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Item 7. Management’s Discussion and Analysis

2022-02-03 compared with 2021-01-29 · 82 added, 123 removed, 131 unchanged (61% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

The following discussion should be read in conjunction with the consolidated financial statements as of December 26, 2020 and December 28, 2019 and for each of the three years in the period ended December 26, 2020 and related notes, which are included in this Annual Report on Form 10-K as well as with the other sections of this Annual Report on Form 10-K, including “Part I, Item 1:

Business,” “Part II, Item 6:

Selected Financial Data” and “Part II, Item 8:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements as of December 25, 2021 and December 26, 2020 and for each of the three years in the period ended December 25, 2021 and related notes, which are included in this Annual Report on Form 10-K as well as with the other sections of this Annual Report on Form 10-K, “Part II, Item 8:

Financial Statements and Supplementary Data.”

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 2020 compared to 2019, an analysis of changes in our financial condition and a discussion of our contractual obligations and off-balance sheet arrangements.

and its wholly-owned subsidiaries (collectively, “us,” “our” or “AMD”), including a discussion of our results of operations for 2021 compared to 2020, an analysis of changes in our financial condition and a discussion of our off-balance sheet arrangements.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 26, 2020.

During 2020, we continued to build on our technical, operational and financial foundation to drive our long-term growth strategy.

We delivered strong financial results and further extended our industry-leading product portfolio despite the backdrop of the COVID-19 pandemic.

Our leadership portfolio of high-performance products, robust customer demand, and consistent execution helped drive strong financial results in 2021.

Net revenue for 2021 was $16.4 billion, an increase of 68% compared to 2020 net revenue of $9.8 billion.

Gross margin, as a percentage of net revenue for 2021, was 48%, compared to 45% in 2020.

Our operating income for 2020 improved to $1.4 billion compared to operating income of $631 million for 2019.

Our net income for 2020 improved to $2.5 billion compared to $341 million in the prior year.

We recognized a $1.3 billion income tax benefit upon the release of a portion of the valuation allowance on deferred tax assets.

We made significant progress towards improving our balance sheet in 2020.

Our operating income for 2021 improved to $3.6 billion compared to operating income of $1.4 billion for 2020.

Our net income for 2021 improved to $3.2 billion compared to $2.5 billion in the prior year.

Cash, cash equivalents and short-term investments as of December 25, 2021 were $3.6 billion, compared to $2.3 billion at the end of 2020.

The aggregate principal amount of total debt as of December 25, 2021 was $313 million, compared to $338 million as of December 26, 2020.

During 2020, we consistently executed our product roadmap and launched multiple products in leading-edge manufacturing technologies.

We introduced a number of 7 nanometer (nm) products during the year, including new additions to our 3rd Gen AMD Ryzen™ desktop processor family, the AMD Ryzen 3 3100 and AMD Ryzen 3 3300X for the mainstream market, and the AMD Ryzen 9 3900XT, AMD Ryzen 7 3800XT and AMD Ryzen 5 3600XT processors for the enthusiast market.

In July 2020, we introduced the AMD Ryzen Threadripper™ PRO Processor family designed for professional workstations from OEMs to system integrators and AMD Ryzen 4000 Series desktop processors with Radeon™ graphics for consumers, gamers, streamers and creators.

We also introduced AMD Athlon™ 3000 Series desktop processors using the same Zen core architecture and built-in Radeon graphics as the AMD Ryzen desktop processor family.

Also, the AMD Ryzen PRO 4000 series and AMD Athlon PRO 3000 series desktop processors were introduced for the commercial market.

In October 2020, we introduced the AMD Ryzen 5000 Series desktop processor family powered by “Zen 3” core architecture.

We also expanded our notebook products in 2020.

In May 2020, we announced the global availability of the AMD Ryzen™ PRO 4000 Series Mobile family for commercial notebooks built with enterprise-grade AMD PRO technologies, which deliver a set of security and manageability features for Enterprise IT deployments.

Also, we announced the AMD Ryzen 3000 C-Series mobile processors and the AMD Athlon 3000 C-Series mobile processors for Chromebook platforms designed for multi-tasking and content creation in distance learning and remote working.

With respect to our graphics products, we expanded our professional offerings with the AMD Radeon™ Pro VII workstation graphics card designed for broadcast and engineering professionals.

