Advanced Micro Devices, Inc.
Advanced Micro Devices, Inc.
The Company uses a 52 or 53 week fiscal year ending on the last Saturday in December. The quartersthree and ninesix months ended September 30, 2017June 26, 2021 and September 24, 2016June 27, 2020 each consisted of 13 weeks and 3926 weeks, respectively.
Statement of Cash Flows. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, provided that all of the amendments are adopted in the same period. The Company is currently evaluating the impact of its pending adoption of ASU 2016-15 on its consolidated financial statements.
Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the timing of adoption and impact of ASU 2016-13 on its consolidated financial statements.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Upon adoption, lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements.
Financial Instruments. In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The ASU also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized
losses on available-for-sale debt securities. Entities will have to assess the realizability of such deferred tax assets in combination with the entities' other deferred tax assets. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 and for interim periods within that reporting period. The Company is currently evaluating the impact of its pending adoption of ASU 2016-01 on its consolidated financial statements.
Revenue Recognition. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), which creates a single source of revenue guidance under U.S. GAAP for all companies in all industries and replaces most existing revenue recognition guidance in U.S. GAAP. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the new standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments to the new standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations.
The new standard is effective for annual reporting periods beginning after December 15, 2017. The new standard permits companies to early adopt the new standard, but not before annual reporting periods beginning after December 15, 2016. The Company will not early adopt the new standard and therefore the new standard will be effective for the Company in the first quarter of its fiscal 2018.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or prospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing additional disclosures comparing results to the previous rules in the year of adoption of the new standard (the modified retrospective method or the cumulative catchup method). The Company currently anticipates adopting the standard using the full retrospective method to restate each prior reporting period presented. The Company’s ability to adopt utilizing the full retrospective method is dependent upon system readiness and the completion of its analysis of information necessary to restate prior period financial statements and the Company is progressing toward the adoption of the standard in the first quarter of fiscal 2018. As part of this plan, the Company is implementing changes to its policies, procedures and controls.
The Company currently believes that the most significant impact relates to accelerated revenue recognition for sales to its distributors, whereby revenue is expected to be recognized upon the initial sale to the Company's distributors, instead of the current recognition upon resale by the distributors to the end customers. Additionally, the Company expects the timing and financial statement classification related to the accounting for some combined development and intellectual property licensing arrangements to change. Currently some of these arrangements result in both the reduction to research and development expenses and revenue recognition based on a fair value allocation of the consideration received. Some of these arrangements may result in the classification of the entire amount as revenue under the new revenue guidance. The Company currently expects other revenue streams to remain substantially unchanged.
NOTE 2. GLOBALFOUNDRIES3 – Supplemental Financial Statement Information
Wafer Supply Agreement. The Wafer Supply Agreement (WSA) governs the terms by which the Company purchases products manufactured by GLOBALFOUNDRIES Inc. (GF).Short-term Investments
Sixth Amendment to Wafer Supply Agreement. On August 30, 2016, the Company entered into a sixth amendment to the WSA (the WSA Sixth Amendment). The WSA Sixth Amendment modified certain terms of the WSA applicable to wafers for the Company’s microprocessor, graphics processor and semi-custom products for a five-year period from January 1, 2016 to December 31, 2020. The Company and GF also agreed to establish a comprehensive framework for technology collaboration for the 7nm technology node.
The WSA Sixth Amendment also provides the Company a limited waiver with rights to contract with another wafer foundry with respect to certain products in the 14nm and 7nm technology nodes and gives the Company greater flexibility in sourcing foundry services across its product portfolio. In consideration for these rights, the Company agreed to pay GF $100 million in installments starting in the fourth fiscal quarter of 2016 through the third fiscal quarter of 2017. During the third fiscal quarter of 2017, the Company paid GF $25 million and, as of September 30, 2017, the Company had paid GF $100 million in aggregate. Starting in 2017 and continuing through 2020, the Company also agreed to make quarterly payments to GF based on the volume of certain wafers purchased from another wafer foundry.
Further, for each calendar year during the term of the WSA Sixth Amendment, the Company and GF agreed to annual wafer purchase targets that increase from 2016 through 2020. If the Company does not meet the annual wafer purchase target for any calendar year, the Company will be required to pay to GF a portion of the difference between the Company’s actual wafer purchases and the wafer purchase target for that year. The annual targets were established based on the Company’s business and market
expectations and took into account the limited waiver it received for certain products. As of September 30, 2017, the Company expects to meet its 2017 wafer purchase target.
The Company and GF also agreed on fixed pricing for wafers purchased during 2016 and established a framework to agree on annual wafer pricing for the years 2017 to 2020. The Company and GF have agreed on pricing for wafer purchases for 2017.
The Company’s total purchases from GF related to wafer manufacturing, research and development activities and other for the quarters ended September 30, 2017 and September 24, 2016 were $331 million and $186 million, respectively. The Company’s total purchases from GF related to wafer manufacturing, research and development activities and other for the nine months ended September 30, 2017 and September 24, 2016 were $773 million and $479 million, respectively. Included in the total purchases for the quarter and nine months ended September 30, 2017 are amounts related to the volume of certain wafers purchased from another wafer foundry, as agreed to by the Company and GF under the WSA Sixth Amendment. As of September 30, 2017 and December 31, 2016, the amount of prepayment and other receivables related to GF was $20 million and $32 million, respectively, included in Prepayment and other receivables - related parties on the Company's condensed consolidated balance sheets. As of September 30, 2017 and December 31, 2016, the amount of payable to GF was $270 million and $255 million, respectively, included in Payables to related parties on the Company's condensed consolidated balance sheets.
Warrant Agreement. Also on August 30, 2016, in consideration for the limited waiver and rights under the WSA Sixth Amendment, the Company entered into a warrant agreement (the Warrant Agreement) with West Coast Hitech L.P. (WCH), a wholly-owned subsidiary of Mubadala Development Company PJSC (Mubadala). Under the Warrant Agreement, WCH and its permitted assigns are entitled to purchase 75 million shares of the Company’s common stock (the Warrant Shares) at a purchase price of $5.98 per share. The warrant is exercisable in whole or in part until February 29, 2020. Notwithstanding the foregoing, the Warrant Agreement will only be exercisable to the extent that Mubadala does not beneficially own, either directly through any other entities directly and indirectly owned by Mubadala or its subsidiaries, an aggregate of more than 19.99% of the Company’s outstanding capital stock after any such exercise.
GF continues to be a related party of the Company because Mubadala and Mubadala Technology Investments LLC (Mubadala Tech, a party to the WSA) are affiliated with WCH, a significant stockholder of the Company. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala.
NOTE 3. Supplemental Balance Sheet Information | | | | | | | | | | | |
| June 26,
2021 | | December 26,
2020 |
| | (In millions) |
| Commercial paper | $ | 993 | | | $ | 295 | |
| Time deposits | 177 | | | 400 | |
| Total short-term investments | $ | 1,170 | | | $ | 695 | |
Accounts Receivable, net
As of September 30, 2017June 26, 2021 and December 31, 2016,26, 2020, Accounts receivable, net included unbilled accounts receivable of $16$158 million and $37$123 million, respectively. Unbilled accounts receivablereceivables primarily represent work completed on development services recognized as revenue but not yet invoiced to customers and semi-custom products under non-cancellable purchase orders that have no alternative use to the Company at contract inception, for which revenue has been recognized but not billed as payments are deferred by customers until certain contractual milestones are met.yet invoiced to customers. All unbilled accounts receivable are expected to be billed and collected within twelve12 months.
Inventories
| | | | | | | | | | | |
| June 26,
2021 | | December 26,
2020 |
| | (In millions) |
| Raw materials | $ | 129 | | | $ | 93 | |
| Work in process | 1,408 | | | 1,139 | |
| Finished goods | 228 | | | 167 | |
| Total inventories | $ | 1,765 | | | $ | 1,399 | |
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| | (In millions) |
| Raw materials | $ | 52 |
| | $ | 11 |
|
| Work in process | 521 |
| | 564 |
|
| Finished goods | 221 |
| | 176 |
|
| Total inventories, net | $ | 794 |
| | $ | 751 |
|
Property Plant and Equipment, net
| | | | | | | | | | | |
| June 26,
2021 | | December 26,
2020 |
| | (In millions) |
| Leasehold improvements | $ | 184 | | | $ | 208 | |
| Equipment | 1,342 | | | 1,209 | |
| Construction in progress | 150 | | | 136 | |
| Property and equipment, gross | 1,676 | | | 1,553 | |
| Accumulated depreciation | (1,005) | | | (912) | |
| Total property and equipment, net | $ | 671 | | | $ | 641 | |
Other Non-Current Assets
| | | | | | | | | | | |
| June 26,
2021 | | December 26,
2020 |
| (In millions) |
| Software technology and licenses, net | $ | 204 | | | $ | 229 | |
| Other | 305 | | | 144 | |
| Total other non-current assets | $ | 509 | | | $ | 373 | |
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| | (In millions) |
| Leasehold improvements | $ | 151 |
| | $ | 148 |
|
| Equipment | 758 |
| | 714 |
|
| Construction in progress | 69 |
| | 19 |
|
| Property, plant and equipment, gross | 978 |
| | 881 |
|
| Accumulated depreciation and amortization | (742 | ) | | (717 | ) |
| Total property, plant and equipment, net | $ | 236 |
| | $ | 164 |
|
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| | (In millions) |
| Software technology and licenses, net | $ | 248 |
| | $ | 232 |
|
| Other | 57 |
| | 47 |
|
| Total other assets | $ | 305 |
| | $ | 279 |
|
Accrued Liabilities
| | | | | | | | | | | |
| June 26,
2021 | | December 26,
2020 |
| | (In millions) |
| Accrued marketing programs and advertising expenses | $ | 855 | | | $ | 839 | |
| Accrued compensation and benefits | 417 | | | 513 | |
| Other accrued and current liabilities | 639 | | | 444 | |
| Total accrued liabilities | $ | 1,911 | | | $ | 1,796 | |
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| | (In millions) |
| Accrued compensation and benefits | $ | 147 |
| | $ | 116 |
|
| Marketing programs and advertising expenses | 124 |
| | 102 |
|
| Software technology and licenses payable | 54 |
| | 24 |
|
| Other | 135 |
| | 149 |
|
| Total accrued liabilities | $ | 460 |
| | $ | 391 |
|
Revenue allocated to remaining performance obligations that were unsatisfied (or partially unsatisfied) as of June 26, 2021 was $281 million, which may include amounts received from customers but not yet earned and amounts that will be invoiced and recognized as revenue in future periods associated with any combination of development services, IP licensing and product revenue. The Company expects to recognize $170 million of revenue allocated to remaining performance obligations in the next 12 months. The revenue allocated to remaining performance obligations does not include amounts which have an original expected duration of one year or less. Revenue recognized over time associated with custom products and development services accounted for approximately 22% of the Company’s revenue for both three and six months ended June 26, 2021 and 9% and 7% for the three and six months ended June 27, 2020, respectively.
NOTE 4.4 – Related Parties — Equity Interest Purchase Agreement - Joint Ventures
ATMP Joint VentureVentures
On April 29, 2016,The Company holds a 15% equity interest in 2 joint ventures (collectively, the Company and certain of its subsidiaries completed the sale of a majority of the equity interests in Suzhou TF-AMD Semiconductor Co., Ltd. (formerly, AMD Technologies (China) Co., Ltd.), and TF-AMD Microelectronics (Penang) Sdn. Bhd. (formerly, Advanced Micro Devices Export Sdn. Bhd.), toATMP JV) with affiliates of Tongfu Microelectronics Co., Ltd. (formerly, Nantong Fujitsu Microelectronics Co., Ltd.) (TFME),Ltd, a Chinese joint stock company, to form two joint ventures (collectively, the ATMP JV). As a result of the sale, TFME’s affiliates own 85% of the equity interests in the ATMP JV while certain of the Company’s subsidiaries own the remaining 15%.company. The Company has no obligation to fund the ATMP JV.
The Company accounts for its equity interests in the ATMP JV under the equity method of accounting due to its significant influence over the ATMP JV. As of September 30, 2017 and December 31, 2016, the carrying value of the Company's investment in the ATMP JV was approximately $57 million and $59 million, respectively. The ATMP JV is a related party of the Company.
The ATMP JV provides assembly, test, marktesting, marking and packaging (ATMP) services to the Company. The Company currently paysassists the ATMP JV forin its management of certain raw material inventory. The purchases from and resales to the ATMP services on a cost-plus basis. JV of inventory under the Company’s inventory management program are reported within purchases and resales with the ATMP JV and do not impact the Company’s condensed consolidated statement of operations.
The Company's totalCompany’s purchases from the ATMP JV during the three and ninesix months ended September 30, 2017June 26, 2021 amounted to approximately $131$270 million and $332$516 million, respectively. The Company's totalCompany’s purchases from the ATMP JV during the three and ninesix months ended September 24, 2016June 27, 2020 amounted to approximately $107$204 million and $173$355 million, respectively. As of September 30, 2017June 26, 2021 and December 31, 2016,26, 2020, the amountamounts payable to the ATMP JV was $174
were $36 million and $128$78 million, respectively, and are included in Payables to related parties on the Company'sCompany’s condensed consolidated balance sheets. The Company’s resales to the ATMP JV during the three and six months ended June 26, 2021 amounted to $9 million and $19 million, respectively. The Company’s resales to the ATMP JV during the three and six months ended June 27, 2020 amounted to $8 million and $15 million, respectively. As of June 26, 2021 and December 26, 2020, the Company’s receivables from the ATMP JV were $6 million and $10 million, respectively, and were included in Receivables from related parties on the Company’s condensed consolidated balance sheets.
During the three and ninesix months ended September 30, 2017,June 26, 2021, the Company recorded a gain of $2 million and $7$4 million respectively, in Equity lossincome in investee on its condensed consolidated statements of operations, which included certain expenses incurred byrespectively. As of June 26, 2021 and December 26, 2020, the Company on behalfcarrying value of the Company’s investment in the ATMP JV. During the three and nine months ended September 24, 2016, the Company recorded $5JV was $67 million and $8$63 million, respectively,respectively.
THATIC Joint Ventures
The Company holds equity interests in Equity loss in investee on its condensed consolidated statements of operations, which included certain expenses incurred by2 joint ventures (collectively, the Company on behalf of the ATMP JV.
NOTE 5. Equity Joint Venture
In February 2016, the Company and Tianjin Haiguang AdvancedTHATIC JV) with Higon Information Technology Investment Co., Ltd. (THATIC), a third-party Chinese entity (JV Partner), formed a joint venture comprisedentity. As of two separate legal entities, China JV1both June 26, 2021 and China JV2 (collectively,December 26, 2020, the THATIC JV). The Company’s equity share in China JV1 and China JV2 is a majority and minority interest, respectively, funded by the Company’s contribution of certain of its patents. The JV Partner is responsible for the initial and on-going financingcarrying value of the THATIC JV’s operations. The Company has no obligations to fund the THATIC JV.
The Company concluded the China JV1 and China JV2 are not operating joint ventures and are variable interest entities due to their reliance on on-going financing by JV Partner. The Company determined that it is not the primary beneficiary of either China JV1 or China JV2, as the Company does not have unilateral power to direct selling and marketing, manufacturing and product development activities related to the THATIC JV’s products. Accordingly, the Company will not consolidate either of these entities and therefore accounts for its investments in the THATIC JV under the equity method of accounting. The THATIC JV is a related party of the Company.investment was 0.
In February 2016, the Company licensed certain of its intellectual property (Licensed IP) to the THATIC JV, for a total of approximately $293 million in license fee payable over several years contingent upon achievement of certain milestones. The Company also expects to receivereceives a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such Licensed IP. The Company will also provide certain engineering and technical support to the THATIC JV in connection with the product development. In March 2017, the Company entered into a development and intellectual property agreement with THATIC JV, and also expects to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such agreement. In addition, from time to time, the Company enters into certain agreements with the THATIC JV to provide other services primarily related to research and development.
The Company recognizes income related to the Licensed IP over the period commencing upon delivery of the first Licensed IP milestone through the date of the milestone that requires the Company’s continuing involvement in the product development process. Royalty payments will be recognized in income once earned. The Company classifies Licensed IP income and royalty income associated with the February 2016 agreement as otherLicensing gain within operating income. During the three and ninesix months ended September 30, 2017,June 26, 2021, the Company recognized zero$1 million and $52$5 million of licensing gain associated withfrom royalty income under the Licensed IP, respectively,agreement, respectively. As of both June 26, 2021 and development and other services fees of $7 million and $17 million, respectively, as a credit to research and development expenses. During the three and nine months ended September 24, 2016,December 26, 2020, the Company recognized $24 millionhad 0 receivables from the THATIC JV.
In June 2019, the Bureau of Industry and $57 million licensing gain, respectively. No credits for developmentSecurity of the United States Department of Commerce added certain Chinese entities to the Entity List, including THATIC and other services associatedthe THATIC JV. The Company is complying with these agreements was recognized byU.S. law pertaining to the Company during the threeEntity List designation.
NOTE 5 – Debt and nine months ended September 24, 2016. No royalty income was recognized by the Company during the three and nine months ended September 30, 2017 and September 24, 2016.Revolving Credit Facility
Debt
The Company’s total exposure to losses through its investment in the THATIC JV is limited to the Company’s investment in the THATIC JV, which was zerodebt as of September 30, 2017. The Company’s share in the net lossesJune 26, 2021 and December 26, 2020 consisted of the THATIC JV for the three and nine months ended September 30, 2017 and September 24, 2016 was not material and is not recorded in the Company’s condensed consolidated statements of operations since the Company is not obligated to fund the THATIC JV’s losses in excess of the Company’s investment in the THATIC JV. The Company’s receivable from the THATIC JV for these agreements was $5 million and zero as of September 30, 2017 and December 31, 2016, respectively, included in Prepayment and other receivables - related parties on its condensed consolidated balance sheets. As of September 30, 2017, the total assets and liabilities of the THATIC JV were not material.
following:
NOTE 6. Debt and Secured Revolving Line of Credit
Debt | | | | | | | | | | | |
| June 26,
2021 | | December 26,
2020 |
| (In millions) |
| 7.50% Senior Notes Due 2022 (7.50% Notes) | $ | 312 | | | $ | 312 | |
| 2.125% Convertible Senior Notes Due 2026 (2.125% Notes) | 1 | | | 26 | |
| | | |
| Total debt (principal amount) | 313 | | | 338 | |
| Unamortized debt discount and issuance costs | 0 | | | (8) | |
| | | |
| | | |
| Total long-term debt, net | $ | 313 | | | $ | 330 | |
2.125% Convertible Senior Notes Due 2026
OnIn September 14, 2016, the Company issued $700$805 million in aggregate principal amount of 2.125% Convertible Senior Notes due 2026 (2.125% Notes). The Company also granted an option to the underwriters to purchase an additional $105 million aggregate principal amount of the 2.125% Notes. On September 28, 2016, this option was exercised in full and the Company issued an additional $105 million aggregate principal amount of the 2.125% Notes.
2026. The 2.125% Notes are general unsecured senior obligations of the Company and will mature on September 1, 2026, unless earlier repurchased or converted. Interest is payable in arrears on March 1 and September 1Company.
During the six months ended June 26, 2021, holders of each year beginning on March 1, 2017. Thethe 2.125% Notes are governed by the terms of a base indenture and a supplemental indenture (together the 2.125% Indentures) dated September 14, 2016 between the Company and Wells Fargo Bank, N.A., as trustee.
Holders may convert their notes at their option at any time prior to the close of business on the business day immediately preceding June 1, 2026 under the occurrence of one of the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2016 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the Measurement Period) in which the trading price per $1,000converted $25 million principal amount of notes, in exchange for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 1, 2026 until the close of business on the business day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion,which the Company will pay or deliver, as the case may be, cash,issued approximately 3 million shares of the Company's common stock or a combination of cash and shares of the Company'sCompany’s common stock at the Company's election.conversion price of $8.00 per share. The first event describedCompany recorded a loss of $6 million from these conversions in (1) above was met during the third quarter of 2017 and as a result, the 2.125% Notes are convertible at the option of the holder from October 1, 2017 and remain convertible until December 31, 2017. The Company's current intent is to deliver shares of its common stock upon conversion of the 2.125% Notes. As such, the Company continued to classify the carrying value of the liability component of the 2.125% Notes as long-term debt and the equity component of the 2.125% Notes as permanent equityOther income (expense), net on its condensed consolidated balance sheet asstatements of September 30, 2017.
The Company may not redeem the notes prior to the maturity date, and no sinking fund is provided for the 2.125% Notes.
The conversion rate is currently 125.0031 shares of common stock per $1,000 principal amount of 2.125% Notes (equivalent to an initial conversion price of approximately $8.00 per share of common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event in certain circumstances.
If the Company undergoes a fundamental change prior to the maturity date of the notes, holders may require the Company to repurchase for cash all or any portion of their 2.125% Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2.125% Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the 2.125% Notes, the Company separated the 2.125% Notes into liability and equity components. The carrying amounts of the liability component was calculated by measuring the fair value of a similar liability that does not have associated conversion features. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2.125% Notes as a whole. The excess of the principal amount of the liability component over its book value (debt discount) is accreted to interest expense over the term of the 2.125% Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the issuance costs related to the 2.125% Notes, the Company allocated the total amount of issuance costs incurred to the liability and equity components based on their relative fair values. Issuance costs attributable to the liability component are being amortized to interest expense over the term of the 2.125% Notes, and the issuance costs attributable to the equity component were netted against the equity component inadditional paid-in capital. During 2016, the Company recorded issuance costs of $15 million and $9 million, for the liability and equity portions, respectively.
The determination of whether or not the 2.125% Notes are convertible must continue to be performed on a calendar-quarter basis.
The 2.125% Notes consisted of the following: |
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| | (In millions) |
| Principal amounts: | | | |
| Principal | $ | 805 |
| | $ | 805 |
|
Unamortized debt discount(1) | (291 | ) | | (308 | ) |
| Unamortized debt issuance costs | (13 | ) | | (14 | ) |
| Net carrying amount | $ | 501 |
| | $ | 483 |
|
Carrying amount of the equity component, net(2) | $ | 305 |
| | $ | 305 |
|
| |
(1)
| Included in the consolidated balance sheets within Long-term debt, net and amortized over the remaining life of the notes using the effective interest rate method. |
| |
(2)
| Included in the consolidated balance sheets within additional paid-in capital, net of $9 million of equity issuance costs. |
operations. As of September 30, 2017, the remaining life of the 2.125% Notes was approximately 108 months.
Based on the closing price of the Company's common stock of $12.75 on September 29, 2017, the last business day of the third quarter of 2017, the if-converted value of the 2.125% Notes exceeded its principal amount by approximately $478 million.
The effective interest rate of the liability component of the 2.125% Notes is 8%. This interest rate was based on the interest rates of similar liabilities at the time of issuance that did not have associated conversion features. The following table sets forth total interest expense recognized related to the 2.125% Notes:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | September 24,
2016 | | September 30,
2017 | | September 24,
2016 |
| | (In millions) |
| Contractual interest expense | $ | 4 |
| | $ | — |
| | $ | 13 |
| | $ | — |
|
| Interest cost related to amortization of debt issuance costs | — |
| | — |
| | 1 |
| | — |
|
| Interest cost related to amortization of the debt discount | $ | 6 |
| | $ | 1 |
| | $ | 17 |
| | $ | 1 |
|
6.75% Senior Notes Due 2019
On FebruaryJune 26, 2014, the Company issued $600 million of its 6.75% Senior Notes due 2019 (6.75% Notes). The 6.75% Notes are general unsecured senior obligations of the Company. Interest is payable on March 1 and September 1 of each year beginning September 1, 2014 until the maturity date of March 1, 2019. The 6.75% Notes are governed by the terms of an indenture (the 6.75% Indenture) dated February 26, 2014 between the Company and Wells Fargo Bank, N.A., as trustee.
During the first nine months of 2017, the Company settled $5 million in aggregate principal amount of its 6.75% Notes with treasury stock. As of September 30, 2017,2021, the outstanding aggregate principal amount of the 6.75%2.125% Notes was $191$1 million.
7.50% Senior Notes Due 2022
On August 15, 2012, the Company issued $500 million of its 7.50% Senior Notes due 2022 (7.50% Notes). The 7.50% Notes are general unsecured senior obligations of the Company. Interest is payable on February 15 and August 15 of each year beginning February 15, 2013 until the maturity date of August 15, 2022. The 7.50% Notes are governed by the terms of an indenture (the 7.50%Indenture) dated August 15, 2012 between the Company and Wells Fargo Bank, N.A., as trustee.
During the first nine months of 2017, the Company settled $3 million in aggregate principal amount of its 7.50% Notes with treasury stock. As of September 30, 2017,June 26, 2021, the outstanding aggregate principal amount of the 7.50% Notes was $347$312 million.
7.00% Senior Notes Due 2024
On June 16, 2014, the Company issued $500 million of its 7.00% Senior Notes due 2024 (7.00% Notes). The 7.00% Notes are general unsecured senior obligations of the Company. Interest is payable on January 1 and July 1 of each year beginning January
1, 2015 until the maturity date of July 1, 2024. The 7.00% Notes are governed by the terms of an indenture (the 7.00% Indenture) dated June 16, 2014 between the Company and Wells Fargo Bank, N.A., as trustee.
During the third quarter of 2017, the Company repurchased $26 million in aggregate principal amount of its 7.00% Notes for $28 million.
During the first nine months of 2017, the Company settled $92 million in aggregate principal amount of its 7.00% Notes for $70 million in cash and $26 million in treasury stock. As of September 30, 2017, the outstanding aggregate principal amount of the 7.00% Notes was $324 million.
Subsequent to the end of the third quarter of 2017 and through November 2, 2017, the Company repurchased $13 million in aggregate principal amount of its 7.00% Notes.
Potential Repurchase of Outstanding NotesRevolving Credit Facility
The Company may electis party to purchase or otherwise retire the 6.75% Notes, 7.50% Notes, 7.00% Notesa $500 million unsecured revolving credit facility (the Revolving Credit Facility), including a $50 million swingline sub-facility and 2.125% Notes with cash, stock or other assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries, or by tender offer when the Company believes the market conditions are favorable.
Secured Revolving Line of Credit
Amended and Restated Loan and Security Agreement
On April 14, 2015, the Company and its subsidiaries, AMD International Sales & Service, Ltd. (AMDISS) and ATI Technologies ULC (collectively, the Loan Parties), entered into an amended and restated loan and security agreement (the Amended and Restated Loan Agreement) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders (the Lenders) and Bank of America, N.A., acting as agent for the Lenders (the Agent).
Fifth Amendment to the Amended and Restated Loan and Security Agreement
On March 21, 2017, the Loan Parties entered into a fifth amendment to the Amended and Restated Loan Agreement (the Fifth Amendment) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders and the Agent, which modifies the Amended and Restated Loan Agreement. The Fifth Amendment amends the Amended and Restated Loan Agreement by, among other things, extending the maturity date of the Secured Revolving Line of Credit from April 14, 2020 to March 21, 2022, reducing the Applicable Margin (as defined in the Amended and Restated Loan Agreement), reducing the commitment fee, lowering the minimum threshold of Availability (as defined in the Amended and Restated Loan Agreement) required to be maintained by the Company and AMDISS in order to avoid cash dominion, amending the borrowing base reporting requirement, amending maximum dollar limits related to supply chain finance arrangements, and reducing the amount of the Secured Revolving Line of Credit available for the issuance$75 million sublimit for letters of credit from $75 millionpursuant to $45 million.
a credit agreement with a syndicate of banks. The Amended and Restated Loan Agreement provides for a Secured Revolving Line of Credit for a principal amount up to $500 million with up to $45 million available for issuance of letters of credit.Facility expires in June 2024. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible accounts receivable (90% for certain qualified eligible accounts receivable), minus specified reserves. The size ofFacility bear interest at either the commitments underLIBOR rate or the Secured Revolving Line of Credit may be increased by up to an aggregate amount of $200 million.
The Secured Revolving Line of Credit is secured by a first priority security interest in the Loan Parties’ accounts receivable, inventory, deposit accounts maintained with the Agent and other specified assets, including books and records.
Sixth Amendment to the Amended and Restated Loan and Security Agreement
On September 19, 2017, the Loan Parties entered into a sixth amendment to the Amended and Restated Loan Agreement (the Sixth Amendment) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders and the Agent, which modifies the Amended and Restated Loan Agreement. The Sixth Amendment amends the definition of the term “Qualified Factor Arrangement” to state that the amount held or owing or subject to repurchase is limited to (i) duringbase rate at the Company’s first fiscal quarter ofoption (in each of its fiscal years, $220 million in the aggregate, (ii) during the Company’s second and third fiscal quarter of each of its fiscal years, $300 million in the aggregate, and (iii) (x) from the first day of the Company’s fourth fiscal quarter of each of its fiscal years to December 20 of each of its fiscal years, $300 million in the aggregate (provided, that not more than $220 million of such amount may consist of Qualified Factor Accounts (as defined in the Sixth Amendment) sold in such period) and
(y) from December 21 of each of the Company’s fiscal years to and including the last day of the Company’s fourth fiscal quarter of each of its fiscal years, $220 million in the aggregate.
case, as customarily defined) plus an applicable margin. As of September 30, 2017, the Secured Revolving Line of Credit had an outstanding loan balance of $70 million, at an interest rate of 4.75%. As of December 31, 2016, the Company did not have anyJune 26, 2021, there were no borrowings outstanding under the Secured Revolving Line of Credit. As of September 30, 2017, the Company had $19 million letter of credit outstandingCredit Facility and up to $327 million available for future borrowings under the Secured Revolving Line of Credit. The Company reports its intra-period changes in its revolving credit balance on a net basis in its condensed consolidated statement of cash flows as the Company intends the period of the borrowings to be brief, repaying borrowed amounts within 90 days. As of September 30, 2017, the Company was in compliance with all required covenants incovenants. As of June 26, 2021, the Amended and Restated Loan Agreement.Company had $13 million of letters of credit outstanding under the Revolving Credit Facility.
NOTE 7. Net Income (Loss) Per Share
Basic net income (loss) per share is computed based on the weighted average number of shares outstanding.
Diluted net income (loss) per share is computed based on the weighted average number of shares outstanding plus any potentially dilutive shares outstanding. Potentially dilutive shares include stock options, restricted stock units, shares issuable upon conversion of the 2.125% Notes and the exercise of the warrant under the Warrant Agreement.
