SEC Company Response from INTEL CORP (INTC) (CIK 0000050863) (INTC) — Jul 2, 2015
INTEL CORP (INTC) (CIK 0000050863)
Date: July 2, 2015 · CIK: 0000050863 · Accession: 0000050863-15-000046
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 000-06217
Referenced dates: June 4, 2015
Letter
Via EDGAR United States Securities and Exchange Commission Division of Corporation Finance Filed February 13, 2015 Form 10-Q for the Fiscal Quarter Ended March 28, 2015 Filed April 27, 2015 File No. 000-06217
Dear Mr. Cascio,
Intel Corporation ("Intel", "we", or "us") has received the comment letter dated June 4, 2015 from the staff of the Division of Corporation Finance ("Staff"), and the following represents our response to the Staff's comments. For your ease of reference, we have included your original comments below and have provided our responses after each comment. We appreciate the ten day extension you graciously provided for us to provide our responses.
Form 10-K for the Fiscal Year Ended December 27, 2014
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Comment No. 1
Mobile and Communications Group, page 39
You disclose that the $1.2 billion decrease in Mobile and Communications Group revenue in 2014 arose from higher cash consideration paid to customers and lower phone component sales partially offset by higher tablet platform unit sales. To help us better understand your disclosure please quantify for us the impact on revenues of lower prices, including the impact of cash consideration paid to customers, and offsetting higher unit sales. In light of the apparent significance of the offsetting components of price and volume in 2014, explain to us how your disclosure considers the guidance about known trends from Item 303(a)(3)(ii) of Regulation S-K.
Intel Corporation
2200 Mission College Blvd.
Santa Clara, CA 95054
www.intel.com
United States Securities and Exchange Commission
Division of Corporation Finance
July 2, 2015
Page 2
Response to Comment No. 1
We acknowledge the Staff's comment regarding quantifying the impact on revenues of lower prices, including the impact of cash consideration paid to customers, and offsetting higher unit sales. As requested by the Staff, the following supplemental information quantifies the revenue drivers discussed in our Form 10-K for the fiscal year ended December 27, 2014 filed on February 13, 2015 ("2014 Form 10-K"):
For 2014, our management identified growing our presence in the tablet market as a strategic objective and set a sizable goal of selling over 40 million tablet platforms. Our platform offering for tablets in 2014 was not optimized for the tablet market and therefore customers who chose to integrate Intel's platform were required to incur a higher bill of materials due to purchasing of third party components (i.e., memory subsystem, power management subsystem, etc.) in order to maintain the same level of functionality as compared to our competitors' offerings. In order to offset a portion of our customers' costs associated with choosing the Intel platform offering, we supplemented the higher incremental cost by offering cash consideration to our customers. Our management believes the cash consideration to our customers is temporary in nature and is not indicative of a material trend. We currently expect to phase out the cash consideration program as we bring an optimized platform to the tablet market.
Our management routinely evaluates the financial impact of growing our presence in the tablet market based on the net impact to gross margin as opposed to the revenue impact from higher unit sales. We believe that our gross margin discussion in our Management's Discussion and Analysis of Financial Condition for our Consolidated Results of Operations of our 2014 Form 10-K allows users of the financial statements to understand the quantitative impact of cash consideration paid to customers as well as higher costs of sales associated with higher tablet unit sales. Our management continues to believe this is the most meaningful metric for understanding the temporary nature of these measures based on information presently available, as viewed by management.
Conversely, in our mature markets, we measure the impact to revenue based on the percentage change in unit sales and average selling prices based on comparison to the prior year comparable period. Instead of providing a comparison of offsetting effects (which we deemed less meaningful because of the expected temporary nature of our cash consideration provided to customers), management focused on their impacts upon gross margin. Accordingly, in the 2014 Form 10-K, we disclosed the quantified impact to gross margin as management viewed such information as the most appropriate metric to inform the reader of the impact to our financial results.
In future filings, we will enhance our disclosure to quantify offsetting discrete events, to the extent material, that can be identified based on their impact to revenue.