In August 2020, we announced the availability of the new AMD Radeon Pro 5000 series GPUs for the updated 27-inch iMac bringing a wide variety of graphically intensive applications and workloads to consumer and professional users.

We also introduced the AMD Radeon RX 6000 Series graphics cards built on AMD RDNA™ 2 gaming architecture and designed for enthusiast-class PC gaming.

In November 2020, we introduced our data center graphics processor, the AMD Instinct™ MI100 GPU accelerator, the first accelerator to use new AMD CDNA architecture dedicated to HPC workloads.

We expanded our EPYC server family during the year.

In April 2020, we announced the extension of the 2nd Gen AMD EPYC processor family with three new processors:

AMD EPYC 7F32 (8 cores), AMD EPYC 7F52 (16 cores) and AMD EPYC 7F72 (24 cores).

These new processors leverage up to 500 MHz of additional base frequency and large amounts of cache.

In October 2020, we announced the AMD EPYC™ processor based Azure Dav4, Eav4,

Easv4 and Lsv2 VMs for use to improve real-time analysis on large volumes of data streaming from applications, websites and more.

We also expanded our embedded processor family with two new AMD Ryzen Embedded R1000 low-power processors that provide customers with a thermal design power (TDP) range of 6 up to 10 watts.

In November 2020, we launched the AMD Ryzen Embedded V2000 series processor built on 7 nm process technology, “Zen 2” cores and high-performance AMD Radeon graphics.

While the current COVID-19 pandemic continues to impact our business operations and practices, and we expect that it may continue to impact our business, we experienced limited financial disruption during 2020.

Although many of our offices remained open to enable critical on-site business functions in accordance with local government guidelines, most of our employees worked from home during 2020.

During the second half of 2020, the majority of our employees in China returned to work and we maintained normal business operations subject to local government health measures.

We continue to monitor and take measures to protect the health and safety of our employees, and support those employees who work from home so that they can be productive.

We monitor demand signals as we adjust our supply chain requirements based on changing customer needs and demands.

We also assess our product schedules and roadmaps to make any adjustments that may be necessary to support remote working requirements and address the geographic and market demand shifts caused by COVID-19.

We introduced a number of high-performance products in 2021.

We expanded the AMD Ryzen mobile processor family with the launch of the AMD Ryzen 5000 Series Mobile Processors with “Zen 3” core architecture designed for gamers, creators and professionals.

We also announced the AMD Ryzen PRO 5000 Series Mobile Processors powered with our “Zen 3” core architecture for business laptops.

AMD Ryzen PRO Series Mobile Processors are built to provide powerful computing experiences with security features for demanding business environments like remote working.

We also launched a number of graphics products during 2021, including the AMD Radeon RX 6700 XT graphics card built on 7 nm process technology and AMD RDNA 2 gaming architecture to deliver performance and power efficiency, as well as the AMD Radeon RX 6600 XT graphics card, designed to deliver high-frame rate, high-fidelity and highly responsive 1080p gaming experience.

For mobile graphics, we introduced the AMD Radeon RX 6000M Series Mobile Graphics designed for high-performance gaming laptops and we announced the AMD Advantage™ Design Framework to deliver best-in-class gaming experiences.

AMD Advantage systems combine AMD Radeon RX 6000M Series Mobile Graphics, AMD Radeon Software and AMD Ryzen 5000 Series Mobile Processors with AMD smart technologies.

We also introduced the AMD Instinct MI200 series accelerators based on the 2nd Gen AMD CDNA architecture, optimized for HPC and AI/ML (Artificial Intelligence/Machine Learning) workloads.

The MI200 series includes the MI250 Open Accelerator Module (OAM) form factor for purpose-built HPC/AI platforms and the MI210 PCIe form factor for mainstream server platforms.

We also introduced our AMD FidelityFX Super Resolution software for game developers to help deliver a high-quality, high-resolution gaming experience.

For professional graphics, we announced our AMD Radeon PRO W6000 series workstation graphics for professional users who have ultra-high resolution media projects, complex design and engineering simulations and advanced image and video editing applications.

We also introduced the AMD Radeon PRO W6000X series graphics for the Mac Pro, designed to power a wide variety of demanding professional applications and workloads.

For the server business, we introduced the next generation of AMD EPYC processors with the AMD EPYC 7003 Series CPUs for high-performance computing, cloud and enterprise customers.