The following table sets forth the components of basic and diluted net income (loss) per share:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | September 24,
2016 | | September 30,
2017 | | September 24,
2016 |
| | (In millions, except per share amounts) |
| Numerator – Net income (loss): | | | | | | | |
| Numerator for basic and diluted net income (loss) per share | $ | 71 |
| | $ | (406 | ) | | $ | (18 | ) | | $ | (446 | ) |
| Denominator - Weighted average shares | | | | | | | |
| Denominator for basic net income (loss) per share | 957 |
| | 815 |
| | 947 |
| | 801 |
|
| Effect of potentially dilutive shares: | | | | | | | |
| Employee stock options and restricted stock units | 44 |
| | — |
| | — |
| | — |
|
| Warrants | 41 |
| | — |
| | — |
| | — |
|
| Denominator for diluted net income (loss) per share | 1,042 |
| | 815 |
| | 947 |
| | 801 |
|
| Net income (loss) per share: | | | | | | | |
| Basic | $ | 0.07 |
| | $ | (0.50 | ) | | $ | (0.02 | ) | | $ | (0.56 | ) |
| Diluted | $ | 0.07 |
| | $ | (0.50 | ) | | $ | (0.02 | ) | | $ | (0.56 | ) |
Potential shares from certain employee stock options, restricted stock units and the conversion of the 2.125% Notes totaling 102 million for the third quarter of 2017 and potential shares from certain employee stock options, restricted stock units, the conversion of the 2.125% Notes and the warrants under the Warrant Agreement totaling 144 million for the third quarter of 2016 were not included in the net income (loss) per share calculations because their inclusion would have been anti-dilutive.
Potential shares from certain employee stock options, restricted stock units, the conversion of the 2.125% Notes and the warrants under the Warrant Agreement totaling 193 million for the nine months ended September 30, 2017 and potential shares from certain employee stock options, restricted stock units, the conversion of the 2.125% Notes and the warrants under the Warrant Agreement totaling 217 million for the nine months ended September 24, 2016 were not included in the net loss per share calculations because their inclusion would have been anti-dilutive.
NOTE 8.6 – Financial Instruments
Cash and Cash EquivalentsFair Value Measurements
Cash and financial instruments measured and recordedFinancial Instruments Recorded at fair valueFair Value on a recurring basis asRecurring Basis
As of September 30, 2017 and December 31, 2016 are summarized below:
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | (In millions) |
| Cash | $ | 118 |
| | $ | 67 |
|
Level 1(1) (2) | | | |
| Government money market funds | $ | 115 |
| | $ | 50 |
|
| Total level 1 | $ | 115 |
| | $ | 50 |
|
Level 2(1) (3) | | | |
| Commercial paper | $ | 646 |
| | $ | 1,147 |
|
| Total level 2 | $ | 646 |
| | $ | 1,147 |
|
| Total | $ | 879 |
| | $ | 1,264 |
|
| |
(1)
| The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the quarter and nine months ended September 30, 2017 or the year ended December 31, 2016. |
| |
(2)
| The Company's Level 1 assets are valued using quoted prices for identical instruments in active markets. |
| |
(3)
| The Company’s Level 2 assets are valued using broker reports that utilize quoted market prices for identical or comparable instruments. Brokers gather observable inputs for all of the Company’s fixed income securities from a variety of industry data providers and other third-party sources. |
In addition to those amounts presented above, as of September 30, 2017 and December 31, 2016,June 26, 2021, the Company had approximately $2$200 million of investmentscash equivalent in government money market funds, used as collateral for letterswhich are classified within Level 1, and $100 million of credit deposits,cash equivalent in commercial paper, which were included in Other current assets on the Company’s condensed consolidated balance sheets. These governmentare classified within Level 2. The money market funds are classified within Level 1 because they are valued using quoted prices for identical instruments in active markets. Their amortized cost approximates theThe commercial paper is classified within Level 2 as its fair value estimates were based on quoted prices for all periods presented.comparable instruments.
As of June 26, 2021 and December 26, 2020, the Company had $993 million and $295 million of commercial paper, respectively, included in Short-term investments on the Company’s condensed consolidated balance sheets. The Companycommercial paper is restricted from accessing these deposits.classified within Level 2 as its fair value estimates were based on quoted prices for comparable instruments.
As of September 30, 2017June 26, 2021 and December 31, 2016,26, 2020, the Company also had approximately $17$65 million and $15$46 million, respectively, of investments in mutual funds held in a Rabbi trust established for the Company'sCompany’s deferred compensation plan, which were included in Other non-current assets on the Company'sCompany’s condensed consolidated balance sheets. These mutual fundsinvestments are classified within Level 1 because they are valued using quoted prices for identical instruments in active markets. Their amortized cost approximates the fair value for all periods presented. The Company is restricted from accessing these investments.
Financial Instruments Recorded at Fair Value on a Non-recurring Basis
During the six months ended June 26, 2021, the Company recorded in Other income (expense), net an impairment charge of $8 million associated with an equity investment.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis.
The Company carries its financial instruments at fair value with the exception ofexcept for its long-term debt. Financial instruments that are not recorded at fair value are measured at fair value on a quarterly basis for disclosure purposes. The carrying amounts and estimated fair values of financial instruments not recorded atthe Company’s long-term debt are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 26, 2021 | | December 26, 2020 |
| | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value |
| | (In millions) |
| | | | | | | |
| Long-term debt, net | $ | 313 | | | $ | 351 | | | $ | 330 | | | $ | 642 | |
The estimated fair value are as follows:
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| | (In millions) |
| Short-term debt | $ | 70 |
| | $ | 70 |
| | $ | — |
| | $ | — |
|
Long-term debt, net(1) | $ | 1,355 |
| | $ | 2,294 |
| | $ | 1,434 |
| | $ | 2,313 |
|
| |
(1)
| Carrying amounts of long-term debt are net of unamortized debt issuance costs of $21 million as of September 30, 2017 and $25 million as of December 31, 2016, based on the adoption of ASU 2015-03 and net of unamortized debt discount associated with the 2.125% Notes of $291 million as of September 30, 2017 and $308 million as of December 31, 2016. |
The Company’s long-term debt is classified withinbased on Level 2.2 inputs of quoted prices for the Company’s debt and comparable instruments in inactive markets The estimated fair value of the debt was estimated based on the quoted market prices for the same or similar issues or on2.125% Notes takes into account the current rates offeredvalue of the Company’s stock price compared to the Company for debtinitial conversion price of the same remaining maturities. approximately $8.00 per share of common stock.
The fair value of the Company’s time deposits, accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing payment terms.
Hedging Transactions and Derivative Financial Instruments
Cash FlowForeign Currency Forward Contracts Designated as Accounting Hedges
The following table shows the amount of gain (loss) included in accumulated other comprehensive gain (loss) and the amount of gain (loss) reclassified from accumulated other comprehensive gain (loss) and included in earningsCompany enters into foreign currency forward contracts to hedge its exposure to foreign currency exchange rate risk related to future forecasted transactions denominated in currencies other than the U.S. Dollar. These contracts generally mature within 18 months and are designated as accounting hedges. As of June 26, 2021 and December 26, 2020, the notional value of the Company’s outstanding foreign currency forward contracts designated as cash flow hedges:hedges was $819 million and $501 million, respectively. The fair value of these contracts was not material as of June 26, 2021 and December 26, 2020.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | September 24,
2016 | | September 30,
2017 | | September 24,
2016 |
| | (In millions) |
| Foreign Currency Forward Contracts - gains (losses) | | | | | | | |
| Contracts designated as cash flow hedging instruments | | | | | | | |
| Other comprehensive income (loss) | $ | 1 |
| | $ | (1 | ) | | $ | 8 |
| | $ | 7 |
|
| Research and development | 3 |
| | 1 |
| | 4 |
| | — |
|
| Marketing, general and administrative | 1 |
| | — |
| | 1 |
| | — |
|
| Contracts not designated as hedging instruments | | | | | | | |
| Other income (expense), net | $ | (2 | ) | | $ | — |
| | $ | (3 | ) | | $ | 2 |
|
The Company’sCompany also enters into foreign currency derivativeforward contracts to reduce the short-term effects of foreign currency fluctuations on certain receivables or payables denominated in currencies other than the U.S. Dollar. These forward contracts generally mature within 3 months and are classified within Level 2 becausenot designated as accounting hedges. As of June 26, 2021 and December 26, 2020, the valuation inputs are based on quoted pricesnotional values of these outstanding contracts were $132 million and market observable data$254 million, respectively. The fair value of similar instrumentsthese contracts was not material as of June 26, 2021 and December 26, 2020.
NOTE 7 – Accumulated Other Comprehensive Income (Loss)
The table below summarizes the changes in active markets, such as currency spot and forward rates.accumulated other comprehensive income (loss):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 26,
2021 | | June 27,
2020 | | June 26,
2021 | | June 27,
2020 |
| Gains (losses) on cash flow hedges: | (In millions) |
| Beginning balance | $ | 6 | | | $ | (14) | | | $ | 17 | | | $ | 0 | |
| Net unrealized gains (losses) arising during the period | 11 | | | 5 | | | 11 | | | (12) | |
| Net (gains) losses reclassified into income during the period | (9) | | | 5 | | | (19) | | | 8 | |
| Tax effect | (1) | | | 0 | | | (2) | | | 0 | |
| Total other comprehensive income (loss) | 1 | | | 10 | | | (10) | | | (4) | |
| Ending balance | $ | 7 | | | $ | (4) | | | $ | 7 | | | $ | (4) | |
NOTE 8 – Earnings Per Share
The following table showssets forth the fair value amounts included in Other current assets should the foreign currency forward contracts be in a gain position or included in Other current liabilities should these contracts be in a loss position. These amountscomponents of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 26,
2021 | | June 27,
2020 | | June 26,
2021 | | June 27,
2020 |
| (In millions, except per share amounts) |
| Numerator | | | | | | | |
| Net income for basic earnings per share | $ | 710 | | | $ | 157 | | | $ | 1,265 | | | $ | 319 | |
| Effect of potentially dilutive shares: | | | | | | | |
| Interest expense related to the 2.125% Notes | 0 | | | 3 | | | 0 | | | 7 | |
| Net income for diluted earnings per share | $ | 710 | | | $ | 160 | | | $ | 1,265 | | | $ | 326 | |
| Denominator | | | | | | | |
| Basic weighted average shares | 1,216 | | | 1,174 | | | 1,214 | | | 1,172 | |
| Effect of potentially dilutive shares: | | | | | | | |
| Employee equity plans and warrants | 16 | | | 22 | | | 17 | | | 22 | |
| 2.125% Notes | 0 | | | 31 | | | 0 | | | 31 | |
| Diluted weighted average shares | 1,232 | | | 1,227 | | | 1,231 | | | 1,225 | |
| Earnings per share: | | | | | | | |
| Basic | $ | 0.58 | | | $ | 0.13 | | | $ | 1.04 | | | $ | 0.27 | |
| Diluted | $ | 0.58 | | | $ | 0.13 | | | $ | 1.03 | | | $ | 0.27 | |
NOTE 9 – Common Stock and Employee Equity Plans
Common Stock
Shares of common stock outstanding were recorded in the Company's condensed consolidated balance sheets as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 26,
2021 | | June 27,
2020 | | June 26,
2021 | | June 27,
2020 |
| (In millions) |
| Balance, beginning of period | 1,215 | | | 1,171 | | | 1,211 | | | 1,170 | |
| Common stock issued under employee equity plans | 1 | | | 3 | | | 2 | | | 4 | |
| Issuance of common stock to settle convertible debt | 0 | | | 0 | | | 3 | | | 0 | |
| Repurchase of common stock | (3) | | | 0 | | | (3) | | | 0 | |
| Balance, end of period | 1,213 | | | 1,174 | | | 1,213 | | | 1,174 | |
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| | (In millions) |
| Foreign Currency Forward Contracts - gains (losses) | | | |
| Contracts designated as cash flow hedging instruments | $ | 6 |
| | $ | (2 | ) |
ForIn May 2021, the foreign currency contracts designated as cash flow hedges, the ineffective portionsCompany’s Board of the hedging relationship and the amounts excluded from the assessmentDirectors approved a stock repurchase program authorizing up to $4 billion of hedge effectiveness were immaterial.
As of September 30, 2017 and December 31, 2016, the notional valuesrepurchases of the Company’s outstanding foreign currency forward contracts were $305common stock (the Repurchase Program). During the three and six months ended June 26, 2021, the Company repurchased 3 million shares of its common stock under the Repurchase Program, for a total cash outlay of $256 million. As of June 26, 2021, $3.7 billion remains available for future stock repurchases under this program. The Repurchase Program does not obligate the Company to acquire any common stock, has no termination date and $138 million, respectively. All the contracts mature within 12 months, and, upon maturity, the amounts recorded in Accumulated other comprehensive gain (loss) are expected tomay be reclassified into earnings. The Company hedges its exposure to the variability in future cash flows for forecasted transactions over a maximum of 12 months.suspended or discontinued at any time.
Stock-based compensation expense was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 26,
2021 | | June 27,
2020 | | June 26,
2021 | | June 27,
2020 |
| (In millions) |
| Cost of sales | $ | 1 | | | $ | 2 | | | $ | 2 | | | $ | 4 | |
| Research and development | 53 | | | 37 | | | 108 | | | 74 | |
| Marketing, general and administrative | 29 | | | 21 | | | 58 | | | 41 | |
| Total stock-based compensation expense before income taxes | 83 | | | 60 | | | 168 | | | 119 | |
| Income tax benefit | (14) | | | 0 | | | (27) | | | 0 | |
| Total stock-based compensation expense after income taxes | $ | 69 | | | $ | 60 | | | $ | 141 | | | $ | 119 | |
NOTE 9.10 – Income Taxes
In the third quarter of 2017, theThe Company recorded an income tax provision of $19$113 million consisting primarily of withholding taxes applicable to IP related revenue from foreign locations.
Forand $202 million for the ninethree and six months ended September 30, 2017, the Company recorded an incomeJune 26, 2021, respectively, representing effective tax provisionrates of $27 million, consisting primarily of withholding taxes applicable to IP related revenue13.7% and licensing gain from foreign locations.
In the third quarter of 2016, the13.8%, respectively. The Company recorded an income tax provision of $4 million consisting of $3and $10 million for withholding taxes applicable to licensing gain from foreign locationsthe three and $1 million of foreign taxes in profitable locations.
For the ninesix months ended September 24, 2016, the Company recorded an incomeJune 27, 2020, respectively, representing effective tax provisionrates of $34 million, including $6 million of foreign taxes2.5% and 3.0%, respectively.
The increase in profitable locations, $5 million for withholding taxes primarily applicable to licensing gain from foreign locations and $4 million of tax benefits arising from other comprehensive income and Canadian tax credits. In addition, the Company recorded the tax effect of completion of the sale of a majority equity interest in two subsidiaries comprising $21 million of income tax expense and effective tax rate was due to significantly higher income in Chinathe United States in the current period, partially offset by the foreign-derived intangible income benefit, research and $6 million of withholdingdevelopment tax credits, and excess tax benefit for stock-based compensation. The lower income tax expense associated withand effective tax rate for the prior year period were due to a future repatriationfull valuation allowance in the United States during 2020, a significant portion of the gain generated in Chinawhich was released by the Chinese portionCompany in the fourth quarter of that transaction (see Note 4. Equity Interest Purchase Agreement - ATMP Joint Venture).2020.
The Company has not recognizedCompany’s effective tax rate for the three and six months ended June 26, 2021 and the three and six months ended June 27, 2020 was lower than the United States federal statutory rate primarily due to the tax benefit of future foreign tax credits associated with the withholding tax expense
as the size and age profile of existing tax attributes does not allow it to satisfy the “more likely than not” criterionbenefits recognized for the recognitionthree and six months ended June 26, 2021 discussed above, and due to the maintenance of deferred tax assets.a full valuation allowance during the three and six months ended June 27, 2020.
As of September 30, 2017, substantially all ofJune 26, 2021, the Company’s U.S.Company continues to maintain a valuation allowance for certain federal, state, and Canadian deferredforeign tax assets, net of deferred tax liabilities, continueattributes. The federal valuation allowance maintained is due to be subjectlimitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. The state and foreign valuation allowance maintained is due to a valuation allowance. The realizationlack of these assets is dependent on substantial futuresufficient sources of taxable income which, as of September 30, 2017, in management’s estimate, is not more likely than not to be achieved.income.
The Company's total gross unrecognized tax benefits increased from $58 million in prior quarter to $61 million as of September 30, 2017. This increase was due to additional R&D unrecognized tax benefits in foreign locations. The Company does not believe it is reasonably possible that unrecognized tax benefits will materially change in the next 12 months. However, the settlement, resolution or closure of tax audits are highly uncertain.
NOTE 10.11 – Segment Reporting
Management, including the Chief Operating Decision Maker, who is the Company’s Chief Executive Officer, reviews and assesses operating performance using segment net revenue and operating income (loss) before interest, other income (expense), net and income taxes.. These performance measures include the allocation of expenses to the operating segments based on management’s judgment. The Company has the following two2 reportable segments:
•the Computing and Graphics segment, which primarily includes desktop and notebook processorsmicroprocessors, accelerated processing units that integrate microprocessors and graphics, chipsets, discrete graphics processing units (GPUs), data center and professional graphics processorsGPUs and licensingdevelopment services. From time to time, the Company may also sell or license portions of its intellectual property (IP) portfolio; andIP portfolio.
•the Enterprise, Embedded and Semi-Custom segment, which primarily includes server and embedded processors, semi-custom System-on-Chip (SoC) products, development services and technology for game consoles and licensingconsoles. From time to time, the Company may also sell or license portions of its IP portfolio.
In addition to these reportable segments, the Company has an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to any of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. This category alsoprimarily includes employee stock-based compensation expense and restructuring and other special charges, net.acquisition-related costs.
The following table provides a summary of net revenue and operating income (loss) by segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 26,
2021 | | June 27,
2020 | | June 26,
2021 | | June 27,
2020 |
| (In millions) |
| Net revenue: | | | | | | | |
| Computing and Graphics | $ | 2,250 | | | $ | 1,367 | | | $ | 4,350 | | | $ | 2,805 | |
| Enterprise, Embedded and Semi-Custom | 1,600 | | | 565 | | | 2,945 | | | 913 | |
| | | | | | | |
| Total net revenue | $ | 3,850 | | | $ | 1,932 | | | $ | 7,295 | | | $ | 3,718 | |
| Operating income (loss): | | | | | | | |
| Computing and Graphics | $ | 526 | | | $ | 200 | | | $ | 1,011 | | | $ | 462 | |
| Enterprise, Embedded and Semi-Custom | 398 | | | 33 | | | 675 | | | 7 | |
All Other (1) | (93) | | | (60) | | | (193) | | | (119) | |
| Total operating income | $ | 831 | | | $ | 173 | | | $ | 1,493 | | | $ | 350 | |
| | | | | |
| (1) | For the three and six months ended June 26, 2021, all other operating losses included $83 million and $168 million of stock-based compensation expense and $10 million and $25 million of acquisition-related costs, respectively. For the three and six months ended June 27, 2020, all other operating losses were related to stock-based compensation expense. |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | September 24,
2016 | | September 30,
2017 | | September 24,
2016 |
| | (In millions) |
| Net revenue: | | | | | | | |
| Computing and Graphics | $ | 819 |
| | $ | 472 |
| | $ | 2,071 |
| | $ | 1,367 |
|
| Enterprise, Embedded and Semi-Custom | 824 |
| | 835 |
| | 1,778 |
| | 1,799 |
|
| Total net revenue | $ | 1,643 |
| | $ | 1,307 |
| | $ | 3,849 |
| | $ | 3,166 |
|
| Operating income (loss): | | | | | | | |
| Computing and Graphics | $ | 70 |
| | $ | (66 | ) | | $ | 62 |
| | $ | (217 | ) |
| Enterprise, Embedded and Semi-Custom | 84 |
| | 136 |
| | 135 |
| | 236 |
|
| All Other | (28 | ) | | (363 | ) | | (75 | ) | | (388 | ) |
| Total operating income (loss) | $ | 126 |
| | $ | (293 | ) | | $ | 122 |
| | $ | (369 | ) |
The following table provides major items included in All Other category:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | September 24,
2016 | | September 30,
2017 | | September 24,
2016 |
| | (In millions) |
| Operating loss: | | | | | | | |
| Stock-based compensation expense | $ | (29 | ) | | $ | (23 | ) | | $ | (76 | ) | | $ | (57 | ) |
| Restructuring and other special charges, net | — |
| | — |
| | — |
| | 10 |
|
| Charge related to the sixth amendment to the WSA with GF | — |
| | (340 | ) | | — |
| | (340 | ) |
| Other | 1 |
| | — |
| | 1 |
| | (1 | ) |
| Total operating loss | $ | (28 | ) | | $ | (363 | ) | | $ | (75 | ) | | $ | (388 | ) |
NOTE 11. Stock-Based Incentive Compensation Plans
Stock Options
The weighted average assumptions applied in the lattice-binomial model that the Company uses to estimate the fair value of employee stock options are as follows:
|
| | | | | |
| | Three and Nine Months Ended |
| | September 30,
2017 | | September 24,
2016 |
| Expected volatility | 56.32 | % | | 59.85 | % |
| Risk-free interest rate | 1.65 | % | | 1.00 | % |
| Expected dividends | 0.00 | % | | 0.00 | % |
| Expected life | 3.92 years |
| | 3.98 years |
|
During the quarter and nine months ended September 30, 2017 and quarter and nine months ended September 24, 2016, the Company granted 0.9 million and 2.2 million shares of employee stock options, respectively, with weighted average grant date fair value per share of $5.46 and $3.10, respectively.
Restricted Stock Units
In the third quarter of 2017, the Company granted 8.3 million shares of restricted stock units, including 0.8 million performance-based restricted stock units (PRSUs) with market conditions discussed below, with weighted average grant date fair value per share of $13.24. In the third quarter of 2016, the Company granted 19.5 million shares of restricted stock units including, 2.0 million PRSUs with market conditions discussed below, with weighted average grant date fair value per share of $5.10.
During the nine months ended September 30, 2017, the Company granted 10.4 million shares of restricted stock units including, 0.8 million PRSUs with market conditions discussed below, with weighted average grant date fair value per share of $13.03. During the nine months ended September 24, 2016, the Company granted 26 million shares of restricted stock units including, 2.0 million PRSUs with market conditions discussed below, with weighted average grant date fair value per share of $4.55.
Performance-based Restricted Stock Units with Market Conditions
During the third quarter of 2017, the Company granted restricted stock units with both a market condition and a service condition (market-based restricted stock units) to the Company's senior executives. The vesting is based on relative Total Shareholder Return (TSR) performance. The number of shares that may be earned is calculated based on the TSR of AMD's common stock as compared to the TSR of the companies included in the PHLX Semiconductor Sector Index (SOX), with the potential payout level of shares within a range from 0% to 250% of the target number of shares granted. These payout levels can be adjusted by two criteria - one based on AMD's TSR and one based on AMD's stock price during the last year of performance period; and an overall payout cap based on total value. Any shares earned shall vest upon the compensation committee's certification of the attainment of the performance level, subject to the recipient's continuous employment or service through each such vesting date.
The Company estimated the fair value of the market-based restricted stock units using a Monte Carlo simulation model on the date of grant. As of September 30, 2017 there were 0.8 million market-based restricted stock units with potential payout level at 100% with a grant date fair value per share of $17.18.
During the third quarter of 2016, the Company granted market-based restricted stock units to the Company’s senior executives. The number of shares that may be earned is based on three-year compounded annual growth rate milestones related to the Company’s closing stock price that may be attained within the three-year performance period, with the potential payout levels of shares at 50%, 100%, 150%, 200% and 250% of the target number of shares granted. Any shares earned pursuant to the attainment of a performance level shall vest 50% upon the compensation committee's certification of the attainment of the performance level (provided, however, that no shares may be earned or vest prior to the first anniversary of the grant date) and the remaining 50% shall vest at the end of the performance period, subject to the recipient’s continuous employment or service through each such vesting date.
The Company estimated the fair value of the market-based restricted stock units using a Monte Carlo simulation model on the date of grant. As of September 24, 2016, there were 2.0 million market-based restricted stock units with the potential payout level at 100% with a grant date fair value per share of $4.50. As of September 30, 2017, all the 2016 market-based restricted stock units achieved the 250% payout level.
NOTE 12.12 – Commitments and Contingencies
WarrantiesCommitments
The Company’s purchase commitments primarily include the Company’s obligations to purchase wafers, substrates from third parties and Indemnitiescertain software and technology licenses and IP licenses.
TheTotal future unconditional purchase commitments as of June 26, 2021 were as follows: | | | | | |
| Year | (In millions) |
| Remainder of 2021 | $ | 3,204 | |
| 2022 | 1,154 | |
| 2023 | 682 | |
| 2024 | 596 | |
| 2025 | 103 | |
| 2026 and thereafter | 277 | |
| Total unconditional purchase commitments | $ | 6,016 | |
In May 2021, the Company generally warrants that its products sold to its customers will conformentered into an amendment (the “A&R Seventh Amendment”) to the Company’s approved specificationsWafer Supply Agreement (WSA) with GLOBALFOUNDRIES Inc. (GF) to extend GF’s capacity commitment and be free from defects in materialpricing for wafer purchases at the 12 nm and workmanship under normal use and service for one year. Subject14 nm technology nodes through December 31, 2024. Specifically, GF agreed to certain exceptions,a minimum annual capacity allocation to the Company for years 2022, 2023 and 2024. The A&R Seventh Amendment also offers a three-year limited warranty to end users for only those central processing unit (CPU)removes all prior exclusivity commitments and AMD accelerated processing unit (APU) products that are commonly referred to as “processors in a box” and for certain server CPU products. The Company also offers extended limited warranties to certain customers of “tray” microprocessor products and/or professional graphics products who have written agreements with the Company and target their computer systems at the commercial and/or embedded markets.
Changes in the Company’s estimated liability for product warranty were as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | September 24,
2016 | | September 30,
2017 | | September 24,
2016 |
| | (In millions) |
| Beginning balance | $ | 10 |
| | $ | 11 |
| | $ | 12 |
| | $ | 15 |
|
| New warranties issued | 7 |
| | 5 |
| | 18 |
| | 15 |
|
| Settlements | (7 | ) | | (5 | ) | | (16 | ) | | (13 | ) |
| Changes in liability for pre-existing warranties, including expirations | 1 |
| | — |
| | (3 | ) | | (6 | ) |
| Ending balance | $ | 11 |
| | $ | 11 |
| | $ | 11 |
| | $ | 11 |
|
In addition to product warranties, the Company, from time to time in its normal course of business, indemnifies other parties, with whom it enters into contractual relationships, including customers, lessors and parties to other transactions withprovides the Company with full flexibility to contract with any wafer foundry with respect to certain matters. In these limited matters,all products manufactured at any technology node. Further, the parties agreed to pricing and annual wafer purchase targets for years 2022, 2023 and 2024, and the Company has agreed to holdpre-pay GF certain third parties harmless against specific types of claims or losses, such asamounts for those arising from a breach of representations or covenants, third-party claims that the Company’s products, when used for their intended purpose(s)wafers in 2022 and under specific conditions, infringe the intellectual property rights of a third party, or other specified claims made against the indemnified party. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the unique facts and circumstances that are likely to be involved in each particular claim and indemnification provision. Historically, payments made by2023. If the Company underdoes not meet the annual wafer purchase target for any of these obligations have not been material.years, it will be required to pay to GF a portion of the difference between the actual wafer purchases and the wafer purchase target for that year.
Contingencies
Securities Class ActionCity of Pontiac Police and Fire Retirement System Litigation
On January 15, 2014,September 29, 2020, the City of Pontiac Police and Fire Retirement System, an AMD shareholder, filed a class action lawsuit captioned Hatamian v.shareholder derivative complaint (the “Complaint”) against AMD et al., C.A. No. 3:14-cv-00226 (the Hatamian Lawsuit) was filed againstand the Companymembers of its Board of Directors (collectively, “Defendants”) in the United States District Court for the Northern District of California. See City of Pontiac Police and Fire Retirement System v. Caldwell, et al., No. 5:20-cv-6794 (N.D. Cal.). The complaint purports to assert claims against the Company and certain individual officers for alleged violations ofComplaint alleges that Defendants breached their fiduciary duties, violated Section 10(b)14(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5were unjustly enriched by misrepresenting the Company’s commitment to diversity, particularly with respect to the composition of the Exchange Act. The plaintiffs seek to represent a proposed classmembership of all persons who purchased or otherwise acquired the Company's common stock during the period April 4, 2011 through OctoberAMD’s Board of Directors and senior leadership team. On December 18, 2012. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual officers regarding the Company's 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for the Company's common stock during the period. The complaint seeks unspecified compensatory damages, attorneys’ fees and costs. On July 7, 2014, the Company2020, Defendants filed a motion to dismiss plaintiffs’ claims.the Complaint. On February 12, 2021, Plaintiff filed an opposition to Defendants’ motion to dismiss, and on March 31, 2015, the Court denied12, 2021, Defendants filed a reply brief in support of the motion to dismiss. On May 14, 2015, the Company filed its answer to plaintiffs’ corrected amended complaint. On September 4, 2015, plaintiffs filed their motion for class certification, and on March 16, 2016,July 1, 2021, the Court granted plaintiffs' motion. A court-ordered mediation held in January 2016 did not result in a settlement of the lawsuit. The discovery process was concluded. The plaintiffs and defendants filed cross-motions for summary judgment, and briefing on those motions was completed in July 2017. On October 9, 2017, the parties signed a definitive settlement agreement resolving this matter and submitted itDefendants’ motion to the Court for approval. Under the terms of this agreement, the settlement will be funded entirely by certain of AMD’s insurance carriers and the defendants will continue to deny any liability or wrongdoing.dismiss, without prejudice.
Based upon information presently known to management, the Company believes that the potential liability, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations.
Shareholder Derivative LawsuitsFuture Link Systems Litigation
On March 20, 2014,December 21, 2020, Future Link Systems, LLC filed a purported shareholder derivative lawsuit captioned Wessels v. Read, et al., Case No. 1:14 cv-262486 (Wessels) was filedpatent infringement complaint against the Company (as a nominal defendant only) and certain of its directors and officers in the Santa Clara County Superior Court of the State of California. The complaint purports to assert claims against the Company and certain individual directors and officers for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual directors and officers regarding its 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for the Company's common stock during the period. On April 27, 2015, a similar purported shareholder derivative lawsuit captioned Christopher Hamilton and David Hamilton v. Barnes, et al., Case No. 5:15-cv-01890 (Hamilton) was filed against the Company (as a nominal defendant only) and certain of its directors and officers in the United States District Court for the NorthernWestern District of California. The case was transferredTexas. Future Link Systems alleges that the Company infringes three U.S. patents: 7,983,888 (related to simulated PCI express circuitry); 6,363,466 (related to out of order data transactions); and 6,622,108 (related to interconnect testing). Future Link Systems seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, costs, and injunctive relief against the Company. On March 22, 2021, the Company filed its answer to Future Link Systems’ complaint and also filed counterclaims based on Future Link Systems’ breach of the parties’ pre-suit non-disclosure agreement. On April 12, 2021, Future Link Systems filed its answer to the judge handling the Hatamian Lawsuit and is now Case No. 4:15-cv-01890.
