdings | | (9) | | | (486) | | | — | | | 79 | | | — | | | (407) | |
Cash dividends declared ($1.46 per share) | | — | | | — | | | — | | | (5,998) | | | — | | | (5,998) | |
Balance as of October 1, 2022 | | 4,127 | | | $ | 30,912 | | | $ | (2,051) | | | $ | 71,024 | | | $ | — | | | $ | 99,885 | |
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See accompanying notes.
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| Financial Statements | Consolidated Condensed Statements of Stockholders' Equity | 8 |
| | | | | |
Notes to Consolidated Condensed Financial Statements | |
| |
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Note 1 : | Basis of Presentation |
We prepared our interim Consolidated Condensed Financial Statements that accompany these notes in conformity with US GAAP, consistent in all material respects with those applied in our 2022 Form 10-K.
We have a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal year 2023 is a 52-week fiscal year; fiscal 2022 was a 53-week fiscal year, with the extra week included in the first quarter of 2022.
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, and 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 2022 Form 10-K where we include additional information on our critical accounting estimates, policies, and the methods and assumptions used in our estimates.
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Note 2 : | Operating Segments |
We previously announced the organizational change to integrate AXG into CCG and DCAI. This change is intended to drive a more effective go-to-market capability and to accelerate the scale of these businesses, while also reducing costs. As a result, we modified our segment reporting in the first quarter of 2023 to align to this and certain other business reorganizations. All prior-period segment data has been retrospectively adjusted to reflect the way our CODM internally receives information and manages and monitors our operating segment performance starting in fiscal year 2023.
We manage our business through the following operating segments:
▪Client Computing (CCG)
▪Data Center and AI (DCAI)
▪Network and Edge (NEX)
▪Mobileye
▪Intel Foundry Services (IFS)
We derive a substantial majority of our revenue from our principal products that incorporate various components and technologies, including a microprocessor and chipset, a stand-alone SoC, or a multichip package, which is based on Intel® architecture.
CCG, DCAI and NEX are our reportable operating segments. Mobileye and IFS do not qualify as reportable operating segments; however, we have elected to disclose the results of these non-reportable operating segments. When we enter into federal contracts, they are aligned to the sponsoring operating segment.
We have sales and marketing, manufacturing, engineering, finance, and administration groups. Expenses for these groups are generally allocated to the operating segments.
We have an "all other" category that includes revenue, expenses, and charges such as:
▪results of operations from non-reportable segments not otherwise presented, and from start-up businesses that support our initiatives;
▪historical results of operations from divested businesses;
▪amounts included within restructuring and other charges;
▪employee benefits, compensation, impairment charges, and other expenses not allocated to the operating segments; and
▪acquisition-related costs, including amortization and any impairment of acquisition-related intangibles and goodwill.
The CODM, who is our CEO, allocates resources to and assesses the performance of each operating segment using information about the operating segment's revenue and operating income (loss). The CODM does not evaluate operating segments using discrete asset information, and we do not identify or allocate assets by operating segments. Based on the interchangeable nature of our manufacturing and assembly and test assets, most of the related depreciation expense is not directly identifiable within our operating segments, as it is included in overhead cost pools and subsequently absorbed into inventory as each product passes through our manufacturing process. Because our products are then sold across multiple operating segments, it is impracticable to determine the total depreciation expense included as a component of each operating segment's operating income (loss) results. We do not allocate gains and losses from equity investments, interest and other income, share-based compensation, or taxes to our operating segments. Although the CODM uses operating income (loss) to evaluate the segments, operating costs included in one segment may benefit other segments. The accounting policies for segment reporting are the same as for Intel as a whole. There have been no changes to our segment accounting policies disclosed in our 2022 Form 10-K except for the organizational change described above.