The EPYC 7003 series processors have up to 64 Zen 3 cores per processor and per-core cache memory and also include security features through AMD Infinity Guard to help drive faster times to results and improve business outcomes.

Although the current COVID-19 pandemic continues to impact our business operations and practices, we experienced limited disruptions during 2021.

We are taking safety measures to protect our employees who are in

the office and support those employees who work from home.

We are also monitoring our operations and public health measures implemented by governmental authorities in response to the pandemic.

COVID-19 also continues to impact the global supply chain, causing disruptions to service providers, logistics and the flow and availability of supplies and products.

Despite these challenges, we took action to maintain a stable supply of materials to meet our production requirements and delivered incremental supply throughout the year.

We also experienced strong customer demand in 2021 and made strategic investments through long-term purchase commitments and prepayment arrangements in our supply chain to secure additional capacity to support future revenue growth.

For example, we amended our Wafer Supply Agreement (WSA) with GLOBALFOUNDRIES Inc.

(GF) in May 2021 (the A&R Seventh Amendment) and in December 2021 (the Amendment) to modify certain terms of the WSA applicable to wafer purchases at the 12 nm and 14 nm technology nodes from December 23, 2021 and continuing through December 31, 2025.

Under the Amendment, GF will provide a minimum annual capacity allocation to us for years 2022 through 2025 and we have corresponding annual wafer targets.

We also agreed to wafer pricing through 2025, and we are obligated to pre-pay GF certain amounts for those wafers in 2022 and 2023.

The Amendment does not affect any of the prior exclusivity commitments that were removed under the A&R Seventh Amendment.

We have full flexibility to contract with any wafer foundry with respect to all products manufactured at any technology node.

Due to our strong financial results and growing cash flow generation, in May 2021, our Board of Directors approved a stock repurchase program (Repurchase Program) to purchase up to $4 billion of our outstanding common stock in the open market.

During the twelve months ended December 25, 2021, we repurchased 16.7 million shares of our common stock under the Repurchase Program, for a total cash outlay of $1.8 billion.

As of December 25, 2021, $2.2 billion remained available for future stock repurchases under this program.

The Repurchase Program does not obligate us to acquire any common stock, has no termination date and may be suspended or discontinued at any time.

As part of our strategy to establish AMD as the industry’s high performance computing leader, we announced in October 2020 that we entered into a definitive agreement to acquire Xilinx, Inc.

in an all-stock transaction.

The transaction is currently expected to close by the end of calendar year 2021.

The completion of the transaction remains subject to certain closing conditions, including regulatory approval, and is currently expected to close in the first quarter of 2022.

We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements.

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and (iv) future taxable income exclusive of reversing temporary differences and carryforwards.

Through the end of 2020, we demonstrated consistent, continued and increasing profitability over the preceding three-year period.

Our ability to sustain and grow our profitability is supported by the continued positive momentum of our consumer and commercial products, including our newly released desktop, mobile and graphics processors, greater market acceptance for our server products, the successful adoption of our new game console processor products, and our leadership in the continued development of HPC products.

In assessing the realizability of the deferred tax assets, we considered the highly dynamic and competitive landscape of our industry, the continued performance and market acceptance of our new products, and the impact of such market acceptance on our estimates of future profitability.

As a result, in the fourth quarter of 2020, we concluded that our history of profitable operating results, including the current period results, along with increasingly favorable forecasts of continued future profitability, provided sufficient positive evidence supporting the realizability of a certain amount of our U.S.

deferred tax assets, accordingly, the release of the related valuation allowance previously recorded against these deferred tax assets, resulting in a tax benefit of $1.3 billion in the fourth quarter of 2020.

We continue to maintain a valuation allowance of approximately $1.6 billion for certain federal, state, and foreign tax attributes.

The federal valuation allowance maintained is due to current limitations, including limitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules.

The state and foreign valuation allowance maintained is due to lack of sufficient sources of income.

Through the end of 2021, we continue to maintain a valuation allowance of approximately $1.7 billion for certain federal, state, and foreign tax attributes.

The federal valuation allowance maintained is due to limitations, under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules.

Certain state and foreign valuation allowances are maintained due to a lack of sufficient sources of future taxable income.

