Business Context and Reporting Period
Advanced Micro Devices, Inc. filed this Form 10-K for the 52-week fiscal year ended December 29, 2012. AMD designs x86 microprocessors, accelerated processing units, embedded processors, chipsets, graphics products and game-console technology. Reportable segments were Computing Solutions and Graphics. The filing also includes fourth-quarter results for the period ended December 29, 2012.
Financial Performance and Liquidity
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net revenue | $5.422 billion | $6.568 billion | Down 17% |
| Gross margin | $1.235 billion; 23% | $2.940 billion; 45% | Down 22 percentage points |
| Operating income (loss) | $(1.056) billion | $368 million | Turned to loss |
| Net income (loss) | $(1.183) billion | $491 million | Turned to loss |
| Diluted loss per share | $(1.60) | $0.66 income | Adverse change |
| Cash flow from operations | $(338) million | $382 million | Turned negative |
| Capital expenditures | $133 million | $250 million | Down $117 million |
| Adjusted free cash flow | $(471) million | $528 million | Down $999 million |
FY 2012 gross margin included a $703 million GLOBALFOUNDRIES waiver charge, a $273 million lower-of-cost-or-market inventory charge and a $5 million legal settlement charge. Excluding these items, management reported adjusted gross margin of approximately 41%, compared with 45% in 2011. A separate $100 million inventory write-down in the third quarter primarily related to Llano products also reduced margin.
Fourth-quarter 2012 revenue was $1.155 billion, gross margin was $178 million, or approximately 15%, operating loss was $422 million and net loss was $473 million, or $(0.63) per share.
- Computing Solutions revenue was $4.005 billion, down 20%, with unit shipments down 14% and average selling price down 7%. Segment operating loss was $231 million versus $556 million of operating income in 2011.
- Graphics revenue was $1.417 billion, down 9%, primarily because GPU revenue declined 16%. Segment operating income increased to $105 million from $51 million.
- Cash, cash equivalents and current marketable securities totaled $1.002 billion at year-end, down from $1.765 billion. Including long-term marketable securities, total investments were approximately $1.183 billion.
- Debt and capital lease obligations totaled $2.042 billion, including $2.019 billion of debt and $23 million of capital leases. Stockholders’ equity declined to $538 million from $1.590 billion.
- AMD had $1.815 billion of contractual obligations to GLOBALFOUNDRIES, including approximately $1.15 billion of wafer commitments for 2013 and $250 million for the first quarter of 2014.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of weak global economic conditions, lower PC demand, increased tablet adoption, lower OEM inventory builds ahead of Windows 8, and lower desktop and server processor shipments and pricing.
- Gross margin deteriorated substantially because of the GLOBALFOUNDRIES-related charges, inventory write-downs, lower processor average selling prices and unfavorable demand conditions.
- Research and development expense declined 7% to $1.354 billion, while marketing, general and administrative expense declined 17% to $823 million as AMD reduced operating costs.
- AMD acquired SeaMicro for total consideration of $312 million, including $293 million in cash, to expand into energy-efficient microservers and cloud data-center products.
- AMD issued $500 million of 7.50% Senior Notes due 2022 and used approximately $499 million to repay its 5.75% Convertible Senior Notes due 2012.
- AMD transferred its remaining GLOBALFOUNDRIES ownership to GLOBALFOUNDRIES under the second wafer supply agreement amendment and entered into a third amendment that reduced fourth-quarter 2012 wafer commitments in exchange for a $320 million fee.
Guidance, Outlook, Commentary and Risks
- Management did not provide a specific numerical revenue or earnings outlook in the filing. AMD stated that PC market conditions were not expected to improve during the first half of 2013.
- A restructuring plan announced in the fourth quarter of 2012 included an approximately 14% workforce reduction, asset impairments and facility consolidations. AMD recorded approximately $90 million of fourth-quarter restructuring expense and expected approximately $190 million of operating savings in 2013.
- AMD believed its cash, cash equivalents, marketable securities and available external financing would fund operations and capital expenditures for the next twelve months, but cautioned that additional financing might not be available on favorable terms or at all.
- The company targeted production in 2014 for its first 64-bit ARM-based AMD Opteron server processor and aimed to shift 40% to 50% of its portfolio toward faster-growing markets over the long term. Execution, timing and commercial success were uncertain.
- Key risks include Intel’s dominant market position and pricing practices, declining legacy PC demand, competition from ARM-based products and Nvidia, dependence on GLOBALFOUNDRIES and other foundries, fixed wafer commitments, manufacturing yields, inventory obsolescence, customer concentration and limited liquidity relative to debt obligations.
- Hewlett-Packard represented more than 10% of consolidated revenue, and the top five customers represented approximately 51% of 2012 revenue. International sales represented 92% of revenue.
- Auction-rate securities had a $37 million par value and $28 million estimated fair value; auctions had failed since 2008, although AMD intended and believed it was able to sell these securities within twelve months.
- AMD had approximately $5.1 million accrued for environmental remediation at three Sunnyvale Superfund sites. Management stated that additional reasonably possible losses from these and other legal matters were not expected to be material.
Important Facts for Investors to Verify
- Whether the planned $190 million of 2013 restructuring savings were achieved without impairing product development or customer relationships.
- AMD’s quarterly cash burn, debt maturities and ability to refinance the $580 million of convertible notes due in 2015 and other obligations.
- Actual GLOBALFOUNDRIES wafer purchases, payments and any excess-capacity or inventory consequences under the amended wafer supply agreement.
- Normalized gross margin after excluding GLOBALFOUNDRIES charges, inventory write-downs and other unusual items, and whether normalized margins improved.
- Progress and customer adoption of SeaMicro, ARM-based server products, embedded products and other non-PC initiatives.
- Revenue concentration, PC-market trends, average selling prices, unit shipments and competitive actions by Intel, Nvidia and ARM-based competitors.
- The liquidity and valuation of remaining auction-rate securities, as well as any subsequent credit-rating changes or financing activity.