Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Advanced Micro Devices, Inc.

Consolidated Statements of Operations

	Year Ended
	December 28, 2019				December 29, 2018				December 30, 2017
	(In millions, except per share amounts)
Net revenue	$	6,731			$	6,475			$	5,253
Cost of sales	3,863				4,028				3,466
Gross profit	2,868				2,447				1,787
Research and development	1,547				1,434				1,196
Marketing, general and administrative	750				562				516
Licensing gain	(60		)		—				(52		)
Operating income	631				451				127
Interest expense	(94		)		(121		)		(126		)
Other expense, net	(165		)		—				(9		)
Income (loss) before income taxes and equity loss	372				330				(8		)
Provision for (benefit from) income taxes	31				(9		)		18
Equity loss in investee	—				(2		)		(7		)
Net income (loss)	$	341			$	337			$	(33	)
Earnings (loss) per share
Basic	$	0.31			$	0.34			$	(0.03	)
Diluted	$	0.30			$	0.32			$	(0.03	)
Shares used in per share calculation
Basic	1,091				982				952
Diluted	1,120				1,064				952

See accompanying notes to consolidated financial statements.

Advanced Micro Devices, Inc.

Consolidated Statements of Comprehensive Income (Loss)

	Year Ended
	December 28, 2019				December 29, 2018				December 30, 2017
	(In millions)
Net income (loss)	$	341			$	337			$	(33	)
Other comprehensive income (loss), net of tax of zero:
Unrealized gains (losses) on available-for-sale securities:
Unrealized gains arising during period	—				—				1
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) arising during period	2				(19		)		17
Reclassification adjustment for (gains) losses realized and included in net income (loss)	6				5				(7		)
Total change in unrealized gains (losses) on cash flow hedges	8				(14		)		10
Cumulative-effect adjustment to accumulated deficit related to the adoption of ASU 2016-01, Financial Instruments	—				2				—
Total comprehensive income (loss)	$	349			$	325			$	(22	)

See accompanying notes to consolidated financial statements.

Advanced Micro Devices, Inc.

Consolidated Balance Sheets

	December 28, 2019				December 29, 2018
	(In millions, except par value amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	1,466			$	1,078
Marketable securities	37				78
Accounts receivable, net	1,859				1,235
Inventories, net	982				845
Prepayment and receivables—related parties	20				34
Prepaid expenses and other current assets	233				270
Total current assets	4,597				3,540
Property and equipment, net	500				348
Operating lease right-of-use assets	205				—
Goodwill	289				289
Investment: equity method	58				58
Other assets	379				321
Total assets	$	6,028			$	4,556
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt, net	$	—			$	136
Accounts payable	988				834
Payables to related parties	213				207
Accrued liabilities	1,084				783
Other current liabilities	74				24
Total current liabilities	2,359				1,984
Long-term debt, net	486				1,114
Long-term operating lease liabilities	199				—
Other long-term liabilities	157				192
Commitments and contingencies (see Notes 17 and 18)
Stockholders’ equity:
Capital stock:
Common stock, par value $0.01; 2,250 shares authorized, 1,175 shares issued and 1,170 shares outstanding as of December 28, 2019; 2,250 shares authorized, 1,010 shares issued and 1,005 shares outstanding as of December 29, 2018	12				10
Additional paid-in capital	9,963				8,750
Treasury stock, at cost (5 shares as of December 28, 2019 and December 29, 2018)	(53		)		(50		)
Accumulated deficit	(7,095		)		(7,436		)
Accumulated other comprehensive income (loss)	—				(8		)
Total stockholders’ equity	2,827				1,266
Total liabilities and stockholders’ equity	$	6,028			$	4,556

See accompanying notes to consolidated financial statements.

Advanced Micro Devices, Inc.

Consolidated Statements of Stockholders’ Equity

	Year Ended
	December 28, 2019				December 29, 2018				December 30, 2017
	(In millions)
Capital stock
Common stock
Balance, beginning of period	$	10			$	9			$	9
Common stock issued under employee equity incentive plans, net of tax withholding	—				1				—
Issuance of common stock upon warrant exercise	1				—				—
Issuance of common stock to partially settle convertible debt	1				—				—
Balance, end of period	$	12			$	10			$	9
Additional paid-in capital
Balance, beginning of period	$	8,750			$	8,464			$	8,334
Common stock issued under employee equity incentive plans, net of tax withholding	74				71				20
Stock-based compensation	197				137				97
Issuance of common stock upon warrant exercise	448				—				—
Issuance of common stock to partially settle convertible debt, net	485				—				—
Issuance of treasury stock to partially settle debt	4				78				13
Issuance of warrants	5				—				—
Balance, end of period	$	9,963			$	8,750			$	8,464
Treasury stock
Balance, beginning of period	$	(50	)		$	(108	)		$	(119	)
Purchase of treasury stock for tax withholding under employee equity incentive plans	(6		)		(6		)		(13		)
Issuance of treasury stock to partially settle debt	3				64				24
Balance, end of period	$	(53	)		$	(50	)		$	(108	)
Accumulated deficit
Balance, beginning of period	$	(7,436	)		$	(7,775	)		$	(7,742	)
Net income (loss)	341				337				(33		)
Cumulative effect adjustment to accumulated deficit related to the adoption of ASU 2016-01, Financial Instruments	—				2				—
Balance, end of period	$	(7,095	)		$	(7,436	)		$	(7,775	)
Accumulated other comprehensive income (loss)
Balance, beginning of period	$	(8	)		$	6			$	(5	)
Other comprehensive income (loss)	8				(14		)		11
Balance, end of period	$	—			$	(8	)		$	6
Total stockholders' equity	$	2,827			$	1,266			$	596

See accompanying notes to consolidated financial statements.

Advanced Micro Devices, Inc.

Consolidated Statements of Cash Flows

	Year Ended
	December 28, 2019				December 29, 2018				December 30, 2017
	(In millions)
Cash flows from operating activities:
Net income (loss)	$	341			$	337			$	(33	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	222				170				144
Stock-based compensation	197				137				97
Amortization of debt discount and issuance costs	30				38				36
Amortization of operating lease right-of-use assets	36				—				—
Loss on debt redemption, repurchase and conversion	176				12				12
Loss on sale/disposal of property and equipment	42				27				—
Impairment of technology licenses	—				45				—
Deferred income taxes	(4		)		(4		)		—
Other	(5		)		(1		)		—
Changes in operating assets and liabilities:
Accounts receivable	(623		)		(806		)		(103		)
Inventories	(137		)		(151		)		(3		)
Prepayment and receivables—related parties	14				(28		)		(6		)
Prepaid expenses and other assets	(176		)		(70		)		(167		)
Payables to related parties	7				35				43
Accounts payable, accrued liabilities and other	373				293				(8		)
Net cash provided by operating activities	493				34				12
Cash flows from investing activities:
Purchases of available-for-sale debt securities	(284		)		(123		)		(222		)
Purchases of property and equipment	(217		)		(163		)		(113		)
Proceeds from maturity of available-for-sale debt securities	325				45				222
Collection of deferred proceeds on sale of receivables	25				71				60
Other	2				—				(1		)
Net cash used in investing activities	(149		)		(170		)		(54		)
Cash flows from financing activities:
Proceeds from issuance of common stock through employee equity incentive plans	74				70				20
Proceeds from (repayments of) short-term debt	(70		)		—				70
Proceeds from warrant exercised by related party	449				—				—
Payments to extinguish long-term debt	(403		)		(41		)		(110		)
Other	(7		)		(1		)		(13		)
Net cash provided by (used in) financing activities	43				28				(33		)
Net increase (decrease) in cash and cash equivalents, and restricted cash	387				(108		)		(75		)
Cash, cash equivalents, and restricted cash at beginning of year	1,083				1,191				1,266
Cash, cash equivalents, and restricted cash at end of year	$	1,470			$	1,083			$	1,191

	Year Ended
	December 28, 2019				December 29, 2018				December 30, 2017
	(In millions)
Supplemental cash flow information:
Cash paid during the year for:
Interest	$	67			$	79			$	88
Income taxes, net of refund	$	(4	)		$	(8	)		$	20
Non-cash investing and financing activities:
Purchases of property and equipment, accrued but not paid	$	65			$	49			$	50
Issuance of common stock to partially settle convertible debt	$	377			$	—			$	—
Issuance of treasury stock to partially settle debt	$	7			$	141			$	38
Deferred proceeds on sale of receivables	$	—			$	25			$	21
Transfer of assets for the acquisition of property and equipment	$	115			$	28			$	12
Other	$	9			$	—			$	—
Reconciliation of cash, cash equivalents, and restricted cash
Cash and cash equivalents	$	1,466			$	1,078			$	1,185
Restricted cash included in Other current assets	$	4			$	5			$	3
Restricted cash included in Other assets	$	—			$	—			$	3
Total cash, cash equivalents, and restricted cash	$	1,470			$	1,083			$	1,191

See accompanying notes to consolidated financial statements.

Advanced Micro Devices, Inc.

Notes to Consolidated Financial Statements

NOTE 1: The Company

Advanced Micro Devices, Inc. is a global semiconductor company. References herein to AMD or the Company mean Advanced Micro Devices, Inc. and its consolidated subsidiaries.

NOTE 2: Summary of Significant Accounting Policies

Fiscal Year. The Company uses a 52 or 53 week fiscal year ending on the last Saturday in December. Fiscal 2019, 2018 and 2017 ended December 28, 2019, December 29, 2018 and December 30, 2017, respectively. Fiscal 2019, 2018 and 2017 each consisted of 52 weeks.

Principles of Consolidation. The consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. Upon consolidation, all inter-company accounts and transactions have been eliminated.

