INTC: Financial Analysis through March 2009 (Update)

We previously analyzed the press release announcing Intel's results for the first quarter of the year, which ended 28 March 2009.

Semiconductor titan Intel Corporation (NASDAQ: INTC) has now filed a formal 10-Q for this period, with complete financial statements and footnotes.  We first jumped to the 10-Q's Cash Flow Statement because comprehensive cash flow data had been omitted from the press release.  The 10-Q indicated that Cash Flow from Operations was much weaker than we had estimated.

We then observed several minor differences between the financial statements in the 10-Q and the earnings announcement issued 16 days earlier.  We didn't find an explanation for these variations.

Intel made the following changes to the Income Statement for the first quarter of 2009: 

• The Cost of Sales increased by $23 million, from $3.884 billion to $3.907 billion; and,
• The Provision for Income Taxes decreased from $5 million to zero. (Earlier tax matters were settled favorably.)
  

These two changes cut reported Net Income by 2.8 percent, from $647 million to $629 million.  We have incorporated the latest data into our version of Intel's Income Statement.  See the following:

    http://sheet.zoho.com/public/ncarvin/intc-income-statement-2009q1?mode=html


Intel made the following changes to its Balance Sheet for 31 March 2009:

• Other current assets increased from $1070 million to $1075 million;
• Other long-term assets increased from $5615 million to $5640 million;
• Other accrued liabilities increased from $2253 million to $2301 million; and,
  
• Retained Earnings decreased from $25,627 million to $25,609 million.

We were surprised Cash Flow from Operations in the first quarter was only $378 million, given that Net Income was over $600 million and there were non-Cash depreciation charges of $1.2 billion.  We should have paid more attention to changes in Balance Sheet accruals. Intel's Cash Flow from Operations in the last four quarters was 31.6 percent less than in the four previous quarters.  Free Cash Flow dropped from 30 percent of Invested Capital to 11 percent.

The 10-Q describes significant accounting changes implemented in the first quarter.  For one, Intel adopted the provisions of FASB Staff Position APB 14-1, which revised the accounting for a class of convertible debt instruments.  This change led to restatements of several items on Intel's Balance Sheet for 31 December 2008.  For our purposes, the most substantial change is the 37 percent reduction in  Long-term Debt, as of 31 December 2008, from $1886 million to $1185 million.  This leads to a discontinuity in our tracking of LTD/Equity and Debt/CFO ratios, but Intel's Debt is not a concern one way or another.

Our initial analysis showed the Overall Gauge score for Intel dropping in the first quarter from 52 to 34 of the 100 possible points.  When we plugged in the new data from the 10-Q, the score fell another five points to 29.

• Cash Management: 10 of 25 (down from 12 in December)
  
• Growth: 0 of 25 (unchanged)
• Profitability: 8 of 25 (down from 16)
• Value: 7 of 25 (down from 15)
  

• Overall: 29 of 100 (down from 53)
  

The latest gauge metrics are listed below.  Figures that changed from the initial report are highlighted.

Cash Management	March 2009	3 months prior	12 months prior
Current Ratio	2.9	2.5	2.5
LTD/Equity	3.0%	3.0%	4.9%
Debt/CFO	0.1 years	0.1 years	0.2 years
Inventory/CGS	71.2 days	77.5 days	75.4 days
Finished Goods/Inventory	40.0%	41.6%	41.7%
Days of Sales Outstanding (DSO)	25.0 days	20.8 days	25.7 days
Working Capital/Invested Capital	39.8%	41.6%	46.0%
Cash Conversion Cycle Time	50.5 days	47.7 days	52.7 days
Gauge Score (0 to 25)	10	12	17

Growth	March 2009	3 months prior	12 months prior
Revenue growth	-10.5%	-2.0%	10.9%
Revenue/Assets	68.8%	70.8%	76.7%
CFO growth	-31.6%	-13.5%	31.7%
Net Income growth	-34.0%	-24.1%	27.4%
Gauge Score (0 to 25)	0	0	19

Growth rates are trailing four quarters compared to four previous quarters.

Profitability	March 2009	3 months prior	12 months prior
Operating Expenses/Revenue	77.2%	74.3%	76.1%
ROIC	19.6%	23.0%	23.0%
Free Cash Flow/Invested Capital	11.1%	19.8%	30.0%
Accrual Ratio	-0.2%	0.5%	2.1%
Gauge Score (0 to 25)	8	16	19

Value	March 2009	3 months prior	12 months prior
P/E	18.9	15.6	18.4
P/E vs. S&P 500 P/E	103%	85%	107%
PEG	N/A	2.0	1.2
Price/Revenue	2.4	2.2	3.2
Enterprise Value/Cash Flow (EV/CFO)	8.3	6.6	8.5
Gauge Score (0 to 25)	7	15	9

Overall	March 2009	3 months prior	12 months prior
Gauge Score (0 to 100)	29	53	58