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| AMD > SEC Filings for AMD > Form 10-Q on 4-Nov-2009 | All Recent SEC Filings |
4-Nov-2009
Quarterly Report
The statements in this report include forward-looking statements. These
forward-looking statements are based on current expectations and beliefs and
involve numerous risks and uncertainties that could cause actual results to
differ materially from expectations. These forward-looking statements should not
be relied upon as predictions of future events as we cannot assure you that the
events or circumstances reflected in these statements will be achieved or will
occur. You can identify forward-looking statements by the use of forward-looking
terminology including "believes," "expects," "may," "will," "should," "seeks,"
"intends," "plans," "pro forma," "estimates," or "anticipates" or the negative
of these words and phrases or other variations of these words and phrases or
comparable terminology. The forward-looking statements relate to, among other
things: the demand for our products; the growth and competitive landscape of the
markets in which we participate; current global business and economic conditions
and end-user demand for PCs; our cost reduction efforts and related
restructuring charges; future sales of previously written-down inventory; our
plans to purchase or otherwise retire our 5.75% Notes, 6.00% Notes and 7.75%
Notes; our ability to liquidate our auction rate securities in the next twelve
months; our capital expenditures; our aggregate contractual obligations; and
availability of external financing. Material factors and assumptions that were
applied in making these forward-looking statements include, without limitation,
the following: (1) the expected rate of market growth and demand for our
products and technologies (and the mix thereof); (2) our expected market share;
(3) our expected product and manufacturing costs and average selling prices;
(4) our overall competitive position and the competitiveness of our current and
future products; (5) our ability to introduce new products and transition to
more advanced manufacturing process technologies, consistent with our current
plans; (6) our ability to make additional investment in research and development
and that such opportunities will be available; and (7) the expected demand for
computers. Material factors that could cause actual results to differ materially
from current expectations include, without limitation, the following: (1) that
Intel Corporation's pricing, marketing and rebating programs, product bundling,
standard setting, new product introductions or other activities may negatively
impact sales; (2) that our substantial indebtedness could adversely affect our
financial position and prevent us from implementing our strategy or fulfilling
our contractual obligations; (3) that we will require additional funding and may
be unable to raise sufficient capital, on favorable terms, or at all; (4) that
we may be unable to maintain the level of investment in research and development
that is required to remain competitive; (5) that we may be unable to develop,
launch and ramp new products and technologies in the volumes required by the
market on a timely basis; (6) that we may be unable to transition to advanced
manufacturing process technologies in a timely and effective way; (7) that there
may be unexpected variations in market growth and demand for our products and
technologies in light of the product mix that we may have available at any
particular time; (8) that demand for computers will be lower than currently
expected; (9) that we may under-utilize GLOBALFOUNDRIES' and our own
manufacturing facilities; and (10) the effect of political or economic
instability, domestically or internationally, on our sales or production.
For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements, see "Part II, Item 1A-Risk Factors" section beginning on page 60 and the "Financial Condition" section beginning on page 48 and such other risks and uncertainties as set forth below in this report or detailed in our other Securities and Exchange Commission (SEC) reports and filings. We assume no obligation to update forward-looking statements.
AMD, the AMD Arrow logo, AMD Opteron, and combinations thereof, ATI and the ATI logo are trademarks of Advanced Micro Devices, Inc. Microsoft is a registered trademark of Microsoft Corporation in the United States and other jurisdictions. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this report and our audited consolidated financial statements and related notes as of December 27, 2008 and December 29, 2007, and for each of the three years in the period ended December 27, 2008 as filed in our Annual Report on Form 10-K for the year ended December 27, 2008.
Overview
We are a global semiconductor company with facilities around the world. Within the global semiconductor industry, we offer primarily:
• x86 microprocessors, for the commercial and consumer markets, embedded microprocessors for commercial, commercial client and consumer markets and chipsets for desktop and notebook PCs, professional workstations and servers; and
• graphics, video and multimedia products for desktop and notebook computers, including home media PCs and professional workstations, servers and technology for game consoles.
In this section, we will describe the general financial condition and the results of operations for Advanced Micro Devices, Inc. and its consolidated subsidiaries as well as GLOBALFOUNDRIES Inc. (GF) and its consolidated subsidiaries, including a discussion of our results of operations for the quarter and nine months ended September 26, 2009 compared to the quarter ended June 27, 2009 and quarter and nine months ended September 27, 2008, an analysis of changes in our financial condition and a discussion of our contractual obligations and off balance sheet arrangements. For accounting purposes, we are required to consolidate the accounts of GF. References in this report to "us," "our," or "AMD" include these consolidated operating results.
