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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-03 · 164 added, 96 removed, 117 unchanged (69% of the section changed)

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Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 25, 2021.

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

2022 was a transformative year for AMD as we took several major steps that scaled and reshaped our business.

In February 2022, we completed our strategic acquisition of Xilinx, Inc.

(Xilinx) which expanded our technology and product portfolio to include adaptable hardware platforms that enable hardware acceleration and rapid innovation across a variety of technologies and established AMD in multiple embedded markets where we have traditionally not had a significant presence.

We now offer Field Programmable Gate Arrays (FPGAs), Adaptive SoCs, and Adaptive Compute Acceleration Platform (ACAP) products.

With the acquisition of Xilinx, we have access to a new set of markets and customers, further strengthening and diversifying our business model.

In May 2022, we expanded our data center solutions capabilities with the acquisition of Pensando Systems, Inc.

We now offer high-performance data processing units (DPUs) and a software stack that complements our existing products.

With the Xilinx and Pensando acquisitions, we are well positioned to provide the industry’s broadest set of leadership compute engines and accelerators to help enable best performance, security, flexibility and total cost of ownership for leading-edge data centers.

Our 2022 financial results reflect the strength of our diversified business model despite the challenging PC market conditions in the second half of 2022.

Net revenue for 2022 was $23.6 billion, an increase of 44% compared to 2021 net revenue of $16.4 billion.

The increase in net revenue was driven by a 64% increase in Data Center segment revenue primarily due to higher sales of our EPYC™ server processors, a 21% increase in Gaming segment revenue primarily due to higher semi-custom product sales, and a significant increase in Embedded segment revenue from the prior year period driven by the inclusion of Xilinx embedded product sales.

This growth was partially offset by a 10% decrease in Client segment revenue primarily due to lower processor shipments driven by a weak PC market and significant inventory correction actions across the PC supply chain.

Gross margin, as a percentage of net revenue for 2022, was 45%, compared to 48% in 2021.

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

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

The decrease in gross margin was primarily due to amortization of intangible assets associated with the Xilinx acquisition.

Operating income for 2022 was $1.3 billion compared to operating income of $3.6 billion for 2021.

The decrease in operating income was primarily driven by amortization of intangible assets associated with the Xilinx acquisition.

Net income for 2022 was $1.3 billion compared to $3.2 billion in the prior year.

The decrease in net income was primarily driven by lower operating income.

Cash, cash equivalents and short-term investments as of December 31, 2022 were $5.9 billion, compared to $3.6 billion at the end of 2021.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

the office and support those employees who work from home.

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

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

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

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

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

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

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

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

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

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

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

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

Our aggregate principal amount of total debt as of December 31, 2022 was $2.5 billion, compared to $313 million as of December 25, 2021.

We took several actions in 2022 to strengthen our financial position.

In June 2022, we issued $1.0 billion in aggregate principal amount of senior notes, consisting of $500 million in aggregate principal amount of 3.924% Senior Notes due 2032 (3.924% Notes) and $500 million in aggregate principal amount of 4.393% Senior Notes due 2052 (4.393% Notes).

The 3.924% Notes will mature on June 1, 2032 and bear interest at a rate of 3.924% per annum, and the 4.393% Notes will mature on June 1, 2052 and bear interest at a rate of 4.393% per annum.

The 3.924% Notes and the 4.393% Notes are senior unsecured obligations.

We also entered into a revolving credit agreement in June 2022.

The agreement provides for a five-year unsecured revolving credit facility in the aggregate principal amount of $3.0 billion.

There were no funds drawn from this facility during the year ended December 31, 2022.

In November 2022, we established a new commercial paper program, under which we may issue unsecured commercial paper notes up to a maximum principal amount outstanding at any time of $3.0 billion with a maturity of up to 397 days from the date of issue.

The commercial paper will be sold at a discount from par or, alternatively, will be sold at par and bear interest at rates that will vary based on market conditions at the time of issuance.

As of December 31, 2022, we had no commercial paper outstanding.

During the twelve months ended December 31, 2022, we returned a total of $3.7 billion to shareholders through the repurchase of 36.3 million shares of common stock under our stock repurchase program.

