10-Q 1 amd0929201810q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2018
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) |  | (Zip Code)

Registrant’s telephone number, including area code: (408) 749-4000

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 þ 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 þ 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 |  | þ |  | 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 þ
Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 26, 2018: 999,407,216

INDEX

|  | Page No.
Part I Financial Information |
Item 1 | Financial Statements (Unaudited) |
| Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 29, 2018 and September 30, 2017 | 3
| Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September 29, 2018 and September 30, 2017 | 4
| Condensed Consolidated Balance Sheets as of September 29, 2018 and December 30, 2017 | 5
| Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 29, 2018 and September 30, 2017 | 6
| Notes to Condensed Consolidated Financial Statements | 7
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 36
Item 4 | Controls and Procedures | 36
Part II Other Information |
Item 1 | Legal Proceedings | 37
Item 1A | Risk Factors | 39
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 54
Item 6 | Exhibits | 55
Signature | 56

2

PART I. FINANCIAL INFORMATION

ITEM 1. | FINANCIAL STATEMENTS

Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Operations (1)
(Unaudited)

| Three Months Ended |  | Nine Months Ended
| September 29, 2018 |  | September 30, 2017 |  | September 29, 2018 |  | September 30, 2017
| (In millions, except per share amounts)
Net revenue | $ | 1,653 |  |  | $ | 1,584 |  |  | $ | 5,056 |  |  | $ | 3,913 |
Cost of sales | 992 |  |  | 1,013 |  |  | 3,146 |  |  | 2,578 |
Gross margin | 661 |  |  | 571 |  |  | 1,910 |  |  | 1,335 |
Research and development | 363 |  |  | 320 |  |  | 1,063 |  |  | 876 |
Marketing, general and administrative | 148 |  |  | 132 |  |  | 424 |  |  | 382 |
Licensing gain | — |  |  | — |  |  | — |  |  | (52 | )
Operating income | 150 |  |  | 119 |  |  | 423 |  |  | 129 |
Interest expense | (30 | ) |  | (31 | ) |  | (92 | ) |  | (95 | )
Other expense, net | (6 | ) |  | (3 | ) |  | (4 | ) |  | (11 | )
Income before equity loss and income taxes | 114 |  |  | 85 |  |  | 327 |  |  | 23 |
Provision for income taxes | 12 |  |  | 22 |  |  | 26 |  |  | 30 |
Equity loss in investee | — |  |  | (2 | ) |  | (2 | ) |  | (7 | )
Net income (loss) | $ | 102 |  |  | $ | 61 |  |  | $ | 299 |  |  | $ | (14 | )
Earnings (loss) per share |  |  |  |  |  |  |
Basic | $ | 0.10 |  |  | $ | 0.06 |  |  | $ | 0.31 |  |  | $ | (0.01 | )
Diluted | $ | 0.09 |  |  | $ | 0.06 |  |  | $ | 0.28 |  |  | $ | (0.01 | )
Shares used in per share calculation |  |  |  |  |  |  |
Basic | 987 |  |  | 957 |  |  | 976 |  |  | 947 |
Diluted | 1,076 |  |  | 1,042 |  |  | 1,058 |  |  | 947 |

(1) Prior year amounts adjusted to reflect the retrospective application of ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 1.

See accompanying notes to condensed consolidated financial statements.
3

Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss) (1)
(Unaudited)

| Three Months Ended |  | Nine Months Ended
| September 29, 2018 |  | September 30, 2017 |  | September 29, 2018 |  | September 30, 2017
| (In millions)
Net income (loss) (1) | $ | 102 |  |  | $ | 61 |  |  | $ | 299 |  |  | $ | (14 | )
Other comprehensive income (loss), net of tax: |  |  |  |  |  |  |
Unrealized gains (losses) on cash flow hedges: |  |  |  |  |  |  |
Unrealized gains (losses) arising during the period | (5 | ) |  | 5 |  |  | (16 | ) |  | 11 |
Reclassification adjustment for (gains) losses realized and included in net income (loss) | 5 |  |  | (3 | ) |  | — |  |  | (4 | )
Total change in unrealized gains (losses) on cash flow hedges | — |  |  | 2 |  |  | (16 | ) |  | 7 |
Total other comprehensive income (loss) | — |  |  | 2 |  |  | (16 | ) |  | 7 |
Cumulative-effect adjustment to accumulated deficit related to the adoption of ASU 2016-01, Financial Instruments | — |  |  | — |  |  | 2 |  |  | — |
Total comprehensive income (loss) | $ | 102 |  |  | $ | 63 |  |  | $ | 285 |  |  | $ | (7 | )

(1) Prior year amounts adjusted to reflect the retrospective application of ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 1.

See accompanying notes to condensed consolidated financial statements.
4

Advanced Micro Devices, Inc.
Condensed Consolidated Balance Sheets (1)
(Unaudited)

| September 29, 2018 |  | December 30, 2017
| (In millions, except par value amounts)
ASSETS |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 1,046 |  |  | $ | 1,185 |
Marketable securities | 10 |  |  | — |
Accounts receivable, net | 1,207 |  |  | 454 |
Inventories, net | 738 |  |  | 694 |
Prepayment and receivables—related parties | 53 |  |  | 33 |
Prepaid expenses | 60 |  |  | 77 |
Other current assets | 200 |  |  | 191 |
Total current assets | 3,314 |  |  | 2,634 |
Property and equipment, net | 318 |  |  | 261 |
Goodwill | 289 |  |  | 289 |
Investment: equity method | 58 |  |  | 58 |
Other assets | 368 |  |  | 310 |
Total assets | $ | 4,347 |  |  | $ | 3,552 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |
Current liabilities: |  |  |
Short-term debt, net | $ | 136 |  |  | $ | 70 |
Accounts payable | 508 |  |  | 384 |
Payables to related parties | 533 |  |  | 412 |
Accrued liabilities | 688 |  |  | 555 |
Other current liabilities | 13 |  |  | 92 |
Total current liabilities | 1,878 |  |  | 1,513 |
Long-term debt, net | 1,167 |  |  | 1,325 |
Other long-term liabilities | 177 |  |  | 118 |
Commitments and contingencies (See Note 12) |  |  |
Stockholders’ equity: |  |  |
Capital stock: |  |  |
Common stock, par value $0.01; shares authorized: 2,250 on September 29, 2018 and 1,500 shares on December 30, 2017; shares issued: 1,007 on September 29, 2018 and 979 shares on December 30, 2017; shares outstanding: 999 on September 29, 2018 and 967 shares on December 30, 2017 | 10 |  |  | 9 |
Additional paid-in capital | 8,666 |  |  | 8,464 |
Treasury stock, at cost (8 shares on September 29, 2018 and 12 shares on December 30, 2017) | (67 | ) |  | (108 | )
Accumulated deficit | (7,474 | ) |  | (7,775 | )
Accumulated other comprehensive income (loss) | (10 | ) |  | 6 |
Total stockholders’ equity | $ | 1,125 |  |  | $ | 596 |
Total liabilities and stockholders’ equity | $ | 4,347 |  |  | $ | 3,552 |

(1) Prior year amounts adjusted to reflect the retrospective application of ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 1.

See accompanying notes to condensed consolidated financial statements.
5

Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Cash Flows (1) (2)
(Unaudited)

| Nine Months Ended
| September 29, 2018 |  | September 30, 2017
| (In millions)
Cash flows from operating activities: |  |  |
Net income (loss) | $ | 299 |  |  | $ | (14 | )
Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |  |
Depreciation and amortization | 127 |  |  | 105 |
Provision for deferred income taxes | — |  |  | 3 |
Stock-based compensation expense | 101 |  |  | 76 |
Amortization of debt discount and issuance costs | 29 |  |  | 27 |
Loss on debt redemption | 7 |  |  | 9 |
Other | 2 |  |  | 4 |
Changes in operating assets and liabilities: |  |  |
Accounts receivable | (753 | ) |  | (527 | )
Inventories | (44 | ) |  | 5 |
Prepayment and receivables - related parties | (20 | ) |  | 6 |
Prepaid expenses and other assets | (26 | ) |  | (78 | )
Payables to related parties | 121 |  |  | 61 |
Accounts payable, accrued liabilities and other | 121 |  |  | 11 |
Net cash used in operating activities | (36 | ) |  | (312 | )
Cash flows from investing activities: |  |  |
Purchases of property and equipment | (122 | ) |  | (69 | )
Purchases of available-for-sale debt securities | (45 | ) |  | (221 | )
Proceeds from maturity of available-for-sale debt securities | 35 |  |  | 221 |
Other | — |  |  | (2 | )
Net cash used in investing activities | (132 | ) |  | (71 | )
Cash flows from financing activities: |  |  |
Proceeds from (repayments of) short-term borrowings, net | — |  |  | 70 |
Proceeds from issuance of common stock through employee equity incentive plans | 44 |  |  | 15 |
Repayments of long-term debt | (15 | ) |  | (70 | )
Other | (1 | ) |  | (14 | )
Net cash provided by financing activities | 28 |  |  | 1 |
Net decrease in cash, cash equivalents, and restricted cash | (140 | ) |  | (382 | )
Cash, cash equivalents, and restricted cash at beginning of period | 1,191 |  |  | 1,266 |
Cash, cash equivalents, and restricted cash at end of period | $ | 1,051 |  |  | $ | 884 |
Supplemental cash flow information: |  |  |
Non-cash investing and financing activities: |  |  |
Purchases of property and equipment, accrued but not paid | $ | 46 |  |  | $ | 53 |
Issuance of treasury stock to partially settle debt | $ | 103 |  |  | $ | 38 |
Non-cash additions of property, plant and equipment | $ | 9 |  |  | $ | 8 |
Reconciliation of cash, cash equivalents, and restricted cash |  |  |
Cash and cash equivalents | $ | 1,046 |  |  | $ | 879 |
Restricted cash included in Other current assets | 5 |  |  | 2 |
Restricted cash included in Other assets | — |  |  | 3 |
Total cash, cash equivalents, and restricted cash | $ | 1,051 |  |  | $ | 884 |

(1) Prior year amounts adjusted to reflect the retrospective application of ASU 2014-09, Revenue from Contracts with Customers. Refer to Note 1.
(2) Amounts reflected adoption of ASU 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230) beginning in the first quarter of 2018.

See accompanying notes to condensed consolidated financial statements.
6

Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements of Advanced Micro Devices, Inc. and its subsidiaries (the Company or 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 29, 2018 shown in this report are not necessarily indicative of results to be expected for the full year ending December 29, 2018. 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 and cash flows. 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 year ended December 30, 2017.
The Company uses a 52 or 53 week fiscal year ending on the last Saturday in December. The three and nine months ended September 29, 2018 and September 30, 2017 each consisted of 13 weeks and 39 weeks, respectively.
Principles of Consolidation. The condensed consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. Upon consolidation, all significant inter-company accounts and transactions are eliminated.
Revenue Recognition. Revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. Sales, value-added, and other taxes collected concurrently with the provision of goods or services are excluded from revenue. Shipping and handling costs associated with product sales are included in cost of sales.
Nature of products and services
The Company's microprocessors, chipsets, graphic processor units (GPUs), professional graphics products, server and embedded processors, and System-on-Chip (SoC) products may be sold as standard non-custom products, or custom products manufactured to customers’ specifications.
Non-custom products: The Company transfers control and recognizes revenue when non-custom products are shipped to customers, which includes original equipment manufacturers (OEM) and distributors, in accordance with the shipping terms of the sale. Certain OEMs may be entitled to rights of return and rebates under OEM agreements. The Company also sells to distributors under terms allowing the majority of distributors certain rights of return and price protection on unsold merchandise held by them. The Company estimates the amount of variable consideration under OEM and distributor arrangements and, accordingly, records a provision for product returns, allowances for price protection and rebates based on actual historical experience and any known events.
The Company offers incentive programs to certain customers, including cooperative advertising, marketing promotions, volume based incentives and special pricing arrangements. Where funds provided for such programs can be estimated, the Company recognizes a reduction to revenue at the time the related revenue is recognized; otherwise, the Company recognizes such reduction to revenue at the later of when; i) the related revenue transaction occurs; or ii) the program is offered. For transactions where the Company reimburses a customer for a portion of the customer’s cost to perform specific product advertising or marketing and promotional activities, such amounts are recognized as a reduction to revenue unless they qualify for expense recognition.
Custom products: Custom products which are associated with the Company’s Enterprise, Embedded, and Semi-Custom segment (semi-custom products), under non-cancellable purchases orders and have no alternative use to the Company at contract inception, are recognized as revenue, based on the value of the semi-custom products and expected margin, over the time of production of the products by the Company. Sale of semi-custom products are not subject to a right of return.
Development and intellectual property licensing agreements: From time to time, the Company may enter into arrangements with customers that combine the provision of development services and a license to the right to use the intellectual property (IP), which is deemed to be a single performance obligation. Accordingly, the Company recognizes revenue for the entire consideration of the arrangement upon transfer of control of the IP license to the customer.
Customers are generally required to pay for products and services within the Company’s standard contractual terms, which are typically net 30 to 60 days. The Company has determined that it does not have significant financing components in its contracts with customers.
7

Refer to Note 3 Supplemental Balance Sheet Information, for further information regarding unearned revenue.
Recently Adopted Accounting Standards
Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), which creates a single source of revenue guidance under U.S. GAAP for all companies in all industries and replaces most existing revenue recognition guidance in U.S. GAAP. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the new standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments to the new standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. The Company adopted the new standard in the first quarter of 2018, using the full retrospective method, which required the Company to adjust prior reporting periods presented. The Company implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
The most significant impacts of the adoption of ASC 606 to the Company related to: (1) the acceleration of revenue recognition for sales of semi-custom products subject to a non-cancellable customer purchase order, (2) the acceleration of revenue recognition for sales to distributors, and (3) the timing and financial statement classification of certain development and intellectual property licensing agreements. Revenue from sales of semi-custom products under non-cancellable purchases orders and that have no alternative use to the Company at contract inception, is recognized, based on the value of the semi-custom products and expected margin, over the time of production of the semi-custom products by the Company, rather than upon shipment. Revenue from sales to the Company's distributors is recognized upon shipment of the product to the distributors (sell-in), net of provision for estimated reserves, instead of the previous revenue recognition which was upon the reported resale of the product by the distributors to their customers (sell-through). For a development and IP licensing agreement executed in 2017, the Company recognized IP-related revenue in the third quarter of 2018 for the entire consideration upon the completion of all the technology milestones. Previously, the agreement resulted in the reduction to research and development expenses in 2017 for development work as the expenses were incurred and would have resulted in licensing revenue to be recognized in periods beyond 2017 upon completion of the deliverables, based on a fair value allocation of the consideration received. Revenue recognition related to the Company’s other revenue streams remain substantially unchanged.
The adoption of ASC 606 had an impact on the Company’s Consolidated Statements of Operations and Consolidated Balance Sheets, but had no impact on cash provided by or used in operating, financing, or investing activities on the Consolidated Statements of Cash Flows.
8

The impact on the Company’s previously reported Consolidated Statement of Operations as a result of the adoption of the new standard was as follows:

| Three months ended September 29, 2017 |  | Nine months ended September 29, 2017
| As Previously Reported |  | Adjustment |  | As Adjusted |  | As Previously Reported |  | Adjustment |  | As Adjusted
| (In millions, except per share amounts)
Net revenue | $ | 1,643 |  |  | $ | (59 | ) |  | $ | 1,584 |  |  | $ | 3,849 |  |  | $ | 64 |  |  | $ | 3,913 |
Cost of sales | 1,070 |  |  | (57 | ) |  | 1,013 |  |  | 2,541 |  |  | 37 |  |  | 2,578 |
Gross margin | 573 |  |  | (2 | ) |  | 571 |  |  | 1,308 |  |  | 27 |  |  | 1,335 |
Research and development | 315 |  |  | 5 |  |  | 320 |  |  | 860 |  |  | 16 |  |  | 876 |
Marketing, general and administrative | 132 |  |  | — |  |  | 132 |  |  | 378 |  |  | 4 |  |  | 382 |
Licensing gain | — |  |  | — |  |  | — |  |  | (52 | ) |  | — |  |  | (52 | )
Operating income (loss) | 126 |  |  | (7 | ) |  | 119 |  |  | 122 |  |  | 7 |  |  | 129 |
Interest expense | (31 | ) |  | — |  |  | (31 | ) |  | (95 | ) |  | — |  |  | (95 | )
Other expense, net | (3 | ) |  | — |  |  | (3 | ) |  | (11 | ) |  | — |  |  | (11 | )
Income (loss) before equity loss and income taxes | 92 |  |  | (7 | ) |  | 85 |  |  | 16 |  |  | 7 |  |  | 23 |
Provision for income taxes | 19 |  |  | 3 |  |  | 22 |  |  | 27 |  |  | 3 |  |  | 30 |
Equity loss in investee | (2 | ) |  | — |  |  | (2 | ) |  | (7 | ) |  | — |  |  | (7 | )
Net income (loss) | $ | 71 |  |  | $ | (10 | ) |  | $ | 61 |  |  | $ | (18 | ) |  | $ | 4 |  |  | $ | (14 | )
Earnings (loss) per share |  |  |  |  |  |  |  |  |  |  |
Basic | $ | 0.07 |  |  | $ | (0.01 | ) |  | $ | 0.06 |  |  | $ | (0.02 | ) |  | $ | 0.01 |  |  | $ | (0.01 | )
Diluted | $ | 0.07 |  |  | $ | (0.01 | ) |  | $ | 0.06 |  |  | $ | (0.02 | ) |  | $ | 0.01 |  |  | $ | (0.01 | )
Shares used in per share calculation |  |  |  |  |  |  |  |  |  |  |
Basic | 957 |  |  |  |  |  | 957 |  |  | 947 |  |  |  |  | 947 |
Diluted | 1,042 |  |  |  |  |  | 1,042 |  |  | 947 |  |  |  |  | 947 |

The impact on the Company’s previously reported Consolidated Balance Sheets line items affected by the adoption of the new standard was as follows:

| December 30, 2017
| As Previously Reported |  | Adjustment |  | As Adjusted
| (In millions, except per share amounts)
Accounts receivable, net | $ | 400 |  |  | $ | 54 |  |  | $ | 454 |
Inventories, net | 739 |  |  | (45 | ) |  | 694 |
Other current assets | 188 |  |  | 3 |  |  | 191 |
Accrued liabilities | 541 |  |  | 14 |  |  | 555 |
Other current liabilities | 57 |  |  | 35 |  |  | 92 |
Deferred income on shipments to distributors | 22 |  |  | (22 | ) |  | — |
Accumulated deficit | (7,760 | ) |  | (15 | ) |  | (7,775 | )

Income Taxes. In March 2018, the FASB issued ASU 2018-05, Income Taxes (ASC 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update) (ASU 2018-05). The ASU 2018-05 includes certain provisions of the Securities and Exchange Commission (SEC) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act of 2017 (the Tax Reform Act) in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Reform Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. The Company has accounted for the tax effects of the Tax Reform Act under the guidance of SAB 118, on a provisional basis. During the nine months ended September 29, 2018, the Company did not recognize any adjustment to the provisional amounts recorded as of December 30, 2017. The Company will continue to assess the Tax Reform Act’s impact for the rest of 2018, including its interpretation by regulatory authorities and the courts, and will adjust its disclosures and financial presentation as necessary.
9

Stock Compensation. In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (ASC 718): Scope of Modification Accounting (ASU 2017-09) to provide clarity and reduce both the (1) diversity in practice and (2) cost and complexity when changing the terms or conditions of share-based payment awards. Under ASU 2017-09, modification accounting is required to be applied unless all of the following criteria are the same immediately before and after the change:
1. The award’s fair value (or calculated value or intrinsic value, if those measurement methods are used);
2. The award’s vesting conditions; and
3. The award’s classification as an equity or liability instrument.
ASU 2017-09 is effective for annual and interim periods beginning after December 15, 2017 on a prospective basis, and early adoption is permitted. The Company adopted this guidance in the first quarter of 2018 and the guidance did not have an impact on its consolidated financial statements.
Statement of Cash Flows. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (ASC 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash (ASU 2016-18), which requires the inclusion of restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-15 and ASU 2016-18 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, provided that all of the amendments are adopted in the same period. The amendments will be applied using a retrospective transition method to each period presented. The Company adopted this guidance in the first quarter of 2018, which resulted in the additional presentation of restricted cash on the statement of cash flows for each period presented and had no material impact on its consolidated financial statements.
Financial Instruments. In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (ASC 825): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The ASU also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. Entities have to assess the realizability of such deferred tax assets in combination with the entities’ other deferred tax assets. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years. The Company adopted this guidance in the first quarter of 2018. For its equity securities that have readily determinable fair values, the Company recorded $2 million of a cumulative effect adjustment to retained earnings upon adoption. For its equity investments that do not have readily determinable fair values, the Company adopted the measurement alternative prospectively with no material impact on its consolidated financial statements.
Recently Issued Accounting Standards
Intangibles. In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (ASC 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires hosting arrangements that are service contracts to follow the guidance for internal-use software to determine which implementation costs can be capitalized. ASU 2018-15 is effective either prospectively or retrospectively for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating how to apply the new guidance.
Reporting Comprehensive Income. In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (ASC 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which gives entities the option to reclassify to retained earnings the tax effects resulting from the Tax Reform Act related to items in AOCI that the FASB refers to as having been stranded in AOCI. The new guidance may be applied retrospectively to each period in which the effect of the Tax Reform Act is recognized in the period of adoption. The Company must adopt this guidance for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the Tax Reform Act was enacted. The guidance, when adopted, will require new disclosures regarding a company’s accounting policy for releasing the tax effects in AOCI and permit the company the option to reclassify to retained earnings the tax effects resulting from the Tax Reform Act that are stranded in AOCI. The Company is currently evaluating how to apply the new guidance.
10

Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations for lease recognition and disclosure. ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet, while recognizing expenses on the income statements in a manner similar to current guidance. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company did not elect to early adopt this standard and therefore the standard will be effective for the Company in the first quarter of 2019. ASU 2016-02 requires that leases be recognized and measured as of the earliest period presented, using a modified retrospective approach, with all periods presented being adjusted and presented under the new standard. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides companies an optional adoption method to ASU 2016-02 whereby a company does not have to adjust comparative period financial statements for the new standard. The Company plans to adopt the new standard using the optional adoption method and thereby not adjust comparative financial statements.
The Company is currently evaluating the application of the new guidance and currently believes the most significant impact upon adoption will be the recognition of right-of-use assets and lease liabilities on the Company's consolidated balance sheets for its operating leases. The Company is progressing on implementing processes to comply with the guidance.
There were no other significant updates to the recently issued accounting standards as disclosed in the Company’s Form 10-K for fiscal year 2017.
Although there are several other new accounting pronouncements issued or proposed by the FASB, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its consolidated financial position or operating results.
NOTE 2. GLOBALFOUNDRIES
Wafer Supply Agreement. The Company and GLOBALFOUNDRIES Inc. (GF) entered into a Wafer Supply Agreement (the WSA) in 2009, under which, among other terms, the Company would purchase wafers from GF. The WSA, which has been amended from time to time, governs the terms by which the Company purchases products manufactured by GF.
Sixth Amendment to Wafer Supply Agreement. On August 30, 2016, the Company entered into a sixth amendment to the WSA (the WSA Sixth Amendment). The WSA Sixth Amendment modified certain terms of the WSA applicable to wafers for the Company’s microprocessor, graphics processor and semi-custom products for a five-year period from January 1, 2016 to December 31, 2020. The Company and GF also agreed to establish a comprehensive framework for technology collaboration for the 7nm technology node.
The WSA Sixth Amendment also provides the Company a limited waiver with rights to contract with another wafer foundry with respect to certain products in the 14nm and 7nm technology nodes and gives the Company greater flexibility in sourcing foundry services across its product portfolio. In consideration for these rights, the Company agreed to pay GF $100 million, to be paid in a series of installments starting in the fourth quarter of 2016 through the third quarter of 2017. As of December 30, 2017, the Company had paid GF $100 million in aggregate. Starting in 2017 and continuing through 2020, the Company also agreed to make quarterly payments to GF based on the volume of certain wafers purchased from another wafer foundry.
Further, for each calendar year during the term of the WSA Sixth Amendment, the Company and GF agreed to annual wafer purchase targets that increase from 2016 through 2020. If the Company does not meet the annual wafer purchase target for any calendar year, the Company will be required to pay to GF a portion of the difference between the Company’s actual wafer purchases and the wafer purchase target for that year. The annual targets were established based on the Company’s business and market expectations and took into account the limited waiver it received for certain products. In 2016 and 2017, the Company met its wafer purchase targets. As of September 29, 2018, the Company expects to meet its 2018 wafer purchase target.
The Company and GF also agreed on fixed pricing for wafers purchased during 2016 and established a framework to agree on annual wafer pricing for the years 2017 to 2020. The Company and GF have agreed on pricing for wafer purchases for 2018.
On August 27, 2018, GF announced that it was putting its 7nm FinFET program on hold indefinitely. The Company is presently focusing the breadth of its 7nm product portfolio on Taiwan Semiconductor Co., Ltd.’s (TSMC) 7nm process. The Company is in discussion with GF to modify the WSA to align with GF’s new business strategy.
The Company’s total purchases from GF related to wafer manufacturing, research and development activities and other for the quarters ended September 29, 2018 and September 30, 2017 were $377 million and $331 million, respectively. The Company’s total purchases from GF related to wafer manufacturing, research and development activities and other for the nine months ended September 29, 2018 and September 30, 2017 were $1.2 billion and $773 million, respectively. Included in the total purchases for the three and nine months ended September 29, 2018 were amounts related to the volume of certain wafers purchased from another
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wafer foundry, as agreed by the Company and GF under the WSA Sixth Amendment. As of September 29, 2018 and December 30, 2017, the amount of prepayment and other receivables related to GF was $15 million and $27 million, respectively, included in Prepayment and receivables—related parties on the Company’s condensed consolidated balance sheets. As of September 29, 2018 and December 30, 2017, the amount of payable to GF was $321 million and $241 million, respectively, included in Payables to related parties on the Company’s condensed consolidated balance sheets.
Warrant Agreement. Also on August 30, 2016, in consideration for the limited waiver and rights under the WSA Sixth Amendment, the Company entered into a warrant agreement (the Warrant Agreement) with West Coast Hitech L.P. (WCH), a wholly-owned subsidiary of Mubadala Development Company PJSC (Mubadala). Under the Warrant Agreement, WCH and its permitted assigns are entitled to purchase 75 million shares of the Company’s common stock (the Warrant Shares) at a purchase price of $5.98 per share. The warrant is exercisable in whole or in part until February 29, 2020. Notwithstanding the foregoing, the Warrant Agreement will only be exercisable to the extent that Mubadala does not beneficially own, either directly through any other entities directly and indirectly owned by Mubadala or its subsidiaries, an aggregate of more than 19.99% of the Company’s outstanding capital stock after any such exercise.
GF continues to be a related party of the Company because Mubadala and Mubadala Technology Investments LLC (Mubadala Tech, a party to the WSA) are affiliated with WCH, a significant stockholder of the Company. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala.
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NOTE 3. Supplemental Balance Sheet Information
Accounts Receivable, net
As of September 29, 2018 and December 30, 2017, Accounts receivable, net included unbilled accounts receivable of $331 million and $75 million, respectively. Unbilled receivables primarily represent work completed on semi-custom products under non-cancellable purchase orders that have no alternative use to the Company at contract inception, for which revenue has been recognized but not yet invoiced to customers. All unbilled accounts receivable are expected to be billed and collected within twelve months.
Inventories, net

| September 29, 2018 |  | December 30, 2017
| (In millions)
Raw materials | $ | 85 |  |  | $ | 34 |
Work in process | 418 |  |  | 446 |
Finished goods | 235 |  |  | 214 |
Total inventories, net | $ | 738 |  |  | $ | 694 |

Property and Equipment, net

| September 29, 2018 |  | December 30, 2017
| (In millions)
Leasehold improvements | $ | 176 |  |  | $ | 187 |
Equipment | 780 |  |  | 758 |
Construction in progress | 80 |  |  | 56 |
Property and equipment, gross | 1,036 |  |  | 1,001 |
Accumulated depreciation | (718 | ) |  | (740 | )
Total property and equipment, net | $ | 318 |  |  | $ | 261 |

Other Assets

| September 29, 2018 |  | December 30, 2017
| (In millions)
Software technology and licenses, net | $ | 274 |  |  | $ | 239 |
Other | 94 |  |  | 71 |
Total other assets | $ | 368 |  |  | $ | 310 |

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Accrued Liabilities

| September 29, 2018 |  | December 30, 2017
| (In millions)
Accrued compensation and benefits | $ | 223 |  |  | $ | 206 |
Marketing programs and advertising expenses | 249 |  |  | 145 |
Software technology and licenses payable | 45 |  |  | 41 |
Other | 171 |  |  | 163 |
Total accrued liabilities | $ | 688 |  |  | $ | 555 |

Other Current Liabilities

| September 29, 2018 |  | December 30, 2017
| (In millions)
Unearned revenue | $ | 3 |  |  | $ | 85 |
Other | 10 |  |  | 7 |
Total other current liabilities | $ | 13 |  |  | $ | 92 |

Unearned revenue represents consideration received or due from customers in advance of the Company satisfying its performance obligations. The unearned revenue is associated with any combination of development services, IP licensing and product revenue. Changes in unearned revenue were as follows:

| Three Months Ended |  | Nine Months Ended
| September 29, 2018 |  | September 30, 2017 |  | September 29, 2018 |  | September 30, 2017
| (In millions)
Beginning balance | $ | 67 |  |  | $ | 43 |  |  | $ | 85 |  |  | $ | 22 |
Unearned revenue | 37 |  |  | 32 |  |  | 124 |  |  | 59 |
Revenue recognized during the period | (86 | ) |  | — |  |  | (186 | ) |  | (6 | )
Other | (15 | ) |  | — |  |  | (20 | ) |  | — |
Ending balance | $ | 3 |  |  | $ | 75 |  |  | $ | 3 |  |  | $ | 75 |

Revenue allocated to remaining performance obligations that are unsatisfied (or partially unsatisfied) as of September 29, 2018 is $121 million, which may include amounts received from customer but not yet earned and amounts that will be invoiced and recognized as revenue in future periods associated with any combination of development services, IP licensing and product revenue. The Company expects to recognize $99 million in the next 12 months, and the remainder thereafter. As permitted under ASC 606, the Company has not disclosed the comparative amounts as of December 30, 2017.
The revenue allocated to remaining performance obligations did not include amounts which have an original contractual expected duration of less than one year.
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NOTE 4. Equity Interest Purchase Agreement - ATMP Joint Venture
In April 2016, the Company and certain of its subsidiaries completed the sale of a majority of the equity interests in Suzhou TF-AMD Semiconductor Co., Ltd. (formerly, AMD Technologies (China) Co., Ltd.), and TF-AMD Microelectronics (Penang) Sdn. Bhd. (formerly, Advanced Micro Devices Export Sdn. Bhd.), to affiliates of Tongfu Microelectronics Co., Ltd. (formerly, Nantong Fujitsu Microelectronics Co., Ltd.) (TFME), a Chinese joint stock company, to form two joint ventures (collectively, the ATMP JV). As a result of the sale, TFME’s affiliates own 85% of the equity interests in the ATMP JV while certain of the Company’s subsidiaries own the remaining 15%. 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. As of September 29, 2018 and December 30, 2017, the carrying value of the Company’s investment in the ATMP JV was approximately $58 million and $58 million, respectively. The ATMP JV is a related party of the Company. The ATMP JV provides assembly, test, mark and packaging (ATMP) services to the Company. The Company currently pays the ATMP JV for ATMP services on a cost-plus basis. The Company assists the ATMP JV in its management of certain raw material inventory. The purchases from and resales back to the ATMP JV of the inventory under inventory management is reported within purchases and resales with the ATMP JV and does not impact the Company’s Statement of Operations.
The Company’s total purchases from the ATMP JV during the three and nine months ended September 29, 2018 amounted to approximately $151 million and $429 million, respectively. The Company’s total purchases from the ATMP JV during the three and nine months ended September 30, 2017 amounted to approximately $131 million and $332 million, respectively. As of September 29, 2018 and December 30, 2017, the amount payable to the ATMP JV was $212 million and $171 million, respectively, included in Payables to related parties on the Company’s condensed consolidated balance sheets. The Company’s resales back to the ATMP JV during the three and nine months ended September 29, 2018 amounted to approximately $21 million and $40 million, respectively, and there were no resales back to the ATMP JV for the comparative periods of 2017. As of September 29, 2018 and December 30, 2017, the Company had receivables from ATMP JV of $19 million and $3 million, respectively, included in Prepayment and receivables—related parties on the Company’s condensed consolidated balance sheets.
During the three and nine months ended September 29, 2018, the Company recorded $0 million and $2 million, respectively, in Equity loss in investee on its condensed consolidated statements of operations, which included certain expenses incurred by the Company on behalf of the ATMP JV. During the three and nine months ended September 30, 2017, the Company recorded $2 million and $7 million, respectively, in Equity loss in investee on its condensed consolidated statements of operations, which included certain expenses incurred by the Company on behalf of the ATMP JV.
NOTE 5. Equity Joint Venture
In February 2016, the Company and Higon Information Technology Co., Ltd. (formerly, Tianjin Haiguang Advanced Technology Investment Co., Ltd.) (THATIC), a third-party Chinese entity (JV Partner), formed a joint venture comprised of two separate legal entities, China JV1 and China JV2 (collectively, the THATIC JV). The Company’s equity share in China JV1 and China JV2 is a majority and minority interest, respectively, funded by the Company’s contribution of certain of its patents. The JV Partner is responsible for the initial and on-going financing of the THATIC JV’s operations. The Company has no obligations to fund the THATIC JV.
The Company concluded the China JV1 and China JV2 are not operating joint ventures and are variable interest entities due to their reliance on on-going financing by the JV Partner. The Company determined that it is not the primary beneficiary of either China JV1 or China JV2, as the Company does not have unilateral power to direct selling and marketing, manufacturing and product development activities related to the THATIC JV’s products. Accordingly, the Company does not consolidate either of these entities and therefore accounts for its investments in the THATIC JV under the equity method of accounting. The THATIC JV is a related party of the Company.
In February 2016, the Company licensed certain of its intellectual property (Licensed IP) to the THATIC JV for a total of approximately $293 million in license fee payable over several years contingent upon achievement of certain milestones. The Company also expects to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such Licensed IP. The Company also provided certain engineering and technical support to the THATIC JV in connection with the product development. In March 2017, the Company entered into a development and intellectual property agreement (Development and IP) with THATIC JV, and also expects to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such agreement. In addition, from time to time, the Company enters into certain agreements with the THATIC JV to provide other services primarily related to research and development.
The Company recognized income related to the Licensed IP over the period commencing upon delivery of the first Licensed IP milestone through the date of the milestone that required the Company’s continuing involvement in the product development process, which was completed at the end of the second quarter of 2017. Royalty payments will be recognized in income once
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earned. The Company classifies Licensed IP income and royalty income, associated with the February 2016 agreement, as licensing gain within other operating income.
During the three and nine months ended September 29, 2018, the Company recognized $86 million of IP-related revenue upon completion of all technology milestones under the Development and IP agreement. During the three and nine months ended September 30, 2017, the Company recognized zero and $52 million, respectively, as licensing gain associated with the Licensed IP.
The Company’s share in the net losses of the THATIC JV for the three and nine months ended September 29, 2018 was not material and is not recorded in the Company’s condensed consolidated statements of operations since the Company is not obligated to fund the THATIC JV’s losses in excess of the Company’s investment in the THATIC JV, which was zero as of September 29, 2018. The Company’s receivable from the THATIC JV for these agreements was $19 million and $3 million as of September 29, 2018 and December 30, 2017, respectively, included in Prepayment and receivables—related parties on its condensed consolidated balance sheets. As of September 29, 2018, the total assets and liabilities of the THATIC JV were not material.
NOTE 6. Debt and Secured Revolving Line of Credit
Debt
2.125% Convertible Senior Notes Due 2026
In September 2016, the Company issued $805 million, in aggregate, principal amount of 2.125% Convertible Senior Notes due 2026 (2.125% Notes). The 2.125% Notes are general unsecured senior obligations of the Company. The interest is payable semi-annually in March and September of each year, commencing in March 2017. As of September 29, 2018, the Company had $805 million principal amount outstanding.
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 the Company’s 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 the Company’s common stock and the conversion rate on each such trading day; or
(3) upon the occurrence of specified corporate events.
On or after June 1, 2026 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, the Company will pay or deliver cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election.
The first event described in (1) above was met during the third quarter of 2018 and as a result, the 2.125% Notes are convertible at the option of the holder from October 1, 2018 and remain convertible until December 31, 2018.
The Company’s current intent is to deliver shares of its common stock upon conversion of the 2.125% Notes. As such, the Company continued to classify the carrying value of the liability component of the 2.125% Notes as long-term debt and the equity component of the 2.125% Notes as permanent equity on its condensed consolidated balance sheet as of September 29, 2018.
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The 2.125% Notes consisted of the following:

| September 29, 2018 |  | December 30, 2017
| (In millions)
Principal amounts: |  |  |
Principal | $ | 805 |  |  | $ | 805 |
Unamortized debt discount(1) | (268 | ) |  | (286 | )
Unamortized debt issuance costs | (11 | ) |  | (12 | )
Net carrying amount | $ | 526 |  |  | $ | 507 |
Carrying amount of the equity component, net(2) | $ | 305 |  |  | $ | 305 |

(1) | Included in the consolidated balance sheets within Long-term debt, net and amortized over the remaining life of the notes using the effective interest rate method.

(2) | Included in the consolidated balance sheets within additional paid-in capital, net of $9 million of equity issuance costs.

As of September 29, 2018, the remaining life of the 2.125% Notes was approximately 96 months.
Based on the closing price of the Company’s common stock of $30.89 on September 28, 2018, the last trading day of the third quarter of 2018, the if-converted value of the 2.125% Notes exceeded its principal amount by approximately $2,303 million.
The effective interest rate of the liability component of the 2.125% Notes is 8%. This interest rate was based on the interest rates of similar liabilities at the time of issuance that did not have associated conversion features. The following table sets forth total interest expense recognized related to the 2.125% Notes:

| Three Months Ended |  | Nine Months Ended
| September 29, 2018 |  | September 30, 2017 |  | September 29, 2018 |  | September 30, 2017
| (In millions)
Contractual interest expense | $ | 5 |  |  | $ | 4 |  |  | $ | 13 |  |  | $ | 13 |
Interest cost related to amortization of debt issuance costs | — |  |  | — |  |  | 1 |  |  | 1 |
Interest cost related to amortization of the debt discount | $ | 6 |  |  | $ | 6 |  |  | $ | 18 |  |  | $ | 17 |