Company’s counterclaims. On September 29, 2015, a similar purported shareholder derivative lawsuit captioned Jake Ha v Caldwell, et al., Case No. 3:15-cv-04485 (Ha) was filed againstJune 3, 2021, the Company (asfiled a nominal defendant only) and certainmotion to transfer the case to Austin, Texas.
Based upon information presently known to management, the Company believes that the potential liability, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations.
ZiiLabs Litigation
On December 16, 2016, a patent lawsuit captioned ZiiLabs v. AMD, C.A. No. 2:16-cv-1418 in the United States District Court for Eastern District of Texas (the ZiiLabs Lawsuit) was filed against the Company. The complaint alleged that the Company infringed four patents related generally to graphics processors and memory controllers. The complaint sought damages, interest, and attorneys’ fees. ZiiLabs filed several similar lawsuits against other companies on the same day. On the same date, ZiiLabs also filed a complaint with the United States International Trade Commission (USITC) pursuant to Section 337 of the Tariff Act of 1930 against the Company and several other companies asserting the same four patents (USITC Proceeding)operations. The complaint sought a limited exclusion order barring the importation of certain products that contain AMD memory controllers and graphics processors. Some of the Company’s customers are also named respondents. On January 18, 2017, the USITC announced that it would institute the investigation, entitled 337-TA-1037, In the Matter of Certain Graphics Processors, DDR Memory Controllers, and Products Containing the Same. On July 20, 2017, the Company obtained a license to the patents-in-suit. Accordingly, the USITC and the Court have dismissed the Company from the proceedings. The resulting settlement obligation was not material. The applicable amount of the patent license was capitalized on the Company's balance sheet in the third quarter of 2017 and amortized over its useful life.
Dickey Litigation
On October 26, 2015, a putative class action complaint captioned Dickey et al. v. AMD, No. 15-cv-04922 was filed against the Company in the United States District Court for the Northern District of California. Plaintiffs allege that the Company misled consumers by using the term "eight cores" in connection with the marketing of certain AMD FX CPUs that are based on the Company's “Bulldozer” core architecture. The plaintiffs allege these products cannot perform eight calculations simultaneously, without restriction. The plaintiffs seek to obtain damages under several causes of action for a nationwide class of consumers who allegedly were deceived into purchasing certain Bulldozer-based CPUs that were marketed as containing eight cores. The plaintiffs also seek attorneys' fees. On December 21, 2015, the Company filed a motion to dismiss the complaint, which was granted on April 7, 2016. The plaintiffs then filed an amended complaint with a narrowed putative class definition, which the Court dismissed upon the Company's motion on October 31, 2016. The plaintiffs subsequently filed a second amended complaint, and the Company filed a motion to dismiss the second amended complaint. On June 14, 2017, the Court issued an order granting in part and denying in part the Company's motion to dismiss, and allowing the plaintiffs to move forward with a portion of their complaint. The putative class definition does not encompass the Company's Ryzen or EYPC processors.
Based upon information presently known to management, the Company believes that the potential liability, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations.
Other Legal Matters
The Company is a defendant or plaintiff in various actions that arose in the normal course of business. With respect to these matters, based on the management’s current knowledge, the Company believes that the amount or range of reasonably possible loss, if any, will not, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, and results of operations, or cash flows.
NOTE 13. Accumulated Other Comprehensive Income (Loss)13 – Pending Acquisition
On October 26, 2020, the Company entered into an Agreement and Plan of Merger (the Merger Agreement), with Thrones Merger Sub, Inc., a wholly-owned subsidiary of the Company (Merger sub), and Xilinx, Inc. (Xilinx), whereby Merger Sub will merge with and into Xilinx (the Merger), with Xilinx surviving such Merger as a wholly-owned subsidiary of the Company. Under the Merger Agreement, at the effective time of the Merger (the Effective Time), each share of common stock of Xilinx (Xilinx Common Stock) issued and outstanding immediately prior to the Effective Time (other than treasury shares and any shares of Xilinx Common Stock held directly by the Company or Merger Sub) will be converted into the right to receive 1.7234 fully paid and non-assessable shares of common stock of the Company and, if applicable, cash in lieu of fractional shares, subject to any applicable withholding. As of the signing of the Merger Agreement, the transaction was valued at $35 billion. The tables below summarizeactual valuation of the changestransaction could differ significantly from the estimated amount due to movements in accumulatedthe price of the Company’s common stock, the number of shares of Xilinx common stock outstanding on the closing date of the Merger and other comprehensive income (loss)factors.
Under the Merger Agreement, the Company will be required to pay a termination fee to Xilinx equal to $1.5 billion if the Merger Agreement is terminated in certain circumstances, including if the Merger Agreement is terminated because the Company’s board of directors has changed its recommendation. The Company will be required to pay a termination fee equal to $1 billion if the Merger Agreement is terminated in certain circumstances related to the failure to obtain required regulatory approvals prior to October 26, 2021 (subject to automatic extension first to January 26, 2022 and then to April 26, 2022, in each case, to the extent the regulatory closing conditions remain outstanding).
On April 7, 2021, the Company’s and Xilinx’s stockholders voted to approve their respective proposals relating to the pending acquisition of Xilinx by component:the Company. Effective as of June 29, 2021, the United Kingdom’s Competition and Markets Authority, and effective as of June 30, 2021, the European Commission issued approvals of the Merger. The completion of the Merger remains subject to other closing conditions, including the receipt of certain approvals and clearances required under the competition laws of certain other foreign jurisdictions. The Merger is subject to customary conditions including regulatory approval and is currently expected to occur by the end of calendar year 2021.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30,
2017 | | September 24,
2016 |
| | Unrealized gains (losses) on available-for-sale securities | | Unrealized gains (losses) on cash flow hedges | | Total | | Unrealized gains (losses) on available-for-sale securities | | Unrealized gains (losses) on cash flow hedges | | Total |
| | (In millions) |
| Beginning balance | $ | (1 | ) | | $ | 1 |
| | $ | — |
| | $ | (2 | ) | | $ | (1 | ) | | $ | (3 | ) |
| Unrealized gains arising during the period | — |
| | 6 |
| | 6 |
| | 1 |
| | — |
| | 1 |
|
| Reclassification adjustment for (gains) losses realized and included in net income (loss) | — |
| | (4 | ) | | (4 | ) | | — |
| | (1 | ) | | (1 | ) |
| Tax effect | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total other comprehensive income (loss) | — |
| | 2 |
| | 2 |
| | 1 |
| | (1 | ) | | — |
|
| Ending balance | $ | (1 | ) | | $ | 3 |
| | $ | 2 |
| | $ | (1 | ) | | $ | (2 | ) | | $ | (3 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30,
2017 | | September 24,
2016 |
| | Unrealized gains (losses) on available-for-sale securities | | Unrealized gains (losses) on cash flow hedges | | Total | | Unrealized gains (losses) on available-for-sale securities | | Unrealized gains (losses) on cash flow hedges | | Total |
| | (In millions) |
| Beginning balance | $ | (1 | ) | | $ | (4 | ) | | $ | (5 | ) | | $ | (1 | ) | | $ | (7 | ) | | $ | (8 | ) |
| Unrealized gains (losses) arising during the period | — |
| | 14 |
| | 14 |
| | (1 | ) | | 7 |
| | 6 |
|
| Reclassification adjustment for (gains) losses realized and included in net income (loss) | — |
| | (5 | ) | | (5 | ) | | — |
| | 1 |
| | 1 |
|
| Tax effect | — |
| | (2 | ) | | (2 | ) | | 1 |
| | (3 | ) | | (2 | ) |
| Total other comprehensive income (loss) | — |
| | 7 |
| | 7 |
| | — |
| | 5 |
| | 5 |
|
| Ending balance | $ | (1 | ) | | $ | 3 |
| | $ | 2 |
| | $ | (1 | ) | | $ | (2 | ) | | $ | (3 | ) |
|
| | | | |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The statements in this report include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements speak only as of the date hereof or as of the dates indicated in the statements and should not be relied upon as predictions of future events, as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma,” “estimates,” “anticipates,” or the negative of these words and phrases, other variations of these words and phrases or comparable terminology. The forward-looking statements relate to, among other things: possible impact of future accounting rules on AMD'sAMD’s condensed consolidated financial statements; demand for AMD’s products; the growth, change and competitive landscape of the markets in which AMD participates; future restructuring activities; the ability to implement new revenue recognition accounting standards; the nature and extent of AMD’s future payments to GLOBALFOUNDRIES Inc. (GF) and the materiality of these payments; the materiality of AMD’s future purchases from GF; AMD's ability to meet it's 2017 wafer purchase target; the expected amounts to be received by AMD under the IP licensing agreement and AMD's expected royalty payments from future product sales of China JVs' products to be developed on the basis of such licensed IP; sales patterns of AMD's PC products and semi-custom System-on-Chip (SoC) products for game consoles; the level of international sales as compared to total sales; international sales will continue to be a significant portion of total sales in the foreseeable future; that other unrecognized tax benefits will not materially change in the next 12 months; that AMD’s cash, and cash equivalents and short-term investment balances together with the availability under that certain secured revolving line of credit (Securedfacility (the Revolving Line of Credit)Credit Facility) made available to AMD and certain of its subsidiaries under the Amended and Restated LoanCredit Agreement, will be sufficient to fund AMD’s operations including capital expenditures over the next 12 months; AMD’s ability to obtain sufficient external financing on favorable terms, or at all; AMD'sAMD’s expectation that based on the information presently known to management, the potential liability related to AMD'sAMD’s current litigation will not have a material adverse effect on its financial condition, cash flows or results of operations; AMD does not expectanticipated ongoing and increased costs related to pay dividends inenhancing and implementing information security controls; all unbilled accounts receivables are expected to be billed and collected within 12 months; revenue allocated to remaining performance obligations that are unsatisfied which will be recognized over the future;next 12 months; a small number of customers will continue to account for a substantial part of AMD'sAMD’s revenue in the future; and anticipated sales in the fourth quarteracquisition of 2017. Material factors that could cause actual resultsXilinx, Inc. is currently expected to differ materially from current expectations include, without limitation, the following: Intel Corporation’s dominance of the microprocessor market and its aggressive business practices may limit AMD’s ability to compete effectively; AMD has a wafer supply agreement with GF with obligations to purchase all of its microprocessor and APU product requirements, and a certain portion of its GPU product requirements from GF with limited exceptions. If GF is not able to satisfy AMD’s manufacturing requirements, AMD's business could be adversely impacted; AMD relies on third parties to manufacture its products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, AMD’s business could be materially adversely affected; failure to achieve expected manufacturing yields for AMD’s products could negatively impact its financial results; the success of AMD’s business is dependent upon its ability to introduce products on a timely basis with features and performance levels that provide value to its customers while supporting and coinciding with significant industry transitions; if AMD cannot generate sufficient revenue and operating cash flow or obtain external financing, it may face a cash shortfall and be unable to make all of its planned investments in research and development or other strategic investments; the loss of a significant customer may have a material adverse effect on AMD; AMD’s receipt of revenue from its semi-custom SoC products is dependent upon its technology being designed into third-party products and the success of those products; global economic uncertainty may adversely impact AMD’s business and operating results; the markets in which AMD’s products are sold are highly competitive; AMD may not be able to generate sufficient cash to service its debt obligations or meet its working capital requirements; AMD has a large amount of indebtedness which could adversely affect its financial position and prevent it from implementing its strategy or fulfilling its contractual obligations; the agreements governing AMD’s notes and the Secured Revolving Line of Credit impose restrictions on AMD that may adversely affect its ability to operate its business; AMD's issuance to West Coast Hitech L.P. (WCH) of warrants to purchase 75 million shares of its common stock, if and when exercised, will dilute the ownership interests of AMD's existing stockholders, and the conversion of the 2.125% Convertible Senior Notes due 2026 (2.125% Notes) may dilute the ownership interest of AMD's existing stockholders, or may otherwise depress the price of its common stock; uncertainties involving the ordering and shipment of AMD’s products could materially adversely affect it; the demand for AMD’s products depends in part on the market conditions in the industries into which they are sold. Fluctuations in demand for AMD’s products or a market decline in any of these industries could have a material adverse effect on its results of operations; AMD’s ability to design and introduce new products in a timely manner is dependent upon third-party intellectual property; AMD depends on third-party companies for the design, manufacture and supply of motherboards, software and other computer platform components to support its business; if AMD loses Microsoft Corporation’s support for its products or other software vendors do not design and develop software to run on AMD’s products, its ability to sell its products could be materially adversely affected; AMD’s reliance on third-party distributors and AIB partners subjects it to certain risks; AMD’s inability to continue to attract and retain qualified personnel may hinder its business; in the event of a change of control, AMD may not be able to repurchase its outstanding debt as requiredclose by the applicable indentures and its Secured Revolving Lineend of Credit, which would result in a default under the indentures and its Secured Revolving Line of Credit; the semiconductor industry is highly cyclical and has experienced se
vere downturns that have materially adversely affected, and may continue to materially adversely affectits business in the future; acquisitions, divestitures and/or joint ventures could disrupt its business, harm its financial condition and operating results or dilute, or adversely affect the price of, its common stock; AMD’s business is dependent upon the proper functioning of its internal business processes and information systems and modification or interruption of such systems may disrupt its business, processes and internal controls; data breaches and cyber-attacks could compromise AMD’s intellectual property or other sensitive information, be costly to remediate and cause significant damage to its business and reputation; AMD’s operating results are subject to quarterly and seasonal sales patterns; if essential equipment, materials or manufacturing processes are not available to manufacture its products, AMD could be materially adversely affected; if AMD’s products are not compatible with some or all industry-standard software and hardware, it could be materially adversely affected; costs related to defective products could have a material adverse effect on AMD; if AMD fails to maintain the efficiency of its supply chain as it responds to changes in customer demand for its products, its business could be materially adversely affected; AMD outsources to third parties certain supply-chain logistics functions, including portions of its product distribution, transportation management and information technology support services; AMD may incur future impairments of goodwill; AMD's stock price is subject to volatility; AMD’s worldwide operations are subject to political, legal and economic risks and natural disasters, which could have a material adverse effect on it; worldwide political conditions may adversely affect demand for AMD’s products; unfavorable currency exchange rate fluctuations could adversely affect AMD; AMD’s inability to effectively control the sales of its products on the gray market could have a material adverse effect on it; if AMD cannot adequately protect its technology or other intellectual property in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, it may lose a competitive advantage and incur significant expenses; AMD is a party to litigation and may become a party to other claims or litigation that could cause it to incur substantial costs or pay substantial damages or prohibit it from selling its products; AMD’s business is subject to potential tax liabilities; and AMD is subject to environmental laws, conflict minerals-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as a variety of other laws or regulations that could result in additional costs and liabilities.
calendar year 2021. For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements, see “Part II, Item 1A—Risk Factors” beginning on page 41 and the “Financial Condition” beginning on page 33section set forth below, and such other risks and uncertainties as set forth below in this report or detailed in our other Securities and Exchange Commission (SEC) reports and filings. We assume no obligation to update forward-looking statements.
AMD, the AMD Arrow logo, ATI, and the ATI logo, Athlon, EPYC, Radeon, Ryzen, Threadripper and combinations thereof, are trademarks of Advanced Micro Devices, Inc. Microsoft is aand Xbox One are trademarks or registered trademarktrademarks of Microsoft Corporation in the United States and other jurisdictions. Sony is a trademark of Sony Corporation. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners. “Zen” is a code name for an AMD architecture, and is not a product name.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this report and our audited consolidated financial statements and related notes as of December 31, 201626, 2020 and December 26, 2015,28, 2019, and for each of the three years infor the period ended December 31, 201626, 2020 as filed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.26, 2020.
Overview
We are a global semiconductor company with facilities around the world. Within the global semiconductor industry, we offer primarily:
company. Our products include x86 microprocessors as standalone devices or as incorporated as an(CPUs), accelerated processing unit (APU)units which integrate microprocessors and graphics (APUs), chipsets, discrete graphics processing units (GPUs), semi-custom System-on-Chip (SOC) products and professional graphics processors; and
serverchipsets for the PC, gaming, datacenter and embedded processors, semi-custom System-on-Chip (SoC) productsmarkets. In addition, we provide development services and technology for game consoles.
We alsosell or license portions of our intellectual property (IP) portfolio.
In this section, we will describe the general financial condition and the results of operations of Advanced Micro Devices, Inc. and its wholly-owned subsidiaries (collectively, “us,” “our” or “AMD”), including a discussion of our results of operations for the quarterthree and ninesix months ended September 30, 2017June 26, 2021 compared to the quarter and nine months ended September 24, 2016,prior year period, an analysis of changes in our financial condition and a discussion of our contractual obligations.
Net revenue infor the third quarter of 2017three months ended June 26, 2021 was $1.64$3.9 billion, a 26%99% increase compared to the third quarter of 2016.prior year period. The year-over-year increase was primarily due to a 74%65% increase in Computing and Graphics net revenue partially offset byand a 1% decrease183% increase in Enterprise, Embedded and Semi-Custom net revenue. The increase in Computing and Graphics segment net revenue was primarily due to higher sales fromof our graphicsRyzen™ processors and desktop processors and IP related revenue.Radeon™ products. The decreaseincrease in
Enterprise, Embedded and Semi-Custom segment net revenue was primarily due to higher semi-custom revenue and EPYC™ server processor revenue.
Gross margin for the three months ended June 26, 2021 was 48% compared to gross margin of 44% for the prior year period. The increase in gross margin was primarily driven by lowera richer mix of sales, of our semi-custom SoCs, mostly offset by IP related revenueincluding high-end Ryzen, Radeon and revenue from our AMD EPYC™ datacenter processors. EPYC processor sales.
Our operating income for the third quarter of 2017three months ended June 26, 2021 was $126$831 million compared to operating lossincome of $293$173 million for the prior year period. The increase in the third quarter of 2016. operating income was primarily driven by strong revenue growth which more than offset higher operating expenses.
Our net income for the third quarter of 2017three months ended June 26, 2021 was $71$710 million compared to net income of $157 million for the prior year period. The increase in net income was primarily driven by higher operating income, partially offset by a net losshigher income tax provision.
Cash, cash equivalents and short-term investments as of $406June 26, 2021 were $3.8 billion, compared to $2.3 billion as of December 26, 2020. The aggregate principal amount of our outstanding debt obligations was $313 million and $338 million as of June 26, 2021 and December 26, 2020, respectively.
During the second quarter of 2021, we introduced the new AMD Radeon RX 6000M Series Mobile Graphics designed for high-performance gaming laptops and we announced the AMD Advantage™ Design Framework to deliver best-in-class gaming experiences. AMD Advantage systems combine AMD Radeon RX 6000M Series Mobile Graphics, AMD Radeon Software and AMD Ryzen 5000 Series Mobile Processors with AMD smart technologies. We also introduced our AMD FidelityFX Super Resolution software for game developers to help deliver a year ago.high-quality, high-resolution gaming experience. In June 2021, we announced our AMD Radeon PRO W6000 series workstation graphics for professional users who have demanding architectural design workloads, ultra-high resolution media projects, complex design and engineering simulations and advanced image and video editing applications.
Amid the COVID-19 pandemic, we continue to focus on the health and safety of our employees. We introduced a number of new productsmonitor and take safety measures to protect our employees who are in the thirdoffice and support those employees who work from home so that they can be productive. Our offices remain open to enable critical on-site business functions in accordance with local government guidelines. The majority of our employees in China and Singapore work on site subject to local government health measures and in July 2021, our US employees began to return to the office in accordance with health and safety protocols. In the other geographies in which we operate, the majority of our employees continued to work from home during the second quarter of 2017. We released mainstream2021. The current COVID-19 pandemic continues to impact our business operations and practices, and while we expect that it may continue to impact our business, we experienced limited financial disruption during the second quarter of 2021.
As part of our strategy to establish AMD as the industry’s high efficiency AMD Ryzen™ 3 desktop processors,performance computing leader, we announced in October 2020 that we entered into a definitive agreement to acquire Xilinx, Inc. in an all-stock transaction. On April 7, 2021, our stockholders and Xilinx’s stockholders voted to approve their respective proposals relating to the AMD Ryzen™ 3 1300xpending acquisition of Xilinx by AMD. Effective as of June 29, 2021, the United Kingdom’s Competition and AMD Ryzen™ 3 1200 processors. We designed both processorsMarkets Authority, and effective as of June 30, 2021, the European Commission issued approvals of the Merger. The completion of the Merger remains subject to deliver optimum performance for gamingother closing conditions, including the receipt of certain approvals and computing applications. We also launched our Ryzen™ Threadripper™ processor,clearances required under the AMD Ryzen™ Threadripper™ 1950xcompetition laws of certain other foreign jurisdictions. The closing of the Merger is subject to customary conditions, including regulatory approval, and Ryzen™ Threadripper™ 1920x, for the high-end desktop market. In addition, we launched our Radeon™ Pro WX 9100 and Radeon™ Pro SSG. These new professional graphics cards can help accelerate the pace of professional content creation. In August 2017, we formally launched our Radeon™ RX Vega family of graphics processors, our most sophisticated graphics processor unit architecture designed for the enthusiast-class gaming segment.
Cash and cash equivalents as ofis currently expected to occur by the end of calendar year 2021.
In May 2021, we announced that our Board of Directors approved a new stock repurchase program to purchase up to $4 billion of our outstanding common stock in the third quarteropen market. During the three and six months ended June 26, 2021, we repurchased 3 million shares of 2017 were $879 million, comparedour common stock under the Repurchase Program, for a total cash outlay of $256 million. As of June 26, 2021, $3.7 billion remains available for future stock repurchases under this program. The repurchase program does not obligate us to $1.26 billion asacquire any common stock, has no termination date and may be suspended or discontinued at any time.
Also in May 2021, we entered into an amendment (the A&R Seventh Amendment) to the Wafer Supply Agreement (WSA) with GLOBALFOUNDRIES Inc. (GF) to extend GF’s capacity commitment and pricing for wafers purchased at the 12 nm and 14 nm technology nodes by us through December 31, 2024. Specifically, GF agreed to a minimum annual capacity allocation to the Company for years 2022, 2023 and 2024. The A&R Seventh Amendment also removes all prior exclusivity commitments and provides us with full flexibility to contract with any wafer foundry with
respect to all products manufactured at any technology node. Further, the parties agreed to pricing and annual wafer purchase targets for years 2022, 2023 and 2024, and we agreed to pre-pay GF certain amounts for those wafers in 2022 and 2023. If we do not meet the annual wafer purchase target for any of these years, we will be required to pay to GF a portion of the end ofdifference between the fourth quarter of 2016.
actual wafer purchases and the wafer purchase target for that year.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist you in understanding our financial statements, the changes in certain key items in those financial statements from yearperiod to year and quarter to quarter,period, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements.
Results of Operations
Management, including the Chief Operating Decision Maker, who isWe report our Chief Executive Officer, reviews and assesses our operatingfinancial performance using segment net revenue and operating income (loss) before interest, other income (expense), net and income taxes. These performance measures include the allocation of expenses to the operating segments based on management’s judgment. We have the following two reportable segments:
the Computing and Graphics segment which primarily includes desktop and notebook processors and chipsets, discrete graphics processors, professional graphics processors and licensing portions of our IP portfolio; and
the Enterprise, Embedded and Semi-Custom segment, which primarily includes server and embedded processors, semi-custom SoC products, development services, technology for game consoles and licensing portions ofsegment.
Additional information on our IP portfolio.
In addition to these reportable segments we have an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to anycontained in Note 11—Segment Reporting of the reportable segments because management does not consider these expenses and credits in evaluating the performanceNotes to Condensed Consolidated Financial Statements (Part I, Financial Information of the reportable segments. This category also includes employee stock-based compensation expense and restructuring and other special charges, net.
We use a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters ended September 30, 2017 and September 24, 2016 each consisted of 13 weeks. The nine months ended September 30, 2017 and September 24, 2016 each consisted of 39 weeks.this Form 10-Q).
Our operating results tend to vary seasonally withseasonally. Historically, our net revenue has been generally higher in the markets in which our products are sold. For example, historically, first quarter PC product sales are generally lowersecond half of the year than fourth quarter sales. In addition, with respect to our semi-custom SoC products for game consoles, we expect sales patterns to follow the seasonal trends of a consumer business with sales in the first half of the year, being lower than sales in the second half of the year.although market conditions and product transitions could impact this trend.
The following table provides a summary of net revenue and operating income (loss) by segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 26,
2021 | | June 27,
2020 | | June 26,
2021 | | June 27,
2020 |
| (In millions) |
| Net revenue: | | | | | | | |
| Computing and Graphics | $ | 2,250 | | | $ | 1,367 | | | $ | 4,350 | | | $ | 2,805 | |
| Enterprise, Embedded and Semi-Custom | 1,600 | | | 565 | | | 2,945 | | | 913 | |
| | | | | | | |
| Total net revenue | $ | 3,850 | | | $ | 1,932 | | | $ | 7,295 | | | $ | 3,718 | |
| Operating income (loss): | | | | | | | |
| Computing and Graphics | $ | 526 | | | $ | 200 | | | $ | 1,011 | | | $ | 462 | |
| Enterprise, Embedded and Semi-Custom | 398 | | | 33 | | | 675 | | | 7 | |
| All Other | (93) | | | (60) | | | (193) | | | (119) | |
| Total operating income | $ | 831 | | | $ | 173 | | | $ | 1,493 | | | $ | 350 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30,
2017 | | September 24,
2016 | | September 30,
2017 | | September 24,
2016 |
| | | (In millions) |
| Net revenue: | | | | | | | | |
| Computing and Graphics | | $ | 819 |
| | $ | 472 |
| | $ | 2,071 |
| | $ | 1,367 |
|
| Enterprise, Embedded and Semi-Custom | | 824 |
| | 835 |
| | 1,778 |
| | 1,799 |
|
| Total net revenue | | $ | 1,643 |
| | $ | 1,307 |
| | $ | 3,849 |
| | $ | 3,166 |
|
| Operating income (loss): | | | | | | | | |
| Computing and Graphics | | $ | 70 |
| | $ | (66 | ) | | $ | 62 |
| | $ | (217 | ) |
| Enterprise, Embedded and Semi-Custom | | 84 |
| | 136 |
| | 135 |
| | 236 |
|
| All Other | | (28 | ) | | (363 | ) | | (75 | ) | | (388 | ) |
| Total operating income (loss) | | $ | 126 |
| | $ | (293 | ) | | $ | 122 |
| | $ | (369 | ) |
Computing and Graphics
Computing and Graphics net revenue of $819 million in$2.3 billion for the third quarter of 2017three months ended June 26, 2021 increased by 74%65%, compared to net revenue of $472 million in$1.4 billion for the third quarter of 2016,prior year period, primarily as a result of a 61%5% increase in unit shipments and a 58% increase in average selling priceprice. Computing and Graphics net revenue of $4.4 billion for the six months ended June 26, 2021 increased by 55%, compared to net revenue of $2.8 billion for the prior year period, primarily as a 1%result of a 9% increase in unit shipments.shipments and a 44% increase in average selling price. The increase in unit shipments for both periods was primarily due to higher demand for our Ryzen processors. The increase in average selling price for both periods was primarily due todriven by a richer mix of higher-end Radeon™client and graphics processors and Ryzen™ desktop processors. The increase in unit shipments was primarily attributable to strong demand for our Radeon™ graphics processors and Ryzen™ desktop processors. In addition, Computing and Graphics net revenue in the third quarter of 2017 included IP related revenue.
Computing and Graphics net revenue of $2,071 million in the first nine months of 2017 increased by 51%, compared to net revenue of $1,367 million in the first nine months of 2016, primarily as a result of a 40% increase in average selling price and a 4% increase in unit shipments. The increase in average selling price was primarily due to a shift in product mix to higher-end Radeon™ graphics processors and Ryzen™ desktop processors. The increase in unit shipments was primarily attributable to higher demand for our graphics processors and Ryzen™ desktop processors.
Computing and Graphics operating income was $70$526 million infor the third quarter of 2017,three months ended June 26, 2021, compared to an operating lossincome of $66$200 million infor the third quarterprior year period. Computing and Graphics operating income was $1.0 billion for the six months ended June 26, 2021, compared to operating income of 2016.$462 million for the prior year period. The improvementincrease in operating resultsincome for both periods was primarily due to the increase in nethigher revenue referenced above, partiallywhich more than offset by the related increase in cost of salesand a $30 million increase inhigher operating expenses. Operating expenses increased for the reasons set forthoutlined under “Expenses” below.
Computing and Graphics operating income was $62 million in the first nine months
Enterprise, Embedded and Semi-Custom
Enterprise, Embedded and Semi-Custom net revenue of $824 million in$1.6 billion for the third quarter of 2017 decreasedthree months ended June 26, 2021 increased by 1%183%, compared to net revenue of $835$565 million infor the third quarter of 2016. The decrease in net revenue was primarily due to lower sales of our semi-custom SoC products, mostly offset by IP related revenue and sales of our AMD EPYC™ datacenter processors.
prior year period. Enterprise, Embedded and Semi-Custom net revenue of $1,778 million in$2.9 billion for the first ninesix months of 2017 decreasedended June 26, 2021 increased by 1%223%, compared to net revenue of $1,799$913 million infor the first nine months of 2016.prior year period. The decrease in net revenueincrease for both periods was primarily due to a decrease in non-recurring engineering (NRE)driven by higher semi-custom revenue and lowerhigher sales of our semi-custom SoC products, mostly offset by IP related revenue and sales of our AMD EPYC™ datacenterEPYC server processors.
Enterprise, Embedded and Semi-Custom operating income was $84$398 million infor the third quarter of 2017three months ended June 26, 2021 compared to operating income of $136$33 million in the third quarter of 2016. The decline in operating results was primarily due to costs associated with the WSA for certain wafers purchased at another foundry, a $36 million increase in operating expenses and $24 million of THATIC JV licensing gain in the third quarter of 2016, partially offset by the benefit from IP related revenue. Operating expenses increased for the reasons set forth under “Expenses” below.
prior year period. Enterprise, Embedded and Semi-Custom operating income was $135$675 million infor the first ninesix months of 2017,ended June 26, 2021 compared to operating income of $236$7 million infor the first nine months of 2016.prior year period. The decline in operating results was primarily due to an $81 million increase in operating expenses driven primarily by datacenter-relatedincome for both periods was due to higher revenue which more than offset higher operating expenses, and costs associated with the WSA for certain wafers purchased at another foundry, partially offset by IP related revenue.expenses. Operating expenses increased for the reasons set forthoutlined under “Expenses” below.
All Other
All Other operating loss of $28$93 million infor the third quarterthree months ended June 26, 2021 consisted of 2017 was related to$83 million of stock-based compensation expense.expense and $10 million of acquisition-related costs. All Other operating loss of $363$60 million infor the third quarterprior year period consisted of 2016 included a charge of $340 million, consisting of the $100 million payment under the sixth amendment to the Wafer Supply Agreement with GF (WSA Sixth Amendment) and the $240 million value of the warrant under a warrant agreement with WCH (Warrant Agreement) and stock-based compensation expense of $23 million.expense.
