AMD 2006 Annual Report Download - page 38

Table of Contents
Uncertainties involving the ordering and shipment of, and payment for, our products could materially adversely affect us.
We typically sell our products pursuant to individual purchase orders. We generally do not have long-term supply arrangements with our customers or
minimum purchase requirements. Generally, our customers may cancel orders more than 30 days prior to shipment without incurring a significant penalty. We
base our inventory levels on customers’ estimates of demand for their products, which are difficult to predict. This difficulty may be compounded when we sell
to OEMs indirectly through distributors, as our forecasts for demand are then based on estimates provided by multiple parties. Moreover, PC and consumer
markets are characterized by short product lifecycles, which can lead to rapid obsolescence and price erosion. In addition, our customers may change their
inventory practices on short notice for any reason. We may build inventories during periods of anticipated growth, and the cancellation or deferral of product
orders, the return of previously sold products or overproduction due to failure of anticipated orders to materialize, could result in excess or obsolete inventory,
which could result in write-downs of inventory and an adverse effect on profit margins. Because market conditions are uncertain, these and other factors could
materially adversely affect us.
Our reliance on third-party distributors subjects us to certain risks.
We market and sell our products directly and through third-party distributors pursuant to agreements that can generally be terminated for convenience by
either party upon prior notice to the other party. These agreements are non-exclusive and permit our distributors to offer our competitors’ products. Our third
party distributors have been a significant factor in our ability to increase sales of our products in certain high growth international markets. Accordingly, we are
dependent on our distributors to supplement our direct marketing and sales efforts. If any significant distributor or a substantial number of our distributors
terminated their relationship with us or decided to market our competitors’ products over our products, our ability to bring our products to market would be
impacted and we would be materially adversely affected.
Additionally, distributors typically maintain an inventory of our products. In most instances, our agreements with distributors protect their inventory of our
products against price reductions, as well as provide return rights for any product that we have removed from our price book and that is not more than twelve
months older than the manufacturing code date. Some agreements with our distributors also contain standard stock rotation provisions permitting limited levels
of product returns. We defer the gross margins on our sales to distributors, resulting from both our deferral of revenue and related product costs, until the
applicable products are re-sold by the distributors. However, in the event of an unexpected significant decline in the price of our products, the price protection
rights we offer to our distributors would materially adversely affect us because our revenue would decline.
Our operations in foreign countries are subject to political and economic risks, which could have a material adverse effect on us.
We maintain operations around the world, including in the United States, Canada, Europe and Asia. For example, all of our wafer fabrication capacity for
microprocessors is located in Germany. Nearly all product assembly and final testing of our microprocessor products is performed at manufacturing facilities in
China, Malaysia and Singapore. In addition, our graphics and chipset products and products for consumer electronics devices are manufactured, assembled and
tested by independent third parties in the Asia-Pacific region and inventory related to those products is stored there. We also have international sales operations
and as part of our business strategy, we are continuing to seek expansion of product sales in high growth markets. Our international sales as a percentage of our
total consolidated revenue was 75 percent in 2006, and China was one of our largest and fastest growing markets.
The political and economic risks associated with our operations in foreign countries include, without limitation:
• expropriation;
• changes in a specific country’s or region’s political or economic conditions;
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Source: ADVANCED MICRO DEVIC, 10-K, March 01, 2007