10-Q 1 a0630201810qdocument.htm 10-Q 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 June 30, 2018.
Or
 
¨
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
a001intellogocolora05.jpg
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 June 30, 2018
Common stock, $0.001 par value
 
4,611 million



TABLE OF CONTENTS
THE ORGANIZATION OF OUR QUARTERLY REPORT ON FORM 10-Q
The order and presentation of content in our Quarterly Report on Form 10-Q (Form 10-Q) differs from the traditional U.S. Securities and Exchange Commission (SEC) Form 10-Q format. We believe this format improves readability and better presents how we organize and manage our business. See "Form 10-Q Cross-Reference Index" within Other Key Information for a cross-reference index to the traditional SEC Form 10-Q format.
We have included key metrics that we use to measure our business, some of which are non-GAAP measures. See these "Non-GAAP Financial Measures" within Other Key Information.

 
 
 
Page
FORWARD-LOOKING STATEMENTS
A QUARTER IN REVIEW
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND SUPPLEMENTAL DETAILS
 
 
Consolidated Condensed Statements of Income
 
Consolidated Condensed Statements of Comprehensive Income
 
Consolidated Condensed Balance Sheets
 
Consolidated Condensed Statements of Cash Flows
 
Notes to Consolidated Condensed Financial Statements
 
 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) - RESULTS OF OPERATIONS
 
 
Overview
 
Revenue, Gross Margin, and Operating Expenses
 
Business Unit Trends and Results
 
Other Consolidated Results of Operations
 
Liquidity and Capital Resources
 
Quantitative and Qualitative Disclosures about Market Risk
OTHER KEY INFORMATION
 
 
Risk Factors
 
Controls and Procedures
 
Non-GAAP Financial Measures
 
Issuer Purchases of Equity Securities
 
Exhibits
 
Form 10-Q Cross-Reference Index






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, projected growth of markets relevant to 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 30, 2017, 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 the date of this filing. 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.

INTEL UNIQUE TERMS
We use specific terms throughout this document to describe our business and results. Below are key terms and how we define them:
PLATFORM PRODUCTS
 
A microprocessor (processor or central processing unit (CPU)) and chipset, a stand-alone System-on-Chip (SoC), or a multichip package. Platform products, or platforms, are primarily used in solutions sold through Client Computing Group (CCG), Data Center Group (DCG), and Internet of Things Group (IOTG) segments.
 
 
 
ADJACENT PRODUCTS
 
All of our non-platform products, for CCG, DCG, and IOTG like modem, ethernet and silicon photonics, as well as Non-Volatile Memory Solutions Group (NSG), Programmable Solutions Group (PSG), and Mobileye products. Combined with our platform products, adjacent products form comprehensive platform solutions to meet customer needs.
 
 
 
PC-CENTRIC BUSINESS
 
Is made up of our CCG business, both platform and adjacent products.
 
 
 
DATA-CENTRIC BUSINESSES
 
Includes our DCG, IOTG, NSG, PSG, and all other businesses.
Intel, the Intel logo, Intel Inside, Intel Optane, Intel Core, Xeon, 3D XPoint and XMM are trademarks of Intel Corporation or its subsidiaries in the U.S. and/or other countries.
*Other names and brands may be claimed as the property of others. 

 
 
1


A QUARTER IN REVIEW
After five decades in the tech industry, we are poised to deliver another record year, our third in a row. We had record second quarter revenue and are continuing to transform the company from a PC-centric to a data-centric company. Our data-centric businesses collectively grew 26% from a year ago and are now approaching 50% of our revenue. Individually, Data Center Group (DCG), Internet of Things Group (IOTG), Non-volatile Memory Solutions Group (NSG), and Programmable Solutions Group (PSG) all achieved double digit revenue growth. Client Computing Group (CCG) continued to execute well, producing 6% revenue growth and funding data-centric investments. Strong operating margin leverage and our lower tax rate resulted in GAAP and non-GAAP EPS growth, even as we continued investing in growth areas. From a capital allocation perspective, in the first half of the year we generated $13.7 billion of cash flow from operations and returned $8.6 billion to shareholders.
REVENUE
 
OPERATING INCOME
 
DILUTED EPS
$17.0B
 
 
 
$5.3B
 
$5.6B
 
$1.05
 
$1.04
GAAP
 
 
 
GAAP
 
non-GAAP1
 
GAAP
 
non-GAAP1
up $2.2B or 15% from Q2 2017
 
up $1.4B or 37% from Q2 2017
 
up $1.4B or 34% from Q2 2017
 
up $0.47 or 82% from Q2 2017
 
up $0.32 or 44% from Q2 2017
 
 
 
 
 
 
 
 
 
Strong performance across all businesses and record revenue from IOTG and NSG
 
Higher demand of performance-leading products and growth of adjacent businesses; offset by corresponding unit costs
 
Top-line revenue growth, strong operating margin leverage, lower tax rate from Tax Reform2
 
 
 
 
 
 
 
 
 
 
 
 Data-centric $B
 
 PC-centric $B
 
 GAAP $B
 
Non-GAAP $B
 
 GAAP
 
 Non-GAAP
pcvsdatacentricrevenue002.jpg operatingincome003.jpg dilutedeps004.jpg
BUSINESS SUMMARY
Fifty years ago, Robert Noyce and Gordon Moore founded Intel. In honor of our golden anniversary, we are embracing Robert Noyce’s inspiring challenge, "Don't be encumbered by history, go off and do something wonderful.” We will celebrate our heritage and the wonderful things we are doing to create a bright future for Intel and the world.
Micron Technology, Inc. (Micron) and Intel announced that we had agreed to complete joint development for the second generation of 3D XPoint™ technology and that technology development beyond the second generation of 3D XPoint technology will be pursued independently in order to optimize the technology for our respective products and business needs. Intel-Micron Flash Technologies (IMFT) facility in Lehi, Utah, will continue to manufacture memory based on 3D XPoint technology.
We had several notable product updates during the quarter. We announced that Mobileye’s EyeQ* computer vision technology and Responsibility Sensitive Safety driving policy will be used in Baidu, Inc.'s, Apollo* commercial Autonomous Vehicle program. We are now shipping the Intel® XMM 7560 modem, our first CDMA and first multi-SIM capable cellular modem, manufactured based on our 14nm process technology. Expanding our memory product line, we announced production of the industry’s first four-bits-per-cell (QLC) NAND PCIe SSDs. CCG launched several new 8th Gen Intel® Core processors including the 8th Gen Intel Core i7-8086K limited-edition processor for gaming.
We released our annual Corporate Responsibility Report, highlighting our progress over the past year in environmental sustainability, supply chain responsibility, diversity and inclusion, and social impact. We made significant progress on our diversity initiatives and accelerated our 2020 diversity goal by two years to achieve full representation3 in our U.S. workforce by the end of 2018.
1 See "Non-GAAP Financial Measures" within Other Key Information.
2 Tax Reform refers to the U.S. Tax Cuts and Jobs Act enacted in December 2017.
3 Full representation of women and underrepresented minorities is the point at which Intel’s workforce in the U.S. matches the supply of skilled talent available (market availability) for current roles at Intel.


