UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2001
-------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-7882
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ADVANCED MICRO DEVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1692300
- --------------------------------- -------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One AMD Place
Sunnyvale, California 94088
- -------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 732-2400
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
The number of shares of $0.01 par value common stock outstanding as of May 9,
2001: 315,993,147
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INDEX
- -----
Part I. Financial Information
---------------------
Page No.
--------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations -
Quarters Ended April 1, 2001 and April 2, 2000 3
Condensed Consolidated Balance Sheets -
April 1, 2001 and December 31, 2000 4
Condensed Consolidated Statements of Cash Flows -
Quarters Ended April 1, 2001 and April 2, 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
Part II. Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 38
Signature 39
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
(Thousands except per share amounts)
Quarter Ended
---------------------------
April 1, April 2,
2001 2000
------------ -------------
Net sales $1,188,747 $1,092,029
Expenses:
Cost of sales 714,830 605,757
Research and development 157,760 161,297
Marketing, general and administrative 149,138 144,306
---------- ----------
1,021,728 911,360
---------- ----------
Operating income 167,019 180,669
Interest income and other, net 18,823 21,128
Interest expense (21,645) (11,479)
---------- ----------
Income before income taxes and equity in net income
(loss) of joint venture 164,197 190,318
Provision for income taxes 52,543 -
---------- ----------
Income before equity in net income (loss) of joint venture 111,654 190,318
Equity in net income (loss) of joint venture 13,183 (969)
---------- ----------
Net income $124,837 $189,349
========== ==========
Net income per common share:
Basic $0.40 $0.63
========== ==========
Diluted $0.37 $0.57
========== ==========
Shares used in per share calculation:
Basic 314,347 302,257
========== ==========
Diluted 351,785 344,381
========== ==========
See accompanying notes.
- ----------------------
-3-
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Thousands)
April 1, December 31,
2001 2000*
----------- ------------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $1,055,776 $ 591,457
Short-term investments 539,780 701,708
---------- ----------
Total cash, cash equivalents and short-term investments 1,595,556 1,293,165
Accounts receivable, net of allowance for doubtful accounts 602,067 547,200
Inventories:
Raw materials 44,470 34,413
Work-in-process 171,873 154,854
Finished goods 138,287 154,274
---------- ----------
Total inventories 354,630 343,541
Deferred income taxes 189,185 218,527
Prepaid expenses and other current assets 139,661 255,256
---------- ----------
Total current assets 2,881,099 2,657,689
Property, plant and equipment, at cost 5,621,154 5,461,801
Accumulated depreciation and amortization (2,957,250) (2,825,334)
---------- ----------
Property, plant and equipment, net 2,663,904 2,636,467
Investment in joint venture 249,866 261,728
Other assets 234,536 211,851
---------- ----------
$6,029,405 $5,767,735
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $377,067 $477,369
Accrued compensation and benefits 139,477 172,815
Accrued liabilities 278,092 276,721
Income taxes payable 84,286 74,806
Deferred income on shipments to distributors 99,286 92,828
Current portion of long-term debt, capital lease obligations and other 183,525 129,570
---------- ----------
Total current liabilities 1,161,733 1,224,109
Deferred income taxes 198,066 203,986
Long-term debt, capital lease obligations and other, less current portion 1,392,970 1,167,973
Commitments and contingencies
Stockholders' equity:
Common stock, par value 3,160 3,141
Capital in excess of par value 1,422,593 1,406,290
Retained earnings 1,981,098 1,856,261
Accumulated other comprehensive loss (130,215) (94,025)
---------- ----------
Total stockholders' equity 3,276,636 3,171,667
---------- ----------
$6,029,405 $5,767,735
========== ==========
* Amounts as of December 31, 2000 were derived from the December 31, 2000 audited financial statements.
See accompanying notes.
----------------------
-4-
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(Thousands)
Quarter Ended
---------------------------
April 1, April 2,
2001 2000
------------- -------------
Cash flows from operating activities:
Net income $ 124,837 $ 189,349
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 152,933 127,892
Net change in deferred income taxes 23,422 (515)
Foreign grant and subsidy income (10,937) (11,711)
Net loss (gain) on disposal of property, plant and equipment 4,119 (3,035)
Undistributed (income) loss of joint venture (13,183) 969
Recognition of deferred gain on sale of building (421) (420)
Net compensation recognized under employee stock plans 984 1,053
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (55,160) 24,405
(Increase) in inventories (11,131) (6,752)
(Increase) decrease in prepaid expenses (2,506) 692
Decrease (increase) in other assets 92,978 (4,926)
Increase (decrease) in tax refund receivable and tax payable 7,152 (6,547)
(Refund) receipt of customer deposits under purchase agreements (30,000) 100,000
(Decrease) increase in payables and accrued liabilities (107,473) 199,623
(Decrease) in accrued compensation (33,338) (223,314)
Income tax benefits from employee stock option exercises 4,480 -
---------- ---------
Net cash provided by operating activities 146,756 386,763
Cash flows from investing activities:
Purchases of property, plant and equipment (162,713) (129,027)
Proceeds from sale of property, plant and equipment 299 9,049
Purchases of available-for-sale securities (743,835) (729,799)
Proceeds from sale/maturity of available-for-sale securities 886,956 495,666
---------- ---------
Net cash provided by (used in) investing activities (19,293) (354,111)
Cash flows from financing activities:
Proceeds from borrowings 330,138 3,598
Payments on debt and capital lease obligations (2,778) (4,246)
Proceeds from issuance of stock and other 10,858 51,557
---------- ---------
Net cash provided by financing activities 338,218 50,909
Effect of exchange rate changes on cash and cash equivalents (1,362) 2,468
---------- ---------
Net increase in cash and cash equivalents 464,319 86,029
Cash and cash equivalents at beginning of period 591,457 294,125
--------- ---------
Cash and cash equivalents at end of period $1,055,776 $ 380,154
========== =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 7,953 $ 25,507
========== =========
Income taxes $ 8,351 $ 3,215
========== =========
See accompanying notes.
- ----------------------
-5-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Advanced Micro Devices, Inc. (the Company or AMD) have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. The results of operations for the interim periods shown in
this report are not necessarily indicative of results to be expected for the
full fiscal year ending December 30, 2001. In the opinion of the Company's
management, the information contained herein reflects all adjustments
necessary to make the results of operations for the interim periods a fair
statement of such operations. All such adjustments are of a normal recurring
nature. The interim financial statements should be read in conjunction with
the financial statements in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
The Company uses a 52- to 53-week fiscal year ending on the last Sunday in
December. The quarters ended April 1, 2001 and April 2, 2000 included 13
weeks and 14 weeks, respectively.
-6-
2. Available-For-Sale Securities
The following is a summary of available-for-sale securities:
April 1,
(Thousands) 2001
--------
Cash equivalents:
Certificates of deposit $ 33,982
Commercial paper 441,180
Money market funds 51,421
Federal agency note 62,711
--------
Total cash equivalents $589,294
========
Short-term investments:
Money market auction rate preferred stocks $246,478
Municipal bonds 283,333
Floating rate note 9,969
--------
Total short-term investments $539,780
========
Long-term investments:
Equity investments $ 18,455
Commercial paper 9,999
Treasury notes 2,105
--------
Total long-term investments (included in other assets) $ 30,559
========
-7-
3. Net Income per Common Share
Basic net income per common share is computed using the weighted-average
common shares outstanding. Diluted net income per common share is computed
using the weighted-average common shares outstanding plus any potential
dilutive securities. Dilutive securities include stock options, restricted
stock and shares issuable upon the conversion of convertible debt. The
following table sets forth the components of basic and diluted income per
common share:
Quarter Ended
----------------------
April 1, April 2,
(Thousands except per share data) 2001 2000
--------- ---------
Numerator:
Numerator for basic income per common share $ 124,837 $ 189,349
Effect of adding back interest expense associated with convertible
debentures 5,275 7,763
--------- ---------
Numerator for diluted income per common share $ 130,112 $ 197,112
Denominator:
Denominator for basic income per share - weighted-average shares 314,347 302,257
Effect of dilutive securities:
Employee stock options 9,484 14,158
Restricted stock - 2
Convertible debentures 27,954 27,964
--------- ---------
Dilutive potential common shares 37,439 42,124
--------- ---------
Denominator for diluted net income per common share - 351,785 344,381
adjusted weighted-average shares
Net income per common share:
--------- ---------
Basic $ 0.40 $ 0.63
========= =========
Diluted $ 0.37 $ 0.57
========= =========
-8-
On August 21, 2000, the Company effected a two-for-one stock split in the
form of a stock dividend of one share of common stock for each share of AMD
common stock held on August 7, 2000. Share and per share amounts have been
adjusted for prior periods presented to give effect to the stock split.
