What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-01-31 compared with 2023-02-27 · 102 added, 137 removed, 144 unchanged (62% of the section changed)

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Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 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 31, 2022.

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.

During 2023 we successfully launched multiple leadership products across our business and made important progress on our artificial intelligence (AI) strategy.

In Data Center, we launched several 4th Gen AMD EPYC™ processors, including our AMD EPYC 97x4 processors, formerly codenamed “Bergamo,” built with our “Zen 4c” architecture core and designed to deliver leadership cloud-native computing, and our AMD EPYC 8004 Series processors, formerly codenamed “Siena”, that bring the “Zen 4c” core into a purpose-built CPU.

In addition, we announced the extension of our 3rd Gen AMD EPYC processor family with six new offerings to meet the needs of general IT and mainstream computing for businesses seeking to leverage the economics of established platforms.

For our AI Data Center solutions, we announced the availability of the AMD Instinct™ MI300X accelerators that are designed to deliver leadership performance for generative AI workloads and high performance computing (HPC) applications.

In addition, we unveiled the AMD Instinct MI300A APU, which integrate the CPU and GPU cores on a single package delivering an efficient platform while also providing the compute performance to accelerate training on the latest AI models.

We enhanced the performance and features of our AMD RoCm™ software by releasing our latest AMD ROCm 6 open software platform for AI and HPC workloads.

We expanded our Embedded processor portfolio with powerful, scalable offerings for a variety of embedded applications such as the AMD Ryzen™ Embedded 7000 Series processor family.

We launched the AMD Versal™ Premium VP1902 adaptive SoC designed to help chipmakers streamline the verification of application-specific integrated circuits (SICs) and SoC designs, and we introduced the Spartan™ Ultrascale+™ FPGA ideal for cost-sensitive applications requiring low power and high I/O.

We launched the AMD Alveo™ MA35D media accelerator to power live interactive streaming services at scale, as well as the AMD Alveo UL3524 accelerator card.

We expanded our Zynq™ UltraScale™ RFSoC digital front-end portfolio with two additional devices to enable the expansion and deployment of 4G/5G radios where lower cost, power and spectrum-efficient radios are required to address increased wireless connectivity.

For our adaptive System-on-Modules (SOMs), we announced the addition of AMD Kria™ K24 SOM and KD240 Drives Starter Kit which offer power-efficient compute in a small factor and target cost-sensitive industrial and commercial edge applications.

We continued to expand our Client product portfolio by launching our Ryzen 7000 Series Mobile processors bringing the power of “Zen 4” and AMD RDNA 3 integrated graphics architecture to notebook users.

We expanded our commercial portfolio with AMD Ryzen PRO 7000 Series Mobile processors to bring advanced and power efficient x86 processors to business notebooks and mobile workstations.

We announced our Ryzen 7045HX3D gaming mobile processor with AMD 3D V-cache technology with leadership mobile gaming performance.

We also introduced AMD Ryzen X3D desktop processors, the Ryzen 9 7900X3D and Ryzen 9 7950X3D processors with 3D V-Cache technology.

For handheld PC gaming consoles, we introduced the AMD Ryzen Z1 and Z1 Extreme processors featuring RDNA 3 architecture based graphics, to bring portability and battery life to handled PC gaming consoles.

In Gaming, we introduced the AMD Radeon RX 7900M graphics for laptops, delivering desktop-class performance for gaming and content creation.

We also introduced the new AMD Radeon™ PRO W7000 Series graphics, our first professional graphic cards built on advanced AMD chiplet design to deliver leadership performance and unique features:

the AMD Radeon PRO W7600 and AMD Radeon PRO W7500.

We designed these workstation graphics cards for mainstream professional workflows.

We also unveiled the AMD Radeon RX 7800 XT and Radeon RX 7700 XT graphics cards optimized to deliver high-performance and high-refresh 1440p gaming experiences along with AMD FidelityFX™ Super Resolution 3 designed to offer performance boosts in supported games.

We expanded our AI engagements with a broad set of data center customers during the year.

In our Data Center GPU business, demand for our Data Center GPUs products was very strong as we had large hyperscaler customers committed to deploy our next generation AMD Instinct MI300 accelerators.

Our AI strategy is focused on three areas:

first, to deliver a broad portfolio and multigenerational roadmap of leadership CPUs, GPUs and adaptive computing solutions for AI inference and training;

second, to extend the open software platform we have established to enable our AI hardware to be deployed broadly and with ease;

and third, expand the deep and collaborative engagements we have established across the ecosystems to accelerate deployments of AMD-based AI solutions at scale.

To help execute our AI strategy and accelerate our AI business, we brought together multiple AI teams across AMD to execute our end-to-end AI hardware strategy and drive development of a comprehensive software ecosystem that will span our full product portfolio.

We strengthened our AI software capabilities with strategic acquisitions during the year.

In August 2023, we acquired Mipsology SAS, an AI software company to help develop the full AMD AI software stack and expand the open ecosystem of software tools, libraries and models.

