AMD uses Intel's $1.25 billion to repay debt
11/19/2009 by: Theo Valich



Last week's landmark settlement between Intel and AMD ended with Intel paying AMD $1.25 billion and signing a royalty-free x86 license. We asked our contacts how come that AMD made such a settlement and those answers was right ahead of us:
  • AMD's x86 cross-license agreement was expiring in 2010, meaning AMD would not be able to continue with CPU production.
  • Intel could not ban AMD from manufacturing CPUs due to x86's monopolistic microprocessor market share, but the company would have to initiate another legal case that would depend on AMD vs. Intel anti-trust lawsuit
  • In the case of the suit, it would probably end in 2012, with Intel paying AMD 3.5-4.0 billion US. AMD would probably have to pay anywhere between 1.5 and 2 billion dollars for manufacturing CPUs in 2011 and 2012 without a valid license from Intel
  • AMD's had almost two billion dollars of debt due in 2012, meaning the timing of the anti-trust lawsuit and the debt payoff would be inconveniently "too close to call".
  • Intel lost all anti-trust legal cases so far, part of which Intel's legal chief decided to "retire" from Intel...only to show up in Apple's HQ less than 48 hours later.
With all that set aside, AMD announced what the company is going to do with 1.25 billion that arrived on their accounts earlier in the week. The cash reserve almost doubled, from 1.5 billion to $2.75 billion. Given that AMD's total debt currently sits at 3.67 billion dollars [2.14 billion net debt], the debt could not be repurchased as whole even if the company cleared its treasury.

AMD's mountain of debt
AMD's mountain of debt

There are two parts of the debt: In 2012, AMD has to pay out 1,875 billion dollars. Out of that, 390 million were high interest [7.75%] notes, while the rest was in 5.75% interest notes. We have to remind you that the debt for the company at one point was higher than five billion dollars, meaning AMD reduced the debt by over 1.5 billion dollars in the past 2-3 years.

AMD's cash situation prior to settlement with Intel
AMD's cash situation prior to settlement with Intel

According to Thomas Seifert, AMD's CFO the company utilized a lot of its cash reserves to purchase their debt as the world economy tanked. In the past nine months, AMD bought $419 million of their debt using only $191 million in cash. This is set to continue by following distribution of afore mentioned $1.25 billion dollar check:
  • New round of senior notes to private investors, gathering 500 million USD, cash reserve up to 3.25 billion
  • Immediate cash buyout and retirement of $390 million of those high-interest notes that were due in 2012, cash reserve down to 2.86 billion
  • Cash and bond buyout of 1 billion of those 5.75% bonds due in 2012, cash down to $1.86 billion
As you can read for yourself, AMD hopes that it will pay out majority of their 2012 debt by the end of the year, leaving three years - 2010, 2011 and 2012 to pay out the remaining 485 million dollars. Given the rate of payment, AMD should turn profit even as it is paying off those remaining 485 million. AMD plans to continue to buy back the mid-yielding 6% bonds due in 2015 as well and clear the newly acquired $500 million debt prior to 2017 and exit the 2017 without any debt at all.

Given that AMD no longer needs to pay Intel royalties on sold processors [even if you purchased an AMD CPU, small portion of money would go to Intel], AMD's margins should significantly grow up and the situation is looking better than ever.

Now, if you wondered how much money does it take to run a Fab, by looking into AMD's financial data we learned that AMD was spending anywhere between 94 and 98 million dollars a quarter, i.e. almost 400 million dollars in a year to keep Fab 36 pushing those wafers out. While Fab 30 was in operation, Fab 30 and Fab 36 were bleeding almost 150 million a quarter. These days are now past for AMD.

AMD's founder, Mr. Jerry Sanders III [also known as Hugh Hefner of semiconductor industry] once said: "Real men have Fabs" - it looks like AMD decided to state they're not real, but "Asset Smart". Truth to be told, AMD should look into the page of one of worlds' most successful fabless companies, nVidia Corporation - and see when "fabless" approach can fail. Just ask a TSMC insider about giving an honest disclosure over 40nm process and everything should be clear.

We wonder what percentage of cash will be invested in R&D, so that AMD finally starts executing their roadmaps on target. You see, we noticed a lot of "Ahead of Schedule" statements by AMD. Unfortunately for AMD's executives, a lot of these "Ahead of Schedule" products are woefully behind the schedule. For instance, Fiorano platform launched on Monday at SC09 - it was supposed to launch in June 2009. AMD Fusion APUs were due in 2009, not in 2011.

All in all, our sources inside AMD are now really confident that they can execute the roadmap, since the Damocles Sword is no longer hanging above their heads.


Tags:
AMD, Advanced Micro Devices, Intel, antitrust, lawsuit, x86, cross-license, x86 license, convertible bonds, high-yield, low-yield, mid-yield, AMD vs. Intel, private offering, AMD debt, net debt, Thomas Seifert, CFO, Chief Financial Officer, royalty-free, fabless, Jerry Sanders, Jerry Sanders III, Jen-Hsun Huang, Fab 30, Fab 36, Fab 38, CapEx, Capital Expenditures, R&D, Research & Development

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