4. Investment in Joint Venture
In 1993, AMD and Fujitsu Limited formed a joint venture, Fujitsu AMD
Semiconductor Limited (FASL), for the development and manufacture of non-
volatile memory devices. FASL operates advanced integrated circuit
manufacturing facilities in Aizu-Wakamatsu, Japan, to produce Flash memory
devices. FASL also uses foundry facilities in Iwate, Japan and Gresham,
Oregon. The Company's share of FASL is 49.992 percent, and the investment is
being accounted for under the equity method. At April 1, 2001, the
cumulative adjustment related to the translation of the FASL financial
statements into U.S. dollars resulted in a decrease in the investment in
FASL of $39 million. The following are the significant FASL related-party
transactions and balances recorded by AMD:
Quarter Ended
----------------------
April 1, April 2,
(Thousands) 2001 2000
---------- -----------
Royalty income $ 14,345 $ 6,542
Purchases 159,727 76,238
April 1, April 2,
(Thousands) 2001 2000
---------- -----------
Royalty receivable $ 20,855 $12,402
Accounts payable 89,917 43,614
The following is condensed unaudited financial data of FASL:
Quarter Ended
-------------------------
April 1, April 2,
(Thousands) 2001 2000
---------- --------------
Net sales $316,467 $ 145,442
Gross profit 75,521 813
Operating income (loss) 74,435 (129)
Net income (loss) 36,575 (247)
The Company's share of the above FASL net income (loss) differs from the
equity in net income (loss) of joint venture reported on the condensed
consolidated statements of operations. The difference is due primarily to
adjustments resulting from the related party transactions between FASL and
the Company which are reflected on the Company's condensed consolidated
statements of operations.
-9-
5. Segment Reporting
In the first quarter of 2001, AMD operated in two reportable segments: the
Core Products and Foundry Services segments. AMD has previously shown three
reportable segments; however, as a result of the sale of Legerity, Inc.
(Legerity), the Company's former Voice Communications product business,
effective July 31, 2000, the Company re-evaluated its segment reporting
structure and eliminated the Voice Communications segment. Segment
information for the period ended April 2, 2000 has been restated to conform
to the current period presentation. The Core Products segment includes
microprocessors, Flash memory devices, Erasable Programmable Read-Only
Memory (EPROM) devices, embedded processors, platform products and
networking products. The Voice Communications segment included voice
communications products of Legerity, until July 31, 2000, the effective date
of its sale. The Foundry Services segment includes fees for wafer
fabrication and assembly, test, mark and pack services provided to Legerity
and Vantis Corporation (Vantis), the Company's former programmable logic
subsidiary. The following table is a summary of the operating income by
segment for the quarters ended April 1, 2001 and April 2, 2000:
Quarter Ended
-------------------------
(Thousands) April 1, April 2,
Net sales: 2001 2000
------------ ------------
Core Products segment $1,147,140 $1,012,644
Voice Communications segment - 59,520
Foundry Services segment 41,607 19,865
------------ ------------
Total net sales $1,188,747 $1,092,029
============ ============
Segment operating income:
Core Products segment $ 166,209 $ 159,137
Voice Communications segment - 16,297
Foundry Services segment 810 5,235
------------ ------------
Total segment operating income 167,019 180,669
Interest income and other, net 18,823 21,128
Interest expense (21,645) (11,479)
Provision for income taxes (52,543) -
Equity in net income (loss) of FASL 13,183 (969)
------------ ------------
Net income $ 124,837 $ 189,349
============ ============
-10-
6. Comprehensive Income
The following are the components of comprehensive income:
Quarter Ended
--------------------------
April 1, April 2,
(Thousands) 2001 2000
----------- ---------------
Net income $ 124,837 $ 189,349
Foreign currency translation adjustments (17,382) (25,369)
Derivative financial instrument gains (losses), net (7,817) -
Unrealized gains on securities, net of tax:
Unrealized gains (losses) on investments arising
during the period (10,990) 2,510
----------- -------------
Other comprehensive income (loss) (36,189) (22,859)
----------- -------------
Comprehensive income $ 88,648 $ 166,490
=========== =============
The components of accumulated other comprehensive loss are as follows:
April 1, April 2,
(Thousands) 2001 2000
----------- ----------
Unrealized gain on investments, net of tax $ 2,152 $ 16,788
Derivatives - cash flow hedging adjustments (7,817) -
Cumulative translation adjustments (124,550) (57,061)
----------- ----------
$(130,215) $(40,273)
=========== ==========
-11-
7. Share Repurchase Program
On January 29, 2001, the Company announced that the Board of Directors had
authorized a program to repurchase up to $300 million worth of the Company's
common shares over a period of time to be determined by management. Any such
repurchases will be made in the open market or in privately negotiated
transactions from time to time in compliance with Rule 10b-18 of the
Securities Exchange Act, subject to market conditions, applicable legal
requirements and other factors. This plan does not obligate the Company to
acquire any particular amount of its common stock, and the plan may be
suspended at any time at the Company's discretion. No shares have been
repurchased as of April 1, 2001.
8. Dresden Loan Agreements
AMD Saxony, an indirect wholly owned subsidiary of the Company, operates the
Company's manufacturing and design facility in Dresden, Germany (Dresden Fab
30). In 1997, AMD Saxony entered into a loan and related agreements (the
Dresden Loan Agreements) with a consortium of banks led by Dresdner Bank AG.
In February 2001, the Dresden Loan Agreements were amended to reflect new
capacity and increased capital spending plans for Dresden Fab 30. Under the
February 2001 amendments, the Company agreed to extend its guaranty of AMD
Saxony's obligations and to make available to AMD Saxony revolving loans of
up to $500 million. The Company also expanded its obligation to reimburse
AMD Saxony for the cost of producing wafers for the Company and agreed to
cancel the cost overrun facility made available by the banks. Under these
amendments, the Company has been released from financial covenants limiting
capital expenditures and requiring AMD Saxony to achieve capacity and
production cost targets by the end of 2001.
The Dresden Loan Agreements, as amended, require that the Company: provide
interim funding to AMD Saxony if either the remaining capital investment
allowances or the remaining interest subsidies are delayed, such interim
funding to be repaid as AMD Saxony receives the grants and subsidies from
the State of Saxony; fund shortfalls in government subsidies resulting from
any default under the subsidy agreements caused by AMD Saxony or its
affiliates; and guarantee up to 35 percent of AMD Saxony's obligations under
the Dresden Loan Agreement, which guarantee must not be less than $100
million or more than $275 million, until the bank loans are repaid in full.
9. Derivative Instrument and Hedging
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). The Statement requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
the derivative are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings (fair value hedges) or
recognized in other comprehensive income until the hedged item is recognized
in earnings (cash flow hedges). The ineffective portion of a derivative's
change in fair value is immediately recognized in earnings. As of January 1,
2001 the Company's foreign currency forward contracts had been entered into
solely to hedge the gains and losses generated by the remeasurement of
foreign currency denominated intercompany accounts. These derivatives
therefore did not qualify for hedge accounting and, therefore, the change in
fair values of these derivatives are adjusted to fair value as a component
of cost of sales and offset the change in fair values of the related
intercompany accounts. Accordingly, the adoption of SFAS 133 had no impact
on the Company's consolidated financial position or operating results.
The Company purchases significant volumes of inventory from its
unconsolidated joint venture in Japan, FASL, and from AMD Saxony. Purchases
from FASL and AMD Saxony are denominated in yen and the euro, respectively.
Therefore, in the normal course of business, the Company's financial
position is routinely subjected to market risk associated with foreign
currency rate fluctuations. The Company's general practice is to ensure that
material business exposure to foreign exchange risks are identified,
measured and minimized using the most effective and efficient methods to
eliminate or reduce such exposures. To protect against the reduction in
value of forecasted yen and euro denominated cash flows resulting from these
transactions, the Company has instituted a foreign currency cash flow
hedging program. The Company purchases foreign currency forward contracts
and sells or purchases foreign currency option contracts generally expiring
within 12 months to hedge portions of its forecasted foreign currency
denominated cash flows. These foreign currency contracts are carried on the
Company's balance sheet at fair value with the effective portion of the
contracts' gain or loss recorded in other comprehensive income (a component
of stockholders' equity) and subsequently recognized in earnings in the same
period the hedged forecasted transaction affects earnings. The Company does
not use derivatives for trading purposes.
The effectiveness test for these foreign currency contracts is a fair value
to fair value comparison method. SFAS 133 permits the exclusion from the
effectiveness assessment of the time value portion of the change in value of
the currency forward contract. The change in fair value of the time value
portion of the derivative is considered by the Company to be inherently
ineffective and is immediately adjusted through earnings each accounting
period. During the three-month period ended April 1, 2001 portions of the
hedging instruments excluded from the assessment of hedge
-12-
effectiveness were not material to the Company's consolidated financial
position or operating results and are included in earnings in the
accompanying Consolidated Statements of Operations.
