Business Context and Reporting Period
Advanced Micro Devices, Inc. (AMD) filed this Form 8-K on December 6, 2012, to report the entry into a Material Definitive Agreement. The filing details a Third Amendment to the Wafer Supply Agreement with GLOBALFOUNDRIES Inc. (GF), effective December 6, 2012, covering wafer deliveries for microprocessor unit products through December 31, 2013.
Key Financial Metrics and Agreements
- Termination Fee: AMD agreed to pay GF a termination fee of $320 million in consideration for waiving a portion of take-or-pay production wafer purchase commitments for Q4 2012.
- One-Time Charge: The company estimates a net one-time charge of $165 million for the write-down of inventory to its net realizable value. This includes a $45 million credit in Q4 2012.
- Expense Recognition: Approximately $110 million of the termination fee will be capitalized into inventory and expensed in Q4 2012 and Q1 2013.
- Cash Flow Impact: The $320 million fee will be paid as follows: $80 million by December 28, 2012; $40 million by April 1, 2013; and the remaining $200 million via a promissory note maturing on December 31, 2013.
- Purchase Commitments: AMD estimates wafer purchases of approximately $115 million in Q4 2012, $1.15 billion in fiscal 2013, and $250 million in Q1 2014.
Material Changes and Unusual Items
The primary material change is the restructuring of the wafer supply relationship with GF. Key unusual items include:
- Inventory Write-Down: A significant one-time charge of $165 million is expected due to the inventory write-down associated with the termination fee.
- Debt Instrument: Issuance of a $200 million promissory note to GF to settle the balance of the termination fee.
- R&D Cost Reduction: As AMD moves to 28nm standard process technology, future reimbursements to GF for certain research and development costs will be reduced.
Guidance, Outlook, and Risks
AMD expects to negotiate the remainder of its 2014 purchase commitments with GF during 2013. The company states it is not able to meaningfully quantify or estimate purchase obligations beyond the first quarter of 2014, though future purchases are expected to remain material. The filing notes that the description of the agreement is qualified by reference to the full Third Amendment and promissory note documents.
Investor Verification Checklist
- Verify the exact timing and amount of the $165 million net one-time charge in the upcoming Q4 2012 earnings report.
- Confirm the impact of the $110 million capitalized inventory expense on Q4 2012 and Q1 2013 gross margins.
- Review the terms of the $200 million promissory note for interest rates and covenants in the subsequent Form 10-K.
- Monitor the execution of the transition to 28nm technology and the resulting reduction in R&D reimbursements to GF.