10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
 
Form 10-Q
 
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number 001-07882
 
 
 
 
ADVANCED MICRO DEVICES, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
94-1692300
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
One AMD Place
Sunnyvale, California
 
94088
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (408) 749-4000
 
 
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 29, 2015: 790,189,438



INDEX
 
 
 
Page No.
 
 
 
Condensed Consolidated Statements of Operations – Three Months and Nine Months Ended September 26, 2015 and September 27, 2014
 
Condensed Consolidated Statements of Comprehensive Income (Loss) – Three Months and Nine Months Ended September 26, 2015 and September 27, 2014
 
Condensed Consolidated Balance Sheets as of September 26, 2015 and December 27, 2014
 
Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 26, 2015 and September 27, 2014
 
 
Item 1
Legal Proceedings

2


PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
(In millions, except per share amounts)
Net revenue
$
1,061

 
$
1,429

 
$
3,033

 
$
4,267

Cost of sales
822

 
935

 
2,236

 
2,788

Gross margin
239

 
494

 
797

 
1,479

Research and development
241

 
278

 
718

 
834

Marketing, general and administrative
108

 
150

 
373

 
460

Amortization of acquired intangible assets
—

 
3

 
3

 
10

Restructuring and other special charges, net
48

 
—

 
135

 
—

Operating income (loss)
(158
)
 
63

 
(432
)
 
175

Interest expense
(39
)
 
(43
)
 
(119
)
 
(136
)
Other expense, net
—

 
(1
)
 
(3
)
 
(70
)
Income (loss) before income taxes
(197
)

19

 
(554
)
 
(31
)
Provision for income taxes
—

 
2

 
4

 
8

Net income (loss)
$
(197
)
 
$
17

 
$
(558
)
 
$
(39
)
Net income (loss) per share
 
 
 
 
 
 
 
Basic
$
(0.25
)
 
$
0.02

 
$
(0.72
)
 
$
(0.05
)
Diluted
$
(0.25
)
 
$
0.02

 
$
(0.72
)
 
$
(0.05
)
Shares used in per share calculation:
 
 
 
 
 
 
 
Basic
785

 
770

 
780

 
765

Diluted
785

 
785

 
780

 
765

See accompanying notes to condensed consolidated financial statements.


3


Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
(In millions)
Net income (loss)
$
(197
)
 
$
17

 
$
(558
)
 
$
(39
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period, net of tax effect of $0
(3
)
 
—

 
(3
)
 
—

Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period, net of tax effects of $0
(13
)
 
(3
)
 
(21
)
 
(3
)
Reclassification adjustment for (gains) losses realized and included in net income (loss), net of tax effects of $0
6

 
1

 
14

 
4

Total other comprehensive income (loss)
(10
)
 
(2
)
 
(10
)
 
1

Total comprehensive income (loss)
$
(207
)
 
$
15

 
$
(568
)
 
$
(38
)
See accompanying notes to condensed consolidated financial statements.


4


Advanced Micro Devices, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
September 26,
2015
 
December 27,
 2014*
 
(In millions, except par value amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
755

 
$
805

Marketable securities
—

 
235

Accounts receivable, net of allowances of $0 and $0
648

 
818

Inventories, net
761

 
685

Prepayments to GLOBALFOUNDRIES
20

 
113

Prepaid expenses
63

 
32

Other current assets
219

 
48

Total current assets
2,466

 
2,736

Property, plant and equipment, net
194

 
302

Acquisition related intangible assets, net
—

 
65

Goodwill
283

 
320

Other assets
286

 
344

Total assets
$
3,229

 
$
3,767

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
230

 
$
177

Accounts payable
388

 
415

Payable to GLOBALFOUNDRIES
226

 
218

Accrued liabilities
408

 
518

Other current liabilities
137

 
40

Deferred income on shipments to distributors
60

 
72

Total current liabilities
1,449

 
1,440

Long-term debt
2,030

 
2,035

Other long-term liabilities
86

 
105

Commitments and contingencies (See Note 9)

 
 
Stockholders’ equity (deficit):
 
 
 
Capital stock:
 
 
 
Common stock, par value $0.01; 1,500 shares authorized on September 26, 2015 and December 27, 2014; shares issued: 803 shares on September 26, 2015 and 788 shares on December 27, 2014; shares outstanding: 790 shares on September 26, 2015 and 776 shares on December 27, 2014
8

 
8

Additional paid-in capital
6,997

 
6,949

Treasury stock, at cost (13 shares on September 26, 2015 and 12 shares on December 27, 2014)
(122
)
 
(119
)
Accumulated deficit
(7,204
)
 
(6,646
)
Accumulated other comprehensive loss
(15
)
 
(5
)
Total stockholders’ equity (deficit)
(336
)
 
187

Total liabilities and stockholders’ equity (deficit)
$
3,229

 
$
3,767

*
Amounts were derived from the December 27, 2014 audited consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.

5


Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
(In millions)
Cash flows from operating activities:
 
 
 
Net loss
$
(558
)
 
$
(39
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
133

 
155

Stock-based compensation expense
47

 
65

Non-cash interest expense
8

 
11

Loss on debt redemptions
—

 
64

Restructuring and other special charges, net
83

 
—

Other
7

 
(9
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
164

 
(144
)
Inventories
(93
)
 
(14
)
Prepayments to GLOBALFOUNDRIES
97

 
—

Prepaid expenses and other assets
(113
)
 
(156
)
Accounts payable, accrued liabilities and other
(74
)
 
(100
)
Payable to GLOBALFOUNDRIES
9

 
(47
)
Net cash used in operating activities
(290
)
 
(214
)
Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(227
)
 
(646
)
Purchases of property, plant and equipment
(64
)
 
(73
)
Proceeds from maturities of available-for-sale securities
462

 
664

Proceeds from sale of property, plant and equipment
8

 
—

Net cash provided by (used in) investing activities
179

 
(55
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
1

 
4

Proceeds from borrowings, net
100

 
1,080

Net proceeds from grants
8

 
5

Repayments of long-term debt and capital lease obligations
(44
)
 
(1,043
)
Other
(4
)
 
(6
)
Net cash provided by financing activities
61

 
40

Net decrease in cash and cash equivalents
(50
)
 
(229
)
Cash and cash equivalents at beginning of period
805

 
869

Cash and cash equivalents at end of period
$
755

 
$
640

See accompanying notes to condensed consolidated financial statements.


6

Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements of Advanced Micro Devices, Inc. and its subsidiaries (the Company or AMD) have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The results of operations for the quarter ended September 26, 2015 shown in this report are not necessarily indicative of results to be expected for the full year ending December 26, 2015. In the opinion of the Company’s management, the information contained herein reflects all adjustments necessary for a fair presentation of the Company’s results of operations, financial position and cash flows. All such adjustments are of a normal, recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 27, 2014.
The Company uses a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters and nine months ended September 26, 2015 and September 27, 2014 each consisted of 13 weeks and 39 weeks, respectively.
Principles of Consolidation. The condensed consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. Upon consolidation, all significant intercompany accounts and transactions are eliminated.
Change to Prior Period Information. During the third quarter of 2014, the Company realigned its organizational structure. As a result of this organizational change, beginning in third quarter of 2014, the Company reports its financial statements based on the new segments described in Note 7 - Segment Reporting with no other impact on the Company’s condensed consolidated financial statements. All prior-period amounts have been adjusted retrospectively to reflect the Company's reportable segment changes.
Recently Issued Accounting Standards
Inventory. In July 2015, the Financial Accounting Standards Board (FASB) issued ASU No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), which simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost or net realizable value. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016 and for interim periods therein, with early adoption permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2015-11 on its consolidated financial statements.
Interest—Imputation of Interest. In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 will be effective for annual reporting periods beginning after December 15, 2015 and interim periods within fiscal years beginning after December 15, 2016, with early adoption permitted. The new guidance will be applied retrospectively to each prior period presented. The Company plans to adopt ASU 2015-03 in the first quarter of 2016, at which time the Company will reclassify approximately $30 million of debt issuance costs associated with the Company's long-term debt from other non-current assets to long-term debt. A reclassification will also be applied retrospectively to each prior period presented.
Disclosure of Going Concern Uncertainties. In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), which provides guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 will be effective in the fourth quarter of 2016, with early adoption permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2014-15 on its consolidated financial statements.
Share-Based Payments with Performance Targets. In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12), which requires that a performance target be treated as a performance condition if it affects vesting and could be achieved after the requisite service period is rendered. ASU 2014-12 will be effective in the first quarter of 2016, with early adoption permitted. The Company may use either of two methods: (i) prospective application to all awards granted or modified after the effective date or (ii) retrospective application to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements.

7

The Company is currently evaluating the impact of its pending adoption of ASU 2014-12 on its consolidated financial statements and has not yet determined which method it will apply.
Revenue Recognition. In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), which creates a single source of revenue guidance under U.S. GAAP for all companies in all industries. The core principle of ASU 2014-09 is that revenue should be recognized in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates. ASU 2014-09 also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used. In July 2015, FASB announced a decision to defer the effective date for this ASU. ASU 2014-09 will be effective for the Company in the first quarter of 2018 with early adoption permitted (for annual reporting periods beginning after December 15, 2016). The Company may adopt ASU 2014-09 either by using a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined which approach it will apply.
NOTE 2. GLOBALFOUNDRIES
Wafer Supply Agreement. The Wafer Supply Agreement (WSA) governs the terms by which the Company purchases products manufactured by GLOBALFOUNDRIES Inc. (GF).
Fourth Amendment to Wafer Supply Agreement. On March 30, 2014, the Company entered into a fourth amendment to the WSA. The primary effect of the fourth amendment was to establish volume purchase commitments and fixed pricing for the 2014 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of the Company’s microprocessor unit, graphics processor unit and semi-custom game console products to be delivered by GF to the Company during the 2014 calendar year.
Fifth Amendment to Wafer Supply Agreement. On April 16, 2015, the Company entered into a fifth amendment to the WSA. The primary effect of the fifth amendment was to establish volume purchase commitments and fixed pricing for the 2015 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of the Company's microprocessor unit, graphics processor unit and semi-custom products to be delivered by GF to the Company during the 2015 calendar year.
The Company’s total purchases from GF related to wafer manufacturing and research and development activities for the quarters ended September 26, 2015 and September 27, 2014 were $288 million and $290 million, respectively. The Company's total purchases from GF related to wafer manufacturing and research and development activities for the nine months ended September 26, 2015 and September 27, 2014 were $704 million and $843 million, respectively.
The Company estimates that its purchase obligations to GF for wafer manufacturing and research and development activities will be approximately $1.1 billion in fiscal year 2015 and at least $106 million during the first quarter of fiscal year 2016. The Company is not able to meaningfully quantify or estimate its future purchase obligations to GF other than those set forth in the fifth amendment to the WSA, but it expects that its future purchases from GF will continue to be material. The Company is currently in discussions with GF regarding the re-profiling of its wafer purchase commitments under the fifth amendment to the WSA. The Company is unable to quantify the outcome of its negotiations with GF.
GF continues to be a related party of the Company because Mubadala Development Company PJSC (Mubadala) and Mubadala Technology Investments LLC (Mubadala Tech) are affiliated with West Coast Hitech L.P. (WCH), the Company’s largest stockholder. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala.

8


NOTE 3. Supplemental Balance Sheet Information
Inventories
 
September 26,
2015
 
December 27,
2014
 
(In millions)
Raw materials
$
20

 
$
40

Work in process
461

 
431

Finished goods
280

 
214

Total inventories, net
$
761

 
$
685

Other Current Assets
 
September 26,
2015
 
December 27,
2014
 
(In millions)
Assets held-for-sale
$
156

 
$
—

Other current assets
63

 
48

Total other current assets
$
219

 
$
48

Property, Plant and Equipment
 
September 26,
2015
 
December 27,
2014
 
(In millions)
Land and land improvements
$
1

 
$
4

Buildings and leasehold improvements
178

 
246

Equipment
1,349

 
1,416

Construction in progress
21

 
14

Property, plant and equipment, gross
1,549

 
1,680

Accumulated depreciation and amortization
(1,355
)
 
(1,378
)
Total property, plant and equipment, net
$
194

 
$
302

Other Assets
 
September 26,
2015
 
December 27,
2014
 
(In millions)
Software and technology licenses, net
$
197

 
$
219

Other
89

 
125

Total other assets
$
286

 
$
344

Accrued Liabilities
 
September 26,
2015
 
December 27,
2014
 
(In millions)
Accrued compensation and benefits
$
99

 
$
139

Marketing programs and advertising expenses
103

 
141

Software and technology licenses payable
48

 
39

Other
158

 
199

Total accrued liabilities
$
408

 
$
518



9


Other Current Liabilities
 
September 26,
2015
 
December 27,
2014
 
(In millions)
Liabilities related to assets held-for-sale
$
81

 
$
—

Other current liabilities
56

 
40

Total other current liabilities
$
137

 
$
40

NOTE 4. Net Income (Loss) Per Share
Basic net loss per share is computed based on the weighted average number of shares outstanding.
Diluted net loss per share is computed based on the weighted average number of shares outstanding plus any potentially dilutive shares outstanding. Potentially dilutive shares include stock options and restricted stock units.
The following table sets forth the components of basic and diluted loss per share:
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
(In millions, except per share amounts)
Numerator – Net income (loss):
 
 
 
 
 
 
 
Numerator for basic and diluted net income (loss) per share
$
(197
)
 
$
17

 
$
(558
)
 
$
(39
)
Denominator – Weighted average shares
 
 
 
 
 
 
 
Denominator for basic net income (loss) per share
785

 
770

 
780

 
765

Effect of potentially dilutive shares:
 
 
 
 
 
 
 
Employee stock options, restricted stock and restricted stock units
—

 
15

 
—

 
—

Denominator for diluted net income (loss) per share
785

 
785

 
780

 
765

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.25
)
 
