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 July 1, 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 July 1, 2017
Common stock, $0.001 par value		4,699 million

INTEL CORPORATION

FORM 10-Q

FOR THE FISCAL QUARTER ENDED JULY 1, 2017

INDEX



		Page

PART I
Item 1.	Financial Statements	2
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
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 July 27, 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					Six Months Ended
(In Millions, Except Per Share Amounts)	Jul 1, 2017		Jul 2, 2016			Jul 1, 2017		Jul 2, 2016
Net revenue	$	14,763	$	13,533		$	29,559	$	27,235
Cost of sales	5,665		5,560			11,314		11,132
Gross margin	9,098		7,973			18,245		16,103
Research and development	3,275		3,145			6,601		6,391
Marketing, general and administrative	1,854		2,007			3,958		4,233
Restructuring and other charges	105		1,414			185		1,414
Amortization of acquisition-related intangibles	37		89			75		179
Operating expenses	5,271		6,655			10,819		12,217
Operating income	3,827		1,318			7,426		3,886
Gains (losses) on equity investments, net	342		478			594		500
Interest and other, net	403		(126		)	367		(208		)
Income before taxes	4,572		1,670			8,387		4,178
Provision for taxes	1,764		340			2,615		802
Net income	$	2,808	$	1,330		$	5,772	$	3,376
Basic earnings per share of common stock	$	0.60	$	0.28		$	1.22	$	0.71
Diluted earnings per share of common stock	$	0.58	$	0.27		$	1.19	$	0.69
Cash dividends declared per share of common stock	$	—	$	—		$	0.5325	$	0.5200
Weighted average shares of common stock outstanding:
Basic	4,710		4,729			4,717		4,725
Diluted	4,845		4,866			4,864		4,870

See accompanying notes.

INTEL CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)



	Three Months Ended						Six Months Ended
(In Millions)	Jul 1, 2017			Jul 2, 2016			Jul 1, 2017			Jul 2, 2016
Net income	$	2,808		$	1,330		$	5,772		$	3,376
Changes in other comprehensive income, net of tax:
Net unrealized holding gains (losses) on available-for-sale investments	(534		)	(346		)	9			(55		)
Deferred tax asset valuation allowance	—			(2		)	—			(3		)
Net unrealized holding gains (losses) on derivatives	136			26			331			213
Net prior service (costs) credits	(12		)	1			(10		)	3
Actuarial valuation	214			(318		)	230			(299		)
Net foreign currency translation adjustment	507			(1		)	508			1
Other comprehensive income (loss)	311			(640		)	1,068			(140		)
Total comprehensive income	$	3,119		$	690		$	6,840		$	3,236

See accompanying notes.

INTEL CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)



(In Millions)	Jul 1, 2017		Dec 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	11,687	$	5,560
Short-term investments	3,158		3,225
Trading assets	11,084		8,314
Accounts receivable, net	5,397		4,690
Inventories	6,324		5,553
Assets held for sale	—		5,210
Other current assets	2,967		2,956
Total current assets	40,617		35,508
Property, plant and equipment, net of accumulated depreciation of $56,520 ($53,934 as of December 31, 2016)	38,130		36,171
Marketable equity securities	5,904		6,180
Other long-term investments	4,481		4,716
Goodwill	14,102		14,099
Identified intangible assets, net	8,867		9,494
Other long-term assets	10,006		7,159
Total assets	$	122,107	$	113,327
Liabilities, temporary equity, and stockholders’ equity
Current liabilities:
Short-term debt	$	4,130	$	4,634
Accounts payable	3,671		2,475
Accrued compensation and benefits	2,332		3,465
Accrued advertising	835		810
Deferred income	1,587		1,718
Liabilities held for sale	—		1,920
Other accrued liabilities	6,227		5,280
Total current liabilities	18,782		20,302
Long-term debt	27,855		20,649
Long-term deferred tax liabilities	2,502		1,730
Other long-term liabilities	3,469		3,538
Contingencies (Note 17)
Temporary equity	874		882
Stockholders’ equity:
Preferred stock	—		—
Common stock and capital in excess of par value, 4,699 issued and outstanding (4,730 issued and outstanding as of December 31, 2016)	25,781		25,373
Accumulated other comprehensive income (loss)	1,174		106
Retained earnings	41,670		40,747
Total stockholders’ equity	68,625		66,226
Total liabilities, temporary equity, and stockholders’ equity	$	122,107	$	113,327

See accompanying notes.

