Intel 17Q3 10Q

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

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ITEM 1.	FINANCIAL STATEMENTS

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.

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

 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.

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.

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

Note 9: Investments

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.

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.

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

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 .

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated condensed financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

·	Overview .

·	Results of Operations .

This interim MD&A should be read in conjunction with the MD&A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (2016 Form 10-K).

Overview

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In Q3 2017 we achieved revenue of $16.1 billion , an increase of $371 million or 2% from Q3 2016 . Excluding the divested Intel Security Group (ISecG), revenue grew 6% from a year ago. Compared to Q3 2016 , our topline growth was primarily driven by strong performance across our data-centric businesses*, which collectively grew 15% year-on-year after adjusting for ISecG. Data Center Group (DCG), Internet of Things Group (IOTG), and Non-Volatile Memory Solutions Group (NSG) all achieved record quarterly revenue. Earnings per share were $0.94 , up 25 cents on a year-on-year basis.

·	CCG, our PC-centric business, had revenue of $8.9 billion with platform volumes down 7% and platform average selling prices up 7% compared to Q3 2016 . We saw a typical inventory build ahead of the holiday season and we believe the worldwide PC supply chain is operating at healthy levels. The PC-centric business continued to improve profitability as operating income grew 8% from a year ago.

·	The data-centric businesses represent approximately 45% of our total revenue. DCG had revenue of $4.9 billion , up 7% with platform volumes up 4% and platform average selling prices up 2% compared to Q3 2016 . IOTG, NSG, and Programmable Solutions Group (PSG) are collectively becoming a larger component of our overall business, growing 25% in aggregate in Q3 2017 from a year ago.

·	Gross margin of 62.3% was down 1 point compared to Q3 2016 .

·	Research and development (R&D) plus marketing, general, and administrative (MG&A) spending for the quarter was $4.9 billion , down 4% from a year ago. R&D and MG&A were 30% of revenue in Q3 2017 , down approximately 2 points from Q3 2016 , and 34% of revenue in the first nine months of 2017 , down approximately 3 points from the first nine months of 2016.

·	Operating income for Q3 2017 was $5.1 billion , up 15% on a year-on-year basis. The tax rate for the quarter was 23.8% , up 2 points compared to Q3 2016 . Net income for Q3 2017 was $4.5 billion , up 34% from Q3 2016 .

·	Q3 2017 operating income and EPS are all-time records. The EPS increase of 25 cents was driven by higher platform revenue, growth in adjacent businesses**, lower restructuring and other charges, and higher gains on sales of a portion of our interest in ASML Holding N.V. (ASML).

·	Our business continues to generate healthy cash flow with $6.3 billion of cash from operations in Q3 2017 . During Q3 2017 , we purchased $3.0 billion in capital assets, paid $1.3 billion in dividends, and used $1.1 billion to repurchase 31 million shares of stock.

Four months ahead of our expectations, we completed our tender offer for the outstanding ordinary shares of Mobileye B.V. (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. As a result of the completion, in Q3 2017 we had acquisition-related impacts associated with this transaction, including inventory valuation adjustment of $27 million and other acquisition-related charges of $113 million .

During the quarter, we launched our 8th Generation Intel ® Core™ Processors, code named Coffee Lake, which delivered significant performance improvement to our client platforms. In addition, we are making great progress in artificial intelligence. For example, we launched the Intel ® Movidius™ Myriad™ X vision processing unit (VPU), the world's first VPU with a dedicated Neural Compute Engine to deliver artificial intelligence capabilities to the edge in a low-power and high-performance package.

* Data-centric businesses consist of DCG, IOTG, NSG, PSG, and all other.

