Interest, Other Income and Non-Operating Items

Introduction

The lines between operating income and pre-tax income are small in most years and decisive in some. Intel's 2024 results show how much can sit there. The company reported an operating loss of about $11.7 billion, and below that line a further net $468 million of income from investment gains, interest and other items. Inside those few lines were a $755 million loss on a derivative tied to a construction agreement, interest received from a European Commission antitrust case, and interest expense that had already been reduced by $1.5 billion of interest capitalized into the cost of new factories.

None of that describes Intel's chip business, which is why bankers separate it. The non-operating section, the layer below operating income in the structure set out in how the income statement works, holds the effects of how a company is financed and what it owns outside its operations, and treating those effects consistently, excluding them from operating profit while still accounting for them in debt capacity and valuation, is part of reading any income statement.

Reported interest expense is more than the coupons a company pays. It typically includes:

Some of that expense is not paid in cash during the period. The amortization of a discount or of issuance costs is a non-cash charge, added back in operating cash flow, and interest paid in kind on some private credit loans is added to the principal instead of being paid. The gap between interest expense and cash interest paid, disclosed in the supplemental cash flow information, can therefore be meaningful for highly leveraged companies. How discounts and fees turn into interest expense is covered in debt issuance costs and original issue discount.

It can also be lower than the interest a company actually incurs. Under Accounting Standards Codification (ASC) 835-20, the interest attributable to building a qualifying asset, such as a factory, a ship or a large software system built for internal use, is capitalized as part of the asset's cost while it is being built, then depreciated with the asset once it is in service. The amount is the interest the company could have avoided by not spending on the asset, whether or not a specific loan funds the project.

Capitalized interest

Interest incurred during the construction of a long-lived asset that is added to the asset's cost instead of being expensed. It reduces reported interest expense during construction and is recognized later as part of the asset's depreciation.

Intel's 2024 annual report states that its interest expense of $1,034 million is net of $1.5 billion of interest capitalized, as the company built new fabrication plants. The interest it actually incurred was therefore roughly $2.5 billion, more than twice the reported figure. For a company in a heavy construction phase, ratios built on reported interest expense flatter its ability to service debt. The mechanics of carrying value and interest expense are set out in debt accounting basics.

Coverage Ratios With and Without Capitalized Interest

The capitalized interest adjustment can change a credit picture sharply. Consider a company with $500 million of EBITDA, $40 million of reported interest expense and $60 million of interest capitalized on projects under construction. On reported figures, EBITDA covers interest 12.5 times; on interest incurred of $100 million, the coverage is 5.0 times. When construction ends, the capitalized amount stops and the full interest bill flows through the income statement, so a lender looking only at reported interest would be surprised by the next year's results. The ratios themselves are covered in leverage and coverage ratios.

Interest earned on cash, short-term investments and loans to others is usually shown either as a separate line or netted against interest expense as net interest. Large cash holders can earn substantial amounts: Intel reported $1,245 million of interest income in 2024, more than its reported interest expense. Bankers keep interest income out of earnings before interest, taxes, depreciation and amortization (EBITDA) for a consistency reason: enterprise value is calculated net of cash, so the earnings figure it is compared with should exclude the income that cash produces. Adding interest income to EBITDA while also subtracting cash from enterprise value would count the cash twice.

The remaining non-operating items are grouped in one or more lines, often called other income and expense or other gains and losses. The usual contents:

Debt extinguishment results deserve a specific note because they arise from financing decisions: a company that repurchases bonds trading below par records a gain, and one that repays loans early with a prepayment penalty and unamortized fees records a loss, as explained in refinancing and extinguishment gains and losses. Neither says anything about operations. Intel's 2024 income statement and notes show several of these items at once:

The $15 million other line looks negligible, but it nets a $755 million loss against $560 million of interest received and other items, neither of which will recur in the same form. A single small net figure can hide large, offsetting items, which is why the notes behind the non-operating lines are worth reading even when the total is modest.

Non-operating income and expense

Income and costs that arise outside a company's core business activities, such as interest, investment gains and losses, foreign exchange effects and gains on debt extinguishment. They are presented below operating income and excluded from operating measures such as earnings before interest and taxes (EBIT) and EBITDA.

The treatment follows from what each item represents. Interest is a financing cost: it is excluded from EBIT and EBITDA but sits at the center of credit analysis, where it is measured gross, including capitalized amounts. Investment income and equity method income come from assets that are valued separately, so they are excluded from operating earnings and the underlying investments are added in the equity value bridge, as the Valuation guide explains in its article on non-operating assets and excess cash. Gains, losses and fair value marks that will not recur are removed from normalized earnings altogether.

The final step is tax. Pre-tax income includes all of these items, so the effective tax rate on reported earnings reflects their tax treatment too. When non-operating items are large, bankers estimate the tax attached to them before building normalized net income, so that removing a gain also removes the tax it generated. How the remaining operating figure is turned into EBIT and EBITDA is set out in operating income, EBIT and EBITDA.