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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-07882
ADVANCED MICRO DEVICES, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
Delaware | | | 94-1692300 |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
2485 Augustine Drive
Santa Clara, California 95054
(Address of principal executive offices)
(408) 749-4000
Registrant’s telephone number, including area code
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | AMD | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☑ | | Accelerated filer | | ☐ | Non-accelerated filer | | ☐ |
Smaller reporting company | | ☐ | | Emerging growth company | | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 27, 2023: 1,615,498,891
INDEX
PART I. FINANCIAL INFORMATION
| | | | | |
ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (In millions, except per share amounts) |
Net revenue | $ | 5,800 | | | $ | 5,565 | | | $ | 16,512 | | | $ | 18,002 | |
Cost of sales | 2,843 | | | 2,799 | | | 8,236 | | | 8,797 | |
Amortization of acquisition-related intangibles | 210 | | | 412 | | | 727 | | | 1,005 | |
Total cost of sales | 3,053 | | | 3,211 | | | 8,963 | | | 9,802 | |
Gross profit | 2,747 | | | 2,354 | | | 7,549 | | | 8,200 | |
| | | | | | | |
Research and development | 1,507 | | | 1,279 | | | 4,361 | | | 3,639 | |
Marketing, general and administrative | 576 | | | 557 | | | 1,708 | | | 1,746 | |
Amortization of acquisition-related intangibles | 450 | | | 590 | | | 1,449 | | | 1,499 | |
Licensing gain | (10) | | | (8) | | | (28) | | | (97) | |
Operating income (loss) | 224 | | | (64) | | | 59 | | | 1,413 | |
| | | | | | | |
Interest expense | (26) | | | (31) | | | (79) | | | (69) | |
Other income (expense), net | 59 | | | 22 | | | 148 | | | (24) | |
Income (loss) before income taxes and equity income | 257 | | | (73) | | | 128 | | | 1,320 | |
| | | | | | | |
Income tax provision (benefit) | (39) | | | (135) | | | (49) | | | 32 | |
Equity income in investee | 3 | | | 4 | | | 10 | | | 11 | |
Net income | $ | 299 | | | $ | 66 | | | $ | 187 | | | $ | 1,299 | |
| | | | | | | |
Earnings per share | | | | | | | |
Basic | $ | 0.18 | | | $ | 0.04 | | | $ | 0.12 | | | $ | 0.84 | |
Diluted | $ | 0.18 | | | $ | 0.04 | | | $ | 0.11 | | | $ | 0.84 | |
Shares used in per share calculation | | | | | | | |
Basic | 1,616 | | | 1,615 | | | 1,613 | | | 1,542 | |
Diluted | 1,629 | | | 1,625 | | | 1,625 | | | 1,555 | |
See accompanying notes.
Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (In millions) |
Net income | $ | 299 | | | $ | 66 | | | $ | 187 | | | $ | 1,299 | |
Other comprehensive loss, net of tax: | | | | | | | |
Net change in unrealized gains on cash flow hedges | (18) | | | (55) | | | (9) | | | (85) | |
Total comprehensive income | $ | 281 | | | $ | 11 | | | $ | 178 | | | $ | 1,214 | |
See accompanying notes.
Advanced Micro Devices, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (In millions, except par value amounts) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 3,561 | | | $ | 4,835 | |
Short-term investments | 2,224 | | | 1,020 | |
Accounts receivable, net | 5,054 | | | 4,126 | |
Inventories | 4,445 | | | 3,771 | |
Receivables from related parties | 1 | | | 2 | |
Prepaid expenses and other current assets | 1,403 | | | 1,265 | |
Total current assets | 16,688 | | | 15,019 | |
Property and equipment, net | 1,566 | | | 1,513 | |
Operating lease right-of-use assets | 507 | | | 460 | |
Goodwill | 24,186 | | | 24,177 | |
Acquisition-related intangibles, net | 21,950 | | | 24,118 | |
Investment: equity method | 93 | | | 83 | |
Deferred tax assets | 76 | | | 58 | |
Other non-current assets | 2,560 | | | 2,152 | |
Total assets | $ | 67,626 | | | $ | 67,580 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 2,245 | | | $ | 2,493 | |
Payables to related parties | 325 | | | 463 | |
Accrued liabilities | 3,376 | | | 3,077 | |
Current portion of long-term debt, net | 752 | | | — | |
Other current liabilities | 929 | | | 336 | |
Total current liabilities | 7,627 | | | 6,369 | |
Long-term debt | 1,715 | | | 2,467 | |
Long-term operating lease liabilities | 395 | | | 396 | |
Deferred tax liabilities | 1,152 | | | 1,934 | |
Other long-term liabilities | 1,767 | | | 1,664 | |
Commitments and contingencies (See Note 12) | | | |
Stockholders’ equity: | | | |
Capital stock: | | | |
Common stock, par value $0.01; shares authorized: 2,250; shares issued: 1,660 and 1,645; shares outstanding: 1,615 and 1,612 | 17 | | | 16 | |
Additional paid-in capital | 59,182 | | | 58,005 | |
Treasury stock, at cost (shares held: 45 and 33) | (4,235) | | | (3,099) | |
Retained earnings (Accumulated deficit) | 56 | | | (131) | |
Accumulated other comprehensive loss | (50) | | | (41) | |
Total stockholders’ equity | 54,970 | | | 54,750 | |
Total liabilities and stockholders’ equity | $ | 67,626 | | | $ | 67,580 | |
See accompanying notes.
Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
| (In millions) |
Cash flows from operating activities: | | | |
Net income | $ | 187 | | | $ | 1,299 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 2,654 | | | 2,954 | |
Stock-based compensation | 1,010 | | | 766 | |
Amortization of operating lease right-of-use assets | 73 | | | 63 | |
Amortization of inventory fair value adjustment | 3 | | | 187 | |
| | | |
Loss on sale or disposal of property and equipment | 10 | | | 15 | |
Deferred income taxes | (800) | | | (1,328) | |
(Gain) loss on equity investments, net | (1) | | | 57 | |
Other | (43) | | | (9) | |
Changes in operating assets and liabilities | | | |
Accounts receivable, net | (929) | | | (1,301) | |
Inventories | (674) | | | (997) | |
Receivables from related parties | 1 | | | (1) | |
Prepaid expenses and other assets | (380) | | | (825) | |
Payables to related parties | (137) | | | 313 | |
Accounts payable | (238) | | | 811 | |
Accrued and other liabilities | 550 | | | 994 | |
Net cash provided by operating activities | 1,286 | | | 2,998 | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (407) | | | (326) | |
Purchases of short-term investments | (3,312) | | | (2,399) | |
Proceeds from maturity of short-term investments | 1,917 | | | 2,864 | |
Proceeds from sale of short-term investments | 248 | | | — | |
Cash received from acquisition of Xilinx | — | | | 2,366 | |
Acquisitions, net of cash acquired | (14) | | | (1,558) | |
Other | (5) | | | (15) | |
Net cash provided by (used in) investing activities | (1,573) | | | 932 | |
Cash flows from financing activities: | | | |
Proceeds from debt, net of issuance costs | — | | | 991 | |
Repayment of debt | — | | | (312) | |
Proceeds from sales of common stock through employee equity plans | 148 | | | 79 | |
Repurchases of common stock | (752) | | | (3,452) | |
Common stock repurchases for tax withholding on employee equity plans | (382) | | | (371) | |
Other | (1) | | | (2) | |
Net cash used in financing activities | (987) | | | (3,067) | |
Net increase (decrease) in cash and cash equivalents | (1,274) | | | 863 | |
Cash and cash equivalents at beginning of period | 4,835 | | | 2,535 | |
Cash and cash equivalents at end of period | $ | 3,561 | | | $ | 3,398 | |
| | | |
| | | |
| | | | | | | | | | | |
Advanced Micro Devices, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
| (In millions) |
Supplemental cash flow information: | | | |
Cash paid for taxes, net of refunds | $ | 34 | | | $ | 584 | |
Non-cash investing and financing activities: | | | |
Purchases of property and equipment, accrued but not paid | $ | 113 | | | $ | 122 | |
| | | |
Issuance of common stock and treasury stock for the acquisition of Xilinx | $ | — | | | $ | 48,514 | |
Fair value of replacement share-based awards related to acquisition of Xilinx | $ | — | | | $ | 275 | |
| | | |
Non-cash activities for leases: | | | |
Operating lease right-of-use assets acquired by assuming related liabilities | $ | 121 | | | $ | 119 | |
| | | |
| | | |
| | | |
| | | |
See accompanying notes.
Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (In millions) |
Capital stock: | | | | | | | |
Common stock, par value | | | | | | | |
Balance, beginning of period | $ | 16 | | | $ | 16 | | | $ | 16 | | | $ | 12 | |
Common stock issued under employee equity plans | 1 | | | — | | | 1 | | | — | |
Issuance of common stock as consideration for acquisition | — | | | — | | | — | | | 4 | |
Balance, end of period | $ | 17 | | | $ | 16 | | | $ | 17 | | | $ | 16 | |
Additional paid-in capital | | | | | | | |
Balance, beginning of period | $ | 58,825 | | | $ | 57,297 | | | $ | 58,005 | | | $ | 11,069 | |
Common stock issued under employee equity plans | 4 | | | 1 | | | 153 | | | 79 | |
Stock-based compensation | 353 | | | 275 | | | 1,010 | | | 765 | |
Issuance of common stock to settle convertible debt | — | | | — | | | 1 | | | — | |
Issuance of common stock as consideration for acquisition | — | | | — | | | — | | | 45,372 | |
Fair value of replacement share-based awards related to acquisition | — | | | — | | | — | | | 275 | |
Issuance of common stock warrants | — | | | 8 | | | 13 | | | 21 | |
| | | | | | | |
Balance, end of period | $ | 59,182 | | | $ | 57,581 | | | $ | 59,182 | | | $ | 57,581 | |
Treasury stock | | | | | | | |
Balance, beginning of period | $ | (3,430) | | | $ | (1,893) | | | $ | (3,099) | | | $ | (2,130) | |
Repurchases of common stock | (511) | | | (617) | | | (752) | | | (3,452) | |
Common stock repurchases for tax withholding on employee equity plans | (294) | | | (305) | | | (384) | | | (371) | |
Reissuance of treasury stock as consideration for acquisition | — | | | — | | | — | | | 3,138 | |
Balance, end of period | $ | (4,235) | | | $ | (2,815) | | | $ | (4,235) | | | $ | (2,815) | |
| | | | | | | |
Retained earnings (Accumulated deficit): | | | | | | | |
Balance, beginning of period | $ | (243) | | | $ | (218) | | | $ | (131) | | | $ | (1,451) | |
| | | | | | | |
Net income | 299 | | | 66 | | | 187 | | | 1,299 | |
Balance, end of period | $ | 56 | | | $ | (152) | | | $ | 56 | | | $ | (152) | |
| | | | | | | |
Accumulated other comprehensive loss: | | | | | | | |
Balance, beginning of period | $ | (32) | | | $ | (33) | | | $ | (41) | | | $ | (3) | |
Other comprehensive loss | (18) | | | (55) | | | (9) | | | (85) | |
Balance, end of period | $ | (50) | | | $ | (88) | | | $ | (50) | | | $ | (88) | |
| | | | | | | |
Total stockholders' equity | $ | 54,970 | | | $ | 54,542 | | | $ | 54,970 | | | $ | 54,542 | |
See accompanying notes.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – The Company
Advanced Micro Devices, Inc. is a global semiconductor company. References herein to AMD or the Company mean Advanced Micro Devices, Inc. and its consolidated subsidiaries. AMD’s products include x86 microprocessors (CPUs) and graphics processing units (GPUs), as standalone devices or as incorporated into accelerated processing units (APUs), chipsets, data center and professional GPUs, embedded processors, semi-custom System-on-Chip (SoC) products, microprocessor and SoC development services and technology, data processing units (DPUs), Field Programmable Gate Arrays (FPGAs), and Adaptive SoC products. From time to time, the Company may also sell or license portions of its intellectual property (IP) portfolio.
NOTE 2 – Basis of Presentation and Significant Accounting Policies
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements of AMD have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The results of operations for the three and nine months ended September 30, 2023 shown in this report are not necessarily indicative of results to be expected for the full year ending December 30, 2023 or any other future period. In the opinion of the Company’s management, the information contained herein reflects all adjustments necessary for a fair presentation of the Company’s results of operations, financial position, cash flows and stockholders’ equity. All such adjustments are of a normal, recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Certain immaterial prior period amounts have been reclassified to conform to current period presentation.
The Company uses a 52- or 53-week fiscal year ending on the last Saturday in December. The three and nine months ended September 30, 2023 and September 24, 2022 each consisted of 13 and 39 weeks, respectively.
Use of Estimates. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results are likely to differ from those estimates, and such differences may be material to the financial statements. Areas where management uses judgment include, but are not limited to, revenue allowances, inventory valuation, valuation of goodwill and long-lived assets, and income taxes.
Significant Accounting Policies. There have been no material changes to the Company’s significant accounting policies in Note 2 - Basis of Presentation and Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
NOTE 3 – Supplemental Financial Statement Information
Accounts Receivable, net
As of September 30, 2023 and December 31, 2022, Accounts receivable, net included unbilled accounts receivable of $1.1 billion for both periods. Unbilled accounts receivable primarily represents work completed on development services and on custom products for which revenue has been recognized but not yet invoiced. All unbilled accounts receivable are expected to be billed and collected within 12 months.
| | | | | | | | | | | |
Inventories | September 30, 2023 | | December 31, 2022 |
| (In millions) |
Raw materials | $ | 245 | | | $ | 231 | |
Work in process | 3,270 | | | 2,648 | |
Finished goods | 930 | | | 892 | |
Total inventories | $ | 4,445 | | | $ | 3,771 | |
| | | | | | | | | | | |
Prepaid Expenses and Other Current Assets | September 30, 2023 | | December 31, 2022 |
| (In millions) |
Prepaid supply agreements | $ | 913 | | | $ | 673 | |
Other | 490 | | | 592 | |
Total prepaid expenses and other current assets | $ | 1,403 | | | $ | 1,265 | |
Prepaid supply agreements relate to the short-term portion of payments made to vendors to secure long-term supply capacity.
| | | | | | | | | | | |
Property and Equipment, net | September 30, 2023 | | December 31, 2022 |
| (In millions) |
Land, building and leasehold improvements | $ | 800 | | | $ | 714 | |
Equipment | 2,295 | | | 2,163 | |
Construction in progress | 201 | | | 143 | |
Property and equipment, gross | 3,296 | | | 3,020 | |
Accumulated depreciation | (1,730) | | | (1,507) | |
Total property and equipment, net | $ | 1,566 | | | $ | 1,513 | |
| | | | | | | | | | | |
Accrued Liabilities | September 30, 2023 | | December 31, 2022 |
| (In millions) |
Accrued marketing programs | $ | 896 | | | $ | 876 | |
Accrued compensation and benefits | 871 | | | 701 | |
Customer program liabilities | 723 | | | 859 | |
Other accrued liabilities | 886 | | | 641 | |
Total accrued liabilities | $ | 3,376 | | | $ | 3,077 | |
| | | | | | | | | | | |
Other Current Liabilities | September 30, 2023 | | December 31, 2022 |
| (In millions) |
Tax liabilities | $ | 769 | | | $ | 156 | |
Other current liabilities | 160 | | 180 |
Total other current liabilities | $ | 929 | | | $ | 336 | |
Revenue
Revenue allocated to remaining performance obligations that are unsatisfied (or partially unsatisfied) include amounts received from customers and amounts that will be invoiced and recognized as revenue in future periods for development services, IP licensing and product revenue. As of September 30, 2023, the aggregate transaction price allocated to remaining performance obligations under contracts with an original expected duration of more than one year was $192 million, of which $129 million is expected to be recognized in the next 12 months. The revenue allocated to remaining performance obligations does not include amounts which have an original expected duration of one year or less.
Revenue recognized over time associated with custom products and development services accounted for 25% and 27% of the Company’s revenue for the three and nine months ended September 30, 2023, respectively and 30% and 24% of the Company’s revenue for the three and nine months ended September 24, 2022, respectively.
NOTE 4 – Segment Reporting
Management, including the Chief Operating Decision Maker (CODM), who is the Company’s Chief Executive Officer, reviews and assesses operating performance using segment net revenue and operating income (loss). These performance measures include the allocation of expenses to the reportable segments based on management’s judgment.
