UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FormFORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedSeptember 29, 200228, 2003
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-7882
ADVANCED MICRO DEVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware | ||
(State or other jurisdiction of incorporation or organization) | 94-1692300 (I.R.S. Employer Identification No.) | |
One AMD Place Sunnyvale, California | ||
(Address of principal executive offices) | 94088 (Zip Code) |
Registrant’s telephone number, including area code: (408) 732-2400
Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-12 of the Exchange Act). Yes x No ¨
Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value common stock outstanding as of October 25, 2002: 343,474,020
Page No. | ||||
Part I.Financial | ||||
Item 1. Financial Statements (unaudited) | ||||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
Part II.Other Information | ||||
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED MICRO DEVICES, INC.INC.
(Unaudited)
(Thousands except per share amounts)
Quarter Ended | Nine Months Ended | |||||||||||||||
September 29, 2002 | September 30, 2001 | September 29, 2002 | September 30, 2001 | |||||||||||||
Net sales | $ | 508,227 | $ | 765,870 | $ | 2,010,599 | $ | 2,939,881 | ||||||||
Expenses: | ||||||||||||||||
Cost of sales | 453,884 | 594,056 | 1,599,048 | 1,945,085 | ||||||||||||
Research and development | 220,959 | 161,185 | 571,266 | 490,059 | ||||||||||||
Marketing, general and administrative | 158,568 | 150,918 | 475,676 | 456,346 | ||||||||||||
Restructuring and other special charges | — | 89,305 | — | 89,305 | ||||||||||||
833,411 | 995,464 | 2,645,990 | 2,980,795 | |||||||||||||
Operating loss | (325,184 | ) | (229,594 | ) | (635,391 | ) | (40,914 | ) | ||||||||
Interest and other income (expense), net | 12,941 | (11,220 | ) | 31,140 | 19,911 | |||||||||||
Interest expense | (21,166 | ) | (9,946 | ) | (49,053 | ) | (51,790 | ) | ||||||||
Loss before income taxes and equity in net income (loss) of joint venture | (333,409 | ) | (250,760 | ) | (653,304 | ) | (72,793 | ) | ||||||||
Income tax benefit | (73,350 | ) | (65,018 | ) | (198,884 | ) | (8,758 | ) | ||||||||
Loss before equity in net income (loss) of joint venture | (260,059 | ) | (185,742 | ) | (454,420 | ) | (64,035 | ) | ||||||||
Equity in net income (loss) of joint venture | 5,888 | (1,187 | ) | 6,148 | 19,296 | |||||||||||
Net loss | $ | (254,171 | ) | $ | (186,929 | ) | $ | (448,272 | ) | $ | (44,739 | ) | ||||
Net loss per common share: | ||||||||||||||||
Basic | $ | (0.74 | ) | $ | (0.54 | ) | $ | (1.31 | ) | $ | (0.14 | ) | ||||
Diluted | $ | (0.74 | ) | $ | (0.54 | ) | $ | (1.31 | ) | $ | (0.14 | ) | ||||
Shares used in per share calculation: | ||||||||||||||||
Basic | 342,780 | 345,044 | 341,796 | 329,837 | ||||||||||||
Diluted | 342,780 | 345,044 | 341,796 | 329,837 | ||||||||||||
Quarter Ended | Nine Months Ended | |||||||||||||||
September 28, 2003 | September 29, 2002 | September 28, 2003 | September 29, 2002 | |||||||||||||
Net sales | $ | 953,759 | $ | 508,227 | $ | 2,313,575 | $ | 2,010,599 | ||||||||
Expenses: | ||||||||||||||||
Cost of sales | 626,880 | 453,884 | 1,548,556 | 1,599,048 | ||||||||||||
Research and development | 213,997 | 220,959 | 625,572 | 571,266 | ||||||||||||
Marketing, general and administrative | 151,111 | 158,568 | 424,500 | 475,676 | ||||||||||||
Restructuring and other special charges (recoveries), net | (8,000 | ) | — | (5,854 | ) | — | ||||||||||
983,988 | 833,411 | 2,592,774 | 2,645,990 | |||||||||||||
Operating income (loss) | (30,229 | ) | (325,184 | ) | (279,199 | ) | (635,391 | ) | ||||||||
Interest and other income, net | 493 | 12,941 | 12,203 | 31,140 | ||||||||||||
Interest expense | (26,848 | ) | (21,166 | ) | (79,017 | ) | (49,053 | ) | ||||||||
Income (loss) before income taxes, minority interest and equity in net income of joint venture | (56,584 | ) | (333,409 | ) | (346,013 | ) | (653,304 | ) | ||||||||
Minority interest in loss of subsidiary | (25,353 | ) | — | (25,353 | ) | — | ||||||||||
Provision (benefit) for income taxes | — | (73,350 | ) | 2,936 | (198,884 | ) | ||||||||||
Income (loss) before equity in net income of manufacturing joint venture | (31,231 | ) | (260,059 | ) | (323,596 | ) | (454,420 | ) | ||||||||
Equity in net income of joint venture | — | 5,888 | 5,913 | 6,148 | ||||||||||||
Net income (loss) | $ | (31,231 | ) | $ | (254,171 | ) | $ | (317,683 | ) | $ | (448,272 | ) | ||||
Net income (loss) per common share: | ||||||||||||||||
Basic: | ||||||||||||||||
Net income (loss) | $ | (0.09 | ) | $ | (0.74 | ) | $ | (0.92 | ) | $ | (1.31 | ) | ||||
Diluted: | ||||||||||||||||
Net income (loss) | $ | (0.09 | ) | $ | (0.74 | ) | $ | (0.92 | ) | $ | (1.31 | ) | ||||
Shares used in per share calculation: | ||||||||||||||||
Basic | 347,334 | 342,780 | 346,222 | 341,796 | ||||||||||||
Diluted | 347,334 | 342,780 | 346,222 | 341,796 | ||||||||||||
See accompanying notes.
-3-
ADVANCED MICRO DEVICES, INC.
(Thousands except share amounts)
September 29, 2002 | December 30, 2001* | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 533,389 | $ | 427,288 | ||||
Short-term investments | 332,435 | 442,709 | ||||||
Total cash, cash equivalents and short-term investments | 865,824 | 869,997 | ||||||
Accounts receivable, net of allowance for doubtful accounts | 428,653 | 659,783 | ||||||
Inventories: | ||||||||
Raw materials | 16,637 | 26,489 | ||||||
Work-in-process | 234,991 | 236,679 | ||||||
Finished goods | 168,604 | 117,306 | ||||||
Total inventories | 420,232 | 380,474 | ||||||
Deferred income taxes | 177,321 | 155,898 | ||||||
Prepaid expenses and other current assets | 253,616 | 286,957 | ||||||
Total current assets | 2,145,646 | 2,353,109 | ||||||
Property, plant and equipment, at cost: | ||||||||
Land | 47,707 | 33,207 | ||||||
Buildings and leasehold improvements | 1,265,229 | 1,461,228 | ||||||
Equipment | 5,165,948 | 4,162,652 | ||||||
Construction-in-progress | 458,609 | 469,191 | ||||||
Total property, plant and equipment | 6,937,493 | 6,126,278 | ||||||
Accumulated depreciation and amortization | (4,007,701 | ) | (3,387,140 | ) | ||||
Property, plant and equipment, net | 2,929,792 | 2,739,138 | ||||||
Investment in joint venture | 374,408 | 363,611 | ||||||
Deferred income taxes | 85,996 | — | ||||||
Other assets | 195,640 | 191,384 | ||||||
$ | 5,731,482 | $ | 5,647,242 | |||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Notes payable to banks | $ | 48,981 | $ | 63,362 | ||||
Accounts payable | 355,576 | 304,990 | ||||||
Accrued compensation and benefits | 119,666 | 129,042 | ||||||
Accrued liabilities | 389,861 | 443,995 | ||||||
Income taxes payable | 38,088 | 56,234 | ||||||
Deferred income on shipments to distributors | 34,151 | 47,978 | ||||||
Current portion of long-term debt, capital lease obligations and other | 307,536 | 268,336 | ||||||
Total current liabilities | 1,293,859 | 1,313,937 | ||||||
Deferred income taxes | — | 105,305 | ||||||
Long-term debt, capital lease obligations and other, less current portion | 1,196,531 | 672,945 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock, par value $0.01; 750,000,000 authorized; 343,474,090 shares issued and outstanding at September 29, 2002 and 340,502,883 at December 30, 2001 | 3,435 | 3,405 | ||||||
Capital in excess of par value | 1,992,146 | 1,966,374 | ||||||
Treasury stock, at cost: 6,310,580 shares | (77,157 | ) | (77,157 | ) | ||||
Retained earnings | 1,347,408 | 1,795,680 | ||||||
Accumulated other comprehensive loss | (24,740 | ) | (133,247 | ) | ||||
Total stockholders’ equity | 3,241,092 | 3,555,055 | ||||||
$ | 5,731,482 | $ | 5,647,242 | |||||
September 28, 2003 | December 29, 2002* | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 994,935 | $ | 397,698 | ||||
Short-term investments | 81,004 | 608,957 | ||||||
Total cash, cash equivalents and short-term investments | 1,075,939 | 1,006,655 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $23,929 on September 28, 2003 and $18,906 on December 29, 2002 | 543,444 | 395,828 | ||||||
Inventories: | ||||||||
Raw materials | 26,160 | 22,741 | ||||||
Work-in-process | 494,142 | 254,957 | ||||||
Finished goods | 172,093 | 154,905 | ||||||
Total inventories | 692,395 | 432,603 | ||||||
Prepaid expenses and other current assets | 206,202 | 184,592 | ||||||
Total current assets | 2,517,980 | 2,019,678 | ||||||
Property, plant and equipment: | ||||||||
Land | 52,754 | 34,443 | ||||||
Buildings and leasehold improvements | 2,189,106 | 1,392,972 | ||||||
Equipment | 7,553,039 | 5,256,502 | ||||||
Construction in progress | 198,079 | 355,746 | ||||||
Total property, plant and equipment | 9,992,978 | 7,039,663 | ||||||
Accumulated depreciation and amortization | (6,184,411 | ) | (4,158,854 | ) | ||||
Property, plant and equipment, net | 3,808,567 | 2,880,809 | ||||||
Investment in joint venture | — | 382,942 | ||||||
Other assets | 337,818 | 335,752 | ||||||
Total Assets | $ | 6,664,365 | $ | 5,619,181 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Notes payable to banks | $ | — | $ | 913 | ||||
Accounts payable | 335,925 | 352,438 | ||||||
Accrued compensation and benefits | 156,569 | 131,324 | ||||||
Accrued liabilities | 310,861 | 435,657 | ||||||
Restructuring accruals | 43,901 | 99,974 | ||||||
Income taxes payable | 47,279 | 21,246 | ||||||
Deferred income on shipments to distributors | 89,329 | 57,184 | ||||||
Current portion of long-term debt and capital lease obligations | 200,717 | 71,339 | ||||||
Other current liabilities | 84,458 | 89,437 | ||||||
Total current liabilities | 1,269,039 | 1,259,512 | ||||||
Deferred income taxes | 95,345 | — | ||||||
Long-term debt and capital lease obligations, less current portion | 1,880,859 | 1,570,322 | ||||||
Other liabilities | 425,282 | 322,082 | ||||||
Minority interest | 711,056 | — | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock, par value $0.01; 750,000,000 shares authorized; shares issued: 354,811,113 on September 28, 2003 and 351,442,331 on December 29, 2002; shares outstanding: 347,928,781 on September 28, 2003 and 344,528,152 on December 29, 2002 | 3,478 | 3,445 | ||||||
Capital in excess of par value | 2,032,576 | 2,014,464 | ||||||
Treasury stock, at cost (6,882,332 shares on September 28, 2003 and 6,914,179 shares on December 29, 2002) | (92,608 | ) | (93,217 | ) | ||||
Retained earnings | 174,700 | 492,668 | ||||||
Accumulated other comprehensive income | 164,638 | 49,905 | ||||||
Total stockholders’ equity | 2,282,784 | 2,467,265 | ||||||
Total liabilities and stockholders’ equity | $ | 6,664,365 | $ | 5,619,181 | ||||
* | Amounts as of December |
See accompanying notes.
-4-
ADVANCED MICRO DEVICES, INC.INC.
(Unaudited)
(Thousands)
Nine Months Ended | ||||||||
September 28, 2003 | September 29, 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (317,683 | ) | $ | (448,272 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
Depreciation | 677,124 | 541,987 | ||||||
Amortization | 31,228 | 14,315 | ||||||
Impairment of equity investment | 2,339 | — | ||||||
Change in provision for doubtful accounts | 5,023 | 3,354 | ||||||
Benefit for deferred income taxes | 15,199 | (200,364 | ) | |||||
Foreign grant and subsidy income | (49,359 | ) | (47,965 | ) | ||||
Net loss on disposal of property, plant and equipment | 19,947 | 12,372 | ||||||
Net gain realized on sale of available-for-sale securities | (3,736 | ) | (4,829 | ) | ||||
Undistributed income of joint venture | (5,913 | ) | (6,148 | ) | ||||
Restructuring and other special charges, net | (4,295 | ) | — | |||||
Recognition of deferred gain on sale of building | (1,260 | ) | (1,261 | ) | ||||
Compensation recognized under employee stock plans | 1,361 | 2,195 | ||||||
Tax expense allocated to minority interest | (1,949 | ) | — | |||||
Minority interest | (25,353 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
(Increase) decrease in accounts receivable | (84,906 | ) | 227,834 | |||||
Increase in inventories | (72,164 | ) | (39,603 | ) | ||||
Decrease in prepaid expenses and other current assets | 14,837 | 36,490 | ||||||
Decrease (increase) in other assets | 26,343 | (1,435 | ) | |||||
Increase (decrease) in income taxes payable | 25,791 | (18,146 | ) | |||||
Refund of customer deposits under long-term purchase agreements | (26,500 | ) | (30,000 | ) | ||||
Net decrease in accounts payable, accrued liabilities, and other liabilities | (330,835 | ) | (21,992 | ) | ||||
Increase (decrease) in accrued compensation and benefits | 11,755 | (9,374 | ) | |||||
Net cash (used in) provided by operating activities | (93,006 | ) | 9,158 | |||||
Cash flows from investing activities: | ||||||||
Formation and consolidation of FASL LLC | 147,616 | — | ||||||
Purchases of property, plant and equipment | (407,535 | ) | (567,182 | ) | ||||
Proceeds from sale of property, plant and equipment | 26,670 | 5,162 | ||||||
Acquisition, net of cash acquired | (6,265 | ) | (26,509 | ) | ||||
Purchases of available-for-sale securities | (970,391 | ) | (3,294,538 | ) | ||||
Proceeds from sales and maturities of available-for-sale securities | 1,500,460 | 3,437,269 | ||||||
Net cash provided by (used in) investing activities | 290,555 | (445,798 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from borrowings, net of issuance costs | 47,350 | 735,643 | ||||||
Proceeds from equipment sale-leaseback | 244,647 | — | ||||||
Payments on debt and capital lease obligations | (85,481 | ) | (280,611 | ) | ||||
Proceeds from foreign grants and subsidies | 142,029 | 50,253 | ||||||
Proceeds from issuance of stock | 17,149 | 23,606 | ||||||
Net cash provided by financing activities | 365,694 | 528,891 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 33,994 | 13,850 | ||||||
Net increase in cash and cash equivalents | 597,237 | 106,101 | ||||||
Cash and cash equivalents at beginning of period | 397,698 | 427,288 | ||||||
Cash and cash equivalents at end of period | $ | 994,935 | $ | 533,389 | ||||
Non-cash financing activities: Equipment acquired under capital leases | $ | 284,297 | $ | — | ||||
(Unaudited)
Nine Months Ended | ||||||||
September 29, 2002 | September 30, 2001 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (448,272 | ) | $ | (44,739 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation | 541,987 | 457,619 | ||||||
Amortization | 14,315 | 14,770 | ||||||
Provision for doubtful accounts | 3,354 | 2,798 | ||||||
Net change in deferred income taxes | (200,364 | ) | (14,453 | ) | ||||
Foreign grant and subsidy income | (47,965 | ) | (38,199 | ) | ||||
Net loss on disposal of property, plant and equipment | 12,372 | 22,812 | ||||||
Net realized gain on sale of available-for-sale securities | (4,829 | ) | — | |||||
Undistributed income of joint venture | (6,148 | ) | (19,296 | ) | ||||
Recognition of deferred gain on sale of building | (1,261 | ) | (1,261 | ) | ||||
Net compensation recognized under employee stock plans | 2,195 | 3,552 | ||||||
Restructuring and other special charges | — | 89,305 | ||||||
Changes in operating assets and liabilities: | ||||||||
Decrease (increase) in accounts receivable | 227,834 | (44,416 | ) | |||||
Increase in inventories | (39,603 | ) | (112,954 | ) | ||||
Decrease in prepaid expenses | 2,798 | 19,888 | ||||||
Increase in other assets | (1,435 | ) | (47,723 | ) | ||||
Decrease (increase) in tax refund receivable | 33,692 | (37,369 | ) | |||||
Increase in tax payable | (18,146 | ) | (25,217 | ) | ||||
Refund of customer deposits under purchase agreements | (30,000 | ) | (39,000 | ) | ||||
Decrease in payables and accrued liabilities | (21,992 | ) | (67,113 | ) | ||||
Decrease in accrued compensation and benefits | (9,374 | ) | (62,926 | ) | ||||
Net cash provided by operating activities | 9,158 | 56,078 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (567,182 | ) | (541,891 | ) | ||||
Proceeds from sale of property, plant and equipment | 5,162 | 1,715 | ||||||
Cash paid for the acquisition of Alchemy, net of cash acquired | (26,509 | ) | — | |||||
Purchases of available-for-sale securities | (3,294,538 | ) | (3,149,900 | ) | ||||
Proceeds from sales/maturities of available-for-sale securities | 3,437,269 | 3,346,085 | ||||||
Investment in joint venture | — | (122,356 | ) | |||||
Net cash used in investing activities | (445,798 | ) | (466,347 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from borrowings and equipment financing, net of issuance costs | 735,643 | 319,090 | ||||||
Payments on debt and capital lease obligations | (280,611 | ) | (90,305 | ) | ||||
Proceeds from foreign grants | 50,253 | 23,312 | ||||||
Proceeds from issuance of stock | 23,606 | 38,252 | ||||||
Repurchase of common stock | — | (68,837 | ) | |||||
Net cash provided by financing activities | 528,891 | 221,512 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 13,850 | (5,277 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 106,101 | (194,034 | ) | |||||
Cash and cash equivalents at beginning of period | 427,288 | 591,457 | ||||||
Cash and cash equivalents at end of period | $ | 533,389 | $ | 397,423 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for (refunded): | ||||||||
Interest | $ | 25,274 | $ | 38,120 | ||||
Income taxes | $ | (18,324 | ) | $ | 58,088 | |||
Supplemental disclosures of non-cash financing activities: | ||||||||
Redemption of convertible debt | $ | — | $ | 516,860 | ||||
-5-
ADVANCED MICRO DEVICES, INC.
September 28, 2003
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Advanced Micro Devices, Inc. (the Company or AMD) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year ending December 29, 2002.28, 2003. In the opinion of the Company’s management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. The interim financial statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the year ended December 30, 2001.29, 2002, as amended. Certain prior period amounts have been reclassified to conform to the current period presentation.
The Company uses a 52- to 53-week53- week fiscal year ending on the last Sunday in December. The Company’s current fiscal year will end on December 29, 2002. The quarters ended September 29, 200228, 2003 and September 30, 200129, 2002 each included 13 weeks. The nine monthsnine- month periods ended September 28, 2003 and September 29, 2002 and September 30, 2001 each included 39 weeks.
2. Summary of Significant Accounting Policies
Principles of Consolidation.The consolidated financial statements include the Company’s accounts and those of its majority and wholly owned subsidiaries (see Note 6FASL LLC). Upon consolidation, all significant intercompany accounts and transactions are eliminated and amounts pertaining to the noncontrolling ownership interests in the operating results and financial position of the majority owned subsidiary, FASL LLC, are reported as “minority interest.” Also included in the financial statements, under the equity method of accounting, are the Company’s percentage equity share of certain investees’ operating results, where the Company adopted Statementhas the ability to exercise significant influence over the operations of the investee.