A QUARTER IN REVIEW
 
2



INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
 
 
Three Months Ended
 
Six Months Ended
(In Millions, Except Per Share Amounts; Unaudited)
 
Jun 30,
2018
 
Jul 1,
2017
 
Jun 30,
2018
 
Jul 1,
2017
Net revenue
 
$
16,962

 
$
14,763

 
$
33,028

 
$
29,559

Cost of sales
 
6,543

 
5,667

 
12,878

 
11,303

Gross margin
 
10,419

 
9,096

 
20,150

 
18,256

Research and development
 
3,371

 
3,262

 
6,682

 
6,573

Marketing, general and administrative
 
1,725

 
1,850

 
3,625

 
3,949

Restructuring and other charges
 

 
105

 

 
185

Amortization of acquisition-related intangibles
 
50

 
37

 
100

 
75

Operating expenses
 
5,146

 
5,254

 
10,407

 
10,782

Operating income
 
5,273

 
3,842

 
9,743

 
7,474

Gains (losses) on equity investments, net
 
(203
)
 
342

 
440

 
594

Interest and other, net
 
459

 
388

 
357

 
319

Income before taxes
 
5,529

 
4,572

 
10,540

 
8,387

Provision for taxes
 
523

 
1,764

 
1,080

 
2,615

Net income
 
$
5,006

 
$
2,808

 
$
9,460

 
$
5,772

Earnings per share – Basic
 
$
1.08

 
$
0.60

 
$
2.03

 
$
1.22

Earnings per share – Diluted
 
$
1.05

 
$
0.58

 
$
1.98

 
$
1.19

Cash dividends declared per share of common stock
 
$

 
$

 
$
0.60

 
$
0.5325

Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
 
Basic
 
4,649

 
4,710

 
4,661

 
4,717

Diluted
 
4,747

 
4,845

 
4,768

 
4,864

See accompanying notes.

FINANCIAL STATEMENTS
  Consolidated Condensed Statements of Income
3




INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended
 
Six Months Ended
(In Millions; Unaudited)
 
Jun 30,
2018
 
Jul 1,
2017
 
Jun 30,
2018
 
Jul 1,
2017
Net income
 
$
5,006

 
$
2,808

 
$
9,460

 
$
5,772

Changes in other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) on available-for-sale equity investments
 

 
(534
)
 

 
9

Net unrealized holding gains (losses) on derivatives
 
(293
)
 
136

 
(174
)
 
331

Actuarial valuation and other pension benefits (expenses), net
 
(122
)
 
202

 
26

 
220

Translation adjustments and other
 
9

 
507

 
(13
)
 
508

Other comprehensive income (loss)
 
(406
)
 
311

 
(161
)
 
1,068

Total comprehensive income
 
$
4,600

 
$
3,119

 
$
9,299

 
$
6,840

See accompanying notes.

FINANCIAL STATEMENTS
  Consolidated Condensed Statements of Comprehensive Income
4



INTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Millions)
 
Jun 30,
2018
 
Dec 30,
2017
 
 
(unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
2,614

 
$
3,433

Short-term investments
 
2,263

 
1,814

Trading assets
 
7,348

 
8,755

Accounts receivable
 
4,636

 
5,607

Inventories
 
7,344

 
6,983

Other current assets
 
3,398

 
2,908

Total current assets
 
27,603

 
29,500

Property, plant and equipment, net of accumulated depreciation of $62,071 ($59,286 as of December 30, 2017)
 
45,914

 
41,109

Equity investments
 
9,245

 
8,579

Other long-term investments
 
3,071

 
3,712

Goodwill
 
24,351

 
24,389

Identified intangible assets, net
 
12,098

 
12,745

Other long-term assets
 
3,690

 
3,215

Total assets
 
$
125,972

 
$
123,249

Liabilities, temporary equity, and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt
 
$
3,510

 
$
1,776

Accounts payable
 
4,143

 
2,928

Accrued compensation and benefits
 
2,601

 
3,526

Deferred income
 

 
1,656

Other accrued liabilities
 
7,317

 
7,535

Total current liabilities

17,571

 
17,421

Debt
 
24,632

 
25,037

Contract liabilities
 
2,393

 

Income taxes payable, non-current
 
5,618

 
4,069

Deferred income taxes
 
1,666

 
3,046

Other long-term liabilities
 
3,391

 
3,791

Contingencies (Note 15)
 

 

Temporary equity
 
654

 
866

Stockholders’ equity:
 
 
 
 
Preferred stock
 

 

Common stock and capital in excess of par value, 4,611 issued and outstanding (4,687 issued and outstanding as of December 30, 2017)
 
25,470

 
26,074

Accumulated other comprehensive income (loss)
 
(1,089
)
 
862

Retained earnings
 
45,666

 
42,083

Total stockholders’ equity
 
70,047

 
69,019

Total liabilities, temporary equity, and stockholders’ equity
 
$
125,972

 
$
123,249

See accompanying notes.