$
0.02

 
$
(0.72
)
 
$
(0.05
)
Diluted
$
(0.25
)
 
$
0.02

 
$
(0.72
)
 
$
(0.05
)
Potential shares from stock options and restricted stock units totaling 64 million and 28 million were not included in the net income (loss) per share calculations for the third quarters of 2015 and 2014, respectively, because their inclusion would have been anti-dilutive.
Potential shares from employee stock options and restricted stock units totaling 61 million and 46 million were not included in the net loss per share calculation for the nine months ended September 26, 2015 and September 27, 2014, because their inclusion would have been anti-dilutive.
NOTE 5. Financial Instruments
Cash and Cash Equivalents and Marketable Securities
Cash and financial instruments measured and recorded at fair value on a recurring basis as of September 26, 2015 and December 27, 2014 are summarized below:

10

 
Total Fair
Value
 
Cash and
Cash
Equivalents
 
(In millions)
September 26, 2015
 
 
 
Cash
$
370

 
$
370

Level 2(2) (3)
 
 
 
Commercial paper
385

 
385

Total level 2
385

 
385

Total
$
755

 
$
755

 
Total Fair
Value
 
Cash and
Cash
Equivalents
 
Short-Term
Marketable
Securities
 
(In millions)
December 27, 2014
 
 
 
 
 
Cash
$
391

 
$
391

 
$
—

Level 1(1) (2)
 
 
 
 
 
Money market funds
4

 
4

 
—

Total level 1
4

 
4

 
—

Level 2(2) (3)
 
 
 
 
 
Commercial paper
618

 
410

 
208

Corporate bonds
27

 
—

 
27

Total level 2
645

 
410

 
235

Total
$
1,040

 
$
805

 
$
235


(1) 
The Company’s Level 1 assets are valued using quoted prices for identical instruments in active markets.
(2) 
The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the quarter and nine months ended September 26, 2015 or the year ended December 27, 2014.
(3) 
The Company’s Level 2 short-term investments are valued using broker reports that utilize quoted market prices for identical or comparable instruments. Brokers gather observable inputs for all of the Company’s fixed income securities from a variety of industry data providers and other third-party sources.
Available-for-sale securities held by the Company as of September 26, 2015 consisted of commercial paper and as of December 27, 2014 also consisted of money market funds and corporate bonds. The amortized cost of available-for-sale securities approximated the fair value for all periods presented.
In addition to those amounts presented above, as of September 26, 2015 and December 27, 2014, the Company had approximately $1 million and $10 million, respectively, of available-for-sale investments in money market funds, used as collateral for leased buildings and letters of credit deposits, which were included in Other assets on the Company’s condensed consolidated balance sheets. These money market funds are classified within Level 1 because they are valued using quoted prices for identical instruments in active markets. Their amortized costs are the same as the fair value for all periods presented. The Company is restricted from accessing these deposits.
Also in addition to those amounts presented above, as of September 26, 2015 and December 27, 2014, the Company had approximately $15 million and $16 million, respectively, of available-for-sale investments in mutual funds held in a Rabbi trust established for the Company's deferred compensation plan, which were also included in Other assets on the Company's condensed consolidated balance sheets. These mutual funds are classified within Level 1 because they are valued using quoted prices for identical instruments in active markets. Their amortized cost approximates the fair value for all periods presented. The Company is restricted from accessing these investments.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis. The Company carries its financial instruments at fair value with the exception of its debt. Financial instruments that are not recorded at fair value are measured at fair value on a quarterly basis for disclosure purposes. The carrying amounts and estimated fair values of financial instruments not recorded at fair value are as follows:

11

 
September 26, 2015
 
December 27, 2014
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(In millions)
Short-term debt (excluding capital leases)
$
230

 
$
230

 
$
172

 
$
173

Long-term debt (excluding capital leases)
$
2,025

 
$
1,341

 
$
2,025

 
$
1,858

The Company’s short-term and long-term debt are classified within Level 2. The fair value of the debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of the Company’s accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing payment terms.
Hedging Transactions and Derivative Financial Instruments
Cash Flow Hedges
The following table shows the amount of gain (loss) included in accumulated other comprehensive income (loss), the amount of gain (loss) 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 gain (loss) included in other income (expense), net, related to contracts not designated as hedging instruments, which was allocated in the condensed consolidated statements of operations:
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
(In millions)
Foreign Currency Forward Contracts - gains (losses)
 
 
 
 
 
 
 
Contracts designated as cash flow hedging instruments
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
(7
)
 
$
(2
)
 
$
(7
)
 
$
1

Cost of sales
(1
)
 
—

 
(2
)
 
—

Research and development
(3
)
 
—

 
(7
)
 
(2
)
Marketing, general and administrative
(2
)
 
(1
)
 
(5
)
 
$
(2
)
Contracts not designated as hedging instruments
 
 
 
 
 
 
 
Other income (expense), net
$
(2
)
 
$
(2
)
 
$
(3
)
 
$
(2
)
The Company’s foreign currency derivative contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates.
The following table shows the fair value amounts included in Other current assets should the foreign currency forward contracts be in a gain position or included in Other current liabilities should these contracts be in a loss position. As of September 26, 2015, the Company’s outstanding contracts were in a net loss position of $15 million. These amounts were recorded in the Company's condensed consolidated balance sheets as follows:
 
September 26,
2015
 
December 27,
2014
 
(In millions)
Foreign Currency Forward Contracts - gains (losses)
 
 
 
Contracts designated as cash flow hedging instruments
$
(13
)
 
$
(6
)
Contracts not designated as hedging instruments
$
(2
)
 
$
(1
)
For the foreign currency contracts designated as cash flow hedges, the ineffective portions of the hedging relationship and the amounts excluded from the assessment of hedge effectiveness were immaterial.
As of September 26, 2015 and December 27, 2014, the notional values of the Company’s outstanding foreign currency forward contracts were $197 million and $298 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.

12

Fair Value Hedges
The Company’s fair value hedge 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.
The following table shows the fair value amounts included in Other assets should the fair value hedge derivative contracts be in a gain position or included in Other long-term liabilities should these contracts be in a loss position. These amounts were recorded in the Company’s condensed consolidated balance sheets as follows:
 
 
September 26,
2015
 
December 27,
2014
 
 
(In millions)
Interest Rate Swap Contracts - gains (losses)
 
 
 
 
Contracts designated as fair value hedging instruments
 
$
5

 
$
3


NOTE 6. Income Taxes
In the third quarter of 2015, the Company did not record any income tax provision. For the nine months ended September 26, 2015, the Company recorded an income tax provision of $4 million due to foreign taxes in profitable locations.
In the third quarter of 2014, the Company recorded an income tax provision of $2 million, due principally to foreign taxes in profitable locations. For the nine months ended September 27, 2014, the Company recorded an income tax provision of $8 million arising from $9 million of foreign taxes in profitable locations, partially offset by $1 million of tax benefits arising from other comprehensive income and Canadian tax credits.
As of September 26, 2015, substantially all of the Company’s U.S. and Canadian deferred tax assets, net of deferred tax liabilities, continue to be subject to a valuation allowance. The realization of these assets is dependent on substantial future taxable income which, as of September 26, 2015, in management’s estimate, is not more likely than not to be achieved.
The Company's total gross unrecognized tax benefits as of September 26, 2015 were $27 million. The Company does not believe it is reasonably possible that other unrecognized tax benefits will materially change in the next 12 months. The Company is currently undergoing a tax audit in a foreign jurisdiction and has recently commenced settlement discussions with the tax authority. Based on information and events that arose after September 26, 2015, the total potential amount related to this matter is approximately $17 million including penalties and interest, which would be due upon the completion of the settlement process with the tax authority. The settlement, resolution or closure of its tax audits is highly uncertain.
NOTE 7. 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) before interest, other income (expense), net and income taxes. These performance measures include the allocation of expenses to the operating segments based on management’s judgment. The Company has the following two reportable segments:
•
the Computing and Graphics segment, which primarily includes desktop and notebook processors and chipsets, discrete graphics processing units (GPUs) and professional graphics; and
•
the Enterprise, Embedded and Semi-Custom segment, which primarily includes server and embedded processors, semi-custom System-on-Chip (SoC) products, engineering services and royalties.
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. Also included in this category are amortization of acquired intangible assets, employee stock-based compensation expense, restructuring and other special charges, net and workforce rebalancing severance charges.
The following table provides a summary of net revenue and operating income (loss) by segment: 

13


 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
(In millions)
Net revenue:
 
 
 
 
 
 
 
Computing and Graphics
$
424

 
$
781

 
$
1,335

 
$
2,470

Enterprise, Embedded and Semi-Custom
637

 
648

 
1,698

 
1,797

Total net revenue
$
1,061

 
$
1,429

 
$
3,033

 
$
4,267

Operating income (loss):
 
 
 
 
 
 
 
Computing and Graphics
$
(181
)
 
$
(17
)
 
$
(403
)
 
$
(20
)
Enterprise, Embedded and Semi-Custom
84

 
108

 
156

 
290

All Other
(61
)
 
(28
)
 
(185
)
 
(95
)
Total operating income (loss)
$
(158
)
 
$
63

 
$
(432
)
 
$
175


NOTE 8. Stock-Based Incentive Compensation Plans
The following table summarizes stock-based compensation expense related to employee stock options and restricted stock units, which is allocated within the Company’s condensed consolidated statements of operations as follows:
 
Three Months Ended
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
(In millions)
Cost of sales
$
—

 
$
1

 
$
2

 
$
3

Research and development
7

 
11

 
27

 
34

Marketing, general and administrative
6

 
9

 
18

 
28

Stock-based compensation expense, net of tax of $0
$
13

 
$
21

 
$
47

 
$
65

For all periods presented, the Company did not realize any excess tax benefit related to stock-based compensation and therefore did not record any related financing cash flows.
Stock Options
The weighted average assumptions applied in the lattice-binomial model that the Company uses to estimate the fair value of employee stock options are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
Expected volatility
71.71
%
 
51.94
%
 
60.19
%
 
52.88
%
Risk-free interest rate
1.32
%
 
1.16
%
 
1.24
%
 
1.11
%
Expected dividends
0.00
%
 
0.00
%
 
0.00
%
 
0.00
%
Expected life
3.91 years

 
3.86 years

 
3.91 years

 
3.86 years

In the third quarters of 2015 and 2014, the Company granted 5.2 million and 5.6 million shares of employee stock options, respectively, with weighted average grant date fair value per share of $0.94 and $1.59, respectively. For the nine months ended September 26, 2015 and September 27, 2014, the Company granted 5.9 million and 5.7 million employee stock options, respectively, with weighted average grant date fair values per share of $0.96 and 1.59, respectively.
Restricted Stock Units
In the third quarter of 2015, the Company granted 25.0 million restricted stock units including 3.3 million of performance-based restricted stock units (PRSUs) with market conditions referenced below and in the third quarter of 2014, the Company granted 17.7 million restricted stock units including 2.9 million PRSUs, with weighted average grant date fair values

14


per share of $1.79 and $4.12, respectively. For the nine months ended September 26, 2015, the Company granted 33.9 million restricted stock units including 3.3 million PRSUs with market conditions referenced below and 0.8 million PRSUs, with weighted average grant date fair values per share of $1.96. For the nine months ended September 27, 2014, the Company granted 19.9 million restricted stock units including 3.7 million PRSUs, with weighted average grant date fair values per share of $4.11.
Performance-based Restricted Stock Units with Market Conditions
During the third quarter of 2015, the Company granted restricted stock units with both a market condition and a service condition (market-based restricted stock units) to the Company’s senior executives. The number of shares that may be earned is based on three-year compounded annual growth rate milestones related to the Company’s closing stock price that may be attained within the three-year performance period, with the potential payout levels of shares at 50%, 100%, 200% and 250% of the target number of shares granted. Any shares earned pursuant to the attainment of a performance level shall vest 50% upon the compensation committee certification of the attainment of the performance level (provided, however, that no shares may be earned or vest prior to the first anniversary of the grant date) and the remaining 50% shall vest at the end of the Performance Period, subject to the recipient’s continuous employment or service through each such vesting date.
The Company estimated the fair value of the market-based restricted stock units using a Monte Carlo simulation model on the date of grant. As of September 26, 2015, there were 3.3 million market-based restricted stock units with the potential payout level at 100% with a grant date fair value per share of $1.44.
NOTE 9. Commitments and Contingencies
Warranties and Indemnities
The Company generally warrants that its products sold to its customers will conform to the Company’s approved specifications and be free from defects in material and workmanship under normal use and service for one year. Subject to certain exceptions, the Company also offers a three-year limited warranty to end users for only those central processing unit (CPU) and AMD accelerated processing unit (APU) products that are commonly referred to as “processors in a box” and for certain server CPU products. The Company also offered extended limited warranties to certain customers of “tray” microprocessor products and/or professional graphics products who have written agreements with the Company and target their computer systems at the commercial and/or embedded markets.
Changes in the Company’s estimated liability for product warranty were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
(In millions)
Beginning balance
$
17

 
$
19

 
$
19

 
$
17

New warranties issued
7

 
6

 
21

 
22

Settlements
(5
)
 
(9
)
 
(20
)
 
(28
)
Changes in liability for pre-existing warranties, including expirations
(4
)
 
3

 
(5
)
 
8

Ending balance
$
15

 
$
19

 
$
15

 
$
19

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.