During the third quarter of 2009, we made progress toward improving our financial performance as we continued to focus on controlling our operating expenses and as demand increased for our products. We continued to improve our competitive position with the introduction of more competitive products. In the third quarter of 2009, we introduced our industry-leading ATI Radeon HD 5000 series of GPU products. We also introduced more energy efficient six-core AMD Opteron™processors for servers.
Net revenue in the third quarter of 2009 was $1.4 billion, an increase of 18 percent compared to the second quarter of 2009 and a decrease of 22 percent compared to the third quarter of 2008. The increase in third quarter 2009 net revenue compared to the second quarter of 2009 was primarily due to a 16 percent increase in unit shipments. Unit shipments increased due to an increase in demand for our products. Net revenue in the third quarter of 2008 included process technology license revenue of $191 million, which accounted for 11 percent of total third quarter 2008 revenue. Without the effect of the process technology license revenue, net revenue in the third quarter of 2009 would have decreased 13 percent compared to the third quarter of 2008. This 13 percent decrease in third quarter 2009 net revenue compared to the third quarter of 2008 was primarily due to a 14 percent decrease in average selling prices. Average selling prices for the third quarter of 2009 compared to the third quarter of 2008 decreased due to a decrease in average selling prices of microprocessors for notebooks and GPU products primarily due to a shift in our product mix to more value-priced products.
Gross margin as a percentage of net revenue for the third quarter of 2009 was 42 percent, a 5 percentage point increase compared to 37 percent in the second quarter of 2009 and a 9 percentage point decrease compared to 51 percent in the third quarter of 2008. Gross margin in the third quarter of 2009 included a $9 million, or 1 percentage point, benefit related to the sale of inventory that had been written-down in the fourth quarter of 2008. A portion of this inventory was also sold in the second quarter of 2009, which benefited gross margin in the second quarter of 2009 by $98 million, or approximately 8 percentage points. The increase in gross margin in the third quarter of 2009 as compared to the second quarter of 2009 was primarily due to an improvement in our unit costs. Our unit costs improved primarily due to an increase in microprocessor unit shipments using our 45-nanometer technology. Gross margin was also favorably impacted by the improvement in utilization of GF's manufacturing assets in the third quarter of 2009. Gross margin in the third quarter of 2008 was favorably impacted by 6 percentage points as a result of the $191 million process technology license revenue noted above. Gross margin in the third quarter of 2009 declined compared to the third quarter of 2008 primarily due to a decline in average selling prices. Average selling prices declined due to a decrease in average selling prices of microprocessors for notebooks and GPU products due to a shift in our product mix to more value-priced products.
Our operating loss for the third quarter of 2009 was $77 million compared to a $249 million operating loss in the second quarter of 2009 and $122 million of operating income in the third quarter of 2008. The improvement in operating performance in the third quarter of 2009 compared to the second quarter of 2009 was primarily due to an 18 percent increase in net revenue described above and a 5 percent decrease in research and development expenses and marketing, general and administrative expenses primarily due to the effect of our cost reduction initiatives. The decline in operating performance in the third quarter of 2009 compared to the third quarter of 2008 was primarily due to a 22 percent decrease in net revenue described above partially offset by a 15 percent decrease in research and development expenses and marketing, general and administrative expenses primarily due to the effect of our cost reduction initiatives.
Our cash, cash equivalents and marketable securities as of September 26, 2009 were $2.5 billion compared to $1.1 billion as of December 27, 2008. The increase in our cash, cash equivalents and marketable securities was primarily due to the consummation of the GF manufacturing joint venture transaction in the first quarter of 2009. Of the $2.5 billion, $975 million constituted GF cash and cash equivalents. During 2009, we repurchased an aggregate of $344 million principal amount of our 6.00% Notes for $161 million in cash.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist you in understanding our financial statements, the changes in certain key items in those financial statements from period to period, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements.