Product Warranties.At the time revenue is recognized, the Company provides for estimated costs that may be incurred under product warranties, with the corresponding expense recognized in cost of sales. Estimates of warranty expense are based on historical experience. Remaining warranty accruals are evaluated periodically and are adjusted for changes in experience.
New Accounting Pronouncements.In January 2003, the Financial Accounting Standards Board issued Interpretation No. 141, “Business Combinations” (SFAS 141), Statement46, “Consolidation of Variable Interest Entities” (FIN 46). Variable interest entities often are created for a single specified purpose, for example, to facilitate securitization, leasing, hedging, research and development, or other transactions or arrangements. This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Accounting Standards No. 142, “GoodwillStatements,” defines what these variable interest entities are and Other Intangible Assets” (SFAS 142)provides guidelines on identifying them and Statementassessing an enterprise’s interests in a variable interest entity to decide whether to consolidate that entity. Generally, FIN 46 applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For existing variable interest entities in which an enterprise holds a variable interest that it acquired before
-6-
February 1, 2003, the provisions of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144) atthis interpretation will apply no later than the beginning of the 2002 fiscal year.first interim or annual reporting period beginning after June 15, 2003. The adoption of these standardsFIN 46 did not have a material impact on the Company’s results of operations or financial statements.
In July 2002,May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146150, “Accounting for Costs AssociatedCertain Financial Instruments with ExitCharacteristics of both Liabilities and Equity” (SFAS 150), which addresses how to classify and measure certain financial instruments with characteristics of both liabilities (or an asset in some circumstances) and equity – as either debt or Disposal Activities” (SFAS 146).equity in the balance sheet. The requirements apply to issuers’ classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (EITF 94-3). The principal difference between SFAS 146 and EITF 94-3 relates to SFAS 146’s timing for recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3 a liability for an exit cost as generally defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan.
3. Stock-Based Incentive Compensation Plans
The Company uses the intrinsic value method to account for stock options issued to its employees under its stock option plans and amortizes deferred compensation, if any, over the vesting period of the options. Compensation expense resulting from the issuance of fixed term stock option awards is measured as the difference between the exercise price of the option and the fair market value of the underlying share of company stock subject to the option on the award’s grant date. For purposes of pro forma disclosures, the Company estimates the fair value of its stock-based awards to employees using a Black-Scholes option pricing model. The pro forma effect on net loss and net loss per share are as follows for the quarters and nine-month periods ended September 28, 2003 and September 29, 2002.
Quarter Ended | Nine Months Ended | |||||||||||||||
(Thousands except per share amounts) | September 28, 2003 | September 29, 2002 | September 28, 2003 | September 29, 2002 | ||||||||||||
Net loss—as reported | $ | (31,231 | ) | $ | (254,171 | ) | $ | (317,683 | ) | $ | (448,272 | ) | ||||
Plus: intrinsic value compensation expense recorded | 366 | 541 | 1,361 | 2,195 | ||||||||||||
Less: fair value compensation expenses | (19,148 | ) | (32,299 | ) | (58,307 | ) | (119,978 | ) | ||||||||
Net loss—pro forma | $ | (50,013 | ) | $ | (285,929 | ) | $ | (374,629 | ) | $ | (566,055 | ) | ||||
Basic net loss per share—as reported | $ | (0.09 | ) | $ | (0.74 | ) | $ | (0.92 | ) | $ | (1.31 | ) | ||||
Diluted net loss per share—as reported | $ | (0.09 | ) | $ | (0.74 | ) | $ | (0.92 | ) | $ | (1.31 | ) | ||||
Basic net loss per share—pro forma | $ | (0.14 | ) | $ | (0.83 | ) | $ | (1.08 | ) | $ | (1.66 | ) | ||||
Diluted net loss per share—pro forma | $ | (0.14 | ) | $ | (0.83 | ) | $ | (1.08 | ) | $ | (1.66 | ) |
On June 27, 2003, the Company filed a Tender Offer Statement with the SEC and made an offer, which was approved by the Company’s stockholders, to exchange certain stock options to purchase shares of the Company’s common stock, outstanding under eligible option plans and held by
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eligible employees, for replacement options to be granted no sooner than six months and one day from the cancellation of the surrendered options. The offer to exchange expired on July 25, 2003. Options to purchase approximately 19.0 million shares of the Company’s common stock were tendered for exchange and cancelled on July 28, 2003. Subject to the terms of the offer to exchange, the Company will grant replacement options to purchase approximately 13.4 million shares of its common stock at fair market value on the date of grant on or after January 29, 2004, in exchange for the options cancelled. The Company does not expect to record compensation expense as a result of the exchange.
4. Financial Instruments
The following is a summary of the available-for-sale securities held by the Company as of September 29, 2002:
(Thousands) | Cost | Fair Market Value | ||||
Cash equivalents: | ||||||
Commercial paper | $ | 226,774 | $ | 226,886 | ||
Money market funds | 19,137 | 19,152 | ||||
Federal agency notes | 2,212 | 2,212 | ||||
Total cash equivalents | $ | 248,123 | $ | 248,250 | ||
Short-term investments: | ||||||
Bank notes | $ | 9,513 | $ | 9,789 | ||
Corporate notes | 77,478 | 78,766 | ||||
Money market auction rate preferred stocks | 127,715 | 127,785 | ||||
Federal agency notes | 114,413 | 116,095 | ||||
Total short-term investments | $ | 329,119 | $ | 332,435 | ||
Long-term investments: | ||||||
Equity investments | $ | 11,571 | $ | 8,414 | ||
Commercial paper | 10,000 | 10,000 | ||||
Federal agency notes | 2,473 | 2,473 | ||||
Total long-term investments (included in other assets) | $ | 24,044 | $ | 20,887 | ||
(Thousands) | Cost | Fair Market Value | ||||
Cash equivalents: | ||||||
Federal agency notes | $ | 5,469 | $ | 6,221 | ||
Money market funds | 764,435 | 764,737 | ||||
Total cash equivalents | $ | 769,904 | $ | 770,958 | ||
Short-term investments: | ||||||
Corporate notes | $ | 13,807 | $ | 13,461 | ||
Federal agency notes | 5,487 | 5,552 | ||||
Auction rate preferred stocks | 59,000 | 59,027 | ||||
Bank notes | 2,727 | 2,964 | ||||
Total short-term investments | $ | 81,021 | $ | 81,004 | ||
Long-term investments: | ||||||
Equity investments | $ | 7,765 | $ | 13,784 | ||
Total long-term investments (included in other assets) | $ | 7,765 | $ | 13,784 | ||
Long-term equity investments consist of marketable equity securities that, while available for sale, are not intended to be used to fund current operations.
The amortized cost and estimated fair value of available-for-sale marketable debt securities (short-term investments) at September 28, 2003, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.
(Thousands) | Amortized Cost | Estimated Fair Value | ||||
Due in one year or less | $ | 13,717 | $ | 13,687 | ||
Due after one year | 67,304 | $ | 67,317 | |||
Total | $ | 81,021 | $ | 81,004 | ||
Available-for-sale securities with maturities greater than twelve months are classified as short-term when they include investments of cash that are intended to be used in current operations. The Company realized a net gain ongains from the sale of available-for-sale securities of $4.8 million in the first nine months of 2003 of $3.7 million, which were included in interest and other income, net.
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At September 28, 2003 and December 29, 2002, the Company had approximately $12 million and $13 million of investments classified as held to maturity, consisting of commercial paper and treasury notes used for long-term workers compensation and leasehold deposits that were included in other assets. The fair value of the investments approximated cost at September 28, 2003 and December 29, 2002.
Included in cash and cash equivalents is a compensating balance of $101$201 million, which represents the next semi-annual principal payment due under the terms ofAMD Saxony is required to keep at all times through June 29, 2005 in an account with Dresdner Bank AG in connection with the Dresden Loan Agreements. Also includedAgreements (see Note 11Guarantees). Included in cashprepaid and cash equivalentsother assets is $31$28 million of restricted cash associated with the advance receipt of interest subsidies from the Federal Republic of Germany and the State of Saxony.Saxony in connection with the Dresden Loan Agreements. Restrictions over the Company’s access to thisthe restricted cash will lapse as the Company incurs qualifying interest expense on the Dresden Term Loansterm loan over the next four quarters.
5. Net Loss Per Common Share
Potential diluted number of common shares is computed as though such dilutive common shares wereinclude shares issuable upon the exercise of outstanding foremployee stock options and the whole period for which loss per share is presented.conversion of outstanding convertible notes and debentures. As the Company incurred net losses for all periods presented, diluted net loss per common share is the same as basic net loss per common share. Potential dilutive common shares of approximately 78 million and 22 million for the three months ended September 28, 2003 and September 29, 2002 and 77 million and 20 million for the three-month and nine-month periodsnine months ended September 28, 2003 and September 29, 2002 and 6 million and 22 million for the three-month and nine-month periods ended September 30, 2001, respectively, were not included in the net loss per common share calculation, as their inclusion would have been anti-dilutive.
6. FASL LLC
In 1993, AMDorder to respond more quickly to changes in market trends and improve efficiencies in the production, marketing and product design of their Flash memory products, the Company and Fujitsu Limited formed FASL LLC effective June 30, 2003. FASL LLC is headquartered in Sunnyvale, California and its manufacturing, research and assembly operations are in the U.S. and Asia. As the Company has a joint venture, Fujitsu AMD Semiconductor Limited (FASL),60% controlling equity interest in FASL LLC, it began consolidating the results of FASL LLC’s operations on June 30, 2003, the effective date of the transaction. The Company is accounting for the developmentFASL LLC transaction as a partial step acquisition and manufacturepurchase business combination under the provisions of non-volatileSFAS 141,Business Combinations, and EITF Consensus No. 01-02,Interpretations of APB Opinion No. 29, [Accounting for Nonmonetary Transactions].
Both the Company and Fujitsu contributed their respective investments in the former Manufacturing Joint Venture (formerly referred to as FASL). As a result of this transaction, the Company acquired an incremental 10.008% controlling interest in the net assets of the Manufacturing Joint Venture (the difference between the Company’s 60% ownership of these net assets after their contribution to FASL LLC and its previous 49.992% ownership in these same net assets prior to their contribution to FASL LLC). Accordingly, the Company recorded its acquired incremental 10.008% interest in the Manufacturing Joint Venture’s contributed net assets based on the assets’ fair value on the effective
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date of the transaction. The remaining 89.992% interest in the Manufacturing Joint Venture’s net assets was recorded at its historical carrying value.
The Company also contributed its Flash memory devices. FASL operates advanced integrated circuit (IC)inventory, its manufacturing facility located in Austin, Texas (Fab 25), its Flash memory research and development facilities in Aizu-Wakamatsu, Japan,Sunnyvale, California, and its Flash memory assembly and test operations in Thailand, Malaysia and China. The Company recorded its continuing 60% interest in these net assets at their historical carrying values. The remaining 40% interest in these net assets was deemed to have been sold to Fujitsu and, accordingly, 40% of the carrying values of these net assets were adjusted to and recorded based on the net assets’ fair value on the effective date of the transaction. The excess of the fair value of the net assets treated as sold over their historical carrying value, approximately $44.7 million, was not recorded as a gain because the fair value of the consideration received by the Company in the form of the Company’s 60% equity interest in Fujitsu’s contributions and the incremental 10.008% interest in the former Manufacturing Joint Venture’s net assets less direct costs of the transaction, did not exceed the 40% interest in book value of the net assets contributed by the Company.
To form FASL LLC, Fujitsu also contributed its Flash memory division, including related inventory, cash, and its Flash memory assembly and test operations in Malaysia. The Company is deemed to have acquired a 60% interest in the net assets contributed by Fujitsu and, accordingly, 60% of the carrying values of these net assets were adjusted to and recorded based on the net assets’ fair value. The remaining 40% interest in these net assets was recorded at the historical carrying value.
As part of the transaction, the Company and Fujitsu entered into various service contracts with FASL LLC. The Company will continue to provide, among other things, certain information technology, facilities, logistics, legal, tax, finance, human resources and environmental, health and safety services to FASL LLC. These contracts continue to be evaluated by the parties to ensure accuracy and efficiency in the manner in which the services are provided and allocated to FASL LLC.
The Company also loaned FASL LLC $120 million pursuant to a promissory note. The note has a term of three years and bears interest at LIBOR plus 4%, but is eliminated in the Company’s consolidated financial statements. Fujitsu also loaned FASL LLC $40 million pursuant to a promissory note. The note has a term of three years, with four equal principal payments due on September 30, 2005, December 31, 2005, March 31, 2006 and June 30, 2006. The note bears interest at LIBOR plus 4% to be paid quarterly.
The following table summarizes the preliminary purchase price allocation to the assets and liabilities of FASL LLC at June 30, 2003, the effective date of the transaction, including the fair values of the assets and liabilities attributable to the Manufacturing Joint Venture, AMD’s contributions and Fujitsu’s contributions. Upon consolidation, all amounts pertaining to Fujitsu’s interest in FASL LLC are reported as minority interest. Management considered a number of factors, including independent appraisals and valuations, in determining the preliminary purchase allocation.
(In millions) | Manufacturing Joint Venture | AMD’s Contributions | Fujitsu’s Contributions | Total | ||||||||||||
Cash | $ | — | $ | 122 | $ | 189 | $ | 311 | ||||||||
Inventory | 55 | 220 | 128 | 403 | ||||||||||||
Fixed assets | 960 | 1,010 | 33 | 2,003 | ||||||||||||
Intangible assets | 21 | — | — | 21 | ||||||||||||
Debt and capital lease obligations | (148 | ) | (609 | ) | (40 | ) | (797 | ) | ||||||||
Other assets (liabilities), net | (100 | ) | (2 | ) | (1 | ) | (103 | ) | ||||||||
Fair value of net assets exchanged/acquired | 788 | 741 | 309 | 1,838 | ||||||||||||
Percent of fair value recorded in the purchase business combination | 10.008 | % | 40 | % | 60 | % | ||||||||||
Fair value recorded | $ | 79 | $ | 296 | $ | 186 | $ | 561 | ||||||||
Net book value of contributions on acquisition date | 762 | 629 | 293 | 1,684 | ||||||||||||
Percent of book value recorded in the purchase business combination | 89.992 | % | 60 | % | 40 | % | ||||||||||
Historical carrying value recorded | $ | 686 | $ | 377 | $ | 117 | $ | 1,180 | ||||||||
Initial purchase combination basis of net assets acquired | $ | 765 | $ | 673 | $ | 303 | $ | 1,741 | ||||||||
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The intangible assets in the table above consist of the estimated fair value of the manufacturing and product distribution contracts among FASL LLC and AMD and Fujitsu which are determined to have an estimated useful life of four years. No value was assigned to in-process research and development because AMD and Fujitsu performed all research and development activities for the productionManufacturing Joint Venture and AMD and Fujitsu did not convey in-process technology rights to FASL LLC. Additionally, FASL LLC pays intellectual property royalties to AMD and Fujitsu for technological know-how used in its business operations at royalty rates deemed to approximate fair market values. No additional intangible assets were identified in connection with the transaction.
The Company’s acquisition cost was approximately $264 million, which includes 40% of the net book value of the Company’s contributions and other direct acquisition costs incurred by the Company. The acquisition cost approximated the fair values of the incremental net assets and equity interests acquired. Accordingly, there was no goodwill associated with the business combination.
The following pro forma financial information includes the combined results of operations of AMD and the Manufacturing Joint Venture as though the Manufacturing Joint Venture had been consolidated by AMD at the beginning of the nine-month periods ended September 28, 2003 and September 29, 2002 and for the quarter ended September 29, 2002. The historically reported operating results of the Manufacturing Joint Venture do not include Flash memory devices.sales recorded by Fujitsu’s former Flash memory operations in periods preceding June 29, 2003 because the information is not available to the Company. Depreciation and amortization expenses were estimated for the pro forma periods based on the amounts at which fixed and intangible assets were recorded at the acquisition date. Pro forma interest income and expense are not material and are not included in the pro forma financial information. Had the transaction occurred at the beginning of fiscal 2003, revenue, net loss and net loss per share would have been $2,536 million, $322 million and $0.93 for the nine-month period ended September 28, 2003. As the effective date of the transaction was June 30, 2003, no pro forma information is necessary for the three months ended September 28, 2003. Had the transaction occurred at the beginning of 2002, revenue, net loss and net loss per share would have been $627 million, $257 million, and $0.75, respectively, for the three-month period ended September 29, 2002 and $2,297 million, $446 million, and $1.30 for the nine-month periods ended September 29, 2002. These pro forma results are not necessarily indicative of the operating results that would have occurred if the transaction had been completed at the beginning of the periods indicated. The Company’s sharepro forma results are not necessarily indicative of future operating results.
In addition, the Manufacturing Joint Venture provided a defined benefit pension plan and a lump-sum retirement benefit plan to certain employees. These plans were and are administered by Fujitsu and cover FASL is 49.992 percent,LLC employees formerly assigned from Fujitsu and employees hired directly by the Manufacturing Joint Venture. A full actuarial valuation has not been completed for the specific portion of the plans that relate to the Manufacturing Joint Venture employees. As a result, the Company estimated FASL LLC’s proportionate allocation of pension obligations, pension assets and elements of pension expensed based on information provided by the actuaries to determine the amounts to be recorded on its consolidated financial statements. For the quarter ended September 28, 2003, the Company recorded an estimated pension cost charge of approximately $3 million and has recorded an estimated pension benefit obligation liability of approximately $25 million. As of September 28, 2003, the estimated projected benefit obligations were approximately $27 million and the estimated total pension plan assets were approximately $4 million. Although the Company believes that the estimates and assumptions used by the Company are reasonable, the actual amounts recorded could vary when a full actuarial valuation is completed as of Fujitsu’s fiscal year ended March 31, 2004. However, the Company does not expect any such difference will have a material impact on its consolidated financial statements.
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The following tables present the significant related party transactions between the Company and the Manufacturing Joint Venture for the periods in which the investment iswas accounted for under the equity method. At September 29, 2002, the cumulative adjustment related to the translation of the FASL financial statements into U.S. dollars resulted in a decrease in the Company’s investment in FASL of $36.8 million.
Quarter Ended | Nine Months Ended | |||||||||||
(Thousands) | September 29, 2002 | September 30, 2001 | September 29, 2002 | September 30, 2001 | ||||||||
Royalty income | $ | 9,789 | $ | 10,975 | $ | 25,330 | $ | 36,675 | ||||
Purchases | 107,832 | 146,766 | 283,713 | 435,520 | ||||||||
(Thousands) | September 29, 2002 | December 30, 2001 | ||||||||||
Royalty receivable | $ | 15,754 | $ | 6,962 | ||||||||
Accounts receivable | 25,686 | — | ||||||||||
Accounts payable | 233 | 37,957 |
Quarter Ended | Nine Months Ended | ||||||||||
(Thousands) | September 28, 2003 | September 29, 2002 | September 28, 2003 | September 29, 2002 | |||||||
Royalty income | — | $ | 9,789 | $ | 24,611 | $ | 25,330 | ||||
Purchases | — | 107,832 | 356,595 | 283,713 | |||||||
Sales to the Manufacturing Joint Venture | — | — | 222,570 | — |
(Thousands) | September 28, | December 29, | ||
Royalty receivable | — | $11,551 | ||
Accounts receivable | — | 96,814 | ||
Accounts payable | — | 108,890 |
The following is condensed unaudited financial data of FASL:
Quarter Ended | Nine Months Ended | |||||||||||||
(Thousands) | September 29, 2002 | September 30, 2001 | September 29, 2002 | September 30, 2001 | ||||||||||
Net sales | $ | 235,986 | $ | 241,812 | $ | 577,167 | $ | 808,573 | ||||||
Gross profit (loss) | 1,429 | (18,864 | ) | 45,133 | 73,669 | |||||||||
Operating income (loss) | (2,673 | ) | (20,172 | ) | 38,209 | 69,822 | ||||||||
Net income (loss) | (1,559 | ) | (11,798 | ) | 18,130 | 40,494 |
Quarter Ended | Nine Months Ended | ||||||||||||
(Thousands) | September 28, 2003 | September 29, 2002 | September 28, 2003 | September 29, 2002 | |||||||||
Net sales | — | $ | 235,986 | $ | 565,037 | $ | 577,167 | ||||||
Gross (loss) profit | — | 1,429 | (12,955 | ) | 45,133 | ||||||||
Operating (loss) income | — | (2,673 | ) | (14,958 | ) | 38,209 | |||||||
Net loss | — | (1,559 | ) | (9,618 | ) | 18,130 |
(Thousands) | September 28, 2003 | December 29, 2002 | |||
Current assets | — | $ | 287,050 | ||
Non-current assets | — | 1,056,107 | |||
Current liabilities | — | 549,015 |
The Company’s share of FASLthe Manufacturing Joint Venture’s net income (loss) set forth above differsdiffered from the equity in net income (loss) of joint venturepreviously reported on the condensed consolidated statements of operations. The difference iswas due to adjustments resulting from intercompany profit eliminations and differences in U.S. and Japanese tax treatment of the Manufacturing Joint Venture’s income, which arewere reflected on the Company’s consolidated statements of operations. The Company has never received cash dividends from its investment in FASL.
