AMD 2008 Annual Report Download - page 42

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. For example, in the fourth quarter of 2008, we recorded an
incremental write-down of inventory of $227 million due to a weak economic outlook. Factors that may result in
excess or obsolete inventory, which could result in write-downs of the value of our inventory, a reduction in
average selling prices, and/or a reduction in our gross margin include:
• a sudden and significant decrease in demand for our products;
• a higher incidence of inventory obsolescence because of rapidly changing technology and customer
requirements;
• a failure to estimate customer demand for our older products as our new products are introduced; or
• our competitors taking aggressive pricing actions.
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. 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 a 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.
Recent failures in the global credit markets may impact the liquidity of our auction rate securities (ARS).
As of December 27, 2008, our investments in ARS included approximately $123 million of student loan
ARS, $32 million of municipal and corporate ARS and $5 million ARS in preferred shares of closed end mutual
funds. Approximately 80 percent of our ARS holdings were AAA rated investments and all of the $123 million
student loan ARS were guaranteed by the Federal Family Educational Loan Program. The uncertainties in the
credit markets have affected all of our ARS and auctions for these securities have failed to settle on their
respective settlement dates. The auctions failed because there was insufficient demand for these securities. A
failed auction does not represent a default by the issuer of the ARS. For each unsuccessful action, the interest rate
is reset based on a formula set forth in each security, which is generally higher than the current market unless
subject to an interest rate cap. When auctions for these securities fail, the investments may not be readily
convertible to cash until a future auction of these investments is successful, a buyer is found outside of the
auction process, the issuers of the ARS establish a different form of financing to replace these securities, or final
payment is due according to contractual maturities (currently, ranging from 17 to 42 years for our ARS). As a
result the liquidity of these investments has been impacted.
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