Business Context and Reporting Period
Company: Advanced Micro Devices, Inc. (AMD)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 28, 2009
Key Event: On March 2, 2009, AMD consummated the formation of GLOBALFOUNDRIES, a manufacturing joint venture with Advanced Technology Investment Company (ATIC) and West Coast Hitech (WCH). AMD contributed its front-end wafer manufacturing assets to GLOBALFOUNDRIES in exchange for equity and debt securities. Consequently, AMD now reports a new "Foundry" segment and relies on GLOBALFOUNDRIES for the manufacturing of its microprocessor products.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 | Q4 2008 |
|---|---|---|---|
| Net Revenue | $1,177 million | $1,487 million | $1,162 million |
| Gross Margin | $511 million (43%) | $621 million (42%) | $272 million (23%) |
| Operating Loss | $(298) million | $(234) million | $(1,274) million |
| Net Loss (Attributable to AMD) | $(416) million | $(364) million | $(1,300) million (approx.) |
| Diluted EPS | $(0.66) | $(0.60) | $(2.13) (approx.) |
| Cash & Marketable Securities | $2,719 million | $1,432 million (Q1 2008 end) | $1,096 million |
| Total Debt & Capital Leases | $5,563 million | $4,776 million (Q1 2008 end) | $4,776 million |
| Operating Cash Flow | $(391) million | $16 million | $(692) million (FY 2008) |
Material Changes vs. Prior Periods
- Revenue Decline: Net revenue decreased 21% year-over-year (Q1 2009 vs. Q1 2008) due to an 11% drop in unit shipments and a 12% decrease in average selling prices, driven by weak global economic conditions and reduced end-user demand.
- Margin Improvement: Gross margin percentage improved to 43% from 23% in Q4 2008. This increase was significantly aided by the sale of inventory previously written down in Q4 2008 (benefit of $64 million). Without this benefit, margins would have declined due to underutilization of manufacturing assets.
- Operating Loss Reduction: Operating loss improved significantly from $(1.274) billion in Q4 2008 to $(298) million in Q1 2009. The Q4 2008 loss included a one-time impairment charge of $684 million for goodwill and intangible assets, which did not recur in Q1 2009.
- Liquidity Surge: Cash and marketable securities increased from $1.1 billion in Q4 2008 to $2.7 billion in Q1 2009. This increase was primarily due to $2.1 billion in proceeds from the GLOBALFOUNDRIES transaction (issuance of preferred shares and convertible notes).
- Restructuring Charges: AMD recorded $60 million in restructuring charges in Q1 2009, primarily related to severance, contract terminations, and facility closures initiated in late 2008.
Guidance, Outlook, and Risks
- Outlook: Management anticipates aggregate consolidated capital expenditures for the remainder of 2009 to be approximately $800 million, with $690 million related to GLOBALFOUNDRIES (including Fab 38 and a new facility in New York).
- Cost Reduction: AMD continues to implement cost-cutting measures, including headcount reductions, temporary salary reductions in the U.S. and Canada, and suspension of 401(k) matching.
- Key Risks:
- GLOBALFOUNDRIES Dependency: AMD now relies entirely on GLOBALFOUNDRIES for microprocessor manufacturing. Any disruption, capacity shortage, or funding failure at GLOBALFOUNDRIES could materially harm AMD.
- Intel Competition: Intel's market dominance and aggressive pricing/bundling strategies continue to pressure AMD's market share and average selling prices.
- Debt Obligations: Total consolidated debt is $5.7 billion. AMD faces significant interest obligations and restrictive covenants, particularly regarding the Fab 36 Term Loan, which requires maintaining specific cash balances and financial ratios.
- Auction Rate Securities (ARS): Approximately $158 million of ARS are illiquid due to failed auctions. While classified as current assets, there is a risk of further impairment if liquidity does not return.
- Joint Venture Funding: ATIC has committed to provide up to $6.0 billion in funding for GLOBALFOUNDRIES over five years, but this is subject to conditions and market availability of third-party debt.
Investor Verification Checklist
- GLOBALFOUNDRIES Funding Status: Verify the status of ATIC's funding commitments and the ability of GLOBALFOUNDRIES to secure third-party debt as required by the Funding Agreement.
- Debt Covenant Compliance: Monitor AMD's group consolidated cash levels relative to the covenants in the Fab 36 Term Loan, especially given the recent credit rating downgrade to CCC+ by S&P.
- Inventory Valuation: Assess the remaining inventory levels and the sustainability of gross margins once the benefit from the Q4 2008 write-downs is fully realized.
- ARS Liquidity: Track the resolution of the auction rate securities market and any potential additional impairment charges.
- Intel Litigation: Monitor the progress of the antitrust lawsuit against Intel, as a loss could materially impact competitive positioning.