Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
 
Form 10-Q
 
 
 
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number 001-07882
 
 
 
 
ADVANCED MICRO DEVICES, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
94-1692300
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
2485 Augustine Drive
Santa Clara, California
 
95054
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (408) 749-4000
 
 
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ   No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
þ
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes  ¨     No  þ
Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 26, 2018: 999,407,216




INDEX
 
 
 
Page No.
 
 
 
 
 
 
 
 
Item 2

2



PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Operations (1) 
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In millions, except per share amounts)
Net revenue
$
1,653

 
$
1,584

 
$
5,056

 
$
3,913

Cost of sales
992

 
1,013

 
3,146

 
2,578

Gross margin
661

 
571

 
1,910

 
1,335

Research and development
363

 
320

 
1,063

 
876

Marketing, general and administrative
148

 
132

 
424

 
382

Licensing gain

 

 

 
(52
)
Operating income
150

 
119

 
423

 
129

Interest expense
(30
)
 
(31
)
 
(92
)
 
(95
)
Other expense, net
(6
)
 
(3
)
 
(4
)
 
(11
)
Income before equity loss and income taxes
114

 
85

 
327

 
23

Provision for income taxes
12

 
22

 
26

 
30

Equity loss in investee

 
(2
)
 
(2
)
 
(7
)
Net income (loss)
$
102

 
$
61

 
$
299

 
$
(14
)
Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
0.10

 
$
0.06

 
$
0.31

 
$
(0.01
)
Diluted
$
0.09

 
$
0.06

 
$
0.28

 
$
(0.01
)
Shares used in per share calculation
 
 
 
 
 
 
 
Basic
987

 
957

 
976

 
947

Diluted
1,076

 
1,042

 
1,058

 
947

(1) Prior year amounts adjusted to reflect the retrospective application of ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 1.
See accompanying notes to condensed consolidated financial statements.

3



Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss) (1) 
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In millions)
Net income (loss) (1)
$
102

 
$
61

 
$
299

 
$
(14
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
(5
)
 
5

 
(16
)
 
11

Reclassification adjustment for (gains) losses realized and included in net income (loss)
5

 
(3
)
 

 
(4
)
Total change in unrealized gains (losses) on cash flow hedges

 
2

 
(16
)
 
7

Total other comprehensive income (loss)

 
2

 
(16
)
 
7

Cumulative-effect adjustment to accumulated deficit related to the adoption of ASU 2016-01, Financial Instruments

 

 
2

 

Total comprehensive income (loss)
$
102

 
$
63

 
$
285

 
$
(7
)
(1) Prior year amounts adjusted to reflect the retrospective application of ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 1.
See accompanying notes to condensed consolidated financial statements.

4



Advanced Micro Devices, Inc.
Condensed Consolidated Balance Sheets (1) 
(Unaudited)
 
September 29,
2018
 
December 30,
2017
 
(In millions, except par value amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,046

 
$
1,185

Marketable securities
10

 

Accounts receivable, net
1,207

 
454

Inventories, net
738

 
694

Prepayment and receivables—related parties
53

 
33

Prepaid expenses
60

 
77

Other current assets
200

 
191

Total current assets
3,314

 
2,634

Property and equipment, net
318

 
261

Goodwill
289

 
289

Investment: equity method
58

 
58

Other assets
368

 
310

Total assets
$
4,347

 
$
3,552

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt, net
$
136

 
$
70

Accounts payable
508

 
384

Payables to related parties
533

 
412

Accrued liabilities
688

 
555

Other current liabilities
13

 
92

Total current liabilities
1,878

 
1,513

Long-term debt, net
1,167

 
1,325

Other long-term liabilities
177

 
118

Commitments and contingencies (See Note 12)

 

Stockholders’ equity:
 
 
 
Capital stock:
 
 
 
Common stock, par value $0.01; shares authorized: 2,250 on September 29, 2018 and 1,500 shares on December 30, 2017; shares issued: 1,007 on September 29, 2018 and 979 shares on December 30, 2017; shares outstanding: 999 on September 29, 2018 and 967 shares on December 30, 2017
10

 
9

Additional paid-in capital
8,666

 
8,464

Treasury stock, at cost (8 shares on September 29, 2018 and 12 shares on December 30, 2017)
(67
)
 
(108
)
Accumulated deficit
(7,474
)
 
(7,775
)
Accumulated other comprehensive income (loss)
(10
)
 
6

Total stockholders’ equity
$
1,125

 
$
596

Total liabilities and stockholders’ equity
$
4,347

 
$
3,552

(1) Prior year amounts adjusted to reflect the retrospective application of ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 1.

See accompanying notes to condensed consolidated financial statements.

5



Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Cash Flows (1) (2) 
(Unaudited)
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
(In millions)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
299

 
$
(14
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation and amortization
127

 
105

Provision for deferred income taxes

 
3

Stock-based compensation expense
101

 
76

Amortization of debt discount and issuance costs
29

 
27

Loss on debt redemption
7

 
9

Other
2

 
4

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(753
)
 
(527
)
Inventories
(44
)
 
5

Prepayment and receivables - related parties
(20
)
 
6

Prepaid expenses and other assets
(26
)
 
(78
)
Payables to related parties
121

 
61

Accounts payable, accrued liabilities and other
121

 
11

Net cash used in operating activities
(36
)
 
(312
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(122
)
 
(69
)
Purchases of available-for-sale debt securities
(45
)
 
(221
)
Proceeds from maturity of available-for-sale debt securities
35

 
221

Other

 
(2
)
Net cash used in investing activities
(132
)
 
(71
)
Cash flows from financing activities:
 
 
 
Proceeds from (repayments of) short-term borrowings, net

 
70

Proceeds from issuance of common stock through employee equity incentive plans
44

 
15

Repayments of long-term debt
(15
)
 
(70
)
Other
(1
)
 
(14
)
Net cash provided by financing activities
28

 
1

Net decrease in cash, cash equivalents, and restricted cash
(140
)
 
(382
)
Cash, cash equivalents, and restricted cash at beginning of period
1,191

 
1,266

Cash, cash equivalents, and restricted cash at end of period
$
1,051

 
$
884

Supplemental cash flow information:
 
 
 
Non-cash investing and financing activities:
 
 
 
Purchases of property and equipment, accrued but not paid
$
46

 
$
53

Issuance of treasury stock to partially settle debt
$
103

 
$
38

Non-cash additions of property, plant and equipment
$
9

 
$
8

Reconciliation of cash, cash equivalents, and restricted cash
 
 
 
Cash and cash equivalents
$
1,046

 
$
879

Restricted cash included in Other current assets
5

 
2

Restricted cash included in Other assets

 
3

Total cash, cash equivalents, and restricted cash
$
1,051

 
$
884

(1) Prior year amounts adjusted to reflect the retrospective application of ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 1.
(2) Amounts reflected adoption of ASU 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230) beginning in the first quarter of 2018.
See accompanying notes to condensed consolidated financial statements.

6


Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements of Advanced Micro Devices, Inc. and its subsidiaries (the Company or AMD) have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The results of operations for the three and nine months ended September 29, 2018 shown in this report are not necessarily indicative of results to be expected for the full year ending December 29, 2018. In the opinion of the Company’s management, the information contained herein reflects all adjustments necessary for a fair presentation of the Company’s results of operations, financial position and cash flows. All such adjustments are of a normal, recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 30, 2017.
The Company uses a 52 or 53 week fiscal year ending on the last Saturday in December. The three and nine months ended September 29, 2018 and September 30, 2017 each consisted of 13 weeks and 39 weeks, respectively.
Principles of Consolidation. The condensed consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. Upon consolidation, all significant inter-company accounts and transactions are eliminated.
Revenue Recognition. 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 Company expects to receive in exchange for those goods or services. Sales, value-added, and other taxes collected concurrently with the provision of goods or services are excluded from revenue. Shipping and handling costs associated with product sales are included in cost of sales.
Nature of products and services
The Company's microprocessors, chipsets, graphic processor units (GPUs), professional graphics products, server and embedded processors, and System-on-Chip (SoC) products may be sold as standard non-custom products, or custom products manufactured to customers’ specifications.
Non-custom products: The Company transfers control and recognizes revenue when non-custom products are shipped to customers, which includes original equipment manufacturers (OEM) and distributors, in accordance with the shipping terms of the sale. Certain OEMs may be entitled to rights of return and rebates under OEM agreements. The Company also sells to distributors under terms allowing the majority of distributors certain rights of return and price protection on unsold merchandise held by them. The Company estimates the amount of variable consideration under OEM and distributor arrangements and, accordingly, records a provision for product returns, allowances for price protection and rebates based on actual historical experience and any known events.
The Company offers incentive programs to certain customers, including cooperative advertising, marketing promotions, volume based incentives and special pricing arrangements. Where funds provided for such programs can be estimated, the Company recognizes a reduction to revenue at the time the related revenue is recognized; otherwise, the Company recognizes such reduction to revenue at the later of when; i) the related revenue transaction occurs; or ii) the program is offered. For transactions where the Company reimburses 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.
Custom products: Custom products which are associated with the Company’s Enterprise, Embedded, and Semi-Custom segment (semi-custom products), under non-cancellable purchases orders and have no alternative use to the Company at contract inception, are recognized as revenue, based on the value of the semi-custom products and expected margin, over the time of production of the products by the Company. Sale of semi-custom products are not subject to a right of return.
Development and intellectual property licensing agreements: From time to time, the Company may enter into arrangements with customers that combine the provision of development services and a license to the right to use the intellectual property (IP), which is deemed to be a single performance obligation. Accordingly, the Company recognizes revenue for the entire consideration of the arrangement upon transfer of control of the IP license to the customer.
Customers are generally required to pay for products and services within the Company’s standard contractual terms, which are typically net 30 to 60 days. The Company has determined that it does not have significant financing components in its contracts with customers.