We further expanded our open AI software capabilities with the acquisition of Nod, Inc., an open AI software company, in October 2023.

Nod, Inc.’s software technology helps accelerate the deployment of AI solutions optimized for AMD Instinct data center accelerators, Ryzen AI processors, EPYC processors, Versal SoCs and Radeon GPUs.

Against the backdrop of a mixed demand environment, net revenue for 2023 was $22.7 billion, a decrease of 4% compared to 2022 net revenue of $23.6 billion.

The decrease in net revenue was primarily due to a 25% decrease in Client segment revenue primarily due to lower processor sales and a 9% decrease in Gaming segment revenue primarily due to lower semi-custom product sales.

This decrease was partially offset by a 17% increase in Embedded segment revenue primarily due to the inclusion of embedded product revenue from Xilinx, Inc.

(Xilinx) for the full twelve months period in 2023, as compared to a partial period from February 14, 2022 (the Xilinx Acquisition Date) in the prior year period, and a 7% increase in Data Center segment revenue primarily driven by higher sales of AMD Instinct GPUs and 4th Gen AMD EPYC CPUs.

Gross margin, as a percentage of net revenue for 2023, was 46%, compared to 45% in 2022.

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 increase in gross margin was primarily due to higher Embedded segment revenue and lower amortization of acquisition-related intangible assets, partially offset by lower Client segment revenue and product mix.

Operating income for 2023 was $401 million compared to operating income of $1.3 billion for 2022.

The decrease in operating income was primarily due to lower Client segment performance and increased R&D investments, partially offset by lower amortization of acquisition-related intangible assets.

Net income for 2023 was $854 million compared to $1.3 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 30, 2023 were $5.8 billion, compared to $5.9 billion at the end of 2022.

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.

Our aggregate principal amount of total debt as of December 30, 2023 and December 31, 2022 was $2.5 billion.

During the twelve months ended December 30, 2023, we returned a total of $985 million to shareholders through the repurchase of 9.7 million shares of common stock under our stock repurchase program.

As of December 30, 2023, $5.6 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.

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, business combination, goodwill, long-lived and intangible assets, and income taxes.

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

Our goodwill is contained within four reporting units:

Data Center, Client, 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.

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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.

Based on our annual qualitative impairment test, we concluded it is not more likely than not that the fair value of each reporting unit exceeded its carrying amount.

Long-Lived and Intangible Assets.

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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

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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All Other (4,419) (4,979)

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

Total operating income

$ 401 $ 1,264

Data Center net revenue of $6.5 billion in 2023 increased by 7%, compared to net revenue of $6.0 billion in 2022.

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.

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.

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.

The increase was primarily driven by higher sales of AMD Instinct GPUs and 4th Gen AMD EPYC CPUs.

Data Center operating income was $1.3 billion in 2023, compared to operating income of $1.8 billion in 2022.

The decrease in operating income was primarily due to product mix and higher research and development (R&D) investment.

Client net revenue of $4.7 billion in 2023 decreased by 25%, compared to net revenue of $6.2 billion in 2022, primarily due to lower sales of Ryzen mobile and desktop processors, resulting from a 16% decrease in average selling price and a 12% decrease in unit shipments.

Lower Ryzen processor sales were due to weak PC market conditions and inventory correction across the PC supply chain that impacted the first half of 2023.

Client operating loss was $46 million in 2023, compared to operating income of $1.2 billion in 2022.

The decrease in operating income was primarily due to lower revenue.

Gaming net revenue of $6.2 billion in 2023 decreased by 9%, compared to net revenue of $6.8 billion in 2022.

The decrease in net revenue was primarily due to lower semi-custom product revenue.

Gaming operating income was $971 million in 2023, compared to operating income of $953 million in 2022.

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.

The increase in operating income was primarily driven by product mix, partially offset by higher R&D investment.

Embedded net revenue of $5.3 billion in 2023 increased by 17%, compared to net revenue of $4.6 billion in 2022.

The increase in net revenue was primarily driven by the inclusion of embedded product revenue from Xilinx, Inc.

(Xilinx) for the full twelve months period in 2023, as compared to a partial period from February 14, 2022 (the Xilinx Acquisition Date) in the prior year period.

Embedded operating income was $2.6 billion in 2023, compared to operating income of $2.3 billion in 2022.

The increase in operating income was primarily driven by the inclusion of Xilinx for the full twelve months period as compared to a partial period from the Xilinx Acquisition Date in the prior year period.

All Other operating loss of $4.4 billion in 2023 primarily consisted of $2.8 billion of amortization of acquisition-related intangibles, $1.4 billion of stock-based compensation expense, and $258 million of acquisition-related and other costs.

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

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Interest expense (106) (88)

Other income, net 8 55

Income tax provision (benefit) (122) 513

Other income (expense), net 197 8

Income tax (benefit)

Gross margin as a percentage of net revenue was 46% in 2023 compared to 45% in 2022.

