AMD has amended its wafer supply agreement with Globalfoundries. Under the new agrement AMD significantly reduced its wafer purchase commitments, the chip designer currently estimates will will purchase only $115 million in wafers from Globalfoundries in Q4 2012, down from $500 million in the previous agreement. For the whole of 2013, AMD is now looking to spend only $1.15 billion at Globalfoundries, and the wafer purchase commitment for Q1 2014 is currently set at $250 million.

In exchange for agreeing to cancel the previous agreement, Globalfoundries will receive a $320 million termination fee from AMD. The cash impact of the revised deal will be spread over several quarters, AMD will pay $80 million by December 28, 2012 and another $40 million by April 1st, 2013. The remaining $200 million is in the form of a promissory note due December 31st, 2013. 

AMD claims the amendment will help the company to return to free cash flow generation in the second half of 2013.

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 million 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.