FINANCIAL STATEMENTS
  Consolidated Condensed Balance Sheets
5



INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended
(In Millions; Unaudited)
 
Jun 30,
2018
 
Jul 1,
2017
Cash and cash equivalents, beginning of period
 
$
3,433

 
$
5,560

Cash flows provided by (used for) operating activities:
 
 
 
 
Net income
 
9,460

 
5,772

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
3,536

 
3,300

Share-based compensation
 
820

 
725

Restructuring and other charges
 

 
185

Amortization of intangibles
 
782

 
634

(Gains) losses on equity investments, net
 
(401
)
 
(526
)
(Gains) losses on divestitures
 
(497
)
 
(387
)
Deferred taxes
 
93

 
807

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
369

 
(618
)
Inventories
 
(303
)
 
(760
)
Accounts payable
 
274

 
425

Accrued compensation and benefits
 
(884
)
 
(1,102
)
Customer deposits and prepaid supply agreements
 
1,580

 

Income taxes payable and receivable
 
(1,226
)
 
563

Other assets and liabilities
 
94

 
(413
)
Total adjustments
 
4,237

 
2,833

Net cash provided by operating activities
 
13,697

 
8,605

Cash flows provided by (used for) investing activities:
 
 
 
 
Additions to property, plant and equipment
 
(7,440
)
 
(4,730
)
Purchases of available-for-sale debt investments
 
(1,578
)
 
(1,876
)
Maturities of available-for-sale debt investments
 
1,720

 
2,197

Purchases of trading assets
 
(6,501
)
 
(7,961
)
Maturities and sales of trading assets
 
7,691

 
5,977

Purchases of equity investments
 
(594
)
 
(643
)
Sales of equity investments
 
215

 
1,751

Proceeds from divestitures
 
548

 
924

Other investing
 
(45
)
 
145

Net cash used for investing activities
 
(5,984
)
 
(4,216
)
Cash flows provided by (used for) financing activities:
 
 
 
 
Increase (decrease) in short-term debt, net
 
1,991

 
(12
)
Issuance of long-term debt, net of issuance costs
 

 
7,078

Repayment of debt and debt conversion
 
(1,169
)
 
(500
)
Proceeds from sales of common stock through employee equity incentive plans
 
320

 
406

Repurchase of common stock
 
(5,807
)
 
(2,518
)
Restricted stock unit withholdings
 
(465
)
 
(404
)
Payment of dividends to stockholders
 
(2,800
)
 
(2,516
)
Other financing
 
(602
)
 
204

Net cash provided by (used for) financing activities
 
(8,532
)
 
1,738

Net increase (decrease) in cash and cash equivalents
 
(819
)
 
6,127

Cash and cash equivalents, end of period
 
$
2,614

 
$
11,687

 
 
 
 
 
Supplemental disclosures of noncash investing activities and cash flow information:
 
 
 
 
Acquisition of property, plant, and equipment included in accounts payable and accrued liabilities
 
$
2,789

 
$
1,686

Loan receivable from McAfee and TPG
 
$

 
$
2,200

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
 
$
209

 
$
280

Income taxes, net of refunds
 
$
2,196

 
$
1,139

See accompanying notes.

FINANCIAL STATEMENTS
  Consolidated Condensed Statements of Cash Flows
6



INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 30, 2017 (2017 Form 10-K), except for changes associated with recent accounting standards for retirement benefits, revenue recognition, and financial instruments as detailed in "Note 2: Recent Accounting Standards and Accounting Policies."
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 2017 Form 10-K.
NOTE 2: RECENT ACCOUNTING STANDARDS AND ACCOUNTING POLICIES
We assess the adoption impacts of recently issued accounting standards by the Financial Accounting Standards Board on our financial statements. The sections below describe impacts from newly adopted standards as well as material updates to our previous assessments, if any, from our 2017 Form 10-K.
ACCOUNTING STANDARDS ADOPTED
Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
Standard/Description: This amended standard was issued to provide additional guidance on the presentation of net periodic benefit cost in the income statement and on the components eligible for capitalization in assets. In accordance with the revised standard, we have separated the different components of net periodic benefit cost, presenting service cost components within operating income and other non-service components separately outside of operating income on the income statement. In addition, only service costs are now eligible for inventory capitalization.
Effective Date and Adoption Considerations: Effective in the first quarter of 2018. Changes to the presentation of benefit costs were required to be adopted retrospectively, while changes to the capitalization of service costs into inventories were required to be adopted prospectively. The standard permits, as a practical expedient, use of the amounts disclosed in the Retirement Benefit Plans footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation requirement.
Effect on Financial Statements or Other Significant Matters: Adoption of the amended standard resulted in the reclassification of approximately $114 million of non-service net periodic benefit costs from line items within operating income to interest and other, net, for the year ended December 30, 2017 ($259 million for the year ended December 31, 2016).
Revenue Recognition - Contracts with Customers
Standard/Description: This standard was issued to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by all companies. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
Effective Date and Adoption Considerations: Effective in the first quarter of 2018. This standard was adopted using a modified retrospective approach through a cumulative adjustment to retained earnings for the fiscal year beginning December 31, 2017.
Effect on Financial Statements or Other Significant Matters: Our adoption assessments identified a change in revenue recognition timing on our component sales made to distributors. Under the new standard we now recognize revenue when we deliver to the distributor rather than deferring recognition until the distributor sells the components.
On the date of initial application, we removed the deferred income and related receivables on component sales made to distributors through a cumulative adjustment to retained earnings. The revenue deferral that was historically recognized in the following period is expected to be primarily offset by the acceleration of revenue recognition in the current period as control of the product transfers to our customer.

