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AMD > SEC Filings for AMD > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for ADVANCED MICRO DEVICES INC


6-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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: demand for our products; the growth, change and competitive landscape of the markets in which we participate; our ability to obtain sufficient external financing on favorable terms, or at all; the nature and extent of our future payments to GLOBALFOUNDRIES Inc. (GF) under the wafer supply agreement (WSA) and the materiality of these payments; that PC market conditions will remain challenging for the remainder of 2013; the timing of anticipated restructuring charges, cash expenditures, and operational savings related to our 2012 restructuring plan; the level of international sales as compared to total sales; our ability to sell our auction rate securities within the next twelve months; our cash, cash equivalents and marketable securities balance; that our cash, cash equivalents and marketable securities balance and anticipated cash flow from operations and available external financing will be sufficient to fund our operations including capital expenditures and debt repayment over the next twelve months; our hedging strategy; our long term strategy to drive more than 20% of our revenue from the semi-custom and embedded markets by the fourth quarter of 2013 and to drive 40% to 50% of our revenue from these and other faster growth markets in the long term; and our dependence on a small number of customers. Material factors and assumptions that were applied in making these forward-looking statements include, without limitation, the following: the expected rate of market growth and demand for our products and technologies (and the mix thereof); GF's manufacturing yields and wafer volumes; our expected market share; our expected product costs and average selling price; our overall competitive position and the competitiveness of our current and future products; our ability to introduce new products, consistent with our current roadmap; our ability to make additional investment in research and development and that such opportunities will be available; the expected demand for computers; and the state of credit markets and macroeconomic conditions. Material factors that could cause actual results to differ materially from current expectations include, without limitation, the following: that Intel Corporation's pricing, marketing and rebating programs, product bundling, standard setting, new product introductions or other activities may negatively impact our plans; that we will require additional funding and may be unable to raise sufficient capital on favorable terms, or at all; that customers stop buying our products or materially reduce their operations or demand for our products; that we may be unable to develop, launch and ramp new products and technologies in the volumes that are required by the market at mature yields on a timely basis; that our third party foundry suppliers will be unable to transition our products to advanced manufacturing process technologies in a timely and effective way or to manufacture our products on a timely basis in sufficient quantities and using competitive process technologies; that we will be unable to obtain sufficient manufacturing capacity or components to meet demand for our products or will not fully utilize our projected manufacturing capacity needs at GFs microprocessor manufacturing facilities; that our requirements for wafers will be less than the fixed number of wafers that we agreed to purchase from GF or GF encounters problems that significantly reduce the number of functional die we receive from each wafer; that we are unable to successfully implement our long-term business strategy; that we inaccurately estimate the quantity or type of products that our customers will want in the future or will ultimately end up purchasing, resulting in excess or obsolete inventory; that we are unable to manage the risks related to the use of our third-party distributors and add-in-board (AIB) partners or offer the appropriate incentives to focus them on the sale of our products; that we may be unable to maintain the level of investment in research and development that is required to remain competitive; 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; that global business and economic conditions will not improve or will worsen; that PC market conditions do not improve or will worsen; that demand for computers will be lower than currently expected; and the effect of political or economic instability, domestically or internationally, on our sales or supply chain.

For a discussion of 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 33 and the "Financial Condition" section beginning on page 26 and other risks and uncertainties 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, ATI and the ATI logo, AMD Opteron, Mobility, Radeon, 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. Sony is a trademark of Sony Corporation and PlayStation is a registered trademark of Sony Computer Entertainment Inc. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners.


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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 29, 2012 and December 31, 2011, and for each of the three years in the period ended December 29, 2012 as filed in our Annual Report on Form 10-K for the year ended December 29, 2012.

Overview

We are a global semiconductor company with facilities around the world. Within the global semiconductor industry, we offer primarily:

• x86 microprocessors, as standalone devices or as incorporated as an accelerated processing unit (APU), for the commercial and consumer markets; embedded microprocessors for commercial, commercial client and consumer markets; chipsets; as well as dense servers; and

• 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 section, we will describe the general financial condition and the results of operations of Advanced Micro Devices, Inc. and its wholly-owned subsidiaries, including a discussion of our results of operations for the quarter ended March 30, 2013 compared to the quarter ended December 29, 2012 and the quarter ended March 31, 2012, an analysis of changes in our financial condition and a discussion of our contractual obligations. References in this report to "us," our" or "AMD" include these consolidated operating results.