6.75% Senior Notes Due 2019
On February 26, 2014, the Company issued $600 million of its 6.75% Senior Notes due 2019 (6.75% Notes). The 6.75% Notes are general unsecured senior obligations of the Company. Interest is payable on March 1 and September 1 of each year beginning September 1, 2014 until the maturity date of March 1, 2019. The 6.75% Notes are governed by the terms of an indenture (the 6.75% Indenture) dated February 26, 2014 between the Company and Wells Fargo Bank, N.A., as trustee.
During the three months ended September 29, 2018, the Company settled $87 million in aggregate principal amount of its 6.75% Notes with treasury stock. During the nine months ended September 29, 2018, the Company settled $101 million in aggregate principal amount of its 6.75% Notes, of which $14 million was settled in cash. As of September 29, 2018, the outstanding aggregate principal amount of the 6.75% Notes was $66 million, which is included in short-term debt on the condensed consolidated balance sheet.
7.50% Senior Notes Due 2022
On August 15, 2012, the Company issued $500 million of its 7.50% Senior Notes due 2022 (7.50% Notes). The 7.50% Notes are general unsecured senior obligations of the Company. Interest is payable on February 15 and August 15 of each year beginning February 15, 2013 until the maturity date of August 15, 2022. The 7.50% Notes are governed by the terms of an indenture (the 7.50% Indenture) dated August 15, 2012 between the Company and Wells Fargo Bank, N.A., as trustee.
During the three and nine months ended September 29, 2018, the Company settled $10 million in aggregate principal amount of its 7.50% Notes with treasury stock. As of September 29, 2018, the outstanding aggregate principal amount of the 7.50% Notes was $337 million.
7.00% Senior Notes Due 2024
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On June 16, 2014, the Company issued $500 million of its 7.00% Senior Notes due 2024 (7.00% Notes). The 7.00% Notes are general unsecured senior obligations of the Company. Interest is payable on January 1 and July 1 of each year beginning January 1, 2015 until the maturity date of July 1, 2024. The 7.00% Notes are governed by the terms of an indenture (the 7.00% Indenture) dated June 16, 2014 between the Company and Wells Fargo Bank, N.A., as trustee.
During the nine months ended September 29, 2018, the Company repurchased $1 million in aggregate principal amount of its 7.00% Notes in cash. As of September 29, 2018, the outstanding aggregate principal amount of the 7.00% Notes was $310 million.
During the three and nine months ended September 29, 2018, the Company recorded $6 million and $7 million loss, respectively, on extinguishment of debt associated with the debt repurchases noted above.
Potential Repurchase of Outstanding Notes
The Company may elect to purchase or otherwise retire the 6.75% Notes, 7.50% Notes, 7.00% Notes and 2.125% Notes with cash, stock or other assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries, or by tender offer when the Company believes the market conditions are favorable.
Secured Revolving Line of Credit
On April 14, 2015, the Company, AMD International Sales & Service, Ltd. (collectively, the Borrowers), ATI Technologies ULC (together with the Borrowers, collectively the Loan Parties), a group of lenders and Bank of America N.A., acting as the agent for the lenders, entered into an amended and restated loan and security agreement, as amended (the Agreement). The Agreement provides for a secured revolving line of credit (the Secured Revolving Line of Credit) that allows the Borrowers to borrow, repay and re-borrow amounts from time to time up to $500 million with up to $45 million available for issuance of letters of credit, subject to certain conditions. Borrowings are limited up to a certain amount of eligible accounts receivable, as determined in accordance with the Agreement. The size of the commitment under the Secured Revolving Line of Credit may be increased by up to an aggregate amount of $200 million. The commitments under the Secured Revolving Line of Credit are available through March 21, 2022. The Borrowers are subject to commitment fees and letter of credit facility fees. The Loan Parties are required to comply with certain covenants under the Agreement.
The Secured Revolving Line of Credit bears interest, at the option of the Borrowers, either at (a) a customary London Interbank Offered Rate (LIBOR) plus an applicable margin (as determined in accordance with the agreement), or (b) (i) the greatest of (x) the bank’s prime rate, (y) the federal funds rate as published by the Federal Reserve Bank of New York plus 0.50%, and (z) LIBOR for a one-month period plus 1.00%, plus (ii) an applicable margin.
As of September 29, 2018 and December 30, 2017, the Secured Revolving Line of Credit had an outstanding loan balance of $70 million, at an interest rate of 5.50% and 4.75%, respectively. As of September 29, 2018, the Company had $26 million of letters of credit outstanding and up to $205 million available for future borrowings under the Secured Revolving Line of Credit. The Company reports its intra-period changes in its revolving credit balance on a net basis in its condensed consolidated statement of cash flows as the Company intends the period of the borrowings to be brief, repaying borrowed amounts within 90 days. As of September 29, 2018, the Loan Parties were in compliance with all required covenants under the Agreement.
NOTE 7. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based on the weighted average number of shares outstanding.
Diluted earnings (loss) per share is computed based on the weighted average number of shares outstanding plus potentially dilutive shares outstanding during the period using the average market price for the respective period. Potentially dilutive shares are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding RSUs, and the assumed exercise of the warrant under the Warrant Agreement with WCH. Potentially dilutive shares issuable upon conversion of the 2.125% Notes are calculated using the if-converted method.
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The following table sets forth the components of basic and diluted earnings (loss) per share:

| Three Months Ended |  | Nine Months Ended
| September 29, 2018 |  | September 30, 2017 |  | September 29, 2018 |  | September 30, 2017
| (In millions, except per share amounts)
Numerator – Net income (loss): |  |  |  |  |  |  |
Numerator for basic earnings (loss) per share | $ | 102 |  |  | $ | 61 |  |  | $ | 299 |  |  | $ | (14 | )
Denominator - Weighted average shares: |  |  |  |  |  |  |
Denominator for basic earnings (loss) per share | 987 |  |  | 957 |  |  | 976 |  |  | 947 |
Effect of potentially dilutive shares: |  |  |  |  |  |  |
Employee stock options and restricted stock units | 34 |  |  | 44 |  |  | 35 |  |  | — |
Warrants | 55 |  |  | 41 |  |  | 47 |  |  | — |
Denominator for diluted earnings (loss) per share | 1,076 |  |  | 1,042 |  |  | 1,058 |  |  | 947 |
Earnings (loss) per share: |  |  |  |  |  |  |
Basic | $ | 0.10 |  |  | $ | 0.06 |  |  | $ | 0.31 |  |  | $ | (0.01 | )
Diluted | $ | 0.09 |  |  | $ | 0.06 |  |  | $ | 0.28 |  |  | $ | (0.01 | )

Potential shares from certain employee stock options, restricted stock units and the conversion of the 2.125% Notes totaling 103 million for the third quarter of 2018 were not included in the earnings (loss) per share calculation because their inclusion would have been anti-dilutive. Potential shares from certain employee stock options, restricted stock units, the conversion of the 2.125% Notes and the warrants under the Warrant Agreement totaling 102 million for the third quarter of 2017 were not included in the earnings (loss) per share calculation because their inclusion would have been anti-dilutive.
Potential shares from certain employee stock options, restricted stock units and the conversion of the 2.125% Notes totaling 104 million for the nine months ended September 29, 2018 were not included in the earnings (loss) per share calculation because their inclusion would have been anti-dilutive. Potential shares from certain employee stock options, restricted stock units, the conversion of the 2.125% Notes and the warrants under the Warrant Agreement totaling 193 million for the nine months ended September 30, 2017 were not included in the earnings (loss) per share calculation because their inclusion would have been anti-dilutive.
NOTE 8. Financial Instruments
Cash, Cash Equivalents, and Marketable Securities
Cash and financial instruments measured and recorded at fair value as of September 29, 2018 and December 30, 2017 are summarized below:

| Total Fair Value |  | Cash and Cash Equivalents |  | Short-Term Marketable Securities
| (In millions)
September 29, 2018 |  |  |  |  |
Cash | $ | 92 |  |  | $ | 92 |  |  | $ | — |
Level 1(1) (2) |  |  |  |  |
Government money market funds | $ | 205 |  |  | $ | 205 |  |  | $ | — |
Total level 1 | $ | 205 |  |  | $ | 205 |  |  | $ | — |
Level 2(1) (3) |  |  |  |  |
Commercial paper | $ | 759 |  |  | $ | 749 |  |  | $ | 10 |
Total level 2 | $ | 759 |  |  | $ | 749 |  |  | $ | 10 |
Total | $ | 1,056 |  |  | $ | 1,046 |  |  | $ | 10 |

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| Total Fair Value |  | Cash and Cash Equivalents
| (In millions)
December 30, 2017 |  |  |
Cash | $ | 108 |  |  | $ | 108 |
Level 1(1) (2) |  |  |
Government money market funds | $ | 395 |  |  | $ | 395 |
Total level 1 | $ | 395 |  |  | $ | 395 |
Level 2(1) (3) |  |  |
Commercial paper | $ | 682 |  |  | $ | 682 |
Total level 2 | $ | 682 |  |  | $ | 682 |
Total | $ | 1,185 |  |  | $ | 1,185 |

(1) | The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the three and nine months ended September 29, 2018 or the year ended December 30, 2017.

(2) | The Company’s Level 1 assets are valued using quoted prices for identical instruments in active markets.

(3) | The Company’s Level 2 assets are valued using broker reports that utilize quoted prices for identical instruments in markets that are not active or comparable instruments in active markets. Brokers gather observable inputs for all of the Company’s fixed income securities from a variety of industry data providers and other third-party sources.

In addition to those amounts presented above, as of September 29, 2018 and December 30, 2017, the Company had approximately $5 million and $2 million, respectively, of investments in government money market funds, used as collateral for letters of credit deposits, which were included in Other current assets on the Company’s condensed consolidated balance sheets. These government money market funds are classified within Level 1 because they are valued using quoted prices for identical instruments in active markets. Their amortized cost approximates the fair value for all periods presented.
As of September 29, 2018 and December 30, 2017, the Company also had approximately $22 million and $18 million, respectively, of investments in mutual funds held in a Rabbi trust established for the Company’s deferred compensation plan, which were included in Other assets on the Company’s condensed consolidated balance sheets. These mutual funds are classified within Level 1 because they are valued using quoted prices for identical instruments in active markets. Their amortized cost approximates the fair value for all periods presented. The Company is restricted from accessing these investments.
As of both September 29, 2018 and December 30, 2017, the Company had the carrying value of approximately $3 million in cost method investments.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis. The Company carries its financial instruments at fair value with the exception of its debt. Financial instruments that are not recorded at fair value are measured at fair value on a quarterly basis for disclosure purposes. The carrying amounts and estimated fair values of financial instruments not recorded at fair value are as follows:

| September 29, 2018 |  | December 30, 2017
| Carrying Amount |  | Estimated Fair Value |  | Carrying Amount |  | Estimated Fair Value
| (In millions)
Short-term debt | $ | 136 |  |  | $ | 137 |  |  | $ | 70 |  |  | $ | 70 |
Long-term debt, net(1) | $ | 1,167 |  |  | $ | 3,830 |  |  | $ | 1,324 |  |  | $ | 2,103 |

(1) | Carrying amounts of long-term debt are net of unamortized debt issuance costs of $17 million as of September 29, 2018 and $19 million as of December 30, 2017, and net of unamortized debt discount associated with the 2.125% Notes of $268 million as of September 29, 2018 and $286 million as of December 30, 2017.

The Company’s long-term debt is classified within Level 2. The fair value of the debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of the Company’s accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing payment terms.
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Hedging Transactions and Derivative Financial Instruments
Cash Flow Hedges and Foreign Currency Forward Contracts not Designated as Hedges
The following table shows the amount of gains (losses) included in accumulated other comprehensive income (loss), the amount of gains (losses) reclassified from accumulated other comprehensive income (loss) and included in earnings related to foreign currency forward contracts designated as cash flow hedges and the amount of gains (losses) included in other income (expense), net, related to contracts not designated as hedging instruments which was allocated in the consolidated statements of operations:

| Three Months Ended |  | Nine Months Ended
| September 29, 2018 |  | September 30, 2017 |  | September 29, 2018 |  | September 30, 2017
| (In millions)
Foreign Currency Forward Contracts - gains (losses) |  |  |  |  |  |  |
Contracts designated as cash flow hedging instruments |  |  |  |  |  |  |
Other comprehensive income (loss) | $ | — |  |  | $ | 1 |  |  | $ | (16 | ) |  | $ | 8 |
Research and development | (4 | ) |  | 3 |  |  | — |  |  | 4 |
Marketing, general and administrative | (1 | ) |  | 1 |  |  | — |  |  | 1 |
Contracts not designated as hedging instruments |  |  |  |  |  |  |
Other income (expense), net | $ | — |  |  | $ | (2 | ) |  | $ | (2 | ) |  | $ | (3 | )

The Company’s foreign currency derivative contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates.
The following table shows the fair value amounts included in Other current assets should the foreign currency forward contracts be in a gain position or included in Other current liabilities should these contracts be in a loss position. These amounts were recorded in the Company’s condensed consolidated balance sheets as follows:

| September 29, 2018 |  | December 30, 2017
| (In millions)
Foreign Currency Forward Contracts - gains (losses) |  |  |
Contracts designated as cash flow hedging instruments | $ | (10 | ) |  | $ | 7 |

For the foreign currency contracts designated as cash flow hedges, the ineffective portions of the hedging relationship and the amounts excluded from the assessment of hedge effectiveness were immaterial.
As of September 29, 2018 and December 30, 2017, the notional values of the Company’s outstanding foreign currency forward contracts were $326 million and $300 million, respectively. All the contracts mature within 12 months, and, upon maturity, the amounts recorded in Accumulated other comprehensive income (loss) are expected to be reclassified into earnings. The Company hedges its exposure to the variability in future cash flows for forecasted transactions over a maximum of 12 months.
NOTE 9. Income Taxes
In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Reform Act. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a modified territorial tax system and imposing a transition tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. ASC 740: Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. During the nine months ended September 29, 2018, the Company did not recognize any adjustment to the provisional amounts recorded as of December 30, 2017. The Company will continue to assess the Tax Reform Act’s impact for the rest of 2018, including its interpretation by regulatory authorities and the courts, and will adjust its disclosures and financial presentation as necessary. Given the complexity of the Global Intangible Low-Taxed Income (GILTI) provisions, the Company is still evaluating the effects of the GILTI provisions and has not yet determined its accounting policy. As of September 29, 2018, because the Company is still evaluating the GILTI provisions and its analysis of future taxable income that is subject to GILTI, the Company has considered GILTI related to current-year operations only in its estimated annualized effective tax rate and has not provided additional GILTI on deferred items.
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In the third quarter of 2018, the Company recorded an income tax provision of $12 million, consisting primarily of $5 million for federal base erosion and anti-abuse tax, which is a new tax under the Tax Reform Act, and $7 million for withholding taxes applicable to IP-related revenue from foreign locations.
For the nine months ended September 29, 2018, the Company recorded an income tax provision of $26 million, consisting primarily of $15 million for federal base erosion and anti-abuse tax, $7 million for withholding taxes applicable to IP-related revenue from foreign locations, and $4 million of foreign taxes in profitable locations.
In the third quarter of 2017, the Company recorded an income tax provision of $22 million, consisting primarily of withholding taxes applicable to IP-related revenue from foreign locations.
For the nine months ended September 30, 2017, the Company recorded an income tax provision of $30 million, consisting primarily of withholding taxes applicable to IP-related revenue and licensing gain from foreign locations.
As of September 29, 2018, substantially all of the Company’s U.S. and Canadian deferred tax assets, net of deferred tax liabilities, continue to be subject to a valuation allowance. The realization of these assets is dependent on substantial future taxable income which, as of September 29, 2018, in management’s estimate, is not more likely than not to be achieved.
The Company’s total gross unrecognized tax benefits were $51 million as of September 29, 2018. The Company does not believe it is reasonably possible that unrecognized tax benefits will materially change in the next 12 months. However, the settlement, resolution or closure of tax audits are highly uncertain.
NOTE 10. Segment Reporting
Management, including the Chief Operating Decision Maker, who is the Company’s Chief Executive Officer, reviews and assesses operating performance using segment net revenue and operating income before interest, other income (expense), net and income taxes. These performance measures include the allocation of expenses to the operating segments based on management’s judgment. The Company has the following two reportable segments:

• | the Computing and Graphics segment, which primarily includes desktop and notebook processors and chipsets, discrete and integrated graphics processing units (GPUs), professional GPUs. The Company also licenses portions of its IP portfolio; and

• | the Enterprise, Embedded and Semi-Custom segment, which primarily includes server and embedded processors, semi-custom System-on-Chip (SoC) products, development services and technology for game consoles. The Company also licenses portions of its IP portfolio.

In addition to these reportable segments, the Company has an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to any of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. This category also includes employee stock-based compensation expense.
The following table provides a summary of net revenue and operating income by segment:

| Three Months Ended |  | Nine Months Ended
| September 29, 2018 |  | September 30, 2017 |  | September 29, 2018 |  | September 30, 2017
| (In millions)
Net revenue: |  |  |  |  |  |  |
Computing and Graphics | $ | 938 |  |  | $ | 835 |  |  | $ | 3,139 |  |  | $ | 2,069 |
Enterprise, Embedded and Semi-Custom | 715 |  |  | 749 |  |  | 1,917 |  |  | 1,844 |
Total net revenue | $ | 1,653 |  |  | $ | 1,584 |  |  | $ | 5,056 |  |  | $ | 3,913 |
Operating income (loss): |  |  |  |  |  |  |
Computing and Graphics | $ | 100 |  |  | $ | 73 |  |  | $ | 355 |  |  | $ | 59 |
Enterprise, Embedded and Semi-Custom | 86 |  |  | 74 |  |  | 169 |  |  | 145 |
All Other (1) | (36 | ) |  | (28 | ) |  | (101 | ) |  | (75 | )
Total operating income | $ | 150 |  |  | $ | 119 |  |  | $ | 423 |  |  | $ | 129 |

(1) All Other operating loss is related to stock-based compensation expense for the three and nine months ended September 29, 2018 and September 30, 2017.
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NOTE 11. Stock-Based Incentive Compensation Plans
Stock Options
During the three and nine months ended September 29, 2018, the Company granted 1.0 million and 1.1 million shares of employee stock options, respectively, with weighted average grant date fair value per share of $8.08 and $7.62, respectively. During the three and nine months ended September 30, 2017, the Company granted 0.9 million shares of employee stock options with weighted average grant date fair value per share of $5.46.
Restricted Stock Units
During the three and nine months ended September 29, 2018, the Company granted 8.8 million and 12.0 million shares of restricted stock units, respectively, including 0.8 million and 1.0 million performance-based restricted stock units (PRSUs), respectively, with market conditions, with weighted average grant date fair value per share of $19.81 and $17.83, respectively. During the three and nine months ended September 30, 2017, the Company granted 8.3 million and 10.4 million shares of restricted stock units, respectively, including 0.8 million PRSUs with market conditions for both periods, with weighted average grant date fair value per share of $13.24 and $13.03, respectively.
Performance-based Restricted Stock Units with Market Conditions
From time to time, the Company grants restricted stock units with both a market condition and a service condition (market-based restricted stock units) to its senior executives. The number of shares earned are dependent upon achievement of the market conditions and vest at the end of the performance period, subject to the requisite service conditions.
During the three and nine months ended September 29, 2018, the Company granted 0.8 million and 1.0 million market-based restricted stock units, respectively, with weighted average grant date fair value per share of $23.97 and $21.67, respectively.
During the three and nine months ended September 30, 2017, the Company granted 0.8 million market-based restricted stock units with weighted average grant date fair value per share of $17.18.
Employee Stock Purchase Plan (ESPP)
During the nine months ended September 29, 2018, 2.2 million shares of common stock were purchased under the ESPP at a purchase price of $9.57, resulting in cash proceeds of $21 million. The fair value of stock purchase rights granted under the ESPP during the second quarter of 2018 was $3.42 per share.
NOTE 12. Commitments and Contingencies
Warranties and Indemnities
The Company generally warrants that its products sold to its customers will conform to the Company’s approved specifications and be free from defects in material and workmanship under normal use and service for one year. Subject to certain exceptions, the Company also offers a three-year limited warranty to end users for only those central processing unit (CPU) and accelerated processing unit (APU) products that are commonly referred to as “processors in a box” and for certain server CPU products. The Company also offers extended limited warranties to certain customers of “tray” microprocessor products and/or professional graphics products who have written agreements with the Company and target their computer systems at the commercial and/or embedded markets.
Changes in the Company’s estimated liability for product warranty were as follows:

| Three Months Ended |  | Nine Months Ended
| September 29, 2018 |  | September 30, 2017 |  | September 29, 2018 |  | September 30, 2017
| (In millions)
Beginning balance | $ | 12 |  |  | $ | 10 |  |  | $ | 12 |  |  | $ | 12 |
New warranties issued | 7 |  |  | 7 |  |  | 20 |  |  | 18 |
Settlements | (7 | ) |  | (7 | ) |  | (21 | ) |  | (16 | )
Changes in liability for pre-existing warranties, including expirations | — |  |  | 1 |  |  | 1 |  |  | (3 | )
Ending balance | $ | 12 |  |  | $ | 11 |  |  | $ | 12 |  |  | $ | 11 |