7


Refer to Note 3 Supplemental Balance Sheet Information, for further information regarding unearned revenue.
Recently Adopted Accounting Standards
Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), 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 Company adopted the new standard in the first quarter of 2018, using the full retrospective method, which required the Company to adjust prior reporting periods presented. The Company implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
The most significant impacts of the adoption of ASC 606 to the Company related to: (1) the acceleration of revenue recognition for sales of semi-custom products subject to a non-cancellable customer purchase order, (2) the acceleration of revenue recognition for sales to distributors, and (3) the timing and financial statement classification of certain development and intellectual property licensing agreements. Revenue from sales of semi-custom products under non-cancellable purchases orders and that have no alternative use to the Company at contract inception, is recognized, based on the value of the semi-custom products and expected margin, over the time of production of the semi-custom products by the Company, rather than upon shipment. Revenue from sales to the Company's distributors is recognized upon shipment of the product to the distributors (sell-in), net of provision for estimated reserves, instead of the previous revenue recognition which was upon the reported resale of the product by the distributors to their customers (sell-through). For a development and IP licensing agreement executed in 2017, the Company recognized IP-related revenue in the third quarter of 2018 for the entire consideration upon the completion of all the technology milestones. Previously, the agreement resulted in the reduction to research and development expenses in 2017 for development work as the expenses were incurred and would have resulted in licensing revenue to be recognized in periods beyond 2017 upon completion of the deliverables, based on a fair value allocation of the consideration received. Revenue recognition related to the Company’s other revenue streams remain substantially unchanged.
The adoption of ASC 606 had an impact on the Company’s Consolidated Statements of Operations and Consolidated Balance Sheets, but had no impact on cash provided by or used in operating, financing, or investing activities on the Consolidated Statements of Cash Flows.

8


The impact on the Company’s previously reported Consolidated Statement of Operations as a result of the adoption of the new standard was as follows:
 
Three months ended September 29, 2017
 
Nine months ended September 29, 2017
 
As Previously Reported
 
Adjustment
 
As Adjusted
 
As Previously Reported
 
Adjustment
 
As Adjusted
 
(In millions, except per share amounts)
Net revenue
$
1,643

 
$
(59
)
 
$
1,584

 
$
3,849

 
$
64

 
$
3,913

Cost of sales
1,070

 
(57
)
 
1,013

 
2,541

 
37

 
2,578

Gross margin
573

 
(2
)
 
571

 
1,308

 
27

 
1,335

Research and development
315

 
5

 
320

 
860

 
16

 
876

Marketing, general and administrative
132

 

 
132

 
378

 
4

 
382

Licensing gain

 

 

 
(52
)
 

 
(52
)
Operating income (loss)
126

 
(7
)
 
119

 
122

 
7

 
129

Interest expense
(31
)
 

 
(31
)
 
(95
)
 

 
(95
)
Other expense, net
(3
)
 

 
(3
)
 
(11
)
 

 
(11
)
Income (loss) before equity loss and income taxes
92

 
(7
)
 
85

 
16

 
7

 
23

Provision for income taxes
19

 
3

 
22

 
27

 
3

 
30

Equity loss in investee
(2
)
 

 
(2
)
 
(7
)
 

 
(7
)
Net income (loss)
$
71

 
$
(10
)
 
$
61

 
$
(18
)
 
$
4

 
$
(14
)
Earnings (loss) per share
 
 
 
 

 
 
 
 
 
 
  Basic
$
0.07

 
$
(0.01
)
 
$
0.06

 
$
(0.02
)
 
$
0.01

 
$
(0.01
)
  Diluted
$
0.07

 
$
(0.01
)
 
$
0.06

 
$
(0.02
)
 
$
0.01

 
$
(0.01
)
Shares used in per share calculation
 
 
 
 

 
 
 
 
 
 
  Basic
957

 


 
957

 
947

 
 
 
947

  Diluted
1,042

 


 
1,042

 
947

 
 
 
947


The impact on the Company’s previously reported Consolidated Balance Sheets line items affected by the adoption of the new standard was as follows:
 
December 30, 2017
 
As Previously Reported
 
Adjustment
 
As Adjusted
 
(In millions, except per share amounts)
Accounts receivable, net
$
400

 
$
54

 
$
454

Inventories, net
739

 
(45
)
 
694

Other current assets
188

 
3

 
191

Accrued liabilities
541

 
14

 
555

Other current liabilities
57

 
35

 
92

Deferred income on shipments to distributors
22

 
(22
)
 

Accumulated deficit
(7,760
)
 
(15
)
 
(7,775
)
Income Taxes. In March 2018, the FASB issued ASU 2018-05, Income Taxes (ASC 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update) (ASU 2018-05). The ASU 2018-05 includes certain provisions of the Securities and Exchange Commission (SEC) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act of 2017 (the Tax Reform Act) in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Reform Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. The Company has accounted for the tax effects of the Tax Reform Act under the guidance of SAB 118, on a provisional basis. During the nine months ended September 29, 2018, the Company did not recognize any adjustment to the provisional amounts recorded as of December 30, 2017. The Company will continue to assess the Tax Reform Act’s impact for the rest of 2018, including its interpretation by regulatory authorities and the courts, and will adjust its disclosures and financial presentation as necessary.

9


  
Stock Compensation. In May 2017, the FASB issued ASU 2017-09, CompensationStock Compensation (ASC 718): Scope of Modification Accounting (ASU 2017-09) to provide clarity and reduce both the (1) diversity in practice and (2) cost and complexity when changing the terms or conditions of share-based payment awards. Under ASU 2017-09, modification accounting is required to be applied unless all of the following criteria are the same immediately before and after the change:
1. The award’s fair value (or calculated value or intrinsic value, if those measurement methods are used);
2. The award’s vesting conditions; and
3. The award’s classification as an equity or liability instrument.
ASU 2017-09 is effective for annual and interim periods beginning after December 15, 2017 on a prospective basis, and early adoption is permitted. The Company adopted this guidance in the first quarter of 2018 and the guidance did not have an impact on its consolidated financial statements.
Statement of Cash Flows. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (ASC 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. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash (ASU 2016-18), which requires the inclusion of restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-15 and ASU 2016-18 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, provided that all of the amendments are adopted in the same period. The amendments will be applied using a retrospective transition method to each period presented. The Company adopted this guidance in the first quarter of 2018, which resulted in the additional presentation of restricted cash on the statement of cash flows for each period presented and had no material impact on its consolidated financial statements.
Financial Instruments. In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (ASC 825): 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 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 those fiscal years. The Company adopted this guidance in the first quarter of 2018. For its equity securities that have readily determinable fair values, the Company recorded $2 million of a cumulative effect adjustment to retained earnings upon adoption. For its equity investments that do not have readily determinable fair values, the Company adopted the measurement alternative prospectively with no material impact on its consolidated financial statements.
Recently Issued Accounting Standards
Intangibles. In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (ASC 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires hosting arrangements that are service contracts to follow the guidance for internal-use software to determine which implementation costs can be capitalized. ASU 2018-15 is effective either prospectively or retrospectively for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating how to apply the new guidance.
Reporting Comprehensive Income. In February 2018, the FASB issued ASU 2018-02, Income StatementReporting Comprehensive Income (ASC 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which gives entities the option to reclassify to retained earnings the tax effects resulting from the Tax Reform Act related to items in AOCI that the FASB refers to as having been stranded in AOCI. The new guidance may be applied retrospectively to each period in which the effect of the Tax Reform Act is recognized in the period of adoption. The Company must adopt this guidance for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the Tax Reform Act was enacted. The guidance, when adopted, will require new disclosures regarding a company’s accounting policy for releasing the tax effects in AOCI and permit the company the option to reclassify to retained earnings the tax effects resulting from the Tax Reform Act that are stranded in AOCI. The Company is currently evaluating how to apply the new guidance.

