Intel 2010 Annual Report Download - page 47

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Inventory
The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable
quality. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. 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. As of December 25, 2010, we had total work-in-process inventory of $1.9 billion and
total finished goods inventory of $1.4 billion. The demand forecast is included in the development of our short-term
manufacturing plans to enable consistency between inventory valuation and build decisions. Product-specific facts and
circumstances reviewed in the inventory valuation process include a review of the customer base, the stage of the product life
cycle of our products, consumer confidence, and customer acceptance of our products, as well as an assessment of the selling
price in relation to the product cost. 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.
In order to determine what 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, and therefore 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. Over the past 12 quarters, excess capacity charges ranged
from zero to $680 million per quarter.
Loss Contingencies
We are subject to various legal and administrative proceedings and asserted and potential claims, accruals related to repair or
replacement of parts in connection with product errata, as well as product warranties and potential asset impairments (loss
contingencies) that arise in the ordinary course of business. An estimated loss from such contingencies is recognized as a
charge to income if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Disclosure of a loss contingency is required if there is at least a reasonable possibility that a loss has been incurred. The
outcomes of legal and administrative proceedings and claims, and the estimation of product warranties and asset impairments,
are subject to significant uncertainty. Significant judgment is required in both the determination of probability and the
determination as to whether a loss is reasonably estimable. With respect to estimating the losses associated with repairing and
replacing parts in connection with product errata, we make judgments with respect to customer return rates, costs to repair or
replace parts, and where the product is in our customer’s manufacturing process. At least quarterly, we review the status of
each significant matter, and we may revise our estimates. These revisions could have a material impact on our results of
operations and financial position.
Accounting Changes and Recent Accounting Standards
For a description of accounting changes and recent accounting standards, including the expected dates of adoption and
estimated effects, if any, on our consolidated financial statements, see “Note 3: Accounting Changes” and “Note 4: Recent
Accounting Standards” in Part II, Item 8 of this Form 10-K.
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