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In addition to product warranties, the Company, from time to time in its normal course of business, indemnifies other parties, with whom it enters into contractual relationships, including customers, lessors and parties to other transactions with the Company with respect to certain matters. In these limited matters, the Company has agreed to hold certain third parties harmless against specific types of claims or losses, such as those arising from a breach of representations or covenants, third-party claims that the Company’s products, when used for their intended purpose(s) and under specific conditions, infringe the intellectual property rights of a third party, or other specified claims made against the indemnified party. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the unique facts and circumstances that are likely to be involved in each particular claim and indemnification provision. Historically, payments made by the Company under these obligations have not been material.
Contingencies
Shareholder Derivative Lawsuits (Wessels, Hamilton and Ha)
On March 20, 2014, a purported shareholder derivative lawsuit captioned Wessels v. Read, et al., Case No. 1:14 cv-262486 (Wessels) was filed against the Company (as a nominal defendant only) and certain of its directors and officers in the Santa Clara County Superior Court of the State of California. The complaint purports to assert claims against the Company and certain individual directors and officers for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual directors and officers regarding its 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for the Company’s common stock during the period. On April 27, 2015, a similar purported shareholder derivative lawsuit captioned Christopher Hamilton and David Hamilton v. Barnes, et al., Case No. 5:15-cv-01890 (Hamilton) was filed against the Company (as a nominal defendant only) and certain of its directors and officers in the United States District Court for the Northern District of California.
On September 29, 2015, a similar purported shareholder derivative lawsuit captioned Jake Ha v Caldwell, et al., Case No. 3:15-cv-04485 (Ha) was filed against the Company (as a nominal defendant only) and certain of its directors and officers in the United States District Court for the Northern District of California. The lawsuit also seeks a court order voiding the stockholder vote on the Company’s 2015 proxy. The case was transferred to the judge handling the Hamilton Lawsuit and is now Case No. 4:15-cv-04485. The Wessels, Hamilton and Ha shareholder derivative lawsuits were stayed pending resolution of a class action lawsuit captioned Hatamian v. AMD, et al., C.A. No. 3:14-cv-00226 filed against the Company in the United States District Court for the Northern District of California (the Hatamian Lawsuit). The Hatamian Lawsuit asserted claims against the Company and certain of its officers for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and SEC Rule 10b-5 concerning certain statements regarding our 32nm technology and “Llano” products. On October 9, 2017, the parties signed a definitive settlement agreement resolving the Hatamian Lawsuit and submitted it to the Court for approval. Under the terms of this agreement, the settlement was funded entirely by certain of AMD’s insurance carriers and the defendants continued to deny any liability or wrongdoing. On March 2, 2018, the court approved the settlement and entered a final judgment in the Hatamian lawsuit.
On January 30, 2018, the Wessels and Hamilton plaintiffs amended their complaints. On February 2, 2018, the Ha plaintiff also filed an amended complaint. On February 22, 2018, the Company filed motions to dismiss the Hamilton and Ha plaintiffs’ amended complaints. On April 2, 2018, we filed a demurrer seeking to dismiss the Wessels amended complaint. On July 23, 2018, the Santa Clara Superior Court sustained the Company's demurrer in the Wessels case, dismissing all claims in that matter with prejudice. The Wessels plaintiff filed a Notice of Appeal on September 27, 2018. On October 4, 2018, the Court issued an order dismissing the Hamilton and Ha amended complaints. The Hamilton plaintiffs filed a Notice of Appeal on October 8, 2018.
Based upon information presently known to management, the Company believes that the potential liability, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations.
Kim Securities Litigation
On January 16, 2018, a putative class action lawsuit captioned Kim et al. v. AMD, et al., Case No. 3:18-cv-00321 was filed against the Company in the United States District Court for the Northern District of California. The complaint purports to assert claims against the Company and certain individual officers for alleged violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 of the Exchange Act. The plaintiff seeks to represent a proposed class of all persons who purchased or otherwise acquired the Company’s common stock during the period February 21, 2017 through January 11, 2018. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual officers regarding a security vulnerability (Spectre), which statements and omissions, the plaintiff claims, allegedly caused the Company’s common stock price to be artificially inflated during the purported class period. The complaint seeks unspecified compensatory damages, attorneys’ fees and costs. On August 3, 2018, plaintiffs filed an amended complaint with similar allegations
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and shortening the class period to June 29, 2017 through January 11, 2018. The Company filed a motion to dismiss plaintiffs’ claims on September 25, 2018.
Based upon information presently known to management, the Company believes that the potential liability, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations.
Hauck Litigation
Since January 19, 2018, three putative class action complaints have been filed against the Company in the United States District Court for the Northern District of California: (1) Diana Hauck et al. v. AMD, Inc., Case No. 5:18-cv-0047, filed on January 19, 2018; (2) Brian Speck et al. v. AMD, Inc., Case No. 5:18-cv-0744, filed on February 4, 2018; and (3) Nathan Barnes and Jonathan Caskey-Medina, et al. v. AMD, Inc., Case No. 5:18-cv-00883, filed on February 9, 2018. On April 9, 2018, the court consolidated these cases and ordered that Diana Hauck et al. v. AMD, Inc. serve as the lead case. On June 13, 2018, six plaintiffs (from California, Louisiana, Florida, and Massachusetts) filed a consolidated amended complaint alleging that the Company failed to disclose its processors’ alleged vulnerability to Spectre. Plaintiffs further allege that the Company's processors cannot perform at its advertised processing speeds without exposing consumers to Spectre, and that any “patches” to remedy this security vulnerability will result in degradation of processor performance. The plaintiffs seek damages under several causes of action on behalf of a nationwide class and four state subclasses (California, Florida, Massachusetts, Louisiana) of consumers who purchased AMD processors and/or devices containing AMD processors. The plaintiffs also seek attorneys’ fees, equitable relief, and restitution. Pursuant to the court's order directing parties to litigate only eight of the causes of action in the consolidated amended complaint initially, the Company filed a motion to dismiss on July 13, 2018. On October 29, 2018, after the plaintiffs voluntarily dismissed one of their claims, the court granted the Company's motion and dismissed six causes of action with leave to amend. The plaintiffs have until November 28, 2018 to file another amended complaint.
Based upon information presently known to management, the Company believes that the potential liability, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations.
Zeng Shareholder Derivative Lawsuit
On March 8, 2018, a purported shareholder derivative lawsuit captioned Zeng v. Su, et al., Case No. 18CIV01192 was filed against the Company (as a nominal defendant only) and certain of the Company’s directors and officers in the San Mateo County Superior Court of the State of California. The complaint purports to assert claims against the Company and certain individual directors and officers for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual directors and officers regarding Spectre, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for the Company's common stock during the period. On April 26, 2018, the lawsuit was transferred to Santa Clara County and assigned a new case number, 18CV327692. On August 14, 2018, the Court stayed this lawsuit pending a decision on the motion to dismiss in Kim et al. v. AMD, et al., Case No. 3:18-cv-00321 filed against the Company in the United States District Court for the Northern District of California.
Based upon information presently known to management, the Company believes that the potential liability, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations.
In re Advanced Micro Devices, Inc. Shareholder Derivative Lawsuit
Two purported shareholder derivative lawsuits were filed against the Company (as a nominal defendant only) and certain of its directors and officers in the United States District Court, Northern District of California: (1) Jacqueline Dolby, derivatively on behalf of AMD, Inc. v. Su et al., Case No. 5:18-cv-03575, filed on June 14, 2018; and (2) Gusinsky Trust, derivatively on behalf of AMD, Inc. v. Su et al., Case No. 5:18-cv-03811, filed on June 26, 2018. The complaints purport to assert claims against the Company and certain individual directors and officers for violation of Section 14(a) of the Exchange Act and SEC Rule 14a-9, breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaints seek damages purportedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual directors and officers regarding Spectre. The plaintiffs allege that these statements and omissions operated to artificially inflate the price paid for the Company's common stock during the period. On July 12, 2018, the court consolidated the Dolby and Gusinsky Trust shareholder derivative lawsuits under the caption In re Advanced Micro Devices, Inc. Shareholder Derivative Litigation. On August 10, 2018, the Court stayed this lawsuit pending a decision on the motion to dismiss in Kim et al. v. AMD, et al., Case No. 3:18-cv-00321 filed against the Company in the United States District Court for the Northern District of California.
Based upon information presently known to management, the Company believes that the potential liability, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations.
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Other Legal Matters
The Company is a defendant or plaintiff in various actions that arose in the normal course of business. With respect to these matters, based on the management’s current knowledge, the Company believes that the amount or range of reasonably possible loss, if any, will not, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position and results of operations or cash flows.
NOTE 13. Accumulated Other Comprehensive Income (Loss)
The tables below summarize the changes in accumulated other comprehensive income (loss) by component:

| Three Months Ended
| September 29, 2018 |  | September 30, 2017
| Unrealized gains (losses) on available-for-sale securities |  | Unrealized gains (losses) on cash flow hedges |  | Total |  | Unrealized gains (losses) on available-for-sale securities |  | Unrealized gains (losses) on cash flow hedges |  | Total
| (In millions)
Beginning balance | $ | — |  |  | $ | (10 | ) |  | $ | (10 | ) |  | $ | (1 | ) |  | $ | 1 |  |  | $ | — |
Unrealized gains (losses) arising during the period | — |  |  | (5 | ) |  | (5 | ) |  | — |  |  | 6 |  |  | 6 |
Reclassification adjustment for (gains) losses realized and included in net income (loss) | — |  |  | 5 |  |  | 5 |  |  | — |  |  | (4 | ) |  | (4 | )
Tax effect | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total other comprehensive income (loss) | — |  |  | — |  |  | — |  |  | — |  |  | 2 |  |  | 2 |
Ending balance | $ | — |  |  | $ | (10 | ) |  | $ | (10 | ) |  | $ | (1 | ) |  | $ | 3 |  |  | $ | 2 |

| Nine Months Ended
| September 29, 2018 |  | September 30, 2017
| Unrealized gains (losses) on available-for-sale securities |  | Unrealized gains (losses) on cash flow hedges |  | Total |  | Unrealized gains (losses) on available-for-sale securities |  | Unrealized gains (losses) on cash flow hedges |  | Total
| (In millions)
Beginning balance | $ | — |  |  | $ | 6 |  |  | $ | 6 |  |  | $ | (1 | ) |  | $ | (4 | ) |  | $ | (5 | )
Unrealized gains (losses) arising during the period | — |  |  | (16 | ) |  | (16 | ) |  | — |  |  | 14 |  |  | 14 |
Reclassification adjustment for gains realized and included in net income (loss) | — |  |  | — |  |  | — |  |  | — |  |  | (5 | ) |  | (5 | )
Tax effect | — |  |  | — |  |  | — |  |  | — |  |  | (2 | ) |  | (2 | )
Total other comprehensive income (loss) | — |  |  | (16 | ) |  | (16 | ) |  | — |  |  | 7 |  |  | 7 |
Ending balance | $ | — |  |  | $ | (10 | ) |  | $ | (10 | ) |  | $ | (1 | ) |  | $ | 3 |  |  | $ | 2 |

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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,” “designed,” 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 consolidated financial statements; demand for AMD’s products; the growth, change and competitive landscape of the markets in which AMD participates; the potential impact of the new revenue recognition accounting standards, including expected impact on seasonality trends; the nature and extent of AMD’s future payments to GLOBALFOUNDRIES Inc. (GF) and the materiality of these payments; the materiality of AMD’s future purchases from GF; AMD’s ability to meet its 2018 wafer purchase target; the expected amounts to be received by AMD under the IP licensing agreement and AMD’s expected royalty payments from future product sales of China JVs’ products to be developed on the basis of such licensed IP; sales patterns of AMD’s PC products and semi-custom System-on-Chip (SoC) products for game consoles; the level of international sales as compared to total sales; international sales will continue to be a significant portion of total sales in the foreseeable future; AMD’s reliance on the JVs for ATMP services; that other unrecognized tax benefits will not materially change in the next 12 months; that AMD’s cash and cash equivalents balances together with the availability under that certain secured revolving line of credit (Secured Revolving Line of Credit) made available to AMD and certain of its subsidiaries under the Amended and Restated Loan Agreement, will be sufficient to fund AMD’s operations including capital expenditures over the next 12 months; AMD’s ability to obtain sufficient external financing on favorable terms, or at all; AMD’s expectation that based on the information presently known to management, the potential liability related to AMD’s current litigation will not have a material adverse effect on its financial condition, cash flows or results of operations; anticipated increase in costs related to IT network security; and a small number of customers will continue to account for a substantial part of AMD’s revenue in the future. Material factors that could cause actual results to differ materially from current expectations include, without limitation, the following: Intel Corporation’s dominance of the microprocessor market and its aggressive business practices may limit AMD’s ability to compete effectively; AMD has a wafer supply agreement with GF with obligations to purchase all of its microprocessor and APU product requirements, and a certain portion of its GPU product requirements from GF with limited exceptions. If GF is not able to satisfy AMD’s manufacturing requirements, AMD’s business could be adversely impacted; AMD relies on third parties to manufacture its products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, AMD’s business could be materially adversely affected; failure to achieve expected manufacturing yields for AMD’s products could negatively impact its financial results; the success of AMD’s business is dependent upon its ability to introduce products on a timely basis with features and performance levels that provide value to its customers while supporting and coinciding with significant industry transitions; if AMD cannot generate sufficient revenue and operating cash flow or obtain external financing, it may face a cash shortfall and be unable to make all of its planned investments in research and development or other strategic investments; the loss of a significant customer may have a material adverse effect on AMD; AMD’s receipt of revenue from its semi-custom SoC products is dependent upon its technology being designed into third-party products and the success of those products; AMD’s products may be subject to security vulnerabilities that could have a material adverse effect on AMD; data breaches and cyber-attacks could compromise AMD’s intellectual property or other sensitive information, be costly to remediate and cause significant damage to its business and reputation; AMD’s operating results are subject to quarterly and seasonal sales patterns; global economic uncertainty may adversely impact AMD’s business and operating results; AMD may not be able to generate sufficient cash to service its debt obligations or meet its working capital requirements; AMD has a large amount of indebtedness which could adversely affect its financial position and prevent it from implementing its strategy or fulfilling its contractual obligations; the agreements governing AMD’s notes and the Secured Revolving Line of Credit impose restrictions on AMD that may adversely affect AMD’s ability to operate its business; the markets in which AMD’s products are sold are highly competitive; AMD’s worldwide operations are subject to political, legal and economic risks and natural disasters, which could have a material adverse effect on it; AMD’s issuance to West Coast Hitech L.P. (WCH) of warrants to purchase 75 million shares of its common stock, if and when exercised, will dilute the ownership interests of AMD’s existing stockholders, and the conversion of the 2.125% Convertible Senior Notes due 2026 (2.125% Notes) may dilute the ownership interest of AMD’s existing stockholders, or may otherwise depress the price of its common stock; uncertainties involving the ordering and shipment of AMD’s products could materially adversely affect it; the demand for AMD’s products depends in part on the market conditions in the industries into which they are sold. Fluctuations in demand for AMD’s products or a market decline in any of these industries could have a material adverse effect on its results of operations; AMD’s ability to design and introduce new products in a timely manner is dependent upon third-party intellectual property; AMD depends on third-party companies for the design, manufacture and supply of motherboards, software and other computer platform components to support its business; if AMD loses Microsoft Corporation’s support for its products or other
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software vendors do not design and develop software to run on AMD’s products, its ability to sell its products could be materially adversely affected; AMD’s reliance on third-party distributors and add-in-board (AIB) partners subjects it to certain risks; AMD may incur future impairments of goodwill and technology license purchases; AMD’s inability to continue to attract and retain qualified personnel may hinder its business; in the event of a change of control, AMD may not be able to repurchase its outstanding debt as required by the applicable indentures and its Secured Revolving Line of Credit, which would result in a default under the indentures and its Secured Revolving Line of Credit; the semiconductor industry is highly cyclical and has experienced severe downturns that have materially adversely affected, and may continue to materially adversely affect its business in the future; acquisitions, divestitures and/or joint ventures could disrupt its business, harm its financial condition and operating results or dilute, or adversely affect the price of, its common stock; AMD’s business is dependent upon the proper functioning of its internal business processes and information systems and modification or interruption of such systems may disrupt its business, processes and internal controls; if essential equipment, materials or manufacturing processes are not available to manufacture its products, AMD could be materially adversely affected; if AMD’s products are not compatible with some or all industry-standard software and hardware, it could be materially adversely affected; costs related to defective products could have a material adverse effect on AMD; if AMD fails to maintain the efficiency of its supply chain as it responds to changes in customer demand for its products, its business could be materially adversely affected; AMD outsources to third parties certain supply-chain logistics functions, including portions of its product distribution, transportation management and information technology support services; AMD’s stock price is subject to volatility; worldwide political conditions may adversely affect demand for AMD’s products; unfavorable currency exchange rate fluctuations could adversely affect AMD; AMD’s inability to effectively control the sales of its products on the gray market could have a material adverse effect on it; if AMD cannot adequately protect its technology or other intellectual property in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, it may lose a competitive advantage and incur significant expenses; AMD is a party to litigation and may become a party to other claims or litigation that could cause it to incur substantial costs or pay substantial damages or prohibit it from selling its products; AMD’s business is subject to potential tax liabilities; and AMD is subject to environmental laws, conflict minerals-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as a variety of other laws or regulations that could result in additional costs and liabilities.
For a discussion of factors that could cause actual results to differ materially from the forward-looking statements, see “Part II, Item 1A—Risk Factors” beginning on page 40 and “Financial Condition” beginning on page 34 and other risks and uncertainties 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.
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AMD, the AMD Arrow logo, ATI, and the ATI logo, Athlon, EPYC, Radeon, Ryzen, Threadripper and combinations thereof, are trademarks of Advanced Micro Devices, Inc. Microsoft and Xbox One are trademarks or registered trademarks of Microsoft Corporation in the United States and other jurisdictions. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners. “Vega” and “Zen” are codenames for AMD architectures, and are not product names.
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 30, 2017 and December 31, 2016, and for each of the three years in the period ended December 30, 2017 as filed in our Annual Report on Form 10-K for the year ended December 30, 2017.
Overview
We are a global semiconductor company with facilities around the world. Within the global semiconductor industry, we offer primarily:

• | x86 microprocessors, as standalone devices or as incorporated into an accelerated processing unit (APU), chipsets, discrete and integrated graphics processing units (GPUs), and professional GPUs; and

• | server and embedded processors, semi-custom System-on-Chip (SoC) products and technology for game consoles.

We also 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 29, 2018 compared to the three and nine months ended September 30, 2017, an analysis of changes in our financial condition and a discussion of our contractual obligations.
During the third quarter of 2018, customer demand for our new products was strong. We expanded our desktop processor offerings in the third quarter of 2018 by introducing our first "Zen" core-based AMD Athlon™ and AMD PRO desktop processors and bringing "Zen" and "Vega" architectures to the entry-level consumer and commercial desktop market. We also launched our second generation AMD Ryzen Threadripper™ processors, including a new WX series for professional computing and an improved X series for enthusiasts and gamers.
Net revenue in the third quarter of 2018 was $1.65 billion, a 4% increase compared to the third quarter of 2017. The year-over-year increase was primarily due to a 12% increase in Computing and Graphics net revenue, partially offset by a 5% decrease in Enterprise, Embedded and Semi-Custom net revenue. Net revenue in the third quarter of 2018 and 2017 included IP-related revenue, of which $86 million in the third quarter of 2018 was related to our THATIC joint venture (See Note 5 of Notes to Condensed Consolidated Financial Statements). The increase in the Computing and Graphics segment net revenue was primarily due to higher sales of our Ryzen™ desktop and mobile processors, partially offset by lower sales of Radeon™ products caused primarily by higher channel inventory and the decline in blockchain-related demand. The decrease in the Enterprise, Embedded and Semi-Custom segment net revenue was primarily due to lower semi-custom revenue and IP-related revenue, partially offset by higher EPYC™ server products revenue. Our operating income for the third quarter of 2018 was $150 million compared to an operating income of $119 million in the third quarter of 2017. Our net income for the third quarter of 2018 was $102 million compared to a net income of $61 million in the third quarter of 2017.
Cash, cash equivalents and marketable securities as of the end of the third quarter of 2018 were $1.06 billion, compared to $1.18 billion as of the end of the fourth quarter of 2017.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist you in understanding our financial statements, the changes in certain key items in those financial statements from year to year and quarter to quarter, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements.
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Results of Operations
Management, including the Chief Operating Decision Maker, who is our Chief Executive Officer, reviews and assesses our operating performance using segment net revenue and operating income (loss) before interest, other income (expense), net and income taxes. These performance measures include the allocation of expenses to the operating segments based on management’s judgment. We have the following two reportable segments:

• | the Computing and Graphics segment, which primarily includes desktop and notebook processors and chipsets, GPUs and professional GPUs. We also license portions of our IP portfolio; and

• | the Enterprise, Embedded and Semi-Custom segment, which primarily includes server and embedded processors, semi-custom SoC products, development services and technology for game consoles. We also license portions of our IP portfolio.

