Intel (INTC) this morning

I woke up this morning to see a flood of news reports about across-the-board salary cuts for senior people at INTC (this is a stock I think I know something about but haven’t had a position in for years). I looked for a press release on the company website. Nothing. It looks like engineers groused to reporters, who then called INTC to verify before releasing their articles. My guess is that the company just didn’t want to address the issue during its earnings call on January 26th.

The stock is up slightly in a flattish market as I’m writing this, implying that this is either old news or Wall Street doesn’t think it’s important.

I went back to the earnings call transcript, whose jargon had caused me to quit halfway through, and read it to the end. Lots about expense control and the extra-large customer chip inventories that will take the first half to work through, nothing specific about salary cuts.

There was something that I’d missed that popped out to me the second time through, though. INTC has suddenly worked out that assets whose value it had been expensing in its financial reporting over a five-year useful life (i.e., 20% of the purchase price a year) actually should be depreciated over eight years (or 12.5% per year). This has nothing to do with the actual flows of cash in and out of the company or the tax it pays to the IRS. It’s all about optics in reports to shareholders.

In 2023, for example, INTC spends $25 billion on new capital assets. If all of that were subject to the old rubric, the company would have written off 20%, or $5 billion, as an expense on the income statement. Under the new company rules, INTC would expense $3.1 billion instead. Same IRS results, same cash in/out of the company, but pre-tax income would be almost $2 billion higher.

I have mixed feelings about this. In the before times, when I was learning the analyst trade, this would be a sure sign of management weakness. Given that trading bots may not read the fine print on accounting conventions and instead react to the eps figure without a thought to earnings quality, maybe this is a prudent protective measure. Could also be there’s some obscure financing covenant that requires a minimum level of eps.

One other thing: INTC says it aspires to cut another $7 billion out of operating expenses over the next year or so. Given that the company pays about $6 billion a year in dividends, that goal could be achieved almost immediately. The company has gone out of its way to say it will maintain a dividend, however. But the wording of this promise is, I think, carefully crafted. INTC isn’t saying it will maintain a dividend at the current level, as I read it–only that it will pay something.

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