AMD 1994 Annual Report Download - page 396

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
pending in the courts. (6) AMD will have the right to use foundries for Am486
products containing Intel microcode for up to 20 percent of annual total unit
shipments of Am486 microprocessors. (7) AMD and its customers will receive a
license for Intel's "Crawford `338" patent, covering memory management. (8) The
two companies agreed not to initiate legal action against one another for any
activity occurring prior to January 6, 1995.
The company recorded a $58 million litigation settlement in 1994 as a
result of the forgoing settlement. Also, during 1994, interest income and other,
net, included a net charge of approximately $5 million resulting from the
securities class action lawsuit and stockholders' derivative action settlements,
and damages awarded to the company in the arbitration proceeding with Intel
Corporation. Interest expense decreased in 1994 and 1993 as compared to 1992,
mainly due to lower average outstanding debt and lower interest rates.
The income tax rate increased to approximately 33 percent in 1994 from 28
percent in 1993 and 10 percent in 1992. The higher tax rate in 1994 was
primarily due to reduced benefits from low taxed foreign income and available
tax credit carryforwards. The company anticipates that the income tax rate will
be approximately 34 percent in 1995.
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. In 1994, these hedging transactions were denominated in lira, yen,
French franc, deutsche mark, 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 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 25, 1994, the
company had approximately $33 million (notional amount) in foreign exchange
forward contracts (see Notes 1, 2, and 3 to the Consolidated Financial
Statements).
In 1994, approximately 15 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.
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 has engaged in interest rate swaps primarily to reduce its
interest rate exposure by changing a portion of the company's interest rate
exposure from a floating rate to a fixed rate basis. At the end of 1994, 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 been
immaterial (see Notes 1, 2, and 3 to the Consolidated Financial Statements).
The company primarily addresses market risk by participating 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, foreign currency options, 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 continually monitors
the credit ratings of such counterparties and limits the financial exposure and
the amount of agreements entered into with any one financial institution.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The semiconductor industry is generally characterized by a highly
competitive and rapidly changing environment in which operating results are
often subject to the effects of new product introductions, manufacturing
technology innovations, rapid fluctuations in product demand, and the
ability to maintain and secure intellectual property rights. While the
company attempts to identify and respond to these changes as soon as
possible, the rapidity of their onset makes prediction of and reaction to
such events an ongoing challenge.
The company believes that its future results of operations and financial
condition could be impacted by any of the following factors: market acceptance
and timing of new products; continued market acceptance of personal computer
industry standards applicable to the company's products; trends in the personal
computer marketplace; capacity constraints; intense price competition;
interruption in procuring needed manufacturing materials; and changes in
domestic and international economic conditions.
The company's microproccessor products, and more specifically the company's
current generation of 486 microprocessors, have significantly contributed, and
are expected to significantly contribute in 1995 to the company's revenues,
margins and profits. The company's 486 microprocessors are re-engineered
versions of 486 microprocessors originally developed by Intel, and contain and
use, under license with Intel, its 486 microcode. The company's next generation
superscalar RISC-based K86(TM) products are being designed to be Microsoft(R)
Windows(R)-compatible and compete with Intel's post-486 generations of X86
Source: ADVANCED MICRO DEVIC, 10-K, March 07, 1995