In addition to these reportable segments, we have an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to either of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. This category also includes employee stock-based compensation expense.
We use a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters ended September 29, 2018 and September 30, 2017 each consisted of 13 weeks. The nine months ended September 29, 2018 and September 30, 2017 each consisted of 39 weeks.
Our operating results tend to vary seasonally. For example, historically, first quarter PC product sales are generally lower than fourth quarter sales and with respect to our semi-custom SoC products for game consoles, our sales patterns generally follow the seasonal trends of consumer business with sales in the first half of the year being lower than sales in the second half of the year. Following the adoption of the revenue recognition standard (ASC 606) effective in the first quarter of 2018, we expect our seasonality trends to be affected as we now recognize certain revenue earlier than prior to the adoption of ASC 606. For example, we expect a portion of our semi-custom SoC product revenue to shift from the second half of the year to the first half of the year.
The following table provides a summary of net revenue and operating income by segment:

|  | Three Months Ended |  | Nine Months Ended
|  | September 29, 2018 |  | September 30, 2017 |  | September 29, 2018 |  | September 30, 2017
|  | (In millions)
Net revenue: |  |  |  |  |  |  |  |
Computing and Graphics |  | $ | 938 |  |  | $ | 835 |  |  | $ | 3,139 |  |  | $ | 2,069 |
Enterprise, Embedded and Semi-Custom |  | 715 |  |  | 749 |  |  | 1,917 |  |  | 1,844 |
Total net revenue |  | $ | 1,653 |  |  | $ | 1,584 |  |  | $ | 5,056 |  |  | $ | 3,913 |
Operating income (loss): |  |  |  |  |  |  |  |
Computing and Graphics |  | $ | 100 |  |  | $ | 73 |  |  | $ | 355 |  |  | $ | 59 |
Enterprise, Embedded and Semi-Custom |  | 86 |  |  | 74 |  |  | 169 |  |  | 145 |
All Other |  | (36 | ) |  | (28 | ) |  | (101 | ) |  | (75 | )
Total operating income |  | $ | 150 |  |  | $ | 119 |  |  | $ | 423 |  |  | $ | 129 |

Computing and Graphics
Computing and Graphics net revenue of $938 million in the third quarter of 2018 increased by 12%, compared to net revenue of $835 million in the third quarter of 2017, primarily as a result of a 20% increase in unit shipments, partially offset by a 10% decrease in average selling price. The increase in unit shipments was primarily attributable to higher demand for our Ryzen desktop and mobile products, partially offset by lower demand for our Radeon products caused primarily by higher channel inventory and the decline in blockchain-related demand. The decrease in average selling price was primarily attributable to a decrease in average selling price of our Radeon products, partially offset by an increase in average selling price of our Ryzen desktop and mobile processors. In addition, there was higher IP-related revenue in the third quarter of 2018 compared to the third quarter of 2017.
Computing and Graphics net revenue of $3.1 billion in the nine months ended September 29, 2018 increased by 52%, compared to net revenue of $2.1 billion in the nine months ended September 30, 2017, primarily as a result of a 29% increase in average selling price and an 18% increase in unit shipments. The increase in average selling price was primarily due to an increase in average selling price of our Radeon products and mobile processors, driven by Ryzen. The increase in unit shipments was primarily attributable to higher demand for our Ryzen and Radeon products as customers continued to adopt our new products. In addition, there was higher IP-related revenue in the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017.
Computing and Graphics operating income was $100 million in the third quarter of 2018, compared to an operating income of $73 million in the third quarter of 2017. The improvement in operating income was primarily driven by richer microprocessors mix and IP-related revenue, partially offset by lower sales of GPUs and higher operating expenses. Operating expenses increased for the reasons set forth under “Expenses” below.
Computing and Graphics operating income was $355 million in the nine months ended September 29, 2018, compared to an operating income of $59 million in the nine months ended September 30, 2017. The improvement in operating income was primarily driven by higher demand for our Radeon and Ryzen products as customers continued to adopt our new products, partially offset by a $173 million increase in operating expenses. Operating expenses increased for the reasons set forth under “Expenses” below.
Enterprise, Embedded and Semi-Custom
Enterprise, Embedded and Semi-Custom net revenue of $715 million in the third quarter of 2018 decreased by 5%, compared to net revenue of $749 million in the third quarter of 2017, primarily as a result of lower semi-custom product revenue and IP-related revenue, partially offset by higher sales of our EPYC server products.
Enterprise, Embedded and Semi-Custom net revenue of $1.9 billion in the nine months ended September 29, 2018 increased by 4%, compared to net revenue of $1.8 billion in the nine months ended September 30, 2017. The increase in net revenue was primarily due to higher sales of our EPYC server products, partially offset by lower semi-custom revenue.
Enterprise, Embedded and Semi-Custom operating income was $86 million in the third quarter of 2018 compared to operating income of $74 million in the third quarter of 2017. The improvement in operating income was due primarily to richer server and semi-custom product mix, partially offset by lower IP-related revenue. Operating expenses remained the same for the reasons set forth under “Expenses” below.
Enterprise, Embedded and Semi-Custom operating income was $169 million in the nine months ended September 29, 2018 compared to operating income of $145 million in the nine months ended September 30, 2017. The improvement in operating income was due primarily to richer server and semi-custom product mix, partially offset by a $33 million increase in operating expenses and lower IP-related revenue. In the nine months ended September 30, 2017, operating income also included a licensing gain of $52 million. Operating expenses increased for the reasons set forth under “Expenses” below.
All Other
All Other operating loss is primarily related to stock-based compensation expense. All Other operating loss of $36 million in the third quarter of 2018 increased by $8 million, compared to $28 million in the third quarter of 2017. All Other operating loss of $101 million in the nine months ended September 29, 2018 increased by $26 million, compared to $75 million in the nine months ended September 30, 2017. The increases were primarily due to a higher weighted average grant date fair value of unvested restricted stock units in the three and nine months ended September 29, 2018, compared to the three and nine months ended September 30, 2017. The increases were also driven by expenses related to our Employee Stock Purchase Plan (ESPP), which commenced in the fourth quarter of 2017.
International Sales
International sales as a percentage of net revenue were 74% in the third quarter of 2018 and 69% in the third quarter of 2017. The increase in international sales as a percentage of net revenue in the third quarter of 2018 compared to the third quarter of 2017 was primarily driven by a lower proportion of revenue from domestic sales of our products within Enterprise, Embedded and Semi-custom segment.
International sales as a percentage of net revenue were 79% in the nine months ended September 29, 2018 and 74% in the nine months ended September 30, 2017. The increase in international sales as a percentage of net revenue in the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017 was primarily driven by a higher proportion of revenue from China and Taiwan related to sales of our products within the Computing and Graphics segment.
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.
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Comparison of Gross Margin, Expenses, Interest Expense, Other Income (Expense), Net, Income Taxes and Equity Loss in investee
The following is a summary of certain condensed consolidated statement of operations data for the periods indicated:

|  | Three Months Ended |  | Nine Months Ended
|  | September 29, 2018 |  | September 30, 2017 |  | September 29, 2018 |  | September 30, 2017
|  | (In millions except for percentages)
Cost of sales |  | $ | 992 |  |  | $ | 1,013 |  |  | $ | 3,146 |  |  | $ | 2,578 |
Gross margin |  | 661 |  |  | 571 |  |  | 1,910 |  |  | 1,335 |
Gross margin percentage |  | 40 | % |  | 36 | % |  | 38 | % |  | 34 | %
Research and development |  | 363 |  |  | 320 |  |  | 1,063 |  |  | 876 |
Marketing, general and administrative |  | 148 |  |  | 132 |  |  | 424 |  |  | 382 |
Licensing gain |  | — |  |  | — |  |  | — |  |  | (52 | )
Interest expense |  | (30 | ) |  | (31 | ) |  | (92 | ) |  | (95 | )
Other expense, net |  | (6 | ) |  | (3 | ) |  | (4 | ) |  | (11 | )
Provision for income taxes |  | 12 |  |  | 22 |  |  | 26 |  |  | 30 |
Equity loss in investee |  | $ | — |  |  | $ | (2 | ) |  | $ | (2 | ) |  | $ | (7 | )

Gross Margin
Gross margin as a percentage of net revenue was 40% in the third quarter of 2018, compared to 36% in the third quarter of 2017. The improvement in gross margin was primarily driven by the ramp of new products with higher gross margin than the corporate average.
Gross margin as a percentage of net revenue was 38% in the nine months ended September 29, 2018, compared to 34% in the nine months ended September 30, 2017. The improvement in gross margin was primarily driven by the ramp of new products with higher gross margin than the corporate average.
Expenses
Research and Development Expenses
Research and development expenses of $363 million in the third quarter of 2018 increased by $43 million, or 13%, compared to $320 million in the third quarter of 2017, primarily due to an increase in product engineering and design costs in our Computing and Graphics segment.
Research and development expenses of $1,063 million in the nine months ended September 29, 2018, increased by $187 million, or 21%, compared to $876 million in the nine months ended September 30, 2017, primarily due to an increase in product engineering and design costs in our Computing and Graphics segment, higher employee incentives in both business segments primarily driven by our improved financial performance and higher stock-based compensation expense.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses of $148 million in the third quarter of 2018 increased by $16 million, or 12%, compared to $132 million in the third quarter of 2017, primarily due to an increase in marketing programs and employee incentives driven by our improved financial performance.
Marketing, general and administrative expenses of $424 million in the nine months ended September 29, 2018, increased by $42 million, or 11%, compared to $382 million in the nine months ended September 30, 2017, primarily due to an increase in marketing programs and employee incentives driven by our improved financial performance.
Interest Expense
Interest expense in the third quarter of 2018 was $30 million, compared to $31 million in the third quarter of 2017. The decrease was primarily due to lower debt balances.
Interest expense in the nine months ended September 29, 2018 was $92 million, compared to $95 million in the nine months ended September 30, 2017. The decrease was primarily due to lower debt balances.
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Other Expense, Net
Other expense, net of $6 million in the third quarter of 2018 increased by $3 million, compared to $3 million of Other expense, net in the third quarter of 2017. The increase was primarily due to a $4 million increase in loss on extinguishment of debt.
Other expense, net of $4 million in the nine months ended September 29, 2018 decreased by $7 million, compared to $11 million of Other expense, net in the nine months ended September 30, 2017. The decrease was primarily due to a $3 million investment impairment charge related to certain of our investments incurred and a $2 million decrease in loss on extinguishment of debt.
Provision For Income Taxes
In the third quarter of 2018, we recorded an income tax provision of $12 million, consisting primarily of $5 million for federal base erosion and anti-abuse tax, which is a new tax under the the Tax Cuts and Job Act of 2017, and $7 million for withholding taxes applicable to IP-related revenue from foreign locations.
For the nine months ended September 29, 2018, we recorded an income tax provision of $26 million, consisting primarily of $15 million for federal base erosion and anti-abuse tax, $7 million for withholding taxes applicable to IP-related revenue from foreign locations, and $4 million of foreign taxes in profitable locations.
In the third quarter of 2017, we recorded an income tax provision of $22 million, consisting primarily of withholding taxes applicable to IP-related revenue from foreign locations.
For the nine months ended September 30, 2017, we recorded an income tax provision of $30 million, consisting primarily of withholding taxes applicable to IP-related revenue and licensing gains from foreign locations.
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FINANCIAL CONDITION
Liquidity and Capital Resources
As of September 29, 2018, our cash, cash equivalents and marketable securities were $1.06 billion, compared to $1.18 billion as of December 30, 2017. The percentage of cash, cash equivalents and marketable securities held domestically was 96% as of September 29, 2018, compared to 95% at December 30, 2017. Our operating, investing and financing activities during the nine months ended September 29, 2018 compared to the nine months ended September 30, 2017 are as described below:

|  | Nine Months Ended
|  | September 29, 2018 |  | September 30, 2017
|  | (In millions )
Net cash provided by (used in): |  |  |  |
Operating activities |  | $ | (36 | ) |  | $ | (312 | )
Investing activities |  | (132 | ) |  | (71 | )
Financing activities |  | 28 |  |  | 1 |

Our aggregate principal debt obligations were $1.6 billion and $1.7 billion as of September 29, 2018 and December 30, 2017, respectively.
We believe our cash and cash equivalents balance along with our Secured Revolving Line of Credit 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. However, we cannot assure that such funds will be available on favorable terms, or at all.
Operating Activities
Net cash used in operating activities was $36 million in the nine months ended September 29, 2018 compared to $312 million in the nine months ended September 30, 2017. The decrease in net cash used in operating activities was primarily due to changes in working capital, largely driven by higher cash collections from increased revenue, partially offset by higher labor costs and timing of accounts payable payments.
Investing Activities
Net cash used in investing activities was $132 million in the nine months ended September 29, 2018, which consisted of $122 million for purchases of property and equipment and $45 million for purchases of available-for-sale debt securities, partially offset by $35 million for maturities of available-for-sale debt securities.
Net cash used in investing activities was $71 million in the nine months ended September 30, 2017, which consisted primarily of $69 million for purchases of property, plant and equipment.
Financing Activities
Net cash provided by financing activities was $28 million in the nine months ended September 29, 2018, which primarily consisted of a cash inflow of $44 million from the issuance of common stock under our stock-based compensation equity plans, partially offset by a cash outflow of $15 million for the repurchase of our 6.75% Senior Notes due 2019 (6.75% Notes) and 7.00% Senior Notes due 2024 (7.00% Notes).
Net cash provided by financing activities was $1 million in the nine months ended September 30, 2017, which consisted of a cash inflow of net proceeds from borrowings pursuant to our Secured Revolving Line of Credit of $70 million and $15 million for proceeds from issuance of common stock from the exercise of employee stock options, partially offset by a cash outflow of $70 million to repurchase a portion of our 7.00% Notes and $14 million for tax withholding on the vesting of restricted stock. The Secured Revolving Line of Credit has a lower interest rate than our long-term debt.
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Contractual Obligations
The following table summarizes our consolidated principal contractual obligations as of September 29, 2018, and is supplemented by the discussion following the table:

| Payments due by period as of September 29, 2018
(In millions) | Total |  | Remainder of 2018 |  | 2019 |  | 2020 |  | 2021 |  | 2022 |  | 2023 and thereafter
6.75% Notes | $ | 66 |  |  | $ | — |  |  | $ | 66 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
7.50% Notes | 337 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 337 |  |  | — |
7.00% Notes | 310 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 310 |
2.125% Notes | 805 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 805 |
Secured Revolving Line of Credit | 70 |  |  | 70 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Other long-term liabilities (1) | 164 |  |  | 8 |  |  | 47 |  |  | 42 |  |  | 34 |  |  | 30 |  |  | 3 |
Aggregate interest obligation (2) | 409 |  |  | 35 |  |  | 68 |  |  | 65 |  |  | 65 |  |  | 64 |  |  | 112 |
Operating leases | 337 |  |  | 14 |  |  | 54 |  |  | 48 |  |  | 43 |  |  | 40 |  |  | 138 |
Purchase obligations (3) | 190 |  |  | 91 |  |  | 59 |  |  | 25 |  |  | 12 |  |  | 3 |  |  | — |
Obligations to GF (4) | 2,452 |  |  | 571 |  |  | 1,101 |  |  | 780 |  |  | — |  |  | — |  |  | — |
Total contractual obligations (5) | $ | 5,140 |  |  | $ | 789 |  |  | $ | 1,395 |  |  | $ | 960 |  |  | $ | 154 |  |  | $ | 474 |  |  | $ | 1,368 |

(1) | Amounts largely 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.

(2) | Represents estimated aggregate interest obligations for our outstanding debt obligations that are payable in cash, excluding non-cash amortization of debt issuance costs and debt discount.

(3) | We have purchase obligations for goods and services where payments are based, in part, on the volume or type of services we acquire. In those cases, we only included the minimum volume of purchase obligations in the table above. Purchase orders for goods and services that are cancellable upon notice and without significant penalties are not included in the amounts above.

(4) | Includes our currently expected purchases from GF for the remainder of 2018 for wafer manufacturing and research and development activities and minimum purchase obligations for wafer purchases for years 2018 through 2020. We cannot meaningfully quantify or estimate our future purchase obligations to GF beyond 2020 but expect that our future purchases from GF will continue to be material. On August 27, 2018, GF announced that it was putting its 7nm FinFET program on hold indefinitely. We are presently focusing the breadth of our 7nm product portfolio on Taiwan Semiconductor Co., Ltd.’s (TSMC) 7nm process. We are currently in discussion with GF to modify the WSA to align with GF’s new business strategy.

(5) | Total amount excludes contractual obligations already recorded on our condensed consolidated balance sheets except for debt obligations and other liabilities related to software and technology licenses and IP licenses.

The expected timing of payments of the obligations in the preceding table is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.
Operating Leases
We lease certain of our facilities under non-cancellable lease agreements that expire at various dates through 2028. Total future non-cancellable lease obligations as of September 29, 2018 were $337 million. During the second quarter of 2018, we entered into a 10-year operating lease to occupy approximately 270,000 square feet of office space in China. Base rent payments commenced in October 2018 and the total estimated base rent payments over the life of the lease are approximately $72 million. In addition to the base rent payments, we are obligated to pay certain customary amounts for our share of operating expenses and tax obligations. We will also incur costs for capital projects for the new office space.
Off-Balance Sheet Arrangements
As of September 29, 2018, we had no off-balance sheet arrangements.
Critical Accounting 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 condensed consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our net
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revenue, inventories, asset impairments 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 our 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.
In accordance with the adoption of the new revenue standard effective the beginning of the first quarter of 2018, we now 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 now establish provisions for rights of return and price protection on unsold product held by our distributors. Other than this change in revenue recognition and related reserves, management believes there have been no other significant changes during the quarter ended September 29, 2018 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 year ended December 30, 2017.
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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 year ended December 30, 2017.
There have not been any material changes in market risk since December 30, 2017.

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 and Chief Financial Officer 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 29, 2018, 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 Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
There was no change in our internal controls over financial reporting during our third quarter of 2018 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION

ITEM 1. | LEGAL PROCEEDINGS

Shareholder Derivative Lawsuits (Wessels, Hamilton and Ha)
On March 20, 2014, a purported shareholder derivative lawsuit captioned Wessels v. Read, et al., Case No. 1:14 cv-262486 (Wessels) was filed against us (as a nominal defendant only) and certain of our directors and officers in the Santa Clara County Superior Court of the State of California. The complaint purports to assert claims against us and certain individual directors and officers for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by us and the individual directors and officers regarding our 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for our common stock during the period. On April 27, 2015, a similar purported shareholder derivative lawsuit captioned Christopher Hamilton and David Hamilton v. Barnes, et al., Case No. 5:15-cv-01890 (Hamilton) was filed against us (as a nominal defendant only) and certain of our directors and officers in the United States District Court for the Northern District of California.
On September 29, 2015, a similar purported shareholder derivative lawsuit captioned Jake Ha v Caldwell, et al., Case No. 3:15-cv-04485 (Ha) was filed against us (as a nominal defendant only) and certain of our directors and officers in the United States District Court for the Northern District of California. The lawsuit also seeks a court order voiding the stockholder vote on our 2015 proxy. The case was transferred to the judge handling the Hamilton Lawsuit and is now Case No. 4:15-cv-04485. The Wessels, Hamilton and Ha shareholder derivative lawsuits were stayed pending resolution of a class action lawsuit captioned Hatamian v. AMD, et al., C.A. No. 3:14-cv-00226 filed against us in the United States District Court for the Northern District of California (the Hatamian Lawsuit). The Hatamian Lawsuit asserted claims against us and certain of our officers for alleged violations of Section 10(b) of the Exchange Act of 1934, as amended (the Exchange Act), and SEC Rule 10b-5 concerning certain statements regarding our 32nm technology and “Llano” products. On October 9, 2017, the parties signed a definitive settlement agreement resolving the Hatamian Lawsuit and submitted it to the Court for approval. Under the terms of this agreement, the settlement was funded entirely by certain of our insurance carriers and the defendants continued to deny any liability or wrongdoing. On March 2, 2018, the court approved the settlement and entered a final judgment in the Hatamian Lawsuit.
On January 30, 2018, the Wessels and Hamilton plaintiffs amended their complaints. On February 2, 2018, the Ha plaintiff also filed an amended complaint. On February 22, 2018, we filed motions to dismiss the Hamilton and Ha plaintiffs’ amended complaints. On April 2, 2018, we filed a demurrer seeking to dismiss the Wessels amended complaint. On July 23, 2018, the Santa Clara Superior Court sustained our demurrer in the Wessels case, dismissing all claims in that matter with prejudice. The Wessels plaintiff filed a Notice of Appeal on September 27, 2018. On October 4, 2018, the Court issued an order dismissing the Hamilton and Ha amended complaints. The Hamilton plaintiffs filed a Notice of Appeal on October 8, 2018.
Based upon information presently known to management, we believe that the potential liability, if any, will not have a material adverse effect on our financial condition, cash flows or results of operations.
Kim Securities Litigation
On January 16, 2018, a putative class action lawsuit captioned Kim et al. v. AMD, et al., Case No. 3:18-cv-00321 was filed against us in the United States District Court for the Northern District of California. The complaint purports to assert claims against us and certain individual officers for alleged violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 of the Exchange Act. The plaintiff seeks to represent a proposed class of all persons who purchased or otherwise acquired our common stock during the period February 21, 2017 through January 11, 2018. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by us and the individual officers regarding a security vulnerability (Spectre), which statements and omissions, the plaintiff claims, allegedly caused our common stock price to be artificially inflated during the purported class period. The complaint seeks unspecified compensatory damages, attorneys’ fees and costs. On August 3, 2018, plaintiffs filed an amended complaint with similar allegations and shortening the class period to June 29, 2017 through January 11, 2018. We filed a motion to dismiss plaintiffs’ claims on September 25, 2018.
Based upon information presently known to management, we believe that the potential liability, if any, will not have a material adverse effect on our financial condition, cash flows or results of operations.
Hauck et al. Litigation
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Since January 19, 2018, three putative class action complaints have been filed against us in the United States District Court for the Northern District of California: (1) Diana Hauck et al. v. AMD, Inc., Case No. 5:18-cv-0047, filed on January 19, 2018; (2) Brian Speck et al. v. AMD, Inc., Case No. 5:18-cv-0744, filed on February 4, 2018; and (3) Nathan Barnes and Jonathan Caskey-Medina, et al. v. AMD, Inc., Case No. 5:18-cv-00883, filed on February 9, 2018. On April 9, 2018, the court consolidated these cases and ordered that Diana Hauck et al. v. AMD, Inc. serve as the lead case. On June 13, 2018, six plaintiffs (from California, Louisiana, Florida, and Massachusetts) filed a consolidated amended complaint alleging that we failed to disclose our processors’ alleged vulnerability to Spectre. Plaintiffs further allege that our processors cannot perform at their advertised processing speeds without exposing consumers to Spectre, and that any “patches” to remedy this security vulnerability will result in degradation of processor performance. The plaintiffs seek damages under several causes of action on behalf of a nationwide class and four state subclasses (California, Florida, Massachusetts, Louisiana) of consumers who purchased our processors and/or devices containing AMD processors. The plaintiffs also seek attorneys’ fees, equitable relief, and restitution. Pursuant to the court’s order directing the parties to litigate only eight of the causes of action in the consolidated amended complaint initially, we filed a motion to dismiss on July 13, 2018. On October 29, 2018, after the plaintiffs voluntarily dismissed one of their claims, the court granted our motion and dismissed six causes of action with leave to amend. The plaintiffs have until November 28, 2018 to file another amended complaint.
Based upon information presently known to management, we believe that the potential liability, if any, will not have a material adverse effect on our financial condition, cash flows or results of operations.
Zeng Shareholder Derivative Lawsuit
On March 8, 2018, a purported shareholder derivative lawsuit captioned Zeng v. Su, et al., Case No. 18CIV01192 was filed against us (as a nominal defendant only) and certain of our directors and officers in the San Mateo County Superior Court of the State of California. The complaint purports to assert claims against us and certain individual directors and officers for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by us and the individual directors and officers regarding Spectre, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for our common stock during the period. On April 26, 2018, the lawsuit was transferred to Santa Clara County and assigned a new case number, 18CV327692. On August 14, 2018, the Court stayed this lawsuit pending a decision on the motion to dismiss in Kim et al. v. AMD, et al., Case No. 3:18-cv-00321 filed against us in the United States District Court for the Northern District of California.
Based upon information presently known to management, we believe that the potential liability, if any, will not have a material adverse effect on our financial condition, cash flows or results of operations.
In re Advanced Micro Devices, Inc. Shareholder Derivative Litigation
Two purported shareholder derivative lawsuits were filed against us (as a nominal defendant only) and certain of our directors and officers in the United States District Court, Northern District of California: (1) Jacqueline Dolby, derivatively on behalf of AMD, Inc. v. Su et al., Case No. 5:18-cv-03575, filed on June 14, 2018; and (2) Gusinsky Trust, derivatively on behalf of AMD, Inc. v. Su et al., Case No. 5:18-cv-03811, filed on June 26, 2018. The complaints purport to assert claims against us and certain individual directors and officers for violation of Section 14(a) of the Exchange Act and SEC Rule 14a-9, breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaints seek damages purportedly caused by alleged materially misleading statements and/or material omissions by us and the individual directors and officers regarding Spectre. The plaintiffs allege that these statements and omissions operated to artificially inflate the price paid for our common stock during the period. On July 12, 2018, the court consolidated the Dolby and Gusinsky Trust shareholder derivative lawsuits under the caption In re Advanced Micro Devices, Inc. Shareholder Derivative Litigation. On August 10, 2018, the Court stayed this lawsuit pending a decision on the motion to dismiss in Kim et al. v. AMD, et al., Case No. 3:18-cv-00321 filed against us in the United States District Court for the Northern District of California.
Based upon information presently known to management, we believe that the potential liability, if any, will not have a material adverse effect on our financial condition, cash flows or results of operations.
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ITEM 1A. | RISK FACTORS