** Adjacent businesses consist of our non-platform results.

Results of Operations

		Three Months Ended														Nine Months Ended
		Q3 2017							Q3 2016							YTD 2017							YTD 2016
(Dollars in Millions, Except Per Share Amounts)		Dollars				% of Net Revenue			Dollars				% of Net Revenue			Dollars				% of Net Revenue			Dollars				% of Net Revenue
Net revenue		$	16,149			100.0	%		$	15,778			100.0	%		$	45,708			100.0	%		$	43,013			100.0	%
Cost of sales		6,092				37.7	%		5,795				36.7	%		17,406				38.1	%		16,927				39.4	%
Gross margin		10,057				62.3	%		9,983				63.3	%		28,302				61.9	%		26,086				60.6	%
Research and development		3,223				20.0	%		3,069				19.4	%		9,824				21.5	%		9,460				22.0	%
Marketing, general and administrative		1,666				10.3	%		2,006				12.7	%		5,624				12.3	%		6,239				14.5	%
Restructuring and other charges		4				—	%		372				2.4	%		189				0.4	%		1,786				4.1	%
Amortization of acquisition-related intangibles		49				0.3	%		74				0.5	%		124				0.3	%		253				0.6	%
Operating income		5,115				31.7	%		4,462				28.3	%		12,541				27.4	%		8,348				19.4	%
Gains (losses) on equity investments, net		846				5.2	%		(12		)		(0.1	)%		1,440				3.2	%		488				1.1	%
Interest and other, net		(31		)		(0.2	)%		(132		)		(0.8	)%		336				0.7	%		(340		)		(0.7	)%
Income before taxes		5,930				36.7	%		4,318				27.4	%		14,317				31.3	%		8,496				19.8	%
Provision for taxes		1,414				8.7	%		940				6.0	%		4,029				8.8	%		1,742				4.1	%
Net income		$	4,516			28.0	%		$	3,378			21.4	%		$	10,288			22.5	%		$	6,754			15.7	%
Diluted earnings per common share		$	0.94						$	0.69						$	2.12						$	1.39

Net Revenue

Our net revenue in Q3 2017 increased by $371 million , or 2% , compared to Q3 2016 . The increase in revenue was driven by higher NSG revenue as well as DCG and IOTG platform unit sales, which was partially offset by desktop platform unit sales. Additionally, revenue was positively impacted by desktop and notebook platform average selling price increases due to mix of products which was partially offset by changes to the Intel Inside ® program in Q3 2017. We are implementing this change in an effort to make the program more efficient, effective and to provide more flexibility to our customers. This change to the Intel Inside ® program impacts the way we classify our cooperative advertising costs and resulted in a reduction in revenue of approximately $200 million with a corresponding reduction in marketing expenses.

Our net revenue for the first nine months of 2017 increased by $2.7 billion , or 6% , compared to the first nine months of 2016 , which reflected an extra workweek. The higher revenue was driven by higher platform average selling prices, up 7% , primarily from notebook and DCG platforms. Additionally, revenue increased due to higher notebook, DCG and IOTG platform unit sales. Revenue also increased from higher NSG and CCG modem revenue. The increase in revenue was offset by the Q2 2017 divestiture of ISecG and lower desktop platform unit sales.

Gross Margin

Our overall gross margin percentage was 62.3% in Q3 2017 , down from 63.3% in Q3 2016 , and was 61.9% in the first nine months of 2017 , up from 60.6% in the first nine months of 2016 . Our overall gross margin dollars in Q3 2017 increased by $74 million , or 0.7% , compared to Q3 2016 , and in the in the first nine months of 2017 increased by $2.2 billion , or 8.5% , compared to the first nine months of 2016 . We derived most of our overall gross margin dollars from the sale of platforms in the CCG and DCG operating segments.

(In Millions)				Gross Margin Reconciliation
$	10,057			Q3 2017 Gross Margin
290				Lower platform unit cost, primarily on 14nm cost improvement
280				Higher gross margin from platform revenue
(170		)		Impact of the ISecG divestiture, offset by higher gross margin from adjacent businesses
(260		)		Higher period charges associated with the ramp of our 10nm process technology
(66		)		Other
$	9,983			Q3 2016 Gross Margin