15


Contingencies
Securities Class Action
On January 15, 2014, a class action lawsuit captioned Hatamian v. AMD, et al., C.A. No. 3:14-cv-00226 was filed against the Company in the United States District Court for the Northern District of California. The complaint purports to assert claims against the Company and certain individual officers for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5 of the Exchange Act. The plaintiffs seek to represent a proposed class of all persons who purchased or otherwise acquired the Company's common stock during the period April 4, 2011 through October 18, 2012. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual officers regarding the Company's 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. The complaint seeks unspecified compensatory damages, attorneys’ fees and costs.
On July 7, 2014, the Company filed a motion to dismiss plaintiffs’ claims. On March 31, 2015, the Court denied the motion to dismiss. On May 14, 2015, the Company filed its answer to plaintiffs’ corrected amended complaint. The discovery process is ongoing. On September 4, 2015, plaintiffs filed their motion for class certification. A court-ordered mediation is scheduled for January 2016.
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.
Shareholder Derivative Lawsuits
On March 20, 2014, a purported shareholder derivative lawsuit captioned Wessels v. Read, et al., Case No. 1:14 cv-262486 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 our 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for its 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 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 case was transferred to the judge handling the Hatamian Lawsuit and is now Case No. 4:15-cv-01890. The Wessels and Hamilton shareholder derivative lawsuits are currently stayed.
On September 29, 2015, a similar purported shareholder derivative lawsuit captioned Jake Ha v Caldwell, et al., Case No. 3:15-cv-04485 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 shareholder vote on the Company’s 2015 proxy.
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.
Other Legal Matters
The Company is a defendant or plaintiff in various actions that arose in the normal course of business. With respect to these matters, based on the management’s current knowledge, the Company believes that the amount or range of reasonably possible loss, if any, will not, either individually or in the aggregate, have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.
NOTE 10. Restructuring and Other Special Charges, Net
2015 Restructuring Plan
On September 26, 2015, the Company implemented a restructuring plan (2015 Restructuring Plan) focused on the Company's ongoing efforts to simplify its business and align resources with its long term strategy.
The 2015 Restructuring Plan involved a reduction of global headcount by approximately 5%. The 2015 Restructuring Plan includes organizational actions such as outsourcing certain IT services and application development. The 2015 Restructuring Plan also anticipates a charge for the consolidation of certain real estate facilities. The Company recorded a $41

16


million restructuring charge in the third quarter of 2015, of which approximately $31 million is related to severance and benefit costs, approximately $1 million to facilities related consolidation charges and approximately $9 million of intangible asset related charges associated with the impairment of certain software licenses that have ongoing payment obligations. The Company expects the 2015 Restructuring Plan will likely result in total cash payments of approximately $26 million and $15 million in the fiscal years 2015 and 2016, respectively. The actions associated with the 2015 Restructuring Plan are expected to be substantially completed by the end of fiscal year 2016.
The following table provides a summary of the restructuring activities in the third quarter of 2015 and the related liabilities recorded in Other current liabilities and Other long-term liabilities on the Company’s condensed consolidated balance sheets as of September 26, 2015:
 
Severance
and related
benefits
 
Other exit
related
costs
 
Total
 
(In millions)
Balance as of June 27, 2015
$
—

 
$
—

 
$
—

Charges
31

 
10

 
41

Cash payments
(3
)
 
—

 
(3
)
Non-cash charges
—

 
(9
)
 
(9
)
Balance as of September 26, 2015
$
28

 
$
1

 
$
29

2014 Restructuring Plan
In October 2014, the Company implemented a restructuring plan (2014 Restructuring Plan) designed to improve operating efficiencies. The 2014 Restructuring Plan involved a reduction of global headcount by approximately 6% and an alignment of its real estate footprint with its reduced headcount. In the nine months ended September 26, 2015, the Company recorded an $18 million restructuring charge, which consisted of $5 million non-cash charge related to asset impairments, $4 million for severance, and related benefits and $9 million for facilities related costs. The 2014 Restructuring Plan was largely completed by the end of the third quarter of 2015.
The following table provides a summary of the restructuring activities in the first nine months of 2015 and the related liabilities recorded in Other current liabilities and Other long-term liabilities on the Company’s condensed consolidated balance sheets as of September 26, 2015:
 
Severance
and related
benefits
 
Other exit
related
costs
 
Total
 
(In millions)
Balance as of December 27, 2014
$
26

 
$
13

 
$
39

Charges
4

 
14

 
18

Cash payments
(22
)
 
(5
)
 
(27
)
Non-cash charges
—

 
(5
)
 
(5
)
Balance as of September 26, 2015
$
8

 
$
17

 
$
25

Dense Server Systems Business Exit
As a part of the Company’s strategy to simplify and sharpen its investment focus, the Company exited the dense server systems business, formerly SeaMicro, in the first quarter of 2015. As a result, the Company recorded a charge of $76 million in Restructuring and other special charges, net on the Company’s condensed consolidated statements of operations in the first nine months ended September 26, 2015. This charge consisted of an impairment charge of $62 million related to the acquired intangible assets. The Company concluded that the carrying value of the acquired intangible assets associated with its dense server systems business was fully impaired as the Company did not have plans to utilize the related freedom fabric technology in any of its future products nor did it have any plans at that time to monetize the associated intellectual property. In addition, the exit charge consisted of a $7 million non-cash charge related to asset impairments, $4 million of severance and related benefits and $3 million for contract or program termination costs. The Company expects to complete this exit activity by the end of the first quarter of 2016.
NOTE 11. Accumulated Other Comprehensive Income (Loss)
The tables below summarize the changes in accumulated other comprehensive income (loss) by component:
 
Three Months Ended
 
September 26,
2015
 
September 27,
2014
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized gains (losses) on cash flow hedges
 
Total
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized gains (losses) on cash flow hedges
 
Total
 
(In millions)
Beginning balance
$
1

 
$
(6
)
 
$
(5
)
 
$
1

 
$
—

 
$
1

Unrealized gains (losses) arising during the period, net of tax
(3
)
 
(13
)
 
(16
)
 
—

 
(3
)
 
(3
)
Reclassification adjustment for (gains) losses realized and included in net income (loss), net of tax
—

 
6

 
6

 
—

 
1

 
1

Total other comprehensive income (loss)
(3
)
 
(7
)
 
(10
)
 
—

 
(2
)
 
(2
)
Ending balance
$
(2
)
 
$
(13
)
 
$
(15
)
 
$
1

 
$
(2
)
 
$
(1
)
 
Nine Months Ended
 
September 26,
2015
 
September 27,
2014
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized gains (losses) on cash flow hedges
 
Total
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized gains (losses) on cash flow hedges
 
Total
 
(In millions)
Beginning balance
$
1

 
$
(6
)
 
$
(5
)
 
$
1

 
$
(3
)
 
$
(2
)
Unrealized gains (losses) arising during the period, net of tax
(3
)
 
(21
)
 
(24
)
 
—

 
(3
)
 
(3
)
Reclassification adjustment for (gains) losses realized and included in net income (loss), net of tax
—

 
14

 
14

 
—

 
4

 
4

Total other comprehensive income (loss)
(3
)
 
(7
)
 
(10
)
 
—

 
1

 
1

Ending balance
$
(2
)
 
$
(13
)
 
$
(15
)
 
$
1

 
$
(2
)
 
$
(1
)



17


NOTE 12. Secured Revolving Line of Credit
Loan and Security Agreement
The Company and its subsidiary, AMD International Sales & Service, Ltd. (together, the Borrowers), entered into a loan and security agreement on November 12, 2013, as amended on December 11, 2014, (the Loan Agreement) for a secured revolving line of credit for a principal amount of up to $500 million (the Secured Revolving Line of Credit), with up to $75 million available for issuance of letters of credit, with a group of lenders and Bank of America, N.A., acting as agent for the lenders (the Agent). The Secured Revolving Line of Credit matures on November 12, 2018. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible account receivable minus certain reserves. The borrowings of the Secured Revolving Line of Credit may be used for general corporate purposes, including working capital needs.
Amended and Restated Loan and Security Agreement
On April 14, 2015, the Borrowers and ATI Technologies ULC (together with the Borrowers, the Loan Parties), amended and restated the Loan Agreement (the Amended and Restated Loan Agreement) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders (the Lenders) and the Agent.
The Amended and Restated Loan Agreement provides for a Secured Revolving Line of Credit for a principal amount of up to $500 million with up to $75 million available for issuance of letters of credit, which remained unchanged from the Loan Agreement. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible accounts receivable (90% for certain qualified eligible accounts receivable), minus specified reserves. The size of the commitments under the Secured Revolving Line of Credit may be increased by up to an aggregate amount of $200 million.
The Secured Revolving Line of Credit matures on April 14, 2020 and is secured by a first priority security interest in the Loan Parties’ accounts receivable, inventory, deposit accounts maintained with the Agent and other specified assets, including books and records.
The Borrowers may elect a per annum interest rate equal to (a) the London Interbank Offered Rate (LIBOR) plus the applicable margin set forth in the applicable chart below (the “Applicable Margin”) as determined by the average availability under the Secured Revolving Line of Credit and the fixed charge coverage ratio for the most recently ended four-fiscal quarter period; or (b) (i) the greatest of (x) the Agent’s prime rate, (y) the federal funds rate, as published by the Federal Reserve Bank of New York plus 0.50%, and (z) LIBOR for a one-month period plus 1.00%, plus (ii) the Applicable Margin.
Applicable Margin, if average availability is equal to or greater than 66.66% of the total commitment amount and the fixed charge coverage ratio for the most recently ended four-fiscal quarter period is greater than or equal to 1.25 to 1.00, is 0.25% for Base Rate Revolver Loans and 1.25% for LIBOR Revolver Loans. Otherwise, Applicable Margin is determined in accordance with the below table:
Level
 
Average
Availability for
Last Fiscal
Month
 
Base Rate
Revolver Loans:
Applicable Margin
 
LIBOR
Revolver Loans:
Applicable Margin
I
  
greater than or equal to 66.66% of the Revolver Commitment
  
0.50%
 
1.50%
II
  
greater than or equal to 33.33% of the Revolver Commitment, less than 66.66%
  
0.75%
 
1.75%
III
  
less than 33.33% of the Revolver Commitment
  
1.00%
 
2.00%
The Secured Revolving Line of Credit may be optionally prepaid or terminated, and unutilized commitments may be reduced at any time, in each case without premium or penalty. In connection with the Secured Revolving Line of Credit, the Borrowers will pay an unused line fee equal to 0.375% per annum, payable monthly on the unused amount of the commitments under the Secured Revolving Line of Credit. The unused line fee decreases to 0.25% per annum when 35% or more of the Secured Revolving Line of Credit is utilized. The Borrowers will pay (i) a monthly fee on all letters of credit outstanding under the Secured Revolving Line of Credit equal to the applicable LIBOR margin and (ii) a fronting fee to the Agent equal to 0.125% of all such letters of credit, payable monthly in arrears.
The Amended and Restated Loan Agreement contains covenants that place certain restrictions on the Loan Parties’ ability to, among other things, allow certain of the Company’s subsidiaries that manufacture or process inventory for the Loan Parties to borrow secured debt or unsecured debt beyond a certain amount, amend or modify certain terms of any debt of $50 million or more or subordinated debt, create or suffer to exist any liens upon accounts or inventory, sell or transfer any of Loan Parties’

18


accounts or inventory other than certain ordinary-course transfers, make certain changes to any Loan Party’s name or form or state of organization without notifying the Agent, liquidate, dissolve, merge, amalgamate, combine or consolidate, or become a party to certain agreements restricting the Loan Parties’ ability to incur or repay debt, grant liens, make distributions, or modify loan agreements.
Further restrictions apply when certain payment conditions (the Payment Conditions) are not satisfied with respect to specified transactions, events or payments. The Payment Conditions include that (i) no default or event of default exists and (ii) at all times during the 45 consecutive days immediately prior to such transaction, event or payment and on a pro forma basis after giving effect to such transaction, event or payment and any incurrence or repayment of indebtedness in connection therewith, the Loan Parties’ Excess Cash Availability (as defined in the Amended and Restated Loan Agreement) is greater than the greater of 20% of the total commitment amount and $100 million. Such restrictions limit the Loan Parties’ ability to, among other things, create any liens upon any of the Loan Parties’ property (other than customary permitted liens and liens on up to $1.5 billion of secured credit facilities debt (which amount includes the Secured Revolving Line of Credit), declare or make any distributions, create any encumbrance on the ability of a subsidiary to make any upstream payments, make asset dispositions other than certain ordinary course dispositions, make certain loans, make payments with respect to subordinated debt or certain borrowed money prior to its due date or become a party to certain agreements restricting the Loan Parties’ ability to enter into any non arm’s-length transaction with an affiliate.
The Loan Parties are required to repurchase, redeem, defease, repay, create a segregated account for the repayment of, or request Agent to reserve a sufficient available amount under the Secured Revolving Line of Credit for the repayment of, all debt for borrowed money exceeding $50 million, by no later than 60 days prior to its maturity date (not including the Secured Revolving Line of Credit). Any reserved funds for this purpose would not be included in domestic cash calculations.
In addition, if at any time the Loan Parties’ Excess Cash Availability is less than the greater of 15% of the total commitment amount and $75 million, the Loan Parties must maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 until (i) no event of default exists and (ii) the Loan Parties’ Excess Cash Availability is greater than the greater of 15% of the total commitment amount and $75 million for 45 consecutive days.
The events of default under the Amended and Restated Loan Agreement include, among other things, payment defaults, the inaccuracy of representations or warranties, defaults in the performance of affirmative and negative covenants, bankruptcy and insolvency related defaults, a cross-default related to indebtedness in an aggregate amount in excess of $50 million, judgments entered against a Loan Party in an amount that exceeds cumulatively $50 million, certain ERISA events and events related to Canadian defined benefits plans and a change of control. When a Payment Condition has not been satisfied, additional events of default include, among other things, a loss, theft damage or destruction with respect to any collateral if the amount not covered by insurance exceeds $50 million.
First Amendment to Amendment and Restated Loan and Security Agreement
On June 10, 2015, the Loan Parties entered into a First Amendment to the Amended and Restated Loan and Security Agreement (the “First Amendment”) by and among the Loan Parties, the Lenders and the Agent, which modifies the Amended and Restated Loan Agreement. Amendments to the Amended and Restated Loan Agreement effected by the First Amendment include the addition of exceptions to the liens and asset sale covenants to permit the Loan Parties to enter into certain supply chain finance arrangements, as well as the addition of certain definitions related thereto.
At September 26, 2015 and December 27, 2014, the Secured Revolving Line of Credit had an outstanding loan balance of $230 million and $130 million, respectively, at an interest rate of 3.75% and 4.25%, respectively. At September 26, 2015, the Secured Revolving Line of Credit also had $16 million related to outstanding Letters of Credit, and up to $151 million available for future borrowings. The Company reports its intra-period changes in its revolving credit balance on a net basis in its condensed consolidated statement of cash flows as the Company intends the period of the borrowings to be brief, repaying borrowed amounts within 90 days. As of September 26, 2015, the Company was in compliance with all required covenants stated in the Loan Agreement.

