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| AMD > SEC Filings for AMD > Form 10-K on 21-Feb-2013 | All Recent SEC Filings |
21-Feb-2013
Annual Report
The following discussion should be read in conjunction with the consolidated financial statements as of December 29, 2012 and December 31, 2011 and for each of the three years in the period ended December 29, 2012 and related notes, which are included in this Form 10-K as well as with the other sections of this Form 10-K, including "Part I, Item 1: Business," "Part II, Item 6: Selected Financial Data," and "Part II, Item 8: Financial Statements and Supplementary Data."
Introduction
We are a global semiconductor company with facilities around the world. Within the global semiconductor industry, we offer primarily:
(i) x86 microprocessors, as standalone devices or as incorporated as an APU, for the commercial and consumer markets, embedded microprocessors for commercial, commercial client and consumer markets and chipsets for desktop and mobile devices, including mobile PCs and tablets, professional workstations and servers; and
(ii) graphics, video and multimedia products for desktop and mobile devices, including mobile PCs and tablets, home media PCs and professional workstations, servers and technology for game consoles.
In this MD&A, we will describe the results of operations and the financial condition for Advanced Micro Devices, Inc. and our consolidated subsidiaries, including a discussion of our results of operations for 2012 compared to 2011 and 2011 compared to 2010, an analysis of changes in our financial condition and a discussion of our contractual obligations and off balance sheet arrangements. References in this Item 7 and in Item 8, "Financial Statements and Supplementary Data," to "us," "our," or "AMD" include the operating results of AMD and our consolidated subsidiaries.
Overview
2012 was a challenging year for our industry and for AMD. The significant macroeconomic issues and unprecedented level and pace of change occurring across the industry magnified the challenges in our business and negatively impacted our 2012 financial results. In the second half of 2012, in particular, broader macroeconomic issues and changing PC dynamics impacted demand for end-user PC products. Weakness in the global economy, a reluctance on the part of OEMs to build inventory in advance of Microsoft's Windows 8™ launch and the increasing popularity of tablets as a consumer device of choice contributed to the challenging business environment. As a result, we faced a difficult selling environment, which adversely affected our 2012 financial performance.
Net revenue for 2012 was $5.4 billion, a decrease of 17% compared to 2011 net revenue of $6.6 billion. Gross margin, as a percentage of net revenue for 2012 was 23% compared to 45% in 2011. Gross margin in 2012 included the following charges, which resulted in a negative impact of 22% in 2012: a $273 million Lower Cost or Market (LCM) charge, a $703 million charge related to a limited waiver of exclusivity from GF and a $5 million charge related to a legal settlement. Gross margin in 2011 included a $24 million charge recorded in connection with a payment to GF, primarily related to certain GF manufacturing assets, and a $5 million charge related to a legal settlement. Absent the effects of these events, which we believe are not indicative of our ongoing operating performance, our gross margin would have been 41% in 2012 compared to 45% in 2011. Gross margin in 2012 was adversely impacted by an inventory write-down of $100 million during the third quarter of 2012 as a result of lower than anticipated future demand for certain products as well as lower average selling price for microprocessor products due to the challenging macroeconomic conditions described above. Our operating loss for 2012 was $1.06 billion compared to operating income of $368 million in 2011. Our net loss for 2012 was $1.18 billion compared to net income of $491 million for 2011. Cash, cash equivalents and marketable securities, including long-term marketable securities, as of December 29, 2012 were $1.2 billion compared to $1.9 billion at December 31, 2011.
As part of our strategy to respond to the macroeconomic issues and the changes occurring in our industry, during 2012, we made key strategic investments to align our business to a changing computing landscape and to position ourselves to take advantage of new opportunities in adjacent high-growth markets. In March 2012, we acquired SeaMicro, Inc. (SeaMicro), an energy-efficient, high-bandwidth micro-server company, to accelerate our strategy to deliver differentiated micro-server solutions to cloud data centers. In June 2012, we, along with ARM, Imagination Technologies, Media Tek, Qualcomm, Samsung and Texas Instruments established the Heterogeneous System Architecture (HSA) Foundation, a non-profit consortium established to define and promote an open standards-based approach to heterogeneous computing. In October 2012, we announced that we will design 64-bit ARM® technology-based processors in addition to our x86 processors for multiple markets, starting with cloud and data center servers. We expect our first ARM technology-based processor will be a highly-integrated, 64-bit multicore system-on-a-chip optimized for the dense, energy-efficient servers. The first ARM technology-based AMD Opteron processor for servers is targeted for production in 2014 and is expected to integrate our AMD SeaMicro Freedom supercompute fabric.