FINANCIAL STATEMENTS
  Notes to Financial Statements
7




Our assessment also identified a change in expense recognition timing related to payments we make to our customers for distinct services they perform as part of cooperative advertising programs, which were previously recorded as operating expenses. We now recognize the expense for cooperative advertising in the period the marketing activities occur. Previously we recognized the expense in the period the customer was entitled to participate in the program, which coincided with the period of sale. On the date of initial adoption, we capitalized the expense of cooperative advertising not performed through a cumulative adjustment to retained earnings.
We have completed our adoption and implemented policies, processes, and controls to support the standard's measurement and disclosure requirements. Refer to the tables below, which summarize the impacts of the changes discussed above to Intel's financial statements recorded as an adjustment to opening balances for the fiscal year beginning December 31, 2017, and also provide comparative reporting of the impacts of adopting the standard.
Accounting Policy Updates: We recognize net product revenue when we satisfy performance obligations as evidenced by the transfer of control of our products or services to customers. Substantially all of our revenue is derived from product sales. In accordance with contract terms, revenue for product sales is recognized at the time of product shipment from our facilities or delivery to the customer location, as determined by the agreed upon shipping terms. We include shipping charges billed to customers in net revenue, and include the related shipping costs in cost of sales.
We measure revenue based on the amount of consideration we expect to be entitled to in exchange for products or services. Any variable consideration is recognized as a reduction of net revenue at the time of revenue recognition. We determine variable consideration, which consists primarily of sales price concessions, by estimating the most likely amount of consideration we expect to receive from the customer based on historical analysis of customer purchase volumes. The impacts of distributor sales price reductions resulting from price protection agreements are also estimated based on historical analysis of such activity and are reflected as a reduction in net revenue.
We make payments to our customers through cooperative advertising programs, such as our Intel Inside® program, for marketing activities for certain of our products. We accrue cooperative advertising obligations and record the costs as a reduction in revenue at the same time that the related revenue is recognized.
Financial Instruments - Recognition and Measurement
Standard/Description: Requires changes to the accounting for financial instruments that primarily affect equity securities, financial liabilities measured using the fair value option, and the presentation and disclosure requirements for such instruments.
Effective Date and Adoption Considerations: Effective in the first quarter of 2018. Changes to our marketable equity securities were required to be adopted using a modified retrospective approach through a cumulative effect adjustment to retained earnings for the fiscal year beginning December 31, 2017. Since management has elected to apply the measurement alternative to non-marketable equity securities, changes to these securities were adopted prospectively.
Effect on Financial Statements or Other Significant Matters: Marketable equity securities previously classified as available-for-sale equity investments are now measured and recorded at fair value with changes in fair value recorded through the income statement.
All non-marketable equity securities formerly classified as cost method investments are measured and recorded using the measurement alternative. Equity securities measured and recorded using the measurement alternative are recorded at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. Adjustments resulting from impairments and qualifying observable price changes are recorded in the income statement.
Beginning in the first quarter of 2018, in accordance with the standard, recurring fair value disclosures are no longer provided for equity securities measured using the measurement alternative. In addition, the existing impairment model has been replaced with a new one-step qualitative impairment model. No initial adoption adjustment was recorded for these instruments since the standard was required to be applied prospectively for securities measured using the measurement alternative.
We have completed our adoption and implemented policies, processes, and controls to support the standard's measurement and disclosure requirements. Refer to the table below, which summarizes impacts, net of tax, of the changes discussed above to Intel's financial statements. This reflects an adjustment to opening balances for the fiscal year beginning December 31, 2017.
Accounting Policy Updates: We regularly invest in equity securities of public and private companies to promote business and strategic objectives. Equity investments are measured and recorded as follows:
Marketable equity securities are equity securities with readily determinable fair value (RDFV) that are measured and recorded at fair value. Prior to fiscal 2018, these securities were measured and recorded at fair value and classified as available-for-sale securities.
Non-marketable equity securities are equity securities without RDFV that are measured and recorded using a measurement alternative which measures the securities at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. These securities were previously accounted for using the cost method of accounting, measured at cost less other-than-temporary impairment.
Equity method investments are equity securities in investees we do not control but over which we have the ability to exercise significant influence. Equity method investments are measured at cost minus impairment, if any, plus or minus our share of equity method investee income or loss. Our proportionate share of the income or loss from equity method investments is recognized on a one-quarter lag.

FINANCIAL STATEMENTS
  Notes to Financial Statements
8




Realized and unrealized gains or losses resulting from changes in value and sale of our equity investments are recorded in gains (losses) on equity investments, net. We previously recorded unrealized gains and losses through other comprehensive income (loss) and realized gains and losses on the sale, exchange or impairment of these equity investments through gains (losses) on equity investments, net.
The carrying value of our portfolio of non-marketable equity securities totaled $2.9 billion as of June 30, 2018 ($2.6 billion as of December 30, 2017). The carrying value of our non-marketable equity securities is adjusted for qualifying observable price changes resulting from the issuance of similar or identical securities by the same issuer. Determining whether an observed transaction is similar to a security within our portfolio requires judgment based on the rights and preferences of the securities. Recording upward and downward adjustments to the carrying value of our equity securities as a result of observable price changes requires quantitative assessments of the fair value of our securities using various valuation methodologies and involves the use of estimates.
Non-marketable equity securities and equity method investments are also subject to periodic impairment reviews. Our quarterly impairment analysis considers both qualitative and quantitative factors that may have a significant impact on the investee's fair value. Qualitative factors considered include industry and market conditions, the financial performance and near-term prospects of the investee, and other relevant events and factors affecting the investee. When indicators of impairment exist, we prepare quantitative assessments of the fair value of our equity investments using both the market and income approaches which require judgment and the use of estimates, including discount rates, investee revenues and costs, and comparable market data of private and public companies, among others. Prior to fiscal 2018, non-marketable equity securities were tested for impairment using the other-than-temporary impairment model which considered the severity and duration of a decline in fair value below cost and our ability and intent to hold the investment for a sufficient period of time to allow for recovery. Impairments of non-marketable equity securities were $43 million in the first six months of 2018 and $325 million in the first six months of 2017.
Opening Balance Adjustments
The following table summarizes the effects of adopting Revenue Recognition - Contracts with CustomersFinancial Instruments - Recognition and Measurement, and other accounting standards on our financial statements for the fiscal year beginning December 31, 2017 as an adjustment to the opening balance:
 
 
 
 
Adjustments from
 
 

(In Millions)
 
Balance as of
Dec 30, 2017
 
Revenue Standard
 
Financial Instruments Standard
 
Other1 
 
Opening Balance as of
Dec 31, 2017
Assets:
 
 
 
 
 
 
 
 
 
 
Accounts receivable
 
$
5,607

 
$
(530
)
 