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| Financial Statements | Notes to Financial Statements | 9 |
Net revenue and operating income (loss) for each period were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Millions) | | Sep 30, 2023 | | Oct 1, 2022 | | Sep 30, 2023 | | Oct 1, 2022 |
Net revenue: | | | | | | | | |
Client Computing | | | | | | | | |
Desktop | | $ | 2,753 | | | $ | 3,222 | | | $ | 7,002 | | | $ | 8,152 | |
Notebook | | 4,503 | | | 4,408 | | | 11,806 | | | 15,118 | |
Other | | 611 | | | 498 | | | 1,606 | | | 1,858 | |
| | 7,867 | | | 8,128 | | | 20,414 | | | 25,128 | |
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Data Center and AI | | 3,814 | | | 4,255 | | | 11,536 | | | 15,024 | |
Network and Edge | | 1,450 | | | 2,133 | | | 4,303 | | | 6,483 | |
Mobileye | | 530 | | | 450 | | | 1,442 | | | 1,304 | |
Intel Foundry Services | | 311 | | | 78 | | | 661 | | | 291 | |
All other | | 186 | | | 294 | | | 466 | | | 782 | |
Total net revenue | | $ | 14,158 | | | $ | 15,338 | | | $ | 38,822 | | | $ | 49,012 | |
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Operating income (loss): | | | | | | | | |
Client Computing | | $ | 2,073 | | | $ | 1,447 | | | $ | 3,632 | | | $ | 5,045 | |
Data Center and AI | | 71 | | | (139) | | | (608) | | | 1,174 | |
Network and Edge | | 17 | | | 197 | | | (470) | | | 907 | |
Mobileye | | 170 | | | 142 | | | 422 | | | 480 | |
Intel Foundry Services | | (86) | | | (90) | | | (369) | | | (247) | |
All other | | (2,253) | | | (1,732) | | | (5,099) | | | (3,893) | |
Total operating income (loss) | | $ | (8) | | | $ | (175) | | | $ | (2,492) | | | $ | 3,466 | |
In the second quarter of 2022, we initiated the wind-down of our Intel® Optane™ memory business, which is part of our DCAI operating segment, resulting in an inventory impairment of $559 million in Cost of sales on the Consolidated Condensed Statements of Income in the first nine months of 2022. The impairment charge was recognized as a Corporate charge in the "all other" category presented above.
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Note 3 : | Non-Controlling Interests |
Semiconductor Co-Investment Program
In 2022, we closed a transaction with Brookfield Asset Management (Brookfield) resulting in the formation of Arizona Fab LLC (Arizona Fab), a VIE for which we and Brookfield own 51% and 49%, respectively. Because we are the primary beneficiary of the VIE, we fully consolidate the results of Arizona Fab into our consolidated financial statements. Generally, contributions will be made to, and distributions will be received from, Arizona Fab based on both parties' proportional ownership. We will be sole operator and majority owner of two new chip factories that will be constructed by Arizona Fab, and we will have the right to purchase 100% of the related factory output. Once production commences, we will be required to operate Arizona Fab at minimum production levels measured in wafer starts per week and will be required to limit excess inventory held on site or we will be subject to certain penalties.
We have an unrecognized commitment to fund our respective share of the total construction costs of Arizona Fab of $29.0 billion.
As of September 30, 2023, a substantial majority of the assets of Arizona Fab consisted of property, plant, and equipment. The assets held by Arizona Fab, which can be used only to settle obligations of the VIE and are not available to us, were $4.0 billion as of September 30, 2023 ($1.8 billion as of December 31, 2022).
Non-controlling interest in Arizona Fab was $2.0 billion as of September 30, 2023 ($874 million as of December 31, 2022). Net loss attributable to non-controlling interest in Arizona Fab was $3 million in the third quarter of 2023 and $12 million in the first nine months of 2023; there was no net income (loss) attributable to non-controlling interest in the first nine months of 2022.
Mobileye
In 2022, Mobileye completed its IPO and certain other equity financing transactions that resulted in net proceeds of $1.0 billion. During the second quarter of 2023, we converted $38.5 million of Class B shares into Class A shares, representing 5% of Mobileye’s outstanding capital stock, and subsequently sold the Class A shares for $42 per share as part of a secondary offering. We received net proceeds of $1.6 billion and increased our capital in excess of par value by $663 million, net of tax, as a result of the secondary offering. We continue to consolidate the results of Mobileye into our consolidated financial statements.