19


NOTE 13. Subsequent Events
Equity Interest Purchase Agreement
On October 15, 2015, the Company entered into an Equity Interest Purchase Agreement (the Equity Interest Purchase Agreement) with Nantong Fujitsu Microelectronics Co., Ltd., a Chinese joint stock company (JV Party), under which the Company will sell to JV Party a majority of the equity interests in AMD Technologies (China) Co. Ltd. a wholly-foreign owned enterprise incorporated as a limited liability company (the Chinese Target Company) and Advanced Micro Devices Export Sdn. Bhd., a Malaysian limited liability company (the Malaysian Target Company) and, together with the Chinese Target Company, (the Target Companies), thereby forming two joint ventures (collectively, the JVs) with JV Party in a transaction valued at approximately $436 million (the Transaction). The JV Party will acquire 85% of the equity interests in each JV for approximately $371 million and the Company estimates it will receive approximately $320 million cash, net of taxes and other customary expenses. After closing, JV Party’s affiliates will own 85% of the equity interests in each JV while the Company’s subsidiaries (the Company Shareholders) will own the remaining 15%. The Transaction will result in the JVs providing assembly, testing, marking, packing and packaging services (ATMP) to the Company. The Company plans to account for its investment in the JVs under the equity method of accounting.
The Equity Interest Purchase Agreement also has related agreements including: (i) with respect to the Malaysian Target Company, a Shareholders’ Agreement, and with respect to the Chinese Target Company, a Joint Venture Contract governing the joint venture relationships from and after the Closing, (ii) an IP License Agreement, (iii) a Manufacturing Services Agreement, (iv) a Transition Services Agreement, and (v) a Trademark License Agreement.
The transaction is expected to close in the first half of 2016, pending all regulatory and other approvals.
As a result of the decision to form the above JVs, the balance sheet as of September 26, 2015 reflects held-for-sale accounting of the ATMP assets and liabilities which requires reclassification of such financial amounts to current assets and current liabilities. The Company reclassified $156 million to other current assets and $81 million to other current liabilities. Asset balances reclassified into other current assets are primarily comprised of property, plant, and equipment of $89 million, preliminary goodwill allocation of $37 million and inventory of $14 million. Liability balances reclassified into other current liabilities are primarily comprised of accounts payable of $74 million. The balances included in the final gain/(loss) calculation, at closing, are likely to be different due to normal operational activities occurring through the closing date, as well as the final goodwill allocation.


20


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in this report include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements speak only as of the date hereof or as of the dates indicated in the statements and should not be relied upon as predictions of future events, as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma,” “estimates,” “anticipates,” or the negative of these words and phrases, other variations of these words and phrases or comparable terminology. The forward-looking statements relate to, among other things: demand for AMD's products; the growth, change and competitive landscape of the markets in which AMD participates; future restructuring activities; the nature and extent of AMD's future payments to GLOBALFOUNDRIES Inc. (GF) and the materiality of these payments; AMD's ability to negotiate a re-profiling of its wafer purchase commitments with GF; the materiality of AMD's future purchases from GF; sales patterns of AMD's semi-custom System-on-Chip (SoC) products; expected completion of its restructuring plan announced in October 2015 (the 2015 Restructuring Plan) and the anticipated cash payments and savings from the 2015 Restructuring Plan; the expected completion of AMD's exit from the dense server systems business; statements regarding the proposed joint ventures (the JVs) between AMD and Nantong Fujitsu Microelectronics, Co., Ltd., including the JVs' expected future performance (including expected results of operations and financial guidance); benefits from the proposed transaction; the JVs' future financial condition, operating results, strategy and plans; statements about regulatory and other approvals; the closing date for the proposed transaction; the level of international sales as compared to total sales; that other unrecognized tax benefits will not materially change in the next 12 months; the total estimated amount related to settlement discussions with a foreign tax authority; that AMD's cash and cash equivalents and marketable securities balances, the savings from our restructuring plans and the Secured Revolving Line of Credit will be sufficient to fund AMD's operations including capital expenditures over the next 12 months; AMD's ability to obtain sufficient external financing on favorable terms, or at all; its dependence on a small number of customers for a substantial part of its revenue; its hedging strategy; and its expenditures related to environmental compliance and conflict minerals disclosure requirements. Material factors that could cause actual results to differ materially from current expectations include, without limitation, the following: Intel Corporation’s dominance of the microprocessor market and its aggressive business practices may limit AMD's ability to compete effectively; AMD relies on GF to manufacture most of its microprocessor and APU products and certain of its GPU and semi-custom products. If GF is not able to satisfy AMD's manufacturing requirements, its business could be adversely impacted; AMD relies on third parties to manufacture its products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, AMD's business could be materially adversely affected; failure to achieve expected manufacturing yields for AMD's products could negatively impact its financial results; the success of AMD's business is dependent upon its ability to introduce products on a timely basis with features and performance levels that provide value to its customers while supporting and coinciding with significant industry transitions; if AMD cannot generate sufficient revenue and operating cash flow or obtain external financing, it may face a cash shortfall and be unable to make all of its planned investments in research and development or other strategic investments; the loss of a significant customer may have a material adverse effect on us; global economic uncertainty may adversely impact AMD's business and operating results; AMD may not be able to generate sufficient cash to service its debt obligations or meet its working capital requirements; AMD has a substantial amount of indebtedness which could adversely affect its financial position and prevent it from implementing its strategy or fulfilling its contractual obligations; the agreements governing AMD's notes and its secured revolving line of credit (Secured Revolving Line of Credit) impose restrictions on AMD that may adversely affect its ability to operate its business; the completion and impact of the 2015 Restructuring Plan, its transformation initiatives and any future restructuring actions could adversely affect it; the markets in which AMD's products are sold are highly competitive; uncertainties involving the ordering and shipment of AMD's products could materially adversely affect it; AMD's receipt of revenue from its semi-custom SoC products is dependent upon its technology being designed into third-party products and the success of those products; the demand for AMD's products depends in part on the market conditions in the industries into which they are sold. Fluctuations in demand for AMD's products or a market decline in any of these industries could have a material adverse effect on its results of operations; AMD's ability to design and introduce new products in a timely manner is dependent upon third-party intellectual property; AMD depends on third-party companies for the design, manufacture and supply of motherboards and other computer platform components to support its business; if AMD loses Microsoft Corporations support for its products or other software vendors do not design and develop software to run on AMD's products, its ability to sell its products could be materially adversely affected; AMD may incur future impairments of goodwill; AMD's reliance on third-party distributors and AIB partners subjects it to certain risks; AMD's inability to continue to attract and retain qualified personnel may hinder its product development programs; in the event of a change of control, AMD may not be able to repurchase its outstanding debt as required by the applicable indentures and its Secured Revolving Line of Credit, which would result in a default under the indentures and its Secured Revolving Line of Credit; the semiconductor industry is highly cyclical and has experienced severe downturns that have materially adversely affected, and may continue to materially adversely affect,

21


its business in the future; AMD's business is dependent upon the proper functioning of its internal business processes and information systems and modification or interruption of such systems may disrupt its business, processes and internal controls; data breaches and cyber-attacks could compromise AMD's intellectual property or other confidential, sensitive information be costly to remediate and cause significant damage to its business and reputation; AMD's operating results are subject to quarterly and seasonal sales patterns; if essential equipment or materials are not available to manufacture its products, AMD could be materially adversely affected; if AMD's products are not compatible with some or all industry-standard software and hardware, it could be materially adversely affected; costs related to defective products could have a material adverse effect on AMD; if AMD fails to maintain the efficiency of its supply chain as it responds to changes in customer demand for its products, its business could be materially adversely affected; AMD outsources to third parties certain supply-chain logistics functions, including portions of its product distribution, transportation management and information technology support services; acquisitions, divestitures and/or joint ventures could disrupt its business, harm its financial condition and operating results or dilute, or adversely affect the price of its common stock; AMD's worldwide operations are subject to political, legal and economic risks and natural disasters, which could have a material adverse effect on it; worldwide political conditions may adversely affect demand for AMD's products; unfavorable currency exchange rate fluctuations could adversely affect AMD; AMD's inability to effectively control the sales of its products on the gray market could have a material adverse effect on it; if AMD cannot adequately protect its technology or other intellectual property in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, it may lose a competitive advantage and incur significant expenses; AMD is a party to litigation and may become a party to other claims or litigation that could cause it to incur substantial costs or pay substantial damages or prohibit it from selling its products; AMD's business is subject to potential tax liabilities; a variety of environmental laws that AMD is subject to could result in additional costs and liabilities; and higher health care costs and labor costs could adversely affect AMD's business.
For a discussion of factors that could cause actual results to differ materially from the forward-looking statements, see “Part II, Item 1A—Risk Factors” beginning on page 44 and “Financial Condition” beginning on page 34 and other risks and uncertainties set forth below in this report or detailed in our other Securities and Exchange Commission (SEC) reports and filings. We assume no obligation to update forward-looking statements.

22

AMD, the AMD Arrow logo, ATI, and the ATI logo and combinations thereof, are trademarks of Advanced Micro Devices, Inc. Microsoft is a registered trademark of Microsoft Corporation in the United States and other jurisdictions. Sony is a trademark of Sony Corporation. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this report and our audited consolidated financial statements and related notes as of December 27, 2014 and December 28, 2013, and for each of the three years in the period ended December 27, 2014 as filed in our Annual Report on Form 10-K for the year ended December 27, 2014.
Overview
We are a global semiconductor company with facilities around the world. Within the global semiconductor industry, we offer primarily:

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

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

In this section, we will describe the general financial condition and the results of operations of Advanced Micro Devices, Inc. and its wholly-owned subsidiaries (collectively, “us,” “our” or “AMD”), including a discussion of our results of operations for the quarter and nine months ended September 26, 2015 compared to the quarter ended June 27, 2015 and the quarter and nine months ended September 27, 2014, an analysis of changes in our financial condition and a discussion of our contractual obligations.

Net revenue in the third quarter of 2015 was $1.06 billion, a 13% increase compared to the second quarter of 2015, and a 26% decrease compared to the third quarter of 2014. The quarter-over-quarter increase was due to a 13% increase in Enterprise, Embedded and Semi-Custom segment net revenue and a 12% increase in Computing and Graphics segment net revenue. The increase in Enterprise, Embedded and Semi-Custom segment net revenue was primarily driven by seasonally higher sales of our semi-custom SoCs. The increase in Computing and Graphics segment net revenue was primarily due to higher sales of GPUs and desktop processors. Gross margin, as a percentage of net revenue, for the third quarter of 2015 was 23%, a 2 percentage point decrease compared to the second quarter of 2015. Gross margin in the third quarter of 2015 was adversely impacted by an inventory write-down of $65 million primarily consisting of older-generation APUs.

Cash and cash equivalents at the end of the third quarter of 2015 were $755 million, compared to $829 million as of the end of the second quarter of 2015. Total debt as of the end of the third quarter of 2015 was $2.26 billion, flat from the prior quarter.

During the third quarter of 2015, we continued to execute our product roadmap and delivered new products. In July 2015, we introduced the A8-7670K APU, the newest addition to our A-Series line of desktop processors. We designed the A8-7670K APU to support Windows® 10, mainstream workloads and online gaming. We also expanded our AMD FirePro™ server GPU family by introducing the world’s first server GPU, the AMD FirePro S9170, designed for high performance compute (HPC) environments. The AMD FirePro S9170 is based on second-generation AMD Graphics Core Next (GCN) GPU architecture, a unified scalable GPU optimized for graphics and compute. In August 2015, we introduced the AMD Radeon® R9 Nano, a small-form-factor mini-ITX enthusiast graphics card designed to deliver energy efficiency and performance for ultra-high resolutions, improved virtual reality experiences and smoother gameplay.

As part of our ongoing efforts to simplify our business and align resources with our long term strategy, we implemented a restructuring plan (2015 Restructuring Plan) in the third quarter of 2015. The 2015 Restructuring Plan provides for a workforce reduction of approximately 5% of our global workforce, organizational actions such as outsourcing IT services and application development and consolidation of certain real estate facilities. We realized operational savings, primarily in operating expenses, of approximately $2 million in the third quarter of 2015. We expect to realize operational savings, primarily in operating expenses, of approximately $7 million in the fourth quarter of fiscal year 2015 and approximately $58 million in fiscal year 2016. We recorded a restructuring and asset impairment charge of approximately $48 million in the third quarter of 2015, comprised of approximately $41 million related to the 2015 Restructuring Plan and approximately $7 million related to our 2014 Restructuring Plan. The majority of the restructuring charge related to the 2015 Restructuring Plan consists of severance and benefits costs.
    

23

Further to our strategic plan, in October 2015, we entered into a definitive agreement to form a joint venture with Nantong Fujitsu Microelectronics Co., Ltd. (NFME). We agreed to sell to NFME 85% of our interest in each of our Assembly, Test, Mark and Pack (ATMP) manufacturing subsidiaries located in Penang, Malaysia and Suzhou, China forming two joint ventures, which will provide us with ATMP services. We will retain a 15% ownership in each of the two joint ventures. As consideration for the transaction we expect to receive approximately $371 million from NFME with net proceeds of $320 million, net of taxes and other charges at the closing of the transaction. The transaction is expected to close in the first half of 2016, pending successful completion of regulatory approvals.
As a result of the decision to form the above JVs, the balance sheet as of September 26, 2015 reflects held-for-sale accounting of the ATMP assets and liabilities which requires reclassification of such financial amounts to current assets and current liabilities. We reclassified $156 million to other current assets and $81 million to other current liabilities.

