ADVANCED MICRO DEVICES INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Advanced Micro Devices, Inc. Consolidated Statements of Operations Year Ended December 25, 2021 December 26, 2020 December 28, 2019 (In millions, except per share amounts) Net revenue $ 16,434 $ 9,763 $ 6,731 Cost of sales 8,505 5,416 3,863 Gross profit 7,929 4,347 2,868 Research and development 2,845 1,983 1,547 Marketing, general and administrative 1,448 995 750 Licensing gain ( 12 ) — ( 60 ) Operating income 3,648 1,369 631 Interest expense ( 34 ) ( 47 ) ( 94 ) Other income (expense), net 55 ( 47 ) ( 165 ) Income before income taxes and equity income 3,669 1,275 372 Income tax provision (benefit) 513 ( 1,210 ) 31 Equity income in investee 6 5 — Net income $ 3,162 $ 2,490 $ 341 Earnings per share Basic $ 2.61 $ 2.10 $ 0.31 Diluted $ 2.57 $ 2.06 $ 0.30 Shares used in per share calculation Basic 1,213 1,184 1,091 Diluted 1,229 1,207 1,120 See accompanying notes to consolidated financial statements. 48 Advanced Micro Devices, Inc. Consolidated Statements of Comprehensive Income Year Ended December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Net income $ 3,162 $ 2,490 $ 341 Other comprehensive income (loss) Net change in unrealized gains (losses) on cash flow hedges ( 20 ) 17 8 Total comprehensive income $ 3,142 $ 2,507 $ 349 See accompanying notes to consolidated financial statements. 49 Advanced Micro Devices, Inc. Consolidated Balance Sheets December 25, 2021 December 26, 2020 (In millions, except par value amounts) ASSETS Current assets: Cash and cash equivalents $ 2,535 $ 1,595 Short-term investments 1,073 695 Accounts receivable, net 2,706 2,066 Inventories 1,955 1,399 Receivables from related parties 2 10 Prepaid expenses and other current assets 312 378 Total current assets 8,583 6,143 Property and equipment, net 702 641 Operating lease right-of-use assets 367 208 Goodwill 289 289 Investment: equity method 69 63 Deferred tax assets 931 1,245 Other non-current assets 1,478 373 Total assets $ 12,419 $ 8,962 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,321 $ 468 Payables to related parties 85 78 Accrued liabilities 2,424 1,796 Current portion of long-term debt, net 312 — Other current liabilities 98 75 Total current liabilities 4,240 2,417 Long-term debt, net of current portion 1 330 Long-term operating lease liabilities 348 201 Other long-term liabilities 333 177 Commitments and Contingencies (see Notes 16 and 17) Stockholders’ equity: Capital stock: Common stock, par value $ 0.01 ; shares authorized: 2,250 ; shares issued: 1,232 and 1,217 ; shares outstanding: 1,207 and 1,211 12 12 Additional paid-in capital 11,069 10,544 Treasury stock, at cost (shares held: 25 and 6 ) ( 2,130 ) ( 131 ) Accumulated deficit ( 1,451 ) ( 4,605 ) Accumulated other comprehensive income (loss) ( 3 ) 17 Total stockholders’ equity 7,497 5,837 Total liabilities and stockholders’ equity $ 12,419 $ 8,962 See accompanying notes to consolidated financial statements. 50 Advanced Micro Devices, Inc. Consolidated Statements of Stockholders’ Equity Year Ended December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Capital stock Common stock Balance, beginning of period $ 12 $ 12 $ 10 Issuance of common stock upon warrant exercise — — 1 Issuance of common stock to settle convertible debt — — 1 Balance, end of period $ 12 $ 12 $ 12 Additional paid-in capital Balance, beginning of period $ 10,544 $ 9,963 $ 8,750 Common stock issued under employee equity plans 104 85 74 Stock-based compensation 379 274 197 Issuance of common stock upon warrant exercise — — 448 Issuance of common stock to settle convertible debt 25 217 485 Issuance of treasury stock to partially settle debt — — 4 Issuance of common stock warrants 17 5 5 Balance, end of period $ 11,069 $ 10,544 $ 9,963 Treasury stock Balance, beginning of period $ ( 131 ) $ ( 53 ) $ ( 50 ) Repurchases of common stock ( 1,762 ) — — Common stock repurchases for tax withholding on employee equity plans ( 237 ) ( 78 ) ( 6 ) Issuance of treasury stock to partially settle debt — — 3 Balance, end of period $ ( 2,130 ) $ ( 131 ) $ ( 53 ) Accumulated deficit Balance, beginning of period $ ( 4,605 ) $ ( 7,095 ) $ ( 7,436 ) Cumulative effect of adoption of accounting standard ( 8 ) — — Net income 3,162 2,490 341 Balance, end of period $ ( 1,451 ) $ ( 4,605 ) $ ( 7,095 ) Accumulated other comprehensive income (loss) Balance, beginning of period $ 17 $ — $ ( 8 ) Other comprehensive income (loss) ( 20 ) 17 8 Balance, end of period $ ( 3 ) $ 17 $ — Total stockholders' equity $ 7,497 $ 5,837 $ 2,827 See accompanying notes to consolidated financial statements. 51 Advanced Micro Devices, Inc. Consolidated Statements of Cash Flows Year Ended December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Cash flows from operating activities: Net income $ 3,162 $ 2,490 $ 341 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 407 312 222 Stock-based compensation 379 274 197 Amortization of debt discount and issuance costs 5 14 30 Amortization of operating lease right-of-use assets 56 42 36 Loss on debt redemption, repurchase and conversion 7 54 176 Loss on sale or disposal of property and equipment 34 33 42 Deferred income taxes 308 ( 1,223 ) ( 7 ) Gain on equity investments, net ( 56 ) ( 2 ) ( 1 ) Other ( 7 ) 8 ( 1 ) Changes in operating assets and liabilities: Accounts receivable, net ( 640 ) ( 219 ) ( 623 ) Inventories ( 556 ) ( 417 ) ( 137 ) Receivables from related parties 8 10 14 Prepaid expenses and other assets ( 920 ) ( 231 ) ( 176 ) Payables to related parties 7 ( 135 ) 7 Accounts payable 801 ( 513 ) 153 Accrued liabilities and other 526 574 220 Net cash provided by operating activities 3,521 1,071 493 Cash flows from investing activities: Purchases of property and equipment ( 301 ) ( 294 ) ( 217 ) Purchases of short-term investments ( 2,056 ) ( 850 ) ( 284 ) Proceeds from maturity of short-term investments 1,678 192 325 Collection of deferred proceeds on sale of receivables — — 25 Other ( 7 ) — 2 Net cash used in investing activities ( 686 ) ( 952 ) ( 149 ) Cash flows from financing activities: Proceeds from short-term borrowings — 200 — Repayments and extinguishment of debt — ( 200 ) ( 473 ) Proceeds from warrant exercise — — 449 Proceeds from sales of common stock through employee equity plans 104 85 74 Repurchases of common stock ( 1,762 ) — — Common stock repurchases for tax withholding on employee equity plans ( 237 ) ( 78 ) ( 6 ) Other — ( 1 ) ( 1 ) Net cash (used in) provided by financing activities ( 1,895 ) 6 43 Net increase in cash and cash equivalents, and restricted cash 940 125 387 Cash, cash equivalents and restricted cash at beginning of year 1,595 1,470 1,083 Cash, cash equivalents and restricted cash at end of year $ 2,535 $ 1,595 $ 1,470 52 Year Ended December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Supplemental cash flow information: Cash paid during the year for: Interest $ 25 $ 31 $ 67 Income taxes, net of refund $ 35 $ 8 $ ( 4 ) Non-cash investing and financing activities: Purchases of property and equipment, accrued but not paid $ 72 $ 31 $ 65 Issuance of common stock to settle convertible debt $ 25 $ 217 $ 377 Transfer of assets for the acquisition of property and equipment $ 37 $ 111 $ 115 Issuance of treasury stock to partially settle debt $ — $ — $ 7 Non-cash activities for leases: Operating lease right-of-use assets acquired by assuming related liabilities $ 227 $ 45 $ 22 Reconciliation of cash, cash equivalents and restricted cash Cash and cash equivalents $ 2,535 $ 1,595 $ 1,466 Restricted cash included in Prepaid expense and other current assets — — 4 Total cash, cash equivalents and restricted cash $ 2,535 $ 1,595 $ 1,470 See accompanying notes to consolidated financial statements. 53 Advanced Micro Devices, Inc. Notes to Consolidated Financial Statements NOTE 1 – The Company Advanced Micro Devices, Inc. is a global semiconductor company. References herein to AMD or the Company mean Advanced Micro Devices, Inc. and its consolidated subsidiaries. AMD’s products include x86 microprocessors (CPUs), as standalone devices or as incorporated into accelerated processing units (APUs), chipsets, discrete and integrated graphics processing units (GPUs), data center and professional GPUs, server and embedded processors, semi-custom SoC products, microprocessor and SoC development services and technology for game consoles. From time to time, the Company may also sell or license portions of its intellectual property (IP) portfolio. NOTE 2 – Summary of Significant Accounting Policies Fiscal Year . The Company uses a 52- or 53-week fiscal year ending on the last Saturday in December. Fiscal 2021, 2020 and 2019 ended on December 25, 2021, December 26, 2020 and December 28, 2019, respectively. Fiscal 2021, 2020 and 2019 each consisted of 52 weeks. Principles of Consolidation. The consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. Upon consolidation, all inter-company accounts and transactions have been eliminated. Reclassification. Certain prior period amounts have been reclassified to conform to current period presentation. Use of Estimates. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results are likely to differ from those estimates, and such differences may be material to the financial statements. Areas where management uses subjective judgment include, but are not limited to, revenue allowances, inventory valuation, valuation and assessing potential impairment, if any, of goodwill and deferred income taxes. 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. Substantially all the Company’s revenue is derived from product sales, representing a single performance obligation. 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. Non-custom product arrangements generally comprise a single performance obligation. 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. Constraints of variable consideration have not been material. 54 Custom products Custom products which are associated with the Company’s Enterprise, Embedded, and Semi-Custom segment (semi-custom products), sold under non-cancellable purchases orders, for which the Company has an enforceable right to payment, and which have no alternative use to the Company at contract inception, are recognized as revenue, over the time of production of the products by the Company. The Company utilizes a cost-based input method, calculated as cost incurred plus estimated margin, to determine the amount of revenue to recognize for in-process, but incomplete, customer orders at a reporting date. The Company believes that a cost-based input method is the most appropriate manner to measure how the Company satisfies its performance obligations to customers because the effort and costs incurred best depict the Company’s satisfaction of its performance obligation. Sales of semi-custom products are not subject to a right of return. Custom products arrangements generally involve a single performance obligation. There are no variable consideration estimates associated with custom products. 