Edgar Filing: INTEL CORP

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



	þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2017



	¨	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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨	Emerging growth company ¨
		(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Shares outstanding of the Registrant’s common stock:



Class		Outstanding as of September 30, 2017
Common stock, $0.001 par value		4,680 million

INTEL CORPORATION

FORM 10-Q

FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2017

INDEX



		Page

PART I
Item 1.	Financial Statements	2
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42

PART II
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 6.	Exhibits	44

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as "anticipates," "expects," "intends," "goals," "plans," "believes," "seeks," "estimates," "continues," "may," "will," “would,” "should," “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management's expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Annual Report on Form 10-K for the year ended December 31, 2016, particularly the "Risk Factors" sections of such reports. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of October 26, 2017. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and Intel does not undertake, and expressly disclaims any duty, to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law.

PART I – FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

INTEL CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)



	Three Months Ended						Nine Months Ended
(In Millions, Except Per Share Amounts)	Sep 30, 2017			Oct 1, 2016			Sep 30, 2017		Oct 1, 2016
Net revenue	$	16,149		$	15,778		$	45,708	$	43,013
Cost of sales	6,092			5,795			17,406		16,927
Gross margin	10,057			9,983			28,302		26,086
Research and development	3,223			3,069			9,824		9,460
Marketing, general and administrative	1,666			2,006			5,624		6,239
Restructuring and other charges	4			372			189		1,786
Amortization of acquisition-related intangibles	49			74			124		253
Operating expenses	4,942			5,521			15,761		17,738
Operating income	5,115			4,462			12,541		8,348
Gains (losses) on equity investments, net	846			(12		)	1,440		488
Interest and other, net	(31		)	(132		)	336		(340		)
Income before taxes	5,930			4,318			14,317		8,496
Provision for taxes	1,414			940			4,029		1,742
Net income	$	4,516		$	3,378		$	10,288	$	6,754
Basic earnings per share of common stock	$	0.96		$	0.71		$	2.19	$	1.43
Diluted earnings per share of common stock	$	0.94		$	0.69		$	2.12	$	1.39
Cash dividends declared per share of common stock	$	0.5450		$	0.5200		$	1.0775	$	1.0400
Weighted average shares of common stock outstanding:
Basic	4,688			4,734			4,707		4,728
Diluted	4,821			4,877			4,849		4,872

See accompanying notes.

INTEL CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)



	Three Months Ended					Nine Months Ended
(In Millions)	Sep 30, 2017		Oct 1, 2016			Sep 30, 2017			Oct 1, 2016
Net income	$	4,516	$	3,378		$	10,288		$	6,754
Changes in other comprehensive income, net of tax:
Net unrealized holding gains (losses) on available-for-sale investments	399		412			408			357
Deferred tax asset valuation allowance	—		(2		)	—			(5		)
Net unrealized holding gains (losses) on derivatives	19		61			350			274
Net prior service (costs) credits	2		1			(8		)	4
Actuarial valuation	11		10			241			(289		)
Net foreign currency translation adjustment	5		(2		)	513			(1		)
Other comprehensive income (loss)	436		480			1,504			340
Total comprehensive income	$	4,952	$	3,858		$	11,792		$	7,094

See accompanying notes.

INTEL CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)



(In Millions)	Sep 30, 2017		Dec 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	9,075	$	5,560
Short-term investments	1,446		3,225
Trading assets	6,983		8,314
Accounts receivable, net	5,954		4,690
Inventories	6,929		5,553
Assets held for sale	—		5,210
Other current assets	2,767		2,956
Total current assets	33,154		35,508
Property, plant and equipment, net of accumulated depreciation of $58,048 ($53,934 as of December 31, 2016)	39,472		36,171
Marketable equity securities	6,059		6,180
Other long-term investments	3,844		4,716
Goodwill	24,389		14,099
Identified intangible assets, net	13,058		9,494
Other long-term assets	7,112		7,159
Total assets	$	127,088	$	113,327
Liabilities, temporary equity, and stockholders’ equity
Current liabilities:
Short-term debt	$	4,142	$	4,634
Accounts payable	3,554		2,475
Accrued compensation and benefits	2,805		3,465
Accrued advertising	892		810
Deferred income	1,706		1,718
Liabilities held for sale	—		1,920
Other accrued liabilities	7,590		5,280
Total current liabilities	20,689		20,302
Long-term debt	27,498		20,649
Long-term deferred tax liabilities	2,943		1,730
Other long-term liabilities	4,152		3,538
Contingencies (Note 18)
Temporary equity	870		882
Stockholders’ equity:
Preferred stock	—		—
Common stock and capital in excess of par value, 4,680 issued and outstanding (4,730 issued and outstanding as of December 31, 2016)	26,547		25,373
Accumulated other comprehensive income (loss)	1,610		106
Retained earnings	42,779		40,747
Total stockholders’ equity	70,936		66,226
Total liabilities, temporary equity, and stockholders’ equity	$	127,088	$	113,327

See accompanying notes.

