AMD 2008 Annual Report Download - page 119

The updated financial forecast for the Graphics segment was lower primarily because of intense pricing
competition with its primary competitor throughout 2007 which required an increase in the Company’s sales and
marketing activities to a greater extent than previously forecasted. In addition, the Company had invested in the
development of new graphics technologies to a greater extent than previously forecasted, which resulted in an
increase in research and development expenses. Also the Company’s primary microprocessor competitor
announced its intention to develop a discrete graphics product. These factors resulted in lower near-term and
longer-term forecasts of Graphics business revenues, operating profitability and cash flows compared to the
Company’s forecasts at the time of the completion of the ATI acquisition.
The updated financial forecast for the former Consumer Electronics segment was lower primarily because
its Digital Television business was affected by the rapid introduction and proliferation of low cost digital
televisions that did not contain its technology. The availability and adoption of these low cost alternatives by
consumers resulted in lower forecasted sales to those companies employing the Companies technology. In
addition, the Company’s Handheld business was dependant on a small number of mobile handset customers for
its revenues. During 2007, one handset customer experienced severe competition and eroding market share for its
consumer handset products. These two principal factors resulted in lower near-term and longer-term forecasts of
revenues, operating profitability, and cash flows compared to the Company’s forecast at the time of the ATI
acquisition. These updated long-term financial forecasts represented the best estimate that the Company’s
management had at the time and the Company believed that its underlying assumptions were reasonable at that
time.
The outcome of the Company’s 2007 goodwill impairment analysis indicated that the carrying amount of
certain acquisition-related intangible assets or asset groups may not be recoverable. The Company assessed the
recoverability of the acquisition-related intangible assets or asset groups, as appropriate, by determining whether
the unamortized balances could be recovered through undiscounted future net cash flows. The Company
determined that certain of the acquisition-related developed product technology associated with its Graphics and
Consumer Electronics segments was impaired primarily due to the revised lower revenue forecasts associated
with the products incorporating such developed product technology. The Company measured the amount of
impairment by calculating the amount by which the carrying value of the assets exceeded their estimated fair
values, which were based on projected discounted future net cash flows. As a result of this impairment analysis,
the Company recorded an impairment charge of $349 million, of which $219 million is included in the caption
“Impairment of goodwill and acquired intangible assets” and $130 million is included in the caption “Income
(loss) from discontinued operations, net of tax” in its 2007 consolidated statement of operations.
2008 Impairment
In the second quarter of 2008, the Company evaluated the viability of its non-core businesses and
determined that it’s Handheld and Digital Television business units were not directly aligned with its core
strategy of computing and graphics market opportunities. Therefore, the Company decided to divest these units
and classify them as discontinued operations in the Company’s financial statements. As a result, the Company
performed an interim impairment test of goodwill and concluded that the carrying amounts of goodwill
associated with its Handheld and Digital Television business units were impaired and recorded an impairment
charge of $799 million, of which $336 million related to the Handheld business unit is included in the caption
“Impairment of goodwill and acquired intangible assets” and $463 million related to the Digital Television
business unit is included in the caption “Income (loss) from discontinued operations, net of tax” in the
Company’s 2008 consolidated statement of operations. The impairment charges were determined by comparing
the carrying value of goodwill assigned to the reporting units with the implied fair value of the goodwill. The
Company considered both the income and market approaches in determining the implied fair value of the
goodwill and chose the same approach that the Company used during the 2007 impairment analysis, which
required estimates of future operating results and cash flows of each of the reporting units discounted using
estimated discount rates ranging from 18 percent to 32 percent. The estimates of future operating results and cash
flows were principally derived from an updated long-term financial forecast, which was revised as a result of the
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