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 Company’s IP. These arrangements are deemed to be single or multiple performance obligations based upon the nature of the arrangements. Revenue is recognized upon the transfer of control, over time or at a point in time, depending on the nature of the arrangements. The Company evaluates whether the licensing component is distinct. A licensing component is distinct if it is both (i) capable of being distinct and (ii) distinct in the context of the arrangement. If the license is not distinct, it is combined with the development services as a single performance obligation and recognized over time. If the license is distinct, revenue is recognized at a point in time when the customer has the ability to benefit from the license. From time to time, the Company may enter into arrangements with customers that solely involve the sale or licensing of its patents or IP. Generally, there are no performance obligations beyond transferring the designated license to the Company’s patents or IP. Accordingly, revenue is recognized at a point in time when the customer has the ability to benefit from the license. There are no variable consideration estimates associated with either combined development and IP arrangements or for standalone arrangements involving either the sale or licensing of IP. 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. Inventories The Company values inventory at standard cost, adjusted to approximate the lower of actual cost or estimated net realizable value using assumptions about future demand and market conditions. In determining excess or obsolescence reserves for its products, the Company considers assumptions such as changes in business and economic conditions, other-than-temporary decreases in demand for its products, and changes in technology or customer requirements. In determining the lower of cost or net realizable value reserves, the Company considers assumptions such as recent historical sales activity and selling prices, as well as estimates of future selling prices. The Company fully reserves for inventories and non-cancellable purchase orders for inventory deemed obsolete. The Company performs periodic reviews of inventory items to identify excess inventories on hand by comparing on-hand balances and non-cancellable purchase orders to anticipated usage using recent historical activity as well as anticipated or forecasted demand. If estimates of customer demand diminish further or market conditions become less favorable than those projected by the Company, additional inventory carrying value adjustments may be required . Goodwill The Company performs its goodwill impairment analysis as of the first day of the fourth quarter of each year and, if certain events or circumstances indicate that an impairment loss may have been incurred, on a more frequent basis. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment. 55 The Company first analyzes qualitative factors to determine if it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. Qualitative factors include industry and market considerations, overall financial performance, share price trends and market capitalization and Company-specific events. If the Company concludes it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, the Company does not proceed to perform a quantitative impairment test. If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative goodwill impairment test will be performed by comparing the fair value of each reporting unit to its carrying value. A quantitative impairment analysis, if necessary, considers the income approach, which requires estimates of the present value of expected future cash flows to determine a reporting unit’s fair value. Significant estimates include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates, and future economic and market conditions. A goodwill impairment charge is recognized for the amount by which a reporting unit’s fair value is less than its carrying value, not to exceed the total amount of goodwill allocated to that reporting unit. Contingencies From time to time the Company is a defendant or plaintiff in various legal actions that arise in the normal course of business. The Company is also subject to income tax, indirect tax or other tax claims by tax agencies in jurisdictions in which it conducts business. In addition, the Company is a party to environmental matters including local, regional, state and federal government clean-up activities at or near locations where the Company currently or has in the past conducted business. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of reasonably possible losses. A determination of the amount of reserves required for these commitments and contingencies that would be charged to earnings, if any, includes assessing the probability of adverse outcomes and estimating the amount of potential losses. The required reserves, if any, may change due to new developments in each matter or changes in circumstances such as a change in settlement strategy. Cash Equivalents and Short-term Investments Cash equivalents consist of financial instruments that are readily convertible into cash and have original maturities of three months or less at the time of purchase. Other investments in time deposits due within 12 months and marketable securities are included in short-term investments. Classification of marketable securities as current is based on the Company’s intent and belief in its ability to sell these securities and use the proceeds from sale in operations within 12 months. Accounts Receivable Accounts receivable are primarily comprised of trade receivables presented net of rebates, price protection and an allowance for credit loss. Accounts receivable also include unbilled receivables, which primarily represent work completed on development services recognized as revenue but not yet invoiced to customers and semi-custom products under non-cancellable purchase orders that have no alternative use to the Company at contract inception, for which revenue has been recognized but not yet invoiced to customers. All unbilled accounts receivables are expected to be billed and collected within twelve months. The Company manages its exposure to customer credit risk through credit limits, credit lines, ongoing monitoring procedures and credit approvals. Furthermore, the Company performs in-depth credit evaluations of all new customers and, at intervals, for existing customers. From this, the Company may require letters of credit, bank or corporate guarantees or advance payments if deemed necessary. The Company maintains an allowance for credit loss, consisting of known specific troubled accounts as well as an amount based on overall estimated potential uncollectible accounts receivable based on historical experience and review of their current credit quality. The Company does not believe the receivable balance from its customers represents a significant credit risk. 56 Investments in Available-for-sale Debt Securities The Company classifies its investments in debt securities at the date of acquisition as available-for-sale. Available-for-sale debt securities are reported at fair value with the related unrealized gains and losses included, net of tax, in accumulated other comprehensive income (loss), a component of stockholders’ equity. If an available-for-sale debt security’s fair value is less than its amortized cost basis, then the Company evaluates whether the decline is the result of a credit loss, in which case an impairment is recorded through an allowance for credit losses. Unrealized gains and losses not attributable to credit losses are included, net of tax, in accumulated other comprehensive income (loss), a component of stockholders’ equity. The cost of securities sold is determined based on the specific identification method. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives of equipment is two to six years , and leasehold improvements are measured by the shorter of the remaining terms of the leases or the estimated useful economic lives of the improvements. Leases Operating and finance leases are recorded as right-of-use (ROU) assets and lease liabilities on the Company’s balance sheet. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are initially recognized based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses the implicit interest rate if readily determinable. When the implicit interest rate is not readily determinable, the Company uses its incremental borrowing rate, which is based on its collateralized borrowing capabilities over a similar term of the lease payments. The Company utilizes the consolidated group incremental borrowing rate for all leases as the Company has centralized treasury operations. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The Company has elected the accounting policy to not recognize ROU assets and lease liabilities that arise from short-term (12 months or less) leases for any class of underlying asset. Operating leases are included in operating lease ROU assets, other current liabilities, and long-term operating lease liabilities on the Company’s consolidated balance sheets. The Company’s finance leases are immaterial. Foreign Currency Translation/Transactions The functional currency of all of the Company’s foreign subsidiaries is the U.S. dollar. Assets and liabilities denominated in non-U.S. dollars have been remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities and historical exchange rates for non-monetary assets and liabilities. Non-U.S. dollar denominated transactions have been remeasured at average exchange rates in effect during each period, except for those cost of sales and expense transactions related to non-monetary balance sheet amounts which have been remeasured at historical exchange rates. The gains or losses from foreign currency remeasurement are included in earnings. Marketing and Advertising Expenses Advertising costs are expensed as incurred. In addition, the Company’s marketing and advertising expenses include certain cooperative advertising funding obligations under customer incentive programs, which costs are recorded upon agreement with customers and vendor partners. Cooperative advertising expenses are recorded as marketing, general and administrative expense to the extent the cash paid does not exceed the estimated fair value of the advertising benefit received. Any excess of cash paid over the estimated fair value of the advertising benefit received is recorded as a reduction of revenue. Total marketing and advertising expenses for 2021, 2020 and 2019 were approximately $ 578 million , $ 314 million and $ 217 million, respectively. 