AMD 1995 Annual Report Download - page 223

MANAGEMENT'S
discussion and analysis
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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RESULTS OF OPERATIONS
Net sales of $2.4 billion in 1995 rose by approximately 14 percent from 1994.
This increase was primarily attributable to substantial growth in Flash memory
sales and secondarily due to an increase in sales of communication products, the
combination of which more than offset a decline in microprocessor sales. Net
sales in 1994 increased by approximately 30 percent from 1993 due to substantial
growth in microprocessor sales.
Sales of Flash memory devices increased in 1995 from 1994 primarily due to
growth in unit shipments and secondarily due to a change in product mix
resulting in higher average selling prices. Prices may decline in 1996 due to
increased competition. The company plans to continue to meet projected long-term
demand for Flash memory devices primarily through its manufacturing joint
venture, Fujitsu AMD Semiconductor Limited (FASL), in which AMD has a 49.95
percent equity interest. During 1995, Flash memory devices contributed, and are
expected to continue to contribute in 1996, a significant and increased portion
of the company's revenues and profits.
Revenues from communication products rose from 1994 to 1995 primarily due
to growth in the Ethernet family of products. Sales of CMOS programmable logic
devices increased from 1994 to 1995 primarily due to increased unit shipments.
In 1995, EPROM sales decreased as compared to 1994 due to comparable declines in
both unit shipments and average selling prices.
In 1995, Am486(R) microprocessor sales decreased slightly primarily due to
average selling price declines, partially offset by increases in unit sales.
Am486 microprocessor products contributed a significant portion of the company's
revenues and profits in 1994 and 1995. Price declines are anticipated to
continue in 1996 while unit shipments may be flat to down depending on market
demand. The company, therefore, expects Am486 microprocessor revenues and
profits in 1996 to be below those of 1995 as the product life cycle of the
fourth-generation x86 products draws to a close.
On January 17, 1996, NexGen, Inc. (NexGen) merged with and into AMD. The
company plans to bring to production status NexGen's sixth-generation design as
the AMD-K6(TM) microprocessor. The company does not expect any sales of AMD-K6
in 1996.
Gross margin was 47 percent in 1995 as compared to 54 percent in 1994 and
52 percent in 1993. The three main factors contributing to the decrease in gross
margin in 1995, in order of significance, were first, Am486 price declines;
second, purchase prices of FASL products, which are higher than the costs of
similar products manufactured internally; and third, the transition of Fab 25
costs from research and development to cost of sales when production commenced
in September 1995. The impact of gross margin declines caused by purchase of
FASL products during 1995 was mostly offset by the company's share of FASL
income. The increase in gross margin from 1993 to 1994 was primarily
attributable to increased sales from higher margin Am486 products during 1994.
Gross margin is anticipated to decline further in 1996 due to continuing
pricing pressures on Am486 microprocessors, increasing purchases from FASL, and
higher expenses and continuing transition of Fab 25 costs from research and
development to cost of sales as production volume increases.
Research and development expenses for 1995 increased to $398 million from
$280 million in 1994, and $263 million in 1993. These increases were primarily
due to higher Fab 25 expenses and secondarily due to increased microprocessor
development costs.
Marketing, general, and administrative expenses were $385 million for 1995,
$359 million for 1994, and $291 million for 1993. The increase from 1994 to 1995
was primarily attributable to higher advertising expenses. The incremental
change from 1993 to 1994 was mainly due to increased legal and microprocessor
advertising expenses. The company expects to incur transaction fees and other
costs incidental to the NexGen merger in the first quarter of 1996 estimated to
be approximately $10 million.
Interest income and other, net rose from 1994 to 1995 primarily due to
higher interest rates during 1995 and secondarily due to a realized gain of
approximately $3 million from equity securities sold during 1995. In 1994,
interest income and other, net included a net charge of approximately $5 million
resulting from the security class action lawsuit and stockholders' derivative
action settlements, and a gain from the damages award in an arbitration
proceeding with Intel Corporation. Interest expense decreased from 1993 through
1995. These decreases resulted from higher capitalized interest mainly related
to the construction of Fab 25.
The income tax rate was approximately 30, 33, and 28 percent in 1995, 1994,
and 1993, respectively. The lower tax rate in 1995 resulted from lower state
taxes and increased benefits from low taxed foreign income. The lower tax rate
in 1993 was primarily due to available tax credit carryforwards.
Source: ADVANCED MICRO DEVIC, 10-K405, March 21, 1996