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EXHIBIT 2
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Management’s ABOUT FORWARD-LOOKING STATEMENTS This Annual Report and Management’s Discussion and Analysis (“MD&A”), and in particular the outlook sections of this MD&A, contain forward-looking statements about ATI’s objectives, strategies, financial condition and results. These “forward-looking” statements are based on current expectations and entail various risks and uncertainties. It must be noted that:
Risks that could cause our actual results to materially differ from our current expectations are outlined in the Risks and Uncertainties section of this MD&A. |
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This MD&A comments on ATI’s operations, performance and financial condition for the three years ended August 31, 2003. The MD&A should be read in conjunction with ATI’s 2003 Consolidated Financial Statements and accompanying notes beginning on page 28 of this Annual Report. All current and historical amounts quoted in this MD&A, in the Consolidated Financial Statements and elsewhere in this Annual Report reflect the accounting change described in note 1 to the Consolidated Financial Statements. All tabular amounts are expressed in thousands of U.S. dollars except per share amounts. In this MD&A, ATI, we, us and our mean ATI Technologies Inc. and its subsidiaries. The MD&A is presented in four sections: About Our Business describes our business, strategy and outlook. Financial Results Analysis provides a detailed review of our financial performance for the past three years. It focuses on operating results as well as liquidity and capital resources. Risks and Uncertainties examines uncertainties and challenges that could affect our business. Our Accounting Policies describe our critical accounting policies and the key estimates and assumptions that management has made in the preparation of our financial statements. It also provides a description of changes in accounting standards used to prepare our financial statements. About Our Business We are dedicated to the delivery of leading-edge performance solutions for the full range of desktop and notebook personal computer (PC), workstation, digital television (DTV), set-top box, game console, color mobile phone and handheld markets. We had revenues of about $1.4 billion in fiscal 2003. In addition, more than 2,200 employees work at ATI in offices in the Americas, Europe and Asia. ATI TERMS EXPLAINED VPUs and GPUs VPUs or GPUs off-load the burden of visual processing from the computer’s microprocessor or central processing unit (CPU). In this way the dedicated VPU and CPU work in tandem to increase overall speed and performance of the PC. Though both VPU and GPU refer to the same general category, we use VPU to distinguish our more recent generations of processors beginning with the introduction of the RADEON™ 9700—the first graphic processor to enable full rendering in real time. IGPs Visual Processing Units for PCs | |
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT.) Desktop Our integrated desktop IGP addresses the value segment of the PC market. We bring speed and an excellent visual experience to the sub-$1,000 PC market. Notebook Our integrated notebook IGPs target the value category of the portable or laptop computer segment. Our products combine excellent graphic performance and low power consumption at a value price-point. Visual Processing Products for Consumer Electronics ATI has been working for several years to leverage our core technology, visual processing expertise and power management know-how in certain consumer markets. Initially we have targeted three end user markets: handheld devices, including color mobile phones; digital television, including set-top boxes; and game consoles. Color mobile phones, PDAs and handheld devices Our IMAGEON™ product line brings leading visual processing along with power saving technology and a high level of integration. Digital television including set-top boxes We are leveraging our core technology in visual processors and multimedia by designing and manufacturing component-level visual and signal processing technologies for the digital TV and set-top box markets. Our XILLEON™ and THEATER™ product lines are cost-effective and highly integrated solutions for this market. Game consoles BUSINESS STRATEGY AND 2003 PROGRESS AND ACHIEVEMENTS
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BUSINESS STRATEGY AND OBJECTIVES | 2003 ACCOMPLISHMENTS | |||
Product and Technology Leadership Consistently raise the technology innovation and performance bar in all segments of the PC market. | We Raised the Bar Again in 2003 Leveraged high-end performance VPUs into the important mainstream and value market segments with the introduction of the RADEON™ 9600 and the RADEON™ 9200. | |||
Establish a Franchise in the IGP Market Bring ATI’s core visual processing expertise to the IGP market that represents about 50% of graphics processor shipments today. | Captured a Leading Share We introduced a series of new IGP products culminating in the release of the RADEON™ 9100 IGP and MOBILITY™ RADEON™ 9100 IGP. Strong customer acceptance of our value/performance proposition has contributed to our successful launch in the IGP market. We partnered with key motherboard manufacturers including ASUS, Gigabyte, MSI, and PC Partner that will help us penetrate the desktop integrated market in fiscal 2004. | |||
Expand in Consumer Electronics Market Segments Leverage our core technology base and expertise in the PC market with products that reach beyond the PC and address the DTV, handheld and game console markets. | Volume Shipments of IMAGEON™ into Achieved Broad-Based Acceptance Agreements with Game Console Manufacturers | |||
Improve Operating and Financial Performance Continuously improve all areas of ATI’s operations to achieve and exceed our financial objectives. | Steady Improvement in Financial In 2003, we improved our inventory management controls and increased our inventory turns to 5.2 from 4.5 in 2002. |
BUSINESS OUTLOOK FOR FISCAL 2004 Although we expect growth from our existing franchises in desktop discrete, notebook discrete and notebook IGP products, we expect much of our fiscal 2004 revenue growth to come from products sold into the handheld, DTV and desktop IGP markets. Based on this outlook for the markets for our products, we expect ATI’s financial performance will improve in 2004 relative to 2003.