24

GLOBALFOUNDRIES
Wafer Supply Agreement. The Wafer Supply Agreement (WSA) governs the terms by which we purchase products manufactured by GLOBALFOUNDRIES Inc. (GF).
Fourth Amendment to Wafer Supply Agreement. On March 30, 2014, we entered into a fourth amendment to the WSA. The primary effect of the fourth amendment was to establish volume purchase commitments and fixed pricing for the 2014 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of our microprocessor unit, graphics processor unit and semi-custom game console products to be delivered by GF to us during the 2014 calendar year.
Fifth Amendment to Wafer Supply Agreement. On April 16, 2015, we entered into a fifth amendment to the WSA. The primary effect of the fifth amendment was to establish volume purchase commitments and fixed pricing for the 2015 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of our microprocessor unit, graphics processor unit and semi-custom products to be delivered by GF to us during the 2015 calendar year.
Our total purchases from GF related to wafer manufacturing and research and development activities for the quarters ended September 26, 2015 and September 27, 2014 were $288 million and $290 million, respectively. Our total purchases from GF related to wafer manufacturing and research and development activities for the nine months ended September 26, 2015 and September 27, 2014 were $704 million and $843 million, respectively.
We estimate that our purchase obligations to GF for wafer manufacturing and research and development activities will be approximately $1.1 billion in fiscal year 2015 and at least $106 million during the first quarter of fiscal year 2016. We are not able to meaningfully quantify or estimate our future purchase obligations to GF other than those set forth in the fifth amendment to the WSA, but we expect that our future purchases from GF will continue to be material. We are currently in discussions with GF regarding the re-profiling of our wafer purchase commitments under the fifth amendment to the WSA. We are unable to quantify the outcome of our negotiations with GF.
GF continues to be a related party of AMD because Mubadala Development Company PJSC (Mubadala) and Mubadala Technology Investments LLC (Mubadala Tech) are affiliated with West Coast Hitech L.P. (WCH), our largest stockholder. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our condensed consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our net revenue, inventories, asset impairments and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of our assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
Management believes there have been no significant changes during the quarter and nine months ended September 26, 2015 to the items that we disclosed as our critical accounting estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 27, 2014.
We will perform an annual goodwill impairment analysis as of the first day of the fourth quarter of 2015 pursuant to our accounting policy. However, we will also test for goodwill impairment at any time during the year if there are indicators of impairment present. If there are declines in our market capitalization, business climate or operating results, we may incur impairment charges that could be material.

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Results of Operations
Management, including the Chief Operating Decision Maker, who is our Chief Executive Officer, reviews and assesses our operating performance using segment net revenue and operating income (loss) before interest, other income (expense), net and income taxes. These performance measures include the allocation of expenses to the operating segments based on management’s judgment. We have the following two reportable segments:
•
the Computing and Graphics segment, which primarily includes desktop and notebook processors and chipsets, discrete GPUs and professional graphics; and
•
the Enterprise, Embedded and Semi-Custom segment, which primarily includes server and embedded processors, semi-custom SoC products, engineering services and royalties.
In addition to these reportable segments, we have an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to any of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. Also included in this category are amortization of acquired intangible assets, employee stock-based compensation expense, restructuring and other special charges, net and workforce rebalancing severance charges.
We use a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters ended September 26, 2015 and September 27, 2014 each consisted of 13 weeks. The nine months ended September 26, 2015 and September 27, 2014 each consisted of 39 weeks.
Our operating results tend to vary seasonally. For example, historically, first quarter PC product sales are generally lower than fourth quarter sales. In addition, with respect to our semi-custom SoC products for game consoles, we expect sales patterns to follow the seasonal trends of a consumer business with sales in the first half of the year being lower than sales in the second half of the year.
The following table provides a summary of net revenue and operating income (loss) by segment:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 26,
2015
 
June 27,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
 
(In millions)
Net revenue:
 
 
 
 
 
 
 
 
 
 
Computing and Graphics
 
$
424

 
$
379

 
$
781

 
$
1,335

 
$
2,470

Enterprise, Embedded and Semi-Custom
 
637

 
563

 
648

 
1,698

 
1,797

Total net revenue
 
$
1,061

 
$
942

 
$
1,429

 
$
3,033

 
$
4,267

Operating income (loss):
 
 
 
 
 
 
 
 
 
 
Computing and Graphics
 
$
(181
)
 
$
(147
)
 
$
(17
)
 
$
(403
)
 
$
(20
)
Enterprise, Embedded and Semi-Custom
 
84

 
27

 
108

 
156

 
290

All Other
 
(61
)
 
(17
)
 
(28
)
 
(185
)
 
(95
)
Total operating income (loss)
 
$
(158
)
 
$
(137
)
 
$
63

 
$
(432
)
 
$
175


Computing and Graphics
Computing and Graphics net revenue of $424 million in the third quarter of 2015 decreased by 46%, compared to net revenue of $781 million in the third quarter of 2014, as a result of a 47% decrease in unit shipments. Average selling price remained flat. The decrease in unit shipments was primarily attributable to lower unit shipments of our desktop and notebook microprocessor products and chipset products due to lower demand.
Computing and Graphics net revenue of $424 million in the third quarter of 2015 increased by 12%, compared to net revenue of $379 million in the second quarter of 2015, as a result of a 16% increase in unit shipments, partially offset by 4% decrease in average selling price. The increase in unit shipments was primarily attributable to higher unit shipment of our GPU products and microprocessor products. Average selling price decreased primarily attributable to a decrease in average selling price of our notebook microprocessor products and our GPU desktop products, partially offset by increase in average selling price of our add-in board (AIB) products.

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Computing and Graphics net revenue of $1,335 million in the first nine months of 2015 decreased by 46%, compared to $2,470 million in the first nine months of 2014, as a result of a 47% decrease in unit shipments, partially offset by a 3% increase in average selling price. The decrease in unit shipments of all categories of products was due to lower demand and lower unit shipments of our chipset products due to our chipsets being integrated into our APU products. The increase in average selling price was primarily attributable to an increase in average selling price of our notebook microprocessor products and our GPU products due to a favorable shift in our product mix, partially offset by a decrease in average selling price of our chipset products.
Computing and Graphics operating loss was $181 million in the third quarter of 2015 compared to operating loss of $17 million in the third quarter of 2014. The decline in operating results was primarily due to the decrease in net revenue referenced above, partially offset by a $136 million decrease in cost of sales, a $29 million decrease in marketing, general and administrative expenses and a $28 million decrease in research and development expenses. Cost of sales decreased primarily due to lower unit shipments in the third quarter of 2015 compared to the third quarter of 2014, partially offset by an inventory write-down of $52 million as a result of lower than anticipated demand for primarily older-generation APU products. Marketing, general and administrative expenses and research and development expenses decreased for the reasons set forth under “Expenses” below.
Computing and Graphics operating loss was $181 million in the third quarter of 2015 compared to operating loss of $147 million in the second quarter of 2015. The decline in operating results was primarily due to an $87 million increase in cost of sales and a $12 million increase in research and development expenses, partially offset by the increase in net revenue referenced above and a $21 million decrease in marketing, general and administrative expenses. Cost of sales increased primarily due to higher unit shipments in the third quarter of 2015 compared to the second quarter of 2015 and an inventory write-down of $52 million as a result of lower than anticipated demand for primarily older-generation APU products. Marketing, general and administrative expenses decreased and research and development expenses increased for the reasons set forth under “Expenses” below.
Computing and Graphics operating loss was $403 million in the first nine months of 2015 compared to operating loss of $20 million in the first nine months of 2014. The decline in operating results was primarily due to the decrease in net revenue referenced above, partially offset by a $584 million decrease in cost of sales, a $115 million decrease in research and development expenses and a $53 million decrease in marketing, general and administrative expenses. Cost of sales decreased primarily due to lower unit shipments in the first nine months of 2015, compared to the first nine months of 2014, partially offset by an inventory write-down of $52 million as a result of lower than anticipated demand for primarily older-generation APU products. Research and development expenses and marketing, general and administrative expenses decreased for the reasons set forth under “Expenses” below.
Enterprise, Embedded and Semi-Custom
Enterprise, Embedded and Semi-Custom net revenue of $637 million in the third quarter of 2015 decreased by 2% compared to net revenue of $648 million in the third quarter of 2014. The decrease was primarily due to a decrease in net revenue received in connection with lower unit shipments of our embedded and server products and a decrease in our non-recurring engineering (NRE) revenue, partially offset by an increase in net revenue received from higher unit shipments of our semi-custom SoC products.
Enterprise, Embedded and Semi-Custom net revenue of $637 million in the third quarter of 2015 increased by 13% compared to net revenue of $563 million in the second quarter of 2015. The increase was primarily due to an increase in net revenue received in connection with higher unit shipments of our semi-custom SoC products.
Enterprise, Embedded and Semi-Custom net revenue of $1,698 million in the first nine months of 2015 decreased by 6% compared to net revenue of $1,797 million in the first nine months of 2014. The decrease was primarily due to a decrease in net revenue received in connection with lower unit shipments of our server and embedded products, NRE revenue, game console royalties and net revenue from our dense server system products as we exited our dense server systems business, partially offset by a seasonal increase in net revenue received in connection with higher unit shipments of our semi-custom SoC products.
Enterprise, Embedded and Semi-Custom operating income was $84 million in the third quarter of 2015 compared to operating income of $108 million in the third quarter of 2014. The decline in operating results was primarily due to the decrease in net revenue referenced above and a $25 million increase in cost of sales, partially offset by an $8 million decrease in marketing, general and administrative expenses and a $5 million decrease in research and development expenses. The increase in cost of sales was primarily due to an inventory write-down of $13 million primarily related to certain units which will not be sold, partially offset by lower manufacturing cost due to lower sales. Marketing, general and administrative expenses and research and development expenses decreased for the reasons set forth under “Expenses” below.

27


Enterprise, Embedded and Semi-Custom operating income was $84 million in the third quarter of 2015 compared to operating income of $27 million in the second quarter of 2015. The improvement in operating results was primarily due to an increase in net revenue referenced above, a $4 million decrease in marketing, general and administrative expenses and a $3 million decrease in research and development expenses, partially offset by a $25 million increase in cost of sales. The increase in cost of sales was primarily due to an inventory write-down of $13 million primarily related to certain units which will not be sold and higher unit shipments of our semi-custom SoC products in the third quarter of 2015, partially offset by the absence of a technology node transition charge of $33 million in the second quarter of 2015. Marketing, general and administrative expenses and research and development expenses decreased for the reasons set forth under “Expenses” below.
Enterprise, Embedded and Semi-Custom operating income was $156 million in the first nine months of 2015 compared to operating income of $290 million in the first nine months of 2014. The decline in operating results was primarily due to the decrease in net revenue referenced above, a $34 million increase in cost of sales and a $16 million increase in research and development expenses, partially offset by a $15 million decrease in marketing, general and administrative expenses. The increase in cost of sales was primarily due to a technology node transition charge of $33 million and an inventory write-down of $13 million primarily related to certain units which will not be sold in the first nine months of 2015, partially offset by a decrease in unit shipments of our server products in the first nine months of 2015 compared to the first nine months of 2014. Research and development expenses increased and marketing, general and administrative expenses decreased for the reasons set forth under “Expenses” below.
All Other
All Other operating loss of $61 million in the third quarter of 2015 included restructuring and other special charges, net of $48 million and stock-based compensation expense of $13 million. All Other operating loss of $28 million in the third quarter of 2014 included stock-based compensation expense of $21 million, $4 million related to other expenses and $3 million related to amortization of acquired intangible assets. All Other operating loss of $17 million in the second quarter of 2015 included stock-based compensation expense of $17 million.
All Other operating loss of $185 million in the first nine months of 2015 included restructuring and other special charges, net of $135 million, stock-based compensation expense of $47 million and $3 million related to amortization of acquired intangible assets. Restructuring and other special charges, net of $135 million included $76 million related to our decision to exit from the dense server systems business, $41 million related to our 2015 Restructuring Plan and $18 million related to our 2014 Restructuring Plan. All Other operating loss of $95 million in the first nine months of 2014 included stock-based compensation expense of $65 million, $14 million related to workforce rebalancing severance charges, $10 million related to amortization of acquired intangible assets and $6 million related to other expenses.
International Sales
International sales as a percentage of net revenue were 75% in the third quarter of 2015 and 82% in the third quarter of 2014. The decrease in international sales as a percentage of net revenue in the third quarter of 2015 compared to the third quarter of 2014 was primarily driven by a higher proportion of revenue from domestic sales of our semi-custom SoC products.
International sales as a percentage of net revenue were 75% in the third and second quarters of 2015.
International sales as a percentage of net revenue were 75% in the first nine months of 2015 and 82% in the first nine months of 2014. The decrease in international sales as a percentage of net revenue in the first nine months of 2015 compared to the first nine months of 2014 was primarily driven by a higher proportion of revenue from domestic sales of our semi-custom SoC products.
We expect that international sales will continue to be a significant portion of total sales in the foreseeable future. Substantially all of our sales transactions were denominated in U.S. dollars.
Comparison of Gross Margin, Expenses, Interest Expense, Other Income (Expense), Net, and Income Taxes
The following is a summary of certain condensed consolidated statement of operations data for the periods indicated: 

28


 
 