INTEL CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)



	Nine Months Ended
(In Millions)	Sep 30, 2017			Oct 1, 2016
Cash and cash equivalents, beginning of period	$	5,560		$	15,308
Cash flows provided by (used for) operating activities:
Net income	10,288			6,754
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	4,990			4,684
Share-based compensation	1,051			1,136
Restructuring and other charges	189			1,786
Amortization of intangibles	999			1,176
(Gains) losses on equity investments, net	(1,372		)	(414		)
(Gains) losses on divestitures	(387		)	—
Deferred taxes	570			(188		)
Changes in assets and liabilities:¹
Accounts receivable	(1,128		)	(100		)
Inventories	(1,245		)	(118		)
Accounts payable	171			188
Accrued compensation and benefits	(551		)	(1,874		)
Income taxes payable and receivable	979			961
Other assets and liabilities	315			(333		)
Total adjustments	4,581			6,904
Net cash provided by operating activities	14,869			13,658
Cash flows provided by (used for) investing activities:
Additions to property, plant and equipment	(7,709		)	(6,095		)
Acquisitions, net of cash acquired	(14,499		)	(15,151		)
Purchases of available-for-sale investments	(1,977		)	(7,962		)
Sales of available-for-sale investments	4,610			3,793
Maturities of available-for-sale investments	3,488			4,928
Purchases of trading assets	(9,792		)	(9,953		)
Maturities and sales of trading assets	11,806			7,867
Investments in loans receivable and reverse repurchase agreements	—			(223		)
Collection of loans receivable and reverse repurchase agreements	250			911
Investments in non-marketable equity investments	(726		)	(893		)
Proceeds from divestitures	3,124			—
Other investing	893			405
Net cash used for investing activities	(10,532		)	(22,373		)
Cash flows provided by (used for) financing activities:
Increase (decrease) in short-term debt, net	(5		)	426
Issuance of long-term debt, net of issuance costs	7,716			2,734
Repayment of debt	(1,502		)	—
Proceeds from sales of common stock through employee equity incentive plans	637			1,024
Repurchase of common stock	(3,611		)	(2,054		)
Restricted stock unit withholdings	(424		)	(434		)
Payment of dividends to stockholders	(3,794		)	(3,692		)
Other financing	161			155
Net cash provided by (used for) financing activities	(822		)	(1,841		)
Net increase (decrease) in cash and cash equivalents	3,515			(10,556		)
Cash and cash equivalents, end of period	$	9,075		$	4,752

Supplemental disclosures of noncash investing activities and cash flow information:
Acquisition of property, plant, and equipment included in accounts payable and accrued liabilities	$	1,736		$	1,505
Non-marketable equity investment in McAfee from divestiture	$	1,078		$	—
Cash paid during the period for:
Interest, net of capitalized interest and interest rate swap payments/receipts	$	386		$	472
Income taxes, net of refunds	$	2,328		$	843


¹	The impact of assets and liabilities reclassified as held for sale was not considered in the changes in assets and liabilities within cash flows from operating activities. See "Note 10: Acquisitions and Divestitures" for additional information.

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 fiscal year ended December 31, 2016 (2016 Form 10-K).

We have a 52- or 53-week fiscal year that ends on the last Saturday in December. Our fiscal year 2017 is a 52-week year ending on December 30, 2017, while our fiscal year 2016 was a 53-week fiscal year that ended on December 31, 2016. The first quarter of fiscal year 2016 was a 14-week quarter compared to the standard 13-week quarters.

We have made estimates and judgments affecting the amounts reported in our consolidated condensed financial statements and the accompanying notes. The actual results that we experience may differ materially from our estimates. The interim financial information is unaudited, but reflects all normal adjustments that are, in our opinion, necessary to provide a fair statement of results for the interim periods presented. This report should be read in conjunction with the consolidated financial statements in our 2016 Form 10-K.

Note 2: Accounting Policies

Advertising

Through cooperative advertising programs, such as our Intel Inside^® program, we reimburse customers for marketing activities for certain of our products. We accrue cooperative advertising obligations and record the costs at the same time that the related revenue is recognized. We record cooperative advertising costs as marketing, general and administrative (MG&A) expenses to the extent that an advertising benefit separate from the revenue transaction can be identified and the fair value of that advertising benefit received is determinable. We record any excess in cash paid to customers over the fair value of the advertising benefit we receive as a reduction in revenue.

We are transitioning customers from the current offerings under the Intel Inside^® program to cooperative advertising offerings more tailored to customers and their marketing audiences. In the second half of 2017, we are recording cooperative advertising costs as a reduction of revenue as we no longer meet the criteria for recording these expenses within MG&A.

Note 3: Recent Accounting Standards

We assess the adoption impacts of recently issued accounting standards by the Financial Accounting Standards Board on our financial statements. The tables below describe impacts from newly issued standards as well as material updates to our previous assessments, if any, from our 2016 Form 10-K.

Accounting Standards Adopted



Standard/Description	Effective Date and Adoption Considerations	Effect on Financial Statements or Other Significant Matters
Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment. This accounting standard update eliminates Step 2 from the existing guidance to simplify how goodwill impairment tests are performed. With the elimination of this step, a goodwill impairment test is performed by comparing the fair value of a reporting unit to its carrying value. An impairment charge is recognized for the amount by which the reporting unit's carrying value exceeds its fair value.	We elected to early adopt this accounting standard update in the second quarter of 2017 on a prospective basis.	We expect the adoption of this update to simplify our annual goodwill impairment testing process, by eliminating the need to estimate the implied fair value of a reporting unit’s goodwill, if its respective carrying value exceeds fair value.

