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CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the following ratings for Advanced Micro Devices Inc. (NYSE: AMD):

--Long-term Issuer Default Rating (IDR) at 'B';

--Senior unsecured debt at 'B+/RR3'.

The Rating Outlook is Positive. Fitch's actions affect approximately $2 billion of total debt.

The Positive Outlook incorporates the potential for:

i) Consistent annual free cash flow;

ii) Ongoing debt reduction from free cash flow; and

iii) Meaningful diversification of AMD's foundry partners.

Fitch believes annual free cash flow will range from breakeven to $500 million through most semiconductor cycles, driven by AMD's fables manufacturing model and lower break-even profitability level from historical restructuring. Fitch estimates free cash flow exceeded $300 million for the latest 12 months (LTM) ended Oct. 1, 2011 and $350 million in fiscal 2010 versus significant historical cash usage.

Consistent free cash flow will enable AMD to continue reducing debt, since the company guided that it will deleverage the balance sheet in order to strengthen its credit profile. AMD reduced the face value of its debt by approximately $150 million though open market repurchases of its convertible notes due 2015 during the quarter ended Oct. 1, 2011.

Fitch estimates the company will have adequate cash available to meaningfully reduce debt by repaying $485 million of convertible notes maturing in August 2012. The company guided that it wants to maintain $1.5 billion of cash on the balance sheet. However, with approximately $1.8 billion of available cash as of Oct. 1, 2011 and aforementioned expectations for free cash flow, Fitch believes cash balances could approach $2 billion by August 2012.

Fitch believes the company's diversification of foundry partners essential to improving AMD's ability to keep pace with Intel Corporation's (Intel) migrations to next generation technology nodes. GLOBALFOUDRIES (GF) currently manufactures the majority of AMD's microprocessors, including the company's accelerated processing units (APU), but GF's manufacturing missteps during the third quarter constrained AMD's supply of mobility APUs. However, AMD's expansion of its partnership with Taiwan Semiconductor Manufacturing Corp. (TSMC) and qualifications with other foundries should provide AMD with second source suppliers.

Fitch believes AMD's revenue growth will be constrained by slowing unit demand in mature markets, cannibalization by media tablets, and Fitch's expectations for intensifying pricing pressures heading into 2012. Positively, AMD should benefit from robust growth in emerging markets, particularly China, where the company has higher market share. AMD's new APU products, particularly in mobility markets, command higher average selling prices (ASP) and should provide some support to revenue levels.

Profitability has improved, but Fitch anticipates operating profitability will remain in the break-even to upper single digit range, depending upon highly cyclical revenue levels.

AMD recently announced another round of restructuring, which should lower annual operating expenses by $115 million beginning in 2012. At the same time, AMD's operating leverage remains substantial with research and development (R&D) critical to next generation technology and product development and gross margins largely a function of product mix.

Credit protection measures remain solid for the rating, albeit within a cyclical context. Fitch estimates total leverage (total debt to operating EBITDA) for the LTM ended Oct. 1, 2011 was approximately 2.6 times (x) and should remain in the 2x-8x range, versus significantly higher levels historically. Interest coverage (operating EBITDA to interest expense) remains near 5x versus well below 1x historically.

The ratings continue to reflect AMD's:

--Strengthened FCF profile: AMD's significantly lower capital intensity will drive higher annual FCF. AMD's manufacturing assets divestiture reduces capital spending as a percentage of sales to the mid-single digits versus 10% to 30% historically. Fitch expects AMD's annual FCF to range from breakeven to $500 million through a normalized semiconductor cycle.

--AMD's essential role within the microprocessor market as a credible second source supplier. Fitch believes AMD's role as the MPU market's only credible second-source supplier with significant production and design scale provides a floor for market share; and

--Slightly lower operating volatility from reduced operating leverage associated with the transformation to a fables semiconductor maker. Furthermore, AMD's restructuring actions over recent years has reduced fixed costs, resulting in lower operating leverage. AMD's announced its latest round of restructuring on Nov. 3, 2011, which will reduce head count by 1,400. AMD expects cash costs related to the plan will be $56 million in 2011, $31 million in 2012, and $15 million in 2013 and reduce annual operating expenses by approximately $100 million. Nonetheless, AMD's revenues will continue to be highly cyclical, due to the company's competitive position and substantial risks associated with MPU technology life cycles.

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;

--Significant investment requirements and technology platform and product risk associated with the microprocessor (MPU) market. Fitch expects AMD's R&D will remain in excess of 20% of revenues, which is higher than the industry average of mid teens; and

--AMD's limited market share in servers and nascent participation within smart phones and media tablets, which Fitch believes will drive the majority of microprocessor growth over the intermediate-term. Fitch believes AMD's strong share of developing markets, most notably China, could offset this concentration.

The ratings may be upgraded in the event of:

--Ongoing debt reduction from free cash flow;

--Consistent annual free cash flow at the higher end of Fitch's expected range; or

--Meaningful diversification of foundry suppliers could result in positive rating actions.

Negative actions could occur if AMD uses significant amounts of cash despite lower capital intensity. Fitch believes these actions likely would be the result of: i) meaningfully weaker than anticipated adoption of AMD's APUs; or ii) drawn out execution missteps by foundry partners.

As of Oct. 1, 2011, Fitch believes AMD's liquidity is sufficient and supported by $1.8 billion of cash and cash equivalents. The company has no revolving credit facility (RCF) and recently wound down its receivables sales facility with IBM. Fitch's expectation for annual free cash flow of up to $500 million also supports the company's liquidity. The ratings incorporate the company meeting at least the majority of its upcoming $485 million convertible note maturing in 2012 with available cash.

Total debt was approximately $2.1 billion as of Oct. 1, 2011 and consisted of:

--$485 million of 5.75% senior unsecured convertible notes due 2012;

--$630 million of 6% senior unsecured convertible notes due 2015;

--$500 million of 8.125% senior unsecured convertible notes due 2017;

--$500 million of 7.75% senior unsecured convertible notes due 2020; and

--$31 million of capital leases.

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 $1.5 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 $290 million, which covers estimated annual fixed charges, resulting in an adjusted reorganization value of $1.3 billion after subtracting administrative claims.

Based upon these assumptions, Fitch estimates recovery for the estimated $2.1 billion of senior unsecured debt has increased to 51%-70%, resulting in Recovery Ratings of 'RR3'.

Additional information is available at '[ www.fitchratings.com ]'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

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 Nonfinancial Corporate Issuers', Nov. 24, 2009;

--'Evaluating Corporate Governance', Dec. 12, 2007;

--'Liquidity Considerations for Corporate Issuers', June 12, 2007;

--'Cash Flow Measures in Corporate Analysis - Amended', Oct. 12, 2005.

Applicable Criteria and Related Research:

Fitch Recovery Ratings for Corporate Finance

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=323442 ]

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489 ]

Evaluating Corporate Governance

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405 ]

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 ]

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