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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements as of December 30, 2017 and December 31, 2016 and for each of the three years in the period ended December 30, 2017 and related notes, which are included in this Annual Report on Form 10-K as well as with the other sections of this Annual Report on Form 10-K, including “Part I, Item 1: Business,” “Part II, Item 6: Selected Financial Data” and “Part II, Item 8: Financial Statements and Supplementary Data.”
Introduction
We are a global semiconductor company primarily offering:
| • | 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 management 's discussion and analysis (MD&A), we will describe the results of operations and the financial condition for us and our consolidated subsidiaries, including a discussion of our results of operations for 2017 compared to 2016 and 2016 compared to 2015, an analysis of changes in our financial condition and a discussion of our contractual obligations and off balance sheet arrangements.
Overview
2017 was an important year for AMD as we launched a number of new high-performance products that re-shaped our product portfolio and improved our technology competitiveness. We launched more than 40 new high-performance CPUs and GPUs and experienced strong customer acceptance of our new products.
We launched our first-generation AMD Ryzen™ desktop CPUs based on our entirely new “Zen” x86 CPU core architecture. We released our AMD Ryzen™ 7 desktop processors designed for PC gamers, creators and the enthusiast market. We also launched our high performance AMD Ryzen™ 5 desktop processors at a variety of price points with up to 6 cores and 12 threads of CPU processing in April 2017. We released our AMD Ryzen™ 3 desktop processors in July 2017 designed to bring “Zen” processing power to mainstream price points. In August 2017, we launched the Ryzen™ Threadripper™ family of high-end desktop processors. For the commercial market, we launched AMD Ryzen™ PRO desktop processors, based on the same “Zen” x86 core architecture. In October 2017, we announced AMD Ryzen 7 2700U and AMD Ryzen 5 2500U, our first mobile processors with Radeon™ Vega graphics, previously codenamed the “Raven Ridge” mobile APUs, for premium 2-in-1s, convertibles and ultra-thin notebook computers. AMD Ryzen 7 2700U and AMD Ryzen5 2500U processors combine the “Zen” x86 core architecture with Radeon™ Vega graphics in an SoC design.
We also expanded our consumer and professional graphics offerings with new graphics solutions. We introduced the Radeon™ RX 500 series in April 2017, a new line of graphics cards based on second-generation “Polaris” architecture that provides additional performance. We also announced the “Polaris” architecture-based Radeon™ Pro Duo card designed for media and entertainment, broadcast, and design and manufacturing workflows. We launched our new “Vega” GPU architecture for the high-end gaming, professional, and datacenter markets. We introduced our Radeon™ RX Vega family of GPUs for enthusiast gamers, Radeon™ Pro SSG for up to 8K video production, and Radeon™ Instinct MI25 for machine intelligence and datacenter markets.
We also focused on improving our competitive position in the server and datacenter markets. In June 2017, we launched the AMD EPYC™ 7000 Series of high performance processors that have up to 32 high-performance “Zen” compute cores and are designed to support a full range of integer, floating point, memory bandwidth and I/O workloads. Customer engagement with our EPYC™ processors continued to grow during the year. In October 2017, we announced the AMD Embedded Radeon™ E9170 Series GPU. The new processor is the first “Polaris” architecture-based AMD Embedded discrete GPU available in multi-chip module (MCM) format with integrated memory for smaller, power-efficient custom designs.
Our financial results improved in 2017 compared to 2016 primarily as the demand for our Computing and Graphics segment products increased. Net revenue for 2017 was $5.3 billion, an increase of 25% compared to 2016. Our operating income for 2017 improved to $204 million compared to an operating loss of $372 million for 2016. Our net income for 2017 improved to $43 million compared to a net loss of $497 million in the prior year. Cash and cash equivalents as of December 30, 2017 were
$1.18 billion, down from $1.26 billion at the end of 2016. Principal amount of total debt as of December 30, 2017 was $1.70 billion, compared to $1.77 billion as of December 31, 2016.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenue, inventories, goodwill 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 assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
Management believes the following critical accounting estimates are the most significant to the presentation of our financial statements and require the most difficult, subjective and complex judgments.
Revenue Allowances. We record a provision for estimated sales returns and allowances on product sales for estimated future price reductions and other customer incentives in the same period that the related revenues are recorded. We base these estimates on actual historical sales returns, historical allowances, historical price reductions, market activity and other known or anticipated trends and factors. These estimates are subject to management’s judgment and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenue and operating results.
Inventory Valuation. At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence based on projected sales outlook. This evaluation includes analysis of historical sales levels by product and projections of future demand. These projections assist us in determining the carrying value of our inventory. In addition, we write off inventories that we consider obsolete. We adjust the remaining specific inventory balances to approximate the lower of our standard manufacturing cost or net realizable value. Among other factors, management considers forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and realizable value. If in any period we anticipate future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made. This would have a negative impact on our gross margin in that period. If in any period we are able to sell inventories that were not valued or that had been written down in a previous period, related revenues would be recorded without any offsetting charge to cost of sales resulting in a net benefit to our gross margin in that period.
Goodwill. Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but rather is tested for impairment at least annually, or more frequently if there are indicators of impairment present.
We perform an annual goodwill impairment analysis as of the first day of the fourth quarter of each year. In the third fiscal quarter of 2017, we adopted ASU 2017-04, Intangibles - Goodwill and Other: Topic 350 Simplifying the Test for Goodwill Impairment. We therefore applied a different impairment analysis for 2017 than was performed in 2016 and 2015.
In assessing impairment of goodwill prior to our adoption of ASU 2017-04, we first analyzed qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The qualitative factors we assessed included long-term prospects of our performance, share price trends, market capitalization and company-specific events. If we concluded it was more likely than not that the fair value of a reporting unit exceeded its carrying amount, we needed not perform the two-step impairment test. If based on that assessment we believed it was more likely than not that the fair value of the reporting units was less than its carrying value, a two-step goodwill impairment test would be performed.
The first step of the two-step test measures for impairment by applying fair value-based tests at the reporting unit level. We evaluate whether goodwill has been impaired at the reporting unit level by first determining whether the estimated fair value of the reporting unit is less than its carrying value and, if so, by determining whether the implied fair value of goodwill within the reporting unit is less than the carrying value. The implied fair value of a reporting unit is determined through the application of
one or more valuation models common to our industry including income, market and cost approaches. While market valuation data for comparable companies is gathered and analyzed, we believe that there has not been sufficient comparability between the peer groups and the specific reporting units to allow for the derivation of reliable indications of value using the market approach. Therefore, we have ultimately employed the income approach which requires estimates of present value of estimated future cash flows. Cash flow projections are based on management’s estimates of revenue growth rates and operating margins taking into consideration industry and market condition. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected cash flows. A variance in the discount rate could have a significant impact on the amount of the goodwill impairment charge recorded, if any. The second step (if necessary) measures the amount of impairment by applying fair value-based tests to the individual assets and liabilities within each reporting unit.