$

 
$

 
$
5,077

Inventories
 
$
6,983

 
$
47

 
$

 
$

 
$
7,030

Other current assets
 
$
2,908

 
$
64

 
$

 
$
(8
)
 
$
2,964

Equity investments
 
$

 
$

 
$
8,579

 
$

 
$
8,579

Marketable equity securities
 
$
4,192

 
$

 
$
(4,192
)
 
$

 
$

Other long-term assets
 
$
7,602

 
$

 
$
(4,387
)
 
$
(43
)
 
$
3,172

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Deferred income
 
$
1,656

 
$
(1,356
)
 
$

 
$

 
$
300

Other accrued liabilities
 
$
7,535

 
$
81

 
$

 
$

 
$
7,616

Deferred income taxes
 
$
3,046

 
$
191

 
$

 
$
(20
)
 
$
3,217

 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
$
862

 
$

 
$
(1,745
)
 
$
(45
)
 
$
(928
)
Retained earnings
 
$
42,083

 
$
665

 
$
1,745

 
$
14

 
$
44,507

1 
Includes adjustments from adoption of "Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory" and "Income StatementReporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income."

FINANCIAL STATEMENTS
  Notes to Financial Statements
9




The following table summarizes the impacts of adopting the new revenue standard on our consolidated condensed statements of income and balance sheets:
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
(In Millions)
 
As reported
 
Adjustments
 
Without new revenue standard
 
As reported
 
Adjustments
 
Without new revenue standard
Income Statement
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenue
 
$
16,962

 
$
78

 
$
17,040

 
$
33,028

 
$
(384
)
 
$
32,644

Cost of sales
 
6,543

 
(26
)
 
6,517

 
12,878

 
(182
)
 
12,696

Gross margin
 
10,419

 
104

 
10,523

 
20,150

 
(202
)
 
19,948

Marketing, general and administrative
 
1,725

 
(18
)
 
1,707

 
3,625

 
(70
)
 
3,555

Operating income
 
5,273

 
122

 
5,395

 
9,743

 
(132
)
 
9,611

Income before taxes
 
5,529

 
122

 
5,651

 
10,540

 
(132
)
 
10,408

Provision for taxes
 
523

 
23

 
546

 
1,080

 
(24
)
 
1,056

Net income
 
$
5,006

 
$
99

 
$
5,105

 
$
9,460

 
$
(108
)
 
$
9,352

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2018
(In Millions)
 
 
 
 
 
 
 
As reported
 
Adjustments
 
Without new revenue standard
Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Accounts receivable
 
 
 
 
 
 
 
$
4,636

 
$
482

 
$
5,118

Inventories
 
 
 
 
 
 
 
$
7,344

 
$
34

 
$
7,378

Other current assets
 
 
 
 
 
 
 
$
3,398

 
$
4

 
$
3,402

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deferred income
 
 
 
 
 
 
 
$

 
$
1,677

 
$
1,677

Other accrued liabilities
 
 
 
 
 
 
 
$
7,317

 
$
(181
)
 
$
7,136

Deferred income taxes
 
 
 
 
 
 
 
$
1,666

 
$
(203
)
 
$
1,463

 
 
 
 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
 
$
45,666

 
$
(773
)
 
$
44,893

NOTE 3: OPERATING SEGMENTS
We manage our business through the following operating segments:
Client Computing Group (CCG)
Data Center Group (DCG)
Internet of Things Group (IOTG)
Non-Volatile Memory Solutions Group (NSG)
Programmable Solutions Group (PSG)
All Other
We offer platform products that incorporate various components and technologies, including a microprocessor and chipset, a stand-alone System-on-Chip (SoC), or a multichip package. A platform product may be enhanced by additional hardware, software, and services offered by Intel. Platform products are used in various form factors across our CCG, DCG, and IOTG operating segments. We derive a substantial majority of our revenue from platform products, which are our principal products and considered as one class of product.
CCG and DCG are our reportable operating segments. IOTG, NSG, and PSG do not meet the quantitative thresholds to qualify as reportable operating segments; however, we have elected to disclose the results of these non-reportable operating segments. 

FINANCIAL STATEMENTS
  Notes to Financial Statements
10




The “all other” category includes revenue, expenses, and charges such as:
results of operations from non-reportable segments not otherwise presented, including Mobileye results;
historical results of operations from divested businesses, including Intel Security Group (ISecG) results;
results of operations of start-up businesses that support our initiatives, including our foundry business;
amounts included within restructuring and other charges;
a portion of employee benefits, compensation, and other expenses not allocated to the operating segments; and
acquisition-related costs, including amortization and any impairment of acquisition-related intangibles and goodwill.
The Chief Operating Decision Maker (CODM), which is our interim Chief Executive Officer, 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.
Net revenue and operating income (loss) for each period were as follows:
 
 
Three Months Ended
 
Six Months Ended
(In Millions)
 
Jun 30,
2018
 
Jul 1,
2017
 
Jun 30,
2018
 
Jul 1,
2017
Net revenue:
 
 
 
 
 
 
 
 
Client Computing Group
 
 
 
 
 
 
 
 
Platform
 
$
8,065

 
$
7,634

 
$
15,680

 
$
15,031

Adjacent
 
663

 
579

 
1,268

 
1,158

 
 
8,728

 
8,213

 
16,948

 
16,189

Data Center Group
 
 
 
 
 
 
 
 
Platform
 
5,100

 
4,026

 
9,924

 
7,905

Adjacent
 
449

 
346

 
859

 
699

 
 
5,549

 
4,372

 
10,783

 
8,604

Internet of Things Group
 
 
 
 
 
 
 
 
Platform
 
745

 
614

 
1,464

 
1,246

Adjacent
 
135

 
106

 
256

 
195

 
 
880

 
720

 
1,720

 
1,441

Non-Volatile Memory Solutions Group
 
1,079

 
874

 
2,119

 
1,740

Programmable Solutions Group
 
517

 
440

 
1,015

 
865

All other
 
209

 
144

 
443

 
720

Total net revenue
 
$
16,962

 
$
14,763

 
$
33,028

 
$
29,559

 
 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
 
Client Computing Group
 
$
3,234

 
$
3,025

 
$
6,025

 
$
6,056

Data Center Group
 
2,737

 
1,661

 
5,339

 
3,148

Internet of Things Group
 
243

 
139

 
470

 
244

Non-Volatile Memory Solutions Group
 
(65
)
 