The Company’s four reportable segments are:
•the Data Center segment, which primarily includes server microprocessors (CPUs) and graphics processing units (GPUs), data processing units (DPUs), Field Programmable Gate Arrays (FPGAs) and Adaptive System-on-Chip (SoC) products for data centers;
•the Client segment, which primarily includes CPUs, accelerated processing units (APUs) that integrate CPUs and GPUs, and chipsets for desktop and notebook personal computers;
•the Gaming segment, which primarily includes discrete GPUs, semi-custom SoC products and development services; and
•the Embedded segment, which primarily includes embedded CPUs and GPUs, APUs, FPGAs and Adaptive SoC products.
From time to time, the Company may also sell or license portions of its IP portfolio.
In addition to these reportable segments, the Company has an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to any of the reportable segments because the CODM does not consider these expenses and credits in evaluating the performance of the reportable segments. This category primarily includes amortization of acquisition-related intangibles, employee stock-based compensation expense, acquisition-related costs and licensing gain. Acquisition-related costs primarily include transaction costs, purchase price adjustments for inventory, certain compensation charges, contract termination and workforce rebalancing charges.
The following table provides a summary of net revenue and operating income by segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (In millions) |
Net revenue: | | | | | | | |
Data Center | $ | 1,598 | | | $ | 1,609 | | | $ | 4,214 | | | $ | 4,388 | |
Client | 1,453 | | | 1,022 | | | 3,190 | | | 5,298 | |
Gaming | 1,506 | | | 1,631 | | | 4,844 | | | 5,161 | |
Embedded | 1,243 | | | 1,303 | | | 4,264 | | | 3,155 | |
Total net revenue | $ | 5,800 | | | $ | 5,565 | | | $ | 16,512 | | | $ | 18,002 | |
Operating income (loss): | | | | | | | |
Data Center | $ | 306 | | | $ | 505 | | | $ | 601 | | | $ | 1,404 | |
Client | 140 | | | (26) | | | (101) | | | 1,342 | |
Gaming | 208 | | 142 | | | 747 | | 687 |
Embedded | 612 | | 635 | | | 2,167 | | | 1,553 | |
All Other(1) | (1,042) | | | (1,320) | | | (3,355) | | | (3,573) | |
Total operating income (loss) | $ | 224 | | | $ | (64) | | | $ | 59 | | | $ | 1,413 | |
| | | | | |
(1) | For the three and nine months ended September 30, 2023, all other operating losses primarily included $660 million and $2.2 billion of amortization of acquisition-related intangibles, $353 million and $1.0 billion of stock-based compensation expense and $39 million and $184 million of acquisition-related costs, respectively. For the three and nine months ended September 24, 2022, all other operating losses primarily included $1.0 billion and $2.5 billion of amortization of acquisition-related intangibles, $275 million and $766 million of stock-based compensation expense and $51 million and $400 million of acquisition-related costs, respectively. |
NOTE 5 – Acquisition-related Intangible Assets
Xilinx Acquisition
On February 14, 2022, the Company completed the acquisition of Xilinx for a total purchase consideration of $48.8 billion. The Company allocated the purchase price to $27.3 billion of identified intangible assets and $1.3 billion of net liabilities, with the excess purchase price of $22.8 billion recorded as goodwill.
Pensando Acquisition
On May 26, 2022, the Company completed the acquisition of Pensando Systems, Inc. (Pensando) for a total purchase consideration of $1.7 billion. The Company allocated the purchase price to 349 million of identified intangible assets and 208 million of other net assets, with the excess purchase price of $1.1 billion recorded as goodwill.
Acquisition-related Intangible Assets
Acquisition-related intangibles were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| (In millions) | | (In millions) |
Developed technology | $ | 12,372 | | | $ | (1,368) | | | $ | 11,004 | | | $ | 12,360 | | | $ | (738) | | | $ | 11,622 | |
Customer relationships | 12,324 | | | (3,355) | | | 8,969 | | | 12,324 | | | (1,973) | | | 10,351 | |
Customer backlog | 809 | | | (809) | | | — | | | 809 | | | (712) | | | 97 | |
Corporate trade name | 65 | | | (65) | | | — | | | 65 | | | (57) | | | 8 | |
Product trademarks | 914 | | | (127) | | | 787 | | | 914 | | | (68) | | | 846 | |
Identified intangible assets subject to amortization | 26,484 | | | (5,724) | | | 20,760 | | | 26,472 | | | (3,548) | | | 22,924 | |
IPR&D not subject to amortization | 1,190 | | | — | | | 1,190 | | | 1,194 | | | — | | | 1,194 | |
Total acquisition-related intangible assets | $ | 27,674 | | | $ | (5,724) | | | $ | 21,950 | | | $ | 27,666 | | | $ | (3,548) | | | $ | 24,118 | |
Acquisition-related intangible amortization expense was $660 million and $2.2 billion for the three and nine months ended September 30, 2023, respectively.
Acquisition-related intangible amortization expense was $1.0 billion and $2.5 billion for the three and nine months ended September 24, 2022, respectively.
Based on the carrying value of acquisition-related intangibles recorded as of September 30, 2023, and assuming no subsequent impairment of the underlying assets, the estimated annual amortization expense for acquisition-related intangibles is expected to be as follows:
| | | | | |
Fiscal Year | (In millions) |
Remainder of 2023 | $ | 630 | |
2024 | 2,290 | |
2025 | 2,065 | |
2026 | 1,954 | |
2027 | 1,844 | |
2028 and thereafter | 11,977 | |
Total | $ | 20,760 | |
NOTE 6 – Related Parties — Equity Joint Ventures
ATMP Joint Ventures
The Company holds a 15% equity interest in two joint ventures (collectively, the ATMP JV) with affiliates of Tongfu Microelectronics Co., Ltd, a Chinese joint stock company. The Company has no obligation to fund the ATMP JV. The Company accounts for its equity interests in the ATMP JV under the equity method of accounting due to its significant influence over the ATMP JV.
The ATMP JV provides assembly, testing, marking and packaging (ATMP) services to the Company. The Company assists the ATMP JV in its management of certain raw material inventory. The purchases from and resales to the ATMP JV of inventory under the Company’s inventory management program are reported within purchases and resales with the ATMP JV and do not impact the Company’s condensed consolidated statements of operations.
The Company’s purchases from the ATMP JV during the three and nine months ended September 30, 2023 amounted to $448 million and $1.2 billion, respectively. The Company’s purchases from the ATMP JV during the three and nine months ended September 24, 2022 amounted to $455 million and $1.2 billion, respectively. As of September 30, 2023 and December 31, 2022, the amounts payable to the ATMP JV were $325 million and $463 million, respectively, and are included in Payables to related parties on the Company’s condensed consolidated balance sheets. The Company’s resales to the ATMP JV during the three and nine months ended September 30, 2023 amounted to $2 million and $5 million, respectively. The Company’s resales to the ATMP JV during the three and nine months ended September 24, 2022 amounted to $5 million and $13 million, respectively. As of September 30, 2023 and December 31, 2022, the Company had receivables from the ATMP JV of $1 million and $2 million, respectively, included in Receivables from related parties on the Company’s condensed consolidated balance sheets.
During the three and nine months ended September 30, 2023, the Company recorded a gain of $3 million and $10 million, respectively, in Equity income in investee on its condensed consolidated statements of operations. During the three and nine months ended September 24, 2022, the Company recorded a gain of $4 million and $11 million, respectively, in Equity income in investee on its condensed consolidated statements of operations. As of September 30, 2023 and December 31, 2022, the carrying value of the Company’s investment in the ATMP JV was $93 million and $83 million, respectively.
THATIC Joint Ventures
The Company holds equity interests in two joint ventures (collectively, the THATIC JV) with Higon Information Technology Co., Ltd. (THATIC), a third-party Chinese entity. As of both September 30, 2023 and December 31, 2022, the carrying value of the investment was zero.
