Intel 2013 Annual Report Download - page 38

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We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not more likely
than not, we must increase our provision for taxes by recording a valuation allowance against the deferred tax
assets that we estimate will not ultimately be recoverable. We believe that we will ultimately recover the deferred tax
assets recorded on our consolidated balance sheets. However, should a change occur in our ability to recover our
deferred tax assets, our tax provision would increase in the period in which we determined that the recovery is not
more likely than not. Recovery of a portion of our deferred tax assets is impacted by management’s plans with
respect to holding or disposing of certain investments; therefore, changes in management’s plans with respect to
holding or disposing of investments could affect our future provision for taxes.
We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax
position for recognition by determining whether the weight of available evidence indicates that it is more likely than
not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.
If we determine that a tax position will more likely than not be sustained on audit, the second step requires us to
estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon
ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits,
which may require periodic adjustments and may not accurately forecast actual outcomes. Determining whether an
uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would
result in the recognition of a tax benefit or an additional charge to the tax provision.
We have not recognized U.S. deferred income taxes on certain undistributed non-U.S. earnings because we plan to
indefinitely reinvest such earnings outside the U.S. Remittances of non-U.S. earnings are based on estimates and
judgments of projected cash flow needs as well as the working capital and investment requirements of our non-U.S.
and U.S. operations. Material changes in our estimates of cash, working capital, and investment needs in the
various jurisdictions could require repatriation of indefinitely reinvested non-U.S. earnings, which would be subject
to U.S. income taxes and applicable non-U.S. income and withholding taxes.
Inventory
Intel has a product development lifecycle that corresponds with substantive engineering milestones. These
engineering milestones are regularly and consistently applied in assessing the point at which our activities, and
associated costs, change in nature from R&D to cost of sales. In order for a product to be manufactured in high
volumes and sold to our customers under our standard warranty, it must meet our rigorous technical quality
specifications. This milestone is known as product release qualification (PRQ). We have identified PRQ as the point
at which the costs incurred to manufacture our products are included in the valuation of inventory.
To determine which costs can be included in the valuation of inventory, we must determine normal capacity at our
manufacturing and assembly and test facilities, based on historical loadings compared to total available capacity. If
the factory loadings are below the established normal capacity level, a portion of our manufacturing overhead costs
would not be included in the cost of inventory; therefore, it would be recognized as cost of sales in that period,
which would negatively impact our gross margin. We refer to these costs as excess capacity charges. Excess
capacity charges were $319 million in 2013 ($540 million in 2012 and $46 million in 2011).
Inventory is valued at the lower of cost or market based upon assumptions about future demand and market
conditions. Product-specific facts and circumstances reviewed in the inventory valuation process include a review of
our customer base, the stage of the product life cycle of our products, consumer confidence, customer acceptance
of our products, and an assessment of selling price in relation to product cost. If the estimated market value of the
inventory is less than the carrying value, we write down the inventory and record the difference as a charge to cost
of sales.
The valuation of inventory also requires us to estimate obsolete and excess inventory as well as inventory that is
not of saleable quality. The demand forecast is utilized in the development of our short-term manufacturing plans to
enable consistency between inventory valuation and build decisions. The estimate of future demand is compared to
work-in-process and finished goods inventory levels to determine the amount, if any, of obsolete or excess
inventory. If our demand forecast for specific products is greater than actual demand and we fail to reduce
manufacturing output accordingly, we could be required to write off inventory, which would negatively impact our
gross margin.
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)