Reclassification. Certain prior period amounts have been reclassified to conform to current period presentation.

Use of Estimates. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results are likely to differ from those estimates, and such differences may be material to the financial statements. Areas where management uses subjective judgment include, but are not limited to, revenue allowances, inventory valuation, valuation and impairment of goodwill and deferred income taxes.

Basis of Presentation. Effective in the first quarter of 2018, the Company adopted Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (ASC 606), using the full retrospective method, which required the Company to adjust prior reporting periods presented. The 2017 amounts presented in the consolidated financial statements and notes to the consolidated financial statements were previously adjusted in the Company’s 2018 Form 10-K to reflect the retrospective application.

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 (CPUs), chipsets, graphics processing unites (GPUs), data center and professional graphics products, accelerated processing units (APUs), 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. The Company also provides development services and licenses portions of its intellectual property (IP) portfolio.

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), sold under non-cancellable purchases orders and which have no alternative use to the Company

at contract inception, are recognized as revenue, based on the value of the inventory and expected margin, over the time of production of the products by the Company. Sales 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 IP. These arrangements are deemed to be single or multiple performance obligations based upon the nature of the arrangements. Revenue is recognized upon the transfer of control, over time or at a point-in time, depending on the nature of the arrangements.

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.

Inventories. Inventories are stated at standard cost adjusted to approximate the lower of actual cost (first-in, first-out method) or estimated net realizable value. The Company adjusts inventory carrying value for estimated excess and obsolescence equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about anticipated or forecasted demand, estimates of future selling prices, competitiveness of product offerings, market and industry conditions, customer requirements and product life cycles. The Company fully reserves for inventories and non-cancellable purchase orders for inventory deemed obsolete. The Company performs periodic reviews of inventory items to identify excess inventories on hand by comparing on-hand balances to anticipated usage using recent historical activity as well as anticipated or forecasted demand. If estimates of customer demand diminish further or market conditions become less favorable than those projected by the Company, additional inventory adjustments may be required.

Goodwill. The Company performs its goodwill impairment analysis as of the first day of the fourth quarter of each year and, if certain events or circumstances indicate that an impairment loss may have been incurred, on a more frequent basis. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment.

Qualitative factors include industry and market consideration, overall financial performance, share price trends and market capitalization and Company-specific events. The Company first analyzes qualitative factors. If the Company concludes it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, the Company does not proceed to perform a quantitative impairment test.

If the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative goodwill impairment test will be performed by comparing the fair value of each reporting unit to its carrying value. A quantitative impairment analysis, if necessary, considers the income approach, which requires estimates of the present value of expected future cash flows to determine a reporting unit’s fair value. Significant estimates include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates, and future economic and market conditions.

A goodwill impairment charge is recognized for the amount by which the reporting unit’s fair value is less than its carrying value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Commitments and Contingencies. From time to time the Company is a defendant or plaintiff in various legal actions that arise in the normal course of business. The Company is also subject to income tax, indirect tax or other tax claims by tax agencies in jurisdictions in which it conducts business. In addition, the Company is a party to environmental matters including local, regional, state and federal government clean-up activities at or near locations where the Company currently or has in the past conducted business. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of reasonably possible losses. A determination of the amount of reserves required for these commitments and contingencies that would be charged to earnings, if any, includes assessing the probability of adverse outcomes and estimating the amount of potential losses. The required reserves, if any, may change due to new developments in each matter or changes in circumstances such as a change in settlement strategy.

Cash Equivalents. Cash equivalents consist of financial instruments that are readily convertible into cash and have original maturities of three months or less at the time of purchase.

Accounts Receivable. Accounts receivable are primarily comprised of trade receivables presented net of rebates, price protection and an allowance for doubtful accounts. Accounts receivable also include unbilled receivables, which 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. The Company maintains an allowance for doubtful accounts based on its assessment of the collectability of amounts owed by customers. The allowance consists of known specific troubled accounts as well as an amount based on overall estimated potential uncollectible accounts receivable based on historical experience.

Investments in Available-for-sale Debt Securities. The Company classifies its investments in debt securities at the date of acquisition as available-for-sale. Available-for-sale debt securities are reported at fair value with the related unrealized gains and losses included, net of tax, in accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains and losses and declines in the value of available-for-sale debt securities determined to be other than temporary are included in other expense, net. The cost of securities sold is determined based on the specific identification method.

The Company classifies investments in available-for-sale debt securities with maturities of more than three months at the time of purchase as marketable securities on its consolidated balance sheets. Classification of these securities as current is based on the Company’s intent and belief in its ability to sell these securities and use the proceeds from sale in operations within 12 months.

Derivative Financial Instruments. The Company maintains a foreign currency hedging strategy which uses derivative financial instruments to mitigate the risks associated with changes in foreign currency exchange rates. This strategy takes into consideration some of the Company’s consolidated exposures. The Company does not use derivative financial instruments for trading or speculative purposes.

In applying its strategy, the Company uses foreign currency forward contracts to hedge certain forecasted revenue and expenses denominated in foreign currencies. The Company designates these contracts as cash flow hedges of forecasted revenue and expenses, to the extent eligible under the accounting rules, and evaluates hedge effectiveness prospectively and retrospectively. To the extent such hedges are effective, the Company records the gain or loss on these contracts as a component of accumulated other comprehensive income (loss) and it reclassifies such gains or losses to earnings in the same period during which the hedged transaction affects earnings. Such amounts are included in the same line item in earnings as the associated forecasted transaction.

The Company also uses, from time to time, foreign currency forward contracts to economically hedge recognized foreign currency exposures on the balance sheets of various subsidiaries. The Company does not designate these forward contracts as hedging instruments. Accordingly, the gain or loss associated with these contracts is immediately recorded in Other expense, net.

Property and Equipment. Property and equipment are stated at cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives are as follows: equipment uses two to six years, and leasehold improvements are measured by the shorter of the remaining terms of the leases or the estimated useful economic lives of the improvements.

Leases. The Company determines if an arrangement is a lease, or contains a lease, at the inception of the arrangement. When the Company determines the arrangement is a lease, or contains a lease, at lease inception, it then determines whether the lease is an operating lease or a finance lease. Operating and finance leases result in the Company recording a right-of-use (ROU) asset and lease liability on its balance sheet. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are initially recognized based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses the implicit interest rate if readily determinable or when the implicit interest rate is not readily determinable, the Company uses its incremental borrowing rate. The incremental borrowing rate is not a commonly quoted rate and is derived through a combination of inputs including the Company’s credit rating and the impact of full collateralization. The incremental borrowing rate is based on the Company’s collateralized borrowing capabilities over a similar term of the lease payments. The Company utilizes the consolidated group incremental borrowing rate for all leases as the Company has centralized treasury operations. The operating lease ROU asset also includes any lease payments made and excludes any lease incentives. Specific lease terms may include options to extend or terminate the lease when the Company believes it is reasonably certain that it will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. As allowed by the guidance, the Company has elected not to recognize ROU assets and lease liabilities that arise from short-term (12 months or less) leases for any class of underlying asset. Operating leases are included in operating lease ROU assets, other current liabilities, and long-term operating lease liabilities on the Company’s consolidated balance sheet. The Company’s finance leases are immaterial.

Product Warranties. The Company generally warrants that its products sold to its customers will conform to its approved specifications and be free from defects in material and workmanship under normal use and conditions for one year. The Company may also offer one to three-year limited warranties based on product type and negotiated warranty terms with certain customers. The Company accrues warranty costs to Cost of sales at the time of sale of warranted products.

Foreign Currency Translation/Transactions. The functional currency of all of the Company’s foreign subsidiaries is the U.S. dollar. Assets and liabilities denominated in non-U.S. dollars have been remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities and historical exchange rates for non-monetary assets and liabilities. Non-U.S. dollar denominated transactions have been remeasured at average exchange rates in effect during each period, except for those cost of sales and expense

transactions related to non-monetary balance sheet amounts which have been remeasured at historical exchange rates. The gains or losses from foreign currency remeasurement are included in earnings.

Marketing and Advertising Expenses. Advertising costs are expensed as incurred. In addition, the Company’s marketing and advertising expenses include certain cooperative advertising funding obligations under customer incentive programs, which costs are recorded upon agreement with customers and vendor partners. Cooperative advertising expenses are recorded as marketing, general and administrative expense to the extent the cash paid does not exceed the estimated fair value of the advertising benefit received. Any excess of cash paid over the estimated fair value of the advertising benefit received is recorded as a reduction of revenue. Total marketing and advertising expenses for 2019, 2018 and 2017 were approximately $217 million, $176 million and $156 million, respectively.

Stock-Based Compensation. The Company estimates stock-based compensation cost for stock options at the grant date based on the option’s fair value as calculated by the lattice-binomial option-pricing model. For time-based restricted stock units, fair value is based on the closing price of the Company’s common stock on the grant date. The Company estimates the grant-date fair value of restricted stock units that involve a market condition using the Monte Carlo simulation model. The Company estimates the grant-date fair value of stock to be issued under the ESPP using the Black-Scholes model. Compensation expense is recognized over the vesting period of the applicable award using the straight-line method, except for the compensation expense related to PRSUs, which are recognized ratably for each vesting tranche from the service inception date to the end of the requisite service period. Forfeiture rates are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Income Taxes. The Company computes the provision for income taxes using the liability method and recognizes deferred tax assets and liabilities for temporary differences between financial statement and income tax bases of assets and liabilities, as well as for operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using tax rates applicable to taxable income in effect for the years in which those tax assets are expected to be realized or settled and provides a valuation allowance against deferred tax assets when it cannot conclude that it is more likely than not that some or all deferred tax assets will be realized. In addition, the Company recognizes tax benefits from uncertain tax positions only if it expects that its tax positions are more likely than not that they will be sustained, based on the technical merits of the positions, on examination by the jurisdictional tax authority. The Company recognizes any accrued interest and penalties to unrecognized tax benefits as interest expense and income tax expense, respectively.