In addition, in the fourth quarter of 2012, we announced a restructuring plan to improve our cost structure and enhance our competitiveness in core growth areas. This restructuring plan primarily involves a reduction of our global workforce of approximately 14% as well as asset impairments and facility consolidations. We expect the restructuring action will result in operational savings, primarily in operating expenses, of approximately $190 million in 2013.
Further, to better align with today's PC market dynamics, we entered into a third amendment to the WSA with GF. Pursuant to the third amendment, we modified our wafer purchase commitments for the fourth quarter of 2012 under the second amendment to the WSA. In addition, we agreed to certain pricing and other terms applicable to wafers for our microprocessor and APU products to be delivered by GF to us during 2013 and through December 31, 2013. Pursuant to the third amendment, we committed to purchase a fixed number of production wafers at negotiated prices in the fourth quarter of 2012 and through December 31, 2013. GF agreed to waive a portion of our wafer purchase commitments for the fourth quarter of 2012. In consideration of this waiver, we agreed to pay GF a fee of $320 million. As a result, we recorded a $273 million LCM charge in the fourth quarter of 2012. The cash impact of this $320 million fee will be spread over several quarters, with $80 million that was paid by December 28, 2012 and $40 million payable by April 1, 2013. For the remainder of the fee, on the same date we entered into the third amendment, we issued a $200 million promissory note to GF that matures on December 31, 2013. Under the third amendment to the WSA, we committed to purchase from GF wafers for approximately $1.15 billion in 2013 and $250 million during the first quarter of 2014. We expect to negotiate the remainder of our 2014 purchase commitments from GF in 2013.
Despite the challenging macroeconomic environment, we continued to focus on executing our engineering milestones. We launched our next AMD A-Series APU, codenamed "Trinity," and our next generation AMD E-Series APU, codenamed "Brazos 2.0." We also announced our AMD Z-60 APU, codenamed "Hondo," our lowest powered APU designed for the performance tablet and small form factor PC market. We launched our AMD Opteron™ 3200, 4300 and 3300 Series server processor platforms based on our next-generation "Piledriver" core architecture. We announced AMD's SeaMicro SM15000 server chassis, which extends fabric-based computing across racks and aisles of the data center to connect directly to large data storage systems. With respect to our graphics products, we launched our AMD Radeon™ HD 7950 graphics processor, and our AMD Radeon HD 7700 and 7800 series graphics processors, all based on 28nm process technology and designed for enthusiast desktop gamers.
GLOBALFOUNDRIES
Formation and Accounting in 2009
On March 2, 2009, we consummated the transactions contemplated by the Master Transaction Agreement among us, Advanced Technology Investment Company LLC (ATIC), and West Coast Hitech L.P. (WCH), pursuant to which we formed GF. Based on the structure of the transaction and the guidance on accounting for
interests in variable interest entities, during 2009, GF was deemed a variable-interest entity, and we were deemed to be the primary beneficiary. Therefore, we consolidated the accounts of GF from March 2, 2009 through December 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 WSA).
Shareholders' Agreement. The Shareholders' Agreement set forth the rights and obligations of AMD and ATIC as shareholders of GF. The initial GF board of directors (GF Board) consisted of eight directors, and AMD and ATIC each designated four directors. We were no longer a party to the Shareholders' Agreement as of March 4, 2012.
Funding Agreement. The Funding Agreement provided for the funding of GF and governed the terms and conditions under which ATIC was obligated to provide such funding. We were no longer a party to the Funding Agreement as of March 4, 2012.
