Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
 
Form 10-Q
 
 
 
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
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
 
94085
(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  þ   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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
þ
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    
Yes  ¨     No  þ
Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 27, 2017: 964,798,603




INDEX
 
 
 
Page No.
 
 
 
 
 
 
 
 

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 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
(In millions, except per share amounts)
Net revenue
$
1,643

 
$
1,307

 
$
3,849

 
$
3,166

Cost of sales
1,070

 
1,248

 
2,541

 
2,519

Gross margin
573

 
59

 
1,308

 
647

Research and development
315

 
259

 
860

 
744

Marketing, general and administrative
132

 
117

 
378

 
339

Restructuring and other special charges, net

 

 

 
(10
)
Licensing gain

 
(24
)
 
(52
)
 
(57
)
Operating income (loss)
126

 
(293
)
 
122

 
(369
)
Interest expense
(31
)
 
(41
)
 
(95
)
 
(122
)
Other income (expense), net
(3
)
 
(63
)
 
(11
)
 
87

Income (loss) before equity loss and income taxes
92

 
(397
)
 
16

 
(404
)
Provision for income taxes
19

 
4

 
27

 
34

Equity loss in investee
(2
)
 
(5
)
 
(7
)
 
(8
)
Net income (loss)
$
71

 
$
(406
)
 
$
(18
)
 
$
(446
)
Net income (loss) per share
 
 
 
 
 
 
 
Basic
$
0.07

 
$
(0.50
)
 
$
(0.02
)
 
$
(0.56
)
Diluted
$
0.07

 
$
(0.50
)
 
$
(0.02
)
 
$
(0.56
)
Shares used in per share calculation
 
 
 
 
 
 
 
Basic
957

 
815

 
947

 
801

Diluted
1,042

 
815

 
947

 
801

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 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
(In millions)
Net income (loss)
$
71

 
$
(406
)
 
$
(18
)
 
$
(446
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period

 
1

 

 

Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Unrealized gains arising during the period
5

 

 
11

 
4

Reclassification adjustment for (gains) losses realized and included in net income (loss)
(3
)
 
(1
)
 
(4
)
 
1

Total change in unrealized gains on cash flow hedges
2

 
(1
)
 
7

 
5

Total other comprehensive income
2

 

 
7

 
5

Total comprehensive income (loss)
$
73

 
$
(406
)
 
$
(11
)
 
$
(441
)
See accompanying notes to condensed consolidated financial statements.


4



Advanced Micro Devices, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
September 30,
2017
 
December 31,
2016
 
(In millions, except par value amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
879

 
$
1,264

Accounts receivable, net
771

 
311

Inventories, net
794

 
751

Prepayment and other receivables - related parties
26

 
32

Prepaid expenses
72

 
63

Other current assets
157

 
109

Total current assets
2,699

 
2,530

Property, plant and equipment, net
236

 
164

Goodwill
289

 
289

Investment: equity method
57

 
59

Other assets
305

 
279

Total assets
$
3,586

 
$
3,321

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
70

 
$

Accounts payable
472

 
440

Payables to related parties
444

 
383

Accrued liabilities
460

 
391

Other current liabilities
73

 
69

Deferred income on shipments to distributors
72

 
63

Total current liabilities
1,591

 
1,346

Long-term debt, net
1,356

 
1,435

Other long-term liabilities
119

 
124

Commitments and contingencies (See Note 12)
 
 

Stockholders’ equity:
 
 
 
Capital stock:
 
 
 
Common stock, par value $0.01; 1,500 shares authorized on September 30, 2017 and December 31, 2016; shares issued: 977 on September 30, 2017 and 949 shares on December 31, 2016; shares outstanding: 965 on September 30, 2017 and 935 shares on December 31, 2016
10

 
9

Additional paid-in capital
8,437

 
8,334

Treasury stock, at cost (12 shares on September 30, 2017 and 14 shares on December 31, 2016)
(108
)
 
(119
)
Accumulated deficit
(7,821
)
 
(7,803
)
Accumulated other comprehensive income (loss)
2

 
(5
)
Total stockholders’ equity
520

 
416

Total liabilities and stockholders’ equity
$
3,586

 
$
3,321


See accompanying notes to condensed consolidated financial statements.