Recently Adopted Accounting Standards

Leases. In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations for lease recognition and disclosure. This standard 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 legacy guidance. The Company adopted this standard in the first quarter of 2019, using the optional modified retrospective approach, which did not require an adjustment to comparative period financial statements, and recorded $228 million of right-of-use assets and $261 million of lease liabilities primarily related to office buildings on its consolidated balance sheet as of December 30, 2018. The Company’s accounting for capital leases, now referred to as finance leases, remains unchanged. The adoption of the new standard had no impact on the Company’s consolidated statement of operations or on net cash provided by or used in operating, financing, or investing activities on its consolidated statement of cash flows.

Upon adoption of ASU 2016-02, the Company elected a transition practical expedient under the new accounting standard allowing it not to separate lease and non-lease components and instead to account for each separate lease component and non-lease component as a single lease component. The Company implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

Recently Issued Accounting Standards

Financial Instruments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, using a modified retrospective adoption method. The Company will adopt this standard in the first quarter of 2020 and the adoption will not have a material impact on its consolidated financial statements.

Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

Although there are several other new accounting pronouncements issued by the FASB, the Company does not believe any of these accounting pronouncements had or will have a material impact on its consolidated financial statements.

NOTE 3: Supplemental Balance Sheet Information

Accounts Receivable, net

As of December 28, 2019 and December 29, 2018, Accounts receivable, net included unbilled accounts receivable of $197 million and $308 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 receivables are expected to be billed and collected within 12 months.

Inventories, net

	December 28, 2019				December 29, 2018
	(In millions)
Raw materials	$	94			$	134
Work in process	691				354
Finished goods	197				357
Total inventories, net	$	982			$	845

Property and Equipment, net

	December 28, 2019				December 29, 2018
	(In millions)
Leasehold improvements	$	203			$	179
Equipment	951				798
Construction in progress	114				78
Property and equipment, gross	1,268				1,055
Accumulated depreciation and amortization	(768		)		(707		)
Total property and equipment, net	$	500			$	348

Depreciation expense for 2019, 2018 and 2017 was $142 million, $94 million and $77 million, respectively.

Other Assets

	December 28, 2019				December 29, 2018
	(In millions)
Software and technology licenses, net	$	210			$	226
Other	169				95
Total other assets	$	379			$	321

During 2018, the Company recorded an impairment charge in Cost of sales of $45 million on technology licenses that are no longer being used.

Accrued Liabilities

	December 28, 2019				December 29, 2018
	(In millions)
Accrued compensation and benefits	$	285			$	236
Marketing programs and advertising expenses	454				275
Other accrued and current liabilities	345				272
Total accrued liabilities	$	1,084			$	783

Other Current Liabilities

	December 28, 2019				December 29, 2018
	(In millions)
Unearned revenue	$	2			$	11
Operating lease liabilities	43				—
Other	29				13
Total other current liabilities	$	74			$	24

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:

	December 28, 2019				December 29, 2018
	(In millions)
Beginning balance	$	11			$	85
Unearned revenue	43				132
Revenue recognized during the period	(52		)		(186		)
Other	—				(20		)
Ending balance	$	2			$	11

Revenue allocated to remaining performance obligations that are unsatisfied (or partially unsatisfied) as of December 28, 2019 is $456 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 $188 million in the next 12 months.

The revenue allocated to remaining performance obligations did not include amounts which have an original expected duration of less than one year.

NOTE 4: Equity Joint Ventures

ATMP Joint Ventures

The Company holds a 15% equity interest in two joint ventures (collectively, the ATMP JV) with Tongfu Microelectronics Co., Ltd, a Chinese joint stock company, and as such, the ATMP JV is a related party of the Company. The Company has no obligation to fund the ATMP JV. The Company accounts for its equity interests in the ATMP JV under the equity method of accounting due to its significant influence over the ATMP JV.

The ATMP JV provides assembly, test, mark and packaging (ATMP) services to the Company. The Company assists the ATMP JV in its management of certain raw material inventory. The purchases from and resales to the ATMP JV of inventory under

inventory management is reported within purchases and resales with the ATMP JV and does not impact the Company’s consolidated statement of operations.

The Company’s total purchases from the ATMP JV during 2019 and 2018 amounted to $660 million and $574 million, respectively. As of December 28, 2019 and December 29, 2018, the amount payable to the ATMP JV was $213 million and $207 million, respectively, included in Payables to related parties on the Company’s consolidated balance sheets. The Company’s resales back to the ATMP JV during 2019 and 2018 amounted to $56 million and $62 million, respectively. As of December 28, 2019 and December 29, 2018, the Company had receivables from ATMP JV of $7 million and $16 million, respectively, included in Prepayment and receivables—related parties on the Company’s consolidated balance sheets.

During 2019, the Company did not record any gain or loss in Equity loss in investee on its consolidated statements of operations. During 2018 and 2017, the Company recorded $2 million and $7 million, respectively, in Equity loss in investee, which included certain expenses incurred by the Company on behalf of the ATMP JV. As of December 28, 2019 and December 29, 2018, the carrying value of the Company’s investment in the ATMP JV was approximately $58 million.

THATIC Joint Ventures

In February 2016, the Company and Higon Information Technology 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 does not consolidate either of these entities and accounts for its investments in the THATIC JV under the equity method of accounting. The THATIC JV is a related party of the Company.

The Company’s share in the net losses of the THATIC JV for 2019 is not recorded in the Company’s 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 December 28, 2019.

In February 2016, the Company licensed certain of its intellectual property (Licensed IP) to the THATIC JV for a total of $293 million in license fees payable over several years 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 classifies Licensed IP income and royalty income, associated with the February 2016 agreement, as licensing gain within operating income.

In March 2017, the Company entered into a development and intellectual property agreement (Development and IP) with the 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. The Company classifies Development and IP income and royalty income, associated with the March 2017 agreement, as revenue once earned.

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.

During 2019 and 2017, the Company recognized $60 million and $52 million as licensing gain associated with the Licensed IP. During 2018, the Company recognized $86 million of IP-related revenue upon completion of all technology milestones under the Development and IP agreement.

The Company’s receivable from the THATIC JV for the above agreements was $13 million and $18 million as of December 28, 2019 and December 29, 2018, respectively, included in Prepayment and receivables—related parties on its consolidated balance sheets.

In June 2019, the U.S. Commerce Department’s Bureau of Industry and Security added certain Chinese entities to the Entity List, including THATIC and the THATIC JV. The Company is complying with U.S. law pertaining to the Entity List designation.

NOTE 5: GLOBALFOUNDRIES

In March 2009, the Company and GLOBALFOUNDRIES Inc. (GF) entered into a Wafer Supply Agreement (WSA) under which 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 through March 1, 2024. Pursuant to the WSA and its amendments, the Company is required to purchase all of its microprocessor and APU product requirements and a certain portion of its GPU product requirements from GF manufactured at process nodes larger than 7 nanometer (nm), with limited exceptions. Under the terms of the WSA, the Company has minimum annual wafer purchase targets through 2021. If the Company fails to meet the agreed wafer purchase target during a calendar year, it will be required to pay to GF a portion of the difference between the actual wafer purchases and the applicable annual purchase target. The Company also agreed to continue to make quarterly payments to GF based on the volume of certain wafers purchased from another wafer foundry.

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 were entitled to purchase 75 million shares of the Company’s common stock at a purchase price of $5.98 per share. On February 13, 2019, WCH exercised its warrant to purchase 75 million shares of the Company’s common stock at a purchase price of $5.98 per share for a total amount of $449 million.

Through May 15, 2019, GF was a related party of the Company because Mubadala and Mubadala Technology Investments LLC (Mubadala Tech, a party to the WSA) were affiliated with WCH, and a director of the Company’s Board of Directors (the Board) was associated with Mubadala. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala. Effective May 15, 2019, the director of the Board associated with Mubadala retired from the Board, and as a result, GF was no longer considered a related party of the Company. All prior period related party classifications on the financial statements for GF have been reclassified to conform to the current period presentation.

The Company’s total purchases from GF related to wafer manufacturing, research and development activities and other for 2019 (through May 15, 2019), 2018 and 2017 were $0.5 billion, $1.6 billion and $1.1 billion, respectively. Included in the total purchases were amounts related to the volume of certain wafers purchased from another wafer foundry, as agreed by the Company and GF. As of December 29, 2018, the amount of prepayment and receivables related to GF was $18 million and the amount of payable to GF was $326 million.

NOTE 6: Goodwill

The carrying amount of goodwill as of both December 28, 2019 and December 29, 2018 was $289 million, which was fully allocated to reporting units within the Company’s Enterprise, Embedded and Semi-Custom segment.

In the fourth quarters of 2019 and 2018, the Company conducted its annual impairment tests of goodwill and concluded that there was no goodwill impairment with respect to its reporting units.

NOTE 7: Debt, Secured Revolving Facility and Secured Revolving Line of Credit

Debt

The Company’s total debt as of December 28, 2019 and December 29, 2018 consisted of:

	December 28, 2019				December 29, 2018
	(In millions)
6.75% Notes	$	—			$	66
7.50% Notes	312				337
7.00% Notes	—				250
2.125% Notes	251				805
Secured Revolving Line of Credit	—				70
Total debt (principal amount)	$	563			$	1,528
Unamortized debt discount associated with 2.125% Notes	(73		)		(262		)
Unamortized debt issuance costs	(4		)		(16		)
Total debt (net)	$	486			1,250
Less: current portion	—				(136		)
Total debt, less current portion	$	486			$	1,114

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.