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7. Foundry Arrangement Guarantee
In 2000, FASLthe Manufacturing Joint Venture further expanded its production capacity through a foundry arrangement with Fujitsu Microelectronics, Inc. (FMI), a wholly owned subsidiary of Fujitsu Limited. In connection with FMI equipping its wafer fabrication facility in Gresham, Oregon (the Gresham Facility), to produce Flash memory devices for sale to FASL,the Manufacturing Joint Venture, the Company agreed to guarantee (the Guarantee) the repayment of up to $125 million to Fujitsu in connection withof Fujitsu’s obligationobligations as a co-signer with FMI under its global multicurrency revolving credit facility (the Credit Facility) with a third-party bank. On November 30,bank (the Guarantee). In 2001, Fujitsu announced that it was closingclosed the Gresham Facility due to athe downturn of the Flash memory market. On March 26, 2002, theThe Company received notice from Fujitsu that FMI requested an advance of funds from Fujitsu to avoid default under the Credit Facility, which notice is required as a condition to the Company’s obligations under the Guarantee. However, to date, the Company has not received a demand for payment under the terms of the Guarantee from Fujitsu. Furthermore, the Company continues to disagreedisagreed with Fujitsu as to the amount if any, ofowed under this Guarantee and reached a settlement, resulting in a cash payment by the Company to Fujitsu. The settlement amount is immaterial to the Company’s obligations underfinancial statements, and was recorded in the Guarantee. WhileCompany’s statement of operations for the second quarter ended June 29, 2003 and paid in the third quarter ended September 28, 2003.
8. Segment Reporting
Prior to the third quarter of 2003, the Company continues to discuss this matter with Fujitsu, the Company cannot at this time reasonably predict its outcome including any amounts the Company might be required to pay Fujitsu, and therefore, has not recorded any liability in its consolidated financial statements associated with the Guarantee.
Beginning in the third quarter of 2002.2003, the Company changed its reportable segments to: the Computation Products segment, which includes x86 microprocessors for servers, workstations, desktop and notebook PCs and chipset products, and the Memory Products segment, which includes the Flash memory products of AMD and FASL LLC. The Company
The All Other category comprises other small operating segments (Personal Connectivity Solutions Products, which includes low power MIPS and allocates resources based on these segments’ reporting income (loss). x86 solutions, and Foundry Services, which included fees from our former voice communications and programmable logic products subsidiaries) that are neither individually nor in the aggregate material. This category also includes certain operating expenses and credits that are not allocated to the operating segments. Prior period segment information has been restated to conform to the current period presentation. However, as the Company’s results of operations for prior periods did not include the consolidation of FASL LLC’s operations the segment operating information for the Memory Products segment for the quarter ended September 28, 2003 is not comparable to the restated segment information for all prior periods presented.
The following table is a summary of sales and operating income (loss) by segment and category with a reconciliation to net loss for the quarters and nine months ended September 29, 200228, 2003 and September 30, 2001:
Quarter Ended | Nine Months Ended | |||||||||||||||
(Thousands) | September 29, 2002 | September 30, 2001 | September 29, 2002 | September 30, 2001 | ||||||||||||
Segment net sales: | ||||||||||||||||
Core Products segment | $ | 494,386 | $ | 741,320 | $ | 1,978,375 | $ | 2,843,915 | ||||||||
Foundry Services segment | 13,841 | 24,550 | 32,224 | 95,966 | ||||||||||||
Total segment net sales | $ | 508,227 | $ | 765,870 | $ | 2,010,599 | $ | 2,939,881 | ||||||||
Segment operating income (loss): | ||||||||||||||||
Core Products segment | $ | (330,856 | ) | $ | (123,947 | ) | $ | (632,602 | ) | $ | 70,053 | |||||
Foundry Services segment | 5,672 | (9,441 | ) | (2,789 | ) | (14,761 | ) | |||||||||
Total segment operating income (loss) | (325,184 | ) | (133,388 | ) | (635,391 | ) | 55,292 | |||||||||
Restructuring and other special charges | — | (89,305 | ) | — | (89,305 | ) | ||||||||||
Additional inventory provision | — | (6,901 | ) | — | (6,901 | ) | ||||||||||
Interest income and other, net | 12,941 | (11,220 | ) | 31,140 | 19,911 | |||||||||||
Interest expense | (21,166 | ) | (9,946 | ) | (49,053 | ) | (51,790 | ) | ||||||||
Income tax benefit | 73,350 | 65,018 | 198,884 | 8,758 | ||||||||||||
Equity in net income (loss) of joint venture | 5,888 | (1,187 | ) | 6,148 | 19,296 | |||||||||||
Net loss | $ | (254,171 | ) | $ | (186,929 | ) | $ | (448,272 | ) | $ | (44,739 | ) | ||||
Quarter Ended | Nine Months Ended | |||||||||||||||
(Thousands) | September 28, 2003 | September 29, 2002 | September 28, 2003 | September 29, 2002 | ||||||||||||
Computation Products | ||||||||||||||||
Revenue | $ | 503,461 | $ | 263,727 | $ | 1,379,190 | $ | 1,334,560 | ||||||||
Operating income (loss) | $ | 19,290 | $ | (316,553 | ) | $ | (85,881 | ) | $ | (503,308 | ) | |||||
Memory Products | ||||||||||||||||
Revenue | 423,815 | 188,589 | 852,707 | 524,200 | ||||||||||||
Operating loss | (49,455 | ) | (14,261 | ) | (186,826 | ) | (100,641 | ) | ||||||||
All Other | ||||||||||||||||
Revenue | 26,483 | 55,911 | 81,678 | 151,839 | ||||||||||||
Operating income (loss) | (64 | ) | 5,630 | (6,492 | ) | (31,442 | ) | |||||||||
Total AMD | ||||||||||||||||
Revenue | 953,759 | 508,227 | 2,313,575 | 2,010,599 | ||||||||||||
Operating income (loss) | (30,229 | ) | (325,184 | ) | (279,199 | ) | (635,391 | ) | ||||||||
Interest income and other, net | 493 | 12,941 | 12,203 | 31,140 | ||||||||||||
Interest expense | (26,848 | ) | (21,166 | ) | (79,017 | ) | (49,053 | ) | ||||||||
Minority interest | 25,353 | — | 25,353 | — | ||||||||||||
(Provision) benefit for income taxes | — | 73,350 | (2,936 | ) | 198,884 | |||||||||||
Equity in net income of Manufacturing Joint Venture | — | 5,888 | 5,913 | 6,148 | ||||||||||||
Net loss | $ | (31,231 | ) | $ | (254,171 | ) | $ | (317,683 | ) | $ | (448,272 | ) | ||||
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9. Comprehensive Income (Loss)
The following are the components of comprehensive loss:
Quarter Ended | Nine Months Ended | |||||||||||||||
(Thousands) | September 29, 2002 | September 30, 2001 | September 29, 2002 | September 30, 2001 | ||||||||||||
Net loss | $ | (254,171 | ) | $ | (186,929 | ) | $ | (448,272 | ) | $ | (44,739 | ) | ||||
Net change in cumulative translation adjustments | (20,483 | ) | 59,525 | 80,873 | 18,585 | |||||||||||
Net change in unrealized gains (losses) on cash flow hedges | (1,307 | ) | 20,060 | 32,111 | 8,412 | |||||||||||
Net change in unrealized gains (losses) on available-for-sale securities | (3,400 | ) | 2,668 | (4,477 | ) | (7,824 | ) | |||||||||
Other comprehensive income (loss) | (25,190 | ) | 82,253 | 108,507 | 19,173 | |||||||||||
Comprehensive loss | $ | (279,361 | ) | $ | (104,676 | ) | $ | (339,765 | ) | $ | (25,566 | ) | ||||
Quarter Ended | Nine Months Ended | |||||||||||||||
(Thousands) | September 28, 2003 | September 29, 2002 | September 28, 2003 | September 29, 2002 | ||||||||||||
Net loss | $ | (31,231 | ) | $ | (254,171 | ) | $ | (317,683 | ) | $ | (448,272 | ) | ||||
Net change in cumulative translation adjustments | 51,504 | (20,483 | ) | 154,494 | 80,873 | |||||||||||
Net change in unrealized gain (loss) on cash flow hedges | (8,086 | ) | (1,307 | ) | (19,713 | ) | 32,111 | |||||||||
Net change in minimum pension liabilities | (3,874 | ) | — | (3,874 | ) | — | ||||||||||
Net change in unrealized gain (loss) on available-for-sale securities | 3,865 | (3,400 | ) | 3,682 | (4,477 | ) | ||||||||||
Other comprehensive income (loss) | 43,409 | (25,190 | ) | 134,589 | 108,507 | |||||||||||
Comprehensive income (loss) | $ | 12,178 | $ | (279,361 | ) | $ | (183,094 | ) | $ | (339,765 | ) | |||||
The components of accumulated other comprehensive lossincome are as follows:
(Thousands) | September 29, 2002 | December 30, 2001 | ||||||
Cumulative translation adjustments | $ | (54,046 | ) | $ | (134,919 | ) | ||
Net unrealized gains (losses) on cash flow hedges | 28,712 | (3,399 | ) | |||||
Unrealized gain on available-for-sale securities | 594 | 5,071 | ||||||
Accumulated other comprehensive loss | $ | (24,740 | ) | $ | (133,247 | ) | ||
(Thousands) | September 28, 2003 | December 29, 2002 | |||||
Net unrealized gain on available-for-sale securities, net of taxes of $2,104 in 2003 and $1,250 in 2002 | $ | 5,762 | $ | 2,152 | |||
Net unrealized gain on cash flow hedges, net of taxes of $13,739 in 2003 and $17,511 in 2002 | 9,366 | 29,079 | |||||
Minimum pension liability | (3,874 | ) | — | ||||
Cumulative translation adjustments | 153,384 | 18,674 | |||||
$ | 164,638 | $ | 49,905 | ||||
10. Long-term Debt and Capital Lease Obligations
Payments Due By Period | |||||||||||||||||||||
(In Thousands) | Total | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 and beyond | ||||||||||||||
4.75% Convertible Senior Debentures Due 2022 | $ | 500,000 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 500,000 | |||||||
4.50% Convertible Senior Notes Due 2007 | 402,500 | — | — | — | — | 402,500 | — | ||||||||||||||
Dresden term loans | 612,740 | 34,424 | 309,813 | 268,503 | — | — | |||||||||||||||
July 2003 FASL term loan | 89,375 | 16,875 | 27,500 | 27,500 | 17,500 | — | — | ||||||||||||||
Manufacturing Joint Venture term loan | 160,923 | — | 42,913 | 42,913 | 42,913 | 32,184 | — | ||||||||||||||
Fujitsu cash note | 40,000 | — | — | 10,000 | 30,000 | — | — | ||||||||||||||
Capital lease obligations | 276,038 | 19,616 | 91,970 | 85,600 | 74,526 | 4,326 | — | ||||||||||||||
Total debt and capital lease obligations | $ | 2,081,576 | $ | 36,491 | $ | 196,807 | $ | 475,826 | $ | 433,442 | $ | 439,010 | $ | 500,000 | |||||||
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On January 29, 2002,July 7, 2003, the Company issued $500amended and restated its 1999 Loan and Security Agreement with a consortium of banks led by a domestic financial institution. It was further amended on October 3, 2003 (the July 2003 Loan Agreement). See Note 14Subsequent Events. The following describes the July 2003 Loan Agreement as of September 28, 2003, before it was amended on October 3, 2003. The July 2003 Loan Agreement provided for a secured revolving line of credit of up to $200 million that expired in July of 2007. The Company could borrow, subject to amounts that were set aside by the lenders, up to 85 percent of its 4.75% Convertible Senior Debentures Due 2022 (the Debentures)eligible accounts receivable from OEMs and 50 percent of its eligible accounts receivable from distributors. The Company had to comply with, among other things, the following financial covenants if the level of net domestic cash (as defined in a private offering pursuant to Rule 144A and Regulation S of the Securities Act.
| |||
September 30, 2003 | $ | 1.25 billion | |
December 31, 2003 | $ | 1.25 billion | |
Last day of each fiscal quarter in 2004 | $ | 1.425 billion | |
Last day of each fiscal quarter in 2005 | $ | 1.85 billion | |
Last day of each fiscal quarter thereafter | $ | 2.0 billion |
Period | Amount | ||
Four fiscal quarters ending September 30, 2003 | |||
Four fiscal quarters ending December 31, 2003 | |||
Four fiscal quarters ending March 31, 2004 | |||
Four fiscal quarters ending June 30, 2004 | |||
Four fiscal quarters ending September 30, 2004 | $ | 850 million | |
Four fiscal quarters ending December 31, 2004 | $ | 950 million | |
Four fiscal quarters ending March 31, 2005 and on each fiscal quarter thereafter | $ | 1,050 million |
The Company’s obligations under the July 2003 Loan Agreement were secured by all of its accounts receivable, inventory, general intangibles (excluding intellectual property) and the Debentures will haverelated proceeds. FASL LLC’s assets, accounts receivable, inventory and general intangibles were not pledged as security for the ability to requireCompany’s obligations. As of September 28, 2003, no amount was outstanding under the July 2003 Loan Agreement.
On July 11, 2003, the Company to repurchase the Debentures at 100 percent of par in $1,000 increments, in whole or in part, on February 1, 2009, February 1, 2012 and February 1, 2017. The holders of the Debentures will also have the ability to require the Company to repurchase the Debentures in the event that the Company undergoes specified fundamental changes, including a change of control. In each such case, the repurchase price would be 100 percent of the principal amount of the Debentures plus accrued and unpaid interest.
FASL LLC must also comply with certainadditional financial covenants if its net domestic cash balance as(as defined in the agreement, dropsJuly 2003 FASL Term Loan) declines below $130 million through the first quarter of 2004, $120 million from the second quarter of 2004 and the end of 2005 and $100 million during 2006. At any time that net domestic cash falls below these thresholds, FASL LLC must comply with, among other things, the following financial covenants:
Period | Amount | |||
Quarter ending September 2003 | $ | (40 million | ) | |
For the six months ending December 2003 | $ | 75 million | ||
For the nine months ending March 2004 | $ | 170 million | ||
For the four quarters ending June 2004 | $ | 285 million | ||
For the four quarters ending September 2004 | $ | 475 million | ||
For the four quarters ending December 2004 | $ | 550 million | ||
For the four quarters ending in 2005 | $ | 640 million | ||
For the four quarters ending in 2006 | $ | 800 million |
Period | Ratio | |
Third Fiscal Quarter of 2003 | -0.6 to 1.00 | |
Fourth Fiscal Quarter of 2003 | 0.2 to 1.00 | |
First Fiscal Quarter of 2004 | 0.25 to 1.00 | |
Period ending June 2004 | 0.4 to 1.00 | |
Period ending September 2004 | 0.8 to 1.00 | |
Period ending December 2004 | 1.0 to 1.00 | |
Full Fiscal Year 2005 | 1.0 to 1.00 | |
Full Fiscal Year 2006 | 0.9 to 1.00 |
At September 28, 2003, FASL LLC’s net domestic cash totaled $202 million.
Manufacturing Joint Venture Loan Refinancing
As a result of the FASL LLC transaction, the Manufacturing Joint Venture’s third party loans were refinanced from the proceeds of a term loan in the aggregate principal amount of $30018 billion yen (approximately $161 million on September 28, 2003) entered into between a wholly owned subsidiary of FASL LLC and a Japanese financial institution. Fujitsu has guaranteed 100 percent of the amounts outstanding under this facility. Under the agreement, the
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amounts borrowed bear an interest rate of TIBOR plus a spread that is determined by Fujitsu’s current debt rating. The current interest rate is 1.06%. Repayment occurs in equal, consecutive, quarterly principal installments ending in June 2007. The Company has agreed to pay Fujitsu 60 percent of any amount paid by Fujitsu under its guarantee of this loan.
Capital Lease and Leaseback Transactions
On July 16, 2003, a wholly owned subsidiary of FASL LLC entered into a sale-leaseback transaction for certain equipment with a third party financial institution in the amount of 12 billion yen (approximately $100 million on July 16, 2003) of cash proceeds. Upon execution of the agreement, the equipment had a net book value of approximately $168 million. As the term on the leaseback is more than 75 percent of the remaining estimated economic lives of the equipment, the Company is accounting for the transaction as a capital lease. The Company recognized an immediate loss of $16 million on the transaction due to the fact that the fair market value of the equipment was less than their net book value at the time of the transaction. The Company also recorded approximately $52 million of deferred loss which will be amortized in proportion to the leased assets over their average estimated remaining lives, which is approximately 3 years. The Company guaranteed 50 percent or up to approximately $50 million of the outstanding obligations under the lease arrangement. As of September 28, 2003, the outstanding lease obligation under this agreement was approximately $91 million. FASL LLC and its subsidiaries also entered into other capital lease transactions during the third quarter of 2003, which resulted in additional capital lease obligations of $152 million as of September 28, 2003.
The Company has guaranteed approximately $156 million of the total $276 million outstanding obligations under capital lease arrangements of FASL LLC as of September 28, 2003.
11. Guarantees
The Company accounts for guarantees in accordance with FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”
Guarantees of indebtedness recorded on the Company’s consolidated balance sheets
The following table summarizes the principal guarantees issued as of September 28, 2003 related to underlying liabilities that are already recorded on the Company’s consolidated balance sheets as of September 28, 2003:
Amounts of guarantee expiration per period | |||||||||||||||||||||
(Thousands) | Amounts Guaranteed * | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 and Beyond | ||||||||||||||
Dresden term loan guarantee | $ | 306,369 | $ | — | $ | — | $ | — | $ | 306,369 | $ | — | $ | — | |||||||
July 2003 FASL term loan guarantee (see Note 10) | 53,625 | 10,125 | 16,500 | 16,500 | 10,500 | — | — | ||||||||||||||
FASL capital lease guarantees (see Note 10) | 155,812 | 10,587 | 47,998 | 51,128 | 43,397 | 2,702 | — | ||||||||||||||
Manufacturing Joint Venture term loan guarantee (see Note 10) | 96,554 | — | 25,748 | 25,748 | 25,748 | 19,310 | — | ||||||||||||||
Total guarantees | $ | 612,360 | $ | 20,712 | $ | 90,246 | $ | 93,376 | $ | 386,014 | $ | 22,012 | $ | 0 | |||||||
* | Amounts guaranteed represent the principal amount of the underlying obligations and are exclusive of obligations for interest, fees and expenses. |
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Dresden Term Loan Agreements and Dresden Term Loan Guarantee
AMD Saxony Limited Liability Company & Co. KG, (AMD Saxony, formerly known as AMD Saxony Manufacturing GmbH), an indirect wholly owned German subsidiary of AMD, continues to facilitize Fab 30, which began production in the third quarter of 2000. AMD, the Federal Republic of Germany, the State of Saxony and a consortium of banks are providing financing for the project.