Wafer Supply Agreement. The WSA governs the terms by which we purchase products manufactured by GF. Pursuant to the WSA, during 2010, we purchased substantially all of our microprocessor unit (MPU) product requirements from GF. During 2010, we paid GF for wafers on a cost-plus basis. 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.
The WSA terminates no later than March 2, 2024. GF has agreed to use commercially reasonable efforts to assist us to transition the supply of products to another provider, and to continue to fulfill purchase orders for up to two years following the termination or expiration of the WSA. During the transition period, pricing for microprocessor products will remain as set forth in the WSA, but our purchase commitments to GF will no longer apply. This agreement has been subsequently modified, as disclosed below.
Governance Changes, Funding and Accounting in 2010
Deconsolidation of GF
On December 18, 2009, ATIC International Investment Company (ATIC II) acquired Chartered Semiconductor Manufacturing Ltd. (Chartered). On December 28, 2009, with our consent, ATIC II, Chartered and GF entered into a Management and Operating Agreement (MOA), which provided for the joint management and operation of GF and Chartered, thereby allowing GF and Chartered to share costs, take advantage of operating synergies and market wafer fabrications services on a collective basis. In order to allow for the signing of the MOA on December 28, 2009, prior to obtaining any regulatory approvals, we agreed to irrevocably waive rights under the Shareholders Agreement with respect to certain matters that require unanimous GF Board approval. Additionally, if any such matters came before the GF Board, we agreed that our designated GF directors will vote in the same manner as the majority of ATIC-designated GF Board members voting on any such matters. As a result of waiving such approval rights, as of December 28, 2009, for financial reporting purposes we no longer shared control with ATIC over GF.
In June 2009, the FASB issued an amendment to improve financial reporting by enterprises involved with variable interest entities. Based on the results of our evaluation and in light of the governance changes whereby we believed we only had protective rights relative to the operations of GF, we concluded that the other investor in GF, ATIC, was the party who had the power to direct the activities of GF that most significantly impact GF's performance and was, therefore, the primary beneficiary of GF. Accordingly, effective as of December 27, 2009, we deconsolidated GF, and during 2010 we accounted for our ownership interest in GF under the equity method of accounting. For purposes of our application of the equity method of accounting during 2010, we recorded our share of GF's results excluding the results of Chartered because GF did not have an equity ownership interest in Chartered. The terms of the Funding Agreement and the WSA described above were not affected by the deconsolidation of GF. Following the deconsolidation, GF became our related party.
Funding of GF
During 2010, ATIC contributed $930 million of cash to GF. We did not participate in the funding. These contributions resulted in an aggregate gain on our ownership interest of $232 million, which we recorded as part of the equity in net loss of investee line item on our consolidated statement of operations.
Contribution Agreement, Funding and Accounting in 2011
GLOBALFOUNDRIES Singapore Pte. Ltd. (GFS, formerly Chartered) Contribution in 2011
On December 27, 2010, pursuant to the Contribution Agreement, ATIC International Investment Company LLC, an affiliate of ATIC, contributed all of the outstanding Ordinary Shares of GFS to GF. As the result of dilution of our ownership in GF, during the first quarter of 2011 and the year ended December 31, 2011, we recognized a non-cash gain of approximately $492 million, net of certain transaction related charges, in Equity income (loss) and dilution gain in investee, net.
Following the GFS contribution and governance changes described above, we assessed our ability to exercise significant influence over GF and considered factors such as our representation on GF's board of directors, participation in GF's policy-making processes, material intra-entity transactions, interchange of managerial personnel, technological dependency, and the extent of our ownership in relation to ownership by the other shareholders. Based on the results of our assessment, we concluded that we no longer had the ability to exercise significant influence over GF. Accordingly, as of the first quarter of 2011, we changed our method of accounting for our ownership interest in GF from the equity method to the cost method of accounting.
Under the cost method of accounting, we no longer recognized any share of GF's net income or loss in our consolidated statement of operations. In addition, we reviewed the carrying value of our investment in GF for impairment at each reporting period. Impairment indicators, among other factors, include significant deterioration in GF's earnings performance or business prospects, significant changes in the market conditions in which GF operates, and GF's ability to continue as a going concern.