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

During 2019, the Company converted $554 million principal amount of its 2.125% Notes through the issuance of approximately 69 million shares of the Company’s common stock at the conversion price of $8.00 per share and an aggregate cash payment of $56 million. As of December 28, 2019, the Company had $251 million principal of its 2.125% Notes outstanding.

The Company’s current intent is to deliver shares of its common stock upon conversion of the 2.125% Notes. As such, no sinking fund is provided for the 2.125% Notes and 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 consolidated balance sheet as of December 28, 2019.

The determination of whether or not the 2.125% Notes are convertible is performed on a calendar-quarter basis.

The 2.125% Notes consisted of the following:

	December 28, 2019				December 29, 2018
	(In millions)
Principal	$	251			$	805
Unamortized debt discount(1)	(73		)		(262		)
Unamortized debt issuance costs	(3		)		(11		)
Net carrying amount	$	175			$	532
Carrying amount of the equity component, net(2)	$	95			$	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 $3 million in equity issuance costs.

As of December 28, 2019, the remaining life of the 2.125% Notes was approximately 81 months.

Based on the closing price of the Company’s common stock of $46.18 on December 27, 2019, the last trading day of 2019, the if-converted value of the 2.125% Notes exceeded its principal amount by approximately $1.2 billion.

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 for the year ended December 28, 2019:

	December 28, 2019				December 29, 2018
	(In millions)
Contractual interest expense	$	15			$	17
Interest cost related to amortization of debt issuance costs	$	1			$	1
Interest cost related to amortization of the debt discount	$	22			$	24

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 were general unsecured senior obligations of the Company. Interest was 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 were 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.

In 2016, the Company repurchased $404 million in aggregate principal amount of its 6.75% Notes pursuant to a partial tender offer for $442 million. In 2017, the Company settled $30 million in aggregate principal amount of its 6.75% Notes, of which $26 million was settled in cash and $5 million was settled in treasury stock. During 2018, the Company settled $101 million in aggregate principal amount of its 6.75% Notes for $14 million in cash and $87 million in treasury stock at a weighted-average cost of $9.04 per share.

During 2019, the Company redeemed the remaining $66 million in aggregate principal amount of its 6.75% Notes with a combination of cash and treasury stock.

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.

In 2014, the Company repurchased $25 million in aggregate principal amount of its 7.50% Notes in open market transactions for $24 million. In 2016, the Company repurchased $125 million in aggregate principal amount of its 7.50% Notes pursuant to a partial tender offer for $135 million. In 2017, the Company settled $3 million in aggregate principal amount of its 7.50% Notes in treasury stock. In 2018, the Company settled $10 million in aggregate principal amount of its 7.50% Notes in treasury stock at a weighted-average cost of $9.01 per share. During 2019, the Company repurchased $25 million in aggregate principal amount of its 7.50% Notes in cash. As of December 28, 2019, the outstanding aggregate principal amount of the 7.50% Notes was $312 million.

Prior to August 15, 2022, the Company may redeem some or all of the 7.50% Notes at a price equal to 100% of the principal amount plus accrued and unpaid interest and a “make whole” premium (as defined in the 7.50% Indenture). Holders have the right to require the Company to repurchase all or a portion of the 7.50% Notes in the event that the Company undergoes a change of control as defined in the 7.50% Indenture, at a repurchase price of 101% of the principal amount plus accrued and unpaid interest. Additionally, an event of default (as defined in the 7.50% Indenture) may result in the acceleration of the maturity of the 7.50% Notes.

7.00% Senior Notes Due 2024

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.

In 2016, the Company settled $84 million in aggregate principal amount of its 7.00% Notes for $77 million in cash and $8 million in treasury stock. In 2017, the Company settled $105 million in aggregate principal amount of its 7.00% Notes for $84 million in cash and $26 million in treasury stock. In 2018, the Company settled $61 million in aggregate principal amount of its 7.00% Notes for $26 million in cash and $35 million in treasury stock at a weighted-average cost of $9.42 per share. During 2019,

the Company repurchased the remaining $250 million in aggregate principal amount of its 7.00% Notes with a combination of cash and treasury stock.

Debt Covenants and Seniority

The 7.50% Notes require the Company to comply with certain financial covenants and a number of restrictive covenants. The 7.50% Notes and 2.125% Notes rank equally with the Company’s existing and future senior debt and are senior to all of the Company’s future subordinated debt. The 7.50% Notes and 2.125% Notes rank junior to all of the Company’s future senior secured debt to the extent of the collateral securing such debt and are structurally subordinated to all existing and future debt and liabilities of the Company’s subsidiaries.

Loss from Debt Redemption, Repurchase and Conversion

In aggregate, during 2019, the Company recorded $176 million of aggregate losses from the redemption, repurchase and conversion of debt noted above in Other expense, net on its consolidated statement of operations.

Potential Repurchase of Outstanding Notes

The Company may elect to purchase or otherwise retire the 7.50% 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 to do so.

Secured Revolving Facility

On June 7, 2019, the Company entered into a secured revolving credit facility for up to $500 million (the Secured Revolving Facility) pursuant to a credit agreement by and among the Company, as borrower, the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent (the Credit Agreement). The Secured Revolving Facility consists of a $500 million, five-year secured revolving loan facility, including a $50 million swingline subfacility and a $75 million sublimit for letters of credit. The Company’s obligations under the Credit Agreement are secured by a lien on substantially all of the Company’s property, other than intellectual property.

The Credit Agreement also provides the ability to increase the Secured Revolving Facility or incur incremental term loans or other incremental equivalent debt by an amount not to exceed certain amounts as set forth in the Credit Agreement. The Company’s available borrowings under the Secured Revolving Facility are also subject to reduction by an amount equal to the net cash proceeds of (i) any debt issuances not permitted by the Secured Revolving Facility and (ii) any non-ordinary course asset sales, in excess of $250 million, if such net cash proceeds are not reinvested by the Company within twelve months of receipt.

Borrowings under the Secured Revolving Facility bear interest at a variable rate based upon, at the Company’s option, either the LIBOR rate or the base rate (in each case, as customarily defined) plus an applicable margin. The applicable margin for LIBOR rate loans ranges, based on an applicable total leverage ratio, from 1.00% to 1.75% per annum, and the applicable margin for base rate loans ranges from 0.00% to 0.75% per annum. The Company is required to pay fees on the undrawn portion available under the Secured Revolving Facility and in respect of outstanding letters of credit. In the event the LIBOR rate is not available, the agreement allows the Company to use the base rate.

The Credit Agreement contains customary affirmative and negative covenants, as well as a total leverage covenant requiring the Company to maintain a maximum ratio of consolidated funded debt to consolidated EBITDA of 4.00:1.00 and an interest coverage covenant requiring the Company to maintain a minimum ratio of consolidated EBITDA to consolidated cash interest expense of 3.00:1.00. The Credit Agreement also contains customary events of default, which if they occur, could result in the termination of commitments under the Secured Revolving Facility, the declaration that all outstanding loans are immediately due and payable in whole or in part and the requirement to maintain cash collateral deposits in respect of outstanding letters of credit.

As of December 28, 2019, there were no borrowings outstanding under the Credit Agreement, and the Company was in compliance with all required covenants under the Credit Agreement as of December 28, 2019. As of December 28, 2019, the Company had $14 million of letters of credit outstanding under the Credit Agreement.

Secured Revolving Line of Credit

On June 7, 2019, in connection with entering into the Credit Agreement as described above, the Company repaid its outstanding loan balance of $70 million under the secured revolving line of credit (Secured Revolving Line of Credit) and terminated the Amended and Restated Loan and Security Agreement dated as of April 14, 2015, as amended, among the Company, a group of

lenders, and Bank of America, N.A., acting as agent for the lenders.

Future Payments on Total Debt

As of December 28, 2019, the Company’s future debt payment obligations for the respective fiscal years were as follows:

	Term Debt (Principal only)
	(In millions)
2020	$	—
2021	—
2022	312
2023	—
2024	—
2025 and thereafter	251
Total	$	563

NOTE 8: Financial Instruments

Cash, Cash Equivalents, and Marketable Securities

Cash and financial instruments measured and recorded at fair value on a recurring basis, which approximates amortized cost, as of December 28, 2019 and December 29, 2018 are summarized below:

	Total Fair Value				Cash and Cash Equivalents				Marketable Securities
	(In millions)
December 28, 2019
Cash	$	1,465			$	1,465			$	—
Level 1(1)
Government money market funds	$	1			$	1			$	—
Total level 1	$	1			$	1			$	—
Level 2(2)
Commercial paper	$	37			$	—			$	37
Total level 2	$	37			$	—			$	37
Total	$	1,503			$	1,466			$	37

	Total Fair Value				Cash and Cash Equivalents				Marketable Securities
	(In millions)
December 29, 2018
Cash	$	315			$	315			$	—
Level 1(1)
Government money market funds	$	275			$	275			$	—
Total level 1	$	275			$	275			$	—
Level 2(2)
Commercial paper	$	566			$	488			$	78
Total level 2	$	566			$	488			$	78
Total	$	1,156			$	1,078			$	78

(1)		Level 1 fair value estimates are based on quoted prices for identical instruments in active markets.
(2)		Level 2 fair value estimates are based on quoted prices for identical or comparable instruments in markets that are not active or comparable instruments in active markets.