In March 1997, AMD Saxony entered into a loan agreement and other related agreements (the Dresden Loan Agreements) with a consortium of banks led by Dresdner Bank AG, a German financial institution, in order to finance the project.
Because most of the amounts under the Dresden Loan Agreements were denominated in deutsche marks (converted to euros), the dollar amounts discussed below are subject to change based on applicable conversion rates. The Company used the exchange rate that was permanently fixed on January 1, 1999, of 1.95583 deutsche marks to one euro for the conversion of deutsche marks to euros, and then used the exchange rate of 0.87 euro to one U.S. dollar as of September 28, 2003, to translate the amounts denominated in deutsche marks into U.S. dollars.
The Dresden Loan Agreements, as amended, provide for the funding of the construction and facilitization of Fab 30 and also require that the Company guarantee up to 50 percent of AMD Saxony’s obligations under the Dresden Loan Agreements, which guarantee must not be less than $128 million or less. more than $344 million, until the bank loans are repaid in full. As of September 28, 2003, the amount outstanding under the guarantee was $306 million.
As AMD Saxony’s obligations under the Dresden Loan Agreements are included in the Company’s consolidated financial statements, no incremental liability is recorded under the Dresden guarantee.
Guarantees of indebtedness not recorded on the Company’s consolidated balance sheets
The following table summarizes the principal guarantees issued as of September 28, 2003 for which the underlying liabilities are not recorded on the Company’s consolidated balance sheets as of September 28, 2003. These guarantees are described below the following table:
Amounts of guarantee expiration per period | ||||||||||||||||||||||
(Thousands) | Amounts* Guaranteed | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 and beyond | |||||||||||||||
FASL LLC operating lease guarantees | $ | 29,386 | $ | 7,647 | $ | 21,739 | $ | — | $ | — | $ | — | $ | — | ||||||||
BAC payment guarantee | 28,686 | — | — | — | — | — | 28,686 | |||||||||||||||
AMTC payment guarantee | 36,718 | — | — | — | — | 36,718 | — | |||||||||||||||
AMTC rental guarantee | 130,036 | — | — | — | — | — | 130,036 | ** | ||||||||||||||
Total | $ | 224,826 | $ | 7,647 | $ | 21,739 | $ | — | $ | — | $ | 36,718 | $ | 158,722 | ||||||||
* | Amounts guaranteed represent the principal amount of the underlying obligations and are exclusive of obligations for interest, fees and expenses. |
** | Amounts outstanding will diminish until the expiration of the guarantee. |
FASL LLC Operating Lease Guarantees
The Company intends to usehas guaranteed certain operating leases entered into by FASL LLC and its subsidiaries totaling approximately $29 million as of September 28, 2003. The amount of the guarantees will be reduced by the actual amount of lease payments paid by FASL LLC over the lease term.
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Advanced Mask Technology Center and Maskhouse Building Administration Guarantees
The Advanced Mask Technology Center GmbH & Co. KG (AMTC), and Maskhouse Building Administration GmbH & Co., KG (BAC), are joint ventures formed by AMD, Infineon Technologies AG and DuPont Photomasks, Inc. for the purpose of constructing and operating a new advanced photomask facility in Dresden, Germany. To finance the project, BAC entered into an $86 million bridge loan in June 2002, and BAC and AMTC entered into a $138 million revolving credit facility and an $86 million term loan in December 2002. In September 2003, the outstanding amounts borrowed under the bridge loan were repaid with proceeds from the term loan. Also in December 2002, in order to occupy the photomask facility, AMTC entered into a rental agreement with BAC. With regard to these commitments by BAC and AMTC, the Company guaranteed up to approximately $29 million plus interest and expenses under the term loan, up to approximately $37 million plus interest and expenses under the revolving loan, and up to approximately $16 million, initially, under the rental agreement. The obligations under the rental agreement guarantee diminish over time through 2011 as the term loan is repaid. However, under certain circumstances of default by the other tenant of the photomask facility under its rental agreement with BAC and certain circumstances of default by more than one joint venture partner under its rental agreement guarantee obligations, the maximum potential amount of the Company’s obligations under the rental agreement guarantee would be approximately $130 million. As of September 28, 2003, $12 million was drawn under the revolving credit facility, and $75 million was drawn under the term loan and are subject to the aforementioned guarantees.
The Company has not recorded any liability in its consolidated financial statements associated with these guarantees because they were issued prior to the effective date of FIN 45.
Warranties and Indemnities
The Company generally offers a three-year limited warranty to end users for certain of its boxed microprocessor products, and a one-year limited warranty only to direct purchasers for all other products.
Changes in the Company’s potential liability for product warranty during the nine months ended September 28, 2003 were as follows:
(Thousands) | ||||
Balance at December 29, 2002 | $ | 19,369 | ||
New warranties issued during the period | 28,437 | |||
Settlements during the period | (21,003 | ) | ||
Changes in liability for pre-existing warranties during the period, including expirations | (4,520 | ) | ||
Balance at September 28, 2003 | $ | 22,283 | ||
In addition to product warranties, the Company, from time to time, in its normal course of business, indemnifies other parties with whom it enters into contractual relationships, including customers, lessors and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other party harmless against specified losses, such as those arising
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from a breach of representations or covenants, third party claims that the Company’s products when used for their intended purpose(s) infringe the intellectual property rights of such third party or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, payments made by the Company under these obligations have not been material.
12. Restructuring and Other Special Charges
2002 Loan Agreement for capital expenditures, working capital and general corporate purposes.
In December 2002, the Company completed the acquisition of Alchemy Semiconductor, Inc. (Alchemy), a privately held company, for approximately $30 million in cash consideration to Alchemy stockholders. Alchemy designed, developed and marketed low-power, high performance microprocessors for personal connectivity devices such as personal digital assistants (PDAs), web tablets and portable and wired Internet access devices and gateways.
As part of this plan, and as a slowdown in the semiconductor industry and a resulting decline in revenues. In connection with the plan, the Company closed Fabs 14 and 15 in Austin, Texas in June 2002. These facilities supported certainresult of the Company’s older products and its Foundry Service operations, which were discontinued as parttechnology agreement with IBM to develop future generations of the plan.Company’s logic process technology, the Company has ceased its silicon processing associated with logic research and development in its Submicron Development Center (SDC) in Sunnyvale, California and has eliminated most of those related resources, including the sale or abandonment of certain equipment used in the SDC.
The 2002 Restructuring Plan has resulted in the consolidation of facilities, primarily at the Company’s Sunnyvale, California site and at sales offices worldwide. The Company has vacated, and is attempting to sublease, certain facilities currently occupied under long-term operating leases. The Company has also reorganized related manufacturing facilitiesterminated the implementation of certain partially completed enterprise resource planning (ERP) software and reduced relatedother information technology implementation activities, primarilyresulting in Penang, Malaysia along with associated administrative support.
Pursuant to the 20012002 Restructuring Plan, the Company recorded restructuring costs and other special charges of $89.3$330.6 million in the fourth quarter of 2002, consisting primarily of $34.1$68.8 million of anticipated severance and fringe benefit costs, $13.0an asset impairment charge of $32.5 million relating to a license that had no future use because of its association with discontinued logic development activities, asset impairment charges of $30.6 million resulting from the abandonment of equipment previously used in logic process development and $3.2 million ofmanufacturing activities, anticipated exit costs of $138.9 million primarily related to closevacating and consolidating the Company’s facilities and $55.5 million resulting from the abandonment of partially completed ERP software and other information technology implementation activities.
In the third quarter ended September 28, 2003, the Company revised its estimates of the number of positions to be eliminated pursuant to the 2002 Restructuring Plan from 2,000 to 1,800 in Austin and Asia, mostly in Penang, and $28.7 million and $10.3response to the additional resources required due to the FASL LLC transaction. As a result, the Company reversed $8 million of non-cashthe estimated severance and fringe benefit accrual due to the decision to reduce the number of positions to be eliminated by 200. Therefore, the 2002 Restructuring Plan will result in the reduction of approximately 1,800 positions or 14 percent of the Company’s employees, affecting all levels of its workforce in almost every organization. As of September 28, 2003, 1,512 employees had been terminated pursuant to the 2002 Restructuring Plan resulting in cumulative cash payments of $50 million for severance and
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employee benefit costs. The Company expects to substantially complete the activities associated with the 2002 Restructuring Plan by the end of December 2003.
During the first quarter of 2003, management approved the sale of additional equipment, primarily equipment used in the SDC, that had been identified as no longer useful in the Company’s operations. As a result, the Company recorded approximately $11 million of asset impairment charges in Austinthe first quarter of 2003, including $3.3 million of charges for decommission costs necessary to complete the equipment’s sale.
The following table summarizes activities under the 2002 Restructuring Plan through September 28, 2003:
(Thousands) | Severance and Employee Benefits | Asset impairment | Exit and Equipment Decommission Costs | Other Restructuring Charges | Total | |||||||||||||||
2002 provision | $ | 68,770 | $ | 118,590 | $ | 138,900 | $ | 4,315 | $ | 330,575 | ||||||||||
Q4 2002 non-cash charges | — | (118,590 | ) | — | — | (118,590 | ) | |||||||||||||
Q4 2002 cash charges | (14,350 | ) | — | (795 | ) | — | (15,145 | ) | ||||||||||||
Accruals at December 29, 2002 | 54,420 | — | 138,105 | 4,315 | 196,840 | |||||||||||||||
Q1 2003 provision | — | 7,791 | 3,314 | — | 11,105 | |||||||||||||||
Q1 2003 non-cash charges | — | (7,791 | ) | — | — | (7,791 | ) | |||||||||||||
Q1 2003 cash charges | (17,820 | ) | — | (751 | ) | (4,223 | ) | (22,794 | ) | |||||||||||
Accruals at March 30, 2003 | 36,600 | — | 140,668 | 92 | 177,360 | |||||||||||||||
Q2 2003 cash charges | (14,922 | ) | — | (8,309 | ) | (77 | ) | (23,308 | ) | |||||||||||
Accruals at June 29, 2003 | 21,678 | — | 132,359 | 15 | 154,052 | |||||||||||||||
Q3 2003 non-cash adjustment | (8,000 | ) | — | — | — | (8,000 | ) | |||||||||||||
Q3 2003 cash charges | (2,568 | ) | — | (5,934 | ) | — | (8,502 | ) | ||||||||||||
Accruals at September 28, 2003 | 11,110 | — | 126,425 | 15 | 137,550 | |||||||||||||||
2001 Restructuring Plan
In 2001, the Company announced a restructuring plan (the 2001 Restructuring Plan) due to the slowdown in the semiconductor industry and Asia, primarily Penang.a resulting decline in revenues. The asset impairment charges related primarilyCompany has substantially completed its execution of the 2001 Restructuring Plan, with the exception of the facilities and equipment decommission activities, which are expected to buildingsbe completed by the end of 2003. During the first quarter of 2003, the Company reduced the estimated accrual of the facility and production equipment that were incurreddecommission costs by $7.4 million based on the most current information available. During the first quarter, the Company also realized a recovery of approximately $1.6 million from the sale of equipment impaired as a result of the Company’s decision to implement the 2001 Restructuring Plan. Management determined thePlan, previously held-for-sale at amounts in excess of its initially estimated fair value of the affected equipment based on market data and conditions.
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The following table summarizes activityactivities under the 2001 Restructuring Plan through September 29, 2002:
(Thousands) | Severance and Employee Benefits | Facilities and equipment impairment | Facility and equipment decommission costs | Other facility exit costs | Total | |||||||||||||||
Q3 2001 charges | $ | 34,105 | $ | 39,000 | $ | 15,500 | $ | 700 | $ | 89,305 | ||||||||||
Non-cash charges | — | (39,000 | ) | — | — | (39,000 | ) | |||||||||||||
Cash charges | (7,483 | ) | — | — | (54 | ) | (7,537 | ) | ||||||||||||
Accruals at December 30, 2001 | 26,622 | — | 15,500 | 646 | 42,768 | |||||||||||||||
Cash charges | (26,622 | ) | — | (439 | ) | — | (27,061 | ) | ||||||||||||
Accruals at September 29, 2002 | $ | — | $ | — | $ | 15,061 | $ | 646 | $ | 15,707 | ||||||||||
(Thousands) | Facilities and Equipment Decommission Costs | Other Facilities Exit Costs | Total | ||||||||
Accrual at December 29, 2002 | $ | 15,055 | $ | 646 | $ | 15,701 | |||||
Q1 2003 cash charges | (630 | ) | — | (630 | ) | ||||||
Q1 2003 non-cash adjustment | (7,400 | ) | — | (7,400 | ) | ||||||
Accruals at March 30, 2003 | 7,025 | 646 | 7,671 | ||||||||
Q2 2003 cash charges | (226 | ) | — | (226 | ) | ||||||
Accruals at June 29, 2003 | 6,799 | 646 | 7,445 | ||||||||
Q3 2003 cash charges | (596 | ) | — | (596 | ) | ||||||
Accruals at September 28, 2003 | $ | 6,203 | $ | 646 | $ | 6,849 | |||||
As of September 28, 2003 and December 29, 2002, approximately $25$100 million is restrictedand $113 million of the total restructuring accruals of $144 million and $213 million were included in other liabilities (long-term) on the balance sheets. (See Note 13.)
13. Other Liabilities
The Company’s other long-term liabilities at September 28, 2003 and December 29, 2002 consisted of:
(Thousands) | September 28, 2003 | December 29, 2002 | ||||
Dresden deferred grants and subsidies | $ | 257,818 | $ | 146,346 | ||
Restructuring accrual | 100,499 | 112,567 | ||||
Customer deposits | 17,500 | 38,000 | ||||
Deferred gain on building | 23,908 | 25,169 | ||||
FASL LLC pension liabilities | 24,704 | — | ||||
Other | 853 | — | ||||
$ | 425,282 | $ | 322,082 | |||
14. Subsequent Events
Amendment of Note Payable to Bank
On July 7, 2003, the Company amended and restated its 1999 Loan and Security Agreement with a consortium of banks led by a domestic financial institution. It was further amended on October 3, 2003. The July 2003 Loan Agreement currently provides for a secured revolving line of credit of up to $125 million that expires in July of 2007. The Company can borrow, subject to amounts that were set aside by the lenders, up to 85 percent of its eligible accounts receivable from OEMs and 50 percent of its eligible accounts receivable from distributors. The Company has to comply with, among other things, the following financial covenants if the level of net domestic cash (as defined in the July 2003 Loan Agreement) it holds declines below $125 million:
| Amount | ||
September 30, 2003 | $ | 1.25 billion | |
December 31, 2003 | $ | 1.25 billion | |
Last day of each fiscal quarter in 2004 | $ | 1.425 billion | |
Last day of each fiscal quarter in 2005 | $ | 1.85 billion | |
Last day of each fiscal quarter thereafter | $ | 2.0 billion |
Period | Amount | ||
Four fiscal quarters ending September 30, 2003 | $ | 150 million | |
Four fiscal quarters ending December 31, 2003 | $ | 400 million | |
Four fiscal quarters ending March 31, 2004 | $ | 550 million | |
Four fiscal quarters ending June 30, 2004 | $ | 750 million | |
Four fiscal quarters ending September 30, 2004 | $ | 850 million | |
Four fiscal quarters ending December 31, 2004 | $ | 950 million | |
Four fiscal quarters ending March 31, 2005 and on each fiscal quarter thereafter | $ | 1,050 million |
At September 28, 2003, net domestic cash, as defined, totaled $429 million. The Company’s obligations under the July 2003 Loan Agreement are secured by all of its accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds. FASL LLC’s assets, accounts receivable, inventory and general intangibles are not pledged as security for the Company’s obligations.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Cautionary Statement Regarding Forward-Looking Statements
TheThis report includes forward-looking statements. These forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations that are forward-looking are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including, “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates,” or “anticipates” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. The forward-looking statements in this report relate to, among other things: operating results; anticipated cash flows; capital expenditures; gross margins; adequacy of resources to fund operations and capital investments; our ability to achieve cost reductions in the amounts and in the timeframes anticipated; normal seasonality in the sale of our products in the fourth quarter of 2003; our ability to transition to new product introductions effectively; our ability to produce microprocessorsproducts and technologies in the volume required by customers on a timely basis; our ability to maintain average selling prices of microprocessors despite aggressive marketing and pricing strategies of our competitors; our ability to achieveeffective way; and customer and market acceptance of our AMD Opteron and AMD Athlon 64 microprocessors including those based on Hammer technology, on a timely basis and produce them in the volumes required by the market at acceptable yields; our ability, and the ability of third parties, to provide timely infrastructure solutions, such as motherboards and chipsets, to support our microprocessors; a recovery in the economy leading to increased demand for our microprocessor products; a recovery in the communication and networking industries leading to an increase in the demand for Flash memory products; the effect of foreign currency hedging transactions; the process technology transition in our submicron integrated circuit manufacturing and design facility in Dresden, Germany (Dresden Fab 30); and the financing and further construction of the Fujitsu AMD Semiconductor Limited (FASL) manufacturing facilities. See “Financial Condition” and “Risk Factors” below, as well as such other risks and uncertainties as are detailed in our other Securities and Exchange Commission reports and filings forMirrorBit products. For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements.statements, see the “Financial Condition” and “Risk Factors” sections set forth below beginning on page 31 and such other risks and uncertainties as set forth below in this report or detailed in our other Securities and Exchange Commission reports and filings.
The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes included in this report and our Audited Consolidated Financial Statements and related notes as of December 30, 200129, 2002 and December 31, 200030, 2001 and for each of the three years in the period ended December 30, 200129, 2002 as filed in our Annual Report on Form 10-K.10-K, as amended.
AMD, the AMD Arrow logo, and combinations thereof, Advanced Micro Devices, AMD Athlon, AMD Duron and AMD Opteron and MirrorBit are either trademarks or registered trademarks of Advanced Micro Devices, Inc. in the United States and/or other jurisdictions. Vantis is a trademark of Lattice Semiconductor Corporation. Legerity is a trademark of Legerity, Inc. MicrosoftSpansion and WindowsMirrorBit are either registered trademarks or trademarks of Microsoft CorporationFASL LLC in the United States and/or other jurisdictions. Pentium is a registered trademarkMicrosoft and Windows are trademarks of IntelMicrosoft Corporation in the United States and/or other jurisdictions. Other terms used to identify companies and products may be trademarks of their respective owners.
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CRITICAL ACCOUNTING POLICIESRESULTS OF OPERATIONS
Prior to the presentationthird quarter of our financial statements and require the most difficult, subjective and complex judgments.
Beginning in the third quarter of 2003, we changed our reportable segments to: the Computation Products segment, which includes x86 microprocessors for servers, workstations, desktop and notebook PCs and chipset products, and the Foundry Services segment. Our CoreMemory Products segment, which includes our PC processorthe Flash memory products Memory productsof AMD and Other IC products. PC processorFASL LLC. Microprocessor products include our seventh-generation microprocessors, theAMD OpteronTM, AMD AthlonTM XP and AMD DuronTM microprocessors. Memory products include Flash memory devices and Erasable Programmable Read-Only Memory, (EPROM)or EPROM devices. We believe that separate reporting of these operating segments, given our new focus on FASL LLC as a separate operating company and its separate market brand - SpansionTM, provides more useful information.
The All Other IC products include embedded processors, networking products, personal connectivitycategory comprises other small operating segments (Personal Connectivity Solutions Products, which includes low power MIPS and x86 solutions, products and platform products, which primarily consist of chipsets used in PCs. Our Foundry Services, segment consists of servicewhich included fees from Legerity, Inc.our former voice communications and Vantis Corporation.
We use a 52- to 53-week fiscal year ending on the last Sunday in December. The quarters ended September 29, 2002, June 30, 200228, 2003 and September 30, 200129, 2002 each included 13 weeks. The nine months ended September 29, 200228, 2003 and September 30, 200129, 2002 each included 39 weeks.
In order to respond more quickly to changes in market trends and improve efficiencies in the production, marketing and product design of our Flash memory products, we and Fujitsu formed FASL LLC effective June 30, 2003. As we have a 60% controlling equity interest in FASL LLC.