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Accounting Standards Not Yet Adopted



Standard/Description	Effective Date and Adoption Considerations	Effect on Financial Statements or Other Significant Matters
Financial Instruments - Recognition and Measurement. Requires changes to the accounting for financial instruments that primarily affect equity securities, financial liabilities measured using the fair value option, and the presentation and disclosure requirements for such instruments.	Effective in the first quarter of 2018. Changes to our marketable equity securities are required to be adopted using a modified-retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. A cumulative-effect adjustment equal to the balance of unrealized gains or losses in accumulated other comprehensive income (loss) for these securities as of December 31, 2017 will be recorded to retained earnings in the period of adoption. Due to fluctuations in our portfolio, the precise impact from adopting the standard will not be known until December 31, 2017. Since management has elected to apply the measurement alternative to non-marketable equity securities, changes to these securities are adopted prospectively.	Marketable equity securities previously classified as available-for-sale equity investments will be measured and recorded at fair value with changes in fair value recorded through the income statement. All non-marketable equity securities formerly classified as cost method investments will be measured and recorded using the measurement alternative upon adoption. Equity securities measured and recorded using the measurement alternative are recorded at cost minus impairment, if any, plus or minus changes resulting from observable price changes. Adjustments resulting from impairments and observable price changes will be recorded in the income statement. Beginning in the first quarter of 2018, in accordance with the standard, fair value measurement and hierarchy disclosures will no longer be provided for equity securities measured using the measurement alternative. In addition, the existing impairment model will be replaced with a new one-step qualitative impairment model. No initial adoption adjustment will be recorded for these instruments since the standard is required to be applied prospectively for securities measured using the measurement alternative. We are finalizing our impact assessment and changes to our accounting policies and financial statement disclosures.
Compensation - Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This amended standard was issued to provide additional guidance on the presentation of net benefit cost in the income statement and on the components eligible for capitalization in assets. The service cost component of the net periodic benefit cost will continue to be reported within operating income on the consolidated income statement. All other non-service components are required to be presented separately outside operating income and only service costs will be eligible for inventory capitalization.	Effective in the first quarter of 2018. Changes to the presentation of benefit costs are required to be adopted retrospectively while changes to the capitalization of service costs into inventories are required to be adopted prospectively. The standard permits, as a practical expedient, to use the amounts disclosed in the Retirement Benefit Plans footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation requirement.	We expect the adoption of the amended standard to result in the reclassification of approximately $260 million from non-service components above the subtotal of operating income to interest and other, net, for the year ended December 31, 2016. We are continuing to assess the impacts of adoption to our 2017 financial statements.

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Note 4: Operating Segments Information

We manage our business through the following operating segments:

Client Computing Group (CCG)

Includes platforms designed for notebooks, 2 in 1 systems, desktops (including all-in-ones and high-end enthusiast PCs), tablets, phones, wireless and wired connectivity products, and mobile communication components.

Data Center Group (DCG)

Includes workload-optimized platforms for compute, storage, and network functions and related products designed for enterprise, cloud, and communication infrastructure market segments.

Internet of Things Group (IOTG)

Includes platforms designed for Internet of Things market segments, including retail, transportation, industrial, video, buildings and smart cities, along with a broad range of other market segments.

Non-Volatile Memory Solutions Group (NSG)

Includes Intel^® Optane™ SSD products and NAND flash memory products primarily used in solid-state drives.

Programmable Solutions Group (PSG)

Includes programmable semiconductors primarily field-programmable gate array (FPGAs) and related products for a broad range of market segments, including communications, data center, industrial, military, and automotive.

All other

Includes results from our other non-reportable segments and corporate-related charges.

We offer platforms that incorporate various components and technologies, including a microprocessor and chipset, a stand-alone System-on-Chip, or a multichip package. A platform may be enhanced by additional hardware, software, and services offered by Intel. Platforms are used in various form factors across our CCG, DCG, and IOTG operating segments. We derive a substantial majority of our revenue from platforms, which is our principal product.

In the third quarter of 2017, we completed our tender offer for the outstanding ordinary shares of Mobileye B.V. (Mobileye), formerly known as Mobileye N.V. In the second quarter of 2017, we completed the planned divestiture of Intel Security Group (ISecG). The results are reported within the "all other" category. See "Note 10: Acquisitions and Divestitures" for additional information.

The “all other” category includes revenue, expenses, and charges such as:


•	results of operations from non-reportable segments;


•	amounts included within restructuring and other charges;


•	a portion of profit-dependent compensation and other expenses not allocated to the operating segments;


•	historical results of operations of divested businesses;


•	results of operations of start-up businesses that support our initiatives, including our foundry business; and


•	acquisition-related costs, including amortization and any impairment of acquisition-related intangibles and goodwill.

The Chief Operating Decision Maker (CODM), which is our Chief Executive Officer (CEO), does not evaluate operating segments using discrete asset information. Operating segments do not record inter-segment revenue. We do not allocate gains and losses from equity investments, interest and other income, or taxes to operating segments. Although the CODM uses operating income to evaluate the segments, operating costs included in one segment may benefit other segments. Except for these differences, the accounting policies for segment reporting are the same as for Intel as a whole.