As of December 31, 2022, $6.5 billion remained available for future stock repurchases under this program.

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

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

in an all-stock transaction.

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

We continued executing our product technology roadmap by delivering a number of new leadership products and technologies during 2022.

For Data Center, we launched our 4th Gen AMD EPYC™ processors with next-generation architecture, technology and features, and designed to deliver optimizations across market segments and applications, while helping businesses free data center resources to create additional workload processing and accelerate output.

We also unveiled our 3rd Gen AMD EPYC processors with AMD 3D V-Cache technology for leadership performance in technical computing workloads.

We introduced the 7 nm Versal™ ACAP VCK5000 development card designed to offer leadership AI inference performance.

We announced the availability of the AMD Instinct™ ecosystem, the new AMD Instinct MI210 accelerator and ROCm™ 5 software.

Together the AMD Instinct and ROCm ecosystem offers exascale-class technology to a broad base of high performance computing (HPC) and artificial intelligence (AI) customers, designed to address the demand for compute-accelerated data center workloads and reduce the time to insights and discoveries.

In the Embedded segment, w e introduced the AMD Ryzen™ Embedded R2000 Series, second-generation mid-range system-on-chip processors optimized for a wide range of industrial and robotics systems, machine vision, IoT (Internet of Things) and thin-client equipment.

We also introduced the Kria™ KR260 Robotics Starter Kit, the latest addition to the Kria portfolio.

The kit enables rapid development of hardware-accelerated applications for robotics, machine vision and industrial communication and control.

For the Client segment, we introduced the Ryzen 7000 Series Desktop processors powered by the new “Zen 4” architecture for gamers, enthusiasts, and content creators.

Along with the introduction of the Ryzen 7000 Series Desktop processors, we also unveiled the new Socket AM5 platform featuring four new chipsets.

These new desktop processors are designed for gamers, enthusiasts, and content creators.

We introduced AMD Ryzen 7000 Mobile processors with up to 16 “Zen 4” architecture cores.

We also introduced the AMD Ryzen 6000 Series Mobile processors, built on “Zen 3+” architecture and includes AMD RDNA™ 2 architecture based on integrated graphics.

We launched the AMD Ryzen 5000 C-Series processors bringing “Zen 3” architecture to premium Chrome OS devices for work and collaboration.

The processors offer up to eight high performance x86 cores.

For workstations, we introduced the new AMD Ryzen Threadripper™ PRO 5000 WX-Series workstation processors designed for professionals to run demanding workstation applications.

We also introduced the AMD Ryzen PRO 7030 Series Mobile processors built on “Zen 3” core architecture.

In the Gaming segment, we unveiled the AMD Radeon ™ RX 7900 XTX and the Radeon RX 7900 XT gaming graphics cards that are built on next-generation high performance, energy-efficient AMD RDNA™ 3 architecture.

We announced new graphics cards to the AMD Radeon RX 6000 Series product line:

the AMD Radeon RX 6950 XT, the AMD Radeon RX 6750 XT and the AMD Radeon RX 6650 XT.

These new graphics cards are built on AMD RDNA 2 gaming architecture and GDDR6 memory at up to 18Gbps.

We launched the new AMD Radeon PRO GPUs including the introduction of the AMD Radeon PRO W6400 graphics card built on AMD RDNA 2 architecture.

Although the current COVID-19 pandemic continues to impact our business operations and practices, we experienced limited disruptions during 2022.

We continue to monitor our operations and public health measures implemented by governmental authorities in response to the pandemic.

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

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The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements.

We evaluate our estimates on an on-going basis, including those related to our revenue, inventories, goodwill and income taxes.

We evaluate our estimates on an on-going basis, including those related to our revenue, inventories, business combination, goodwill, long-lived and intangible assets, and income taxes.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

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Revenue contracts with our customers include variable amounts which we evaluate under ASC 606-10-32-8 through 14 in order to determine the net amount of consideration to which we are entitled and which we recognize as revenue.

We determine the net amount of consideration to which we are entitled by estimating the most likely amount of consideration we expect to receive from the customer after adjustments to the contract price for rights of return and rebates to our OEM customers and rights of return, rebates and price protection on unsold merchandise to our distributor customers.