In addition to those amounts presented above, as of December 28, 2019 and December 29, 2018, the Company had approximately $4 million and $5 million, respectively, of investments in money market funds, used as collateral for letters of credit deposits, which were included in Other current assets on the Company’s consolidated balance sheets. As of December 28, 2019 and December 29, 2018, the Company also had approximately $30 million and $21 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 consolidated balance sheets. These government money market funds and 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.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis. The Company carries its certain 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:

	December 28, 2019								December 29, 2018
	Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
	(In millions)
Short-term debt	$	—			$	—			$	136			$	136
Long-term debt, net(1)	$	486			$	1,823			$	1,114			$	2,428

(1)

Carrying amounts of long-term debt are net of unamortized debt issuance costs of $4 million and $16 million as of December 28, 2019 and December 29, 2018, respectively, and net of $73 million and $262 million unamortized debt discount associated with the 2.125% Notes as of December 28, 2019 and December 29, 2018, respectively. The carrying amounts above do not include the equity component related to the conversion feature of the 2.125% Notes of $95 million and $305 million as of December 28, 2019 and December 29, 2018, respectively.

The estimated fair value of the Company’s short-term and long-term debt are based on Level 2 inputs. The Company’s 2.125% Notes, included in Long-term debt, net, above, were convertible at the option of the holder as of December 28, 2019. The estimated fair value of the 2.125% Notes takes into account the value of the Company’s stock price of $46.18 as of December 28, 2019 and the initial conversion price of approximately $8.00 per share of common stock.

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.

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 losses included in accumulated other comprehensive income (loss) (AOCI), the amount of losses reclassified from accumulated other comprehensive income (loss) and included in earnings related to the foreign currency forward contracts designated as cash flow hedges and the amount of losses included in other expense, net, related to contracts not designated as hedging instruments which was allocated in the consolidated statements of operations:

				Year Ended
				December 28, 2019												December 29, 2018
	Cost of sales			Research and development				Marketing, general and administrative				Other expense, net				Research and development				Marketing, general and administrative				Other expense, net
				(In millions)
Contracts designated as cash flow hedging instruments
Losses reclassified from AOCI into earnings	$	(1	)	$	(4	)		$	(1	)		$	—			$	(4	)		$	(1	)		$	—
Contracts not designated as hedging instruments
Losses recognized in earnings	—			—				—				(1		)		—				—				(3		)
Total losses	$	(1	)	$	(4	)		$	(1	)		$	(1	)		$	(4	)		$	(1	)		$	(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 of the Company’s foreign currency derivative contracts depending on whether the foreign currency forward contracts were a gain or loss position. These amounts were recorded in the Company’s consolidated balance sheets in either Other current assets or Other current liabilities.

	December 28, 2019				December 29, 2018
	(In millions)
Foreign Currency Forward Contracts - gains (losses)
Contracts designated as cash flow hedging instruments - gains	$	2			$	1
Contracts designated as cash flow hedging instruments - losses	$	(2	)		$	(8	)

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 December 28, 2019 and December 29, 2018, the notional values of the Company’s outstanding foreign currency forward contracts were $739 million and $396 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: Accumulated Other Comprehensive Income (Loss)

Unrealized holding gains or losses on the Company’s available-for-sale debt securities and unrealized holding gains and losses on derivative financial instruments qualifying as cash flow hedges are included in other comprehensive income (loss).

The table below summarizes the changes in accumulated other comprehensive income (loss) for the years ended December 28, 2019 and December 29, 2018:

	Year Ended
	December 28, 2019				December 29, 2018
	Unrealized gains (losses) on cash flow hedges				Unrealized gains (losses) on cash flow hedges
Beginning balance	$	(8	)		$	6
Unrealized gain (losses) arising during the period, net of tax of zero	2				(19		)
Reclassification adjustment for gains realized and included in net income, net of tax of zero	6				5
Total other comprehensive income (loss)	8				(14		)
Ending balance	$	—			$	(8	)

NOTE 10: Concentrations of Credit and Operation Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of investments in available-for-sale debt securities, trade receivables and derivative financial instruments used in hedging activities.

The Company places its investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure with any one financial institution. At the time an investment is made, investments in commercial paper of industrial firms and financial institutions are rated A1, P1 or better. The Company invests in tax-exempt securities including municipal notes and bonds and bonds that are rated A, A2 or better and repurchase agreements, each of which have securities of the type and quality listed above as collateral.

The Company believes that concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company’s customer base, thus diluting the trade credit risk. The Company’s top three customers with the highest accounts receivable balances each accounted for approximately 15%, 9% and 8%, respectively, of the total consolidated accounts receivable balance as of December 28, 2019 and 16%, 12% and 7%, respectively, of the total consolidated accounts receivable balance as of December 29, 2018. However, the Company does not believe the receivable balance from these customers represents a significant credit risk based on past collection experience and review of their current credit quality. The Company manages its exposure to customer credit risk through credit limits, credit lines, ongoing monitoring procedures and credit approvals. Furthermore, the Company performs in-depth credit evaluations of all new customers and, at intervals, for existing customers. From this, the Company may require letters of credit, bank or corporate guarantees or advance payments if deemed necessary.

The Company’s existing derivative financial instruments are with large international financial institutions of investment grade credit rating. The Company does not believe that there is significant risk of nonperformance by these counterparties because the Company monitors their credit rating on an ongoing basis. By using derivative instruments, the Company is subject to credit and market risk. If a counter-party fails to fulfill its performance obligations under a derivative contract, the Company’s credit risk will equal the fair value of the derivative instrument. Generally, when the fair value of a derivative contract is positive, the counter-party owes the Company, thus creating a receivable risk for the Company. Based upon certain factors including a review of the credit default swap rates for the Company’s counter-parties, the Company determined its counter-party credit risk to be immaterial. At December 28, 2019, the Company’s obligations under the contracts did not exceed counter-parties’ obligations.

The Company is dependent on certain equipment and materials from a limited number of suppliers and relies on a limited number of foreign companies to supply the majority of certain types of integrated circuit packages for back-end manufacturing operations. Similarly, certain non-proprietary materials or components such as memory, PCBs, substrates and capacitors used in the manufacture of the Company’s graphics products are currently available from only a limited number of sources. Interruption of supply or increased demand in the industry could cause shortages and price increases in various essential materials. If the Company or its third-party manufacturing suppliers are unable to procure certain of these materials or its foundries are unable to procure materials for manufacturing its products, its business would be materially adversely affected.

NOTE 11: 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. 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, the assumed issuance of common stock under the employee stock purchase plan (ESPP) and the assumed exercise of the warrants. Potentially dilutive shares issuable upon conversion of the 2.125% Convertible Senior Notes due 2026 (2.125% Notes) are calculated using the if-converted method.

The following table sets forth the components of basic and diluted earnings (loss) per share:

	2019				2018				2017
	(In millions, except per share amounts)
Numerator-Net income (loss):
Numerator for basic and diluted earnings per share	341				337				(33		)
Denominator-Weighted average shares:
Denominator for basic earnings per share	1,091				982				952
Effect of potentially dilutive shares:
Employee equity incentive plans and warrants	29				82				—
Denominator for diluted earnings per share	1,120				1,064				952
Earnings (loss) per share:
Basic	$	0.31			$	0.34			$	(0.03	)
Diluted	$	0.30			$	0.32			$	(0.03	)

Potential shares from employee equity incentive plans and the conversion of the 2.125% Notes totaling 93 million and 105 million shares for 2019 and 2018, respectively, and potential shares from employee equity incentive plans, the conversion of the 2.125% Notes and the warrants under the Warrant Agreement totaling 189 million shares for 2017, were not included in the diluted earnings (loss) per share calculation as their inclusion would have been anti-dilutive.

NOTE 12: Common Stock and Stock-Based Incentive Compensation Plans

Shares Outstanding

Shares of common stock outstanding were as follows:

	Year Ended
	December 28, 2019			December 29, 2018			December 30, 2017
	(In millions)
Number of shares
Balance, beginning of period	1,005			967			935
Common stock issued under employee equity incentive plans, net of tax withholding	20			31			32
Issuance of common stock upon warrant exercise	75			—			—
Issuance of common stock to partially settle convertible debt	69			—			—
Issuance of treasury stock to partially settle debt	1			7			—
Balance, end of period	1,170			1,005			967

The Company’s stock-based incentive programs are intended to attract, retain and motivate highly qualified employees. On April 29, 2004, the Company’s stockholders approved the 2004 Equity Incentive Plan (the 2004 Plan). The Company introduced the Employee Stock Purchase Plan (ESPP) in the fourth quarter of 2017.

Under the 2004 Plan, stock options generally vest and become exercisable over a three-year period from the date of grant and expire within ten years after the grant date. Unvested shares that are reacquired by the Company from forfeited outstanding equity awards become available for grant and may be reissued as new awards.

Under the 2004 Plan, the Company can grant (i) stock options, and (ii) RSUs, including time-based RSUs and Performance-based Restricted Stock Units (PRSUs).

Stock Options. A stock option is the right to purchase shares of the Company’s common stock at a fixed exercise price for a fixed period of time. Under the 2004 Plan, nonstatutory and incentive stock options may be granted. The exercise price of the shares subject to each nonstatutory stock option and incentive stock option cannot be less than 100% of the fair market value of the Company’s common stock on the date of the grant. The exercise price of each option granted under the 2004 Plan must be paid in full at the time of the exercise.

Time-based RSUs. Time-based RSUs are awards that can be granted to any employee, director or consultant and that obligate the Company to issue a specific number of shares of the Company’s common stock in the future if the vesting terms and conditions are satisfied. The purchase price for the shares is $0.00 per share.