(In Millions)				Gross Margin Reconciliation
$	28,302			YTD 2017 Gross Margin
1,795				Higher gross margin from platform revenue
930				Lower platform unit cost, primarily on 14nm cost improvement
480				Lower Altera and other acquisition-related charges
(300		)		Impact of the ISecG divestiture, offset by higher gross margin from adjacent businesses
(580		)		Higher factory start-up costs, primarily driven by the ramp of our 10nm process technology
(109		)		Other
$	26,086			YTD 2016 Gross Margin

1) Client Computing Group

(Dollars in Millions)		Q3 2017				Q3 2016				% Change			YTD 2017				YTD 2016				% Change
Platform revenue		$	8,132			$	8,258			(2	)%		$	23,163			$	22,395			3	%
Other revenue		728				634				15	%		1,886				1,384				36	%
Net revenue		$	8,860			$	8,892			—	%		$	25,049			$	23,779			5	%
Operating income		$	3,600			$	3,327			8	%		$	9,656			$	7,123			36	%
CCG platform unit sales										(7	)%										(3	)%
CCG platform average selling prices										7	%										7	%

CCG revenue in Q3 2017 was flat compared to Q3 2016 . The following impacted CCG revenue:

(In Millions)				Revenue Reconciliation
$	8,860			Q3 2017 CCG Revenue
(192		)		Lower desktop platform unit sales, down 6%
94				Higher CCG other revenue, including modem products
66				Other platform impacts
$	8,892			Q3 2016 CCG Revenue

(In Millions)				Revenue Reconciliation
$	25,049			YTD 2017 CCG Revenue
657				Higher notebook platform unit sales, up 5%
571				Higher notebook platform average selling prices, up 4%, from mix of processors
502				Higher CCG other revenue, including modem products
(482		)		Lower desktop platform unit sales, down 4%
22				Other platform impacts
$	23,779			YTD 2016 CCG Revenue

The following impacted CCG operating income:

(In Millions)				Operating Income Reconciliation
$	3,600			Q3 2017 CCG Operating Income
275				Lower CCG platform unit cost, primarily on 14nm cost improvement
145				Lower factory start-up costs, primarily driven by the ramp of our 10nm process technology
(215		)		Higher period charges associated with the ramp of our 10nm process technology
68				Other
$	3,327			Q3 2016 CCG Operating Income

(In Millions)				Operating Income Reconciliation
$	9,656			YTD 2017 CCG Operating Income
1,025				Lower CCG platform unit cost, primarily on 14nm cost improvement
865				Higher gross margin from CCG platform revenue
565				Lower CCG spending and share of technology development and MG&A costs
78				Other
$	7,123			YTD 2016 CCG Operating Income

2) Data Center Group

(Dollars in Millions)		Q3 2017				Q3 2016				% Change			YTD 2017				YTD 2016				% Change
Platform revenue		$	4,439			$	4,164			7	%		$	12,344			$	11,589			7	%
Other revenue		439				378				16	%		1,138				979				16	%
Net revenue		$	4,878			$	4,542			7	%		$	13,482			$	12,568			7	%
Operating income		$	2,255			$	2,110			7	%		$	5,403			$	5,639			(4	)%
DCG platform unit sales										4	%										3	%
DCG platform average selling prices										2	%										3	%

DCG revenue in Q3 2017 was up 7% compared to Q3 2016 based on growth in the cloud market segment, up 24%, and the communication market segment, up 9%, offset by the enterprise market segment, down 6%. The following impacted DCG revenue:

(In Millions)				Revenue Reconciliation
$	4,878			Q3 2017 DCG Revenue
173				Higher DCG platform unit sales, up 4%
102				Higher DCG platform average selling prices, up 2%, from mix of processors
61				Other
$	4,542			Q3 2016 DCG Revenue

(In Millions)				Revenue Reconciliation
$	13,482			YTD 2017 DCG Revenue
384				Higher DCG platform unit sales, up 3%
371				Higher DCG platform average selling prices, up 3%, from mix of processors
159				Other
$	12,568			YTD 2016 DCG Revenue

The following impacted DCG operating income:

(In Millions)				Operating Income Reconciliation
$	2,255			Q3 2017 DCG Operating Income
255				Higher gross margin from DCG platform revenue
(145		)		Higher factory start-up costs, primarily driven by the ramp of our 10nm process technology
35				Other
$	2,110			Q3 2016 DCG Operating Income