We determine the net amount of consideration to which we are entitled by estimating the most likely amount of consideration we expect to receive from the customer after adjustments to the contract price for rights of return and rebates to our original equipment manufacturers (OEM) customers and rights of return, rebates and price protection on unsold merchandise to our distributor customers.

We base our determination of necessary adjustments to the contract price by reference to actual historical activity and experience, including actual historical returns, rebates and credits issued to OEM and distributor customers adjusted, as applicable, to include adjustments, if any, for known events or current economic conditions, or both.

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Overall, our estimates of inventory carrying value adjustments have been materially consistent with actual results.

Business Combinations.

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values.

The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.

Significant estimates in valuing developed technology, in-process research and development, customer relationships and other identifiable intangible assets include, but are not limited to, expected future revenue growth rates and margins, future changes in technology, time to recreate customer relationships, useful lives, and discount rates.

Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite lived intangible assets, including goodwill, are not amortized.

During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

Goodwill is the excess of the aggregate of the consideration transferred over the identifiable assets acquired and liabilities assumed in connection with business combinations.

Our reporting units are at the operating segment level.

Our goodwill is contained within three reporting units:

Data Center, Gaming and Embedded.

We perform our goodwill impairment analysis as of the first day of the fourth quarter of each year and, if certain events or circumstances indicate that an impairment loss may have been incurred, on a more frequent basis.

The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment.

We first analyze qualitative factors to determine if it is more likely than not that the fair value of a reporting unit exceeds its carrying amount.

Qualitative factors include industry and market considerations, overall financial performance, share price trends and market capitalization and Company-specific events.

If we conclude it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, we do not proceed to perform a quantitative impairment test.

If we conclude it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative goodwill impairment test will be performed by comparing the fair value of each reporting unit to its carrying value.

A quantitative impairment analysis, if necessary, considers the income approach, which requires estimates of the present value of expected future cash flows to determine a reporting unit’s fair value.

Significant estimates include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates, and future economic and market conditions.

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.

The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment, which occurs when the carrying value of a reporting unit exceeds its fair value.

Significant judgment is required in estimating the fair value of our reporting units to determine if the fair values of those units exceed their carrying values and an impairment to goodwill is required when a quantitative goodwill impairment test is performed.

We typically obtain the assistance of third-party valuation specialists to help in determining the fair value of our reporting units.

The fair values of our reporting units are estimated using a combination of the income approach, which requires estimating the present value of expected future cash flows of a reporting unit, and the market approach, which uses financial ratios of comparable companies to arrive at an estimated value for the reporting unit.

Significant estimates and assumptions used in the income approach include assessments of macroeconomic conditions, growth rates of our reporting units in the near- and long-term, expectations of our ability to execute on our roadmap and projections, and the discount rate applied to cash flows.

Significant estimates used in the market approach include the identification of comparable companies for each reporting unit, the determination of an appropriate control premium that a market participant would apply to a reporting unit, and the determination of appropriate multiples to apply to a reporting unit based on adjustments and consideration of specific attributes of that reporting unit.

The most significant assumptions utilized in the determination of the estimated fair values of our reporting units are the sales and earnings growth rates (including long-term growth rates) and discount rates.

Long-term growth rates are dependent on overall market growth rates, the competitive environment and inflation.

As a result, long-term growth rates could be adversely impacted by a sustained deceleration in category growth or an increased competitive environment.

Discount rates, which are consistent with a weighted average cost of capital that is likely to be expected by a market participant, are based upon industry required rates of return, including consideration of both debt and equity components of the capital structure.

Our discount rates may be impacted by adverse changes in the macroeconomic environment, prolonged and continuing inflationary pressures, volatility in the equity and debt markets and other factors that otherwise create or exacerbate risks in our reporting units.

Changes in operating plans or adverse changes in the business or in the macroeconomic environment in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that would trigger future impairment charges of our reporting units’ goodwill.

Based on our annual impairment testing, the fair values of all of our reporting units exceeded their carrying values.