57 Stock-Based Compensation The Company estimates stock-based compensation cost for stock options at the grant date based on the option’s fair value as calculated by the Black-Scholes model. For time-based restricted stock units (RSUs), fair value is based on the closing price of the Company’s common stock on the grant date. The Company estimates the grant-date fair value of RSUs that involve a market condition using the Monte Carlo simulation model. The Company estimates the grant-date fair value of stock to be issued under the Company’s Employee Stock Purchase plan (ESPP) using the Black-Scholes model. Compensation expense is recognized over the vesting period of the applicable award using the straight-line method, except for the compensation expense related to RSUs with performance or market conditions (PRSUs), which are recognized ratably for each vesting tranche from the service inception date to the end of the requisite service period. Forfeiture rates are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Income Taxes The Company computes the provision for income taxes using the liability method and recognizes deferred tax assets and liabilities for temporary differences between financial statement and income tax bases of assets and liabilities, as well as for operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using tax rates applicable to taxable income in effect for the years in which those tax assets are expected to be realized or settled and provides a valuation allowance against deferred tax assets when it cannot conclude that it is more likely than not that some or all deferred tax assets will be realized. The assessment requires significant judgment and is performed in each of the applicable taxing jurisdictions. In addition, the Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that they will be sustained, based on the technical merits of the positions, on examination by the jurisdictional tax authority. The Company recognizes any accrued interest and penalties to unrecognized tax benefits as interest expense and income tax expense, respectively. Recently Adopted Accounting Standards Income Taxes. In December 2019, the Financial Accounting Standards Board (FASB) issued ASU 2019-12, I ncome Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which simplifies various aspects of accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted this standard in the first quarter of 2021 using the modified retrospective adoption method through a cumulative-effect adjustment to accumulated deficit as of the beginning of the period. The adoption of this new standard resulted in the recognition of an $8.4 million deferred tax liability associated with book-tax differences in foreign equity method investments. Recently Issued Accounting Standards Although there are several other new accounting pronouncements issued by the FASB, the Company does not believe any of these accounting pronouncements had or will have a material impact on its consolidated financial statements. NOTE 3 – Supplemental Financial Statement Information Short-term Investments December 25, 2021 December 26, 2020 (In millions) Commercial paper $ 880 $ 295 Time deposits 193 400 Total short-term investments $ 1,073 $ 695 Accounts Receivable, net As of December 25, 2021 and December 26, 2020, Accounts receivable, net included unbilled accounts receivable of $ 329 million and $ 123 million, respectively. Unbilled accounts receivables primarily represent work completed for development services and on custom products for which revenue has been recognized but not yet invoiced. All unbilled accounts receivable are expected to be billed and collected within 12 months. 58 Inventories December 25, 2021 December 26, 2020 (In millions) Raw materials $ 82 $ 93 Work in process 1,676 1,139 Finished goods 197 167 Total inventories $ 1,955 $ 1,399 Property and Equipment, net December 25, 2021 December 26, 2020 (In millions) Leasehold improvements $ 206 $ 208 Equipment 1,534 1,209 Construction in progress 96 136 Property and equipment, gross 1,836 1,553 Accumulated depreciation ( 1,134 ) ( 912 ) Total property and equipment, net $ 702 $ 641 Depreciation expense for 2021, 2020 and 2019 was $ 296 million , $ 217 million and $ 142 million, respectively. Other Non-current Assets December 25, 2021 December 26, 2020 (In millions) Prepaid long-term supply agreements $ 916 $ — Software and technology licenses, net 328 229 Other 234 144 Total other non-current assets $ 1,478 $ 373 Prepaid long-term supply agreements relate to payments made to vendors to secure long-term supply capacity. Accrued Liabilities December 25, 2021 December 26, 2020 (In millions) Accrued marketing programs $ 933 $ 839 Accrued compensation and benefits 705 513 Other accrued and current liabilities 786 444 Total accrued liabilities $ 2,424 $ 1,796 Revenue Revenue allocated to remaining performance obligations that are unsatisfied (or partially unsatisfied) include amounts received from customers and amounts that will be invoiced and recognized as revenue in future periods for development services, IP licensing and product revenue. As of December 25, 2021, the aggregate transaction price allocated to remaining performance obligations under contracts with an original expected duration of more than one year was $ 197 million , of which $ 126 million is expected to be recognized in the next 12 months. The revenue allocated to remaining performance obligations does not include amounts which have an original expected duration of one year or less. Revenue recognized over time associated with custom products and development services accounted for approximately 23 % , 18 % and 19 % of the Company’s revenue in 2021, 2020 and 2019, respectively. 59 NOTE 4 – Related Parties—Equity Joint Ventures ATMP Joint Venture s The Company holds a 15 % equity interest in two joint ventures (collectively, the ATMP JV) with affiliates of Tongfu Microelectronics Co., Ltd, a Chinese joint stock company. The Company has no obligation to fund the ATMP JV. The Company accounts for its equity interests in the ATMP JV under the equity method of accounting due to its significant influence over the ATMP JV. The ATMP JV provides assembly, test, mark and packaging (ATMP) services to the Company. The Company assists the ATMP JV in its management of certain raw material inventory. The purchases from and resales to the ATMP JV of inventory under the Company’s inventory management program are reported within purchases and resales with the ATMP JV and do not impact the Company’s consolidated statement of operations. The Company’s purchases from the ATMP JV during 2021 and 2020 amounted to $ 1.1 billion and $ 831 million, respectively. As of December 25, 2021 and December 26, 2020, the amounts payable to the ATMP JV were $ 85 million and $ 78 million, respectively, and are included in Payables to related parties on the Company’s consolidated balance sheets. The Company’s resales to the ATMP JV during 2021 and 2020 amounted to $ 28 million for each year . As of December 25, 2021 and December 26, 2020, the Company had receivables from ATMP JV of $ 2 million and $ 10 million, respectively, included in Receivables from related parties on the Company’s consolidated balance sheets. During 2021, the Company recorded a gain of $ 6 million in Equity income in investee on its consolidated statement of operations. During 2020, the Company recorded a gain of $ 5 million in Equity income in investee on its consolidated statement of operations. During 2019, the Company did not record any gain or loss in Equity income in investee. As of December 25, 2021 and December 26, 2020, the carrying value of the Company’s investment in the ATMP JV was approximately $ 69 million and $ 63 million, respectively. THATIC Joint Ventures The Company holds equity interests in two joint ventures (collectively, the THATIC JV) with Higon Information Technology Co., Ltd. (THATIC), a third-party Chinese entity. As of December 25, 2021 and December 26, 2020, the carrying value of the investment was zero. In February 2016, the Company licensed certain of its intellectual property (Licensed IP) to the THATIC JV, payable over several years upon achievement of certain milestones. The Company also receives a royalty based on the sales of the THATIC JV’s products developed on the basis of such Licensed IP. The Company classifies Licensed IP and royalty income associated with the February 2016 agreement as Licensing gain within operating income. During 2021, the Company recognized $ 12 million of licensing gain from royalty income under the agreement. The Company recognized $ 60 million as licensing gain associated with the Licensed IP during 2019. As of December 25, 2021 and December 26, 2020, the Company had no receivables from the THATIC JV. In June 2019, the Bureau of Industry and Security of the United States Department of Commerce added certain Chinese entities to the Entity List, including THATIC and the THATIC JV. The Company is complying with U.S. law pertaining to the Entity List designation. NOTE 5 – Goodwill The carrying amount of goodwill as of December 25, 2021 and December 26, 2020 was $ 289 million, which was allocated to reporting units within the Company’s Enterprise, Embedded and Semi-Custom segment. During the fourth quarter of 2021 and 2020, the Company conducted its annual impairment tests of goodwill and concluded that there was no goodwill impairment with respect to its reporting units. 60 NOTE 6 – Debt and Revolving Credit Facility Debt The Company’s total debt as of December 25, 2021 and December 26, 2020 consisted of: December 25, 2021 December 26, 2020 (In millions) 7.50 % Senior Notes Due 2022 ( 7.50 % Notes) $ 312 $ 312 2.125 % Convertible Senior Notes Due 2026 ( 2.125 % Notes) 1 26 Total debt (principal amount) 313 338 Unamortized debt discount and issuance costs — ( 8 ) Total debt (net) 313 330 Less: current portion of long-term debt ( 312 ) — Total long-term debt, net of current portion $ 1 $ 330 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. During 2021, holders of the 2.125 % Notes converted $ 25 million principal amount of notes in exchange for approximately 3 million shares of the Company’s common stock at the conversion price of $ 8.00 per share. The Company recorded a loss of $ 7 million from these conversions in Other income (expense), net on its consolidated statements of operations. As of December 25, 2021, the outstanding aggregate principal amount of the 2.125 % Notes was $ 1 million . The Company’s current intent is to deliver shares of its common stock upon conversion of the 2.125 % Notes. As such, no sinking fund is provided for the 2.125 % Notes and 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 consolidated balance sheet as of December 25, 2021. The determination of whether or not the 2.125 % Notes are convertible is performed on a calendar-quarter basis. Based on the closing price of the Company’s common stock of $ 146.14 on December 23, 2021, the last trading day of 2021, the if-converted value of the 2.125 % Notes exceeded its principal amount by approximately $ 15 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 for the year ended December 25, 2021: December 25, 2021 December 26, 2020 (In millions) Contractual interest expense $ — $ 4 Interest cost related to amortization of the debt discount $ — $ 6 The carrying amount of the equity component of the 2.125 % Notes was $ 0 million and $ 10 million as of December 25, 2021 and December 26, 2020, respectively. 