The following discussion should be read in conjunction with the consolidated financial statements as ofDecember 25, 2021 andDecember 26, 2020 and for each of the three years in the period endedDecember 25, 2021 and related notes, which are included in this Annual Report on Form 10-K as well as with the other sections of this Annual Report on Form 10-K, "Part II, Item 8: Financial Statements and Supplementary Data." Introduction In this section, we will describe the general financial condition and the results of operations ofAdvanced Micro Devices, Inc. and its wholly-owned subsidiaries (collectively, "us," "our" or "AMD"), including a discussion of our results of operations for 2021 compared to 2020, an analysis of changes in our financial condition and a discussion of our off-balance sheet arrangements. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 26, 2020 . Overview Our leadership portfolio of high-performance products, robust customer demand, and consistent execution helped drive strong financial results in 2021. Net revenue for 2021 was$16.4 billion , an increase of 68% compared to 2020 net revenue of$9.8 billion . Gross margin, as a percentage of net revenue for 2021, was 48%, compared to 45% in 2020. Our operating income for 2021 improved to$3.6 billion compared to operating income of$1.4 billion for 2020. Our net income for 2021 improved to$3.2 billion compared to$2.5 billion in the prior year. Cash, cash equivalents and short-term investments as ofDecember 25, 2021 were$3.6 billion , compared to$2.3 billion at the end of 2020. The aggregate principal amount of total debt as ofDecember 25, 2021 was$313 million , compared to$338 million as ofDecember 26, 2020 . We introduced a number of high-performance products in 2021. We expanded the AMD Ryzen mobile processor family with the launch of the AMD Ryzen 5000 Series Mobile Processors with "Zen 3" core architecture designed for gamers, creators and professionals. We also announced the AMD Ryzen PRO 5000 Series Mobile Processors powered with our "Zen 3" core architecture for business laptops. AMD Ryzen PRO Series Mobile Processors are built to provide powerful computing experiences with security features for demanding business environments like remote working. We also launched a number of graphics products during 2021, including the AMD Radeon RX 6700 XT graphics card built on 7 nm process technology and AMD RDNA 2 gaming architecture to deliver performance and power efficiency, as well as the AMD Radeon RX 6600 XT graphics card, designed to deliver high-frame rate, high-fidelity and highly responsive 1080p gaming experience. For mobile graphics, we introduced the 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 the AMD Instinct MI200 series accelerators based on the 2nd Gen AMD CDNA architecture, optimized for HPC and AI/ML (Artificial Intelligence/Machine Learning) workloads. The MI200 series includes the MI250 Open Accelerator Module (OAM) form factor for purpose-built HPC/AI platforms and the MI210 PCIe form factor for mainstream server platforms. We also introduced our AMD FidelityFX Super Resolution software for game developers to help deliver a high-quality, high-resolution gaming experience. For professional graphics, we announced our AMD Radeon PRO W6000 series workstation graphics for professional users who have ultra-high resolution media projects, complex design and engineering simulations and advanced image and video editing applications. We also introduced the AMD Radeon PRO W6000X series graphics for the Mac Pro, designed to power a wide variety of demanding professional applications and workloads. For the server business, we introduced the next generation of AMD EPYC processors with the AMD EPYC 7003 Series CPUs for high-performance computing, cloud and enterprise customers. The EPYC 7003 series processors have up to 64 Zen 3 cores per processor and per-core cache memory and also include security features through AMD Infinity Guard to help drive faster times to results and improve business outcomes. Although the current COVID-19 pandemic continues to impact our business operations and practices, we experienced limited disruptions during 2021. We are taking safety measures to protect our employees who are in 39 -------------------------------------------------------------------------------- the office and support those employees who work from home. We are also monitoring our operations and public health measures implemented by governmental authorities in response to the pandemic. COVID-19 also continues to impact the global supply chain, causing disruptions to service providers, logistics and the flow and availability of supplies and products. Despite these challenges, we took action to maintain a stable supply of materials to meet our production requirements and delivered incremental supply throughout the year. We also experienced strong customer demand in 2021 and made strategic investments through long-term purchase commitments and prepayment arrangements in our supply chain to secure additional capacity to support future revenue growth. For example, we amended our Wafer Supply Agreement (WSA) with GLOBALFOUNDRIES Inc. (GF) inMay 2021 (the A&R Seventh Amendment) and inDecember 2021 (the Amendment) to modify certain terms of the WSA applicable to wafer purchases at the 12 nm and 14 nm technology nodes fromDecember 23, 2021 and continuing throughDecember 31, 2025 . Under the Amendment, GF will provide a minimum annual capacity allocation to us for years 2022 through 2025 and we have corresponding annual wafer