AMD 2015 Q2 Form 10-Q Summary
Business Context and Reporting Period
Advanced Micro Devices, Inc. is a global semiconductor company offering x86 microprocessors, accelerated processing units, chipsets, graphics processors, professional graphics, server and embedded processors, and semi-custom system-on-chip products. The filing covers the 13-week quarter and 26-week six-month period ended June 27, 2015, compared primarily with June 28, 2014 and March 28, 2015.
AMD reported two segments: Computing and Graphics, and Enterprise, Embedded and Semi-Custom. Management cited weak consumer PC demand and OEM reluctance to build Windows 10 inventory while working through Windows 8 inventory.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Net revenue | $942 million | $1.441 billion | $1.972 billion | $2.838 billion |
| Gross margin | $232 million; 25% | $498 million; 35% | $558 million; 28% | $985 million; 35% |
| Operating income (loss) | $(137) million | $63 million | $(274) million | $112 million |
| Net loss | $(181) million | $(36) million | $(361) million | $(56) million |
| Diluted loss per share | $(0.23) | $(0.05) | $(0.46) | $(0.07) |
| Operating cash flow | Not separately provided | Not separately provided | $(231) million | $(232) million |
Q2 revenue declined 35% year over year and 8% from Q1 2015. Gross margin declined to 25% from 32% in Q1 2015 and 35% in Q2 2014. A $33 million technology-node transition charge reduced Q2 gross margin by approximately three percentage points.
Segment Performance
| Segment | Q2 2015 Revenue | Year-over-Year Change | Q2 2015 Operating Income (Loss) |
|---|---|---|---|
| Computing and Graphics | $379 million | Down 54% | $(147) million |
| Enterprise, Embedded and Semi-Custom | $563 million | Down 8% | $27 million |
Computing and Graphics revenue fell primarily because unit shipments declined 58%, partly offset by a 10% increase in average selling price. Enterprise, Embedded and Semi-Custom revenue increased 13% from Q1 2015, driven mainly by higher semi-custom SoC shipments, but declined year over year because of lower server shipments and non-recurring engineering revenue.
Cash, Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $829 million at June 27, 2015, compared with $805 million at December 27, 2014; marketable securities were zero at quarter-end versus $235 million at year-end.
- Total debt and capital lease obligations were approximately $2.3 billion, including $235 million of short-term debt and $2.034 billion of long-term debt. The filing separately describes total debt as approximately $2.27 billion.
- Stockholders’ equity declined to a deficit of $141 million from equity of $187 million at year-end, primarily reflecting the year-to-date net loss.
- Cash used in operating activities was $231 million for the first six months. Investing activities provided $196 million, mainly from net maturities of marketable securities, while financing activities provided $59 million.
- Accounts receivable declined to $687 million from $818 million, while inventories increased to $799 million from $685 million.
- The secured revolving credit facility had $230 million outstanding, $16 million of letters of credit, and up to $222 million available for additional borrowing at June 27, 2015. AMD stated that it was in compliance with all covenants.
- Management stated that available cash, restructuring savings and the revolving facility should be sufficient to fund operations and capital expenditures for the next 12 months, but warned that future financing may be required to meet longer-term debt obligations.
Material Changes Versus Comparable Periods
- Revenue, gross profit and operating results deteriorated materially because of weak PC demand, lower OEM orders and unfavorable product mix.
- Research and development expense decreased 15% year over year in Q2 to $235 million; marketing, general and administrative expense decreased 13% to $134 million.
- Interest expense decreased to $40 million from $46 million in Q2 2014. Other expense declined to $3 million from $49 million, largely because Q2 2014 included a debt-repurchase loss.
- Year-to-date results included $87 million of restructuring and special charges, including a $76 million charge related to exiting the dense server systems business and an $11 million charge under the 2014 restructuring plan.
- AMD paid off the remaining $42 million of its 6.00% Convertible Senior Notes using proceeds from its revolving credit facility.
- AMD entered into a fifth amendment to its GLOBALFOUNDRIES wafer supply agreement, establishing 2015 volume commitments and pricing. The company was negotiating to re-profile those commitments but could not quantify the outcome.
Guidance, Outlook, Commentary and Unusual Items
- No formal quarterly or full-year revenue or earnings guidance is provided in the filing.
- Management expected the 2014 restructuring plan to be largely completed by the end of Q3 2015 and the dense server systems business exit by the end of Q1 2016. AMD also anticipated additional restructuring charges from potential expense-alignment actions but could not quantify them.
- AMD introduced or announced several products, including the Radeon R9 Fury X with high-bandwidth memory, sixth-generation A-Series mobile processors, the A10-7870K APU and details of its future “Zen” processor core.
- Fiscal 2015 purchases and research and development obligations to GLOBALFOUNDRIES were estimated at approximately $1.1 billion, with at least $75 million expected in Q1 fiscal 2016. Total remaining contractual obligations were $4.847 billion, including $2.025 billion of principal notes, $230 million under the revolver, $962 million of estimated interest and $777 million of obligations to GLOBALFOUNDRIES.
- International sales represented 75% of Q2 revenue. The top five customers represented approximately 68% of total Q2 revenue, creating significant customer concentration risk.
Principal Risks and Contingencies
- AMD remains exposed to continued PC-market weakness, intense competition from Intel and other semiconductor companies, pricing pressure, product-cycle execution and rapid technology changes.
- AMD relies heavily on GLOBALFOUNDRIES and other third-party manufacturers. Lower demand relative to committed wafer volumes could produce excess inventory or higher unit costs.
- Substantial leverage, negative stockholders’ equity, recurring operating cash outflows and cross-default provisions could constrain financial flexibility. Credit ratings were downgraded during 2015, including a Moody’s downgrade disclosed in July 2015.
- The company’s secured credit facility and debt indentures contain financial, operational and change-of-control restrictions. A default could accelerate repayment of outstanding borrowings.
- AMD disclosed a securities class action involving alleged misstatements regarding 32nm technology and the Llano product. Discovery had commenced; management believed any potential liability would not materially affect the company. Related shareholder derivative lawsuits were stayed.
- Substantially all U.S. and Canadian deferred tax assets remained subject to a valuation allowance. Gross unrecognized tax benefits were $29 million, and tax-audit outcomes remain uncertain.
Important Facts for Investors to Verify
- Whether Computing and Graphics demand and unit shipments recover following the Windows 10 transition and PC-market weakness.
- The effect of the $33 million technology-node transition charge and any additional restructuring or impairment charges on future gross margin and earnings.
- The outcome of negotiations with GLOBALFOUNDRIES regarding wafer-commitment re-profiling and the resulting inventory, cost and cash requirements.
- AMD’s ability to reduce operating cash burn and fund approximately $2.3 billion of debt while maintaining adequate liquidity.
- Future performance of the Enterprise, Embedded and Semi-Custom segment, including semi-custom console demand and server shipments.
- Compliance with revolving-credit covenants and the company’s ability to refinance or repay debt maturities, particularly the $600 million of 6.75% notes due in 2019.
- Potential effects of the securities and derivative litigation, tax audits, environmental matters and other contingencies, for which the filing does not provide a quantified probable loss.