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Item 7. Management’s Discussion and Analysis

2021-01-29 compared with 2020-02-04 · 145 added, 109 removed, 109 unchanged (70% of the section changed)

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

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

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

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Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 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 28, 2019.

2019 marked a milestone in our multi-year journey with the launch of our 7 nanometer (nm) product portfolio.

We executed our product roadmap and introduced a number of high-performance products in 2019.

For the PC market, we introduced the 3rd Gen AMD Ryzen™ desktop processor family based on the new Zen 2 core architecture with AMD chiplet design approach.

In addition to our mainstream PC product family, we introduced the next generation of the Ryzen™ Threadripper™ product line designed for the high-end desktop segment for creators and enthusiasts.

We announced our second-generation AMD Ryzen™ 3000 Series notebook processors, powering ultrathin, commercial and gaming notebooks.

A number of high-performance graphics products were also launched in 2019.

We introduced the AMD Radeon™ VII, a premium graphics card for gamers, creators and enthusiasts.

We also announced the availability of the AMD Radeon™ RX 5700-series gaming graphics card family, the AMD Radeon™ RX 5500 series that will be available in desktop PCs from major PC manufacturers as well as the Radeon™ 5500M GPU for notebook PCs.

Our AMD Radeon™ Pro Vega II GPU is designed to power demanding professional applications.

We also announced the AMD Radeon™ Pro W5700, a 7nm professional PC workstation graphics card that enables 3D professionals to visualize and interact with their designs in real time.

For the server market, we introduced the 2nd Gen AMD EPYC™ family of processors that feature up to 64 “Zen 2” cores in 7nm process technology for performance and are designed to reduce total cost of ownership (TOC) by up to 50%.

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

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

Net revenue for 2020 was $9.8 billion, an increase of 45% compared to 2019 net revenue of $6.7 billion.

Gross margin, as a percentage of net revenue for 2020, was 45%, compared to 43% in 2019.

Our operating income for 2019 improved to $631 million compared to operating income of $451 million for 2018.

Our net income for 2019 improved to $341 million compared to $337 million in the prior year.

Cash, cash equivalents and marketable securities as of December 28, 2019 were $ 1.5 billion , up from $1.2 billion at the end of 2018.

We made significant progress towards improving our balance sheet in 2019 as we reduced our debt.

Principal amount of total debt as of December 28, 2019 was $563 million , compared to $ 1.5 billion as of December 29, 2018.

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

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

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

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

Cash, cash equivalents and short-term investments as of December 26, 2020 were $2.3 billion, compared to $1.5 billion at the end of 2019.

The aggregate principal amount of total debt as of December 26, 2020 was $338 million, compared to $563 million as of December 28, 2019.

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

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

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

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

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

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

We also expanded our notebook products in 2020.

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

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

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

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

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

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

We expanded our EPYC server family during the year.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

in an all-stock transaction.

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

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 impairments and income taxes.

We evaluate our estimates on an on-going basis, including those related to our revenue, inventories, goodwill 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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Management believes the following critical accounting estimates are the most significant to the presentation of our financial statements and require the most difficult, subjective and complex judgments.

Revenue recognition.

We recognize revenue upon the shipment of the product to our distributors (sell-in), rather than upon the resale of the product by our distributors to their customers (sell-through).

Accordingly, we have established provisions for rights of return and price protection on unsold product held by our distributors.

Revenue Allowances.

We record a provision for estimated sales returns and allowances on product sales for estimated future price reductions and other customer incentives in the same period that the related revenues are recorded.

We base these estimates on actual historical sales returns, historical allowances, historical price reductions, market activity and other known or anticipated trends and factors.

These estimates are subject to management’s judgment and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenue and operating results.

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 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.

Our estimates of necessary adjustments for distributor price incentives and price protection on unsold products held by distributors are based on actual historical incentives provided to distributor customers and known future price movements based on our internal and external market data analysis.

Our estimates of necessary adjustments for OEM price incentives utilize, in addition to known pricing agreements, actual historical rebate attainment rates and estimates of future OEM rebate program attainment based on internal and external market data analysis.

We offer incentive programs through cooperative advertising and marketing promotions.

Where funds provided for such programs can be estimated, we recognize a reduction to revenue at the time the related revenue is recognized;

otherwise, we recognize such reduction to revenue at the later of when:

i) the related revenue transaction occurs;

or ii) the program is offered.

For transactions where we reimburse a customer for a portion of the customer’s cost to perform specific product advertising or marketing and promotional activities, such amounts are recognized as a reduction to revenue unless they qualify for expense recognition.