Impairment of Investment in GF
During the fourth quarter of 2011, we identified indicators of impairment, including revised financial projections which we received from GF. The fair value of our GF investment was determined by a valuation analysis of GF's Class A Preferred Shares, utilizing the revised financial projections. We concluded the decline in fair value was other than temporary. As a result of the valuation analysis, we recorded a non-cash impairment charge of approximately $209 million, based on the difference between the carrying value and the fair value of the investment as of December 31, 2011. As of December 31, 2011, our investment balance in GF after impairment was $278 million.
Amended Wafer Supply Agreement
On April 2, 2011, we entered into a first amendment to the WSA. The primary effect of the first amendment was to change the pricing methodology applicable to wafers delivered in 2011 for our microprocessors, including APU products. The first amendment also modified our existing commitments regarding the production of certain GPU and chipset products at GF. Pursuant to the first amendment, GF committed to provide us with, and we committed to purchase, a fixed number of 45nm and 32nm wafers per quarter in 2011. We paid GF a fixed price for 45nm wafers delivered in 2011. Our price for 32nm wafers varied based on the wafer volumes and manufacturing yield of such wafers and was based on good die. In addition, we also agreed to pay an additional quarterly amount to GF during 2012 totaling up to $430 million if GF met specified conditions related to the continued availability of 32nm capacity as of the beginning of 2012. As part of the second amendment described below, GF agreed to waive these quarterly payments, and therefore we are no longer required to pay them.
Amendments to Wafer Supply Agreement and Accounting in 2012
Second Amendment to Wafer Supply Agreement
On March 4, 2012, we entered into a second amendment to the WSA with GF. The primary effect of this second amendment was to modify certain pricing and other terms of the WSA applicable to wafers for our microprocessor and APU products to be delivered by GF to us during 2012. Pursuant to the second amendment, GF committed to provide us with, and we committed to purchase, a fixed number of production wafers in 2012. We paid GF fixed prices for production wafers delivered in 2012.
The second amendment also granted us certain rights to contract with another wafer foundry supplier with respect to specified 28 nm products for a specified period of time. In consideration for these rights, we agreed to pay GF $425 million and transfer to GF all of the capital stock of GF that we owned. As a result of us receiving these rights in the first quarter of 2012, we recorded a charge related to this limited waiver of exclusivity from GF of $703 million consisting of the $425 million cash payment and a $278 million non-cash charge representing the carrying and fair value of the capital stock that we transferred to GF. Pursuant to the second amendment, $150 million of the $425 million was paid on March 5, 2012, $50 million was paid on June 29, 2012 and $50 million was paid on October 1, 2012 with the remaining $175 million paid by December 31, 2012. In addition, as security for the final two payments, we issued a $225 million promissory note to GF.
As a result of the transfer of our shares of GF capital stock, we no longer owned any GF capital stock. Also, we are no longer entitled to designate a director to GF's board, and our designated director resigned effective as of the date of the second amendment. As of March 4, 2012, we were no longer a party to either the Shareholders' Agreement or the Funding Agreement.
Third Amendment to Wafer Supply Agreement
On December 6, 2012, we entered into a third amendment to the WSA with GF. Pursuant to the third amendment, we modified our wafer purchase commitments for the fourth quarter of 2012 under the second amendment to the WSA. In addition, we agreed to certain pricing and other terms of the WSA applicable to wafers for our microprocessor and APU products to be delivered by GF to us during 2013 and through December 31, 2013. Pursuant to the third amendment, we committed to purchase a fixed number of production wafers at negotiated prices in the fourth quarter of 2012 and through December 31, 2013. GF agreed to waive a portion of our wafer purchase commitments for the fourth quarter of 2012. In consideration of this waiver, we agreed to pay GF a fee of $320 million. As a result, we recorded an LCM charge of $273 million for the write-down of inventory to its market value in the fourth quarter of 2012. The cash impact of this $320 million fee will be spread over several quarters, with $80 million paid by December 28, 2012 and $40 million by April 1, 2013. For the remainder of the fee, we issued a $200 million promissory note to GF that matures on December 31, 2013.