INTEL CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)



	Six Months Ended
(In Millions)	Jul 1, 2017			Jul 2, 2016
Cash and cash equivalents, beginning of period	$	5,560		$	15,308
Cash flows provided by (used for) operating activities:
Net income	5,772			3,376
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	3,300			3,141
Share-based compensation	725			812
Restructuring and other charges	185			1,414
Amortization of intangibles	634			791
(Gains) losses on equity investments, net	(526		)	(426		)
(Gains) losses on divestitures	(387		)	—
Deferred taxes	807			71
Changes in assets and liabilities:¹
Accounts receivable	(618		)	734
Inventories	(760		)	(104		)
Accounts payable	425			375
Accrued compensation and benefits	(1,102		)	(1,659		)
Income taxes payable and receivable	563			(79		)
Other assets and liabilities	(413		)	(546		)
Total adjustments	2,833			4,524
Net cash provided by operating activities	8,605			7,900
Cash flows provided by (used for) investing activities:
Additions to property, plant and equipment	(4,730		)	(3,632		)
Acquisitions, net of cash acquired	(3		)	(14,619		)
Purchases of available-for-sale investments	(1,894		)	(5,693		)
Sales of available-for-sale investments	1,698			3,685
Maturities of available-for-sale investments	2,197			2,393
Purchases of trading assets	(7,961		)	(7,205		)
Maturities and sales of trading assets	5,977			5,313
Investments in loans receivable and reverse repurchase agreements	—			(223		)
Collection of loans receivable and reverse repurchase agreements	—			650
Investments in non-marketable equity investments	(625		)	(663		)
Proceeds from divestitures	924			—
Other investing	201			304
Net cash used for investing activities	(4,216		)	(19,690		)
Cash flows provided by (used for) financing activities:
Increase (decrease) in short-term debt, net	(12		)	1,416
Issuance of long-term debt, net of issuance costs	7,078			2,734
Repayment of debt	(500		)	—
Proceeds from sales of common stock through employee equity incentive plans	406			527
Repurchase of common stock	(2,518		)	(1,597		)
Restricted stock unit withholdings	(404		)	(394		)
Payment of dividends to stockholders	(2,516		)	(2,461		)
Other financing	204			142
Net cash provided by (used for) financing activities	1,738			367
Net increase (decrease) in cash and cash equivalents	6,127			(11,423		)
Cash and cash equivalents, end of period	$	11,687		$	3,885

Supplemental disclosures of noncash investing activities and cash flow information:
Acquisition of property, plant, and equipment included in accounts payable and accrued liabilities	$	1,686		$	1,479
Loan receivable from McAfee and TPG	$	2,200		$	—
Non-marketable equity investment in McAfee	$	1,078		$	—
Cash paid during the period for:
Interest, net of capitalized interest and interest rate swap payments/receipts	$	280		$	348
Income taxes, net of refunds	$	1,139		$	689


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 9: 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: 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.

Accounting Standards Not Yet Adopted



Standard/Description	Effective Date and Adoption Considerations	Effect on Financial Statements or Other Significant Matters
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 3: 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.

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;


•	divested businesses for which discrete operating results are not regularly reviewed by our Chief Operating Decision Maker (CODM), who is our Chief Executive Officer;