Both we and Fujitsu contributed our respective investments in the Manufacturing Joint Venture (formerly referred to as FASL). We also contributed Flash memory inventory, our manufacturing facility located in Austin, Texas (Fab 25), our Flash memory research and development facilities in Sunnyvale, California, and our Flash memory assembly and test operations in Thailand, Malaysia and China. In addition, Fujitsu contributed its Flash memory division, including related inventory, cash, and its Flash memory assembly and test operations in Malaysia.
As a result of the transaction, we began consolidating the results of FASL LLC’s operations on the first day of the quarter ended September 28, 2003. The results of operations for prior periods do not include the consolidation of FASL LLC’s operations. Accordingly, the results of operations during the third quarter of 2003 are not comparable to the results of operations in prior periods.
The following is a summary of our net sales by segment and category for the periods presented below:
Quarter Ended | Nine Months Ended | ||||||||||||||
September 29, 2002 | June 30, 2002 | September 30, 2001 | September 29, 2002 | September 30, 2001 | |||||||||||
(Millions) | |||||||||||||||
Core Products segment: | |||||||||||||||
PC Processors | $ | 262 | $ | 380 | $ | 467 | $ | 1,326 | $ | 1,717 | |||||
Memory Products | 189 | 175 | 210 | 524 | 937 | ||||||||||
Other IC Products | 43 | 39 | 64 | 128 | 190 | ||||||||||
494 | 594 | 741 | 1,978 | 2,844 | |||||||||||
Foundry Services segment | 14 | 6 | 25 | 32 | 96 | ||||||||||
$ | 508 | $ | 600 | $ | 766 | $ | 2,011 | $ | 2,940 | ||||||
Quarters Ended | Nine Months Ended | ||||||||||||||
(Millions) | September 28, 2003 | June 29, 2003 | September 29, 2002 | September 28, 2003 | September 29, 2002 | ||||||||||
Computation Products | $ | 503 | $ | 406 | $ | 264 | $ | 1,379 | $ | 1,334 | |||||
Memory Products | 424 | 211 | 188 | 853 | 524 | ||||||||||
All Other | 27 | 28 | 56 | 82 | 152 | ||||||||||
$ | 954 | $ | 645 | $ | 508 | $ | 2,314 | $ | 2,010 | ||||||
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Net Sales Comparison of Quarters Ended September 29, 200228, 2003 and June 30,29, 2003
Net sales of $954 million for the third quarter of 2003 increased 48 percent compared to the net sales of $645 million for the second quarter of 2003.
Computation Products net sales of $503 million increased 24 percent in the third quarter of 2003 compared to the second quarter of 2003. The increase in net sales was due to growth in Europe and Asia. Microprocessor unit shipments and average selling prices increased by 8 percent and 14 percent during the quarter. In the fourth quarter of 2003, we expect microprocessor sales to increase due to normal seasonality and the availability of a richer mix of products.
Memory products net sales of $424 million increased 101 percent in the third quarter of 2003 compared to the second quarter of 2003. The increase in net sales was primarily attributable to the effect of consolidating the operating results of FASL LLC, which includes FASL LLC sales to Fujitsu, and increased demand for Flash memory products. Further quantification of the breakdown in the sales increase is not practical due to the reorganization of geographical sales territories between AMD and Fujitsu. In the fourth quarter of 2003, we expect our reported Flash memory device sales to increase primarily due to normal seasonality and increasing customer acceptance of MirrorBitTM technology.
Net Sales Comparison of Quarters Ended September 28, 2003 and September 29, 2002
Net sales of $954 million for the third quarter of 2003 increased 88 percent compared to net sales of $508 million for the third quarter of 2002.
Computation Products net sales of $503 million increased 91 percent in the third quarter of 2003 compared to the third quarter of 2002 decreaseddue to a 55 percent increase in microprocessor unit shipments and a 21 percent increase in microprocessor average selling prices.
Memory products net sales of $424 million increased 125 percent in the third quarter of 2003 compared to the third quarter of 2002. The increase in net sales was primarily attributable to the effect of consolidating the operating results of FASL LLC, which includes FASL LLC sales to Fujitsu, and increased demand for Flash memory products. Further quantification of the breakdown in the sales increase is not practical due to the reorganization of customers and geographical sales territories between AMD and Fujitsu.
Net Sales Comparison of Nine Months Ended September 28, 2003 and September 29, 2002
Net sales of $2,314 million for the first nine months of 2003 increased by 15 percent compared to net sales of $600$2,010 million for the second quarterfirst nine months of 2002.
Computation Products net sales of $262$1,379 million decreased by 31increased 3 percent in the first nine months of 2003 compared to the second quarter of 2002. This decrease was due to declines in both average selling prices and unit sales, reflecting industry-wide weakness in PC sales. This decrease also reflected our decision not to accept orders from certain customers, not to ship to certain customers and our receipt of product returns from certain customers, each as part of our efforts to reduce excess PC processor inventory in the overall supply chain. In the fourth quarter of 2002, we expect unit shipments of PC processors to follow seasonal patterns, which generally show increases from third quarter levels. Our ability to increase PC processor revenue in the fourth quarter of 2002 depends upon customer demand for the newest versions of the AMD Athlon processors, an increase of average selling prices and an increase in unit shipments of our PC processors.
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Memory products net sales of $189$853 million decreased by 10 percent in the third quarter of 2002 compared to the same quarter of 2001 due to a decline in average selling prices, partially offset by an increase in unit shipments.
Comparison of Expenses, Gross Margin Percentage and Interest
The following is a summary of expenses, gross margin percentage and interest and other income, net for the periods presented below:
Quarter Ended | Nine Months Ended | |||||||||||||||||||
September 29, 2002 | June 30, 2002 | September 30, 2001 | September 29, 2002 | September 30, 2001 | ||||||||||||||||
(Millions except for gross margin percentage) | ||||||||||||||||||||
Cost of sales | $ | 454 | $ | 558 | $ | 594 | $ | 1,599 | $ | 1,945 | ||||||||||
Gross margin percentage | 11 | % | 7 | % | 22 | % | 20 | % | 34 | % | ||||||||||
Research and development | $ | 221 | $ | 178 | $ | 161 | $ | 571 | $ | 490 | ||||||||||
Marketing, general and administrative | 159 | 160 | 151 | 476 | 456 | |||||||||||||||
Restructuring and other special charges | — | — | 89 | — | 89 | |||||||||||||||
Interest and other income, net | 13 | 9 | (11 | ) | 31 | 20 | ||||||||||||||
Interest expense | 21 | 16 | 10 | 49 | 52 |
Quarters Ended | Nine Months Ended | |||||||||||||||||||
(Millions except for gross margin percentage) | September 28, 2003 | June 29, 2003 | September 29, 2002 | September 28, 2003 | September 29, 2002 | |||||||||||||||
Cost of sales | $ | 627 | $ | 425 | $ | 454 | $ | 1,549 | $ | 1,599 | ||||||||||
Gross margin percentage | 34 | % | 34 | % | 11 | % | 33 | % | 20 | % | ||||||||||
Research and development | $ | 214 | $ | 209 | $ | 221 | $ | 626 | $ | 571 | ||||||||||
Marketing, general and administrative | 151 | 135 | 159 | 425 | �� | 476 | ||||||||||||||
Restructuring and other special charges, net | (8 | ) | — | — | (6 | ) | — | |||||||||||||
Interest and other income, net | 0.5 | 5 | 13 | 12 | 31 | |||||||||||||||
Interest expense | 27 | 26 | 21 | 79 | 49 |
The gross margin percentage is significantly affected by fluctuations in unit sales and average selling prices.
Research and development expenses in the third quarter of 2003 were relatively flat compared to the second quarter of 2003 and to the third quarter of 2002. Research and development expenses of $626 million for the first nine months of 2003 increased nine percent from the first nine months of
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2002 due to the reallocation of manufacturing resources, previously included in costscost of goods sold, to increased research and development activities for our upcoming eighth-generation microprocessors based on Hammer technology,microprocessors.
We amortize the foreign capital grants, interest subsidies and cost savings realized from the closure of our facilities pursuant to the 2001 Restructuring Plan described below. This increase was partially offset by a decline in the unit shipments and average selling prices of our PC processors as well as our decision not to accept orders from certain customers, not to ship to certain customers and our receipt of product returns from certain customers, each as part of our efforts to reduce excess PC processor inventory in the overall supply chain. The gross margin percentage of 11 percent in the third quarter of 2002 decreased from 22 percent in the third quarter of 2001. The gross margin percentage of 20 percent for the first nine months of 2002 decreased from 34 percent for the same period in 2001. These declines were primarily due to a decline in both average selling prices and unit shipments of our PC processors.
Marketing, general and administrative expenses of $159 million in the third quarter of 2002 were flat compared to $160 million in the second quarter of 2002 and increased five percent compared to $151 million in the third quarter of 2001.2003 increased 12 percent compared to the second quarter of 2003. The increase was due primarily to incremental administrative expenses due to the FASL LLC transaction. Marketing, general and administrative expenses in the third quarter of $476 million for2003 decreased 5 percent compared to the third quarter of 2002, and decreased 11 percent in the first nine months of 2003 compared to the first nine months of 2002. The decreases were primarily a result of cost savings realized as a result of the 2002 Restructuring Plan.
Interest and other income, net, of approximately $0.5 million in the third quarter of 2003 decreased from $5 million in the second quarter of 2003, and decreased from $13 million in the third quarter of 2002. Interest and other income, net, of $12 million in the first nine months of 2003 decreased from $31 million in the first nine months of 2002. In each case, the decrease was primarily due to lower short-term investment balances resulting in lower investment income and approximately $2.3 million in charges in 2003 for other than temporary declines in our equity investments.
Interest expense of $27 million in the third quarter of 2003 was relatively flat compared to the second quarter of 2003 and increased four27 percent compared to the third quarter of 2002 due primarily to the effect of the 4.50% Convertible Senior Notes due 2007 sold in November 2002 and the $110 million term loan drawn at the end of September 2002. Interest expense of $79 million in the first nine months of 2003 increased 61 percent compared to the first nine months of 2001 primarily due to increased marketing activities associated with our AMD Athlon microprocessor family.
In December 2002, we began implementing a restructuring plan (the 2002 Restructuring Plan) to further align our cost structure to industry conditions resulting from weak customer demand and industry-wide excess inventory.
As part of this plan, and as a result of our technology agreement with IBM to develop future generations of our logic process technology, we have ceased silicon processing associated with logic research and development in our Submicron Development Center (SDC) and have eliminated most of those related resources, including the sale or abandonment of certain equipment used in the SDC.
The 2002 Restructuring Plan has resulted in the consolidation of facilities, primarily at our Sunnyvale, California site and at sales offices worldwide. We have vacated, and are attempting to
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sublease, certain facilities currently occupied under long-term operating leases. We have also terminated the implementation of certain partially completed enterprise resource planning (ERP) software and other information technology implementation activities, resulting in the abandonment of certain software, hardware and capitalized development costs.
Pursuant to the 2002 Restructuring Plan, we recorded restructuring costs and other special charges of $330.6 million in the fourth quarter of 2002, consisting primarily of $68.8 million of anticipated severance and fringe benefit costs, an asset impairment charge of $32.5 million relating to a license that has no future use because of its association with discontinued logic development activities, asset impairment charges of $30.6 million resulting from the abandonment of equipment previously used in logic process development and manufacturing activities, anticipated exit costs of $138.9 million primarily related to vacating and consolidating our facilities and $55.5 million resulting from the abandonment of partially completed ERP software and other information technology implementation activities.
In the third quarter ended September 28, 2003, we revised our estimates of the number of positions to be eliminated pursuant to the 2002 Restructuring Plan from 2,000 to 1,800 in response to the additional resources required due to the FASL LLC transaction. As a larger amountresult, we reversed $8 million of capitalized interest duringthe estimated severance and fringe benefit accrual due to the decision to reduce the number of positions to be eliminated by 200. Therefore, the 2002 Restructuring Plan will result in the reduction of approximately 1,800 positions or 14 percent of our employees, affecting all levels of our workforce in almost every organization. As of September 28, 2003, 1,512 employees had been terminated pursuant to the 2002 Restructuring Plan resulting in cumulative cash payments of $50 million in severance and employee benefit costs. We expect to substantially complete the activities associated with the 2002 Restructuring Plan by the end of December 2003.
During the first nine monthsquarter of 2003, management approved the sale of additional equipment, primarily equipment used in the SDC, that has been identified as no longer useful in our operations. As a result, we recorded approximately $11 million of asset impairment charges in the first quarter of 2003, including $3.3 million of charges for decommission costs necessary to complete the equipment’s sale.
The following table summarizes activities under the 2002 offset by additional interestRestructuring Plan through September 28, 2003:
(Thousands) | Severance and Employee Benefits | Asset impairment | Exit and Equipment Decommission Costs | Other Restructuring Charges | Total | |||||||||||||||
2002 provision | $ | 68,770 | $ | 118,590 | $ | 138,900 | $ | 4,315 | $ | 330,575 | ||||||||||
Q4 2002 non-cash charges | — | (118,590 | ) | — | — | (118,590 | ) | |||||||||||||
Q4 2002 cash charges | (14,350 | ) | — | (795 | ) | — | (15,145 | ) | ||||||||||||
Accruals at December 29, 2002 | 54,420 | — | 138,105 | 4,315 | 196,840 | |||||||||||||||
Q1 2003 provision | — | 7,791 | 3,314 | — | 11,105 | |||||||||||||||
Q1 2003 non-cash charges | — | (7,791 | ) | — | — | (7,791 | ) | |||||||||||||
Q1 2003 cash charges | (17,820 | ) | — | (751 | ) | (4,223 | ) | (22,794 | ) | |||||||||||
Accruals at March 30, 2003 | 36,600 | — | 140,668 | 92 | 177,360 | |||||||||||||||
Q2 2003 cash charges | (14,922 | ) | — | (8,309 | ) | (77 | ) | (23,308 | ) | |||||||||||
Accruals at June 29, 2003 | 21,678 | — | 132,359 | 15 | 154,052 | |||||||||||||||
Q3 2003 non-cash adjustment | (8,000 | ) | — | — | — | (8,000 | ) | |||||||||||||
Q3 2003 cash charges | (2,568 | ) | — | (5,934 | ) | — | (8,502 | ) | ||||||||||||
Accruals at September 28, 2003 | 11,110 | — | 126,425 | 15 | 137,550 | |||||||||||||||
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As a result of the 2002 Restructuring Plan, we expect to realize cost reductions of approximately $150 million in 2003. As of September 28, 2003, the actions taken to date pursuant to the 2002 Restructuring Plan resulted in actual expense on our $500 million 4.75% Convertible Senior Debentures Due 2022.
In fiscal 2001, we announced a restructuring plan (the 2001 Restructuring Plan), due to athe continued slowdown in the semiconductor industry and a resulting decline in revenues. In connectionWe have substantially completed our execution of the 2001 Restructuring Plan, with the plan, we closed Fabs 14 and 15 in Austin, Texas in June 2002. These facilities supported certainexception of our older products and Foundry Service operations, which have been discontinued as part of our plan. We also reorganized related manufacturing facilities and equipment decommission activities which are expected to be completed by the end of 2003. During the first quarter of 2003, we reduced relatedthe estimated accrual of the facility and equipment decommission costs by $7.4 million based on the most current information available. During the first quarter, we also realized a recovery of approximately $1.6 million from the sale of equipment impaired as a result of the 2001 Restructuring Plan, previously held-for-sale at amounts in excess of its initially estimated fair value. Both amounts were included in restructuring and other special charges (recoveries) net.
The following table summarizes activities primarily in Penang, Malaysia, along with associated administrative support.
(Thousands) | Facilities and Equipment Decommission Costs | Other Facilities Exit Costs | Total | ||||||||
Accrual at December 29, 2002 | $ | 15,055 | $ | 646 | $ | 15,701 | |||||
Q1 2003 cash charges | (630 | ) | — | (630 | ) | ||||||
Q1 2003 non-cash adjustment | (7,400 | ) | — | (7,400 | ) | ||||||
Accruals at March 30, 2003 | 7,025 | 646 | 7,671 | ||||||||
Q2 2003 cash charges | (226 | ) | — | (226 | ) | ||||||
Accruals at June 29, 2003 | 6,799 | 646 | 7,445 | ||||||||
Q3 2003 cash charges | (596 | ) | — | (596 | ) | ||||||
Accruals at September 28, 2003 | $ | 6,203 | $ | 646 | $ | 6,849 | |||||
As a result of the 2001 Restructuring Plan, we recorded restructuring costs and other special charges of $89.3 million, consisting of $34.1 million of anticipated severance and fringe benefit costs, $13.0 million and $3.2 million of anticipated exit costs to close facilities in Austin and Asia, mostly in Penang, and $28.7 million and $10.3 million of non-cash asset impairment charges in Austin and Asia, primarily Penang. The asset impairment charges related primarily to buildings and production equipment that were incurred as a result of our decision to implement the restructuring plan. Management determined the fair value of the affected equipment based on market data and conditions.
Income Taxes
We recorded no income tax benefit against our pre-tax losses in the third quarter of 2002.
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The effective tax benefit rates for the quarter and nine months ended September 29, 2002 were 22 percent and 30 percent, respectively, reflecting a valuation allowance against certain deferred tax assets. The effective tax benefit rates for the quarter and nine months ended September 30, 2001 were 26 percent and 12 percent, respectively, reflecting the provision of U.S. taxes on certain previously undistributed earnings of low-taxed foreign subsidiaries. The tax benefit on the restructuring chargesassets in the quarter ended September 30, 2001form of tax credit carryforwards where we believed it was $21 million or 24 percent, reflectingmore likely than not that the allocation of the charge between U.S. and foreign low-taxed jurisdictions.
Other Items
International sales as a percent of net sales were 79 percent in the third quarter of 2003 compared to 73 percent in the second quarter of 2003 and 75 percent in the third quarter of 2002. International sales as a percent of net sales were 75 percent in the third quarterfirst nine months of 2002 compared to 72 percent in the second quarter of 20022003 and 68 percent in the third quarter of 2001. International sales as a percent of net sales were 69 percent in the first nine months of 2002 compared to 64 percent in the first nine months of 2001.2002. During the third quarter of 2002,2003, approximately one21 percent of our net sales were denominated in foreign currencies other than the sameU.S. dollar, primarily the yen, as incompared to one percent during the secondthird quarter of 2002. We doThis was due to the consolidation of FASL LLC. Our foreign exchange risk exposure resulting from these sales is partially mitigated as a result of our yen denominated die purchases. The impact on our operating results from changes in foreign currency rates individually and in the aggregate has not have sales denominated in local currencies in countries that have highly inflationary economies.
Comparison of Segment Income (Loss)
Prior to the previous discussionsthird quarter of 2003, we had two reportable segments, the Core Products and Foundry Services segments. Primarily as a result of the formation of FASL LLC, we re-evaluated our reportable segments. We review and assess operating performance using segment revenues and operating income before interest, taxes and minority interest. These performance measures include the allocation of expenses to the operating segments based on net sales by product group.
Beginning in the third quarter of 2003, we changed our reportable segments to: the Computation Products segment, which includes x86 microprocessors for servers, workstations, desktop and notebook PCs and chipset products, and the Memory Products segment, which includes the Flash memory products of AMD and FASL LLC. Microprocessor products include our AMD OpteronTM, AMD AthlonTM and AMD DuronTM microprocessors. Memory products include Flash memory devices and Erasable Programmable Read-Only Memory, or EPROM devices. We believe that separate reporting of these operating segments, given our new focus on FASL LLC as a separate operating company and its separate market brand—Spansion, provides more useful information.
The All Other category comprises other small operating segments (Personal Connectivity Solutions Products, which includes lower power MIPS and x86 solutions, and Foundry Services, which included fees from our former voice communications and programmable logic products subsidiaries) that are neither individually nor in the aggregate material. This category also includes certain operating expenses and credits that are not allocated to the operating segments. Prior period segment information has been restated to conform to the current period presentation. However, as the results of operations for prior periods do not include the consolidation of FASL LLC’s operations, the restated information for the Memory Products segment for the current periods are not comparable to those in prior periods.