United States Securities and Exchange Commission
Division of Corporation Finance
July 2, 2015
Page 3
Item 8. Financial Statements
Comment No. 2
Note 26. Operating Segments and Geographic Information, page 113
We note that in 2015 you reorganized your business to combine the PC Client Group segment and Mobile and Communications Group segment to form a new Client Computing Group (CCG) operating segment. We also note that your pre- and post- reorganization segments each include numerous product platforms. To help us better understand how you apply FASB ASC Topic 280 in identifying reportable segments and how the business reorganization lead to the revised segment reporting structure, please respond to the following for both pre- and post-reorganization:
·
Tell us the title and describe to us the role of each of the individuals who report to the Chief Operating Decision Maker (CODM).
·
Please identify and describe to us the role of each of your segment managers.
·
Describe to us the information regularly provided to the CODM and how frequently it is prepared.
·
Similarly, describe to us the financial information provided to the Board and how frequently it is prepared.
·
Explain to us how budgets are prepared, who approves the budget at each step of the process and describe the level of detail discussed at each step.
·
Tell us how often the CODM meets with his staff to discuss variances between actual and budgeted results.
·
Describe the level of detail communicated to the CODM when actual results differ from budgets and clarify who is involved in meetings with the CODM to discuss budget variances.
·
Describe the basis for determining segment manager compensation.
Response to Comment No. 2
As the Staff noted in Comment No. 2 above, in November 2014, Intel announced the implementation of a new operating structure, which merged the tablet, phone and modem business from our Mobile and Communications Group (MCG) with the PC Client Group (PCCG) organization, forming the Client Computing Group (CCG). CCG is responsible for all aspects of the full client computing market and our customer and partner relationships. The new structure reflects our strategy to address all aspects of the client computing market segment and utilizes our intellectual property to offer compelling solutions for a wide range of end-user devices. As the platform designs for these end-user devices converge, the new operating structure is designed to ensure that we are able to respond to market demand and provide a more coordinated approach to customers, as well as reduce costs and increase efficiencies by combining competing product roadmaps targeted for the client computing market segment. Additionally, the CCG design and research and development work will be performed by a pooled group of resources benefiting all CCG platforms.
United States Securities and Exchange Commission
Division of Corporation Finance
July 2, 2015
Page 4
As part of the reorganization, the roles of the former PCCG and MCG segment managers have been combined into a single CCG segment manager. The responsibilities of a segment manager involve leading a global organization, managing major customer and partner relationships, influencing product design roadmaps, interfacing with key suppliers, as well as managing their individual segment budgets, and identifying, prioritizing and executing on strategic projects in order to meet or exceed their segment performance goals. Individual segment manager role descriptions are more fully described in Exhibit A attached hereto. The graphic shown below represents our operating segments prior to the reorganization as well as after:
Our CODM
Based on the factors set forth in ASC 280-10-50-5, Intel's Chief Operating Decision Maker ("CODM") is our CEO, Brian Krzanich. Mr. Krzanich is responsible for making resource allocation decisions and setting performance metrics for all of our segment managers and functional group managers (e.g. sales and marketing, manufacturing, engineering, finance, and administration groups). He maintains regular contact with our segment managers for our material businesses, discussing operating activities, financial results, forecasts, and plans. Mr. Krzanich's direct reports and organizational reporting structure are depicted in Exhibit B, which exhibit we are delivering to the Staff supplementally under Rule 12b-4 of the Securities Exchange Act of 1934, as amended.
In May 2013, we created an Executive Office comprised of both our CEO (CODM) and our President, Renee James. Please be advised that, although Intel's President has been part of the Executive Office, the President reports to the CEO and decisions about the allocation of resources reside with the CEO. The Executive Office does not function as a management committee. The CEO (CODM) effectively controls the Executive Office and has complete decision making authority regarding allocation of resources to the operating segments. On July 2, 2015, Intel announced that Ms. James will depart Intel in January 2016, and accordingly the Executive Office structure is no longer in use at this time.
United States Securities and Exchange Commission
Division of Corporation Finance
July 2, 2015
Page 5
Please also be advised that Exhibits A and B to this response include the title and role description as well as the organizational structure of the CEO's (CODM's) direct reports and further designates whether such individuals are a segment manager (and indicates which roles have been added or removed post-formation of the CCG, which was first announced in November in 2014 and made effective beginning in the first quarter of 2015).