Long-Lived and Intangible Assets.

Long-lived and intangible assets to be held and used are reviewed for impairment if indicators of potential impairment exist and at least annually for indefinite-lived intangible assets.

Impairment indicators are reviewed on a quarterly basis.

Assets are grouped and evaluated for impairment at the lowest level of identifiable cash flows.

When indicators of impairment exist and assets are held for use, we estimate future undiscounted cash flows attributable to the related asset groups.

In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the asset group or based on appraisals.

Factors affecting impairment of assets held for use include the ability of the specific assets to generate separately identifiable positive cash flows.

When assets are removed from operations and held for sale, we estimate impairment losses as the excess of the carrying value of the assets over their fair value.

Market conditions are among the factors affecting impairment of assets held for sale.

Changes in any of these factors could necessitate impairment recognition in future periods for assets held for use or assets held for sale.

Income Taxes .

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Results of Operations

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

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

During the second quarter of fiscal year 2022, we changed our reporting segments to align our financial reporting with how we manage our business in strategic end markets.

This is consistent with how our Chief Operating Decision Maker (CODM) assesses our financial performance and allocates resources.

As a result, we report our financial performance based on the following four reportable segments:

Data Center, Client, Gaming, and Embedded.

Additional information on our reportable segments is contained in Note 4 – Segment Reporting of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

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The following table provides a summary of net revenue and operating income (loss) by segment for 2022 and 2021:

December 25, 2021 December 26, 2020

2022 December 25,

(In millions)

Computing and Graphics $ 9,332 $ 6,432

Enterprise, Embedded and Semi-Custom 7,102 3,331

Data Center $ 6,043 $ 3,694

Client 6,201 6,887

Gaming 6,805 5,607

Embedded 4,552 246

Total net revenue $ 23,601 $ 16,434

Operating income (loss):

Computing and Graphics $ 2,090 $ 1,266

Enterprise, Embedded and Semi-Custom 1,979 391

Data Center $ 1,848 $ 991

Client 1,190 2,088

Gaming 953 934

Embedded 2,252 44

All Other (4,979) (409)

Total operating income $ 3,648 $ 1,369

Computing and Graphics

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

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

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

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

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

Total operating income (loss) $ 1,264 $ 3,648

Data Center net revenue of $6 billion in 2022 increased by 64%, compared to net revenue of $3.7 billion in 2021.

The increase was primarily driven by higher sales of our EPYC server processors.

Data Center operating income was $1.8 billion in 2022, compared to operating income of $991 million in 2021.

The increase in operating income was primarily driven by higher revenue, partially offset by higher operating expenses.

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

Enterprise, Embedded and Semi-Custom

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

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

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

Client net revenue of $6.2 billion in 2022 decreased by 10%, compared to net revenue of $6.9 billion in 2021, primarily driven by a 24% decrease in unit shipment, partially offset by a 19% increase in average selling price.

The decrease in unit shipments was due to challenging PC market conditions and significant inventory correction across the PC supply chain experienced during the second half of 2022.

The increase in average selling price was primarily driven by a richer mix of Ryzen mobile processor sales.

Client operating income was $1.2 billion in 2022, compared to operating income of $2.1 billion in 2021.

The decrease in operating income was primarily driven by lower revenue and higher operating expenses.

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

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

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

Gaming net revenue of $6.8 billion in 2022 increased by 21%, compared to net revenue of $5.6 billion in 2021.

The increase in net revenue was driven by higher semi-custom product sales due to higher demand for gaming console SoCs, partially offset by lower gaming graphics sales due to a decrease in unit shipments driven by soft consumer demand given weakened macroeconomic conditions experienced in the second half of 2022.

Gaming operating income was $953 million in 2022, compared to operating income of $934 million in 2021.

The increase in operating income was primarily driven by higher revenue, partially offset by higher operating expenses.

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

Embedded net revenue of $4.6 billion in 2022 increased significantly, compared to net revenue of $246 million in 2021.

The significant increase in net revenue was primarily driven by the inclusion of Xilinx embedded product revenue as a result of the acquisition of Xilinx in February 2022.