10


Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations for lease recognition and disclosure. ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet, while recognizing expenses on the income statements in a manner similar to current guidance. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company did not elect to early adopt this standard and therefore the standard will be effective for the Company in the first quarter of 2019. ASU 2016-02 requires that leases be recognized and measured as of the earliest period presented, using a modified retrospective approach, with all periods presented being adjusted and presented under the new standard. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides companies an optional adoption method to ASU 2016-02 whereby a company does not have to adjust comparative period financial statements for the new standard. The Company plans to adopt the new standard using the optional adoption method and thereby not adjust comparative financial statements.
The Company is currently evaluating the application of the new guidance and currently believes the most significant impact upon adoption will be the recognition of right-of-use assets and lease liabilities on the Company's consolidated balance sheets for its operating leases. The Company is progressing on implementing processes to comply with the guidance.
There were no other significant updates to the recently issued accounting standards as disclosed in the Company’s Form 10-K for fiscal year 2017.
Although there are several other new accounting pronouncements issued or proposed by the FASB, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its consolidated financial position or operating results.
NOTE 2. GLOBALFOUNDRIES
Wafer Supply Agreement. The Company and GLOBALFOUNDRIES Inc. (GF) entered into a Wafer Supply Agreement (the WSA) in 2009, under which, among other terms, the Company would purchase wafers from GF. The WSA, which has been amended from time to time, governs the terms by which the Company purchases products manufactured by GF.
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, to be paid in a series of installments starting in the fourth quarter of 2016 through the third quarter of 2017. As of December 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. In 2016 and 2017, the Company met its wafer purchase targets. As of September 29, 2018, the Company expects to meet its 2018 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 2018.
On August 27, 2018, GF announced that it was putting its 7nm FinFET program on hold indefinitely. The Company is presently focusing the breadth of its 7nm product portfolio on Taiwan Semiconductor Co., Ltd.’s (TSMC) 7nm process. The Company is in discussion with GF to modify the WSA to align with GF’s new business strategy.
The Company’s total purchases from GF related to wafer manufacturing, research and development activities and other for the quarters ended September 29, 2018 and September 30, 2017 were $377 million and $331 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 29, 2018 and September 30, 2017 were $1.2 billion and $773 million, respectively. Included in the total purchases for the three and nine months ended September 29, 2018 were amounts related to the volume of certain wafers purchased from another

11



wafer foundry, as agreed by the Company and GF under the WSA Sixth Amendment. As of September 29, 2018 and December 30, 2017, the amount of prepayment and other receivables related to GF was $15 million and $27 million, respectively, included in Prepayment and receivables—related parties on the Company’s condensed consolidated balance sheets. As of September 29, 2018 and December 30, 2017, the amount of payable to GF was $321 million and $241 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.

12



NOTE 3. Supplemental Balance Sheet Information
Accounts Receivable, net
As of September 29, 2018 and December 30, 2017, Accounts receivable, net included unbilled accounts receivable of $331 million and $75 million, respectively. Unbilled receivables primarily represent work completed on 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 yet invoiced to customers. All unbilled accounts receivable are expected to be billed and collected within twelve months.
Inventories, net
 
September 29,
2018
 
December 30,
2017
 
(In millions)
Raw materials
$
85

 
$
34

Work in process
418

 
446

Finished goods
235

 
214

Total inventories, net
$
738

 
$
694

Property and Equipment, net
 
September 29,
2018
 
December 30,
2017
 
(In millions)
Leasehold improvements
$
176

 
$
187

Equipment
780

 
758

Construction in progress
80

 
56

Property and equipment, gross
1,036

 
1,001

Accumulated depreciation
(718
)
 
(740
)
Total property and equipment, net
$
318

 
$
261

Other Assets
 
September 29,
2018
 
December 30,
2017
 
(In millions)
Software technology and licenses, net
$
274

 
$
239

Other
94

 
71

Total other assets
$
368

 
$
310


13



Accrued Liabilities
 
September 29,
2018
 
December 30,
2017
 
(In millions)
Accrued compensation and benefits
$
223

 
$
206

Marketing programs and advertising expenses
249

 
145

Software technology and licenses payable
45

 
41

Other
171

 
163

Total accrued liabilities
$
688

 
$
555

Other Current Liabilities
 
September 29,
2018
 
December 30,
2017
 
(In millions)
Unearned revenue
$
3

 
$
85

Other
10

 
7

Total other current liabilities
$
13

 
$
92

Unearned revenue represents consideration received or due from customers in advance of the Company satisfying its performance obligations. The unearned revenue is associated with any combination of development services, IP licensing and product revenue. Changes in unearned revenue were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In millions)
Beginning balance
$
67

 
$
43

 
$
85

 
$
22

Unearned revenue
37

 
32

 
124

 
59

Revenue recognized during the period
(86
)
 

 
(186
)
 
(6
)
Other
(15
)
 

 
(20
)
 

Ending balance
$
3

 
$
75

 
$
3

 
$
75

Revenue allocated to remaining performance obligations that are unsatisfied (or partially unsatisfied) as of September 29, 2018 is $121 million, which may include amounts received from customer 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 $99 million in the next 12 months, and the remainder thereafter. As permitted under ASC 606, the Company has not disclosed the comparative amounts as of December 30, 2017.
The revenue allocated to remaining performance obligations did not include amounts which have an original contractual expected duration of less than one year.

14



NOTE 4. Equity Interest Purchase Agreement - ATMP Joint Venture
In April 2016, 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.), 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 the Company’s subsidiaries own the remaining 15%. 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 29, 2018 and December 30, 2017, the carrying value of the Company’s investment in the ATMP JV was approximately $58 million and $58 million, respectively. The ATMP JV is a related party of the Company. The ATMP JV provides assembly, test, mark and packaging (ATMP) services to the Company. The Company currently pays the ATMP JV for ATMP services on a cost-plus basis. The Company assists the ATMP JV in its management of certain raw material inventory. The purchases from and resales back to the ATMP JV of the inventory under inventory management is reported within purchases and resales with the ATMP JV and does not impact the Company’s Statement of Operations.
The Company’s total purchases from the ATMP JV during the three and nine months ended September 29, 2018 amounted to approximately $151 million and $429 million, respectively. The Company’s 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. As of September 29, 2018 and December 30, 2017, the amount payable to the ATMP JV was $212 million and $171 million, respectively, included in Payables to related parties on the Companys condensed consolidated balance sheets. The Company’s resales back to the ATMP JV during the three and nine months ended September 29, 2018 amounted to approximately $21 million and $40 million, respectively, and there were no resales back to the ATMP JV for the comparative periods of 2017. As of September 29, 2018 and December 30, 2017, the Company had receivables from ATMP JV of $19 million and $3 million, respectively, included in Prepayment and receivables—related parties on the Company’s condensed consolidated balance sheets.
During the three and nine months ended September 29, 2018, the Company recorded $0 million and $2 million, respectively, in Equity loss in investee on its condensed consolidated statements of operations, which included certain expenses incurred by the Company on behalf of the ATMP JV. During the three and nine months ended September 30, 2017, the Company recorded $2 million and $7 million, respectively, in Equity loss in investee on its condensed consolidated statements of operations, which included certain expenses incurred by the Company on behalf of the ATMP JV.
NOTE 5. Equity Joint Venture
In February 2016, the Company and Higon Information Technology Co., Ltd. (formerly, 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). 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 financing 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 the 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 does 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.
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 receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such Licensed IP. The Company also provided 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 (Development and IP) 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 recognized 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 required the Company’s continuing involvement in the product development process, which was completed at the end of the second quarter of 2017. Royalty payments will be recognized in income once

15



earned. The Company classifies Licensed IP income and royalty income, associated with the February 2016 agreement, as licensing gain within other operating income.
During the three and nine months ended September 29, 2018, the Company recognized $86 million of IP-related revenue upon completion of all technology milestones under the Development and IP agreement. During the three and nine months ended September 30, 2017, the Company recognized zero and $52 million, respectively, as licensing gain associated with the Licensed IP.
The Company’s share in the net losses of the THATIC JV for the three and nine months ended September 29, 2018 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, which was zero as of September 29, 2018. The Company’s receivable from the THATIC JV for these agreements was $19 million and $3 million as of September 29, 2018 and December 30, 2017, respectively, included in Prepayment and receivables—related parties on its condensed consolidated balance sheets. As of September 29, 2018, the total assets and liabilities of the THATIC JV were not material.
NOTE 6. Debt and Secured Revolving Line of Credit
Debt
2.125% Convertible Senior Notes Due 2026
In September 2016, the Company issued $805 million, in aggregate, principal amount of 2.125% Convertible Senior Notes due 2026 (2.125% Notes). The 2.125% Notes are general unsecured senior obligations of the Company. The interest is payable semi-annually in March and September of each year, commencing in March 2017. As of September 29, 2018, the Company had $805 million principal amount outstanding.
The 2.125% Notes mature on September 1, 2026. However, as outlined in the indenture governing the 2.125% Notes, holders of the 2.125% Notes may convert them at their option during certain time periods and upon 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 (equivalent to an initial conversion price of approximately $8.00 per share of common stock);
(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 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, the Company will pay or deliver cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election.
The first event described in (1) above was met during the third quarter of 2018 and as a result, the 2.125% Notes are convertible at the option of the holder from October 1, 2018 and remain convertible until December 31, 2018.
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 equity on its condensed consolidated balance sheet as of September 29, 2018.