In addition, the calculation of our tax liabilities involves addressing uncertainties in the application of complex, multi-jurisdictional tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing authorities.

If our estimates of these taxes are greater or less than actual results, an additional tax benefit or charge could result.

Results of Operations

We report our financial performance based on the following two reportable segments:

the Computing and Graphics segment and the Enterprise, Embedded and Semi-Custom segment.

Computing and Graphics, and Enterprise, Embedded and Semi-Custom.

Additional information on our reportable segments is contained in Note 14 – Segment Reporting of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

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The following table provides a summary of net revenue and operating income (loss) by segment for 2021 and 2020:

2020 2019 2018

December 25, 2021 December 26, 2020

(In millions)

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Computing and Graphics

Computing and Graphics net revenue of $6.4 billion in 2020 increased by 37%, compared to $4.7 billion in 2019, primarily as a result of a 37% increase in unit shipments and a 2% increase in average selling price.

The increase in unit shipments was primarily due to higher demand for our Ryzen processors.

The increase in average selling price was primarily driven by a richer mix of client processors from higher sales of our Ryzen processors, which have a higher average selling price, partially offset by lower average selling price for our Radeon products due to product cycle timing.

Computing and Graphics operating income was $1.3 billion in 2020 compared to $577 million in 2019.

The increase in operating income was primarily driven by the margin contribution from higher sales which more than offset higher operating expenses.

Computing and Graphics net revenue of $9.3 billion in 2021 increased by 45%, compared to $6.4 billion in 2020, primarily as a result of a 57% increase in average selling price, partially offset by an 8% decrease in unit shipments.

The increase in average selling price was primarily driven by a richer mix of Ryzen, Radeon and AMD Instinct products.

The lower unit shipments were primarily driven by a strategic focus on premium and higher end products in a tight supply environment.

Computing and Graphics operating income was $2.1 billion in 2021 compared to $1.3 billion in 2020.

The increase in operating income was primarily driven by higher revenue and improved margin in the segment which more than offset higher operating expenses.

Operating expenses increased for the reasons outlined under “Expenses” below.

Enterprise, Embedded and Semi-Custom

Enterprise, Embedded and Semi-Custom net revenue of $3.3 billion in 2020 increased by 65% compared to net revenue of $2.0 billion in 2019, primarily driven by higher sales of our EPYC server processors and higher semi-custom revenue.

Enterprise, Embedded and Semi-Custom operating income was $391 million in 2020 compared to $263 million in 2019.

The increase in operating income was primarily due to the margin contribution from the increase in revenue which more than offset higher operating expenses in 2020 and a $60 million licensing gain recorded in 2019.

Enterprise, Embedded and Semi-Custom net revenue of $7.1 billion in 2021 increased by 113% compared to net revenue of $3.3 billion in 2020, primarily driven by higher sales of our semi-custom products and EPYC server processors.

Enterprise, Embedded and Semi-Custom operating income was $2.0 billion in 2021 compared to $391 million in 2020.

The increase in operating income was primarily due to the higher revenue and improved margin in the segment which more than offset higher operating expenses.

Operating expenses increased for the reasons outlined under “Expenses” below.

All Other operating loss of $421 million in 2021 included stock-based compensation expense of $379 million and acquisition-related costs of $42 million.

All Other operating loss of $209 million in 2019 included $197 million of stock-based compensation expense and a $12 million contingent loss accrual on a legal matter.

Comparison of Gross Margin, Expenses, Licensing Gain, Interest Expense, Other Expense and Income Taxes

All Other operating loss of $288 million in 2020 included stock-based compensation expense of $274 million and acquisition-related costs of $14 million.

Comparison of Gross Margin, Expenses, Licensing Gain, Interest Expense, Other Income (Expense) and Income Taxes

The following is a summary of certain consolidated statement of operations data for 2021 and 2020:

2020 2019 2018

December 25, 2021 December 26, 2020

(In millions, except for percentages)

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Interest expense (34) (47)

Other expense, net (47) (165) —

Other income (expense), net 55 (47)

Income tax provision (benefit) 513 (1,210)

Gross margin as a percentage of net revenue was 48% in 2021 compared to 45% in 2020.

The increase in gross margin was primarily driven by sales of Ryzen and EPYC processors in 2020, which have a higher gross margin than the corporate average, partially offset by sales of semi-custom products and Radeon products, which have a lower gross margin than the corporate average.

