Market Overview

Fitch Affirms AMD's 'B' IDR & Revises Outlook to Negative; Downgrades Sr Unsecured to 'B/RR4'

CHICAGO--(BUSINESS WIRE)--

Fitch has taken the following actions on the ratings for Advanced Micro Devices Inc.'s (NYSE: AMD):

--Affirmed long-term IDR at 'B';

--Downgraded senior unsecured debt to 'B/RR4' from 'B+/RR3'.

The Rating Outlook is revised to Negative from Stable. Fitch's actions affect approximately $2.0 billion of total debt.

The Negative Rating Outlook reflects Fitch's belief that AMD's operating results will remain pressured through at least the near-term driven by a combination of cyclical and secular headwinds. As a result, Fitch expects profitability to plummet and negative free cash flow (FCF), which may materially weaken liquidity.

Cyclical headwinds are adversely affecting the broader PC supply chain and Fitch believes these are incorporated into AMD's current ratings. However, Intel's market share gains, AMD's excess inventories in the channel, and increasing tablet penetration are exacerbating already formidable pressure on revenues from weak worldwide personal computers (PC) demand and a protracted PC refresh cycle in advance of Microsoft's Window 8 release.

As a result, AMD has given mid-point guidance of negative 17.5% revenue growth for 2012 and Fitch expects low double-digit negative revenue growth in 2013. Sales could benefit from more strong adoption of the company's newest generation of accelerated processor units (APU) or a return to supply and demand balance in the channel.

Fitch expects AMD's operating EBITDA will end 2012 at approximately half its 2011 level and could trough in 2013 within a range of roughly break even to $250 million. Gross profit margins will remain pressured and in the mid to high 30s range versus the low to mid 40s of recent years, driven by broad based average selling price (ASP) pressures and lower utilization of AMD's back end equipment. These pressures appear unlikely to abate over the near-term but could be somewhat offset by stronger than anticipated adoption of AMD's APUs.

The company's restructuring actions should begin yielding benefits in the current quarter and be fully realized at the end of the third quarter of 2013. The program is the second announced within the last year and will reduce global headcount by 15% and aims to save AMD approximately $190 million in annual operating expenses.

Nonetheless, Fitch estimates AMD will use over $200 million per year in both 2012 and 2013. Cash usage is being exacerbated by outlays for restructuring ($80 million) and amending a purchase agreement with its foundry partner, GLOBALFOUNDRIES ($425 million).

Fitch believes AMD's liquidity was sufficient as of Sep. 30, 2012 and consisted of $1.5 billion of cash and cash equivalents (includes approximately $200 million of long-term marketable securities). Nonetheless, pro forma for Fitch's projected cash usage ranges, cash balances could decline to below the company's stated optimal cash balance of $1.1 billion (note: management has stated $700 million - $800 million is sufficient to run the business). AMD reduced its stated optimal cash balance from $1.5 billion during the third quarter earnings call.

In connection with the restructuring announcement, AMD reiterated its shift in focus away from legacy PC markets and aims to achieve 40% - 50% of sales from faster growth markets over the long run. The company believes it can achieve 20% of sales from faster-growth markets over the next year (versus 15% currently). The company believes these markets - servers for the cloud, new embedded markets, and ultra-portable/low-power- offer higher growth and greater differentiation opportunities.

Fitch believes AMD's focus on rebalancing its sales portfolio will be imperative to its longer-term relevance. In Fitch's opinion, AMD's historical role as the only viable alternative PC microprocessor supplier to Intel may be undermined by the supply chain's adoption of ARM Holding's based processors to power future PC models. Fitch is concerned AMD's headcount reductions will include research & development (R&D) and potentially slow AMD's penetration in faster growing markets.

Negative rating actions could be taken if:

--FCF usage exceeds Fitch's expectations, resulting in cash balances falling and likely remaining below target levels beyond the near-term.

--Faster than anticipated penetration by tablets or share losses to without commensurate sales growth in AMD's focus markets.

--Meaningful penetration of ARM-based processors into AMD's traditional PC and Server markets.

The ratings could be stabilized if:

--Sales growth tracks that of its peer group, affirming AMD's strategy of accelerating sales in faster growth non-legacy PC markets; or

--AMD's sales levels and restructuring actions result in the resumption of positive FCF.

AMD's ratings continue to be supported by:

--Lower capital intensity as a fabless semiconductor maker, resulting in a stronger FCF profile;

--Lower revenue breakeven level from historical and recently announced restructuring actions; and

--The company's historical role as the only viable alternative microprocessor supplier to Intel.

Fitch's concerns center on:

--AMD's limited share in rapidly growing markets for small-form factor mobility products;

--AMD's modest share of the overall PC market, including servers;

--Current reliance on GLOBALFOUNDRIES for the majority of its microprocessors as it continues ramping production with TSMC; and

--Higher than industry average dependence upon R&D investments and efficiency, given its status as a fabless supplier.

Liquidity at Sept. 30, 2012 was sufficient and consisted of $1.3 billion of cash and cash equivalents. The company has no revolving credit facility. Fitch estimates FCF usage of $3500 -$450 million for 2012 and negative FCF for 2013.

Total debt was $2.1 billion at Sept. 29, 2012 and consisted of:

--$580 million of 6% senior unsecured convertible notes due 2015;

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

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

--$500 million of 7.5% senior unsecured notes due 2022; and

--Approximately $25 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 $1.0 billion exceeds a projected liquidation value.

To arrive at a reorganization value, Fitch assumes a 4x reorganization multiple and applies it to its estimate of distressed operating EBITDA of $260 million, which covers estimated annual fixed charges, resulting in an adjusted reorganization value of $932 million after subtracting administrative claims. Fitch estimates the approximately $2.1 billion of unsecured claims recover approximately 44%, resulting in recovery ratings of RR4.

Fitch reduced the reorganization multiple to 4x from 5x to reflect Fitch's believe that over the longer-term AMD may no longer be the only credible viable alternative PC processor supplier to Intel.

WHAT COULD TRIGGER A RATING ACTION

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--FCF usage exceeds Fitch's expectations, resulting in cash balances falling and likely remaining below target levels beyond the near-term.

--Faster than anticipated penetration by tablets or share losses to without commensurate sales growth in AMD's focus markets.

--Meaningful penetration of ARM-based processors into AMD's traditional PC and Server markets.

Positive: The current Rating Outlook is Negative. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Rating Technology Companies' (Aug. 9, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Rating Technology Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682324

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Fitch Ratings
Primary Analyst
Jason Pompeii, +1-312-368-3210
Senior Director
Fitch Inc., 70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
John Witt, CFA, +1-212-908-0673
Director
or
Committee Chairman
James Rizzo, CFA, +1-212-908-0548
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

 

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