16



The 2.125% Notes consisted of the following:
 
September 29,
2018
 
December 30,
2017
 
(In millions)
Principal amounts:
 
 
 
Principal
$
805

 
$
805

Unamortized debt discount(1)
(268
)
 
(286
)
Unamortized debt issuance costs
(11
)
 
(12
)
Net carrying amount
$
526

 
$
507

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.
As of September 29, 2018, the remaining life of the 2.125% Notes was approximately 96 months.
Based on the closing price of the Company’s common stock of $30.89 on September 28, 2018, the last trading day of the third quarter of 2018, the if-converted value of the 2.125% Notes exceeded its principal amount by approximately $2,303 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 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In millions)
Contractual interest expense
$
5

 
$
4

 
$
13

 
$
13

Interest cost related to amortization of debt issuance costs

 

 
1

 
1

Interest cost related to amortization of the debt discount
$
6

 
$
6

 
$
18

 
$
17

6.75% Senior Notes Due 2019
On February 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 three months ended September 29, 2018, the Company settled $87 million in aggregate principal amount of its 6.75% Notes with treasury stock. During the nine months ended September 29, 2018, the Company settled $101 million in aggregate principal amount of its 6.75% Notes, of which $14 million was settled in cash. As of September 29, 2018, the outstanding aggregate principal amount of the 6.75% Notes was $66 million, which is included in short-term debt on the condensed consolidated balance sheet.
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 three and nine months ended September 29, 2018, the Company settled $10 million in aggregate principal amount of its 7.50% Notes with treasury stock. As of September 29, 2018, the outstanding aggregate principal amount of the 7.50% Notes was $337 million.
7.00% Senior Notes Due 2024

17



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 nine months ended September 29, 2018, the Company repurchased $1 million in aggregate principal amount of its 7.00% Notes in cash. As of September 29, 2018, the outstanding aggregate principal amount of the 7.00% Notes was $310 million.
During the three and nine months ended September 29, 2018, the Company recorded $6 million and $7 million loss, respectively, on extinguishment of debt associated with the debt repurchases noted above.
Potential Repurchase of Outstanding Notes
The Company may elect to purchase or otherwise retire the 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 the Company believes the market conditions are favorable.
Secured Revolving Line of Credit

On April 14, 2015, the Company, AMD International Sales & Service, Ltd. (collectively, the Borrowers), ATI Technologies ULC (together with the Borrowers, collectively the Loan Parties), a group of lenders and Bank of America N.A., acting as the agent for the lenders, entered into an amended and restated loan and security agreement, as amended (the Agreement). The Agreement provides for a secured revolving line of credit (the Secured Revolving Line of Credit) that allows the Borrowers to borrow, repay and re-borrow amounts from time to time up to $500 million with up to $45 million available for issuance of letters of credit, subject to certain conditions. Borrowings are limited up to a certain amount of eligible accounts receivable, as determined in accordance with the Agreement. The size of the commitment under the Secured Revolving Line of Credit may be increased by up to an aggregate amount of $200 million. The commitments under the Secured Revolving Line of Credit are available through March 21, 2022. The Borrowers are subject to commitment fees and letter of credit facility fees. The Loan Parties are required to comply with certain covenants under the Agreement.
The Secured Revolving Line of Credit bears interest, at the option of the Borrowers, either at (a) a customary London Interbank Offered Rate (LIBOR) plus an applicable margin (as determined in accordance with the agreement), or (b) (i) the greatest of (x) the bank’s prime rate, (y) the federal funds rate as published by the Federal Reserve Bank of New York plus 0.50%, and (z) LIBOR for a one-month period plus 1.00%, plus (ii) an applicable margin.
As of September 29, 2018 and December 30, 2017, the Secured Revolving Line of Credit had an outstanding loan balance of $70 million, at an interest rate of 5.50% and 4.75%, respectively. As of September 29, 2018, the Company had $26 million of letters of credit outstanding and up to $205 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 29, 2018, the Loan Parties were in compliance with all required covenants under the Agreement.
NOTE 7. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based on the weighted average number of shares outstanding.
Diluted earnings (loss) per share is computed based on the weighted average number of shares outstanding plus potentially dilutive shares outstanding during the period using the average market price for the respective period. Potentially dilutive shares are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding RSUs, and the assumed exercise of the warrant under the Warrant Agreement with WCH. Potentially dilutive shares issuable upon conversion of the 2.125% Notes are calculated using the if-converted method.

18



The following table sets forth the components of basic and diluted earnings (loss) per share:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In millions, except per share amounts)
Numerator – Net income (loss):
 
 
 
 
 
 
 
Numerator for basic earnings (loss) per share
$
102

 
$
61

 
$
299

 
$
(14
)
Denominator - Weighted average shares:
 
 
 
 
 
 
 
Denominator for basic earnings (loss) per share
987

 
957

 
976

 
947

Effect of potentially dilutive shares:
 
 
 
 
 
 
 
Employee stock options and restricted stock units
34

 
44

 
35

 

Warrants
55

 
41

 
47

 

Denominator for diluted earnings (loss) per share
1,076

 
1,042

 
1,058

 
947

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.10

 
$
0.06

 
$
0.31

 
$
(0.01
)
Diluted
$
0.09

 
$
0.06

 
$
0.28

 
$
(0.01
)
Potential shares from certain employee stock options, restricted stock units and the conversion of the 2.125% Notes totaling 103 million for the third quarter of 2018 were not included in the earnings (loss) per share calculation 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 102 million for the third quarter of 2017 were not included in the earnings (loss) per share calculation because their inclusion would have been anti-dilutive.
Potential shares from certain employee stock options, restricted stock units and the conversion of the 2.125% Notes totaling 104 million for the nine months ended September 29, 2018 were not included in the earnings (loss) per share calculation 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 were not included in the earnings (loss) per share calculation because their inclusion would have been anti-dilutive.
NOTE 8. Financial Instruments
Cash, Cash Equivalents, and Marketable Securities
Cash and financial instruments measured and recorded at fair value as of September 29, 2018 and December 30, 2017 are summarized below:
 
Total Fair
Value
 
Cash and
Cash
Equivalents
 
Short-Term
Marketable
Securities
 
(In millions)
September 29, 2018
 
 
 
 
 
Cash
$
92

 
$
92

 
$

Level 1(1) (2)
 
 
 
 
 
Government money market funds
$
205

 
$
205

 
$

Total level 1
$
205

 
$
205

 
$

Level 2(1) (3)
 
 
 
 
 
Commercial paper
$
759

 
$
749

 
$
10

Total level 2
$
759

 
$
749

 
$
10

Total
$
1,056

 
$
1,046

 
$
10


19


 
Total Fair
Value
 
Cash and
Cash
Equivalents
 
(In millions)
December 30, 2017
 
 
 
Cash
$
108

 
$
108

Level 1(1) (2)
 
 
 
Government money market funds
$
395

 
$
395

Total level 1
$
395

 
$
395

Level 2(1) (3)
 
 
 
Commercial paper
$
682

 
$
682

Total level 2
$
682

 
$
682

Total
$
1,185

 
$
1,185


(1) 
The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the three and nine months ended September 29, 2018 or the year ended December 30, 2017.
(2) 
The Companys 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 prices for identical instruments in markets that are not active or comparable instruments in active markets. 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 29, 2018 and December 30, 2017, the Company had approximately $5 million and $2 million, respectively, of investments in government money market funds, used as collateral for letters of credit deposits, which were included in Other current assets on the Company’s condensed consolidated balance sheets. These government 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 the fair value for all periods presented.
As of September 29, 2018 and December 30, 2017, the Company also had approximately $22 million and $18 million, respectively, of investments in mutual funds held in a Rabbi trust established for the Company’s deferred compensation plan, which were included in Other assets on the Company’s condensed consolidated balance sheets. These mutual funds 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.
As of both September 29, 2018 and December 30, 2017, the Company had the carrying value of approximately $3 million in cost method investments.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis. The Company carries its financial instruments at fair value with the exception of its 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 at fair value are as follows:
 
September 29, 2018
 
December 30, 2017
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(In millions)
Short-term debt
$
136

 
$
137

 
$
70

 
$
70

Long-term debt, net(1)
$
1,167

 
$
3,830

 
$
1,324

 
$
2,103


(1)
Carrying amounts of long-term debt are net of unamortized debt issuance costs of $17 million as of September 29, 2018 and $19 million as of December 30, 2017, and net of unamortized debt discount associated with the 2.125% Notes of $268 million as of September 29, 2018 and $286 million as of December 30, 2017.
The Company’s long-term debt is classified within Level 2. The fair value of the debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of the Company’s accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing payment terms.