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT.) Financial Results Analysis During fiscal 2003, ATI reviewed its revenue recognition accounting policy as it is applied to the shipment of products to our customers. Following this review, we corrected our revenue recognition accounting policy by revising the timing of when revenue is recognized to more clearly identify the point in the shipping process when the risk and rewards of ownership have been transferred to the customer. This change and the related income tax effect have been applied retroactively. The financial statements of all prior periods presented for comparative purposes have been restated to give effect to this change. Details are provided in note 1 in the accompanying financial statements. Our financial results have been and will continue to be subject to quarterly and other fluctuations. For a discussion of factors affecting our operating results, please refer to “Risks and Uncertainties” on page 22. OPERATING RESULTS |
Comparison of Operating Results unaudited | 2003 | 2002 | 2001 | ||||||||||||||||
(Restated) | (Restated) | ||||||||||||||||||
REVENUES | $ | 1,385,293 | 100.0% | $ | 1,015,779 | 100.0% | $ | 1,040,365 | 100.0 | % | |||||||||
Cost of goods sold | 952,001 | 68.7% | 682,385 | 67.2% | 799,038 | 76.8 | % | ||||||||||||
Gross margin | 433,292 | 31.3% | 333,394 | 32.8% | 241,327 | 23.2 | % | ||||||||||||
EXPENSES | |||||||||||||||||||
Selling and marketing | 96,925 | 7.0% | 77,920 | 7.7% | 75,594 | 7.2 | % | ||||||||||||
Research and development | 212,976 | 15.4% | 164,609 | 16.2% | 149,465 | 14.4 | % | ||||||||||||
Administrative | 39,413 | 2.8% | 35,662 | 3.5% | 37,261 | 3.6 | % | ||||||||||||
Amortization and write-down of | |||||||||||||||||||
goodwill and intangible assets | 10,767 | 0.8% | 97,501 | 9.6% | 114,507 | 11.0 | % | ||||||||||||
Other charges | 28,724 | 2.1% | – | 0.0% | – | 0.0 | % | ||||||||||||
388,805 | 28.1% | 375,692 | 37.0% | 376,827 | 36.2 | % | |||||||||||||
NET INCOME (LOSS) FROM OPERATIONS | 44,487 | 3.2% | (42,298 | ) | (4.2% | ) | (135,500 | ) | (13.0 | %) | |||||||||
Interest and other income, net | 4,382 | 0.3% | 732 | 0.1% | 64,131 | 6.1 | % | ||||||||||||
Interest expense | (1,899 | ) | (0.1% | ) | (659 | ) | (0.1% | ) | (1,180 | ) | (0.1 | %) | |||||||
Income (loss) before income taxes | 46,970 | 3.4% | (42,225 | ) | (4.2% | ) | (72,549 | ) | (7.0 | %) | |||||||||
Income taxes (recovery) | 11,741 | 0.9% | 6,854 | 0.6% | (18,760 | ) | (1.8 | %) | |||||||||||
NET INCOME (LOSS) | $ | 35,229 | 2.5% | $ | (49,079 | ) | (4.8% | ) | $ | (53,789 | ) | (5.2 | %) | ||||||
NET INCOME (LOSS) PER SHARE | |||||||||||||||||||
Basic | $ | 0.15 | $ | (0.21 | ) | $ | (0.23 | ) | |||||||||||
Diluted | $ | 0.14 | $ | (0.21 | ) | $ | (0.23 | ) | |||||||||||
ADJUSTED NET INCOME (LOSS)* | |||||||||||||||||||
Adjusted net income (loss) | $ | 67,015 | $ | 48,078 | $ | (15,836 | ) | ||||||||||||
Adjusted net income (loss) per share | |||||||||||||||||||
Basic | $ | 0.28 | $ | 0.20 | $ | (0.07 | ) | ||||||||||||
Diluted | $ | 0.27 | $ | 0.19 | $ | (0.07 | ) | ||||||||||||
*Please see table titled “Reconciliation of Adjusted Net Income (Loss)” included on page 18. |
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Adjusted net income is a “non-GAAP financial measure” that does not have an established meaning under generally accepted accounting principles (“GAAP”), but is referred to in this Annual Report because management of ATI believes that it is indicative of our operating performance and is generally used by investors to evaluate companies in the graphics industry. Such term may not be comparable to similarly titled measures presented by other publicly traded companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. |
REVENUES Revenues increased by $370 million to approximately $1.4 billion in 2003. This increase was primarily a result of our strong entry into the notebook IGP market and a growing demand for our high performance desktop products. Overall growth in the notebook market also contributed to growth in discrete and integrated notebook products. Over 55% of our revenues in 2003 were generated by our desktop discrete products which was a relative decrease compared to 2002 where desktop products represented over 60% of revenues. Over 40% of revenues in 2003 were generated by our notebook products, with over 10% of our overall sales coming from our notebook IGP products—a new market segment for us. In 2002, notebook product sales represented about a third of our revenues. Notebook market growth as well as our entry into the notebook integrated market contributed to this shift in 2003. Royalties and licensing income from our Nintendo business continued to represent less than 5% of revenues in 2003, and in absolute dollars were slightly lower in 2003 relative to 2002. | |||||||||
Revenues | |||||||||
$ billions | |||||||||
1.0 | 1.0 | 1.4 | |||||||
01* | 02* | 03 | |||||||
*Restated | |||||||||