(110
)
 
(146
)
 
(239
)
Programmable Solutions Group
 
101

 
97

 
198

 
189

All other
 
(977
)
 
(970
)
 
(2,143
)
 
(1,924
)
Total operating income
 
$
5,273

 
$
3,842

 
$
9,743

 
$
7,474


FINANCIAL STATEMENTS
  Notes to Financial Statements
11




Disaggregated net revenue for each period was as follows:
 
 
Three Months Ended
 
Six Months Ended
(In Millions)
 
Jun 30,
2018
 
Jul 1,
2017
 
Jun 30,
2018
 
Jul 1,
2017
Platform revenue
 
 
 
 
 
 
 
 
Desktop platform
 
$
2,954

 
$
2,776

 
$
5,861

 
$
5,631

Notebook platform
 
5,086

 
4,816

 
9,775

 
9,314

DCG platform
 
5,100

 
4,026

 
9,924

 
7,905

Other platform1
 
770

 
656

 
1,508

 
1,332

 
 
13,910

 
12,274

 
27,068

 
24,182

 
 

 
 
 
 
 
 
Adjacent revenue2
 
3,052

 
2,489

 
5,960

 
4,843

ISecG divested business
 

 

 

 
534

Total revenue
 
$
16,962

 
$
14,763

 
$
33,028

 
$
29,559

1 
Includes our tablet, service provider, and IOTG platform revenue.
2 
Includes all of our non-platform products for CCG, DCG, and IOTG like modem, ethernet, and silicon photonics, as well as NSG, PSG, and Mobileye products.
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)
 
Jun 30,
2018
 
Jul 1,
2017
 
Jun 30,
2018
 
Jul 1,
2017
Net income available to common stockholders
 
$
5,006

 
$
2,808

 
$
9,460

 
$
5,772

Weighted average shares of common stock outstanding – basic
 
4,649

 
4,710

 
4,661

 
4,717

Dilutive effect of employee equity incentive plans
 
52

 
36

 
59

 
48

Dilutive effect of convertible debt
 
46

 
99

 
48

 
99

Weighted average shares of common stock outstanding – diluted
 
4,747

 
4,845

 
4,768

 
4,864

Earnings per share – Basic
 
$
1.08

 
$
0.60

 
$
2.03

 
$
1.22

Earnings per share – Diluted
 
$
1.05

 
$
0.58

 
$
1.98

 
$
1.19

Potentially dilutive shares of common stock from employee equity incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding restricted stock units (RSUs), and the assumed issuance of common stock under the stock purchase plan. In December 2017, we paid cash to satisfy the conversion of our 2035 debentures, which we excluded from our dilutive earnings per share computation starting in the fourth quarter of 2017 and are no longer dilutive. Our 2039 debentures require settlement of the principal amount of the debt in cash upon conversion. Since the conversion premium is paid in cash or stock at our option, we determined the potentially dilutive shares of common stock by applying the treasury stock method. As of June 30, 2018, we paid cash to satisfy the conversion of a portion of our 2039 debentures. The potentially dilutive shares associated with the converted portion are excluded from our diluted earnings per share computation in the first six months of 2018 as they are no longer dilutive.
In all periods presented, potentially dilutive outstanding 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 outstanding 2039 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 2039 debentures in the future if the average market price is below the conversion price.
NOTE 5: CONTRACT LIABILITIES
(In Millions)
 
Jun 30,
2018
 
Opening Balance as of Dec 31, 2017
Contract liabilities from prepaid supply agreements
 
$
2,704

 
$
105

Contract liabilities from software, services and other
 
115

 
195

Total contract liabilities
 
$
2,819

 
$
300

Contract liabilities are primarily related to partial prepayments received from customers on long term supply agreements towards future NSG product delivery. As new prepaid supply agreements are entered into and performance obligations are negotiated, this component of the contract liability balance will increase, and as customers purchase product and utilize their prepaid balances, the balance will decrease. The short-term portion of prepayments from supply agreements is reported on the consolidated condensed balance sheets within other accrued liabilities.
The following table shows the changes in contract liability balances relating to prepaid supply agreements during the first six months of 2018:
(In Millions)
 
 
Prepaid supply agreements balance as of Dec 31, 2017
 
$
105

Additions and adjustments
 
2,723

Revenue recognized
 
(124
)
Prepaid supply agreements balance as of Jun 30, 2018
 
$
2,704

Additions in the first six months of 2018 include a $1.0 billion reclassification from customer deposits previously included in other long-term liabilities. The long-term supply agreements represent $5.0 billion in future anticipated revenues with 4% expected to be recognized during the current year and the remainder ratably over the next five years.
NOTE 6: OTHER FINANCIAL STATEMENT DETAILS
INVENTORIES
(In Millions)
 
Jun 30,
2018
 
Dec 30,
2017
Raw materials
 
$
1,236

 
$
1,098

Work in process
 
4,081

 
3,893

Finished goods
 
2,027

 
1,992

Total inventories
 
$
7,344

 
$
6,983

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)
 
Jun 30,
2018
 
Jul 1,
2017
 
Jun 30,
2018
 
Jul 1,
2017
Interest income
 
$
108

 
$
136

 
$
199

 
$
212

Interest expense
 
(116
)
 
(156
)
 
(228
)
 
(302
)
Other, net
 
467

 
408

 
386

 
409

Total interest and other, net
 
$
459

 
$
388

 
$
357

 
$
319

Interest expense in the preceding table is net of $126 million of interest capitalized in the second quarter of 2018 and $239 million in the first six months of 2018 ($69 million in the second quarter of 2017 and $136 million in the first six months of 2017).
In the second quarter of 2018, we completed the divestiture of Wind River Systems, Inc. and recognized a pre-tax gain of $494 million. For the six months ended June 30, 2018, we have settled conversion requests for our 2039 convertible debentures totaling $476 million in principal, resulting in a cumulative loss of $130 million.