In February 2016, the Company licensed certain of its intellectual property (Licensed IP) to the THATIC JV, payable over several years upon achievement of certain milestones. The Company also receives a royalty based on the sales of the THATIC JV’s products developed on the basis of such Licensed IP. The Company classifies Licensed IP and royalty income associated with the February 2016 agreement as Licensing gain within operating income. During the three and nine months ended September 30, 2023, the Company recognized $10 million and $28 million of licensing gain from royalty income associated with Licensed IP, respectively. During the three and nine months ended September 24, 2022, the Company recognized $8 million of licensing gain from royalty income and $97 million of licensing gain from a milestone achievement and royalty income, respectively. As of both September 30, 2023 and December 31, 2022, the Company had no receivables from the THATIC JV.
In June 2019, the Bureau of Industry and Security of the United States Department of Commerce added certain Chinese entities to the Entity List, including THATIC and the THATIC JV. The Company is complying with U.S. law pertaining to the Entity List designation.
NOTE 7 – Debt and Revolving Credit Facility
Debt
The Company’s total debt as of September 30, 2023 and December 31, 2022 consisted of the following:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (In millions) |
2.95% Senior Notes Due 2024 (2.95% Notes) | $ | 750 | | | $ | 750 | |
2.125% Convertible Senior Notes Due 2026 (2.125% Notes) | — | | | 1 | |
2.375% Senior Notes Due 2030 (2.375% Notes) | 750 | | | 750 | |
3.924% Senior Notes Due 2032 (3.924% Notes) | 500 | | | 500 | |
4.393% Senior Notes Due 2052 (4.393% Notes) | 500 | | | 500 | |
Total debt (principal amount) | 2,500 | | | 2,501 | |
Unamortized debt premium, discount and issuance costs, net | (33) | | | (34) | |
Total debt (net) | 2,467 | | | 2,467 | |
Less: current portion of long-term debt (principal amount) | (750) | | | — | |
Less: unamortized debt premium related to current portion of debt | (2) | | | — | |
Total long-term debt | $ | 1,715 | | | $ | 2,467 | |
2.95% Senior Notes Due 2024 and 2.375% Senior Notes Due 2030
The 2.95% Notes and 2.375% Notes, which were assumed from the acquisition of Xilinx, are general unsecured senior obligations of the Company with semi-annual fixed interest payments due on June 1 and December 1. The indentures governing the 2.95% Notes and 2.375% Notes contain various covenants which limit the Company’s ability to, among other things, create certain liens on principal property or the capital stock of certain subsidiaries, enter into certain sale and leaseback transactions with respect to principal property, and consolidate or merge with, or convey, transfer or lease all or substantially all of the Company’s assets to another person.
3.924% Senior Notes Due 2032 and 4.393% Senior Notes Due 2052
On June 9, 2022, the Company issued $1.0 billion in aggregate principal amount of 3.924% Notes and 4.393% Notes. The 3.924% Notes and 4.393% Notes are general unsecured senior obligations of the Company. The interest is payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 2022. The 3.924% and 4.393% Notes are governed by the terms of an indenture dated June 9, 2022 between the Company and US Bank Trust Company, National Association as trustee. As of September 30, 2023, the outstanding aggregate principal amount of the 3.924% Notes and 4.393% Notes was $1.0 billion.
The Company may redeem some or all of the 3.924% Notes and 4.393% Notes prior to March 1, 2032 and December 1, 2051, respectively, at a price equal to the greater of the present value of the principal amount and future interest through the maturity of the 3.924% Notes or 4.393% Notes or 100% of the principal amount plus accrued and unpaid interest. Holders have the right to require the Company to repurchase all or a portion of the 3.924% Notes or 4.393% Notes in the event that the Company undergoes a change of control as defined in the indenture, at a repurchase price of 101% of the principal amount plus accrued and unpaid interest. Additionally, an event of default may result in the acceleration of the maturity of the 3.924% Notes and 4.393% Notes.
2.125% Convertible Senior Notes Due 2026
During the nine months ended September 30, 2023 and September 24, 2022, the activity on the 2.125% Notes was immaterial.
Future Debt Payment Obligations
As of September 30, 2023, the Company’s future principal debt payment obligations were as follows:
| | | | | |
Fiscal Year | (In millions) |
| |
2024 | $ | 750 | |
| |
| |
| |
2028 and thereafter | 1,750 | |
Total | $ | 2,500 | |
Revolving Credit Facility
The Company has $3.0 billion available under a revolving credit agreement, as amended, that expires on April 29, 2027 (Revolving Credit Agreement). As of September 30, 2023, the Company had no outstanding borrowings under the Revolving Credit Agreement. Revolving loans under the Revolving Credit Agreement can be either Secure Overnight Financing Rate (SOFR) Loans or Base Rate Loans (each as defined in the Revolving Credit Agreement) at the Company's option. Each SOFR Loan will bear interest at a rate per annum equal to the applicable SOFR plus a margin between 0.625% and 1.250%. Each Base Rate Loan will bear interest equal to the Base Rate plus a margin between 0.000% and 0.250%. The Revolving Credit Agreement also contains a sustainability-linked pricing component which provides for interest rate and facility fee reductions or increases based on the Company meeting or missing targets related to environmental sustainability, specifically greenhouse gas emissions. The Revolving Credit Agreement contains customary representations and warranties, affirmative and negative covenants, and events of default applicable to the Company and its subsidiaries. As of September 30, 2023, the Company was in compliance with these covenants.
Commercial Paper
On November 3, 2022, the Company established a commercial paper program, under which the Company may issue unsecured commercial paper notes up to a maximum principal amount outstanding at any time of $3 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 September 30, 2023, the Company had no commercial paper outstanding.
NOTE 8 – Financial Instruments
Fair Value Measurements
The Company’s financial instruments are measured and recorded at fair value on a recurring basis, except for non-marketable equity investments in privately-held companies. These equity investments are generally accounted for under the measurement alternative, defined as cost, less impairments, adjusted for subsequent observable price changes and are periodically assessed for impairment when events or circumstances indicate that a decline in value may have occurred.
Financial Instruments Recorded at Fair Value on a Recurring Basis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
(In millions) | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
Cash equivalents | | | | | | | | | | | |
Money market funds | $ | 1,711 | | | $ | — | | | $ | 1,711 | | | $ | 3,017 | | | $ | — | | | $ | 3,017 | |
Commercial paper | — | | | 822 | | | 822 | | | — | | | 224 | | | 224 | |
U.S. Treasury and agency securities | 229 | | | — | | | 229 | | | — | | | — | | | — | |
Time deposits and certificate of deposits | — | | | 212 | | | 212 | | | — | | | 159 | | | 159 | |
Foreign government securities | — | | | 47 | | | 47 | | | — | | | — | | | — | |
Short-term investments | | | | | | | | | | | |
Commercial paper | — | | | 464 | | | 464 | | | — | | | 441 | | | 441 | |
Time deposits and certificates of deposits | — | | | 7 | | | 7 | | | — | | | — | | | — | |
Asset-backed and mortgage-backed securities | — | | | 34 | | | 34 | | | — | | | 39 | | | 39 | |
U.S. Treasury and agency securities | 1,518 | | | — | | | 1,518 | | | 466 | | | — | | | 466 | |
Foreign government securities | — | | | 149 | | | 149 | | | — | | | 74 | | | 74 | |
Equity investments | 52 | | | — | | | 52 | | | — | | | — | | | — | |
Other non-current assets | | | | | | | | | | | |
Time deposits and certificates of deposits | — | | | 3 | | | 3 | | | — | | | 9 | | | 9 | |
Equity investments | — | | | — | | | — | | | 8 | | | — | | | 8 | |
Deferred compensation plan investments | 110 | | | — | | | 110 | | | 90 | | | — | | | 90 | |
Total assets measured at fair value | $ | 3,620 | | | $ | 1,738 | | | $ | 5,358 | | | $ | 3,581 | | | $ | 946 | | | $ | 4,527 | |
Deferred compensation plan investments are primarily mutual fund investments held in a Rabbi trust established to maintain the Company’s executive deferred compensation plan.