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| Financial Statements | Notes to Financial Statements | 10 |
As of September 30, 2023, Intel held approximately 88% (94% as of December 31, 2022) of the outstanding equity interest in Mobileye. Non-controlling interest in Mobileye was $1.8 billion as of September 30, 2023 ($1.0 billion as of December 31, 2022). Net income attributable to non-controlling interest in Mobileye was $6 million in the third quarter of 2023 and $3 million of net loss in the first nine months of 2023; there was no net income (loss) attributable to non-controlling interest in the first nine months of 2022.
IMS Nanofabrication
In August 2023, we closed an agreement to sell a 20% minority stake in our IMS Nanofabrication GmbH (IMS) business, a business within our IFS operating segment, to Bain Capital Special Situations (Bain Capital). Net proceeds resulting from the sale were $849 million and our capital in excess of par value increased by $591 million, net of tax. We continue to consolidate the results of IMS into our consolidated financial statements.
Non-controlling interest in IMS was $109 million as of September 30, 2023. Net income attributable to the non-controlling interest in IMS was $10 million in the third quarter of 2023 and in the first nine months of 2023.
In September 2023, we signed agreements to sell an additional 12.5% minority stake in our IMS business, including 10% to Taiwan Semiconductor Manufacturing Company, Ltd. (TSMC), which are expected to close in the fourth quarter of 2023.
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Note 4 : | Earnings (Loss) Per Share |
We computed basic earnings (loss) per share of common stock based on the weighted average number of shares of common stock outstanding during the period. We computed diluted earnings (loss) 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.
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| | Three Months Ended | | Nine Months Ended |
(In Millions, Except Per Share Amounts) | | Sep 30, 2023 | | Oct 1, 2022 | | Sep 30, 2023 | | Oct 1, 2022 |
Net income (loss) | | $ | 310 | | | $ | 1,019 | | | $ | (985) | | | $ | 8,678 | |
Less: Net income (loss) attributable to non-controlling interests | | 13 | | | — | | | (5) | | | — | |
Net income (loss) attributable to Intel | | 297 | | | 1,019 | | | (980) | | | 8,678 | |
Weighted average shares of common stock outstanding—basic | | 4,202 | | | 4,118 | | | 4,180 | | | 4,104 | |
Dilutive effect of employee equity incentive plans | | 27 | | | 7 | | | — | | | 19 | |
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Weighted average shares of common stock outstanding—diluted | | 4,229 | | | 4,125 | | | 4,180 | | | 4,123 | |
Earnings (loss) per share attributable to Intel—basic
| | $ | 0.07 | | | $ | 0.25 | | | $ | (0.23) | | | $ | 2.11 | |
Earnings (loss) per share attributable to Intel—diluted
| | $ | 0.07 | | | $ | 0.25 | | | $ | (0.23) | | | $ | 2.10 | |
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 RSUs, and the assumed issuance of common stock under the stock purchase plan. Securities that were anti-dilutive were insignificant and were excluded from the computation of diluted earnings per share in all periods presented.
Due to our net loss in the nine months ended September 30, 2023, the assumed exercise of outstanding stock options, the assumed vesting of outstanding RSUs, and the assumed issuance of common stock under the stock purchase plan had an anti-dilutive effect on diluted loss per share for the period and were excluded.
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Note 5 : | Other Financial Statement Details |
Accounts Receivable
We sell certain of our accounts receivable on a non-recourse basis to third-party financial institutions. We record these transactions as sales of receivables and present cash proceeds as cash provided by operating activities in the Consolidated Condensed Statements of Cash Flows. Accounts receivable sold under non-recourse factoring arrangements were $1.5 billion during the first nine months of 2023. After the sale of our accounts receivable, we expect to collect payment from the customers and remit it to the third-party financial institution.