During the first quarter of 2013, we continued to execute our three-step plan to stabilize, accelerate and ultimately transform our business model in response to the changing dynamics of the PC market. As of the end of the first quarter of 2013, we had largely completed our restructuring activities, designed to reduce operating costs and improve efficiency. Also, during the first quarter of 2013, we continued to focus on the second step of our plan, which is accelerating our business in 2013 by executing our 2013 product roadmap. We started volume shipments of our next generation A-Series APU, codenamed "Kabini," designed for ultrathin notebooks and small form factor machines in the entry and mainstream segments. We also launched our next generation AMD Elite A-Series APUs, codenamed "Richland," designed to deliver innovative user experiences such as facial log-in and gesture recognition. With respect to our graphics products, we announced our Radeon™ HD 8000M Series graphics, a new series of discrete graphics processors for performance gaming. We also launched AMD FirePro™ R5000 remote workstation-class graphics card, designed to power remote 3D-graphics workflows and full computing experiences over IP networks for data center environments. Also, during the first quarter of 2013, Sony announced that it would use a semi-custom APU based on our "Jaguar" central processing unit core and next-generation Radeon graphics in its Sony PlayStation®4 game console system.

Net revenue for the first quarter of 2013 was $1.09 billion, a 31% decrease from the first quarter of 2012 and a 6% decrease compared to the fourth quarter of 2012. Although we continued to experience a challenging macroeconomic environment and weak consumer demand for end-user PC products, we were able to improve our operating performance in the first quarter of 2013 compared to the fourth quarter of 2012. Our operating loss for the first quarter of 2013 was $98 million compared to $422 million in the fourth quarter of 2012. The improvement in operating performance in the first quarter of 2013 compared to the fourth quarter of 2012 was primarily due to the absence of a lower cost or market (LCM) charge related to GLOBALFOUNDRIES' (GF's) waiver of our take-or-pay obligations taken in the fourth quarter of 2012. In addition, our operating results for the first quarter of 2013 included restructuring and other special charges, net, of $47 million and a $5 million charge for amortization of acquired intangible assets. Our operating results for the fourth quarter of 2012 included restructuring and other special charges, net, of $90 million and a $4 million charge for amortization of acquired intangible assets. Absent the effect of these charges, which we believe are not indicative of our ongoing operating performance, our operating loss would have been $46 million for the first quarter of 2013 compared to operating loss of $55 million for the fourth quarter of 2012. This improvement in operating performance was primarily due to lower operating expenses. Also, despite the current macroeconomic environment, we continued to manage operating expenses, which continued to decrease in the first quarter of 2013 compared to the first and fourth quarters of 2012, as well as our balance of cash, cash equivalents and marketable securities, including the long term marketable securities, which as of March 30, 2013, was $1.2 billion, flat compared to December 29, 2012.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed 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 condensed consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenue, inventories, asset


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impairments, long-lived assets including acquired intangible assets 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 there have been no significant changes during the quarter ended March 30, 2013 to the items that we disclosed as our critical accounting estimates in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 29, 2012.

Results of Operations

Management, including the Chief Operating Decision Maker, who is our Chief Executive Officer, reviews and assesses our operating performance using segment net revenue and operating income (loss) before interest, other income (expense), net, and income taxes. These performance measures include the allocation of expenses to the operating segments based on management's judgment.

We use the following two reportable operating segments:

• the Computing Solutions segment, which includes microprocessors, as standalone devices or as incorporated as an APU, chipsets, embedded processors and dense servers; and

• the Graphics segment, which includes graphics, video and multimedia products developed for use in desktop and notebook computers, including home media PCs, professional workstations and servers as well as revenue received in connection with the development and sale of game console systems that incorporate our graphics technology.

In addition to these reportable segments, we have an All Other category, which is not a reportable segment. This category includes certain expenses and credits that were not allocated to any of the operating segments because management does not consider these expenses and credits in evaluating the performance of the operating segments. Also included in this category are amortization of acquired intangible assets, employee stock-based compensation expense, restructuring and other special charges and a charge related to the limited waiver of exclusivity from GF.

We use a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters ended March 30, 2013, December 29, 2012, and March 31, 2012 consisted of 13 weeks.

