ADVANCED MICRO DEVICES INC quarterly report, Q2 FY2010

Advanced Micro Devices, Inc. — Form 10-Q Summary

Business Context and Reporting Period

AMD is a global semiconductor company offering x86 microprocessors, chipsets, embedded processors, graphics, video and multimedia products, and game-console graphics technology. This unaudited filing covers the quarter and six months ended June 26, 2010, each comprising 13 and 26 weeks, respectively.

Beginning in fiscal 2010, AMD deconsolidated GLOBALFOUNDRIES (GF) and began accounting for its investment under the equity method. Comparisons with 2009 are therefore not fully comparable. AMD now reports Computing Solutions and Graphics as its reportable segments.

Key Financial Metrics

Metric	Q2 2010	Q2 2009	Six Months 2010	Six Months 2009
Net revenue	$1.653 billion	$1.184 billion	$3.227 billion	$2.361 billion
Gross profit	$738 million	$441 million	$1.479 billion	$952 million
Gross margin	45%	37%	46%	40%
Operating income (loss)	$125 million	$(249) million	$307 million	$(547) million
Net income (loss) attributable to AMD common stockholders	$(43) million	$(330) million	$214 million	$(746) million
Diluted EPS	$(0.06)	$(0.49)	$0.29	$(1.15)
Net cash used in operating activities	Not provided for quarter	Not provided for quarter	$(75) million	$(535) million

• Q2 revenue increased 40% year over year and 5% from Q1 2010, reaching a reported quarterly record.
• Computing Solutions revenue was $1.212 billion, up 31% year over year, primarily from higher unit shipments, especially notebook processors and chipsets. Segment operating income was $128 million versus a $67 million loss in Q2 2009.
• Graphics revenue was $440 million, up 87% year over year, driven primarily by GPU demand and higher GPU average selling prices. Segment operating income was $33 million versus a $17 million loss in Q2 2009.
• Research and development expense was $371 million in Q2 and $694 million for the six months. Marketing, general and administrative expense was $229 million in Q2 and $448 million for the six months.
• Q2 net loss included a $120 million equity-method loss related to GF. For the six months, equity-method losses were $303 million.
• AMD recognized $303 million of other income during the six months, including an approximately $325 million non-cash gain from GF deconsolidation.
• Cash, cash equivalents and marketable securities totaled $1.896 billion at June 26, 2010, compared with $2.676 billion at December 26, 2009. Management stated that $904 million of the decline represented GF cash and cash equivalents removed through deconsolidation.
• Long-term debt and capital lease obligations were $2.421 billion, including $2.418 billion of long-term debt and capital lease obligations less current portions. AMD also had $143 million outstanding under its IBM-related accounts receivable financing arrangement.
• Adjusted free cash flow was $253 million for the six months, a non-GAAP measure that adds $407 million of distributor payments to IBM parties and subtracts $79 million of capital expenditures from the resulting cash flow measure.
• Capital expenditures were $79 million for the six months. AMD anticipated approximately $81 million of additional consolidated capital expenditures during the remaining two quarters of 2010.

Material Changes Versus Prior Comparable Period

• Revenue, gross margin and operating results improved substantially, reflecting stronger IT demand, higher unit shipments, improved GF manufacturing utilization, lower unit costs and favorable product mix.
• Graphics demand remained strong, but supply constraints limited shipments of newer GPU products and affected channel mix and average selling prices.
• AMD moved from a consolidated GF manufacturing model to an equity-method investment. GF generated $854 million of revenue and a $20 million net loss in Q2 2010; AMD recorded its proportionate results rather than consolidating GF.
• AMD’s Class A preferred ownership in GF declined from approximately 83% at December 27, 2009, to approximately 79% at June 26, 2010, after ATIC contributed $327 million to GF. AMD recorded an approximately $6 million gain from the related dilution.
• Operating cash flow improved from a $535 million use in the first six months of 2009 to a $75 million use in 2010, although working-capital requirements, including accounts receivable, remained a significant cash use.
• AMD repurchased $216 million principal amount of its 6.00% convertible senior notes for approximately $209 million during the first six months.
• Research and development expense decreased on a reported basis because 2009 included GF-related spending; excluding the former Foundry segment, AMD stated that ongoing R&D spending increased.

Guidance, Outlook, Risks and Unusual Items

• Management expected cash, marketable securities, anticipated operating cash flow and available external financing to fund operations and capital expenditures for the next twelve months, but cautioned that capital-market access may be unavailable or unfavorable.
• AMD issued $500 million of 7.75% senior notes due 2020 on August 4, 2010, after the quarter end. It intended to use approximately $490 million of net proceeds and existing cash to purchase up to $800 million of its 6.00% notes through a tender offer.
• AMD estimated approximately $1.5 billion of payments to GF through the end of Q2 2011 for wafer purchases and research and development reimbursement. Future GF obligations beyond twelve months were not meaningfully quantifiable but were expected to remain material.
• Key risks include Intel’s competitive and pricing practices, dependence on GF and other third-party foundries, GPU supply constraints, manufacturing yields and technology transitions, semiconductor cyclicality, customer concentration, foreign exchange exposure, international operations and substantial indebtedness.
• AMD’s five largest customers represented approximately 51% of Q2 net revenue. International sales represented 88% of Q2 revenue.
• Auction-rate securities had a $117 million par value and $108 million estimated fair value at quarter end, with failed auctions and continuing liquidity risk. AMD held a right to sell certain UBS-related securities at par through July 2, 2012.
• AMD guaranteed certain GF-related and joint-venture obligations, including $321 million outstanding under the Fab 36 term loan, $8 million of AMTC/BAC rental obligations and $22 million of AMTC revolving-credit obligations. GF generally agreed to indemnify AMD subject to specified conditions.
• AMD recorded $26 million of foreign-currency forward-contract losses in other income and expense during the six months, partly reflecting the loss of cash-flow-hedge accounting after GF deconsolidation.
• AMD reported ongoing patent litigation with Samsung; trial was scheduled for January 24, 2011. OPTi litigation matters had been settled and dismissed.

Important Facts for Investors to Verify

• Reconcile reported earnings with the approximately $325 million non-cash GF deconsolidation gain and the $303 million equity-method GF loss.
• Assess sustainable gross margins excluding the $69 million Q1 2010 deconsolidation benefit and unusual 2009 inventory benefits.
• Review GF wafer supply minimums, estimated payments and AMD’s exposure to GF losses, dilution and manufacturing delays.
• Confirm the final outcome of the $500 million 7.75% notes issuance and the tender offer for up to $800 million of 6.00% notes.
• Evaluate liquidity after debt repurchases, the tender offer, GF-related obligations, accounts receivable financing and expected capital expenditures.
• Monitor GPU supply constraints, notebook and server demand, customer concentration and competitive pressure from Intel and other graphics suppliers.
• Review the status and potential financial impact of Samsung litigation, tax contingencies, guarantees and auction-rate securities.