Three Months Ended
 
Nine Months Ended
 
 
September 26,
2015
 
June 27,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
 
(In millions except for percentages)
Cost of sales
 
$
822

 
$
710

 
$
935

 
$
2,236

 
$
2,788

Gross margin
 
239

 
232

 
494

 
797

 
1,479

Gross margin percentage
 
23
%
 
25
%
 
35
%
 
26
%
 
35
%
Research and development
 
241

 
235

 
278

 
718

 
834

Marketing, general and administrative
 
108

 
134

 
150

 
373

 
460

Amortization of acquired intangible assets
 
—

 
—

 
3

 
3

 
10

Restructuring and other special charges, net
 
48

 
—

 
—

 
135

 
—

Interest expense
 
(39
)
 
(40
)
 
(43
)
 
(119
)
 
(136
)
Other income (expense), net
 
—

 
(3
)
 
(1
)
 
(3
)
 
(70
)
Provision for income taxes
 
—

 
1

 
2

 
4

 
8

Gross Margin
Gross margin as a percentage of net revenue was 23% in the third quarter of 2015 compared to 35% in the third quarter of 2014. Gross margin in the third quarter of 2015 was adversely impacted by an inventory write-down of $65 million, which was primarily the result of lower anticipated demand for older-generation APUs. The impact of the write-down accounted for six gross margin percentage points. Gross margin in the third quarter of 2015 was also adversely impacted by a higher proportion of revenue from our Enterprise, Embedded and Semi-Custom segment, which has lower average gross margins.
Gross margin as a percentage of net revenue was 23% in the third quarter of 2015 compared to 25% in the second quarter of 2015. Gross margin in the third quarter of 2015 was adversely impacted by an inventory write-down of $65 million, which was primarily the result of lower anticipated demand for older-generation APUs. The impact of the write-down accounted for six gross margin percentage points. Gross margin in the third quarter of 2015 was adversely impacted by a higher proportion of revenue from our Enterprise, Embedded and Semi-Custom segment, which has lower average gross margin. In addition, gross margin in the second quarter of 2015 included a technology node transition charge of $33 million, which accounted for three gross margin percentage points.
Gross margin as a percentage of net revenue was 26% in the first nine months of 2015 compared to 35% in the first nine months of 2014. Gross margin in the first nine months of 2015 was adversely impacted by an inventory write-down of $65 million, which was primarily the result of lower anticipated demand for older-generation APUs and a technology node transition charge of $33 million. The impact of the write-down accounted for two gross margin percentage points and the technology node transition charge accounted for one gross margin percentage point. Gross margin in the first nine months of 2015 was also adversely impacted by a higher proportion of revenue from our Enterprise, Embedded and Semi-Custom segment, which has lower average gross margin than our Computing and Graphics segment and lower game console royalties.
Expenses
Research and Development Expenses
Research and development expenses of $241 million in the third quarter of 2015 decreased by $37 million, or 13%, compared to $278 million in the third quarter of 2014. The decrease was primarily due to a $28 million decrease in research and development expenses attributable to our Computing and Graphics segment and a $6 million decrease attributable to the All Other category primarily due to $5 million decrease in stock-based compensation and other employee compensation expenses. Research and development expenses attributable to our Computing and Graphics segment decreased primarily due to a $23 million decrease in product engineering and design costs and a $5 million decrease in other employee compensation and benefit expenses.
Research and development expenses of $241 million in the third quarter of 2015 increased by $6 million, or 3%, compared to $235 million in the second quarter of 2015. The increase was primarily due to a $12 million increase in research and development expenses attributable to our Computing and Graphics segment, partially offset by a $3 million decrease in research and development expenses attributable to our Enterprise, Embedded and Semi-Custom segment. The increase in research and development expenses in our Computing and Graphics segment was primarily due to an increase in product engineering and design costs. The decrease in research and development expenses in our Enterprise, Embedded and Semi-Custom segment was primarily due to a decrease in product engineering and design costs.

29


Research and development expenses of $718 million in the first nine months of 2015 decreased by $116 million, or 14%, compared to $834 million in the first nine months of 2014. The decrease was primarily due to a $115 million decrease in research and development expenses attributable to our Computing and Graphics segment and a $17 million decrease in the All Other category, primarily due to a $9 million workforce rebalancing severance charges recorded in the first nine months of 2014 and $6 million decrease in stock compensation expenses, partially offset by a $16 million increase in research and development expenses attributable to our Enterprise, Embedded and Semi-Custom segment. Research and development expenses attributable to our Computing and Graphics segment decreased primarily due to a $95 million decrease in product engineering and design costs and a $20 million decrease in other employee compensation and benefit expenses. Research and development expenses attributable to our Enterprise, Embedded and Semi-Custom segment increased primarily due to a $21 million increase in product engineering and design costs, offset by a $5 million decrease in other employee compensation and benefit expenses.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses of $108 million in the third quarter of 2015 decreased by $42 million, or 28%, compared to $150 million in the third quarter of 2014. The decrease was primarily due to a $29 million decrease in marketing, general and administrative expenses attributable to our Computing and Graphics segment and an $8 million decrease in marketing, general and administrative expenses attributable to our Enterprise, Embedded and Semi-Custom segment. Marketing, general and administrative expenses attributable to our Computing and Graphics segment decreased primarily due to a $19 million decrease in sales and marketing activities and a $10 million decrease in other general and administrative expenses. Marketing, general and administrative expenses attributable to our Enterprise, Embedded and Semi-Custom segment decreased primarily due to a $6 million decrease in other general and administrative expenses.
Marketing, general and administrative expenses of $108 million in the third quarter of 2015 decreased by $26 million, or 19%, compared to $134 million in the second quarter of 2015. The decrease was primarily due to a decrease in marketing, general and administrative expenses attributable to our Computing and Graphics segment as a result of a decrease in sales and marketing activities.
Marketing, general and administrative expenses of $373 million in the first nine months of 2015 decreased by $87 million, or 19%, compared to $460 million in the first nine months of 2014. The decrease was primarily due to a $53 million decrease in marketing, general and administrative expenses attributable to our Computing and Graphics segment, a $19 million decrease in the All Other category, primarily due to a $10 million decrease in stock-based compensation expenses and a $5 million decrease related to workforce rebalancing severance charges recorded in the first nine months of 2014 and a $15 million decrease in marketing, general and administrative expenses attributable to our Enterprise, Embedded and Semi-Custom segment. Marketing, general and administrative expenses attributable to our Computing and Graphics segment decreased primarily due to a $30 million decrease in sales and marketing activities and a $23 million decrease in other general and administrative expenses. Marketing, general and administrative expenses attributable to our Enterprise, Embedded and Semi-Custom segment decreased primarily due to a $13 million decrease in other general and administrative expenses.
Restructuring and Other Special Charges, Net
2015 Restructuring Plan
In September 2015, we implemented a restructuring plan focused on our ongoing efforts to simplify our business and align resources with our long term strategy.
The 2015 Restructuring Plan involved a reduction of global headcount by approximately 5%. The 2015 Restructuring Plan includes organizational actions such as outsourcing certain IT services and application development. The 2015 Restructuring Plan also anticipates a charge for the consolidation of certain real estate facilities. We recorded a $41 million restructuring charge in the third quarter of 2015, of which approximately $31 million is related to severance and benefit costs, approximately $1 million to facilities related consolidation charges and approximately $9 million of intangible asset related charges associated with the impairment of certain software licenses that have ongoing payment obligations. We expect the 2015 Restructuring Plan will likely result in total cash payments of approximately $26 million and $15 million in the fiscal years 2015 and 2016, respectively.
The savings from the 2015 Restructuring Plan are anticipated to be approximately $2 million and $7 million in the third and fourth quarters of fiscal year 2015, respectively. We anticipate savings of approximately $58 million in fiscal year 2016. The actions associated with the 2015 Restructuring Plan are expected to be substantially completed by the end of fiscal year 2016.

30


The following table provides a summary of the restructuring activities in the third quarter of 2015 and the related liabilities recorded in Other current liabilities and Other long-term liabilities on our condensed consolidated balance sheets as of September 26, 2015:
 
Severance
and related
benefits
 
Other exit
related
costs
 
Total
 
(In millions)
Balance as of June 27, 2015
$
—

 
$
—

 
$
—

Charges
31

 
10

 
41

Cash payments
(3
)
 
—

 
(3
)
Non-cash charges
—

 
(9
)
 
(9
)
Balance as of September 26, 2015
$
28

 
$
1

 
$
29

2014 Restructuring Plan
In October 2014, we implemented a restructuring plan (2014 Restructuring Plan) designed to improve operating efficiencies. The 2014 Restructuring Plan involved a reduction of global headcount by approximately 6% and an alignment of our real estate footprint with our reduced headcount. In the first nine months ended September 26, 2015, we recorded an $18 million restructuring charge, which consisted of $4 million for severance and related benefits, $5 million non-cash charge related to asset impairments, and $9 million for facilities related costs. The 2014 Restructuring Plan was largely completed by the end of the third quarter of 2015.
The following table provides a summary of the restructuring activities in the first nine months of 2015 and the related liabilities recorded in Other current liabilities and Other long-term liabilities on our condensed consolidated balance sheets as of September 26, 2015:
 
Severance
and related
benefits
 
Other exit
related
costs
 
Total
 
(In millions)
Balance at December 27, 2014
$
26

 
$
13

 
$
39

Charges
4

 
14

 
18

Cash payments
(22
)
 
(5
)
 
(27
)
Non-cash charges
—

 
(5
)
 
(5
)
Balance as of September 26, 2015
$
8

 
$
17

 
$
25

Dense Server Systems Business Exit
As a part of our strategy to simplify and sharpen our investment focus, we exited the dense server systems business, formerly SeaMicro, in the first quarter of 2015. As a result, we recorded a charge of $76 million in Restructuring and other special charges, net on our condensed consolidated statements of operations in the first nine months of 2015. This charge consisted of an impairment charge of $62 million related to the acquired intangible assets. We concluded that the carrying value of the acquired intangible assets associated with our dense server systems business was fully impaired as we did not have plans to utilize the related freedom fabric technology in any of our future products nor did we have any plans at that time to monetize the associated intellectual property. In addition, the exit charge consisted of a $7 million non-cash charge related to asset impairments, $4 million of severance and related benefits and $3 million for contract or program termination costs. We expect to complete this exit activity by the end of the first quarter of 2016.

Interest Expense
Interest expense of $39 million in the third quarter of 2015 decreased by $4 million compared to $43 million in the third quarter of 2014, primarily due to the repurchases of other debt in the fourth quarter of 2014 and the payoff of the remaining principal amount of the 6.00% Convertible Senior Notes due 2015 (6.00% Notes) during the second quarter of 2015.
Interest expense of $39 million in the third quarter of 2015 was flat as compared to the second quarter of 2015.

31


Interest expense of $119 million in the first nine months of 2015 decreased by $17 million compared to $136 million in the first nine months of 2014, primarily due to the timing of the issuances of new debt and repurchases of other debt in 2014.
Other Expense, Net
Other expense, net of $0 in the third quarter of 2015 was relatively flat as compared to both the third quarter of 2014 and the second quarter of 2015.
Other expense, net, of $3 million in the first nine months of 2015 decreased by $67 million compared to $70 million of other expense, net, in the first nine months of 2014, primarily as a result of a $64 million loss from debt repurchases during the first nine months of 2014.
Income Taxes
In the third quarter of 2015, we did not record any income tax provision. For the nine months ended September 26, 2015, we recorded an income tax provision of $4 million due to foreign taxes in profitable locations.
In the third quarter of 2014, we recorded an income tax provision of $2 million due principally to foreign taxes in profitable locations. For the nine months ended September 27, 2014, we recorded an income tax provision of $8 million arising from $9 million of foreign taxes in profitable locations, partially offset by $1 million of tax benefits arising from other comprehensive income and Canadian tax credits.
As of September 26, 2015, substantially all of our U.S. and Canadian deferred tax assets, net of deferred tax liabilities, continue to be subject to a valuation allowance. The realization of these assets is dependent on substantial future taxable income, which at September 26, 2015, in our estimate, is not more likely than not to be achieved.
Our gross unrecognized tax benefits as of September 26, 2015 were $27 million. We do not believe it is reasonably possible that other unrecognized tax benefits will materially change in the next 12 months. We are currently undergoing a tax audit in a foreign jurisdiction and have recently commenced settlement discussions with the tax authority. Based on information and events that arose after September 26, 2015, the total potential amount related to this matter is approximately $17 million including penalties and interest, which would be due upon the completion of the settlement process with the tax authority. The settlement, resolution or closure of our tax audits are highly uncertain.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense related to employee stock options and restricted stock units, which we allocated in the condensed consolidated statements of operations:
 
Three Months Ended
 
Nine Months Ended
 
September 26,
2015
 
June 27,
2015
 
September 27,
2014
 
September 26,
2015
 
September 27,
2014
 
(In millions)
Cost of sales
$
—

 
$
1

 
$
1

 
$
2

 
$
3

Research and development
7

 
10

 
11

 
27

 
34

Marketing, general and administrative
6

 
6

 
9

 
18

 
28

Stock-based compensation expense, net of tax of $0
$
13

 
$
17

 
$
21

 
$
47

 
$
65

For all periods presented, we did not realize any excess tax benefit related to stock-based compensation and therefore did not record any related financing cash flows.
Stock-based compensation expense of $13 million in the third quarter of 2015 decreased by $8 million compared to $21 million in the third quarter of 2014. The decrease was primarily due to a lower weighted average grant date fair value and the effect of the 2015 and 2014 Restructuring Plans.
Stock-based compensation expense of $13 million in the third quarter of 2015 decreased by $4 million compared to the second quarter of 2015. The decrease was primarily due to a lower weighted average grant date fair value, the departure of one of our executives and the effect of the 2015 Restructuring Plan.
Stock-based compensation expense of $47 million in the first nine months of 2015 decreased by $18 million compared to $65 million in the first nine months of 2014. The decrease was primarily due to a lower weighted average grant date fair value and the effect of the 2015 and 2014 Restructuring Plans.