The increase in gross margin was primarily driven by a richer mix of EPYC, Radeon and Ryzen processor sales.

Research and Development Expenses

Research and development expenses of $2.8 billion in 2021 increased by $862 million, or 43%, compared to $2.0 billion in 2020.

The increase was primarily driven by an increase in product development costs in both the Computing and Graphics and Enterprise and Embedded and Semi-Custom segments, due to an increase in headcount and higher annual employee incentives driven by improved financial performance.

The increase was primarily driven by an increase in product development costs due to an increase in headcount and higher annual employee incentives driven by improved financial performance.

Marketing, General and Administrative Expenses

Marketing, general and administrative expenses of $995 million in 2020 increased by $245 million, or 33%, compared to $750 million in 2019.

The increase was primarily due to an increase in go-to-market activities in both the Computing and Graphics and Enterprise, Embedded and Semi-Custom segments, and an increase in headcount and higher annual employee incentives driven by improved financial performance.

Marketing, general and administrative expenses of $1.4 billion in 2021 increased by $453 million, or 46%, compared to $995 million in 2020.

The increase was primarily due to an increase in go-to-market activities in both the Computing and Graphics and Enterprise, Embedded and Semi-Custom segments, as well as an increase in headcount and higher annual employee incentives driven by improved financial performance.

Licensing Gain

During 2019, we recognized $60 million as licensing gain associated with the licensed IP to THATIC JV.

See Note 4 of “Notes to Consolidated Financial Statements” for additional information.

During 2021, we recognized $12 million of royalty income associated with the licensed IP to the THATIC JV, our two joint ventures with Higon Information Technology Co., Ltd., a third-party Chinese entity.

We did not recognize a licensing gain for the year ended December 26, 2020.

Interest Expense

Interest expense of $47 million in 2020 decreased by $47 million compared to $94 million in 2019, primarily due to lower debt balances.

Other Expense, Net

Other expense, net decreased in 2020 by $118 million from net of $165 million in 2019.

Other expense, net for both periods primarily comprised of losses on redemptions, repurchases and conversions of our outstanding debt and convertible debt instruments.

Interest expense of $34 million in 2021 decreased by $13 million compared to $47 million in 2020, primarily due to lower debt balances as a result of conversions by holders of our 2.125% Convertible Senior Notes due 2026.

Other Income (Expense), net

Other income, net was $55 million for the year ended December 25, 2021 compared to $47 million of Other expense, net for the year ended December 26, 2020.

The change was primarily due to a net gain of $56 million from an increase in fair value of equity investments in 2021 and lower losses from the conversion of our convertible debt of $47 million in 2020.

Income Taxes Provision (Benefit)

Through the end of 2020, we demonstrated consistent, continued and increasing profitability over the preceding three-year period.

Our ability to sustain and grow such profitability is supported by the continued positive momentum of our consumer and commercial products including our newly released desktop, mobile and graphics processors, greater market acceptance for our server products, the successful adoption of our new game console processor products, and our continued leadership in the development of HPC products.

deferred tax assets and, accordingly, the release of the related valuation allowance previously recorded against these deferred tax assets, resulting in a tax benefit of $1.3 billion in the fourth quarter of 2020.

We continue to maintain a valuation allowance of approximately $1.6 billion for certain federal, state, and foreign tax attributes.

The state and foreign valuation allowance maintained is due to lack of sufficient sources of income.

We recorded an income tax benefit of $1.2 billion in 2020 and an income tax provision of $31 million in 2019.

We recorded an income tax provision of $513 million in 2021 and an income tax benefit of $1.2 billion in 2020, representing effective tax rates of 14% and (95)% respectively.

The income tax provision of $513 million was due to higher income in the U.S.

and increase in foreign taxes, partially offset by $147 million of foreign-derived intangible income tax benefit, $78 million of research and development tax credits, and $125 million of excess tax benefit for stock-based compensation net of non-deductible officers’ compensation.

The income tax benefit in 2020 was primarily due to $1.3 billion of tax benefit from the valuation allowance release in the U.S.

This benefit was partially offset by approximately $10 million of withholding tax expense related to cross-border transactions, $13 million of state and foreign taxes, and a $75 million increase in valuation allowance against certain state and foreign tax credits, which are reflected as part of the state taxes and foreign rate benefit in the reconciliation table in the tax footnote.

