AMD faces $948M in Q2 charges on layoffs, ATI deal

One analyst suggests AMD may need to take further restructuring charges and that a manufacturing partnership may be announced soon as the company continues to seek Q3 profitability.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 7/11/2008

As its stock continued to get slammed, Advanced Micro Devices Inc today announced nearly $1 billion in various Q2 charges related to the company’s ATI acquisition, its previously announced layoffs, and its investments.

In a SEC (Securities Exchange Commission) filing this morning, the struggling company said it performed an interim impairment analysis of its goodwill and intangible assets associated with its handheld and DTV reporting units of its consumer electronics segment that it acquired from ATI Technologies. AMD said the reporting units “have not performed in accordance with the company's expectations.”

On that, the company estimated impairment charges of $880 million for its Q2, ended June 28. Wall Street watchers have suggested that AMD overpaid for the GPU maker since AMD first announced a materials charge on the buy in December 2007. AMD paid $5.4 billion for ATI in October 2006.

To be true, the combined AMD-ATI company has taken GPU market share from competitor Nvidia Corp. AMD’s was also recently credited by iSuppli Corp as chipping away at its MPU rival Intel Corp’s overall market share. 

Meanwhile, the company continues to seek profitability after CFO Bob Rivet late last year promised investors the company would be back in the black in Q3. In an effort to reach profitability, AMD announced a 10% workforce reduction in April as it downgraded Q1 revenue expectations. Approximately 1,650 jobs will be cut as part of the effort by the end of the September quarter.

AMD said in its SEC filing today that on the layoffs the company expects to record a restructuring charge of approximately $32 million for Q2, primarily related to employee severance payments.

In addition, AMD said it expects to incur other-than-temporary investment impairment charges of approximately $36 million related to its short-term investments. These charges consist of a $24 million charge for AMD’s investment in Spansion Inc, which it helped found in 2005, and a $12 million charge related to AMD’s holdings in auction rate securities.

“With $1.6 billion in goodwill and intangible assets still in books, we believe AMD may need to take further restructuring charges,” Tim Luke, a semiconductor market analyst at Lehman Brothers, said in a research note this morning. “While the news may impact sentiment negatively, our checks suggest that AMD’s Q2 may be trending broadly in line to slightly below guidance of revenues down seasonally (down 4 to 5% quarter over quarter) in what remains a back-end loaded June quarter (approximately 46% of microprocessor Q2 revenues are recorded in June).”

AMD further said in the SEC filing that it expects to recognize a gain in connection with sales of certain 200-mm wafer fabrication tools. The company estimated that the Q2 gross margin impact will be approximately $190 million.

The tools sale has reignited interest in AMD’s asset-lite manufacturing plans. The company has been extremely tight-lipped about its manufacturing strategy, with executives avoiding questions on fab plans at its December financial analysts meeting, as well as its May stockholder meeting. AMD has also yet to make firm plans for the more than $1 billion in incentives New York State has offered the company for its slated fab there. 

Several industry watchers have suggested AMD move to a fabless model to reach profitability and have made note of AMD’s tight partnership with Taiwan Semiconductor Manufacturing Co, the semiconductor industry’s No. 1 foundry.

“We believe negotiations in ‘asset-smart’ [asset-lite] strategy are ongoing with possible partners. We believe AMD is likely to provide some form of update on asset smart with its Q2 earnings call,” Luke said, adding that Lehman Brothers believes management is still focused on seeing some type of deal in Q3.

“We believe updates on AMD's planned move to an asset-smart model is a key catalyst for the stock given ongoing balance-sheet challenges. We highlight that AMD may clearly need to secure an asset-light partner to bolster its stretched balance sheet and develop a manufacturing strategy for 32 nm,” Luke continued.

Indeed, AMD’s stock has not escaped the brunt of the company’s string of bad news, with today’s announced charges adding to its fall. The stock, after dropping below the $5 mark to a new 16-year low Thursday, was trading at $4.72 as of 12:20 pm eastern today. In contrast, AMD’s stock closed at $14.56 on July 11, 2007.

“Going forward, for Q3 negotiations on the asset-smart deal remains a key focus,” Luke said. “We believe that broader ramp of Barcelona (B3 patch) should help the [second half] outlook while Puma in notebooks is seeing good traction with HP and Toshiba. AMD’s 45-nm server product Shanghai appears to be on track for Q4. Checks suggest that AMD continues to gain traction in graphics with the launch of RV770; however, it may have limited impact on Q2 financials given a release just a week before the quarter closed. We expect solid traction in graphics for Q3 given the strong reception of the RV770 offering. Overall, current order trends appear to suggest Q3 is trending in line with seasonality.”

AMD reported Q1 revenue of $1.5 billion, down 15% quarter over quarter, in April. At the time, AMD said it expected Q2 revenue to decrease in line with seasonality. AMD is scheduled to report its Q2 numbers on July 17.