AMD 2011 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Advanced Micro Devices, Inc. is a global semiconductor company offering x86 microprocessors, chipsets, embedded processors, graphics products, multimedia technology and game-console graphics technology. The filing covers the 14-week quarter ended April 2, 2011, compared with the 13-week quarter ended March 27, 2010 and the quarter ended December 25, 2010.
AMD reported strong customer demand for its low-power Brazos accelerated processing unit platform and began revenue shipments of its Llano APU. Management expected to ship its Bulldozer server platform toward the end of summer 2011.
Financial Highlights
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net revenue | $1.613 billion | $1.574 billion | Up 2% |
| Gross margin | $691 million; 43% | $741 million; 47% | Margin down 4 points |
| Operating income | $54 million | $182 million | Down $128 million |
| Net income | $510 million | $257 million | Up $253 million |
| Diluted EPS | $0.68 | $0.35 | Up $0.33 |
| Cash used in operating activities | $(168) million | $23 million provided | Declined $191 million |
| Adjusted free cash flow | $154 million | $177 million | Down $23 million |
Net income included an approximately $492 million non-cash gain related to dilution of AMD's investment in GLOBALFOUNDRIES. Excluding this unusual item, reported earnings substantially overstated underlying operating profitability.
- Computing Solutions revenue was $1.200 billion, up 3% year over year; unit shipments increased 16%, while average selling price declined 11%.
- Graphics revenue was $413 million, broadly flat year over year and down 3% sequentially.
- Research and development expense increased to $367 million from $323 million, and marketing, general and administrative expense increased to $261 million from $219 million.
- Q1 2011 operating expenses were $628 million. Marketing, general and administrative expense included $13 million of separation costs related to the former CEO's resignation.
Liquidity, Balance Sheet and Debt
| Balance-sheet item | April 2, 2011 | December 25, 2010 |
|---|---|---|
| Cash and cash equivalents | $602 million | $606 million |
| Marketable securities | $1.143 billion | $1.183 billion |
| Cash, cash equivalents and marketable securities | $1.745 billion | $1.789 billion |
| Total assets | $5.209 billion | $4.964 billion |
| Total current liabilities | $1.375 billion | $1.674 billion |
| Long-term debt and capital leases | $2.192 billion | $2.188 billion |
| Stockholders' equity | $1.558 billion | $1.013 billion |
AMD stated that available liquidity, anticipated operating cash flow and external financing would be sufficient to fund operations and capital expenditures for the next twelve months, but cautioned that capital-market conditions could limit access to financing or increase its cost.
The company had approximately $2.3 billion of outstanding principal under its 5.75%, 6.00%, 8.125% and 7.75% notes. The remaining principal amount of the 5.75% convertible notes due 2012 was $485 million. Total contractual obligations were $3.888 billion, excluding future GLOBALFOUNDRIES obligations under the amended wafer supply agreement.
Material Changes Versus Comparable Periods
- Revenue increased modestly year over year, but reported operating income fell because of higher research and development and marketing costs and lower gross margin.
- Reported net income increased primarily because Q1 2011 included the $492 million GLOBALFOUNDRIES dilution gain, while Q1 2010 included a net loss from equity accounting for GLOBALFOUNDRIES and a separate $325 million deconsolidation gain.
- Reported gross margin declined to 43% from 47%. Management stated that adjusted gross margin, excluding a $24 million GLOBALFOUNDRIES-related charge and an approximately $5 million legal-settlement charge, was 45% versus 43% in Q1 2010.
- AMD changed its GLOBALFOUNDRIES investment accounting from the equity method to the cost method after its fully diluted ownership declined to 12% and its voting ownership declined to 15%. The investment was recorded at $486 million, and AMD no longer recognizes its share of GLOBALFOUNDRIES earnings or losses.
- Net cash used in operations was $168 million, reflecting working-capital effects and the non-cash GLOBALFOUNDRIES gain. AMD terminated its accounts-receivable financing arrangement with IBM Parties in February 2011; $34 million remained outstanding under previously purchased invoices at quarter-end.
- AMD's amended wafer supply agreement reduced 2011 wafer costs and requires fixed quarterly purchases of specified 45nm and 32nm wafer volumes.
Guidance, Outlook, Risks and Unusual Items
- AMD estimated GLOBALFOUNDRIES wafer purchases of approximately $1.1 billion to $1.5 billion in 2011 and $1.5 billion to $1.9 billion in 2012, plus approximately $82 million of 2011 research and development-related purchase obligations.
- Under the amended agreement, AMD expects to make additional quarterly payments in 2012 if GLOBALFOUNDRIES meets specified 32nm-capacity conditions. Future wafer costs remain sensitive to demand, volumes and manufacturing yields.
- Management identified competition from Intel, product-development and execution risk, reliance on third-party foundries, manufacturing capacity and yield risk, semiconductor cyclicality, PC and server demand, customer concentration and supply-chain disruption from the Japan earthquake and tsunami.
- The top five customers represented approximately 50% of consolidated Q1 2011 revenue. International sales represented 93% of revenue.
- AMD held $57 million of auction-rate securities at fair value, with failed auctions and continuing liquidity risk. The securities had a par value of $65 million.
- AMD liquidated Euro currency forward contracts after the wafer agreement reduced its direct or indirect Euro exposure and recognized a $6 million gain. Outstanding foreign-currency forward contracts had a $155 million notional value and were in a $5 million net gain position.
- AMD settled graphics-related litigation with Graphics Properties Holdings for an immaterial amount and obtained patent immunity for covered AMD products. The company stated that other legal matters were not expected to have a material financial effect.
- The company was searching for a chief executive officer following the former CEO's resignation. Management identified potential disruption, retention and execution risks during the transition.
Important Facts for Investors to Verify
- Reconcile reported $510 million net income with operating performance excluding the $492 million non-cash GLOBALFOUNDRIES dilution gain.
- Monitor cash generation, particularly the transition away from the former IBM accounts-receivable financing arrangement and the impact on reported operating cash flow.
- Verify execution of Brazos, Llano and Bulldozer launches, customer demand, average selling prices and product mix.
- Track GLOBALFOUNDRIES manufacturing yields, capacity utilization, wafer pricing and AMD's substantial 2011 and 2012 purchase commitments.
- Assess refinancing and liquidity needs associated with the $485 million of convertible notes due in 2012 and total debt of approximately $2.2 billion.
- Monitor auction-rate securities liquidity, customer concentration, Intel competition, supply-chain effects from Japan and the CEO transition.