Advanced Micro Devices, Inc. — Fiscal 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011, consisting of 53 weeks. The filing also provides fourth-quarter data for the period ended December 31, 2011. AMD designs x86 microprocessors, accelerated processing units, chipsets, embedded processors, graphics products and game-console technologies. Its reportable segments are Computing Solutions and Graphics.
Financial performance and liquidity
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Net revenue | $6.568 billion | $6.494 billion |
| Gross margin | $2.940 billion; 45% | $2.961 billion; 46% |
| Operating income | $368 million | $848 million |
| Net income attributable to AMD common stockholders | $491 million | $471 million |
| Diluted EPS | $0.66 | $0.64 |
| Net cash provided by operating activities | $382 million | $(412) million |
| Adjusted free cash flow | $528 million | $355 million |
| Cash, cash equivalents and marketable securities | $1.765 billion | $1.789 billion |
| Debt and capital lease obligations | $2.016 billion | $2.192 billion |
Computing Solutions revenue increased 4% to $5.002 billion, driven by a 16% increase in unit shipments, partially offset by an 11% decline in average selling price. Segment operating income increased to $556 million from $529 million. Graphics revenue declined 6% to $1.565 billion, and Graphics operating income fell to $51 million from $149 million, primarily due to lower GPU shipments, lower average selling prices and weaker customer demand.
Fourth-quarter revenue was $1.691 billion, compared with $1.649 billion in the fourth quarter of 2010. Fourth-quarter gross margin was $773 million, or approximately 46%. Operating income was $71 million versus $413 million in the prior-year quarter. AMD reported a fourth-quarter net loss of $177 million, or $(0.24) per diluted share, compared with net income of $375 million, or $0.50 per diluted share, in the fourth quarter of 2010.
Material changes versus the prior comparable period
- Revenue was broadly stable year over year, but operating income declined substantially because of higher operating expenses, restructuring charges and the absence of favorable 2010 items.
- Gross margin decreased to 45% from 46%; excluding a $24 million GF-related charge and approximately $5 million of legal settlement costs in 2011, and a $69 million GF-related benefit in 2010, management stated that adjusted gross margin was 45% in both periods.
- Research and development expense increased 3% to $1.453 billion, while marketing, general and administrative expense increased 6% to $992 million.
- AMD changed its accounting for its GLOBALFOUNDRIES investment from the equity method to the cost method in 2011. It recognized a non-cash dilution gain of approximately $492 million and a fourth-quarter non-cash impairment charge of approximately $209 million. The GF investment balance was $278 million at year-end.
- AMD reduced the principal amount of its 6.00% convertible notes by $200 million through repurchases, leaving $580 million outstanding. The $485 million principal amount of 5.75% convertible notes was classified as current and matures in August 2012.
- Operating cash flow improved from an outflow of $412 million in 2010 to an inflow of $382 million in 2011, although the filing’s adjusted free cash flow includes a $396 million adjustment related to distributor payments under a terminated receivables-financing arrangement.
Guidance, outlook, commentary and risks
- AMD launched or expanded APU products, including Brazos and Llano, and introduced Bulldozer-based Opteron 6200 and 4200 server processors and the Radeon HD 7970 GPU. Management cited strong demand for certain APUs and improved 32nm yields in the second half of 2011.
- A fourth-quarter 2011 restructuring plan reduced the global workforce by approximately 10%. AMD recorded a $100 million charge, expected approximately $52 million of related cash expenditures in 2012 and $15 million in 2013, and estimated more than $200 million of combined 2012 operating savings from restructuring and other efficiency actions.
- AMD expected cash, investments, operating cash flow and available external financing to fund operations and capital expenditures for the next twelve months, but cautioned that capital-market access may become difficult or expensive.
- The Wafer Supply Agreement with GLOBALFOUNDRIES is being renegotiated. AMD estimated approximately $1.5 billion of GF wafer purchases and $71 million of related research and development obligations in 2012. The company could owe up to $430 million of additional 2012 payments if specified capacity conditions are met.
- Supply constraints at GLOBALFOUNDRIES affected 32nm and 45nm products during 2011, including a fourth-quarter manufacturing disruption affecting 45nm supply. Such constraints could reduce revenue and gross margin.
- The Thailand floods caused a hard-disk-drive shortage that AMD believed reduced Graphics demand in the fourth quarter; the shortage was expected to continue through at least the first quarter of 2012.
- Key structural risks include intense competition from Intel and Nvidia, growing ARM-based competition, dependence on third-party foundries and suppliers, customer concentration, semiconductor cyclicality, high leverage, foreign-exchange exposure, intellectual-property litigation and environmental liabilities.
- Hewlett-Packard represented approximately 22% of consolidated 2011 revenue, and the top five customers represented approximately 51% of consolidated revenue. International sales represented 93% of revenue.
- Auction-rate securities had a $45 million par value and $38 million estimated fair value at year-end; auctions had failed since 2008, although AMD believed it could sell the securities within twelve months.
Important facts for investors to verify
- Reconcile fourth-quarter net loss and operating income with the $209 million GF impairment, $98 million net restructuring charge and other unusual items.
- Assess the refinancing or repayment plan for the $485 million of convertible notes maturing in August 2012.
- Review the final terms and pricing methodology of the amended GLOBALFOUNDRIES Wafer Supply Agreement and the resulting gross-margin impact.
- Evaluate whether the stated 2012 cost savings are realized without impairing product development, supply capacity or competitive positioning.
- Monitor PC, server, tablet and GPU demand, the hard-disk-drive shortage, customer concentration and Intel/ARM competitive actions.
- Distinguish GAAP operating cash flow of $382 million from management’s non-GAAP adjusted free cash flow of $528 million and review the discontinued receivables-financing arrangement.
- Review debt covenants, cross-default provisions, conversion or dilution exposure, and the company’s ability to maintain adequate liquidity.