The following is a summary of cash equivalents and short-term investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Cost/ Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Cost/ Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| (in millions) | | (in millions) |
Asset-backed and mortgage-backed securities | $ | 37 | | | $ | — | | | $ | (3) | | | $ | 34 | | | $ | 42 | | | $ | — | | | $ | (3) | | | $ | 39 | |
Commercial paper | 1,286 | | | — | | | — | | | 1,286 | | | 669 | | | — | | | (4) | | | 665 | |
Money market funds | 1,711 | | | — | | | — | | | 1,711 | | | 3,017 | | | — | | | — | | | 3,017 | |
Time deposits and certificates of deposits | 219 | | | — | | | — | | | 219 | | | 159 | | | — | | | — | | | 159 | |
U.S. Treasury and agency securities | 1,750 | | | — | | | (3) | | | 1,747 | | | 471 | | | — | | | (5) | | | 466 | |
Foreign government securities | 196 | | | — | | | — | | | 196 | | | 74 | | | — | | | — | | | 74 | |
Equity investments | 50 | | | 2 | | | — | | | 52 | | | — | | | — | | | — | | | — | |
| $ | 5,249 | | | $ | 2 | | | $ | (6) | | | $ | 5,245 | | | $ | 4,432 | | | $ | — | | | $ | (12) | | | $ | 4,420 | |
As of September 30, 2023, the Company did not have material available-for-sale debt securities which had been in a continuous unrealized loss position of more than twelve months.
The contractual maturities of cash equivalents and investments classified as available-for-sale are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| (In millions) | | (In millions) |
Due within 1 year | $ | 3,067 | | | $ | 3,063 | | | $ | 1,224 | | | $ | 1,218 | |
Due in 1 year through 5 years | 391 | | | 391 | | | 159 | | | 156 | |
Due in 5 years and later | 33 | | | 31 | | | 41 | | | 38 | |
| $ | 3,491 | | | $ | 3,485 | | | $ | 1,424 | | | $ | 1,412 | |
Financial Instruments Not Recorded at Fair Value
The Company carries its financial instruments at fair value except for its debt. The carrying amounts and estimated fair values of the Company’s debt are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| (In millions) | | (In millions) |
Current portion of long-term debt, net | $ | 752 | | | $ | 735 | | | $ | — | | | $ | — | |
| | | | | | | |
Long-term debt, net of current portion | $ | 1,715 | | | $ | 1,483 | | | $ | 2,467 | | | $ | 2,281 | |
The estimated fair value of the Company’s long-term debt is based on Level 2 inputs of quoted prices for the Company’s debt and comparable instruments in inactive markets.
The fair value of the Company’s accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing terms.
Financial Instruments Measured at Fair Value on a Non-Recurring Basis
The Company’s investments in non-marketable securities in privately-held companies are recorded using a measurement alternative that adjusts the securities to fair value when the Company recognizes an observable price adjustment or an impairment. As of September 30, 2023 and December 31, 2022, the Company had non-marketable securities in privately-held companies of $148 million and $137 million, respectively, that are recorded under Other non-current assets in the balance sheet. Impairment losses or observable price adjustments were not material during the three and nine months ended September 30, 2023 and September 24, 2022.
Hedging Transactions and Derivative Financial Instruments
Foreign Currency Forward Contracts Designated as Accounting Hedges
The Company enters into foreign currency forward contracts to hedge its exposure to foreign currency exchange rate risk related to future forecasted transactions denominated in currencies other than the U.S. Dollar. These contracts generally mature within 24 months and are designated as accounting hedges. As of September 30, 2023 and December 31, 2022, the notional value of the Company’s outstanding foreign currency forward contracts designated as cash flow hedges was $2.3 billion and $1.9 billion, respectively. The fair value of these contracts, recorded as a liability, was $38 million and $27 million as of September 30, 2023 and December 31, 2022, respectively.
Foreign Currency Forward Contracts Not Designated as Accounting Hedges
The Company also enters into foreign currency forward contracts to reduce the short-term effects of foreign currency fluctuations on certain receivables or payables denominated in currencies other than the U.S. Dollar. These forward contracts generally mature within 3 months and are not designated as accounting hedges. As of September 30, 2023 and December 31, 2022, the notional value of these outstanding contracts was $673 million and $485 million, respectively. The fair value of these contracts was not material as of September 30, 2023 and December 31, 2022.
NOTE 9 – Earnings Per Share
The following table sets forth the components of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (In millions, except per share amounts) |
Numerator | | | | | | | |
Net income for basic earnings per share | $ | 299 | | | $ | 66 | | | $ | 187 | | | $ | 1,299 | |
Denominator | | | | | | | |
Basic weighted average shares | 1,616 | | | 1,615 | | | 1,613 | | | 1,542 | |
Potentially dilutive shares from employee equity plans and warrants | 13 | | | 10 | | | 12 | | | 13 | |
Diluted weighted average shares | 1,629 | | | 1,625 | | | 1,625 | | | 1,555 | |
Earnings per share: | | | | | | | |
Basic | $ | 0.18 | | | $ | 0.04 | | | $ | 0.12 | | | $ | 0.84 | |
Diluted | $ | 0.18 | | | $ | 0.04 | | | $ | 0.11 | | | $ | 0.84 | |
Securities which would have been anti-dilutive are not material and are excluded from the computation of diluted earnings per share for all periods presented.
NOTE 10 – Common Stock and Employee Equity Plans
Common Stock
Shares of common stock outstanding were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (In millions) |
Balance, beginning of period | 1,614 | | | 1,612 | | | 1,612 | | | 1,207 | |
Common stock issued in the acquisition of Xilinx | — | | | — | | | — | | | 429 | |
Common stock issued under employee equity plans | 9 | | | 10 | | | 14 | | | 14 | |
Common stock repurchases for tax withholding on equity awards | (3) | | | (3) | | | (4) | | | (5) | |
Issuance of common stock upon warrant exercise | — | | | — | | | 1 | | | — | |
Repurchases of common stock | (5) | | | (7) | | | (8) | | | (33) | |
Balance, end of period | 1,615 | | | 1,612 | | | 1,615 | | | 1,612 | |
Stock Repurchase Program
The Company has an approved stock repurchase program authorizing repurchases of up to $12 billion of the Company’s common stock (Repurchase Program). During the three and nine months ended September 30, 2023, the Company returned $511 million and $752 million to shareholders through the repurchase of 5 million and 8 million shares of its common stock under the Repurchase Program, respectively. As of September 30, 2023, $5.8 billion remains available for future stock repurchases under the Repurchase Program. The Repurchase Program does not obligate the Company to acquire any common stock, has no termination date and may be suspended or discontinued at any time.
Stock-based Compensation
Stock-based compensation expense recorded in the Condensed Consolidated Statements of Operations was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (In millions) |
Cost of sales | $ | 6 | | | $ | 8 | | | $ | 24 | | | $ | 20 | |
Research and development | 260 | | | 185 | | | 721 | | | 478 | |
Marketing, general and administrative | 87 | | | 82 | | | 265 | | | 268 | |
Total | $ | 353 | | | $ | 275 | | | $ | 1,010 | | | $ | 766 | |
NOTE 11 – Income Taxes
The Company determines its income taxes for interim reporting periods by applying the Company’s estimated annual effective tax rate to the year-to-date results, adjusted for tax items discrete to each period. The difference between the U.S. federal statutory tax rate of 21% and the Company's estimated annual effective tax rate for the three and nine months ended September 30, 2023 and September 24, 2022 was primarily due to the income tax benefit from foreign-derived intangible income (FDII) and research and development tax credits.
The Company recorded an income tax benefit of $39 million and $49 million for the three and nine months ended September 30, 2023, representing effective tax rates of (15.2)% and (35.8)%, respectively. The Company recorded the tax effects of stock-based compensation, uncertain tax positions, and other items discrete to the period resulting in income tax benefit of $17 million and $29 million for the three and nine months ended September 30, 2023, respectively.
The Company recorded an income tax benefit of $135 million and a provision of $32 million for the three and nine months ended September 24, 2022, representing effective tax rates of 195.7% and 2.4%, respectively. For the three and nine months ended September 24, 2022, the impact of tax items discrete to the periods was not material to the total tax expense or the effective tax rate.
As of September 30, 2023 and December 31, 2022, the Company had long-term income tax liabilities of $1.5 billion recorded under Other long-term liabilities in the balance sheet.
NOTE 12 – Commitments and Contingencies
Commitments
The Company’s purchase commitments primarily include obligations to purchase wafers and substrates from third parties. These purchase obligations were made under noncancellable purchase orders or contractual obligations requiring minimum purchases for which cancellation would lead to significant penalties. Purchase commitments also include future payments related to certain software, technology and IP licenses.