32


FINANCIAL CONDITION
Liquidity and Capital Resources    
Our cash and cash equivalents and marketable securities consisted of money market funds and commercial paper. As of September 26, 2015, our cash and cash equivalents and marketable securities of $755 million were lower compared to $1.0 billion as of December 27, 2014. The decrease was primarily due to lower sales and the timing of related collections, the timing of accounts payable payments made and the debt interest payments of $145 million for the first nine months of 2015. During the first nine months of 2015, we used $64 million for purchases of property, plant and equipment. The percentage of cash and cash equivalents held domestically increased from 89% as of December 27, 2014 to 91% as of September 26, 2015, as a result of repatriation of cash from China.
Our debt and capital lease obligations as of September 26, 2015 were $2.3 billion compared to $2.2 billion as of December 27, 2014. During the first nine months of 2015, we received $100 million net proceeds from our Secured Revolving Line of Credit, of which $42 million was used to repay the remaining aggregate principal amount of our 6.00% Notes.
We believe our cash and cash equivalents balance along with the savings from our Restructuring Plans and our Secured Revolving Line of Credit will be sufficient to fund operations, including capital expenditures, over the next 12 months. We believe that in the event we decide to obtain external funding, we may be able to access the capital markets on terms and in amounts adequate to meet our objectives.
Over the longer term, should additional funding be required, such as to meet payment obligations of our long-term debt when due, we may need to raise the required funds through borrowings or public or private sales of debt or equity securities, which may be issued from time to time under an effective registration statement, through the issuance of securities in a transaction exempt from registration under the Securities Act of 1933, as amended, or a combination of one or more of the foregoing. Uncertain global economic conditions have in the past adversely impacted, and may in the future adversely impact, our business. If market conditions deteriorate, we may be limited in our ability to access the capital markets to meet liquidity needs on favorable terms or at all, which could adversely affect our liquidity and financial condition, including our ability to refinance maturing liabilities.
Operating Activities
Net cash used in operating activities was $290 million in the first nine months of 2015 compared to $214 million in the first nine months of 2014. The increase in cash used in operating activities was primarily due to lower cash collections during the first nine months of 2015 compared to the first nine months of 2014 driven by lower sales compared to the first nine months of 2014, partially offset by lower other operating expenses and labor cost as a result of restructuring actions and the absence of the final $200 million cash payment made in the first quarter of 2014 related to GF’s waiver of a portion of our obligations for wafer purchase commitments.
Investing Activities
Net cash provided by investing activities was $179 million in the first nine months of 2015, which consisted of a net cash inflow of $235 million from maturities of available-for-sale securities and $8 million of proceeds from sale of our building in Markham, Canada, partially offset by a cash outflow of $64 million for purchases of property, plant and equipment.
Net cash used in investing activities was $55 million in the first nine months of 2014, which consisted of a cash outflow of $73 million for purchases of property, plant and equipment, offset by a net cash inflow of $18 million from purchases, sales and maturity of available for sale securities.
Financing Activities
Net cash provided by financing activities was $61 million in the first nine months of 2015, primarily due to $100 million net proceeds from our Secured Revolving Line of Credit borrowings, of which $42 million was used to repay the remaining aggregate principal amount of our 6.00% Notes during the second quarter of 2015.
Net cash provided by financing activities was $40 million in the first nine months of 2014, primarily due to net proceeds from borrowings pursuant to our 6.75% Senior Notes due 2019 (6.75% Notes) of $589 million and our 7.00% Senior Notes due 2020 (7.00% Notes) of $491 million, partially offset by $518 million in payments to repurchase a portion of our 6.00% Notes, $522 million in payments to repurchase our 8.125% Senior Notes due 2017 and $3 million in payments for capital lease obligations. During the first nine months of 2014, we also received $5 million in net proceeds from U.S. government grants for research and development activities and $4 million from the exercise of employee stock options.

33


During the first nine months of 2015 and 2014, we did not realize any excess tax benefit related to stock-based compensation. Therefore, we did not record any effects relating to financing cash flows for these periods.

Contractual Obligations
The following table summarizes our consolidated principal contractual obligations, as of September 26, 2015, and is supplemented by the discussion following the table:
 
Payments due by period as of September 26, 2015
(In millions)
Total
 
Remainder of 2015
 
2016
 
2017
 
2018
 
2019
 
2020 and
thereafter
6.75% Notes
$
600

 
$
—

 
$
—

 
$
—

 
$
—

 
$
600

 
$
—

7.75% Notes
450

 
—

 
—

 
—

 
—

 
—

 
450

7.50% Notes
475

 
—

 
—

 
—

 
—

 
—

 
475

7.00% Notes
500

 
—

 
—

 
—

 
—

 
—

 
500

Secured Revolving Line of Credit
230

 
230

 
—

 
—

 
—

 
—

 
—

Other long-term liabilities
46

 
—

 
2

 
37

 
5

 
—

 
2

Aggregate interest obligation (1)
924

 
37

 
148

 
148

 
148

 
126

 
317

Operating leases
307

 
13

 
50

 
49

 
44

 
26

 
125

Purchase obligations (2)
388

 
244

 
126

 
14

 
3

 
1

 
—

Obligations to GF (3)
488

 
382

 
106

 
—

 
—

 
—

 
—

Total contractual obligations (4)
$
4,408

 
$
906

 
$
432

 
$
248

 
$
200

 
$
753

 
$
1,869


(1) 
Represents estimated aggregate interest obligations for our outstanding debt obligations that are payable in cash, excluding non-cash amortization of debt issuance costs.
(2) 
We have purchase obligations for goods and services where payments are based, in part, on the volume or type of services we acquire. In those cases, we only included the minimum volume of purchase obligations in the table above. Purchase orders for goods and services that are cancelable upon notice and without significant penalties are not included in the amounts above. In addition, we have obligations for software technology and licenses where payments are fixed and non-cancelable which are also included in the table above.
(3) 
Includes our purchase obligations to GF for wafer manufacturing and research and development activities. The obligation for fiscal year 2016 of at least $106 million represents our current purchase commitments during the first quarter of fiscal year 2016 including, but not limited to, our commitment under the fifth amendment to the WSA. We generally negotiate our purchase commitments with GF on an annual basis and as such we cannot meaningfully quantify or estimate our future purchase obligations to GF other than those set forth in the fifth amendment to the WSA, but we expect that our future purchases from GF will continue to be material.
(4) 
Total amount excludes contractual obligations already recorded on our condensed consolidated balance sheets except for debt obligations and other long-term liabilities.

34


6.00% Convertible Senior Notes Due 2015

On April 27, 2007, we issued $2.2 billion aggregate principal amount of our 6.00% Notes. During the second quarter of 2015, we paid off the remaining $42 million in aggregate principal amount of our 6.00% Notes in cash. As of September 26, 2015, we did not have any 6.00% Notes outstanding.
6.75% Senior Notes Due 2019
On February 26, 2014, we issued $600 million of our 6.75% Notes. Our 6.75% Notes are our general unsecured senior obligations. Interest is payable on March 1 and September 1 of each year beginning September 1, 2014 until the maturity date of March 1, 2019. Our 6.75% Notes are governed by the terms of an indenture (the 6.75% Indenture) dated February 26, 2014 between us and Wells Fargo Bank, N.A., as trustee.
At any time before March 1, 2019, we may redeem some or all of our 6.75% Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a “make whole” premium (as set forth in the 6.75% Indenture).
As of September 26, 2015, the outstanding aggregate principal amount of our 6.75% Notes was $600 million.
7.75% Senior Notes Due 2020
On August 4, 2010, we issued $500 million of our 7.75% Senior Notes due 2020 (7.75% Notes). Our 7.75% Notes are our general unsecured senior obligations. Interest is payable on February 1 and August 1 of each year beginning February 1, 2011 until the maturity date of August 1, 2020. Our 7.75% Notes are governed by the terms of an indenture (the 7.75% Indenture) dated August 4, 2010 between us and Wells Fargo Bank, N.A., as trustee.
At any time before August 1, 2015, we may redeem some or all of our 7.75% Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a “make whole” premium (as set forth in the 7.75% Indenture).
Starting August 1, 2015, we may redeem our 7.75% Notes for cash at the following specified prices plus accrued and unpaid interest: 
Period
Price as
Percentage of
Principal Amount
Beginning on August 1, 2015 through July 31, 2016
103.875
%
Beginning on August 1, 2016 through July 31, 2017
102.583
%
Beginning on August 1, 2017 through July 31, 2018
101.292
%
On August 1, 2018 and thereafter
100.000
%
As of September 26, 2015, the outstanding aggregate principal amount of our 7.75% Notes was $450 million.
7.50% Senior Notes Due 2022
On August 15, 2012, we issued $500 million of our 7.50% Senior Notes due 2022 (7.50% Notes). Our 7.50% Notes are our general unsecured senior obligations. Interest is payable on February 15 and August 15 of each year beginning February 15, 2013 until the maturity date of August 15, 2022. Our 7.50% Notes are governed by the terms of an indenture (the 7.50% Indenture) dated August 15, 2012 between us and Wells Fargo Bank, N.A., as trustee.
At any time before August 15, 2022, we may redeem up to 35% of the aggregate principal amount of our 7.50% Notes within 90 days of the closing of an equity offering with the net proceeds thereof at a redemption price equal to 107.5% of the principal amount thereof, together with accrued and unpaid interest to but excluding the date of redemption. At any time before August 15, 2022, we may redeem some or all of our 7.50% Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a “make whole” premium (as set forth in the 7.50% Indenture).
As of September 26, 2015, the outstanding aggregate principal amount of our 7.50% Notes was $475 million.

35


7.00% Senior Notes Due 2024
On June 16, 2014, we issued $500 million of 7.00% Notes. The 7.00% Notes are our general unsecured senior obligations. Interest is payable on January 1 and July 1 of each year beginning January 1, 2015 until the maturity date of July 1, 2024. The 7.00% Notes are governed by the terms of an indenture (the 7.00% Indenture) dated June 16, 2014 between us and Wells Fargo Bank, N.A., as trustee.
At any time before July 1, 2017, we may redeem up to 35% of the aggregate principal amount of the 7.00% Notes within 90 days of the closing of an equity offering with the net proceeds thereof at a redemption price equal to 107.000% of the principal amount thereof, together with accrued and unpaid interest to but excluding the date of redemption. Prior to July 1, 2019, we may redeem some or all of the 7.00% Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a “make whole” premium (as set forth in the 7.00% Indenture).
Starting July 1, 2019, we may redeem our 7.00% Notes for cash at the following specified prices plus accrued and unpaid interest: 
Period
Price as
Percentage of
Principal Amount
Beginning on July 1, 2019 through June 30, 2020
103.500
%
Beginning on July 1, 2020 through June 30, 2021
102.333
%
Beginning on July 1, 2021 through June 30, 2022
101.167
%
On July 1, 2022 and thereafter
100.000
%
As of September 26, 2015, the outstanding aggregate principal amount of our 7.00% Notes was $500 million.
Potential Repurchase of Outstanding Notes
We may elect to purchase or otherwise retire 6.75% Notes, 7.75% Notes, 7.50% Notes and 7.00% Notes with cash, stock or other assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries, or by tender offer when we believe the market conditions are favorable to do so.
Secured Revolving Line of Credit
Loan and Security Agreement
AMD and its subsidiary, AMD International Sales & Service, Ltd. (together, the Borrowers), entered into a loan and security agreement on November 12, 2013, as amended on December 11, 2014, (the Loan Agreement) for a secured revolving line of credit for a principal amount of up to $500 million (the Secured Revolving Line of Credit), with up to $75 million available for issuance of letters of credit, with a group of lenders and Bank of America, N.A., acting as agent for the lenders (the Agent). The Secured Revolving Line of Credit matures on November 12, 2018. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible account receivable minus certain reserves. The borrowings of the Secured Revolving Line of Credit may be used for general corporate purposes, including working capital needs.
Amended and Restated Loan and Security Agreement
On April 14, 2015, the Borrowers and ATI Technologies ULC (together with the Borrowers, the Loan Parties), amended and restated the Loan Agreement (the Amended and Restated Loan Agreement) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders (the Lenders) and the Agent.
The Amended and Restated Loan Agreement provides for a Secured Revolving Line of Credit for a principal amount up to $500 million with up to $75 million available for issuance of letters of credit, which remained unchanged from the Loan Agreement. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible accounts receivable (90% for certain qualified eligible accounts receivable), minus specified reserves. The size of the commitments under the Secured Revolving Line of Credit may be increased by up to an aggregate amount of $200 million.
The Secured Revolving Line of Credit matures on April 14, 2020 and is secured by a first priority security interest in the Loan Parties’ accounts receivable, inventory, deposit accounts maintained with the Agent and other specified assets, including books and records.

36


The Borrowers may elect a per annum interest rate equal to (a) the London Interbank Offered Rate (LIBOR) plus the applicable margin set forth in the applicable chart below (the “Applicable Margin”) as determined by the average availability under the Secured Revolving Line of Credit and the fixed charge coverage ratio for the most recently ended four-fiscal quarter period; or (b) (i) the greatest of (x) the Agent’s prime rate, (y) the federal funds rate, as published by the Federal Reserve Bank of New York plus 0.50%, and (z) LIBOR for a one-month period plus 1.00%, plus (ii) the Applicable Margin.