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Net revenue and operating income (loss) for each period were as follows:



	Three Months Ended						Nine Months Ended
(In Millions)	Sep 30, 2017			Oct 1, 2016			Sep 30, 2017			Oct 1, 2016
Net revenue:
Client Computing Group
Platform	$	8,132		$	8,258		$	23,163		$	22,395
Other	728			634			1,886			1,384
	8,860			8,892			25,049			23,779
Data Center Group
Platform	4,439			4,164			12,344			11,589
Other	439			378			1,138			979
	4,878			4,542			13,482			12,568
Internet of Things Group
Platform	680			605			1,926			1,673
Other	169			84			364			239
	849			689			2,290			1,912
Non-Volatile Memory Solutions Group	891			649			2,631			1,760
Programmable Solutions Group	469			425			1,334			1,249
All other	202			581			922			1,745
Total net revenue	$	16,149		$	15,778		$	45,708		$	43,013
Operating income (loss):
Client Computing Group	$	3,600		$	3,327		$	9,656		$	7,123
Data Center Group	2,255			2,110			5,403			5,639
Internet of Things Group	146			191			390			403
Non-Volatile Memory Solutions Group	(52		)	(134		)	(291		)	(453		)
Programmable Solutions Group	113			78			302			(184		)
All other	(947		)	(1,110		)	(2,919		)	(4,180		)
Total operating income	$	5,115		$	4,462		$	12,541		$	8,348

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Note 5: Earnings Per Share

We computed basic earnings per share of common stock based on the weighted average number of shares of common stock outstanding during the period. We computed diluted earnings per share of common stock based on the weighted average number of shares of common stock outstanding plus potentially dilutive shares of common stock outstanding during the period.



	Three Months Ended				Nine Months Ended
(In Millions, Except Per Share Amounts)	Sep 30, 2017		Oct 1, 2016		Sep 30, 2017		Oct 1, 2016
Net income available to common stockholders	$	4,516	$	3,378	$	10,288	$	6,754
Weighted average shares of common stock outstanding—basic	4,688		4,734		4,707		4,728
Dilutive effect of employee equity incentive plans	34		47		43		54
Dilutive effect of convertible debt	99		96		99		90
Weighted average shares of common stock outstanding—diluted	4,821		4,877		4,849		4,872
Basic earnings per share of common stock	$	0.96	$	0.71	$	2.19	$	1.43
Diluted earnings per share of common stock	$	0.94	$	0.69	$	2.12	$	1.39

Potentially dilutive shares of common stock from employee incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding restricted stock units (RSUs), and the assumed issuance of common stock under the stock purchase plan. Potentially dilutive shares of common stock for our 2005 debentures are determined by applying the if-converted method. However, as our 2009 debentures require settlement of the principal amount of the debt in cash upon conversion, with the conversion premium paid in cash or stock at our option, potentially dilutive shares of common stock are determined by applying the treasury stock method.

In all periods presented, potentially dilutive securities which would have been antidilutive are insignificant and are excluded from the computation of diluted earnings per share.

In all periods presented, we included our 2009 debentures in the calculation of diluted earnings per share of common stock because the average market price was above the conversion price. We could potentially exclude the 2009 debentures in the future if the average market price is below the conversion price.

Note 6: Other Financial Statement Details

Inventories



(In Millions)	Sep 30, 2017		Dec 31, 2016
Raw materials	$	1,115	$	695
Work in process	3,965		3,190
Finished goods	1,849		1,668
Total inventories	$	6,929	$	5,553

Deferred Income



(In Millions)	Sep 30, 2017		Dec 31, 2016
Deferred income on shipments of components to distributors	$	1,530	$	1,475
Deferred income from software, services and other	176		243
Current deferred income	$	1,706	$	1,718

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Gains (Losses) on Equity Investments, Net

The components of gains (losses) on equity investments, net for each period were as follows:



	Three Months Ended						Nine Months Ended
(In Millions)	Sep 30, 2017			Oct 1, 2016			Sep 30, 2017			Oct 1, 2016
Share of equity method investee losses, net	$	(110	)	$	(10	)	$	(129	)	$	(30	)
Impairments	(10		)	(48		)	(613		)	(137		)
Gains on sales, net	944			38			2,020			553
Dividends	—			—			68			74
Other, net	22			8			94			28
Total gains (losses) on equity investments, net	$	846		$	(12	)	$	1,440		$	488

Interest and Other, Net

The components of interest and other, net for each period were as follows:



	Three Months Ended						Nine Months Ended
(In Millions)	Sep 30, 2017			Oct 1, 2016			Sep 30, 2017			Oct 1, 2016
Interest income	$	137		$	56		$	349		$	159
Interest expense	(191		)	(180		)	(493		)	(575		)
Other, net	23			(8		)	480			76
Total interest and other, net	$	(31	)	$	(132	)	$	336		$	(340	)

Interest expense in the preceding table is net of $77 million of interest capitalized in the third quarter of 2017 and $212 million in the first nine months of 2017 ($36 million in the third quarter of 2016 and $82 million in the first nine months of 2016).

