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Table of Contents
contracts to reduce our exposure to currency fluctuations on our foreign currency exposures. The objective of these contracts is to minimize the impact of foreign
currency exchange rate movements on our operating results and on the cost of capital asset acquisitions. Our accounting policy for these instruments is based on
our designation of such instruments as hedges of underlying exposure to variability in cash flows. We do not use these contracts for speculative or trading
purposes.
As of December 25, 2005, we had an aggregate of $566 million (notional amount) of short-term foreign currency forward contracts and purchased call
option contracts denominated in euro outstanding.
Commencing from December 26, 2005, we changed the functional currency for our German subsidiaries, AMD Saxony and AMD Fab 36 KG, from the
euro to the U.S. dollar. Therefore, from 2006 and for the foreseeable future, all of our subsidiaries will use the U.S. dollar as their functional currency. The
change in the functional currency of these subsidiaries is in accordance with SFAS 52, “Foreign Currency Translation”, (SFAS 52) and reflects the changed
economic facts and circumstances pertaining to these subsidiaries. Under the requirements of SFAS 52, we assessed the various economic factors relating to
AMD Saxony and AMD Fab 36 KG and concluded that due to changes in facts, circumstances, scope of operations and business practices, the U.S. dollar is now
the currency of the primary economic environment in which these subsidiaries operate. However, locally incurred expenses of these subsidiaries will continue to
be denominated in euro, and unfavorable currency exchange rate fluctuations would cause our euro-denominated expenses to increase as a percentage of net
sales, thereby adversely affecting our profitability and cash flow. We will continue to monitor and to hedge this foreign risk exposure.
In addition, as a result of the Spansion IPO, as of December 21, 2005, we no longer have any foreign exchange risk related to Japanese yen, and
approximately $370 million of Spansion’s debt to third parties, which was mostly variable rate, was deconsolidated from our financial position. During the time
that Spansion’s results of operations were consolidated with our results of operations, we had sales, costs, assets and liabilities that were denominated in Japanese
yen. For example, sales of Spansion Flash memory products in Japan were denominated in yen and certain manufacturing costs related to Spansion Flash
memory products were denominated in yen.
Unrealized gains and losses related to the foreign currency forward and option contracts for the year ended December 25, 2005 were not material. We do
not anticipate any material adverse effect on our consolidated financial position, results of operations or cash flows resulting from the use of these instruments in
the future. However, we cannot give any assurance that these strategies will be effective or that transaction losses can be minimized or forecasted accurately. In
particular, generally, we hedge only a portion of our foreign currency exchange exposure. Moreover, we determine our total foreign currency exchange exposure
using projections of long-term expenditures for items such as equipment and materials used in manufacturing. We cannot assure you that our hedging activities
will eliminate foreign exchange rate exposure. Failure to do so could have an adverse effect on our business, financial condition, results of operations and cash
flow.
The following table provides information about our foreign currency forward and option contracts as of December 25, 2005 and December 26, 2004. All
of our foreign currency forward contracts and option contracts mature within the next 12 months.
Fiscal 2005
Fiscal 2004
Notional
Amount
Average
contract
rate
Estimated
fair value
Notional
amount
Average
contract
rate
Estimated
fair value
(In thousands except contract rates)
Foreign currency forward contracts:
Japanese yen $ — — $ — $ 10,542 104.3400 $ (73)
European Union euro 239,198 1.2020 3,005 11,846 1.1846 1,685
Foreign currency option contracts:
European Union euro $ 326,481 1.3002 $ (12,872) $ 460,707 1.2869 $ 28,375
Total: $ 565,679 $ (9,867) $ 483,095 $ 29,987
73
Source: ADVANCED MICRO DEVIC, 10-K, February 27, 2006