Applicable Margin, if average availability is equal to or greater than 66.66% of the total commitment amount and the fixed charge coverage ratio for the most recently ended four-fiscal quarter period is greater than or equal to 1.25 to 1.00, is 0.25% for Base Rate Revolver Loans and 1.25% for LIBOR Revolver Loans. Otherwise, Applicable Margin is determined in accordance with the below table:
Level
 
Average
Availability for
Last Fiscal
Month
 
Base Rate
Revolver Loans:
Applicable Margin
 
LIBOR
Revolver Loans:
Applicable Margin
I
  
greater than or equal to 66.66% of the Revolver Commitment
  
0.50%
 
1.50%
II
  
greater than or equal to 33.33% of the Revolver Commitment, less than 66.66%
  
0.75%
 
1.75%
III
  
less than 33.33% of the Revolver Commitment
  
1.00%
 
2.00%
The Secured Revolving Line of Credit may be optionally prepaid or terminated, and unutilized commitments may be reduced at any time, in each case without premium or penalty. In connection with the Secured Revolving Line of Credit, the Borrowers will pay an unused line fee equal to 0.375% per annum, payable monthly on the unused amount of the commitments under the Secured Revolving Line of Credit. The unused line fee decreases to 0.25% per annum when 35% or more of the Secured Revolving Line of Credit is utilized. The Borrowers will pay (i) a monthly fee on all letters of credit outstanding under the Secured Revolving Line of Credit equal to the applicable LIBOR margin and (ii) a fronting fee to the Agent equal to 0.125% of all such letters of credit, payable monthly in arrears.
The Amended and Restated Loan Agreement contains covenants that place certain restrictions on the Loan Parties’ ability to, among other things, allow certain of AMD’s subsidiaries that manufacture or process inventory for the Loan Parties to borrow secured debt or unsecured debt beyond a certain amount, amend or modify certain terms of any debt of $50 million or more or subordinated debt, create or suffer to exist any liens upon accounts or inventory, sell or transfer any of Loan Parties’ accounts or inventory other than certain ordinary-course transfers, make certain changes to any Loan Party’s name or form or state of organization without notifying the Agent, liquidate, dissolve, merge, amalgamate, combine or consolidate, or become a party to certain agreements restricting the Loan Parties’ ability to incur or repay debt, grant liens, make distributions, or modify loan agreements.
Further restrictions apply when certain payment conditions (the Payment Conditions) are not satisfied with respect to specified transactions, events or payments. The Payment Conditions include that (i) no default or event of default exists and (ii) at all times during the 45 consecutive days immediately prior to such transaction, event or payment and on a pro forma basis after giving effect to such transaction, event or payment and any incurrence or repayment of indebtedness in connection therewith, the Loan Parties’ Excess Cash Availability (as defined in the Amended and Restated Loan Agreement) is greater than the greater of 20% of the total commitment amount and $100 million. Such restrictions limit the Loan Parties’ ability to, among other things, create any liens upon any of the Loan Parties’ property (other than customary permitted liens and liens on up to $1.5 billion of secured credit facilities debt (which amount includes the Secured Revolving Line of Credit), declare or make any distributions, create any encumbrance on the ability of a subsidiary to make any upstream payments, make asset dispositions other than certain ordinary course dispositions, make certain loans, make payments with respect to subordinated debt or certain borrowed money prior to its due date or become a party to certain agreements restricting the Loan Parties’ ability to enter into any non-arm’s-length transaction with an affiliate.
The Loan Parties are required to repurchase, redeem, defease, repay, create a segregated account for the repayment of, or request Agent reserve a sufficient available amount under the Secured Revolving Line of Credit for the repayment of, all debt for borrowed money exceeding $50 million, by no later than 60 days prior to its maturity date (not including the Secured Revolving Line of Credit). Any reserved funds for this purpose would not be included in domestic cash calculations.
In addition, if at any time the Loan Parties’ Excess Cash Availability is less than the greater of 15% of the total commitment amount and $75 million, the Loan Parties must maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 until (i) no event of default exists and (ii) the Loan Parties’ Excess Cash Availability is greater than the greater of 15% of the total commitment amount and $75 million for 45 consecutive days.

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The events of default under the Amended and Restated Loan Agreement include, among other things, payment defaults, the inaccuracy of representations or warranties, defaults in the performance of affirmative and negative covenants, bankruptcy and insolvency related defaults, a cross-default related to indebtedness in an aggregate amount in excess of $50 million, judgments entered against a Loan Party in an amount that exceeds cumulatively $50 million, certain ERISA events and events related to Canadian defined benefits plans and a change of control. When a Payment Condition has not been satisfied, additional events of default include, among other things, a loss, theft damage or destruction with respect to any collateral if the amount not covered by insurance exceeds $50 million.
First Amendment to Amendment and Restated Loan and Security Agreement
On June 10, 2015, the Loan Parties entered into a First Amendment to the Amended and Restated Loan and Security Agreement (the “First Amendment”) by and among the Loan Parties, the Lenders and the Agent, which modifies the Amended and Restated Loan Agreement. Amendments to the Amended and Restated Loan Agreement effected by the First Amendment include the addition of exceptions to the liens and asset sale covenants to permit the Loan Parties to enter into certain supply chain finance arrangements, as well as the addition of certain definitions related thereto.
As of September 26, 2015 and December 27, 2014, our Secured Revolving Line of Credit had an outstanding loan balance of $230 million and $130 million, respectively, at an interest rate of 3.75% and 4.25%, respectively. At September 26, 2015, the Secured Revolving Line of Credit also had $16 million related to outstanding Letters of Credit, and up to $151 million available for future borrowings. The Company reports its intra-period changes in its revolving credit balance on a net basis in its condensed consolidated statement of cash flows as the Company intends the period of the borrowings to be brief, repaying borrowed amounts within 90 days. As of September 26, 2015, we were in compliance with all required covenants stated in the Loan Agreement.
The agreements governing our 6.75% Notes, 7.75% Notes, 7.50% Notes, 7.00% Notes and our Secured Revolving Line of Credit contain cross-default provisions whereby a default under one agreement would likely result in cross defaults under agreements covering other borrowings. The occurrence of a default under any of these borrowing arrangements would permit the applicable note holders or the lenders under the Secured Revolving Line of Credit to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable.
Other Long-Term Liabilities
Other long-term liabilities in the contractual obligations table above primarily consists of $44 million of payments due under certain software and technology licenses that will be paid through 2018.
Other long-term liabilities in the contractual obligations table above exclude amounts recorded on our condensed consolidated balance sheet that do not require us to make cash payments, which, as of September 26, 2015, primarily consisted of $18 million of deferred gains resulting from certain real estate transactions that occurred in Sunnyvale, California in 1998, in Markham, Ontario, Canada in 2015 and 2008 and in Singapore in 2013. Accruals related to facility consolidation and site closure costs under our restructuring plans of $8 million and deferred rent related to our facilities in Sunnyvale, California of $6 million are excluded from other long-term liabilities in the contractual obligations table above as they are included in the operating leases obligations. Also excluded from other long-term liabilities in the contractual obligations table above are $4 million of environmental reserves and $4 million of non-current unrecognized tax benefits, which represent potential cash payments that could be payable by us upon settlements with the related authorities. We have not included these amounts in the contractual obligations table above because we cannot make reasonably reliable estimates regarding the timing of the settlements with the related authorities, if any.
Capital Lease Obligations
We terminated our capital lease obligations and entered into a non-cancelable operating lease agreement related to one of our facilities in Markham, Ontario, Canada during the third quarter of 2015. As of September 26, 2015, we did not have any capital lease obligations outstanding.
Operating Leases
We lease certain of our facilities and, in some jurisdictions, we lease the land on which our facilities are built under non-cancelable lease agreements that expire at various dates through 2028. We lease certain office equipment for terms ranging from one to five years. Total future non-cancelable lease obligations as of September 26, 2015 were $307 million, including $248 million of future lease payments and estimated operating costs related to the real estate transactions that occurred in Austin, Texas, Sunnyvale, California, Markham, Canada, and Singapore.
Purchase Obligations

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Our purchase obligations primarily include our obligations to purchase wafers and substrates from third parties, excluding our wafer purchase commitments to GF under the WSA. As of September 26, 2015, total non-cancelable purchase obligations were $388 million.
Obligations to GF
Obligations to GF included our purchase obligations to GF for wafer manufacturing and research and development activities. As of September 26, 2015, we estimate the remaining contractual obligations to GF will be $382 million through the end of the fiscal year 2015 and at least $106 million during the first quarter of fiscal year 2016. We are not able to meaningfully quantify or estimate our future purchase obligations to GF other than those set forth in the fifth amendment to the WSA, but we expect that our future purchases from GF will continue to be material. We are currently in discussions with GF regarding the re-profiling of our wafer commitments under the fifth amendment to the WSA.  We are unable to quantify the outcome of our negotiations with GF.
Off-Balance Sheet Arrangements
As of September 26, 2015, we had no off-balance sheet arrangements.

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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to “Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 27, 2014.
There have not been any material changes in market risk since December 27, 2014.

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ITEM 4.
CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports made under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of September 26, 2015, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
There was no change in our internal controls over financial reporting during our third quarter of 2015 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS

Securities Class Action
On January 15, 2014, a class action lawsuit captioned Hatamian v. AMD, et al., C.A. No. 3:14-cv-00226 (the “Hatamian Lawsuit”) was filed against us in the United States District Court for the Northern District of California. The complaint purports to assert claims against AMD and certain individual officers for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5 of the Exchange Act. The plaintiffs seek to represent a proposed class of all persons who purchased or otherwise acquired our common stock during the period April 4, 2011 through October 18, 2012. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by us and the individual officers regarding our 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for our common stock during the period. The complaint seeks unspecified compensatory damages, attorneys’ fees and costs.
On July 7, 2014, we filed a motion to dismiss plaintiffs’ claims. On March 31, 2015, the Court denied the motion to dismiss. On May 14, 2015, we filed our answer to plaintiffs’ corrected amended complaint. The discovery process is ongoing. On September 4, 2015, plaintiffs filed their motion for class certification. A court-ordered mediation is scheduled for January 2016.
Based upon information presently known to management, we believe that the potential liability, if any, will not have a material adverse effect on our financial condition, cash flows or results of operations.

Shareholder Derivative Lawsuits
On March 20, 2014, a purported shareholder derivative lawsuit captioned Wessels v. Read, et al., Case No. 1:14-cv-262486 was filed against us (as a nominal defendant only) and certain of our directors and officers in the Santa Clara County Superior Court of the State of California. The complaint purports to assert claims against us and certain individual directors and officers for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by us and the individual directors and officers regarding our 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for our common stock during the period. On April 27, 2015, a similar purported shareholder derivative lawsuit captioned Christopher Hamilton and David Hamilton v. Barnes, et al., Case No. 5:15-cv-01890 was filed against us (as a nominal defendant only) and certain of our directors and officers in the United States District Court for the Northern District of California. The case was transferred to the judge handling the Hatamian Lawsuit and is now Case No. 4:15-cv-01890. The Wessels and Hamilton shareholder derivative lawsuits are currently stayed.
On September 29, 2015, a similar purported shareholder derivative lawsuit captioned Jake Ha v Caldwell, et al., Case No. 3:15-cv-04485 was filed against us (as a nominal defendant only) and certain of our directors and officers in the United States District Court for the Northern District of California. The lawsuit also seeks a court order voiding the shareholder vote on AMD’s 2015 proxy.
Based upon information presently known to management, we believe that the potential liability, if any, will not have a material adverse effect on our financial condition, cash flows or results of operations.



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ITEM 1A.
RISK FACTORS

The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In addition, you should consider the interrelationship and compounding effects of two or more risks occurring simultaneously.
Intel Corporation’s dominance of the microprocessor market and its aggressive business practices may limit our ability to compete effectively.
Intel Corporation has been the market share leader for microprocessors for many years. Intel’s market share, margins and significant financial resources enable it to market its products aggressively, to target our customers and our channel partners with special incentives and to influence customers who do business with us. These aggressive activities have in the past and are likely in the future to result in lower unit sales and a lower average selling price for many of our products and adversely affect our margins and profitability.
Intel exerts substantial influence over computer manufacturers and their channels of distribution through various brand and other marketing programs. As a result of Intel’s position in the microprocessor market, Intel has been able to control x86 microprocessor and computer system standards and benchmarks and to dictate the type of products the microprocessor market requires of us. Intel also dominates the computer system platform, which includes core logic chipsets, graphics chips, motherboards and other components necessary to assemble a computer system. OEMs that purchase microprocessors for computer systems are highly dependent on Intel, less innovative on their own and, to a large extent, are distributors of Intel technology. Additionally, Intel is able to drive de facto standards and specifications for x86 microprocessors that could cause us and other companies to have delayed access to such standards.
As long as Intel remains in this dominant position, we may be materially adversely affected by Intel’s:
•
business practices, including rebating and allocation strategies and pricing actions, designed to limit our market share and margins;
•
product mix and introduction schedules;
•
product bundling, marketing and merchandising strategies;
•
exclusivity payments to its current and potential customers and channel partners;
•
control over industry standards, PC manufacturers and other PC industry participants, including motherboard, memory, chipset and basic input/output system, or BIOS, suppliers and software companies as well as the graphics interface for Intel platforms; and
•
marketing and advertising expenditures in support of positioning the Intel brand over the brand of its original equipment manufacture (OEM) customers.
Intel has substantially greater financial resources than we do and accordingly spends substantially greater amounts on marketing and research and development than we do. We expect Intel to maintain its market position and to continue to invest heavily in marketing, research and development, new manufacturing facilities and other technology companies. To the extent Intel manufactures a significantly larger portion of its microprocessor products using more advanced process technologies, or introduces competitive new products into the market before we do, we may be more vulnerable to Intel’s aggressive marketing and pricing strategies for microprocessor products. For example, Intel has introduced microprocessors for low-cost notebooks, similar to products that we offer for low-cost notebooks.
Intel could also take actions that place our discrete GPUs at a competitive disadvantage, including giving one or more of our competitors in the graphics market, such as Nvidia Corporation, preferential access to its proprietary graphics interface or other useful information.
 

Intel’s position in the microprocessor market and integrated graphics chipset market, its introduction of competitive new products, its existing relationships with top-tier OEMs and its aggressive marketing and pricing strategies could result in lower unit sales and a lower average selling price for our products, which could have a material adverse effect on us.