targets. We also agreed to wafer pricing through 2025, and we are obligated to pre-pay GF certain amounts for those wafers in 2022 and 2023. The Amendment does not affect any of the prior exclusivity commitments that were removed under the A&R Seventh Amendment. We have full flexibility to contract with any wafer foundry with respect to all products manufactured at any technology node. Due to our strong financial results and growing cash flow generation, inMay 2021 , our Board of Directors approved a stock repurchase program (Repurchase Program) to purchase up to$4 billion of our outstanding common stock in the open market. During the twelve months endedDecember 25, 2021 , we repurchased 16.7 million shares of our common stock under the Repurchase Program, for a total cash outlay of$1.8 billion . As ofDecember 25, 2021 ,$2.2 billion remained available for future stock repurchases under this program. The Repurchase Program does not obligate us to acquire any common stock, has no termination date and may be suspended or discontinued at any time. As part of our strategy to establish AMD as the industry's high performance computing leader, we announced inOctober 2020 that we entered into a definitive agreement to acquire Xilinx, Inc. in an all-stock transaction. The completion of the transaction remains subject to certain closing conditions, including regulatory approval, and is currently expected to close in the first quarter of 2022. We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements. Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance withU.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 consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenue, inventories, goodwill 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 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 the following critical accounting estimates are the most significant to the presentation of our financial statements and require the most difficult, subjective and complex judgments. Revenue Allowances. Revenue contracts with our customers include variable amounts which we evaluate under ASC 606-10-32-8 through 14 in order to determine the net amount of consideration to which we are entitled and which we recognize as revenue. We determine the net amount of consideration to which we are entitled by estimating the most likely amount of consideration we expect to receive from the customer after adjustments to the contract price for rights of return and rebates to our OEM customers and rights of return, rebates and price protection on unsold merchandise to our distributor customers. We base our determination of necessary adjustments to the contract price by reference to actual historical activity and experience, including actual historical returns, rebates and credits issued to OEM and distributor customers adjusted, as applicable, to include adjustments, if any, for known events or current economic conditions, or both. 40 -------------------------------------------------------------------------------- Our estimates of necessary adjustments for distributor price incentives and price protection on unsold products held by distributors are based on actual historical incentives provided to distributor customers and known future price movements based on our internal and external market data analysis. Our estimates of necessary adjustments for OEM price incentives utilize, in addition to known pricing agreements, actual historical rebate attainment rates and estimates of future OEM rebate program attainment based on internal and external market data analysis. We offer incentive programs through cooperative advertising and marketing promotions. Where funds provided for such programs can be estimated, we recognize a reduction to revenue at the time the related revenue is recognized; otherwise, we recognize such reduction to revenue at the later of when: i) the related revenue transaction occurs; or ii) the program is offered. For transactions where we reimburse a customer for a portion of the customer's cost to perform specific product advertising or marketing and promotional activities, such amounts are recognized as a reduction to revenue unless they qualify for expense recognition. We also provide limited product return rights to certain OEMs and to most distribution customers. These return rights are generally limited to a contractual percentage of the customer's prior quarter shipments, although, from time to time we may approve additional product returns beyond the contractual arrangements based on the applicable facts and circumstances. In order to estimate adjustments to revenue to account for these returns, including product restocking rights provided to distributor and OEM customers, we utilize relevant, trended actual historical product return rate information gathered, adjusted for actual known information or events, as applicable. Overall, our estimates of adjustments to contract price due to variable consideration under our contracts with OEM and distributor customers, based on our assumptions and include adjustments, if any, for known events, have been materially consistent with actual results; however, these estimates are subject to management's judgment and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenue and operating results. Inventory Valuation. We value inventory at standard cost, adjusted to approximate the lower of actual cost or estimated net realizable value using assumptions about future demand and market conditions. Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on specific facts and circumstances. In determining excess or obsolescence reserves for products, we consider assumptions such as changes in business and economic conditions, other-than-temporary decreases in demand for our products, and changes in technology or customer requirements. In determining the lower of cost or net realizable value reserves, we consider assumptions such as recent historical sales activity and selling prices, as well as estimates of future selling prices. If in any period we anticipate a change in assumptions such as future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in cost of sales, resulting in a negative impact to our gross margin in that period. If in any period we are able to sell inventories that had been written down to a level below the ultimate realized selling price in a previous period, related revenue would be recorded with a lower or no offsetting charge to cost of sales resulting in a net benefit to our gross margin in that period. Overall, our estimates of inventory carrying value adjustments have been materially consistent with actual results.Goodwill . We perform our goodwill impairment analysis as of the first day of the fourth quarter of each year and, if certain events or circumstances indicate that an impairment loss may have been incurred, on a more frequent basis. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment. We first analyze qualitative factors to determine if it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. Qualitative factors include industry and market considerations, overall financial performance, share price trends and market capitalization and Company-specific events. If we conclude it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, we do not proceed to perform a quantitative impairment test. If we conclude it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative goodwill impairment test will be performed by comparing the fair value of each reporting unit to its carrying value. A quantitative impairment analysis, if necessary, considers the income approach, which requires estimates of the present value of expected future cash flows to determine a reporting unit's fair value. Significant estimates include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates, and future economic and market conditions. 41 -------------------------------------------------------------------------------- A goodwill impairment charge is recognized for the amount by which a reporting unit's fair value is less than its carrying value, not to exceed the total amount of goodwill allocated to that reporting unit. Income Taxes. In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes. We regularly assess the likelihood that we will be able to recover our deferred tax assets. Unless recovery is considered more-likely-than-not (a probability level of more than 50%), we will record a charge to income tax expense in the form of a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable or maintain the valuation allowance recorded in prior periods. When considering all available evidence, if we determine it is more-likely-than-not we will realize our deferred tax assets, we will reverse some or all of the existing valuation allowance, which would result in a credit to income tax expense and the establishment of an asset in the period of reversal. In determining the need to establish or maintain a valuation allowance, we consider the four sources of jurisdictional taxable income: (i) carryback of net operating losses to prior years; (ii) future reversals of existing taxable temporary differences; (iii) viable and prudent tax planning strategies; and (iv) future taxable income exclusive of reversing temporary differences and carryforwards. Through the end of 2021, we continue to maintain a valuation allowance of approximately$1.7 billion for certain federal, state, and foreign tax attributes. The federal valuation allowance maintained is due to limitations, under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. Certain state and foreign valuation allowances are maintained due to a lack of sufficient sources of future taxable income. In addition, the calculation of our tax liabilities involves addressing uncertainties in the application of complex, multi-jurisdictional tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing authorities. Results of Operations We report our financial performance based on the following two reportable segments: Computing and Graphics, and Enterprise, Embedded and Semi-Custom. Additional information on our reportable segments is contained in Note 14 - Segment Reporting of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K). Our operating results tend to vary seasonally. 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. The following table provides a summary of net revenue and operating income (loss) by segment for 2021 and 2020: December 25, 2021 December 26, 2020 (In millions) Net revenue: Computing and Graphics $ 9,332 $ 6,432 Enterprise, Embedded and Semi-Custom 7,102 3,331 Total net revenue $ 16,434 $ 9,763 Operating income (loss): Computing and Graphics $ 2,090 $ 1,266 Enterprise, Embedded and Semi-Custom 1,979 391 All Other (421) (288) Total operating income $ 3,648 $ 1,369 42
-------------------------------------------------------------------------------- Computing and Graphics Computing and Graphics net revenue of$9.3 billion in 2021 increased by 45%, compared to$6.4 billion in 2020, primarily as a result of a 57% increase in average selling price, partially offset by an 8% decrease in unit shipments. The increase in average selling price was primarily driven by a richer mix of Ryzen, Radeon and AMD Instinct products. The lower unit shipments were primarily driven by a strategic focus on premium and higher end products in a tight supply environment. Computing and Graphics operating income was$2.1 billion in 2021 compared to$1.3 billion in 2020. The increase in operating income was primarily driven by higher revenue and improved margin in the segment which more than offset higher operating expenses. Operating expenses increased for the reasons outlined under "Expenses" below. Enterprise, Embedded and Semi-Custom Enterprise, Embedded and Semi-Custom net revenue of$7.1 billion in 2021 increased by 113% compared to net revenue of$3.3 billion in 2020, primarily driven by higher sales of our semi-custom products and EPYC server processors. Enterprise, Embedded and Semi-Custom operating income was$2.0 billion in 2021 compared to$391 million in 2020. The increase in operating income was primarily due to the higher revenue and improved margin in the segment which more than offset higher operating expenses. Operating expenses increased for the reasons outlined under "Expenses" below. All Other All Other operating loss of$421 million in 2021 included stock-based compensation expense of$379 million and acquisition-related costs of$42 million . All Other operating loss of$288 million in 2020 included stock-based compensation expense of$274 million and acquisition-related costs of$14 million . Comparison of Gross Margin, Expenses, Licensing Gain, Interest Expense, Other Income (Expense) and Income Taxes The following is a summary of certain consolidated statement of operations data for 2021 and 2020: December 25, 2021 December 26, 2020 (In millions, except for percentages) Net revenue $ 16,434 $ 9,763 Cost of sales 8,505 5,416 Gross profit 7,929 4,347 Gross margin 48 % 45 % Research and development 2,845 1,983 Marketing, general and administrative 1,448 995 Licensing gain (12) - Interest expense (34) (47) Other income (expense), net 55 (47) Income tax provision (benefit) 513 (1,210) Gross Margin Gross margin as a percentage of net revenue was 48% in 2021 compared to 45% in 2020. The increase in gross margin was primarily driven by a richer mix of EPYC, Radeon and Ryzen processor sales. Expenses Research and Development Expenses Research and development expenses of$2.8 billion in 2021 increased by$862 million , or 43%, compared to$2.0 billion in 2020. The increase was primarily driven by an increase in product development costs due to an increase in headcount and higher annual employee incentives driven by improved financial performance. 43 -------------------------------------------------------------------------------- Marketing, General and Administrative Expenses Marketing, general and administrative expenses of$1.4 billion in 2021 increased by$453 million , or 46%, compared to$995 million in 2020. The increase was primarily due to an increase in go-to-market activities in both the Computing and Graphics and Enterprise, Embedded and Semi-Custom segments, as well as an increase in headcount and higher annual employee incentives driven by improved financial performance. Licensing Gain During 2021, we recognized$12 million of royalty income associated with the licensed IP to the THATIC JV, our two joint ventures withHigon Information Technology Co., Ltd. , a third-party Chinese entity. We did not recognize a licensing gain for the year endedDecember 26, 2020 . Interest Expense Interest expense of$34 million in 2021 decreased by$13 million compared to$47 million in 2020, primarily due to lower debt balances as a result of conversions by holders of our 2.125% Convertible Senior Notes due 2026. Other Income (Expense), net Other income, net was$55 million for the year endedDecember 25, 2021 compared to$47 million of Other expense, net for the year endedDecember 26, 2020 . The change was primarily due to a net gain of$56 million from an increase in fair value of equity investments in 2021 and lower losses from the conversion of our convertible debt of$47 million in 2020. Income Taxes Provision (Benefit) We recorded an income tax provision of$513 million in 2021 and an income tax benefit of$1.2 billion in 2020, representing effective tax rates of 14% and (95)% respectively. The income tax provision of$513 million was due to higher income in theU.S. and increase in foreign taxes, partially offset by$147 million of foreign-derived intangible income tax benefit,$78 million of research and development tax credits, and$125 million of excess tax benefit for stock-based compensation net of non-deductible officers' compensation. The income tax benefit in 2020 was primarily due to$1.3 billion of tax benefit from the valuation allowance release in theU.S. This benefit was partially offset by approximately$10 million of withholding tax expense related to cross-border transactions,$13 million of state and foreign taxes, and a$75 million increase in valuation allowance against certain state and foreign tax credits. Through the end of fiscal year 2021, we continued to maintain a valuation allowance of approximately$1.7 billion for certain federal, state, and foreign tax attributes. The federal valuation allowance maintained is due to limitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. Certain state and foreign valuation allowance maintained is due to lack of sufficient sources of future taxable income. International Sales International sales as a percentage of net revenue were 72% in 2021 and 77% in 2020. 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 are denominated inU.S. dollars. FINANCIAL CONDITION Liquidity and Capital Resources As ofDecember 25, 2021 , our cash, cash equivalents and short-term investments were$3.6 billion compared to$2.3 billion as ofDecember 26, 2020 . The percentage of cash and cash equivalents held domestically was 91% as ofDecember 25, 2021 , and 94% as ofDecember 26, 2020 . Subsequent toDecember 25, 2021 , we repurchased$1.0 billion of our common stock under our stock repurchase program. 44 -------------------------------------------------------------------------------- Our operating, investing and financing cash flow activities for 2021 and 2020 were as follows: December 25, 2021 December 26, 2020 (In millions) Net cash provided by (used in): Operating activities $ 3,521 $ 1,071 Investing activities (686) (952) Financing activities (1,895) 6
Net increase in cash and cash equivalents and restricted cash $
940 $ 125 Our aggregate principal debt obligations were$313 million and$338 million as ofDecember 25, 2021 andDecember 26, 2020 , respectively. We believe our cash, cash equivalents, short-term investments and cash flows from operations along with our Revolving Credit Facility will be sufficient to fund operations, including capital expenditures and purchase commitments, over the next 12 months and beyond. We believe we will be able to access the capital markets should we require additional funds. However, we cannot assure that such funds will be available on favorable terms, or at 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$3.5 billion in 2021, primarily due to our higher net income of$3.2 billion in 2021, adjusted for non-cash adjustments of$1.1 billion and net cash outflows of$774 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a$640 million increase in accounts receivable driven primarily by$1.6 billion higher revenue in the fourth quarter of 2021 compared to the fourth quarter of 2020, a$556 million increase in inventories driven by our continued increase in product build in support of customer demand, and a$920 million increase in prepaid expenses and other assets due primarily to prepayments under long-term supply agreements in 2021, offset by an$801 million increase in accounts payable primarily due to timing of payments to our suppliers, and a$526 million increase in accrued liabilities and other, both of which were driven mainly by higher marketing accruals, and higher accrued annual employee incentives due to improved financial performance. Net cash provided by operating activities was$1.1 billion in 2020, primarily due to our net income of$2.5 billion , adjusted for non-cash adjustments of$488 million and net cash outflows of$931 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a$219 million increase in accounts receivable driven primarily by$1.1 billion higher revenue in the fourth quarter of 2020 compared to the fourth quarter of 2019, partially offset by higher collections due to better revenue linearity in the fourth quarter of 2020 compared to the fourth quarter of 2019, a$417 million increase in inventories driven by an increase in product build in support of customer demand, a$231 million increase in prepaid expenses and other assets due primarily to an increase in vendor credits, a$513 million decrease in accounts payable primarily due to timing of payments to our suppliers, offset by a$574 million increase in accrued liabilities and other driven by higher marketing accruals and higher accrued annual employee incentives due to improved financial performance. Investing Activities Net cash used in investing activities was$686 million in 2021, which primarily consisted of higher cash used for purchases of short-term investments of$2.1 billion and$301 million for purchases of property and equipment, partially offset by higher cash provided by maturities of short-term investments of$1.7 billion . Net cash used in investing activities was$952 million in 2020, which primarily consisted of$850 million for purchases of short-term investments and$294 million for purchases of property and equipment, partially offset by$192 million for maturities of short-term investments. 45 -------------------------------------------------------------------------------- Financing Activities Net cash used in financing activities was$1.9 billion in 2021, which primarily consisted of common stock repurchases of$1.8 billion under the$4 billion stock repurchase program and higher repurchases to cover tax withholding on employee equity plans of$237 million , partially offset by higher proceeds from the issuance of common stock under our employee equity plans of$104 million . Net cash provided by financing activities was$6 million in 2020, which primarily consisted of proceeds from the issuance of common stock under our employee equity plans of$85 million , partially offset by$78 million of common stock repurchased to cover employee withholding taxes on vesting of employee equity grants. We borrowed$200 million of short-term debt during the second quarter of 2020 and paid off the balance during the third quarter of 2020. Contractual Obligations For a description of our contractual obligations such as debt, leases, purchase and other contractual obligations, see Part II, Item 8 Notes to Consolidated Financial Statements Note 6 - Debt and Revolving Credit Facility and Note 16 - Commitments and Guarantees. Off-Balance Sheet Arrangements As ofDecember 25, 2021 , we had no off-balance sheet arrangements. 46
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