In 2003, three customers accounted for 40% (16%, 13% and 11% respectively) of total revenues. In 2002, only one customer represented over 10% of our sales, at 21%. Our top ten customers accounted for approximately 70% of revenues in 2003 compared with 71% last year. Our revenues declined 2.4% in 2002 versus 2001 primarily as a result of the ongoing transition in ATI’s business from board sales to component sales. Unit sales volume increased in 2002, but with an increased mix of lower dollar components versus boards. |
Gross Margin In the remaining three quarters, however, our gross margin climbed steadily and exceeded 35% in the fourth quarter. We achieved higher margins on our board-level products, reflecting the strength of our high-end products. We also saw improvement in desktop chip margins largely due to higher margins from new products, as well as improved contribution of our consumer business. The increase in gross margin percentage was somewhat moderated by lower margins on our “embedded memory” products sold into the notebook PC market. Certain of our notebook products include third party memory. The memory is generally passed through with a limited markup. This results in reduced gross margin percentage. | |||||||||
Gross Margin | |||||||||
$ millions | |||||||||
241.3 | 333.4 | 433.3 | |||||||
01* | 02* | 03 | |||||||
*Restated | |||||||||
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT.) | |
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EXPENSES Selling and Marketing Expenses As a percentage of revenues, our selling and marketing expenses declined to 7.0% in 2003 from 7.7% last year. Selling and marketing expenses include salaries, commissions and bonuses earned by sales and marketing personnel, direct sales costs, promotional and advertising costs, and travel and entertainment expenses. | |||||||||
Operating Expenses† | |||||||||
$ millions | |||||||||
262.3 | 278.2 | 349.3 | |||||||
01* | 02* | 03 | |||||||
*Restated | |||||||||
The white box, or system integrator channel, is an increasingly important distribution channel for ATI and one that already contributes positively to revenue and profitability. Approximately $11.5 million of our sales and marketing expenses in the form of variable selling expenses were used in support of our pursuit of business in this channel, particularly in the Asia-Pacific region. AMI Technologies Corp. (“AMI”), our third-party sales and distribution partner in Asia-Pacific, generated increased sales and corresponding commissions in 2003. Subsequent to year-end, ATI purchased certain assets of AMI. With this acquisition, we expect to reduce our expenses associated with sales into this region in fiscal 2004. Selling and marketing expenses increased in 2002 compared to 2001 as a result of marketing |
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Research and Development Expenses As a percentage of revenues, R&D expenses declined to 15.4% in 2003 from 16.2% last year. R&D expenses include engineering salaries, costs of development tools and software, component and board prototype costs, consulting fees, licensed technology fees and patent filing fees. Investment in R&D is a key part of our strategy to maintain product and technology leadership. It has enabled us to expand into the IGP segment and open new markets in consumer electronics. We will continue to invest in R&D in support of our strategic objectives. In 2003, our R&D expenses rose as a result of both an increase in staffing, as well as the cost of technology required to support the increasing complexity of our products, and a broader product line. Key activities contributing to our higher R&D spending in 2003 included increased investment in the following: | |||||||||
Research and Development Expenses | |||||||||
$ millions | |||||||||
149.5 | 164.6 | 213.0 | |||||||
01 | 02 | 03 | |||||||
R&D expenses increased by $15.1 million to $164.6 million from 2001 to 2002. This increase was attributable to the development and support of new products for the integrated chipset and consumer markets; the reflection of a full year of costs from the acquisition of the FGL Graphics division of SONICblue Ltd. in March 2001; the staffing of our 3D design teams in Marlborough, MA and Santa Clara, CA; a $1.5 million expense associated with the acquisition of NxtWave in June 2002; as well as higher product development costs, including increased prototyping costs. Administrative Expenses As a percentage of revenue, administrative expenses declined to 2.8% in 2003 from 3.5% in 2002. Administrative expenses consist of salaries and expenses of the corporate infrastructure groups, including the operations, human resources, finance, legal and information technology departments. Administrative expenses in 2003 increased $3.8 million relative to 2002 as a result of additional personnel needed to support investments in R&D and marketing, as well as the foreign exchange impact. Most of our administrative expenditures are denominated in Canadian dollars. The decrease in administrative expenses in 2002 compared to the prior year was primarily due to lower staffing levels in our board business and other areas resulting from our transition to a chip model. | ||