Note 7: Restructuring and Other Charges



	Three Months Ended				Nine Months Ended
(In Millions)	Sep 30, 2017		Oct 1, 2016		Sep 30, 2017			Oct 1, 2016
2016 Restructuring Program	$	2	$	349	$	(51	)	$	1,763
Other charges	2		23		240			23
Total restructuring and other charges	$	4	$	372	$	189		$	1,786

2016 Restructuring Program

In the second quarter of 2017, we substantially completed the 2016 Restructuring Program. For further information, see "Note 7: Restructuring and Other Charges" in Part II, Item 8 of our 2016 Form 10-K.

Restructuring and other charges by type for the 2016 Restructuring Program for the period were as follows:



	Three Months Ended					Nine Months Ended
(In Millions)	Sep 30, 2017			Oct 1, 2016		Sep 30, 2017			Oct 1, 2016
Employee severance and benefit arrangements	$	(2	)	$	338	$	(72	)	$	1,752
Pension settlement charges	—			10		—			10
Asset impairment and other charges	4			1		21			1
Total restructuring and other charges	$	2		$	349	$	(51	)	$	1,763

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Restructuring and other activity for the 2016 Restructuring Program for the first nine months of 2017 was as follows:



(In Millions)	Employee Severance and Benefits			Asset Impairments and Other			Total
Accrued restructuring balance as of December 31, 2016	$	585		$	10		$	595
Additional accruals	—			21			21
Adjustments	(72		)	—			(72		)
Cash payments	(282		)	(25		)	(307		)
Non-cash settlements	—			(2		)	(2		)
Accrued restructuring balance as of September 30, 2017	$	231		$	4		$	235

A substantial majority of the accrued restructuring balance as of September 30, 2017 is expected to be paid within the next 12 months and was recorded within accrued compensation and benefits. Restructuring actions related to this program that were approved in 2016 impacted approximately 15,000 employees.

Other charges



	Three Months Ended				Nine Months Ended
(In Millions)	Sep 30, 2017		Oct 1, 2016		Sep 30, 2017		Oct 1, 2016
ISecG separation costs	$	1	$	23	$	144	$	23
Other	1		—		96		—
Total other charges	$	2	$	23	$	240	$	23

Note 8: Income Taxes

Our effective income tax rate was 28.1% in the first nine months of 2017 compared to 20.5% in the first nine months of 2016. A majority of the increase in the effective rate was attributable to the $822 million tax expense due to our divestiture of ISecG.

Note 9: Investments

Available-for-Sale Investments



	September 30, 2017									December 31, 2016
(In Millions)	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate debt	$	2,603	$	12	$	(7	)	$	2,608	$	3,847	$	4	$	(14	)	$	3,837
Financial institution instruments	7,709		6		(4		)	7,711		6,098		5		(11		)	6,092
Government debt	986		3		(3		)	986		1,581		—		(8		)	1,573
Marketable equity securities	2,101		3,958		—			6,059		2,818		3,363		(1		)	6,180
Total available-for-sale investments	$	13,399	$	3,979	$	(14	)	$	17,364	$	14,344	$	3,372	$	(34	)	$	17,682

Government debt includes instruments such as non-U.S. government bonds and U.S. agency securities. Financial institution instruments include instruments issued or managed by financial institutions in various forms such as commercial paper, fixed and floating rate bonds, money market fund deposits, and time deposits. Substantially all time deposits were issued by institutions outside the U.S. as of September 30, 2017 (most time deposits were issued by institutions outside the U.S. as of December 31, 2016).

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

During the third quarter of 2017, we sold available-for sale investments for proceeds of $2.9 billion ($195 million in the third quarter of 2016). During the first nine months of 2017, we sold available-for-sale investments for proceeds of $4.7 billion ($4.0 billion in the first nine months of 2016). The gross realized gains on sales of available-for-sale investments were $927 million in the third quarter of 2017 and $2.0 billion in the first nine months of 2017 ($41 million in the third quarter of 2016 and $538 million in the first nine months of 2016).

On April 28, 2017, Cloudera, Inc. (Cloudera) completed its initial public offering and we have designated our previous equity and cost method investments in Cloudera as available-for-sale. During the second quarter of 2017, we determined we had an other-than-temporary decline in the fair value of our investment and recognized an impairment charge of $278 million. We recognized the impairment in the second quarter due to the duration and severity of the decline in the investment's fair value, which we determined was below cost based upon observable market prices after the initial public offering.

The fair value of available-for-sale debt investments, by contractual maturity, as of September 30, 2017, were as follows:



(In Millions)	Fair Value
Due in 1 year or less	$	3,314
Due in 1–2 years	1,573
Due in 2–5 years	2,200
Due after 5 years	71
Instruments not due at a single maturity date	4,147
Total	$	11,305

Equity Method Investments

McAfee

In the second quarter of 2017, we closed our divestiture of the ISecG business and retained a 49% interest in McAfee as partial consideration. Our investment is accounted for under the equity method of accounting and is classified within other long-term assets. In the third quarter of 2017, we received a $735 million dividend from McAfee and recorded our share of equity method investee losses. The carrying value of our investment was $257 million as of September 30, 2017. For further information related to the divestiture of the ISecG business, see "Note 10: Acquisitions and Divestitures".

IM Flash Technologies, LLC

Since the inception of IM Flash Technologies, LLC (IMFT) in 2006, Micron Technology, Inc. (Micron) and Intel have jointly developed NAND flash memory and, most recently, 3D XPoint™ technology products. Intel also purchases jointly developed products directly from Micron under certain supply agreements.