GLOBALFOUNDRIES
On March 2, 2009, we consummated the transactions contemplated by the Master Transaction Agreement among us, Advanced Technology Investment Company LLC (ATIC), a limited liability company established under the laws of the Emirate of Abu Dhabi and wholly owned by the Government of the Emirate of Abu Dhabi, and West Coast Hitech L.P., an exempted limited partnership organized under the laws of the Cayman Islands (WCH), acting through its general partner, West Coast Hitech G.P., Ltd., a corporation organized under the laws of the Cayman Islands, pursuant to which we formed GLOBALFOUNDRIES Inc., (GF). At the closing of this transaction (Closing), we contributed certain assets and liabilities to GF, including, among other things, shares of the groups of German subsidiaries owning Fab 1 Module 1 (formerly Fab 36) and Fab 1 Module 2 (formerly Fab 30/38), certain manufacturing assets, real property, tangible personal property, employees, inventories, books and records, a portion of our patent portfolio, intellectual property and technology, rights under certain material contracts and authorizations necessary for GF to carry on its business. In exchange we received GF securities consisting of one Class A Ordinary Share, 1,090,950 Class A Preferred Shares and 700,000 Class B Preferred Shares, and the assumption of certain liabilities by GF. ATIC contributed $1.4 billion of cash to GF in exchange for GF securities consisting of one Class A Ordinary Share, 218,190 Class A Preferred Shares, 172,760 Class B Preferred Shares, $202 million aggregate principal amount of 4% Class A Subordinated Convertible Notes (the Class A Notes) and $807 million aggregate principal amount of 11% Class B Subordinated Convertible Notes (the Class B Notes), and transferred $700 million of cash to us in exchange for the transfer by us of 700,000 GF Class B Preferred Shares.
At the Closing, we also issued to WCH, for an aggregate purchase price of $125
million, 58 million shares of our common stock and warrants to purchase
35 million shares of our common stock at an exercise price of $0.01 per share
(the Warrants). The Warrants are exercisable after the earlier of (i) public
ground-breaking of GF's planned manufacturing facility in New York and
(ii) March 2, 2011. The Warrants expire on March 2, 2019. On July 24, 2009 GF
held a public ground-breaking for its planned manufacturing facility in New
York. As a result, the Warrants issued by us to WCH on March 2, 2009 to purchase
35 million shares of the Company's common stock at an exercise price of $0.01
per share became exercisable by WCH on July 24, 2009. These Warrants are
included in our basic earnings per share calculation in the third quarter of
2009.
Under the Master Transaction Agreement, the cash consideration that WCH and ATIC paid and the securities that they received are as follows:
• Cash paid by WCH to AMD for the purchase of 58 million shares of AMD common stock and Warrants: $125 million;
• Cash paid by ATIC to GF for the aggregate principal amount of Class A Notes, which are convertible into 201,810 Class A Preferred Shares: $202 million;
• Cash paid by ATIC to GF for the aggregate principal amount of Class B Notes, which are convertible into 807,240 Class B Preferred Shares: $807 million;
• Cash paid by ATIC to GF for 218,190 Class A Preferred Shares: $218 million;
• Cash paid by ATIC to GF for 172,760 Class B Preferred Shares: $173 million; and
• Cash paid by ATIC to AMD for 700,000 Class B Preferred Shares: $700 million.
As of the Closing, AMD and ATIC owned 1,090,950, or 83.3%, and 218,190, or 16.7%, respectively, of Class A Preferred Shares, and ATIC owned 100% of the Class B Preferred Shares and 100% of the Class A Notes and Class B Notes.
Class A Preferred Shares. The Class A Preferred Shares rank senior in right of payment to the Ordinary Shares of GF and junior in right of payment to the Class B Preferred Shares for purposes of dividends, distributions and upon a Liquidation Event (as defined below). The Class A Preferred Shares are not entitled to any dividend or pre-determined accretion in value. In the event of the liquidation, dissolution or winding up of GF (Liquidation Event), each Class A Preferred Share will be entitled to receive, after the distribution to the holders of the Class B Preferred Shares but prior to any distribution to the holders of Ordinary Shares, out of the remaining assets of GF, if any, an amount equal to the initial purchase price per share of the Class A Preferred Shares. Each Class A Preferred Share is convertible, at the option of the holder thereof, into Class B Ordinary Shares at the then applicable Class A Conversion Rate upon a Liquidation Event. Each Class A Preferred Share will automatically convert into Class B Ordinary Shares at the then applicable Class A Conversion Rate upon the earlier of (i) an initial public offering of GF (IPO) or (ii) a change of control transaction of GF. The "Class A Conversion Rate" is 100 Class B Ordinary Shares for each Class A Preferred Share converted, subject to customary anti-dilution adjustments. The Class A Preferred Shares are non-voting until the Reconciliation Event (defined below). Following the Reconciliation Event, each Class A Preferred Share will vote on an as-converted basis with the Ordinary Shares, voting together as a single class, with respect to any question upon which holders of Ordinary Shares have the right to vote.