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT.) |
Amortization of Intangible Assets | 2003 | 2002 | 2001 | ||||||||||
Goodwill: | |||||||||||||
Amortization expense | $ | – | $ | 73,134 | $ | 75,404 | |||||||
Write-down | – | 10,319 | – | ||||||||||
– | 83,453 | 75,404 | |||||||||||
Intangible assets: | |||||||||||||
Amortization expense | 10,767 | 8,963 | 34,592 | ||||||||||
Write-down | – | 5,085 | 4,511 | ||||||||||
10,767 | 14,048 | 39,103 | |||||||||||
$ | 10,767 | $ | 97,501 | $ | 114,507 | ||||||||
Our total amortization expense fell by $86.7 million or 89.0% to $10.8 million in 2003. This decrease is the result of discontinuing amortization of goodwill in response to new accounting standards. Please see “Our Accounting Policies” in this MD&A for more information. Amortization expense totaled $97.5 million in 2002 compared to $114.5 million in 2001. The decline was the result of the completion in April 2001 of the amortization of the purchased-in-process R&D associated with the acquisition of ArtX Inc. (ArtX). This was slightly offset by the write-down of core technology and goodwill associated with the acquisitions of ArtX and Chromatic Research Inc. (Chromatic) that totaled $15.4 million during 2002. During fiscal 2002, we conducted a comprehensive review of the carrying values of core technology and goodwill arising from the acquisitions of Chromatic and ArtX and concluded that there was a permanent impairment in these values. As a result, during the year we wrote off the remaining balances of core technology and goodwill arising from the acquisition of Chromatic totaling $4.8 million, and at year-end wrote off $4.2 million of core technology and $6.4 million in goodwill related to the ArtX acquisition. Other Charges Other charges included:
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Interest and Other Income |
2003 | 2002 | 2001 | |||||||||||
Interest income on cash and short-term investments | 2,802 | 4,916 | 4,005 | ||||||||||
Gains/(losses) on investments | 3,876 | (3,355 | ) | 61,216 | |||||||||
Gains/(losses) on foreign exchange | 819 | (444 | ) | (1,876 | ) | ||||||||
Loss on disposal of fixed assets | (3,932 | ) | (1,104 | ) | (69 | ) | |||||||
Other income | 817 | 719 | 855 | ||||||||||
Interest and other income, net | 4,382 | 732 | 64,131 | ||||||||||
We disposed of certain long-term investments in 2003 enabling us to realize a gain of $3.9 million. During fiscal 2002, we disposed of a portion of a long-term investment realizing a loss of $0.3 million. We then wrote down the remaining balance of this investment by $0.5 million to reflect the other-than-temporary decline in its value. The balance was then reclassified as a short-term investment as it was our intention to sell the remaining portion of this investment. In 2002, we also received an additional 107,387 shares of Broadcom Corporation, valued at $2.1 million, resulting from the release of escrowed shares pursuant to the terms of the agreement to purchase our share investment in SiByte Inc. by Broadcom in the preceding fiscal year. On August 31, 2002, the Company wrote down its total investment in Broadcom by $4.7 million to reflect the other than temporary decline in its value. Interest Expense Our interest expense relates primarily to our capital lease obligation and mortgage for the building facility located in Markham, Ontario, a joint venture in which we hold a 50% ownership. In 2002, interest expense also included our proportionate share of the interest expense related to the interim construction financing of the joint venture. Income Taxes |
2003 | 2002 | 2001 | |||||||||||
(Restated) | (Restated) | ||||||||||||
Operating income tax expense (recovery) | 15,570 | 10,553 | (3,422 | ) | |||||||||
Recovery of future tax liability related to intangible assets | |||||||||||||
(other than goodwill) | (1,679 | ) | (3,547 | ) | (16,329 | ) | |||||||
Income tax expense (recovery) related to sale of investments | 6 | (152 | ) | 991 | |||||||||
Income tax recovery related to other charges | (2,156 | ) | _ | _ | |||||||||
11,741 | 6,854 | (18,760 | ) | ||||||||||
ATI’s operating tax rate, which excludes the impact of the amortization of intangible assets related to acquisitions, and the effect of the gain (loss) on investments and other special charges, was 18.9% in 2003, 18.0% in 2002 and 17.8% in 2001. ATI’s tax rate is affected by the amount of net income earned in its various operating jurisdictions. See note 12 to the Consolidated Financial Statements. |
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT.) |
Net Income (Loss) Net income rose in 2003 relative to 2002 as a result of several factors. Revenues and gross margin increased in 2003 while amortization expenses decreased significantly due to new accounting policies. Increases in operating expenses across all other functional areas in 2003 partially offset these improvements. Our net loss in 2002 was $49.1 million compared to a net loss of $53.8 million in 2001. The decrease in net loss in 2002 compared to the prior year was largely due to improved gross margins. Adjusted Net Income (Loss) Reconciliation of Adjusted Net Income (Loss) |
