); all other ratings are affirmed. The outlook is revised to positive from negative, recognizing AMD's stabilizing cash flows as the company's product portfolio has improved in recent quarters.
The ratings continue to reflect AMD's high debt levels, its distant second place in the personal computer microprocessor industry, good position in the flash memory market, and historically large negative cash flows in two very challenging industries. These factors are partly offset by the PC and cellphone industries' needs for multiple sources, and AMD's having achieved competitive product lines and manufacturing processes, compared to its earlier efforts.
The company had $2.4 billion of debt and capitalized operating leases outstanding at March 31, 2004.
AMD has about a 19% share of the microprocessor market by units sold, principally in the desktop segment. The company's 64-bit server-class microprocessors are now in volume production and profitable, contributing to rising average selling prices in the March quarter, despite secular pressures. These chips retain software compatibility with earlier 32-bit designs, giving end users additional flexibility in updating their software platforms.
Still, Intel's (INTC
) far larger product development capabilities could permit its near-term introduction of equivalent chips, potentially reversing AMD's current 64-bit lead, while Intel's financial strength provides it substantial ability over the longer term to pressure AMD through aggressive pricing. AMD continues to have only limited presence in the enterprise market.
AMD's flash memory products -- marketed as "Spansion" -- represent half of total sales. Products are manufactured by FASL LLC, a 60%-owned venture with Fujitsu Ltd. The venture holds about a 26% share of the flash memory market, roughly equal to Intel's share. FASL turned profitable in the March quarter, although the sector is expected to remain highly volatile. AMD's newer proprietary flash products have been well-received in the wireless handset market. Sustained high volumes of advanced products will be essential for long-term good earnings in the flash industry.
AMD's total sales were $1.2 billion in the March, 2004 quarter, flat with December despite seasonal pressures. EBITDA was $366 million in the quarter, and totaled $1045 million for the trailing 12 months. AMD has generated positive free cash flows for the past two quarters after accumulating $1 billion in negative free cash flows in the prior two years. The company funded its operational losses through the sale of noncore businesses and new debt issuances.
AMD is building an additional microprocessor factory, Fab 36, in Dresden, Germany, expected to be in production in 2005. The plant should enhance AMD's competitiveness because of its use of 300-mm wafers, benefiting from a license to some of IBM Corp.'s (IBM
) process technology. Although Fab 36 is partly subsidized by the German government, capital expenditures could be substantial over the next few years.
Although total debt levels are high, leverage currently is moderate because of recently improved operating profitability. Debt was about 2.3 times EBITDA for the four quarters ended March 31, 2004, but had been 30 times EBITDA for the four quarters ended March 31, 2003. EBITDA interest coverage is currently about 12 times.
Liquidity: Cash balances at March 31, 2004, were $1.3 billion, sufficient for near to intermediate term operating needs. Cash balances include approximately $355 million of cash at FASL LLC. While free cash flows have recently turned positive, challenging industry conditions, and the potential for further cash flow volatility, continue to call for ample liquidity at all times.
AMD has a $125 million undrawn four-year revolving credit agreement, which was renewed in July 2003, secured by most of its accounts receivable and inventory, excluding FASL. Borrowings are limited to 50% of eligible accounts receivable from distributors, plus 85% of eligible receivables from original equipment manufacturers. AMD must comply with certain financial covenants if net domestic cash falls below $125 million.
AMD is the obligor on the repayment of $629 million in bank loans for its existing Dresden plant, Fab 30. Although the loans are guaranteed by German government agencies, failure to meet the Dresden obligations would result in a cross-default on the company's subordinated debt. An additional $57 million is guaranteed to support AMD's one-third share of a photomask development center and a mask production facility in Dresden. In the event of default in the agreements by partner Infineon Technologies AG (unrated), AMD's photomask obligations would be higher.
FASL LLC has a term loan facility secured by its Texas Fab 25 factory, of which $65 million was outstanding at March 31, 2004. The agreement expires in September 2006. AMD must comply with certain financial covenants if its domestic cash balances fall below $130 million.
In all, AMD is committed to debt and capital lease repayments of $147 million for the remainder of 2004. Repayments rise thereafter, to $517 million in 2005, $458 million in 2006, and $432 million in 2007. Financing requirements for the new Dresden plant are not yet clear, although AMD's obligations are not expected to be material before the end of 2005.
Outlook: The outlook is positive. AMD has materially refreshed its product portfolio and has substantially cut costs, and its free cash flows have been positive for two quarters. Although competitive pressures are challenging, sustained free cash flows, and prospects for alleviating the company's longer-term financial commitments, could lead to an adjustment to ratings within the next year. From Standard & Poor's RatingsDirect