Intel 2006 Annual Report Download - page 96

Table of Contents
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Subject to certain conditions, Intel and Micron each agreed to contribute an additional $1.4 billion in the three years following
the initial capital contributions, of which Intel had contributed $128 million as of December 30, 2006. In January 2007, Intel
made an additional capital contribution to IMFT of $258 million.
IMFT is a variable interest entity as defined by FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities
(revised December 2003)—an interpretation of ARB No. 51” (FIN 46(R)), because all positive and negative variances in
IMFT’s cost structure are passed on to Intel and Micron through their purchase agreement with IMFT. Micron and Intel are
considered related parties under the provisions of FIN 46(R), and Intel has determined that Intel is not the primary beneficiary
of IMFT. Intel accounts for its interest in IMFT using the equity method of accounting. Intel’s proportionate share of income
or losses from its investment in IMFT is recorded in interest and other, net. Intel’s maximum exposure to loss as a result of its
involvement with IMFT is $1.3 billion as of December 30, 2006, which represents Intel’s investment. Intel’s investment in
IMFT is classified within other long-term assets on the consolidated balance sheet.
Concurrent with the formation of IMFT, Intel paid Micron $270 million for product designs developed by Micron as well as
certain other intellectual property. Intel owns the rights with respect to all product designs and licensed the designs to Micron.
Micron paid Intel $40 million to license these initial product designs and will pay additional royalties on new product designs.
Intel recorded its net investment in this technology of $230 million as an identified intangible asset, which is included in the
intellectual property asset classification. The identified intangible asset will be amortized into cost of sales over its expected
five-year life. Costs incurred by Intel and Micron for product and process development related to IMFT are generally split
evenly between Intel and Micron and are classified as research and development on the consolidated statements of income.
Intel has entered into a long-term supply agreement with Apple Inc. to supply a portion of the NAND flash memory output
that Intel will purchase from IMFT through December 31, 2010. In January 2006, Apple pre-paid a refundable $250 million to
Intel that will be applied to purchases of NAND flash memory by Apple beginning in 2008. Intel has classified the $250
million as other long-term liabilities on the consolidated balance sheet.
Note 18: Commitments
The company leases a portion of its capital equipment and certain of its facilities under operating leases that expire at various
dates through 2021. Additionally, the company leases portions of its land that expire at various dates through 2062. Rental
expense was $160 million in 2006 ($150 million in 2005 and $136 million in 2004). Minimum rental commitments under all
non-cancelable leases with an initial term in excess of one year are payable as follows: 2007—$114 million; 2008—
$80 million; 2009—$58 million; 2010—$33 million; 2011—$24 million; 2012 and beyond—$75 million. Commitments for
construction or purchase of property, plant and equipment increased from $2.7 billion at December 31, 2005 to $3.3 billion at
December 30, 2006, primarily due to purchase obligations for capital equipment related to our next-generation 45-nanometer
process technology. Other purchase obligations and commitments as of December 30, 2006 totaled $1.8 billion. Other
purchase obligations and commitments include agreements to purchase raw material or other goods as well as payments due
under various types of licenses and non-contingent funding obligations. Funding obligations include, for example, agreements
to fund various projects with other companies. In addition, the company has various contractual commitments related to the
IMFT venture with Micron (see “Note 17: Venture”).
Note 19: Contingencies
Tax Matters
In connection with the regular examination of Intel’s tax returns for the years 1999 through 2005, the IRS formally assessed,
in 2005 and 2006, certain adjustments to the amounts reflected by Intel on those returns as a tax benefit for its export sales.
The company does not agree with these adjustments and has appealed the assessments. If the IRS prevails in its position,
Intel’s federal income tax due for 1999 through 2005 would increase by approximately $2.2 billion, plus interest. In addition,
the IRS will likely make a similar claim for 2006, and if the IRS prevails, income tax due for 2006 would increase by
approximately $200 million, plus interest.
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