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| Financial Statements | Notes to Financial Statements | 11 |
Inventories
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(In Millions) | | Sep 30, 2023 | | Dec 31, 2022 |
Raw materials | | $ | 1,278 | | | $ | 1,517 | |
Work in process | | 6,266 | | | 7,565 | |
Finished goods | | 3,922 | | | 4,142 | |
Total inventories | | $ | 11,466 | | | $ | 13,224 | |
Property, Plant, and Equipment
Effective January 2023, we increased the estimated useful life of certain production machinery and equipment from 5 years to 8 years. We estimate this change resulted in an approximate $690 million increase to gross margin and an approximate $110 million decrease in R&D expense in the third quarter of 2023 when compared to what the impact would have been using the estimated useful life in place prior to this change. We estimate this change resulted in an approximate $1.6 billion increase to gross margin and an approximate $320 million decrease in R&D expenses in the first nine months of 2023. As of September 30, 2023, we estimate this change resulted in an approximate $1.2 billion decrease in ending inventory values. These estimates are based on the assets in use and under construction as of the beginning of 2023.
Other Accrued Liabilities
Other accrued liabilities include deferred compensation of $2.6 billion as of September 30, 2023 ($2.4 billion as of December 31, 2022).
Interest and Other, Net | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Millions) | | Sep 30, 2023 | | Oct 1, 2022 | | Sep 30, 2023 | | Oct 1, 2022 |
Interest income | | $ | 332 | | | $ | 170 | | | $ | 979 | | | $ | 315 | |
Interest expense | | (204) | | | (114) | | | (611) | | | (347) | |
Other, net | | 19 | | | 82 | | | 144 | | | 1,048 | |
Total interest and other, net | | $ | 147 | | | $ | 138 | | | $ | 512 | | | $ | 1,016 | |
Interest expense is net of $395 million of interest capitalized in the third quarter of 2023 and $1.1 billion in the first nine months of 2023 ($220 million in the third quarter of 2022 and $516 million in the first nine months of 2022). Other, net includes a gain in 2022 of $1.0 billion resulting from the first closing of the divestiture of our NAND memory business.
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Note 6 : | Restructuring and Other Charges |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Millions) | | Sep 30, 2023 | | Oct 1, 2022 | | Sep 30, 2023 | | Oct 1, 2022 |
Employee severance and benefit arrangements | | $ | 59 | | | $ | 607 | | | $ | 191 | | | $ | 650 | |
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Litigation charges and other | | 757 | | | 4 | | | 854 | | | (1,199) | |
Asset impairment charges | | — | | | 53 | | | 35 | | | 89 | |
Total restructuring and other charges | | $ | 816 | | | $ | 664 | | | $ | 1,080 | | | $ | (460) | |
The 2022 Restructuring Program was approved in the third quarter of 2022 to rebalance our workforce and operations to create efficiencies and improve our product execution in alignment with our strategy. We expect these actions to be substantially completed by the end of 2023, but this is subject to change. Any changes to the estimates or timing of executing the 2022 Restructuring Program will be reflected in our results of operations.
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Restructuring activity for the 2022 Restructuring Program during the first nine months of 2023 was as follows: |
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(In Millions) | | | | | | |
Accrued restructuring balance as of December 31, 2022 | | $ | 873 | | | | | |
Additional accruals | | 130 | | | | | |
Adjustments | | 56 | | | | | |
Cash payments | | (923) | | | | | |
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Accrued restructuring balance as of September 30, 2023 | | $ | 136 | | | | | |
| | | | | | | | | | | |
| Financial Statements | Notes to Financial Statements | 12 |
The accrued restructuring balances as of September 30, 2023 and December 31, 2022 were recorded as current liabilities within accrued compensation and benefits on the Consolidated Condensed Balance Sheets. The cumulative cost of the 2022 Restructuring Program as of September 30, 2023 was $1.2 billion.