We also provide limited product return rights to certain OEMs and to most distribution customers.

These return rights are generally limited to a contractual percentage of the customer’s prior quarter shipments, although, from time to time we may approve additional product returns beyond the contractual arrangements based on the applicable facts and circumstances.

In order to estimate adjustments to revenue to account for these returns, including product restocking rights provided to distributor and OEM customers, we utilize relevant, trended actual historical product return rate information gathered, adjusted for actual known information or events, as applicable.

Overall, our estimates of adjustments to contract price due to variable consideration under our contracts with OEM and distributor customers, based on our assumptions and include adjustments, if any, for known events, have been materially consistent with actual results;

however, these estimates are subject to management’s judgment and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenue and operating results.

Inventory Valuation.

At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence based on projected sales outlook.

This evaluation includes analysis of historical sales levels by product and projections of future demand.

These projections assist us in determining the carrying value of our inventory.

In addition, we write off inventories that we consider obsolete.

We adjust the remaining specific inventory balances to approximate the lower of our actual cost or estimated net realizable value.

Among other factors, management considers recent historical activity as well as anticipated or forecasted demand, estimates of future selling prices, competitiveness of product offerings, market and industry conditions, customer requirements and product life cycles when determining excess, obsolescence and net realizable value in relation to the inventory on hand.

If in any period we anticipate future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made.

This would have a negative impact on our gross margin in that period.

If in any period we are able to sell inventories that were not valued or that had been written down in a previous period, related revenues would be recorded without any offsetting charge to cost of sales resulting in a net benefit to our gross margin in that period.

We value inventory at standard cost, adjusted to approximate the lower of actual cost or estimated net realizable value using assumptions about future demand and market conditions.

Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on specific facts and circumstances.

In determining excess or obsolescence reserves for products, we consider assumptions such as changes in business and economic conditions, other-than-temporary decreases in demand for our products, and changes in technology or customer requirements.

In determining the lower of cost or net realizable value reserves, we consider assumptions such as recent historical sales activity and selling prices, as well as estimates of future selling prices.

If in any period we anticipate a change in assumptions such as future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in cost of sales, resulting in a negative impact to our gross margin in that period.

If in any period we are able to sell inventories that had been written down to a level below the ultimate realized selling price in a previous period, related revenue would be recorded with a lower or no offsetting charge to cost of sales resulting in a net benefit to our gross margin in that period.

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

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.

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

We first analyze qualitative factors.

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.

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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 the reporting unit’s fair value is less than its carrying value.

Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

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.

Income Taxes .

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These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.

We must assess the likelihood that we will be able to recover our deferred tax assets.

We regularly assess the likelihood that we will be able to recover our deferred tax assets.

Unless recovery is considered more-likely-than-not (a probability level of more than 50%), we will record a charge to income tax expense in the form of a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable or maintain the valuation allowance recorded in prior periods.

In determining the need to establish or maintain a valuation allowance, we consider multiple factors including past performance, the reversal of deferred tax liabilities, tax planning strategies, and future expected taxable income.

When considering all available evidence, if it is determined we can more-likely-than-not realize our deferred tax assets, we will reverse the existing valuation allowance, which would result in a credit to income tax expense and the establishment of an asset in the period of reversal.

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

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

We recognize the interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively.

When considering all available evidence, if we determine it is more-likely-than-not we will realize our deferred tax assets, we will reverse some or all of the existing valuation allowance, which would result in a credit to income tax expense and the establishment of an asset in the period of reversal.

In determining the need to establish or maintain a valuation allowance, we consider the four sources of jurisdictional taxable income:

(i) carryback of net operating losses to prior years;

(ii) future reversals of existing taxable temporary differences;

(iii) viable and prudent tax planning strategies;

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

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

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

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

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

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

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

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

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

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

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

Results of Operations

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

Additional information on our reportable segments is contained in Note 15:

Segment Reporting of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

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

Our operating results tend to vary seasonally.

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The following table provides a summary of net revenue and operating income (loss) by segment for 2020, 2019 and 2018.

2020 2019 2018

(In millions)

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Enterprise, Embedded and Semi-Custom 391 263 163

All Other (288) (209) (182)

Total operating income $ 1,369 $ 631 $ 451

Computing and Graphics

Computing and Graphics net revenue of $4.7 billion in 2019 increased by 14% , compared to $4.1 billion in 2018 , primarily as a result of a 22% increase in average selling price and a 4% increase in unit shipments.

The increase in average selling price was primarily driven by a richer mix of client processors due to strong demand of our Ryzen processors.