Embedded operating income was $2.3 billion in 2022, compared to operating income of $44 million in 2021.

The significant increase in operating income was primarily driven by the inclusion of Xilinx embedded product revenue.

All Other operating loss of $5.0 billion in 2022 primarily consisted of $3.5 billion of amortization of acquisition-related intangibles, $1.1 billion of stock-based compensation expense, and $452 million of acquisition-related costs, which primarily include transaction costs, amortization of Xilinx inventory fair value step-up adjustment, and depreciation related to the Xilinx fixed assets fair value step-up adjustment, certain compensation charges related to the acquisitions of Xilinx and Pensando, and licensing gain.

All Other operating loss of $409 million in 2021 primarily consisted of $379 million of stock-based compensation expense and $42 million of acquisition-related costs.

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

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Cost of sales 11,550 8,505

Amortization of acquisition-related intangibles 1,448 —

Gross profit 10,603 7,929

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Marketing, general and administrative 2,336 1,448

Amortization of acquisition-related intangibles 2,100 —

Licensing gain (102) (12)

Interest expense (88) (34)

Other income (expense), net 55 (47)

Other income, net 8 55

Income tax provision (benefit) (122) 513

Gross margin as a percentage of net revenue was 45% in 2022 compared to 48% in 2021.

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

The decrease in gross margin was primarily due to amortization of intangible assets associated with the Xilinx acquisition.

Research and Development Expenses

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

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

Research and development expenses of $5.0 billion in 2022 increased by $2.2 billion, or 76%, compared to $2.8 billion in 2021.

The increase was primarily driven by strategic investments across all of our segments, including an increase in headcount through acquisitions and organic growth.

Marketing, General and Administrative Expenses

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

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

Marketing, general and administrative expenses of $2.3 billion in 2022 increased by $888 million, or 61%, compared to $1.4 billion in 2021.

The increase was primarily due to an increase in headcount through acquisitions and organic growth, go-to-market activities, and acquisition-related costs.

Amortization of Acquisition-Related Intangibles

In 2022, cost of sales and operating expense included $1.4 billion and $2.1 billion, respectively, of amortization expense from intangible assets acquired as a result of the acquisitions of Xilinx and Pensando.

Licensing Gain

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

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

During 2022, we recognized $102 million of licensing gain from milestone achievement and royalty income associated with the licensed IP to the THATIC JV, our two joint ventures with Higon Information Technology Co., Ltd., a third-party Chinese entity.

We recognized a licensing gain from royalty income of $12 million for the year ended December 25, 2021.

Interest Expense

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

Interest expense of $88 million in 2022 increased by $54 million compared to $34 million in 2021, primarily due to interest expense from the 2.95% Senior Notes due 2024 and the 2.375% Senior Notes due 2030 (together, the Assumed Xilinx Notes) and the 3.924% Notes and 4.393% Notes issued in 2022.

Other Income (Expense), net

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

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

Income Taxes Provision (Benefit)

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

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

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

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

This benefit was partially offset by approximately $10 million of withholding tax expense related to cross-border transactions, $13 million of state and foreign taxes, and a $75 million increase in valuation allowance against certain state and foreign tax credits.

Other income (expense), net is primarily comprised of interest income from short-term investments, changes in valuation of equity investments and foreign currency transaction gains and losses.

Other income, net was $8 million in 2022 compared to $55 million of Other income, net in 2021.

The change was primarily due to a $62 million decrease in the fair value of equity investments in 2022 compared to an increase in fair value of $56 million from equity investments in 2021, partially offset by $65 million of interest income driven mainly by rising interest rates in 2022 compared to losses from conversion of our convertible debt of $7 million in 2021.

Income Tax Provision (Benefit)

We recorded an income tax benefit of $122 million in 2022 and an income tax provision of $513 million in 2021, representing effective tax rates of (10%) and 14%, respectively.

The reduction in income tax expense in 2022 was primarily due to the lower pre-tax income coupled with a $261 million foreign-derived intangible income tax benefit and $241 million of research and development tax credits.

Through the end of fiscal year 2022, we continued to maintain a valuation allowance of approximately $2.1 billion for certain federal, state, and foreign tax attributes.