61 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. As of December 25, 2021, the outstanding aggregate principal amount of the 7.50 % Notes was $ 312 million. Prior to August 15, 2022, the Company may redeem some or all of the 7.50 % Notes at a price equal to 100 % of the principal amount plus accrued and unpaid interest and a “make whole” premium (as defined in the 7.50 % Indenture). Holders have the right to require the Company to repurchase all or a portion of the 7.50 % Notes in the event that the Company undergoes a change of control as defined in the 7.50 % Indenture, at a repurchase price of 101 % of the principal amount plus accrued and unpaid interest. Additionally, an event of default (as defined in the 7.50 % Indenture) may result in the acceleration of the maturity of the 7.50 % Notes. Debt Covenants and Seniority The 7.50 % Notes require the Company to comply with certain financial covenants and a number of restrictive covenants. The 7.50 % Notes and 2.125 % Notes rank equally with the Company’s existing and future senior debt and are senior to all of the Company’s future subordinated debt. The 7.50 % Notes and 2.125 % Notes rank junior to all of the Company’s future senior secured debt to the extent of the collateral securing such debt and are structurally subordinated to all existing and future debt and liabilities of the Company’s subsidiaries. Potential Repurchase of Outstanding Notes The Company may elect to purchase or otherwise retire the 7.50 % 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 to do so. Revolving Credit Facility The Company is party to a $ 500 million unsecured revolving credit facility (the Revolving Credit Facility), including a $ 50 million swingline sub-facility and a $ 75 million sublimit for letters of credit pursuant to a credit agreement with a syndicate of banks. The Revolving Credit Facility expires in June 2024. Borrowings under the Revolving Credit Facility bear interest at either the LIBOR rate or the base rate at the Company’s option (in each case, as customarily defined) plus an applicable margin. As of December 25, 2021, there were no borrowings outstanding under the Revolving Credit Facility and the Company was in compliance with all required covenants. As of December 25, 2021, the Company had $ 14 million of letters of credit outstanding under the Revolving Credit Facility. Future Payments on Total Debt As of December 25, 2021, the Company’s future debt payment obligations were as follows: Term Debt (Principal only) Year (In millions) 2022 $ 312 2026 1 Total $ 313 62 NOTE 7 – Financial Instruments Fair Value Measurements The Company’s financial instruments are measured and recorded at fair value on a recurring basis, except for non-marketable equity investments in privately-held companies. These equity investments are generally accounted for under the measurement alternative, defined as cost, less impairments, adjusted for subsequent observable price changes and are periodically assessed for impairment when events or circumstances indicate that a decline in value may have occurred. Fair Value Hierarchy The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. The guidance for fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories: Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities. Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. Level 3 — Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation. Financial Instruments Recorded at Fair Value on a Recurring Basis December 25, 2021 December 26, 2020 (In millions) Level 1 Level 2 Total Level 1 Level 2 Total Cash equivalents Money market funds $ 4 $ — $ 4 $ 1 $ — $ 1 Commercial paper — 45 45 — — — Short-term investments Commercial paper — 880 880 — 295 295 Time deposits — 193 193 — 400 400 Other non-current assets Equity investments 66 — 66 — — — Deferred compensation plan investments 72 — 72 46 — 46 Total assets measured at fair value $ 142 $ 1,118 $ 1,260 $ 47 $ 695 $ 742 The Company did not have any financial instruments measured at fair value on a recurring basis within Level 3 fair value measurements as of December 25, 2021 or December 26, 2020. During the year ended December 25, 2021, the Company recognized a $ 64 million gain recorded in Other income in the consolidated statements of operations due to an increase in the fair value of an equity investment. Deferred compensation plan investments are mutual fund investments held in a Rabbi trust established to maintain the Company’s executive deferred compensation plan. 63 Financial Instruments Not Recorded at Fair Value The Company carries its financial instruments at fair value with the exception of its long-term debt. The carrying amounts and estimated fair values of the Company’s long-term debt are as follows: December 25, 2021 December 26, 2020 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value (In millions) Current portion of long-term debt, net $ 312 $ 326 $ — $ — Long-term debt, net of current portion 1 15 330 642 The estimated fair value of the Company’s long-term debt are based on Level 2 inputs as the fair value is based on quoted prices for the Company’s debt and comparable instruments in inactive markets. The Company’s 2.125% Notes, included in Long-term debt, net, above, were convertible at the option of the holder as of December 25, 2021. The estimated fair value of the 2.125% Notes as of December 25, 2021 takes into account the value of the Company’s stock price of $ 146.14 as of December 23, 2021, the last trading date for the year ended December 25, 2021 and the initial conversion price of approximately $8.00 per share of common stock. The fair value of the Company’s time deposits, accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing terms. Hedging Transactions and Derivative Financial Instruments Foreign Currency Forward Contracts Designated as Accounting Hedges The Company enters into foreign currency forward contracts to hedge its exposure to foreign currency exchange rate risk related to future forecasted transactions denominated in currencies other than the U.S. Dollar. These contracts generally mature within 18 months and are designated as accounting hedges. As of December 25, 2021 and December 26, 2020, the notional values of the Company’s outstanding foreign currency forward contracts designated as cash flow hedges were $ 894 million and $ 501 million, respectively. The fair value of these contracts was not material as of December 25, 2021 and December 26, 2020. Foreign Currency Forward Contracts Not Designated as Accounting Hedges The Company also enters into foreign currency forward contracts to reduce the short-term effects of foreign currency fluctuations on certain receivables or payables denominated in currencies other than the U.S. Dollar. These forward contracts generally mature within 3 months and are not designated as accounting hedges. As of December 25, 2021 and December 26, 2020, the notional values of outstanding contracts were $ 291 million and $ 254 million, respectively. The fair value of these contracts was not material as of December 25, 2021 and December 26, 2020. NOTE 8 – Accumulated Other Comprehensive Income (Loss) Unrealized holding gains or losses on the Company’s available-for-sale debt securities and unrealized holding gains and losses on derivative financial instruments qualifying as cash flow hedges are included in other comprehensive income (loss). The table below summarizes the changes in accumulated other comprehensive income (loss): December 25, 2021 December 26, 2020 December 28, 2019 Gains (losses) on cash flow hedges: (In millions) Beginning balance $ 17 $ — $ ( 8 ) Net unrealized gains (losses) arising during the period 5 18 2 Net losses (gains) reclassified into income during the period ( 25 ) ( 1 ) 6 Total other comprehensive income (loss) ( 20 ) 17 8 Ending balance $ ( 3 ) $ 17 $ — 64 NOTE 9 – Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of investments in time deposits, available-for-sale debt securities and trade receivables. The Company places its investments with high credit quality financial institutions. At the time an investment is made, investments in commercial paper of industrial firms and financial institutions are rated A1, P1, F1 or better. The Company invests in tax-exempt securities including municipal notes and bonds and bonds that are rated A, A2 or better and repurchase agreements, each of which have securities of the type and quality listed above as collateral. The Company believes that concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company’s customer base, thus diluting the trade credit risk. The Company’s top three customers with the highest accounts receivable balances each accounted for approximately 20 %, 15 % and 9 % of the total consolidated accounts receivable balance as of December 25, 2021 and 18 %, 17 % and 6 %, of the total consolidated accounts receivable balance as of December 26, 2020. However, the Company does not believe the receivable balance from these customers represents a significant credit risk based on past collection experience and review of their current credit quality. The Company is exposed to credit losses from nonperformance by counterparties on foreign currency hedge contracts. These counterparties are large global institutions, and to date, no such counterparty has failed to meet its financial obligations to the Company. NOTE 10 – Earnings Per Share Basic earnings per share is computed based on the weighted-average number of shares outstanding. Diluted earnings per share is computed based on the weighted-average number of shares outstanding plus potentially dilutive shares outstanding during the period. Potentially dilutive shares are determined by applying the treasury stock method to the Company’s stock options, RSUs (including PRSUs), common stock to be issued under the ESPP and warrants. Potentially dilutive shares issuable upon conversion of the 2.125 % Convertible Senior Notes due 2026 ( 2.125 % Notes) are calculated using the if-converted method. The following table sets forth the components of basic and diluted earnings per share: December 25, 2021 December 26, 2020 December 28, 2019 (In millions, except per share amounts) Numerator Net income for basic earnings per share $ 3,162 $ 2,490 $ 341 Effect of potentially dilutive shares: Interest expense related to the 2.125% Notes — 1 — Net income for diluted earnings per share $ 3,162 $ 2,491 $ 341 Denominator Basic weighted-average shares 1,213 1,184 1,091 Effect of potentially dilutive shares: Employee equity plans and warrants 16 20 29 2.125% Notes — 3 — Diluted weighted-average shares 1,229 1,207 1,120 Earnings per share: Basic $ 2.61 $ 2.10 $ 0.31 Diluted $ 2.57 $ 2.06 $ 0.30 Potential shares from employee equity plans and the impact from the conversion of the 2.125 % Notes up to the conversion date, totaling 2 million and 22 million shares for 2021 and 2020, respectively, were not included in the earnings per share calculation because their inclusion would have been anti-dilutive. 