In the third quarter of 2017, we adopted ASU 2017-04 which eliminated step two from the goodwill impairment test. In assessing impairment of goodwill, if we conclude that it is more likely than not that the carrying amount of a reporting unit exceeds its fair value during our qualitative assessment, a one-step goodwill impairment test will be performed. During the quantitative test, if it is concluded that the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
Based on the results of our annual qualitative analysis of goodwill in 2017, we determined that it was more likely than not that the fair value of our reporting units exceeded their carrying amount and, as such, we did not need to perform the quantitative impairment test and there was no goodwill impairment.
Based on the results of our annual qualitative analysis of goodwill in 2016, we determined that it was more likely than not that the fair value of our reporting units exceeded their carrying amount and, as such, we did not need to perform the two-step impairment test and there was no goodwill impairment.
Estimates of fair value for all of our reporting units can be affected by a variety of external and internal factors. Potential events or circumstances that could reasonably be expected to negatively affect the key assumptions we used in estimating the fair value of our reporting units include adverse changes in our industry, increased competition, an inability to successfully introduce new products in the marketplace or to achieve internal forecasts, and a decline in our stock price. If the estimated fair value of our reporting units declines due to any of these factors, we may be required to record future goodwill impairment.
Income Taxes. In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our charge to income tax expense in the form of a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable. We consider past performance, future expected taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing authorities. If our estimates of these taxes are greater or less than actual results, an additional tax benefit or charge will result. We recognize the interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively.
In December 2017,the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (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 permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. We have recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in our consolidated financial statements for the year ended December 30, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Reform Act. The accounting is expected to be complete within one year of the date of enactment.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (GILTI) provisions of the Tax Reform Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Because of the complexity of the new provisions, we are continuing to evaluate how the provisions will be accounted for under U.S. GAAP wherein companies are allowed to make an accounting policy election of either (i) account for GILTI as a component of tax expense in the period in which we are subject to the rules (the period cost method), or (ii) account for GILTI in the Company’s measurement of deferred taxes (the deferred method). Currently, we have not elected a method and will only do so after we complete the analysis of the GILTI provisions and our election method will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in our taxable income related to GILTI and, if so, the impact that is expected.
Results of Operations
We intend this discussion of our financial condition and our 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, the primary factors that resulted in those changes and how certain accounting principles, policies and estimates affect our financial statements.
We use a 52 or 53 week fiscal year ending on the last Saturday in December. The years ended December 30, 2017, December 31, 2016 and December 26, 2015 included 52 weeks, 53 weeks and 52 weeks, respectively. The extra week in 2016 did not have a material impact on our results of operations. References in this report to 2017, 2016 and 2015 refer to the fiscal year unless explicitly stated otherwise.
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, income taxes and equity loss in investee. 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, graphics processing units (GPUs), professional GPUs and licensing portions of our intellectual property (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, technology for game consoles and licensing 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 any of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. Also included in this category are employee stock-based compensation expense, the charge related to the Sixth Amendment to the WSA with GLOBALFOUNDRIES (GF), restructuring and other special charges, net and amortization of acquired intangible assets. We also reported the results of former businesses in the All Other category because the operating results were not material.
The following table provides a summary of net revenue and operating income (loss) by segment for 2017, 2016 and 2015.
| 2017 | 2016 | 2015 | |||||||||
| (In millions) | |||||||||||
| Net revenue: | |||||||||||
| Computing and Graphics | $ | 3,029 | $ | 1,967 | $ | 1,805 | |||||
| Enterprise, Embedded and Semi-Custom | 2,300 | 2,305 | 2,186 | ||||||||
| Total net revenue | $ | 5,329 | $ | 4,272 | $ | 3,991 | |||||
| Operating income (loss): | |||||||||||
| Computing and Graphics | $ | 147 | $ | (238 | ) | $ | (502 | ) | |||
| Enterprise, Embedded and Semi-Custom | 154 | 283 | 215 | ||||||||
| All Other | (97 | ) | (417 | ) | (194 | ) | |||||
| Total operating income (loss) | $ | 204 | $ | (372 | ) | $ | (481 | ) |
Computing and Graphics
Computing and Graphics net revenue of $3.0 billion in 2017 increased by 54% compared to $2.0 billion in 2016 as a result of a 47% increase in average selling price and a 2% increase in unit shipments. The increase in the average selling price was primarily due to a favorable shift in product mix as we transitioned to our new Radeon™ GPU and Ryzen™ desktop processor products. The increase in unit shipments was primarily attributable to higher demand for our GPU products.
Computing and Graphics net revenue of $2.0 billion in 2016 increased by 9% compared to $1.8 billion in 2015 as a result of a 9% increase in unit shipments, offset by a 2% decrease in average selling price. The increase in unit shipments was primarily attributable to higher unit shipments of our GPU products, partially offset by lower unit shipments of our microprocessor products. The increase of unit shipments of our GPU products was primarily driven by demand for our Polaris architecture-based GPU products. The decrease in unit shipments of our microprocessor products was primarily due to lower unit shipments of our desktop microprocessor products due to lower demand, partially offset by higher shipments of notebook microprocessor products driven by higher demand for our 7th Generation A-Series notebook processors. The decrease in average selling price was primarily attributable to a decrease in average selling price of our desktop microprocessor and notebook GPU products due to a shift in our product mix, partially offset by an increase in average selling price of our channel GPU products primarily due to strong demand for our Polaris architecture-based GPU products.
Computing and Graphics operating income was $147 million in 2017 compared to an operating loss of $238 million in 2016. The improvement in operating results was primarily due to the increase in net revenue referenced above, partially offset by the related increase in cost of sales and an $84 million increase in operating expenses. Operating expenses increased for the reasons set forth under “Expenses” below.
Computing and Graphics operating loss was $238 million in 2016 compared to an operating loss of $502 million in 2015. The improvement in operating results was primarily due to the increase in net revenue referenced above and a decrease in operating expenses, partially offset by an increase in cost of sales primarily due to higher sales in 2016 compared to 2015. In 2015, cost of sales included an inventory write-down of $52 million as a result of lower than anticipated demand for primarily older-generation APU products. Operating expenses decreased for the reasons set forth under “Expenses” below.
Enterprise, Embedded and Semi-Custom
Enterprise, Embedded and Semi-Custom net revenue of $2.3 billion in 2017 was flat compared to 2016. IP related revenue and sales of our AMD EPYC™ datacenter processors, which were launched in June of 2017, were mostly offset by a decrease in non-recurring engineering (NRE) revenue and lower sales of our semi-custom SoC products.
Enterprise, Embedded and Semi-Custom net revenue of $2.3 billion in 2016 increased by 5% compared to net revenue of $2.2 billion in 2015. The increase in net revenue was primarily due to an increase in unit shipments of our semi-custom SoC products and NRE revenue. The increase in unit shipments was primarily driven by increased demand.
Enterprise, Embedded and Semi-Custom operating income was $154 million in 2017 compared to operating income of $283 million in 2016. The decline in operating results was primarily due to a $108 million increase in operating expenses driven primarily by datacenter-related operating expenses, and costs associated with the WSA for certain wafers purchased at another foundry, partially offset by IP related revenue. The decline in operating results was also due to $36 million less licensing gain recorded in
2017 related to the licensed IP to the THATIC JV compared to 2016. Operating expenses increased for the reasons set forth under “Expenses” below.