All Other operating loss of $75$193 million infor the first ninesix months ended June 26, 2021 consisted of 2017 was primarily related to$168 million of stock-based compensation expense.expense and $25 million of acquisition-related costs. All Other operating loss of $388$119 million infor the first nine monthsprior year period consisted of 2016 primarily included a charge of $340 million, consisting of the $100 million payment under the WSA Sixth Amendment and the $240 million value of the warrant under the Warrant Agreement and stock-based compensation expense of $57 million, partially offset by restructuring reversals of $10 million.expense.
International Sales
International sales as a percentage of net revenue were 72% in74% and 79% for the third quarter of 2017three months ended June 26, 2021 and 73% in the third quarter of 2016. The decrease in international sales as a percentage of net revenue in the third quarter of 2017 compared to the third quarter of 2016 was primarily driven by a higher proportion of revenue from domestic sales of our products from the Computing and Graphics segment.
June 27, 2020, respectively. International sales as a percentage of net revenue were75% inand 81% for the first ninesix months of 2017ended June 26, 2021 and 78% in the first nine months of 2016. The decrease in international sales as a percentage of net revenue in the first nine months of 2017 compared to the first nine months of 2016 was primarily driven by a higher proportion of revenue from domestic sales of our desktop processors, graphics processors and semi-custom SoC products.
June 27, 2020, respectively. We expect that international sales will continue to be a significant portion of total sales in the foreseeable future. Substantially all of our sales transactions were denominated in U.S. dollars.
Comparison of Gross Margin, Expenses, Licensing Gain, Interest Expense, Other Income (Expense), NetExpense and Income Taxes
The following is a summary of certain condensed consolidated statement of operations data for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 26,
2021 | | June 27,
2020 | | June 26,
2021 | | June 27,
2020 |
| | (In millions except for percentages) |
| Net revenue | $ | 3,850 | | | $ | 1,932 | | | $ | 7,295 | | | $ | 3,718 | |
| Cost of sales | 2,020 | | | 1,084 | | | 3,878 | | | 2,052 | |
| Gross profit | 1,830 | | | 848 | | | 3,417 | | | 1,666 | |
| Gross margin | 48 | % | | 44 | % | | 47 | % | | 45 | % |
| Research and development | 659 | | | 460 | | | 1,269 | | | 902 | |
| Marketing, general and administrative | 341 | | | 215 | | | 660 | | | 414 | |
| | | | | | | |
| Licensing gain | (1) | | | — | | | (5) | | | — | |
| Interest expense | (10) | | | (14) | | | (19) | | | (27) | |
| Other income (expense), net | — | | | 1 | | | (11) | | | 5 | |
| Income tax provision | 113 | | | 4 | | | 202 | | | 10 | |
| Equity income in investee | 2 | | | 1 | | | 4 | | | 1 | |
| | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30,
2017 | | September 24,
2016 | | September 30,
2017 | | September 24,
2016 |
| | | (In millions except for percentages) |
| Cost of sales | | $ | 1,070 |
| | $ | 1,248 |
| | $ | 2,541 |
| | $ | 2,519 |
|
| Gross margin | | 573 |
| | 59 |
| | 1,308 |
| | 647 |
|
| Gross margin percentage | | 35 | % | | 5 | % | | 34 | % | | 20 | % |
| Research and development | | 315 |
| | 259 |
| | 860 |
| | 744 |
|
| Marketing, general and administrative | | 132 |
| | 117 |
| | 378 |
| | 339 |
|
| Restructuring and other special charges, net | | — |
| | — |
| | — |
| | (10 | ) |
| Licensing gain | | — |
| | (24 | ) | | (52 | ) | | (57 | ) |
| Interest expense | | (31 | ) | | (41 | ) | | (95 | ) | | (122 | ) |
| Other income (expense), net | | (3 | ) | | (63 | ) | | (11 | ) | | 87 |
|
| Provision for income taxes | | 19 |
| | 4 |
| | 27 |
| | 34 |
|
| Equity loss in investee | | $ | (2 | ) | | $ | (5 | ) | | $ | (7 | ) | | $ | (8 | ) |
Gross Margin
Gross margin as a percentage of net revenue was 35% in48% and 44% for the third quarter of 2017, compared to 5% in the third quarter of 2016 and 34% in the first nine months of 2017, compared to 20% in the first nine months of 2016. The gross margins in the quarter and ninethree months ended September 24, 2016 were negatively impactedJune 26, 2021 and June 27, 2020, respectively. Gross margin was 47% and 45% for the six months ended June 26, 2021 and June 27, 2020, respectively. The increase for both periods was primarily driven by a charge of $340 million consisting of the $100 million payment under the WSA Sixth Amendment and the value of the warrant of $240 million under the Warrant Agreement. The impact of the charge in the quarter and nine months ended September 24, 2016 accounted for 26 and 11 percentage points, respectively. Substantially all of the resulting gross margin increase for the third quarter of 2017 compared with the third quarter of 2016 was driven by the benefit from IP related revenue and also a richer revenue mix from the Computing and Graphics segment, which were partially offset by costs associated with the WSA for certain wafers purchased at another foundry. The resulting increase in gross margin for the nine months ended September 30, 2017 compared to the nine months ended September 24, 2016 was primarily due to richer mix from Computingof sales, including high-end Ryzen, Radeon and Graphics segment and the benefit from IP related revenue, partially offset by costs associated with the WSA for certain wafers purchased at another foundry.EPYC processor sales.
Expenses
Research and Development Expenses
Research and development expenses of $315$659 million infor the third quarter of 2017three months ended June 26, 2021 increased by $56$199 million, or 22%43%, compared to $259$460 million infor the third quarterprior year period. Research and development expenses of 2016.$1,269 million for the six months ended June 26, 2021 increased by $367 million, or 41%, compared to $902 million for the prior year period. The increase for both periods was primarily driven by an increase in product development costs in both the Computing and Graphics and Enterprise, Embedded and Semi-Custom segments due to an increase in researchheadcount and development expenses, mainly product engineering and design costs, andhigher annual employee incentives driven by improved financial performance.
Research and development expenses of $860 million in the first nine months of 2017 increased by $116 million, or 16%, compared to $744 million in the first nine months of 2016. The increase was primarily due to an increase in research and development expenses, mainly product engineering and design related costs driven primarily by higher datacenter related investments, and annual employee incentives driven byour improved financial performance.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses of $132$341 million infor the third quarter of 2017three months ended June 26, 2021 increased by $15$126 million, or 13%59%, compared to $117$215 million infor the third quarterprior year period. Marketing, general and administrative expenses of 2016.$660 million for the six months ended June 26, 2021 increased by $246 million, or 59%, compared to $414 million for the prior year period. The increase for both periods was primarily due to an increase in expenses related togo-to-market activities in both the Computing and Graphics and Enterprise, Embedded and Semi-Custom segments, and an increase in headcount and higher annual employee incentives driven by our improved financial performance, increasesperformance. In addition, in generalconnection with our pending acquisition of Xilinx, Inc., we incurred $10 million and administrative$25 million of acquisition-related costs for the three and salessix months ended June 26, 2021, respectively.
Licensing Gain
During the three and marketing expenses primarily attributablesix months ended June 26, 2021, we recognized $1 million and $5 million, respectively, of royalty income associated with the licensed IP to our Enterprise, Embedded and Semi-Custom segment.the THATIC JV.
Marketing, general and administrative expenses of $378 million in the first nine months of 2017 increased by $39 million, or 12%, compared to $339 million in the first nine months of 2016. The increase was due to increase in expenses related to annual employee incentives driven by our improved financial performance, increases in general and administrative and sales and marketing expenses primarily attributable to our Enterprise, Embedded and Semi-Custom segment.
Interest Expense
Interest expensesexpense for the third quarter and the first ninethree months of 2017 were $31ended June 26, 2021 was $10 million and $95 million, respectively, compared to interest expenses$14 million for the third quarter andprior year period. Interest expense for the first ninesix months ended June 26, 2021 was $19 million compared to $27 million for the prior year period. The decrease for both periods was due to lower debt balances as a result of 2016 were $41conversions by the holders of our 2.125% Convertible Senior Notes due 2026.
Other Income (Expense), Net
Other income, net for the three months ended June 26, 2021, was zero compared to $1 million and $122of Other income, net for the prior year period. Other expense, net was $11 million respectively.for the six months ended June 26, 2021, compared to $5 million of Other income, net for the prior year period. The decreases arechange was primarily due to lower weighted average interest ratesan impairment charge of $8 million associated with an equity investment and lowera loss on conversion of our convertible debt balances.
Other Income (expense), Net
Other expense, netinstruments of $3$6 million in the third quarter of 2017, decreased by $60 million, compared to $63 million in the third quarter of 2016, primarily due to the $61 million total loss on debt repurchases in the third quarter of 2016.current period.
Other expense, net of $11 million in the first nine months of 2017, changed by $98 million, compared to $87 million Other income, net in the first nine months of 2016, primarily due to the gain on sale of equity interests in ATMP JV of $150 million, partially offset by the $61 million total loss on debt repurchases in the first nine months of 2016 and $9 million total loss on debt redemption in the first nine months of 2017.
Income TaxesTax Provision
In the third quarter of 2017, weWe recorded an income tax provision of $19$113 million consisting primarily of withholding taxes applicable to IP related revenue from foreign locations.
For the nine months ended September 30, 2017, we recorded an income tax provision of $27 million, consisting primarily of withholding taxes applicable to IP related revenue and licensing gain from foreign locations.
In the third quarter of 2016, we recorded an income tax provision of $4 million, consisting of $3 million for withholding taxes applicable to licensing gain from foreign locations and $1 million of foreign taxes in profitable locations.
For the nine months ended September 24, 2016, we recorded an income tax provision of $34 million, including $6 million of foreign taxes in profitable locations, $5 million for withholding taxes primarily applicable to licensing gain from foreign locations and $4 million for the three months ended June 26, 2021 and June 27, 2020, respectively, representing effective tax rates of tax benefits arising from other comprehensive income13.7% and Canadian tax credits. In addition, we recorded the tax effect of completion of the sale of a majority equity interest2.5%, respectively.
The increase in two subsidiaries comprising $21 million of income tax expense and effective tax rate in Chinathe current year period was due to significantly higher income in the United States, partially offset by the foreign-derived intangible income benefit, research and $6 million of withholdingdevelopment tax credits, and excess tax benefit for stock-based compensation. The lower income tax expense associated withand effective tax rate for the prior year period was due to a future repatriation offull valuation allowance in the gain generated in China by the ChineseUnited States during 2020, a significant portion of that transaction (see Note 4. Equity Interest Purchase Agreement - ATMP Joint Venture).
We have not recognizedwhich was released by us in the tax benefitfourth quarter of future foreign tax credits associated with the withholding tax expense as the size and age profile of existing tax attributes does not allow us to satisfy the “more likely than not” criterion for the recognition of deferred tax assets.2020.
As of September 30, 2017, substantially all of our U.S. and Canadian deferred tax assets, net of deferred tax liabilities,June 26, 2021, we continue to be subject tomaintain a valuation allowance.allowance for certain federal, state, and foreign tax attributes. The realization of these assetsfederal valuation allowance maintained is dependent on substantial future taxable income, which as of September 30, 2017, in our estimate, is not more likely than not to be achieved.
Our total gross unrecognized tax benefits increased from $58 million in the prior quarter to $61 million as of September 30, 2017. This increase was due to additional R&D unrecognized tax benefits inlimitations under Internal Revenue Code Section
382 or 383, separate return loss year rules, or dual consolidated loss rules. The state and foreign locations. We do not believe itvaluation allowance maintained is reasonably possible that unrecognized tax benefits will materially change in the next 12 months. However, the settlement, resolution or closure of our tax audits are highly uncertain.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense related to employee stock options and restricted stock units, which we allocated in our condensed consolidated statements of operations as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2017 | | September 24,
2016 | | September 30,
2017 | | September 24,
2016 |
| | (In millions) |
| Cost of sales | $ | 1 |
| | $ | — |
| | $ | 2 |
| | $ | 1 |
|
| Research and development | 18 |
| | 15 |
| | 45 |
| | 34 |
|
| Marketing, general and administrative | 10 |
| | 8 |
| | 29 |
| | 22 |
|
| Stock-based compensation expense, net of tax of $0 | $ | 29 |
| | $ | 23 |
| | $ | 76 |
| | $ | 57 |
|
For all periods presented, we did not realize any excess tax benefit related to stock-based compensation and therefore did not record any related operating cash flows.
Stock-based compensation expense of $29 million in the third quarter of 2017 increased by $6 million, compared to $23 million in the third quarter of 2016. Stock-based compensation expense of $76 million in the first nine months of 2017 increased by $19 million, compared to $57 million in the first nine months of 2016. The increase was primarily due to a higher weighted average grant date fair valuelack of unvested restricted stock units in the three and nine months ended September 30, 2017, compared to the three and nine months ended September 24, 2016. The increase was also driven by fewer actual forfeitures in 2017 compared to 2016.sufficient sources of taxable income.
GLOBALFOUNDRIES
Wafer Supply Agreement. The Wafer Supply Agreement (WSA) governs the terms by which we purchase products manufactured by GLOBALFOUNDRIES Inc. (GF).
Sixth Amendment to Wafer Supply Agreement. On August 30, 2016, we entered into a sixth amendment to the WSA (the WSA Sixth Amendment). The WSA Sixth Amendment modified certain terms of the WSA applicable to wafers for our microprocessor, graphics processor and semi-custom products for a five-year period from January 1, 2016 to December 31, 2020. AMD and GF also agreed to establish a comprehensive framework for technology collaboration for the 7nm technology node.
The WSA Sixth Amendment also provides us a limited waiver with rights to contract with another wafer foundry with respect to certain products in the 14nm and 7nm technology nodes and gives us greater flexibility in sourcing foundry services across our product portfolio. In consideration for these rights, we agreed to pay GF $100 million in installments starting in the fourth fiscal quarter of 2016 through the third fiscal quarter of 2017. During the third fiscal quarter of 2017, we paid GF $25 million and, as of September 30, 2017, we had paid GF $100 million in aggregate. Starting in 2017 and continuing through 2020, we also agreed to make quarterly payments to GF based on the volume of certain wafers purchased from another wafer foundry.
Further, for each calendar year during the term of the WSA Sixth Amendment, AMD and GF agreed to annual wafer purchase targets that increase from 2016 through 2020. If we do not meet the annual wafer purchase target for any calendar year, we will be required to pay to GF a portion of the difference between our actual wafer purchases and the wafer purchase target for that year. The annual targets were established based on our business and market expectations and took into account the limited waiver we received for certain products. As of September 30, 2017, we expect to meet our 2017 wafer purchase target.
AMD and GF also agreed on fixed pricing for wafers purchased during 2016 and established a framework to agree on annual wafer pricing for the years 2017 to 2020. AMD and GF have agreed on pricing for wafer purchases for 2017.
Our total purchases from GF related to wafer manufacturing, research and development activities and other for the quarters ended September 30, 2017 and September 24, 2016 were $331 million and $186 million, respectively. Our total purchases from GF related to wafer manufacturing, research and development activities and other for the nine months ended September 30, 2017 and September 24, 2016 were $773 million and $479 million, respectively. Included in the total purchases for the quarter and nine months ended September 30, 2017 are amounts related to the volume of certain wafers purchased from another wafer foundry, as agreed to by us and GF under the WSA Sixth Amendment. As of September 30, 2017 and December 31, 2016, the amount of prepayment and other receivables related to GF was $20 million and $32 million, respectively, included in Prepayment and other receivables - related parties on our condensed consolidated balance sheets. As of September 30, 2017 and December 31, 2016, the amount payable to GF was $270 million and $255 million, respectively, included in Payable to related parties on our condensed consolidated balance sheets.
Warrant Agreement. Also on August 30, 2016, in consideration for the limited waiver and rights under the WSA Sixth Amendment, we entered into a warrant agreement (the Warrant Agreement) with West Coast Hitech L.P. (WCH), a wholly-owned subsidiary of Mubadala Development Company PJSC (Mubadala). Under the Warrant Agreement, WCH and its permitted assigns are entitled to purchase 75 million shares of our common stock (the Warrant Shares) at a purchase price of $5.98 per share. The warrant is exercisable in whole or in part until February 29, 2020. Notwithstanding the foregoing, the Warrant Agreement will only be exercisable to the extent that Mubadala does not beneficially own, either directly through any other entities directly and indirectly owned by Mubadala or its subsidiaries, an aggregate of more than 19.99% of our outstanding capital stock after any such exercise.
GF continues to be a related party of AMD because Mubadala and Mubadala Technology Investments LLC (Mubadala Tech, a party to the WSA) are affiliated with WCH, a significant stockholder of ours. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala.
Equity Interest Purchase Agreement - ATMP Joint Venture
On April 29, 2016, we and certain of our subsidiaries completed the sale of a majority of the equity interests in Suzhou TF-AMD Semiconductor Co., Ltd. (formerly, AMD Technologies (China) Co., Ltd.), and TF-AMD Microelectronics (Penang) Sdn. Bhd. (formerly, Advanced Micro Devices Export Sdn. Bhd.), to affiliates of Tongfu Microelectronics Co., Ltd. (formerly, Nantong Fujitsu Microelectronics Co., Ltd.) (TFME), a Chinese joint stock company, to form two joint ventures (collectively, the ATMP JV). As a result of the sale, TFME’s affiliates own 85% of the equity interests in the ATMP JV while certain of our subsidiaries own the remaining 15%. We have no obligation to fund the ATMP JV.
We account for our equity interests in the ATMP JV under the equity method of accounting due to our significant influence over the ATMP JV. As of September 30, 2017 and December 31, 2016, the carrying value of our investment in the ATMP JV was approximately $57 million and $59 million, respectively. The ATMP JV is a related party of ours. The ATMP JV provides assembly, test, mark and packaging (ATMP) services to us. We currently pay the ATMP JV for ATMP services on a cost-plus basis. Our total purchases from the ATMP JV during the three and nine months ended September 30, 2017 amounted to approximately $131 million and $332 million, respectively. Our total purchases from the ATMP JV during the three and nine months ended September 24, 2016 amounted to approximately $107 million and $173 million, respectively. As of September 30, 2017 and December 31, 2016, the amount payable to the ATMP JV was $174 million and $128 million, respectively, included in Payables to related parties on our condensed consolidated balance sheets.
During the three and nine months ended September 30, 2017, we recorded $2 million and $7 million, respectively, in Equity loss in investee on our condensed consolidated statements of operations, which included certain expenses incurred by us on behalf of the ATMP JV. During the three and nine months ended September 24, 2016, we recorded a loss of $5 million and $8 million, respectively, in Equity loss in investee on our condensed consolidated statements of operations, which included certain expenses incurred by us on behalf of the ATMP JV.
Equity Joint Venture
In February 2016, we and Tianjin Haiguang Advanced Technology Investment Co., Ltd. (THATIC), a third-party Chinese entity (JV Partner), formed a joint venture comprised of two separate legal entities, China JV1 and China JV2 (collectively, the THATIC JV). Our equity share in China JV1 and China JV2 is a majority and minority interest, respectively, funded by our contribution of certain of our patents. The JV Partner is responsible for the initial and on-going financing of the THATIC JV’s operations. We have no obligations to fund the THATIC JV.
We concluded the China JV1 and China JV2 are not operating joint ventures and are variable interest entities due to their reliance on on-going financing by the JV Partner. We determined that we are not the primary beneficiary of either China JV1 or China JV2, as we do not have unilateral power to direct selling and marketing, manufacturing and product development activities related to the THATIC JV’s products. Accordingly, we will not consolidate either of these entities and therefore account for our investments in the THATIC JV under the equity method of accounting. The THATIC JV is a related party of ours.
In February 2016, we licensed certain of our intellectual property (Licensed IP) to the THATIC JV for a total of approximately $293 million in license fee payable over several years contingent upon achievement of certain milestones. We also expect to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such Licensed IP. We will also provide certain engineering and technical support to the THATIC JV in connection with the product development. In March 2017, we entered into a development and intellectual property agreement with THATIC JV, and also expect to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such agreement. In addition, from time to time, we enter into certain agreements with the THATIC JV to provide other services primarily related to research and development.
We recognize income related to the Licensed IP over the period commencing upon delivery of the first Licensed IP milestone through the date of the milestone that requires our continuing involvement in the product development process. Royalty payments will be recognized in income once earned. We classify Licensed IP income and royalty income as other operating income. During the three and nine months ended September 30, 2017, we recognized zero and $52 million licensing gain associated with the Licensed IP, respectively, and development and other services fees of $7 million and $17 million, respectively, as a credit to research and development expenses. During the three and nine months ended September 24, 2016, we recognized $24 million and $57 million licensing gain, respectively. No credits for development and other services associated with these agreements was recognized by us during the three and nine months ended September 24, 2016. No royalty income was recognized during the three and nine months ended September 30, 2017 and September 24, 2016.
Our total exposure to losses through our investment in the THATIC JV is limited to our investment in the THATIC JV, which was zero as of September 30, 2017. Our share in the net losses of the THATIC JV for the three and nine months ended September 30, 2017 and September 24, 2016 was not material and is not recorded in our condensed consolidated statements of operations since we are not obligated to fund the THATIC JV’s losses in excess of our investment in the THATIC JV. Our receivable from THATIC JV for these agreements was $5 million and zero as of September 30, 2017 and December 31, 2016, respectively, included in Prepayment and other receivables - related parties on our condensed consolidated balance sheets. As of September 30, 2017, the total assets and liabilities of the THATIC JV were not material.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of September 30, 2017,June 26, 2021, our cash, and cash equivalents and short-term investments were $879 million,$3.8 billion, compared to $1.26$2.3 billion as of December 31, 2016. The decrease in the nine months of 2017 was due to net cash used in our operating and investing activities as described below.26, 2020. The percentage of cash, and cash equivalents and short-term investments held domestically waswere 93% and 94% as of September 30, 2017,June 26, 2021 and December 26, 2020, respectively.
Our operating, investing and financing activities for the six months ended June 26, 2021 compared to 98% at December 31, 2016.the prior year period are as described below:
The following is a summary of our cash flows for the periods indicated:
| | | | | Nine Months Ended | | Six Months Ended |
| | | September 30,
2017 | | September 24,
2016 | | June 26,
2021 | | June 27,
2020 |
| | | (In millions ) | | (In millions) |
| Net cash provided by (used in): | | | | | Net cash provided by (used in): | |
| Operating activities | | $ | (315 | ) | | $ | (98 | ) | Operating activities | $ | 1,850 | | | $ | 178 | |
| Investing activities | | (71 | ) | | 293 |
| Investing activities | (603) | | | (109) | |
| Financing activities | | 1 |
| | 278 |
| Financing activities | (219) | | | 240 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 1,028 | | | $ | 309 | |
Our aggregate principal debt obligations of $1.43 billion, net of unamortized debt issuance costswere $313 million and unamortized debt discount associated with the 2.125% Convertible Senior Notes Due 2026 (2.125% Notes)$338 million as of September 30, 2017, decreased from $1.44 billion atJune 26, 2021 and December 31, 2016.
26, 2020, respectively.
We believe our cash, and cash equivalents balanceand short-term investments along with our Secured Revolving Line of Credit Facility will be sufficient to fund current and long-term operations, including capital expenditures, over the next 12 months.months and beyond. We believe that in the event we decide to obtain external funding, we maywill be able to access the capital markets on terms and in amounts adequate to meet our objectives.
Shouldshould we require additional funding,funds. However, we cannot assure that such as to meet payment obligations of our long-term debt when due, we may need to raise the required funds through borrowings or public or private sales of debt or equity securities, which maywill be issued from time to time under an effective registration statement, through the issuance of securities in a transaction exempt from registration under the Securities Act of 1933 or a combination of one or more of the foregoing. Uncertain global economic conditions have in the past adversely impacted, and may in the future adversely impact, our business. If market conditions deteriorate, we may be limited in our ability to access the capital markets to meet liquidity needsavailable on favorable terms, or at all, which could adversely affect our liquidity and financial condition, including our ability to refinance maturing liabilities.all.
Operating Activities
Our working capital cash inflows and outflows from operations are primarily cash collections from our customers, payments for inventory purchases and payments for employee-related expenditures.
Net cash provided by operating activities was $1.9 billion in the six months ended June 26, 2021, primarily due to our net income of $1.3 billion, adjusted for non-cash and non-operating charges of $562 million and net cash inflows of $23 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $346 million increase in accounts payable due to an increase in inventory purchases, a $90 million increase in accrued liabilities and other driven primarily by higher customer-related accruals, partially offset by a $366 million increase in inventories driven by an increase in product build in support of customer demand.
Net cash used in operating activities was $315$178 million in for the ninesix months ended September 30, 2017 compared to $98 million in the nine months ended September 24, 2016. The increase in cash used in operating activities wasJune 27, 2020, primarily due to our net income of $319 million, adjusted for non-cash and non-operating charges of $321 million and net cash outflows of $462 million from changes in working capital, largelyour operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $342 million increase in inventories driven by higher wafer purchases, higher labor costs,an increase in product build in support of customer demand, and a $201 million decrease in accounts payable due to timing of payments to GF in aggregate of $75 million for a limited waiver with rights under the WSA Sixth Amendment and timing of accounts payable payments, partially offset by higher cash collection primarily due to higher revenue and lower interest payment resulting from debt reductions.our suppliers.
Investing Activities
Net cash used in investing activities was $71$603 million infor the ninesix months ended September 30, 2017,June 26, 2021 which primarily consisted primarily of $69$1.1 billion for purchases of short-term investments and $130 million for purchases of property plant and equipment.equipment, partially offset by $655 million for maturities of short-term investments.
Net cash provided byused in investing activities was $293$109 million infor the ninesix months ended September 24, 2016,June 27, 2020 which primarily consisted of net$146 million for purchases of property and equipment and $55 million for purchases of short-term investments, partially offset by $92 million for maturities of short-term investments.
Financing Activities
Net cash inflowused in financing activities was $219 million for the six months ended June 26, 2021, which primarily consisted of $346common stock repurchases of $256 million from saleand repurchases for tax withholding on employee equity plans of equity interests in the ATMP JV,$14 million, partially offset by a cash outflowinflow of $56$51 million for purchasesfrom issuance of property, plant and equipment.
Financing Activitiescommon stock under our employee equity plans.
Net cash provided by financing activities was $1$240 million infor the ninesix months ended September 30, 2017,June 27, 2020, which primarily consisted of a cash inflow of net proceeds from borrowings pursuant to our Secured Revolving Lineshort-term borrowing of Credit of $70$200 million and $15 million for proceeds from issuance of common stock from the exercise of employee stock options, partially offset by a cash outflow of $70 million to repurchase a portion of our 7.00% Notes and $14 million for tax withholding on the vesting of restricted stock. The Secured Revolving Line of Credit has a lower interest rate than the long-term debt.
Net cash provided by financing activities was $278 million in the nine months ended September 24, 2016, primarily due to $681 million net proceeds from the new issued 2.125% Notes, the $668 million net proceeds from the sale of 115 million shares of our common stock and $12 million of proceeds from the issuance of common stock under our stock-based compensationemployee equity plans partially offset by the repurchases of an aggregate principal amount of $796 million of our outstanding 6.75% Senior Notes due 2019 (6.75% Notes), 7.75% Senior Notes due 2020, 7.50% Senior Notes due 2022 (7.50% Notes) and 7.00% Senior Notes due 2024 (7.00% Notes) for $848 million in cash and repayments in aggregate of $230 million of our Secured Revolving Line of Credit.$42 million.
Contractual Obligations
The following table summarizes our consolidated principal contractual cash obligations, as of September 30, 2017,June 26, 2021, and is supplemented by the discussion following the table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payment due by period |
| (In millions) | Total | | Remainder of 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 and thereafter |
Term debt (1) | $ | 313 | | | $ | — | | | $ | 312 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | |
Aggregate interest obligation (2) | 38 | | | 12 | | | 24 | | | 1 | | | 1 | | | — | | | — | |
Other long-term liabilities (3) | 127 | | | 19 | | | 66 | | | 20 | | | 10 | | | 9 | | | 3 | |
| Operating leases | 344 | | | 34 | | | 69 | | | 62 | | | 53 | | | 44 | | | 82 | |
Purchase obligations (4) | 5,889 | | | 3,185 | | | 1,088 | | | 662 | | | 586 | | | 94 | | | 274 | |
Total contractual obligations (5) | $ | 6,711 | | | $ | 3,250 | | | $ | 1,559 | | | $ | 745 | | | $ | 650 | | | $ | 147 | | | $ | 360 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due by period as of September 30, 2017 |
| (In millions) | Total | | Remainder of 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 and thereafter |
| 6.75% Notes | $ | 191 |
| | $ | — |
| | $ | — |
| | $ | 191 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| 7.50% Notes | 347 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 347 |
|
| 7.00% Notes | 324 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 324 |
|
| 2.125% Notes | 805 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 805 |
|
| Secured Revolving Line of Credit | 70 |
| | 70 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other long-term liabilities (1) | 134 |
| | 18 |
| | 52 |
| | 51 |
| | 8 |
| | 3 |
| | 2 |
|
Aggregate interest obligation (2) | 468 |
| | — |
| | 80 |
| | 74 |
| | 67 |
| | 67 |
| | 180 |
|
| Operating leases | 265 |
| | 10 |
| | 40 |
| | 35 |
| | 31 |
| | 29 |
| | 120 |
|
Purchase obligations (3) | 313 |
| | 255 |
| | 42 |
| | 12 |
| | 3 |
| | 1 |
| | — |
|
Obligations to GF (4) | 2,931 |
| | 335 |
| | 1,052 |
| | 764 |
| | 780 |
| | — |
| | — |
|
Total contractual obligations (5) | $ | 5,848 |
| | $ | 688 |
| | $ | 1,266 |
| | $ | 1,127 |
| | $ | 889 |
| | $ | 100 |
| | $ | 1,778 |
|
| | | | | | | | |
(1) | | See Note 5 – Debt and Revolving Credit Facility of the Notes to Condensed Consolidated Financial Statements for additional information. |
| | |
| (2) | | Represents interest obligations, payable in cash, for our outstanding debt. |
| | |
| (3) | | Amounts largelyprimarily represent future fixed and non-cancelablenon-cancellable cash payments associated with software technology and licenses and IP licenses, including the payments due within the next 12 months. |
| | |
(2)
(4) | Represents estimated aggregate interest obligations for our outstanding debt obligations that are payable in cash, excluding non-cash amortization of debt issuance costs and debt discount. |
| |
(3)
| We haveRepresents purchase obligations for goods and services where payments are based, in part, on the volume or type of services we acquire. In those cases, we only included the minimum volume of purchase obligations in the table above. Purchase orders for goods and services that are cancelablecancellable upon notice and without significant penalties are not included in the amounts above. |
| | |
(4)
(5) | Includes our currently expected purchases from GF for the remainder of 2017 for wafer manufacturing and research and development activities and minimum purchase obligations for wafer purchases for years 2018 through 2020. We cannot meaningfully quantify or estimate our future purchase obligations to GF beyond 2020 but expect that our future purchases from GF will continue to be material. |
| |
(5)
| Total amount excludes contractual obligations already recorded on our condensed consolidated balance sheets, except for debt obligations, operating leases, and other liabilities related to software and technology licenses and IP licenses. |
The expected timing of payments of the obligations in the preceding table is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.