The increase in unit shipments was primarily due to higher demand for our Ryzen processors, partially offset by lower demand for our Radeon graphics products.

Computing and Graphics operating income was $577 million in 2019 compared to operating income of $470 million in 2018 .

The increase in operating income was primarily driven by higher sales, partially offset by a $194 million increase in operating expenses.

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

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

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

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

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

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

Enterprise, Embedded and Semi-Custom

Enterprise, Embedded and Semi-Custom net revenue of $2.0 billion in 2019 decreased by 14% compared to net revenue of $2.4 billion in 2018 , primarily as a result of lower semi-custom product revenue, partially offset by higher sales of our EPYC server processors.

Enterprise, Embedded and Semi-Custom operating income was $263 million in 2019 compared to operating income of $163 million in 2018 .

The increase in operating income was due primarily to higher sales of our EPYC server processor and a licensing

gain of $60 million recognized in the first quarter of 2019, partially offset by lower semi-custom product revenue and a $37 million increase in operating expenses.

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

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

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

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

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

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

All Other operating loss of $182 million in 2018 included $137 million of stock-based compensation expense and an impairment of technology licenses of $45 million .

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

The following is a summary of certain consolidated statement of operations data for 2020, 2019 and 2018:

2020 2019 2018

(In millions, except for percentages)

Net revenue $ 9,763 $ 6,731 $ 6,475

Cost of sales 5,416 3,863 4,028

Gross margin percentage

Gross profit 4,347 2,868 2,447

Gross margin 45 % 43 % 38 %

Research and development 1,983 1,547 1,434

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Other expense, net (47) (165) —

Provision for (benefit from) income taxes

Income tax provision (benefit) (1,210) 31 (9)

Gross margin as a percentage of net revenue was 45% in 2020 compared to 43% in 2019.

The improvement in gross margin was primarily driven by higher sales of Ryzen and EPYC processors, which have a higher gross margin than the corporate average.

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

Research and Development Expenses

Research and development expenses of $2.0 billion in 2020 increased by $436 million, or 28%, compared to $1.5 billion in 2019.

The increase was primarily due to an increase in product development costs in both the Computing and Graphics and Enterprise, Embedded and Semi-Custom segments as well as an increase in stock-based compensation expense.

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

Marketing, General and Administrative Expenses

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

The increase was primarily due to an increase in go-to-market activities in both the Computing and Graphics and Enterprise, Embedded and Semi-Custom segments, as well as an increase in stock-based compensation expense.

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

Licensing Gain

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Other Expense, Net

Other expense , net increased in 2019 by $165 million from net of zero in 2018 .

The change from 2018 to 2019 was primarily due to $176 million of loss on redemption, repurchases and conversions of debt in 2019.

Provision For (Benefit From) Income Taxes

We recorded an income tax provision of $31 million in 2019 and income tax benefit of $9 million in 2018.

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

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

Income Taxes Provision (Benefit)

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

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

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

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

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

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

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

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

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

income taxes accrued in the prior year.

The income tax benefit in 2018 was primarily due to a $36 million refund of withholding tax from a foreign jurisdiction related to a legal settlement from 2010, offset by $13 million of U.S.

income taxes resulting from the Tax Reform Act, $7 million tax provision in foreign locations and $7 million of withholding taxes on cross-border transactions.

As we continue to make progress in our business resulting in improved financial results, our future reassessment could possibly result in a determination that a valuation allowance is no longer required.

The impact of the determination would result in the release of the valuation allowance and significant financial impact in a future reporting period with a material non-cash income tax benefit and the recording of additional deferred tax assets on our consolidated balance sheet.

International Sales

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Liquidity and Capital Resources

As of December 28, 2019 , our cash, cash equivalents and marketable securities were $1.5 billion compared to $1.2 billion as of December 29, 2018 .

As of December 26, 2020, our cash, cash equivalents and short-term investments were $2.3 billion compared to $1.5 billion as of December 28, 2019.

The percentage of cash and cash equivalents held domestically was 94% as of December 26, 2020, and 90% as of December 28, 2019.

Our operating, investing and financing activities for fiscal 2019 , 2018 and 2017 were as follows:

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

2020 2019 2018

(In millions)

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

Our aggregate principal debt obligations were $0.6 billion and $1.5 billion as of December 28, 2019 and December 29, 2018 , respectively.

We believe our cash, cash equivalents and marketable securities balance along with our Secured Revolving Facility entered into in June 2019 (refer to Note 7 of “Notes to Consolidated Financial Statements for additional information) will be sufficient to fund operations, including capital expenditures, over the next 12 months.