Enterprise, Embedded and Semi-Custom operating income was $283 million in 2016 compared to operating income of $215 million in 2015. The improvement in operating results was primarily due to the increase in net revenue referenced above, an $88 million licensing gain recorded in 2016 related to the Licensed IP to the THATIC JV, and a decrease in cost of sales, in part due to the absence of a technology node transition charge of $33 million recorded in 2015, partially offset by an increase in operating expenses. Operating expenses increased for the reasons set forth under “Expenses” below.
All Other
All Other operating loss of $97 million in 2017 was related to stock-based compensation expense.
All Other operating loss of $417 million in 2016 included a charge of $340 million, which was comprised of the $100 million payment under the Sixth Amendment and the $240 million value of the warrant under the Warrant Agreement, and stock-based compensation expense of $86 million, partially offset by restructuring reversals of $10 million.
All Other operating loss of $194 million in 2015 included restructuring and other special charges, net of $129 million and stock-based compensation expense of $63 million. Restructuring and other special charges, net of $129 million included $76 million related to our decision to exit from the dense server systems business, $37 million related to our 2015 Restructuring Plan and $16 million related to our 2014 Restructuring Plan.
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 consolidated statement of operations data for 2017, 2016 and 2015:
| 2017 | 2016 | 2015 | |||||||||
| (In millions, except for percentages) | |||||||||||
| Cost of sales | $ | 3,506 | $ | 3,274 | $ | 2,911 | |||||
| Gross margin | 1,823 | 998 | 1,080 | ||||||||
| Gross margin percentage | 34 | % | 23 | % | 27 | % | |||||
| Research and development | 1,160 | 1,008 | 947 | ||||||||
| Marketing, general and administrative | 511 | 460 | 482 | ||||||||
| Amortization of acquired intangible assets | — | — | 3 | ||||||||
| Restructuring and other special charges, net | — | (10 | ) | 129 | |||||||
| Licensing gain | (52 | ) | (88 | ) | — | ||||||
| Interest expense | (126 | ) | (156 | ) | (160 | ) | |||||
| Other income (expense), net | (9 | ) | 80 | (5 | ) | ||||||
| Provision for income taxes | 19 | 39 | 14 | ||||||||
| Equity loss in investee | $ | (7 | ) | $ | (10 | ) | $ | — |
Gross Margin
Gross margin as a percentage of net revenue was 34% in 2017 compared to 23% in 2016. Gross margin improved in 2017 primarily due to the absence of the charge of $340 million recorded in 2016, described below, which accounted for eight gross margin percentage points. In addition, the increase in gross margin percentage for 2017 compared to 2016 was due to a favorable shift in product mix to new Radeon™ GPU and Ryzen™ desktop processor products in the Computing and Graphics segment.
Gross margin as a percentage of net revenue was 23% in 2016 compared to 27% in 2015. Gross margin in 2016 was adversely impacted by a charge of $340 million, comprised of a $100 million payment under the Sixth Amendment and the value of the warrant of $240 million under the Warrant Agreement. The impact of the charge accounted for eight gross margin percentage points. Gross margin in 2015 was adversely impacted by an inventory write-down of $65 million, which was primarily the result of lower anticipated demand for older-generation APUs, and a technology node transition charge of $33 million. The impact of the inventory write-down and the technology node transition charge accounted for approximately two percentage points. In the absence of these charges, the gross margin would have increased by two percentage points, primarily driven by improved product mix.
Expenses
Research and Development Expenses
Research and development expenses of $1.2 billion in 2017 increased by $152 million, or 15%, compared to $1.0 billion in 2016. The increase was primarily due to a $92 million increase in product engineering and design related costs, driven by strategic investments in datacenter and other high performance products attributable to both segments, and also due to higher annual employee incentives driven by improved financial performance.
Research and development expenses of $1.0 billion in 2016 increased by $61 million, or 6%, compared to $947 million in 2015. The increase was primarily due to a $138 million increase in research and development expenses attributable to our Enterprise, Embedded and Semi-Custom segment and a $13 million increase attributable to our All Other category, partially offset by a $90 million decrease in research and development expenses attributable to our Computing and Graphics segment. Research and development expenses attributable to our Enterprise, Embedded and Semi-Custom segment increased primarily due to a $128 million increase in product engineering and design costs. Research and development expenses attributable to our All Other category increased primarily due to a $13 million increase in stock-based compensation expense. Research and development expenses attributable to our Computing and Graphics segment decreased primarily due to a $108 million decrease in product engineering and design costs.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses of $511 million in 2017 increased by $51 million, or 11%, compared to $460 million in 2016. The increase was primarily due to a $30 million increase in sales and marketing activities attributable to both segments and also due to higher annual employee incentives driven by our improved financial performance.
Marketing, general and administrative expenses of $460 million in 2016 decreased by $22 million, or 5%, compared to $482 million in 2015. The decrease was primarily due to a $40 million decrease in marketing, general and administrative expenses attributable to our Computing and Graphics segment primarily due to an $18 million decrease in sales and marketing activities and a $22 million decrease in other general and administrative expenses, partially offset by a $6 million increase in other general and administrative expenses attributable to our Enterprise, Embedded and Semi-Custom segment and a $12 million increase attributable to our All Other category primarily due to an $11 million increase in stock-based compensation expense.
Restructuring and Other Special Charges, Net
2015 Restructuring Plan
In the third quarter of 2015, we implemented a restructuring plan (2015 Restructuring Plan) focused on our ongoing efforts to simplify our business and better align resources around our priorities and business outlook. The 2015 Restructuring Plan involved a reduction of global headcount by approximately 5% and included organizational actions such as outsourcing certain IT services and application development. During 2015, we recorded a $37 million restructuring charge which consisted of $27 million for severance and benefit costs, $1 million for facilities-related costs and $9 million for intangible asset-related charges. The actions associated with the 2015 Restructuring Plan were completed during the first quarter of 2017. The liabilities related to the 2015 Restructuring Plan recorded in Other current liabilities and Other long-term liabilities on our consolidated balance sheets as of December 30, 2017 and December 31, 2016 were zero and $3 million, respectively.
2014 Restructuring Plan
In the fourth quarter of 2014, we implemented a restructuring plan (2014 Restructuring Plan) designed to improve operating efficiencies. The 2014 Restructuring Plan involved a reduction of global headcount by approximately 6% and an alignment of our real estate footprint with our reduced headcount. We recorded a $57 million restructuring charge in the fourth quarter of 2014, which consisted of $44 million for severance and costs related to the continuation of certain employee benefits, $6 million for contract or program termination costs, $1 million for facilities-related costs and $6 million for asset impairments, a non-cash charge. During 2015, we recorded a $16 million restructuring charge which consisted of $5 million non-cash charge related to asset impairments, $2 million for severance and related benefits and $9 million for facilities-related costs. The 2014 Restructuring Plan was completed during the third quarter of 2015.The liabilities related to the 2014 Restructuring Plan recorded in Other current liabilities and Other long-term liabilities on our consolidated balance sheets as of December 30, 2017 and December 31, 2016 were zero and $4 million, respectively.