Resource allocation decisions are typically made as part of the annual budget cycle and performance metrics related to our operating segments and segment managers are primarily encompassed in our annual incentive cash plan. These annual cycles are described below. Our CEO (CODM) reviews financial information on a bi-monthly, quarterly, and semi-annual basis. The primary processes used to review information correspond to Intel's financial close and financial planning cycles. Thereafter, our Board of Directors performs a higher level financial review aligned with Intel's financial close and financial planning cycles. The information regularly reviewed by each includes the following:
Information Regularly Provided thru:
Financial Close
Financial Plan
BOD Financial Review Package
BOD Financial Review Package
Audit Committee Financial Review
Frequency:
Quarterly
Semi Annually
~bi-monthly BOD mtgs
Quarterly
Quarterly
Provided to:
CODM
BOD
CODM
BOD
CODM
BOD
CODM
BOD
CODM
Audit Committee
Forecasted Consolidated Income Statements
P
P
P
P
P
P
Consolidated Income Statements
P
P
P
P
P
Consolidated Gross Margin Analysis
P
P
P
Operating Segment Revenue
P
P
P
P
P
P
P
P
Operating Segment Operating Profit
P
P
P
P
P
P
Platform Product Revenue
P
P
P
P
P
While the timing and types of information reviewed during our financial close and financial planning cycles have remained consistent pre- and post-reorganization, the segment information included in these cycles now reflects the CCG operating segment whereas previously segment results for both PCCG and MCG operating segments were provided.
Annual Budget Cycle
Strategic Business Plan
Intel's budget cycle for the following fiscal year begins in July each year. External market trends are incorporated into the planning cycle and initial product group business plans are utilized to set product roadmaps. These roadmaps are then used to build a spending profile for the business, including sizing of additional market opportunities and potential revenue growth. Each segment manager then presents their proposed three year business plan to the CEO (CODM) for discussion and approval.
Operating Segment and Functional Group Budgets
In September of each year, input and feedback from executive management is incorporated into product roadmaps and initial targets are communicated to the operating segment finance groups and general managers as part of our zero-based budget planning process. The individual segment managers and their finance controllers further distribute budget targets to the business unit level groups within their operating segment. Detail-level budgets are developed by the finance organizations, and the
United States Securities and Exchange Commission
Division of Corporation Finance
July 2, 2015
Page 6
resulting initial targets are utilized to determine projects that will not be funded. Operating segment managers then set product level business plans and conduct reviews including the following: (i) overall profitability of their operating segment, (ii) project level spending plans (both headcount and spending profiles) and (iii) plan for disinvestment of projects that are no longer supported as part of the corporate strategy. Segment managers review these detail-level budgets and propose their annual plan to the CEO (CODM) in November.
Annual Budget Reviews with CODM
"PLAN reviews" are a set of meetings during which the CEO (CODM) reviews the consolidated Intel business plan as well as the annual plans presented by each operating segment manager and functional group manager. The consolidated business plan for the following fiscal year involves not only a review of the consolidated income statement (revenue, gross margin, spending and overall profitability), but also involves strategic investment decisions or targeted budget reduction decisions that will need to be made with each of the respective operating segment and functional group managers during the PLAN review meetings.
During the PLAN review meetings, operating segment managers are expected to present their plan for the business including any new product investments, disinvestments or budget shortfalls that would place the operating segments' product roadmap at risk. These presentations contain operating segment revenue, gross margin, spending (both direct as well as indirect allocations from functional groups) as well as a measure of operating segment profitability. A prioritized list of projects under our zero-based budgeting model, including associated costs, as well as identification of whether such projects are no longer funded, is also provided. Additionally, revenue and operating profit for business units may be provided at the segment manager's discretion as part this annual review although such information is not reviewed on a regular basis as part of the financial close process. Segment managers are given individual segment budgets for total operating expense spending that may be allocated between their business unit divisions. Once approved by the CEO (CODM), a final summary of the PLAN budget for the next fiscal year is reviewed by the Board.