6.75% Senior Notes Due 2019
On February 26, 2014, we issued $600 million of our 6.75% Notes. Our 6.75% Notes are our general unsecured senior obligations. Interest is payable on March 1 and September 1 of each year beginning September 1, 2014 until the maturity date of March 1, 2019. Our 6.75% Notes are governed by the terms of an indenture (the 6.75% Indenture) dated February 26, 2014 between us and Wells Fargo Bank, N.A., as trustee.
At any time before March 1, 2019, we may redeem some or all of our 6.75% Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a “make whole” premium (as set forth in the 6.75% Indenture).
During the first nine months of 2017, we settled $5 million in aggregate principal amount of our 6.75% Notes with treasury stock. As of September 30, 2017, the outstanding aggregate principal amount of our 6.75% Notes was $191 million.
7.50% Senior Notes Due 2022
On August 15, 2012, we issued $500 million of our 7.50% Notes. Our 7.50% Notes are our general unsecured senior obligations. Interest is payable on February 15 and August 15 of each year beginning February 15, 2013 until the maturity date of August 15, 2022. Our 7.50% Notes are governed by the terms of an indenture (the 7.50% Indenture) dated August 15, 2012 between us and Wells Fargo Bank, N.A., as trustee.
Prior to August 15, 2022, we may redeem some or all of our 7.50% Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a “make whole” premium (as set forth in the 7.50% Indenture).
During the first nine months of 2017,, we settled $3 million in aggregate principal amount of our 7.50% Notes with treasury stock. As of September 30, 2017, the outstanding aggregate principal amount of our 7.50% Notes was $347 million.
7.00% Senior Notes Due 2024
On June 16, 2014, we issued $500 million of our 7.00% Notes. The 7.00% Notes are our general unsecured senior obligations. Interest is payable on January 1 and July 1 of each year beginning January 1, 2015 until the maturity date of July 1, 2024. The 7.00% Notes are governed by the terms of an indenture (the 7.00% Indenture) dated June 16, 2014 between us and Wells Fargo Bank, N.A., as trustee.
At any time before July 1, 2017, we may redeem up to 35% of the aggregate principal amount of the 7.00% Notes within 90 days of the closing of an equity offering with the net proceeds thereof at a redemption price equal to 107.000% of the principal amount thereof, together with accrued and unpaid interest to but excluding the date of redemption. Prior to July 1, 2019, we may redeem some or all of the 7.00% Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a “make whole” premium (as set forth in the 7.00% Indenture).
Starting July 1, 2019, we may redeem our 7.00% Notes for cash at the following specified prices plus accrued and unpaid interest:
|
| | |
Period | Price as
Percentage of
Principal Amount
|
|
Beginning on July 1, 2019 through June 30, 2020 | 103.500 | % |
Beginning on July 1, 2020 through June 30, 2021 | 102.333 | % |
Beginning on July 1, 2021 through June 30, 2022 | 101.167 | % |
On July 1, 2022 and thereafter | 100.000 | % |
During the third quarter of 2017, we repurchased $26 million in aggregate principal amount of our 7.00% Notes for $28 million.
During the first nine months of 2017, we settled $92 million in aggregate principal amount of its 7.00% Notes for $70 million in cash and $26 million in treasury stock. As of September 30, 2017, the outstanding aggregate principal amount of our 7.00% Notes was $324 million.
2.125% Convertible Senior Notes Due 2026
On September 14, 2016, we issued $700 million in aggregate principal amount of our 2.125% Notes. We also granted an option to the underwriters to purchase up to an additional $105 million aggregate principal amount of our 2.125% Notes. On September 28, 2016, this option was exercised in full and we issued an additional $105 million aggregate principal amount of our 2.125% Notes.
Our 2.125% Notes are our general unsecured senior obligations and will mature on September 1, 2026, unless earlier repurchased or converted. Interest is payable in arrears on March 1 and September 1 of each year beginning on March 1, 2017. Our 2.125% Notes are governed by the terms of a base indenture and a supplemental indenture (together the 2.125% Indentures) dated September 14, 2016 between us and Wells Fargo Bank, N.A., as trustee.
Holders may convert their notes at their option at any time prior to the close of business on the business day immediately preceding June 1, 2026 under the occurrence of one of the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2016 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the Measurement Period”) in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less
than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 1, 2026 until the close of business on the business day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of the our common stock, at our election. The first event described in (1) above was met during the third quarter of 2017 and as a result, the 2.125% Notes are convertible at the option of the holder as of October 1, 2017 and remain convertible until December 31, 2017. Our current intent is to deliver shares of our common stock upon conversion of the 2.125% Notes. As such, we continued to classify the carrying value of the liability component of the 2.125% Notes as long-term debt and the equity component of the 2.125% Notes as permanent equity on our condensed consolidated balance sheet as of September 30, 2017.
We may not redeem the notes prior to the maturity date, and no sinking fund is provided for the 2.125% Notes.
The conversion rate is currently 125.0031 shares of common stock per $1,000 principal amount of 2.125% Notes (equivalent to an initial conversion price of approximately $8.00 per share of common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, we will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event in certain circumstances.
If we undergo a fundamental change prior to the maturity date of the notes, holders may require us to repurchase for cash all or any portion of their 2.125% Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2.125% Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
As of September 30, 2017, the outstanding aggregate principal amount of our 2.125% Notes was $805 million.
Potential Repurchase of Outstanding Notes
We may elect to purchase or otherwise retire all or a portion of our 6.75% Notes, 7.50% Notes, 7.00% Notes and 2.125% Notes with cash, stock or other assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries, or by tender offer when we believe the market conditions are favorable.
Secured Revolving Line of Credit
Amended and Restated Loan and Security Agreement
On April 14, 2015, AMD and its subsidiaries, AMD International Sales & Service, Ltd. (AMDISS) and ATI Technologies ULC (collectively, the Loan Parties), entered into an amended and restated loan and security agreement (the Amended and Restated Loan Agreement) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders (the Lenders) and Bank of America, N.A., acting as agent for the Lenders (the Agent).
Fifth Amendment to the Amended and Restated Loan and Security Agreement
On March 21, 2017, the Loan Parties entered into a fifth amendment to the Amended and Restated Loan Agreement (the Fifth Amendment) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders and the Agent, which modifies the Amended and Restated Loan Agreement. The Fifth Amendment amends the Amended and Restated Loan Agreement by, among other things, extending the maturity date of the Secured Revolving Line of Credit from April 14, 2020 to March 21, 2022, reducing the Applicable Margin (as defined in the Amended and Restated Loan Agreement), reducing the commitment fee, lowering the minimum threshold of Availability (as defined in the Amended and Restated Loan Agreement) required to be maintained by AMD and AMDISS in order to avoid cash dominion, amending the borrowing base reporting requirement, amending maximum dollar limits related to supply chain finance arrangements, and reducing the amount of the Secured Revolving Line of Credit available for the issuance for letters of credit from $75 million to $45 million.
The Amended and Restated Loan Agreement provides for a Secured Revolving Line of Credit for a principal amount up to $500 million with up to $45 million available for issuance of letters of credit. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible accounts receivable (90% for certain qualified eligible accounts receivable), minus specified reserves. The size of the commitments under the Secured Revolving Line of Credit may be increased by up to an aggregate amount of $200 million.
The Secured Revolving Line of Credit is secured by a first priority security interest in the Loan Parties’ accounts receivable, inventory, deposit accounts maintained with the Agent and other specified assets, including books and records.
Sixth Amendment to the Amended and Restated Loan and Security Agreement
On September 19, 2017, the Loan Parties entered into a sixth amendment to the Amended and Restated Loan Agreement (the Sixth Amendment) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders and the Agent, which modifies the Amended and Restated Loan Agreement. The Sixth Amendment amends the definition of the term “Qualified Factor Arrangement” to state that the amount held or owing or subject to repurchase is limited to (i) during AMD's first fiscal quarter of each of its fiscal years, $220 million in the aggregate, (ii) during AMD's second and third fiscal quarter of each of its fiscal years, $300 million in the aggregate, and (iii) (x) from the first day of the AMD's fourth fiscal quarter of each of its fiscal years to December 10 of each of its fiscal years, $300 million in the aggregate (provided, that not more than $220 million of such amount may consist of Qualified Factor Accounts (as defined in the Sixth Amendment) sold in such period) and (y) from December 21 of each of AMD's fiscal years to and including the last day of AMD's fourth fiscal quarter of each of its fiscal years, $220 million in the aggregate.
As of September 30, 2017, the Secured Revolving Line of Credit had an outstanding loan balance of $70 million, at an interest rate of 4.75%. As of December 31, 2016, we did not have any borrowings outstanding under the Secured Revolving Line of Credit. As of September 30, 2017, we had $19 million letters of credit outstanding and up to $327 million available for future borrowings under the Secured Revolving Line of Credit. We report our intra-period changes in our revolving credit balance on a net basis in our condensed consolidated statement of cash flows as we intend the period of the borrowings to be brief, repaying borrowed amounts within 90 days. As of September 30, 2017, we were in compliance with all required covenants in the Amended and Restated Loan Agreement.
The agreements governing our 6.75% Notes, 7.50% Notes, 7.00% Notes, 2.125% Notes and Secured Revolving Line of Credit contain cross-default provisions whereby a default under one agreement would likely result in cross defaults under agreements covering other borrowings. The occurrence of a default under any of these borrowing arrangements would permit the applicable note holders or the lenders under the Secured Revolving Line of Credit to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable.
Operating Leases
We lease certain of our facilities under non-cancelable lease agreements that expire at various dates through 2028. We lease certain office equipment for terms ranging from one to five years. Total future non-cancelable lease obligations as of September 30, 2017 were $265 million, including $222 million of future lease payments and estimated operating costs related to the real estate transactions that occurred in Austin, Texas; Sunnyvale and Santa Clara, California; Markham, Ontario, Canada; and Singapore. During the second quarter of 2016, we signed an amendment to the lease agreement associated with our headquarters in Sunnyvale, California so that the lease expires in December 2017. In connection with the amendment, the lease payments were reduced for 2017. During the third quarter of 2016, we entered into a 10 year operating lease to occupy 220,000 square feet of new headquarters office space in Santa Clara, California. As of September 30, 2017, we have paid approximately $1 million for base rent and the total estimate of future base rent payments over the life of the lease are approximately $103 million. In addition to base rent payments, we will be obligated to pay certain customary amounts for our share of operating expenses and tax obligations. We will also incur costs for capital projects on the new office space. We have the option to extend the term of the lease for two additional five-year periods.
Purchase Obligations
Our purchase obligations primarily include our obligations to purchase wafers and substrates from third parties, excluding our wafer purchase commitments to GF under the WSA. As of September 30, 2017, total non-cancelable purchase obligations were $313 million.
Obligations to GF
Our currently expected purchases from GF for the remainder of 2017 for wafer and research and development activities, and minimum purchase obligations for wafer purchases for years 2018 through 2020 are approximately $2.9 billion. We are not able to meaningfully quantify or estimate our future purchase obligations to GF beyond this amount but expect that our future purchases from GF will continue to be material.
Off-Balance Sheet Arrangements
As of September 30, 2017, we had no off-balance sheet arrangements.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our condensed consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our net revenue, inventories, asset impairmentsgoodwill and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of our assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
Management believes there have been no significant changes duringfor the quarterthree and ninesix months ended September 30, 2017June 26, 2021 to the items that we disclosed as our critical accounting estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
We will perform an annual goodwill impairment analysis as of the first day of the fourth quarter of 2017 pursuant to our accounting policy. However, we will also test for goodwill impairment at any time during the year if there are indicators of impairment present. If there are declines in our market capitalization, business climate or operating results, we may incur impairment charges that could be material.
26, 2020.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Reference is made to “Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.26, 2020.
There have not been any material changes in marketinterest rate risk, default risk or foreign exchange risk since December 31, 2016.26, 2020.
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| ITEM 4. | CONTROLS AND PROCEDURES |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports made under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of September 30, 2017,June 26, 2021, the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
There was no change in our internal controls over financial reporting during our third quarter of 2017for the three months ended June 26, 2021 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Securities Class Action
On January 15, 2014,For a class action lawsuit captioned Hatamian v. AMD, et al., C.A. No. 3:14-cv-00226 (the Hatamian Lawsuit) was filed against us in the United States District Court for the Northern Districtdiscussion of California. The complaint purportsour legal proceedings, refer to assert claims against usNote 12—Commitments and certain individual officers for alleged violations of Section 10(b)Contingencies of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5 of the Exchange Act. The plaintiffs seekNotes to represent a proposed class of all persons who purchased or otherwise acquired our common stock during the period April 4, 2011 through October 18, 2012. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by us and the individual officers regarding our 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for our common stock during the period. The complaint seeks unspecified compensatory damages, attorneys’ fees and costs. On July 7, 2014, we filed a motion to dismiss plaintiffs’ claims. On March 31, 2015, the Court denied the motion to dismiss. On May 14, 2015, we filed our answer to plaintiffs’ corrected amended complaint. On September 4, 2015, plaintiffs filed their motion for class certification, and on March 16, 2016, the Court granted plaintiffs’ motion. A court-ordered mediation held in January 2016 did not result in a settlement of the lawsuit. The discovery process was concluded. The plaintiffs and defendants filed cross-motions for summary judgment, and briefing on those motions was completed in July 2017. On October 9, 2017, the parties signed a definitive settlement agreement resolving this matter and submitted it to the Court for approval. Under the termsCondensed Consolidated Financial Statements (Part I, Item 1 of this agreement, the settlement will be funded entirely by certain of AMD’s insurance carriers and the defendants will continue to deny any liability or wrongdoing.Form 10-Q).
Based upon information presently known to management, we believe that the potential liability, if any, will not have a material adverse effect on our financial condition, cash flows or results of operations.
Shareholder Derivative Lawsuits
On March 20, 2014, a purported shareholder derivative lawsuit captioned Wessels v. Read, et al., Case No. 1:14 cv-262486 (Wessels) was filed against us (as a nominal defendant only) and certain of our directors and officers in the Santa Clara County Superior Court of the State of California. The complaint purports to assert claims against us and certain individual directors and officers for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by us and the individual directors and officers regarding our 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for our common stock during the period. On April 27, 2015, a similar purported shareholder derivative lawsuit captioned Christopher Hamilton and David Hamilton v. Barnes, et al., Case No. 5:15-cv-01890 (Hamilton) was filed against us (as a nominal defendant only) and certain of our directors and officers in the United States District Court for the Northern District of California. The case was transferred to the judge handling the Hatamian Lawsuit and is now Case No. 4:15-cv-01890.
On September 29, 2015, a similar purported shareholder derivative lawsuit captioned Jake Ha v Caldwell, et al., Case No. 3:15-cv-04485 (Ha) was filed against us (as a nominal defendant only) and certain of our directors and officers in the United States District Court for the Northern District of California. The lawsuit also seeks a court order voiding the stockholder vote on our 2015 proxy. The case was transferred to the judge handling the Hatamian Lawsuit and is now Case No. 4:15-cv-04485. The Wessels, Hamilton and Ha shareholder derivative lawsuits are currently stayed.
Based upon information presently known to management, we believe that the potential liability, if any, will not have a material adverse effect on our financial condition, cash flows or results of operations.
ZiiLabs Litigation
On December 16, 2016, a patent lawsuit captioned ZiiLabs v. AMD, C.A. No. 2:16-cv-1418 in the United States District Court for Eastern District of Texas (the ZiiLabs Lawsuit) was filed against us. The complaint alleges that we infringed four patents related generally to graphics processors and memory controllers. The complaint seeks damages, interest, and attorneys’ fees. ZiiLabs filed several similar lawsuits against other companies on the same day. On the same date, ZiiLabs also filed a complaint with the United States International Trade Commission (USITC) pursuant to Section 337 of the Tariff Act of 1930 against us and several other companies asserting the same four patents (USITC Proceeding). The complaint seeks a limited exclusion order barring the importation of certain products that contain AMD memory controllers and graphics processors. Some of AMD’s customers are also named respondents. On January 18, 2017, the USITC announced that it would institute the investigation, entitled 337-TA-1037, In the Matter of Certain Graphics Processors, DDR Memory Controllers, and Products Containing the Same. On July 20, 2017, we obtained a license to the patents-in-suit. Accordingly, the USITC and the Court have dismissed AMD from the proceedings. The resulting settlement obligation was not material.
Dickey Litigation
On October 26, 2015, a putative class action complaint captioned Dickey et al. v. AMD, No. 15-cv-04922 was filed against us in the United States District Court for the Northern District of California. The plaintiffs allege that we misled consumers by using the term "eight cores" in connection with the marketing of certain AMD FX CPUs that are based on our “Bulldozer” core architecture. The plaintiffs allege these products cannot perform eight calculations simultaneously, without restriction. The plaintiffs seek to obtain damages under several causes of action for a nationwide class of consumers who allegedly were deceived into purchasing certain Bulldozer-based CPUs that were marketed as containing eight cores. The plaintiffs also seek attorneys' fees. On December 21, 2015, we filed a motion to dismiss the complaint, which was granted on April 7, 2016. The plaintiffs then filed an amended complaint with a narrowed putative class definition, which the Court dismissed upon our motion on October 31, 2016. The plaintiffs subsequently filed a second amended complaint, and we filed a motion to dismiss the second amended complaint. On June 14, 2017, the Court issued an order granting in part and denying in part our motion to dismiss, and allowing the plaintiffs to move forward with a portion of their complaint. The putative class definition does not encompass our Ryzen™ or EPYC™ processors.
Based upon information presently known to management, we believe that the potential liability, if any, will not have a material adverse effect on our financial condition, cash flows or results of operations.
The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In addition, you should consider the interrelationship and compounding effects of two or more risks occurring simultaneously.
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, operations and financial results.
Economic and Strategic Risks
•Intel Corporation’s dominance of the microprocessor market and its aggressive business practices may limit our ability to compete effectively.effectively on a level playing field.
•Global economic and market uncertainty may adversely impact our business and operating results.
•The loss of a significant customer may have a material adverse effect on us.
•The ongoing novel coronavirus (COVID-19) pandemic could materially adversely affect our business, financial condition and results of operations.
•The markets in which our products are sold are highly competitive.
•The demand for our products depends in part on the market conditions in the industries into which they are sold. Fluctuations in demand for our products or a market decline in any of these industries could have a material adverse effect on our results of operations.
•The semiconductor industry is highly cyclical and has experienced severe downturns that have materially adversely affected, and may continue to materially adversely affect, our business in the future.
•Our operating results are subject to quarterly and seasonal sales patterns.
•If we cannot adequately protect our technology or other intellectual property in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, we may lose a competitive advantage and incur significant expenses.
•Unfavorable currency exchange rate fluctuations could adversely affect us.
Operational and Technology Risks
•We rely on third parties to manufacture our products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, our business could be materially adversely affected.
•If essential equipment, materials, substrates or manufacturing processes are not available to manufacture our products, we could be materially adversely affected.
•Failure to achieve expected manufacturing yields for our products could negatively impact our financial results.
•The success of our business is dependent upon our ability to introduce products on a timely basis with features and performance levels that provide value to our customers while supporting and coinciding with significant industry transitions.
•Our revenue from our semi-custom SoC products is dependent upon our semi-custom SoC products being incorporated into customers’ products and the success of those products.
•Our products may be subject to security vulnerabilities that could have a material adverse effect on us.
•IT outages, data loss, data breaches and cyber-attacks could compromise our intellectual property or other sensitive information, be costly to remediate or cause significant damage to our business, reputation and operations.
•Uncertainties involving the ordering and shipment of our products could materially adversely affect us.
•Our ability to design and introduce new products in a timely manner is dependent upon third-party intellectual property.
•We depend on third-party companies for the design, manufacture and supply of motherboards, software, memory and other computer platform components to support our business.
•If we lose Microsoft Corporation’s support for our products or other software vendors do not design and develop software to run on our products, our ability to sell our products could be materially adversely affected.
•Our reliance on third-party distributors and add-in-board (AIB) partners subjects us to certain risks.
•Our business is dependent upon the proper functioning of our internal business processes and information systems and modification or interruption of such systems may disrupt our business, processes and internal controls.
•If our products are not compatible with some or all industry-standard software and hardware, we could be materially adversely affected.
•Costs related to defective products could have a material adverse effect on us.
•If we fail to maintain the efficiency of our supply chain as we respond to changes in customer demand for our products, our business could be materially adversely affected.
•We outsource to third parties certain supply-chain logistics functions, including portions of our product distribution, transportation management and information technology support services.
•Our inability to effectively control the sales of our products on the gray market could have a material adverse effect on us.
Legal and Regulatory Risks
•Government actions and regulations such as export administration regulations, tariffs, and trade protection measures may limit our ability to export our products to certain customers.
•If we cannot realize our deferred tax assets, our results of operations could be adversely affected.
•Our business is subject to potential tax liabilities, including as a result of tax regulation changes.
•We are party to litigation and may become a party to other claims or litigation that could cause us to incur substantial costs or pay substantial damages or prohibit us from selling our products.
•We are subject to environmental laws, conflict minerals-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as a variety of other laws or regulations that could result in additional costs and liabilities.
Xilinx Merger and Acquisition Risks
•Acquisitions, joint ventures and/or investments, including our recently announced acquisition of Xilinx, and the failure to integrate acquired businesses, could disrupt our business and/or dilute or adversely affect the price of our common stock.
•Our ability to complete the Merger is subject to closing conditions, including the receipt of consents and approvals from governmental authorities, which may impose conditions that could adversely affect us or cause the Merger not to be completed.
•Whether or not it is completed, the announcement and pendency of the Merger could cause disruptions in our business, which could have an adverse effect on our business and financial results.
•Any impairment of the combined company’s tangible, definite-lived intangible or indefinite-lived intangible assets, including goodwill, may adversely impact the combined company’s financial position and results of operations.
Liquidity and Capital Resources Risks
•The agreements governing our notes and our Revolving Credit Facility impose restrictions on us that may adversely affect our ability to operate our business.
•Our indebtedness could adversely affect our financial position and prevent us from implementing our strategy or fulfilling our contractual obligations.
•We may not be able to generate sufficient cash to meet our working capital requirements. Also, if we cannot generate sufficient revenue and operating cash flow, we may face a cash shortfall and be unable to make all of our planned investments in research and development or other strategic investments.
General Risks
•Our worldwide operations are subject to political, legal and economic risks and natural disasters, which could have a material adverse effect on us.
•We may incur future impairments of goodwill and technology license purchases.
•Our inability to continue to attract and retain qualified personnel may hinder our business.
•Our stock price is subject to volatility.
•Worldwide political conditions may adversely affect demand for our products.
For a more complete discussion of the material risks facing our business, see below.
Economic and Strategic Risks
Intel Corporation’s dominance of the microprocessor market and its aggressive business practices may limit our ability to compete effectively on a level playing field.
Intel Corporation has been the market share leader for microprocessors for many years. Intel’s market share, margins and significant financial resources enable it to market its products aggressively, to target our customers and our channel partners with special incentives and to influence customers who do business with us. These aggressive activities have in the past and are likely in the future to resultresulted in lower unit sales and a lower average selling price for many of our products and adversely affectaffected our margins and profitability.
Intel exerts substantial influence over computer manufacturers and their channels of distribution through various brand and other marketing programs. As a result of Intel’s position in the microprocessor market, Intel has been able to control x86 microprocessor and computer system standards and benchmarks and to dictate the type of products the microprocessor market requires of us. Intel also dominates the computer system platform, which includes core logic chipsets, graphics chips, motherboardsnetworking devices (wired and wireless), non-volatile storage and other components necessary to assemble a computer system. Additionally, Intel is able to drive de facto standards and specifications for x86 microprocessors that could cause us and other companies to have delayed access to such standards.
As long as Intel remains in this dominant position, we may be materially adversely affected by Intel’s business practices, including rebating and allocation strategies and pricing actions, designed to limit our market share and margins; product mix and introduction schedules; product bundling, marketing and merchandising strategies; exclusivity payments to its current and potential customers, retailers and channel partners; de facto control over industry standards, and heavy influence on PC manufacturers and other PC industry participants, including motherboard, memory, chipset and basic input/output system (BIOS) suppliers and software companies as well as the graphics interface for Intel platforms; and marketing and advertising expenditures in support of positioning the Intel brand over the brand of its original equipment manufacturer (OEM) customers and retailers.
Intel has substantially greater financial resources than we do and accordingly spends substantially greater amounts on marketing and research and development than we do. We expect Intel to maintain its market position and to continue to invest heavily in marketing, research and development, new manufacturing facilities and other technology companies. To the extent Intel manufactures a significantly larger portion of its microprocessor products using more advanced process technologies, or introduces competitive new products into the market before we do, we may be more vulnerable to Intel’s aggressive marketing and pricing strategies for microprocessor products. For example, Intel has introduced microprocessors for low-cost notebooks, similar to products that we offer for low-cost notebooks
As long as Intel remains in this dominant position, we may be materially adversely affected by Intel’s:
business practices, including rebating and allocation strategies and pricing actions, designed to limit our market share and margins;
product mix and introduction schedules;
product bundling, marketing and merchandising strategies;
exclusivity payments to its current and potential customers and channel partners;
de facto control over industry standards, and heavy influence on PC manufacturers and other PC industry participants, including motherboard, memory, chipset and basic input/output system, or BIOS, suppliers and software companies as well as the graphics interface for Intel platforms; and
marketing and advertising expenditures in support of positioning the Intel brand over the brand of its original equipment manufacturer OEM customers.
Intel could also take actions that place our discrete GPUsgraphics processing units (GPUs) at a competitive disadvantage, including giving one or more of our competitors in the graphics market, such as Nvidia Corporation, preferential access to its proprietary graphics interface or other useful information. Also, Intel has announced that it is developing their own high-end discrete GPUs. Intel’s position in the microprocessor market and integrated graphics chipset market, its introduction of competitive new products, its existing relationships with top-tier OEMs, and its aggressive marketing and pricing strategies could result in lower unit sales and a lower average selling priceprices for our products, which could have a material adverse effect on us.
WeGlobal economic and market uncertainty may adversely impact our business and operating results.
Uncertain global economic conditions have in the past and may in the future adversely impact our business, including, without limitation, a slowdown in the Chinese economy, one of the largest global markets for desktop and notebook PCs. Uncertainty in the worldwide economic environment may negatively impact consumer confidence and spending causing our customers to postpone purchases. In addition, during challenging economic times, our current or potential future customers may experience cash flow problems and as a result may modify, delay or cancel plans to purchase our products. Additionally, if our customers are not successful in generating sufficient revenue or are unable to secure financing, they may not be able to pay, or may delay payment of, accounts receivable that they owe us. The risk related to our customers potentially defaulting on or delaying payments to us is increased because we expect that a small number of customers will continue to account for a substantial part of our revenue. Any inability of our current or potential future customers to pay us for our products may adversely affect
our earnings and cash flow. Moreover, our key suppliers may reduce their output or become insolvent, thereby adversely impacting our ability to manufacture our products. In addition, uncertain economic conditions may make it more difficult for us to raise funds through borrowings or private or public sales of debt or equity securities.
The loss of a significant customer may have a wafer supply agreement with GF with obligations to purchase allmaterial adverse effect on us.
We depend on a small number of our microprocessor and APU product requirements, andcustomers for a certainsubstantial portion of our GPU product requirementsbusiness and we expect that a small number of customers will continue to account for a significant part of our revenue in the future. If one of our key customers decides to stop buying our products, or if one of these customers materially reduces its operations or its demand for our products, our business would be materially adversely affected.
The ongoing novel coronavirus (COVID-19) pandemic could materially adversely affect our business, financial condition and results of operations.
The COVID-19 pandemic has caused government authorities to implement numerous public health measures, including quarantines, business closures, travel bans, and restrictions related to social gathering and mobility, to contain the virus. We have experienced and expect to continue to experience disruptions to our business as these measures have, and will continue to have, an effect on our business operations and practices.
While many of our offices around the world remain open, either because the pandemic has been contained in that location or to enable critical on-site business functions in compliance with government guidelines, we continue to have some employees work from GF, with limited exceptions.home until further notice. It is uncertain as to when the measures put in place to attempt to contain the spread of COVID-19 will be lifted or whether there will be additional measures put into place. If GF isCOVID-19 continues to spread or if there are further waves of the virus, we may need to further limit operations or modify our business practices in a manner that may impact our business. If our employees are not able to satisfyperform their job duties due to self-isolation, quarantine, travel restrictions or illness, or are unable to perform them as efficiently at home for an extended period of time, we may not be able to meet our product schedules, roadmaps and customer commitments and we may experience an overall lower productivity of our workforce. We continue to monitor our operations and public health measures implemented by governmental authorities in response to COVID-19. Although some public health measures have eased and a small portion of our employees are at work in certain offices, our efforts to reopen our offices safely may not be successful and could expose our employees to health risks. Even when COVID-19 measures regarding mobility are lifted or modified, our employees’ ability to return to work may delay the return of our full workforce and the resumption of normal business operations.
We have experienced some disruptions to parts of our supply chain as a result of COVID-19. We may adjust our supply chain requirements based on changing customer needs and demands. We may also assess our product schedules and roadmaps to make any adjustments that may be necessary to support remote working requirements and address the geographic and market demand shifts caused by COVID-19. If the supply of our products to customers is delayed, reduced or canceled due to disruptions encountered by our third-party manufacturing, requirements,suppliers or vendors as a result of facility closures, border and port closures, and mobility limitations put on their workforces, it could have a material adverse effect on our business.
COVID-19 has in the short-term and may in the long-term adversely impact the global economy, potentially leading to an economic downturn. This could negatively impact consumer confidence and spending causing our customers to postpone or cancel purchases, or delay paying or default on payment of outstanding amounts due to us, which may have a material adverse effect on our business.
COVID-19 has also led to a disruption and volatility in the global capital and financial markets. While we believe our cash, cash equivalents and short-term investments along with our Revolving Credit Facility will be sufficient to fund operations, including capital expenditures, over the next 12 months, to the extent we may require additional funding to finance our operations and capital expenditures and such funding may not be available to us as a result of contracting capital and financial markets resulting from COVID-19, it may have an adverse effect on our business.
The extent to which COVID-19 impacts our business and financial results will depend on future developments, which are unpredictable and highly uncertain, including the continued spread, duration and severity of the outbreak, the appearances of new variants of COVID-19, the breadth and duration of business disruptions related to COVID-19, the availability and distribution of effective treatments and vaccines, and public health measures and actions taken throughout the world to contain COVID-19. The prolonged effect of COVID-19 could materially adversely impact our business, financial condition and results of operations.
The markets in which our products are sold are highly competitive.