20


Hedging Transactions and Derivative Financial Instruments
Cash Flow Hedges and Foreign Currency Forward Contracts not Designated as Hedges
The following table shows the amount of gains (losses) included in accumulated other comprehensive income (loss), the amount of gains (losses) reclassified from accumulated other comprehensive income (loss) and included in earnings related to foreign currency forward contracts designated as cash flow hedges and the amount of gains (losses) included in other income (expense), net, related to contracts not designated as hedging instruments which was allocated in the consolidated statements of operations:    
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In millions)
Foreign Currency Forward Contracts - gains (losses)
 
 
 
 
 
 
 
Contracts designated as cash flow hedging instruments
 
 
 
 
 
 
 
Other comprehensive income (loss)
$

 
$
1

 
$
(16
)
 
$
8

Research and development
(4
)
 
3

 

 
4

Marketing, general and administrative
(1
)
 
1

 

 
1

Contracts not designated as hedging instruments
 
 
 
 
 
 
 
Other income (expense), net
$

 
$
(2
)
 
$
(2
)
 
$
(3
)
The Company’s foreign currency derivative contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates.
The following table shows 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 amounts were recorded in the Company’s condensed consolidated balance sheets as follows:
 
September 29,
2018
 
December 30,
2017
 
(In millions)
Foreign Currency Forward Contracts - gains (losses)
 
 
 
Contracts designated as cash flow hedging instruments
$
(10
)
 
$
7

For the foreign currency contracts designated as cash flow hedges, the ineffective portions of the hedging relationship and the amounts excluded from the assessment of hedge effectiveness were immaterial.
As of September 29, 2018 and December 30, 2017, the notional values of the Company’s outstanding foreign currency forward contracts were $326 million and $300 million, respectively. All the contracts mature within 12 months, and, upon maturity, the amounts recorded in Accumulated other comprehensive income (loss) are expected to 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.
NOTE 9. Income Taxes
In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Reform Act. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a modified territorial tax system and imposing a transition tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. ASC 740: Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. During the nine months ended September 29, 2018, the Company did not recognize any adjustment to the provisional amounts recorded as of December 30, 2017. The Company will continue to assess the Tax Reform Act’s impact for the rest of 2018, including its interpretation by regulatory authorities and the courts, and will adjust its disclosures and financial presentation as necessary. Given the complexity of the Global Intangible Low-Taxed Income (GILTI) provisions, the Company is still evaluating the effects of the GILTI provisions and has not yet determined its accounting policy. As of September 29, 2018, because the Company is still evaluating the GILTI provisions and its analysis of future taxable income that is subject to GILTI, the Company has considered GILTI related to current-year operations only in its estimated annualized effective tax rate and has not provided additional GILTI on deferred items.

21



In the third quarter of 2018, the Company recorded an income tax provision of $12 million, consisting primarily of $5 million for federal base erosion and anti-abuse tax, which is a new tax under the Tax Reform Act, and $7 million for withholding taxes applicable to IP-related revenue from foreign locations.
For the nine months ended September 29, 2018, the Company recorded an income tax provision of $26 million, consisting primarily of $15 million for federal base erosion and anti-abuse tax, $7 million for withholding taxes applicable to IP-related revenue from foreign locations, and $4 million of foreign taxes in profitable locations.
In the third quarter of 2017, the Company recorded an income tax provision of $22 million, consisting primarily of withholding taxes applicable to IP-related revenue from foreign locations.
For the nine months ended September 30, 2017, the Company recorded an income tax provision of $30 million, consisting primarily of withholding taxes applicable to IP-related revenue and licensing gain from foreign locations.
As of September 29, 2018, substantially all of the Company’s U.S. and Canadian deferred tax assets, net of deferred tax liabilities, continue to be subject to a valuation allowance. The realization of these assets is dependent on substantial future taxable income which, as of September 29, 2018, in management’s estimate, is not more likely than not to be achieved.
The Company’s total gross unrecognized tax benefits were $51 million as of September 29, 2018. 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. 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 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 two reportable segments:
the Computing and Graphics segment, which primarily includes desktop and notebook processors and chipsets, discrete and integrated graphics processing units (GPUs), professional GPUs. The Company also licenses portions of its IP portfolio; and

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. The Company also licenses 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 also includes employee stock-based compensation expense.
The following table provides a summary of net revenue and operating income by segment: 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In millions)
Net revenue:
 
 
 
 
 
 
 
Computing and Graphics
$
938

 
$
835

 
$
3,139

 
$
2,069

Enterprise, Embedded and Semi-Custom
715

 
749

 
1,917

 
1,844

Total net revenue
$
1,653

 
$
1,584

 
$
5,056

 
$
3,913

Operating income (loss):
 
 
 
 
 
 
 
Computing and Graphics
$
100

 
$
73

 
$
355

 
$
59

Enterprise, Embedded and Semi-Custom
86

 
74

 
169

 
145

All Other (1)
(36
)
 
(28
)
 
(101
)
 
(75
)
Total operating income
$
150

 
$
119

 
$
423

 
$
129

(1) All Other operating loss is related to stock-based compensation expense for the three and nine months ended September 29, 2018 and September 30, 2017.

22



NOTE 11. Stock-Based Incentive Compensation Plans
Stock Options
During the three and nine months ended September 29, 2018, the Company granted 1.0 million and 1.1 million shares of employee stock options, respectively, with weighted average grant date fair value per share of $8.08 and $7.62, respectively. During the three and nine months ended September 30, 2017, the Company granted 0.9 million shares of employee stock options with weighted average grant date fair value per share of $5.46.
Restricted Stock Units
During the three and nine months ended September 29, 2018, the Company granted 8.8 million and 12.0 million shares of restricted stock units, respectively, including 0.8 million and 1.0 million performance-based restricted stock units (PRSUs), respectively, with market conditions, with weighted average grant date fair value per share of $19.81 and $17.83, respectively. During the three and nine months ended September 30, 2017, the Company granted 8.3 million and 10.4 million shares of restricted stock units, respectively, including 0.8 million PRSUs with market conditions for both periods, with weighted average grant date fair value per share of $13.24 and $13.03, respectively.
Performance-based Restricted Stock Units with Market Conditions
From time to time, the Company grants restricted stock units with both a market condition and a service condition (market-based restricted stock units) to its senior executives. The number of shares earned are dependent upon achievement of the market conditions and vest at the end of the performance period, subject to the requisite service conditions.
During the three and nine months ended September 29, 2018, the Company granted 0.8 million and 1.0 million market-based restricted stock units, respectively, with weighted average grant date fair value per share of $23.97 and $21.67, respectively.
During the three and nine months ended September 30, 2017, the Company granted 0.8 million market-based restricted stock units with weighted average grant date fair value per share of $17.18.
Employee Stock Purchase Plan (ESPP)
During the nine months ended September 29, 2018, 2.2 million shares of common stock were purchased under the ESPP at a purchase price of $9.57, resulting in cash proceeds of $21 million. The fair value of stock purchase rights granted under the ESPP during the second quarter of 2018 was $3.42 per share.
NOTE 12. Commitments and Contingencies
Warranties and Indemnities
The Company generally warrants that its products sold to its customers will conform to the Company’s approved specifications and be free from defects in material and workmanship under normal use and service for one year. Subject to certain exceptions, the Company also offers a three-year limited warranty to end users for only those central processing unit (CPU) and 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 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In millions)
Beginning balance
$
12

 
$
10

 
$
12

 
$
12

New warranties issued
7

 
7

 
20

 
18

Settlements
(7
)
 
(7
)
 
(21
)
 