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

The increase in gross margin was primarily driven by higher Embedded segment revenue and lower amortization of acquisition-related intangible assets, partially offset by lower Client segment revenue and product mix.

Research and Development Expenses

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.

Research and development expenses of $5.9 billion in 2023 increased by $867 million, or 17%, compared to $5.0 billion in 2022.

The increase was primarily due to higher employee-related costs due to an increase in headcount to support increased investment in AI.

Marketing, General and Administrative Expenses

Marketing, general and administrative expenses of $2.4 billion in 2023 increased by $16 million, or 1%, compared to $2.3 billion in 2022.

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

The increase was primarily due to an increase in employee-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.

Amortization of acquisition-related intangibles of $2.8 billion for 2023 decreased by $737 million, or 21%, compared to $3.5 billion in 2022.

The decrease was primarily due to certain acquisition-related intangibles being fully amortized in the first half of the current fiscal year.

Licensing Gain

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.

We recognized $34 million of licensing gain from royalty income and $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, in 2023 and 2022, respectively.

Interest Expense

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.

Interest expense of $106 million in 2023 increased by $18 million compared to $88 million in 2022, primarily due to interest expense from our 3.924% Senior Notes Due 2032 (3.924% Notes) and our 4.393% Senior Notes Due 2052 (4.393% Notes) that were issued in June 2022.

Other Income (expense), net

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.

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.

Other income (expense), net was $197 million in 2023 compared to $8 million of Other income, net in 2022.

The change was primarily due to an increase in interest income driven by rising interest rates.

Income Tax Benefit

We recorded an income tax benefit of $346 million and $122 million in 2023 and 2022, respectively, representing effective tax rates of (68%) and (10%), respectively.

The increase in income tax benefit in 2023 was primarily due to the lower pre-tax income coupled with a $185 million foreign-derived intangible income tax benefit and $169 million of research and development tax credits.

Global Minimum Tax

The OECD is continuing discussions surrounding fundamental changes in allocation of profits among tax jurisdictions in which companies do business, as well as the implementation of a global minimum tax (namely the “Pillar One” and “Pillar Two” proposals).

The Council of the European Union has adopted the global corporate 15% minimum tax as provided for in Pillar Two and has directed EU member states to implement legislation enacting Pillar Two.

Many countries, including non-EU member states, have implemented laws based on Pillar Two proposals, with effective dates starting in 2024.

Although many countries have already introduced Pillar Two legislation applicable to the Company effective in 2024, certain jurisdictions in which we operate have not adopted corresponding legislation to date.

The impact associated with Pillar Two will be accounted for as period costs.

We continue to evaluate the impact of proposed and enacted legislative changes to our effective tax rate and cash flows as new guidance becomes available.

International Sales

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As of December 30, 2023, our cash, cash equivalents and short-term investments were $5.8 billion compared to $5.9 billion as of December 31, 2022.

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 77% as of December 30, 2023, and 73% as of December 31, 2022.

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Financing activities (1,146) (3,264)

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.

Net increase (decrease) in cash and cash equivalents $ (902) $ 2,300

We have $3.0 billion available under an unsecured revolving credit agreement (Revolving Credit Agreement) that expires on April 29, 2027.

No funds were drawn from this credit facility during the year ended December 30, 2023.

We also have a commercial paper program to 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.

We did not issue any commercial paper during the year ended December 30, 2023.

Our aggregate principal debt obligations were $2.5 billion as of December 30, 2023.

Our 2.95% Notes with a principal amount of $750 million are due in June 2024.

As of December 30, 2023, we had unconditional purchase commitments of approximately $4.6 billion, of which $3.9 billion are in fiscal year 2024.

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

Our contractual obligations and purchase commitments relate primarily to our obligations to purchase wafers and substrates from third parties and future payments related to certain software and technology licenses and IP licenses.

See Note 16 – Commitments and Guarantees.

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.

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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 $1.7 billion in 2023, primarily due to our net income of $854 million in 2023, adjusted for non-cash adjustments of $3.9 billion and net cash outflows of $3.0 billion from changes in our operating assets and liabilities.

The primary drivers of the changes in operating assets and liabilities included a $1.3 billion increase in accounts receivable driven primarily by higher revenue in the last month of 2023 compared to the last month of 2022, and a $580 million increase in inventories driven primarily by build of advanced process nodes to support the ramp of new products.

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.

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 $1.4 billion in 2023, which primarily consisted of cash used for purchases of short-term investments of $3.7 billion, $546 million for purchases of property and equipment, and cash used in acquisitions, net of cash acquired of $131 million, partially offset by proceeds from maturities of short-term investments of $2.7 billion and sale of short-term investments of $300 million.

(“Pensando”) of $1.5 billion and $450 million for purchases of property and equipment.

Financing Activities

Net cash used in financing activities was $1.1 billion in 2023, which primarily consisted of common stock repurchases of $985 million under the Repurchase Program and repurchases to cover tax withholding on employee equity plans of $427 million, partially offset by proceeds from the issuance of common stock under our employee equity plans of $268 million.

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