Probably posted already - from 12/8/03
Most have probably seen this however some (including myself when I was out of town) may have missed it.
SAN FRANCISCO (CBS.MW) -- Advanced Micro Devices appears ready to post a profit for the first time in two years, but an accounting rule will likely force it to reduce those earnings by as much as a penny a share.
The issue is convertible debt -- money lent to companies in exchange for the right to own shares in the future. Companies don't count those shares while calculating per-share profit or loss if the shares artificially improve the bottom line.
But once a company's profit hits a certain level -- which differs from company to company based on how the debt deals are structured -- the shares need to be added to the outstanding share count.
AMD (AMD: news, chart, profile) could hit that level this quarter if it earns about 5 cents a share, well within current Wall Street estimates. At that point, it will have to count another 50 million shares when it figures out its earnings per share.
That 14 percent boost in the number of shares outstanding could shave 0.63 cents a share off the chipmaker's bottom line, enough to round the earnings down a full penny.
AMD will not be alone. Since 2000, almost $350 billion has been raised through more than 1,000 convertible debt deals, according to Prospect News, a publisher of bond market newsletters.
Many of these debt issuers, benefiting from an improving economy, could face significant amounts of dilution as previously excluded stock begins to enter share counts.
"This is an issue that investors overlook, but it is a fairly common one for companies going from no or low profits to sustainable profits," said Bala Dharan, professor of accounting at Rice University.
'The whole picture'
AMD hasn't reported a quarterly profit since the second quarter of 2001, but this quarter the company is expected to earn 3 cents a share, with some analysts predicting earnings as high as 10 cents a share.
The impact to AMD's bottom line is the price of success for a company that sold large amounts of convertible debt. AMD sold a total of $900 million of convertible securities in two separate transactions in 2002.
Indeed, the same accounting rules will trigger more dilution once AMD earns about 22 cents a share, requiring AMD to add another 20 million shares to its count. The company could hit that 22-cent level four quarters from now.
A company must withhold certain shares from its count of outstanding stock if they are "anti-dilutive," meaning that the shares would artificially improve the bottom line if included in per-share earnings or loss calculations.
For example, AMD excluded 77 million shares because they were anti-dilutive from its third-quarter share count, according to a quarterly filing with the SEC. Anti-dilutive securities include warrants and stock options eligible for exercise, convertible bonds and preferred stock.
In that third quarter, AMD reported a loss of $31.2 million, or 9 cents a share based on 347.3 million shares outstanding. If AMD had included its 77 million anti-dilutive shares, its per-share loss would have improved to 7.4 cents a share.
Accounting rules dictate that fully diluted earnings show the smallest earnings that can be reported by assuming the complete exercise of all outstanding stock options and warrants, as well as the total conversion of convertible bonds and preferred stock.
The point at which the shares must be included in the outstanding share count is based on when, and at what prices, the debt can be converted into common stock.
However, pinpointing the exact effect on net income is difficult due to various "financial and technical criteria," an AMD representative said.
The impact of the dilution on AMD's stock remains to be seen. Shares have doubled to around $16 since mid-August and have almost tripled since March.
Semiconductor analyst Krishna Shankar with JMP Securities called the potential dilution a factor investors should consider, but said that the overall trend of the business, including revenue growth and uptake on its new 64-bit chips, should be of greater importance.
"Investors will probably look at the whole picture -- what the absolute level of the net income is relative to expectations," he said. "At this point, people are buying AMD not for its current earnings, but for the potential of flash memory and AMD64."
Jack
AI