Class B Preferred Shares. The Class B Preferred Shares rank senior in right of payment to all other classes or series of equity securities of GF for purposes of dividends, distributions and upon a Liquidation Event. Each Class B Preferred Share is deemed to accrete in value at a rate of 12% per year, compounded semiannually, of the initial purchase price per such share. The accreted value accrues daily from the Closing and is taken into account upon certain distributions to the holders of Class B Preferred Shares or upon conversion of the Class B Preferred Shares. In the event of a Liquidation Event, each Class B Preferred Share will be entitled to receive, prior to any distribution to the holders of any other classes or series of equity securities, an amount equal to its accreted value. Upon completion of the above distribution to the holders of Class B Preferred Shares, each Class A Preferred Share will be entitled to receive its liquidation preference amount out of any remaining assets of GF. Upon completion of the above distributions to the holders of Preferred Shares, all of the remaining assets of GF, if any, will be distributed pro rata among the holders of Ordinary Shares. Each Class B Preferred Share is convertible, at the option of the holder thereof, into Class B Ordinary Shares at the then applicable Class B Conversion Rate (as hereinafter defined) upon a Liquidation Event. Each Class B Preferred Share automatically converts into Class B Ordinary Shares at the then applicable Class B Conversion Rate upon the earlier of (i) an IPO or (ii) a change of control transaction of GF. The "Class B Conversion Rate" is 100 Class B Ordinary Shares for each Class B Preferred Share converted, subject to customary anti-dilution adjustments. The Class B Preferred Shares are non-voting until the Reconciliation Event (defined below). Following the Reconciliation Event, each Class B Preferred Share will vote on an as-converted basis with the Ordinary Shares, voting together as a single class, with respect to any question upon which holders of Ordinary Shares have the right to vote.
Class A Subordinated Convertible Notes. The Class A Notes accrue interest at a
rate of 4% per annum, compounded semiannually, and mature upon the later of
(i) 10 years from the date of issuance or (ii) the date of the earlier of
(i) such time when we have secured for GF certain rights under our existing
cross license agreement with Intel Corporation (Intel Patent Cross License
Agreement), or (ii) such time when GF's Board of Directors determines that GF no
longer needs to be a "Subsidiary" under the Intel Patent Cross License Agreement
(the Reconciliation Event). Interest on the Class A Notes is payable
semiannually in additional Class A Notes. The Class A Notes are the unsecured
obligations of GF and rank subordinated in right of payment to any current or
future senior indebtedness of GF. The Class A Notes are not redeemable by GF
without the note holder's consent. The Class A Notes are convertible, in whole
or in part, in multiples of $1,000, into GF Class A Preferred Shares at the
option of the holder at any time prior to the close of business on the business
day immediately preceding the maturity date based on the conversion ratio in
effect on the date of conversion, if (i) such conversion would not cause GF to
fail to constitute our "Subsidiary" under the Intel Patent Cross License
Agreement or (ii) the Reconciliation Event has occurred. On or after the
Reconciliation Event, the Class A Notes will automatically convert into Class A
Preferred Shares upon the earlier of (i) an IPO, (ii) certain change of control
transactions of GF or (iii) the close of business on the business day
immediately preceding the maturity date.
Class B Subordinated Convertible Notes. The Class B Notes accrue interest at a
rate of 11% per annum, compounded semiannually, and mature upon the later of
(i) 10 years from the date of issuance or (ii) the date of the Reconciliation
Event. Interest on the Class B Notes is payable semiannually in additional Class
B Notes. The Class B Notes are the unsecured obligations of GF and rank
subordinated in right of payment to any current or future senior indebtedness of
GF. The Class B Notes are not redeemable by GF without the note holder's
consent. The Class B Notes are convertible, in whole or in part, in multiples of
$1,000, into GF Class B Preferred Shares at the option of the holder at any time
prior to the close of business on the business day immediately preceding the
maturity date at the conversion ratio in effect on the date of conversion, if
(i) such conversion would not cause GF to fail to constitute our "Subsidiary"
under the Intel Patent Cross License Agreement or (ii) the Reconciliation Event
has occurred. On or after the Reconciliation Event, the Class B Notes will
automatically convert into GF Class B Preferred Shares upon the earlier of
(i) an IPO, (ii) certain change of control transactions of GF or (iii) the close
of business on the business day immediately preceding the maturity date.
Based on the structure of the transaction, pursuant to the guidance on accounting for interests in variable interest entities, GF is a variable-interest entity, and we are deemed to be the primary beneficiary and, therefore, required to consolidate the accounts of GF.