As of September 30, 2017, we own a 49% interest in IMFT. The carrying value of our investment was $855 million as of September 30, 2017 ($849 million as of December 31, 2016) and is classified within other long-term assets.

IMFT is a variable interest entity and all costs of IMFT are passed on to Micron and Intel through sale of products or services in proportional share of ownership. Our portion of IMFT costs, primarily related to product purchases and production-related services, was approximately $115 million in the third quarter of 2017 and approximately $350 million in the first nine months of 2017 (approximately $115 million in the third quarter of 2016 and approximately $315 million in the first nine months of 2016). The amount due to IMFT for product purchases and services provided was approximately $73 million as of September 30, 2017 (approximately $95 million as of December 31, 2016).

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. Except for the amount due to IMFT for product purchases and production-related services, we did not have any additional liabilities recognized on our consolidated condensed balance sheets in connection with our interests in this joint venture as of September 30, 2017. 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.

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Non-marketable Cost Method Investments

Beijing UniSpreadtrum Technology Ltd.

During 2014, we entered into a series of agreements with Tsinghua Unigroup Ltd. (Tsinghua Unigroup), an operating subsidiary of Tsinghua Holdings Co. Ltd., to, among other things, jointly develop Intel^® architecture- and communications-based solutions for phones. We agreed to invest up to 9.0 billion Chinese yuan (approximately $1.5 billion as of the date of the agreement) for a minority stake of approximately 20% of Beijing UniSpreadtrum Technology Ltd., a holding company under Tsinghua Unigroup. During 2015, we invested $966 million to complete the first phase of the equity investment and accounted for our interest using the cost method of accounting. During the second quarter of 2017, we reduced our expectation of the company's future operating performance due to competitive pressures, which resulted in an other-than-temporary impairment charge of $147 million.

Trading Assets

Net gains related to trading assets still held at the reporting date were $81 million in the third quarter of 2017 and $433 million in the first nine months of 2017 (there were $72 million net gains related to trading assets still held at the reporting date in the third quarter of 2016 and $245 million of net gains in the first nine months of 2016). Net losses on the related derivatives were $75 million in the third quarter of 2017 and $402 million in the first nine months of 2017 (net losses of $54 million in the third quarter of 2016 and $224 million in the first nine months of 2016).

Note 10: Acquisitions and Divestitures

Acquisition of Mobileye

On August 21, 2017, we completed our tender offer for all of the outstanding ordinary shares of Mobileye, a global leader in the development of computer vision and machine learning, data analysis, localization and mapping for advanced driver assistance systems and autonomous driving. This acquisition combines Mobileye's leading computer vision expertise with Intel’s high-performance computing and connectivity expertise to create automated driving solutions from car to cloud. The combination is expected to accelerate innovation for the automotive industry and position Intel as a leading technology provider in the fast-growing market for highly and fully autonomous vehicles. The transaction also extends Intel’s strategy to invest in data-intensive market opportunities that build on our strengths in computing and connectivity from the cloud, through the network, to the device.

As of the completion of the tender offer, we acquired substantially all of the outstanding ordinary shares of Mobileye. We acquired 84.4% of the outstanding shares on August 8, 2017 and 97.3% as of August 21, 2017, and we intend to acquire all remaining outstanding shares. We have reflected the acquisition of the additional outstanding shares and reduction to the noncontrolling interest by $1.8 billion in the tables below.

Total consideration to acquire Mobileye was $14.5 billion (net of $366 million of cash and cash equivalents acquired).

The preliminary fair values of the assets acquired and liabilities assumed by major class in the acquisition of Mobileye were recognized as follows:



(In Millions)
Short-term investments and marketable securities	$	370
Tangible assets	227
Goodwill	10,278
Identified intangible assets	4,482
Current liabilities	(69		)
Deferred tax liabilities and other	(418		)
Noncontrolling interest	(375		)
Total	$	14,495

We assumed outstanding unvested Mobileye stock options and RSUs granted under two Mobileye equity plans. We will not grant additional equity awards under these two Mobileye equity plans. In connection with the acquisition, we recognized share-based compensation expense of $71 million for cash-settled awards.

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

The preliminary allocation of the purchase price was based upon estimates and assumptions that are subject to change within the one year measurement period. The primary areas of the purchase price allocation that are not yet finalized are certain tax matters, identification of contingencies, and goodwill.

The fair value of the noncontrolling interest was determined based on the quoted share price of Mobileye as of August 8, 2017, and the remaining outstanding shares that constitute the noncontrolling interest. We recorded the noncontrolling interest as a component of equity.

Goodwill of $10.3 billion arising from the acquisition is attributed to the expected synergies and other benefits that will be generated from the combination of Intel and Mobileye. Substantially all of the goodwill recognized is not expected to be deductible for tax purposes. The goodwill recognized from the acquisition is included within "all other."

The identified intangible assets assumed in the acquisition of Mobileye were recognized as follows:



	Fair Value (In Millions)		Weighted Average Estimated Useful Life (In Years)
Developed technology	$	2,346	9
Customer relationships	713		12
Brands	64		10
Identified intangible assets subject to amortization	3,123
In-process research and development	1,359
Identified intangible assets not subject to amortization	1,359
Total identified intangible assets	$	4,482

Acquired developed technology represents the fair value of Mobileye products that have reached technological feasibility and are a part of Mobileye’s product offerings, as opposed to in-process research and development which represents the fair value of products that have not reached technological feasibility. Customer relationships represent the fair values of the underlying relationships and agreements with Mobileye’s customers.