The following is a summary of operating income (loss)loss by segment and category for the periods presented below:
Quarter Ended | Nine Months Ended | |||||||||||||||||||
September 29, 2002 | June 30, 2002 | September 30, 2001 | September 29, 2002 | September 30, 2001 | ||||||||||||||||
(Millions) | ||||||||||||||||||||
Core Products | $ | (331 | ) | $ | (289 | ) | $ | (124 | ) | $ | (632 | ) | $ | 70 | ||||||
Foundry Services | 6 | (7 | ) | (9 | ) | (3 | ) | (15 | ) | |||||||||||
Total segment operating income (loss) | $ | (325 | ) | $ | (296 | ) | $ | (133 | ) | $ | (635 | ) | $ | 55 | ||||||
Quarters Ended | Nine Months Ended | |||||||||||||||||||
(Millions) | September 28, 2003 | June 29, 2003 | September 29, 2002 | September 28, 2003 | September 29, 2002 | |||||||||||||||
Computation Products | $ | 19 | $ | (52 | ) | $ | (317 | ) | $ | (86 | ) | $ | (503 | ) | ||||||
Memory Products | (49 | ) | (73 | ) | (14 | ) | (187 | ) | (101 | ) | ||||||||||
All Other | — | 2 | 6 | (6 | ) | (31 | ) | |||||||||||||
Total segment operating income (loss) | $ | (30 | ) | $ | (123 | ) | $ | (325 | ) | $ | (279 | ) | $ | (635 | ) | |||||
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Computation Products operating resultsincome of $19 million for the third quarter of 2002 decreased $422003 improved $71 million compared tofrom the second quarter of 20022003 and $207$336 million comparedfrom the third quarter of 2002. The increases were due to the sameincrease in revenue over the second quarter of 2001. Core Products’2003 and the third quarter of 2002. Computation Products operating resultsloss of $86 million for the nine months ended September 28, 2003 improved $417 million from the nine months ended September 29, 2002. The improvement was due to cost reduction efforts, including cost savings realized pursuant to our 2002 Restructuring Plan.
Memory products operating loss of $49 million for the third quarter of 2003 decreased by $24 million from the second quarter of 2003, and increased by $35 million from the third quarter of 2002. Memory Products operating loss of $187 million for the nine months ended September 28, 2003 increased $86 million from the nine months ended September 29, 2002. Further quantification of the changes is not practical due to the reorganization of geographical sales territories between AMD and Fujitsu.
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FINANCIAL CONDITION
Net cash used by operating activities was $93 million in the first nine months of 2002 decreased $7022003, primarily as a result of our year-to-date net loss of $318 million compared to the first nine monthsand other uses of 2001. The changecash in operating results was primarilyactivities of approximately $436 million due to net changes in operating assets and liabilities, offset by non-cash charges, including $708 million of depreciation and amortization, non-cash credits of $49 million from foreign grant and subsidy income, and $20 million of net loss on disposal of property, plant and equipment. The net changes in operating assets and liabilities included a decline in both average selling pricespayment of $90 million for technology licenses, approximately $27 million refund of customer deposits under long-term purchase agreements, and unit shipmentsapproximately $35 million of our PC processors.
Net cash provided by operating activities was $9 million in the first nine months of 2002 as a result of non-cash charges, including $556 million of depreciation and amortization, $12 million of net loss on disposal of property, plant and equipment and other cash provided by operating activities of approximately $144 million of other cash due to net changes in operating assets and liabilities. This wasliabilities, offset by our nine-monthyear-to-date net losses of $448 million and non-cash credits of $248 million from net changes of $200 million in deferred income taxes and $48 million of foreign grant and subsidy income.
Net cash provided by investing activities was $291 million during the first nine months of $532003, primarily as a result of $148 million as a result of the acquisition of a controlling interest in FASL LLC and a$530 million net decreasecash inflow from purchases and sales of $417available-for-sale securities, offset by $408 million from changes in operating assetsused for the purchases of property, plant and liabilities.
Net cash used inby investing activities was $446 million in the first nine months of 2002, primarily due to $567 million used for the purchases of property, plant and equipment, $30 million, net of cash acquired, to purchase Alchemy Semiconductor, offset by $143 million of net cash inflow from purchases and sales of available-for-sale securities and $5 million of proceeds from the sale of property, plant and equipment.
Net cash used in investingprovided by financing activities was $466$366 million induring the first nine months of 20012003, primarily due to $542$245 million used for the purchasesreceived from equipment sale-leaseback transactions, $7 million in borrowings under our July 2003 Loan Agreement, $40 million cash note from Fujitsu as part of property, plant and equipment and $122FASL LLC transaction, $142 million of additional equity investments in FASL,capital investment grants received from the German government as part of the Dresden Fab 30 loan agreements, and $17 million of proceeds primarily from sale of stock under our Employee Stock Purchase Plan, offset by $196$85 million of net cash inflow from the purchasesin payments on debt and sales of available-for-sale securities.
Net cash provided by financing activities was $529 million in the first nine months of 2002, primarily due to $486 million in proceeds, net of $14 million in debt issuance costs, from issuing our 4.75% Convertible Senior Debentures Due 2022,convertible senior debentures, $108 million in proceeds from our September 2002 Loan Agreement (currently the July 2003 FASL Term Loan), net of $2 million in debt issuance costs, $120 million in borrowings under our July 1999 Loan Agreement (currently the July 2003 Loan Agreement), $13 million in proceeds from equipment lease financing, $24 million in proceeds from the issuance of stock in connection with stock option exercises and employee purchases under our Employee Stock Purchase Plan and $50 million of capital investment grants and interest subsidies from the German government as part of the Dresden Fab 30 loan agreements, offset by $281 million in payments on debt and capital lease obligations.
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Contractual Cash Obligations and Guarantees
The following tables summarize our principal contractual cash obligations and principal guarantees at September 29, 200228, 2003, and are supplemented by the discussion following the tables:
Principal Contractual Cash Obligations:Obligations at September 28, 2003 were:
Payments Due By Period | |||||||||||||||||||||
(In Thousands) | Total | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 and beyond | ||||||||||||||
4.75% Convertible Senior Debentures Due 2022 | $ | 500,000 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 500,000 | |||||||
4.50% Convertible Senior Notes Due 2007 | 402,500 | — | — | — | — | 402,500 | — | ||||||||||||||
Dresden term loans | 612,740 | — | 34,424 | 309,813 | 268,503 | — | — | ||||||||||||||
July 2003 FASL term loan | 89,375 | 16,875 | 27,500 | 27,500 | 17,500 | — | — | ||||||||||||||
Manufacturing Joint Venture loan | 160,923 | — | 42,913 | 42,913 | 42,913 | 32,184 | — | ||||||||||||||
Fujitsu cash note | 40,000 | — | — | 10,000 | 30,000 | — | — | ||||||||||||||
Capital lease obligations | 276,038 | 19,616 | 91,970 | 85,600 | 74,526 | 4,326 | — | ||||||||||||||
Operating leases | 475,259 | 18,258 | 69,764 | 58,728 | 47,429 | 39,733 | 241,347 | ||||||||||||||
Unconditional purchase commitments | 127,988 | 13,033 | 52,030 | 52,022 | 3,176 | 2,591 | 5,136 | ||||||||||||||
Total contractual cash obligations | $ | 2,684,823 | $ | 67,782 | $ | 318,601 | $ | 586,576 | $ | 484,047 | $ | 481,334 | $ | 746,483 | |||||||
Principal Guarantees at September 28, 2003 were:
Guarantees of indebtedness recorded on our consolidated balance sheets
(Thousands) | Total | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 and Beyond | ||||||||||||||
Notes payable to banks | $ | 48,981 | $ | 48,981 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
September 2002 term loan | 110,000 | 6,875 | 27,500 | 27,500 | 27,500 | 20,625 | — | ||||||||||||||
Dresden term loans | 551,636 | 101,321 | 213,900 | 157,610 | 78,805 | — | — | ||||||||||||||
Convertible Senior Debentures | 500,000 | — | — | — | — | — | 500,000 | ||||||||||||||
Capital lease obligations | 44,043 | 3,748 | 15,838 | 15,600 | 5,508 | 3,349 | — | ||||||||||||||
Operating leases | 452,267 | 15,487 | 51,371 | 47,066 | 42,120 | 38,408 | 257,815 | ||||||||||||||
Unconditional purchase commitments | 41,020 | 2,380 | 9,520 | 9,424 | 9,424 | 2,568 | 7,704 | ||||||||||||||
Total contractual cash obligations | $ | 1,747,947 | $ | 178,792 | $ | 318,129 | $ | 257,200 | $ | 163,357 | $ | 64,950 | $ | 765,519 | |||||||
Guarantees: | |||||||||||||||||||||
Amounts of guarantee expiration per period | |||||||||||||||||||||
(Thousands) | Total amounts guaranteed | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 and Beyond | ||||||||||||||
Dresden guarantee | $ | 300,000 | $ | — | $ | — | $ | — | $ | 300,000 | $ | — | $ | — | |||||||
BAC guarantee | 24,465 | — | 24,465 | — | — | — | — | ||||||||||||||
FASL guarantee | 127,000 | — | — | — | — | — | 127,000 | ||||||||||||||
Fujitsu guarantee | 125,000 | — | 125,000 | — | — | — | — | ||||||||||||||
Total guarantees | $ | 576,465 | $ | — | $ | 149,465 | $ | — | $ | 300,000 | $ | — | $ | 127,000 | |||||||
The following table summarizes the principal guarantees issued as of September 28, 2003 related to Banksunderlying liabilities that are already recorded on our consolidated balance sheets as of September 28, 2003:
Amounts of guarantee expiration per period | |||||||||||||||||||||
(Thousands) | Amounts* Guaranteed | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 and Beyond | ||||||||||||||
Dresden term loan guarantee | $ | 306,369 | $ | — | $ | — | $ | — | $ | 306,369 | $ | — | $ | — | |||||||
July 2003 FASL term loan guarantee | 53,625 | 10,125 | 16,500 | 16,500 | 10,500 | — | — | ||||||||||||||
FASL capital lease guarantees | 155,812 | 10,587 | 47,998 | 51,128 | 43,397 | 2,702 | — | ||||||||||||||
Manufacturing Joint Venture term loan guarantee | 96,554 | — | 25,748 | 25,748 | 25,748 | 19,310 | — | ||||||||||||||
Total guarantees | $ | 612,360 | $ | 20,712 | $ | 90,246 | $ | 93,376 | $ | 386,014 | $ | 22,012 | $ | 0 | |||||||
* | Amounts guaranteed represent the principal amount of the underlying obligations and are exclusive of obligations for interest, fees and expenses. |
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Guarantees of indebtedness not recorded on our consolidated balance sheets
The following table summarizes the principal guarantees issued as of September 28, 2003 for which the related underlying liabilities are not recorded on our consolidated balance sheets as of September 28, 2003:
Amounts of guarantee expiration per period | ||||||||||||||||||||||
(Thousands) | Amounts Guaranteed* | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 and beyond | |||||||||||||||
FASL LLC operating lease guarantees | $ | 29,386 | $ | 7,647 | $ | 21,739 | $ | — | $ | — | $ | — | $ | — | ||||||||
BAC payment guarantee | 28,686 | — | — | — | — | — | 28,686 | |||||||||||||||
AMTC payment guarantee | 36,718 | — | — | — | — | 36,718 | — | |||||||||||||||
AMTC rental guarantee | 130,036 | — | — | — | — | — | 130,036 | ** | ||||||||||||||
Total | $ | 224,826 | $ | 7,647 | $ | 21,739 | $ | — | $ | — | $ | 36,718 | $ | 158,722 | ||||||||
* | Amounts guaranteed represent the principal amount of the underlying obligations and are exclusive of obligations for interest, fees and expenses. |
** | Amounts outstanding will diminish until the expiration of the guarantee. |
July 2003 Loan Agreement
On July 7, 2003, we amended and restated our 1999 Loan and Security Agreement
Measurement Date | Amount | |
September 30, 2003 | $1.25 billion | |
December 31, 2003 | $1.25 billion | |
Last day of each fiscal quarter in 2004 | $1.425 billion | |
Last day of each fiscal quarter in 2005 | $1.85 billion | |
Last day of each fiscal quarter thereafter | $2.0 billion |
Period | Amount | |
Four fiscal quarters ending September 30, 2003 | $150 million | |
Four fiscal quarters ending December 31, 2003 | $400 million | |
Four fiscal quarters ending March 31, 2004 | $550 million | |
Four fiscal quarters ending June 30, 2004 | $750 million | |
Four fiscal quarters ending September 30, 2004 | $850 million | |
Four fiscal quarters ending December 31, 2004 | $950 million | |
Four fiscal quarters ending March 31, 2005 and on each fiscal quarter thereafter | $1,050 million |
At September 28, 2003, net domestic cash, as defined, totaled $429 million. Our obligations under the July 19992003 Loan Agreement are secured by a pledge of all of our accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds from the realization of these assets. As of September 29, 2002, $45 million was outstanding under the July 1999 Loan Agreement, which we have subsequently repaid.
4.75% Convertible Senior Debentures Due 2022
On January 29, 2002, we issued $500 million of our 4.75% Convertible Senior Debentures Due 2022 (the 4.75% Debentures) in a private offering pursuant to Rule 144A and Regulation S of the Securities Act.
The interest rate payable on the 4.75% Debentures will be reset on each of August 1, 2008, August 1, 2011 and August 1, 2016 to a rate per annum equal to the interest rate payable 120 days prior to the reset dates on 5-year U.S. Treasury Notes, plus 43 basis points. The interest rate will not be less than 4.75 percent and will not exceed 6.75 percent. Holders of the Debentures will also have the right to require us to repurchase all or a portion of theirour 4.75% Debentures on February 1, 2009, February 1, 2012, and
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February 1, 2017, at2017. The holders of the 4.75% Debentures will also have the ability to require us to repurchase the Debentures in the event that we undergo specified fundamental changes, including a change of control. In each such case, the redemption or repurchase price equal towould be 100 percent of the principal amount of the 4.75% Debentures plus accrued and unpaid interest. The 4.75% Debentures are convertible by the holders into our common stock at a conversion price of $23.38 per share at any time. At this conversion price, each $1,000 principal amount of the 4.75% Debentures will be convertible into approximately 43 shares of our common stock.
Beginning on February 5, 2005, the 4.75% Debentures are redeemable by us for cash at specified prices expressed as a percentage of the outstanding principal amount plus accrued and unpaid interest at our option, provided that we may not redeem the 4.75% Debentures prior to February 1,5, 2006 unless the last reported sale price of our common stock is at least 130 percent of the then effective conversion price for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days of the date of the redemption notice.
The redemption prices are as follows for Debentures to be redeemed during the periods set forth below:
Period | Price | ||
Beginning on February 5, 2005 through February 4, 2006 | 102.375 | % | |
Beginning on February 5, 2006 through February 4, 2007 | 101.583 | % | |
Beginning on February 5, 2007 through February 4, 2008 | 100.792 | % | |
Beginning on February 5, 2008 | 100.000 | % |
We may elect to purchase or otherwise retire our bonds with cash, stock or assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries where we believe that market conditions are favorable to do so. Such purchases may have a material effect on our liquidity, financial condition and results of operations.
4.50% Convertible Senior Notes Due 2007
On November 25, 2002, we sold $402.5 million of 4.50% Convertible Senior Notes Due 2007 (the 4.50% Notes) in a registered offering. Interest on the 4.50% Notes is payable semiannually in arrears on June 1 and December 1 of each year, beginning June 1, 2003. Beginning on December 4, 2005, the 4.50% Notes are redeemable by us at our option for cash at specified prices expressed as a percentage of the outstanding principal amount plus accrued and unpaid interest provided that we may not redeem the 4.50% Notes unless the last reported sale price of our common stock is at least 150 percent of the then effective conversion price for at least 20 trading days within a period of thirty trading days, ending within 5 trading days of the date of the redemption notice.
The redemption prices are as follows for the specified periods:
Period | Price | ||
Beginning on December 4, 2005 through November 30, 2006 | 101.8 | % | |
Beginning on December 1, 2006 through November 30, 2007 | 100.9 | % | |
On December 1, 2007 | 100.0 | % |
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The 4.50% Notes are convertible at the option of the holder at any time prior to the close of business on the business day immediately preceding the maturity date of December 1, 2007, unless previously redeemed or repurchased, into shares of common stock at a conversion price of $7.37 per share, subject to adjustment in certain circumstances. At this conversion price, each $1,000 principal amount of the 4.50% Notes will be convertible into approximately 135 shares of our common stock. Issuance costs incurred in the amount of approximately $12 million are being amortized ratably, which approximates the interest method, over the term of the 4.50% Notes as interest expense.
Holders have the right to require us to repurchase all or a portion of our 4.50% Notes in the event that we undergo specified fundamental changes, including a change of control. In each such case, the redemption or repurchase price would be 100 percent of the principal amount of the 4.50% Notes plus accrued and unpaid interest.
Dresden Term Loans and Dresden Term Loan Guarantee
AMD Saxony, Limited Liability Company & Co. KG (formerly known as AMD Saxony Manufacturing GmbH) (AMD Saxony), an indirect wholly-ownedwholly owned German subsidiary of AMD, continues to facilitize Dresden Fab 30, which began production in the third quarter of 2000. AMD, the Federal Republic of Germany, the State of Saxony, and a consortium of banks are providing financing for the project.We currently estimate that the construction and facilitization costs of Dresden Fab 30 will be $2.6$2.7 billion when it is fully equipped by the end of 2005. As of September 29, 2002,28, 2003, we had invested $2.1$2.2 billion in AMD Saxony.
In March 1997, AMD Saxony entered into a loan agreement and other related agreements (the Dresden Loan Agreements) with a consortium of banks led by Dresdner Bank AG a German financial institution, in order to finance the project. The Dresden Loan Agreements were amended in February 1998, June 1999, February 2001 and June 2002.
Because most of the amounts under the Dresden Loan Agreements are denominated in deutsche marks (converted to euros), the dollar amounts set forth below are subject to change based on applicable conversion rates. We used the exchange rate that was permanently fixed on January 1, 1999, of 1.95583 deutsche marks to 1.00one euro for the conversion of deutsche marks to euros, and then used exchange rate of 1.020.87 euro to 1.00one U.S. dollar as of September 29, 2002,28, 2003, to valuetranslate the amounts denominated in deutsche marks.
The Dresden Loan Agreements, as amended, provide for the funding of the construction and facilitization of Dresden Fab 30. The funding consists of:
The Dresden Loan Agreements require that we partially fund Dresden Fab 30 project costs in the form of subordinated and revolving loans to, or equity investments in, AMD Saxony. In accordance with the terms of the Dresden Loan Agreements, as of September 29, 2002, we had invested $14828, 2003, the balances were $168 million in the form of subordinated loans, $257$66 million in the form of revolving loans and $286 million in the form of equity
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investments in AMD Saxony.Saxony, net of repayments. These amounts have been eliminated in our consolidated financial statements.
In addition to support from AMD, the consortium of banks referred to above had made available up to $751$880 million in loans to AMD Saxony to help fund Dresden Fab 30 project costs. The loans have been fully drawn and a portion has been repaid. AMD Saxony had $552$613 million of such loans outstanding as of September 29, 2002,28, 2003, which are included in our consolidated balance sheets. Please refer to the Contractual Cash Obligation table, above, for repayment schedule.
Finally, pursuant to a Subsidy Agreement, as amended in August 2002, the Federal Republic of Germany and the State of Saxony are supporting the Dresden Fab 30 project, in accordance with the Dresden Loan Agreements, in the form of:
Of these amounts, AMD Saxony had received approximately $284$412 million in capital investment grants and allowances, and $146$122 million in interest subsidies. Of theIn addition, AMD Saxony received advanced payments for interest subsidies received, approximately $25 million is restricted from our access for more than one year, and are therefore included in Other Assets. In additionamounting to the above-mentioned subsidies,$28 million. AMD Saxony had also received $25$44 million in research and development subsidies through September 29, 2002. These amounts28, 2003. Amounts received under the Subsidy Agreement are included inrecorded as a long-term liability on our consolidated financial statements.statements and are being amortized to operations ratably over the contractual life of the Subsidy Agreement as a reduction to operating expenses through December of 2008. The historical rates were used to translate the amounts denominated in deutsche marks (converted to euros) into U.S. dollars.