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.
Intel Corporation’s dominance of the microprocessor market and its aggressive business practices may limit our ability to compete effectively.
Intel Corporation has been the market share leader for microprocessors for many years. Intel’s market share, margins and significant financial resources enable it to market its products aggressively, to target our customers and our channel partners with special incentives and to influence customers who do business with us. These aggressive activities have in the past and are likely in the future to result in lower unit sales and a lower average selling price for many of our products and adversely affect our margins and profitability.
Intel exerts substantial influence over computer manufacturers and their channels of distribution through various brand and other marketing programs. As a result of Intel’s position in the microprocessor market, Intel has been able to control x86 microprocessor and computer system standards and benchmarks and to dictate the type of products the microprocessor market requires of us. Intel also dominates the computer system platform, which includes core logic chipsets, graphics chips, motherboards and other components necessary to assemble a computer system. Additionally, Intel is able to drive de facto standards and specifications for x86 microprocessors that could cause us and other companies to have delayed access to such standards.
Intel has substantially greater financial resources than we do and accordingly spends substantially greater amounts on marketing and research and development than we do. We expect Intel to maintain its market position and to continue to invest heavily in marketing, research and development, new manufacturing facilities and other technology companies. To the extent Intel manufactures a significantly larger portion of its microprocessor products using more advanced process technologies, or introduces competitive new products into the market before we do, we may be more vulnerable to Intel’s aggressive marketing and pricing strategies for microprocessor products.
As long as Intel remains in this dominant position, we may be materially adversely affected by Intel’s:

• | business practices, including rebating and allocation strategies and pricing actions, designed to limit our market share and margins;

•product mix and introduction schedules;
•product bundling, marketing and merchandising strategies;
•exclusivity payments to its current and potential customers, retailers and channel partners;

• | de facto control over industry standards, and heavy influence on PC manufacturers and other PC industry participants, including motherboard, memory, chipset and basic input/output system (BIOS), suppliers and software companies as well as the graphics interface for Intel platforms; and

• | marketing and advertising expenditures in support of positioning the Intel brand over the brand of its original equipment manufacturer OEM customers and retailers.

Intel could also take actions that place our discrete GPUs at a competitive disadvantage, including giving one or more of our competitors in the graphics market, such as Nvidia Corporation, preferential access to its proprietary graphics interface or other useful information. Also, Intel recently announced that it is developing their own high-end discrete GPUs. Intel’s position in the microprocessor market and integrated graphics chipset market, its introduction of competitive new products, its existing relationships with top-tier OEMs, and its aggressive marketing and pricing strategies could result in lower unit sales and a lower average selling price for our products, which could have a material adverse effect on us.
We have a wafer supply agreement with GF with obligations to purchase all of our microprocessor and APU product requirements, and a certain portion of our GPU product requirements from GF, with limited exceptions. If GF is not able to satisfy our manufacturing requirements, our business could be adversely impacted.
The WSA governs the terms by which we purchase products manufactured by GF. The WSA is in place until 2024. Pursuant to the WSA, we are required to purchase all of our microprocessor and APU product requirements, and a portion of our GPU product requirements from GF with limited exceptions. If GF is unable to achieve anticipated manufacturing yields, remain competitive using or implementing advanced leading-edge process technologies needed to manufacture future generations of our products, manufacture our products on a timely basis at competitive prices or meet our capacity requirements, then we may experience delays in product launches, supply shortages for certain products or increased costs and our business could be materially adversely affected. Moreover, if GF is unable to satisfy our manufacturing requirements, then our business could be materially adversely affected.
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In August 2016, we entered into the sixth amendment to the WSA with GF (the Sixth Amendment) pursuant to which we agreed to certain annual wafer purchase targets through 2020, and if we fail to meet the agreed wafer purchase target during a calendar year we will be required to pay to GF a portion of the difference between our actual wafer purchases and the applicable annual purchase target. If our actual wafer requirements are less than the number of wafers required to meet the applicable annual wafer purchase target, we could have excess inventory or higher inventory unit costs, both of which may adversely impact our gross margin and our results of operations.
On August 27, 2018, GF announced that it was putting its 7nm FinFET program on hold indefinitely. As a result, we are in discussions with GF to modify the WSA to align with GF’s new business strategy. If we are unable to modify the WSA (including but not limited to the Sixth Amendment) with GF related to products manufactured at the 7nm process node and beyond, then our business could be materially adversely affected.
In addition, GF has relied on Mubadala Technology Investments LLC (Mubadala Tech) for its funding needs. If Mubadala Tech fails to adequately fund GF on a timely basis, or at all, GF’s ability to manufacture products for us could be materially adversely affected.
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.
We rely on third-party wafer foundries to fabricate the silicon wafers for all of our products. We also rely on third-party manufacturers to assemble, test, mark and pack (ATMP) our products. It is important to have reliable relationships with all of these third-party manufacturing suppliers to ensure adequate product supply to respond to customer demand.
We cannot guarantee that these manufacturers or our other third-party manufacturing suppliers will be able to meet our near-term or long-term manufacturing requirements. If we experience supply constraints from our third-party manufacturing suppliers, we may be required to allocate the affected products amongst our customers, which could have a material adverse effect on our relationships with these customers and on our financial condition. In addition, if we are unable to meet customer demand due to fluctuating or late supply from our manufacturing suppliers, it could result in lost sales and have a material adverse effect on our business.
We do not have long-term commitment contracts with some of our third-party manufacturing suppliers. We obtain some of these manufacturing services on a purchase order basis and these manufacturers are not required to provide us with any specified minimum quantity of product beyond the quantities in an existing purchase order. Accordingly, we depend on these suppliers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs, to produce products of acceptable quality and at acceptable manufacturing yields and to deliver those products to us on a timely basis and at acceptable prices. The manufacturers we use also fabricate wafers and ATMP products for other companies, including certain of our competitors. They could choose to prioritize capacity for other customers, increase the prices that they charge us on short notice or reduce or eliminate deliveries to us, which could have a material adverse effect on our business.
Other risks associated with our dependence on third-party manufacturers include limited control over delivery schedules and quality assurance, lack of capacity in periods of excess demand, misappropriation of our intellectual property, dependence on several small undercapitalized subcontractors and limited ability to manage inventory and parts. Moreover, if any of our third-party manufacturers suffer any damage to facilities, lose benefits under material agreements, experience power outages, lack sufficient capacity to manufacture our products, encounter financial difficulties, are unable to secure necessary raw materials from their suppliers or suffer any other disruption or reduction in efficiency, we may encounter supply delays or disruptions. If we are unable to secure sufficient or reliable supplies of products, our ability to meet customer demand may be adversely affected and this could materially affect our business.
If we transition the production of some of our products to new manufacturers, we may experience delayed product introductions, lower yields or poorer performance of our products. If we experience problems with product quality or are unable to secure sufficient capacity from a particular third-party manufacturer, or if we for other reasons cease utilizing one of those suppliers, we may be unable to secure an alternative supply for any specific product in a short time frame. We could experience significant delays in the shipment of our products if we are required to find alternative third-party manufacturers, which could have a material adverse effect on our business.
We are party to two assembly, test, mark and pack (ATMP) joint ventures (collectively, the JVs) with Tongfu Fujitsu Microelectronics Co., Ltd. The majority of our ATMP services are provided by the JVs and there is no guarantee that the JVs will be able to fulfill our long-term ATMP requirements. If we are unable to meet customer demand due to fluctuating or late supply from the JVs, it could result in lost sales and have a material adverse effect on our business.
Failure to achieve expected manufacturing yields for our products could negatively impact our financial results.
Semiconductor manufacturing yields are a result of both product design and process technology, which is typically proprietary to the manufacturer, and low yields can result from design failures, process technology failures or a combination of both. Our third-party foundries, including GF, are responsible for the process technologies used to fabricate silicon wafers. If our third-party
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foundries experience manufacturing inefficiencies or encounter disruptions, errors or difficulties during production, we may fail to achieve acceptable yields or experience product delivery delays. We cannot be certain that our third-party foundries will be able to develop, obtain or successfully implement leading-edge process technologies needed to manufacture future generations of our products profitably or on a timely basis or that our competitors will not develop new technologies, products or processes earlier. Moreover, during periods when foundries are implementing new process technologies, their manufacturing facilities may not be fully productive. A substantial delay in the technology transitions to smaller process technologies could have a material adverse effect on us, particularly if our competitors transition to more cost effective technologies before us. For example, we are presently focusing the breadth of our 7nm product portfolio on Taiwan Semiconductor Co., Ltd.’s (TSMC) 7nm process. If TSMC is not able to manufacture our products on 7nm in sufficient quantities to meet customer demand, it could have a material adverse effect on our business.
Any decrease in manufacturing yields could result in an increase in per unit costs, which would adversely impact our gross margin and/or force us to allocate our reduced product supply amongst our customers, which could harm our relationships and reputation with our customers and materially adversely affect our business.
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 success depends to a significant extent on the development, qualification, implementation and acceptance of new product designs and improvements that provide value to our customers. Our ability to develop, qualify and distribute, and have manufactured, new products and related technologies to meet evolving industry requirements, at prices acceptable to our customers and on a timely basis are significant factors in determining our competitiveness in our target markets. As consumers have new product feature preferences or have different requirements than those consumers in the PC market, PC sales could be negatively impacted, which could adversely impact our business. Our product roadmap includes AMD Ryzen and AMD EPYC processors based on our new x86 processor core codenamed “Zen” to help drive our re-entry into high-performance and server computing. We cannot assure you that our efforts to execute our product roadmap will result in innovative products and technologies that provide value to our customers. If we fail to or are delayed in developing, qualifying or shipping new products or technologies that provide value to our customers and address these new trends or if we fail to predict which new form factors consumers will adopt and adjust our business accordingly, we may lose competitive positioning, which could cause us to lose market share and require us to discount the selling prices of our products. Although we make substantial investments in research and development, we cannot be certain that we will be able to develop, obtain or successfully implement new products and technologies on a timely basis or that they will be well-received by our customers. Moreover, our investments in new products and technologies involve certain risks and uncertainties and could disrupt our ongoing business. New investments may not generate sufficient revenue, may incur unanticipated liabilities and may divert our limited resources and distract management from our current operations. We cannot be certain that our ongoing investments in new products and technologies will be successful, will meet our expectations and will not adversely affect our reputation, financial condition and operating results.
Delays in developing, qualifying or shipping new products can also cause us to miss our customers’ product design windows or, in some cases, breach contractual obligations or cause us to pay penalties. If our customers do not include our products in the initial design of their computer systems or products, they will typically not use our products in their systems or products until at least the next design configuration. The process of being qualified for inclusion in a customer’s system or product can be lengthy and could cause us to further miss a cycle in the demand of end-users, which also could result in a loss of market share and harm our business. We also depend on the success and timing of our customers' platform launches. If our customers delay their product launches or if our customers do not effectively market their platforms with our products, it could result in a delay in bringing our products to market and cause us to miss a cycle in the demand of end-users, which could materially adversely affect our business. In addition, market demand requires that products incorporate new features and performance standards on an industry-wide basis. Over the life of a specific product, the sale price is typically reduced over time. The introduction of new products and enhancements to existing products is necessary to maintain the overall corporate average selling price. If we are unable to introduce new products with sufficiently high sale prices or to increase unit sales volumes capable of offsetting the reductions in the sale prices of existing products over time, our business could be materially adversely affected.
If we cannot generate sufficient revenue and operating cash flow or obtain external financing, we may face a cash shortfall and be unable to make all of our planned investments in research and development or other strategic investments.
Our ability to fund research and development expenditures depends on generating sufficient revenue and cash flow from operations and the availability of external financing, if necessary. Our research and development expenditures, together with ongoing operating expenses, will be a substantial drain on our cash flow and may decrease our cash balances. If new competitors, technological advances by existing competitors, or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. If we are required to invest significantly greater resources than anticipated in research and development efforts without an increase in revenue, our operating results could decline.
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We regularly assess markets for external financing opportunities, including debt and equity financing. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms. The health of the credit markets may adversely impact our ability to obtain financing when needed. Any downgrades from credit rating agencies such as Moody’s or Standard & Poor’s may adversely impact our ability to obtain external financing or the terms of such financing. Credit agency downgrades or concerns regarding our credit worthiness may impact relationships with our suppliers, who may limit our credit lines. Our inability to obtain needed financing or to generate sufficient cash from operations may require us to abandon projects or curtail planned investments in research and development or other strategic initiatives. If we curtail planned investments in research and development or abandon projects, our products may fail to remain competitive and our business would be materially adversely affected.
The loss of a significant customer may have a material adverse effect on us.
We depend on a small number of customers for a substantial portion of our business and we expect that a small number of customers will continue to account for a significant part of our revenue in the future. If one of our key customers decides to stop buying our products, or if one of these customers materially reduces or reorganizes its operations or its demand for our products, our business would be materially adversely affected.
Our receipt of revenue from our semi-custom SoC products is dependent upon our technology being designed into third-party products and the success of those products.
The revenue that we receive from our semi-custom SoC products is in the form of non-recurring engineering fees charged to third parties for design and development services and revenue received in connection with sales of our semi-custom SoC products to these third parties. As a result, our ability to generate revenue from our semi-custom products depends on our ability to secure customers for our semi-custom design pipeline, our customers’ desire to pursue the project, and our semi-custom SoC products being incorporated into those customer’s products. Any revenue from sales of our semi-custom SoC products is directly related to sales of the third-party’s products and reflective of their success in the market. Moreover, we have no control over the marketing efforts of these third parties, and we cannot make any assurances that sales of their products will be successful in current or future years. Consequently, the semi-custom SoC product revenue expected by us may not be fully realized and our operating results may be adversely affected.
Our products may be subject to security vulnerabilities that could have a material adverse effect on us.
The products that we sell are complex and may be subject to security vulnerabilities that could result in, among other things, the loss, corruption, theft or misuse of confidential data or system performance issues. Our efforts to prevent and address security vulnerabilities may decrease performance, be only partially effective or not successful at all. We may also depend on third parties, such as customers, vendors and end users, to deploy our mitigations or create their own, and they may delay, decline or modify the implementation of such mitigations. Our relationships with our customers could be adversely affected as some of our customers may stop purchasing our products, reduce or delay future purchases of our products, or use competing products. Any of these actions by our customers could adversely affect our revenue. We also are subject to claims and litigation related to the recently disclosed side-channel exploits, such as Spectre, and may face additional claims or litigation for future vulnerabilities. Actual or perceived security vulnerabilities of our products may subject us to adverse publicity, damage to our brand and reputation, and could materially harm our business or financial results.
Data breaches and cyber-attacks could compromise our intellectual property or other sensitive information, be costly to remediate and cause significant damage to our business and reputation.
In the ordinary course of our business, we maintain sensitive data on our networks, and also may maintain sensitive information on our business partners’ and third party providers’ networks, including our intellectual property and proprietary or confidential business information relating to our business and that of our customers and business partners. The secure maintenance of this information is critical to our business and reputation. We believe that companies have been increasingly subject to a wide variety of security incidents, cyber-attacks, hacking and phishing attacks, and other attempts to gain unauthorized access. These threats can come from a variety of sources, all ranging in sophistication from an individual hacker or insider threat to a state-sponsored attack. Cyber threats may be generic, or they may be custom-crafted against our information systems. Cyber-attacks have become increasingly more prevalent and much harder to detect, defend against or prevent. Our network and storage applications, as well as those of our customers, business partners, and third-party providers, may be subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions.
It is often difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. These data breaches and any unauthorized access, misuse or disclosure of our information or intellectual property could compromise our intellectual property and expose sensitive business information. Cyber-attacks on us or our customers, business partners or third party providers could also cause us to incur significant remediation costs, result in product development delays, disrupt key business operations and divert attention of management and key information technology resources. These incidents could also subject us to liability, expose us to significant expense and cause significant harm to our reputation and business. In addition, we are currently subject to claims and could be subject to additional claims in the future for damages resulting from loss of data from alleged
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vulnerabilities in the security of our processors. We also maintain confidential and personally identifiable information about our workers. The integrity and protection of our worker data is critical to our business and our workers have a high expectation that we will adequately protect their personal information. We anticipate an increase in costs related to:
•enhancing and implementing information security controls, including costs related to upgrading computer and network security components;
•training workers to maintain and monitor our security controls;
•remediating any data security breach and addressing the related litigation;
•mitigating reputational harm; and
•compliance with external regulations.
We often partner with third-party providers for certain worker services and we may provide certain limited worker information to such third parties based on the scope of the services provided to us. However, if these third parties fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, our workers’ data may be improperly accessed, used or disclosed. A breach of data privacy is likely to cause significant disruption of our business operations. Failure to adequately maintain and update our security systems could materially adversely affect our operations and our ability to maintain worker confidence. Failure to prevent unauthorized access to electronic and other confidential information and data breaches could materially adversely affect our financial condition, our competitive position and operating results.
Our operating results are subject to quarterly and seasonal sales patterns.
A large portion of our quarterly sales have historically been made in the last month of the quarter. This uneven sales pattern makes prediction of revenue for each financial period difficult and increases the risk of unanticipated variations in quarterly results and financial condition. In addition, our operating results tend to vary seasonally with the markets in which our products are sold. For example, historically, first quarter PC product sales are generally lower than fourth quarter sales and with respect to our semi-custom SoC products for game consoles, our sales patterns generally follow the seasonal trends of consumer business with sales in the first half of the year being lower than sales in the second half of the year. Following the adoption of the new revenue recognition standard (ASC 606) effective in the first quarter of 2018, we expect our seasonality trends to be affected as we will recognize certain revenue earlier than prior to the adoption of the new revenue recognition standard. For example, we expect a portion of our semi-custom SoC product revenue to shift from the second half of the year to the first half of the year. Many of the factors that create and affect quarterly and seasonal trends are beyond our control.
Global economic uncertainty may adversely impact our business and operating results.
Uncertain global economic conditions have in the past and may in the future adversely impact our business. Uncertainty in the worldwide economic environment may negatively impact consumer confidence and spending causing our customers to postpone purchases. In addition, during challenging economic times, our current or potential future customers may experience cash flow problems and as a result may modify, delay or cancel plans to purchase our products. Additionally, if our customers are not successful in generating sufficient revenue or are unable to secure financing, they may not be able to pay, or may delay payment of, accounts receivable that they owe us. The risk related to our customers’ potentially defaulting on or delaying payments to us is increased because we expect that a small number of customers will continue to account for a substantial part of our revenue. Any inability of our current or potential future customers to pay us for our products may adversely affect our earnings and cash flow. Moreover, our key suppliers may reduce their output or become insolvent, thereby adversely impacting our ability to manufacture our products. In addition, uncertain economic conditions may make it more difficult for us to raise funds through borrowings or private or public sales of debt or equity securities.
We may not be able to generate sufficient cash to service our debt obligations or meet our working capital requirements.
Our ability to make payments on and to refinance our debt will depend on our financial and operating performance, which may fluctuate significantly from quarter to quarter, and is subject to prevailing economic conditions and financial, business and other factors, many of which are beyond our control. We cannot assure you that we will be able to generate cash flow or that we will be able to borrow funds, including under our secured revolving line of credit for a principal amount up to $500 million (our Secured Revolving Line of Credit), in amounts sufficient to enable us to service our debt or to meet our working capital requirements. If we are not able to generate sufficient cash flow from operations or to borrow sufficient funds to service our debt, we may be required to sell assets or equity, reduce expenditures, refinance all or a portion of our existing debt or obtain additional financing. We cannot assure you that we will be able to refinance our debt, sell assets or equity, borrow funds under our Secured Revolving Line of Credit or borrow more funds on terms acceptable to us, if at all.
We have a large amount of indebtedness which could adversely affect our financial position and prevent us from implementing our strategy or fulfilling our contractual obligations.
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Our total debt as of September 29, 2018 was $1.3 billion, net of unamortized debt issuance costs and unamortized debt discount associated with the 2.125% Notes. Our large indebtedness may:

• | make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments;

• | limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions and general corporate and other purposes;

• | limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general corporate purposes;

•require us to use a substantial portion of our cash flow from operations to make debt service payments;
•place us at a competitive disadvantage compared to our competitors with relatively less debt; and
•increase our vulnerability to the impact of adverse economic and industry conditions.
We enter into sale and factoring arrangements from time to time with respect to certain of our accounts receivables, which arrangements are non-recourse to us in the event that an account debtor fails to pay for credit-related reasons, and are not included in our indebtedness. We could become obligated to repurchase such accounts receivables or otherwise incur liability to the counterparties under these arrangements under certain circumstances, such as where a commercial dispute arises between us and an account debtor.
The agreements governing our notes and our Secured Revolving Line of Credit impose restrictions on us that may adversely affect our ability to operate our business.
The indentures governing our 6.75% Senior Notes due 2019 (6.75% Notes), 7.50% Senior Notes due 2022 (7.50% Notes) and 7.00% Senior Notes due 2024 (7.00% Notes) contain various covenants which limit our ability to, among other things:
•incur additional indebtedness;
•pay dividends and make other restricted payments;
•make certain investments, including investments in our unrestricted subsidiaries;
•create or permit certain liens;

• | create or permit restrictions on the ability of certain restricted subsidiaries to pay dividends or make other distributions to us;

•use the proceeds from sales of assets;
•enter into certain types of transactions with affiliates; and
•consolidate or merge or sell our assets as an entirety or substantially as an entirety.
In addition, the Amended and Restated Loan Agreement restricts our ability to make cash payments on the notes to the extent that, on the date of such payment, a default or event of default exists under the Amended and Restated Loan Agreement, or we have not had at all times during the 45 consecutive days immediately preceding such payment, or would not have, on a pro forma basis after giving effect to such payment, Excess Cash Availability (as defined in the Amended and Restated Loan Agreement) of at least $50 million. Any of our future debt agreements may contain similar restrictions. If we fail to make any cash payment on a series of notes when required by the applicable indenture, it would constitute an event of default under such indenture, which, in turn, would constitute an event of default under the agreements governing our other indebtedness.
Our Secured Revolving Line of Credit also contains various covenants which limit our ability to, among other things, make certain investments, merge or consolidate with other entities and permit certain subsidiaries from incurring indebtedness. In addition, further restrictions apply when certain payment conditions (the Payment Conditions) are not satisfied with respect to specified transactions, events or payments. The Payment Conditions include that (i) no default or event of default exists and (ii) at all times during the 45 consecutive days immediately prior to such transaction, event or payment and on a pro forma basis after giving effect to such transaction, event or payment and any incurrence or repayment of indebtedness in connection therewith, the Excess Cash Availability (as defined in the Amended and Restated Loan Agreement) available cash is greater than the greater of 15% of the total commitment amount and $75 million. If Payment Conditions are not satisfied under certain circumstances, we will become subject to various additional covenants which limit our ability to, among other things:

• | create liens upon any of the Loan Parties’ property (other than customary permitted liens and liens in respect of up to $1.5 billion of secured credit facilities debt, which amount includes our Secured Revolving Line of Credit);

•declare or make cash distributions;
•create any encumbrance on the ability of a subsidiary to make any upstream payments;
•make asset dispositions other than certain ordinary course dispositions and certain supply chain finance arrangements;
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• | make certain loans, make payments with respect to subordinated debt or certain borrowed money prior to its due date; and

•enter into any non-arm’s-length transaction with an affiliate (except for certain customary exceptions).
The agreements governing our notes and our Secured Revolving Line of Credit contain cross-default provisions whereby a default under one agreement would likely result in cross defaults under agreements covering other borrowings. For example, the occurrence of a default with respect to any indebtedness or any failure to repay debt when due in an amount in excess of $50 million would cause a cross default under the indentures (to the extent such default would result in the acceleration of such indebtedness) governing our 6.75% Notes, 7.50% Notes, 7.00% Notes and 2.125% Notes, as well as under our Secured Revolving Line of Credit. The occurrence of a default under any of these borrowing arrangements would permit the applicable note holders or the lenders under our Secured Revolving Line of Credit to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable. If the note holders or the trustee under the indentures governing our 6.75% Notes, 7.50% Notes, 7.00% Notes or 2.125% Notes or the lenders under our Secured Revolving Line of Credit accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings.
The markets in which our products are sold are highly competitive.
The markets in which our products are sold are very competitive and delivering the latest and best products to market on a timely basis is critical to achieving revenue growth. We believe that the main factors that determine our product competitiveness are timely product introductions, product quality, product features and capabilities (including enabling state-of-the-art visual and virtual reality experiences), energy efficiency (including power consumption and battery life), reliability, processor clock speed, performance, size (or form factor), selling price, cost, adherence to industry standards (and the creation of open industry standards), level of integration, software and hardware compatibility, security and stability, brand recognition and availability.
We expect that competition will continue to be intense due to rapid technological changes, frequent product introductions by our competitors or new competitors of products that may provide better performance/experience or may include additional features that render our products uncompetitive. We may also face aggressive pricing by competitors, especially during challenging economic times. In addition, our competitors have significant marketing and sales resources which could increase the competitive environment in such a declining market, leading to lower prices and margins. Some competitors may have greater access or rights to complementary technologies, including interface, processor and memory technical information. For instance, with the introduction of our APU products and other competing solutions with integrated graphics, we believe that demand for additional discrete graphics chips and cards may decrease in the future due to improvements in the quality and performance of integrated graphics. If competitors introduce competitive new products into the market before us, demand for our products could be adversely impacted and our business could be adversely affected. In addition, Intel Corporation has announced that it plans to expand its position in integrated graphics for the PC market with high-end discrete graphics solutions for a broad range of computing segments, which may negatively impact our ability to compete in these computing segments.
In addition, we are entering markets with current and new competitors who may be able to adapt more quickly to customer requirements and emerging technologies. We cannot assure you that we will be able to compete successfully against current or new competitors who may have stronger positions in these new markets or superior ability to anticipate customer requirements and emerging industry trends. We may face delays or disruptions in research and development efforts, or we may be required to invest significantly greater resources in research and development than anticipated.
Our worldwide operations are subject to political, legal and economic risks and natural disasters, which could have a material adverse effect on us.
We maintain operations around the world, including in the United States, Canada, Europe, Australia and Asia. We rely on third-party wafer foundries in Europe and Asia. Nearly all product assembly and final testing of our products is performed at manufacturing facilities, operated by third-party manufacturing facilities, in China, Malaysia and Taiwan. We also have international sales operations. International sales, as a percent of net revenue, were 74% in the third quarter of 2018. We expect that international sales will continue to be a significant portion of total sales in the foreseeable future.
The political, legal and economic risks associated with our operations in foreign countries include, without limitation:
•expropriation;
•changes in a specific country’s or region’s political or economic conditions;
•changes in tax laws, trade protection measures and import or export licensing requirements;
•difficulties in protecting our intellectual property;
•difficulties in managing staffing and exposure to different employment practices and labor laws;
•changes in foreign currency exchange rates;
•restrictions on transfers of funds and other assets of our subsidiaries between jurisdictions;
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•changes in freight and interest rates;
•disruption in air transportation between the United States and our overseas facilities;
•loss or modification of exemptions for taxes and tariffs; and
•compliance with U.S. laws and regulations related to international operations, including export control and economic sanctions laws and regulations and the Foreign Corrupt Practices Act.
In addition, our worldwide operations (or those of our business partners) could be subject to natural disasters such as earthquakes, tsunamis, flooding, typhoons and volcanic eruptions that disrupt manufacturing or other operations. For example, our Santa Clara operations are located near major earthquake fault lines in California. Any conflict or uncertainty in the countries in which we operate, including public health issues (for example, an outbreak of a contagious disease such as Avian Influenza, measles or Ebola), safety issues, natural disasters, fire, disruptions of service from utilities, nuclear power plant accidents or general economic or political factors. For example, the United Kingdom’s 2016 referendum, commonly referred to as “Brexit,” has created economic and political uncertainty in the European Union. Also, the European Union’s General Data Protection Regulation, which became effective in May 2018, imposes significant new requirements on how we collect, process and transfer personal data, as well as significant fines for non-compliance. Also the United States administration has called for changes to domestic and foreign policy. The United States administration has announced tariffs on certain products imported into the United States with China as the country of origin, and we are taking steps to mitigate the impact of these tariffs on our business and AMD processor-based products. There is also a possibility of future tariffs imposed by the United States, China or other countries that could have a material adverse effect on our business. Any of the above risks, should they occur, could result in an increase in the cost of components, production delays, general business interruptions, delays from difficulties in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, longer payment cycles, increased taxes, restrictions on the repatriation of funds and the burdens of complying with a variety of foreign laws, any of which could ultimately have a material adverse effect on our business.
Our issuance to West Coast Hitech L.P. (WCH) of warrants to purchase 75 million shares of our common stock, if and when exercised, will dilute the ownership interests of our existing stockholders, and the conversion of the 2.125% Notes may dilute the ownership interest of our existing stockholders, or may otherwise depress the price of our common stock.
In consideration for the limited waiver and rights under the Sixth Amendment, we issued warrants to WCH to purchase 75 million shares of our common stock. Any issuance by us of shares of our common stock to WCH upon exercise of the warrants will dilute the ownership interests of our existing stockholders. Any sales in the public market by WCH of any shares owned by WCH could adversely affect prevailing market prices of our common stock, and the anticipated exercise by WCH of the warrants could depress the price of our common stock.
Also, the conversion of some or all of the 2.125% Notes may dilute the ownership interests of our existing stockholders. All of the 2.125% Notes were convertible at the option of their holders prior to their scheduled term from April 1, 2018 until June 30, 2018. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the 2.125% Notes may encourage short selling by market participants because the conversion thereof could be used to satisfy short positions, or the anticipated conversion of the 2.125% Notes into cash and/or shares of our common stock could depress the price of our common stock.
Uncertainties involving the ordering and shipment of our products could materially adversely affect us.
We typically sell our products pursuant to individual purchase orders. We generally do not have long-term supply arrangements with our customers or minimum purchase requirements except that orders generally must be for standard pack quantities. Generally, our customers may cancel orders for standard products more than 30 days prior to shipment without incurring significant fees. We base our inventory levels in part on customers’ estimates of demand for their products, which may not accurately predict the quantity or type of our products that our customers will want in the future or ultimately end up purchasing. Our ability to forecast demand is even further complicated when our products are sold indirectly through downstream channel distributors and customers, as our forecasts for demand are then based on estimates provided by multiple parties throughout the downstream channel.
PC and consumer markets are characterized by short product lifecycles, which can lead to rapid obsolescence and price erosion. In addition, our customers may change their inventory practices on short notice for any reason. We may build inventories during periods of anticipated growth, and the cancellation or deferral of product orders or overproduction due to failure of anticipated orders to materialize, could result in excess or obsolete inventory, which could result in write-downs of inventory and an adverse effect on gross margins.
Factors that may result in excess or obsolete inventory, which could result in write-downs of the value of our inventory, a reduction in the average selling price or a reduction in our gross margin include:
•a sudden or significant decrease in demand for our products;
•a production or design defect in our products;
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•a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements;

• | a failure to accurately estimate customer demand for our products, including for our older products as our new products are introduced; or