(16
)
Changes in liability for pre-existing warranties, including expirations

 
1

 
1

 
(3
)
Ending balance
$
12

 
$
11

 
$
12

 
$
11


23



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 with the Company with respect to certain matters. In these limited matters, the Company has agreed to hold certain third parties harmless against specific types of claims or losses, such as those arising from a breach of representations or covenants, third-party claims that the Company’s products, when used for their intended purpose(s) 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 by the Company under these obligations have not been material.
Contingencies
Shareholder Derivative Lawsuits (Wessels, Hamilton and Ha)
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 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 Northern District of California.
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 the Company (as a nominal defendant only) and certain of its 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 the Company’s 2015 proxy. The case was transferred to the judge handling the Hamilton Lawsuit and is now Case No. 4:15-cv-04485. The Wessels, Hamilton and Ha shareholder derivative lawsuits were stayed pending resolution of a class action lawsuit captioned Hatamian v. AMD, et al., C.A. No. 3:14-cv-00226 filed against the Company in the United States District Court for the Northern District of California (the Hatamian Lawsuit). The Hatamian Lawsuit asserted claims against the Company and certain of its officers for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and SEC Rule 10b-5 concerning certain statements regarding our 32nm technology and “Llano” products. On October 9, 2017, the parties signed a definitive settlement agreement resolving the Hatamian Lawsuit and submitted it to the Court for approval. Under the terms of this agreement, the settlement was funded entirely by certain of AMD’s insurance carriers and the defendants continued to deny any liability or wrongdoing. On March 2, 2018, the court approved the settlement and entered a final judgment in the Hatamian lawsuit.
On January 30, 2018, the Wessels and Hamilton plaintiffs amended their complaints. On February 2, 2018, the Ha plaintiff also filed an amended complaint. On February 22, 2018, the Company filed motions to dismiss the Hamilton and Ha plaintiffs’ amended complaints. On April 2, 2018, we filed a demurrer seeking to dismiss the Wessels amended complaint. On July 23, 2018, the Santa Clara Superior Court sustained the Company's demurrer in the Wessels case, dismissing all claims in that matter with prejudice. The Wessels plaintiff filed a Notice of Appeal on September 27, 2018. On October 4, 2018, the Court issued an order dismissing the Hamilton and Ha amended complaints. The Hamilton plaintiffs filed a Notice of Appeal on October 8, 2018.
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.
Kim Securities Litigation
On January 16, 2018, a putative class action lawsuit captioned Kim et al. v. AMD, et al., Case No. 3:18-cv-00321 was filed against the Company in the United States District Court for the Northern District of California. The complaint purports to assert claims against the Company and certain individual officers for alleged violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 of the Exchange Act. The plaintiff seeks to represent a proposed class of all persons who purchased or otherwise acquired the Company’s common stock during the period February 21, 2017 through January 11, 2018. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual officers regarding a security vulnerability (Spectre), which statements and omissions, the plaintiff claims, allegedly caused the Company’s common stock price to be artificially inflated during the purported class period. The complaint seeks unspecified compensatory damages, attorneys’ fees and costs. On August 3, 2018, plaintiffs filed an amended complaint with similar allegations

24



and shortening the class period to June 29, 2017 through January 11, 2018. The Company filed a motion to dismiss plaintiffs’ claims on September 25, 2018.
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.
Hauck Litigation
Since January 19, 2018, three putative class action complaints have been filed against the Company in the United States District Court for the Northern District of California: (1) Diana Hauck et al. v. AMD, Inc., Case No. 5:18-cv-0047, filed on January 19, 2018; (2) Brian Speck et al. v. AMD, Inc., Case No. 5:18-cv-0744, filed on February 4, 2018; and (3) Nathan Barnes and Jonathan Caskey-Medina, et al. v. AMD, Inc., Case No. 5:18-cv-00883, filed on February 9, 2018. On April 9, 2018, the court consolidated these cases and ordered that Diana Hauck et al. v. AMD, Inc. serve as the lead case. On June 13, 2018, six plaintiffs (from California, Louisiana, Florida, and Massachusetts) filed a consolidated amended complaint alleging that the Company failed to disclose its processors’ alleged vulnerability to Spectre. Plaintiffs further allege that the Company's processors cannot perform at its advertised processing speeds without exposing consumers to Spectre, and that any “patches” to remedy this security vulnerability will result in degradation of processor performance. The plaintiffs seek damages under several causes of action on behalf of a nationwide class and four state subclasses (California, Florida, Massachusetts, Louisiana) of consumers who purchased AMD processors and/or devices containing AMD processors. The plaintiffs also seek attorneys’ fees, equitable relief, and restitution. Pursuant to the court's order directing parties to litigate only eight of the causes of action in the consolidated amended complaint initially, the Company filed a motion to dismiss on July 13, 2018. On October 29, 2018, after the plaintiffs voluntarily dismissed one of their claims, the court granted the Company's motion and dismissed six causes of action with leave to amend. The plaintiffs have until November 28, 2018 to file another amended complaint.
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.
Zeng Shareholder Derivative Lawsuit
On March 8, 2018, a purported shareholder derivative lawsuit captioned Zeng v. Su, et al., Case No. 18CIV01192 was filed against the Company (as a nominal defendant only) and certain of the Company’s directors and officers in the San Mateo 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, unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets. 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 Spectre, 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 26, 2018, the lawsuit was transferred to Santa Clara County and assigned a new case number, 18CV327692. On August 14, 2018, the Court stayed this lawsuit pending a decision on the motion to dismiss in Kim et al. v. AMD, et al., Case No. 3:18-cv-00321 filed against the Company in the United States District Court for the Northern District of California. 
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.
In re Advanced Micro Devices, Inc. Shareholder Derivative Lawsuit
Two purported shareholder derivative lawsuits were filed against the Company (as a nominal defendant only) and certain of its directors and officers in the United States District Court, Northern District of California: (1) Jacqueline Dolby, derivatively on behalf of AMD, Inc. v. Su et al., Case No. 5:18-cv-03575, filed on June 14, 2018; and (2) Gusinsky Trust, derivatively on behalf of AMD, Inc. v. Su et al., Case No. 5:18-cv-03811, filed on June 26, 2018. The complaints purport to assert claims against the Company and certain individual directors and officers for violation of Section 14(a) of the Exchange Act and SEC Rule 14a-9, breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaints seek damages purportedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual directors and officers regarding Spectre. The plaintiffs allege that these statements and omissions operated to artificially inflate the price paid for the Company's common stock during the period. On July 12, 2018, the court consolidated the Dolby and Gusinsky Trust shareholder derivative lawsuits under the caption In re Advanced Micro Devices, Inc. Shareholder Derivative Litigation. On August 10, 2018, the Court stayed this lawsuit pending a decision on the motion to dismiss in Kim et al. v. AMD, et al., Case No. 3:18-cv-00321 filed against the Company in the United States District Court for the Northern District of California. 
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.

25



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)
The tables below summarize the changes in accumulated other comprehensive income (loss) by component:
 
Three Months Ended
 
September 29,
2018
 
September 30,
2017
 
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
$

 
$
(10
)
 
$
(10
)
 
$
(1
)
 
$
1

 
$

Unrealized gains (losses) arising during the period

 
(5
)
 
(5
)
 

 
6

 
6

Reclassification adjustment for (gains) losses realized and included in net income (loss)

 
5

 
5

 

 
(4
)
 
(4
)
Tax effect

 

 

 

 

 

Total other comprehensive income (loss)

 

 

 

 
2

 
2

Ending balance
$

 
$
(10
)
 
$
(10
)
 
$
(1
)
 
$
3

 
$
2


 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
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
$

 
$
6

 
$
6

 
$
(1
)
 
$
(4
)
 
$
(5
)
Unrealized gains (losses) arising during the period

 
(16
)
 
(16
)
 

 
14

 
14

Reclassification adjustment for gains realized and included in net income (loss)

 

 

 

 
(5
)
 
(5
)
Tax effect

 

 

 

 
(2
)
 
(2
)
Total other comprehensive income (loss)

 
(16
)
 
(16
)
 

 
7

 
7

Ending balance
$

 
$
(10
)
 
$
(10
)
 
$
(1
)
 
$
3

 
$
2




26



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,” “designed,” 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’s consolidated financial statements; demand for AMD’s products; the growth, change and competitive landscape of the markets in which AMD participates; the potential impact of the new revenue recognition accounting standards, including expected impact on seasonality trends; 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 its 2018 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; AMD’s reliance on the JVs for ATMP services; that other unrecognized tax benefits will not materially change in the next 12 months; that AMD’s cash and cash equivalents balances together with the availability under that certain secured revolving line of credit (Secured Revolving Line of Credit) made available to AMD and certain of its subsidiaries under the Amended and Restated Loan 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’s expectation that based on the information presently known to management, the potential liability related to AMD’s current litigation will not have a material adverse effect on its financial condition, cash flows or results of operations; anticipated increase in costs related to IT network security; and a small number of customers will continue to account for a substantial part of AMD’s revenue in the future. Material factors that could cause actual results 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; AMD’s products may be subject to security vulnerabilities that could have a material adverse effect on AMD; 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; global economic uncertainty may adversely impact AMD’s business and operating results; 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 AMD’s ability to operate its business; the markets in which AMD’s products are sold are highly competitive; AMD’s worldwide operations are subject to political, legal and economic risks and natural disasters, which could have a material adverse effect on it; 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

27



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 add-in-board (AIB) partners subjects it to certain risks; AMD may incur future impairments of goodwill and technology license purchases; 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 required by the applicable indentures and its Secured Revolving Line 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 severe downturns that have materially adversely affected, and may continue to materially adversely affect its 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; 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’s stock price is subject to volatility; 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.
For a discussion of factors that could cause actual results to differ materially from the forward-looking statements, see “Part II, Item 1A—Risk Factors” beginning on page 40 and “Financial Condition” beginning on page 34 and other risks and uncertainties 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.