(In Millions)				Operating Income Reconciliation
$	5,403			YTD 2017 DCG Operating Income
(555		)		Higher factory start-up costs, primarily driven by the ramp of our 10nm process technology
(365		)		Higher DCG operating expense, primarily on increased share of technology development and MG&A costs
710				Higher gross margin from DCG platform revenue
(26		)		Other
$	5,639			YTD 2016 DCG Operating Income

3) Internet of Things Group

(Dollars in Millions)		Q3 2017				Q3 2016				% Change			YTD 2017				YTD 2016				% Change
Platform revenue		$	680			$	605			12	%		$	1,926			$	1,673			15	%
Other revenue		169				84				101	%		364				239				52	%
Net revenue		$	849			$	689			23	%		$	2,290			$	1,912			20	%
Operating income		$	146			$	191			(24	)%		$	390			$	403			(3	)%

The net revenue for the IOTG operating segment increased by $160 million in Q3 2017 compared to Q3 2016 , driven by $152 million from higher IOTG platform unit sales and $74 million of milestone-based revenue from adjacent business, offset by $77 million from lower IOTG platform average selling prices . IOTG revenue grew across the retail, industrial, and video market segments.

The net revenue for the IOTG operating segment increased by $378 million in the first nine months of 2017 compared to the first nine months of 2016 , driven by $201 million from higher IOTG platform unit sales , $74 million of milestone-based revenue from adjacent business, and $52 million from higher IOTG platform average selling prices .

The operating income for the IOTG operating segment decreased by $45 million in Q3 2017 compared to Q3 2016 , and decreased by $13 million in the first nine months of 2017 compared to the first nine months of 2016 . The operating income decreases were driven by higher spending and increased share of technology development and MG&A costs, partially offset by higher gross margin from IOTG revenue .

36

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INTEL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

4) Non-Volatile Memory Solutions Group

(Dollars in Millions)		Q3 2017				Q3 2016				% Change			YTD 2017				YTD 2016				% Change
Net revenue		$	891			$	649			37	%		$	2,631			$	1,760			49	%
Operating income (loss)		$	(52	)		$	(134	)		61	%		$	(291	)		$	(453	)		36	%

The net revenue for the NSG operating segment increased by $242 million in Q3 2017 compared to Q3 2016 , driven by $347 million higher volume due to strength in data center, offset by $105 million lower average selling prices due to mix of products sold .

The net revenue for the NSG operating segment increased by $871 million in the first nine months of 2017 compared to the first nine months of 2016 , driven by $1.3 billion higher SSD volume from market demand and strength in data center, offset by $401 million lower average selling prices due to mix of products sold .

The operating loss for the NSG operating segment decreased by $82 million in Q3 2017 compared to Q3 2016 . Operating loss decrease was primarily driven by $156 million lower unit cost due to mix of products and cost improvements as we continue to ramp our Dalian, China facility.

The operating loss for the NSG operating segment decreased $162 million in the first nine months of 2017 compared to the first nine months of 2016 , driven by $401 million lower unit cost due to mix of products and cost improvements, and by higher volume, offset by lower average selling prices .

5) Programmable Solutions Group

(Dollars in Millions)		Q3 2017				Q3 2016				% Change			YTD 2017				YTD 2016				% Change
Net revenue		$	469			$	425			10	%		$	1,334			$	1,249			7	%
Operating income (loss)		$	113			$	78			45	%		$	302			$	(184	)		n/m

PSG had operating income in the first nine months of 2017 compared to an operating loss in the first nine months of 2016 , primarily driven by acquisition-related charges, including a deferred revenue write-down and inventory valuation adjustment, in the first nine months of 2016 . Due to the revaluation of deferred revenue to fair value, we excluded revenue of $99 million and associated costs that would have created $64 million of operating income in the first nine months of 2016 . Additionally, we incurred approximately $387 million in the first nine months of 2016 of additional cost of sales charges that would have been excluded from the operating results in the first nine months of 2016 if the acquired inventory had not been remeasured to fair value upon acquisition and then sold to end customers, resulting in zero margin on that inventory for the period.

