AMD 1995 Annual Report Download - page 225

MANAGEMENT'S
discussion and analysis
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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International sales were 56, 55, and 54 percent of total sales in 1995,
1994, and 1993, respectively. During 1995, approximately 17 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 Standard No. 52 as one in which the
cumulative inflation over a three-year consecutive period approximates 100
percent.) 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 1995, 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 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 31, 1995, the
company had approximately $37 million (notional amount) of foreign exchange
forward contracts (see Notes 2, 3, and 4 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 1995, the
net outstanding notional amount of interest rate swaps was $190 million, of
which $150 million will mature in 1996 and $40 million will mature in 1997.
Gains and losses related to these interest rate swaps have been immaterial (see
Notes 2, 3, and 4 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 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 the credit ratings of such counterparties, and
reduces the financial exposure by limiting the amount of agreements entered into
with any one financial institution.
In 1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standard No. 121 (SFAS 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS 121 is effective for fiscal years beginning
after December 15, 1995. Adoption of SFAS 121 is not expected to have a material
impact on the company's financial condition or results of operations.
The company accounts for its stock option plans and its employee stock
purchase plan in accordance with provisions of the Accounting Principles Board's
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In 1995,
the Financial Accounting Standards Board released the Statement of Financial
Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based
Compensation." SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The company expects to continue
to account for its employee stock plans in accordance with the provisions of APB
25. Accordingly, SFAS 123 is not expected to have any material impact on the
company's financial condition or results of operations.
FINANCIAL CONDITION
Cash, cash equivalents, and short-term investments increased by $113 million
from 1994 to 1995. This increase was primarily attributable to a $150 million
term loan obtained in January of 1995. The $612 million of cash generated from
operating activities in 1995 was used to fund investments in property, plant,
and equipment to expand manufacturing capacity primarily related to Fab 25.
Working capital increased by $81 million from $394 million at the end of
1994 to $475 million at the end of 1995. This increase was primarily due to
higher cash, cash equivalents, and short-term investments.
At the end of 1995, the company's total cash investment in FASL was $160
million as compared to $142 million at the end of 1994. No additional cash
investment is currently planned for 1996. In 1995, FASL approved construction of
a second Flash memory fab, FASL II, at a site contiguous to the existing FASL
facility in Aizu-Wakamatsu, Japan. Groundbreaking on FASL II occurred in the
first quarter of 1996. The planned $1.1 billion in capital expenditures for FASL
II construction is expected to be
Source: ADVANCED MICRO DEVIC, 10-K405, March 21, 1996