At April 1, 2001 the Company expects to reclassify the amount accumulated in
other comprehensive income to earnings within the next twelve months due to
the recognition in earnings of the hedged forecasted transactions.
If a cash flow hedge should be discontinued because it is probable that the
original forecasted transaction will not occur, the net gain or loss in
accumulated other comprehensive income will be reclassified into earnings as
a component of income and expense. No such amounts were recorded in earnings
during the three-month period ended April 1, 2001.
The following table summarizes activity in other comprehensive income
related solely to derivatives classified as cash flow hedges held by the
Company during the period from January 1, 2001 through April 1, 2001:
(Thousands)
Cumulative effect of adopting FAS 133 $ -
Changes in fair value of derivatives, net 7,817
Derivatives portion of other comprehensive income, net -
---------
$ 7,817
=========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
The statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations that are forward-looking are based on
current expectations and beliefs and involve numerous risks and uncertainties
that could cause actual results to differ materially. The forward-looking
statements relate to, among other things: operating results; anticipated cash
flows; capital expenditures; adequacy of resources to fund operations and
capital investments; our ability to produce AMD Athlon(TM) and AMD Duron(TM)
microprocessors in the volume required by customers on a timely basis; the
ability of third parties to provide timely infrastructure solutions
(motherboards and chipsets) to support our microprocessors; our ability to
increase customer and market acceptance of the newest versions of our seventh-
generation microprocessors, particularly in commercial and mobile markets; a
recovery in the communications industry leading to an increase in the demand for
Flash memory products; the effect of foreign currency hedging transactions; the
production ramp of our new submicron integrated circuit manufacturing and design
facility in Dresden, Germany (Dresden Fab 30); and the financing and
construction of the Fujitsu AMD Semiconductor Limited (FASL) manufacturing
facilities. See "Financial Condition" and "Risk Factors" below, as well as such
other risks and uncertainties as are detailed in our other Securities and
Exchange Commission reports and filings for a discussion of the factors that
could cause actual results to differ materially from the forward-looking
statements.
The following discussion should be read in conjunction with the Unaudited
Condensed Financial Statements and related notes included in this report and our
Audited Financial Statements and related notes as of December 31, 2000 and
December 26, 1999 and each of the three years in the period ended December 31,
2000 as filed in our Annual Report on Form 10-K.
AMD, the AMD logo, and combinations thereof, Advanced Micro Devices, AMD-K6, AMD
Athlon, AMD Duron, AMD-760 and 3DNow! are either trademarks or registered
trademarks of Advanced Micro Devices, Inc. Vantis is a trademark of Vantis
Corporation. Legerity is a trademark of Legerity, Inc. Microsoft and Windows
are either registered trademarks or trademarks of Microsoft Corporation. Other
terms used to identify companies and products may be trademarks of their
respective owners.
-14-
RESULTS OF OPERATIONS
During the three months ended April 1, 2001 we participated in all three
technology areas within the digital integrated circuit (IC) market--
microprocessors, memory circuits and logic circuits--through our Core Products
and Foundry Services segments. Our Core Products segment includes our PC
processors, Memory products and Other IC products. PC processors include our
current seventh-generation microprocessors, the AMD Athlon and AMD Duron
microprocessors, and our sixth-generation microprocessors. Memory products
include Flash memory devices and Erasable Programmable Read-Only Memory (EPROM)
devices. Other IC products include embedded processors, platform products and
networking products. Our former Voice Communications segment consisted of our
voice communications products subsidiary, Legerity, Inc. (Legerity), until July
31, 2000, the effective date of its sale. Our Foundry Services segment consists
of fees for services that we provide to our former subsidiaries, Legerity and
Vantis corporation (Vantis), our former programmable logic subsidiary.
On August 4, 2000, we completed the sale of 90 percent of Legerity for
approximately $375 million in cash, effective July 31, 2000. We retained a ten
percent ownership interest in Legerity and a warrant to acquire approximately an
additional ten percent. As part of the transaction, we entered into various
service contracts with Legerity to continue to provide, among other things,
wafer fabrication and assembly, test, mark and pack services to Legerity. We
receive fees from Legerity for these services.
We use a 52- to 53-week fiscal year ending on the last Sunday in December. The
quarters ended April 1, 2001 and December 31, 2000 each included 13 weeks and
the quarter ended April 2, 2000 included 14 weeks.
-15-
The following is a summary of our net sales by segment for the periods presented
below:
Quarter Ended
---------------------------------
April 1, December 31, April 2,
(Millions) 2001 2000 2000
--------- ------------ ----------
Core Products segment:
PC Processors $ 661 $ 566 $ 563
Memory Products 411 458 327
Other IC Products 75 98 122
--------- ------------ ----------
1,147 1,122 1,012
Foundry Services segment 42 53 20
Voice Communications segment - - 60
--------- ------------ ----------
$ 1,189 $1,175 $ 1,092
========= ============ ==========
Net Sales Comparison of Quarters Ended April 1, 2001 and December 31, 2000
Net sales of $1,189 million for the first quarter of 2001 increased by one
percent compared to net sales of $1,175 million for the fourth quarter of 2000.
PC Processors net sales of $661 million increased 17 percent in the first
quarter of 2001 compared to the fourth quarter of 2000. The increase in net
sales was primarily due to both higher unit and dollar sales of our seventh
generation microprocessors, partially offset by lower unit sales of AMD-K6(R)
microprocessors. Overall PC Processors sales growth in the second quarter of
2001 is dependent upon continuing a successful production ramp in Dresden Fab
30, market acceptance of the newest versions of the AMD Athlon and AMD Duron
processors, availability of chipsets and motherboards from third-party suppliers
and increasing market acceptance of our seventh generation microprocessors
particularly in commercial and mobile markets, as to which we cannot give any
assurance.
Memory products net sales of $411 million decreased 10 percent in the first
quarter of 2001 compared to the fourth quarter of 2000. The decrease was
primarily the result of the communications and networking equipment industry
downturn resulting in a decrease in the sales of Flash memory devices. We expect
another significant sales decline in Flash memory devices in the second quarter
of 2001.
The Other IC products net sales of $75 million decreased 24 percent in the first
quarter of 2001 compared to the fourth quarter of 2000 primarily due to
decreased net sales of chipset products and networking products. Networking
product sales decreased as a result of the communications sector decline.
The Foundry Services segment included service fees of $42 million in the first
quarter of 2001 compared to $53 million in the fourth quarter of 2000. This 21
percent decrease was due to the communications sector decline. We expect that
service fees will continue to decline.
-16-
Net Sales Comparison of Quarters Ended April 1, 2001 and April 2, 2000
Net sales of $1,189 million for the first quarter of 2001 increased by nine
percent compared to net sales of $1,092 million for the first quarter of 2000.
PC Processors net sales of $661 million increased 17 percent in the first
quarter of 2001 compared to the same quarter of 2000 primarily due to increased
net sales of our seventh generation microprocessors offset by a decrease in net
sales of AMD-K6 microprocessors. The increase in net sales was primarily due to
both higher unit and dollar sales of our seventh-generation microprocessors,
partially offset by lower unit sales of AMD-K6 microprocessors which was due to
market shift toward our seventh-generation microprocessors.
Memory products net sales of $411 million increased by 26 percent in the first
quarter of 2001 compared to the same quarter of 2000 as a result of strong
growth in demand for Flash memory devices, which was slightly offset by a
decline in net sales of EPROMs.
The Other IC products net sales of $75 million in the first quarter of 2001
decreased when compared to the same quarter of 2000 as a result of decreased net
sales from networking products, chipsets and embedded processors products.
The Foundry Services segment service fees of $42 million in the first quarter of
2001 increased compared to the same quarter of 2000. The increase was primarily
due to the addition of service fees from Legerity in the first quarter of 2001.
Comparison of Expenses, Gross Margin Percentage and Interest
The following is a summary of expenses, gross margin percentage and interest
income and other, net for the periods presented below:
Quarter Ended
----------------------------------
April 1, December 31, April 2,
(Millions except for gross margin percentage) 2001 2000 2000
--------- ------------- ----------
Cost of sales $ 715 $ 657 $ 606
Gross margin percentage 40% 44% 45%
Research and development $ 158 $ 162 $ 161
Marketing, general and administrative 149 161 144
Interest income and other, net 19 25 21
Interest expense 22 20 11
We operate in an industry characterized by high fixed costs due to the capital-
intensive manufacturing process, particularly the state-of-the-art production
facilities required for PC processors and memory devices. As a result, our
gross margin percentage is significantly affected by fluctuations in product
sales. The gross margin percentage growth depends on continually increasing
sales because fixed costs continue to rise due to the ongoing capital
investments required to expand production capacity and capability.