Litigation charges and other includes a $401 million charge in the third quarter of 2023 for an EC-imposed fine. In 2009, we recorded and paid an EC fine that was subsequently annulled, resulting in a benefit of $1.2 billion in the first quarter of 2022. Refer to "Note 13: Contingencies" within the Notes to Consolidated Condensed Financial Statements for further information on legal proceedings related to the EC fine.
Also in the third quarter of 2023 we mutually agreed with Tower to terminate the agreement we entered into during the first quarter of 2022 to acquire Tower in a cash-for-stock transaction, representing a total enterprise value of approximately $5.4 billion as of the agreement date. We mutually agreed to terminate the agreement due to our inability to obtain required regulatory approvals in a timely manner and we paid a termination fee in accordance with the terms of the agreement, resulting in a $353 million charge included in Litigation charges and other.
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| | Three Months Ended | | Nine Months Ended |
(In Millions) | | Sep 30, 2023 | | Oct 1, 2022 | | Sep 30, 2023 | | Oct 1, 2022 |
Income (loss) before taxes | | $ | (52) | | | $ | (188) | | | $ | (2,026) | | | $ | 8,564 | |
Provision for (benefit from) taxes | | $ | (362) | | | $ | (1,207) | | | $ | (1,041) | | | $ | (114) | |
Effective tax rate | | 696.2 | % | | 642.0 | % | | 51.4 | % | | (1.3) | % |
Our provision for, or benefit from, income taxes for an interim period has historically been determined using an estimated annual effective tax rate, adjusted for discrete items, if any. Under certain circumstances where we are unable to make a reliable estimate of the annual effective tax rate, we use the actual effective tax rate for the year-to-date period. During the first nine months of 2023, we used this approach due to the variability of the rate as a result of fluctuations in forecasted income and the effects of being taxed in multiple tax jurisdictions.
Short-term Investments
Short-term investments include marketable debt investments in corporate debt, government debt, and financial institution instruments, and are recorded within cash and cash equivalents and short-term investments on the Consolidated Condensed Balance Sheets. Government debt includes instruments such as non-US government bills and bonds and US 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. As of September 30, 2023, and December 31, 2022, substantially all time deposits were issued by institutions outside the US.
For certain of our marketable debt investments, we economically hedge market risks at inception with a related derivative instrument or the marketable debt investment itself is used to economically hedge currency exchange rate risk from remeasurement. These hedged investments are reported at fair value with gains or losses from the investments and the related derivative instruments recorded in interest and other, net. The fair value of our hedged investments was $16.1 billion as of September 30, 2023 ($16.2 billion as of December 31, 2022). For hedged investments still held at the reporting date, we recorded net losses of $329 million in the third quarter of 2023 and net losses of $336 million in the first nine months of 2023 ($861 million of net losses in the third quarter of 2022 and $1.8 billion of net losses in the first nine months of 2022). We recorded net gains on the related derivatives of $320 million in the third quarter of 2023 and net gains of $354 million in the first nine months of 2023 ($916 million of net gains in the third quarter of 2022 and net gains of $1.8 billion in the first nine months of 2022).
Our remaining unhedged marketable debt investments are reported at fair value, with unrealized gains or losses, net of tax, recorded in accumulated other comprehensive income (loss). The adjusted cost of our unhedged investments was $6.1 billion as of September 30, 2023 ($10.2 billion as of December 31, 2022), which approximated the fair value for these periods.
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| Financial Statements | Notes to Financial Statements | 13 |
The fair value of marketable debt investments, by contractual maturity, as of September 30, 2023, was as follows:
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(In Millions) | | Fair Value |
Due in 1 year or less | | $ | 11,487 | |
Due in 1–2 years | | 2,249 | |
Due in 2–5 years | | 6,220 | |
Due after 5 years | | 417 | |
Instruments not due at a single maturity date1 | | 1,814 | |
Total | | $ | 22,187 | |
1 Instruments not due at a single maturity date is comprised of money market fund deposits, which are classified as either short-term investments or cash and cash equivalents.