FINANCIAL STATEMENTS
  Notes to Financial Statements
12




NOTE 7: INCOME TAXES
During the second quarter of 2018, we adjusted our provisional tax estimates related to the U.S. Tax Cuts and Jobs Act (Tax Reform) that we recorded in the fourth quarter of 2017 to reflect the impact of additional analysis related to the transition tax liability. Our accounting remains incomplete as of the second quarter of 2018 and will be refined throughout 2018 based on our ongoing analysis of data and tax positions along with new guidance from regulators and interpretation of the law. Our estimated annual effective tax rate for the first six months of 2018 includes provisional tax estimates for certain Tax Reform provisions related to foreign-derived intangible income and low-taxed intangible income. We expect that these provisions will be clarified by additional analysis and regulatory guidance, and the clarification could impact our estimated annual effective tax rate.
Our effective income tax rate was 10.2% in the first six months of 2018 compared to 31.2% in the first six months of 2017. Tax Reform reduced the U.S. statutory federal tax rate from 35.0% to 21.0%, which favorably impacted our effective tax rate in the first six months of 2018 by approximately eight percentage points. Further, the Tax Reform provisions related to foreign-derived intangible income favorably impacted our effective tax rate by approximately three percentage points, and the provision related to low-taxed intangible income and the repeal of the domestic manufacturing deduction each unfavorably impacted our effective tax rate by approximately one percentage point. The decrease in the first six months of 2018 was also driven by one-time items, primarily associated with the $822 million tax expense in the second quarter of 2017 due to our divestiture of ISecG, which increased our effective tax rate in the first six months of 2017 by approximately nine percentage points, and the adjustment to our provisional estimates for Tax Reform in the first six months of 2018, which reduced our effective tax rate by approximately two percentage points.
NOTE 8: INVESTMENTS
DEBT INVESTMENTS
Trading Assets
Net losses related to trading assets still held at the reporting date were $326 million in the second quarter of 2018 and $214 million in the first six months of 2018 ($321 million of net gains in the second quarter of 2017 and $483 million in the first six months of 2017). Net gains on the related derivatives were $316 million in the second quarter of 2018 and $221 million in the first six months of 2018 ($311 million of net losses in the second quarter of 2017 and $446 million in the first six months of 2017).
Available-for-Sale Debt Investments
 
 
June 30, 2018
 
December 30, 2017
(In Millions)
 
Adjusted Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Adjusted Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Corporate debt
 
$
2,054

 
$
2

 
$
(27
)
 
$
2,029

 
$
2,294

 
$
4

 
$
(13
)
 
$
2,285

Financial institution instruments
 
3,433

 
4

 
(16
)
 
3,421

 
3,387

 
3

 
(9
)
 
3,381

Government debt
 
791

 

 
(13
)
 
778

 
961

 

 
(6
)
 
955

Total available-for-sale debt investments
 
$
6,278

 
$
6

 
$
(56
)
 
$
6,228

 
$
6,642

 
$
7

 
$
(28
)
 
$
6,621

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 June 30, 2018 and December 30, 2017.
The fair value of available-for-sale debt investments, by contractual maturity, as of June 30, 2018, was as follows:
(In Millions)
 
Fair Value
Due in 1 year or less
 
$
3,011

Due in 1–2 years
 
1,115

Due in 2–5 years
 
1,887

Due after 5 years
 
69

Instruments not due at a single maturity date
 
146

Total
 
$
6,228


FINANCIAL STATEMENTS
  Notes to Financial Statements
13




EQUITY INVESTMENTS
(In Millions)
 
Jun 30,
2018
 
Dec 30,
2017
Marketable equity securities
 
$
4,432

 
$
4,192

Non-marketable equity securities
 
2,851

 
2,613

Equity method investments
 
1,962

 
1,774

Total
 
$
9,245


$
8,579

The components of gains (losses) on equity investments, net for each period were as follows:
 
 
Three Months Ended
 
Six Months Ended
(In Millions)
 
Jun 30,
2018
 
Jul 1,
2017
 
Jun 30,
2018
 
Jul 1,
2017
Initial mark to market adjustments on marketable equity securities1 2
 
$
46

 
$

 
$
46

 
$

Ongoing mark to market adjustments on marketable equity securities1 2
 
(235
)
 

 
371

 

Gains (losses) on sales2
 
1

 
802

 
11

 
1,076

Observable price adjustments on non-marketable equity securities2
 
24

 

 
148

 

Impairments
 
(26
)
 
(555
)
 
(43
)
 
(603
)
Share of equity method investee gains (losses)
 
(70
)
 
(8
)
 
(152
)
 
(19
)
Dividends
 
35

 
66

 
37

 
68

Other
 
22

 
37

 
22

 
72

Total gains (losses) on equity investments, net
 
$
(203
)
 
$
342

 
$
440

 
$
594

1 
Initial mark to market adjustments refers to the fair value adjustment recorded upon a security becoming marketable, generally as a result of an initial public offering (IPO), whereas ongoing mark to market adjustments refers to all post-IPO mark to market adjustments.
2 Both initial and ongoing mark to market adjustments and observable price adjustments relate to the new financial instruments standard adopted in the first quarter of 2018, and are not applicable in prior periods. Gains (losses) on sales includes realized gains (losses) on sales of non-marketable equity securities and equity method investments, and in 2017 also includes realized gains (losses) on sales of available-for-sale equity securities which are now reflected in ongoing mark to market adjustments on marketable equity securities.
 
 
Three Months Ended
 
Six Months Ended
(In Millions)
 
Jun 30,
2018
 
Jun 30,
2018
Net gains (losses) recognized during the period on equity securities
 
$
(133
)
 
$
592

Less: Net (gains) losses recognized during the period on equity securities sold during the period
 
(11
)
 
(49
)
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date
 
$
(144
)
 
$
543

Cloudera, Inc.
On April 28, 2017, Cloudera, Inc. (Cloudera) completed its initial public offering and we 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.
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 2017, we reduced our expectation of the company's future operating performance due to competitive pressures, which resulted in an impairment charge of $308 million.

