Advanced Micro Devices (NYSE: AMD) has figured out how to report consistently positive earnings and even grow them without boosting revenues. Is this a simple sleight-of-hand magic trick or does the company simply run smoother these days?
In the fourth quarter of 2011, AMD held sales relatively flat year over year, but non-GAAP earnings per share jumped 36%. So far, so good -- there must be operational efficiency improvements at play, right?
On the other hand, the GAAP numbers tell a different story. Last year's earnings of $0.50 per share sunk to a negative $0.24. In that light, this was a terrible quarter.
So what's the real story? Let's dive into the non-GAAP adjustments to figure it out.
Financial gymnastics
The biggest difference by far is a $209 million charge to account for a money-losing investment in the spun-off GlobalFoundries manufacturing operation. Seeing this charge on the income sheet is all you need to appreciate the company's decision to sever that money-losing division in the first place.
Backing out that item alone would instantly turn the red ink black. Then there's a $98 million restructuring charge, which seems steep until you consider the benefits of that change. According to CFO Thomas Seifert, the move delivered $40 million in cost savings last quarter and will pay for itself very shortly.
Oh, and there's that little $283 million legal settlement from last year that just doesn't happen every quarter. That's not the huge antitrust settlement with Intel (Nasdaq: INTC), but a smaller patent infringement case against Samsung regarding graphics technologies from the ATI portfolio.
That whole settlement was recorded as income in the fourth quarter of 2010, though the last installment payment was posted in the just-reported period. And you wonder why we Fools prefer solid cash flows over opaque and easily manipulated earnings.
If you follow the actual cash, AMD saw $187 million in operating cash flows and a nice, round $100 million of free cash. The GlobalFoundries charge is an accounting construct and not money coming out of AMD's bank accounts.
So there's a good deal of non-recurring adjustment going on here. What you don't see is huge swings in stock-based compensation, depreciation and amortization, and other easily manipulated figures. AMD isn't raising huge red flags here.
Let's take some action
In my eyes, AMD's non-GAAP adjustments look both legit and reasonable. In the absence of warning signs of the dark side of the accounting game, I'm happy to conclude that AMD really is running better than it used to. The restructuring program seems to have made an immediate difference.
There's still plenty of room for improvement. Adjusted earnings are bigger than the free cash flows. The faster AMD can wriggle out of the GlobalFoundries position, the better. Speaking of the manufacturing arm, AMD has been held back by low production yields on new products and needs to put those issues firmly behind it. Taiwan Semiconductor Manufacturing (NYSE: TSM) is always available in case GlobalFoundries doesn't cut the mustard, you know. Manufacturing may be a competitive advantage for Intel, but many chip makers simply can't duplicate that success.
The company is in the habit of beating analyst targets, yet share prices fell more than 10% over the last year. The Street thinks shares are priced about right today, and our CAPS community is even a bit skeptical with a two-star rating on the stock (out of five).
That's a lot of wishy-washiness. There are no sure bets in life, or the stock market. AMD's road to solid investment returns is far from clear, but the company has a lot of levers to pull. Moreover, Intel and other bellwethers are sending clear signals that the semiconductor market is due for a general upturn, which would lift this little boat too.
So I'm taking a chance on AMD by placing a thumbs-up CAPScall on the stock today. AMD has treated my All-Star CAPS portfolio very well in the past -- I closed out my last position at a 146% gain for a net score of 107.
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