Dense Server Systems Business Exit
As a part of our strategy to simplify and sharpen our investment focus, we exited the dense server systems business, formerly SeaMicro, in the first quarter of 2015. As a result, we recorded a charge of $76 million in “Restructuring and other special charges, net” on our consolidated statements of operations during 2015. This charge consisted of an impairment charge of $62 million related to the acquired intangible assets. We concluded that the carrying value of the acquired intangible assets associated with our dense server systems business was fully impaired as we did not have plans to utilize the related freedom fabric technology in any of our future products nor did we have any plans at that time to monetize the associated intellectual property. In addition, the exit charge consisted of a $7 million non-cash charge related to asset impairments, $4 million of severance and related benefits and $3 million for contract or program termination costs. We substantially completed this exit activity during the second quarter of 2016.
Interest Expense
Interest expense of $126 million in 2017 decreased by $30 million compared to $156 million in 2016, primarily due to lower weighted average interest rates and lower debt balances.
Interest expense of $156 million in 2016 decreased by $4 million compared to $160 million in 2015, primarily due to the repurchases of debt bearing higher interest rates and issuance of new debt at a lower interest rate in late 2016.
Other Income (Expense), Net
Other expense, net of $9 million in 2017 changed by $89 million compared to $80 million Other income, net in 2016. Other expense, net in 2017 consisted of $12 million total loss on debt redemption partially offset by a $3 million gain for final settlement related to the sale of 85% of the equity interest in the ATMP facilities. The change from 2016 to 2017 was primarily the result of the absence in 2017 of the substantial gain on sale of equity interests in ATMP JV that was partially offset by debt repurchases which was realized in 2016.
Other income, net of $80 million in 2016 changed by $85 million compared to $5 million Other expense, net in 2015, primarily due to net gain on sale of equity interests in the ATMP JV of $146 million partially offset by the $68 million total loss on debt repurchases in 2016.
Income Taxes
In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (Tax Reform Act). The Tax Reform Act includes significant changes to the U.S. corporate income tax system which reduces the U.S. federal corporate tax rate from 35% to 21% as of January 1, 2018, shifts to a modified territorial tax regime which requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign-sourced earnings.
We recorded an income tax provision of $19 million, $39 million and $14 million in 2017, 2016 and 2015, respectively.
The income tax provision in 2017 was primarily due to $39 million of foreign taxes in profitable locations including $27 million of withholding taxes on cross-border transactions where no foreign tax credit is expected to be realizable, offset by $1 million of tax benefits for Canadian tax credits and $19 million primarily attributable to the reversal of the valuation allowance on Alternate Minimum Tax (AMT) credit carryovers due to the Tax Reform Act.
The income tax provision in 2016 was primarily due to $41 million of foreign taxes in profitable locations including $27 million attributable to gain on the sale of 85% of the ownership interest in the subsidiary operating a factory in Suzhou and $9 million of withholding taxes on cross-border transactions where no foreign tax credit is expected to be realizable, offset by $2 million of tax benefits for Canadian tax credits and the monetization of certain U.S. tax credits.
The income tax provision in 2015 was primarily due to $16 million of foreign taxes in profitable locations, offset by $2 million of tax benefits for Canadian tax credits and the monetization of certain U.S. tax credits.
As of December 26, 2015, the Italian tax authorities had concluded their audit of our subsidiaries’ activities in Italy for the years 2003 through 2013. We entered into a settlement for $11 million in taxes and penalties, which was reflected in full in the 2015 tax provision and $2 million in interest.
As of December 30, 2017, substantially all of our U.S. and foreign deferred tax assets, net of deferred tax liabilities, continued to be subject to a valuation allowance. The realization of these assets is dependent on substantial future taxable income which in management’s estimate at December 30, 2017 is not more likely than not to be achieved.
Stock-Based Compensation Expense
We allocated stock-based compensation expense related to employee stock options and restricted stock units for the years ended December 30, 2017, December 31, 2016 and December 26, 2015 in our consolidated statements of operations as follows:
| 2017 | 2016 | 2015 | |||||||||
| (In millions) | |||||||||||
| Cost of sales | $ | 2 | $ | 2 | $ | 3 | |||||
| Research and development | 57 | 49 | 36 | ||||||||
| Marketing, general and administrative | 38 | 35 | 24 | ||||||||
| Total stock-based compensation expense, net of tax of $0 | $ | 97 | $ | 86 | $ | 63 |
During 2017, we did not realize any excess tax benefits related to stock-based compensation and therefore we did not record any effects relating to operating cash flows. During 2016 and 2015, we did not realize any excess tax benefits related to stock-based compensation and therefore we did not record any effects relating to financing cash flows.
Stock-based compensation expense of $97 million in 2017 increased by $11 million as compared to $86 million in 2016. The increase was primarily due to a higher weighted average grant date fair value of unvested restricted stock units in 2017 compared to 2016. The increase was also driven by fewer actual forfeitures in 2017 compared to 2016.
Stock-based compensation expense of $86 million in 2016 increased by $23 million as compared to $63 million in 2015. The increase was primarily due to a higher weighted average grant date fair value and higher number of shares related to restricted stock units granted in 2016 compared to the restricted stock units granted in 2015, which became fully amortized in 2016. The increase was also driven by performance-based restricted stock units with market conditions granted in 2015 and 2016.
GLOBALFOUNDRIES
Formation and Accounting
On March 2, 2009, we consummated the transactions contemplated by the Master Transaction Agreement among us, Mubadala Technology Investments LLC, or Mubadala Tech (formerly, Advanced Technology Investment Company LLC) and WCH, pursuant to which we formed GLOBALFOUNDRIES Inc. (GF). In connection with the consummation of the transactions contemplated by the Master Transaction Agreement, AMD, Mubadala Tech and GF entered into a Wafer Supply Agreement (the WSA), a Funding Agreement (the Funding Agreement) and a Shareholders’ Agreement (the Shareholders’ Agreement) on March 2, 2009.
On March 4, 2012, as partial consideration for certain rights received under a second amendment to the WSA, we transferred to GF all of the remaining capital stock of GF that we owned. In addition, as of March 4, 2012, the Funding Agreement was terminated and we were no longer party to the Shareholders’ Agreement. As a result of these transactions, we no longer owned any GF capital stock as of March 4, 2012.
GF continues to be a related party of ours because Mubadala and Mubadala Tech are affiliated with WCH, a significant stockholder of ours. WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala.
Wafer Supply Agreement
The WSA governs the terms by which we purchase products manufactured by GF. Pursuant to the WSA, we are required to purchase from GF all of our microprocessor and APU product requirements and a certain portion of our GPU product requirements, with limited exceptions. If we acquire a third-party business that manufactures microprocessor and APU products, we will have up to two years to transition the manufacture of such microprocessor and APU products to GF.
The WSA terminates no later than March 2, 2024. GF has agreed to use commercially reasonable efforts to assist us to transition the supply of products to another provider and to continue to fulfill purchase orders for up to two years following the termination or expiration of the WSA. During the transition period, pricing for microprocessor and APU products will remain as set forth in the WSA, but our purchase commitments to GF will no longer apply.
Sixth Amendment to Wafer Supply Agreement
On August 30, 2016, we entered into a sixth amendment (the Sixth Amendment) to the WSA with GF. The Sixth Amendment modified certain terms of the WSA applicable to wafers for our microprocessor, graphics processor and semi-custom products for a five-year period from January 1, 2016 to December 31, 2020. We agreed to establish with GF a comprehensive framework for technology collaboration for the 7nm technology node.