unaudited | 2003 | 2002 | 2001 | ||||||||||
(Restated) | (Restated) | ||||||||||||
Net income (loss) – GAAP basis | $ | 35,229 | $ | (49,079 | ) | $ | (53,789 | ) | |||||
Amortization of intangible assets | 10,767 | 97,501 | 114,507 | ||||||||||
Other charges | 28,724 | – | – | ||||||||||
Loss (gain) on investments | (3,876 | ) | 3,355 | (61,216 | ) | ||||||||
Tax recovery of other charges | (2,156 | ) | – | – | |||||||||
Net tax on sale of investments | 6 | (152 | ) | 991 | |||||||||
Deferred tax recovery of future tax liability | (1,679 | ) | (3,547 | ) | (16,329 | ) | |||||||
Adjusted net income (loss) | $ | 67,015 | $ | 48,078 | $ | (15,836 | ) | ||||||
Adjusted net income (loss) per share | |||||||||||||
Basic | $ | 0.28 | $ | 0.20 | $ | (0.07 | ) | ||||||
Diluted | $ | 0.27 | $ | 0.19 | $ | (0.07 | ) | ||||||
Our adjusted net income rose in 2003 as a result of increased revenues and gross margin, offset by increased operating expenses, excluding amortization of intangible assets and other charges. The increase in adjusted net income for 2002 compared to the prior year was largely due to improved gross margin, offset by higher overall operating expenses, excluding amortization of intangible assets. LIQUIDITY AND CAPITAL RESOURCES 2003 Highlights and Outlook for 2004
We generated positive cash flows from operations from our net income and improvements in working capital in the period. We are targeting continuing improvement in cash flows and modestly lower inventory levels relative to sales in fiscal 2004. |
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Cash Position |
unaudited | 2003 | 2002 | 2001 | ||||||||||
(Restated) | (Restated) | ||||||||||||
Net income (loss) | $ | 35,229 | $ | (49,079 | ) | $ | (53,789 | ) | |||||
Non-cash add backs | 12,883 | 125,620 | 56,247 | ||||||||||
Working capital changes | 57,337 | (19,599 | ) | 99,485 | |||||||||
Issue of common shares | 20,977 | 12,495 | 4,687 | ||||||||||
Bank indebtedness | (12,015 | ) | 3,266 | 8,749 | |||||||||
Net movement in long-term debt | 9,645 | (312 | ) | – | |||||||||
Net purchases to capital assets | (16,390 | ) | (30,111 | ) | (31,091 | ) | |||||||
Net proceeds from sale of long-term | |||||||||||||
investments, net of purchases | 7,569 | – | 62,561 | ||||||||||
Net purchases of short-term investments | (135 | ) | (4,649 | ) | (40,597 | ) | |||||||
Acquisitions | – | (22,118 | ) | (9,201 | ) | ||||||||
Other | (1,140 | ) | 362 | – | |||||||||
113,960 | 15,875 | 97,051 | |||||||||||
Foreign exchange loss | (181 | ) | (204 | ) | (431 | ) | |||||||
Net increase in cash and cash equivalents | $ | 113,779 | $ | 15,671 | $ | 96,620 | |||||||
Cash, cash equivalents and | |||||||||||||
short-term investments | $ | 350,689 | $ | 236,927 | $ | 216,455 | |||||||
Our cash position (cash, cash equivalents and short-term investments) increased 48.0% to $350.7 million in fiscal 2003 as a result of improved revenues and operational performance in 2003, as well as $37.5 million of deferred revenue that was recorded for development agreements with Microsoft Corp. and Nintendo Co. Ltd. We have access to $25.4 million in credit facilities at August 31, 2003 compared to $101.0 million at August 31, 2002. We had access to $101.0 million in credit facilities at the end of fiscal 2002 compared to $98.0 million at August 31, 2001. As at August 31, 2003, we are committed to the following minimum payments related to office premises, license and royalty agreements, building under capital lease payments and mortgage payments: | Cash Position | ||||||||
$ millions | |||||||||
216.5 | 236.9 | 350.7 | |||||||
01 | 02 | 03 | |||||||
Total | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | |||||||||||||||||
Commitment related to | |||||||||||||||||||||||
office premises, license | |||||||||||||||||||||||
and royalty agreements | $ | 79,451 | $ | 22,494 | $ | 20,491 | $ | 9,666 | $ | 6,207 | $ | 6,252 | $ | 14,341 | |||||||||
Commitment related to | |||||||||||||||||||||||
capital lease | 26,995 | 1,784 | 1,784 | 1,784 | 1,858 | 1,962 | 17,823 | ||||||||||||||||
Commitment related to | |||||||||||||||||||||||
mortgage | 16,797 | 1,493 | 1,493 | 1,493 | 1,493 | 1,493 | 9,332 | ||||||||||||||||
Total commitments | $ | 123,243 | $ | 25,771 | $ | 23,768 | $ | 12,943 | $ | 9,558 | $ | 9,707 | $ | 41,496 | |||||||||
We believe that cash flows from operating activities, together with our cash position and borrowings |
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT.) |
