AMD's Cash Crunch

Advanced Micro Devices (NYSE: AMD  ) is dangerously low on cash.

Or so says analyst Doug Freedman at American Technology Research. Is he right? Maybe. Here's a look at AMD's free cash flow, cash on hand, and debt from the last five reported quarters:

Metric

Q4 '05

Q1 '06

Q2 '06

Q3 '06

Q4 '06 (est.)

Free cash flow

$208.2

$256.0

($236.5)

($194.7)

($261)

Cash and equivalents

$1,794.8

$2,632.7

$2,530.1

$2,356.9

$1,541.0

Total debt

$1,370.3

$658.3

$692.2

$689.4

$3,797.0

Source: Capital IQ. Numbers in millions.

Compare last year's Q4 to this year's. I know my numbers are estimates, but the math works. Start with a $574 million loss and then add back $416 million for acquired R&D, $72 million for amortizing intangibles, and an estimated $250 million in depreciation (roughly in line with last year's Q4) -- that's $164 million in cash earnings.

I'd be fine with that, except since acquiring ATI, AMD has engaged in a price war with Intel (Nasdaq: INTC  ) while increasing its capital outlays. For example, in Q3, the chipmaker spent $425 million on new equipment, up 17% year over year. Assuming no spending increases in Q4, AMD probably burned through $261 million in cash.

Or, in simpler terms, AMD appears to have covered just 38% of its capital needs with cash flow.

Then there's the debt. With $3.8 billion now on the books, AMD is going to need cash flow to cover its interest payments. So far there isn't any, which makes one of two outcomes very likely:

1. AMD dramatically cuts back its capex in the coming quarters, or
2. AMD appeals to investors via a secondary offering, causing dilution for shareholders who are waiting patiently to realize hoped-for gains from the ATI deal.

Naturally, I think the latter is much more likely, which means Freedman has a point. But that doesn't mean disaster is imminent. AMD is still doing remarkably well in servers, for example. I'm willing to reserve judgment until after we have the annual report, which should be filed by the end of the second week of March.

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Fool contributor Tim Beyers, who is ranked 1,494 out of more than 22,700 in our Motley Fool CAPS investor intelligence database, likes his chips with salsa. Or maybe queso. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on tech stocks, Foolishness, and investing in general may be found in his blog. The Motley Fool's disclosure policy is the chip on Wall Street's shoulder.


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