AMD 2005 Annual Report Download - page 37

Table of Contents
memory net sales. In addition, the improvement in gross margin was due to a 1.5 percent increase in gross margin for Computation Products. Computation
Products margin improved as a result of a nine percent increase in average selling prices discussed above, partially offset by increased manufacturing costs
caused by the shift in our product mix to higher-end microprocessor products. Gross margin also improved because we were better able to absorb our fixed
manufacturing costs due in part to improving yields at Fab 30. The improvement in gross margin was partially offset by a 12 percent decrease in gross margin for
Memory Products due primarily to a decrease of 28 percent in average selling prices in 2005 compared to 2004, partially offset by an increase of 14 percent in
unit shipments in 2005 compared to 2004.
Gross margin percentage increased to 39 percent in 2004 compared to 34 percent in 2003. The increase in gross margin was primarily due to an increase in
net sales of 42 percent and lower unit manufacturing costs resulting from our transition to smaller, more cost efficient manufacturing process technologies for
both microprocessors and Flash memory products. Further quantification of the improvement in gross margin percentage is not practical due to the consolidation
of Spansion’s operating results as of June 30, 2003.
We record grants and allowances that we receive from the State of Saxony and the Federal Republic of Germany for Fab 30 or Fab 36, and we recorded
the interest subsidies we received for Fab 30, as long-term liabilities on our financial statements. We amortize these amounts as they are earned as a reduction to
operating expenses. We record the amortization of the production related grants and allowances as a credit to cost of sales. The credit to cost of sales totaled $72
million in 2005, $67 million in 2004 and $46 million in 2003. The fluctuations in the recognition of these credits have not significantly impacted our gross
margins.
In 2005 and 2004 we capitalized construction and facilitization costs related to Fab 36. Once Fab 36 begins producing revenue-generating products, which
we anticipate will be in the first quarter of 2006, we will begin depreciating these costs to cost of sales.
Expenses
Research and Development Expenses
Research and development expenses of $1,144 million in 2005 increased 22 percent from $935 million in 2004 due primarily to an increase of $103
million in product design and process improvement costs for new generations of our microprocessors and increased start-up costs associated with the Fab 36
project of $96 million.
Research and development expenses of $935 million in 2004 increased ten percent from $852 million in 2003 due in part to higher research and
development expenses as a result of the consolidation of Spansion LLC’s results of operations with our results of operations effective June 30, 2003, increased
start-up costs associated with the Fab 36 project of approximately $29 million and a $24 million increase in product design and engineering costs for new
generations of our microprocessors. These factors were partially offset by a $23 million decrease in Fab 30 research and development activities.
From time to time, we also apply for and obtain subsidies from the State of Saxony, the Federal Republic of Germany and the European Union for certain
research and development projects. We record the amortization of the research and development related grants and allowances as well as the research and
development subsidies as a reduction of research and development expenses when all conditions and requirements set forth in the subsidy grant are met. The
credit to research and development expenses totaled $44 million in 2005, $21 million in 2004 and $29 million in 2003.
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Source: ADVANCED MICRO DEVIC, 10-K, February 27, 2006