Operating Activities – Working Capital At August 31, 2003, 93.3% of accounts receivable were less than 60 days outstanding, compared with 92.3% at August 31, 2002. We have Export Development Corporation insurance covering approximately 89.8% of our total accounts receivable at August 31, 2003 compared to 81.2% last year. Days sales in accounts receivable increased to 53 days in 2003 compared to 50 days in 2002. At August 31, 2003, one customer accounted for 18% of our accounts receivable balance. Accounts receivable increased by 19.6% to $141.1 million at August 31, 2002 compared to the prior year-end, due to slightly longer payment terms in our industry as well as greater than usual amount of product sold in the last few weeks of the fiscal year as our new product lines began to ship. | |||||||||
Accounts Receivable | |||||||||
$ millions | |||||||||
118.0 | 141.1 | 234.5 | |||||||
01* | 02* | 03 | |||||||
*Restated | |||||||||
At August 31, 2002, 92.3% of our accounts receivable were less than 60 days outstanding, compared with 95.2% at August 31, 2001. We had Export Development Corporation insurance covering approximately 81.2% of our total accounts receivable at August 31, 2002 and 81.3% at our prior year-end. Days sales in accounts receivable increased to 50 days in 2002 compared to 38 days in 2001. At August 31, 2002, one customer accounted for 12% of our accounts receivables. |
Inventories Inventories declined by 8.1% to $176.5 million at the end of 2003 compared to inventories at the end of fiscal 2002. Inventory levels in 2003 were in line with our target of 60 days. In 2003, we continued to implement an inventory management program to reduce inventories of raw materials, work in progress and finished goods. Inventories on hand increased significantly in the last two quarters of fiscal 2002 as we ramped up production of our new products. We also encountered a slower turn of our existing product line during this time frame. Inventories increased by $80.2 million at the end of 2002 compared to August 31, 2001 as a result of lower than expected sales in the last two quarters of the year and increased purchases to support new product introductions. | |||||||||
Inventories | |||||||||
$ millions | |||||||||
111.9 | 192.1 | 176.5 | |||||||
01* | 02* | 03 | |||||||
*Restated | |||||||||
In 2002 accounts payable increased to $172.1 million from $79.7 million at the prior year-end as a result of the timing of payments to suppliers and increased inventory purchases for the new product lines. Accrued liabilities increased to $136.7 million in 2003 compared to $49.4 million in 2002. The increase is largely a result of the timing of payments related to sales rebates and price protection which are also a function of sales, as well as accruals related to other charges noted above, some of which were accrued in the last quarter of the year. There was no significant change in accrued liabilities in 2002 compared to 2001. Deferred Revenue This deferred revenue is associated with two development contracts, where we have recorded amounts relating to these contracts, but have not yet recognized the revenue. The revenue will be recognized as services are provided under each of the respective contracts. |
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Cash generated from common shares issued from the exercise of stock options was $12.5 million in 2002 compared to $4.7 million in 2001. Our bank indebtedness, which arose from the short-term financing provided to the joint venture to construct our new building, declined to nil from $12.0 million in the prior year. Upon completion of the new building a long-term mortgage was obtained in 2003 by the joint venture resulting in an increase of our long-term debt obligations. Investing Activities Capital expenditures in 2002 were $30.1 million, compared to $31.1 million in fiscal 2001. The majority of these expenditures related to the construction of our new building which was completed in fiscal 2002. In 2002 capital additions included $22.4 million of additions to building-in-progress. In 2001, capital additions included building-in-progress additions of $11.5 million, representing our 50% share of the costs incurred to construct our new building that were subsequently transferred into building under capital lease. Laboratory, computer equipment and software purchases accounted for another $16.2 million in capital additions in 2001. Long-Term Investments During fiscal 2003, we disposed of all of our remaining shares in Broadcom Corp., realizing a gain of $3.8 million. In 2002 we did not make any long-term investments. SUBSEQUENT EVENT CLAIMS AND PROCEEDINGS See notes 15 and 21 of the Consolidated Financial Statements regarding other claims and proceedings affecting ATI. |
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT.) |