FINANCIAL STATEMENTS
  Notes to Financial Statements
14




IM Flash Technologies, LLC
IMFT was formed in 2006 by Micron and Intel to jointly develop NAND flash memory and 3D XPoint™ technology products. On July 16, 2018, Intel and Micron announced that they agreed to complete joint development for the second generation of 3D XPoint technology, which is expected to occur in the first half of 2019. Technology development beyond the second generation of 3D XPoint technology will be pursued independently by the two companies in order to optimize the technology for their respective product and business needs. Intel continues to purchase jointly developed products from Micron under certain supply agreements.
As of June 30, 2018, we own a 49% interest in IMFT. The carrying value of our investment was $1.9 billion as of June 30, 2018 ($1.5 billion as of December 30, 2017), which is classified as an equity method investment.
The IMFT operating agreement continues through 2024 unless terminated earlier, and provides for certain buy-sell rights of the joint venture. Intel has the right to cause Micron to buy our interest in IMFT and, if exercised, Micron could elect to receive financing from us for one to two years. Commencing in January 2019, Micron has the right to call our interest in IMFT with the closing date to be effective within one year.
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 was approximately $144 million in the second quarter of 2018 and approximately $227 million in the first six months of 2018 (approximately $105 million in the second quarter of 2017 and approximately $235 million in the first six months of 2017). In the event that IMFT has excess cash, IMFT will make payments to Micron and Intel in the form of dividends.
IMFT depends on Micron and Intel for any additional cash needs. During the first six months of 2018, we extended $319 million in member debt financing (MDF) to IMFT to fund the ramp of 3D XPoint technology. The MDF balance may be converted to a capital contribution at our request, or may be repaid upon availability of funds. Our known maximum exposure to loss approximated the carrying value of our investment balance in IMFT. 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 and future cash calls. 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.
We have determined that we do not have the characteristics of a consolidating investor in the variable interest entity and therefore, we account for our interest in IMFT using the equity method of accounting.

FINANCIAL STATEMENTS
  Notes to Financial Statements
15




NOTE 9: IDENTIFIED INTANGIBLE ASSETS
 
 
June 30, 2018
(In Millions)
 
Gross Assets
 
Accumulated
Amortization
 
Net
Acquisition-related developed technology
 
$
9,513

 
$
(2,472
)
 
$
7,041

Acquisition-related customer relationships
 
2,036

 
(388
)
 
1,648

Acquisition-related brands
 
143

 
(39
)
 
104

Licensed technology and patents
 
3,084

 
(1,487
)
 
1,597

Identified intangible assets subject to amortization
 
14,776

 
(4,386
)
 
10,390

In-process research and development
 
1,567

 

 
1,567

Other intangible assets
 
141

 

 
141

Identified intangible assets not subject to amortization
 
1,708

 

 
1,708

Total identified intangible assets
 
$
16,484

 
$
(4,386
)
 
$
12,098

 
 
December 30, 2017
(In Millions)
 
Gross Assets
 
Accumulated
Amortization
 
Net
Acquisition-related developed technology
 
$
8,912

 
$
(1,922
)
 
$
6,990

Acquisition-related customer relationships
 
2,052

 
(313
)
 
1,739

Acquisition-related brands
 
143

 
(29
)
 
114

Licensed technology and patents
 
3,104

 
(1,370
)
 
1,734

Identified intangible assets subject to amortization
 
14,211

 
(3,634
)
 
10,577

In-process research and development
 
2,168

 

 
2,168

Identified intangible assets not subject to amortization
 
2,168

 

 
2,168

Total identified intangible assets
 
$
16,379

 
$
(3,634
)
 
$
12,745

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
 
Jun 30,
2018
 
Jul 1,
2017
 
Jun 30,
2018
 
Jul 1,
2017
Acquisition-related developed technology
 
Cost of sales
 
$
275

 
$
198

 
$
550

 
$
407

Acquisition-related customer relationships
 
Amortization of acquisition-related intangibles
 
45

 
33

 
90

 
68

Acquisition-related brands
 
Amortization of acquisition-related intangibles
 
5

 
4

 
10

 
7

Licensed technology and patents
 
Cost of sales
 
67

 
78

 
132

 
152

Total amortization expenses
 
 
 
$
392

 
$
313

 
$
782

 
$
634

We expect future amortization expenses for the next five years to be as follows:
(In Millions)
 
Remainder of 2018
 
2019
 
2020
 
2021
 
2022
Acquisition-related developed technology
 
$
549

 
$
1,097

 
$
1,066

 
$
1,030

 
$
991

Acquisition-related customer relationships
 
90

 
180

 
179

 
179

 
171

Acquisition-related brands
 
10

 
20

 
20

 
20

 
6

Licensed technology and patents
 
127

 
238

 
208

 
196

 
191

Total future amortization expenses
 
$
776

 
$
1,535

 
$
1,473

 
$
1,425

 
$
1,359


FINANCIAL STATEMENTS
  Notes to Financial Statements
16




NOTE 10: OTHER LONG-TERM ASSETS
(In Millions)
 
Jun 30,
2018
 
Dec 30,
2017
Non-current deferred tax assets
 
$
1,026

 
$
840

Pre-payments for property, plant and equipment
 
1,117

 
714

Loans receivable
 
541

 
860

Other
 
1,006

 
801

Total other long-term assets
 
$
3,690

 
$
3,215


FINANCIAL STATEMENTS
  Notes to Financial Statements
17




NOTE 11: 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 our 2017 Form 10-K.
ASSETS AND LIABILITIES MEASURED AND RECORDED AT FAIR VALUE ON A RECURRING BASIS
 
 
June 30, 2018
 
December 30, 2017
 
 
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
 
$

 
$
231

 
$

 
$
231

 
$

 
$
30

 
$

 
$
30

Financial institution instruments 1
 
146

 
517

 

 
663

 
335

 
640

 

 
975

Government debt 2
 

 

 

 

 

 
90

 

 
90

Reverse repurchase agreements
 

 
1,249

 

 
1,249

 

 
1,399

 

 
1,399

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
 

 
500

 

 
500

 

 
672

 
3

 
675

Financial institution instruments 1
 

 
1,602

 

 
1,602

 

 
1,009

 

 
1,009

Government debt 2
 

 
161