AMD 10-Q Summary: Second Quarter 2012
Business Context and Reporting Period
Advanced Micro Devices, Inc. is a global semiconductor company providing x86 microprocessors, accelerated processing units, chipsets, embedded processors, graphics products, and game-console graphics technology. The filing covers the quarter and six months ended June 30, 2012. The quarter comprised 13 weeks, while the comparable quarter ended July 2, 2011 comprised 13 weeks; the six-month periods comprised 26 and 27 weeks, respectively.
Financial Performance and Liquidity
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Net revenue | $1.413 billion | $1.574 billion | $2.998 billion | $3.187 billion |
| Gross margin | $638 million; 45% | $720 million; 46% | $665 million; 22% | $1.411 billion; 44% |
| Operating income (loss) | $77 million | $105 million | $(503) million | $159 million |
| Net income (loss) | $37 million | $61 million | $(553) million | $571 million |
| Diluted EPS | $0.05 | $0.08 | $(0.75) | $0.76 |
- Q2 revenue declined 10% year over year and 11% from Q1 2012, primarily due to weaker desktop processor demand from distributors in China and Europe, weaker consumer spending, and lower mobile-PC OEM demand.
- Q2 gross margin was 45%, including a $5 million legal-settlement charge. Excluding that item, management stated gross margin was approximately 46%. The six-month margin was depressed by the $703 million GLOBALFOUNDRIES exclusivity-waiver charge recorded in Q1.
- Operating expenses were $557 million in Q2, down from $598 million in Q1 and $606 million in Q2 2011. Research and development expense was $345 million and marketing, general and administrative expense was $212 million.
- Six-month operating cash flow was $188 million, compared with $6 million in the prior-year period. Capital expenditures were $79 million, producing reported non-GAAP free cash flow of $109 million.
- Cash and cash equivalents were $1.015 billion at June 30, 2012. Cash, cash equivalents and marketable securities totaled approximately $1.6 billion, down $186 million from December 31, 2011.
- Total debt and capital lease obligations were approximately $2.0 billion, including $485 million of 5.75% convertible notes classified as current and due August 15, 2012.
- Current assets were $3.233 billion and current liabilities were $2.352 billion. Inventories increased to $833 million from $476 million at year-end, principally reflecting lower sales and anticipated demand.
Segment Results and Material Changes
- Computing Solutions: Q2 revenue was $1.046 billion, down 13% year over year and 13% sequentially. Unit shipments declined 10% year over year and average selling price declined 4%. Segment operating income fell to $82 million from $142 million in Q2 2011 and $124 million in Q1 2012.
- Graphics: Q2 revenue was $367 million, flat year over year and down 4% sequentially. Segment operating income improved to $31 million from a $7 million loss in Q2 2011 and $34 million in Q1 2012.
- Management cited strong demand for next-generation Trinity A-Series APUs and Brazos 2.0 E-Series APUs, and the launch of the Radeon HD 7970 GHz Edition.
- 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 accelerate AMD’s server strategy for cloud-focused data centers.
- AMD transferred its remaining GLOBALFOUNDRIES equity interest and paid or committed to pay $425 million for a limited waiver of certain foundry exclusivity rights. The transaction generated a $703 million Q1 charge, comprising $425 million of cash and a $278 million non-cash charge.
- Under the amended wafer supply agreement, AMD committed to purchase a fixed number of 2012 wafers. Management estimated approximately $1.5 billion of 2012 wafer purchases from GLOBALFOUNDRIES, plus approximately $71 million of related research and development obligations.
Outlook, Risks, Contingencies and Unusual Items
- Management expected the weak PC consumer buying environment to continue into Q3 2012. No specific revenue or margin guidance amount is provided in the filing text.
- AMD stated that its cash, marketable securities, anticipated operating cash flow and available external financing were expected to fund operations, capital expenditures and debt repayment for the next twelve months, while acknowledging that financing may not be available on favorable terms or at all.
- Near-term obligations included the $485 million maturity of the 5.75% convertible notes in August 2012, $50 million payable to GLOBALFOUNDRIES by October 2, 2012, and $175 million payable by December 31, 2012. A $225 million non-interest-bearing promissory note secured the final two GLOBALFOUNDRIES payments.
- Total contractual obligations were approximately $4.235 billion, including debt principal, interest, leases, purchase obligations and the GLOBALFOUNDRIES promissory note. Purchase obligations included $706 million of estimated wafer commitments for the second half of 2012.
- Auction-rate securities had a $32 million estimated fair value against $37 million of par value. Auctions had failed since 2008, although AMD reported no defaults and expected to sell the securities within twelve months.
- Key risks included PC-market weakness, intense competition from Intel and other semiconductor companies, reliance on GLOBALFOUNDRIES and other third-party manufacturers, manufacturing yields and supply constraints, inventory obsolescence, customer concentration, substantial leverage, refinancing risk, foreign-currency exposure, intellectual-property litigation, environmental liabilities and execution risks related to SeaMicro.
- The five largest customers represented approximately 54% of Q2 revenue. International sales represented 93% of Q2 revenue.
- Management stated that ordinary-course litigation was not expected to have a material effect, but indemnification obligations and certain intellectual-property, environmental and tax matters could not be fully quantified.
Most Important Facts to Verify
- Whether AMD refinanced or repaid the $485 million 5.75% convertible notes at maturity and the resulting effect on liquidity and leverage.
- Whether weak PC demand and elevated inventory led to additional inventory write-downs, pricing pressure or margin deterioration after Q2.
- Actual 2012 wafer purchases and payments to GLOBALFOUNDRIES versus fixed commitments under the amended agreement.
- SeaMicro’s contribution to revenue, operating results, cash flow and server-market execution after the acquisition.
- Availability and cost of external financing, including any effects from credit-market conditions or debt cross-default provisions.
- Progress in reducing customer concentration and dependence on desktop-PC demand, distributors and third-party manufacturers.