Equity Investments
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(In Millions) | | Sep 30, 2023 | | Dec 31, 2022 |
Marketable equity securities1 | | $ | 1,117 | | | $ | 1,341 | |
Non-marketable equity securities | | 4,578 | | | 4,561 | |
Equity method investments | | 5 | | | 10 | |
Total | | $ | 5,700 | | | $ | 5,912 | |
1 Over 90% of our marketable equity securities are subject to trading-volume or market-based restrictions, which limit the number of shares we may sell in a specified period of time, impacting our ability to liquidate these investments. The trading volume restrictions generally apply for as long as we own more than 1% of the outstanding shares. Market-based restrictions result from the rules of the respective exchange.
The components of gains (losses) on equity investments, net for each period were as follows:
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| | Three Months Ended | | Nine Months Ended |
(In Millions) | | Sep 30, 2023 | | Oct 1, 2022 | | Sep 30, 2023 | | Oct 1, 2022 |
Ongoing mark-to-market adjustments on marketable equity securities | | $ | (267) | | | $ | (244) | | | $ | (164) | | | $ | (883) | |
Observable price adjustments on non-marketable equity securities | | 7 | | | 67 | | | 17 | | | 273 | |
Impairment charges | | (53) | | | (45) | | | (127) | | | (112) | |
Sale of equity investments and other1 | | 122 | | | 71 | | | 228 | | | 4,804 | |
Total gains (losses) on equity investments, net | | $ | (191) | | | $ | (151) | | | $ | (46) | | | $ | 4,082 | |
1 Sale of equity investments and other includes initial fair value adjustments recorded upon a security becoming marketable, realized gains (losses) on sales of non-marketable equity investments and equity method investments, and our share of equity method investee gains (losses) and distributions.
Net unrealized gains and losses for our marketable and non-marketable equity securities for each period were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | | |
(In Millions) | | Sep 30, 2023 | | Oct 1, 2022 | | Sep 30, 2023 | | Oct 1, 2022 | | | | | | |
Net unrealized gains (losses) recognized during the period on equity securities | | $ | (205) | | | $ | (154) | | | $ | (64) | | | $ | (490) | | | | | | | |
Less: Net (gains) losses recognized during the period on equity securities sold during the period | | 12 | | | 1 | | | (15) | | | 15 | | | | | | | |
Net unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date | | $ | (193) | | | $ | (153) | | | $ | (79) | | | $ | (475) | | | | | | | |
McAfee Corp.
During the first quarter of 2022, the sale of the McAfee consumer business was completed and we received $4.6 billion in cash for the sale of our remaining share of McAfee, recognizing a $4.6 billion gain in sale of equity investments and other.
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| Financial Statements | Notes to Financial Statements | 14 |
NAND Memory Business
On December 29, 2021, we closed the first phase of our agreement with SK hynix Inc. (SK hynix) to divest our NAND memory business for $9.0 billion in cash. Our NAND memory business includes our NAND memory technology and manufacturing business (the NAND OpCo Business), of which we deconsolidated our ongoing interests as part of the sale. The transaction will be completed in two closings and upon the first closing in the first quarter of 2022, SK hynix paid $7.0 billion of consideration and we recognized a pre-tax gain of $1.0 billion within interest and other, net, and tax expense of $495 million. We recorded a receivable in other long-term assets for the remaining proceeds of $1.9 billion which remains outstanding as of September 30, 2023, and will be received upon the second closing of the transaction, expected to be no earlier than March 2025.
The wafer manufacturing and sale agreement includes incentives and penalties that are contingent on the cost of operation and output of the NAND OpCo Business. These incentives and penalties present a maximum exposure of up to $500 million annually, and $1.5 billion in the aggregate. We are currently in negotiations with SK hynix to update the operating plan of the NAND OpCo Business in light of the current business environment and projections, which may impact the metrics associated with the incentives and penalties and our expectations of the performance of the NAND OpCo Business against those metrics.
As of September 30, 2023, we also have a receivable due from the NAND OpCo Business, a deconsolidated entity, of $204 million recorded within other current assets on the Consolidated Condensed Balance Sheets. We will be reimbursed for costs of $32 million per quarter in 2023 for corporate function services, which include human resources, information technology, finance, supply chain, and other compliance requirements associated with being wholly owned subsidiaries.
