Science & Technology
Science and Technology
Science and Technology
Tue, November 23, 2010
Fitch Upgrades Advanced Micro Devices' IDR to 'B'; Outlook Stable
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has upgraded the following Issuer Default Rating *(IDR) and outstanding debt rating for Advanced Micro Devices Inc. (NYSE: AMD):
--Long-term IDR to 'B' from 'B-';
--Senior unsecured debt upgraded to 'B+/RR3' from 'B-/RR4'.
The Rating Outlook is Stable. Fitch's actions affect approximately $2.2 billion of total debt.
The rating and Outlook reflects:
--Higher operating profitability, which Fitch believes is more sustainable from lower operating expenses following AMD's restructuring actions taken over the past two years; and
--Strengthening free cash flow profile from meaningfully reduced capital spending.
Fitch expects that AMD's fixed cost reductions over the past two years and outsourced manufacturing model should enable the company to maintain operating profitability at higher than historical levels. Fitch estimates AMD's operating income will remain in the mid to high single digits beyond the near-term, versus operating losses in each of the past three years. This incorporates Fitch's expectation that AMD's outsourced manufacturing model will yield more consistent gross margins in the range of 40%-45%. Fitch also believes AMD's technology roadmap, including its converged micro and graphics processor devices, could strengthen the company's competitiveness in more profitable markets, resulting in a richer sales mix.
As a result, Fitch expects annual operating EBITDA will remain near $1 billion over the intermediate-term versus $250 million as recently as 2007. Despite these positive operating trends, Fitch anticipates AMD's operating performance will remain cyclical and subject to meaningful selling price erosion and weaker than expected demand from technological obsolescence, driven by Intel Corp.'s (Intel) superior financial flexibility and cumulative investment advantage. Fitch believes AMD's longer-term market share of the microprocessor market will remain near 20% and growth in certain markets, particularly consumer notebooks, may be tempered by robust growth of smaller form factor mobile devices (i.e. tablets), markets in which AMD currently has limited share.
In conjunction with higher profitability, Fitch believes AMD's free cash flow profile has strengthened from meaningfully lower annual capital spending requirements following AMD's formation of its manufacturing joint venture, GLOBALFOUNDRIES (GF). Annual capital spending requirements are $150 million-$250 million, versus an average of more than $1 billion over the last four years. As a result, Fitch estimates AMD could generate modestly positive free cash flow in 2010 and more than $250 million of annual free cash flow beyond the near term.
As part of AMD's agreements related to GF, the company will likely continue to not participate in capital calls to fund capital expenditures at GF. AMD's foundry partner, Advanced Technology Investment Corporation (ATIC), is required to fund its pro rata share of quarterly capital calls, as well as the portion AMD elects not to fund. This results in the ongoing dilution of AMD's economic ownership in GF. As a result, AMD's lower ongoing annual capital spending requirements are primarily for maintenance. Fitch expects AMD's 2011 capital spending budget of approximately $220 million to be one-time in nature and provide for retooling AMD's assembly and test facility for volume production of accelerated processing units (APU).
Despite the positive impact of its outsourcing relationship with GF on AMD's free cash flow profile, Fitch believes AMD's reliance on GF as its sole supplier of front end manufacturing for microprocessors, which continues to represent the majority of AMD's total sales, is a meaningful intermediate-term concern. Audited financial statements for the JV are not publicly available even as GF aggressively expands capacity and technological capabilities in a race with foundry market leader, Taiwan Semiconductor Manufacturing Corporation (TSMC), Samsung Semiconductor, Inc., and other established foundries for technology leadership within a consolidating market. GF aspires to double 2010 sales (an AMD reported approximately $2.5 billion for the first three quarters of 2010) by the end of 2012. Fitch believes this heightens execution risk by requiring the simultaneous development of multiple process technologies.
Pursuant to the Funding Agreement related to GF, ATIC committed to additional equity funding $3.6 billion to $6 billion in phases through roughly 2010, of which Fitch estimates ATIC has provided $637 million in 2010. Nonetheless, Fitch remains unclear about ATIC's longer-term commitment should GF stumble along its technology roadmap or be meaningfully out-invested by competitors, reducing the probability of GF achieving or maintaining technology leadership. Were ATIC to limit equity contributions to the lower end of the committed range, Fitch believes AMD could be compelled to support capital spending at GF while shopping for an alternate partner or transferring production to another foundry. Fitch believes this process could take up to one year and result in the resumption of significant cash usage over the pro forma short-term. Nonetheless, the ratings and outlook incorporate Fitch's belief that GF's current sales growth and growth objectives mitigate the potential for GF experiencing distress over the near-term.