Risks and Uncertainties Our reported operating results may vary from prior periods or may be adversely impacted in periods when we are undergoing a product line transition during which sales of new products must be ramped up to replace sales of our older products. These older products often come under significant pricing and margin pressure as a result of competitors’ actions in the marketplace. Should our new products, including integrated chipset products, and products for the consumer electronic device market, not offer the features and performance required by our customers or fail to achieve meaningful marketshare, our operating results will be negatively impacted. Our ability to develop new products is dependent upon our ability to obtain licenses to emerging industry technology or other intellectual property rights, which may not be readily available or available on commercially reasonable terms. As a result of any combination of these or other issues referred to below, our operating results and common share price may be subject to a significant level of volatility, particularly on a quarterly basis. Factors that have affected our operating results in the past and could affect them in the future include, among other things:
As indicated above, most of our operating expenses are relatively fixed in the short term. As a result, we may be unable to rapidly adjust our spending to compensate for any unexpected revenue shortfall, which could harm quarterly operating results. Also, our products have varying gross margins. As a result of the factors listed above, period-to-period comparisons of our operating results should not be relied upon as an indication of future performance. The results of any quarterly period are not indicative of results to be expected for a full fiscal year. Accordingly, our operating results may be below the expectations of securities analysts and investors. Our failure to meet these expectations could adversely affect the market price of our common shares. |
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For a more complete discussion of general risks and uncertainties which apply to our business and our financial results, please see ATI’s Annual Information Form and other filings with Canadian and U.S. securities regulatory authorities. For a description of certain legal proceedings affecting ATI, please see notes 15 and 21 to the Consolidated Financial Statements. Our Accounting Policies Under GAAP, we are required to make estimates and assumptions when we account for and report assets, liabilities, revenue and expenses and disclose contingent assets and liabilities in our financial statements. We are also required to constantly evaluate the estimates and assumptions we use. We base our estimates and assumptions on historical experience and other factors that we believe are reasonable in the circumstances. Because our estimates and assumptions involve judgment and varying degrees of uncertainty, actual results could materially differ from our estimates and assumptions. We make significant estimates when determining provisions for sales returns and allowances, our allowance for doubtful accounts, our provision for inventory obsolescence, the fair value of reporting units for goodwill impairment testing, the useful lives and valuation of intangible assets, the valuation of long-term investments, restructuring charges, our worldwide income tax provision and the realization of future tax assets. We believe the following are the most critical accounting policies we follow as they rely heavily on our judgment and estimates: Revenue Recognition We record estimated sales returns and allowances, price protection, sales rebates, and other volume-based incentives at the time we recognize revenue. If our estimates of future market conditions and changing product lifecycles in the marketplace are inaccurate we may be required to materially increase customer incentive offerings, which could necessitate a further reduction of revenue. We also provide for the estimated cost of product warranties at the time of revenue recognition. If actual product warranty costs vary from our estimates we may have to record material adjustments to our warranty expense. Inventory Valuation Goodwill |
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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT.) |
Income Taxes We record a valuation allowance to reduce our future tax assets to the amount of future tax benefit that is more likely than not to be realized. We consider future taxable income in our operating jurisdictions and ongoing prudent and feasible tax planning strategies in determining the need for the valuation allowance. If we were to determine that we could realize our future tax assets in excess of their recorded amounts we would record an adjustment to the future tax asset and increase income in the period the determination is made. Alternatively, if we were to determine that we could not realize all or parts of our future tax assets, we may record a material charge to income in the period the determination is made. During 2003 we have applied changes as a result of newly issued accounting standards as follows: Goodwill and Other Intangible Assets We applied the new standards and as a result reclassified $2.3 million from workforce to goodwill as of September 1, 2002 to conform to the new guidance. In addition, we allocated our existing goodwill to our reporting units and completed the transitional impairment test in the second quarter of 2003. We determined no transitional impairment existed as of September 1, 