GF continues to be a related party of AMD. Our expenses related to GF's wafer manufacturing were $1.2 billion, $904 million and $1.2 billion in 2012, 2011 and 2010. Our expenses related to GF's research and development activities were $49 million, $79 million and $114 million for 2012, 2011 and 2010.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenue, inventories, asset impairments and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management's expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
Management believes the following critical accounting estimates are the most significant to the presentation of our financial statements and require the most difficult, subjective and complex judgments.
Revenue Allowances. We record a provision for estimated sales returns and allowances on product sales for estimated future price reductions and other customer incentives in the same period that the related revenues are recorded. We base these estimates on actual historical sales returns, allowances, historical price reductions, market activity, and other known or anticipated trends and factors. These estimates are subject to management's judgment, and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenues and operating results.
Inventory Valuation. At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analysis of sales levels by product and projections of future demand. These projections assist us in determining the carrying value of our inventory. In addition, we write off inventories that are considered obsolete. We adjust the remaining specific inventory balances to approximate the lower of our standard manufacturing cost or market value. Among other factors, management considers forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and market value. If, in any period, we anticipate future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made. This would have a negative impact on our gross margin in that period. If in any period we are able to sell inventories that were not valued or that had been written off in a previous period, related revenues would be recorded without any offsetting charge to cost of sales, resulting in a net benefit to our gross margin in that period.
Goodwill. Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but rather is tested for impairment at least annually, or more frequently if there are indicators of impairment present.
We perform the annual goodwill impairment analysis as of the first day of the fourth quarter of each fiscal year. We evaluate whether goodwill has been impaired at the reporting unit level by first determining whether the estimated fair value of the reporting unit is less than its carrying value and, if so, by determining whether the implied fair value of goodwill within the reporting unit is less than the carrying value. The implied fair value of a reporting unit is determined through the application of one or more valuation models common to our industry, including the income, market and cost approaches. While market valuation data for comparable companies is gathered and analyzed, we believe that there has not been sufficient comparability between the peer groups and the specific reporting units to allow for the derivation of reliable indications of value using a market approach. Therefore, we have ultimately employed the income approach which requires estimates of future operating results and cash flows of each of the reporting units, discounted using estimated discount rates. The key assumptions we have used to determine the fair value of our reporting units includes projected cash flows for the next 10 years and discount rates ranging from 15% to 30%. Discount rates are based on our weighted-average cost of capital, adjusted for the risks associated with operations. A variance in the discount rate could have a significant impact on the amount of the goodwill impairment charge recorded, if any.
Based on the results of our annual analysis of goodwill in 2012 and 2011, each reporting unit's fair values exceeded their carrying values, indicating that there was no goodwill impairment.
For the annual goodwill impairment analysis in 2012, each reporting unit's estimated fair value exceeded its carrying value ranging from approximately 6% to approximately 170%. The estimated fair value of our Computing Solutions reporting unit exceeded its carrying value by approximately 6%. Total goodwill relating to our Computing Solutions reporting unit was $230 million as of December 29, 2012. The reasons for the small excess of fair value over carrying value of the Computing Solutions reporting unit are primarily due to the recent global economic downturn, the changes in our industry, specifically related to the decline in PC sales, and the decline in our market capitalization. Estimates of fair value for all of our reporting units can be affected by a
variety of external and internal factors. Potential events or circumstances that could reasonably be expected to negatively affect the key assumptions we used in estimating the fair value of our Computing Solutions reporting unit include adverse changes in our industry, increased competition, an inability to successfully introduce new products in the marketplace or to achieve internal forecasts, and further decline in our stock price. If the estimated fair value of our Computing Solutions reporting unit declines due to any of these factors, we may be required to record future goodwill impairment charges.
Income Taxes. In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets, which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our charge to income tax expense, in the form of a valuation allowance, for the deferred tax assets that we estimate will not ultimately be recoverable. We consider past performance, . . .
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