ATIC's noncontrolling interest, represented by its equity interests in GF, is
presented outside of stockholders' equity in the condensed consolidated balance
sheet due to ATIC's right to put those securities back to us in the event of a
change of control of AMD during the two years following the Closing. Our net
income (loss) attributable to its common stockholders per share consists of
consolidated net income (loss), as adjusted for (i) the portion of GF's earnings
or losses attributable to ATIC, which is based on ATIC's proportional ownership
interest in GF's Class A Preferred Shares (16.7% as of September 26, 2009), and
(ii) the non-cash accretion on GF's Class B Preferred Shares attributable to us,
based on the proportional ownership interest of GF's Class A Preferred Shares
(83.3% as of September 26, 2009).
At the Closing, AMD, ATIC and GF also entered into a Shareholders' Agreement (the Shareholders' Agreement), a Funding Agreement (the Funding Agreement), and a Wafer Supply Agreement (the Wafer Supply Agreement), certain terms of each of which are summarized below.
Shareholders' Agreement. The Shareholders' Agreement sets forth the rights and obligations of AMD and ATIC as shareholders of GF. The initial GF board of directors (GF Board) consists of eight directors, and AMD and ATIC each designated four directors. After the Reconciliation Event, the number of directors a GF shareholder may designate may decrease according to the percentage of GF' shares it owns on a fully diluted basis.
Pursuant to the Shareholders' Agreement, GF is not allowed to take certain corporate actions without unanimous GF Board approval. The Shareholders' Agreement sets forth procedures by which any deadlock with respect to matters requiring GF Board approval is to be resolved.
Pursuant to the Shareholders' Agreement, if a change of control of AMD occurs within two years of Closing, ATIC will have the right to put any or all GF securities (valued at their fair market value) held by ATIC and its permitted transferees to us in exchange for cash, or if a change of control of AMD occurs after a specified event, ATIC will have the option to purchase in cash any or all of GF securities (valued at their fair market value) held by us and our permitted transferees.
Funding Agreement. The Funding Agreement provides for the future funding of GF and governs the terms and conditions under which ATIC is obligated to provide such funding. Pursuant to the Funding Agreement, ATIC has committed to additional equity funding of a minimum of $3.6 billion and up to $6.0 billion to be provided in phases over the next five years. We have the right, but not the obligation, to provide additional future capital to GF in an amount pro rata to our interest in the fully converted ordinary shares of GF.
At each equity funding, the equity securities to be issued by GF will consist of 20% of Class A Preferred Shares and 80% of Class B Preferred Shares. Rather than issuing Preferred Shares, GF may, in certain circumstances, issue additional Class A Notes and Class B Notes to ATIC in those same proportions in connection with future funding. The aggregate amount of equity funding to be provided by the shareholders in any fiscal year depends on the time period of such funding and the amounts set forth in the five-year capital plan of GF. In addition, GF is required to obtain specified third-party debt in any given fiscal year, as set forth in its five-year capital plan. To the extent that GF obtains more than the specified amount of third-party debt, ATIC is able to reduce its funding commitment accordingly. To the extent that GF is not able to obtain the full amount of third-party debt, ATIC is not obligated to make up the difference. To the extent we choose not to participate in an equity financing of GF, ATIC is obligated to purchase our share of GF securities, subject to ATIC's funding commitments under the Funding Agreement.
ATIC's obligations to provide funding are subject to certain conditions including the accuracy of GF's representations and warranties in the Funding Agreement, the absence of a material adverse effect on GF or AMD and the absence of a material breach or default by GF or AMD under the provisions of any transaction document. There are additional funding conditions for each of the phases which are set forth in more detail in the Funding Agreement.
July Funding from ATIC to GF. In July 2009, pursuant to a funding request from GF in accordance with the Funding Agreement, ATIC contributed $260 million of cash to GF in exchange for GF securities consisting of $52 million aggregate principal amount of Class A Notes and $208 million aggregate principal amount of Class B Notes. We declined to participate in the funding request. As a result, our economic ownership interest in GF (on a fully converted to common basis) decreased to approximately 32 percent.
Wafer Supply Agreement. The Wafer Supply Agreement governs the terms by which we purchase products manufactured by GF. Pursuant to the Wafer Supply Agreement, we purchase, subject to limited exceptions, all of our microprocessor unit (MPU) product requirements from GF. If we acquire a third-party business that manufactures MPU products, we will have up to two years to transition the manufacture of such MPU products to GF. In addition, once GF establishes a 32nm-qualified process, we will purchase from GF, where competitive, specified percentages of our graphics processor unit (GPU) requirements at all process nodes, which percentages will increase linearly over a five-year period. At our request, GF will also provide sort services to us on a product-by-product basis.
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