2002. Further, we completed our annual impairment test in the fourth quarter of 2003 and determined no impairment had occurred. Stock-based Compensation and Other Stock-based Payments We have applied the pro forma disclosure provisions of the new standard to awards granted on or after September 1, 2002 that are provided in note 11 to the Consolidated Financial Statements. No restatement of prior periods was required as a result of the adoption of the new standard. Disposal of Long-lived Assets and Discontinued Operations We have fully adopted the revised Section 3475 to disposal activities initiated on or after May 1, 2003; we were not impacted by this change. Section 3063 is effective for our 2004 fiscal year. We expect that the adoption of this standard will have no material impact on our financial position, results of operations or cash flows. |
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Guarantees We have fully adopted this guideline as of March 1, 2003. The disclosures required by this standard are included in note 14 to the Consolidated Financial Statements. In addition to the standards we have applied in the year there are additional new standards that will be applied in future years as follows: Generally Accepted Accounting Principles Asset Retirement Obligations Consolidation of Variable Interest Entities |
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QUARTERLY INFORMATION |
unaudited | November 30 | February 28 | May 31 | August 31 | |||||||||||||||||||||||||||
2002 | 2001 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | ||||||||||||||||||||||||
(Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||||||||||||||
REVENUES | $ | 335,436 | $ | 261,309 | $ | 313,492 | $ | 262,559 | $ | 355,691 | $ | 269,046 | $ | 380,674 | $ | 222,865 | |||||||||||||||
Cost of goods sold | 244,251 | 179,568 | 222,969 | 173,759 | 239,590 | 174,970 | 245,191 | 154,088 | |||||||||||||||||||||||
Gross margin | 91,185 | 81,741 | 90,523 | 88,800 | 116,101 | 94,076 | 135,483 | 68,777 | |||||||||||||||||||||||
EXPENSES | |||||||||||||||||||||||||||||||
Selling and marketing | 22,247 | 20,546 | 21,354 | 19,648 | 25,696 | 19,493 | 27,628 | 18,233 | |||||||||||||||||||||||
Research and | |||||||||||||||||||||||||||||||
development | 48,450 | 40,070 | 49,528 | 41,754 | 53,713 | 39,935 | 61,285 | 42,850 | |||||||||||||||||||||||
Administrative | 9,212 | 8,781 | 9,318 | 8,357 | 10,326 | 9,852 | 10,557 | 8,672 | |||||||||||||||||||||||
Amortization and | |||||||||||||||||||||||||||||||
write-down of | |||||||||||||||||||||||||||||||
goodwill and | |||||||||||||||||||||||||||||||
intangible assets | 3,165 | 21,190 | 3,162 | 21,164 | 3,169 | 21,679 | 1,271 | 33,468 | |||||||||||||||||||||||
Other charges | – | – | 15,996 | – | 2,288 | – | 10,440 | – | |||||||||||||||||||||||
83,074 | 90,587 | 99,358 | 90,923 | 95,192 | 90,959 | 111,181 | 103,223 | ||||||||||||||||||||||||
INCOME (LOSS) FROM | |||||||||||||||||||||||||||||||
OPERATIONS | 8,111 | (8,846 | ) | (8,835 | ) | (2,123 | ) | 20,909 | 3,117 | 24,302 | (34,446 | ) | |||||||||||||||||||
Interest and other | |||||||||||||||||||||||||||||||
income (expense) | 572 | 1,729 | 602 | 1,343 | (1,350 | ) | (306 | ) | 4,558 | (2,034 | ) | ||||||||||||||||||||
Interest expense | (426 | ) | (2 | ) | (469 | ) | (1 | ) | (488 | ) | (248 | ) | (516 | ) | (408 | ) | |||||||||||||||
Income (loss) before | |||||||||||||||||||||||||||||||
income taxes | 8,257 | (7,119 | ) | (8,702 | ) | (781 | ) | 19,071 | 2,563 | 28,344 | (36,888 | ) | |||||||||||||||||||
Income taxes (recovery) | 913 | 2,047 | 715 | 3,187 | 4,063 | 3,874 | 6,050 | (2,254 | ) | ||||||||||||||||||||||
NET INCOME (LOSS) | 7,344 | (9,166 | ) | (9,417 | ) | (3,968 | ) | 15,008 | (1,311 | ) | 22,294 | (34,634 | ) | ||||||||||||||||||
RETAINED EARNINGS, | |||||||||||||||||||||||||||||||
beginning of period | 68,797 | 117,876 | 76,141 | 108,710 | 66,724 | 104,742 | 81,732 | 103,431 | |||||||||||||||||||||||
RETAINED EARNINGS, | |||||||||||||||||||||||||||||||
end of period | $ | 76,141 | $ | 108,710 | $ | 66,724 | $ | 104,742 | $ | 81,732 | $ | 103,431 | $ | 104,026 | $ | 68,797 | |||||||||||||||
Net income (loss) | |||||||||||||||||||||||||||||||
per share: | |||||||||||||||||||||||||||||||
Basic | $ | 0.03 | $ | (0.04 | ) | $ | (0.04 | ) | $ | (0.02 | ) | $ | 0.06 | $ | (0.01 | ) | $ | 0.09 | $ | (0.15 | ) | ||||||||||
Diluted | 0.03 | (0.04 | ) | (0.04 | ) | (0.02 | ) | 0.06 | (0.01 | ) | 0.09 | (0.15 | ) | ||||||||||||||||||
WEIGHTED AVERAGE | |||||||||||||||||||||||||||||||
NUMBER OF SHARES | |||||||||||||||||||||||||||||||
(000’s): | |||||||||||||||||||||||||||||||
Basic | 236,947 | 232,496 | 237,227 | 234,154 | 238,183 | 236,082 | 240,647 | 236,848 | |||||||||||||||||||||||
Diluted | 243,298 | 232,496 | 237,227 | 234,154 | 242,539 | 236,082 | 249,525 | 236,848 | |||||||||||||||||||||||
OUTSTANDING NUMBER | |||||||||||||||||||||||||||||||
OF SHARES, END OF | |||||||||||||||||||||||||||||||
QUARTER (000’s) | 236,989 | 232,787 | 237,297 | 234,787 | 239,267 | 236,620 | 241,742 | 236,871 |