Quarterly Budget Reviews
Each quarter in preparation for the quarterly earnings rele
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filename1.htm
July 2, 2015
Via EDGAR
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street NE
Mail Stop 6010
Washington, D.C. 20549
Attn: Brian Cascio, Accounting Branch Chief
Re:
Intel Corporation
Form 10-K for the Fiscal Year Ended December 27, 2014
Filed February 13, 2015
Form 10-Q for the Fiscal Quarter Ended March 28, 2015
Filed April 27, 2015
File No. 000-06217
Dear Mr. Cascio,
Intel Corporation ("Intel", "we", or "us") has received the comment letter dated June 4, 2015 from the staff of the Division of Corporation Finance ("Staff"), and the following represents our response to the Staff's comments. For your ease of reference, we have included your original comments below and have provided our responses after each comment. We appreciate the ten day extension you graciously provided for us to provide our responses.
Form 10-K for the Fiscal Year Ended December 27, 2014
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Comment No. 1
Mobile and Communications Group, page 39
You disclose that the $1.2 billion decrease in Mobile and Communications Group revenue in 2014 arose from higher cash consideration paid to customers and lower phone component sales partially offset by higher tablet platform unit sales. To help us better understand your disclosure please quantify for us the impact on revenues of lower prices, including the impact of cash consideration paid to customers, and offsetting higher unit sales. In light of the apparent significance of the offsetting components of price and volume in 2014, explain to us how your disclosure considers the guidance about known trends from Item 303(a)(3)(ii) of Regulation S-K.
Intel Corporation
2200 Mission College Blvd.
Santa Clara, CA 95054
www.intel.com
United States Securities and Exchange Commission
Division of Corporation Finance
July 2, 2015
Page 2
Response to Comment No. 1
We acknowledge the Staff's comment regarding quantifying the impact on revenues of lower prices, including the impact of cash consideration paid to customers, and offsetting higher unit sales. As requested by the Staff, the following supplemental information quantifies the revenue drivers discussed in our Form 10-K for the fiscal year ended December 27, 2014 filed on February 13, 2015 ("2014 Form 10-K"):
For 2014, our management identified growing our presence in the tablet market as a strategic objective and set a sizable goal of selling over 40 million tablet platforms. Our platform offering for tablets in 2014 was not optimized for the tablet market and therefore customers who chose to integrate Intel's platform were required to incur a higher bill of materials due to purchasing of third party components (i.e., memory subsystem, power management subsystem, etc.) in order to maintain the same level of functionality as compared to our competitors' offerings. In order to offset a portion of our customers' costs associated with choosing the Intel platform offering, we supplemented the higher incremental cost by offering cash consideration to our customers. Our management believes the cash consideration to our customers is temporary in nature and is not indicative of a material trend. We currently expect to phase out the cash consideration program as we bring an optimized platform to the tablet market.
Our management routinely evaluates the financial impact of growing our presence in the tablet market based on the net impact to gross margin as opposed to the revenue impact from higher unit sales. We believe that our gross margin discussion in our Management's Discussion and Analysis of Financial Condition for our Consolidated Results of Operations of our 2014 Form 10-K allows users of the financial statements to understand the quantitative impact of cash consideration paid to customers as well as higher costs of sales associated with higher tablet unit sales. Our management continues to believe this is the most meaningful metric for understanding the temporary nature of these measures based on information presently available, as viewed by management.
Conversely, in our mature markets, we measure the impact to revenue based on the percentage change in unit sales and average selling prices based on comparison to the prior year comparable period. Instead of providing a comparison of offsetting effects (which we deemed less meaningful because of the expected temporary nature of our cash consideration provided to customers), management focused on their impacts upon gross margin. Accordingly, in the 2014 Form 10-K, we disclosed the quantified impact to gross margin as management viewed such information as the most appropriate metric to inform the reader of the impact to our financial results.
In future filings, we will enhance our disclosure to quantify offsetting discrete events, to the extent material, that can be identified based on their impact to revenue.