The Sixth Amendment also provides us 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 us greater flexibility in sourcing foundry services across our product portfolio. In consideration for these rights, we agreed to pay GF $100 million in installments starting in the fourth fiscal quarter of 2016 through the third fiscal quarter of 2017. From the fourth fiscal quarter of 2016 to the third fiscal quarter of 2017, we paid GF $25 million each quarter and as of December 30, 2017, we had paid GF $100 million in aggregate. Starting in 2017 and continuing through 2020, we 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 Sixth Amendment, we agreed with GF to annual wafer purchase targets that increase from 2016 through 2020. If we do not meet the annual wafer purchase target for any calendar year, we will be required to pay to GF a portion of the difference between our actual wafer purchases and the wafer purchase target for that year. The annual targets were established based on our business and market expectations and took into account the limited waiver we received for certain products. We met our 2017 annual wafer purchase target.
We agreed with GF on fixed pricing for wafers purchased during 2016 and established a framework to agree on annual wafer pricing for the years 2017 to 2020. AMD and GF had agreed on pricing for wafer purchases for 2017.
Our total purchases from GF related to wafer manufacturing, research and development activities and other for 2017, 2016 and 2015 were $1.1 billion, $0.7 billion and $0.9 billion, respectively. Included in the total purchases for the year ended December 30, 2017 are amounts related to the volume of certain wafers purchased from another wafer foundry, as agreed to by us and GF under the Sixth Amendment. As of December 30, 2017 and December 31, 2016, the amount of prepayment and other receivables related to GF was $27 million and $32 million, respectively, included in Prepayment and other receivables - related parties on our consolidated balance sheets. As of December 30, 2017 and December 31, 2016, the amount of payable to GF was $241 million and $255 million, respectively, included in Payables to related parties on our consolidated balance sheets.
Warrant Agreement
Also on August 30, 2016, in consideration of the limited waiver and rights under the Sixth Amendment, we entered into a warrant agreement (the Warrant Agreement) with WCH, a wholly-owned subsidiary of Mubadala. Under the Warrant Agreement, WCH and its permitted assigns are entitled to purchase 75 million shares of our common stock (the Warrant Shares) at a purchase price of $5.98 per share. The warrant under the Warrant Agreement 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 or through any other entities directly and indirectly owned by Mubadala or its subsidiaries, an aggregate of more than 19.99% of our outstanding capital stock after any such exercise.
Equity Interest Purchase Agreement - ATMP Joint Venture
In April 2016, we and certain of our 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 our subsidiaries own the remaining 15%. We have no obligations to fund the ATMP JV.
As the result of the transaction, we received approximately $342 million, including purchase price adjustments, in net cash proceeds for selling 85% of the equity interest in each of Suzhou TF-AMD Semiconductor Co., Ltd. and TF AMD Microelectronics (Penang) Sdn. Bhd. These proceeds, net of certain transaction costs, were included in investing activities on our consolidated statements of cash flows for the year ended December 31, 2016.
We recognized a net pre-tax gain on the sale of the 85% equity interest in ATMP JV of $146 million for the year ended December 31, 2016, which was recognized in Other income (expense), net on our consolidated statements of operations. The net pre-tax gain reflects the excess of the sum of net cash proceeds and fair value of our retained 15% equity interests in the ATMP JV over the sum of the net book values of our former subsidiaries and other closing costs directly attributed to the divestiture. The above gain includes $11 million in excess of fair value of our retained interest over the corresponding net book values. During
2017, we recorded a $3 million pre-tax gain for final settlement related to the sale of 85% of the equity interest in ATMP facilities in Other income (expense), net on our consolidated statements of operations.
We account for our equity interests in the ATMP JV under the equity method of accounting due to our significant influence over the ATMP JV. As of December 30, 2017 and December 31, 2016, the carrying value of our investment in the ATMP JV was $58 million and $59 million, respectively.
Following the deconsolidation, the ATMP JV is our related party. The ATMP JV provides assembly, test, mark and packaging (ATMP) services to us. We currently pay the ATMP JV for ATMP services on a cost-plus basis. Our total purchases from the ATMP JV during 2017 and 2016 amounted to approximately $438 million and $265 million, respectively. As of December 30, 2017 and December 31, 2016, the amount payable to the ATMP JV was $171 million and $128 million, respectively, included in Payables to related parties on our consolidated balance sheets.
During 2017 and 2016, we recorded losses of $7 million and $10 million, respectively, in Equity loss in investee on our consolidated statements of operations, which included certain expenses incurred by us on behalf of the ATMP JV.
Equity Joint Venture
In February 2016, we and 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). Our equity share in China JV1 and China JV2 is a majority and minority interest, respectively, funded by our contribution of certain of our patents. The JV Partner is responsible for the initial and on-going financing of the THATIC JV’s operations. We have no obligations to fund the THATIC JV.
We 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 JV Partner. We determined that we are not the primary beneficiary of either China JV1 or China JV2, as we do not have unilateral power to direct selling and marketing, manufacturing and product development activities related to the THATIC JV's products. Accordingly, we do not consolidate either of these entities and therefore account for our investments in the THATIC JV under the equity method of accounting. The THATIC JV is a related party of ours.
In February 2016, we licensed certain of our intellectual property (Licensed IP) to the THATIC JV for a total of approximately $293 million in 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 also provided certain engineering and technical support to the THATIC JV in connection with the product development. In March 2017, we entered into a development and intellectual property agreement (Development and IP) with THATIC JV, and also expect 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, we enter into certain agreements with the THATIC JV to provide other services primarily related to research and development.
We 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 our 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 earned. We classify Licensed IP income and royalty income associated with the February 2016 agreement as other operating income. During 2017, we recognized a $52 million licensing gain associated with the Licensed IP. In addition, during 2017 we recognized $36 million of Development and IP fees and other services fees of $12 million as credits to research and development expenses. During 2016, we recognized an $88 million licensing gain. No credits for the Development and IP agreement and other services was recognized as credits to research and development by us during 2016. No royalty income was recognized by us during 2017 and 2016.
Our total exposure to losses through our investment in the THATIC JV is limited to our investments in the THATIC JV, which was zero as of December 30, 2017. Our share in the net losses of the THATIC JV for 2017 was not material and is not recorded in our consolidated statement of operations since we are not obligated to fund the THATIC JV's losses in excess of our investment in the THATIC JV. Our receivable from the THATIC JV for these agreements was $3 million and zero as of December 30, 2017 and December 31, 2016, respectively, included in Prepayment and other receivables - related parties on our consolidated balance sheets. As of December 30, 2017 and December 31, 2016, the total assets and liabilities of the THATIC JV were not material.
International Sales
International sales as a percentage of net revenue were 74% in 2017 and 78% in 2016. The decrease in international sales as a percentage of net revenue in 2017 compared to 2016 was primarily driven by a higher proportion of revenue from domestic sales of our desktop processors, graphics processors and semi-custom SoC products.
