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Another take on AMD's debts

AMD has little choice when it comes to borrowing.
Written by John G. Spooner, Contributor

I have been looking at AMD’s cash flow situation, recently. While it’s true that the company will have a relatively high amount of debt after it issues its $2 billion in senior notes—that’s $2 billion, as you can see here (link: here) , plus extra $200 million set aside to cover over allotments—I think that borrowing the extra money is a pragmatic decision by AMD. Yes, it's risky. It certainly does increase AMD's total long-term debt. It's debt will be north of $4 billion. But the company has immediate needs.

Following its acquisition of ATI and its first quarter loss, AMD on a path to burn through about $200 million in cash per quarter for the rest of 2007. That comes from a combination of lower gross margins from ATI products and its price war with Intel, both of which have worked to lower its profitability considerably. This has caused AMD to reported two quarterly losses in a row and is likely to see it report a loss in the second quarter. Issuing the senior notes, on the other hand, will give AMD the cash it needs to work with for the rest of 2007 and 2008 as well. This cash will allows the company some breathing room while it works to deliver its latest products, including its quad-core Barcelona chip, as well as to integrate its ATI business. Technically, AMD can also use some of the funds toward capital expenditures as well.

While there’s been a lot written about AMD’s debt piling up, the question you have to ask yourself, as a customer or even an investor, is do you want an AMD that is scrimping and saving, right now, or do you want an AMD that is able to fully fund its R&D and its marketing programs? I believe that scrimping and saving, at this time and in this business, would be a huge mistake for AMD.

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