65 NOTE 11 – Common Stock and Stock-Based Compensation Common Stock Shares of common stock outstanding were as follows: Year Ended December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Balance, beginning of period 1,211 1,170 1,005 Common stock issued under employee equity plans 12 14 20 Repurchases of common stock ( 17 ) — — Common stock repurchases for tax withholding on equity awards ( 2 ) ( 1 ) — Issuance of common stock upon warrant exercise — — 75 Issuance of common stock to settle convertible debt 3 28 69 Issuance of treasury stock to partially settle debt — — 1 Balance, end of period 1,207 1,211 1,170 Stock Repurchase Program In May 2021, the Company’s Board of Directors approved a stock repurchase program authorizing up to $4 billion of repurchases of the Company’s outstanding common stock (the Repurchase Program). During the year ended December 25, 2021, the Company repurchased 16.7 million shares of its common stock under the Repurchase Program for $ 1.8 billion. As of December 25, 2021, $ 2.2 billion remained available for future stock repurchases under this program. This Repurchase Program does not obligate the Company to acquire any common stock, has no termination date and may be suspended or discontinued at any time. Stock-Based Compensation The Company’s employee equity programs are intended to attract, retain and motivate highly qualified employees. On April 29, 2004, the Company’s stockholders approved the 2004 Equity Incentive Plan, as amended and restated (the 2004 Plan). In the fourth quarter of 2017, the Company introduced the 2017 ESPP, as amended and restated (the 2017 Plan). Under the 2004 Plan, stock options generally vest and become exercisable over a three-year period from the date of grant and expire within seven years after the grant date. Unvested shares that are reacquired by the Company from forfeited outstanding equity awards become available for grant and may be reissued as new awards. Under the 2004 Plan, the Company can grant (i) stock options, and (ii) RSUs, including time-based RSUs and PRSUs. Stock Options. Under the 2004 Plan, nonstatutory and incentive stock options may be granted. The exercise price of the shares subject to each nonstatutory stock option and incentive stock option cannot be less than 100 % of the fair market value of the Company’s common stock on the date of the grant. The exercise price of each option granted under the 2004 Plan must be paid in full at the time of the exercise. Time-based RSUs. Time-based RSUs are awards that can be granted to any employee, director or consultant and that obligate the Company to issue a specific number of shares of the Company’s common stock in the future if the vesting terms and conditions are satisfied. PRSUs. PRSUs can be granted to certain of the Company’s senior executives. The performance metrics can be financial performance, non-financial performance and/or market conditions. Each PRSU award reflects a target number of shares (Target Shares) that may be issued to an award recipient before adjusting based on the Company’s financial performance, non-financial performance and/or market conditions. The actual number of shares that a grant recipient receives at the end of the period may range from 0 % to 250 % of the Target Shares granted, depending upon the degree of achievement of the performance target designated by each individual award. 66 ESPP. Under the 2017 Plan, eligible employees who participate in an offering period may have up to 15 % of their eligible earnings withheld, up to certain limitations, to purchase shares of common stock at 85 % of the lower of the fair market value on the first or the last business day of the six-month offering period. The offering periods commence in May and November each year. As of December 25, 2021, the Company had 50 million shares of common stock that were available for future grants and 17 million shares reserved for issuance upon the exercise of outstanding stock options or the vesting of unvested RSUs, including PRSUs, under the 2004 Plan. In addition, the Company had 39 million shares of common stock that were available for issuance under the 2017 plan. Valuation and Expense Stock-based compensation expense was allocated in the consolidated statements of operations as follows: December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Cost of sales $ 5 $ 6 $ 6 Research and development 246 173 129 Marketing, general, and administrative 128 95 62 Total stock-based compensation expense before income taxes 379 274 197 Income tax benefit ( 58 ) ( 42 ) — Total stock-based compensation expense, net of income taxes $ 321 $ 232 $ 197 Stock Options. The weighted-average estimated fair value of employee stock options granted for the years ended December 25, 2021, December 26, 2020 and December 28, 2019 was $ 46.07 , $ 38.49 and $ 13.31 per share, respectively, using the following assumptions: December 25, 2021 December 26, 2020 December 28, 2019 Expected volatility 51.77 % 57.87 % 52.60 % - 56.51 % Risk-free interest rate 0.69 % 0.18 % 1.53 % - 2.51 % Expected dividends — % — % — % Expected life (in years) 4.55 4.30 3.94 - 3.95 The Company uses a combination of the historical volatility of its common stock and the implied volatility for publicly traded options on the Company’s common stock as the expected volatility assumption. The risk-free interest rate is based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the option grant at the date closest to the option grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the near future. The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. The following table summarizes stock option activity and related information: Outstanding Number of Shares Weighted- Average Exercise Price Aggregate Intrinsic Value Weighted-Average Remaining Contractual Life (in years) (In millions, except share price) Balance as of December 26, 2020 7 $ 12.91 Granted 1 $ 107.58 Exercised ( 3 ) $ 4.38 Balance as of December 25, 2021 5 $ 23.98 $ 614 2.80 Exercisable December 25, 2021 4 $ 13.24 $ 561 2.23 The total intrinsic value of stock options exercised for 2021, 2020 and 2019 was $ 277 million, $ 180 million and $ 84 million, respectively. As of December 25, 2021, the Company had $ 23 million of total unrecognized compensation expense related to stock options, which will be recognized over the weighted-average period of 1.76 years. 67 Time-based RSUs. The weighted-average grant date fair values of time-based RSUs granted during 2021, 2020 and 2019 were $ 107.02 , $ 78.59 and $ 32.52 per share, respectively. The following table summarizes time-based RSU activity and related information: Number of Shares Weighted- Average Grant-Date Fair Value Aggregate Intrinsic Value Weighted-Average Remaining Contractual Life (in years) (In millions except share price) Unvested shares as of December 26, 2020 12 $ 43.98 Granted 5 $ 107.02 Forfeited ( 1 ) $ 63.99 Vested ( 6 ) $ 36.37 Unvested shares as of December 25, 2021 10 $ 79.03 $ 1,460 1.26 The total fair value of time-based RSUs vested during 2021, 2020 and 2019 was $ 678 million, $ 642 million and $ 395 million, respectively. As of December 25, 2021, the Company had $ 704 million of total unrecognized compensation expense related to time-based RSUs, which will be recognized over the weighted-average period of 1.92 years. PRSUs. The weighted-average grant date fair values of PRSUs granted during 2021, 2020 and 2019 were $ 153.89 , $ 122.95 and $ 50.00 , respectively, using the following assumptions: December 25, 2021 December 26, 2020 December 28, 2019 Expected volatility 57.75 % 55.74 % - 60.10 % 60.54 % - 62.52 % Risk-free interest rate 0.43 % 0.14 % - 1.41 % 1.56 % - 2.49 % Expected dividends — % — % — % Expected term (in years) 3.00 2.48 - 3.00 2.48 - 5.00 The Company uses the historical volatility of its common stock and risk-free interest rate based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the PRSUs grant at the date closest to the grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the near future. The expected term of PRSUs represents the requisite service periods of these PRSUs. The following table summarizes PRSU activity and related information: Number of Shares Weighted-Average Grant-Date Fair Value Aggregate Intrinsic Value Weighted-Average Remaining Contractual Life (in years) (In millions except share price) Unvested shares as of December 26, 2020 3 $ 55.63 Granted — $ 153.89 Forfeited — $ — Vested ( 1 ) $ 24.40 Unvested shares as of December 25, 2021 2 $ 78.59 $ 338 1.50 The total fair value of PRSUs vested during 2021, 2020 and 2019 was $ 98 million, $ 76 million and $ 65 million, respectively. As of December 25, 2021, the Company had $ 103 million of total unrecognized compensation expense related to PRSUs, which will be recognized over the weighted-average period of 1.50 years. 68 ESPP. The weighted-average grant date fair value for the ESPP during 2021, 2020 and 2019 was $ 27.27 , $ 20.97 and $ 9.96 per share, respectively, using the following assumptions: December 25, 2021 December 26, 2020 December 28, 2019 Expected volatility 36.90 % - 39.39 % 55.16 % - 66.53 % 48.95 % - 67.02 % Risk-free interest rate 0.04 % - 0.07 % 0.11 % - 0.15 % 1.58 % - 2.46 % Expected dividends — % — % — % Expected term (in years) 0.50 0.50 0.50 The Company uses the historical volatility of its common stock and the risk-free interest rate based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the ESPP grant at the date closest to the ESPP grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the near future. The expected term of the ESPP represents the six-month offering period. During 2021, 1 million shares of common stock were purchased under the ESPP at a purchase price of $ 65.43 resulting in aggregate cash proceeds of $ 92 million. As of December 25, 2021, the Company had $ 19 million of total unrecognized compensation expense related to the ESPP, which will be recognized over the weighted-average period of 0.38 years. NOTE 12 – Retirement Benefit Plans The Company provides retirement benefit plans in the United States and certain foreign countries. The Company has a 401(k) retirement plan that allows participating employees in the United States to contribute as defined by the plan and subject to Internal Revenue Service limitations. The Company matches 75 % of employees’ contributions up to 6 % of their eligible compensation. The Company’s contributions to the 401(k) plan for 2021, 2020 and 2019 were approximately $ 35 million , $ 29 million and $ 25 million, respectively. 69 NOTE 13 – Income Taxes Income before income taxes consists of the following: December 25, 2021 December 26, 2020 December 28, 2019 (In millions) U.S. $ 3,528 $ 1,213 $ 334 Non-U.S. 147 67 38 Total pre-tax income including equity income (loss) in investee $ 3,675 $ 1,280 $ 372 The income tax provision (benefit) consists of: December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Current: U.S. Federal $ 112 $ — $ ( 13 ) U.S. State and Local 11 5 1 Non-U.S. 82 8 50 Total 205 13 38 Deferred: U.S. Federal 320 ( 1,193 ) — U.S. State and Local ( 7 ) ( 28 ) — Non-U.S. ( 5 ) ( 2 ) ( 7 ) Total 308 ( 1,223 ) ( 7 ) Income tax provision (benefit) $ 513 $ ( 1,210 ) $ 31 The table below displays the reconciliation between statutory federal income taxes and the total income tax provision (benefit). December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Statutory federal income tax expense at 21% $ 772 $ 269 $ 78 State taxes (benefit) 1 ( 6 ) 1 Foreign withholding taxes 7 10 22 Foreign rate detriment / (benefit) 71 ( 3 ) 2 Valuation allowance change 3 ( 1,301 ) ( 59 ) Research credits ( 78 ) ( 57 ) — Excess tax benefits relating to share-based compensation ( 125 ) ( 116 ) — Tax Reform Act — — ( 13 ) Foreign Derived Intangible Income deduction ( 147 ) — — Other 9 ( 6 ) — Income tax provision (benefit) $ 513 $ ( 1,210 ) $ 31 The Company 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 a result of higher income in the U.S. and increase in foreign taxes, partially offset by $ 147 million of foreign-derived intangible income 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. 