-17-
The gross margin percentage of 40 percent in the first quarter of 2001 decreased
from 44 percent in the fourth quarter of 2000 and from 45 percent in the same
quarter of 2000. The decrease in gross margin percentage in the first quarter of
2001 compared to the fourth quarter of 2000 was primarily attributable to a
decline in the average selling price for memory devices and charges for
increased memory product inventories. The decrease in gross margin percentage in
the first quarter of 2001 compared to the same quarter in 2000 was due to the
aforementioned charges for increased memory product inventories combined with
higher fixed manufacturing costs. Fixed costs will continue to increase as we
ramp production in Dresden Fab 30. Dresden Fab 30 went into production in the
second quarter of 2000, which contributed to, and will continue to contribute
to, increases in cost of sales.
Research and development expenses of $158 million in the first quarter of 2001
decreased three percent compared to the immediately prior quarter, and two
percent compared to the same quarter in 2000. The decrease in research and
development expenses was primarily due to a decrease in expenses relating to the
technology development alliance we have with Motorola.
Included in research and development and cost of sales were the recognition of
deferred credits on foreign capital grants and interest subsidies that were
received for Dresden Fab 30. These credits of approximately $11 million per
quarter (denominated in deutsche marks) will continue to be offset against
Dresden Fab 30 expenses in future quarters until June 2007.
Marketing, general and administrative expenses of $149 million in the first
quarter of 2001 decreased seven percent compared to the fourth quarter of 2000
as a result of spending controls and discontinuing certain marketing and
promotional activities for the AMD Athlon microprocessor. Marketing, general and
administrative expenses in the first quarter of 2001 increased three percent
compared to the first quarter of 2000. The increase was primarily due to
increased advertising and marketing for the AMD Athlon microprocessor.
Interest income and other, net of $19 million in the first quarter of 2001
decreased 26 percent compared to the fourth quarter of 2000 and decreased 10
percent compared to the same quarter of 2000. The decrease was primarily due to
the cancellation of an interest rate swap in the first quarter of 2001 and a
lower short-term investment balance.
Interest expense of $22 million in the first quarter of 2001 increased nine
percent compared to the fourth quarter of 2000 and increased 89 percent compared
to the same quarter of 2000. During the construction of Dresden Fab 30 we
capitalized interest expense attributable to the construction. Fab 30 began
production at the end of the second quarter of 2000 and consequently we no
longer capitalize these interest costs.
-18-
Income Tax
We recorded a $53 million income tax provision in the first quarter of 2001 and
no income tax provision in the first quarter of 2000. The effective tax rate
for the quarter ended April 1, 2001 was 32 percent. The effective tax rate for
the quarter ended April 2, 2000 of zero percent reflected the utilization of net
operating loss carryforwards.
Other Items
International sales as a percent of net sales were 63 percent in the first
quarter of 2001 compared to 62 percent in the fourth quarter of 2000 and 59
percent in the first quarter of 2000. During the first quarter of 2001,
approximately five percent of our net sales were denominated in foreign
currencies. We do not have sales denominated in local currencies in countries
that have highly inflationary economies, as defined by generally accepted
accounting principles. The impact on our operating results from changes in
foreign currency rates individually and in the aggregate has not been
significant.
-19-
Comparison of Segment Income
For a comparison of segment net sales, refer to the previous discussions on net
sales by product group.
The following is a summary of operating income by segment for the periods
presented below:
Quarter Ended
----------------------------------
April 1, December 31, April 2,
(Millions) 2001 2000 2000
--------- ------------- ---------
Core Products $ 166 $ 190 $ 160
Foundry Services 1 5 5
Voice Communications - - 16
--------- ------------- ---------
Total $ 167 $ 195 $ 181
========= ============= =========
Core Products' operating income in the first quarter of 2001 decreased 13
percent compared to the fourth quarter of 2000. The decrease was primarily due
to a downturn in the communications and networking equipment industry resulting
in a decrease in net sales of our Flash memory devices and Other IC products.
The decrease was also attributable to a decline in average selling price for
Flash memory devices and charges for increased memory product inventories. Core
Products operating income in the first quarter of 2001 increased four percent
compared to the first quarter of 2000 mainly due to higher net sales of our
seventh generation microprocessors. As a result of the sale of Legerity,
effective July 31, 2000, we no longer operate in our former Voice Communications
segment, resulting in no operating income in the first quarter of 2001 compared
to an operating income of $16 million in the first quarter of 2000.
-20-
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
Net cash provided by operating activities was $147 million in the first quarter
of 2001 primarily due to net income of $125 million and depreciation and
amortization of $153 million, offset by a decrease of $141 million in payables,
accrued liabilities, and accrued compensation.
Net cash provided by operating activities was $387 million in the first quarter
of 2000 primarily due to net income of $189 million, depreciation and
amortization expenses of $128 million, and $100 million from customer deposits
under long-term purchase agreements, offset by a decrease of $24 million in
payables, accrued liabilities and accrued compensation.
Net cash used by investing activities was $19 million during the first quarter
of 2001. Major uses of cash during the period included $163 million for the
purchases of property, plant and equipment, primarily for Dresden Fab 30 and
Asia manufacturing facilities, and $736 million for purchases of available-for-
sale securities. Net cash provided by investing activities included $887
million of proceeds from the maturity of available-for-sale securities.
Net cash used by investing activities was $354 million in the first quarter of
2000. Major uses of cash during the period included $129 million from purchases
of property, plant and equipment, primarily for Dresden Fab 30 and Asia
manufacturing facilities and $730 million from purchases of available-for-sale
securities. Net cash provided by investing activities included $496 million of
proceeds from the maturities of available-for-sale securities.
Net cash provided by financing activities was $338 million during the first
quarter of 2001. Major uses of cash during the period included $3 million in
payments on debt and capital lease obligations offset by $320 million in
proceeds from Dresden FAB 30 borrowing activities, $10 million in proceeds from
Dresden FAB 30 foreign grants and subsidies and $9 million in proceeds from
issuance of stock.
Net cash provided by financing activities was $51 million in the first quarter
of 2000 primarily due to $52 million in proceeds from issuance of stock in
connection with stock option exercises and purchases under our Employee Stock
Purchase Plan.
Under our Loan and Security Agreement (the Loan Agreement) effective on July 13,
1999, which provides for a four-year secured revolving line of credit of up to
$200 million, we can borrow, subject to amounts which may be set aside by the
lenders, up to 85 percent of our eligible accounts receivable from Original
Equipment Manufacturers (OEMs) and 50 percent of our eligible accounts
receivable from distributors. We must comply with certain financial covenants
if the level of domestic cash we hold declines to certain levels, or the amount
of borrowings under the Loan Agreement rises to certain levels. Our obligations
under the Loan Agreement are secured by a pledge of most of our accounts
receivable, inventory, general intangibles and the related proceeds. As of
April 1, 2001, no funds were drawn under the Loan Agreement. In addition, we
had available unsecured, uncommitted bank lines of credit in the amount of $24
million, none of which were outstanding.
-21-
We plan to make capital investments of approximately $1 billion during 2001.
These investments include those relating to the continued facilitization of
Dresden Fab 30 and our fabrication facility in Austin, Texas (Fab 25).
On January 29, 2001, we announced that our Board of Directors had authorized a
program to repurchase up to $300 million worth of our common shares over a
period of time to be determined by management. Any such repurchases will be made
in the open market or in privately negotiated transactions from time to time in
compliance with the Rule 10b-18 of the Securities Exchange Act, subject to
market conditions, applicable legal requirements and other factors. This plan
does not obligate us to acquire any particular amount of our common stock, and
the plan may be suspended at any time at our discretion. No shares have been
repurchased as of April 1, 2001.
On May 7, 2001, we announced the redemption of all of our outstanding 6%
Convertible Subordinated Notes due 2005 on May 21, 2001.
AMD Saxony, an indirect wholly owned German subsidiary of AMD, has constructed a
fab and has installed equipment in Dresden Fab 30 which began production in the
second quarter of 2000. AMD, the Federal Republic of Germany, the State of
Saxony and a consortium of banks are supporting the project. We currently
estimate construction and facilitization costs of Dresden Fab 30 will be $2.3
billion when fully equipped by the end of 2003. We have invested $1.5 billion
to date. In March 1997, AMD Saxony entered into a loan agreement and other
related agreements (the Dresden Loan Agreements) with a consortium of banks led
by Dresdner Bank AG. Because most of the amounts under the Dresden Loan
Agreements are denominated in deutsche marks, the dollar amounts set forth below
are subject to change based on applicable conversion rates. We used the
exchange rate at the end of first quarter of 2001, which was approximately 2.18
deutsche marks to one U.S. dollar, to value the amounts denominated in deutsche
marks. The Dresden Loan Agreements provide for the funding of the construction
and facilitization of Dresden Fab 30. The funding consists of:
. equity, subordinated loans and loan guarantees from AMD;
. loans from a consortium of banks; and
. grants, subsidies and loan guarantees from the Federal Republic of Germany
and the State of Saxony.
