Advanced Micro Devices, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
AMD is a global semiconductor company offering x86 microprocessors, accelerated processing units, chipsets, embedded processors, graphics and multimedia products. The filing covers the 13-week quarter ended March 31, 2012, compared primarily with the 14-week quarter ended April 2, 2011 and the quarter ended December 31, 2011. Results are unaudited and prepared under U.S. GAAP.
AMD began volume shipments of its Trinity and Brazos 2.0 APUs, launched Radeon HD 7000-series graphics products using 28nm technology, introduced Opteron 3200 server platforms and acquired SeaMicro, an energy-efficient microserver company.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net revenue | $1.585 billion | $1.613 billion | Down 2% |
| Gross margin | $27 million; 2% | $691 million; 43% | Down sharply due primarily to GF charge |
| Operating income (loss) | $(580) million | $54 million | Declined $634 million |
| Net income (loss) | $(590) million | $510 million | Declined $1.10 billion |
| Diluted earnings (loss) per share | $(0.80) | $0.68 | Turned to loss |
| Net cash provided by operating activities | $107 million | $(168) million | Improved $275 million |
| Non-GAAP free cash flow | $67 million | $154 million adjusted | Down $87 million |
Excluding the $703 million GLOBALFOUNDRIES limited-waiver charge and certain other nonrecurring items, management stated that gross margin would have been approximately 46% in Q1 2012 versus 45% in Q1 2011. Operating expenses were $598 million, including $6 million of SeaMicro acquisition costs. Research and development expense was $368 million, marketing, general and administrative expense was $230 million, restructuring charges were $8 million, interest expense was $43 million and the income tax benefit was $32 million.
Computing Solutions revenue was $1.203 billion, essentially flat year over year, while segment operating income increased to $124 million from $100 million. Graphics revenue declined to $382 million from $413 million, while segment operating income increased to $34 million from $19 million.
Liquidity, cash flow and debt
- Cash and cash equivalents were $1.193 billion at March 31, 2012, compared with $869 million at December 31, 2011.
- Current marketable securities were $351 million and long-term marketable securities were $169 million. Total cash, cash equivalents and marketable securities were approximately $1.7 billion, down approximately $201 million from year-end, primarily reflecting the SeaMicro acquisition and GLOBALFOUNDRIES-related payments.
- Total debt and capital lease obligations were approximately $2.0 billion. The $485 million carrying amount of the 5.75% convertible senior notes due in August 2012 was classified as current.
- Contractual obligations totaled $4.892 billion, including $1.905 billion of purchase obligations, $678 million of estimated interest obligations and $1.5 billion of estimated 2012 wafer purchases from GLOBALFOUNDRIES.
- Management believed available liquidity, operating cash flow and external financing would be sufficient for operations, capital expenditures and debt repayment over the next 12 months, while acknowledging that capital markets might not remain available on favorable terms.
Material changes and unusual items
- AMD amended its Wafer Supply Agreement with GLOBALFOUNDRIES on March 4, 2012. In exchange for specified foundry rights, including limited rights to use another wafer supplier, AMD paid $425 million in cash and transferred its remaining GLOBALFOUNDRIES shares valued at $278 million. AMD recorded a total $703 million charge.
- Of the $425 million cash obligation, $150 million was paid in March, $50 million was due by July 2, $50 million by October 2 and $175 million by December 31, 2012. AMD also issued a $225 million non-interest-bearing promissory note securing the final two payments.
- AMD expected to pay GLOBALFOUNDRIES approximately $1.5 billion for 2012 wafer purchases and approximately $74 million for related research and development obligations. First-quarter purchases totaled approximately $420 million.
- AMD acquired SeaMicro for total consideration of $312 million, including $293 million in cash, and recorded $230 million of goodwill and $101 million of identified intangible assets. The acquisition was not material to reported first-quarter revenue or operating results because it closed late in the quarter.
- The company recorded $8 million of restructuring charges in Q1 2012. Its workforce-reduction and related restructuring plan was substantially completed by quarter-end, with $55 million of related liabilities remaining.
- The Q1 2011 comparison benefited from a $492 million dilution gain related to GLOBALFOUNDRIES, making year-over-year net income comparisons especially distorted.
Outlook, commentary and principal risks
The filing does not provide a clear quantitative revenue, gross-margin or earnings guidance figure for the full year. Management stated that results for the quarter are not necessarily indicative of full-year results and expected international sales to remain a significant portion of revenue; international sales were 93% of Q1 revenue.
Key risks include dependence on GLOBALFOUNDRIES and other third-party manufacturers, manufacturing yields and capacity constraints, intense competition from Intel and other semiconductor companies, cyclical and uncertain PC demand, customer concentration, product-transition and launch risks, substantial indebtedness and the August 2012 maturity of the $485 million convertible notes. The top five customers represented approximately 51% of Q1 revenue.
AMD continued to hold $32 million of auction-rate securities at fair value, with failed auctions since 2008 and stated maturities extending from 2030 to 2050. Management intended and believed it had the ability to sell these securities within 12 months. Substantially all U.S. and Canadian deferred tax assets remained subject to a valuation allowance.
Investor verification checklist
- Verify the effect of the $703 million GLOBALFOUNDRIES charge when assessing underlying gross margin and operating performance.
- Verify AMD’s refinancing, repayment or other funding plan for the $485 million convertible notes due in August 2012.
- Monitor cash usage, GLOBALFOUNDRIES payments, the $1.5 billion 2012 wafer commitment and other purchase obligations.
- Assess whether Trinity, Brazos 2.0, Radeon HD 7000 and Opteron 3200 launches improve unit volumes, average selling prices and margins.
- Evaluate manufacturing yield, capacity and supply risks at GLOBALFOUNDRIES and other third-party suppliers.
- Track PC and graphics demand, customer concentration, competitive pricing and the potential impact of weaker seasonal or macroeconomic conditions.
- Confirm the integration and expected strategic contribution of SeaMicro, including the carrying value of acquired goodwill and intangible assets.