•	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 CODM 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						Six Months Ended
(In Millions)	Jul 1, 2017			Jul 2, 2016			Jul 1, 2017			Jul 2, 2016
Net revenue:
Client Computing Group
Platform	$	7,634		$	6,938		$	15,031		$	14,137
Other	579			400			1,158			750
	8,213			7,338			16,189			14,887
Data Center Group
Platform	4,026			3,718			7,905			7,425
Other	346			309			699			601
	4,372			4,027			8,604			8,026
Internet of Things Group
Platform	614			497			1,246			1,068
Other	106			75			195			155
	720			572			1,441			1,223
Non-Volatile Memory Solutions Group	874			554			1,740			1,111
Programmable Solutions Group	440			465			865			824
All other	144			577			720			1,164
Total net revenue	$	14,763		$	13,533		$	29,559		$	27,235
Operating income (loss):
Client Computing Group	$	3,025		$	1,911		$	6,056		$	3,796
Data Center Group	1,661			1,765			3,148			3,529
Internet of Things Group	139			89			244			212
Non-Volatile Memory Solutions Group	(110		)	(224		)	(239		)	(319		)
Programmable Solutions Group	97			(62		)	189			(262		)
All other	(985		)	(2,161		)	(1,972		)	(3,070		)
Total operating income	$	3,827		$	1,318		$	7,426		$	3,886

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Note 4: Earnings Per Share

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



	Three Months Ended				Six Months Ended
(In Millions, Except Per Share Amounts)	Jul 1, 2017		Jul 2, 2016		Jul 1, 2017		Jul 2, 2016
Net income available to common stockholders	$	2,808	$	1,330	$	5,772	$	3,376
Weighted average shares of common stock outstanding—basic	4,710		4,729		4,717		4,725
Dilutive effect of employee equity incentive plans	36		49		48		57
Dilutive effect of convertible debt	99		88		99		88
Weighted average shares of common stock outstanding—diluted	4,845		4,866		4,864		4,870
Basic earnings per share of common stock	$	0.60	$	0.28	$	1.22	$	0.71
Diluted earnings per share of common stock	$	0.58	$	0.27	$	1.19	$	0.69

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 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 5: Other Financial Statement Details

Inventories



(In Millions)	Jul 1, 2017		Dec 31, 2016
Raw materials	$	1,014	$	695
Work in process	3,775		3,190
Finished goods	1,535		1,668
Total inventories	$	6,324	$	5,553

Deferred Income



(In Millions)	Jul 1, 2017		Dec 31, 2016
Deferred income on shipments of components to distributors	$	1,416	$	1,475
Deferred income from software, services and other	171		243
Current deferred income	$	1,587	$	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						Six Months Ended
(In Millions)	Jul 1, 2017			Jul 2, 2016			Jul 1, 2017			Jul 2, 2016
Share of equity method investee losses, net	$	(8	)	$	(12	)	$	(19	)	$	(20	)
Impairments	(555		)	(60		)	(603		)	(89		)
Gains on sales, net	802			419			1,076			515
Dividends	66			74			68			74
Other, net	37			57			72			20
Total gains (losses) on equity investments, net	$	342		$	478		$	594		$	500

Interest and Other, Net

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



	Three Months Ended						Six Months Ended
(In Millions)	Jul 1, 2017			Jul 2, 2016			Jul 1, 2017			Jul 2, 2016
Interest income	$	136		$	51		$	212		$	103
Interest expense	(156		)	(187		)	(302		)	(395		)
Other, net	423			10			457			84
Total interest and other, net	$	403		$	(126	)	$	367		$	(208	)

Interest expense in the preceding table is net of $69 million of interest capitalized in the second quarter of 2017 and $136 million in the first six months of 2017 ($24 million in the second quarter of 2016 and $46 million in the first six months of 2016).

Note 6: Restructuring and Other Charges



	Three Months Ended					Six Months Ended
(In Millions)	Jul 1, 2017			Jul 2, 2016		Jul 1, 2017			Jul 2, 2016
2016 Restructuring Program	$	(42	)	$	1,414	$	(53	)	$	1,414
Other charges	147			—		238			—
Total restructuring and other charges	$	105		$	1,414	$	185		$	1,414

2016 Restructuring Program

In the second quarter of 2016, our management approved and commenced the 2016 Restructuring Program. This program was substantially completed in the second quarter of 2017.