The income tax provision in 2019 was primarily due to $22 million of withholding taxes related to cross-border transactions and $22 million of foreign income taxes in profitable locations, partially offset by a $13 million benefit for a reduction of U.S.

income taxes accrued in the prior year.

Through the end of fiscal year 2021, we continued to maintain a valuation allowance of approximately $1.7 billion for certain federal, state, and foreign tax attributes.

The federal valuation allowance maintained is due to limitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules.

Certain state and foreign valuation allowance maintained is due to lack of sufficient sources of future taxable income.

International Sales

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The percentage of cash and cash equivalents held domestically was 91% as of December 25, 2021, and 94% as of December 26, 2020.

Our operating, investing and financing cash flow activities for fiscal 2020, 2019 and 2018 were as follows:

2020 2019 2018

Subsequent to December 25, 2021, we repurchased $1.0 billion of our common stock under our stock repurchase program.

Our operating, investing and financing cash flow activities for 2021 and 2020 were as follows:

December 25, 2021 December 26, 2020

(In millions)

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Financing activities (1,895) 6

Net increase (decrease) in cash and cash equivalents, and restricted cash $ 125 $ 387 $ (108)

Net increase in cash and cash equivalents, and restricted cash $ 940 $ 125

Our aggregate principal debt obligations were $313 million and $338 million as of December 25, 2021 and December 26, 2020, respectively.

We believe our cash, cash equivalents and short-term investments balance along with our Revolving Credit Facility entered into in June 2019 (refer to Note 6 of “Notes to Consolidated Financial Statements for additional information) will be sufficient to fund operations, including capital expenditures, over the next 12 months.

We believe our cash, cash equivalents, short-term investments and cash flows from operations along with our Revolving Credit Facility will be sufficient to fund operations, including capital expenditures and purchase commitments, over the next 12 months and beyond.

We believe we will be able to access the capital markets should we require additional funds.

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Our working capital cash inflows and outflows from operations are primarily cash collections from our customers, payments for inventory purchases and payments for employee-related expenditures.

Net cash provided by operating activities was $3.5 billion in 2021, primarily due to our higher net income of $3.2 billion in 2021, adjusted for non-cash adjustments of $1.1 billion and net cash outflows of $774 million from changes in our operating assets and liabilities.

The primary drivers of the changes in operating assets and liabilities included a $640 million increase in accounts receivable driven primarily by $1.6 billion higher revenue in the fourth quarter of 2021 compared to the fourth quarter of 2020, a $556 million increase in inventories driven by our continued increase in product build in support of customer demand, and a $920 million increase in prepaid expenses and other assets due primarily to prepayments under long-term supply agreements in 2021, offset by an $801 million increase in accounts payable primarily due to timing of payments to our suppliers, and a $526 million increase in accrued liabilities and other, both of which were driven mainly by higher marketing accruals, and higher accrued annual employee incentives due to improved financial performance.

Net cash provided by operating activities was $1.1 billion in 2020, primarily due to our net income of $2.5 billion, adjusted for non-cash adjustments of $488 million and net cash outflows of $931 million from changes in our operating assets and liabilities.

The primary drivers of the changes in operating assets and liabilities included a $219 million increase in accounts receivable driven primarily by $1.1 billion higher revenue in the fourth quarter of 2020 compared to the fourth quarter of 2019, partially offset by higher collections due to better revenue linearity in the fourth quarter of 2020 compared to the fourth quarter of 2019, a $417 million increase in inventories driven by an increase in product build in support of customer demand, a $231 million increase in prepaid expenses and other assets due primarily to an increase in vendor credits, a $513 million decrease in accounts payable primarily due to timing of payments to our suppliers, offset by a $574 million increase in accrued liabilities and other driven by higher marketing accruals and higher accrued annual employee incentives due to improved financial performance.

Net cash provided by operating activities was $493 million in 2019, primarily due to our net income of $341 million, adjusted for non-cash and non-operating charges of $694 million and net cash outflows of $542 million from changes in our operating assets and liabilities.