Total future unconditional purchase commitments as of September 30, 2023 were as follows: | | | | | |
Fiscal Year | (In millions) |
Remainder of 2023 | $ | 2,426 | |
2024 | 1,893 | |
2025 | 343 | |
2026 | 182 | |
2027 | 51 | |
2028 and thereafter | 146 | |
Total unconditional purchase commitments | $ | 5,041 | |
On an ongoing basis, the Company works with suppliers on timing of payments and deliveries of purchase commitments, taking into account business conditions.
Contingencies
During the quarterly period ended September 30, 2023, there were no material legal proceedings. The Company is a defendant or plaintiff in various actions that arose in the normal course of business. With respect to these matters, based on management’s current knowledge, the Company believes that the amount or range of reasonably possible loss, if any, will not, either individually or in the aggregate, have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
NOTE 13 – Subsequent Events
On October 27, 2023, the Company renewed its lease agreement on approximately 444,000 sq. ft. facility in Austin, Texas for a lease term extending through September 2038. Total noncancelable lease payments under the new lease are approximately $232 million.
| | | | | |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The statements in this report include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements speak only as of the date hereof or as of the dates indicated in the statements and should not be relied upon as predictions of future events, as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma,” “estimates,” “anticipates,” or the negative of these words and phrases, other variations of these words and phrases or comparable terminology. The forward-looking statements relate to, among other things: possible impact of future accounting rules on AMD’s condensed consolidated financial statements; demand for AMD’s products; the growth, change and competitive landscape of the markets in which AMD participates; international sales will continue to be a significant portion of total sales in the foreseeable future; that AMD’s cash, cash equivalents and short-term investment balances and cash flows from operations together with the availability under the revolving credit facility (the Revolving Credit Agreement) and commercial paper program will be sufficient to fund AMD’s operations including capital expenditures and purchase commitments over the next 12 months and beyond; AMD’s ability to access capital markets should it require additional funds; anticipated ongoing and increased costs related to enhancing and implementing information security controls; all unbilled accounts receivables are expected to be billed and collected within 12 months; a small number of customers will continue to account for a substantial part of AMD’s revenue in the future; the legal and regulatory environment relating to emerging technologies; and AMD expects to fund stock repurchases through cash generated from operations. For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements, see “Part II, Item 1A—Risk Factors” and the “Financial Condition” section set forth in “Part I, Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations,” or MD&A, and such other risks and uncertainties as set forth below in this report or detailed in our other Securities and Exchange Commission (SEC) reports and filings. We assume no obligation to update forward-looking statements.
References in this Quarterly Report on Form 10-Q to “AMD,” “we,” “us,” “management,” “our” or the “Company” mean Advanced Micro Devices, Inc. and our consolidated subsidiaries.
AMD, the AMD Arrow logo, Alveo, Athlon, EPYC, FidelityFX, Kria, Radeon, Ryzen, Versal, Xilinx and combinations thereof are trademarks of Advanced Micro Devices, Inc. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners. “Zen” is a codename for an AMD architecture and is not a product name.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this report and our audited consolidated financial statements and related notes as of December 31, 2022 and December 25, 2021, and for each of the three years for the period ended December 31, 2022 as filed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Overview and Recent Developments
We are a global semiconductor company primarily offering:
•server microprocessors (CPUs) and graphics processing units (GPUs), data processing units (DPUs), Field Programmable Gate Arrays (FPGAs) and Adaptive System-on-Chip (SoC) products for data centers;
•CPUs, accelerated processing units (APUs) that integrate CPUs and GPUs, and chipsets for desktop and notebook personal computers;
•discrete GPUs, semi-custom SoC products and development services; and
•embedded CPUs, GPUs, APUs, FPGAs, and Adaptive SoC products.
From time to time, we may also sell or license portions of our intellectual property (IP) portfolio.
In this section, we will describe the general financial condition and the results of operations of Advanced Micro Devices, Inc. and its wholly-owned subsidiaries (collectively, “us,” “our” or “AMD”), including a discussion of our results of operations for the three and nine months ended September 30, 2023 compared to the prior year period and an analysis of changes in our financial condition.
Net revenue for the three months ended September 30, 2023 was $5.8 billion, a 4% increase compared to the prior year period. The increase in net revenue was driven mainly by a 42% increase in Client segment revenue primarily due to higher Ryzen mobile processor sales as PC market conditions improved, partially offset by an 8% decrease in Gaming segment revenue primarily due to lower semi-custom product revenue, and a 5% decrease in Embedded segment revenue primarily due to lower sales in the communications market.
Gross margin for the three months ended September 30, 2023 was 47% compared to gross margin of 42% for the prior year period. The increase in gross margin was primarily driven by lower amortization of acquisition-related intangible assets, higher Client segment revenue and product mix.
Operating income for the three months ended September 30, 2023 was $224 million compared to operating loss of $64 million for the prior year period. Net income for the three months ended September 30, 2023 was $299 million compared to net income of $66 million for the prior year period. The increase in operating and net income was primarily driven by higher Client segment revenue and lower amortization of acquisition-related intangible assets.
We introduced a number of new products during the third quarter of 2023, including the new AMD Radeon™ PRO W7000 Series: 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 announced the availability of the new AMD EPYC™ 8004 Series processors that bring the “Zen 4c” core into a purpose-built CPU, enabling hardware providers to create energy efficient and differentiated platforms. 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 also announced the AMD Alveo™ UL3524 accelerator card, a new fintech accelerator designed for ultra-low latency electronic trading applications providing execution performance at nanosecond speed.
As of September 30, 2023 our cash, cash equivalents and short-term investments were $5.8 billion compared to $5.9 billion as of December 31, 2022. During the nine months ended September 30, 2023, we generated $1.3 billion of cash from operating activities, and returned $752 million to shareholders through our stock repurchase program. We have an approved stock repurchase program authorizing repurchases of up to $12 billion of our common stock (Repurchase Program), of which $5.8 billion remains available for future stock repurchases as of September 30, 2023.
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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). 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, 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. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
Management believes there have been no significant changes for the three and nine months ended September 30, 2023 to the items that we disclosed as our critical accounting estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Results of Operations
Our operating results tend to vary seasonally. Historically, our net revenue has been generally higher in the second half of the year than in the first half of the year, although market conditions and product transitions could impact this trend.
The following table provides a summary of net revenue and operating income (loss) by segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| (In millions) |
Net revenue: | | | | | | | |
Data Center | $ | 1,598 | | | $ | 1,609 | | | $ | 4,214 | | | $ | 4,388 | |
Client | 1,453 | | | 1,022 | | | 3,190 | | | 5,298 | |
Gaming | 1,506 | | | 1,631 | | | 4,844 | | | 5,161 | |
Embedded | 1,243 | | | 1,303 | | | 4,264 | | | 3,155 | |
Total net revenue | $ | 5,800 | | | $ | 5,565 | | | $ | 16,512 | | | $ | 18,002 | |
Operating income (loss): | | | | | | | |
Data Center | $ | 306 | | | $ | 505 | | | $ | 601 | | | $ | 1,404 | |
Client | 140 | | | (26) | | | (101) | | | 1,342 | |
Gaming | 208 | | | 142 | | | 747 | | | 687 | |
Embedded | 612 | | | 635 | | | 2,167 | | | 1,553 | |
All Other | (1,042) | | | (1,320) | | | (3,355) | | | (3,573) | |
Total operating income (loss) | $ | 224 | | | $ | (64) | | | $ | 59 | | | $ | 1,413 | |
Data Center
Data Center net revenue of $1.6 billion for the three months ended September 30, 2023 was flat, compared to net revenue of $1.6 billion for the prior year period. Higher sales of EPYC processors was offset by lower sales of adaptive SoC data center products.
Data Center net revenue of $4.2 billion for the nine months ended September 30, 2023 decreased by 4%, compared to net revenue of $4.4 billion for the prior year period primarily due to lower EPYC processor sales.
Data Center operating income was $306 million for the three months ended September 30, 2023, compared to operating income of $505 million for the prior year period. The decrease in operating income was primarily due to increased Research and Development (R&D) investment in artificial intelligence (AI) and product mix.
Data Center operating income was $601 million for the nine months ended September 30, 2023, compared to operating income of $1.4 billion for the prior year period. The decrease in operating income was primarily due to lower revenue and increased investment in R&D.