International sales as a percentage of net revenue were 78% in 2016 and 75% in 2015. The increase in international sales as a percentage of net revenue in 2016 compared to 2015 was primarily driven by higher proportion of revenue from international sales of our semi-custom SoC products.
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.
FINANCIAL CONDITION
Liquidity
As of December 30, 2017, our cash and cash equivalents consisted of cash, government money market funds and commercial paper. Our cash and cash equivalents as of December 30, 2017 were $1.2 billion compared to $1.3 billion as of December 31, 2016. The decrease during the year was due to net cash used in our investing and financing activities, partially offset by net cash provided by our operating activities discussed below. The percentage of cash and cash equivalents held domestically was 95% as of December 30, 2017, and 98% as of December 31, 2016.
Our cash flows for fiscal 2017, 2016 and 2015 were as follows:
| 2017 | 2016 | 2015 | |||||||||
| (In millions) | |||||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 68 | $ | 90 | $ | (226 | ) | ||||
| Investing activities | (114 | ) | 267 | 147 | |||||||
| Financing activities | (33 | ) | 122 | 59 | |||||||
| Net increase (decrease) in cash and cash equivalents | $ | (79 | ) | $ | 479 | $ | (20 | ) |
Our debt obligations of $1.40 billion, net of unamortized debt discount of $286 million, associated with the 2.125% Notes, as of December 30, 2017 decreased compared to $1.44 billion as of December 31, 2016.
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 that in the event we decide to obtain external funding, we may be able to access the capital markets on terms and in amounts adequate to meet our objectives.
Should we require additional funding such as to meet payment obligations of our long-term debt when due, we may need to raise the required funds through borrowings or public or private sales of debt or equity securities, which may be issued from time to time under an effective registration statement, through the issuance of securities in a transaction exempt from registration under the Securities Act of 1933, as amended, or a combination of one or more of the foregoing. Uncertain global economic conditions have in the past adversely impacted, and may in the future adversely impact, our business. If market conditions deteriorate, we may be limited in our ability to access the capital markets to meet liquidity needs on favorable terms or at all, which could adversely affect our liquidity and financial condition including our ability to refinance maturing liabilities.
Operating Activities
Net cash provided by operating activities was $68 million in 2017 compared to net cash provided by operating activities of $90 million in 2016. The decrease in cash inflows from operating activities was primarily due to higher operating costs including higher wafer purchases, higher labor costs and payments to GF in aggregate of $50 million of a limited waiver of rights under the Sixth Amendment, partially offset by higher cash collection primarily due to higher revenue and lower interest payments resulting from debt reductions.
Net cash provided by operating activities was $90 million in 2016 compared to net cash used in operating activities of $226 million in 2015. The increase in cash flows from operating activities was primarily due to lower operating expenses including lower labor costs and lower restructuring-related payments, the receipt of $97 million associated with the licensing agreement with THATIC JV and higher sales and timing of related collections, partially offset by timing of accounts payable payments.
During 2017, we did not realize any excess tax benefit related to stock-based compensation. Therefore, we did not record any effects relating to operating cash flows for these periods.
Investing Activities
Net cash used in investing activities was $114 million in 2017, which consisted primarily of a cash outflow of $113 million for purchases of property, plant and equipment.
Net cash provided by investing activities was $267 million in 2016, which consisted of a net cash inflow of $342 million from sale of equity interests in the ATMP JV, partially offset by a cash outflow of $77 million for purchases of property, plant and equipment.
Net cash provided by investing activities was $147 million in 2015, which consisted of a net cash inflow of $235 million from purchases, sales and maturities of available for sale securities, partially offset by a net cash outflow of $88 million for purchases and sales of property, plant and equipment.
Financing Activities
Net cash used in financing activities was $33 million in 2017, primarily due to the repurchases of an aggregate principal amount of $103 million of our outstanding 6.75% Notes and 7.00% Notes for $110 million in cash and $13 million for tax withholding on the vesting of restricted stock, partially offset by the $70 million net proceeds from our Secured Revolving Line of Credit and the $20 million proceeds from issuance of common stock under stock-based compensation equity plans.
Net cash provided by financing activities was $122 million in 2016, primarily due to the $782 million net proceeds from the issuance of our 2.125% Notes, the $667 million net proceeds from selling 115 million shares of our common stock and the $20 million proceeds from issuance of common stock under stock-based compensation equity plans, partially offset by the repurchases of an aggregate principal amount of $1.1 billion of our outstanding 6.75% Notes, 7.75% Notes, 7.50% Notes and 7.00% Notes for $1.1 billion in cash and repayments in aggregate of $230 million of our Secured Revolving Line of Credit.
Net cash provided by financing activities was $59 million in 2015, primarily due to net proceeds from borrowings pursuant to our Secured Revolving Line of Credit of $100 million, of which $42 million was used to repay the remaining aggregate principal amount of our 6.00% Convertible Senior Notes due 2015 (6.00% Notes) during the second quarter of 2015. In addition, during 2015, we received $5 million from the exercise of employee stock options.
During 2016 and 2015, we did not realize any excess tax benefit related to stock-based compensation. Therefore, we did not record any effects relating to financing cash flows for these periods.
Contractual Obligations
The following table summarizes our consolidated principal contractual cash obligations, as of December 30, 2017, and is supplemented by the discussion following the table:
| Payment due by period | |||||||||||||||||||||||||||
| (In millions) | Total | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 and thereafter | ||||||||||||||||||||
| Senior Notes | |||||||||||||||||||||||||||
| 6.75% Notes | $ | 166 | $ | — | $ | 166 | $ | — | $ | — | $ | — | $ | — | |||||||||||||
| 7.50% Notes | 347 | — | — | — | — | 347 | — | ||||||||||||||||||||
| 7.00% Notes | 311 | — | — | — | — | — | 311 | ||||||||||||||||||||
| 2.125% Notes | 805 | — | — | — | — | — | 805 | ||||||||||||||||||||
| Secured Revolving Line of Credit | 70 | 70 | — | — | — | — | — | ||||||||||||||||||||
| Other long-term liabilities(1) | 109 | 51 | 45 | 8 | 3 | — | 2 | ||||||||||||||||||||
| Aggregate interest obligation (2) | 459 | 78 | 72 | 66 | 66 | 65 | 112 | ||||||||||||||||||||
| Operating leases | 255 | 40 | 35 | 31 | 29 | 28 | 92 | ||||||||||||||||||||
| Purchase obligations (3) | 513 | 346 | 65 | 40 | 33 | 29 | — | ||||||||||||||||||||
| Obligations to GF (4) | 2,841 | 1,297 | 764 | 780 | — | — | — | ||||||||||||||||||||
| Total contractual obligations (5) | $ | 5,876 | $ | 1,882 | $ | 1,147 | $ | 925 | $ | 131 | $ | 469 | $ | 1,322 |
| (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) | These minimum purchase obligations are our contractual minimums and do not necessarily reflect our actual expected expenditures, which could be significantly different. 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. |
| (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. |
Senior Notes
6.75% Senior Notes Due 2019
On February 26, 2014, we issued $600 million of our 6.75% Notes. Our 6.75% Notes are our general unsecured senior obligations. Interest is payable on March 1 and September 1 of each year beginning September 1, 2014 until the maturity date of March 1, 2019. Our 6.75% Notes are governed by the terms of an indenture (the 6.75% Indenture) dated February 26, 2014 between us and Wells Fargo Bank, N.A., as trustee.
