AMD cuts silicon wafer orders by three quarters, gets billed for almost the full amount anyway

If you're in need of a concrete example of how the chip-making industry is trickier than ever, and how it rewards scale at the expense of flexibility, then please, look no further. AMD has just significantly reduced its order for silicon wafers from its old mate Globalfoundries, in an effort to avoid the inventory surpluses and write-downs that have recently plagued its balance sheet. Instead of buying the originally agreed $500 million-worth of cake trays this quarter, it's now committed to spending just $115 million. Except it was never, ever gonna be that simple. In lieu of reneging on its contract at short notice, AMD will have to pay Globalfoundries a $320 million penalty on top, bringing the final cost of the deal to just $65 million less than what it would have paid for the full order.

On the plus side, of course, that's still a major saving for a company which is going through an intense rough patch (to say the least) and trying to cling to every dime. Besides, AMD managed to get out of paying the fee as a lump sum, while also reducing its obligations for 2013 and agreeing to pay Globalfoundries less for R&D once it shifts to a more standard 28nm process -- so it can't entirely have run out of clout.

Show full PR text

AMD Amends Wafer Supply Agreement With GLOBALFOUNDRIES

Dec 06, 2012 (Marketwire via COMTEX) -- AMD (NYSE: AMD) today announced that it successfully amended its Wafer Supply Agreement (WSA) with GLOBALFOUNDRIES Inc.

The closure of amendment negotiations solidifies AMD's new operating model as communicated at the third quarter 2012 earnings announcement.

To better align with today's PC market dynamics, AMD and GLOBALFOUNDRIES agreed on purchase commitments for fourth quarter 2012 and established fixed pricing and other terms of the WSA which apply to products AMD will purchase from GLOBALFOUNDRIES through Dec. 31, 2013.

"Today's announcement demonstrates that the long-term strategic partnership between AMD and GLOBALFOUNDRIES continues to benefit both companies," said Rory Read, president and chief executive officer, AMD. "GLOBALFOUNDRIES' performance in meeting our delivery requirements in 2012 was strong and they remain a strategic and important foundry partner moving forward. We are committed to develop and grow our business with GLOBALFOUNDRIES, increasing our engagement across our industry leading APU and graphics roadmaps. The newly amended agreement is another step we are taking to further strengthen our relationship with GLOBALFOUNDRIES as well as AMD's financial foundation."

Announcement details:

AMD lowered its wafer purchase commitments for the fourth quarter 2012.
AMD currently estimates that it will purchase wafers from GLOBALFOUNDRIES for approximately $115 million in the fourth quarter 2012 and $1.15 billion in fiscal 2013. AMD has also committed to purchase wafers from GLOBALFOUNDRIES for approximately $250 million during first quarter 2014.
AMD expects to negotiate the remainder of its 2014 purchase commitments from GLOBALFOUNDRIES in 2013.
AMD will make a termination payment of $320 million related to the take-or-pay agreement with GLOBALFOUNDRIES associated with the adjusted wafer purchase commitments in fourth quarter 2012.
The cash impact of the termination fee will spread over several quarters:
$80 million by Dec. 28, 2012;
$40 million by Apr. 1, 2013; and
A $200 million promissory note issued by AMD to GLOBALFOUNDRIES due on Dec. 31, 2013.
The termination fee will result in a net one-time charge of approximately $165 million1 recorded in the fourth quarter 2012.

Separately, as AMD moves to standard 28nm process technology, AMD will reduce future reimbursements to GLOBALFOUNDRIES for certain research and development costs.

As a result of the amendment, AMD expects to return to free cash flow generation in the second half of 2013.