Advanced Micro Devices, Inc. — Q3 2012 Form 10-Q Summary
Business context and reporting period
AMD is a global semiconductor company serving computing, embedded, graphics, workstation, server, game-console and related markets. Reported segments are Computing Solutions and Graphics. The quarter ended September 29, 2012 comprised 13 weeks; the nine-month period comprised 39 weeks. The comparable 2011 quarter comprised 13 weeks and the comparable nine-month period 40 weeks. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net revenue | $1.269 billion | $1.690 billion | $4.267 billion | $4.877 billion |
| Gross margin | $392 million; 31% | $756 million; 45% | $1.057 billion; 25% | $2.167 billion; 44% |
| Operating income (loss) | $(131) million | $138 million | $(634) million | $297 million |
| Net income (loss) | $(157) million | $97 million | $(710) million | $668 million |
| Diluted EPS | $(0.21) | $0.13 | $(0.96) | $0.90 |
- Q3 revenue declined 25% year over year and 10% from Q2 2012. Computing Solutions revenue was $927 million, down 28% year over year and 11% sequentially; Graphics revenue was $342 million, down 15% year over year and 7% sequentially.
- Q3 gross margin was reduced by a $100 million inventory write-down, primarily involving first-generation Llano A-Series APUs, lower microprocessor average selling prices and lower assembly and test utilization.
- Nine-month gross margin included a $703 million charge related to the GLOBALFOUNDRIES limited waiver of exclusivity. Excluding this charge and a $5 million legal-settlement charge, management stated that nine-month gross margin was approximately 41%, versus 45% in the prior-year period.
- Operating expenses declined year over year: research and development was $328 million in Q3 and $1.041 billion for nine months; marketing, general and administrative expense was $188 million in Q3 and $630 million for nine months.
- Net cash used in operating activities was $52 million for the first nine months, versus $195 million provided in the prior-year period. Capital expenditures were $111 million, resulting in company-reported non-GAAP free cash flow of negative $163 million.
- Cash, cash equivalents and marketable securities totaled approximately $1.48 billion at September 29, 2012, down $434 million from December 31, 2011. Cash and cash equivalents were $776 million, current marketable securities $524 million and long-term marketable securities $180 million.
- Debt and capital lease obligations were approximately $2.04 billion. AMD repaid approximately $499 million of 5.75% convertible notes and issued $500 million of 7.50% senior notes due 2022.
- Inventories increased to $744 million from $476 million at year-end 2011, while accounts receivable declined to $683 million from $919 million.
Material changes versus prior comparable periods
- Weak consumer PC demand, tablet adoption and OEM caution ahead of Windows 8 reduced unit shipments and pricing. Computing Solutions Q3 unit shipments declined 18% and average selling price declined 12% year over year.
- Graphics revenue declined primarily because GPU revenue fell 25%, partly offset by higher revenue from game-console technology. Graphics operating income improved to $18 million from $12 million because of lower costs and expenses.
- Computing Solutions shifted from $149 million of operating income in Q3 2011 to a $114 million operating loss in Q3 2012.
- AMD acquired SeaMicro on March 23, 2012 for total consideration of $312 million, including $293 million in cash. The acquisition added $230 million of goodwill and was intended to support dense, energy-efficient server offerings.
- AMD transferred its remaining GLOBALFOUNDRIES shares and obtained limited rights to use another foundry for specified 28-nanometer products. The transaction generated a total $703 million charge, consisting of $425 million in cash consideration and a $278 million non-cash charge.
- AMD’s accumulated deficit increased to $5.687 billion from $4.977 billion at December 31, 2011, and stockholders’ equity declined to $989 million from $1.590 billion.
Guidance, outlook, management commentary and risks
- Management expected the fourth quarter to remain challenging and did not expect PC market conditions to improve for at least several quarters. The filing does not provide clear numerical revenue or earnings guidance.
- In October 2012, AMD announced a restructuring plan involving approximately 13% of its global workforce and site consolidations. Estimated Q4 restructuring expense was approximately $71 million, including approximately $45 million of Q4 cash expenditures and $26 million of cash expenditures in Q1 2013. Expected savings were approximately $20 million in Q4 2012 and $165 million in 2013. Additional first-half 2013 actions and charges could be material but were not quantifiable.
- AMD estimated approximately $1.5 billion of 2012 wafer purchases from GLOBALFOUNDRIES and approximately $56 million of additional 2012 research-and-development purchase obligations. Negotiations over 2013 pricing and other WSA terms were unresolved, and future commitments were not meaningfully estimable.
- Contractual obligations totaled $4.189 billion as of September 29, 2012, including $2.08 billion of note principal, $975 million of estimated interest, $696 million of purchase obligations and a $225 million non-interest-bearing promissory note to GLOBALFOUNDRIES. The filing states that $50 million of the note was paid on October 1, 2012.
- Management believed available liquidity, expected operating cash flow and external financing would fund operations and capital expenditures for the next 12 months, but cautioned that financing might not be available on favorable terms or at all.
- Auction-rate securities had a $32 million fair value and $37 million par value. Auctions had failed since 2008, although AMD reported no defaults and expected to sell the securities within 12 months.
- Key risks include prolonged PC weakness, Intel competition and pricing, dependence on GLOBALFOUNDRIES and other third-party manufacturers, manufacturing yields and capacity, inventory obsolescence, substantial leverage and refinancing needs, customer concentration, restructuring execution, potential goodwill impairment and access to external financing. The top five customers represented approximately 52% of Q3 revenue.
- AMD planned its annual goodwill impairment analysis during Q4 2012 and stated that continued declines in market capitalization, business conditions or operating results could result in material impairment charges.
Important facts for investors to verify
- Whether the $100 million inventory write-down and weak PC demand were temporary or indicate sustained product and channel deterioration.
- Execution, cash costs and savings from the 2012 restructuring plan, including potentially material additional 2013 charges.
- Final GLOBALFOUNDRIES WSA terms for 2013, minimum wafer commitments, pricing and related gross-margin exposure.
- AMD’s ability to generate positive operating cash flow and refinance or repay the approximately $2.04 billion debt balance, particularly the $580 million of 6.00% notes due 2015.
- Results of the Q4 goodwill impairment analysis and the carrying value and performance of SeaMicro-related assets.
- Liquidity and valuation developments for the $32 million auction-rate securities portfolio.