•our competitors introducing new products or taking aggressive pricing actions.
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.
Industry-wide fluctuations in the computer marketplace have materially adversely affected us in the past and may materially adversely affect us in the future. A large portion of our Computing and Graphics revenue is focused on the consumer desktop PC and notebook segments, which have in the past experienced a decline driven by, among other factors, the adoption of smaller and other form factors, increased competition and changes in replacement cycles. The success of our semi-custom SoC products is dependent on securing customers for our semi-custom design pipeline and consumer market conditions, including the success of the Sony PlayStation®4, Sony PlayStation®4 Pro, Microsoft® Xbox One™ S and Microsoft® Xbox One™ X game console systems worldwide. In addition, the GPU market has at times seen elevated demand due to the application of GPU products to cryptocurrency mining. For example, our GPU revenue has been affected in part by the volatility of the cryptocurrency mining market. Demand for cryptocurrency could change quickly. For example, China and South Korea have instituted restrictions on cryptocurrency trading. If we are unable to manage the risks related to a decrease in the demand for cryptocurrency mining, our GPU business could be materially adversely affected.
Our ability to design and introduce new products in a timely manner is dependent upon third-party intellectual property.
In the design and development of new and enhanced products, we rely on third-party intellectual property such as software development tools and hardware testing tools. Furthermore, certain product features may rely on intellectual property acquired from third parties. The design requirements necessary to meet customer demand for more features and greater functionality from semiconductor products may exceed the capabilities of the third-party intellectual property or development tools available to us. If the third-party intellectual property that we use becomes unavailable, is not available with required functionality and performance in the time frame or price point needed for our new products or fails to produce designs that meet customer demands, our business could be materially adversely affected.
We depend on third-party companies for the design, manufacture and supply of motherboards, software and other computer platform components to support our business.
We depend on third-party companies for the design, manufacture and supply of motherboards, graphics cards, software (e.g. BIOS, operating systems, drivers) and other components that our customers utilize to support and/or use our microprocessor, GPU and APU offerings. We also rely on our add-in-board (AIB) partners to support our GPU and APU products. In addition, our microprocessors are not designed to function with motherboards and chipsets designed to work with Intel microprocessors. If the designers, manufacturers, AIBs and suppliers of motherboards, graphics cards, software and other components decrease their support for our product offerings, our business could be materially adversely affected.
If we lose Microsoft Corporation’s support for our products or other software vendors do not design and develop software to run on our products, our ability to sell our products could be materially adversely affected.
Our ability to innovate beyond the x86 instruction set controlled by Intel depends partially on Microsoft designing and developing its operating systems to run on or support our x86-based microprocessor products. With respect to our graphics products, we depend in part on Microsoft to design and develop its operating system to run on or support our graphics products. Similarly, the success of our products in the market, such as our APU products, is dependent on independent software providers designing and developing software to run on our products. If Microsoft does not continue to design and develop its operating systems so that they work with our x86 instruction sets or does not continue to develop and maintain their operating systems to support our graphics products, independent software providers may forego designing their software applications to take advantage of our innovations and customers may not purchase PCs with our products. In addition, some software drivers licensed for use with our products are certified by Microsoft. If Microsoft did not certify a driver, or if we otherwise fail to retain the support of Microsoft or other software vendors, our ability to market our products would be materially adversely affected.
Our reliance on third-party distributors and AIB partners subjects us to certain risks.
We market and sell our products directly and through third-party distributors and AIB partners pursuant to agreements that can generally be terminated for convenience by either party upon prior notice to the other party. These agreements are non-exclusive and permit both our distributors and AIB partners to offer our competitors’ products. We are dependent on our distributors and AIB partners to supplement our direct marketing and sales efforts. If any significant distributor or AIB or a substantial number of our distributors or AIB partners terminated their relationship with us, decided to market our competitors’ products over our products or decided not to market our products at all, our ability to bring our products to market would be impacted and we would be materially adversely affected. In addition, if we are unable to collect accounts receivables from our significant distributors and/or
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AIB partners, it could have a material adverse effect on our business. If we are unable to manage the risks related to the use of our third-party distributors and AIB partners or offer appropriate incentives to focus them on the sale of our products, our business could be materially adversely affected.
Additionally, distributors and AIB partners typically maintain an inventory of our products. In most instances, our agreements with distributors protect their inventory of our products against price reductions, as well as provide return rights for any product that we have removed from our price book and that is not more than 12 months older than the manufacturing date. Some agreements with our distributors also contain standard stock rotation provisions permitting limited levels of product returns. Our agreements with AIB partners protect their inventory of our products against price reductions. In the event of a significant decline in the price of our products, the price protection rights we offer would materially adversely affect us because our revenue and corresponding gross margin would decline.
We may incur future impairments of goodwill and technology license purchases.
We perform our annual goodwill impairment analysis as of the first day of the fourth quarter of each year. Subsequent to our annual goodwill impairment analysis, we monitor for any events or changes in circumstances, such as significant adverse changes in business climate or operating results, changes in management’s business strategy, an inability to successfully introduce new products in the marketplace, an inability to successfully achieve internal forecasts or significant declines in our stock price, which may represent an indicator of impairment. The occurrence of any of these events may require us to record future goodwill impairment charges.
We license certain third party technologies and tools for the design and production of our products. We report the value of those licenses as intangible assets on the balance sheet and we periodically evaluate the carrying value of those licenses based on their future economic benefit to us. Factors such as the life of the assets, changes in competing technologies, changes to the business strategy may represent an indicator of impairment. The occurrence of any of these events may require us to record future technology license impairment charges.
Our inability to continue to attract and retain qualified personnel may hinder our business.
Much of our future success depends upon the continued service of numerous qualified engineering, marketing, sales and executive personnel. Competition for highly skilled employees and executives in the technology industry is intense. If we are not able to continue to attract, train and retain qualified personnel necessary for our business, the progress of our product development programs could be hindered, and we could be materially adversely affected. To help attract, retain and motivate qualified personnel, we use share-based incentive awards such as employee stock options and non-vested share units (restricted stock units). If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate personnel could be weakened, which could harm our results of operations. Also, if the value of our stock awards increases substantially, this could potentially create great personal wealth for our employees and affect our ability to retain these employees. In addition, our current and any future restructuring plans may adversely impact our ability to attract and retain key employees.
In the event of a change of control, we may not be able to repurchase our outstanding debt as required by the applicable indentures and our Secured Revolving Line of Credit, which would result in a default under the indentures and our Secured Revolving Line of Credit.
Upon a change of control, we will be required to offer to repurchase all of our 6.75% Notes, 7.50% Notes, 7.00% Notes and 2.125% Notes then outstanding at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, up to, but excluding, the repurchase date. In addition, a change of control would be an event of default under our Secured Revolving Line of Credit. As of September 29, 2018, $70 million borrowings were outstanding under the Secured Revolving Line of Credit, $26 million related to letters of credit under the Secured Revolving Line of Credit remained outstanding and $1.5 billion principal amount was outstanding under our notes. Future debt agreements may contain similar provisions. We may not have the financial resources to repurchase our outstanding notes and prepay all of our outstanding obligations under our Secured Revolving Line of Credit.
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 semiconductor industry is highly cyclical and has experienced significant downturns, often in conjunction with constant and rapid technological change, wide fluctuations in supply and demand, continuous new product introductions, price erosion and declines in general economic conditions. We have incurred substantial losses in recent downturns, due to:
•substantial declines in average selling prices;
•the cyclical nature of supply and demand imbalances in the semiconductor industry;
•a decline in demand for end-user products (such as PCs) that incorporate our products; and
•excess inventory levels.
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Industry-wide fluctuations in the computer marketplace have materially adversely affected us in the past and may materially adversely affect us in the future. For example, a large portion of our Computing and Graphics revenue is focused on consumer desktop PC and notebook segments. While overall growth in Computing and Graphics is stabilizing, the areas within Computing and Graphics are changing. Our ability to take advantage of the opportunities within Computing and Graphics is based on foreseeing those changes and making timely investments in the form factors that serve those growing sub-segments.
Global economic uncertainty and weakness have in the past impacted the semiconductor market as consumers and businesses have deferred purchases, which negatively impacted demand for our products. Our financial performance has been, and may in the future be, negatively affected by these downturns.
The growth of our business is also dependent on continued demand for our products from high-growth adjacent emerging global markets. Our ability to be successful in such markets depends in part on our ability to establish adequate local infrastructure, as well as our ability to cultivate and maintain local relationships in these markets. If demand from these markets is below our expectations, sales of our products may decrease, which would have a material adverse effect on us.
Acquisitions, divestitures and/or joint ventures could disrupt our business, harm our financial condition and operating results or dilute, or adversely affect the price of, our common stock.
Our success will depend, in part, on our ability to expand our product offerings and grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may pursue growth through the acquisition of complementary businesses, solutions or technologies or through divestitures or joint ventures rather than through internal development. The identification of suitable acquisition or joint venture candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions or joint ventures. Moreover, if such acquisitions or joint ventures require us to seek additional debt or equity financing, we may not be able to obtain such financing on terms favorable to us or at all. Even if we successfully complete an acquisition or a joint venture, we may not be able to assimilate and integrate effectively or efficiently the acquired business, technologies, solutions, assets, personnel or operations, particularly if key personnel of the acquired company decide not to work for us. Acquisitions and joint ventures may also involve the entry into geographic or business markets in which we have little or no prior experience. Consequently, we may not achieve anticipated benefits of the acquisitions or joint ventures which could harm our operating results. In addition, to complete an acquisition, we may issue equity securities, which would dilute our stockholders’ ownership and could adversely affect the price of our common stock, as well as incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could adversely affect our results of operations. Acquisitions and joint ventures may also reduce our cash available for operations and other uses, which could harm our business. Also, any failure on our part to effectively evaluate and execute new business initiatives could adversely affect our business. We may not adequately assess the risk of new business initiatives and subsequent events may arise that alter the risks that were initially considered.
Furthermore, we may not achieve the objectives and expectations with respect to future operations, products and services. In 2016, we consummated the transaction with TFME, under which we sold to TFME 85% of the equity interests in our JVs. Going forward, we expect the majority of our ATMP services will be provided by the JVs and there is no guarantee that the JVs will be able to fulfill our long-term ATMP requirements. If we are unable to meet customer demand due to fluctuating or late supply from the JVs, it could result in lost sales and have a material adverse effect on our business.
In addition, we may not realize the anticipated benefits from any new business initiatives. For example, in connection with our strategy of licensing portions of our intellectual property portfolio, in 2016, we entered into a joint venture with Higon Information Technology Co., Ltd. (formerly, Tianjin Haiguang Advanced Technology Investment Co., Ltd.) (THATIC), comprised of two separate legal entities, China JV1 and China JV2 (collectively, the THATIC JV). The primary purpose of the THATIC JV is to support our expansion into the server and workstation product market in China. We also licensed certain of our intellectual property (Licensed IP) to the THATIC JV for license fees payable over several years contingent upon achievement of certain milestones. We also expect to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such Licensed IP. We may not realize the expected benefits from this joint venture, including the THATIC JV’s expected future performance, the receipt of any future milestone payments from the Licensed IP, and the receipt of any royalty payments from future sales of products by the THATIC JV.
Our business is dependent upon the proper functioning of our internal business processes and information systems and modification or interruption of such systems may disrupt our business, processes and internal controls.
We rely upon a number of internal business processes and information systems to support key business functions, and the efficient operation of these processes and systems is critical to our business. Our business processes and information systems need to be sufficiently scalable to support the growth of our business and may require modifications or upgrades that expose us to a number of operational risks. As such, our information systems will continually evolve and adapt in order to meet our business needs. These changes may be costly and disruptive to our operations and could impose substantial demands on management time.
These changes may also require changes in our information systems, modification of internal control procedures and significant training of employees and third-party resources. We continuously work on simplifying our information systems and
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applications through consolidation and standardization efforts. There can be no assurance that our business and operations will not experience any disruption in connection with this transition. Our information technology systems, and those of third-party information technology providers or business partners, may also be vulnerable to damage or disruption caused by circumstances beyond our control including catastrophic events, power anomalies or outages, natural disasters, viruses or malware, cyber-attacks, data breaches and computer system or network failures, exposing us to significant cost, reputational harm and disruption or damage to our business.
In addition, as our IT environment continues to evolve, we are embracing new ways of communicating and sharing data internally and externally with customers and partners using methods such as mobility and the cloud that can promote business efficiency. However, these practices can also result in a more distributed IT environment, making it more difficult for us to maintain visibility and control over internal and external users, and meet scalability and administrative requirements. If our security controls cannot keep pace with the speed of these changes, or if we are not able to meet regulatory and compliance requirements, our business would be materially adversely affected.
If essential equipment, materials or manufacturing processes are not available to manufacture our products, we could be materially adversely affected.
We may purchase equipment and materials for use by our back-end manufacturing service providers from a number of suppliers and our operations depend upon obtaining deliveries of adequate supplies of equipment and materials on a timely basis. Our third-party suppliers also depend on the same timely delivery of adequate quantities of equipment and materials in the manufacture of our products. In addition, as many of our products increase in technical complexity, we rely on our third-party suppliers to update their processes in order to continue meeting our back-end manufacturing needs. Certain equipment and materials that are used in the manufacture of our products are available only from a limited number of suppliers, or in some cases, a sole supplier. We also depend on a limited number of suppliers to provide the majority of certain types of integrated circuit packages for our microprocessors, including our APU products. Similarly, certain non-proprietary materials or components such as memory, printed circuit boards (PCBs), interposers, substrates and capacitors used in the manufacture of our products are currently available from only a limited number of sources. Because some of the equipment and materials that we and our third-party manufacturing suppliers purchase are complex, it is sometimes difficult to substitute one supplier for another. From time to time, suppliers may extend lead times, limit supply or increase prices due to capacity constraints or other factors. Also, some of these materials and components may be subject to rapid changes in price and availability. Interruption of supply or increased demand in the industry could cause shortages and price increases in various essential materials. Dependence on a sole supplier or a limited number of suppliers exacerbates these risks. If we are unable to procure certain of these materials for our back-end manufacturing operations, or our third-party foundries or manufacturing suppliers are unable to procure materials for manufacturing our products, our business would be materially adversely affected.
If our products are not compatible with some or all industry-standard software and hardware, we could be materially adversely affected.
Our products may not be fully compatible with some or all industry-standard software and hardware. Further, we may be unsuccessful in correcting any such compatibility problems in a timely manner. If our customers are unable to achieve compatibility with software or hardware, we could be materially adversely affected. In addition, the mere announcement of an incompatibility problem relating to our products could have a material adverse effect on our business.
Costs related to defective products could have a material adverse effect on us.
Products as complex as those we offer may contain defects or failures when first introduced or when new versions or enhancements to existing products are released. We cannot assure you that, despite our testing procedures, errors will not be found in new products or releases after commencement of commercial shipments in the future, which could result in loss of or delay in market acceptance of our products, material recall and replacement costs, loss of revenue, writing down the inventory of defective products, the diversion of the attention of our engineering personnel from product development efforts, defending against litigation related to defective products or related liabilities, including property damage, personal injury, damage to our reputation in the industry and loss of data or intangible property, and could adversely affect our relationships with our customers. In addition, we may have difficulty identifying the end customers of the defective products in the field. As a result, we could incur substantial costs to implement modifications to correct defects. Any of these problems could materially adversely affect our business.
We could be subject to potential product liability claims if one of our products causes, or merely appears to have caused, an injury, whether tangible or intangible. Claims may be made by consumers or others selling our products, and we may be subject to claims against us even if an alleged injury is due to the actions of others. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business.
If we fail to maintain the efficiency of our supply chain as we respond to changes in customer demand for our products, our business could be materially adversely affected.
Our ability to meet customer demand for our products depends, in part, on our ability to deliver the products our customers want on a timely basis. Accordingly, we rely on our supply chain for the manufacturing, distribution and fulfillment of our products.
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As we continue to grow our business, expand to high-growth adjacent markets, acquire new customers and strengthen relationships with existing customers, the efficiency of our supply chain will become increasingly important because many of our customers tend to have specific requirements for particular products, and specific time-frames in which they require delivery of these products. If we are unable to consistently deliver the right products to our customers on a timely basis in the right locations, our customers may reduce the quantities they order from us, which could have a material adverse effect on our business.
We outsource to third parties certain supply-chain logistics functions, including portions of our product distribution, transportation management and information technology support services.
We rely on third-party providers to operate our regional product distribution centers and to manage the transportation of our work-in-process and finished products among our facilities, to our manufacturing suppliers and to our customers. In addition, we rely on third parties to provide certain information technology services to us, including help desk support, desktop application services, business and software support applications, server and storage administration, datacenter operations, database administration and voice, video and remote access. We cannot guarantee that these providers will fulfill their respective responsibilities in a timely manner in accordance with the contract terms, in which case our internal operations and the distribution of our products to our customers could be materially adversely affected. Also, we cannot guarantee that our contracts with these third-party providers will be renewed, in which case we would have to transition these functions in-house or secure new providers, which could have a material adverse effect on our business if the transition is not executed appropriately.
Our stock price is subject to volatility.
Our stock price has experienced price and volume fluctuations and could be subject to wide fluctuations in the future. The trading price of our stock may fluctuate widely due to various factors including, actual or anticipated fluctuations in our financial conditions and operating results, changes in financial estimates by us or securities analysts, changes in our capital structure, including issuance of additional debt or equity to the public, interest rate changes, news regarding our products or products of our competitors, and broad market and industry fluctuations. Stock price fluctuations could impact the value of our equity compensation, which could affect our ability to recruit and retain employees. In addition, volatility in our stock price could adversely affect our business and financing opportunities.
Worldwide political conditions may adversely affect demand for our products.
Worldwide political conditions may create uncertainties that could adversely affect our business. The United States has been and may continue to be involved in armed conflicts that could have a further impact on our sales and our supply chain. The consequences of armed conflict, political instability or civil or military unrest are unpredictable, and we may not be able to foresee events that could have a material adverse effect on us. Terrorist attacks or other hostile acts may negatively affect our operations, or adversely affect demand for our products, and such attacks or related armed conflicts may impact our physical facilities or those of our suppliers or customers. Furthermore, these attacks or hostile acts may make travel and the transportation of our products more difficult and more expensive, which could materially adversely affect us. Any of these events could cause consumer spending to decrease or result in increased volatility in the United States economy and worldwide financial markets.
Unfavorable currency exchange rate fluctuations could adversely affect us.
We have costs, assets and liabilities that are denominated in foreign currencies. As a consequence, movements in exchange rates could cause our foreign currency denominated expenses to increase as a percentage of revenue, affecting our profitability and cash flows. Whenever we believe appropriate, we hedge a portion of our short-term foreign currency exposure to protect against fluctuations in currency exchange rates. We determine our total foreign currency exposure using projections of long-term expenditures for items such as payroll. We cannot assure you that these activities will be effective in reducing foreign exchange rate exposure. Failure to do so could have an adverse effect on our business, financial condition, results of operations and cash flow. In addition, the majority of our product sales are denominated in U.S. dollars. Fluctuations in the exchange rate between the U.S. dollar and the local currency can cause increases or decreases in the cost of our products in the local currency of such customers. An appreciation of the U.S. dollar relative to the local currency could reduce sales of our products.
Our inability to effectively control the sales of our products on the gray market could have a material adverse effect on us.
We market and sell our products directly to OEMs and through authorized third-party distributors. From time to time, our products are diverted from our authorized distribution channels and are sold on the “gray market.” Gray market products result in shadow inventory that is not visible to us, thus making it difficult to forecast demand accurately. Also, when gray market products enter the market, we and our distribution channels compete with these heavily discounted gray market products, which adversely affects demand for our products and negatively impact our margins. In addition, our inability to control gray market activities could result in customer satisfaction issues because any time products are purchased outside our authorized distribution channels there is a risk that our customers are buying counterfeit or substandard products, including products that may have been altered, mishandled or damaged, or are used products represented as new.
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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.
We rely on a combination of protections provided by contracts, including confidentiality and nondisclosure agreements, copyrights, patents, trademarks and common law rights, such as trade secrets, to protect our intellectual property. However, we cannot assure you that we will be able to adequately protect our technology or other intellectual property from third-party infringement or from misappropriation in the United States and abroad. Any patent licensed by us or issued to us could be challenged, invalidated or circumvented or rights granted there under may not provide a competitive advantage to us.
Furthermore, patent applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property on a worldwide basis in a cost-effective manner. In jurisdictions where foreign laws provide less intellectual property protection than afforded in the United States and abroad, our technology or other intellectual property may be compromised, and our business would be materially adversely affected.
We are party to litigation and may become a party to other claims or litigation that could cause us to incur substantial costs or pay substantial damages or prohibit us from selling our products.
From time to time, we are a defendant or plaintiff in various legal actions. For example, as described in Note 12 of our consolidated financial statements, we have been subject to certain claims concerning federal securities laws and corporate governance. Our products are purchased by and/or used by consumers, which could increase our exposure to consumer actions such as product liability claims and consumer class action claims, including those described in Note 12 of our consolidated financial statements. On occasion, we receive claims that individuals were allegedly exposed to substances used in our former semiconductor wafer manufacturing facilities and that this alleged exposure caused harm. Litigation can involve complex factual and legal questions, and its outcome is uncertain. It is possible that if a claim is successfully asserted against us, including the claims described in Note 12 of our consolidated financial statements, it could result in the payment of damages that could be material to our business.
With respect to intellectual property litigation, from time to time, we have been notified of, or third parties may bring or have brought, actions against us and/or against our customers based on allegations that we are infringing the intellectual property rights of others, contributing to or inducing the infringement of the intellectual property rights of others, improperly claiming ownership of intellectual property or otherwise improperly using the intellectual property of others. If any such claims are asserted, we may seek to obtain a license under the third parties’ intellectual property rights. We cannot assure you that we will be able to obtain all of the necessary licenses on satisfactory terms, if at all. These parties may file lawsuits against us or our customers seeking damages (potentially up to and including treble damages) or an injunction against the sale of products that incorporate allegedly infringed intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the sale of some of our products or to increase the costs of selling some of our products or which could damage our reputation. The award of damages, including material royalty payments, or other types of damages, or the entry of an injunction against the manufacture and sale of some or all of our products could have a material adverse effect on us. We could decide, in the alternative, to redesign our products or to resort to litigation to challenge such claims. Such challenges could be extremely expensive and time-consuming regardless of their merit, could cause delays in product release or shipment and/or could have a material adverse effect on us. We cannot assure you that litigation related to our intellectual property rights or the intellectual property rights of others can always be avoided or successfully concluded.
Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which could have a material adverse effect on us.
Our business is subject to potential tax liabilities.
We are subject to income taxes in the United States, Canada and other foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. The United States federal government enacted significant tax reform, and certain provisions of the new law may adversely affect us. The Tax Cuts and Job Act of 2017 (the Tax Reform Act) has resulted in significant changes to the United States corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense. The Tax Reform Act also transitions international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to United States taxation. These changes became effective in 2018. We recorded preliminary estimates of the impact of the Tax Reform Act in accordance with Staff Accounting Bulletin No.118 (SAB 118). These estimates are subject to further analysis and review which may result in material adjustments in 2018.
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In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain, including uncertainties due to the Tax Reform Act. Although we believe our tax estimates are reasonable, we cannot assure you that the final determination of any tax audits and litigation will not be materially different from that which is reflected in historical income tax provisions and accruals. Should additional taxes be assessed as a result of an audit, assessment or litigation, there could be a material adverse effect on our cash, income tax provision and net income in the period or periods for which that determination is made.
We are subject to environmental laws, conflict minerals-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as a variety of other laws or regulations that could result in additional costs and liabilities.
Our operations and properties have in the past been and continue to be subject to various United States and foreign laws and regulations, including those relating to materials used in our products and manufacturing processes, discharge of pollutants into the environment, the treatment, transport, storage and disposal of solid and hazardous wastes and remediation of contamination. These laws and regulations require our suppliers to obtain permits for operations making our products, including the discharge of air pollutants and wastewater. Although our management systems are designed to oversee our suppliers’ compliance, we cannot assure you that our suppliers have been or will be at all times in complete compliance with such laws, regulations and permits. If our suppliers violate or fail to comply with any of them, a range of consequences could result, including fines, suspension of production, alteration of manufacturing processes, import/export restrictions, sales limitations, criminal and civil liabilities or other sanctions. Such non-compliance from our manufacturing suppliers could result in disruptions in supply, higher sourcing costs, and/or reputational damage for us.
Environmental laws are complex, change frequently and have tended to become more stringent over time. For example, the European Union (EU) and China are two among a growing number of jurisdictions that have enacted restrictions on the use of lead and other materials in electronic products. These regulations affect semiconductor devices and packaging. As regulations restricting materials in electronic products continue to increase around the world, there is a risk that the cost, quality and manufacturing yields of products that are subject to these restrictions, may be less favorable compared to products that are not subject to such restrictions, or that the transition to compliant products may not meet customer roadmaps, or produce sudden changes in demand, which may result in excess inventory. A number of jurisdictions including the EU, Australia, California and China are developing or have finalized market entry or public procurement regulations for computers and servers based on ENERGY STAR specifications as well as additional energy consumption limits. There is the potential for certain of our products being excluded from some of these markets which could materially adversely affect us.
Certain environmental laws, including the United States Comprehensive, Environmental Response, Compensation and Liability Act of 1980, or the Superfund Act, impose strict or, under certain circumstances, joint and several liability on current and previous owners or operators of real property for the cost of removal or remediation of hazardous substances and impose liability for damages to natural resources. These laws often impose liability even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances. These environmental laws also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatment facilities when such facilities are found to be contaminated. Such persons can be responsible for cleanup costs even if they never owned or operated the contaminated facility. We have been named as a responsible party at three Superfund sites in Sunnyvale, California. Although we have not yet been, we could be named a potentially responsible party at other Superfund or contaminated sites in the future. In addition, contamination that has not yet been identified could exist at our other facilities.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted disclosure and reporting requirements for companies that use “conflict” minerals originating from the Democratic Republic of Congo or adjoining countries. We continue to incur additional costs associated with complying with these requirements, such as costs related to developing internal controls for the due diligence process, determining the source of any conflict minerals used in our products, auditing the process and reporting to our customers and the SEC. In addition to the SEC regulation, the European Union, China and other jurisdictions are developing new policies focused on conflict minerals that may impact and increase the cost of our compliance program. Also, since our supply chain is complex, we may face reputational challenges if we are unable to sufficiently verify the origins of the subject minerals. Moreover, we are likely to encounter challenges to satisfy those customers who require that all of the components of our products are certified as “conflict free.” If we cannot satisfy these customers, they may choose a competitor’s products.
The United States federal government has issued new policies for federal procurement focused on eradicating the practice of forced labor and human trafficking. In addition, the United Kingdom and the State of California have issued laws that require us to disclose our policy and practices for identifying and eliminating forced labor and human trafficking in our supply chain. Several customers as well as the Responsible Business Alliance have also issued expectations to eliminate these practices that may impact us. While we have a policy and management systems to identify and avoid these practices in our supply chain, we cannot guarantee that our suppliers will always be in conformance to these laws and expectations. We may face enforcement liability and reputational challenges if we are unable to sufficiently meet these expectations. Moreover, we are likely to encounter challenges with customers if we cannot satisfy their forced and trafficked labor polices and they may choose a competitor’s product.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the third quarter of 2018, we settled $87 million in aggregate principal amount of our 6.75% Notes with 4,530,863 treasury shares and $10 million in aggregate principal amount of our 7.50% Notes with 616,323 treasury shares.
Please refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for further discussion regarding the 6.75% Notes and 7.50% Notes.
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ITEM 6. | EXHIBITS

*10.1 |  | Amended and Restated 2017 Employee Stock Purchase Plan dated August 23, 2018.
31.1 |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 |  | Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 |  | Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS |  | XBRL Instance Document.
101.SCH |  | XBRL Taxonomy Extension Schema Document.
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document.
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document.

| * Management contracts and compensatory plans or arrangements.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|  | ADVANCED MICRO DEVICES, INC.
October 31, 2018 |  | By: | /s/Devinder Kumar
|  | Name: | Devinder Kumar
|  | Title: | Senior Vice President, Chief Financial Officer and Treasurer Signing on behalf of the Registrant as the Principal Financial Officer

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