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					Six Months Ended
(In Millions)	Jul 1, 2017			Jul 2, 2016		Jul 1, 2017			Jul 2, 2016
Employee severance and benefit arrangements	$	(49	)	$	1,414	$	(70	)	$	1,414
Asset impairment and other charges	7			—		17			—
Total restructuring and other charges	$	(42	)	$	1,414	$	(53	)	$	1,414

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Restructuring and other activity for the 2016 Restructuring Program for the first six 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	—			17			17
Adjustments	(70		)	—			(70		)
Cash payments	(217		)	(16		)	(233		)
Non-cash settlements	—			(1		)	(1		)
Accrued restructuring balance as of July 1, 2017	$	298		$	10		$	308

We recorded the additional accruals as restructuring and other charges and within the "all other" operating segments category. A substantial majority of the accrued restructuring balance as of July 1, 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		Six Months Ended
(In Millions)	Jul 1, 2017		Jul 1, 2017
ISecG separation costs	$	70	$	143
Other	77		95
Total other charges	$	147	$	238

Note 7: Income Taxes

Our effective income tax rate was 31.2% in the first six months of 2017 compared to 19.2% in the first six 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 8: Investments

Available-for-Sale Investments



	July 1, 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	$	6,115	$	13	$	(7	)	$	6,121	$	3,847	$	4	$	(14	)	$	3,837
Financial institution instruments	8,011		7		(6		)	8,012		6,098		5		(11		)	6,092
Government debt	1,778		3		(5		)	1,776		1,581		—		(8		)	1,573
Marketable equity securities	2,560		3,344		—			5,904		2,818		3,363		(1		)	6,180
Total available-for-sale investments	$	18,464	$	3,367	$	(18	)	$	21,813	$	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 July 1, 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 second quarter of 2017, we sold available-for sale investments for proceeds of $1.3 billion ($875 million in the second quarter of 2016). During the first six months of 2017, we sold available-for-sale investments for proceeds of $1.8 billion ($3.8 billion in the first six months of 2016). The gross realized gains on sales of available-for-sale investments were $796 million in the second quarter of 2017 and $1.1 billion in the first six months of 2017 ($403 million in the second quarter of 2016 and $497 million in the first six 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 July 1, 2017, were as follows:



(In Millions)	Fair Value
Due in 1 year or less	$	8,408
Due in 1–2 years	1,434
Due in 2–5 years	2,976
Due after 5 years	71
Instruments not due at a single maturity date	3,020
Total	$	15,909

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. The carrying value of our investment was $1.1 billion as of July 1, 2017. Our investment is accounted for under the equity method of accounting and is classified within other long-term assets. For further information related to the divestiture of ISecG, see "Note 9: 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 July 1, 2017, we own a 49% interest in IMFT. The carrying value of our investment was $837 million as of July 1, 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 $105 million in the second quarter of 2017 and approximately $235 million in the first six months of 2017 (approximately $100 million in the second quarter of 2016 and approximately $200 million in the first six months of 2016). The amount due to IMFT for product purchases and services provided was approximately $100 million as of July 1, 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 July 1, 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 $321 million in the second quarter of 2017 and $483 million in the first six months of 2017 (there were no net gains or losses related to trading assets still held at the reporting date in the second quarter of 2016 and $190 million of net gains in the first six months of 2016). Net losses on the related derivatives were $311 million in the second quarter of 2017 and $446 million in the first six months of 2017 (net losses of $184 million in the first six months of 2016).

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Note 9: Acquisitions and Divestitures

Pending Acquisition of Mobileye

During the first quarter of 2017, we entered into a definitive agreement to acquire Mobileye N.V. (Mobileye). Pursuant to the terms of the agreement, a wholly-owned subsidiary of Intel commenced a tender offer on April 5, 2017 to acquire all of the issued and outstanding ordinary shares of Mobileye for $63.54 per share in cash, representing a fully-diluted equity value of approximately $15.3 billion as of the date of the agreement. The transaction is expected to close during the third quarter of 2017, pending satisfaction of all closing conditions. Mobileye is 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 will combine Mobileye’s leading computer vision expertise with Intel’s high-performance computing and connectivity expertise to create automated driving solutions from cloud to car.

