Struggling chipmaker AMD said that it will pay $320 million to terminate its wafer manufacturing agreement with Globalfoundries for the fourth quarter.
The news comes as AMD struggles to compete against Intel and find a mobile strategy. As a result, AMD has been whacked by weak PC sales. Previous agreements with Globalfoundries, formerly the manufacturing unit of AMD, were based on higher demand assumptions.
According to a statement, AMD renegotiated its purchase commitments for the fourth quarter and established fixed pricing and terms for 2013. AMD also agreed to how many chips it will buy in 2013. AMD will take a charge of $165 million in the fourth quarter.
The revamped deal with Globalfoundries isn't all that surprising. AMD is in a cash crunch and analysts said that the company's cash position could land somewhere between $700 million to $1.1 billion, a range that is below management's comfort zone.
Among the moving parts:
- AMD said it will buy fewer wafers in the fourth quarter.
- The company will buy $115 million of chips from Globalfoundries in the fourth quarter and $1.15 billion in 2013.
- AMD will buy $250 million of processors from Globalfoundries in the first quarter of 2014.
- 2014 purchase commitments will be set in 2013.
- The termination fee will be spread out over the quarters ahead. AMD will pay Globalfoundries $80 million by Dec. 28, $40 million by April 1 and a $200 million note issued by AMD due on Dec. 31.
Those payments appear to be structured to give AMD time to mend its cash position and improve its results by the end of 2013.
Analysts expect AMD to burn through cash in the quarters ahead.
Evercore recently outlined AMD's cash prospects in a chart. These assumptions were made before the latest Globalfoundries deal.