Our aggregate principal debt obligations were $338 million and $563 million as of December 26, 2020 and December 28, 2019, respectively.

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

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

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Operating Activities

Net cash provided by operating activities was $493 million in 2019 compared to net cash provided by operating activities of $34 million in 2018 .

The increase in net cash provided by operating activities was primarily due to changes in working capital, largely driven by higher cash collections, partially offset by timing of accounts payable payments and higher wafer purchases and payroll.

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

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

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

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

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

Investing Activities

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

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

Net cash used in investing activities was $170 million in 2018, which primarily consisted of $163 million for purchases of property and equipment and a net cash outflow from purchases and maturities of available-for-sale debt securities of $78 million.

Financing Activities

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

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

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

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

Net cash provided by financing activities was $28 million in 2018, which consisted of a net cash inflow of $70 million from the issuance of common stock through employee equity incentive plans, partially offset by $41 million of cash used for debt reduction activities in 2018.

Contractual Obligations

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Payment due by period

(In millions)

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

Term debt (1)

$ 338 $ — $ 312 $ — $ — $ — $ 26

Aggregate interest obligation (2)

54 25 25 1 1 1 1

Other long-term liabilities (3)

159 55 64 19 10 8 3

Operating leases (4)

284 52 55 48 41 34 54

Purchase obligations (5)

3,032 2,971 7 15 15 15 9

Total contractual obligations (6)

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

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

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

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

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

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

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

7.50% Senior Notes Due 2022

On August 15, 2012, we issued $500 million of the 7.50% Senior Notes due 2022 (7.50% Notes).

The 7.50% Notes are our general unsecured senior obligations.

Interest is payable on February 15 and August 15 of each year beginning February 15, 2013 until the maturity date of August 15, 2022.

The 7.50% Notes are governed by the terms of an indenture (the 7.50% Indenture) dated August 15, 2012 between us and Wells Fargo Bank, N.A., as trustee.

In 2014, we repurchased $25 million in aggregate principal amount of the 7.50% Notes in open market transactions for $24 million .

In 2016, we repurchased $125 million in aggregate principal amount of the 7.50% Notes pursuant to a partial tender offer for $135 million .

In 2017, we settled $3 million in aggregate principal amount of the 7.50% Notes in treasury stock.

In 2018 , we settled $10 million in aggregate principal amount of the 7.50% Notes in treasury stock at a weighted-average cost of $9.01 per share.

During 2019 , we repurchased $25 million in aggregate principal amount of the 7.50% Notes in cash.

As of December 28, 2019 , the outstanding aggregate principal amount of the 7.50% Notes was $312 million .

2.125% Convertible Senior Notes Due 2026

In September 2016, we issued $805 million in aggregate principal amount of 2.125% Convertible Senior Notes due 2026 ( 2.125% Notes).

The 2.125% Notes are our general unsecured senior obligations.

The interest is payable semi-annually in March and September of each year, commencing in March 2017.

The 2.125% Notes mature on September 1, 2026.

However, as outlined in the indenture governing the 2.125% Notes, holders of the 2.125% Notes may convert them at their option during certain time periods and upon the occurrence of one of the following circumstances:

(1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2016 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day (equivalent to an initial conversion price of approximately $8.00 per share of common stock);

(2) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;

(3) upon the occurrence of specified corporate events.

On or after June 1, 2026 and until the close of business on the business day immediately preceding the maturity date, holders may convert their notes at any time regardless of the foregoing circumstances.

Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock at our election.

The event described in (1) above was met during the fourth calendar quarter of 2019 and, as a result, the 2.125% Notes are convertible at the option of the holder from January 1, 2020 and remain convertible until March 31, 2020.

During 2019, we converted $554 million principal amount of the 2.125% Notes through the issuance of approximately 69 million shares of our common stock at the conversion price of $8.00 per share and an aggregate cash payment of $56 million.

As of December 28, 2019 , we had $251 million principal of 2.125% Notes outstanding.

See Note 7 of “Notes to Consolidated Financial Statements” below for additional information regarding our 7.50% Notes and 2.125% Notes.

Operating Leases

We lease certain of our facilities under non-cancellable lease agreements that expire at various dates through 2028.

In addition, we lease certain office equipment for terms ranging from one to five years.

Total future non-cancellable lease obligations as of December 28, 2019 were $287 million , including future lease payments related to leases in Santa Clara, California;

Austin, Texas;

Markham, Canada and Shanghai, China.

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

We have foreign and U.S.

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

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

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

Off-Balance Sheet Arrangements

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

What changed 10-K

Item 7. Management’s Discussion and Analysis