In the third quarter of 2023, we remarketed $423 million aggregate principal amount 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 unsecured general obligations in accordance with loan agreements we entered into with each of the Industrial Development Authority of the City of Chandler, Arizona and the State of Oregon Business Development Commission. The bonds mature in 2035 and 2040 and have 3.8% and 4.1% coupons. Both the Arizona and Oregon bonds are subject to optional tender starting in February 2028 and mandatory tender in June 2028, at which time we may remarket the bonds for a new term period.
In the first quarter of 2023, we issued a total of $11.0 billion aggregate principal amount of senior notes. We also amended both our 5-year $5.0 billion revolving credit facility agreement, extending the maturity date by one year to March 2028, and our 364-day $5.0 billion credit facility agreement, extending the maturity date to March 2024. The revolving credit facilities had no borrowings outstanding as of September 30, 2023.
We have an ongoing authorization from our Board of Directors to borrow up to $10.0 billion under our commercial paper program. In the first nine months of 2023, we settled in cash $3.9 billion of our commercial paper. We had no outstanding commercial paper as of September 30, 2023 ($3.9 billion as of December 31, 2022).
Our senior fixed rate notes pay interest semiannually. We may redeem the fixed rate notes prior to their maturity at our option at specified redemption prices and subject to certain restrictions. The obligations under our senior fixed rate notes rank equally in the right of payment with all of our other existing and future senior unsecured indebtedness and effectively rank junior to all liabilities of our subsidiaries.
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| Financial Statements | Notes to Financial Statements | 15 |
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Sep 30, 2023 | | Dec 31, 2022 | | |
| | 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 | | $ | — | | | $ | 1,074 | | | $ | — | | | $ | 1,074 | | | $ | — | | | $ | 856 | | | $ | — | | | $ | 856 | | | |
Financial institution instruments¹ | | 1,779 | | | 1,876 | | | — | | | 3,655 | | | 6,899 | | | 1,474 | | | — | | | 8,373 | | | |
Government debt² | | — | | | 49 | | | — | | | 49 | | | — | | | — | | | — | | | — | | | |
Reverse repurchase agreements | | — | | | 2,334 | | | — | | | 2,334 | | | — | | | 1,301 | | | — | | | 1,301 | | | |
Short-term investments: | | | | | | | | | | | | | | | | | | |
Corporate debt | | — | | | 6,168 | | | — | | | 6,168 | | | — | | | 5,381 | | | — | | | 5,381 | | | |
Financial institution instruments¹ | | 35 | | | 4,105 | | | — | | | 4,140 | | | 196 | | | 4,729 | | | — | | | 4,925 | | | |
Government debt² | | 50 | | | 7,051 | | | — | | | 7,101 | | | 48 | | | 6,840 | | | — | | | 6,888 | | | |
Other current assets: | | | | | | | | | | | | | | | | | | |
Derivative assets | | 131 | | | 1,013 | | | — | | | 1,144 | | | — | | | 1,264 | | | — | | | 1,264 | | | |
Loans receivable | | — | | | 53 | | | — | | | 53 | | | — | | | 53 | | | — | | | 53 | | | |
Marketable equity securities | | 1,117 | | | — | | | — | | | 1,117 | | | 1,341 | | | — | | | — | | | 1,341 | | | |
Other long-term assets: | | | | | | | | | | | | | | | | | | |
Derivative assets | | — | | | 1 | | | — | | | 1 | | | — | | | 10 | | | — | | | 10 | | | |
| | | | | | | | | | | | | | | | | | |
Total assets measured and recorded at fair value | | $ | 3,112 | | | $ | 23,724 | | | $ | — | | | $ | 26,836 | | | $ | 8,484 | | | $ | 21,908 | | | $ | — | | | $ | 30,392 | | | |
Liabilities | | | | | | | | | | | | | | | | | | |
Other accrued liabilities: | | | | | | | | | | | | | | | | | | |
Derivative liabilities | | $ | 17 | | | $ | 727 | | | $ | 147 | | | $ | 891 | | | $ | 111 | | | $ | 485 | | | $ | 89 | | | $ | 685 | | | |
| | | | | | | | | | | | | | | | | | |
Other long-term liabilities: | | | | | | | | | | | | | | | | | | |
Derivative liabilities | | — | | | 841 | | | — | | | 841 | | | — | | | 699 | | | — | | | 699 | | | |
Total liabilities measured and recorded at fair value | | $ | 17 | | | $ | 1,568 | | | $ | 147 | | | $ | 1,732 | | | $ | 111 | | | $ | 1,184 | | | $ | 89 | | | $ | 1,384 | | | |
1Level 1 investments consist of money market funds. Level 2 investments consist primarily of certificates of deposit, time deposits, and notes and bonds issued by financial institutions.
