AMD 2009 Annual Report Download - page 37

products, which may not accurately predict the quantity or type of our products that our customers will want in
the future or ultimately end up purchasing. Our ability to forecast demand is even further complicated when we
sell indirectly through distributors, as our forecasts for demand are then based on estimates provided by multiple
parties. Moreover, PC and consumer markets are characterized by short product lifecycles, which can lead to
rapid obsolescence and price erosion. In addition, our customers may change their inventory practices on short
notice for any reason. We may build inventories during periods of anticipated growth, and the cancellation or
deferral of product orders or overproduction due to failure of anticipated orders to materialize, could result in
excess or obsolete inventory, which could result in write-downs of inventory and an adverse effect on profit
margins. Factors that may result in excess or obsolete inventory, which could result in write-downs of the value
of our inventory, a reduction in the average selling price, and/or a reduction in our gross margin include:
• a sudden and significant decrease in demand for our products;
• a higher incidence of inventory obsolescence because of rapidly changing technology and customer
requirements;
• a failure to estimate customer demand for our older products as our new products are introduced; or
• our competitors taking aggressive pricing actions.
Because market conditions are uncertain, these and other factors could materially adversely affect us.
Our reliance on third-party distributors subjects us to certain risks.
We market and sell our products directly and through third-party distributors pursuant to agreements that
can generally be terminated for convenience by either party upon prior notice to the other party. These
agreements are non-exclusive and permit our distributors to offer our competitors’ products. We are dependent
on our distributors to supplement our direct marketing and sales efforts. If any significant distributor or a
substantial number of our distributors terminated their relationship with us or decided to market our competitors’
products over our products, our ability to bring our products to market would be impacted and we would be
materially adversely affected.
Additionally, 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 provide return rights
for any product that we have removed from our price book and that is not more than twelve months older than the
manufacturing code date. Some agreements with our distributors also contain standard stock rotation provisions
permitting limited levels of product returns. We defer the gross margins on our sales to distributors, resulting
from both our deferral of revenue and related product costs, until the applicable products are re-sold by the
distributors. However, in the event of a significant decline in the price of our products, the price protection rights
we offer to our distributors would materially adversely affect us because our revenue would decline.
Failures in the global credit markets have impacted and may continue to impact the liquidity of our
auction rate securities.
As of December 26, 2009, the par value of all our auction rate securities, or ARS, was $165 million with an
estimated fair value of $159 million. As of December 26, 2009, our investments in ARS included approximately
$58 million of student loan ARS and $34 million of municipal and corporate ARS. The uncertainties in the credit
markets have affected all of our ARS and auctions for these securities have failed to settle on their respective
settlement dates. The auctions failed because there was insufficient demand for these securities. A failed auction
does not represent a default by the issuer of the ARS. For each unsuccessful action, the interest rate is reset based
on a formula set forth in each security, which is generally higher than the current market unless subject to an
interest rate cap. When auctions for these securities fail, the investments may not be readily convertible to cash
until a future auction of these investments is successful, a buyer is found outside of the auction process, the
issuers of the ARS establish a different form of financing to replace these securities or redeem them, or final
29