AMD 1993 Annual Report Download - page 364

2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
primarily to pricing pressures caused by increased competition. These pricing
pressures are expected to continue in 1994. Management anticipates flash memory
unit shipments will resume growth in the first quarter of 1994, as the company
ramps up the production of its new 4-megabit flash memory devices introduced in
the fourth quarter of 1993. The company plans to meet projected long-term
demand for flash memory through a manufacturing joint venture with Fujitsu
Limited of Japan, which is expected to begin volume production in 1995.
EPROM sales declined from 1992 because of lower unit shipments due to
capacity constraints created by allocating internal capacity to flash memory
devices. However, in the fourth quarter of 1993, EPROM revenue grew
considerably as compared to the third quarter of 1993 due to higher unit
shipments produced by increased foundry capacity. Management anticipates this
demand will continue in 1994, and increased EPROM foundry production will
expand current capacity levels consistent with market demand in 1994.
Sales of programmable logic devices (PLDs) rose slightly in 1993 from 1992
and 1991 due to an increase in sales of CMOS PLDs, which currently represent a
substantial portion of total PLD sales. Sales of CMOS PLDs in 1993 grew
significantly from 1992 and 1991, with MACH(R) family products (mid-density
PLDs) acting as the driving force. However, in the fourth quarter, CMOS PLD
sales declined as compared to the immediate prior quarter. The company believes
that one of the factors causing this CMOS PLD sales decline may have been
customers' temporary inventory build-up. During 1993, bipolar PLD sales
declined as compared to 1992 and 1991. Management anticipates flat PLD sales
in 1994 with strong growth in MACH family products offset by declining bipolar
PLD sales.
Cost of sales of $789.6 million for 1993 contributed to a gross margin of 52
percent as compared to a gross margin of 51 percent in 1992 and 46 percent in
1991. These gross margin improvements were related to a richer product mix,
improved capacity utilization, and better manufacturing yields which more than
offset declining Am386 device prices and increased manufacturing costs. Gross
margins may decrease in 1994 due to increased competition, increased foundry
costs principally related to EPROMs, changes in product mix and the impact of
litigation.
Research and development expense for 1993 increased to $262.8 million from
$227.9 million in 1992 and $213.8 million in 1991. This increase is mainly due
to higher spending on process and product development in the SDC and its
supporting engineering organizations, and microprocessor development. Research
and development expense exceeded 15 percent of net sales in each of the last
three years. The company anticipates a slight increase in research and
development expense in 1994.
Marketing, general and administrative expense was $290.9 million for 1993,
$270.2 million for 1992, and $244.9 million for 1991. The increase from 1992
to 1993 was primarily attributable to increased legal expenses relating to
litigation with Intel, and microprocessor advertising rebates. The incremental
change from 1991 to 1992 was mainly related to higher sales commissions and
advertising expense and larger bonus and profit-sharing accruals. Marketing,
general and administrative expense was 18 percent of sales in 1993 and 1992 and
20 percent in 1991.
In summary, total operating expenses were $1,343.2 million in 1993, $1,244.5
million in 1992 and $1,117.5 million in 1991. Operating expenses as a
percentage of sales were on a downward trend from 1991 through 1993. As a
result of this trend, operating income as a percentage of sales rose to 19
percent in 1993 as compared to 18 percent in 1992 and 9 percent in 1991.
Although the company is continuing to focus on cost-containment, operating
expenses may rise in 1994 due to further increases in depreciation and to
foundry expenses, which are dependent on product demand.
Interest and other income was $16.5 million in 1993, down from $18.9 million
in 1992, and $57.0 million in 1991. While cash balances increased, interest
income declined to $16.0 million in 1993 from $16.6 million in 1992, due to
lower interest rates during 1993. Interest income increased by $8.0 million
from 1991 because of higher cash available for investment. Interest and other
income included the net gain on sale of assets for all three years. A net gain
of $46.1 million was realized in 1991 on the sale or disposition of assets,
primarily attributable to the sale of 3.5 million shares of Xilinx, Inc. Net
interest expense was $3.8 million in 1993, down from $17.2 million in 1992 and
$20.9 million in 1991 due to lower average outstanding debt and lower interest
rates.
Provision for taxes on income was $89.0 million in 1993, $26.6 million in
1992 and zero in 1991. The 1993 income tax provision increased to 28 percent
from 10 percent in the prior year as book net operating loss carryforwards were
fully utilized in 1992. The 1991 income tax provision included a reduction of
previously provided taxes recorded in deferred income taxes as a result of the
settlement of various tax audits during the year. Management anticipates that
the provision for taxes on income will be between 30 and 32 percent in 1994.
Effective December 28, 1992, the company changed its method of accounting
for income taxes to the liability method required by Statement of Financial
Accounting Standards No. 109 (SFAS No. 109). As permitted by SFAS No. 109,
prior periods' financial statements have not been restated. A valuation
allowance of approximately $26 million was provided at December 26, 1993, for
certain deferred tax assets related to stock-option deductions. The company
believes that the realization of remaining deferred tax assets (approximately
$100 million at December 26, 1993) is more likely than not to be realized
because of offsetting deferred tax liabilities (approximately $65 million at
December 26, 1993) and potential tax carrybacks. There was no effect on net
Source: ADVANCED MICRO DEVIC, 10-K, March 07, 1994