Operating Expenses

(Dollars in Millions)		Q3 2017				Q3 2016				YTD 2017				YTD 2016
Research and development (R&D)		$	3,223			$	3,069			$	9,824			$	9,460
Marketing, general and administrative (MG&A)		$	1,666			$	2,006			$	5,624			$	6,239
R&D and MG&A as percentage of net revenue		30.3		%		32.2		%		33.8		%		36.5		%
Restructuring and other charges		$	4			$	372			$	189			$	1,786
Amortization of acquisition-related intangibles		$	49			$	74			$	124			$	253

Research and Development

R&D increased by $154 million , or 5% , in Q3 2017 compared to Q3 2016 and by $364 million , or 4% , in the first nine months of 2017 compared to the first nine months of 2016 . These increases were driven by higher process development costs for our 7nm process technology, higher investments in data-centric businesses, and higher profit-dependent compensation due to an increase in net income. Increases were partially offset by the ISecG divestiture, cost savings from gained efficiencies, and the impact of an extra work week in Q1 2016.

Marketing, General and Administrative

MG&A decreased by $340 million , or 17% , in Q3 2017 compared to Q3 2016 . This decrease was driven by the ISecG divestiture and changes to the Intel Inside ® program, partially offset by acquisition-related charges associated with Mobileye and higher profit-dependent compensation due to an increase in net income.

MG&A decreased $615 million , or 10% , in the first nine months of 2017 compared to the first nine months of 2016 . This decrease was driven by the ISecG divestiture, changes to the Intel Inside ® program, and the impact of an extra work week in Q1 2016, partially offset by higher profit-dependent compensation due to an increase in net income.

Restructuring and Other Charges

(In Millions)		Q3 2017				Q3 2016				YTD 2017				YTD 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 Q2 2016, our management approved and commenced the 2016 Restructuring Program. The program was substantially completed during Q2 2017 .

Other Charges. Other charges consist primarily of expenses associated with the divestiture of ISecG that was completed in Q2 2017 .

For further information, see " Note 7: Restructuring and Other Charges " in Part I, Item 1 of this Form 10-Q.

Gains (Losses) on Equity Investments and Interest and Other, Net

(In Millions)		Q3 2017				Q3 2016				YTD 2017				YTD 2016
Gains (losses) on equity investments, net		$	846			$	(12	)		$	1,440			$	488
Interest and other, net		$	(31	)		$	(132	)		$	336			$	(340	)

Gains (losses) on equity investments, net

We recognized higher net realized gains on sales of a portion of our interest in ASML of $926 million  in  Q3 2017 and $2.0 billion in the first nine months of 2017 compared to $407 million for the first nine months of 2016 . The higher net realized gains were partially offset by $613 million of impairment charges and our share of equity method investee losses for the first nine months of 2017 .

Interest and other, net

We recognized a lower interest and other, net loss in Q3 2017 compared to Q3 2016 due primarily to higher interest income Q3 2017 . We recognized an interest and other, net gain for the first nine months of 2017 compared to a net loss for the first nine months of 2016 due primarily to a $387 million gain on the divestiture of ISecG in Q2 2017 and higher interest income in the first nine months of 2017 .

Liquidity and Capital Resources

We consider the following when assessing our liquidity and capital resources:

(Dollars in Millions)		Sep 30, 2017				Dec 31, 2016
Cash and cash equivalents, short-term investments, and trading assets		$	17,504			$	17,099
Other long-term investments		$	3,844			$	4,716
Loans receivable and other		$	894			$	996
Reverse repurchase agreements with original maturities greater than three months		$	250			$	250
Total debt		$	31,640			$	25,283
Temporary equity		$	870			$	882
Debt as percentage of permanent stockholders’ equity		44.6		%		38.2		%

Cash generated by operations is our primary source of liquidity. We maintain a diverse investment portfolio that we continually analyze based on issuer, industry, and country. When assessing our sources of liquidity we include investments as shown in the preceding table. Substantially all of our investments in debt instruments and financing receivables are in investment-grade securities.