The following table provides a summary of net revenue and operating income
(loss) by segment and category:

                                                   Quarter Ended
                                   March 30,       December 29,        March 31,
                                     2013              2012              2012
                                                   (In millions)
       Net revenue:
       Computing Solutions        $       751      $         829      $     1,203
       Graphics                           337                326              382
       All Other                           -                  -                -

       Total net revenue          $     1,088      $       1,155      $     1,585

       Operating income (loss):
       Computing Solutions        $       (39 )    $        (323 )    $       124
       Graphics                            16                 22               34
       All Other                          (75 )             (121 )           (738 )

       Total operating loss       $       (98 )    $        (422 )    $      (580 )


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Computing Solutions

Computing Solutions net revenue of $751 million in the first quarter of 2013 decreased by 38% compared to net revenue of $1,203 million in the first quarter of 2012 as a result of a 32% decrease in unit shipments and a 9% decrease in average selling price. Unit shipments of all categories of products decreased. The decrease in the average selling price was primarily attributable to a decrease in average selling price of our microprocessors and chipsets. Unit shipments and average selling price of our products decreased due to challenging market conditions and the increasing popularity of tablets as a consumer device of choice, which resulted in weaker demand for our products.

Computing Solutions net revenue of $751 million in the first quarter of 2013 decreased by 9% compared to $829 million in the fourth quarter of 2012 as a result of a 13% decrease in unit shipments, partially offset by a 4% increase in average selling price. The decrease in unit shipments was primarily attributable to a decrease in unit shipments of our microprocessor products for mobile devices and desktop PCs as well as our chipset products. Unit shipments decreased due to decreased demand as a result of seasonality and the market conditions described above. The increase in average selling price was attributable to an increase in average selling price of our microprocessor products primarily due to a shift in our product mix to higher end microprocessor products.

Computing Solutions operating loss was $39 million in the first quarter of 2013 compared to operating income of $124 million in the first quarter of 2012. The decline in operating results was primarily due to the decrease in revenue referenced above, partially offset by a $175 million decrease in cost of sales, a $69 million decrease in research and development expenses and a $46 million decrease in marketing, general and administrative expenses. Cost of sales decreased primarily due to lower unit shipments in the first quarter of 2013 compared to the first quarter of 2012 and a $20 million benefit from sales of previously reserved inventory in the first quarter of 2013. Research and development expenses and marketing, general and administrative expenses decreased for the reasons set forth under "Expenses," below.

Computing Solutions operating loss was $39 million in the first quarter of 2013 compared to an operating loss of $323 million in the fourth quarter of 2012. The improvement in operating results was primarily due to a $316 million decrease in cost of sales, a $22 million decrease in research and development expenses and a $10 million decrease in marketing, general and administrative expenses, partially offset by the decrease in revenue referenced above. Cost of sales decreased primarily due to the absence in the first quarter of 2013 of the $273 million LCM charge taken in the fourth quarter of 2012 related to the fee for GF's waiver of a portion of our wafer purchase obligations for the fourth quarter of 2012, lower unit shipments in the first quarter of 2013 compared to the fourth quarter of 2012 and a $20 million benefit from sales of previously reserved inventory in the first quarter of 2013. Research and development expenses and marketing, general and administrative expenses decreased for the reasons set forth under "Expenses," below.

Graphics

Graphics net revenue of $337 million in the first quarter of 2013 decreased by 12% compared to net revenue of $382 million in the first quarter of 2012. The decrease was due to a 24% decrease in net revenue from sales of GPU products, partially offset by an increase in net revenue received in connection with the sale of game console systems that incorporate our graphics technology. Net revenue from sales of GPU products decreased due to lower unit shipments, partially offset by an increase in average selling price. GPU unit shipments decreased due to challenging market conditions, which adversely impacted demand. GPU average selling price increased primarily due to improved product mix. The increase in net revenue in connection with the sale of game console systems that incorporate our graphics technology was primarily attributable to a milestone payment received in the first quarter of 2013.

Graphics net revenue of $337 million in the first quarter of 2013 increased by 3% compared to net revenue of $326 million in the fourth quarter of 2012. The increase was primarily due to an increase in net revenue received in connection with the sale of game console systems that incorporate our graphics technology. The increase in net revenue in connection with the sale of game console systems that incorporate our graphics technology was primarily attributable to a milestone payment received in the first quarter of 2013. Net revenue from sales of GPU products remained flat due to lower unit shipments, which were substantially offset by increased average selling price. GPU unit shipments decreased due to challenging market conditions. GPU average selling price increased primarily due to improved product mix.

Graphics operating income was $16 million in the first quarter of 2013 compared to operating income of $34 million in the first quarter of 2012. The decline in operating results was primarily due to the decrease in net revenue referenced above and a $12 million increase in research and development expenses, partially offset by a $39 million decrease in cost of sales. Research and development expenses increased for the reasons set forth under "Expenses" below. The decrease in cost of sales was primarily due to lower GPU unit shipments in the first quarter of 2013 compared to the first quarter of 2012.