Client
Client net revenue of $1.5 billion for the three months ended September 30, 2023 increased by 42%, compared to net revenue of $1.0 billion for the prior year period, primarily due to a 62% increase in unit shipments driven by higher Ryzen mobile processor sales as PC market conditions improved, partially offset by a 10% decrease in average selling price.
Client net revenue of $3.2 billion for the nine months ended September 30, 2023 decreased by 40%, compared to net revenue of $5.3 billion for the prior year period, primarily due to a 19% decrease in average selling price and a 27% decrease in unit shipments driven by lower Ryzen processor sales. The decrease in shipments and average selling price resulted from a weaker PC market and inventory correction across the PC supply chain impacting the first half of 2023.
Client operating income was $140 million for the three months ended September 30, 2023, compared to operating loss of $26 million for the prior year period. The increase in operating income was primarily driven by higher revenue and lower operating expenses.
Client operating loss was $101 million for the nine months ended September 30, 2023, compared to operating income of $1.3 billion for the prior year period. The decrease in operating income was primarily due to lower revenue.
Gaming
Gaming net revenue of $1.5 billion for the three months ended September 30, 2023 decreased by 8%, compared to net revenue of $1.6 billion for the prior year period, primarily due to lower semi-custom product revenue, partially offset by higher Radeon GPU sales.
Gaming net revenue of $4.8 billion for the nine months ended September 30, 2023 decreased by 6%, compared to net revenue of $5.2 billion for the prior year period, primarily due to lower gaming graphics revenue.
Gaming operating income was $208 million for the three months ended September 30, 2023, compared to operating income of $142 million for the prior year period. The increase in operating income was primarily driven by higher Radeon GPU sales.
Gaming operating income was $747 million for the nine months ended September 30, 2023, compared to operating income of $687 million for the prior year period. The increase in operating income was primarily driven by product mix.
Embedded
Embedded net revenue of $1.2 billion for the three months ended September 30, 2023 decreased by 5%, compared to net revenue of $1.3 billion for the prior year period. The decrease in net revenue was primarily due to lower revenue in the communications market.
Embedded net revenue of $4.3 billion for the nine months ended September 30, 2023 increased by 35%, compared to net revenue of $3.2 billion for the prior year period. The increase in net revenue was primarily driven by the inclusion of embedded product revenue from Xilinx, Inc. (Xilinx) for the full nine 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 $612 million for the three months ended September 30, 2023, compared to operating income of $635 million for the prior year period, the decrease was primarily due to increased investment in R&D.
Embedded operating income was $2.2 billion for the nine months ended September 30, 2023, compared to operating income of $1.6 billion for the prior year period. The increase in operating income was primarily driven by the inclusion of Xilinx for the full nine months period as compared to a partial period from the Xilinx Acquisition Date in the prior year period.
All Other
All Other operating loss of $1.0 billion for the three months ended September 30, 2023 primarily consisted of $660 million of amortization of acquisition-related intangibles, $353 million of stock-based compensation expense, and $39 million of acquisition-related costs. All Other operating loss of $1.3 billion for the prior year period primarily consisted of $1.0 billion of amortization of acquisition-related intangibles, $275 million of stock-based compensation expense, and $51 million of acquisition-related costs.
All Other operating loss of $3.4 billion for the nine months ended September 30, 2023 primarily consisted of $2.2 billion of amortization of acquisition-related intangibles, $1.0 billion of stock-based compensation expense, and $184 million of acquisition-related costs. All Other operating loss of $3.6 billion for the prior year period primarily consisted of $2.5 billion of amortization of acquisition-related intangibles, $766 million of stock-based compensation expense, $400 million of acquisition-related costs, and $97 million of licensing gain.
Acquisition-related costs primarily include transaction costs, purchase price adjustments for inventory, certain compensation charges, contract termination and workforce rebalancing charges.
International Sales
International sales as a percentage of net revenue were 68% and 62% for the three months ended September 30, 2023 and September 24, 2022, respectively. International sales as a percentage of net revenue was 67% for both the nine month periods ended September 30, 2023 and September 24, 2022. We expect that international sales will continue to be a significant portion of total sales in the foreseeable future. Substantially all of our sales transactions were denominated in U.S. dollars.
Comparison of Gross Margin, Expenses, Licensing Gain, Interest Expense, Other Income (Expense) and Income Taxes
The following is a summary of certain condensed consolidated statement of operations data for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| |
Net revenue | $ | 5,800 | | | $ | 5,565 | | | $ | 16,512 | | | $ | 18,002 | |
Cost of sales | 2,843 | | | 2,799 | | | 8,236 | | | 8,797 | |
Amortization of acquisition-related intangibles | 210 | | | 412 | | | 727 | | | 1,005 | |
Gross profit | 2,747 | | | 2,354 | | | 7,549 | | | 8,200 | |
Gross margin | 47 | % | | 42 | % | | 46 | % | | 46 | % |
Research and development | 1,507 | | | 1,279 | | | 4,361 | | | 3,639 | |
Marketing, general and administrative | 576 | | | 557 | | | 1,708 | | | 1,746 | |
Amortization of acquisition-related intangibles | 450 | | | 590 | | | 1,449 | | | 1,499 | |
Licensing gain | (10) | | | (8) | | | (28) | | | (97) | |
Interest expense | (26) | | | (31) | | | (79) | | | (69) | |
Other income (expense), net | 59 | | | 22 | | | 148 | | | (24) | |
Income tax provision (benefit) | (39) | | | (135) | | | (49) | | | 32 | |
Equity income in investee | 3 | | | 4 | | | 10 | | | 11 | |
| | | | | | | |
Gross Margin
Gross margin was 47% and 42% for the three months ended September 30, 2023 and September 24, 2022, respectively. The increase in gross margin was primarily driven by lower amortization of acquisition-related intangible assets, higher Client segment revenue and product mix.
Gross margin remained flat at 46% for the nine months ended September 30, 2023 and September 24, 2022, primarily due to higher Embedded segment performance and lower amortization of acquisition-related intangible assets, partially offset by lower Client segment performance.
Expenses
Research and Development Expenses
Research and development expenses of $1.5 billion for the three months ended September 30, 2023 increased by $228 million, or 18%, compared to $1.3 billion for the prior year period. Research and development expenses of $4.4 billion for the nine months ended September 30, 2023 increased by $722 million, or 20%, compared to $3.6 billion for the prior year period. The increase in both periods was primarily driven by an increase in 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 $576 million for the three months ended September 30, 2023 increased by $19 million, or 3%, compared to $557 million for the prior year period, primarily due to an increase in employee-related costs.
Marketing, general and administrative expenses of $1.7 billion for the nine months ended September 30, 2023 decreased by $38 million, or 2%, compared to $1.7 billion for the prior year period, primarily due to a decrease in acquisition-related costs.
Amortization of Acquisition-Related Intangibles
Amortization of acquisition-related intangibles of $660 million for the three months ended September 30, 2023 decreased by $342 million, or 34%, compared to $1.0 billion for the prior year period. Amortization of acquisition-related intangibles of $2.2 billion for the nine months ended September 30, 2023 decreased by $328 million or 13% compared to $2.5 billion amortization for the prior year period. 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 the three and nine months ended September 30, 2023, we recognized $10 million and $28 million of licensing gain from royalty income associated with certain intellectual property licensed to two joint ventures in which we have an equity interest in with Higon Information Technology Co., Ltd., a third-party Chinese entity (Licensed IP). During the three and nine months ended September 24, 2022, we recognized $8 million of licensing gain from royalty income and $97 million of licensing gain from a milestone achievement and royalty income associated with the Licensed IP.
Interest Expense
Interest expense for the three months ended September 30, 2023 and September 24, 2022 was $26 million and $31 million, respectively, the decrease was primarily due to the 7.5% Senior Notes due 2022, which matured and were repaid in 2022.
Interest expense for the nine months ended September 30, 2023 and September 24, 2022 was $79 million and $69 million, respectively, the increase was primarily due to interest expense from the 3.924% Senior Notes Due 2032 (3.924% Notes) and the 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 for the three and nine months ended September 30, 2023 was $59 million and $148 million, respectively, primarily due to interest income driven by rising interest rates.
Other income, net for the three months ended September 24, 2022 was $22 million, primarily due to interest income driven by rising interest rates. Other expenses, net for the nine months ended September 24, 2022 was $24 million, primarily due to a $57 million decrease in the fair value of equity investments, partially offset by $33 million of interest income driven by rising interest rates.
