Intel 2003 Annual Report Download - page 35

Table of Contents
Index to Financial Statements
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Critical Accounting Estimates
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in
our financial statements, which we discuss under the heading “Results of Operations” following this section of our MD&A. Some of our
accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Our most critical accounting estimates include the assessment of recoverability of goodwill, which impacts goodwill
impairments; valuation of non-marketable equity securities, which impacts net gains (losses) on equity securities when we record impairments;
valuation of inventory, which impacts gross margin; assessment of recoverability of long-lived assets, which primarily impacts gross margin
when we impair manufacturing assets or accelerate their depreciation; and recognition and measurement of current and deferred income tax
assets and liabilities, which impacts our tax provision. Below, we discuss these policies further, as well as the estimates and judgments
involved. We also have other policies that we consider key accounting policies, such as our policies for revenue recognition, including the
deferral of revenue on sales to distributors; however, these policies do not meet the definition of critical accounting estimates, because they do
not generally require us to make estimates or judgments that are difficult or subjective.
Goodwill. Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net
identified tangible and intangible assets acquired. We perform an annual review in the fourth quarter of each year, or more frequently if
indicators of potential impairment exist, to determine if the recorded goodwill is impaired. Our impairment review process compares the fair
value of the reporting unit to its carrying value, including the goodwill related to the reporting unit. To determine the fair value, our review
process uses the income method and is based on a discounted future cash flow approach that uses estimates including the following for the
reporting units: revenue, based on assumed market segment growth rates and Intel’s assumed market segment share; estimated costs; and
appropriate discount rates based on the particular business’s weighted average cost of capital. Our estimates of market segment growth, our
market segment share and costs are based on historical data, various internal estimates and a variety of external sources, and are developed as
part our routine long-range planning process. In addition to being used in our goodwill impairment analysis, the same estimates are used in the
planning for our long-term manufacturing capacity needs as part of our capital budgeting process and for both long-term and short-term
business planning and forecasting. We test the reasonableness of the inputs and outcomes of our discounted cash flow analysis by comparison
to available and comparable market data. In determining the carrying value of the reporting unit, we must include an allocation of our
manufacturing assets because of the interchangeable nature of our manufacturing capacity. This allocation is based on each reporting unit’s
relative percentage of utilization of our manufacturing assets. During the fourth quarter of 2003, the company completed its most recent review,
resulting in a $611 million non-cash goodwill impairment charge related to the WCCG reporting unit (see “Note 16: Goodwill” in the Notes to
the Consolidated Financial Statements and the WCCG discussion in the “Results of Operations”
section of this MD&A). A substantial majority
of our remaining recorded goodwill is related to the ICG reporting unit. The estimates we used in our most recent review for ICG assume that
we will gain market segment share in the future and that the communications business will experience a gradual recovery and return to growth
from the current trends. We may incur charges for the impairment of goodwill in the future if the communications sector does not recover as
we expect, if we fail to deliver new products for ICG, if the products fail to gain expected market acceptance, if we fail to achieve our assumed
revenue growth rates or assumed gross margin, or if interest rates increase significantly.
Non-Marketable Equity Securities. At December 27, 2003, the carrying value of our portfolio of strategic investments in non-
marketable
equity securities, excluding equity derivatives, totaled $665 million ($730 million at December 28, 2002). Under our Intel Capital program, we
make equity investments in companies around the world to further our strategic objectives and support our key business initiatives. The Intel
Capital program focuses on investing in companies and initiatives to stimulate growth in the Internet economy and its infrastructure, create new
business opportunities for Intel and expand global markets for our products. The investments may support, among other things, Intel product
initiatives, emerging trends in the technology industry or worldwide Internet deployment. This strategic investment program helps advance our
overall mission to be the preeminent supplier of building blocks to the worldwide Internet economy.
We invest in companies that develop software, hardware and other technologies or provide services supporting technologies. Our current
investment focus areas include: enabling mobile and Internet client devices, helping to create the digital home, advancing high- performance
communications infrastructure and developing the next generation of silicon production technologies. Our focus areas tend to develop and
change over time due to rapid advancements in technology.
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