ADVANCED MICRO DEVICES INC annual report, FY2010

AMD 2010 Form 10-K Summary

Business context and reporting period

Advanced Micro Devices, Inc. is a global semiconductor company offering x86 microprocessors, chipsets, embedded processors, graphics processors and related multimedia products. Reported segments were Computing Solutions and Graphics. The fiscal year ended December 25, 2010 and comprised 52 weeks; the filing also provides fourth-quarter data for the 13 weeks ended December 25, 2010.

AMD launched new server, desktop, notebook, graphics and AMD Fusion APU products during 2010. The company began shipping its first Fusion APU products in November 2010, although delays in 32nm manufacturing affected certain planned APU products.

Key financial metrics

Metric	2010	2009	Change
Net revenue	$6.494 billion	$5.403 billion	+20%
Gross margin	$2.961 billion	$2.272 billion	+30%
Gross margin percentage	46%	42%	+4 percentage points
Operating income	$848 million	$664 million	+28%
Income from continuing operations	$471 million	$296 million	+59%
Net income attributable to AMD common stockholders	$471 million	$304 million	+55%
Diluted EPS	$0.64	$0.45	+42%
Net cash used in operating activities	$412 million	$473 million provided	Decline of $885 million
Adjusted free cash flow	$355 million	Not provided	Non-GAAP measure

Fourth-quarter 2010 revenue was $1.649 billion, compared with $1.646 billion in the fourth quarter of 2009. Fourth-quarter operating income was $413 million, compared with $1.288 billion in the prior-year quarter, which benefited from the Intel settlement. Fourth-quarter net income attributable to common stockholders was $375 million, or $0.50 diluted EPS, compared with $1.178 billion, or $1.52 diluted EPS, in fourth-quarter 2009.

• Computing Solutions revenue was $4.817 billion, up 16%, with unit shipments up 18% and average selling price down 2%. Segment operating income increased to $529 million from $142 million.
• Graphics revenue was $1.663 billion, up 43%, driven by higher GPU shipments, stronger demand for DirectX 11 products and favorable product mix. Segment operating income increased to $149 million from $35 million.
• Research and development expense was $1.405 billion, down from $1.721 billion, primarily because 2009 included Foundry segment costs that were no longer consolidated after the GLOBALFOUNDRIES deconsolidation.
• Interest expense was $199 million, down from $438 million, primarily because GLOBALFOUNDRIES debt and related interest were no longer consolidated and AMD reduced its debt.
• Cash, cash equivalents and marketable securities totaled $1.789 billion at year-end, down from $2.676 billion, although $904 million of the 2009 balance represented GLOBALFOUNDRIES cash. Excluding GLOBALFOUNDRIES, AMD stated that liquidity was essentially flat.
• Total debt and capital lease obligations were $2.4 billion, including $229 million of accounts-receivable financing that was classified as debt but was not a cash obligation. Stockholders’ equity was $1.013 billion.

Material changes versus the prior comparable period

• AMD deconsolidated GLOBALFOUNDRIES effective at the beginning of 2010 and initially accounted for its interest under the equity method. This removed GLOBALFOUNDRIES revenue, assets, liabilities and operating results from AMD’s consolidated statements.
• AMD recorded a $325 million non-cash gain on GLOBALFOUNDRIES deconsolidation and a $462 million equity-method loss related to GLOBALFOUNDRIES in 2010.
• AMD reduced its debt by approximately $357 million, repurchased $1.016 billion principal amount of 6.00% Notes and issued $500 million of 7.75% Senior Notes due 2020.
• Computing Solutions and Graphics both became profitable on a segment basis, while 2009 included a $433 million Foundry operating loss.
• Gross margin improved partly because of manufacturing cost reductions, product mix and a $69 million deconsolidation-related benefit. Management stated that adjusted gross margin, excluding specified one-time items, was approximately 45% in 2010 versus 36% in 2009.
• AMD recognized a $283 million gain from its Samsung patent settlement in 2010. This compared with a $1.242 billion net gain from the Intel settlement in 2009.

Outlook, commentary, risks and unusual items

• Management expected continued opportunity in the server market and planned to increase focus on converting OEM designs into higher sales volumes. AMD had more than 70 major-OEM designs at year-end but stated that volume sales were below expectations.
• AMD expected customers to ship systems using its Llano APU in the second quarter of 2011. The filing also described planned 2011 notebook, embedded and graphics product launches.
• On December 27, 2010, ATIC contributed GLOBALFOUNDRIES Singapore to GLOBALFOUNDRIES. This diluted AMD’s fully diluted ownership from approximately 23% to 14% and caused AMD to change to cost-method accounting in the first quarter of 2011. AMD expected a material, but unquantified, non-cash dilution gain.
• AMD estimated wafer purchases from GLOBALFOUNDRIES of approximately $1.5 billion in both 2011 and 2012. Future obligations beyond 2012 could not be meaningfully estimated but were expected to remain material.
• AMD terminated its IBM receivables-financing supplier agreements on February 11, 2011. The program had produced approximately $988 million of proceeds in 2010 and had $229 million outstanding at year-end.
• Principal risks include Intel’s market dominance and pricing practices, dependence on third-party foundries and suppliers, manufacturing yield and technology-transition delays, cyclical PC and semiconductor demand, customer concentration, substantial indebtedness, limited access to financing, foreign operations, currency exposure and product defects.
• Hewlett-Packard accounted for approximately 22% of 2010 consolidated revenue, and the top five customers collectively accounted for approximately 49% of revenue.
• AMD had $485 million of 5.75% convertible notes due in 2012, $780 million of 6.00% convertible notes due in 2015, $500 million of 8.125% notes due in 2017 and $500 million of 7.75% notes due in 2020. The debt agreements contain restrictive covenants and cross-default provisions.
• Outstanding auction-rate securities had a par value of $66 million and an estimated fair value of $57 million; auctions remained illiquid, although AMD classified the securities as current marketable securities.
• Material contingencies included a $3.6 million accrued environmental liability, guarantees related to former GLOBALFOUNDRIES obligations, and patent litigation involving Graphics Properties Holdings. Management assessed the potential material loss in the principal SGI-related litigation as remote, while potential losses in related customer cases could not yet be estimated.
• AMD disclosed that it was searching for a chief executive officer and that leadership transition could disrupt operations and retention of key personnel.

Investor verification checklist

• Reconcile reported 2010 liquidity with the effect of GLOBALFOUNDRIES deconsolidation and distinguish cash from marketable securities and restricted investments.
• Assess operating cash generation using GAAP cash flow, not only AMD’s non-GAAP adjusted free cash flow, including the effect of the terminated IBM receivables-financing program.
• Review the timing and terms of 2012 and 2015 debt maturities, cross-default provisions, covenants and potential conversion dilution.
• Monitor GLOBALFOUNDRIES wafer commitments, manufacturing yields, 32nm execution and the impact of the 2011 change to cost-method accounting.
• Evaluate customer concentration, especially Hewlett-Packard, and AMD’s ability to convert OEM design wins into sustained unit volumes.
• Verify the sustainability of the 2010 margin improvement after excluding the deconsolidation benefit, product-mix effects and other unusual items.
• Track execution of Llano and other Fusion products, server-market expansion, competitive actions by Intel and Nvidia, and potential demand effects from tablets and changing PC form factors.