The Dresden Loan Agreements require that we partially fund Dresden Fab 30
project costs in the form of subordinated loans to, or equity investments in,
AMD Saxony. In accordance with the terms of the Dresden Loan Agreements, we
have invested $425 million as of April 1, 2001 in the form of subordinated loans
to and equity in AMD Saxony. In addition to support from AMD, the consortium of
banks referred to above has made available $687 million in loans to AMD Saxony
to help fund Dresden Fab 30 project costs. As of April 1, 2001, all of the
available loans were outstanding.
Finally, the Federal Republic of Germany and the State of Saxony are supporting
the Dresden Fab 30 project, in accordance with the Dresden Loan Agreements, in
the form of:
. guarantees of the lesser of 65 percent of AMD Saxony bank debt or $687
million;
. capital investment grants and allowances totaling $287 million; and
. interest subsidies totaling $141 million.
-22-
Of these amounts, AMD Saxony had received $284 million in capital investment
grants and allowances and $38 million in interest subsidies as of April 1, 2001.
The grants and subsidies are subject to conditions, including meeting specified
levels of employment in December 2001 and maintaining those levels until June
2007. Noncompliance with the conditions of the grants and subsidies could
result in the forfeiture of all or a portion of the future amounts to be
received as well as the repayment of all or a portion of amounts received to
date. As of April 1, 2001, we were in compliance with all of the conditions of
the grants and subsidies.
In February 2001, we amended the Dresden Loan Agreements to reflect new capacity
and increased capital expenditure plans for Dresden Fab 30. Under the February
2001 amendments, we agreed to increase and extend our guaranty of AMD Saxony's
obligations and to make available to AMD Saxony revolving loans of up to $500
million. We expanded our obligation to reimburse AMD Saxony for the cost of
producing wafers from us, and we also agreed to cancel the cost overrun facility
made available by the banks. Under the February 2001 amendments, we have been
released from financial covenants limiting capital expenditures and requiring
AMD Saxony to achieve capacity and production cost targets by the end of 2001.
The Dresden Loan Agreements, as amended, also require that we:
. provide interim funding to AMD Saxony if either the remaining capital
investment allowances or the remaining interest subsidies are delayed, such
funding to be repaid to AMD as AMD Saxony receives the grants or subsidies
from the State of Saxony;
. fund shortfalls in government subsidies resulting from any default under the
subsidy agreements caused by AMD Saxony or its affiliates; and
. guarantee up to 35 percent of AMD Saxony's obligations under the Dresden Loan
Agreements, which guarantee must not be less than $100 million or more than
$275 million, until the bank loans are repaid in full.
The definition of defaults under the Dresden Loan Agreements includes the
failure of AMD, AMD Saxony or AMD Holding, the parent company of AMD Saxony and
a wholly owned subsidiary of AMD, to comply with obligations in connection with
the Dresden Loan Agreements, including:
. material variances from the approved plans and specifications;
. our failure to fund equity contributions or shareholder loans or otherwise
comply with our obligations relating to the Dresden Loan Agreements;
. the sale of shares in AMD Saxony or AMD Holding;
. the failure to pay material obligations;
. the occurrence of a material adverse change or filings or proceedings in
bankruptcy or insolvency with respect to us, AMD Saxony or AMD Holding; and
. the occurrence of default under the indenture dated August 1, 1996 between
AMD and the United States Trust Company of New York (the Indenture) pursuant
to which our Senior Secured Notes were issued or the Loan Agreement.
-23-
Generally, any default with respect to borrowings made or guaranteed by AMD
results in recourse to us of more than $10 million and if not cured by us, would
result in a cross-default under the Dresden Loan Agreements and the Loan
Agreement. Under certain circumstances, cross-defaults result under our
Convertible Subordinated Notes due 2005 and the Dresden Loan Agreements. As of
April 1, 2001, we were in compliance with all conditions of the Dresden Loan
Agreements.
In the event we are unable to meet our obligation to make loans to, or equity
investments in, AMD Saxony as required under the Dresden Loan Agreements, AMD
Saxony will be unable to complete the continued facilitization of Dresden Fab
30, and we will be in default under the Dresden Loan Agreements and the Loan
Agreement, which would permit acceleration of certain indebtedness, which would
have a material adverse effect on us. We cannot assure that we will be able to
obtain the funds necessary to fulfill these obligations. Any such failure would
have a material adverse effect on us.
FASL, a joint venture formed by AMD and Fujitsu Limited (Fujitsu) in 1993, is
continuing the facilitization of its second Flash memory device wafer
fabrication facility, FASL JV2, in Aizu-Wakamatsu, Japan. The facility,
including equipment, is expected to cost approximately $1.3 billion when fully
equipped. As of April 1, 2001, approximately $858 million (denominated in yen)
of this cost had been funded. In July 2000, FASL broke ground for a third
fabrication facility for the manufacture of Flash Memory devices in Aizu-
Wakamatsu, Japan. The facility, designated as FASL JV3, is expected to cost
approximately $1.5 billion when fully equipped. Capital expenditures for FASL
JV2 and FASL JV3 construction to date have been funded by cash generated from
FASL operations and borrowings by FASL.
FASL has also expanded its production capacity through a foundry arrangement
with Fujitsu Microelectronics, Inc. (FMI). In connection with this foundry
arrangement, we agreed to guarantee up to $125 million of Fujitsu's obligations
under FMI's credit facility. As of April 1, 2001, we had $125 million in loan
guarantees outstanding with respect to this agreement.
A significant portion of the FASL capital expenditures in 2001 will continue to
be funded by cash generated from FASL operations. In addition, both Fujitsu and
AMD intend to make capital contributions of 15 billion yen (approximately $125
million) each to FASL during the second quarter of 2001. Further, to the extent
that additional funds are required for the full facilitization of FASL JV2 or
ramp of FASL JV3, AMD may be required to contribute cash or guarantee third-
party loans in proportion to our 49.992 percent interest in FASL. As of April
1, 2001, we had $16 million in loan guarantees outstanding with respect to these
loans. These planned costs are denominated in yen and are, therefore, subject
to change due to foreign exchange rate fluctuations. At the end of the first
quarter of 2001, the exchange rate was approximately 123.54 yen to 1 U.S.
dollar, which we used to calculate the amounts denominated in yen.
We believe that cash flows from operations and current cash balances, together
with available external financing and the extension of existing facilities, will
be sufficient to fund operations and capital investments for at least the next
12 months.
RECENT DEVELOPMENTS
On May 4, 2001, we, along with Intel Corporation, announced the renewal of the
patent cross-license agreement between the companies.
RISK FACTORS
Our business, results of operations and financial condition are subject to a
number of risk factors, including the following:
-24-
Flash Memory Products
The demand for Flash memory devices has decreased substantially due to the
recent sharp downturn in the communications sector. It is extremely difficult
to forecast memory product sales given the uncertainties of the level of demand
in a continuing soft communications sector. Therefore, we cannot be certain as
to the level of demand for our Flash memory devices. If the communications
sector does not recover and the sales of our Flash memory products continue to
decline, our business could be materially and adversely affected.
Competition in the market for Flash memory devices will increase in 2001 and
beyond as existing manufacturers introduce new products and industry-wide
production capacity increases. We may be unable to maintain or increase our
market share in Flash memory devices as the market develops and as existing and
potential new competitors introduce competitive products. A decline in our Flash
memory device business or decline in revenue in this product line could have a
material adverse effect on our business.
Microprocessor Products
Dependence on AMD Seventh-Generation Microprocessors. We must continue to
successfully market our seventh-generation Microsoft Windows compatible
microprocessors, the AMD Athlon and AMD Duron microprocessors, in order to
increase our microprocessor product revenues in 2001 and beyond, and to benefit
fully from the substantial financial investments and commitments we have made
and continue to make related to microprocessors. We began volume shipments of
AMD Athlon microprocessors in the second half of 1999. We began shipments of
AMD Duron processors, a derivative of the AMD Athlon processor designed to
provide an optimized solution for value-conscious business and home users, in
the second half of 2000. Our production and sales plans for AMD Athlon and AMD
Duron microprocessors are subject to numerous risks and uncertainties,
including:
. our ability to maintain average selling prices of seventh-generation
microprocessors despite aggressive Intel marketing programs and product
bundling of microprocessors, motherboards, chipsets and combinations thereof;
. whether Tier One OEM customers will use our seventh-generation
microprocessors in systems developed for the commercial market;
. our ability to successfully offer new higher performance versions of the AMD
Athlon microprocessor competitive with Intel's Pentium III and Pentium IV
processors;
. our ability on a timely basis to produce seventh-generation microprocessors
in the volume and with the performance and feature set required by customers;
. our ability to expand our chipset and system design capabilities;
. the pace at which we are able to ramp production in Dresden Fab 30 on 0.18-
and 0.13-micron copper interconnect process technology;
. the availability and acceptance of motherboards and chipsets designed for our
seventh-generation microprocessors; and
-25-
. the use and market acceptance of a non-Intel processor bus (adapted by us
from Digital Equipment Corporation's EV6 bus) in the design of our seventh-
generation microprocessors, and the availability of chipsets from vendors who
will develop, manufacture and sell chipsets with the EV6 interface in volumes
required by us.
If we fail to achieve continued market acceptance of our seventh-generation
microprocessors our business will be materially and adversely affected.
Investment in and Dependence on AMD Microprocessor Products. Our microprocessor
product revenues have and will continue in 2001 and 2002 to make significant
contributions to our overall revenues, profit margins and operating results. We
plan to continue to make significant capital expenditures to support our
microprocessor products both in the near and long term. These capital
expenditures will be a substantial drain on our cash flow and possibly on our
cash balances as well.
Our ability to increase microprocessor product revenues, and benefit fully from
the substantial financial investments and commitments we have made and continue
to make related to microprocessors, depends upon success of the AMD Athlon and
AMD Duron microprocessors, which are our seventh-generation Microsoft Windows
compatible microprocessors, and future generations of microprocessors beginning
with the "Hammer" family of microprocessors that we plan to introduce in 2002.
The Hammer processors will be our first processors capable of 64-bit operation,
and are being designed to deliver leading-edge performance on both the 64-bit
software used by high-end workstations and servers and the 32-bit software used
by the majority of desktop and mobile computer users.
The microprocessor market is characterized by short product life cycles and
migration to ever-higher performance microprocessors. To compete successfully
against Intel in this market, we must transition to new process technologies at
a fast pace and offer higher performance microprocessors in significantly
greater volumes. We must achieve acceptable yields while producing
microprocessors at higher speeds. Any significant difficulty in achieving
microprocessor yield and volume plans may adversely affect our results of
operations and liquidity. If we fail to offer higher performance
microprocessors in significant volume on a timely basis in the future, our
business could be materially and adversely affected. We may not achieve the
production ramp necessary to meet our customers' volume requirements for higher
performance microprocessors. It is also possible that we may not increase our
microprocessor revenues enough to achieve sustained profitability.
To sell the volume of AMD Athlon and AMD Duron microprocessors we currently plan
to make in 2001 and 2002, we must increase sales to existing customers and
develop new customers in both consumer and commercial markets. If we lose any
current top tier OEM customers, or if we fail to attract additional customers
through direct sales and through our distributors, we may not be able to sell
the volume of units planned. This result could have a material adverse effect
on our business.
-26-
Our production and sales plans for microprocessors are subject to other risks
and uncertainties, including:
. the effects of Intel's new product introductions, marketing strategies and
pricing;
. adverse market conditions in the personal computer (PC) market and consequent
diminished demand for our microprocessors;
. market acceptance of our microprocessors, including the timely volume
availability of motherboards and chipsets designed for these processors;
. whether we can successfully fabricate higher performance microprocessors in
planned volume and speed mixes;
. whether we will have the financial and other resources necessary to continue
to invest in the microprocessor products, including leading-edge wafer
fabrication equipment and advanced process technologies;
. the possibility that our newly introduced products may be defective; and
. unexpected interruptions in our manufacturing operations.
See also the discussions below regarding Intel Dominance and Process Technology.
Intel Dominance. Intel has dominated the market for microprocessors used in PCs
for many years. Because of its dominant market position, Intel has historically
set and controlled x86 microprocessor and PC system standards and, thus,
dictated the type of product the market requires of Intel's competitors. In
addition, Intel may and does vary prices on its microprocessors and other
products at will and thereby affects the margins and profitability of its
competitors due to its financial strength and dominant position. Because Intel
has dominated the microprocessor market for many years and has brand strength,
we have in the past priced AMD microprocessors below the published price of
Intel processors offering comparable performance. Thus, Intel's processor
marketing and pricing can impact and have impacted the average selling prices of
our microprocessors, and consequently can impact and have impacted our overall
margins.
Intel also exerts substantial influence over PC manufacturers and their channels
of distribution through the "Intel Inside" brand program and other marketing
programs. Intel invests billions of dollars in, and as a result exerts
influence over, many other technology companies. We expect Intel to continue to
invest heavily in research and development, new manufacturing facilities and
other technology companies, and to remain dominant:
. through the Intel Inside and other marketing programs;
. through other contractual constraints on customers, retailers, industry
suppliers and other third parties;
. by controlling industry standards; and
. by controlling supply and demand of motherboards, chipsets and other system
components.
As an extension of its dominant microprocessor market share, Intel also
dominates the PC platform. As a result, PC manufacturers have been increasingly
unable to innovate and differentiate their product offerings. We do not have the
financial resources to compete with Intel on such a large scale. As long as
Intel remains in this dominant position, we may be materially and adversely
affected by its:
-27-
. product mix and introduction schedules;
. product bundling, marketing, merchandising and pricing strategies;
. control over industry standards, PC manufacturers and other PC industry
participants, including motherboard, chipset and basic input/output system
(BIOS) suppliers; and
. end user brand loyalty.
As Intel expanded its dominance over the PC system platform, many PC
manufacturers reduced their system development expenditures and now purchase
microprocessors together with chipsets or in assembled motherboards. PC OEMs
are increasingly dependent on Intel, less innovative on their own and, to a
large extent, distributors of Intel technology. In marketing our microprocessors
to these OEMs and dealers, we depend on companies other than Intel for the
design and manufacture of core-logic chipsets, graphics chips, motherboards,
BIOS software and other components. In recent years, many of these third-party
designers and manufacturers have lost significant market share to Intel. In
addition, these companies produce chipsets, motherboards, BIOS software and
other components to support each new generation of Intel's microprocessors only
if Intel makes information about its products available to them in time to
address market opportunities. Delay in the availability of such information
makes, and will continue to make, it increasingly difficult for these third
parties to retain or regain market share.
To compete with Intel in the microprocessor market in the future, we intend to
continue to form close relationships with third-party designers and
manufacturers of chipsets, motherboards, graphics chips, BIOS software and other
components. Similarly, we intend to expand our chipset and system design
capabilities, and to offer OEMs licensed system designs incorporating our
microprocessors and companion products. We cannot be certain, however, that our
efforts will be successful.
We do not currently plan to develop microprocessors that are bus interface
protocol compatible with the Pentium III, Pentium IV and Celeron processors
because our patent cross-license agreement with Intel does not extend to
microprocessors that are bus interface protocol compatible with Intel's sixth
and subsequent generation processors. Thus, the AMD Athlon and AMD Duron
microprocessors are not designed to function with motherboards and chipsets
designed to work with Intel microprocessors. The same will be true of our
Hammer family microprocessors. Our ability to compete with Intel in the market
for seventh-generation and future generation microprocessors will depend on our:
. success in designing and developing the microprocessors; and
. ability to ensure that the microprocessors can be used in PC platforms
designed to support our microprocessors, or that platforms are available
which support both Intel processors and our microprocessors.
A failure for any reason of the designers and producers of motherboards,
chipsets, processor modules and other system components to support our
microprocessor offerings would have a material adverse effect on our business.
-28-
Dependence on Microsoft and Logo License. Our ability to innovate beyond the x86
instruction set controlled by Intel depends on support from Microsoft in its
operating systems. If Microsoft does not provide support in its operating
systems for the x86 instructions that we innovate and design into our
processors, independent software providers may forego designing their software
applications to take advantage of our innovations. This would adversely affect
our ability to market our processors. For example, we cannot assure that
Microsoft will support our Hammer family of microprocessors and its x86-64 bit
instruction set. Microsoft's support is vital to the success of the Hammer
family products currently in development.
In addition, we have entered into logo license agreements with Microsoft that
allow us to label our products as "Designed for Microsoft Windows." We have also
obtained appropriate certifications from recognized testing organizations for
our microprocessors. If we fail to maintain the logo license agreements with
Microsoft, we may lose our ability to label our microprocessors with the
Microsoft Windows logo. This could impair our ability to market the products and
could have a material adverse effect on our business.
Fluctuations in the PC Market. Since most of our microprocessor products are
used in PCs and related peripherals, our future growth is closely tied to the
growth of the PC industry. Industry-wide fluctuations in the PC marketplace
have in the past and may in the future materially and adversely affect our
business.
Demand for Our Products Affected by Worldwide Economic Conditions
A continued decline of the worldwide semiconductor market could further decrease
the demand for microprocessors, Flash memory devices and other integrated
circuits. A significant decline in economic conditions in any significant
geographic area, either domestically or internationally, could decrease the
overall demand for our products, which could have a material adverse effect on
our business.
Financing Requirements
We will have significant capital requirements over the next 12 months. To the
extent that we cannot generate the required capital internally or obtain such
capital externally, our business could be materially adversely affected. We
cannot assure the availability of such capital on terms favorable to us, or at
all. We currently plan to make capital investments of approximately $1 billion
in 2001 although the actual expenditures may vary. These investments include
those relating to the continued facilitization of Dresden Fab 30 and Fab 25.
In March 1997, our indirect wholly owned subsidiary, AMD Saxony, entered into
the Dresden Loan Agreements with a consortium of banks led by Dresdner Bank AG.
The Dresden Loan Agreements require that we partially fund Dresden Fab 30
project costs in the form of subordinated loans to, or equity investments in,
AMD Saxony. In accordance with the terms of the Dresden Loan Agreements, we
have invested $425 million as of April 1, 2001, in the form of subordinated
-29-
loans and equity in AMD Saxony. If we are unable to meet our obligations to AMD
Saxony as required under the Dresden Loan Agreements, we will be in default
under the Dresden Loan Agreement and the Loan Agreement, which would permit
acceleration of indebtedness, which would have a material adverse effect on our
business.
In July 2000, FASL broke ground for a third fabrication facility, FASL JV3, for
the manufacture of Flash memory devices in Aizu-Wakamatsu, Japan. As of December
2000, the building was complete and the clean room was under construction. FASL
JV3 is expected to cost $1.5 billion when fully equipped. FASL capital
expenditures to date have been funded by cash generated from FASL operations and
borrowings by FASL. A significant portion of the FASL capital expenditures in
2001 will continue to be funded by cash generated from FASL operations. In
addition, both Fujitsu and AMD intend to make capital contributions of 15
billion yen (approximately $125 million) each to FASL during the second quarter
of 2001. These planned costs are denominated in yen and are, therefore, subject
to change due to foreign exchange rate fluctuations. At the end of the first
quarter of 2001, the exchange rate was approximately 123.54 yen to 1 U.S.
dollar, which was used to calculate the amounts denominated in yen. Further, to
the extent that additional funds are required for the full facilitization of
FASL JV2 or ramp of FASL JV3, AMD may be required to contribute cash or
guarantee third-party loans in proportion to our 49.992 percent interest in
FASL. If we are unable to fulfill our obligations to FASL, our business will be
materially and adversely affected.
On July 13, 1999, we entered into a Loan and Security Agreement (the Loan
Agreement) with a consortium of banks led by Bank of America. Under the Loan
Agreement, which provides for a four-year secured revolving line of credit of up
to $200 million, we can borrow, subject to amounts which may be set aside by the
lenders, up to 85 percent of our eligible accounts receivable from OEMs and 50
percent of our eligible accounts receivable from distributors. We must comply
with certain financial covenants if the level of domestic cash we hold declines
to certain levels, or the amount of borrowings under the Loan Agreement rises to
certain levels. Our obligations under the Loan Agreement are secured by a
pledge of most of our accounts receivable, inventory, general intangibles and
the related proceeds.
Manufacturing
Capacity. We underutilize our manufacturing facilities from time to time as a
result of reduced demand for certain of our products. In the past, there have
been times when our operations related to microprocessors have been particularly
affected by this situation. If we underutilize our manufacturing facilities in
the future, our gross margins may suffer. We are substantially increasing our
manufacturing capacity by making significant capital investments in Fab 25 and
Dresden Fab 30. FASL is currently constructing FASL JV3 and increasing
production capacity through foundry arrangements. We are continuing to increase
production in our test and assembly facility in Suzhou, China. We have based our
strategy of increasing our manufacturing capacity on industry projections for
future growth. If these industry projections are inaccurate, or if demand for
our products does not increase consistent with our plans and expectations, we
will likely underutilize our manufacturing facilities and our business could be
materially and adversely affected.
In contrast to the above, there also have been situations in the past in which
our manufacturing facilities were inadequate to meet the demand for certain of
our products. Our inability to obtain sufficient manufacturing capacities to
meet demand, either in our own facilities or through foundry or similar
arrangements with others, could have a material adverse effect on our business.
At this time, the risk is that we will have underutilized capacity.
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Process Technology. In order to remain competitive, we must make continuing
substantial investments in improving our process technologies. In particular, we
have made and continue to make significant research and development investments
in the technologies and equipment used to fabricate our microprocessor products
and our Flash memory devices. Portions of these investments might not be fully
recovered if we fail to continue to gain market acceptance, if the
communications sector does not recover or if the market for our Flash memory
products should significantly deteriorate. Likewise, we are making a
substantial investment in Dresden Fab 30. We have developed and installed 0.18-
micron process technology and copper interconnect technology in Dresden Fab 30
in order to manufacture AMD Athlon microprocessors. We have entered into a
strategic alliance with Motorola to co-develop logic process and embedded Flash
technologies. The logic process technology which is the subject of the alliance
includes the copper interconnect and silicon on insulator technology that is
required for AMD Athlon microprocessors and subsequent generations of
microprocessors. The successful development and implementation of silicon on
insulator technology is, for example, critical to the success of the Hammer
family of processors currently under development. We cannot be certain that the
strategic alliance will be successful or that we will be able to develop or
obtain the leading-edge process technologies that will be required in Fab 25 or
Dresden Fab 30 to fabricate microprocessors successfully.
Manufacturing Interruptions and Yields. Any substantial interruption of our
manufacturing operations, either as a result of a labor dispute, equipment
failure or other cause, could materially and adversely affect our business
operations. We also have been and may in the future be materially and adversely
affected by fluctuations in manufacturing yields. The design and manufacture of
ICs is a complex process. Normal manufacturing risks include errors and
interruptions in the fabrication process and defects in raw materials, as well
as other risks, all of which can affect yields. Additional manufacturing risks
incurred in ramping up new fabrication areas and/or new manufacturing processes
include equipment performance and process controls as well as other risks, all
of which can affect yields.
Product Incompatibility. Our products may possibly be incompatible with some or
all industry-standard software and hardware. If our customers are unable to
achieve compatibility with software or hardware after our products are shipped
in volume, we could be materially adversely affected. It is also possible that
we may be unsuccessful in correcting any such compatibility problems that are
discovered or that corrections will be unacceptable to customers or made in an
untimely manner. In addition, the mere announcement of an incompatibility
problem relating to our products could have a material adverse effect on our
business.
Product Defects. One or more of our products may possibly be found to be
defective after we have already shipped such products in volume, requiring a
product replacement, recall or a software fix which would cure such defect but
impede performance. We may also be subject to product returns which could
impose substantial costs on us and have a material and adverse effect on our
business.
Essential Manufacturing Materials. Certain raw materials we use in the
manufacture of our products are available from a limited number of suppliers.
For example, we are dependent on key chemicals from a limited number of
suppliers, and a few foreign companies principally supply several types of
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the integrated circuit packages purchased by us. Interruption of supply or
increased demand in the industry could cause shortages in various essential
materials. We would have to reduce our manufacturing operations if we were
unable to procure certain of these materials. This reduction in our
manufacturing operations could have a material adverse effect on our business.
International Manufacturing and Foundries. Nearly all product assembly and
final testing of our products are performed at our manufacturing facilities in
Penang, Malaysia; Bangkok, Thailand; Suzhou, China; and Singapore; or by
subcontractors in the United States and Asia. We also depend on foreign foundry
suppliers and joint ventures for the manufacture of a portion of our finished
silicon wafers. Foreign manufacturing and construction of foreign facilities
entail political and economic risks, including political instability,
expropriation, currency controls and fluctuations, changes in freight and
interest rates, and loss or modification of exemptions for taxes and tariffs.
For example, if we were unable to assemble and test our products abroad, or if
air transportation between the United States and our overseas facilities were
disrupted, there could be a material adverse effect on our business.
Key Personnel
Our future success depends upon the continued service of numerous key
engineering, manufacturing, marketing, sales and executive personnel. We may or
may not be able to continue to attract, retain and motivate qualified personnel
necessary for our business. Loss of the service of, or failure to recruit, key
engineering design personnel could be significantly detrimental to our product
development programs, including next generation microprocessors and Flash memory
devices, or otherwise have a material adverse effect on our business.
Fluctuations in Operating Results
Our operating results are subject to substantial quarterly and annual
fluctuations due to a variety of factors, including:
. the effects of competition with Intel in microprocessor and Flash memory
device markets;
. the gain or loss of significant customers;
. new product introductions by us or our competitors;
. changes in the mix of products produced and sold and in the mix of sales by
distribution channels;
. market acceptance of new or enhanced versions of our products;
. decreases in unit average selling prices of our products due to competitive
pricing pressures or other factors;
. production capacity levels and fluctuations in manufacturing yields;
. availability and cost of products from our suppliers;
. seasonal customer demand; and
. the timing of significant orders and the timing and extent of product
development costs.
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Our operating results also tend to vary seasonally due to vacation and holiday
schedules. Our revenues are generally lower in the first, second and third
quarters of each year than in the fourth quarter. This seasonal pattern is
largely a result of decreased demand in Europe during the summer months and
higher demand in the retail sector of the personal computer market during the
winter holiday season.
In addition, operating results have recently been, and may in the future be,
adversely affected by general economic and other conditions causing a downturn
in the market for semiconductor devices, or otherwise affecting the timing of
customer orders or causing order cancellations or rescheduling. Our customers
may change delivery schedules or cancel orders without significant penalty. Many
of the factors listed above are outside of our control. These factors are
difficult to forecast, and these or other factors could materially and adversely
affect our quarterly or annual operating results.
Other Risk Factors
Technological Change and Industry Standards. The market for our products is
generally characterized by rapid technological developments, evolving industry
standards, changes in customer requirements, frequent new product introductions
and enhancements, short product life cycles and severe price competition.
Currently accepted industry standards may change. Our success depends
substantially on our ability, on a cost-effective and timely basis, to continue
to enhance our existing products and to develop and introduce new products that
take advantage of technological advances and adhere to evolving industry
standards. An unexpected change in one or more of the technologies related to
our products, in market demand for products based on a particular technology or
of accepted industry standards could materially and adversely affect our
business. We may or may not be able to develop new products in a timely and
satisfactory manner to address new industry standards and technological changes,
or to respond to new product announcements by others. In addition, new products
may or may not achieve market acceptance.
Competition. The integrated circuit industry is intensely competitive and,
historically, has experienced rapid technological advances in product and system
technologies. After a product is introduced, costs and average selling prices
normally decrease over time as production efficiency and competition increase,
and as successive generations of products are developed and introduced for sale.
Technological advances in the industry result in frequent product introductions,
regular price reductions, short product life cycles and increased product
capabilities that may result in significant performance improvements.
Competition in the sale of ICs is based on:
. performance;
. product quality and reliability;
. price;
. adherence to industry standards;
. software and hardware compatibility;
. marketing and distribution capability;
. brand recognition;
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. financial strength; and
. ability to deliver in large volumes on a timely basis.
Order Revision and Cancellation Policies. We manufacture and market standard
lines of products. Sales are made primarily pursuant to purchase orders for
current delivery or agreements covering purchases over a period of time, which
may be revised or canceled without penalty. As a result, we must commit
resources to the production of products without any advance purchase commitments
from customers. Our inability to sell products after we devoted significant
resources to them could have a material adverse effect on our business.
Distributors typically maintain an inventory of our products. In most instances,
our agreements with distributors protect their inventory of our products against
price reductions, as well as products that are slow moving or have been
discontinued. These agreements, which may be canceled by either party on a
specified notice, generally allow for the return of our products if the
agreement with the distributor is terminated. The market for our products is
generally characterized by, among other things, severe price competition. The
price protection and return rights we offer to our distributors could materially
and adversely affect us if there is an unexpected significant decline in the
price of our products.
Intellectual Property Rights. It is possible that:
. we will be unable to protect our technology or other intellectual property
adequately through patents, copyrights, trade secrets, trademarks and other
measures;
. patent applications that we may file will not be issued;
. foreign intellectual property laws will not protect our intellectual property
rights;
. any patent licensed by or issued to us will be challenged, invalidated or
circumvented or that the rights granted thereunder will not provide
competitive advantages to us; and
. others will independently develop similar products, duplicate our products or
design around our patents and other rights.
From time to time, we have been notified that we may be infringing intellectual
property rights of others. If any such claims are asserted against us, we may
seek to obtain a license under the third party's intellectual property rights.
We could decide, in the alternative, to resort to litigation to challenge such
claims. Such challenges could be extremely expensive and time-consuming and
could have a material adverse effect on our business. We cannot give any
assurance that all necessary licenses can be obtained on satisfactory terms, or
whether litigation may always be avoided or successfully concluded.
California Energy Crisis. California's two largest power companies are
currently experiencing a power shortage that has resulted in "rolling" blackouts
to maintain the stability of the state power grid. Certain of our California
facilities, including headquarters, product design, sales and process technology
development facilities, are susceptible to power interruptions as long as the
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energy crisis continues. One of the power companies, PG&E, has filed an
additional contingency plan with the California Public Utilities Commission that
would, if implemented, result in lengthy and routine power interruptions that
would directly impact our leading-edge process technology development efforts,
which could have a material adverse impact on our business. We are continuing
to assess the impact of the energy crisis on our operations.
Environmental Regulations. We could possibly be subject to fines, suspension of
production, alteration of our manufacturing processes or cessation of our
operations if we fail to comply with present or future governmental regulations
related to the use, storage, handling, discharge or disposal of toxic, volatile
or otherwise hazardous chemicals used in the manufacturing process. Such
regulations could require us to acquire expensive remediation equipment or to
incur other expenses to comply with environmental regulations. Any failure to
control the use of, disposal or storage of, or adequately restrict the discharge
of, hazardous substances could subject us to future liabilities and could have a
material adverse effect on our business.
International Sales. Our international sales operations entail political and
economic risks, including expropriation, currency controls, exchange rate
fluctuations, changes in freight rates and changes in rates and exemptions for
taxes and tariffs.
Volatility of Stock Price; Ability to Access Capital. Based on the trading
history of our stock, we believe that the following factors have caused and are
likely to continue to cause the market price of our common stock to fluctuate
substantially:
. quarterly fluctuations in our operating and financial results;
. announcements of new products and/or pricing by us or our competitors;
. the pace of new process technology and product manufacturing ramps;
. production yields of key products; and
. general conditions in the semiconductor industry.
In addition, an actual or anticipated shortfall in revenue, gross margins or
earnings from securities analysts' expectations could have an immediate effect
on the trading price of our common stock in any given period. Technology
company stocks in general have experienced extreme price and volume fluctuations
that are often unrelated to the operating performance of the companies. This
market volatility may adversely affect the market price of our common stock and
consequently limit our ability to raise capital or to make acquisitions. Our
current long term business plan envisions substantial cash outlays which may
require external capital financing. It is possible that capital and/or long-term
financing will be unavailable on terms favorable to us or in sufficient amounts
to enable us to implement our strategic plans.
Debt Restrictions. The Dresden Loan Agreements substantially prohibit AMD Saxony
from transferring assets to us.
Earthquake Danger. Our corporate headquarters, a portion of our manufacturing
facilities, assembly and research and development activities and certain other
critical business operations are located near major earthquake fault lines. We
could be materially and adversely affected in the event of a major earthquake.
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Euro Conversion. On January 1, 1999, eleven of the fifteen member countries of
the European Union established fixed conversion rates between their existing
currencies and the euro. The participating countries adopted the euro as their
common legal currency on that date. The transition period will last through
January 1, 2002. We do not expect the introduction and use of the euro to
materially affect our foreign exchange activities, to affect our use of
derivatives and other financial instruments or to result in any material
increase in costs to us. We will continue to assess the impact of the
introduction of the euro currency over the transition period.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In February 2001, we cancelled the interest rate swap agreement with a
counterparty under which the difference between fixed- and floating-rate
interest amounts calculated on an agreed-upon notional principal amount ($400
million) were exchanged at specified intervals. The cancellation resulted in a
gain to us of $475,000.
For additional Quantitative and Qualitative Disclosures about Market Risk,
including other foreign exchange risks associated with Dresden Fab 30, reference
is made to Part II, Item 7A, Quantitative and Qualitative Disclosures about
Market Risk, in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
***10.25(c) Amendment 3 to the Technology Development and Licence Agreement,
entered into as of January 18, 2001, by AMD and its subsidiaries and
Motorola, Inc. and its subsidiaries.
***Confidential treatment has been requested with respect to certain parts
of this exhibit.
(b) Reports on Form 8-K
1. A Current Report on Form 8-K dated January 17, 2001 reporting under Item 5
- Other Events was filed announcing AMD's fourth quarter earnings.
2. A Current Report on Form 8-K dated January 29, 2001 reporting under Item 5
- Other Events was filed announcing a program to repurchase shares.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED MICRO DEVICES, INC.
Date: May 14, 2001 By:/s/ Robert J. Rivet
-------------------
Robert J. Rivet
Senior Vice President, Chief Financial Officer
Signing on behalf of the registrant and as
the principal accounting officer
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