AMD 2005 Annual Report Download - page 35

Table of Contents
downturn in the overall Flash memory market, lower than expected sales in the wireless handset market and delays in qualifying a product based on Spansion’s
second-generation MirrorBit technology also contributed to a decline in net sales in the fourth quarter of 2004. Also, Memory Product net sales declined in the
second half of 2004 compared with the first half of 2004 because Spansion was not able to meet demand for certain of lower density products for the embedded
category of the Flash memory market in the first half of 2004, which we believe adversely impacted relationships with customers who did not receive allocations
of these embedded products. Competitors were able to take advantage of this situation to increase their market share in the second half of 2004. Spansion was
unable to meet demand for these products in the first half of 2004 because in 2003 it underestimated demand with respect to these products for the first half of
2004 and was unable to install additional wafer fabrication capacity on a timely basis. As a result, a significant number of end customers for lower density
products were under-served, and these customers chose to rely on competitors both for product supply and for their design-in activities in the first half of 2004,
resulting in an increased market share for those competitors in the second half of 2004 when those designs went into production. Further quantification of the
breakdown in the increase in net sales is not practical due to the reorganization of geographical sales territories between us and Fujitsu in connection with the
initial formation of Spansion LLC as of June 30, 2003.
Memory Products had an operating loss of $311 million in 2005 compared to operating income of $35 million in 2004. The decline in operating results
was primarily due to a decrease in net sales of $430 million while the cost of sales only decreased $109 million. Net sales decreased as a result of a decrease of
28 percent in average selling prices in 2005 compared to 2004. Net sales for the Memory Products segment for 2005 are not fully comparable with net sales for
2004 because Spansion’s net sales are not consolidated with our net sales from December 21, 2005 through December 25, 2005. In addition, we recorded a
goodwill impairment charge of approximately $16 million during the fourth quarter of 2005. Goodwill in the amount of $16 million was generated on June 30,
2003 as a result of the formation of Spansion LLC, which we accounted for as a partial step acquisition and purchase business combination. In the fourth quarter
of 2005, after considering the fact that the estimated fair value of Spansion was less than our carrying net book value and after comparing the estimated fair value
of Spansion’s assets (other than goodwill) to our carrying net book value for such assets, we concluded that the implied fair value of goodwill is zero. Therefore,
we wrote off the entire $16 million of recorded goodwill.
Memory Products operating income of $35 million in 2004 increased $225 million from an operating loss of $190 million in 2003. The increase was
primarily due to the effect of consolidating Spansion’s results of operations, which include Spansion’s sales to Fujitsu, for 12 months in 2004 compared to six
months in 2003. In addition, our manufacturing costs decreased due to our transition to 110-nanometer process technology for certain of our Flash memory
products in 2004 and as a result of increased shipments of Flash memory products based on MirrorBit technology, which are less expensive to manufacture than
Flash memory products based on floating gate technology. Further quantification of the changes is not practical due to the consolidation of Spansion’s results of
operations with our financial results as of June 30, 2003.
Personal Connectivity Solutions Group
Personal Connectivity Solutions (PCS) net sales of $136 million in 2005 increased four percent compared to net sales of $131 million in 2004. The
increase was primarily due to $13 million increase in sales of AMD Geode products and $8 million increase in sales of embedded processors, partially offset by a
$15 million decrease in sales of networking products and MIPS-architecture based products.
PCS net sales of $131 million in 2004 decreased seven percent compared to net sales of $140 million in 2003. The decrease was primarily due to a $43
million decrease in sales of certain end-of-life embedded microprocessors, partially offset by a $33 million increase in sales of AMD Geode products. We
acquired the Geode product line from National Semiconductor in August 2003. Accordingly, the increase in sales of AMD Geode products in 2004 was due to
the fact that in 2004 we had 12 months of sales whereas in 2003 we had approximately four months of sales.
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Source: ADVANCED MICRO DEVIC, 10-K, February 27, 2006