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As of December 31, 2022, our cash, cash equivalents and short-term investments were $5.9 billion compared to $3.6 billion as of December 25, 2021.

The increase in cash, cash equivalents and short-term investments was primarily driven by the $2.4 billion of cash and $1.6 billion of short-term investments acquired from the Xilinx acquisition, $1.0 billion from the debt issuance of our 3.924% Notes and 4.393% Notes, and cash flows from operations, partially offset by stock repurchases and cash paid for the acquisition of Pensando.

The percentage of cash and cash equivalents held domestically was 73% as of December 31, 2022, and 91% as of December 25, 2021.

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

Our operating, investing and financing cash flow activities for 2022 and 2021 were as follows:

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Financing activities (3,264) (1,895)

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

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

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

Net increase in cash and cash equivalents $ 2,300 $ 940

Our aggregate principal debt obligations were $2.5 billion as of December 31, 2022, which consisted primarily of $1.5 billion of the Xilinx Notes assumed as part of the Xilinx acquisition and $1.0 billion of 3.924% Notes and 4.393% Notes issued during the year, compared to $313 million as of December 25, 2021, respectively.

We repaid $312 million of our 7.50% Senior Notes that matured in August 2022.

On April 29, 2022, we entered into a revolving credit agreement (Revolving Credit Agreement) with Wells Fargo Bank, N.A.

as administrative agent and other banks identified therein as lenders.

The Revolving Credit Agreement provides for a five-year unsecured revolving credit facility in the aggregate principal amount of $3.0 billion.

There were no funds drawn from this facility during the year ended December 31, 2022.

On November 3, 2022, we established a new commercial paper program where we may issue unsecured commercial paper notes up to a maximum principal amount outstanding at any time of $3.0 billion with a maturity of up to 397 days from the date of issue.

The commercial paper will be sold at a discount from par or, alternatively, will be sold at par and bear interest at rates that will vary based on market conditions at the time of issuance.

As of December 31, 2022, we had no commercial paper outstanding.

As of December 31, 2022, we had unconditional purchase commitments of approximately $8.6 billion, of which $6.5 billion are in fiscal year 2023.

On an ongoing basis, we work with our suppliers on the timing of payments and deliveries of purchase commitments, taking into account business conditions.

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

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

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Operating Activities

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

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

Net cash provided by operating activities was $3.6 billion in 2022, primarily due to our net income of $1.3 billion in 2022, adjusted for non-cash adjustments of $4.1 billion and net cash outflows of $1.8 billion from changes in our operating assets and liabilities.

The primary drivers of the changes in operating assets and liabilities included a $1.4 billion increase in inventories driven primarily by build of advanced process nodes to support the ramp of new products, a $1.1 billion increase in accounts receivable driven primarily by higher revenue in the fourth quarter of 2022 compared to the fourth quarter of 2021, and a $1.2 billion increase in prepaid expenses and other assets due primarily to prepayments under long-term supply agreements in 2022, offset by an $931 million increase in accounts payable primarily due to timing of payments to our suppliers, and a $546 million increase in accrued liabilities and other driven mainly by higher customer-related accruals.

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

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

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

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

Investing Activities

Net cash provided by investing activities was $2 billion in 2022, which primarily consisted of higher cash provided by maturities of short-term investments of $4.3 billion and cash acquired as part of the acquisition of Xilinx of $2.4 billion, partially offset by higher cash used for purchases of short-term investments of $2.7 billion, cash used in the acquisition of Pensando of $1.5 billion and $450 million for purchases of property and equipment.

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

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

Financing Activities

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

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

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

Contractual Obligations

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

Net cash used in financing activities was $3.3 billion in 2022, which primarily consisted of common stock repurchases of $3.7 billion under the Repurchase Program, higher repurchases to cover tax withholding on employee equity plans of $406 million and repayment of debt of $312 million, partially offset by proceeds from the issuance of debt of $991 million and higher proceeds from the issuance of common stock under our employee equity plans of $167 million.

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

Off-Balance Sheet Arrangements

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What changed 10-K

Item 7. Management’s Discussion and Analysis