Graphics operating income was $16 million in the first quarter of 2013 compared to operating income of $22 million in the fourth quarter of 2012. The decline in operating results was primarily due to a $21 million increase in research and development expenses and a $10 million increase in marketing, general and administrative expenses, partially offset by the increase in net revenue referenced above and a $16 million decrease in cost of sales. Research and development expenses and marketing, general and administrative expenses increased for the reasons set forth under "Expenses" below. The decrease in cost of sales was primarily due to lower GPU unit shipments in the first quarter of 2013 compared to the fourth quarter of 2012.


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All Other

All Other operating loss of $75 million in the first quarter of 2013 included net restructuring and other special charges of $47 million, stock-based compensation expense of $24 million and $5 million related to amortization of acquired intangible assets.

All Other operating loss of $738 million in the first quarter of 2012 included a $703 million charge related to the limited waiver of exclusivity from GF, stock-based compensation expense of $21 million, $8 million of net restructuring and other special charges, $6 million of acquisition costs related to SeaMicro and $1 million related to amortization of acquired intangible assets.

All Other operating loss of $121 million in the fourth quarter of 2012 primarily included net restructuring and other special charges of $90 million, stock-based compensation expense of $23 million and $4 million related to amortization of acquired intangible assets.

International Sales

International sales as a percentage of net revenue were 92% in the first quarter of 2013 and 93% in the first and fourth quarters of 2012. We expect that international sales will continue to be a significant portion of total sales in the foreseeable future. Substantially all of our sales transactions were denominated in U.S. dollars.

Comparison of Gross Margin, Expenses, Interest Income, Interest Expense, Other
Income (Expense), Net and Income Taxes

The following is a summary of certain condensed consolidated statement of
operations data for the periods indicated:



                                                                      Quarter Ended
                                                   March 30,          December 29,           March 31,
                                                     2013                 2012                 2012
                                                          (In millions except for percentages)
Cost of sales                                     $       643         $         977         $     1,558
Gross margin                                              445                   178                  27
Gross margin percentage                                    41 %                  15 %                 2 %
Research and development                                  312                   313                 368
Marketing, general and administrative                     179                   193                 230
Amortization of acquired intangible assets                  5                     4                   1
Restructuring and other special charges, net               47                    90                   8
Interest income                                             1                     2                   2
Interest expense                                          (44 )                 (45 )               (43 )
Other income (expense), net                                (3 )                  (4 )                (1 )
Provision (benefit) for income taxes                        2                     4                 (32 )

Gross Margin

Gross margin as a percentage of net revenue was 41% in the first quarter of 2013 compared to 2% in the first quarter of 2012. Gross margin in the first quarter of 2012 included a $703 million charge related to the limited waiver of exclusivity from GF. Absent the effect of this charge, which we believe is not indicative of our ongoing operating performance, our gross margin would have been 46% in the first quarter of 2012 compared to 41% in the first quarter of 2013. The decline in gross margin was primarily due to lower average selling price for our products and an unfavorable product mix. In addition, gross margin in the first quarter of 2013 included a $20 million benefit from sales of previously reserved inventory, which accounted for two gross margin percentage points.


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Gross margin as a percentage of net revenue was 41% in the first quarter of 2013 compared to 15% in the fourth quarter of 2012. Gross margin in the fourth quarter of 2012 included the LCM charge of $273 million. Absent the effect of this charge, which we believe is not indicative of our ongoing operating performance, our gross margin would have been 39% in the fourth quarter of 2012 compared to 41% in first quarter of 2013. Gross margin in the first quarter of 2013 included a $20 million benefit from sales of previously reserved inventory, which accounted for two gross margin percentage points. During the first quarter of 2013 compared to the fourth quarter of 2012, higher average selling price for our products was offset by an unfavorable product mix.

Expenses

Research and Development Expenses

Research and development expenses of $312 million in the first quarter of 2013 decreased by $56 million, or 15%, compared to $368 million in the first quarter of 2012, reflecting the effect of the 2012 restructuring plan and our efforts to reduce operating expenses. The decrease was primarily due to a $69 million decrease in research and development expenses attributable to our Computing Solutions segment, partially offset by a $12 million increase in research and development expenses attributable to our Graphics segment. Research and development expenses attributable to our Computing Solutions segment decreased as a result of a $39 million decrease in manufacturing process technology expenses related to GF, a $25 million decrease in product engineering and design . . .

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