AMD

Business Context and Reporting Period

Company: Advanced Micro Devices, Inc. (AMD)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 27, 2008
Business Overview: AMD is a global semiconductor company offering x86 microprocessors, chipsets, and graphics products for PCs, servers, and workstations. The company operates primarily through two reportable segments: Computing Solutions and Graphics.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net revenue decreased slightly by 1% year-over-year. Excluding a one-time $191 million process technology license revenue, revenue would have declined 4% due to lower average selling prices and unit volumes in the Computing Solutions segment.
• Profitability: The operating loss narrowed by $355 million compared to 2007. This improvement was primarily driven by a $193 million gain on the sale of 200mm equipment and the aforementioned technology license revenue. Without these items, the operating loss would have been flat.
• Impairments: AMD recorded $1.089 billion in impairment charges for goodwill and acquired intangible assets in 2008, compared to $1.132 billion in 2007. These charges were driven by the divestiture of non-core businesses and the deterioration of the company's market capitalization.
• Cash Flow: Net cash used in operating activities was $692 million in 2008, compared to $310 million in 2007, reflecting significant losses and a decrease in accounts payable.

Guidance, Outlook, and Risks

• Manufacturing Joint Venture: AMD entered into a Master Transaction Agreement to form "The Foundry Company" with Advanced Technology Investment Company (ATIC). Upon consummation, AMD expects to receive approximately $2.2 billion in cash (consolidated basis) and transfer approximately $1.1 billion of indebtedness to the joint venture. ATIC has committed to provide up to $6.0 billion in equity funding over five years.
• Divestitures: AMD completed the sale of its Digital Television business unit to Broadcom for $141.5 million. In January 2009, it sold certain Handheld business assets to Qualcomm for $65 million.
• Outlook: Management expects revenue to decrease in the first quarter of 2009 compared to the fourth quarter of 2008 due to macroeconomic conditions and supply chain inventory corrections. Additional restructuring charges are expected in the first and second quarters of 2009.
• Key Risks:
  • Intel Dominance: Intel's aggressive pricing, marketing, and control over industry standards pose a significant competitive threat.
  • Liquidity: Substantial indebtedness ($5.1 billion) and the need for external financing to fund operations and the joint venture.
  • Market Conditions: The global credit crisis and recession have reduced end-user demand for PCs and servers, leading to inventory corrections by customers.
  • Joint Venture Execution: Risks associated with the failure to consummate the ATIC transaction or realize anticipated synergies.

Investor Verification Checklist

• Joint Venture Status: Verify the progress and regulatory approval status of the "The Foundry Company" transaction with ATIC, as it is critical to AMD's liquidity and debt reduction strategy.
• Inventory Levels: Monitor inventory write-downs and customer inventory correction trends, particularly in the notebook PC sector, which management expects to continue into the first half of 2009.
• Debt Covenants: Review compliance with financial covenants in the Fab 36 Term Loan and senior notes, specifically regarding consolidated cash balances and credit ratings.
• Product Roadmap: Assess the market reception and yield rates of the new 45-nanometer quad-core Opteron and Phenom II processors.
• Legal Proceedings: Track the status of the antitrust lawsuit against Intel Corporation, with trial scheduled for February 2010.