Performance-based Restricted Stock Units. Performance-based Restricted Stock Units (PRSUs) can be granted to certain of the Company’s senior executives. The performance metrics can be financial performance, non-financial performance and/or market conditions. Each PRSU award reflects a target number of shares (Target Shares) that may be issued to an award recipient before adjusting based on the Company’s financial performance, non-financial performance and/or market conditions. The actual number of shares that a grant recipient receives at the end of the period may range from 0% to 250% of the Target Shares granted, depending upon the degree of achievement of the performance target designated by each individual award.

Employee Stock Purchase Plan. Under the ESPP, eligible employees who participate in an offering period may have up to 10% of their earnings withheld, up to certain limitations, to purchase shares of common stock at 85% of the lower of the fair market value on the first or the last business day of the six-month offering period. The offering periods commence in May and November each year.

As of December 28, 2019, the Company had 61 million shares of common stock that were available for future grants and 30 million shares reserved for issuance upon the exercise of outstanding stock options or the vesting of unvested restricted stock units. In addition, the Company had 42 million shares of common stock that were available for issuance under the ESPP.

Valuation and Expense

Stock-based compensation expense was allocated in the consolidated statements of operations as follows:

	2019				2018				2017
	(In millions)
Cost of sales	$	6			$	4			$	2
Research and development	129				91				57
Marketing, general, and administrative	62				42				38
Total stock-based compensation expense, net of tax of $0	$	197			$	137			$	97

During 2019, 2018 and 2017, the Company did not realize any excess tax benefits related to stock-based compensation and therefore the Company did not record any related financing cash flows.

Stock Options. The weighted-average estimated fair value of employee stock options granted for the years ended December 28, 2019, December 29, 2018 and December 30, 2017 was $13.31, $7.62 and $5.46 per share, respectively, using the following assumptions:

	2019			2018			2017
Expected volatility	52.60% - 56.51%			51.51% - 60.46%			57.26	%
Risk-free interest rate	1.53% - 2.51%			2.20% - 2.83%			1.68	%
Expected dividends	—	%		—	%		—	%
Expected life (in years)	3.94 - 3.95			3.92 - 3.94			3.92

The Company uses a combination of the historical volatility of its common stock and the implied volatility for publicly traded options on the Company’s common stock as the expected volatility assumption required by the lattice-binomial model. The risk-free interest rate is based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the option grant at the date closest to the option grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the near future. The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the lattice-binomial model.

The following table summarizes stock option activity and related information:

	Outstanding Number of Shares			Weighted- Average Exercise Price				Aggregate Intrinsic Value				Weighted-Average Remaining Contractual Life (in years)
	(In millions, except share price)
Balance as of December 29, 2018	13			$	5.33
Granted	1			$	32.86
Canceled	(1	)		$	17.52
Exercised	(3	)		$	3.74
Balance as of December 28, 2019	10			$	7.56			$	226			3.20
Exercisable December 28, 2019	9			$	4.56			$	215			2.72

The total intrinsic value of stock options exercised for 2019, 2018 and 2017 was $84 million, $67 million and $27 million, respectively.

As of December 28, 2019, the Company had $12 million of total unrecognized compensation expense related to stock options, which will be recognized over the weighted-average period of 1.87 years.

Time-based RSUs. The weighted-average grant date fair values of time-based RSUs granted during 2019, 2018 and 2017 were $32.52, $17.66 and $12.65 per share, respectively.

The following table summarizes time-based RSU activity and related information:

	Number of Shares			Weighted- Average Fair Value				Aggregate Intrinsic Value				Weighted-Average Remaining Contractual Life (in years)
	(In millions except share price)
Unvested shares as of December 29, 2018	24			$	12.86
Granted	8			$	32.52
Forfeited	(2	)		$	16.49
Vested	(12	)		$	10.39
Unvested shares as of December 28, 2019	18			$	22.93			$	503			1.19

The total fair value of time-based RSUs vested during 2019, 2018 and 2017 was $395 million, $315 million and $294 million, respectively.

As of December 28, 2019, the Company had $322 million of total unrecognized compensation expense related to time-based RSUs, which will be recognized over the weighted-average period of 1.80 years.

PRSUs. The weighted-average grant date fair values of PRSUs granted during 2019, 2018 and 2017 were $50.00, $21.67 and $17.18, respectively, using the following assumptions:

	2019			2018			2017
Expected volatility	60.54% - 62.52%			63.77% - 67.97%			64.39	%
Risk-free interest rate	1.56% - 2.49%			2.06% - 2.82%			1.50	%
Expected dividends	—	%		—	%		—	%
Expected term (in years)	2.48 - 5.00			2.48 - 3.00			3.00

The Company uses the historical volatility of its common stock and risk-free interest rate based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the PRSUs grant at the date closest to the grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the near future. The expected term of PRSUs represents the weighted-average period the PRSUs are expected to remain outstanding.

The following table summarizes PRSU activity and related information:

	Number of Shares			Weighted- Average Fair Value				Aggregate Intrinsic Value				Weighted-Average Remaining Contractual Life (in years)
	(In millions except share price)
Unvested shares as of December 29, 2018	2			$	14.58
Granted	2			$	50.00
Forfeited	—			$	22.39
Vested	(1	)		$	3.60
Unvested shares as of December 28, 2019	3			$	36.13			$	90			2.56

The total fair value of PRSUs vested during 2019, 2018 and 2017 was $65 million, $84 million and $34 million, respectively.

As of December 28, 2019, the Company had $85 million of total unrecognized compensation expense related to PRSUs, which will be recognized over the weighted-average period of 2.56 years.

ESPP. The weighted-average grant date fair value for the ESPP during 2019, 2018 and 2017 was $9.96, $4.71 and $3.46 per share, respectively, using the following assumptions:

	2019			2018			2017
Expected volatility	48.95% - 67.02%			45.88% - 66.66%			56.07	%
Risk-free interest rate	1.58% - 2.46%			2.05% - 2.52%			1.36	%
Expected dividends	—	%		—	%		—	%
Expected term (in years)	0.50			0.50			0.49

The Company uses the historical volatility of its common stock and the risk-free interest rate based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the ESPP grant at the date closest to the ESPP grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the near future. The expected term of the ESPP represents the weighted-average period the ESPP is expected to remain outstanding.

During 2019, 1.8 million and 1.4 million shares of common stock were purchased in each of the two six-month offering periods under the ESPP at a purchase price of $16.18 and $23.77 per share, respectively, resulting in aggregate cash proceeds of $62 million. As of December 28, 2019, the Company had $9 million of total unrecognized compensation expense related to the ESPP, which will be recognized over the weighted-average period of 0.37 years.

NOTE 13: Retirement Benefit Plans

The Company provides retirement benefit plans in the United States and certain foreign countries. The Company has a 401(k) retirement plan that allows participating employees in the United States to contribute as defined by the plan and subject to Internal Revenue Service limitations. The Company matches 75% of employees’ contributions up to 6% of their compensation. The Company’s contributions to the 401(k) plan for 2019, 2018 and 2017 were approximately $25 million, $21 million and $18 million, respectively.

NOTE 14: Income Taxes

Income (loss) before income taxes consists of the following:

	2019				2018				2017
	(In millions)
U.S.	$	334			$	114			$	53
Non-U.S.	38				214				(68		)
Total pre-tax income (loss) including equity loss in investee	$	372			$	328			$	(15	)

The provision for (benefit from) income taxes consists of:

	2019				2018				2017
	(In millions)
Current:
U.S. Federal	$	(13	)		$	12			$	(3	)
U.S. State and Local	1				—				—
Non-U.S.	50				(17		)		37
Total	38				(5		)		34
Deferred:
U.S. Federal	—				—				(15		)
Non-U.S.	(7		)		(4		)		(1		)
Total	(7		)		(4		)		(16		)
Provision for (benefit from) income taxes	$	31			$	(9	)		$	18

The table below displays the reconciliation between statutory federal income taxes and the total provision for (benefit from) income taxes.

	2019				2018				2017
	(In millions)
Statutory federal income tax expense (benefit) at 21%, 21% and 35% rate	$	78			$	69			$	22
State taxes	1				1				1
Foreign withholding taxes (refund)	22				(29		)		27
Foreign rate detriment	2				2				—
Valuation allowance change	(59		)		(64		)		(12		)
Credit monetization	—				(1		)		(20		)
Tax Reform Act	(13		)		13				—
Provision for (benefit from) income taxes	$	31			$	(9	)		$	18

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

The income tax provision in 2018 was primarily due to a $36 million refund of withholding tax from a foreign jurisdiction related to a legal settlement from 2010, offset by $13 million of U.S. income taxes resulting from the Tax Reform Act, $7 million tax provision in foreign locations and $7 million of withholding taxes on cross-border transactions.

The income tax provision in 2017 was primarily due to $38 million of foreign taxes in profitable locations including $27 million of withholding taxes on cross-border transactions, 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.

Deferred income taxes reflect the net tax effects of tax carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the balances for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 28, 2019 and December 29, 2018 are as follows:

	December 28, 2019				December 29, 2018
	(In millions)
Deferred tax assets:
Net operating loss carryovers	$	1,455			$	1,533
Accruals and reserves not currently deductible	245				123
Acquired intangibles and goodwill	45				101
Federal and state tax credit carryovers	617				527
Foreign research and development ITC credits	429				370
Other	159				104
Total deferred tax assets	2,950				2,758
Less: valuation allowance	(2,743		)		(2,580		)
Total deferred tax assets, net of valuation allowance	207				178
Deferred tax liabilities:
Discount of convertible notes	(22		)		(54		)
Undistributed foreign earnings	(110		)		(105		)
Other	(64		)		(15		)
Total deferred tax liabilities	(196		)		(174		)
Net deferred tax assets	$	11			$	4

The breakdown between deferred tax assets and deferred tax liabilities as of December 28, 2019 and December 29, 2018 is as follows:

	December 28, 2019				December 29, 2018
	(In millions)
Deferred tax assets	$	22			$	15
Deferred tax liabilities	(11		)		(11		)
Net deferred tax assets	$	11			$	4

Deferred tax assets are included in Other assets on the consolidated balance sheets. Deferred tax liabilities are included in Other long-term liabilities on the consolidated balance sheets.