Income Tax Provision (Benefit)
We determine income taxes for interim reporting periods by applying our estimated annual effective tax rate to the year-to-date results and adjusted for tax items discrete to each period. The difference between the U.S. federal statutory tax rate of 21% and our effective tax rate for the three and nine months ended September 30, 2023 and September 24, 2022 was primarily due to the income tax benefit from foreign-derived intangible income (FDII) and research and development tax credits.
We recorded an income tax benefit of $39 million and $49 million for the three and nine months ended September 30, 2023, respectively, representing effective tax rates of (15.2)% and (35.8)%, respectively. We recorded the tax effects of stock-based compensation, uncertain tax positions, and other items discrete to the period resulting in income tax benefit of $17 million and $29 million for the three and nine months ended September 30, 2023, respectively.
We recorded an income tax benefit of $135 million and a provision of $32 million for the three and nine months ended September 24, 2022, representing effective tax rates of 195.7% and 2.4%, respectively. For the three and nine months ended September 24, 2022, the impact of tax items discrete to the periods was not material to the total tax expense or the effective tax rate.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of September 30, 2023 and December 31, 2022, our cash, cash equivalents and short-term investments were $5.8 billion and $5.9 billion, respectively. The percentage of cash, cash equivalents and short-term investments held domestically as of September 30, 2023 and December 31, 2022 were 81% and 73%, respectively.
Our operating, investing and financing activities for the nine months ended September 30, 2023 compared to the prior year period are as described below:
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
| (In millions) |
Net cash provided by (used in): | | | |
Operating activities | $ | 1,286 | | | $ | 2,998 | |
Investing activities | (1,573) | | | 932 | |
Financing activities | (987) | | | (3,067) | |
Net (decrease) increase in cash and cash equivalents | $ | (1,274) | | | $ | 863 | |
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 nine months ended September 30, 2023.
We also have a 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. We did not issue any commercial paper during the nine months ended September 30, 2023.
As of September 30, 2023, our principal debt obligations were $2.5 billion. Our 2.95% Notes with a principal amount of $750 million are due in June 2024.
As of September 30, 2023, we had unconditional purchase commitments of approximately $5.0 billion, of which $2.4 billion are for the remainder of fiscal year 2023. On an ongoing basis, we work with our suppliers on the timing of payments and deliveries of purchase commitments, taking into account business conditions.
We believe our cash, cash equivalents, short-term investments and cash flows from operations along with our Revolving Credit Agreement and commercial paper program will be sufficient to fund operations, including capital expenditures and purchase commitments, over the next 12 months and beyond. We believe we will be able to access the capital markets should we require additional funds. However, we cannot assure that such funds will be available on favorable terms, or at all.
Operating Activities
Our working capital cash inflows and outflows from operations are primarily cash collections from our customers, payments for inventory purchases and payments for employee-related expenditures.
Net cash provided by operating activities was $1.3 billion in the nine months ended September 30, 2023, primarily due to our net income of $187 million, adjusted for non-cash and non-operating charges of $2.9 billion and net cash outflows of $1.8 billion from changes in our operating assets and liabilities. The primary driver of the change in operating assets and liabilities was a $929 million increase in accounts receivable driven primarily by higher revenue in the last month of the quarter ended September 30, 2023 compared to the last month of the quarter ended December 31, 2022, and a $674 million increase in inventory primarily to support the continued ramp of Data Center and Client products in advanced process technology nodes.
Net cash provided by operating activities was $3.0 billion in the nine months ended September 24, 2022, primarily due to our net income of $1.3 billion, adjusted for non-cash and non-operating charges of $2.7 billion and net cash outflows of $1.0 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 first three quarters of 2022, a $997 million increase in inventory primarily driven by product build in the Client segment, partially offset by a $994 million increase in accrued liabilities and other driven primarily by higher customer-related accruals.
Investing Activities
Net cash used in investing activities was $1.6 billion for the nine months ended September 30, 2023 which primarily consisted of cash used in the purchases of short-term investments of $3.3 billion and purchases of property and equipment of $407 million, partially offset by $2.2 billion of proceeds from the maturity and sale of short-term investments.
Net cash provided by investing activities was $932 million for the nine months ended September 24, 2022 which primarily consisted of $2.4 billion of cash received from Xilinx and $2.9 billion of proceeds from the maturity of short-term investments, partially offset by cash used in the acquisition of Pensando Systems, Inc. of $1.6 billion, purchases of short-term investments of $2.4 billion and purchases of property and equipment of $326 million.
Financing Activities
Net cash used in financing activities was $987 million for the nine months ended September 30, 2023, which primarily consisted of common stock repurchases of $752 million and repurchases for tax withholding on employee equity plans of $382 million, partially offset by a cash inflow of $148 million from issuance of common stock under our employee equity plans.
Net cash used in financing activities was $3.1 billion for the nine months ended September 24, 2022, which primarily consisted of common stock repurchases of $3.5 billion and repurchases for tax withholding on employee equity plans of $371 million and repayment of debt of $312 million, partially offset by proceeds from the issuance of debt of $991 million and a cash inflow of $79 million from issuance of common stock under our employee equity plans.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Reference is made to “Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
There have not been any material changes in interest rate risk, default risk or foreign exchange risk since December 31, 2022.
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ITEM 4. | CONTROLS AND PROCEDURES |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports made under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of September 30, 2023, the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
During the nine months ended September 30, 2023, we completed the implementation of our new enterprise resource planning (ERP) system to help us manage our operations and financial reporting. In connection with this implementation, we modified the design and documentation of our internal control processes and procedures relating to the new system. Following the implementation, the changes to our control environment were validated according to our established processes and our internal controls over financial reporting continued to operate as designed.
There were no other changes in our internal controls over financial reporting for the three months ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
For a discussion of our legal proceedings, refer to Note 12—Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q).
The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In addition, you should consider the interrelationship and compounding effects of two or more risks occurring simultaneously.
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, operations and financial results.
Economic and Strategic Risks
•Intel Corporation’s dominance of the microprocessor market and its aggressive business practices may limit our ability to compete effectively on a level playing field.
•Economic and market uncertainty may adversely impact our business and operating results.
•The semiconductor industry is highly cyclical and has experienced severe downturns that have materially adversely affected, and may continue to materially adversely affect, our business in the future.
•The demand for our products depends in part on the market conditions in the industries into which they are sold. Fluctuations in demand for our products or a market decline in any of these industries could have a material adverse effect on our results of operations.
•The loss of a significant customer may have a material adverse effect on us.
•The ongoing COVID-19 pandemic could materially adversely affect our business, financial condition and results of operations.
•The markets in which our products are sold are highly competitive.
•Our operating results are subject to quarterly and seasonal sales patterns.
•If we cannot adequately protect our technology or other intellectual property in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, we may lose a competitive advantage and incur significant expenses.
•Unfavorable currency exchange rate fluctuations could adversely affect us.
Operational and Technology Risks
•We rely on third parties to manufacture our products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, our business could be materially adversely affected.
•If essential equipment, materials, substrates or manufacturing processes are not available to manufacture our products, we could be materially adversely affected.
•Failure to achieve expected manufacturing yields for our products could negatively impact our financial results.
•The success of our business is dependent upon our ability to introduce products on a timely basis with features and performance levels that provide value to our customers while supporting and coinciding with significant industry transitions.
•Our revenue from our semi-custom System-on-Chip (SoC) products is dependent upon our semi-custom SoC products being incorporated into customers’ products and the success of those products.
•Our products may be subject to security vulnerabilities that could have a material adverse effect on us.
•IT outages, data loss, data breaches and cyber-attacks could disrupt operations and compromise our intellectual property or other sensitive information, be costly to remediate or cause significant damage to our business, reputation and financial results.
•We may encounter difficulties in operating our newly upgraded enterprise resource planning (ERP) system, which could materially adversely affect us.
•Uncertainties involving the ordering and shipment of our products could materially adversely affect us.
•Our ability to design and introduce new products in a timely manner includes the use of third-party intellectual property.
•We depend on third-party companies for the design, manufacture and supply of motherboards, software, memory and other computer platform components to support our business and products.
•If we lose Microsoft Corporation’s support for our products o