28


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 and Xbox One are trademarks or registered trademarks of Microsoft Corporation in the United States and other jurisdictions. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners. “Vega” and “Zen” are codenames for AMD architectures, and are not product names.
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 30, 2017 and December 31, 2016, and for each of the three years in the period ended December 30, 2017 as filed in our Annual Report on Form 10-K for the year ended December 30, 2017.
Overview
We are a global semiconductor company with facilities around the world. Within the global semiconductor industry, we offer primarily:
x86 microprocessors, as standalone devices or as incorporated into an accelerated processing unit (APU), chipsets, discrete and integrated graphics processing units (GPUs), and professional GPUs; and

server and embedded processors, semi-custom System-on-Chip (SoC) products and technology for game consoles.

We also 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 three and nine months ended September 29, 2018 compared to the three and nine months ended September 30, 2017, an analysis of changes in our financial condition and a discussion of our contractual obligations.
During the third quarter of 2018, customer demand for our new products was strong. We expanded our desktop processor offerings in the third quarter of 2018 by introducing our first "Zen" core-based AMD Athlon™ and AMD PRO desktop processors and bringing "Zen" and "Vega" architectures to the entry-level consumer and commercial desktop market. We also launched our second generation AMD Ryzen Threadripper™ processors, including a new WX series for professional computing and an improved X series for enthusiasts and gamers.
Net revenue in the third quarter of 2018 was $1.65 billion, a 4% increase compared to the third quarter of 2017. The year-over-year increase was primarily due to a 12% increase in Computing and Graphics net revenue, partially offset by a 5% decrease in Enterprise, Embedded and Semi-Custom net revenue. Net revenue in the third quarter of 2018 and 2017 included IP-related revenue, of which $86 million in the third quarter of 2018 was related to our THATIC joint venture (See Note 5 of Notes to Condensed Consolidated Financial Statements). The increase in the Computing and Graphics segment net revenue was primarily due to higher sales of our Ryzen™ desktop and mobile processors, partially offset by lower sales of Radeon™ products caused primarily by higher channel inventory and the decline in blockchain-related demand. The decrease in the Enterprise, Embedded and Semi-Custom segment net revenue was primarily due to lower semi-custom revenue and IP-related revenue, partially offset by higher EPYC™ server products revenue. Our operating income for the third quarter of 2018 was $150 million compared to an operating income of $119 million in the third quarter of 2017. Our net income for the third quarter of 2018 was $102 million compared to a net income of $61 million in the third quarter of 2017.
Cash, cash equivalents and marketable securities as of the end of the third quarter of 2018 were $1.06 billion, compared to $1.18 billion as of the end of the fourth quarter of 2017.
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 year to year and quarter to quarter, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements.

29


Results of Operations
Management, including the Chief Operating Decision Maker, who is our Chief Executive Officer, reviews and assesses our 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. We have the following two reportable segments:
the Computing and Graphics segment, which primarily includes desktop and notebook processors and chipsets, GPUs and professional GPUs. We also license 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 and technology for game consoles. We also license portions of 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 either of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. This category also includes employee stock-based compensation expense.
We use a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters ended September 29, 2018 and September 30, 2017 each consisted of 13 weeks. The nine months ended September 29, 2018 and September 30, 2017 each consisted of 39 weeks.
Our operating results tend to vary seasonally. For example, historically, first quarter PC product sales are generally lower than fourth quarter sales and with respect to our semi-custom SoC products for game consoles, our sales patterns generally follow the seasonal trends of consumer business with sales in the first half of the year being lower than sales in the second half of the year. Following the adoption of the revenue recognition standard (ASC 606) effective in the first quarter of 2018, we expect our seasonality trends to be affected as we now recognize certain revenue earlier than prior to the adoption of ASC 606. For example, we expect a portion of our semi-custom SoC product revenue to shift from the second half of the year to the first half of the year.
The following table provides a summary of net revenue and operating income by segment:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
 
(In millions)
Net revenue:
 
 
 
 
 
 
 
 
Computing and Graphics
 
$
938

 
$
835

 
$
3,139

 
$
2,069

Enterprise, Embedded and Semi-Custom
 
715

 
749

 
1,917

 
1,844

Total net revenue
 
$
1,653

 
$
1,584

 
$
5,056

 
$
3,913

Operating income (loss):
 
 
 
 
 
 
 
 
Computing and Graphics
 
$
100

 
$
73

 
$
355

 
$
59

Enterprise, Embedded and Semi-Custom
 
86

 
74

 
169

 
145

All Other
 
(36
)
 
(28
)
 
(101
)
 
(75
)
Total operating income
 
$
150

 
$
119

 
$
423

 
$
129

Computing and Graphics
Computing and Graphics net revenue of $938 million in the third quarter of 2018 increased by 12%, compared to net revenue of $835 million in the third quarter of 2017, primarily as a result of a 20% increase in unit shipments, partially offset by a 10% decrease in average selling price. The increase in unit shipments was primarily attributable to higher demand for our Ryzen desktop and mobile products, partially offset by lower demand for our Radeon products caused primarily by higher channel inventory and the decline in blockchain-related demand. The decrease in average selling price was primarily attributable to a decrease in average selling price of our Radeon products, partially offset by an increase in average selling price of our Ryzen desktop and mobile processors. In addition, there was higher IP-related revenue in the third quarter of 2018 compared to the third quarter of 2017.
Computing and Graphics net revenue of $3.1 billion in the nine months ended September 29, 2018 increased by 52%, compared to net revenue of $2.1 billion in the nine months ended September 30, 2017, primarily as a result of a 29% increase in average selling price and an 18% increase in unit shipments. The increase in average selling price was primarily due to an increase in average selling price of our Radeon products and mobile processors, driven by Ryzen. The increase in unit shipments was primarily attributable to higher demand for our Ryzen and Radeon products as customers continued to adopt our new products. In addition, there was higher IP-related revenue in the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017.
Computing and Graphics operating income was $100 million in the third quarter of 2018, compared to an operating income of $73 million in the third quarter of 2017. The improvement in operating income was primarily driven by richer microprocessors mix and IP-related revenue, partially offset by lower sales of GPUs and higher operating expenses. Operating expenses increased for the reasons set forth under “Expenses” below.
Computing and Graphics operating income was $355 million in the nine months ended September 29, 2018, compared to an operating income of $59 million in the nine months ended September 30, 2017. The improvement in operating income was primarily driven by higher demand for our Radeon and Ryzen products as customers continued to adopt our new products, partially offset by a $173 million increase in operating expenses. Operating expenses increased for the reasons set forth under “Expenses” below.
Enterprise, Embedded and Semi-Custom
Enterprise, Embedded and Semi-Custom net revenue of $715 million in the third quarter of 2018 decreased by 5%, compared to net revenue of $749 million in the third quarter of 2017, primarily as a result of lower semi-custom product revenue and IP-related revenue, partially offset by higher sales of our EPYC server products.
Enterprise, Embedded and Semi-Custom net revenue of $1.9 billion in the nine months ended September 29, 2018 increased by 4%, compared to net revenue of $1.8 billion in the nine months ended September 30, 2017. The increase in net revenue was primarily due to higher sales of our EPYC server products, partially offset by lower semi-custom revenue.
Enterprise, Embedded and Semi-Custom operating income was $86 million in the third quarter of 2018 compared to operating income of $74 million in the third quarter of 2017. The improvement in operating income was due primarily to richer server and semi-custom product mix, partially offset by lower IP-related revenue. Operating expenses remained the same for the reasons set forth under “Expenses” below.
Enterprise, Embedded and Semi-Custom operating income was $169 million in the nine months ended September 29, 2018 compared to operating income of $145 million in the nine months ended September 30, 2017. The improvement in operating income was due primarily to richer server and semi-custom product mix, partially offset by a $33 million increase in operating expenses and lower IP-related revenue. In the nine months ended September 30, 2017, operating income also included a licensing gain of $52 million. Operating expenses increased for the reasons set forth under “Expenses” below.
All Other
All Other operating loss is primarily related to stock-based compensation expense. All Other operating loss of $36 million in the third quarter of 2018 increased by $8 million, compared to $28 million in the third quarter of 2017. All Other operating loss of $101 million in the nine months ended September 29, 2018 increased by $26 million, compared to $75 million in the nine months ended September 30, 2017. The increases were primarily due to a higher weighted average grant date fair value of unvested restricted stock units in the three and nine months ended September 29, 2018, compared to the three and nine months ended September 30, 2017. The increases were also driven by expenses related to our Employee Stock Purchase Plan (ESPP), which commenced in the fourth quarter of 2017.
International Sales
International sales as a percentage of net revenue were 74% in the third quarter of 2018 and 69% in the third quarter of 2017. The increase in international sales as a percentage of net revenue in the third quarter of 2018 compared to the third quarter of 2017 was primarily driven by a lower proportion of revenue from domestic sales of our products within Enterprise, Embedded and Semi-custom segment.
International sales as a percentage of net revenue were 79% in the nine months ended September 29, 2018 and 74% in the nine months ended September 30, 2017. The increase in international sales as a percentage of net revenue in the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017 was primarily driven by a higher proportion of revenue from China and Taiwan related to sales of our products within the Computing and Graphics segment.
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.