As of December 28, 2019, substantially all of the Company’s U.S. and foreign deferred tax assets, net of deferred tax liabilities, continued to be subject to a valuation allowance. The Company evaluates the need for and the amount of a valuation allowance for deferred tax assets based on available evidence whether it is more-likely-than-not (a probability level of more than 50%) that these assets will be realized. In completing this assessment management must consider both objective and subjective factors in its assessment. These factors include, but are not limited to a history of losses in prior years, unique competitiveness of the semiconductor industry, future reversal of existing temporary differences, tax planning strategies, and future taxable income exclusive of reversing temporary differences and loss carryforwards. After evaluating all available evidence, the Company determined that the valuation allowances for the United States and Canada should both be maintained.

The Company’s United States federal and state net operating losses carryforwards as of December 28, 2019, were $6.7 billion and $0.5 billion, respectively. The United States federal net operating losses will expire between 2026 through 2037, and the state net operating losses will expire at various dates through 2037. The federal credit of $399 million will expire at various dates between 2020 and 2039. The state credits of $239 million will expire at various dates between 2020 through 2039 except for California R&D credit, which does not expire. The Company also has $365 million of credit carryforward in Canada that will expire between 2023 and 2028.

The Tax Reform Act modified the income tax liability in the United States for companies with subsidiaries outside of the United States. As a result of the Tax Reform Act the impact of future distributions of undistributed earnings that are indefinitely

reinvested are anticipated to be withholding taxes from local jurisdictions. The amount of cumulative undistributed earnings that are permanently reinvested that could be subject to withholding taxes are $142 million as of December 28, 2019.

A reconciliation of the Company's gross unrecognized tax benefits is as follows:

	2019				2018				2017
	(In millions)
Balance at beginning of year	$	49			$	49			$	42
Increases for tax positions taken in prior years	5				1				7
Decreases for tax positions taken in prior years	—				(1		)		(2		)
Increases for tax positions taken in the current year	15				3				3
Decreases for settlements with taxing authorities	(3		)		(2		)		—
Decreases for lapsing of the statute of limitations	(1		)		(1		)		(1		)
Balance at end of year	$	65			$	49			$	49

The amount of unrecognized tax benefits that would impact the effective tax rate was $17 million, $9 million and $9 million as of December 28, 2019, December 29, 2018 and December 30, 2017, respectively. The Company had no material amounts of accrued interest and accrued penalties related to unrecognized tax benefits as of December 28, 2019, December 29, 2018 and December 30, 2017.

It is possible the Company may have tax audits close in the next 12 months that could materially change the balance of the uncertain tax benefits; however, the timing of tax audit closures and settlements are highly uncertain. The Company and its subsidiaries have several foreign and U.S. state audits in process at any one point in time. The Company has provided for uncertain tax positions that require a liability under the adopted method to account for uncertainty in income taxes.

The Company is subject to taxation in the United States and foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The material jurisdiction in which the Company is subject to potential examination by the taxing authority is the United States, which is open for years from 2006 onwards due to the net operating losses.

NOTE 15: 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 (loss). 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), data center and professional GPUs and development services. The Company also licenses portions of its IP portfolio.

•	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 primarily includes employee stock-based compensation expense.

The following table provides a summary of net revenue and operating income (loss) by segment for 2019, 2018 and 2017.

	2019				2018				2017
	(In millions)
Net revenue:
Computing and Graphics	$	4,709			$	4,125			$	2,977
Enterprise, Embedded and Semi-Custom	2,022				2,350				2,276
Total net revenue	$	6,731			$	6,475			$	5,253
Operating income (loss):
Computing and Graphics	$	577			$	470			$	92
Enterprise, Embedded and Semi-Custom	263				163				132
All Other	(209		)		(182		)		(97		)
Total operating income	$	631			$	451			$	127

The following table provides major items included in All Other category:

	2019				2018				2017
	(In millions)
Operating loss:
Stock-based compensation expense	$	(197	)		$	(137	)		$	(97	)
Impairment of technology licenses	—				(45		)		—
Loss contingency on legal matter	(12		)		—				—
Total operating loss	$	(209	)		$	(182	)		$	(97	)

The Company does not discretely allocate assets to its operating segments, nor does management evaluate operating segments using discrete asset information.

The Company’s operations outside the United States include research and development activities and sales, marketing and administrative activities. The Company conducts product and system research and development activities for its products in the United States with additional design and development engineering teams located in Canada, China, India, Taiwan and Singapore. The Company’s material sales and marketing offices are located in the United States, Latin America, Europe and Asia.

The following table summarizes sales to external customers by geographic regions based on billing location of the customer:

	2019				2018				2017
	(In millions)
United States	$	1,764			$	1,327			$	1,360
China (including Hong Kong)	1,736				1,319				974
Japan	840				1,225				1,215
Europe	762				470				263
Taiwan	719				1,197				738
Singapore	597				728				550
Other countries	313				209				153
Total sales to external customers	$	6,731			$	6,475			$	5,253

The following table summarizes Property and equipment, net by geographic areas:

	2019				2018
	(In millions)
United States	$	300			$	232
Canada	99				51
China	36				17
Singapore	33				29
Other countries	32				19
Total property and equipment, net	$	500			$	348

The following table summarizes sales to major customers that accounted for at least 10% of the Company’s consolidated net revenue for the respective years:

	2019			2018			2017
Customer A	12	%		19	%		23	%
Customer B	*			11	%		15	%

*		Less than 10%

Sales to customers A and B consisted of products from the Company’s Enterprise, Embedded and Semi-Custom segment.

NOTE 16: Other Expense, Net

The following table summarizes the components of Other expense, net:

	2019				2018				2017
	(In millions)
Interest income	$	15			$	18			$	6
Gain on sale of 85% ATMP JV	—				—				3
Loss on debt redemption, repurchase and conversion	(176		)		(12		)		(12		)
Other	(4		)		(6		)		(6		)
Other expense, net	$	(165	)		$	—			$	(9	)

NOTE 17: Commitments and Guarantees

Operating Leases

The Company has entered into operating and finance leases for its corporate offices, data centers, research and development facilities and certain equipment. The leases expire at various dates through 2028, some of which include options to extend the lease for up to 5 years.

For 2019, 2018 and 2017, the Company recorded $56 million, $53 million and $44 million, respectively, of operating lease expense, including short-term lease expense. For the year ended December 28, 2019, the Company recorded $25 million of variable lease expense, which primarily included operating expenses and property taxes associated with the usage of facilities under the operating leases. For the year ended December 28, 2019, cash paid for operating leases included in operating cash flows was $47 million. The Company’s finance leases and short-term leases are immaterial.

Supplemental information related to leases is as follows:

	December 28, 2019
Weighted-average remaining lease term – operating leases	6.26 years
Weighted-average discount rate – operating leases	5.55	%

Future minimum lease payments under non-cancellable operating lease liabilities as of December 28, 2019 are as follows:

Year	(In millions)
2020	$	54
2021	48
2022	44
2023	37
2024	33
2025 and thereafter	71
Total minimum lease payments	287
Less: interest	(45		)
Present value of net minimum lease payments	242
Less: current portion	(43		)
Total long-term operating lease liabilities	$	199

Certain other operating leases contain provisions for escalating lease payments subject to changes in the consumer price index.

Purchase and Other Contractual Obligations

The Company’s purchase obligations primarily include the Company’s obligations to purchase wafers and substrates from third parties. The Company also had other contractual obligations, primarily included in Other long-term liabilities and Accrued liabilities on its consolidated balance sheet, which primarily consisted of $146 million of payments due under certain software and technology licenses and IP licenses that will be paid through 2022.

Total future unconditional purchase obligations as of December 28, 2019 were as follows:

Year	(In millions)
2020	$	1,731
2021	642
2022	58
2023	5
2024	2
2025 and thereafter	7
Total unconditional purchase commitments	$	2,445

Warranties and Indemnities

Changes in the Company’s estimated liability for product warranty during the years ended December 28, 2019 and December 29, 2018 are as follows:

	December 28, 2019				December 29, 2018
	(In millions)
Beginning balance	$	13			$	12
New warranties issued during the period	31				27
Settlements during the period	(29		)		(28		)
Changes in liability for pre-existing warranties during the period, including expirations	—				2
Ending balance	$	15			$	13

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.

NOTE 18: 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 Exchange Act of 1934, as amended (the Exchange Act), and SEC Rule 10b-5 concerning certain statements regarding its 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 the Company’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, the Company 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 Federal Court issued an order dismissing the Hamilton and Ha amended complaints. The Hamilton plaintiffs filed a Notice of Appeal on October 8, 2018, and the Ha plaintiffs filed a Notice of Appeal on October 15, 2018. On November 19, 2018, the Hamilton and Ha plaintiffs filed a motion seeking summary reversal of the order dismissing their claims. The Company opposed this motion on December 13, 2018, and the Court denied it on February 25, 2019. The Wessels, Hamilton, and Ha appeals are currently pending. Briefing has completed in each appeal.

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 et al. 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 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

the Company’s 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, 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 filed their amended consolidated complaint on December 6, 2018. On January 3, 2019, the Company again moved to dismiss the subset of claims currently at issue. On April 4, 2019, the court granted the Company’s motion and dismissed all claims currently at issue with prejudice. On May 6, 2019, the court granted the parties’ stipulation and request under Fed. R. Civ. P. 54(b) to enter a partial final judgment and certify for appeal the court’s April 4, 2019 dismissal order, and on that same date, the plaintiffs voluntarily dismissed without prejudice their remaining claims pursuant to an agreement whereby, subject to certain terms and conditions, the Company agreed to toll the statute of limitations and/or statute of repose. On May 30, 2019, the plaintiffs filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth Circuit. Briefing has completed for the appeal.

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.

Quarterhill Inc. Litigation

On July 2, 2018, three entities named Aquila Innovations, Inc. (Aquila), Collabo Innovations, Inc. (Collabo), and Polaris Innovations, Ltd. (Polaris), filed separate patent infringement complaints against the Company in the United States District Court for the Western District of Texas. Aquila alleges that the Company infringes two patents (6,239,614 and 6,895,519) relating to power management; Collabo alleges that the Company infringes one patent (7,930,575) related to power management; and Polaris alleges that the Company infringes two patents (6,728,144 and 8,117,526) relating to control or use of dynamic random-access memory, or DRAM. Each of the three complaints seeks unspecified monetary damages, interest, fees, expenses, and costs against the Company; Aquila and Collabo also seek enhanced damages. Aquila, Collabo, and Polaris each appear to be related to a patent assertion entity named Quarterhill Inc. (formerly WiLAN Inc.). On November 16, 2018, AMD filed answers in the Collabo and Aquila cases and filed a motion to dismiss in the Polaris case. On January 25, 2019, the Company filed amended answers and counterclaims in the Collabo and Aquila cases. On July 22, 2019, the Company’s motion to dismiss in the Polaris case was denied. On August 23, 2019, the Court held a claim construction hearing in each case.

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.

Dickey Litigation

On October 26, 2015, a putative class action complaint captioned Dickey et al. v. AMD, No. 15-cv-04922 was filed against the Company in the United States District Court for the Northern District of California. Plaintiffs allege that the Company misled consumers by using the term “eight cores” in connection with the marketing of certain AMD FX CPUs that are based on the Company’s “Bulldozer” core architecture. The plaintiffs allege these products cannot perform eight calculations simultaneously, without restriction. The plaintiffs seek to obtain damages under several causes of action for a nationwide class of consumers who allegedly were deceived into purchasing certain Bulldozer-based CPUs that were marketed as containing eight cores. The plaintiffs also seek attorneys’ fees. On December 21, 2015, the Company filed a motion to dismiss the complaint, which was granted on April 7, 2016. The plaintiffs then filed an amended complaint with a narrowed putative class definition, which the Court dismissed upon the Company’s motion on October 31, 2016. The plaintiffs subsequently filed a second amended complaint, and the Company filed a motion to dismiss the second amended complaint. On June 14, 2017, the Court issued an order granting in part and denying in part the Company’s motion to dismiss, and allowing the plaintiffs to move forward with a portion of their complaint. On March 27, 2018, plaintiffs filed their motion for class certification. On January 17, 2019, the Court granted plaintiffs’ motion for class certification. The class definition does not encompass the Company’s Ryzen or EPYC processors. On January 31, 2019, the Company filed a petition in the Ninth Circuit Court of Appeals, seeking review of certain aspects of the January 17, 2019 class certification order. On May 9, 2019, the parties attended mediation and reached a tentative settlement. On June 3, 2019, the Ninth Circuit Court of Appeals denied the Company’s petition seeking appellate review of the January 17, 2019 class certification order. On August 9, 2019, the parties executed a formal settlement agreement. On August 23, 2019, plaintiffs filed their motion for preliminary approval of the settlement agreement. On October 4, 2019, the Court granted the motion for preliminary approval of the settlement agreement.

Based upon information presently known to management, the Company believes that the settlement will not have a material adverse effect on its financial condition, cash flows or results of operations.

Monterey Research Litigation

On November 15, 2019, Monterey Research, LLC filed a patent infringement complaint against the Company in the United States District Court for the District of Delaware. Monterey Research alleges that the Company infringes six U.S. patents: 6,534,805

(related to SRAM cell design); 6,629,226 (related to read interface protocols); 6,651,134 (related to memory devices); 6,765,407 (related to programmable digital circuits); 6,961,807 (related to integrated circuits and associated memory systems); and 8,373,455 (related to output buffer circuits). Monterey Research seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, costs, and injunctive relief against the Company. On January 22, 2020, the Company filed a motion to dismiss part of Monterey Research’s 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.

Environmental Matters

The Company is named as a responsible party on Superfund clean-up orders for three sites in Sunnyvale, California that are on the National Priorities List. Since 1981, the Company has discovered hazardous material releases to the groundwater from former underground tanks and proceeded to investigate and conduct remediation at these three sites. The chemicals released into the groundwater were commonly used in the semiconductor industry in the United States in the wafer fabrication process prior to 1979.

In 1991, the Company received Final Site Clean-up Requirements Orders from the California Regional Water Quality Control Board relating to the three sites. The Company has entered into settlement agreements with other responsible parties on two of the orders. During the term of such agreements, other parties have agreed to assume most of the foreseeable costs as well as the primary role in conducting remediation activities under the orders. The Company remains responsible for additional costs beyond the scope of the agreements as well as all remaining costs in the event that the other parties do not fulfill their obligations under the settlement agreements.

To address anticipated future remediation costs under the orders, the Company has computed and recorded an estimated environmental liability of approximately $3 million and has not recorded any potential insurance recoveries in determining the estimated costs of the cleanup. The progress of future remediation efforts cannot be predicted with certainty and these costs may change. The Company believes that any amount in addition to what has already been accrued would not be material.

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 financial position, results of operations, or cash flows.

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Advanced Micro Devices, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Advanced Micro Devices, Inc. (the Company) as of December 28, 2019 and December 29, 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 28, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 4, 2020 expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Note 2 to the consolidated financial statements, the Company changed its method for accounting for leases as a result of the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the amendments effective December 30, 2018 under the optional modified retrospective approach.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

	Inventory Valuation
Description of the Matter	At December 28, 2019, the Company’s net inventory balance was $982 million. As discussed in Note 2 of the consolidated financial statements, the Company adjusts the inventory carrying value to the lower of actual cost or the estimated net realizable value after completing ongoing reviews of on-hand inventory quantities in excess of forecasted demand, by considering recent historical activity as well as anticipated or forecasted demand. Auditing management’s inventory carrying value adjustments involved significant judgment because the estimates are based on a number of factors that are affected by market, industry, and competitive conditions outside the Company's control. In particular, in estimating inventory carrying value adjustments, management developed assumptions such as forecasts of future sales quantities and the selling prices, which are sensitive to the competitiveness of product offerings, customer requirements, and product life cycles. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company's inventory carrying value adjustment determination process, including the basis for developing above described assumptions and management’s judgments. Our audit procedures included, among others, testing the reasonableness of management’s key assumptions and judgments and testing the accuracy and completeness of the underlying data used to determine the amount of inventory carrying value adjustments. For instance, we compared the quantities and carrying value of on-hand inventories to related unit sales, both historical and forecasted, assessed the reasonableness of management’s estimates of future sales prices by analyzing historical sales and evaluating any factors that may impact sales prices, and evaluated the appropriateness and adequacy of management’s adjustments to such sales forecasts by analyzing potential technological changes in line with product life cycles and/or identified alternative customer uses. We also assessed the accuracy of forecasts underlying management's estimates by comparing management’s historical forecasts to actual results, evaluated industry and market factors and performed sensitivity analyses over the significant assumptions used by management to evaluate necessary changes in the inventory carrying value adjustments.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1970.

San Jose, California

February 4, 2020

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Advanced Micro Devices, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Advanced Micro Devices, Inc.’s internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Advanced Micro Devices, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 28, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 28, 2019 and December 29, 2018 , the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 28, 2019, and the related notes and our report dated February 4, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

San Jose, California

February 4, 2020

Supplementary Financial Information (unaudited)

The Company uses a 52 or 53 week fiscal year ending on the last Saturday in December. All quarters of 2019 and 2018 consisted of 13 weeks.

	(In millions, except per share amounts)
	2019																2018
	Dec. 28				Sep. 28				June 29				Mar. 30				Dec. 29				Sep. 29				June 30				Mar. 31
Net revenue	$	2,127			$	1,801			$	1,531			$	1,272			$	1,419			$	1,653			$	1,756			$	1,647
Cost of sales	1,178				1,024				910				751				882				992				1,104				1,050
Gross margin	949				777				621				521				537				661				652				597
Research and development	395				406				373				373				371				363				357				343
Marketing, general and administrative	206				185				189				170				138				148				142				134
Licensing gain	—				—				—				(60		)		—				—				—				—
Operating income	348				186				59				38				28				150				153				120
Interest expense	(18		)		(24		)		(25		)		(27		)		(29		)		(30		)		(31		)		(31		)
Other income (expense), net	(125		)		(36		)		3				(7		)		4				(6		)		1				1
Income before income taxes	205				126				37				4				3				114				123				90
Provision for (benefit from) income taxes	35				7				2				(13		)		(35		)		12				6				8
Equity loss in investee	—				1				—				(1		)		—				—				(1		)		(1		)
Net income	$	170			$	120			$	35			$	16			$	38			$	102			$	116			$	81
Earnings per share
Basic	$	0.15			$	0.11			$	0.03			$	0.01			$	0.04			$	0.10			$	0.12			$	0.08
Diluted	$	0.15			$	0.11			$	0.03			$	0.01			$	0.04			$	0.09			$	0.11			$	0.08
Shares used in per share calculation
Basic	1,140				1,097				1,084				1,044				1,002				987				972				968
Diluted	1,188				1,117				1,109				1,094				1,079				1,076				1,147				1,039