Business Context and Reporting Period
Advanced Micro Devices, Inc. filed this unaudited Form 10-Q for the quarter and six months ended July 2, 2011. The fiscal quarter comprised 13 weeks and the six-month period comprised 27 weeks. AMD develops x86 microprocessors, accelerated processing units, chipsets, embedded processors, graphics products, and game-console technologies.
AMD reported strong demand for Fusion APU products, including Brazos and newly ramping Llano platforms. The Computing Solutions segment benefited from higher unit shipments, while the Graphics segment faced weaker GPU demand and lower game-console royalty revenue.
Financial Performance and Position
| Metric | Quarter Ended July 2, 2011 | Prior Comparable Quarter | Six Months Ended July 2, 2011 | Prior Comparable Six Months |
|---|---|---|---|---|
| Net revenue | $1.574 billion | $1.653 billion | $3.187 billion | $3.227 billion |
| Gross margin | $720 million; 46% | $738 million; 45% | $1.411 billion; 44% | $1.479 billion; 46% |
| Operating income | $105 million | $125 million | $159 million | $307 million |
| Net income (loss) | $61 million | $(43) million | $571 million | $214 million |
| Diluted earnings per share | $0.08 | $(0.06) | $0.76 | $0.29 |
Quarterly revenue declined 5% year over year and 2% sequentially. Computing Solutions revenue was $1.207 billion, essentially flat year over year, as a 15% increase in unit shipments was offset by a 13% decline in average selling price. Graphics revenue fell 17% year over year to $367 million and 11% sequentially.
Quarterly operating expenses were $615 million before considering the presentation of operating income components, including research and development of $367 million and marketing, general and administrative expense of $239 million. Six-month research and development expense increased to $734 million from $694 million, while six-month marketing, general and administrative expense increased to $500 million from $448 million.
Six-month net income included a $492 million non-cash dilution gain related to GLOBALFOUNDRIES. Excluding this unusual item and related accounting effects, the filing does not present a consolidated adjusted net income figure.
As of July 2, 2011, AMD had $554 million of cash and cash equivalents and $1.307 billion of marketable securities, for total cash, cash equivalents, and marketable securities of $1.861 billion. Total assets were $5.224 billion and stockholders’ equity was $1.641 billion.
Long-term debt and capital lease obligations totaled approximately $2.199 billion, including $2.195 billion classified as long term. Principal debt obligations included $485 million of 5.75% convertible notes due 2012, $780 million of 6.00% convertible notes due 2015, $500 million of 8.125% senior notes due 2017, and $500 million of 7.75% senior notes due 2020.
For the six months, net cash provided by operating activities was $6 million, compared with cash used of $75 million in the prior-year period. Net cash used in investing activities was $244 million, including $105 million of capital expenditures. Net cash provided by financing activities was $186 million. Management reported quarterly operating cash flow of $174 million and quarterly non-GAAP adjusted free cash flow of $143 million. Six-month adjusted free cash flow was $297 million, but this measure included a temporary adjustment for distributor payments to the former IBM receivables-financing parties.
Material Changes Versus Prior Comparable Period
- Revenue declined despite stronger APU-related unit shipments, primarily because of lower average selling prices and weaker Graphics performance.
- Gross margin improved to 46% in the quarter from 45%, supported by a richer mix of margin-accretive APU products. Six-month reported gross margin declined to 44% from 46%, partly because the prior-year period included a $69 million benefit related to GLOBALFOUNDRIES deconsolidation and the current period included a $24 million GLOBALFOUNDRIES-related charge and approximately $5 million of legal-settlement expense.
- Computing Solutions quarterly operating income increased to $142 million from $128 million, while Graphics shifted to a $7 million operating loss from $33 million of operating income.
- Six-month operating income declined to $159 million from $307 million, primarily because of higher operating expenses and the absence of prior-year benefits associated with GLOBALFOUNDRIES.
- AMD changed its accounting for its GLOBALFOUNDRIES investment from the equity method to the cost method after its ownership and governance influence declined. AMD held an 11% fully diluted and 13% voting interest at July 2, 2011, carried at $486 million.
- AMD’s total cash, cash equivalents, and marketable securities increased $72 million from December 25, 2010, while long-term debt remained broadly flat.
- AMD terminated its receivables-financing arrangements with the IBM parties in February 2011; no related invoices remained outstanding at July 2, 2011.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a specific revenue or earnings forecast. Management stated that cash, cash equivalents, marketable securities, expected operating cash flow, and available external financing were expected to fund operations and capital expenditures for the following twelve months, while warning that financing may not be available on favorable terms or at all.
Under the amended Wafer Supply Agreement, AMD expects to pay GLOBALFOUNDRIES approximately $1.1 billion to $1.3 billion in 2011 and $1.5 billion to $1.9 billion in 2012 for wafer purchases. AMD also estimated approximately $82 million of 2011 research-and-development-related purchase obligations. Additional 2012 payments of up to $430 million may be required if specified 32nm capacity conditions are met; management expected those conditions to be satisfied.
- AMD depends heavily on third-party foundries, particularly GLOBALFOUNDRIES, for manufacturing capacity, yields, technology transitions, and timely supply.
- Intel’s market dominance, pricing, rebates, product introductions, and integrated graphics offerings could pressure AMD’s market share, average selling prices, margins, and profitability.
- Demand for PCs, servers, graphics products, and game consoles is cyclical and affected by macroeconomic conditions, seasonality, product transitions, and changing form factors such as tablets.
- AMD’s five largest customers represented approximately 52% of second-quarter revenue, creating customer-concentration risk.
- AMD was conducting a search for a chief executive officer, and management identified possible disruption and personnel-retention risks during the leadership transition.
- AMD held $52 million of auction rate securities at fair value, with failed auctions since 2008 and contractual maturities extending from 2030 to 2050. Management believed it could sell them within twelve months, but liquidity remained uncertain.
- Unrecognized tax benefits totaled approximately $78 million gross, of which $12 million had been recognized as liabilities. AMD expected approximately $5 million could be resolved or reduced within twelve months.
- Off-balance-sheet and contingent exposures included a $17 million joint and several guarantee related to an AMTC revolving credit facility and a $2 million rental-obligation guarantee.
- AMD received a $58 million net Samsung settlement payment in May 2011 and expected to receive an additional $58 million gross payment, or $70 million before withholding taxes, by November 30, 2011.
Important Facts for Investors to Verify
- Whether sustained Llano and Brazos adoption can offset lower average selling prices and support future gross-margin expansion.
- GLOBALFOUNDRIES manufacturing yields, capacity availability, wafer pricing, and the resulting 2011 and 2012 cash commitments.
- The maturity, refinancing, conversion, or repurchase strategy for the $485 million of convertible notes due in 2012 and AMD’s broader debt-service capacity.
- The sustainability of positive operating cash flow after the termination of the former IBM receivables-financing arrangement and the change in adjusted free cash flow methodology.
- Graphics demand, game-console royalty trends, and whether the Graphics segment can return to profitability.
- The recoverability and liquidity of the $486 million GLOBALFOUNDRIES investment and the $52 million auction rate securities portfolio.
- Potential effects of Intel competition, PC-market weakness, Japan-related supply-chain disruption, customer concentration, and leadership-transition uncertainty.