The primary drivers of the changes in operating assets and liabilities included a $623 million increase in account receivable driven primarily by $708 million higher revenue during the fourth quarter of 2019 compared to the fourth quarter of 2018, a $137 million increase in inventories driven by an increase in wafer purchases during the fourth quarter of 2019 compared to the fourth quarter of 2018, and a $176 million increase in prepaid expenses and other assets due primarily to an increase in vendor credits and other non-current assets, partially offset by a $153 million increase in accounts payable due to an increase in inventory purchases and a $220 million increase in accrued liabilities and other driven by higher marketing accruals.

Investing Activities

Net cash used in investing activities was $686 million in 2021, which primarily consisted of higher cash used for purchases of short-term investments of $2.1 billion and $301 million for purchases of property and equipment, partially offset by higher cash provided by maturities of short-term investments of $1.7 billion.

Net cash used in investing activities was $952 million in 2020, which primarily consisted of $850 million for purchases of short-term investments and $294 million for purchases of property and equipment, partially offset by $192 million for maturities of short-term investments.

Net cash used in investing activities was $149 million in 2019, which primarily consisted of $217 million for purchases of property and equipment, partially offset by a net cash inflow from purchases and maturities of available-for-sale debt securities of $41 million.

Financing Activities

Net cash used in financing activities was $1.9 billion in 2021, which primarily consisted of common stock repurchases of $1.8 billion under the $4 billion stock repurchase program and higher repurchases to cover tax withholding on employee equity plans of $237 million, partially offset by higher proceeds from the issuance of common stock under our employee equity plans of $104 million.

Net cash provided by financing activities was $6 million in 2020, which primarily consisted of proceeds from the issuance of common stock under our employee equity plans of $85 million, partially offset by $78 million of common stock repurchased to cover employee withholding taxes on vesting of employee equity grants.

We borrowed $200 million of short-term debt during the second quarter of 2020 and paid off the balance during the third quarter of 2020.

Net cash provided by financing activities was $43 million in 2019, which primarily consisted of a cash inflow of $449 million from the warrant exercised by West Coast Hitech L.P.

(WCH) and $74 million from the issuance of common stock under our stock-based compensation equity plans, partially offset by $473 million of cash used for debt reduction activities during the year.

Contractual Obligations

The following table summarizes our consolidated principal contractual cash obligations, as of December 26, 2020, and is supplemented by the discussion following the table:

Payment due by period

(In millions) Total 2021 2022 2023 2024 2025 2026 and

Term debt (1)

$ 338 $ — $ 312 $ — $ — $ — $ 26

Aggregate interest obligation (2)

54 25 25 1 1 1 1

Other long-term liabilities (3)

159 55 64 19 10 8 3

Operating leases (4)

284 52 55 48 41 34 54

Purchase obligations (5)

3,032 2,971 7 15 15 15 9

Total contractual obligations (6)

$ 3,867 $ 3,103 $ 463 $ 83 $ 67 $ 58 $ 93

(1) See Note 6 – Debt and Revolving Credit Facility of the Notes to Consolidated Financial Statements for additional information.

(2) Represents interest obligations, payable in cash, for our outstanding debt.

(3) Amounts primarily 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.

(4) See Note 16 – Commitments and Guarantees of the Notes to Consolidated Financial Statements for additional information.

(5) Represents purchase obligations for goods and services where payments are based, in part, on the volume or type of services we acquire.

In those cases, we only included the minimum volume of purchase obligations in the table above.

Purchase orders for goods and services that are cancellable upon notice and without significant penalties are not included in the amounts above.

(6) Total amount excludes contractual obligations already recorded on our consolidated balance sheets except for debt obligations and other liabilities related to software and technology licenses and IP licenses.

The expected timing of payments of the obligations in the preceding table is estimated based on current information.

Timing of payments and actual amounts paid may be different, depending on the timing of receipt of goods or services, or changes to agreed-upon amounts for some obligations.

Our total gross unrecognized tax benefits were $119 million as of December 26, 2020.

We have foreign and U.S.

state tax audits in process at any one point in time.

At this time, we are unable to make a reasonably reliable estimate of the timing of payments due to uncertainties in the timing of tax audit outcomes;

therefore, such amounts are not included in the above contractual obligations table.

For a description of our contractual obligations such as debt, leases, purchase and other contractual obligations, see Part II, Item 8 Notes to Consolidated Financial Statements Note 6 - Debt and Revolving Credit Facility and Note 16 - Commitments and Guarantees.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis