Intel 2008 Annual Report Download - page 87

Table of Contents
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Initial production from IMFT began in early 2006. Our portion of IMFT costs, primarily related to product purchases and
start-up,
was approximately $1.1 billion during 2008 (approximately $790 million during 2007 and $300 million during 2006).
The amount due to IMFT for product purchases and services provided was approximately $190 million as of December 27,
2008 and approximately $130 million as of December 29, 2007. Costs that Intel and Micron have incurred for product and
process development related to IMFT are generally split evenly between Intel and Micron and are generally classified in
research and development.
In the fourth quarter of 2008, management approved a plan with Micron to discontinue the supply of NAND flash memory
from the 200mm facility within the IMFT manufacturing network. The agreement resulted in a $215 million restructuring
charge primarily related to the IMFT 200mm supply agreement. The restructuring charge resulted in a reduction of our
investment in IMFT of $184 million, a cash payment to Micron of $24 million, and other cash payments of $7 million.
Subject to certain conditions, we originally agreed to contribute up to approximately $1.7 billion for IMFS in the three years
following the initial capital contributions, of which our maximum remaining commitment was approximately $1.3 billion as of
December 27, 2008. However, the construction of the IMFS fabrication facility has been placed on hold.
IMFT and IMFS are each governed by a Board of Managers, with Micron and Intel initially appointing an equal number of
managers to each of the boards. The number of managers appointed by each party adjusts depending on the parties’ ownership
interests. These ventures will operate until 2016 but are subject to prior termination under certain terms and conditions.
These joint ventures are variable interest entities as defined by FASB Interpretation No. 46(R), “Consolidation of Variable
Interest Entities” (FIN 46(R)), because all costs of the joint ventures will be passed on to Micron and Intel through our
purchase agreements. IMFT and IMFS are dependent upon Micron and Intel for any additional cash requirements. Our known
maximum exposure to loss approximated our investment balances as of December 27, 2008, which were $1.7 billion in IMFT
and $329 million in IMFS ($2.2 billion in IMFT and $146 million in IMFS as of December 29, 2007). As of December 27,
2008, except for the amount due to IMFT and IMFS for product purchases and services, we did not incur any additional
liabilities in connection with our interests in these joint ventures. In addition to the potential loss of our existing investments,
our actual losses could be higher, as Intel and Micron are liable for other future operating costs and/or obligations of IMFT
and IMFS. In addition, future cash calls could increase our investment balance and the related exposure to loss. Finally, as we
are currently committed to purchasing 49% of IMFT’s production output and production-related services, we may be required
to purchase products at a cost in excess of realizable value.
Micron and Intel are also considered related parties under the provisions of FIN 46(R). As a result, the primary beneficiary is
the entity that is most closely associated with the joint ventures. To make that determination, we reviewed several factors. The
most important factors were consideration of the size and nature of the joint ventures’ operations relative to Micron and Intel,
and which party had the majority of economic exposure under the purchase agreements. Based on those factors, we have
determined that Micron is most closely associated with the joint ventures; therefore, we account for our interests using the
equity method of accounting and do not consolidate these joint ventures.
The fair value of our investment in IMFT and IMFS approximated carrying value as of December 27, 2008 and is included
within other long-term assets. We determine the fair value of our investments in IMFT and IMFS and related intangible assets
using the income approach, based on a weighted average of multiple discounted cash flow scenarios of our NAND Solutions
Group business. The assumptions that most significantly affect the fair value determination are the estimates for the projected
revenue and discount rate. It is reasonably possible that the estimates used in our valuation as of December 27, 2008 could
change in the near term and result in an impairment of our investments. Based on our valuation as of December 27, 2008, a
5% decline in projected revenue in each of our cash flow scenarios would result in a decline in the fair value of our investment
of up to approximately $300 million, and a one percentage point increase in the discount rate would result in a decline in the
fair value of our investment by approximately $225 million.
In connection with an agreement between Intel and Apple, Inc. to supply a portion of the NAND flash memory output that we
will purchase from IMFT, Apple provided a refundable $250 million pre-payment to Intel. In the fourth quarter of 2008, the
NAND flash memory supply agreement was terminated, and the remaining portion of the pre
-payment of $167 million was
refunded to Apple.
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