Divestiture of Intel Security Group

On April 3, 2017, we closed the transaction with TPG VII Manta Holdings, L.P., now known as Manta Holdings, L.P. (TPG), transferring certain assets and liabilities relating to ISecG to a newly formed, jointly-owned, separate cybersecurity company called McAfee.

Total consideration received was $4.2 billion, consisting of $924 million in cash proceeds, $1.1 billion in the form of equity representing a 49% ownership interest in McAfee, and $2.2 billion in the form of promissory notes issued by McAfee and TPG. During the third quarter of 2017, McAfee and TPG repaid the $2.2 billion of promissory notes, which are included within proceeds from divestiture.

The carrying amounts of the major classes of ISecG assets and liabilities as of the transaction close date included the following:



(In Millions)	Apr 3, 2017
Accounts receivable	$	317
Goodwill	3,601
Identified intangible assets	965
Other assets	276
Total assets	$	5,159

Deferred income	$	1,553
Other liabilities	276
Total liabilities	$	1,829

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

As of the transaction close date, we recognized a pre-tax gain of $387 million within "Interest and other, net," which is net of $507 million of currency translation adjustment losses reclassified from accumulated other comprehensive income (loss) associated with currency charges on the carrying values of ISecG goodwill and identified intangible assets. In addition, we recognized a tax expense of $822 million.

Note 11: Identified Intangible Assets

As a result of our acquisition of Mobileye during the third quarter of 2017, we recorded $4.5 billion of identified intangible assets. For further information about these acquired identified intangible assets, see "Note 10: Acquisitions and Divestitures."



	September 30, 2017
(In Millions)	Gross Assets		Accumulated Amortization			Net
Acquisition-related developed technology	$	8,937	$	(1,686	)	$	7,251
Acquisition-related customer relationships	2,052		(265		)	1,787
Acquisition-related brands	143		(24		)	119
Licensed technology and patents	3,237		(1,504		)	1,733
Identified intangible assets subject to amortization	14,369		(3,479		)	10,890
In-process research and development	2,168		—			2,168
Identified intangible assets not subject to amortization	2,168		—			2,168
Total identified intangible assets	$	16,537	$	(3,479	)	$	13,058



	December 31, 2016
(In Millions)	Gross Assets		Accumulated Amortization			Net
Acquisition-related developed technology	$	7,405	$	(1,836	)	$	5,569
Acquisition-related customer relationships	1,449		(260		)	1,189
Acquisition-related brands	87		(21		)	66
Licensed technology and patents	3,285		(1,423		)	1,862
Identified intangible assets subject to amortization	12,226		(3,540		)	8,686
In-process research and development	808		—			808
Identified intangible assets not subject to amortization	808		—			808
Total identified intangible assets	$	13,034	$	(3,540	)	$	9,494

Amortization expenses recorded in the consolidated condensed statements of income for each period were as follows:



		Three Months Ended				Nine Months Ended
(In Millions)	Location	Sep 30, 2017		Oct 1, 2016		Sep 30, 2017		Oct 1, 2016
Acquisition-related developed technology	Cost of sales	$	243	$	235	$	650	$	705
Acquisition-related customer relationships	Amortization of acquisition-related intangibles	45		69		113		234
Acquisition-related brands	Amortization of acquisition-related intangibles	4		5		11		19
Licensed technology and patents	Cost of sales	73		76		225		218
Total amortization expense		$	365	$	385	$	999	$	1,176

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

We expect future amortization expense for the next five years to be as follows:



(In Millions)	Remainder of 2017		2018		2019		2020		2021
Acquisition-related developed technology	$	262	$	1,045	$	1,043	$	1,011	$	976
Acquisition-related customer relationships	48		181		180		179		179
Acquisition-related brands	5		20		20		20		20
Licensed technology and patents	61		239		227		202		187
Total future amortization expenses	$	376	$	1,485	$	1,470	$	1,412	$	1,362

Note 12: Other Long-Term Assets



(In Millions)	Sep 30, 2017		Dec 31, 2016
Equity method investments	$	1,406	$	1,328
Non-marketable cost method investments	2,719		3,098
Non-current deferred tax assets	789		907
Pre-payments for property, plant and equipment	468		347
Loans receivable	543		236
Reverse repurchase agreements	—		250
Other	1,187		993
Total other long-term assets	$	7,112	$	7,159

Note 13: Borrowings

Short-Term Debt



(In Millions)	Sep 30, 2017			Dec 31, 2016
Drafts payable	$	21		$	25
Current portion of long-term debt	4,129			4,618
Less: debt issuance costs associated with the current portion of long-term debt	(8		)	(9		)
Total short-term debt	$	4,142		$	4,634

Our current portion of long-term debt includes our 2009 junior subordinated convertible debentures due 2039.

We have an ongoing authorization from our Board of Directors to borrow up to $10.0 billion under our commercial paper program. This amount includes an increase of $5.0 billion in the authorization limit approved by our Board of Directors in April 2017.

During the second quarter of 2017, we repaid $500 million of our 1.75% senior notes that matured in May 2017.