2Level 1 investments consist primarily of US Treasury securities. Level 2 investments consist primarily of non-US government debt.
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.
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 and equity method investments that have not been remeasured or impaired in the current period, grants receivable, reverse repurchase agreements with original maturities greater than three months, and issued debt. We classify the fair value of grants receivable and reverse repurchase agreements with original maturities greater than three months as Level 2. The estimated fair value of these financial instruments approximates their carrying value. The aggregate carrying value of grants receivable as of September 30, 2023 was $833 million (the aggregate carrying value as of December 31, 2022 was $437 million). We have no reverse repurchase agreements with original maturities greater than three months as of September 30, 2023 (the aggregate carrying value as of December 31, 2022 was $400 million).
We classify the fair value of issued debt (excluding any commercial paper) as Level 2. The fair value of our issued debt was $43.5 billion as of September 30, 2023 ($34.3 billion as of December 31, 2022).
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| Financial Statements | Notes to Financial Statements | 16 |
| | | | | |
Note 12 : | Derivative Financial Instruments |
Volume of Derivative Activity
Total gross notional amounts for outstanding derivatives (recorded at fair value) at the end of each period were as follows:
| | | | | | | | | | | | | | | | |
(In Millions) | | Sep 30, 2023 | | Dec 31, 2022 | | |
Foreign currency contracts | | $ | 31,291 | | | $ | 31,603 | | | |
Interest rate contracts | | 17,920 | | | 16,011 | | | |
Other | | 2,103 | | | 2,094 | | | |
Total | | $ | 51,314 | | | $ | 49,708 | | | |
Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Sep 30, 2023 | | Dec 31, 2022 |
(In Millions) | | Assets1 | | Liabilities2 | | Assets1 | | Liabilities2 |
Derivatives designated as hedging instruments: | | | | | | | | |
Foreign currency contracts3 | | $ | 27 | | | $ | 643 | | | $ | 142 | | | $ | 290 | |
Interest rate contracts | | — | | | 966 | | | — | | | 777 | |
Total derivatives designated as hedging instruments | | $ | 27 | | | $ | 1,609 | | | $ | 142 | | | $ | 1,067 | |
Derivatives not designated as hedging instruments: | | | | | | | | |
Foreign currency contracts3 | | $ | 601 | | | $ | 102 | | | $ | 866 | | | $ | 194 | |
Interest rate contracts | | 386 | | | 4 | | | 266 | | | 12 | |
Equity contracts | | 131 | | | 17 | | | — | | | 111 | |
Total derivatives not designated as hedging instruments | | $ | 1,118 | | | $ | 123 | | | $ | 1,132 | | | $ | 317 | |
Total derivatives | | $ | 1,145 | | | $ | 1,732 | | | $ | 1,274 | | | $ | 1,384 | |
1Derivative assets are recorded as other assets, current and long-term.
2Derivative liabilities are recorded as other liabilities, current and long-term.
3A majority of these instruments mature within 12 months.
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| Financial Statements | Notes to Financial Statements | 17 |
Amounts Offset in the Consolidated Condensed Balance Sheets