70 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 $ 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 above. The income tax provision in 2019 was primarily due to $ 22 million of withholding tax related to cross-border transactions and $ 22 million of tax in foreign locations, partially offset by a $ 13 million benefit for a reduction of U.S. income taxes accrued in the prior year. Deferred income taxes reflect the net tax effects of tax carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the balances for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 25, 2021 and December 26, 2020 were as follows: December 25, 2021 December 26, 2020 (In millions) Deferred tax assets: Net operating loss carryovers $ 920 $ 1,029 Accruals and reserves not currently deductible 631 514 Employee benefits not currently deductible 164 122 Federal and state tax credit carryovers 319 569 Foreign research and development ITC credits 547 489 Capitalized costs 121 174 Lease liability 124 72 Other 27 29 Total deferred tax assets 2,853 2,998 Less: valuation allowance ( 1,735 ) ( 1,576 ) Total deferred tax assets, net of valuation allowance 1,118 1,422 Deferred tax liabilities: Acquired intangibles and goodwill ( 50 ) ( 1 ) Right-of-use assets ( 110 ) ( 62 ) Discount of convertible notes — ( 2 ) Undistributed foreign earnings ( 24 ) ( 114 ) Other ( 15 ) ( 9 ) Total deferred tax liabilities ( 199 ) ( 188 ) Net deferred tax assets $ 919 $ 1,234 The movement in the deferred tax valuation allowance was as follows: December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Balance at beginning of year $ 1,576 $ 2,867 $ 2,443 Charges (reductions) to income tax expense/other accounts* 3 ( 1,301 ) ( 61 ) Net (deductions) recoveries + 156 10 485 Balance at end of year $ 1,735 $ 1,576 $ 2,867 * Amounts recorded against other accounts are not material + The 2019 and 2021 net recoveries were primarily related to net originating deferred tax assets and newly generated tax credits 71 Deferred tax liabilities are included in Other long-term liabilities on the consolidated balance sheets. The breakdown between deferred tax assets and deferred tax liabilities as of December 25, 2021 and December 26, 2020 is as follows: December 25, 2021 December 26, 2020 (In millions) Deferred tax assets $ 931 $ 1,245 Deferred tax liabilities ( 12 ) ( 11 ) Net deferred tax assets $ 919 $ 1,234 Through the end of fiscal year 2021, the Company 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. The Company’s United States federal and state net operating losses carryforwards as of December 25, 2021, were $ 1.9 billion and $ 265 million, respectively. Net operating losses may be subject to limitations by the Internal Revenue Code and similar provisions. The United States federal net operating losses will expire between 2034 and 2037, and the state net operating losses will expire at various dates through 2039. The federal tax credits of $ 441.8 million will expire at various dates between 2022 and 2041. The state tax credits of $ 288 million will expire at various dates between 2022 through 2036 except for California R&D credit, which does not expire. The Company also has $ 552 million of credit carryforward in Canada that will expire between 2026 and 2040. Under current U.S. tax law the impact of future distributions of undistributed earnings that are indefinitely reinvested are anticipated to be withholding taxes from local jurisdictions and non-conforming U.S. state jurisdictions. The amount of cumulative undistributed earnings that are permanently reinvested that could be subject to withholding taxes are $ 364 million as of December 25, 2021. A reconciliation of the Company's gross unrecognized tax benefits was as follows: December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Balance at beginning of year $ 119 $ 65 $ 49 Increases for tax positions taken in prior years 14 41 5 Decreases for tax positions taken in prior years ( 9 ) ( 15 ) — Increases for tax positions taken in the current year 156 30 15 Decreases for settlements with taxing authorities ( 5 ) ( 1 ) ( 3 ) Decreases for lapsing of the statute of limitations — ( 1 ) ( 1 ) Balance at end of year $ 275 $ 119 $ 65 The amount of unrecognized tax benefits that would impact the effective tax rate was $ 215 million, $ 77 million and $ 17 million as of December 25, 2021, December 26, 2020 and December 28, 2019, respectively. The Company had $39 million of accrued penalties and interest related to unrecognized tax benefits as of December 25, 2021. The Company had no material amounts of accrued interest and accrued penalties related to unrecognized tax benefits as of December 26, 2020 and December 28, 2019. It is possible the Company may have tax audits close in the next 12 months that could materially change the balance of the uncertain tax benefits; however, the timing of tax audit closures and settlements are highly uncertain. The Company and its subsidiaries have several foreign and U.S. state audits in process at any one point in time. The Company has provided for uncertain tax positions that require a liability under the adopted method to account for uncertainty in income taxes. The Company is subject to taxation in the United States and foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The material jurisdiction in which the Company is subject to potential examination by the taxing authority is the United States, which is open for years from 2008 onwards due to the net operating losses. 72 NOTE 14 – Segment Reporting Management, including the Chief Operating Decision Maker, who is the Company’s Chief Executive Officer, reviews and assesses operating performance using segment net revenue and operating income (loss). 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 microprocessors, accelerated processing units that integrate microprocessors and graphics, chipsets, discrete graphics processing units (GPUs), data center and professional GPUs, and development services. From time to time, the Company may also sell or license portions of its IP portfolio. • 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. From time to time, the Company may also sell or license portions of its IP portfolio. In addition to these reportable segments, the Company has an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to any of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. This category primarily includes employee stock-based compensation expense and acquisition-related costs. The following table provides a summary of net revenue and operating income (loss) by segment for 2021, 2020 and 2019. December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Net revenue: Computing and Graphics $ 9,332 $ 6,432 $ 4,709 Enterprise, Embedded and Semi-Custom 7,102 3,331 2,022 Total net revenue $ 16,434 $ 9,763 $ 6,731 Operating income (loss): Computing and Graphics $ 2,090 $ 1,266 $ 577 Enterprise, Embedded and Semi-Custom 1,979 391 263 All Other ( 421 ) ( 288 ) ( 209 ) Total operating income $ 3,648 $ 1,369 $ 631 The following table provides items included in All Other category: December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Operating loss: Stock-based compensation expense $ ( 379 ) $ ( 274 ) $ ( 197 ) Acquisition-related costs ( 42 ) ( 14 ) — Loss contingency on legal matter — — ( 12 ) Total operating loss $ ( 421 ) $ ( 288 ) $ ( 209 ) The Company does not discretely allocate assets to its operating segments, nor does management evaluate operating segments using discrete asset information. 73 The following table summarizes sales to external customers by geographic regions based on billing location of the customer: December 25, 2021 December 26, 2020 December 28, 2019 (In millions) United States $ 4,656 $ 2,294 $ 1,764 China (including Hong Kong) 4,096 2,329 1,736 Japan 2,381 1,033 840 Europe 1,249 1,108 762 Taiwan 2,091 1,187 719 Singapore 1,389 1,096 597 Other countries 572 716 313 Total sales to external customers $ 16,434 $ 9,763 $ 6,731 The following table summarizes sales to major customers that accounted for at least 10% of the Company’s consolidated net revenue for the respective years: December 25, 2021 December 26, 2020 December 28, 2019 Customer A 14 % * 12 % Customer B 11 % * * * Less than 10% Sales to customer A consisted of products primarily from the Enterprise, Embedded and Semi-Custom segment and sales to customer B consisted of products primarily from the Computing and Graphics segment. The following table summarizes Property and equipment, net by geographic areas: December 25, 2021 December 26, 2020 (In millions) United States $ 486 $ 421 Canada 105 126 China 35 34 Singapore 35 32 Other countries 41 28 Total property and equipment, net $ 702 $ 641 NOTE 15 – Other Income (Expense), Net The following table summarizes the components of Other income (expense), net: December 25, 2021 December 26, 2020 December 28, 2019 (In millions) Interest income $ 8 $ 8 $ 15 Loss on debt redemption, repurchase and conversion ( 7 ) ( 54 ) ( 176 ) Gains on equity investments, net 56 2 1 Other expense ( 2 ) ( 3 ) ( 5 ) Other income (expense), net $ 55 $ ( 47 ) $ ( 165 ) 74 NOTE 16 – Commitments and Guarantees Operating Leases The Company has entered into operating and finance leases for its corporate offices, data centers, research and development facilities and certain equipment. The leases expire at various dates through 2031, some of which include options to extend the lease for up to ten years. For 2021, 2020 and 2019, the Company recorded $ 71 million , $ 59 million and $ 56 million, respectively, of operating lease expense, including short-term lease expense. For 2021 and 2020, the Company recorded $ 26 million and $ 27 million, respectively, of variable lease expense, which primarily included operating expenses and property taxes associated with the usage of facilities under the operating leases. For 2021 and 2020, cash paid for operating leases included in operating cash flows was $ 67 million and $ 55 million, respectively. The Company’s finance and short-term leases are immaterial to the Company’s consolidated financial statements. Supplemental information related to leases is as follows: December 25, 2021 Weighted-average remaining lease term in years – operating leases 6.10 Weighted-average discount rate – operating leases 3.70 % Future minimum lease payments under non-cancellable operating lease liabilities as of December 25, 2021 are as follows: Year (In millions) 2022 $ 89 2023 85 2024 78 2025 68 2026 59 2027 and thereafter 92 Total minimum lease payments 471 Less: interest ( 52 ) Present value of net minimum lease payments 419 Less: current portion ( 71 ) Total long-term operating lease liabilities $ 348 Certain other operating leases contain provisions for escalating lease payments subject to changes in the consumer price index. Commitments The Company’s purchase commitments primarily include the Company’s obligations to purchase wafers and substrates from third parties and future payments related to certain software and technology licenses and IP licenses. 