AMD FY2013 Form 10-K Summary
Business context and reporting period
Advanced Micro Devices, Inc. is a global semiconductor company offering Computing Solutions, including x86 processors, APUs, chipsets, embedded processors and dense servers, and Graphics and Visual Solutions, including GPUs, professional graphics and semi-custom system-on-chip products. The filing covers the 52-week fiscal year ended December 28, 2013, with quarterly information including the fourth quarter ended December 28, 2013.
AMD completed the first two phases of a transformation strategy focused on reducing operating expenses and expanding beyond traditional PCs into semi-custom, embedded, professional graphics, ultra-low-power client and dense-server markets. PlayStation 4 and Xbox One products using AMD semi-custom SOCs launched in the fourth quarter.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net revenue | $5.299 billion | $5.422 billion |
| Gross margin | $1.978 billion; 37% | $1.235 billion; 23% |
| Operating income (loss) | $103 million | $(1.056) billion |
| Net income (loss) | $(83) million | $(1.183) billion |
| Diluted loss per share | $(0.11) | $(1.60) |
| Net cash used in operating activities | $(148) million | $(338) million |
| Non-GAAP free cash flow | $(232) million | $(471) million |
| Cash, cash equivalents and marketable securities | $1.2 billion | $1.2 billion |
| Total debt | $2.058 billion | $2.042 billion |
Fourth-quarter revenue was $1.589 billion, compared with $1.155 billion in the fourth quarter of 2012. Fourth-quarter gross margin was $553 million, or approximately 35%, operating income was $135 million and net income was $89 million, or $0.12 diluted earnings per share.
At year-end, current assets were $2.884 billion and current liabilities were $1.618 billion. Cash and cash equivalents were $869 million, current marketable securities were $228 million and long-term marketable securities were $90 million. Accounts receivable increased to $832 million and inventories increased to $884 million, primarily to support higher fourth-quarter sales and game-console ramps.
AMD had $530 million principal amount of 6.00% convertible notes due 2015, $500 million of 8.125% notes due 2017, $500 million of 7.75% notes due 2020 and $500 million of 7.50% notes due 2022. The company also had $55 million outstanding under a $500 million secured revolving credit facility, leaving $445 million available at year-end. Management stated that available liquidity was expected to fund operations and capital expenditures for the next twelve months, but noted that future financing may be required to meet longer-term debt obligations.
Material changes versus the prior comparable period
- Annual revenue declined 2%, reflecting a 22% decline in Computing Solutions revenue to $3.104 billion, partly offset by a 55% increase in Graphics and Visual Solutions revenue to $2.193 billion.
- Computing Solutions operating loss improved to $22 million from $231 million, primarily due to lower costs, reduced operating expenses and the absence of significant 2012 inventory and GLOBALFOUNDRIES-related charges.
- Graphics and Visual Solutions operating income increased to $216 million from $105 million, driven mainly by semi-custom SOC shipments for game consoles, despite lower GPU revenue.
- Gross margin increased to 37% from 23%. The 2012 comparison included a $703 million GLOBALFOUNDRIES-related charge, a $273 million inventory valuation charge and a $100 million inventory write-down. Excluding those items, AMD estimated 2012 gross margin at 41%, compared with 37% in 2013.
- Research and development expense declined 11% to $1.201 billion, and marketing, general and administrative expense declined 18% to $674 million. Operating expenses decreased approximately 31% from the first quarter of 2012 to the fourth quarter of 2013.
- Operating cash use improved by $190 million, while capital expenditures declined to $84 million from $133 million.
Guidance, outlook, commentary, risks and unusual items
Management targeted approximately 50% of revenue from high-growth adjacent markets by the end of 2015. The filing does not provide a specific numerical revenue, earnings or margin forecast for fiscal 2014. Management expected future purchases from GLOBALFOUNDRIES to remain material and was negotiating a fourth amendment to the wafer supply agreement.
- AMD remains exposed to challenging PC market conditions, declining demand for traditional desktops and notebooks, rapid product cycles and intense competition from Intel and Nvidia.
- Customer concentration is significant: the top five customers represented approximately 54% of 2013 revenue, while Hewlett-Packard, Microsoft and Sony each represented more than 10%.
- Manufacturing dependence on GLOBALFOUNDRIES and other third-party foundries creates risks relating to capacity, yields, process transitions, pricing and fixed wafer commitments.
- Game-console and semi-custom revenue depends on the market success of third-party products and is seasonally weighted toward the second half of the year. Royalties from third parties were expected to decline as AMD transitions toward a semi-custom model.
- Unusual 2013 items included a $48 million net gain from patent licenses and settlements, a $24 million net charge from real-estate sale-and-leaseback transactions, approximately $30 million of restructuring and special charges, and a $57 million benefit from selling previously reserved inventory.
- AMD repurchased $50 million principal amount of its 6.00% notes during 2013 and repurchased an additional $64 million after year-end. Debt agreements include covenants, domestic cash trigger provisions and cross-default provisions.
- A securities class action filed in January 2014 alleges misleading statements regarding 32nm technology and the Llano product. Management believed potential liability would not materially affect financial condition, cash flows or results of operations. AMD also carried an estimated $5.4 million environmental remediation liability for three Sunnyvale sites.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Facts investors should verify
- Whether semi-custom SOC, embedded and other non-PC revenue can offset continued weakness in Computing Solutions and traditional PC markets.
- The terms and financial impact of the proposed fourth amendment to the GLOBALFOUNDRIES wafer supply agreement.
- AMD’s ability to refinance or repay the $530 million of 6.00% notes due in 2015 and manage subsequent maturities while generating negative free cash flow.
- Whether inventory growth, customer concentration and game-console seasonality create future working-capital or margin pressure.
- Progress toward the stated goal of approximately 50% of revenue from high-growth adjacent markets by the end of 2015.