At any time before March 1, 2019, we may redeem some or all of our 6.75% Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a “make whole” premium (as set forth in the 6.75% Indenture).
In 2016, we repurchased $404 million in aggregate principal amount of our 6.75% Notes pursuant to a partial tender offer for $442 million. During 2017, we settled $30 million in aggregate principal amount of our 6.75% Notes for $26 million in cash and $5 million in treasury stock. As of December 30, 2017, the outstanding aggregate principal amount of our 6.75% Notes was $166 million.
See Note 11 of “Notes to Consolidated Financial Statements” below, for additional information regarding our 6.75% Notes.
7.50% Senior Notes Due 2022
On August 15, 2012, we issued $500 million of our 7.50% Notes. Our 7.50% Notes are our general unsecured senior obligations. Interest is payable on February 15 and August 15 of each year beginning February 15, 2013 until the maturity date of August 15, 2022. The 7.50% Notes are governed by the terms of an indenture (the 7.50% Indenture) dated August 15, 2012 between us and Wells Fargo Bank, N.A., as trustee.
Prior to August 15, 2022, we may redeem some or all of our 7.50% Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a “make whole” premium (as set forth in the 7.50% Indenture).
In 2014, we repurchased $25 million in aggregate principal amount of our 7.50% Notes. In 2016, we repurchased $125 million in aggregate principal amount of our 7.50% Notes. During 2017, we settled $3 million in aggregate principal amount of its 7.50% Notes for $3 million in treasury stock. As of December 30, 2017, the outstanding aggregate principal amount of our 7.50% Notes was $347 million.
See Note 11 of “Notes to Consolidated Financial Statements” below, for additional information regarding our 7.50% Notes.
7.00% Senior Notes Due 2024
On June 16, 2014, we issued $500 million of our 7.00% Notes. The 7.00% Notes are our general unsecured senior obligations. 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 us and Wells Fargo Bank, N.A., as trustee.
Prior to July 1, 2019, we may redeem some or all of the 7.00% Notes at a price equal to 100% of the principal amount plus accrued and unpaid interest and a “make whole” premium (as set forth in the 7.00% Indenture).
Starting July 1, 2019, we may redeem our 7.00% Notes for cash at the following specified prices plus accrued and unpaid interest:
| Period | Price as Percentage of Principal Amount |
| Beginning on July 1, 2019 through June 30, 2020 | 103.500% |
| Beginning on July 1, 2020 through June 30, 2021 | 102.333% |
| Beginning on July 1, 2021 through June 30, 2022 | 101.167% |
| On July 1, 2022 and thereafter | 100.000% |
In 2016, we settled $84 million in aggregate principal amount of our 7.00% Notes for $77 million in cash and $8 million in treasury stock. During 2017, we settled $105 million in aggregate principal amount of our 7.00% Notes for $84 million in cash and $26 million in treasury stock. As of December 30, 2017, the outstanding aggregate principal amount of the 7.00% Notes was $311 million.
See Note 11 of “Notes to Consolidated Financial Statements” below, for additional information regarding our 7.00% Notes.
2.125% Convertible Senior Notes Due 2026
On September 14, 2016, we issued $700 million in aggregate principal amount of our 2.125% Notes. We also granted an option to the underwriters to purchase up to an additional $105 million aggregate principal amount of our 2.125% Notes. On September 28, 2016, this option was exercised in full and we issued an additional $105 million aggregate principal amount of our 2.125% Notes.
Our 2.125% Notes are our general unsecured senior obligations and will mature on September 1, 2026, unless earlier repurchased or converted. Interest is payable in arrears on March 1 and September 1 of each year beginning on March 1, 2017. Our 2.125% Notes are governed by the terms of a base indenture and a supplemental indenture (together the 2.125% Indentures) dated September 14, 2016 between us and Wells Fargo Bank, N.A., as trustee.
Holders may convert their notes at their option at any time prior to the close of business on the business day immediately preceding June 1, 2026 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2016 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon
the occurrence of specified corporate events. On or after June 1, 2026 and until the close of business on the business day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of the our common stock, at our election. During the fourth quarter of 2017, none of the conversion conditions were satisfied and as a result, the 2.125% Notes are not eligible for conversion during the first calendar quarter of 2018.We may not redeem the notes prior to the maturity date, and no sinking fund is provided for the notes.
The conversion rate is initially 125.0031 shares of common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $8.00 per share of common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, we will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event in certain circumstances.
If we undergo a fundamental change prior to the maturity date of the notes, holders may require us to repurchase for cash all or any portion of their notes at a fundamental change repurchase price equal to 100% of the principal amount of the notes to be repurchased plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
As of December 30, 2017, the outstanding aggregate principal amount of our 2.125% Notes was $805 million. See Note 11 of “Notes to Consolidated Financial Statements” below for additional information regarding our 2.125% Notes.
Potential Repurchase of Outstanding Notes
We may elect to purchase or otherwise retire all or a portion of our 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 we believe the market conditions are favorable to do so.
Secured Revolving Line of Credit
Loan and Security Agreement
We and our subsidiary, AMD International Sales & Service, Ltd. (together, the Borrowers), entered into a loan and security agreement on November 12, 2013, as amended on December 11, 2014 (the Loan Agreement), for our secured revolving line of credit for a principal amount of up to $500 million (the Secured Revolving Line of Credit), with up to $75 million available for issuance of letters of credit, with a group of lenders and Bank of America, N.A., acting as agent for the lenders (the Agent). Our Secured Revolving Line of Credit had a maturity date of November 12, 2018. Borrowings under our Secured Revolving Line of Credit were limited to up to 85% of eligible account receivable minus certain reserves and may be used for general corporate purposes including working capital needs.
Amended and Restated Loan and Security Agreement
On April 14, 2015, the Borrowers and ATI Technologies ULC (collectively, the Loan Parties), amended and restated the Loan Agreement (the Amended and Restated Loan Agreement) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders (the Lenders) and the Agent.
The Amended and Restated Loan Agreement provides for a Secured Revolving Line of Credit for a principal amount up to $500 million with up to $75 million available for issuance of letters of credit, which remained unchanged from the Loan Agreement. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible accounts receivable (90% for certain qualified eligible accounts receivable) minus specified reserves. The size of the commitments under the Secured Revolving Line of Credit may be increased by up to an aggregate amount of $200 million.
The Secured Revolving Line of Credit matures on April 14, 2020 and is secured by a first priority security interest in the Loan Parties’ accounts receivable, inventory, deposit accounts maintained with the Agent and other specified assets including books and records.
First Amendment to the Amended and Restated Loan and Security Agreement
On June 10, 2015, the Loan Parties entered into a first amendment to the Amended and Restated Loan and Security Agreement (the First Amendment) by and among the Loan Parties, the Lenders and the Agent, which modifies the Amended and Restated Loan and Security Agreement. Amendments to the Amended and Restated Loan Agreement effected by the First Amendment included the addition of exceptions to the liens and asset sale covenants to permit the Loan Parties to enter into certain supply chain finance arrangements, as well as the addition of certain definitions related thereto.