Divestiture of Intel Security Group

On September 7, 2016, we announced a definitive agreement with TPG VII Manta Holdings, L.P., now known as Manta Holdings, L.P. (TPG), to transfer certain assets and liabilities relating to ISecG to a newly formed, jointly-owned, separate cybersecurity company, called McAfee. The transaction closed on April 3, 2017.

Total consideration 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. The promissory notes are classified as a loan receivable within other long-term assets. The notes accrue interest quarterly at an interest rate of three-month LIBOR plus 7.0% per annum and mature in 2020, but may be repaid early without penalty. The interest rate will increase by 0.5% every three months beginning in the first quarter of 2018. Additionally, McAfee may borrow $250 million on a line of credit provided by Intel. The line of credit will be closed when the notes are repaid.

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

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.

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Note 10: Identified Intangible Assets



	July 1, 2017
(In Millions)	Gross Assets		Accumulated Amortization			Net
Acquisition-related developed technology	$	6,591	$	(1,441	)	$	5,150
Acquisition-related customer relationships	1,340		(224		)	1,116
Acquisition-related brands	79		(19		)	60
Licensed technology and patents	3,184		(1,451		)	1,733
Identified intangible assets subject to amortization	11,194		(3,135		)	8,059
In-process research and development	808		—			808
Identified intangible assets not subject to amortization	808		—			808
Total identified intangible assets	$	12,002	$	(3,135	)	$	8,867



	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				Six Months Ended
(In Millions)	Location	Jul 1, 2017		Jul 2, 2016		Jul 1, 2017		Jul 2, 2016
Acquisition-related developed technology	Cost of sales	$	198	$	235	$	407	$	470
Acquisition-related customer relationships	Amortization of acquisition-related intangibles	33		82		68		165
Acquisition-related brands	Amortization of acquisition-related intangibles	4		7		7		14
Licensed technology and patents	Cost of sales	78		71		152		142
Total amortization expense		$	313	$	395	$	634	$	791

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	$	394	$	784	$	782	$	750	$	715
Acquisition-related customer relationships	67		122		121		119		119
Acquisition-related brands	7		13		13		13		14
Licensed technology and patents	132		231		219		194		179
Total future amortization expenses	$	600	$	1,150	$	1,135	$	1,076	$	1,027

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

Note 11: Other Long-Term Assets



(In Millions)	Jul 1, 2017		Dec 31, 2016
Equity method investments	$	2,266	$	1,328
Non-marketable cost method investments	2,719		3,098
Non-current deferred tax assets	753		907
Pre-payments for property, plant and equipment	422		347
Loans receivable	2,725		236
Reverse repurchase agreements	—		250
Other	1,121		993
Total other long-term assets	$	10,006	$	7,159

Note 12: Borrowings

Short-Term Debt



(In Millions)	Jul 1, 2017			Dec 31, 2016
Drafts payable	$	13		$	25
Current portion of long-term debt	4,125			4,618
Less: debt issuance costs associated with the current portion of long-term debt	(8		)	(9		)
Total short-term debt	$	4,130		$	4,634

Our current portion of long-term debt includes our 2009 junior subordinated convertible debentures due 2039 and our 2012 senior notes due 2017.

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)	Jul 1, 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	603			604
A$250, 3.25%, due December 2019¹	191			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	1,999			1,988
$750, 2.35%, due May 2022	748			—
$1,000, 3.10%, due July 2022	995			987
A$550, 4.00%, due December 2022¹	419			394
$1,500, 2.70%, due December 2022	1,493			1,480
$400, 4.10%, due November 2023	422			424
$1,250, 2.88%, due May 2024	1,241			—
$600, 2.70%, due June 2024	600			—
$2,250, 3.70%, due July 2025	2,176			2,148
$1,000, 2.60%, due May 2026	995			983
$1,000, 3.15%, due May 2027	997			—
$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	1,005			995
$915, 4.70%, due December 2045	905			894
$1,250, 4.10%, due May 2046	1,243			1,243
$1,000, 4.10%, due May 2047	994			—
Junior subordinated convertible debentures:
$1,600, 2.95%, due December 2035	1,000			992
$2,000, 3.25%, due August 2039	1,126			1,118
Long-term debt	32,059			25,337
Less: current portion of long-term debt	(4,125		)	(4,618		)
Less: debt issuance costs	(79		)	(70		)
Total long-term debt	$	27,855		$	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 15: 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.