Other potential sources of liquidity include our commercial paper program and our automatic shelf registration statement on file with the SEC, pursuant to which we may offer an unspecified amount of debt, equity, and other securities. Under our commercial paper program, we have an ongoing authorization from our Board of Directors to borrow up to $10.0 billion . This amount includes an increase of $5.0 billion in the authorization limit approved by our Board of Directors in April 2017. No commercial paper remained outstanding as of September 30, 2017 . In Q3 2017, we redeemed our $1.0 billion , 4.90% senior notes due August 2045 as well as issued a total of $640 million aggregate principal amount of senior notes to finance a portion of the senior notes redeemed.

As of September 30, 2017 , $10.0 billion of our $17.5 billion of cash and cash equivalents, short-term investments, and trading assets was held by our non-U.S. subsidiaries. Of the $10.0 billion held by our non-U.S. subsidiaries, approximately $4.9 billion was available for use in the U.S. without incurring additional U.S. income taxes in excess of the amounts already accrued in our financial statements as of September 30, 2017 . The remaining amount of non-U.S. cash and cash equivalents, short-term investments, and trading assets has been indefinitely reinvested and, therefore, no U.S. current or deferred taxes have been accrued. This amount is earmarked for near-term investment in our operations outside the U.S. and future acquisitions of non-U.S. entities. We believe our U.S. sources of cash and liquidity are sufficient to meet our business needs in the U.S., and do not expect that we will need to repatriate the funds we have designated as indefinitely reinvested outside the U.S. Under current tax laws, should our plans change and we were to choose to repatriate some or all of the funds we have designated as indefinitely reinvested outside the U.S., such amounts would be subject to U.S. income taxes and applicable non-U.S. income and withholding taxes.

During Q3 2017, we acquired 97.3% of Mobileye's outstanding ordinary shares for $14.5 billion net cash. We funded the acquisition, and expect to fund the remaining portion, with cash held by our non-U.S. subsidiaries.

During Q2 2017, we completed the divestiture of our ISecG business for total consideration of $4.2 billion . The consideration included cash proceeds of $924 million and $2.2 billion in the form of promissory notes. During Q3 2017, McAfee and TPG repaid the $2.2 billion of promissory notes and McAfee paid us a $735 million dividend.

We believe we have sufficient financial resources to meet our business requirements in the next 12 months, including capital expenditures for worldwide manufacturing and assembly and test; working capital requirements; and potential dividends, common stock repurchases, acquisitions, and strategic investments.

In summary, our cash flows for each period were as follows:

		Nine Months Ended
(In Millions)		Sep 30, 2017				Oct 1, 2016
Net cash provided by operating activities		$	14,869			$	13,658
Net cash used for investing activities		(10,532		)		(22,373		)
Net cash provided by (used for) financing activities		(822		)		(1,841		)
Net increase (decrease) in cash and cash equivalents		$	3,515			$	(10,556	)

Operating Activities

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.

For the first nine months of 2017 compared to the first nine months of 2016 , the $1.2 billion increase in cash provided by operations was primarily due to higher net income. This increase was partially offset by adjustments to net income for non-cash items, primarily driven by reduced restructuring charges, as well as changes in working capital, which benefited from $1.0 billion receipts of customer deposits.

Investing Activities

Investing cash flows consist primarily of capital expenditures; investment purchases, sales, maturities, and disposals; and proceeds from divestitures and cash used for acquisitions.

Cash used for investing activities was lower for the first nine months of 2017 compared to the first nine months of 2016 primarily due to net sales of available-for-sale investments and trading assets, as well as proceeds from our divestiture of ISecG. This activity was partially offset by higher capital expenditures.

Financing Activities

Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, and proceeds from the sale of shares of common stock through employee equity incentive plans.

Cash used for financing activities was lower in the first nine months of 2017 compared to the first nine months of 2016 primarily due to higher issuances of long-term debt. This increase was partially offset by higher repurchases of common stock and repayment of debt.