75 Total future unconditional purchase commitments as of December 25, 2021 were as follows: Year (In millions) 2022 $ 5,765 2023 1,658 2024 755 2025 329 2026 176 2027 and thereafter 383 Total unconditional purchase commitments $ 9,066 Warranties and Indemnities The Company generally warrants that its products sold to its customers will conform to its approved specifications and be free from defects in material and workmanship under normal use and conditions for one year . The Company may also offer one to three-year limited warranties based on product type and negotiated warranty terms with certain customers. The Company accrues warranty costs to Cost of sales at the time of sale of warranted products. Changes in the Company’s estimated liability for product warranty during the years ended December 25, 2021 and December 26, 2020 are as follows: December 25, 2021 December 26, 2020 (In millions) Beginning balance $ 37 $ 15 Provisions during the period 106 82 Settlements during the period ( 92 ) ( 60 ) Ending balance $ 51 $ 37 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. In addition, the impact from changes in estimates for pre-existing warranties has been immaterial. NOTE 17 – 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 32 nm 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. 76 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 Exchange Act of 1934, as amended (the Exchange Act), and SEC Rule 10b-5 concerning certain statements regarding its 32 nm 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 the Company’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 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 California Court of Appeal affirmed this decision on August 27, 2020 and issued its remittitur on September 9, 2020, which foreclosed further appeals in the state court litigation. On October 4, 2018, the district court issued an order dismissing the Hamilton and Ha amended complaints and both plaintiffs appealed. On March 16, 2020, the Ninth Circuit affirmed the district court’s dismissal of the Ha complaint and the time to seek further appeals has since expired. On the same day, the Ninth Circuit also reversed and remanded the district court’s dismissal of the Hamilton complaint for further consideration of defendants’ motion to dismiss. Following supplemental briefing, the district court entered an order on April 5, 2021 dismissing with prejudice all claims in the Hamilton action as precluded by the decision in the Wessels case. Quarterhill Inc. Litigation On July 2, 2018, three entities named Aquila Innovations, Inc. (Aquila), Collabo Innovations, Inc. (Collabo), and Polaris Innovations, Ltd. (Polaris), filed separate patent infringement complaints against the Company in the United States District Court for the Western District of Texas. Aquila alleges that the Company infringes two patents (6,239,614 and 6,895,519) relating to power management; Collabo alleges that the Company infringes one patent (7,930,575) related to power management; and Polaris alleges that the Company infringes two patents (6,728,144 and 8,117,526) relating to control or use of dynamic random-access memory, or DRAM. Each of the three complaints seeks unspecified monetary damages, interest, fees, expenses, and costs against the Company; Aquila and Collabo also seek enhanced damages. Aquila, Collabo, and Polaris each appear to be related to a patent assertion entity named Quarterhill Inc. (formerly WiLAN Inc.). On May 14, 2020, at the request of Polaris, the Court dismissed all claims related to one of the two patents in suite in the Polaris case. On June 10, 2020, the Court granted AMD’s motions to stay the Polaris and Aquila cases pending the completion of inter partes review of each of the patents-in-suit in those cases by the Patent Trial and Appeal Board. On February 22, 2021, February 26, 2021, and March 10, 2021, the Patent Trial and Appeal Board issued final written decisions in inter partes reviews invalidating all asserted claims of the remaining Polaris and Aquila patents. On May 10, 2021, Aquila filed a notice of appeal to the Court of Appeals for the Federal Circuit for the IPR decision regarding U.S. Patent No. 6,895,519. On April 30, 2021, Polaris filed a notice of appeal to the Court of Appeals for the Federal Circuit for the IPR decision regarding U.S. Patent No. 8,117,526. On May 14, 2021, AMD filed a notice of cross-appeal to the Court of Appeals for the Federal Circuit for the IPR decision regarding U.S. Patent No. 8,117,526. Appellate briefing is underway. 77 Monterey Research Litigation On November 15, 2019, Monterey Research, LLC filed a patent infringement complaint against the Company in the United States District Court for the District of Delaware (Case. No. 1:19-cv-02149). Monterey Research alleges that the Company infringes six U.S. patents: 6,534,805 (related to SRAM cell design); 6,629,226 (related to read interface protocols); 6,651,134 (related to memory devices); 6,765,407 (related to programmable digital circuits); 6,961,807 (related to integrated circuits and associated memory systems); and 8,373,455 (related to output buffer circuits). Monterey Research seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, costs, and injunctive relief against the Company. On January 22, 2020, the Company filed a motion to dismiss part of Monterey Research’s complaint. On February 5, 2020, Monterey Research filed an amended complaint. On February 19, 2020, the Company filed a renewed motion to dismiss part of Monterey Research’s complaint. On October 13, 2020, the Court granted in part, and denied in part, the Company’s renewed motion to dismiss. On October 27, 2020, the Company filed its answer to Monterey’s complaint and also filed counterclaims based on Monterey’s breach of the parties’ pre-suit non-disclosure agreement. On December 1, 2020, Monterey filed a motion to dismiss the Company’s counterclaims. On January 5, 2021, the Court granted the Company’s motion to stay the litigation pending inter partes review of the patents-in-suit by the Patent Trial and Appeals Board. In November and December 2021 and January 2022, the USPTO issued five final written decisions in the inter partes reviews cancelling all challenged claims of five patents in suit. On August 12, 2021, Monterey filed two patent infringement complaints in the United States District Court for the Western District of Texas (Case. No. 6:21-cv-00839 and Case. No. 6:21-cv-00840). In the first complaint, Monterey alleges that the Company infringes two patents (8,694,776 and 9,767,303) related to memory controllers, three patents (8,572,297, 7,609,799, and 7,899,145) related to circuit designs, and one patent (6,979,640) related to semiconductor processing. In the second complaint, Monterey alleges that the Company infringes one patent (6,680,516) related to semiconductor processing. In both complaints, Monterey Research seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, costs, and injunctive relief against the Company. On October 22, 2021, Monterey Research filed an amended complaint in Case. No. 6:21-cv-00840 withdrawing its infringement claims for the ’776 and ’303 patents, and asserting an additional infringement claim for a patent related to circuit design (8,103,497).On November 15, 2021, the Company filed a motion to dismiss the complaint. On December 8, 2021, Monterey filed its response. On December 20, 2021, the Company filed a motion to transfer the case to Austin division. City of Pontiac Police and Fire Retirement System Litigation On September 29, 2020, the City of Pontiac Police and Fire Retirement System, an AMD shareholder, filed a shareholder derivative complaint (the “Complaint”) against AMD and the members of its Board of Directors (collectively, “Defendants”) in the United States District Court for the Northern District of California. See City of Pontiac Police and Fire Retirement System v. Caldwell, et al., No. 5:20-cv-6794 (N.D. Cal.). The Complaint alleges that Defendants breached their fiduciary duties, violated Section 14(a) of the Exchange Act of 1934, and were unjustly enriched by misrepresenting the Company’s commitment to diversity, particularly with respect to the composition of the membership of AMD’s Board of Directors and senior leadership team. On December 18, 2020, Defendants filed a motion to dismiss the Complaint. On February 12, 2021, Plaintiff filed an opposition to Defendants’ motion to dismiss, and on March 12, 2021, Defendants filed a reply brief in support of the motion to dismiss. On July 1, 2021, the Court granted Defendants’ motion to dismiss, without prejudice. On August 2, 2021, the parties filed a joint stipulation to dismiss the case with prejudice, and the court approved the joint stipulation on August 3, 2021. 78 Xilinx Acquisition Litigation On October 26, 2020, the Company, its wholly-owned subsidiary, Thrones Merger Sub, Inc., and Xilinx, Inc. (“Xilinx”) entered a definitive agreement (the “Merger Agreement”) in which the Company will acquire Xilinx by merging Thrones Merger Sub, Inc. with and into Xilinx, with Xilinx continuing as the surviving corporation and becoming a wholly-owned subsidiary of the Company (the “Proposed Transaction”). See Note 13 of Notes to Consolidated Financial Statements for additional information. On December 3, 2020, the Company and Xilinx filed a Registration Statement on Form S-4 (together with the joint proxy statement and prospectus contained therein, the “Registration Statement”) describing the Proposed Transaction and other related matters. On December 11, 2020, a Xilinx shareholder filed a putative class action in the New York State Supreme Court, New York County, regarding the Proposed Transaction. Nunez v. Xilinx, Case No. 656971/2020 (N.Y. Sup. Ct.) (“Nunez”). The lawsuit alleges that the Board of Directors of Xilinx breached their fiduciary duties to Xilinx shareholders in connection with the Proposed Transaction by allegedly failing to obtain fair, adequate and maximum consideration for Xilinx shareholders in connection with the Proposed Transaction and by not disclosing certain material information about the Proposed Transaction in the Registration Statement. The lawsuit asserts a single claim against the Company, alleging that it aided and abetted the Xilinx directors’ breach of their fiduciary duties. The lawsuit seeks to enjoin or rescind any transaction with Xilinx as well as certain other equitable relief, unspecified damages and attorneys’ fees and costs. On December 15, 2020, a Xilinx shareholder filed a lawsuit in the United States District Court for the Southern District of New York, regarding the Proposed Transaction. Shumacher v. Xilinx, Case No. 1:20-cv-10595 (S.D.N.Y.) (“Shumacher”). The lawsuit alleges that Xilinx and its Board of Directors disseminated a false and misleading Registration Statement that omitted material information regarding the Proposed Transaction, thereby violating Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The lawsuit also asserts a single claim against the Company, alleging that it acted as a controlling person of Xilinx within the meaning of Section 20(a) of the Exchange Act by virtue of its supervisory control over the composition of the Registration Statement. The lawsuit seeks to enjoin or rescind any transaction with Xilinx as well as certain other equitable relief, unspecified damages and attorneys’ fees and costs. On December 23, 2020, a shareholder of the Company filed a lawsuit in the