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.

Subsequent to the end of the second quarter of 2017, we gave notice of our intention to redeem the $1.0 billion, 4.90% senior notes due August 2045. The redemption date is August 11, 2017.

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 13: 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



	July 1, 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	$	—	$	2,645	$	—	$	2,645	$	—	$	498	$	—	$	498
Financial institution instruments ¹	3,020		2,139		—		5,159		1,920		811		—		2,731
Government debt ²	—		466		—		466		—		332		—		332
Reverse repurchase agreements	—		2,335		—		2,335		—		768		—		768
Short-term investments:
Corporate debt	—		1,654		6		1,660		—		1,332		6		1,338
Financial institution instruments ¹	—		1,221		—		1,221		—		1,603		—		1,603
Government debt ²	—		277		—		277		—		284		—		284
Trading assets:
Asset-backed securities	—		22		—		22		—		87		—		87
Corporate debt	—		2,461		—		2,461		—		2,847		—		2,847
Financial institution instruments ¹	92		1,544		—		1,636		36		1,608		—		1,644
Government debt ²	31		6,934		—		6,965		32		3,704		—		3,736
Other current assets:
Derivative assets	—		326		—		326		—		382		—		382
Loans receivable	—		86		—		86		—		326		—		326
Marketable equity securities	5,472		432		—		5,904		6,180		—		—		6,180
Other long-term investments:
Corporate debt	—		1,811		5		1,816		—		1,995		6		2,001
Financial institution instruments ¹	—		1,632		—		1,632		—		1,758		—		1,758
Government debt ²	—		1,033		—		1,033		—		957		—		957
Other long-term assets:
Derivative assets	—		64		9		73		—		31		9		40
Loans receivable	—		525		—		525		—		236		—		236
Total assets measured and recorded at fair value	8,615		27,607		20		36,242		8,168		19,559		21		27,748
Liabilities
Other accrued liabilities:
Derivative liabilities	—		444		—		444		—		371		—		371
Other long-term liabilities:
Derivative liabilities	—		125		12		137		—		179		33		212
Total liabilities measured and recorded at fair value	$	—	$	569	$	12	$	581	$	—	$	550	$	33	$	583


¹	Level 1 investments consist of money market funds. Level 2 investments consist primarily of commercial paper, certificates of deposit, time deposits, and notes and bonds issued by financial institutions.


²	Level 1 investments consist primarily of US Treasury securities. Level 2 investments consist primarily of US Agency notes and non-U.S. government debt.

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (Continued)

In the second quarter of 2017, we began assigning fair value hierarchy levels based on the underlying instrument type for our fixed income portfolio. We have reclassified prior period amounts to conform to the current period presentation.

Fair Value Option for Loans Receivable

As of July 1, 2017 and December 31, 2016, the fair value of our loans receivable for which we elected the fair value option did not significantly differ from the contractual principal balance based on the contractual currency.

Assets Measured and Recorded at Fair Value on a Non-Recurring Basis

Our non-marketable equity investments, marketable equity method investments, and non-financial assets, such as intangible assets and property, plant and equipment, are recorded at fair value only if an impairment is recognized.

We classified non-marketable equity investments as Level 3. Impairments recognized on non-marketable equity investments held as of July 1, 2017 were $277 million during the second quarter of 2017 and $325 million during the first six months of 2017 ($57 million during the second quarter of 2016 and $84 million during the first six months of 2016 on non-marketable equity investments held as of July 2, 2016).

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

The carrying amounts and fair values of financial instruments not recorded at fair value on a recurring basis at the end of each period were as follows:



	July 1, 2017
(In Millions)	Carrying Amount		Fair Value Measured Using						Fair Value
(In Millions)	Carrying Amount		Level 1		Level 2		Level 3		Fair Value
Grants receivable	$	440	$	—	$	440	$	—	$	440
Loans receivable¹	$	2,465