Advanced Micro Devices, Inc. — Q3 2011 Form 10-Q Summary
Business context and reporting period
AMD is a global semiconductor company producing x86 microprocessors, accelerated processing units, chipsets, graphics processors and related technologies. The filing covers the quarter and nine months ended October 1, 2011. The quarter comprised 13 weeks and the nine-month period comprised 40 weeks, compared with 13 and 39 weeks, respectively, in the comparable 2010 periods.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net revenue | $1.690 billion | $1.618 billion | $4.877 billion | $4.845 billion |
| Gross margin | $756 million; 45% | $739 million; 46% | $2.167 billion; 44% | $2.218 billion; 46% |
| Operating income | $138 million | $128 million | $297 million | $435 million |
| Net income (loss) | $97 million | $(118) million | $668 million | $96 million |
| Diluted EPS | $0.13 | $(0.17) | $0.90 | $0.13 |
| Net cash from operations | $189 million in Q3 | Not clearly provided | $195 million | $(199) million |
- Q3 operating expenses were $610 million, up 3% year over year and flat sequentially.
- Q3 non-GAAP adjusted free cash flow was $131 million; nine-month adjusted free cash flow was $428 million, compared with $344 million in the prior-year period. The measure includes non-GAAP adjustments related to the former IBM receivables financing arrangement.
- Cash, cash equivalents and marketable securities totaled $1.807 billion at October 1, 2011, including $625 million of cash and cash equivalents and $1.182 billion of current marketable securities. Including $50 million of long-term marketable securities, total cash and marketable securities were approximately $1.857 billion.
- Total debt and capital lease obligations were approximately $2.0 billion on the balance sheet, including $489 million classified as current. Principal debt outstanding was approximately $2.1 billion before discounts.
- Current assets were $3.412 billion versus current liabilities of $1.855 billion. The $485 million carrying amount of the 5.75% Convertible Senior Notes due 2012 was reclassified to current liabilities.
- Segment revenue was $1.286 billion for Computing Solutions and $403 million for Graphics. Segment operating income was $149 million and $12 million, respectively.
Material changes versus comparable periods
- Q3 revenue increased 4% year over year and 7% sequentially. Computing Solutions revenue rose 5% year over year, driven mainly by higher unit shipments, while average selling price declined 15%. Graphics revenue increased 4% year over year and 10% sequentially.
- Q3 gross margin declined to 45% from 46% in both the prior-year quarter and the preceding quarter. Supply constraints for 32nm and 45nm products, unfavorable product mix and lower server processor shipments adversely affected margins.
- Q3 net income improved from a $118 million loss to $97 million of income. The nine-month result included a $492 million non-cash dilution gain related to GLOBALFOUNDRIES, while the 2010 period included a $325 million gain from GLOBALFOUNDRIES deconsolidation.
- AMD changed its GLOBALFOUNDRIES investment accounting from the equity method to the cost method in the first quarter of 2011 after its ownership and governance position declined. The investment was $486 million at October 1, 2011; AMD owned 9.6% on a fully diluted basis and 11.2% on a voting basis.
- AMD repurchased $150 million principal amount of its 6.00% Convertible Senior Notes due 2015 for approximately $153 million and recognized a $5 million loss. Remaining principal was $630 million.
- Nine-month operating cash flow improved by $394 million year over year, primarily because the prior-year period had significant cash effects associated with GLOBALFOUNDRIES deconsolidation and working-capital financing activity.
Guidance, outlook, commentary and risks
- Management expected continued Q4 2011 supply constraints for 45nm microprocessors as production capacity was shifted toward Llano APUs. Management stated that this would adversely affect gross margin.
- AMD expected to pay GLOBALFOUNDRIES approximately $900 million to $1.0 billion for 2011 wafer purchases and $1.5 billion to $1.9 billion in 2012. The company also expected approximately $80 million of 2011 research-and-development-related obligations under the wafer supply agreement and potential additional 2012 payments of up to $430 million if specified capacity conditions were met.
- On November 3, 2011, AMD initiated a restructuring plan affecting approximately 1,400 employees. The company estimated approximately $101 million of Q4 2011 restructuring expense and approximately $4 million in 2012, with expected operational savings of approximately $10 million in Q4 2011 and $118 million in 2012. Management expected to reinvest a significant portion of the savings.
- Management believed existing cash, marketable securities, anticipated operating cash flow and available financing would fund operations and capital expenditures for the next 12 months, but cautioned that capital-market access might not be available on favorable terms or at all.
- Key risks include dependence on GLOBALFOUNDRIES and third-party manufacturing yields, semiconductor cyclicality, intense competition from Intel and other vendors, declining average selling prices, high leverage and the $485 million 2012 note maturity, customer concentration, uncertain PC demand, access to financing, foreign exchange exposure and auction-rate securities liquidity.
- The top five customers represented approximately 51% of Q3 revenue, and international sales represented 93% of Q3 revenue.
- Auction-rate securities had a $52 million par value and $45 million fair value. Auctions had failed since 2008, although AMD reported no defaults and intended to sell the securities within 12 months.
- AMD had a $1 million rental guarantee and a $15 million guarantee related to an AMTC revolving credit facility. Product warranty liabilities were $20 million at quarter-end.
Important facts for investors to verify
- Whether GLOBALFOUNDRIES resolved the 32nm and 45nm yield and capacity issues and whether subsequent margins reflected the expected supply constraints.
- The actual timing, cash costs, savings and tax-holiday recapture effects of the November 2011 restructuring plan.
- AMD’s ability to refinance or repay the $485 million of 5.75% Convertible Senior Notes due August 2012 while continuing required investment in research and development and manufacturing capacity.
- Actual wafer purchases and payments to GLOBALFOUNDRIES under the amended wafer supply agreement, including the potential 2012 payment of up to $430 million.
- The collectability and liquidity of auction-rate securities and the availability and terms of any future external financing.
- The sustainability of APU demand, server processor adoption and Graphics profitability amid declining average selling prices and competitive pressure.
- The effect of customer concentration, international exposure, PC-market weakness and third-party supply-chain disruptions on revenue and cash flow.