The markets in which our products are sold are very competitive and delivering the latest and best products to market on a timely basis is critical to achieving revenue growth. We believe that the main factors that determine our product competitiveness are timely product introductions, product quality, product features and capabilities (including enabling state-of-the-art visual and virtual reality experiences), energy efficiency (including power consumption and battery life), reliability, processor clock speed, performance, size (or form factor), selling price, cost, adherence to industry standards (and the creation of open industry standards), level of integration, software and hardware compatibility, security and stability, brand recognition and availability.
We expect that competition will continue to be intense due to rapid technological changes, frequent product introductions by our competitors or new competitors of products that may provide better performance/experience or that may include additional features that render our products comparatively less competitive. We may also face aggressive pricing by competitors, especially during challenging economic times. In addition, our competitors have significant marketing and sales resources which could increase the competitive environment in a declining market, leading to lower prices and margins. Some competitors may have greater access or rights to complementary technologies, including interface, processor and memory technical information. For instance, with our APU products and other competing solutions with integrated graphics, we believe that demand for additional discrete graphics chips and cards may decrease in the future due to improvements in the quality and performance of integrated graphics. If competitors introduce competitive new products into the market before us, demand for our products could be adversely impacted and our business could be adversely impacted.affected. In addition, Intel is seeking to expand its position in integrated graphics for the PC market with high-end discrete graphics solutions for a broad range of computing segments, which may negatively impact our ability to compete in these computing segments. We also face competition from companies that use competing computing architectures and platforms like the ARM architecture. Increased adoption of ARM-based semiconductor designs could lead to further growth and development of the ARM ecosystem.
In addition, we are entering markets with current and new competitors who may be able to adapt more quickly to customer requirements and emerging technologies. We cannot assure you that we will be able to compete successfully against current or new competitors who may have stronger positions in these new markets or superior ability to anticipate customer requirements and emerging industry trends. Furthermore, we may face competition from some of our customers who internally develop the same products as us.We may face delays or disruptions in research and development efforts, or we may be required to invest significantly greater resources in research and development than anticipated. Also, the semiconductor industry has seen several mergers and acquisitions over the last number of years. Further consolidation could adversely impact our business due to there being fewer suppliers, customers and partners in the industry.
The WSA governsdemand for our products depends in part on the terms bymarket conditions in the industries into which we purchasethey are sold. Fluctuations in demand for our products manufactured by GF. The WSA isor a market decline in place until 2024. Pursuant toany of these industries could have a material adverse effect on our results of operations.
Industry-wide fluctuations in the WSA, we are required to purchase all of our microprocessorcomputer marketplace have materially adversely affected us in the past and APU product requirements, and amay materially adversely affect us in the future. A large portion of our GPU product requirements from GF with limited exceptions. If GFComputing and Graphics revenue is unable to achieve anticipated manufacturing yields, remain competitive using or implementing advanced leading-edge process technologies needed to manufacture future generationsfocused on the consumer desktop PC and notebook segments, which have in the past experienced a decline driven by, among other factors, the adoption of smaller and other form factors, increased competition and changes in replacement cycles. The success of our semi-custom SoC products manufactureis dependent on securing customers for our semi-custom design pipeline and consumer market conditions, including the success of the Sony PlayStation®5, Microsoft® Xbox Series S and Microsoft® Xbox Series X game console systems and next generation consoles for Sony and Microsoft, worldwide. In addition, the GPU market has at times seen elevated demand due to the application of GPU products to cryptocurrency mining. For example, our GPU revenue has been affected in part by the volatility of the cryptocurrency mining market. Demand for cryptocurrency has changed and is likely to continue to change quickly. For example, China and South Korea have instituted restrictions on a timely basis at competitive pricescryptocurrency trading and the valuations of the currencies, and corresponding interest in mining of such currencies are subject to significant fluctuations. Alternatively, countries may create, or meet our capacity requirements, then we may experience delays in product launches, supply shortages for certain productsthe case of China are creating, their own cryptocurrencies or increased costs and our businessequivalents that could be materially adversely affected. Moreover, if GF is unable to satisfy our manufacturing requirements andalso impact interest in mining. If we are unable to secure from GF additional exceptions allowing usmanage the risks related to contract with another wafer foundry to satisfy those requirements, thenthe volatility of the cryptocurrency mining market, our GPU business could be materially adversely affected.
The semiconductor industry is highly cyclical and has experienced severe downturns that have materially adversely affected, and may continue to materially adversely affect, our business in the future.
The semiconductor industry is highly cyclical and has experienced significant downturns, often in conjunction with constant and rapid technological change, wide fluctuations in supply and demand, continuous new product introductions, price erosion and declines in general economic conditions. We have incurred substantial losses in recent downturns, due to substantial declines in average selling prices; the cyclical nature of supply and demand imbalances in the semiconductor industry; a decline in demand for end-user products (such as PCs) that incorporate our products; and excess inventory levels.
Industry-wide fluctuations in the computer marketplace have materially adversely affected us in the past and may materially adversely affect us in the future. Global economic uncertainty and weakness have in the past impacted the semiconductor market as consumers and businesses have deferred purchases, which negatively impacted demand for our products. Our financial performance has been, and may in the future be, negatively affected by these downturns.
The growth of our business is also dependent on continued demand for our products from high-growth adjacent emerging global markets. Our ability to be successful in such markets depends in part on our ability to establish adequate local infrastructure, as well as our ability to cultivate and maintain local relationships in these markets. If demand from these markets is below our expectations, sales of our products may decrease, which would have a material adverse effect on us.
Our operating results are subject to quarterly and seasonal sales patterns.
The profile of our sales may be weighted differently during the year. A large portion of our quarterly sales have historically been made in the last month of the quarter. This uneven sales pattern makes prediction of revenue for each financial period difficult and increases the risk of unanticipated variations in quarterly results and financial condition. In August 2016,addition, our operating results tend to vary seasonally with the markets in which our products are sold. For example, historically, our net revenue has been generally higher in the second half of the year than in the first half of the year, although market conditions and product transitions could impact these trends. Many of the factors that create and affect quarterly and seasonal trends are beyond our control.
If we entered intocannot adequately protect our technology or other intellectual property in the sixth amendmentUnited States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, we may lose a competitive advantage and incur significant expenses.
We rely on a combination of protections provided by contracts, including confidentiality and nondisclosure agreements, copyrights, patents, trademarks and common law rights, such as trade secrets, to the WSA (WSA Sixth Amendment) pursuant to whichprotect our intellectual property. However, we agreed to certain annual wafer purchase targets through 2020, and if we fail to meet the agreed wafer purchase target during a calendar yearcannot assure you that we will be requiredable to payadequately protect our technology or other intellectual property from third-party infringement or from misappropriation in the United States and abroad. Any patent licensed by us or issued to GFus could be challenged, invalidated or circumvented or rights granted thereunder may not provide a competitive advantage to us. Also, due to measures to slow down the outbreak of COVID-19, various patent offices and courts have been adversely impacted and there is a potential for delay or disruptions that might affect certain of our patent rights.
Furthermore, patent applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property on a worldwide basis in a cost-effective manner. In jurisdictions where foreign laws provide less intellectual property protection than afforded in the United States and abroad, our technology or other intellectual property may be compromised, and our business would be materially adversely affected.
Unfavorable currency exchange rate fluctuations could adversely affect us.
We have costs, assets and liabilities that are denominated in foreign currencies. As a consequence, movements in exchange rates could cause our foreign currency denominated expenses to increase as a percentage of revenue, affecting our profitability and cash flows. Whenever we believe appropriate, we hedge a portion of our short-term foreign currency exposure to protect against fluctuations in currency exchange rates. We determine our total foreign currency exposure using projections of long-term expenditures for items such as payroll. We cannot assure you that these activities will be effective in reducing foreign exchange rate exposure. Failure to do so could have an adverse
effect on our business, financial condition, results of operations and cash flow. In addition, the differencemajority of our product sales are denominated in U.S. dollars. Fluctuations in the exchange rate between our actual wafer purchasesthe U.S. dollar and the applicable annual purchase target. Iflocal currency can cause increases or decreases in the cost of our actual wafer requirements are less thanproducts in the numberlocal currency of wafers requiredsuch customers. An appreciation of the U.S. dollar relative to meet the applicable annual wafer purchase target, welocal currency could have excess inventory or higher inventory unit costs, bothreduce sales of which may adversely impact our gross marginproducts.
Operational and our results of operations.
In addition, GF has relied on Mubadala Technology Investments LLC (Mubadala Tech) for its funding needs. If Mubadala Tech fails to adequately fund GF on a timely basis, or at all, GF’s ability to manufacture products for us could be materially adversely affected.Risks
We rely on third parties to manufacture our products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, our business could be materially adversely affected.
We rely onutilize third-party wafer foundries to fabricate the silicon wafers for all of our products. We rely on Taiwan Semiconductor Manufacturing Company Limited (TSMC) for the production of all wafers for our 7 nanometer (nm) products, and we rely primarily on GLOBALFOUNDRIES Inc. (GF) for wafers for products manufactured at process nodes larger than 7 nm. We also rely on third-party manufacturers to assemble, test, mark and pack (ATMP) our products. It is important to have reliable relationships with all of these third-party manufacturing suppliers to ensure adequate product supply to respond to customer demand.
We cannot guarantee that these manufacturers or our other third-party manufacturing suppliers will be able to meet our near-term or long-term manufacturing requirements. If we experience supply constraints from our third-party manufacturing suppliers, we may be required to allocate the affected products amongst our customers, which could have a material adverse effect on our relationships with these customers and on our financial condition. In addition, if we are unable to meet customer demand due to fluctuating or late supply from our manufacturing suppliers, it could result in lost sales and have a material adverse effect on our business. For example, if TSMC is not able to manufacture wafers for our 7 nm products in sufficient quantities to meet customer demand, it could have a material adverse effect on our business.
We do not have long-term commitment contracts with some of our third-party manufacturing suppliers. We obtain some of these manufacturing services on a purchase order basis and these manufacturers are not required to provide us with any specified minimum quantity of product beyond the quantities in an existing purchase order. Accordingly, we depend on these suppliers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs, to produce products of acceptable quality and at acceptable manufacturing yields and to deliver those products to us on a timely basis and at acceptable prices. The manufacturers we use also fabricate wafers and ATMP products for other companies, including certain of our competitors. They could choose to prioritize capacity for other customers, increase the prices that they charge us on short notice, require prepayments, or reduce or eliminate deliveries to us, which could have a material adverse effect on our business.
Other risks associated with our dependence on third-party manufacturers include limited control over delivery schedules and quality assurance, lack of capacity in periods of excess demand, misappropriation of our intellectual property, dependence on several small undercapitalized subcontractors, and limited ability to manage inventory and parts. Moreover, if any of our third-party manufacturers suffer any damage to facilities, lose benefits under material agreements, experience power outages, lack
sufficient capacity to manufacture our products, encounter financial difficulties, are unable to secure necessary raw materials from their suppliers, or suffer any other disruption or reduction in efficiency, or experience uncertain social economic or political circumstances or conditions, we may encounter supply delays or disruptions. If we are unable to secure sufficient or reliable supplies of products, our ability to meet customer demand may be adversely affected and this could materially affect our business.
If we transition the production of some of our products to new manufacturers, we may experience delayed product introductions, lower yields or poorer performance of our products. If we experience problems with product quality or are unable to secure sufficient capacity from a particular third-party manufacturer, or if we for other reasons cease utilizing one of those suppliers, we may be unable to secure an alternative supply for any specific product in a short time frame. We could experience significant delays in the shipment of our products if we are required to find alternative third-party manufacturers, which could have a material adverse effect on our business.
In April 2016, we consummatedWe are a transactionparty to a wafer supply agreement (WSA) with Tongfu Fujitsu Microelectronics Co., Ltd. (formerly, Nantong Fujitsu Microelectronics Co., Ltd.) (TFME), underGF that governs the terms by which we soldpurchase products manufactured by GF and is in place until 2024. In May 2021, we entered into an amendment (the “A&R Seventh Amendment”) to TFME 85%the WSA that modifies certain terms applicable to wafer purchases at the 12 nm and 14 nm technology nodes by us. GF agreed to a minimum annual capacity allocation to us for years 2022, 2023 and 2024. The A&R Seventh Amendment also removes all prior exclusivity commitments and provides us with full flexibility to contract with any wafer foundry with respect to all products manufactured at any technology node. Further, the parties agreed to pricing and new annual wafer purchase targets for years 2022, 2023 and 2024, and we agreed to
pre-pay GF certain amounts for those wafers in 2022 and 2023. If we do not meet the annual wafer purchase target for any of these years, we will be required to pay to GF a portion of the equity interestsdifference between the actual wafer purchases and the wafer purchase target for that year. If our actual wafer requirements are less than the number of wafers required to meet the applicable annual wafer purchase target, we could have excess inventory or higher inventory unit costs, both of which may adversely impact our gross margin and our results of operations. We could experience significant delays in the shipment of our products if we are required to find alternative third-party manufacturers, which could have a material adverse effect on our business.
We are party to two ATMP facilities consisting of Suzhou TF-AMD Semiconductor Co., Ltd. (formerly AMD Technologies (China) Co., Ltd.) and TF-AMD Microelectronics (Penang) Sdn. Bhd. (formerly Advanced Micro Devices Export Sdn. Bhd.) thereby forming two joint ventures (collectively, the ATMP JVs). with Tongfu Microelectronics Co., Ltd. The majority of our ATMP services will beare provided by the ATMP JVs and there is no guarantee that the ATMP JVs will be able to fulfill our long-term ATMP requirements. If we are unable to meet customer demand due to fluctuating or late supply from the ATMP JVs, it could result in lost sales and have a material adverse effect on our business.
If essential equipment, materials, substrates or manufacturing processes are not available to manufacture our products, we could be materially adversely affected.
We may purchase equipment, materials and substrates for use by our back-end manufacturing service providers from a number of suppliers and our operations depend upon obtaining deliveries of adequate supplies of equipment and materials on a timely basis. Our third-party suppliers also depend on the same timely delivery of adequate quantities of equipment and materials in the manufacture of our products. In addition, as many of our products increase in technical complexity, we rely on our third-party suppliers to update their processes in order to continue meeting our back-end manufacturing needs. Certain equipment and materials that are used in the manufacture of our products are available only from a limited number of suppliers, or in some cases, a sole supplier. We also depend on a limited number of suppliers to provide the majority of certain types of integrated circuit packages for our microprocessors, including our APU products. Similarly, certain non-proprietary materials or components such as memory, printed circuit boards (PCBs), interposers, substrates and capacitors used in the manufacture of our products are currently available from only a limited number of sources. If we are unable to procure a stable supply of substrates on an ongoing basis and at reasonable costs to meet our production requirements, we could experience a shortage in substrate supply or an increase in production costs, which could have a material adverse effect on our business. We have long-term purchase commitments with some of our substrate suppliers. If the delivery of such supply is delayed or does not occur for any reason, it could materially impact our ability to procure the required volume of substrates and to meet customer demand. Conversely, a decrease in customer demand could result in excess substrate inventory and an increase in our production costs. Because some of the equipment and materials that we and our third-party manufacturing suppliers purchase are complex, it is sometimes difficult to substitute one supplier for another. From time to time, suppliers may extend lead times, limit supply or increase prices due to capacity constraints or other factors. Also, some of these materials and components may be subject to rapid changes in price and availability. Interruption of supply or increased demand in the industry could cause shortages and price increases in various essential materials. Dependence on a sole supplier or a limited number of suppliers exacerbates these risks. If we are unable to procure certain of these materials for our back-end manufacturing operations, or our third-party foundries or manufacturing suppliers are unable to procure materials for manufacturing our products, our business would be materially adversely affected.
Failure to achieve expected manufacturing yields for our products could negatively impact our financial results.
Semiconductor manufacturing yields are a result of both product design and process technology, which is typically proprietary to the manufacturer, and low yields can result from design failures, process technology failures or a combination of both. Our third-party foundries including GF, are responsible for the process technologies used to fabricate silicon wafers. If our third-party foundries experience manufacturing inefficiencies or encounter disruptions, errors or difficulties during production, we may fail to achieve acceptable yields or experience product delivery delays. We cannot be certain that our third-party foundries will be able to develop, obtain or successfully implement leading-edge process technologies needed to manufacture future generations of our products profitably or on a timely basis or that our competitors will not develop new technologies, products or processes earlier. Moreover, during periods when foundries are implementing new process technologies, their manufacturing facilities may not be fully productive. A substantial delay in the technology transitions to smaller process technologies could have a material adverse effect on us, particularly if our competitors transition to more cost effective technologies before us. For example, we are presently focusing our 7 nm product portfolio on TSMC’s 7 nm process. If TSMC is not able to manufacture wafers for our 7 nm products in sufficient quantities to meet customer demand, it could have a material adverse effect on our business.
Any decrease in manufacturing yields could result in an increase in per unit costs, which would adversely impact our gross margin and/or force us to allocate our reduced product supply amongst our customers, which could harm our relationships and reputation with our customers and materially adversely affect our business.
The success of our business is dependent upon our ability to introduce products on a timely basis with features and performance levels that provide value to our customers while supporting and coinciding with significant industry transitions.
Our success depends to a significant extent on the development, qualification, implementation and acceptance of new product designs and improvements that provide value to our customers. Our ability to develop, qualify and distribute, and have manufactured, new products and related technologies to meet evolving industry requirements, at prices acceptable to our customers and on a timely basis are significant factors in determining our competitiveness in our target markets. For example, a large portion of our Computing and Graphics revenue is focused on consumer desktop PC and notebook. While overall growth in Computing and Graphics is stabilizing, the areas within Computing and Graphics are changing. Our ability to take advantage of the opportunities within the areas of Computing and Graphics is based on foreseeing those changes and making timely investments in the form factors that serve those areas. As consumers adopt new form factors, have new product feature preferences or have different requirements than those consumers in the PC market, PC sales could be negatively impacted, which could adversely impact our business. Our product roadmap includes our next-generation AMD Ryzen™, AMD Radeon™ and AMD EPYC™ processors based on our new x86 processor core codenamed “Zen” to help drive our re-entry into high-performance and server computing.using 7 nm process technology. We cannot assure you that our efforts to execute our product roadmap and address markets beyond our core PC market will result in innovative products and technologies that provide value to our customers. If we fail to or are delayed in developing, qualifying or shipping new products or technologies that provide value to our customers and address these new trends or if we fail to predict which new form factors consumers will adopt and adjust our business accordingly, we may lose competitive positioning, which could cause us to lose market share and require us to discount the selling prices of our products. Although we make substantial investments in research and development, we cannot be certain that we will be able to develop, obtain or successfully implement new products and technologies on a timely basis or that they will be well-received by our customers. Moreover, our investments in new products and technologies involve certain risks and uncertainties and could disrupt our ongoing business. New investments may not generate sufficient revenue, may incur unanticipated liabilities and may divert our limited resources and distract management from our current operations. We
cannot be certain that our ongoing investments in new products and technologies will be successful, will meet our expectations and will not adversely affect our reputation, financial condition and operating results.
Delays in developing, qualifying or shipping new products can also cause us to miss our customers’ product design windows or, in some cases, breach contractual obligations or cause us to pay penalties. If our customers do not include our products in the initial design of their computer systems or products, they will typically not use our products in their systems or products until at least the next design configuration. The process of being qualified for inclusion in a customer’s system or product can be lengthy and could cause us to further miss a cycle in the demand of end-users, which also could result in a loss of market share and harm our business. We also depend on the success and timing of our customers’ platform launches. If our customers delay their product launches or if our customers do not effectively market their platforms with our products, it could result in a delay in bringing our products to market and cause us to miss a cycle in the demand of end-users, which could materially adversely affect our business. In addition, market demand requires that products incorporate new features and performance standards on an industry-wide basis. Over the life of a specific product, the sale price is typically reduced over time. The introduction of new products and enhancements to existing products is necessary to maintain the overall corporate average selling price. If we are unable to introduce new products with sufficiently high sale prices or to increase unit sales volumes capable of offsetting the reductions in the sale prices of existing products over time, our business could be materially adversely affected.
If we cannot generate sufficient revenue and operating cash flow or obtain external financing, we may face a cash shortfall and be unable to make all of our planned investments in research and development or other strategic investments.
Our ability to fund research and development expenditures depends on generating sufficient revenue and cash flow from operations and the availability of external financing, if necessary. Our research and development expenditures, together with ongoing operating expenses, will be a substantial drain on our cash flow and may decrease our cash balances. If new competitors, technological advances by existing competitors or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. If we are required to invest significantly greater resources than anticipated in research and development efforts without an increase in revenue, our operating results could decline.
We regularly assess markets for external financing opportunities, including debt and equity financing. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms. The health of the credit markets may adversely impact our ability to obtain financing when needed. Any downgrades from credit rating agencies such as Moody’s or Standard & Poor’s may adversely impact our ability to obtain external financing or the terms of such financing. Credit agency downgrades or concerns regarding our credit worthiness may impact relationships with our suppliers, who may limit our credit lines. Our inability to obtain needed financing or to generate sufficient cash from operations may require us to abandon projects or curtail planned investments in research and development or other strategic initiatives. If we curtail planned investments in research and development or abandon projects, our products may fail to remain competitive and our business would be materially adversely affected.
The loss of a significant customer may have a material adverse effect on us.
Collectively, Sony Corporation, Microsoft Corporation and HP Inc. accounted for approximately 49% of our consolidated net revenue for the quarter ended September 30, 2017. Sales to Sony and Microsoft consisted of products from our Enterprise, Embedded and Semi-Custom segment and sales to HP Inc. consisted primarily of products from our Computing and Graphics segment. We expect that a small number of customers will continue to account for a substantial part of revenue of our businesses in the future. If one of our key customers decides to stop buying our products, or if one of these customers materially reduces or reorganizes its operations or its demand for our products, our business would be materially adversely affected.
Our receipt of revenue from our semi-custom SoC products is dependent upon our technologysemi-custom SoC products being designedincorporated into third-partycustomers’ products and the success of those products.
The revenue that we receive from our semi-custom SoC products is in the form of non-recurring engineering fees charged to third parties for design and development services and revenue received in connection with sales of our semi-custom SoC products to these third parties. As a result, our ability to generate revenue from our semi-custom products depends on our ability to secure customers for our semi-custom design pipeline, our customers’ desire to pursue the project and our semi-custom SoC products being incorporated into those customer’scustomers’ products. Any revenue from sales of our semi-custom SoC products is directly related to sales of the third-party’s products and reflective of their success in the market. Moreover, we have no control over the marketing efforts of these third parties, and we cannot make any assurances that sales of their products will be successful in current or future years. Consequently, the semi-custom SoC product revenue expected by us may not be fully realized and our
operating results may be adversely affected.
Global economic uncertaintyOur products may be subject to security vulnerabilities that could have a material adverse effect on us.
The products that we sell are complex and may be subject to security vulnerabilities that could result in, among other things, the loss, corruption, theft or misuse of confidential data or system performance issues. Our efforts to prevent and address security vulnerabilities may decrease performance, be only partially effective or not successful at all. We may depend on vendors to create mitigations to their technology that we incorporate into our products and they may delay or decline to make such mitigations. We may also depend on third parties, such as customers and end users, to deploy our mitigations alone or as part of their own mitigations, and they may delay, decline or modify the implementation of such mitigations. Our relationships with our customers could be adversely impactaffected as some of our business and operating results.
Uncertain global economic conditionscustomers may stop purchasing our products, reduce or delay future purchases of our products, or use competing products. Any of these actions by our customers could adversely affect our revenue. We have in the past and may in the future adversely impact our business, including, without limitation, a slowdown in the Chinese economy, one of the largest global markets for desktopbe subject to claims and notebook PCs. Uncertainty
in the worldwide economic environment may negatively impact consumer confidence and spending causing our customers to postpone purchases. In addition, during challenging economic times, our current or potential future customers may experience cash flow problems and as a result may modify, delay or cancel plans to purchase our products. Additionally, if our customers are not successful in generating sufficient revenue or are unable to secure financing, they may not be able to pay, or may delay payment of, accounts receivable that they owe us. The risklitigation related to our customers’ potentially defaulting onsecurity vulnerabilities. Actual or delaying payments to us is increased because we expect that a small numberperceived security vulnerabilities of customers will continue to account for a substantial part of our revenue. Any inability of our current or potential future customers to pay us for our products may subject us to adverse publicity, damage to our brand and reputation, and could materially harm our business or financial results.
IT outages, data loss, data breaches and cyber-attacks could compromise our intellectual property or other sensitive information, be costly to remediate or cause significant damage to our business, reputation and operations.
In the ordinary course of our business, we maintain sensitive data on our information technology (IT) assets, and also may maintain sensitive information on our business partners’ and third-party providers’ IT assets, including our intellectual property and proprietary or confidential business information relating to our business and that of our customers and business partners. The White House, SEC and other regulators have also increased their focus on companies’ cybersecurity vulnerabilities and risks. Maintaining the security of this information is important to our business and reputation. We believe that companies like AMD have been increasingly subject to a wide variety of security incidents, cyber-attacks, hacking and phishing attacks, business and system disruption attacks, and other attempts to gain unauthorized access. The increased prevalence of work-from-home arrangements at AMD and our providers has presented additional operational and cybersecurity risks to our IT systems. These threats can come from a variety of sources, all ranging in sophistication from an individual hacker or insider threat to a state-sponsored attack. Cyber threats may be generic, or they may be custom-crafted against our information systems. Cyber-attacks have become increasingly more prevalent and much harder to detect, defend against or prevent. Our network and storage applications, as well as those of our customers, business partners, and third-party providers, may be subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions.
It is often difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. These data breaches and any unauthorized access, misuse or disclosure of our information or intellectual property could compromise our intellectual property and expose sensitive business information. Cyber-attacks on us or our customers, business partners or third-party providers could also cause us to incur significant remediation costs, result in product development delays, disrupt key business operations and divert attention of management and key information technology resources. These incidents could also subject us to liability, expose us to significant expense and cause significant harm to our reputation and business.
We also maintain confidential and personally identifiable information about our workers and consumers. The confidentiality and integrity of our worker and consumer data is important to our business and our workers and consumers have a high expectation that we adequately protect their personal information.
We anticipate ongoing and increasing costs related to: enhancing and implementing information security controls, including costs related to upgrading application, computer, and network security components; training workers to maintain and monitor our security controls; remediating any data security breach and addressing the related litigation; mitigating reputational harm; and compliance with external regulations, such as the European Union’s General Data Protection Regulation and the California Consumer Privacy Act.
We often partner with third-party providers for certain worker services and we may provide certain limited worker information to such third parties based on the scope of the services provided to us. However, if these third parties fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, our workers’ data may be improperly accessed, used or disclosed.
A breach of data privacy may cause significant disruption of our business operations. Failure to adequately maintain and update our security systems could materially adversely affect our earningsoperations and cash flow. Moreover, our key suppliers may reduce their output or become insolvent, thereby adversely impacting our ability to manufacture our products. In addition, uncertain economic conditions may make it more difficult for usmaintain worker confidence. Failure to raise funds through borrowings or private or public sales of debt or equity securities.
The markets in which our products are sold are highly competitive.
The markets in which our products are sold are very competitive and delivering the latest and best productsprevent unauthorized access to market on a timely basis is critical to achieving revenue growth. We believe that the main factors that determine our product competitiveness are timely product introductions, product quality, product features and capabilities (including enabling state-of-the-art visual and virtual reality experience), energy efficiency (including power consumption and battery life), reliability, processor clock speed, performance, size (or form factor), selling price, cost, adherence to industry standards (and the creation of open industry standards), level of integration, software and hardware compatibility, security and stability, brand recognition and availability.
We expect that competition will continue to be intense due to rapid technological changes, frequent product introductions by our competitors or new competitors of products that may provide better performance/experience or may include additional features that render our products uncompetitive. We may also face aggressive pricing by competitors, especially during challenging economic times. Some competitors may have greater access or rights to complementary technologies, including interface, processor and memory technical information. For instance, with the introduction of our APU productselectronic and other competing solutions with integrated graphics, we believe that demand for additional discrete graphics chipsconfidential information, IT outages, data
loss and cards may decrease in the future due to improvements in the quality and performance of integrated graphics. In addition, our competitors have significant marketing and sales resources whichdata breaches could increase the competitive environment in such a declining market, leading to lower prices and margins. If competitors introduce competitive new products into the market before us, demand for our products could be adversely impacted and our business could be adversely affected.
In addition, we are entering markets with current and new competitors who may be able to adapt more quickly to customer requirements and emerging technologies. We cannot assure you that we will be able to compete successfully against current or new competitors who may have stronger positions in these new markets or superior ability to anticipate customer requirements and emerging industry trends. We may face delays or disruptions in research and development efforts, or we may be required to invest significantly greater resources in research and development than anticipated.
We may not be able to generate sufficient cash to service our debt obligations or meet our working capital requirements.
Our ability to make payments on and to refinance our debt will depend on our financial and operating performance, which may fluctuate significantly from quarter to quarter, and is subject to prevailing economic conditions and financial, business and other factors, many of which are beyond our control. We cannot assure you that we will be able to generate cash flow or that we will be able to borrow funds, including under our secured revolving line of credit for a principal amount up to $500 million (our Secured Revolving Line of Credit), in amounts sufficient to enable us to service our debt or to meet our working capital requirements. If we are not able to generate sufficient cash flow from operations or to borrow sufficient funds to service our debt, we may be required to sell assets or equity, reduce expenditures, refinance all or a portion of our existing debt or obtain additional financing. We cannot assure you that we will be able to refinance our debt, sell assets or equity, borrow funds under our Secured Revolving Line of Credit or borrow more funds on terms acceptable to us, if at all.
We have a large amount of indebtedness which couldmaterially adversely affect our financial condition, our competitive position and prevent us from implementing our strategy or fulfilling our contractual obligations.
Our total debt as of September 30, 2017 was $1.4 billion, net of unamortized debt issuance costs and unamortized debt discount associated with the 2.125% Notes. Our large indebtedness may:
make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments;
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions and general corporate and other purposes;
limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general corporate purposes;
require us to use a substantial portion of our cash flow from operations to make debt service payments;
place us at a competitive disadvantage compared to our competitors with relatively less debt; and
increase our vulnerability to the impact of adverse economic and industry conditions.
We enter into sale and factoring arrangements from time to time with respect to certain of our accounts receivables, which arrangements are non-recourse to us in the event that an account debtor fails to pay for credit-related reasons, and are not included in our indebtedness. We could become obligated to repurchase such accounts receivables or otherwise incur liability to the counterparties under these arrangements under certain circumstances, such as where a commercial dispute arises between us and an account debtor.
The agreements governing our notes and our Secured Revolving Line of Credit impose restrictions on us that may adversely affect our ability to operate our business.
The indentures governing our 6.75% Senior Notes due 2019 (6.75% Notes), 7.50% Senior Notes due 2022 (7.50% Notes), 7.00% Senior Notes due 2024 (7.00% Notes) and 2.125% Notes contain various covenants which limit our ability to, among other things:
incur additional indebtedness;
pay dividends and make other restricted payments;
make certain investments, including investments in our unrestricted subsidiaries;
create or permit certain liens;
create or permit restrictions on the ability of certain restricted subsidiaries to pay dividends or make other distributions to us;
use the proceeds from sales of assets;
enter into certain types of transactions with affiliates; and
consolidate or merge or sell our assets as an entirety or substantially as an entirety.
In addition, the Amended and Restated Loan Agreement restricts our ability to make cash payments on the notes to the extent that, on the date of such payment, a default or event of default exists under the Amended and Restated Loan Agreement, or we have not had at all times during the 45 consecutive days immediately preceding such payment, or would not have, on a pro forma basis after giving effect to such payment, Excess Cash Availability (as defined in the Amended and Restated Loan Agreement) of at least $50 million. Any of our future debt agreements may contain similar restrictions. If we fail to make any cash payment on a series of notes when required by the applicable indenture, it would constitute an event of default under such indenture, which, in turn, would constitute an event of default under the agreements governing our other indebtedness.
Our Secured Revolving Line of Credit also contains various covenants which limit our ability to, among other things, make certain investments, merge or consolidate with other entities and permit certain subsidiaries from incurring indebtedness. In addition, further restrictions apply when certain payment conditions (the Payment Conditions) are not satisfied with respect to specified transactions, events or payments. The Payment Conditions include that (i) no default or event of default exists and (ii) at all times during the 45 consecutive days immediately prior to such transaction, event or payment and on a pro forma basis after giving effect to such transaction, event or payment and any incurrence or repayment of indebtedness in connection therewith, the Loan Parties’ Excess Cash Availability (as defined in the Amended and Restated Loan Agreement) available cash is greater than the greater of 10% of the total commitment amount and $50 million. If Payment Conditions are not satisfied under certain circumstances, we will become subject to various additional covenants which limit our ability to, among other things:
create liens upon any of the Loan Parties’ property (other than customary permitted liens and liens in respect of up to $1.5 billion of secured credit facilities debt (which amount includes our Secured Revolving Line of Credit);
declare or make cash distributions;
create any encumbrance on the ability of a subsidiary to make any upstream payments;
make asset dispositions other than certain ordinary course dispositions and certain supply chain finance arrangements;
make certain loans, make payments with respect to subordinated debt or certain borrowed money prior to its due date; and
enter into any non-arm’s-length transaction with an affiliate (except for certain customary exceptions).
The agreements governing our notes and our Secured Revolving Line of Credit contain cross-default provisions whereby a default under one agreement would likely result in cross defaults under agreements covering other borrowings. For example, the
occurrence of a default with respect to any indebtedness or any failure to repay debt when due in an amount in excess of $50 million would cause a cross default under the indentures (to the extent such default would result in the acceleration of such indebtedness) governing our 6.75% Notes, 7.50% Notes, 7.00% Notes and 2.125% Notes, as well as under our Secured Revolving Line of Credit. The occurrence of a default under any of these borrowing arrangements would permit the applicable note holders or the lenders under our Secured Revolving Line of Credit to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable. If the note holders or the trustee under the indentures governing our 6.75% Notes, 7.50% Notes, 7.00% Notes or 2.125% Notes or the lenders under our Secured Revolving Line of Credit accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings.
Our issuance to West Coast Hitech L.P. (WCH) of warrants to purchase 75 million shares of our common stock, if and when exercised, will dilute the ownership interests of our existing stockholders, and the conversion of the 2.125% Notes may dilute the ownership interest of our existing stockholders, or may otherwise depress the price of our common stock.
In consideration for the limited waiver and rights under the WSA Sixth Amendment, we issued warrants to WCH to purchase 75 million shares of our common stock. Any issuance by us of common shares to WCH upon exercise of the warrants will dilute the ownership interests of our existing stockholders. Any sales in the public market by WCH of any shares owned by WCH could adversely affect prevailing market prices of our common stock, and the anticipated exercise by WCH of the warrants could depress the price of our common stock.
Also, the conversion of some or all of the 2.125% Notes may dilute the ownership interests of our existing stockholders. All of the 2.125% Notes are convertible at the option of their holders prior to their scheduled term from October 1, 2017 until December 31, 2017. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the 2.125% Notes may encourage short selling by market participants because the conversion thereof could be used to satisfy short positions, or the anticipated conversion of the 2.125% Notes into cash and/or shares of our common stock could depress the price of our common stock.operating results.
Uncertainties involving the ordering and shipment of our products could materially adversely affect us.
We typically sell our products pursuant to individual purchase orders. We generally do not have long-term supply arrangements with our customers or minimum purchase requirements except that orders generally must be for standard pack quantities. Generally, our customers may cancel orders for standard products more than 30 days prior to shipment without incurring significant fees. We base our inventory levels in part on customers’ estimates of demand for their products, which may not accurately predict the quantity or type of our products that our customers will want in the future or ultimately end up purchasing. Our ability to forecast demand is even further complicated when our products are sold indirectly through downstream channel distributors and customers, as our forecasts for demand are then based on estimates provided by multiple parties throughout the downstream channel. For instance, we have experienced and continue to experience increased demand for our products. To the extent we fail to forecast demand and product mix accurately or are unable to increase production or secure sufficient capacity and there is a mismatch between supply and demand for our products, it could limit our ability to meet customer demand and have a material adverse effect on our business.
PC and consumerMany of our markets are characterized by short product lifecycles, which can lead to rapid obsolescence and price erosion. In addition, our customers may change their inventory practices on short notice for any reason. For instance, our customers may experience a shortage of, or delay in receiving certain components to build their products, which in turn may affect the demand for or the timing of our products. We may build inventories during periods of anticipated growth, and the cancellation or deferral of product orders or overproduction due to failure of anticipated orders to materialize could result in excess or obsolete inventory, which could result in write-downs of inventory and an adverse effect on gross margins.
Factors that may result in excess or obsolete inventory, which could result in write-downs of the value of our inventory, a reduction in the average selling price or a reduction in our gross margin include:
a sudden or significant decrease in demand for our products;
a production or design defect in our products;
a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements;
a failure to accurately estimate customer demand for our products, including for our older products as our new products are introduced; or
our competitors introducing new products or taking aggressive pricing actions.
The demand for our products depends in part on the market conditions in the industries into which they are sold. Fluctuations in demand for our products or a market decline in any of these industries could have a material adverse effect on our results of operations.
Industry-wide fluctuations in the computer marketplace have materially adversely affected us in the past and may materially adversely affect us in the future. A large portion of our Computing and Graphics revenue is focused on the consumer desktop PC
and notebook segments, which have experienced and continue to experience a decline driven by, among other factors, the adoption of smaller and other form factors, increased competition and changes in replacement cycles. The success of our semi-custom SoC products is dependent on securing customers for our semi-custom design pipeline and consumer market conditions, including the success of the Sony PlayStation®4, Sony PlayStation®4 Pro, Microsoft Xbox One and Microsoft Xbox One X game console systems worldwide. In addition, the GPU market has seen elevated demand due to the application of GPU products to cryptocurrency mining. For example, in the third quarter of 2017, our GPU revenue was driven in part due to an increased interest in cryptocurrency mining. The cryptocurrency market is unstable and demand could change quickly. For example, China and South Korea have recently instituted restrictions on cryptocurrency trading. If we are unable to manage the risks related to a decrease in the demand for cryptocurrency mining, our GPU business could be materially adversely affected.
Our ability to design and introduce new products in a timely manner is dependent upon third-party intellectual property.
In the design and development of new and enhanced products, we rely on third-party intellectual property such as development and testing tools for software development tools and hardware testing tools.hardware. Furthermore, certain product features may rely on intellectual property acquired from third parties. The design requirements necessary to meet customer demand for more features and greater functionality from semiconductor products may exceed the capabilities of the third-party intellectual property or development or testing tools available to us. If the third-party intellectual property that we use becomes unavailable, is not available with required functionality andor performance in the time frame, manufacturing technology, or price point needed for our new products or fails to produce designs that meet customer demands, our business could be materially adversely affected.
We depend on third-party companies for the design, manufacture and supply of motherboards, software, memory and other computer platform components to support our business.
We depend on third-party companies for the design, manufacture and supply of motherboards, graphics cards, software (e.g., BIOS, operating systems, drivers), memory and other components that our customers utilize to support and/or use our microprocessor, GPU and APU offerings. We also rely on AIBsour AIB partners to support our GPU and APU products. In addition, our microprocessors are not designed to function with motherboards and chipsets designed to work with Intel microprocessors. If the designers, manufacturers, AIBs and suppliers of motherboards, graphics cards, software, memory and other components decreasecease or reduce their design, manufacture or production of current or future products that are based on or support for our product offerings,products, our business could be materially adversely affected.
If we lose Microsoft Corporation’s support for our products or other software vendors do not design and develop software to run on our products, our ability to sell our products could be materially adversely affected.
Our ability to innovate beyond the x86 instruction set controlled by Intel depends partially on Microsoft designing and developing its operating systems to run on or support our x86-based microprocessor products. With respect to our graphics products, we depend in part on Microsoft to design and develop its operating system to run on or support our graphics products. Similarly, the success of our products in the market, such as our APU products, is dependent on independent software providers designing and developing software to run on our products. If Microsoft does not continue to design and develop its operating systems so that they work with our x86 instruction sets or does not continue to develop and maintain their operating systems to support our graphics products, independent software providers may forego designing their software applications to take advantage of our innovations and customers may not purchase PCs with our products. In addition, some software drivers soldlicensed for use with our products are certified by Microsoft. If Microsoft did not certify a driver, or if we otherwise fail to retain the support of Microsoft or other software vendors, our ability to market our products would be materially adversely affected.
Our reliance on third-party distributors and AIB partners subjects us to certain risks.
We market and sell our products directly and through third-party distributors and AIB partners pursuant to agreements that can generally be terminated for convenience by either party upon prior notice to the other party. These agreements are non-exclusive and permit both our distributors and AIBsAIB partners to offer our competitors’ products. We are dependent on our distributors and AIBsAIB partners to supplement our direct marketing and sales efforts. If any significant distributor or AIB partner or a substantial number of our distributors or AIBsAIB partners terminated their relationship with us, decided to market our competitors’ products over our products or decided not to market our products at all, our ability to bring our products to market would be impacted and we would be materially adversely affected. In addition, if we are unable to collect accounts receivable from our significant distributors and/or AIB partners, it could have a material adverse effect on our business. If we are unable to manage the risks related to the use of our third-party distributors and AIB partners or offer appropriate incentives to focus them on the sale of our products, our business could be materially adversely affected.
Additionally, distributors and AIBsAIB partners typically maintain an inventory of our products. In most instances, our agreements with distributors protect their inventory of our products against price reductions, as well as provide return rights for any product that we have removed from our price book and that is not more than 12 months older than the manufacturing code date. Some agreements with our distributors also contain standard stock rotation provisions permitting limited levels of product returns. Our agreements with AIBsAIB partners protect their inventory of our products against price reductions. We defer the gross margins on our sales to distributors and AIBs, resulting from both our deferral of revenue and related product costs, until the applicable products are re-sold by the
distributors or the AIBs. However, inIn the event of a significant decline in the price of our products, the price protection rights we offer would materially adversely affect us because our revenue and corresponding gross margin would decline.
Our inability to continue to attract and retain qualified personnel may hinder our business.
Much of our future success depends upon the continued service of numerous qualified engineering, marketing, sales and executive personnel. Competition for highly skilled employees and executives in the technology industry is intense. If we are not able to continue to attract, train and retain qualified personnel necessary for our business, the progress of our product development programs could be hindered, and we could be materially adversely affected. To help attract, retain and motivate qualified personnel, we use share-based incentive awards such as employee stock options and non-vested share units (restricted stock units). If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate personnel could be weakened, which could harm our results of operations. Also, if the value of our stock awards increases substantially, this could potentially create great personal wealth for our employees and affect our ability to retain these employees. In addition, our current and any future restructuring plans may adversely impact our ability to attract and retain key employees.
In the event of a change of control, we may not be able to repurchase our outstanding debt as required by the applicable indentures and our Secured Revolving Line of Credit, which would result in a default under the indentures and our Secured Revolving Line of Credit.
Upon a change of control, we will be required to offer to repurchase all of our 6.75% Notes, 7.50% Notes, 7.00% Notes and 2.125% Notes then outstanding at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, up to, but excluding, the repurchase date. In addition, a change of control would be an event of default under our Secured Revolving Line of Credit. As of September 30, 2017, $70 million borrowings were outstanding under the Secured Revolving Line of Credit, $19 million related to letters of credit under the Secured Revolving Line of Credit remained outstanding and $1.7 billion principal was outstanding under our notes. Future debt agreements may contain similar provisions. We may not have the financial resources to repurchase our outstanding notes and prepay all of our outstanding obligations under our Secured Revolving Line of Credit.
The semiconductor industry is highly cyclical and has experienced severe downturns that have materially adversely affected, and may continue to materially adversely affect, our business in the future.
The semiconductor industry is highly cyclical and has experienced significant downturns, often in conjunction with constant and rapid technological change, wide fluctuations in supply and demand, continuous new product introductions, price erosion and declines in general economic conditions. We have incurred substantial losses in recent downturns, due to:
substantial declines in average selling prices;
the cyclical nature of supply and demand imbalances in the semiconductor industry;
a decline in demand for end-user products (such as PCs) that incorporate our products; and
excess inventory levels.
Industry-wide fluctuations in the computer marketplace have materially adversely affected us in the past and may materially adversely affect us in the future. For example, a large portion of our Computing and Graphics revenue is focused on consumer desktop PC and notebook segments. While the overall growth in these segments is stabilizing, the sub-segments of these markets are changing. Our ability to take advantage of the growth in these sub-segments is based on foreseeing those changes and making timely investments in the form factors that serve those growing sub-segments.
Global economic uncertainty and weakness have also impacted the semiconductor market as consumers and businesses have deferred purchases, which negatively impacted demand for our products. Our financial performance has been, and may in the future be, negatively affected by these downturns.
The growth of our business is also dependent on continued demand for our products from high-growth adjacent emerging global markets. Our ability to be successful in such markets depends in part on our ability to establish adequate local infrastructure, as well as our ability to cultivate and maintain local relationships in these markets. If demand from these markets is below our expectations, sales of our products may decrease, which would have a material adverse effect on us.
Acquisitions, divestitures and/or joint ventures could disrupt our business, harm our financial condition and operating results or dilute, or adversely affect the price of, our common stock.
Our success will depend, in part, on our ability to expand our product offerings and grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may pursue growth through the acquisition of complementary businesses, solutions or technologies or through divestitures or joint ventures rather than through internal
development. The identification of suitable acquisition or joint venture candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions or joint ventures. Moreover, if such acquisitions or joint ventures require us to seek additional debt or equity financing, we may not be able to obtain such financing on terms favorable to us or at all. Even if we successfully complete an acquisition or a joint venture, we may not be able to assimilate and integrate effectively or efficiently the acquired business, technologies, solutions, assets, personnel or operations, particularly if key personnel of the acquired company decide not to work for us. Acquisitions and joint ventures may also involve the entry into geographic or business markets in which we have little or no prior experience. Consequently, we may not achieve anticipated benefits of the acquisitions or joint ventures which could harm our operating results. In addition, to complete an acquisition, we may issue equity securities, which would dilute our stockholders’ ownership and could adversely affect the price of our common stock, as well as incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could adversely affect our results of operations. Acquisitions and joint ventures may also reduce our cash available for operations and other uses, which could harm our business. Also, any failure on our part to effectively evaluate and execute new business initiatives could adversely affect our business. We may not adequately assess the risk of new business initiatives and subsequent events may arise that alter the risks that were initially considered.
Furthermore, we may not achieve the objectives and expectations with respect to future operations, products and services. On April 2016, we consummated the transaction with TFME, under which we sold to TFME 85% of the equity interests in our JVs. Going forward, we expect the majority of our ATMP services will be provided by the JVs and there is no guarantee that the JVs will be able to fulfill our long-term ATMP requirements. If we are unable to meet customer demand due to fluctuating or late supply from the JVs, it could result in lost sales and have a material adverse effect on our business.
In addition, we may not realize the anticipated benefits from any new business initiatives. For example, in connection with our strategy of licensing portions of our intellectual property portfolio, in the first quarter of 2016, we entered into a joint venture with Tianjin Haiguang Advanced Technology Investment Co., Ltd. (THATIC), comprised of two separate legal entities, China JV1 and China JV2 (collectively, the THATIC JV). The primary purpose of the THATIC JV is to support our expansion into the server and workstation product market in China. We also licensed certain of our intellectual property (Licensed IP) to the THATIC JV for license fees payable over several years contingent upon achievement of certain milestones. We also expect to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such Licensed IP. We may not realize the expected benefits from this joint venture, including the THATIC JV’s expected future performance, the receipt of any future milestone payments from the Licensed IP, and the receipt of any royalty payments from future sales of products by the THATIC JV.
Our business is dependent upon the proper functioning of our internal business processes and information systems and modification or interruption of such systems may disrupt our business, processes and internal controls.
We rely upon a number of internal business processes and information systems to support key business functions, and the efficient operation of these processes and systems is critical to our business. Our business processes and information systems need to be sufficiently scalable to support the growth of our business and may require modifications or upgrades that expose us to a number of operational risks. As such, our information systems will continually evolve and adapt in order to meet our business needs. These changes may be costly and disruptive to our operations and could impose substantial demands on management time.
These changes may also require changes in our information systems, modification of internal control procedures and significant training of employees and third-party resources. We continuously work on simplifying our information systems and applications through consolidation and standardization efforts. There can be no assurance that our business and operations will not experience any disruption in connection with this transition. Our information technology systems, and those of third-party information technology providers or business partners, may also be vulnerable to damage or disruption caused by circumstances beyond our control including catastrophic events, power anomalies or outages, natural disasters, viruses or malware, cyber-attacks, data breaches and computer system or network failures, exposing us to significant cost, reputational harm and disruption or damage to our business.
In addition, as our IT environment continues to evolve, we are embracing new ways of communicating and sharing data internally and externally with customers and partners using methods such as mobility and the cloud that can promote business efficiency. However, these practices can also result in a more distributed IT environment, making it more difficult for us to maintain visibility and control over internal and external users, and meet scalability and administrative requirements. If our security controls cannot keep pace with the speed of these changes, or if we are not able to meet regulatory and compliance requirements, our business would be materially adversely affected.
Data breaches and cyber-attacks could compromise our intellectual property or other sensitive information, be costly to remediate and cause significant damage to our business and reputation.
In the ordinary course of our business, we maintain sensitive data on our networks, and also may maintain sensitive information on our business partners' and third party providers' networks, including our intellectual property and proprietary or confidential business information relating to our business and that of our customers and business partners. The secure maintenance of this information is critical to our business and reputation. We believe that companies have been increasingly subject to a wide variety of security incidents, cyber-attacks, hacking and phishing attacks, and other attempts to gain unauthorized access. These threats can come from a variety of sources, all ranging in sophistication from an individual hacker to a state-sponsored attack. Cyber threats may be generic, or they may be custom-crafted against our information systems. Cyber-attacks have become increasingly more prevalent and much harder to detect and defend against. Our network and storage applications, as well as those of our customers, business partners, and third party providers, may be subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. It is often difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. These data breaches and any unauthorized access, misuse or disclosure of our information or intellectual property could compromise our intellectual property and expose sensitive business information. Cyber-attacks on us or our customers, business partners or third party providers could also cause us to incur significant remediation costs, result in product development delays, disrupt key business operations and divert attention of management and key information technology resources. These incidents could also subject us to liability, expose us to significant expense and cause significant harm to our reputation and business. In addition, we could be subject to potential claims for damages resulting from loss of data from alleged vulnerabilities in the security of our processors. We also maintain confidential and personally identifiable information about our workers. The integrity and protection of our worker data is critical to our business and our workers have a high expectation that we will adequately protect their personal information. We anticipate an increase in costs related to:
implementing new data security procedures, including costs related to upgrading computer and network security;
training workers to maintain and monitor our security measures;
remediating any data security breach and addressing the related litigation; and
mitigating reputational harm.
We often partner with third-party providers for certain worker services and we may provide certain limited worker information to such third parties based on the scope of the services provided to us. However, if these third parties fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, our workers’ data may be improperly accessed, used or disclosed. A breach of data privacy is likely to cause significant disruption of our business operations. Failure to adequately maintain and update our security systems could materially adversely affect our operations and our ability to maintain worker confidence. Failure to prevent unauthorized access to electronic and other confidential information and data breaches could materially adversely affect our financial condition, our competitive position and operating results.
Our operating results are subject to quarterly and seasonal sales patterns.
A large portion of our quarterly sales have historically been made in the last month of the quarter. This uneven sales pattern makes prediction of revenue for each financial period difficult and increases the risk of unanticipated variations in quarterly results and financial condition. In addition, our operating results tend to vary seasonally with the markets in which our products are sold. For example, historically, first quarter PC product sales are generally lower than fourth quarter sales. In addition, with respect to our semi-custom SoC products for game consoles, we expect sales patterns to follow the seasonal trends of a consumer business with sales in the first half of the year being lower than sales in the second half of the year. Many of the factors that create and affect quarterly and seasonal trends are beyond our control.
If essential equipment, materials or manufacturing processes are not available to manufacture our products, we could be materially adversely affected.
We may purchase equipment and materials for our back-end manufacturing operations from a number of suppliers and our operations depend upon obtaining deliveries of adequate supplies of equipment and materials on a timely basis. Our third-party suppliers also depend on the same timely delivery of adequate quantities of equipment and materials in the manufacture of our products. In addition, as many of our products increase in technical complexity, we rely on our third-party suppliers to update their processes in order to continue meeting our back-end manufacturing needs. Certain equipment and materials that are used in the manufacture of our products are available only from a limited number of suppliers, or in some cases, a sole supplier. We also depend on a limited number of suppliers to provide the majority of certain types of integrated circuit packages for our microprocessors, including our APU products. Similarly, certain non-proprietary materials or components such as memory, printed circuit boards (PCBs), interposers, substrates and capacitors used in the manufacture of our products are currently available from only a limited number of sources. Because some of the equipment and materials that we and our third-party manufacturing suppliers purchase are complex, it is sometimes difficult to substitute one supplier for another.
From time to time, suppliers may extend lead times, limit supply or increase prices due to capacity constraints or other factors. Also, some of these materials and components may be subject to rapid changes in price and availability. Interruption of supply or increased demand in the industry could cause shortages and price increases in various essential materials. Dependence on a sole supplier or a limited number of suppliers exacerbates these risks. If we are unable to procure certain of these materials for our back-end manufacturing operations, or our third-party foundries or manufacturing suppliers are unable to procure materials for manufacturing our products, our business would be materially adversely affected.
If our products are not compatible with some or all industry-standard software and hardware, we could be materially adversely affected.
Our products may not be fully compatible with some or all industry-standard software and hardware. Further, we may be unsuccessful in correcting any such compatibility problems in a timely manner. If our customers are unable to achieve compatibility with software or hardware, we could be materially adversely affected. In addition, the mere announcement of an incompatibility problem relating to our products could have a material adverse effect on our business.
Costs related to defective products could have a material adverse effect on us.
Products as complex as those we offer may contain defects or failures when first introduced or when new versions or enhancements to existing products are released. We cannot assure you that, despite our testing procedures, errors will not be found in new products or releases after commencement of commercial shipments in the future, which could result in loss of or delay in market acceptance of our products, material recall and replacement costs, delay in recognition or loss of revenue, writing down the inventory of defective products, the diversion of the attention of our engineering personnel from product development efforts, defending against litigation related to defective products or related liabilities, including property damage, or personal injury, and damage to our reputation in the industry and loss of data or intangible property, and could adversely affect our relationships with our customers. In addition, we may have difficulty identifying the end customers of the defective products in the field. As a result, we could incur substantial costs to implement modifications to correct defects. Any of these problems could materially adversely affect our business.
We could be subject to potential product liability claims if one of our products causes, or merely appears to have caused, an injury.injury, whether tangible or intangible. Claims may be made by consumers or others selling our products, and we may be subject to claims against us even if an alleged injury is due to the actions of others. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business.
If we fail to maintain the efficiency of our supply chain as we respond to changes in customer demand for our products, our business could be materially adversely affected.
Our ability to meet customer demand for our products depends, in part, on our ability to deliver the products our customers want on a timely basis. Accordingly, we rely on our supply chain for the manufacturing, distribution and fulfillment of our products. As we continue to grow our business, expand to high-growth adjacent markets, acquire new customers and strengthen relationships with existing customers, the efficiency of our supply chain will become increasingly important because many of our customers tend to have specific requirements for particular products, and specific time-frames in which they require delivery of these products. If we are unable to consistently deliver the right products to our customers on a timely basis in the right locations, our customers may reduce the quantities they order from us, which could have a material adverse effect on our business.
We outsource to third parties certain supply-chain logistics functions, including portions of our product distribution, transportation management and information technology support services.
We rely on third-party providers to operate our regional product distribution centers and to manage the transportation of our work-in-process and finished products among our facilities, to our manufacturing suppliers and to our customers. In addition, we rely on third parties to provide certain information technology services to us, including help desk support, desktop application services, business and software support applications, server and storage administration, datacenterdata center operations, database administration and voice, video and remote access. We cannot guarantee that these providers will fulfill their respective responsibilities in a timely manner in accordance with the contract terms, in which case our internal operations and the distribution of our products to our customers could be materially adversely affected. Also, we cannot guarantee that our contracts with these third-party providers will be renewed, in which case we would have to transition these functions in-house or secure new providers, which could have a material adverse effect on our business if the transition is not executed appropriately.
We may incur future impairments of goodwill.
We perform our annual goodwill impairment analysis as of the first day of the fourth quarter of each year. Subsequent to our annual goodwill impairment analysis, we monitor for any events or changes in circumstances, such as significant adverse changes in business climate or operating results, changes in management’s business strategy, an inability to successfully introduce
new products in the marketplace, an inability to successfully achieve internal forecasts or significant declines in our stock price, which may represent an indicator of impairment. The occurrence of any of these events may require us to record future goodwill impairment charges.
Our stock price is subject to volatility.
Our stock price has experienced price and volume fluctuations and could be subject to wide fluctuations in the future. The trading price of our stock may fluctuate widely due to various factors including, actual or anticipated fluctuations in our financial conditions and operating results, changes in financial estimates by us or securities analysts, changes in our capital structure, including issuance of additional debt or equity to the public, interest rate changes, and broad market and industry fluctuations. Stock price fluctuations could impact the value of our equity compensation, which could affect our ability to recruit and retain employees. In addition, volatility in our stock price could adversely affect our business and financing opportunities.
Our worldwide operations are subject to political, legal and economic risks and natural disasters, which could have a material adverse effect on us.
We maintain operations around the world, including in the United States, Canada, Europe and Asia. We rely on third-party wafer foundries in Europe and Asia. Nearly all product assembly and final testing of our products is performed at manufacturing facilities, operated by third-party manufacturing facilities, in China, Malaysia and Taiwan. We also have international sales operations. International sales, as a percent of net revenue, were 72% in the third quarter of 2017. We expect that international sales will continue to be a significant portion of total sales in the foreseeable future.
The political, legal and economic risks associated with our operations in foreign countries include, without limitation:
expropriation;
changes in a specific country’s or region’s political or economic conditions;
changes in tax laws, trade protection measures and import or export licensing requirements;
difficulties in protecting our intellectual property;
difficulties in managing staffing and exposure to different employment practices and labor laws;
changes in foreign currency exchange rates;
restrictions on transfers of funds and other assets of our subsidiaries between jurisdictions;
changes in freight and interest rates;
disruption in air transportation between the United States and our overseas facilities;
loss or modification of exemptions for taxes and tariffs; and
compliance with U.S. laws and regulations related to international operations, including export control and economic sanctions laws and regulations and the Foreign Corrupt Practices Act.
In addition, our worldwide operations (or those of our business partners) could be subject to natural disasters such as earthquakes, tsunamis, flooding, typhoons and volcanic eruptions that disrupt manufacturing or other operations. For example, our Sunnyvale operations are located near major earthquake fault lines in California. Any conflict or uncertainty in the countries in which we operate, including public health issues (for example, an outbreak of a contagious disease such as Avian Influenza, measles or Ebola), safety issues, natural disasters, fire, disruptions of service from utilities, nuclear power plant accidents or general economic or political factors. For example, the United Kingdom’s recent referendum, commonly referred to as “Brexit,” has created economic and political uncertainty in the European Union. Also the new U.S. administration has called for changes to domestic and foreign policy. We cannot predict the impact, if any, of the policies adopted by the new administration will have on our business. Until we know what changes are enacted, we will not know whether in total we benefit from, or are negatively affected by, the changes. Any of the above risks, should they occur, could result in an increase in the cost of components, production delays, general business interruptions, delays from difficulties in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, longer payment cycles, increased taxes, restrictions on the repatriation of funds and the burdens of complying with a variety of foreign laws, any of which could ultimately have a material adverse effect on our business.
Worldwide political conditions may adversely affect demand for our products.
Worldwide political conditions may create uncertainties that could adversely affect our business. The United States has been and may continue to be involved in armed conflicts that could have a further impact on our sales and our supply chain. The consequences of armed conflict, political instability or civil or military unrest are unpredictable, and we may not be able to foresee events that could have a material adverse effect on us. Terrorist attacks or other hostile acts may negatively affect our operations,
or adversely affect demand for our products, and such attacks or related armed conflicts may impact our physical facilities or those of our suppliers or customers. Furthermore, these attacks or hostile acts may make travel and the transportation of our products more difficult and more expensive, which could materially adversely affect us. Any of these events could cause consumer spending to decrease or result in increased volatility in the United States economy and worldwide financial markets.
Unfavorable currency exchange rate fluctuations could adversely affect us.
We have costs, assets and liabilities that are denominated in foreign currencies. As a consequence, movements in exchange rates could cause our foreign currency denominated expenses to increase as a percentage of revenue, affecting our profitability and cash flows. Whenever we believe appropriate, we hedge a portion of our short-term foreign currency exposure to protect against fluctuations in currency exchange rates. We determine our total foreign currency exposure using projections of long-term expenditures for items such as payroll. We cannot assure you that these activities will be effective in reducing foreign exchange rate exposure. Failure to do so could have an adverse effect on our business, financial condition, results of operations and cash flow. In addition, the majority of our product sales are denominated in U.S. dollars. Fluctuations in the exchange rate between the U.S. dollar and the local currency can cause increases or decreases in the cost of our products in the local currency of such customers. An appreciation of the U.S. dollar relative to the local currency could reduce sales of our products.
Our inability to effectively control the sales of our products on the gray market could have a material adverse effect on us.
We market and sell our products directly to OEMs and through authorized third-party distributors. From time to time, our products are diverted from our authorized distribution channels and are sold on the “gray market.” Gray market products result in shadow inventory that is not visible to us, thus making it difficult to forecast demand accurately. Also, when gray market products enter the market, we and our distribution channels compete with these heavily discounted gray market products, which adversely affects demand for our products and negatively impactimpacts our margins. In addition, our inability to control gray market activities could result in customer satisfaction issues because any time products are purchased outside our authorized distribution channels there is a risk that our customers are buying counterfeit or substandard products, including products that may have been altered, mishandled or damaged, or are used products represented as new.
Legal and Regulatory Risks
Government actions and regulations such as export administration regulations, tariffs, and trade protection measures may limit our ability to export our products to certain customers.
We have equity interests in two joint ventures (collectively, the THATIC JV) with Higon Information Technology Co., Ltd. (THATIC), a third-party Chinese entity. In June 2019, the Bureau of Industry and Security (BIS) of the United States Department of Commerce added certain Chinese entities to the Entity List, including THATIC and the THATIC JV. In October 2019, the BIS added additional Chinese entities to the Entity List. Also, the United States administration has called for changes to domestic and foreign policy. Specifically, United States-China trade relations remain uncertain. The United States administration has announced tariffs on certain products imported into the United States with China as the country of origin, and China has imposed tariffs in response to the actions of the United States. We are taking steps to mitigate the impact of these tariffs on our business and AMD processor-based products. There is also a possibility of future tariffs, trade protection measures, import or export regulations or other restrictions imposed on our products or on our customers by the United States, China or other countries that could have a material adverse effect on our business. A significant trade disruption or the establishment or increase of any tariffs, trade protection measures or restrictions could result in lost sales adversely impacting our reputation and business.
If we cannot adequately protectrealize our technologydeferred tax assets, our results of operations could be adversely affected.
Our deferred tax assets include net operating losses and tax credit carryforwards that can be used to offset taxable income and reduce income taxes payable in future periods. Each quarter, we consider both positive and negative evidence to determine whether all or a portion of the deferred tax assets are more likely than not to be realized. If we determine that some or all of our deferred tax assets are not realizable, it could result in a material expense in the period in which this determination is made which may have a material adverse effect on our financial condition and results of operations.
In addition, a significant amount of our deferred tax assets and a portion of the deferred tax assets related to net operating losses or tax credits which remain under a valuation allowance could be subject to limitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. The limitations could reduce our ability to utilize the net operating losses or tax credits before the expiration of the tax attributes.
Our business is subject to potential tax liabilities, including as a result of tax regulation changes.
We are subject to income tax, indirect tax or other intellectual propertytax claims by tax agencies in jurisdictions in which we conduct business. Significant judgment is required in determining our worldwide provision for income taxes. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the United Stateslaw are issued or applied. Any changes to tax laws could have a material adverse effect on our tax obligations and abroad, through patents, copyrights, trade secrets, trademarkseffective tax rate.
In the ordinary course of our business, there are many transactions and calculations where the ultimate income tax, indirect tax, or other measures,tax determination is uncertain. Although we may lose a competitive advantage and incur significant expenses.
We rely on a combination of protections provided by contracts, including confidentiality and nondisclosure agreements, copyrights, patents, trademarks and common law rights, such as trade secrets, to protectbelieve our intellectual property. However,tax estimates are reasonable, we cannot assure you that wethe final determination of any tax audits and litigation will not be able to adequately protectmaterially different from that which is reflected in historical tax provisions and accruals. Should additional taxes be assessed as a result of an audit, assessment or litigation, there could be a material adverse effect on our technology or other intellectual property from third-party infringement or from misappropriationcash, tax provisions and net income in the United States and abroad. Any patent licensed by usperiod or issued to us could be challenged, invalidated or circumvented or rights granted there under may not provide a competitive advantage to us.periods for which that determination is made.
Furthermore, patent applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property on a worldwide basis in a cost-effective manner. In jurisdictions where foreign laws provide less intellectual property protection than afforded in the United States and abroad, our technology or other intellectual property may be compromised, and our business would be materially adversely affected.
We are party to litigation and may become a party to other claims or litigation that could cause us to incur substantial costs or pay substantial damages or prohibit us from selling our products.
From time to time, we are a defendant or plaintiff in various legal actions. For example, on January 15, 2014, March 20, 2014, April 27, 2015, and September 29, 2015, complaints were filed against us seeking damages for alleged securities law violations which areas described in Note 12 of our condensed consolidated financial statements.statements, we have been subject to certain claims concerning federal securities laws and corporate governance. Our products are purchased by and/or used by consumers, which could increase our exposure to consumer actions such as product liability claims and consumer class action claims.claims, including those described in Note 12 of our condensed consolidated financial statements. On occasion, we receive claims that individuals were allegedly exposed to substances used in our former semiconductor wafer manufacturing facilities and that this alleged exposure caused harm. Litigation can involve complex factual and legal questions, and its outcome is uncertain. AnyIt is possible that if a claim that is successfully asserted against us, including the claims filed against us on January 15, 2014, March 20, 2014, April 27, 2015 and September 29, 2015, maydescribed in Note 12 of our condensed consolidated financial statements, it could result in the payment of damages that could be material to our business.
With respect to intellectual property litigation, from time to time, we have been notified of, or third parties may bring or have brought, actions against us and/or against our customers based on allegations that we are infringing the intellectual property rights of others, contributing to or inducing the infringement of the intellectual property rights of others, improperly claiming ownership of intellectual property or otherwise improperly using the intellectual property of others. If any such claims are asserted,
we may seek to obtain a license under the third parties’ intellectual property rights. We cannot assure you that we will be able to obtain all of the necessary licenses on satisfactory terms, if at all. These parties may file lawsuits against us or our customers seeking damages (potentially up to and including treble damages) or an injunction against the sale of products that incorporate allegedly infringed intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the sale of some of our products or to increase the costs of selling some of our products or which could damage our reputation. The award of damages, including material royalty payments, or other types of damages, or the entry of an injunction against the manufacture and sale of some or all of our products could have a material adverse effect on us. We could decide, in the alternative, to redesign our products or to resort to litigation to challenge such claims. Such challenges could be extremely expensive and time-consuming regardless of their merit, could cause delays in product release or shipment and/or could have a material adverse effect on us. We cannot assure you that litigation related to our intellectual property rights or the intellectual property rights of others can always be avoided or successfully concluded.
Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which could have a material adverse effect on us.
Our business is subject to potential tax liabilities.
We are subject to income taxes in the United States, Canada and other foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, we cannot assure you that the final determination of any tax audits and litigation will not be materially different from that which is reflected in historical income tax provisions and accruals. Should additional taxes be assessed as a result of an audit, assessment or litigation, there could be a material adverse effect on our cash, income tax provision and net income in the period or periods for which that determination is made.
We are subject to environmental laws, conflict minerals-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as a variety of other laws or regulations that could result in additional costs and liabilities.
Our operations and properties have in the past been and continue to be subject to various United States and foreign laws and regulations, including those relating to materials used in our products and manufacturing processes, discharge of pollutants into the environment, the treatment, transport, storage and disposal of solid and hazardous wastes and remediation of contamination. These laws and regulations require our suppliers to obtain permits for operations making our products, including the discharge of air pollutants and wastewater. Although our management systems are designed to oversee our suppliers’ compliance, we cannot assure you that our suppliers have been or will be at all times in complete compliance with such laws, regulations and permits. If our suppliers violate or fail to comply with any of them, a range of consequences could result, including fines, suspension of production, alteration of manufacturing processes, import/export restrictions, sales limitations, criminal and civil liabilities or other sanctions. Such non-compliance from our manufacturing suppliers could result in disruptions in supply, higher sourcing costs, and/or reputational damage for us.
Environmental laws are complex, change frequently and have tended to become more stringent over time. For example, the European Union (EU) and China are two among a growing number of jurisdictions that have enacted restrictions on the use of lead and other materials in electronic products. These regulations affect semiconductor devices and packaging. As regulations restricting materials in electronic products continue to increase around the world, there is a risk that the cost, quality and manufacturing yields of products that are subject to these restrictions may be less favorable compared to products that are not subject to such restrictions, or that the transition to compliant products may not meet customer roadmaps, or produce sudden changes in demand, which may result in
excess inventory. A number of jurisdictions including the EU, Australia, California and China are developing or have finalized market entry or public procurement regulations for computers and servers based on ENERGY STAR specifications as well as additional energy consumption limits. There is the potential for certain of our products being excluded from some of these markets which could materially adversely affect us.
Certain environmental laws, including the U.S.United States Comprehensive, Environmental Response, Compensation and Liability Act of 1980, or the Superfund Act, impose strict or, under certain circumstances, joint and several liability on current and previous owners or operators of real property for the cost of removal or remediation of hazardous substances and impose liability for damages to natural resources. These laws often impose liability even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances. These environmental laws also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatment facilities when such facilities are found to be contaminated. Such persons can be responsible for cleanup costs even if they never owned or operated the contaminated facility. We have been named as a responsible party at three Superfund sites in Sunnyvale, California. Although we have not yet been, we could be named a potentially responsible party at other Superfund or contaminated sites in the future. In addition, contamination that has not yet been identified could exist at our other facilities.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted disclosure and reporting requirements for companies that use “conflict” minerals originating from the Democratic Republic of Congo or adjoining countries. We continue to incur additional costs associated with complying with these requirements, such as costs related to developing internal controls for the due diligence process, determining the source of any conflict minerals used in our products, auditing the process and reporting to our customers and the SEC. In addition to the SEC regulation, the European Union, China and other jurisdictions are developing new policies focused on conflict minerals that may impact and increase the cost of our compliance program. Also, since our supply chain is complex, we may face reputational challenges if we are unable to sufficiently verify the origins of the subject minerals. Moreover, we are likely to encounter challenges to satisfy those customers who require that all of the components of our products arebe certified as “conflict free.” If we cannot satisfy these customers, they may choose a competitor’s products.
The U.S.United States federal government has issued new policies for federal procurement focused on eradicating the practice of forced labor and human trafficking. Germany’s federal procurement office, in collaboration with the Bitkom trade association, issued new supply chain labor requirements. In addition, the United Kingdom, Australia and the State of California have issued laws that require us to disclose our policy and practices for identifying and eliminating forced labor and human trafficking in our supply chain. Several customers as well as the Electronic Industry Citizenship Coalition (EICC)Responsible Business Alliance have also issued expectations to eliminate these practices that may impact us. While we have a policy and management systems to identify and avoid these practices in our supply chain, we cannot guarantee that our suppliers will always be in conformance to these laws and expectations. We may face enforcement liability and reputational challenges if we are unable to sufficiently meet these expectations. Moreover, we are likely to encounter challenges with customers if we cannot satisfy their forced and trafficked labor polices and they may choose a competitor’s products.
product.
Xilinx Merger and Acquisition Risks
Acquisitions, joint ventures and/or investments, including our recently announced acquisition of Xilinx, and the failure to integrate acquired businesses, could disrupt our business and/or dilute or adversely affect the price of our common stock.
Our success will depend, in part, on our ability to expand our product offerings and grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may pursue growth through the acquisition of complementary businesses, solutions or technologies or through joint ventures or investments rather than through internal development. The identification of suitable acquisition or joint venture candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions or joint ventures.
For example, on October 26, 2020, we, along with a direct wholly-owned subsidiary of ours, entered into an Agreement and Plan of Merger (the Merger Agreement) with Xilinx, Inc. (Xilinx), whereby we agreed to acquire Xilinx (the Merger). We entered into the Merger Agreement with the belief that the Merger will result in certain benefits, including certain operational synergies and cost efficiencies, and drive product innovations. Achieving these anticipated benefits will depend on successfully combining our and Xilinx’s businesses together. It is not certain that Xilinx’s business can be successfully integrated with our business in a timely manner or at all, or that
any of the anticipated benefits will be realized for a variety of reasons, including, but not limited to: failure to obtain applicable regulatory approval in a timely manner or otherwise; failure to satisfy other closing conditions to the Merger; our inability to integrate or benefit from Xilinx’s acquired technologies or services in a profitable manner; diversion of capital and other resources, including management’s attention from our existing business; unanticipated costs or liabilities associated with the Merger; failure to leverage the increased scale of the combined businesses quickly and effectively; coordinating and integrating in countries in which we have not previously operated; the potential impact of the Merger on our relationships with employees, vendors, suppliers and customers; the impairment of relationships with, or the loss of, Xilinx’s employees, vendors, suppliers and customers; adverse changes in general economic conditions in regions in which we and Xilinx operate; potential litigation associated with the Merger; difficulties in the assimilation of employees and culture; difficulties in managing the expanded operations of a larger and more complex company; challenges in attracting and retaining key personnel; and difficulties with harmonizing our and Xilinx’s financial reporting systems. Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in expected revenues and diversion of management’s time and attention, which could materially impact the combined company. In addition, even if the operations of the businesses are integrated successfully, the full benefits of the Merger may not be realized within the anticipated time frame or at all. All of these factors could decrease or delay the expected accretive effect of the Merger and negatively impact the combined company. If we cannot successfully integrate our and Xilinx’s businesses and operations, or if there are delays in combining the businesses, it could negatively impact our ability to develop or sell new products and impair our ability to grow our business, which in turn could adversely affect our financial condition and operating results.
Acquisitions and joint ventures may also involve the entry into geographic or business markets in which we have little or no prior experience. Consequently, we may not achieve anticipated benefits of acquisitions or joint ventures, which could harm our operating results. In addition, to complete an acquisition (and as contemplated in the Merger), we may issue equity securities, which would dilute our stockholders’ ownership and could adversely affect the price of our common stock, and/or incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could adversely affect our results of operations. Moreover, if such acquisitions or joint ventures require us to seek additional debt or equity financing, we may not be able to obtain such financing on terms favorable to us or at all. Even if we successfully complete an acquisition or joint venture, we may not be able to assimilate and integrate effectively or efficiently the acquired business, technologies, solutions, assets, personnel or operations, particularly if key personnel of the acquired company decide not to work for us.
Acquisitions and joint ventures may also reduce our cash available for operations and other uses, which could harm our business. Also, any failure on our part to effectively evaluate and execute new business initiatives could adversely affect our business. We may not adequately assess the risks of new business initiatives and subsequent events may arise that alter the risks that were initially considered. Furthermore, we may not achieve the objectives and expectations with respect to future operations, products and services. The majority of our ATMP services are provided by the ATMP JVs, and there is no guarantee that the JVs will be able to fulfill our long-term ATMP requirements. If we are unable to meet customer demand due to fluctuating or late supply from the ATMP JVs, it could result in lost sales and have a material adverse effect on our business.
In addition, we may not realize the anticipated benefits from our business initiatives. For example, we may not realize the expected benefits from the THATIC JV’s expected future performance, including the receipt of any future milestone payments and any royalties from certain licensed intellectual property. In June 2019, the BIS added certain Chinese entities to the Entity List, including THATIC and the THATIC JV. We are complying with U.S. law pertaining to the Entity List designation.
Our ability to complete the Merger is subject to closing conditions, including the receipt of consents and approvals from governmental authorities, which may impose conditions that could adversely affect us or cause the Merger not to be completed.
The Merger is subject to a number of closing conditions as specified in the Merger Agreement. These include, among others, the receipt of approvals under certain competition laws and the absence of governmental restraints or prohibitions preventing the consummation of the Merger. No assurance can be given that the required consents and approvals will be obtained or that the closing conditions will be satisfied in a timely manner or at all. Also, if a settlement or other resolution is not reached in any legal proceedings that have been, or might be, instituted against us, our directors, Xilinx or its directors relating to the transactions contemplated by the Merger Agreement and the plaintiffs in such proceedings secure injunctive or other relief prohibiting, delaying or otherwise adversely affecting our and/or Xilinx’s ability to complete the Merger on the terms contemplated by the Merger Agreement, then such injunctive or other relief may prevent the Merger from becoming effective in a timely manner, or at all. Any delay in
completing the Merger could cause the combined company not to realize, or to be delayed in realizing, some or all of the benefits that we expect to achieve. We cannot provide any assurances that these conditions will not result in the abandonment or delay of the Merger. The occurrence of any of these events could have a material adverse effect on our results of operations and the trading price of our common stock. Additionally, under the Merger Agreement, Xilinx will be required to pay a termination fee to us equal to $1 billion if the Merger Agreement is terminated in certain circumstances, including if the Merger Agreement is terminated because Xilinx’s board of directors has changed its recommendation. We will be required to pay a termination fee to Xilinx equal to $1.5 billion if the Merger Agreement is terminated in certain circumstances, including if the Merger Agreement is terminated because our board of directors has changed its recommendation. We will be required to pay a termination fee equal to $1 billion if the Merger Agreement is terminated in certain circumstances related to the failure to obtain required regulatory approvals by October 26, 2021 (subject to automatic extension first to January 26, 2022 and then to April 26, 2022, in each case, to the extent the regulatory closing conditions remain outstanding).
Whether or not it is completed, the announcement and pendency of the Merger could cause disruptions in our business, which could have an adverse effect on our business and financial results.
Whether or not it is completed, the announcement and pendency of the Merger could cause disruptions in our business: our and Xilinx’s current and prospective employees may experience uncertainty about their future roles with the combined company, which might adversely affect the ability to retain key employees; uncertainty regarding the completion of the Merger may cause customers, suppliers, distributors, vendors, strategic partners or others to delay or defer entering into contracts, make other decisions or seek to change or cancel existing business relationships; and the attention of management may be directed toward the completion of the Merger. If the Merger is not completed, we will have incurred significant costs, including the potential payment of termination fees and the diversion of management resources, for which we will have received little or no benefit.
Any impairment of the combined company’s tangible, definite-lived intangible or indefinite-lived intangible
assets, including goodwill, may adversely impact the combined company’s financial position and results of operations.
The Merger will be accounted for using the acquisition method of accounting under the provisions of ASC 805, Business Combinations, with AMD representing the accounting acquirer under this guidance. We will record assets acquired, including identifiable intangible assets, and liabilities assumed from Xilinx at their respective fair values at the date of completion of the Merger. Any excess of the purchase price over the net fair value of such assets and liabilities will be recorded as goodwill. In connection with the Merger, the combined company is expected to record significant goodwill and other intangible assets on its consolidated balance sheet.
Indefinite-lived intangible assets, including goodwill, will be tested for impairment at least annually, and all tangible and intangible assets including goodwill will be tested for impairment when certain indicators are present. If, in the future, the combined company determines that tangible or intangible assets, including goodwill, are impaired, the combined company would record an impairment charge at that time. Impairment testing of goodwill and intangible assets requires significant use of judgment and assumptions, particularly as it relates to the determination of fair value. A decrease in the long-term economic outlook and future cash flows of the combined company’s business could significantly impact asset values and potentially result in the impairment of intangible assets, including goodwill, which may have a material adverse impact on the combined company’s financial position and results of operations.
Liquidity and Capital Resources Risks
The agreements governing our notes and our Revolving Credit Facility impose restrictions on us that may adversely affect our ability to operate our business.
The indenture governing our 7.50% Senior Notes due 2022 (7.50% Notes) contains various covenants which limit our ability to, among other things: make certain investments, including investments in our unrestricted subsidiaries; and consolidate or merge or sell our assets as an entirety or substantially as an entirety.
In addition, the Revolving Credit Facility’s credit agreement (Credit Agreement) restricts our ability to make cash payments on the notes to the extent that (i) on the date of such payment, an event of default exists under the Credit Agreement or would result therefrom or (ii) if we would have, on a pro forma basis after giving effect to such payment, a consolidated total leverage ratio that exceeds 3.50x. Any of our future debt agreements may contain similar restrictions. If under certain circumstances we fail to make a cash payment on a series of notes when
required by the applicable indenture, it would constitute an event of default under such indenture, which, in turn, could constitute an event of default under the agreements governing our other indebtedness.
Our Revolving Credit Facility also contains various covenants which limit our ability to, among other things, incur additional indebtedness and liens, make certain investments, merge or consolidate with other entities, make certain dispositions, create any encumbrance on the ability of a subsidiary to make any upstream payments, make payments with respect to subordinated debt or certain borrowed money prior to its due date and enter into any non-arm’s-length transaction with an affiliate (in each case, except for certain customary exceptions).
The agreements governing our notes and our Revolving Credit Facility contain cross-default provisions whereby a default under certain agreements with respect to other indebtedness would result in cross defaults under the indentures or the Revolving Credit Facility. For example, the occurrence of a default with respect to any indebtedness or any failure to repay indebtedness when due in an amount in excess of (i) $50 million would cause a cross default under the indentures (to the extent such default would result in the acceleration of such indebtedness) governing our 7.50% Notes and 2.125% Convertible Senior Notes due 2026 (2.125% Notes), and (ii) $100 million would cause a cross default under the Revolving Credit Facility. The occurrence of a default under any of these borrowing arrangements would permit the applicable note holders or the lenders under our Revolving Credit Facility to declare all amounts outstanding under the indentures or the Revolving Credit Facility to be immediately due and payable. If the note holders or the trustee under the indentures governing our 7.50% Notes or 2.125% Notes or the lenders under our Revolving Credit Facility accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings.
Our indebtedness could adversely affect our financial position and prevent us from implementing our strategy or fulfilling our contractual obligations.
Our total debt principal amount outstanding as of June 26, 2021 was $313 million. Our indebtedness may make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments; limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions and general corporate and other purposes; limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general corporate purposes; require us to use a substantial portion of our cash flow from operations to make debt service payments; place us at a competitive disadvantage compared to our competitors with relatively less debt; and increase our vulnerability to the impact of adverse economic and industry conditions.
We may not be able to generate sufficient cash to meet our working capital requirements. Also, if we cannot generate sufficient revenue and operating cash flow, we may face a cash shortfall and be unable to make all of our planned investments in research and development or other strategic investments.
Our ability to generate sufficient cash to meet our working capital requirements will depend on our financial and operating performance, which may fluctuate significantly from quarter to quarter, and is subject to prevailing economic, financial and business conditions along with other factors, many of which are beyond our control. We cannot assure you that we will be able to generate cash flow in amounts sufficient to enable us to meet our working capital requirements. If we are not able to generate sufficient cash flow from operations, we may be required to sell assets or equity, reduce expenditures, refinance all or a portion of our existing debt or obtain additional financing.
In addition, our ability to fund research and development expenditures depends on generating sufficient revenue and cash flow from operations and the availability of external financing, if necessary. Our research and development expenditures, together with ongoing operating expenses, will be a substantial drain on our cash flow and may decrease our cash balances. If new competitors, technological advances by existing competitors, or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. If we are required to invest significantly greater resources than anticipated in research and development efforts without an increase in revenue, our operating results could decline.
Our inability to generate sufficient cash from operations may require us to abandon projects or curtail planned investments in research and development or other strategic initiatives. If we curtail planned investments in research and development or abandon projects, our products may fail to remain competitive and our business would be materially adversely affected.
General Risks
Our worldwide operations are subject to political, legal and economic risks and natural disasters, which could have a material adverse effect on us.
We maintain operations around the world, including in the United States, Canada, Europe, Australia and Asia. We rely on third-party wafer foundries in the United States, Europe and Asia. Nearly all product assembly and final testing of our products is performed at manufacturing facilities, operated by third-party manufacturing facilities, in China, Malaysia and Taiwan. We also have international sales operations. International sales, as a percent of net revenue, were 74% and 75% for the three and six months ended June 26, 2021, respectively. We expect that international sales will continue to be a significant portion of total sales in the foreseeable future.
The political, legal and economic risks associated with our operations in foreign countries include, without limitation: expropriation; changes in a specific country’s or region’s political or economic conditions; changes in tax laws, trade protection measures and import or export licensing requirements; difficulties in protecting our intellectual property; difficulties in managing staffing and exposure to different employment practices and labor laws; changes in foreign currency exchange rates; restrictions on transfers of funds and other assets of our subsidiaries between jurisdictions; changes in freight and interest rates; disruption in air transportation between the United States and our overseas facilities; loss or modification of exemptions for taxes and tariffs; and compliance with U.S. laws and regulations related to international operations, including export control and economic sanctions laws and regulations and the Foreign Corrupt Practices Act.
In addition, our worldwide operations (or those of our business partners) could be subject to natural disasters and climate change such as earthquakes, tsunamis, flooding, typhoons, droughts, fires, extreme heat and volcanic eruptions that disrupt our operations, or those of our manufacturers, vendors or customers. For example, our Santa Clara operations are located near major earthquake fault lines in California. There may be conflict or uncertainty in the countries in which we operate, including public health issues (for example, an outbreak of a contagious disease such as COVID-19, avian influenza, measles or Ebola), safety issues, natural disasters, fire, disruptions of service from utilities, nuclear power plant accidents or general economic or political factors. For example, governments worldwide have implemented, and continue to implement, measures to slow down the outbreak of COVID-19. We have experienced, and will continue to experience, disruptions to our business as these measures have, and will continue to have, an effect on our business operations and practices. Also, the European Union’s General Data Protection Regulation imposes significant new requirements on how we collect, process and transfer personal data, as well as significant fines for non-compliance. Any of the above risks, should they occur, could result in an increase in the cost of components, production delays, general business interruptions, delays from difficulties in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, longer payment cycles, increased taxes, restrictions on the repatriation of funds and the burdens of complying with a variety of foreign laws, any of which could ultimately have a material adverse effect on our business.
We may incur future impairments of goodwill and technology license purchases.
We perform our annual goodwill impairment analysis as of the first day of the fourth quarter of each year. Subsequent to our annual goodwill impairment analysis, we monitor for any events or changes in circumstances, such as significant adverse changes in business climate or operating results, changes in management’s business strategy, an inability to successfully introduce new products in the marketplace, an inability to successfully achieve internal forecasts or significant declines in our stock price, which may represent an indicator of impairment. The occurrence of any of these events may require us to record future goodwill impairment charges.
We license certain third-party technologies and tools for the design and production of our products. We report the value of those licenses as other non-current assets on the balance sheet and we periodically evaluate the carrying value of those licenses based on their future economic benefit to us. Factors such as the life of the assets, changes in competing technologies, and changes to the business strategy may represent an indicator of impairment. The occurrence of any of these events may require us to record future technology license impairment charges.
Our inability to continue to attract and retain qualified personnel may hinder our business.
Much of our future success depends upon the continued service of numerous qualified engineering, marketing, sales and executive employees. Competition for highly skilled executives and employees in the technology industry is intense and our competitors have targeted individuals in our organization that have desired skills and experience. If we are not able to continue to attract, train and retain our leadership team and our qualified employees necessary for our business, the progress of our product development programs could be hindered, and we could be materially
adversely affected. To help attract, retain and motivate our executives and qualified employees, we use share-based incentive awards such as employee stock options and non-vested share units (restricted stock units). If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate our executives and employees could be weakened, which could harm our results of operations. Also, if the value of our stock awards increases substantially, this could potentially create great personal wealth for our executives and employees and affect our ability to retain our personnel. In addition, any future restructuring plans may adversely impact our ability to attract and retain key employees.
Our stock price is subject to volatility.
Our stock price has experienced price and volume fluctuations and could be subject to wide fluctuations in the future. The trading price of our stock may fluctuate widely due to various factors including actual or anticipated fluctuations in our financial conditions and operating results, changes in financial estimates by us or financial estimates and ratings by securities analysts, changes in our capital structure, including issuance of additional debt or equity to the public, interest rate changes, inflation, news regarding our products or products of our competitors, and broad market and industry fluctuations. Stock price fluctuations could impact the value of our equity compensation, which could affect our ability to recruit and retain employees. In addition, volatility in our stock price could adversely affect our business and financing opportunities.
In May 2021, we announced that our Board of Directors approved a new stock repurchase program to purchase up to $4 billion of our outstanding common stock in the open market. This repurchase program does not obligate us to acquire any common stock, has no termination date and may be suspended or discontinued at any time. Our stock repurchases could affect the trading price of our stock, the volatility of our stock price, reduce our cash reserves, and may be suspended or discontinued at any time, which may result in a decrease in our stock price.
Worldwide political conditions may adversely affect demand for our products.
Worldwide political conditions may create uncertainties that could adversely affect our business. The United States has been and may continue to be involved in armed conflicts that could have a further impact on our sales and our supply chain. The consequences of armed conflict, political instability or civil or military unrest are unpredictable, and we may not be able to foresee events that could have a material adverse effect on us. Terrorist attacks or other hostile acts may negatively affect our operations, or adversely affect demand for our products, and such attacks or related armed conflicts may impact our physical facilities or those of our suppliers or customers. Furthermore, these attacks or hostile acts may make travel and the transportation of our products more difficult and more expensive, which could materially adversely affect us. Any of these events could cause consumer spending to decrease or result in increased volatility in the United States economy and worldwide financial markets.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
We issued warrants dated June 28, 2021 to purchase 107,314 shares, of our common stock to a commercial partner pursuant to a strategic arrangement with such partner. The warrants have an exercise price of $25.50 per share and expire on June 28, 2024.
The warrants were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities
In May 2021, we announced that our Board of Directors approved a new stock repurchase program to purchase up to $4 billion of our outstanding common stock in the open market. We expect to fund repurchases through cash generated from operations which have been strengthened by our strong operational results. Our stock repurchase program does not obligate us to acquire any common stock, has no termination date and may be suspended or discontinued at any time.
The following table provides information relating to our repurchase of common stock for the three months ended June 26, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Repurchased | | Average Price Paid per Share | | Total Number of Shares Repurchased as Part of Publicly Announced Program | | Maximum Dollar Value of Shares That May Yet be Purchased Under the Program |
| (In millions, except shares and per share data) |
| March 28, 2021 - April 24, 2021 | — | | | $ | — | | | — | | | $ | — | |
| April 25, 2021 - May 22, 2021 | 386,649 | | | $ | 77.59 | | | 386,649 | | | $ | 3,970 | |
| May 23, 2021 - June 26, 2021 | 2,848,247 | | | $ | 79.35 | | | 3,234,896 | | | $ | 3,744 | |
| Total | 3,234,896 | | | | | | | |
Equity Award Share Withholding
During the six months ended June 26, 2021, we paid approximately $14 million in employee withholding taxes due upon the vesting of net settled equity awards. We withheld approximately 0.2 million shares of common stock from employees in connection with such net share settlement at an average price of $87.54 per share. These shares may be deemed to be “issuer purchases” of shares.
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| *10.1 | | | |
| *10.2 | | | |
| *10.3 | | | |
| **10.4 | | | |
10.231.1 | | |
31.1 | | | |
| 31.2 | | | |
| 32.1 | | | |
| 32.2 | | | |
| 101.INS | | XBRL Instance Document. | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document | |
| _____________________ | |
*Management contracts and compensatory plans or arrangements. | |
**Portions of this exhibit have been omitted because they are both (i) not material and (ii) would be competitively harmful if publicly disclosed. | |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | ADVANCED MICRO DEVICES, INC. |
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| July 28, 2021 | | ADVANCED MICRO DEVICES, INC.By: | /s/Devinder Kumar |
| | Name: | Devinder Kumar |
November 2, 2017 | | By:Title: | /s/Devinder Kumar
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| | Name: | Devinder Kumar |
| | Title: | SeniorExecutive Vice President, Chief Financial Officer and Treasurer
Signing on behalf of the Registrant as the Principal Financial Officer
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