United States Securities and Exchange Commission
Division of Corporation Finance
July 2, 2015
Page 3
Item 8. Financial Statements
Comment No. 2
Note 26. Operating Segments and Geographic Information, page 113
We note that in 2015 you reorganized your business to combine the PC Client Group segment and Mobile and Communications Group segment to form a new Client Computing Group (CCG) operating segment. We also note that your pre- and post- reorganization segments each include numerous product platforms. To help us better understand how you apply FASB ASC Topic 280 in identifying reportable segments and how the business reorganization lead to the revised segment reporting structure, please respond to the following for both pre- and post-reorganization:
·
Tell us the title and describe to us the role of each of the individuals who report to the Chief Operating Decision Maker (CODM).
·
Please identify and describe to us the role of each of your segment managers.
·
Describe to us the information regularly provided to the CODM and how frequently it is prepared.
·
Similarly, describe to us the financial information provided to the Board and how frequently it is prepared.
·
Explain to us how budgets are prepared, who approves the budget at each step of the process and describe the level of detail discussed at each step.
·
Tell us how often the CODM meets with his staff to discuss variances between actual and budgeted results.
·
Describe the level of detail communicated to the CODM when actual results differ from budgets and clarify who is involved in meetings with the CODM to discuss budget variances.
·
Describe the basis for determining segment manager compensation.
Response to Comment No. 2
As the Staff noted in Comment No. 2 above, in November 2014, Intel announced the implementation of a new operating structure, which merged the tablet, phone and modem business from our Mobile and Communications Group (MCG) with the PC Client Group (PCCG) organization, forming the Client Computing Group (CCG). CCG is responsible for all aspects of the full client computing market and our customer and partner relationships. The new structure reflects our strategy to address all aspects of the client computing market segment and utilizes our intellectual property to offer compelling solutions for a wide range of end-user devices. As the platform designs for these end-user devices converge, the new operating structure is designed to ensure that we are able to respond to market demand and provide a more coordinated approach to customers, as well as reduce costs and increase efficiencies by combining competing product roadmaps targeted for the client computing market segment. Additionally, the CCG design and research and development work will be performed by a pooled group of resources benefiting all CCG platforms.
United States Securities and Exchange Commission
Division of Corporation Finance
July 2, 2015
Page 4
As part of the reorganization, the roles of the former PCCG and MCG segment managers have been combined into a single CCG segment manager. The responsibilities of a segment manager involve leading a global organization, managing major customer and partner relationships, influencing product design roadmaps, interfacing with key suppliers, as well as managing their individual segment budgets, and identifying, prioritizing and executing on strategic projects in order to meet or exceed their segment performance goals. Individual segment manager role descriptions are more fully described in Exhibit A attached hereto. The graphic shown below represents our operating segments prior to the reorganization as well as after:
Our CODM
Based on the factors set forth in ASC 280-10-50-5, Intel's Chief Operating Decision Maker ("CODM") is our CEO, Brian Krzanich. Mr. Krzanich is responsible for making resource allocation decisions and setting performance metrics for all of our segment managers and functional group managers (e.g. sales and marketing, manufacturing, engineering, finance, and administration groups). He maintains regular contact with our segment managers for our material businesses, discussing operating activities, financial results, forecasts, and plans. Mr. Krzanich's direct reports and organizational reporting structure are depicted in Exhibit B, which exhibit we are delivering to the Staff supplementally under Rule 12b-4 of the Securities Exchange Act of 1934, as amended.
In May 2013, we created an Executive Office comprised of both our CEO (CODM) and our President, Renee James. Please be advised that, although Intel's President has been part of the Executive Office, the President reports to the CEO and decisions about the allocation of resources reside with the CEO. The Executive Office does not function as a management committee. The CEO (CODM) effectively controls the Executive Office and has complete decision making authority regarding allocation of resources to the operating segments. On July 2, 2015, Intel announced that Ms. James will depart Intel in January 2016, and accordingly the Executive Office structure is no longer in use at this time.
United States Securities and Exchange Commission
Division of Corporation Finance
July 2, 2015
Page 5
Please also be advised that Exhibits A and B to this response include the title and role description as well as the organizational structure of the CEO's (CODM's) direct reports and further designates whether such individuals are a segment manager (and indicates which roles have been added or removed post-formation of the CCG, which was first announced in November in 2014 and made effective beginning in the first quarter of 2015).