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Long-Term Debt

Our indebtedness is carried at amortized cost net of applicable hedge adjustments.



(In Millions)	Sep 30, 2017			Dec 31, 2016
Floating-rate senior notes:
$700, three-month LIBOR plus 0.08%, due May 2020	$	700		$	—
$800, three-month LIBOR plus 0.35%, due May 2022	800			—
Fixed-rate senior notes:
$500, 1.75%, due May 2017	—			501
$3,000, 1.35%, due December 2017	3,000			2,999
$600, 2.50%, due November 2018	602			604
A$250, 3.25%, due December 2019¹	196			180
$1,000, 1.85%, due May 2020	1,000			—
$1,750, 2.45%, due July 2020	1,749			1,749
$500, 1.70%, due May 2021	499			499
$2,000, 3.30%, due October 2021	1,995			1,988
$750, 2.35%, due May 2022	747			—
$1,000, 3.10%, due July 2022	994			987
A$550, 4.00%, due December 2022¹	431			394
$1,500, 2.70%, due December 2022	1,491			1,480
$400, 4.10%, due November 2023	421			424
$1,250, 2.88%, due May 2024	1,242			—
$600, 2.70%, due June 2024	596			—
$2,250, 3.70%, due July 2025	2,177			2,148
$1,000, 2.60%, due May 2026	993			983
$1,000, 3.15%, due May 2027	991			—
$750, 4.00%, due December 2032	745			745
$1,500, 4.80%, due October 2041	1,491			1,491
$925, 4.25%, due December 2042	924			924
$2,000, 4.90%, due July 2045	1,999			1,999
$1,007, 4.90%, due August 2045	—			995
$915, 4.70%, due December 2045	910			894
$1,250, 4.10%, due May 2046	1,243			1,243
$1,000, 4.10%, due May 2047	994			—
$640, 4.10%, due August 2047	638			—
Junior subordinated convertible debentures:
$1,600, 2.95%, due December 2035	1,004			992
$2,000, 3.25%, due August 2039	1,130			1,118
Long-term debt	31,702			25,337
Less: current portion of long-term debt	(4,129		)	(4,618		)
Less: debt issuance costs	(75		)	(70		)
Total long-term debt	$	27,498		$	20,649


¹	To manage foreign currency risk associated with the Australian-dollar-denominated notes issued in 2015, we entered into currency interest rate swaps with an aggregate notional amount of $577 million, which effectively converted these notes to U.S.-dollar-denominated notes. For further discussion on our currency interest rate swaps, see "Note 16: Derivative Financial Instruments."

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

During the second quarter of 2017, we issued a total of $7.1 billion aggregate principal amount of senior notes. We intend to use the net proceeds from the offering of the notes for general corporate purposes, which may include refinancing of outstanding debt or repurchases of shares of our common stock.

During the third quarter of 2017, we redeemed the $1.0 billion 4.90% senior notes due August 2045. Additionally, we issued a total of $640 million aggregate principal amount of senior notes. We used the net proceeds from the offering of the notes to finance a portion of the redemption price of our 4.90% senior notes due August 2045.

Our senior floating rate notes pay interest quarterly and 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 the notes rank equally in right of payment with all of our other existing and future senior unsecured indebtedness and effectively rank junior to all liabilities of our subsidiaries.

For further information on our debt instruments, see "Note 14: Borrowings" in Part II, Item 8 of our 2016 Form 10-K.

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Note 14: Fair Value

For information about our fair value policies, and methods and assumptions used in estimating the fair value of our financial assets and liabilities, see “Note 2: Accounting Policies" and "Note 15: Fair Value" in Part II, Item 8 of our 2016 Form 10-K.

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis



	September 30, 2017								December 31, 2016
	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	$	—	$	150	$	—	$	150	$	—	$	498	$	—	$	498
Financial institution instruments ¹	4,146		1,619		—		5,765		1,920		811		—		2,731
Government debt ²	—		100		—		100		—		332		—		332
Reverse repurchase agreements	—		1,599		—		1,599		—		768		—		768
Short-term investments:
Corporate debt	—		750		6		756		—		1,332		6		1,338
Financial institution instruments ¹	—		557		—		557		—		1,603		—		1,603
Government debt ²	—		133		—		133		—		284		—		284
Trading assets:
Asset-backed securities	—		12		—		12		—		87		—		87
Corporate debt	—		2,269		—		2,269		—		2,847		—		2,847
Financial institution instruments ¹	57		990		—		1,047		36		1,608		—		1,644
Government debt ²	31		3,624		—		3,655		32		3,704		—		3,736
Other current assets:
Derivative assets	2		289		—		291		—		382		—		382
Loans receivable	—		88		—		88		—		326		—		326
Marketable equity securities	5,584		475		—		6,059		6,180		—		—		6,180
Other long-term investments:
Corporate debt	—		1,697		5		1,702		—		1,995		6		2,001
Financial institution instruments ¹	—		1,389		—		1,389		—		1,758		—		1,758
Government debt ²	—		753		—		753		—		957		—		957
Other long-term assets:
Derivative assets	—		74		9		83		—		31		9		40
Loans receivable	—		543		—		543		—		236		—		236
Total assets measured and recorded at fair value	9,820		17,111		20		26,951		8,168		19,559		21		27,748
Liabilities
Other accrued liabilities: