AMD 1996 Annual Report Download - page 213

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITIONS
The Company recorded a tax credit of $85 million in 1996, resulting in an
effective tax rate (benefit) of approximately 41 percent. The income tax rate
was approximately 28 percent for 1995 and 34 percent for 1994. The lower tax
rate in 1995 resulted from lower state taxes and increased benefits from foreign
income taxed at a lower rate. Realization of the Company's net deferred tax
assets ($46 million at December 29, 1996) is dependent on future taxable income.
While the Company believes that it is more likely than not that such assets will
be realized, other factors, including those mentioned in the discussion of Risk
Factors, may impact the ultimate realization of such assets.
International sales were 53, 56 and 55 percent of total sales in 1996, 1995 and
1994, respectively. During 1996, approximately 16 percent of the Company's net
sales were denominated in foreign currencies. The Company does not have sales
denominated in local currencies in those countries which have highly
inflationary economies. (A highly inflationary economy is defined in accordance
with the Statement of Financial Accounting Standards No. 52 as one in which the
cumulative inflation over a three-year consecutive period approximates 100
percent or more.) The impact on the Company's operating results from changes in
foreign currency rates individually and in the aggregate has not been material.
The Company enters into foreign exchange forward contracts to buy and sell
currencies as economic hedges of the Company's foreign net monetary asset
position including the Company's liabilities for products purchased from FASL.
In 1996 and 1995, these hedging transactions were denominated in lira, yen,
French franc, deutsche mark (DM) and pound sterling. The maturities of these
contracts are generally short-term in nature. The Company believes its foreign
exchange contracts do not subject the Company to material risk from exchange
rate movements because gains and losses on these contracts are designed to
offset losses and gains on the net monetary asset position being hedged. Net
foreign currency gains and losses have not been material. As of December 29,
1996, the Company had approximately $25 million (notional amount) of foreign
exchange forward contracts (see Notes 3, 4 and 5 to the Consolidated Financial
Statements).
The Company has engaged in interest rate swaps primarily to reduce its interest
rate exposure by changing a portion of the Company's interest rate obligation
from a floating rate to a fixed rate basis. At the end of 1996, the net
outstanding notional amount of interest rate swaps was $40 million, which will
mature in 1997. Gains and losses related to these interest rate swaps have not
been material (see Notes 3, 4 and 5 to the Consolidated Financial Statements).
The Company participates as an end user in various derivative markets to manage
its exposure to interest and foreign currency exchange rate fluctuations. The
counterparties to the Company's foreign exchange forward contracts and interest
rate swaps consist of a number of major, high credit quality, international
financial institutions. The Company does not believe that there is significant
risk of nonperformance by these counterparties because the Company monitors
their credit ratings, and reduces the financial exposure by limiting the
notional amount of agreements entered into with any one financial institution.
FINANCIAL CONDITION
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The Company's working capital balance decreased to $446 million at December 29,
1996 from $462 million at December 31, 1995 primarily due to continued capital
spending, particularly on Fab 25, repayment of the Company's $150 million four-
year term bank loan, and the net loss in 1996, which were offset by the net
proceeds from the sale of $400 million of the Company's Senior Secured Notes in
the third quarter of 1996. The Company's cash, cash equivalents and short-term
investments balance was approximately $386 million at December 29, 1996 compared
to $510 million at December 31, 1995.
Excluding the cash received from the sale of the Senior Secured Notes, the
Company's capital investments and its recent operating performance have resulted
in significant negative cash flow. In 1996 the Company made substantial capital
investments in its process technology and manufacturing capacity based, in part,
upon Company and industry projections regarding future growth in the market for
ICs. The Company plans to make capital investments of approximately $500 million
in 1997, excluding those relating to the Dresden Facility (as defined below) and
FASL. The Company's current capital plan and requirements are based on the
availability of financial resources and various product-mix, selling-price, and
unit-demand assumptions and are, therefore, subject to revision.
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Source: ADVANCED MICRO DEVIC, 10-K, March 20, 1997