Business Context and Reporting Period
Company: Advanced Micro Devices, Inc. (AMD)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 27, 2009 (Second Quarter of Fiscal Year 2009)
Business Overview: AMD is a global semiconductor company offering x86 microprocessors, chipsets, and graphics products. A pivotal event during this period was the March 2, 2009, formation of GLOBALFOUNDRIES (GF), a manufacturing joint venture with Advanced Technology Investment Company (ATIC). AMD now consolidates GF's financial results, creating a new "Foundry" segment. The company operates in a challenging macroeconomic environment characterized by weak PC demand and aggressive pricing competition.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Net Revenue | $1,184 million | $1,362 million | $2,361 million | $2,849 million |
| Gross Margin | $441 million (37%) | $511 million (38%) | $952 million (40%) | $1,132 million (40%) |
| Operating Loss | $(249) million | $(569) million | $(547) million | $(803) million |
| Net Loss (Attributable to AMD) | $(330) million | $(1,195) million | $(746) million | $(1,559) million |
| Diluted EPS (Loss) | $(0.49) | $(1.97) | $(1.15) | $(2.57) |
| Cash & Equivalents | $1,979 million | $1,310 million (Q2 2008) | Total Cash, Equivalents & Marketable Securities: $2,514 million | |
| Total Debt & Capital Leases | $5,532 million | Includes $1.8 billion attributable to GF |
Material Changes vs. Prior Period
- Revenue Decline: Q2 2009 revenue decreased 13% year-over-year due to a 20% drop in average selling prices (ASPs) driven by a shift to value-priced products, partially offset by a 27% increase in unit shipments as customers replenished inventory.
- Improved Operating Performance: Operating loss narrowed significantly from $569 million in Q2 2008 to $249 million in Q2 2009. This improvement was driven by the absence of a $403 million goodwill/intangible impairment charge recorded in Q2 2008 and reduced operating expenses.
- Segment Restructuring: The company transitioned from two segments (Computing Solutions, Graphics) to three (Computing Solutions, Graphics, Foundry) following the GF transaction. The Foundry segment reported an operating loss of $101 million in Q2 2009.
- Liquidity Improvement: Cash, cash equivalents, and marketable securities increased from $1.1 billion at year-end 2008 to $2.5 billion at June 27, 2009, primarily due to $2.1 billion in proceeds from the GF transaction (ATIC and WCH funding).
- Debt Repurchases: AMD repurchased $158 million principal of its 6.00% Notes in Q1 2009 and $15 million of its 5.75% Notes in Q2 2009, realizing significant gains.
Guidance, Outlook, and Risks
- Outlook: Management expects end-user PC demand to stabilize but notes continued pressure on ASPs due to customer demand for value-priced products. Gross margins are expected to remain under pressure from lower ASPs and underutilization of GF manufacturing assets.
- Capital Expenditures: Anticipated consolidated capital expenditures for the remainder of 2009 are approximately $594 million, with $526 million related to GF (including Fab 2 in New York).
- Key Risks:
- Intel Dominance: Intel's aggressive pricing and market dominance continue to limit AMD's ability to compete effectively.
- GF Dependency: AMD relies on GF for substantially all microprocessor manufacturing. Underutilization of GF facilities increases per-unit costs.
- Liquidity of ARS: Approximately $167 million in Auction Rate Securities (ARS) are illiquid due to failed auctions. While classified as current assets, there is uncertainty regarding their liquidity and potential impairment.
- Debt Covenants: AMD has substantial indebtedness ($5.6 billion). While currently compliant, a decline in group consolidated cash below specific thresholds could trigger restrictive financial covenants.
- Unusual Items: Q2 2009 results included a $98 million benefit to gross margin from the sale of inventory previously written down in Q4 2008. Q2 2008 included a $193 million gain on the sale of 200mm equipment and a $403 million impairment charge, making year-over-year comparisons difficult.
Investor Verification Checklist
- GF Funding Commitments: Verify ATIC's adherence to the Funding Agreement, which commits up to $6.0 billion in future equity funding for GF.
- Auction Rate Securities (ARS): Monitor the liquidity status of the $167 million ARS portfolio and any potential future impairment charges if fair value declines further.
- Debt Covenants: Track "group consolidated cash" levels to ensure compliance with Fab 36 Term Loan covenants, which require maintaining specific cash balances if credit ratings decline.
- Inventory Write-downs: Assess the remaining inventory levels and the potential for further write-downs as the benefit from selling previously written-down inventory diminishes.
- Intel Litigation: Monitor the status of the antitrust lawsuit against Intel and any potential impact on market share or revenue.