The Subsidy Agreement, as amended, imposes conditions on AMD Saxony, including the requirement to attain a certain employment levelsemployee headcount by December 2003 and to maintain those levelssuch headcount until December 2008. Noncompliance with the conditions of the grants, allowances and subsidies could result in the forfeiture of all or a portion of the future amounts to be received, as well as the repayment of all or a portion of amounts received to date. In December 2002, AMD Saxony reduced its anticipated December 2003 employment levels as a result of the 2002 Restructuring Plan (see Note 9 of the Condensed Consolidated Financial Statements). Consequently, the anticipated headcount is below the level required to be maintained by the Subsidy Agreement. Based on these revised headcount estimates, the maximum amount of capital investment grants and allowances available under the Subsidy Agreement would be reduced from $477 million to $418 million. We adjusted the quarterly amortization of these amounts accordingly. There have been no conditions of noncompliance through September 29, 200228, 2003 that would result in forfeiture of any of the grants and allowances.
The Dresden Loan Agreements, as amended, also require that we:
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As AMD Saxony’s obligations under the Dresden Loan Agreements are included in our consolidated financial statements, no incremental liability is recorded under the Dresden guarantee.
AMD Saxony would be in default under the Dresden Loan Agreements if we, AMD Saxony, or AMD Saxony Holding GmbH (AMD Holding) fail, AMD Saxony Admin GmbH or AMD Saxony LLC failed to comply with certain obligations thereunder or upon the occurrence of certain events, including:
Generally, any default with respect to borrowings made or guaranteed by AMD that results in recourse to us of more than $2.5 million, and that is not cured by us, would result in a cross-default under the Dresden Loan Agreements, the July 1999 Loan Agreement and the September 2002 Loan Agreement.Agreements. As of September 29, 2002,28, 2003, we were in compliance with all conditions of the Dresden Loan Agreements.
In the event we are unable to meet our obligations to AMD Saxony as required under the Dresden Loan Agreements, we will be in default under the Dresden Loan Agreements, the July 1999 Loan Agreement and the September 2002 Loan Agreement, which would permit acceleration of certain indebtedness which could haveof approximately $613 million. The occurrence of a material adverse effect on us.default under the Dresden Loan Agreements would likely result in a cross-default under the Indentures governing our 4.75% Debentures and 4.50% Notes. We cannot assure that we will be able to obtain the funds necessary to fulfill these obligations. Any such failure would have a material adverse effect on us.
Advanced Mask Technology Center Guarantee and BAC Guarantee
The Advanced Mask Technology Center GmbH & Co. KG (AMTC), and Maskhouse Building Administration GmbH & Co., KG (BAC), are joint ventures formed by AMD,us, Infineon Technologies AG and DuPont Photomasks, Inc. for the purpose of constructing and operating a new advanced photomask facility in Dresden, Germany. InTo finance the project, BAC entered into an $86 million bridge loan in June 2002, and BAC and AMTC entered into a $138 million revolving credit facility and an $86 million term loan in connectionDecember 2002. In September 2003, the outstanding amounts under the bridge loan were repaid with proceeds from the financing ofterm loan. Also in December 2002, in order to occupy the construction of thisphotomask facility, AMDAMTC entered into a rental agreement with BAC. With regard to these commitments by BAC and AMTC, we guaranteed the payment obligations of BAC, in an amount not
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agreement. The obligations under the rental agreement guarantee diminish over time through 2011 as the term loan is repaid. However, under certain circumstances of default by the other tenant of the photomask facility under its rental agreement with BAC and that we may be required to enter into additional guarantee arrangements in connection with this financing.
We have not recorded any liability in our consolidated financial statements associated with the Guarantee.
Capital Lease Obligations
As of September 28, 2003, we had capital lease obligations of approximately $276 million. Obligations under these lease agreements are collateralized by the assets leased and are payable through 2007. Leased assets consist principally of machinery and equipment.
Operating Leases, Unconditional Purchase Commitments and Other Operating Commitments
We lease certain of our facilities, including our executive offices in Sunnyvale, California, under lease agreements that expire at various dates through 2018. We lease certain of our manufacturing and office equipment for terms ranging from one to five years. Total future lease obligations as of September 28, 2003, were approximately $475 million, of which $130 million was recorded as a liability for certain facilities pursuant to our 2002 Restructuring Plan.
We enter into purchase commitments for manufacturing supplies and services. Total purchase commitments as of September 28, 2003, were approximately $128 million for periods through 2009. $90 million of the amount relates to the remaining payments for a three-year service contract. As the services are being performed ratably over the life of the arrangement, we expense the payments as incurred. As a result, we do not carry any liabilities relating to this agreement. The remaining $38 million consists of miscellaneous purchase agreements for raw materials and office supplies.
FASL LLC Debt and Guarantees
July 2003 FASL Term Loan
On July 11, 2003, we amended our September 2002 Loan Agreement and assigned it to FASL LLC. Under the Amended and Restated Term Loan Agreement (the July 2003 FASL Term Loan), amounts borrowed bear interest at a variable rate of LIBOR plus four percent, which was 5.14% percent at September 28, 2003. Repayment occurs in equal, consecutive, quarterly principal and interest installments ending in September 2006. As of September 28, 2003, $89 million was outstanding under the July 2003 FASL Term Loan, of which 60 percent is guaranteed by the Company and 40 percent is guaranteed by Fujitsu.
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FASL LLC must also comply with additional fundsfinancial covenants if its net domestic cash balance (as defined in the July 2003 FASL Term Loan) declines below $130 million through the first quarter of 2004, $120 million from the second quarter of 2004 and the end of 2005 and $100 million during 2006. At any time that net domestic cash falls below these thresholds, FASL LLC must comply with, among other things, the following financial covenants:
Period | Amount | |
Quarter ending September 2003 | (40 million) | |
For the six months ending December 2003 | $75 million | |
For the nine months ending March 2004 | $170 million | |
For the four quarters ending June 2004 | $285 million | |
For the four quarters ending September 2004 | $475 million | |
For the four quarters ending December 2004 | $550 million | |
For the four quarters ending in 2005 | $640 million | |
For the four quarters ending 2006 | $800 million |
Period | Ratio | |
Third Fiscal Quarter of 2003 | -0.6 to 1.00 | |
Fourth Fiscal Quarter of 2003 | 0.2 to 1.00 | |
First Fiscal Quarter of 2004 | 0.25 to 1.00 | |
Period ending June 2004 | 0.4 to 1.00 | |
Period ending September 2004 | 0.8 to 1.00 | |
Period ending December 2004 | 1.0 to 1.00 | |
Full Fiscal Year 2005 | 1.0 to 1.00 | |
Full Fiscal Year 2006 | 0.9 to 1.00 |
At September 28, 2003, FASL LLC’s net domestic cash totaled $202 million.
FASL Leases and Guarantees
On July 16, 2003, a wholly owned subsidiary of FASL LLC entered into a sale-leaseback transaction for certain equipment with a third party financial institution in the amount of 12 billion yen (approximately $100 million on July 16, 2003) in cash proceeds. Upon execution of the agreement, the equipment had a net book value of approximately $168 million. As the term on the leaseback is more than 75 percent of the remaining estimated economic lives of the equipment, we are requiredaccounting for the full facilitizationtransaction as a capital lease. We recognized an immediate loss of FASL JV2 and FASL JV3, we$16 million on the transaction due to the fact that the fair market value of the equipment was less than their net book value at the time of the transaction. We also recorded approximately $52 million of deferred loss which will be required to contribute cash or guarantee third-party loansamortized in proportion to the leased assets over their average estimated remaining lives, which is approximately 3 years. We guaranteed 50 percent or up to approximately $50 million of the outstanding obligations, under the lease arrangement. As of September 28, 2003, the outstanding lease obligation under this agreement was approximately $91 million. FASL LLC and its subsidiaries also entered into other capital lease transactions during the third quarter of 2003, which resulted in additional capital lease obligations of $152 million as of September 28, 2003.
We have guaranteed approximately $156 million of the total $276 million outstanding obligations under capital lease arrangements of FASL LLC as of September 28, 2003.
We also guaranteed certain operating leases entered into by FASL LLC and its subsidiaries totaling approximately $29 million as of September 28, 2003.
Fujitsu Cash Note
As a result of the FASL LLC transaction, Fujitsu also loaned to FASL LLC $40 million pursuant to a promissory note. The note has a term of three years, with four equal principal payments on September 30, 2005, December 31, 2005, March 31, 2006 and June 30, 2006.
Manufacturing Joint Venture Loan and Guarantee
As a result of the FASL LLC transaction agreements with Fujitsu, the Manufacturing Joint Venture’s third party loans were refinanced from the proceeds of a term loan in the aggregate principal amount of 18 billion yen (approximately $161 million on September 28, 2003) entered into between a wholly owned subsidiary of FASL LLC and a Japanese financial institution. Under the agreement, the amounts borrowed bear an interest rate of TIBOR plus a spread that is determined by Fujitsu’s current debt rating. The current interest rate is 1.06%. Repayment occurs in equal, consecutive, quarterly principal installments ending in June 2007. Fujitsu has guaranteed 100 percent of the amounts outstanding under this facility. We have agreed to pay Fujitsu 60 percent of any amount paid by Fujitsu under its guarantee of this loan.
In addition, during the four-year period commencing on June 30, 2003, we are obligated to provide FASL LLC with additional funding to finance operations shortfall. Generally, FASL LLC is first
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required to seek any required financing from external sources. However, if such third party financing is not available, we must provide funding to FASL LLC equal to our 49.992 percentpro-rata ownership interest in FASL upLLC, which is currently 60 percent.
Other Financing Activities
We expect capital expenditures for 2003 to 25 billion yen ($204 million). Asbe approximately $600 million. The capital expenditures for the first six months of September 29, 2002, we had $127 million in loan guarantees outstanding with respect to FASL’s outstanding third-party loans.
Supplementary Stock-Based Incentive Compensation Disclosures
Section I. Option Program Description
Our stock option programs are intended to attract, retain and motivate highly qualified employees. We have several stock option plans under which key employees have been granted incentive (ISOs) and nonqualified (NSOs) stock options to purchase our common stock. Generally, options vest and become exercisable over four years from the date of grant and expire five to ten years after the date of grant. ISOs granted under the plans have exercise prices of not less than 100 percent of the fair market value of the common stock on the date of grant. Exercise prices of NSOs range from $0.01 to the fair market value of the common stock on the date of grant.
Section II. General Option Information
The following is a summary of stock option activity for the next 12 months.
Nine Months Ended September 28, 2003 | Year Ended December 29, 2002 | |||||||||||
Number of Shares | Weighted-Average Exercise Price | Number of Shares | Weighted-Average Exercise Price | |||||||||
Options: | ||||||||||||
Outstanding at beginning of period | 60,408,754 | $ | 18.58 | 52,944,339 | $ | 20.44 | ||||||
Granted | 4,253,320 | 7.67 | 11,828,688 | 5.62 | ||||||||
Canceled | (22,122,447 | ) | 27.75 | (3,413,705 | ) | 20.34 | ||||||
Exercised | (629,311 | ) | 6.12 | (950,568 | ) | 6.23 | ||||||
Outstanding at end of period | 41,910,316 | $ | 12.82 | 60,408,754 | $ | 18.58 | ||||||
Exercisable at end of period | 28,388,967 | $ | 13.60 | 33,806,970 | $ | 19.55 | ||||||
Available for grant at beginning of period | 13,018,643 | 21,145,854 | ||||||||||
Available for grant at end of period | 30,434,693 | 13,018,643 |
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In-the-money and out-of-the-money stock option information as of September 28, 2003, was as follows:
As of September 28, 2003 (Shares in thousands) | Exercisable | Unexercisable | Total | |||||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||
In-the-Money | 16,890,031 | $ | 8.15 | 7,849,871 | N/A | (3) | 24,739,902 | $ | 7.89 | |||||||
Out-of-the-Money(1) | 11,498,936 | $ | 21.61 | 5,671,478 | N/A | (3) | 17,170,414 | $ | 19.93 | |||||||
Total Options Outstanding | 28,388,967 | 13,521,349 | 41,910,316 | (2) | ||||||||||||
(1) | Out-of-the-money stock options have an exercise price equal to or above $10.87, the market value of AMD’s common stock, on the last trading day of the third quarter of 2003, September 26, 2003. |
(2) | Includes 422,603 shares granted from treasury stock as non-plan grants. |
(3) | Weighted average exercise price information for unexercisable options is not available. |
Section III. Distribution and Dilutive Effect of Options
Options granted to employees, including officers, and non-employee directors were as follows:
2003 YTD | 2002 | 2001 | |||||||
Net grants(1) during the period as % of outstanding shares(2) | (5.14 | %) | 2.44 | % | 3.71 | % | |||
Grants to listed officers(3) during the period as % of total options granted | 10.63 | % | 14.33 | % | 7.88 | % | |||
Grants to listed officers(3) during the period as % of outstanding shares | 0.13 | % | 0.49 | % | 0.33 | % | |||
Cumulative options held by listed officers(3) as % of total options outstanding | 26.87 | % | 17.93 | % | 16.51 | % |
(1) | Options grants are net of options canceled. |
(2) | Outstanding shares as of September 28, 2003, December 29, 2002 and December 30, 2001. |
(3) | The “listed officers” are those listed in our proxy statement filed with our notice of annual meeting dated March 8, 2002 and March 25, 2003. |
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Section IV. Executive Options
Options granted to listed officers for the nine months ended September 28, 2003 were as follows:
Name(1) | 2003 Option Grants | Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term | |||||||||||||||||
Number of Securities Underlying Options Per Grant | Percent of Total Options Granted to Employees as of September 28, 2003 | Exercise Price Per Share | Expiration Date | ||||||||||||||||
0% | 5% | 10% | |||||||||||||||||
W. J. Sanders III | — | — | — | — | — | — | — | ||||||||||||
Hector de J. Ruiz | 125,000 | 2.98 | % | $ | 7.36 | 5/1/2013 | $ | — | $ | 578,583 | $ | 1,466,243 | |||||||
125,000 | 2.98 | % | $ | 7.16 | 8/1/2013 | $ | — | $ | 562,861 | $ | 1,426,399 | ||||||||
Robert R. Herb | 19,791 | 0.47 | % | $ | 7.36 | 5/1/2013 | $ | — | $ | 91,606 | $ | 232,147 | |||||||
19,791 | 0.47 | % | $ | 7.16 | 8/1/2013 | $ | — | $ | 89,117 | $ | 225,839 | ||||||||
Robert J. Rivet | 31,250 | 0.75 | % | $ | 7.36 | 5/1/2013 | $ | — | $ | 144,646 | $ | 366,561 | |||||||
31,250 | 0.75 | % | $ | 7.16 | 8/1/2013 | $ | — | $ | 140,715 | $ | 356,600 | ||||||||
William T. Siegle | 18,750 | 0.45 | % | $ | 7.36 | 5/1/2013 | $ | — | $ | 86,787 | $ | 219,936 | |||||||
18,750 | 0.45 | % | $ | 7.16 | 8/1/2013 | $ | — | $ | 84,429 | $ | 213,960 | ||||||||
Thomas M. McCoy | 31,250 | 0.75 | % | $ | 7.36 | 5/1/2013 | $ | — | $ | 144,646 | $ | 366,561 | |||||||
31,250 | 0.75 | % | $ | 7.16 | 8/1/2013 | $ | — | $ | 140,715 | $ | 356,600 |
(1) | The “listed officers” are those listed in our proxy statement filed with out notice of annual meeting dated March 25, 2003. |
Option exercises during 2003 and option values for listed officers(1) for the nine months ended September 28, 2003 were as follows:
Name | Shares Acquired on Exercise | Value Realized (2) | Number of Securities Options at 9/28/03 | Values of Unexercised In-the Money Options at 9/28/03 | |||||||||||
Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||
W. J. Sanders III | — | $ | — | �� | 3,550,000 | 250,000 | $ | 7,678,000 | $ | — | |||||
Hector de J. Ruiz | — | $ | — | 1,600,000 | 2,350,000 | $ | — | $ | 1,066,250 | ||||||
Robert R. Herb | — | $ | — | 962,509 | 327,075 | $ | 984,108 | $ | 474,083 | ||||||
Robert J. Rivet | 10,000 | $ | 71,500.00 | 377,780 | 284,720 | $ | 186,964 | $ | 470,661 | ||||||
William T. Siegle | 9,000 | $ | 64,260.00 | 532,666 | 110,834 | $ | 526,348 | $ | 420,095 | ||||||
Thomas M. McCoy | — | $ | — | 647,360 | 270,140 | $ | 368,176 | $ | 465,886 |
(1) | The “listed officers” are those listed in our proxy statement filed with our notice of annual meeting dated March 25, 2003. |
(2) | Value for these purposes is based solely on the difference between market value of underlying shares on the applicable date (i.e., date of exercise or fiscal year-end) and exercise price of options. |
Section V. Equity Compensation Plan Information
The number of shares issuable upon exercise of outstanding options granted to employees and non-employee directors, as well as the number of shares remaining available for future issuance, under our equity compensation plans as of September 28, 2003, are summarized in the following table:
Nine Months Ended September 28, 2003 | |||||||||
Plan category | Number of Securities to be Issued Upon Exercise of Outstanding Options | Weighted-Average Exercise Price of Outstanding Options | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a) | ||||||
(a) | (b) | (c) | |||||||
Equity compensation plans approved by shareholders | 23,383,135 | $ | 14.96 | 17,629,863 | |||||
Equity compensation plans not approved by shareholders | 18,527,181 | (1) | $ | 10.11 | 12,804,830 | (2) | |||
TOTAL | 41,910,316 | 30,434,693 | |||||||
(1) | Includes 422,603 shares granted from treasury stock as non-plan grants. |
(2) | Of these shares, approximately 1,677,767 shares can be issued as restricted stock under the 1998 Stock Incentive Plan. |
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On June 27, 2003, we filed a Tender Offer Statement with the SEC and made an offer, which was approved by our stockholders to exchange certain stock options to purchase shares of our common stock, outstanding under eligible option plans and held by eligible employees, for replacement options to be granted no sooner than six months and one day from the cancellation of the surrendered options. The offer to exchange expired on July 25, 2003. Options to purchase approximately 19 million shares of our common stock were tendered for exchange and cancelled on July 28, 2003. Subject to the terms of the offer to exchange, we will grant replacement options to purchase approximately 13.4 million shares of its common stock at fair market value on the date of grant on or after January 29, 2004, in exchange for the options cancelled. We do not expect to record compensation expense as a result of the exchange.
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 141, “Business Combinations” (SFAS 141), Statement46, “Consolidation of Variable Interest Entities” (FIN 46). Variable interest entities often are created for a single specified purpose, for example, to facilitate securitization, leasing, hedging, research and development, or other transactions or arrangements. This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Accounting Standards No. 142, “GoodwillStatements,” defines what these variable interest entities are and Other Intangible Asset” (SFAS 142)provides guidelines on identifying them and Statementassessing an enterprise’s interests in a variable interest entity to decide whether to consolidate that entity. Generally, FIN 46 applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For existing variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003, the provisions of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144) atthis interpretation will apply no later than the beginning of the 2002 fiscal year.first interim or annual reporting period beginning after June 15, 2003. The adoption of these standardsFIN 46 did not have a material impact on our results of operations or financial statements.
In July 2002,May 2003, the FASBFinancial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146150, “Accounting for Costs AssociatedCertain Financial Instruments with ExitCharacteristics of both Liabilities and Equity” (SFAS 150), which addresses how to classify and measure certain financial instruments with characteristics of both liabilities (or an asset in some circumstances) and equity – as either debt or Disposal Activities” (SFAS 146).equity in the balance sheet. The requirements apply to issuers’ classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” (EITF 94-3). The principal difference between SFAS 146 and EITF 94-3 relates to SFAS 146’s timing for recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3 a liability for an exit cost as generally defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146150 is effective for exitfinancial instruments entered into or disposal activities that are initiatedmodified after DecemberMay 31, 2002, with early adoption encouraged. The Company will adopt SFAS 146 prospectively as of December 30, 2002,2003, and otherwise is effective at the beginning of fiscal yearthe first interim period beginning
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after June 15, 2003. The adoption of SFAS 150 did not have a material impact on our results of operations or financial condition.
