Business Context and Reporting Period
Company: Advanced Micro Devices, Inc. (AMD)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 26, 2009
Overview: AMD is a global semiconductor company offering x86 microprocessors, chipsets, and graphics products. The reporting period reflects the consolidation of GLOBALFOUNDRIES Inc. (GF), a joint venture formed in March 2009 with Advanced Technology Investment Company (ATIC) to manufacture AMD's microprocessors. The company operates three reportable segments: Computing Solutions, Graphics, and Foundry.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Revenue | $1,396 million | $1,797 million | $3,757 million | $4,646 million |
| Gross Margin | $585 million (42%) | $916 million (51%) | $1,537 million (41%) | $2,048 million (44%) |
| Operating Income (Loss) | $(77) million | $122 million | $(624) million | $(681) million |
| Net Income (Loss) | $(135) million | $(127) million | $(884) million | $(1,666) million |
| Net Loss Attributable to AMD Common Stockholders | $(128) million | $(134) million | $(874) million | $(1,693) million |
| Diluted EPS (Attributable to Common Stockholders) | $(0.18) | $(0.22) | $(1.32) | $(2.79) |
| Cash, Cash Equivalents, and Marketable Securities | $2,511 million | $1,096 million (Dec 2008) | N/A | |
| Total Debt and Capital Lease Obligations | $5,570 million | $4,776 million (Dec 2008) | N/A | |
| Net Cash Used in Operating Activities (9 Months) | $(677) million | $(442) million | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Q3 2009 revenue decreased 22% year-over-year, primarily due to a 14% decrease in average selling prices (ASPs) driven by a shift to value-priced products and the absence of $191 million in process technology license revenue recorded in Q3 2008.
- Operating Loss Improvement: Operating loss narrowed to $77 million in Q3 2009 from $249 million in Q2 2009, driven by an 18% revenue increase quarter-over-quarter and cost reduction initiatives. However, it remained a loss compared to the $122 million operating income in Q3 2008.
- Segment Performance:
- Computing Solutions: Revenue decreased 23% year-over-year but increased 17% quarter-over-quarter. Operating income improved to $76 million from a loss of $72 million in Q2 2009.
- Graphics: Revenue decreased 21% year-over-year due to lower ASPs and royalty revenue. Operating income was $8 million, down from $47 million in Q3 2008.
- Foundry: A new segment established in Q1 2009. Reported an operating loss of $101 million in Q3 2009, flat compared to Q2 2009.
- Liquidity Increase: Cash and marketable securities increased to $2.5 billion from $1.1 billion at year-end 2008, largely due to $2.1 billion in funding received from ATIC and WCH for the GF joint venture.
- Debt Repurchases: AMD repurchased $344 million principal amount of its 6.00% Notes for $161 million in cash during the first nine months of 2009, recognizing a gain of approximately $174 million.
Guidance, Outlook, and Risks
- Outlook: Management expects international sales to remain a significant portion of total revenue (86% in Q3 2009). The company anticipates aggregate consolidated capital expenditures for the remainder of 2009 to be approximately $357 million, with $308 million related to GF.
- GlobalFoundries Funding: ATIC has committed to provide additional equity funding of a minimum of $3.6 billion and up to $6.0 billion over the next five years. In July 2009, ATIC contributed an additional $260 million, diluting AMD's economic ownership in GF to approximately 32%.
- Key Risks:
- Intel Dominance: Intel's aggressive pricing, marketing, and control over industry standards pose a significant competitive threat, potentially limiting AMD's market share and margins.
- GF Dependency: AMD relies on GF for substantially all microprocessor manufacturing. Disruptions at GF or under-utilization of its facilities could materially adversely affect AMD's business.
- Financial Markets: Instability in credit markets affects the liquidity of AMD's Auction Rate Securities (ARS) holdings ($164 million fair value). While no defaults have occurred, auctions have failed to settle.
- Debt Covenants: AMD has substantial indebtedness ($5.7 billion). Failure to meet financial covenants, particularly if group consolidated cash declines below specified thresholds, could result in defaults.
- Inventory and ASPs: The semiconductor industry is cyclical. Continued declines in ASPs and excess inventory levels could lead to further write-downs.
- Unusual Items:
- Gain on Debt Repurchase: $66 million gain recognized in Q3 2009 from repurchasing 6.00% Notes.
- Restructuring: $4 million in restructuring charges in Q3 2009, including a $3 million reversal from a prior plan and $7 million in new charges.
- Impairment: No goodwill or intangible asset impairments were recorded in the first nine months of 2009, compared to $405 million in the same period in 2008.
Investor Verification Checklist
- GF Liquidity and Funding: Verify the status of ATIC's funding commitments and GF's ability to meet its own debt obligations and capital expenditure plans.
- Auction Rate Securities (ARS): Assess the liquidity risk and potential impairment charges related to the $164 million ARS portfolio given the continued failure of auctions.
- Debt Covenants: Monitor group consolidated cash levels against the thresholds ($500 million) that trigger stricter financial covenants on the Fab 36 Term Loan.
- Intel Litigation: Track the progress of the antitrust lawsuit against Intel and any potential impact on market share or legal settlements.
- Inventory Valuation: Review inventory levels and the potential for future write-downs given the shift to value-priced products and declining ASPs.
- Convertible Notes: Evaluate the dilution risk associated with the 5.75% and 6.00% Convertible Senior Notes if stock prices rise above conversion prices.