The ratings continue to be supported by:
--AMD's essential role within the microprocessor market as a credible second source supplier;
--Increasingly diversified product and customer portfolio, including design wins with all major personal computer (PC) original equipment manufacturers (OEMS) and solid momentum in graphics processing units (GPU); and
--Improving operating performance and free cash flow profile.
Ratings concerns continue to center on:
--Intel's ongoing dominance of the microprocessor market, resulting in superior financial flexibility that Fitch believes will enable Intel to maintain its cost and technology leadership over the longer-term;
--AMD's greater than industry average R&D investment requirements, which Fitch believes will remain higher than 20% of sales; and
--AMD's reliance on GF as its sole provider of front end manufacturing capacity for MPUs.
Fitch may take negative rating actions if AMD continues to use cash despite its lower capital intensity. Fitch believes this scenario would be driven by meaningfully weaker than anticipated commercial acceptance of next generation products and suggesting a failing technology roadmap or execution missteps at its foundry partner. Conversely, Fitch may take additional positive rating actions on stronger than anticipated annual free cash flow used to reduce AMD's net debt position or diversification of its foundry suppliers.
While more subdued consumer spending is expected to slow personal computer (PC) unit growth in fourth quarter-2010 (4Q'10), Fitch still believes AMD's revenues will grow 20% to a record approximately $6.5 billion from approximately $5.4 billion in 2009. Aside from overall recovering end markets, AMD's stronger graphics processing capabilities, increased customer penetration in the notebook microprocessor market, and robust indirect channel sales in China drove sales growth. Importantly, average selling prices remained relatively stable, supporting the competitiveness of AMD's current technology offerings and healthy inventory levels. Beyond 2010, Fitch believes consumer caution will continue but that solid growth in developing economies, particularly China, and the company's richer sales mix products should support at least low to mid single digit revenue growth in 2011 and 2012.
Fitch believes AMD's ongoing ability to execute on its next generation product roadmap remains a highly significant variable to AMD's revenue picture. However, GF sharing in the development of leading edge capabilities should reduce this execution risk. Along with the aforementioned cost reductions, AMD should be able to maintain lower absolute levels of R&D and achieve break even operating profitability at current sales levels and gross margins at the lower end of the recent 40%-45% range. As a result, higher and more consistent profitability within the context of lower debt levels than a year ago should yield strengthened albeit still cyclical credit protection measures. Fitch estimates total leverage (total debt to operating EBITDA) will end 2010 below 3x with interest coverage (operating EBITDA to interest expense) at greater than 4x.
Fitch believes AMD's liquidity as of September 25, 2010 was adequate and consisted of approximately $1.7 billion of cash and cash equivalents. AMD has no revolving credit facility. While historically meaningfully negative, Fitch estimates annual free cash flow will augment liquidity in the near-term, driven by higher profitability and healthy inventory levels.
Total debt was $2.2 billion as of Sept. 25, 2010, consisting primarily of:
--$485 million of 5.75% senior unsecured convertible notes due 2012;
--$780 million of 6.0% senior unsecured convertible notes due 2015 (par amount excluding effect of associated discounts);
--$500 million of 8.125% senior unsecured notes due 2017 (par amount excluding effect of associated discounts);
--$500 million of 7.75% senior unsecured notes due 2020.
AMD's Recovery Ratings (RRs) reflect Fitch's belief that the company would be reorganized rather than liquidated in a bankruptcy scenario. This is given Fitch's estimates that AMD's reorganization value of approximately $2.5 billion exceeds a projected liquidation value. Furthermore, Fitch believes AMD's role as a credible viable alternative microprocessor supplier to Intel also supports reorganization rather than liquidation of AMD in a bankruptcy scenario. To arrive at a reorganization value, Fitch assumes a 5x reorganization multiple, and applies it to its estimate of distressed operating EBITDA of $300 million, which covers estimated annual fixed charges, resulting in an adjusted reorganization value of $1.5 billion after subtracting administrative claims.
Based upon these assumptions, Fitch estimates recovery for the estimated $2.2 billion of senior unsecured debt has increased to 51%-70%, resulting in Recovery Ratings of 'RR3'.
Additional information is available at '[ www.fitchratings.com ]'
Applicable Criteria and Related Research:
--'Short Term Ratings for Corporate Finance' (Nov. 2, 2010);
--'Corporate Rating Methodology' (Aug. 13, 2010);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 24, 2009);
--'Evaluating Corporate Governance' (Dec. 12, 2007);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007);
--'Cash Flow Measure in Corporate Analysis- Amended' (Oct. 12, 2005).
Applicable Criteria and Related Research:
Short-Term Ratings for Corporate Finance
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]
Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489006 ]
Evaluating Corporate Governance
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=363502 ]
Liquidity Considerations for Corporate Issuers
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666 ]
Cash Flow Measures in Corporate Analysis
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=243758 ]
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '[ WWW.FITCHRATINGS.COM ]'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