Risk Factors
We must achieve market acceptance for our AMD Opteron and AMD Athlon 64 microprocessors, or we will be materially adversely affected. We introduced our AMD Opteron processors in April 2003 and therefore, its adoptionwe introduced our AMD Athlon 64 processors in September 2003. These processors are designed to provide high performance for both 32-bit and 64-bit applications in servers and workstations and in desktop and mobile PCs. The success of these processors is not expectedsubject to risks and uncertainties including market acceptance of our new 64-bit technology and our ability to produce them in a timely manner on new process technologies, including silicon-on-insulator technology, in the volume and with the performance and feature set required by customers; their market acceptance; the availability, performance and feature set of motherboards and chipsets designed for our eighth-generation processors; and the support of the operating system and application program providers for our 64-bit instruction set.
We cannot be certain that our substantial investments in research and development of process technologies will lead to improvements in technology and equipment used to fabricate our products or that we will have any impact onsufficient resources to invest in the Company’s current financial positionlevel of research and development that is required to remain competitive. We make substantial investments in research and development of process technologies in an effort to improve the technologies and equipment used to fabricate our products. For example, the successful development and implementation of silicon-on-insulator technology is critical to our AMD Opteron and AMD Athlon 64 microprocessors. In addition, we have an agreement with a partner to develop future generations of logic process technology. However, we cannot be certain that we will be able to develop or resultsobtain or successfully implement leading-edge process technologies needed to fabricate future generations of operations.
RISK FACTORS
The semiconductor industry is highly cyclical and is currently experiencinghas been in a severe downturn which isthat adversely affecting,affected, and may continue to adversely affect, our business.
If current conditions do not significantly improve in the near term, or if these conditions in the semiconductor industry occur in the future, as they likely will to a lesser or greater degree, our business will continue to be adversely affected.
Fluctuations in the personal computer market may continue to materially adversely affect us.
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In addition, current trends of consolidation within the personal computer industry, as recently evidenced by the Hewlett-Packard/Compaq merger, as well as potential market share increases by customers who exclusively purchase microprocessors from Intel corporation,Corporation, such as Dell, Corporation,Inc., could further materially adversely affect us.
We plan for significant capital expenditures in 2003 and beyond and if we cannot generate the capital required for these capital expenditures and other ongoing operating expenses through operating cash flow and external financing activities, we may be materially adversely affected.
In March 1997, AMD Saxony entered into the Dresden Loan AgreementAgreements and other related agreements. These agreements require that we partially fund Dresden Fab 30 project costs in the form of subordinated and revolving loans to, or equity investments in, AMD Saxony. We currently estimate that the maximum construction and facilitization costs to us of Dresden Fab 30 will be $2.6$2.7 billion when fully equipped.equipped by the end of 2005. We had invested $2.1$2.2 billion as of September 29, 2002.28, 2003. If we are unable to meet our obligations to AMD Saxony as required under these agreements, we will be in default under the Dresden Loan Agreement,Agreements, which would permit acceleration of $552$613 million of indebtedness, as well as acceleration bya cross-default ofunder the indentures governing our obligations under4.75% Debentures and 4.50% Notes.
FASL LLC, our other borrowing arrangements.
In addition, during the four-year period commencing on June 30, 2003, we are obligated to provide FASL LLC with additional funding to finance operational cash flow needs. Generally, FASL LLC is first required to contribute cash or guarantee third-party loans in proportionseek any required financing from external sources. However, if such third party financing is not available, we must provide funding to FASL LLC equal to our 49.992 percentpro-rata ownership interest in FASL.
We have a substantial amount of debt and debt service obligations, and may incur additional debt, that could adversely affect our financial position.
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million of availability under our July 19992003 Loan Agreement (subject to our borrowing base). We had also guaranteed approximately $455$225 million of debt, and we are currently in disagreement as to the amount we owe, if any, under our additional guarantee to repay up to $125 million to Fujitsu in connection with a closed wafer fabrication facility in Gresham, Oregon. None of these amounts arewhich is not reflected as debt on our balance sheet.
Our high degree of leverage may:
Our ability to make payments on and to refinance our debt or our guarantees of other parties’ debts will depend on our financial and operating performance, which may fluctuate significantly from quarter to quarter and is subject to prevailing economic conditions and to financial, business and other factors beyond our control.
We cannot assure you that we will continue to generate sufficient cash flow or that we will be able to borrow funds under our credit facilities in amounts sufficient to enable us to service our debt, or meet our working capital and capital expenditure requirements. If we are not able to generate sufficient cash flow from operations or to borrow sufficient funds to service our debt, due to borrowing base restrictions or otherwise, we may be required to sell assets or equity, reduce capital expenditures, refinance all or a portion of our existing debt or obtain additional financing. We cannot assure you that we will be able to refinance our debt, sell assets or equity, or borrow more funds on terms acceptable to us, if at all.
If we are not successful in integrating the operations of our new majority owned subsidiary, FASL LLC, we could be materially adversely affected. Effective June 30, 2003, we and Fujitsu Limited executed several agreements which resulted in the integration of our and Fujitsu’s Flash memory operations in the third quarter. We contributed our Flash memory group, our Fab 25 in Austin, Texas, our Submicron Development Center in Sunnyvale, California, and our assembly and test operations in Thailand, Malaysia and China. Fujitsu contributed its Flash memory business division and its Flash memory assembly and test operations in Malaysia. We, together with Fujitsu, contributed our Manufacturing Joint Venture, which became a wholly owned subsidiary of FASL LLC.
Any benefits of this proposed transaction are subject to, among other things, the following risks:
We cannot assure you that we will be able to successfully integrate these operations or that we will be able to achieve and sustain any benefit from FASL LLC’s creation.
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Intel Corporation’s dominance of the PC processor market may limit our ability to compete effectively in that market. Intel has dominated the market for microprocessors used in PCs for many years. As a result, Intel has been able to control x86 microprocessor and PC system standards and dictate the type of products the market requires of Intel’s competitors. In addition, the financial strength of Intel allows it to market its product aggressively, to target our customers and our channel partners with special incentives and to discipline customers who do business with us. These aggressive activities can result in lower unit sales and average selling prices for us and adversely affect our margins and profitability. Intel also exerts substantial influence over PC manufacturers and their channels of distribution through the “Intel Inside” brand program and other marketing programs. As long as Intel remains in this dominant position, we may be materially adversely affected by its:
We expect Intel to maintain its dominant position in the marketplace as well as to continue to invest heavily in research and development, new manufacturing facilities and other technology companies. Intel has substantially greater financial resources than we do and accordingly expends substantially greater amounts on research and development than we do.
In marketing our microprocessors to OEMs and dealers, we depend on third-party companies other than Intel for the design and manufacture of core-logic chipsets, graphics chips, motherboards, BIOS software and other components. In recent years, many of these third-party designers and manufacturers have lost significant market share to Intel or exited the business. In addition, these companies produce chipsets, motherboards, BIOS software and other components to support each new generation of Intel’s microprocessors, and Intel has significant leverage over their business opportunities.
Our microprocessors are not designed to function with motherboards and chipsets designed to work with Intel microprocessors. Our ability to compete with Intel in the market for AMD Opteron and AMD Athlon 64 microprocessors will depend on our ability to ensure that PC platforms are designed to support our microprocessors. A failure of the designers and producers of motherboards, chipsets and other system components to support our microprocessor offerings would have a material adverse effect on us.
If we are unable to develop, produce and successfully market higher-performing microprocessor products, we may be materially adversely affected. The microprocessor market is characterized by short product life cycles and migration to ever-higher performance microprocessors. To compete successfully, we must transition to new process technologies at a fast pace and offer higher-performance microprocessors in significantly greater volumes. If we fail to achieve yield and
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volume goals or to offer higher-performance microprocessors in significant volume on a timely basis and at competitive prices, we could be materially adversely affected.
To be successful, we must increase sales of our x86 microprocessor products to existing customers and develop new customers in both consumer and commercial markets, particularly the latter. Our production and sales plans for microprocessors are subject to other risks and uncertainties, including:
Our ability to increase microprocessor product revenues and benefit fully from the substantial investments we have made and continue to make related to microprocessors depends on the continuing success of our AMD Athlon XP microprocessors and the success of future generations of microprocessors, most immediately the AMD Opteron processor, and the AMD Athlon 64 processor. If we fail to achieve continued and expanded market acceptance of our microprocessors, we may be materially adversely affected.
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If we were to lose Microsoft Corporation’s support for our products, our ability to market our processors would be materially adversely affected. Our ability to innovate beyond the x86 instruction set controlled by Intel depends on support from Microsoft in its operating systems. If Microsoft does not continue to provide support in its operating systems for our x86 instruction sets, including our 64-bit technology introduced with our AMD Opteron and AMD Athlon 64 processors, independent software providers may forego designing their software applications to take advantage of our innovations. If we fail to retain the support of Microsoft, our ability to market our processors could be materially adversely affected.
The completion and impact of our restructuring program and cost reductions could adversely affect us. We formulated the 2002 Restructuring Plan to address the continuing industry-wide weakness in the semiconductor industry by adjusting our cost structure to industry conditions. Pursuant to the 2002 Restructuring Plan, we plan to reduce our fixed costs as a percentage of total costs over time from approximately 80 percent to approximately 70 percent. We have reduced our expenses in the third quarter of 2003 by approximately $38 million compared to the fourth quarter of 2002. As a result of the 2002 Restructuring Plan, we expect total expenses in 2003 to be reduced by approximately $150 million compared to 2002. We cannot, however, be sure that the goals of the 2002 Restructuring Plan will be realized. If we do not execute the 2002 Restructuring Plan well, the ultimate effects of it could prove to be adverse.
The loss of a significant customer for our Spansion Flash memory products in the high-end mobile telephone market, or a lack of market acceptance of MirrorBit™ technology may have a material adverse effect on us. Since the third quarter of 2002, our Flash memory product sales growth was almost entirely based on strength in the high-end mobile phone market. To date, our sales in that market have been concentrated in a few customers. In addition, we expect competition in the market for Flash memory devices to continue to increase as competing manufacturers introduce new products and industry-wide production capacity increases. We may be unable to maintain or increase our market share in Flash memory devices as the market develops and other competitors introduce new competing products. A decline in unit sales of our Flash memory devices, lower average selling prices, or a loss of a significant customer in the high-end mobile phone market, would have a material adverse effect on us.
In July 2002, we commenced production shipments of the first product with MirrorBit technology. MirrorBit technology is a new memory cell architecture that enables Flash memory products to hold twice as much data as standard flash memory devices. A lack of customer or market acceptance or
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any substantial difficulty in transitioning Flash memory products to any future process technology could reduce FASL LLC’s ability to be competitive in the market and could have a material adverse effect on us.
Spansion memory products are based on the NOR architecture and a significant market shift to the NAND architecture could materially adversely affect us. Spansion memory products are based on the Boolean logic-based NOR (Not Or) architecture, which is typically used for code execution. Any significant shift in the marketplace to products based on NAND (Not And) architecture, which typically offers greater storage capacity, or other architectures will reduce the total market available to us and therefore reduce our market share, which could have a materially adverse affect on us.
Worldwide economic and political conditions may affect demand for our products and slow payment by our customers. The economic slowdown in the United States and worldwide, exacerbated by the occurrence and threat of terrorist attacks and consequences of sustained military action in the Middle East, adversely affected demand for our products. A decline of the worldwide semiconductor market or a significant decline in economic conditions in any significant geographic area would likely decrease the overall demand for our products, which could have a material adverse effect on us. If the economic slowdown returns as a result of terrorist activities, military action or otherwise, it could adversely impact our customers’ ability to pay us in a timely manner.
Manufacturing capacity utilization rates may adversely affect us.At times we underutilize our manufacturing facilities as a result of reduced demand for certain of our products. We are substantially increasing our and FASL LLC’s manufacturing capacity by making significant capital investments in Fab 30, Fab 25, FASL JV2, FASL JV3 and the test and assembly facility in Suzhou, China. If the increase in demand for our products is not consistent with our expectations, we may underutilize our manufacturing facilities, and we could be materially adversely affected. This has in the past had, and in the future may have, a material adverse effect on our earnings and cash flow.
There may also be situations in which our manufacturing facilities are inadequate to meet the demand for certain of our products. Our inability to obtain sufficient manufacturing capacity to meet demand, either in our own facilities or through foundry or similar arrangements with others, could have a material adverse effect on us.
Further, during periods when we are implementing new process technologies, our or FASL LLC’s manufacturing facilities may not be fully productive. A substantial delay in the technology transitions in Fab 30 to smaller process technologies employing silicon-on-insulator technology could have a material adverse effect on us.
At this time, the most significant risk is manufacturing capacity constraint.
Unless we maintain manufacturing efficiency, our future profitability could be materially adversely affected. Manufacturing semiconductor components involves highly complex processes that require advanced equipment. We and our competitors continuously modify these processes in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields. Our manufacturing efficiency will be an important factor in our future profitability, and we cannot be sure that we will be able to maintain our manufacturing efficiency or increase manufacturing efficiency to the same extent as our competitors.
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We cannot be sure that we will not experience manufacturing problems in achieving acceptable yields or product delivery delays in the future as a result of, among other things, capacity constraints, construction delays, upgrading or expanding existing facilities or changing our process technologies, which could result in a loss of future revenues. Our results of operations could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenues do not increase proportionately.
External factors, such as the SARS virus and potential terrorist attacks and other acts of violence or war, may materially adversely affect us. Earlier this year the severe acute respiratory syndrome (SARS) virus had an adverse effect upon the Asian economies and affected demand for our products in Asia. A new outbreak of the virus could have a similar impact on demand for our products in Asia. In addition, if there were to be a case of SARS discovered in any of our operations in Asia, the measures to prevent the spread of the virus could disrupt our operations at that location. There have been no cases of SARS affecting our operations to date.
Terrorist attacks may negatively affect our operations directly or indirectly and such attacks or related armed conflicts may directly impact our physical facilities or those of our suppliers or customers. Furthermore, these attacks may make travel and the transportation of our products more difficult and more expensive and ultimately affect our sales.
Also as a result of terrorism, the United States may be involved in armed conflicts that could have a further impact on our sales, our supply chain, and our ability to deliver products to our customers. Political and economic instability in some regions of the world may also result and could negatively impact our business. The consequences of armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment.
More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility to the United States economy and worldwide financial markets. They also could result in or exacerbate economic recession in the United States or abroad. Any of these occurrences could have a significant impact on our operating results and financial condition, and also may result in the volatility of the market price for our securities and on the future prices of our securities.
Intense competition in the integrated circuit industry may materially adversely affect us.us
Our debt instruments impose restrictions on us that may adversely affect our ability to operate our business.
Our ability to satisfy the covenants, financial ratios and tests of our debt instruments and FASL LLC’s ability to satisfy the covenants, financial ratios and tests of the July 2003 FASL Term Loan can be affected by events beyond our or FASL LLC’s control. We cannot assure you that we or
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FASL LLC will meet those requirements. A breach of any of these covenants, financial ratios or tests could result in a default under our July 19992003 Loan Agreement, our September 2002the July 2003 FASL Term Loan Agreement and/or the Dresden Loan Agreement.Agreements. In addition, these agreements contain cross-default provisions whereby a default under one agreement would likely result in cross-default under agreements covering other borrowings. For example, the occurrence of a default under the July 2003 FASL Term Loan would cause a cross-default under the July 2003 Loan Agreement and a default under the July 2003 Loan Agreement or under the indentures governing our 4.75% Debentures and our 4.50% Notes would cause a cross-default under the Dresden Loan Agreements. The occurrence of an event ofa default under any of these agreements or under the indenture governing our Debentures would likely result in a cross-default under the agreements covering the other borrowings andborrowing arrangements would permit the applicable lenders or noteholdersnote holders to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable and permittingwould permit the lenders to terminate all commitments to extend further credit. If we or FASL LLC were unable to repay those amounts, the lenders under the July 19992003 Loan Agreement, the September 2002July 2003 FASL Term Loan Agreement and the Dresden Loan AgreementAgreements could proceed against the collateral granted to them to secure that indebtedness. We have pledgedgranted a security interest in substantially all of our personal property, including inventory and accounts receivable as security under our July 19992003 Loan Agreement, andFASL LLC has granted a security interest in certain property, plant and equipment as security under our September 2002the July 2003 FASL Term Loan Agreement, and AMD Saxony has pledged substantially all of its property as security under the Dresden Loan Agreement.Agreements. If the lenders under any of the credit facilities or the noteholdersnote holders or the trustee under the indentureindentures governing our 4.75% Debentures and our 4.50% Notes accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings and our other indebtedness.
Costs related to defective products could have a material adverse effect on us.
If essential raw materials are not available to manufacture our products, we could be materially adversely affected.
Our operations in foreign countries are subject to political and economic risks, which could have a material adverse effect on us.
The political and economic risks associated with our operations in foreign countries include:
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any of which could have a material adverse effect on us.
As part of our business strategy, we are continuing to seek expansion of product sales in emerging overseas markets. We recently signed a research and development joint venture agreement with China Basic Education Software Company, Ltd. to develop hardware platforms
Our inability to continue to attract and retain key personnel may hinder our product development programs.
Our operating results are subject to substantial seasonal fluctuations.
Uncertainties involving the ordering and shipment of, and payment for, our products could materially adversely affect us.
While we believe inventories in the PC industry supply chain. In some cases, this led to delays in payments for our products. We believe thatchain are currently at reasonable levels, market conditions are uncertain and these and other factors could continue to materially adversely affect our revenues in the near term.
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Our price protection obligations and return rights under specific provisions in our agreements with distributors may adversely affect us.
If we cannot adequately protect our technology or other intellectual property, in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, we may lose a competitive advantage and incur significant expenses.
From time to time, we have been notified that we may be infringing intellectual property rights of others. If any such claims are asserted against us, we may seek to obtain a license under the third party’s intellectual property rights. We cannot assure you that all necessary licenses can be obtained on satisfactory terms, if at all. We could decide, in the alternative, to resort to litigation to challenge such claims. Such challenges could be extremely expensive and time-consuming and could have a material adverse effect on us. We cannot assure you that litigation related to the intellectual property rights of us and others will always be avoided or successfully concluded.
Failure to comply with any of the applicable environmental regulations could subject us toresult in a range of consequences including fines, suspension of production, alteration of our manufacturing process, cessation of operations or regulatory action.sales, and criminal and civil liabilities.
Our corporate headquarters assembly and research and development activitiesFASL LLC’s manufacturing facilities in Japan are located in an earthquake zone and these operations could be interrupted in the event of an earthquake.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form
10-K for the fiscal year ended December 30, 2001.
ITEM 4. | CONTROLS AND PROCEDURES |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizedrecognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily wasis required to apply its judgment in evaluating the cost-benefit relationship of possible
As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.
There havehas been no significant changeschange in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or in other factors that could significantlyis reasonably likely to materially affect, theour internal controls subsequent to the date we completed our evaluation.
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PART II. OTHER INFORMATION
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K |
(a) | Exhibits |
(a-1) First Amendment to Amended and Restated Loan and Security Agreement, dated as of |
Loan | |||
*10.64 | Master Rental Agreement, dated July 16, 2003 among GE Capital Leasing Corporation, as |
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | To be filed by amendment. |
(b) | Reports on Form 8-K |
A Current Report on Form 8-K dated July 17, 200214, 2003 reporting under Item 5—5 – Other Events and Item 7 – Financial Statements, Pro Forma Financial Information and Exhibits, was filedfurnished announcing our second quarter results.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ADVANCED MICRO DEVICES, INC. | ||||||||
Date: November 12, | By: | /s/ | ||||||
Robert J. Rivet | ||||||||
Senior Vice President, Chief Financial Officer | ||||||||
Signing on behalf of the registrant and as the principal accounting officer |
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