United States District Court of the Southern District of New York regarding the Proposed Transaction. Vazirani v. Advanced Micro Devices, Case No. 1:20-cv-10894 (S.D.N.Y) (“Vazirani”). The lawsuit alleges that the Company and its Board of Directors disseminated a false and misleading Registration Statement that omitted material information regarding the Proposed Transaction, thereby violating Sections 14(a) and 20(a) of the Exchange Act. The lawsuit seeks to enjoin or rescind any transaction with Xilinx as well as certain other equitable relief, unspecified damages and attorneys’ fees and costs. On March 22, 2021, the Nunez complaint was voluntarily dismissed, and on March 25, 2021, the Vazirani complaint was voluntarily dismissed. The Shumacher complaint was voluntarily dismissed on April 9, 2021. Future Link Systems Litigation On December 21, 2020, Future Link Systems, LLC filed a patent infringement complaint against the Company in the United States District Court for the Western District of Texas. Future Link Systems alleges that the Company infringes three U.S. patents: 7,983,888 (related to simulated PCI express circuitry); 6,363,466 (related to out of order data transactions); and 6,622,108 (related to interconnect testing). Future Link Systems seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, costs, and injunctive relief against the Company. On March 22, 2021, the Company filed its answer to Future Link Systems’ complaint and also filed counterclaims based on Future Link Systems’ breach of the parties’ pre-suit non-disclosure agreement. On April 12, 2021, Future Link Systems filed its answer to the Company’s counterclaims. On June 3, 2021, the Company filed a motion to transfer the case to Austin, Texas. On October 14, 2021, the Court issued an order construing certain terms in the asserted patents. On November 22, 2021, the case was reassigned to the Austin division. On January 5, 2022, the Company filed a motion to strike Future Link System’s infringement contentions, and Future Link Systems filed a response on January 19, 2022. On January 14, 2022, the USPTO instituted an IPR trial for one of the three patents in suit. On December 21, 2021, Future Link Systems LLC filed a lawsuit alleging infringement of two patents related to power management. The Company was served with the complaint on December 28, 2021. On December 28, 2021, Future Link Systems LLC filed a complaint at the United States International Trade Commission alleging infringement of the same two power management patents. Several of the Company’s customers were also named as respondents. On January 26, 2022, the USITC announced that it would institute the investigation. 79 Based upon information presently known to management, the Company believes that the potential liability of the above listed legal proceedings, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations. Environmental Matters The Company is named as a responsible party on Superfund clean-up orders for three sites in Sunnyvale, California that are on the National Priorities List. Since 1981, the Company has discovered hazardous material releases to the groundwater from former underground tanks and proceeded to investigate and conduct remediation at these three sites. The chemicals released into the groundwater were commonly used in the semiconductor industry in the United States in the wafer fabrication process prior to 1979. In 1991, the Company received Final Site Clean-up Requirements Orders from the California Regional Water Quality Control Board relating to the three sites. The Company has entered into settlement agreements with other responsible parties on two of the orders. During the term of such agreements, other parties have agreed to assume most of the foreseeable costs as well as the primary role in conducting remediation activities under the orders. The Company remains responsible for additional costs beyond the scope of the agreements as well as all remaining costs in the event that the other parties do not fulfill their obligations under the settlement agreements. To address anticipated future remediation costs under the orders, the Company has computed and recorded an estimated environmental liability of approximately $ 3.8 million and has not recorded any potential insurance recoveries in determining the estimated costs of the cleanup. The progress of future remediation efforts cannot be predicted with certainty and these costs may change. The Company believes that any amount in addition to what has already been accrued would not be material. 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 financial position, results of operations, or cash flows. NOTE 18 - Pending Acquisition On October 26, 2020, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Thrones Merger Sub, Inc., the Company’s wholly owned subsidiary (Merger Sub), and Xilinx, Inc. (Xilinx), whereby Merger Sub will merge with and into Xilinx (the Merger), with Xilinx surviving such Merger as a wholly owned subsidiary of the Company. Under the Merger Agreement, at the effective time of the Merger (the Effective Time), each share of common stock of Xilinx (Xilinx Common Stock) issued and outstanding immediately prior to the Effective Time (other than treasury shares and any shares of Xilinx Common Stock held directly by the Company or Merger Sub) will be converted into the right to receive 1.7234 fully paid and non-assessable shares of the Company’s common stock and, if applicable, cash in lieu of fractional shares, subject to any applicable withholding. As of the signing of the Merger Agreement, the transaction was valued at $35 billion. The actual valuation of the transaction could differ significantly from the estimated amount due to movements in the price of the Company’s common stock, the number of shares of Xilinx common stock outstanding on the closing date of the Merger and other factors. Under the Merger Agreement, the Company will be required to pay a termination fee to Xilinx equal to $ 1.5 billion if the Merger Agreement is terminated in certain circumstances, including if the Merger Agreement is terminated because the Company’s board of directors has changed its recommendation. The Company will be required to pay a termination fee equal to $ 1.0 billion if the Merger Agreement is terminated in certain circumstances related to the failure to obtain required regulatory approvals prior to October 26, 2021 (subject to automatic extension first to January 26, 2022 and then to April 26, 2022, in each case, to the extent the regulatory closing conditions remain outstanding). On April 7, 2021, the Company’s stockholders voted to approve all the proposals relating to the Merger at a special meeting of stockholders. Xilinx stockholders also voted to approve their respective proposals relating to the Merger at a Xilinx special meeting held on the same day. The closing of the Merger is subject to customary conditions, including regulatory approval. The Merger is currently expected to close in the first quarter of 2022. 80 NOTE 19 - Subsequent Events Subsequent to December 25, 2021, through the date of issuance of these consolidated financial statements (the “issuance date”), the Company repurchased $ 1.0 billion of its common stock under the Repurchase Program. As of the issuance date, $ 1.2 billion remained available for future stock repurchases under the Repurchase Program. 81 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Advanced Micro Devices, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Advanced Micro Devices, Inc. (the Company) as of December 25, 2021 and December 26, 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 25, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 25, 2021 and December 26, 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 25, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 25, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 3, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 82 Inventory Valuation Description of the Matter At December 25, 2021, the Company’s net inventory balance was $1,955 million. As discussed in Note 2 of the consolidated financial statements, the Company adjusts the inventory carrying value to the lower of actual cost or the estimated net realizable value after completing ongoing reviews of on-hand inventory quantities exceeding forecasted demand, by considering recent historical activity as well as anticipated or forecasted demand. Auditing management’s inventory carrying value adjustments involved significant judgment because the estimates are based on several factors that are affected by market, industry, and competitive conditions outside the Company's control. In estimating inventory carrying value adjustments, management developed assumptions such as forecasts of future sales quantities and the selling prices, which are sensitive to the competitiveness of product offerings, customer requirements, and product life cycles. These significant assumptions are forward-looking and could be affected by future economic and market conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company's inventory carrying value adjustment determination process, including the basis for developing the above-described assumptions and management’s judgments. Our audit procedures included, among others, testing the reasonableness of management’s key assumptions and judgments and testing the accuracy and completeness of the underlying data used to determine the amount of inventory carrying value adjustments. For instance, we compared the quantities and carrying value of on-hand inventories to related unit sales, both historical and forecasted, assessed the reasonableness of management’s estimates of future sales prices by analyzing historical sales and evaluating any factors that may impact sales prices, and evaluated the appropriateness and adequacy of management’s adjustments to such sales forecasts by analyzing potential technological changes in line with product life cycles and/or identified alternative customer uses. We also assessed the accuracy of forecasts underlying management's estimates by comparing management’s historical forecasts to actual results, evaluated industry and market factors and performed sensitivity analyses over the significant assumptions used by management to evaluate necessary changes in the inventory carrying value adjustments. /s/ Ernst & Young LLP We have served as the Company’s auditor since 1970. San Jose, California February 3, 2022 83 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Advanced Micro Devices, Inc. Opinion on Internal Control over Financial Reporting We have audited Advanced Micro Devices, Inc.’s internal control over financial reporting as of December 25, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Advanced Micro Devices, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 25, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 25, 2021 and December 26, 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 25, 2021, and the related notes and our report dated February 3, 2022 expressed an unqualified opinion thereon . Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP San Jose, California February 3, 2022 84 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.