30



Comparison of Gross Margin, Expenses, Interest Expense, Other Income (Expense), Net, Income Taxes and Equity Loss in investee
The following is a summary of certain condensed consolidated statement of operations data for the periods indicated: 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
 
(In millions except for percentages)
Cost of sales
 
$
992

 
$
1,013

 
$
3,146

 
$
2,578

Gross margin
 
661

 
571

 
1,910

 
1,335

Gross margin percentage
 
40
%
 
36
%
 
38
%
 
34
%
Research and development
 
363

 
320

 
1,063

 
876

Marketing, general and administrative
 
148

 
132

 
424

 
382

Licensing gain
 

 

 

 
(52
)
Interest expense
 
(30
)
 
(31
)
 
(92
)
 
(95
)
Other expense, net
 
(6
)
 
(3
)
 
(4
)
 
(11
)
Provision for income taxes
 
12

 
22

 
26

 
30

Equity loss in investee
 
$

 
$
(2
)
 
$
(2
)
 
$
(7
)
Gross Margin
Gross margin as a percentage of net revenue was 40% in the third quarter of 2018, compared to 36% in the third quarter of 2017. The improvement in gross margin was primarily driven by the ramp of new products with higher gross margin than the corporate average.
Gross margin as a percentage of net revenue was 38% in the nine months ended September 29, 2018, compared to 34% in the nine months ended September 30, 2017. The improvement in gross margin was primarily driven by the ramp of new products with higher gross margin than the corporate average.
Expenses
Research and Development Expenses
Research and development expenses of $363 million in the third quarter of 2018 increased by $43 million, or 13%, compared to $320 million in the third quarter of 2017, primarily due to an increase in product engineering and design costs in our Computing and Graphics segment.
Research and development expenses of $1,063 million in the nine months ended September 29, 2018, increased by $187 million, or 21%, compared to $876 million in the nine months ended September 30, 2017, primarily due to an increase in product engineering and design costs in our Computing and Graphics segment, higher employee incentives in both business segments primarily driven by our improved financial performance and higher stock-based compensation expense.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses of $148 million in the third quarter of 2018 increased by $16 million, or 12%, compared to $132 million in the third quarter of 2017, primarily due to an increase in marketing programs and employee incentives driven by our improved financial performance.
Marketing, general and administrative expenses of $424 million in the nine months ended September 29, 2018, increased by $42 million, or 11%, compared to $382 million in the nine months ended September 30, 2017, primarily due to an increase in marketing programs and employee incentives driven by our improved financial performance.
Interest Expense
Interest expense in the third quarter of 2018 was $30 million, compared to $31 million in the third quarter of 2017. The decrease was primarily due to lower debt balances.
Interest expense in the nine months ended September 29, 2018 was $92 million, compared to $95 million in the nine months ended September 30, 2017. The decrease was primarily due to lower debt balances.

31



Other Expense, Net
Other expense, net of $6 million in the third quarter of 2018 increased by $3 million, compared to $3 million of Other expense, net in the third quarter of 2017. The increase was primarily due to a $4 million increase in loss on extinguishment of debt.
Other expense, net of $4 million in the nine months ended September 29, 2018 decreased by $7 million, compared to $11 million of Other expense, net in the nine months ended September 30, 2017. The decrease was primarily due to a $3 million investment impairment charge related to certain of our investments incurred and a $2 million decrease in loss on extinguishment of debt.
Provision For Income Taxes
In the third quarter of 2018, we recorded an income tax provision of $12 million, consisting primarily of $5 million for federal base erosion and anti-abuse tax, which is a new tax under the the Tax Cuts and Job Act of 2017, and $7 million for withholding taxes applicable to IP-related revenue from foreign locations.
For the nine months ended September 29, 2018, we recorded an income tax provision of $26 million, consisting primarily of $15 million for federal base erosion and anti-abuse tax, $7 million for withholding taxes applicable to IP-related revenue from foreign locations, and $4 million of foreign taxes in profitable locations.
In the third quarter of 2017, we recorded an income tax provision of $22 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 $30 million, consisting primarily of withholding taxes applicable to IP-related revenue and licensing gains from foreign locations.


32



FINANCIAL CONDITION
Liquidity and Capital Resources    
As of September 29, 2018, our cash, cash equivalents and marketable securities were $1.06 billion, compared to $1.18 billion as of December 30, 2017. The percentage of cash, cash equivalents and marketable securities held domestically was 96% as of September 29, 2018, compared to 95% at December 30, 2017. Our operating, investing and financing activities during the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017 are as described below:
 
 
Nine Months Ended
 
 
September 29,
2018
 
September 30,
2017
 
 
(In millions )
Net cash provided by (used in):
 
 
 
 
Operating activities
 
$
(36
)
 
$
(312
)
Investing activities
 
(132
)
 
(71
)
Financing activities
 
28

 
1

Our aggregate principal debt obligations were $1.6 billion and $1.7 billion as of September 29, 2018 and December 30, 2017, respectively.
We believe our cash and cash equivalents balance along with our Secured Revolving Line of Credit will be sufficient to fund operations, including capital expenditures, over the next 12 months. 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
Net cash used in operating activities was $36 million in the nine months ended September 29, 2018 compared to $312 million in the nine months ended September 30, 2017. The decrease in net cash used in operating activities was primarily due to changes in working capital, largely driven by higher cash collections from increased revenue, partially offset by higher labor costs and timing of accounts payable payments.
Investing Activities
Net cash used in investing activities was $132 million in the nine months ended September 29, 2018, which consisted of $122 million for purchases of property and equipment and $45 million for purchases of available-for-sale debt securities, partially offset by $35 million for maturities of available-for-sale debt securities.
Net cash used in investing activities was $71 million in the nine months ended September 30, 2017, which consisted primarily of $69 million for purchases of property, plant and equipment.
Financing Activities
Net cash provided by financing activities was $28 million in the nine months ended September 29, 2018, which primarily consisted of a cash inflow of $44 million from the issuance of common stock under our stock-based compensation equity plans, partially offset by a cash outflow of $15 million for the repurchase of our 6.75% Senior Notes due 2019 (6.75% Notes) and 7.00% Senior Notes due 2024 (7.00% Notes).
Net cash provided by financing activities was $1 million in the nine months ended September 30, 2017, which consisted of a cash inflow of net proceeds from borrowings pursuant to our Secured Revolving Line of Credit of $70 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 our long-term debt.

33


Contractual Obligations
The following table summarizes our consolidated principal contractual obligations as of September 29, 2018, and is supplemented by the discussion following the table:
 
Payments due by period as of September 29, 2018
(In millions)
Total
 
Remainder of 2018
 
2019
 
2020
 
2021
 
2022
 
2023 and
thereafter
6.75% Notes
$
66

 
$

 
$
66

 
$

 
$

 
$

 
$

7.50% Notes
337

 

 

 

 

 
337

 

7.00% Notes
310

 

 

 

 

 

 
310

2.125% Notes
805

 

 

 

 

 

 
805

Secured Revolving Line of Credit
70

 
70

 

 

 

 

 

Other long-term liabilities (1)
164

 
8

 
47

 
42

 
34

 
30

 
3

Aggregate interest obligation (2)
409

 
35

 
68

 
65

 
65

 
64

 
112

Operating leases
337

 
14

 
54

 
48

 
43

 
40

 
138

Purchase obligations (3)
190

 
91

 
59

 
25

 
12

 
3

 

Obligations to GF (4)
2,452

 
571

 
1,101

 
780

 

 

 

Total contractual obligations (5)
$
5,140

 
$
789

 
$
1,395

 
$
960

 
$
154

 
$
474

 
$
1,368


(1) 
Amounts largely represent future fixed and non-cancellable cash payments associated with software technology and licenses and IP licenses, including the payments due within the next 12 months.
(2)