Resource allocation decisions are typically made as part of the annual budget cycle and performance metrics related to our operating segments and segment managers are primarily encompassed in our annual incentive cash plan. These annual cycles are described below. Our CEO (CODM) reviews financial information on a bi-monthly, quarterly, and semi-annual basis. The primary processes used to review information correspond to Intel's financial close and financial planning cycles. Thereafter, our Board of Directors performs a higher level financial review aligned with Intel's financial close and financial planning cycles. The information regularly reviewed by each includes the following:
Information Regularly Provided thru:
Financial Close
Financial Plan
BOD Financial Review Package
BOD Financial Review Package
Audit Committee Financial Review
Frequency:
Quarterly
Semi Annually
~bi-monthly BOD mtgs
Quarterly
Quarterly
Provided to:
CODM
BOD
CODM
BOD
CODM
BOD
CODM
BOD
CODM
Audit Committee
Forecasted Consolidated Income Statements
P
P
P
P
P
P
Consolidated Income Statements
P
P
P
P
P
Consolidated Gross Margin Analysis
P
P
P
Operating Segment Revenue
P
P
P
P
P
P
P
P
Operating Segment Operating Profit
P
P
P
P
P
P
Platform Product Revenue
P
P
P
P
P
While the timing and types of information reviewed during our financial close and financial planning cycles have remained consistent pre- and post-reorganization, the segment information included in these cycles now reflects the CCG operating segment whereas previously segment results for both PCCG and MCG operating segments were provided.
Annual Budget Cycle
Strategic Business Plan
Intel's budget cycle for the following fiscal year begins in July each year. External market trends are incorporated into the planning cycle and initial product group business plans are utilized to set product roadmaps. These roadmaps are then used to build a spending profile for the business, including sizing of additional market opportunities and potential revenue growth. Each segment manager then presents their proposed three year business plan to the CEO (CODM) for discussion and approval.
Operating Segment and Functional Group Budgets
In September of each year, input and feedback from executive management is incorporated into product roadmaps and initial targets are communicated to the operating segment finance groups and general managers as part of our zero-based budget planning process. The individual segment managers and their finance controllers further distribute budget targets to the business unit level groups within their operating segment. Detail-level budgets are developed by the finance organizations, and the
United States Securities and Exchange Commission
Division of Corporation Finance
July 2, 2015
Page 6
resulting initial targets are utilized to determine projects that will not be funded. Operating segment managers then set product level business plans and conduct reviews including the following: (i) overall profitability of their operating segment, (ii) project level spending plans (both headcount and spending profiles) and (iii) plan for disinvestment of projects that are no longer supported as part of the corporate strategy. Segment managers review these detail-level budgets and propose their annual plan to the CEO (CODM) in November.
Annual Budget Reviews with CODM
"PLAN reviews" are a set of meetings during which the CEO (CODM) reviews the consolidated Intel business plan as well as the annual plans presented by each operating segment manager and functional group manager. The consolidated business plan for the following fiscal year involves not only a review of the consolidated income statement (revenue, gross margin, spending and overall profitability), but also involves strategic investment decisions or targeted budget reduction decisions that will need to be made with each of the respective operating segment and functional group managers during the PLAN review meetings.
During the PLAN review meetings, operating segment managers are expected to present their plan for the business including any new product investments, disinvestments or budget shortfalls that would place the operating segments' product roadmap at risk. These presentations contain operating segment revenue, gross margin, spending (both direct as well as indirect allocations from functional groups) as well as a measure of operating segment profitability. A prioritized list of projects under our zero-based budgeting model, including associated costs, as well as identification of whether such projects are no longer funded, is also provided. Additionally, revenue and operating profit for business units may be provided at the segment manager's discretion as part this annual review although such information is not reviewed on a regular basis as part of the financial close process. Segment managers are given individual segment budgets for total operating expense spending that may be allocated between their business unit divisions. Once approved by the CEO (CODM), a final summary of the PLAN budget for the next fiscal year is reviewed by the Board.
Quarterly Budget Reviews
Each quarter in preparation for the quarterly earnings rele