Second Amendment to the Amended and Restated Loan and Security Agreement
On April 29, 2016, the Loan Parties entered into a second amendment to the Amended and Restated Loan and Security Agreement (the Second Amendment) by and among the Loan Parties, the Lenders and the Agent, which modifies the Amended and Restated Loan and Security Agreement. The primary amendment to the Amended and Restated Loan Agreement effected by the Second Amendment related to the expansion of the definition of the term "Permitted Asset Dispositions" to include the sale or transfer of inventory to the ATMP JV pursuant to the Equity Interest Purchase Agreement between us and TFME.
Third Amendment to the Amended and Restated Loan and Security Agreement
On June 21, 2016, the Loan Parties entered into a third amendment to the Amended and Restated Loan and Security Agreement (the Third Amendment) by and among the Loan Parties, the Lenders and the Agent, which modifies the Amended and Restated Loan and Security Agreement. Amendments to the Amended and Restated Loan Agreement effected by the Third Amendment included the further expansion of the asset sale covenants to permit the Loan Parties to enter into certain supply chain finance arrangements.
Fourth Amendment to the Amended and Restated Loan and Security Agreement
On September 7, 2016, the Loan Parties entered into a fourth amendment to the Amended and Restated Loan and Security Agreement (the Fourth Amendment) by and among the Loan Parties, the Lenders and the Agent, which modifies the Amended and Restated Loan and Security Agreement. The primary amendment to the Amended and Restated Loan agreement effected by the Fourth Amendment increased the dollar limit as set forth the definition related to certain supply chain finance arrangements.
Fifth Amendment to the Amended and Restated Loan and Security Agreement
On March 21, 2017, the Loan Parties entered into a fifth amendment to the Amended and Restated Loan Agreement (the Fifth Amendment) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders and the Agent, which modifies the Amended and Restated Loan Agreement. The Fifth Amendment amends the Amended and Restated Loan Agreement by, among other things, extending the maturity date of the Secured Revolving Line of Credit from April 14, 2020 to March 21, 2022, reducing the Applicable Margin (as defined in the Amended and Restated Loan Agreement), reducing the commitment fee, lowering the minimum threshold of Availability (as defined in the Amended and Restated Loan Agreement) required to be maintained by the Company and AMDISS in order to avoid cash dominion, amending the borrowing base reporting requirement, amending maximum dollar limits related to supply chain finance arrangements, increasing the LC Facility Fees (as defined in the Amended and Restated Loan Agreement) and reducing the amount of the Secured Revolving Line of Credit available for the issuance for letters of credit from $75 million to $45 million.
The Amended and Restated Loan Agreement provides for a Secured Revolving Line of Credit for a principal amount up to $500 million with up to $45 million available for issuance of letters of credit. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible accounts receivable (90% for certain qualified eligible accounts receivable), minus specified reserves. The size of the commitments under the Secured Revolving Line of Credit may be increased by up to an aggregate amount of $200 million.
The Secured Revolving Line of Credit is secured by a first priority security interest in the Loan Parties’ accounts receivable, inventory, deposit accounts maintained with the Agent and other specified assets, including books and records.
Sixth Amendment to the Amended and Restated Loan and Security Agreement
On September 19, 2017, the Loan Parties entered into a sixth amendment to the Amended and Restated Loan Agreement (the Sixth Amendment) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders and the Agent, which modifies the Amended and Restated Loan Agreement. The Sixth Amendment amends the definition of the term “Qualified Factor Arrangement” to state that the amount held or owing or subject to repurchase is limited to (i) during the Company’s first fiscal quarter of each of its fiscal years, $220 million in the aggregate, (ii) during the Company’s second and third fiscal quarter of each of its fiscal years, $300 million in the aggregate, and (iii) (x) from the first day of the Company’s fourth fiscal quarter of each of its fiscal years to December 20 of each of its fiscal years, $300 million in the aggregate (provided, that not more than $220 million of such amount may consist of Qualified Factor Accounts (as defined in the Sixth Amendment) sold in such period) and(y) from December 21 of each of the Company’s fiscal years to and including the last day of the Company’s fourth fiscal quarter of each of its fiscal years, $220 million in the aggregate.
Seventh Amendment to the Amended and Restated Loan and Security Agreement
On November 14, 2017, the Loan Parties entered into a seventh amendment to the Amended and Restated Loan Agreement (the Seventh Amendment) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders and the Agent, which modifies the Amended and Restated Loan Agreement. The Seventh Amendment amends the definition of the term “Qualified Factor Arrangement” to state that the amount held or owing to Qualified Factor or subject to repurchase shall not exceed $300 million in the aggregate.
As of December 30, 2017, the Secured Revolving Line of Credit had an outstanding loan balance of $70 million at an interest rate of 4.75%. As of December 31, 2016, we had repaid an aggregate of $230 million of the Secured Revolving Line of Credit and we had no borrowings outstanding. As of December 30, 2017, the Secured Revolving Line of Credit had $19 million related to outstanding letters of credit and up to $92 million available for future borrowings. We report intra-period changes in revolving credit balance on a net basis in our condensed consolidated statement of cash flows as we intend the period of the borrowings to be brief, repaying borrowed amounts within 90 days. As of December 30, 2017, we were in compliance with all required covenants stated in the Loan Agreement.
The agreements governing our 6.75% Notes, 7.50% Notes, 7.00% Notes, 2.125% 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. The occurrence of a default under any of these borrowing arrangements would permit the applicable note holders or the lenders under the Secured Revolving Line of Credit to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable.
Operating Leases
We lease certain of our facilities and in some jurisdictions we lease the land on which our facilities are built under non-cancellable lease agreements that expire at various dates through 2028. We lease certain office equipment for terms ranging from one to five years. Total future non-cancellable lease obligations as of December 30, 2017 were $255 million, including $217 million of future lease payments that occurred in Austin, Texas, Santa Clara, California, Markham, Canada, and Singapore. During the second quarter of 2016, we signed an amendment to the lease agreement associated with our former headquarters in Sunnyvale, California so that the lease expired in December 2017. In connection with the amendment, the lease payments were reduced for 2017. During the third quarter of 2016, we entered into a 10-year operating lease to occupy 220,000 square feet of new office space in Santa Clara. The base rent obligation commenced in August 2017. As of December 30, 2017, the total estimate of future base rent over the life of the lease is approximately $103 million, included in amounts above. In addition to the base rent payments, we will be obligated to pay certain customary amounts for our share of operating expenses and tax obligation. We will also incur costs for capital projects on the new office space. We have the option to extend the term of the lease for two additional five-year periods.
Purchase Obligations
Our purchase obligations primarily include our obligations to purchase wafers and substrates from third parties, excluding our wafer purchase commitments to GF under the WSA. As of December 30, 2017, total non-cancellable purchase obligations were $513 million.
Obligations to GF
As of December 30, 2017, our minimum wafer purchase obligations for the years 2018 through 2020 are approximately $2.8 billion. We cannot meaningfully quantify or estimate our future purchase obligations to GF beyond this amount but expect that our future purchases from GF will continue to be material.
Off-Balance Sheet Arrangements
As of December 30, 2017, we had no off-balance sheet arrangements.
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