5



Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
(In millions)
Cash flows from operating activities:
 
 
 
Net loss
$
(18
)
 
$
(446
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Net gain on sale of equity interests in ATMP JV

 
(146
)
Depreciation and amortization
105

 
99

Provision for deferred income taxes

 
11

Stock-based compensation expense
76

 
57

Non-cash interest expense
27

 
11

Loss on debt redemption
9

 
61

Fair value of warrant issued related to sixth amendment to the WSA

 
240

Other
4

 
(4
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(460
)
 
(107
)
Inventories
(43
)
 
(94
)
Prepayment and other receivables - related parties
6

 
20

Prepaid expenses and other assets
(82
)
 
(134
)
Payables to related parties
61

 
183

Accounts payable, accrued liabilities and other

 
151

Net cash used in operating activities
(315
)
 
(98
)
Cash flows from investing activities:
 
 
 
Net proceeds from sale of equity interests in ATMP JV

 
346

Purchases of property, plant and equipment
(69
)
 
(56
)
Purchases of available-for-sale securities
(221
)
 

Proceeds from maturity of available-for-sale securities
221

 

Other
(2
)
 
3

Net cash provided by (used in) investing activities
(71
)
 
293

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock, net of issuance costs

 
668

Proceeds from issuance of convertible senior notes, net of issuance costs

 
681

Proceeds from issuance of common stock under stock-based compensation equity plans
15

 
12

Proceeds from (repayments of) borrowings, net
70

 
(230
)
Repayments of long-term debt
(70
)
 
(848
)
Other
(14
)
 
(5
)
Net cash provided by financing activities
1

 
278

Net increase (decrease) in cash and cash equivalents
(385
)
 
473

Cash and cash equivalents at beginning of period
1,264

 
785

Cash and cash equivalents at end of period
$
879

 
$
1,258

Supplemental cash flow information:
 
 
 
Non-cash investing and financing activities:
 
 
 
Purchases of property, plant and equipment, accrued but not paid
$
53

 
$

Issuance of common stock to partially settle long-term debt
$
38

 
$

Non-cash additions of property, plant and equipment
$
8

 
$

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 and nine months ended September 30, 2017 shown in this report are not necessarily indicative of results to be expected for the full year ending December 30, 2017. 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 31, 2016.
The Company uses a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters and nine months ended September 30, 2017 and September 24, 2016 each consisted of 13 weeks and 39 weeks, respectively.
Principles of Consolidation. The condensed consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. Upon consolidation, all significant inter-company accounts and transactions are eliminated.
Recently Adopted Accounting Standards
Goodwill Impairment. In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other: Topic 350: Simplifying the Test for Goodwill Impairment (ASU 2017-04), which eliminates step two from the goodwill impairment test. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual and any interim impairment tests performed for periods beginning after December 15, 2019 on a prospective basis, and earlier adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company elected to early adopt this accounting standard update in the third quarter of 2017 on a prospective basis. The Company does not expect the standard to have an impact on its consolidated financial statements. The Company expects the adoption of this update to simplify its annual goodwill impairment testing process, by eliminating the need to estimate the implied fair value of a reporting unit’s goodwill, if its respective carrying value exceeds fair value.
Stock Compensation. In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which is intended to simplify several aspects of the accounting for share-based payment award transactions. The Company adopted this guidance in the first quarter of 2017 and elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. In the first quarter of 2017, the Company recorded a $96 million cumulative-effect adjustment in accumulated deficit and an offsetting increase in deferred tax assets for previously unrecognized excess tax benefits that existed as of December 31, 2016. Since substantially all of the Company’s U.S. and foreign deferred tax assets, net of deferred tax liabilities, are subject to a valuation allowance and the realization of these assets is not more likely than not to be achieved, the Company recorded a $96 million valuation allowance against these deferred tax assets with an offsetting adjustment in accumulated deficit. The Company elected to report cash flows related to excess tax benefits as an operating activity on a prospective basis. The presentation requirement for cash flows related to employee taxes paid for withheld shares did not impact the statements of cash flows because such cash flows have historically been presented as a financing activity.
Investments. In March 2016, the FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting (ASU 2016-07), which requires the equity method investor to add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment qualifies for equity method accounting. The Company adopted this guidance in the first quarter of 2017, and it did not have an impact on its consolidated financial statements.
Inventory. In July 2015, the Financial Accounting Standards Board (FASB) issued ASU No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), which requires entities to measure inventory at the lower of cost or net realizable value. This ASU simplifies the subsequent measurement of inventory by replacing the lower of cost or market test with a lower of cost or net realizable value test. The Company adopted this guidance in the first quarter of 2017, and it did not have an impact on its consolidated financial statements.
Recently Issued Accounting Standards

7


Derivatives and Hedging. In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods therein with early adoption permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements, as well as its planned adoption date.
Although there are several other new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its consolidated financial position or operating results.
Stock Compensation. In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation: Topic 718: Scope of Modification Accounting (ASU 2017-09) to provide clarity and reduce both the (1) diversity in practice and (2) cost and complexity when changing the terms or conditions of share-based payment awards. Under ASU 2017-09, modification accounting is required to be applied unless all of the following are the same immediately before and after the change:
1. The award’s fair value (or calculated value or intrinsic value, if those measurement methods are used).
2. The award’s vesting conditions.
3. The award’s classification as an equity or liability instrument.
ASU 2017-09 is effective for annual and interim periods beginning after December 15, 2017 on a prospective basis, and early adoption is permitted. The Company has evaluated the impact of its pending adoption of ASU 2017-09 and does not expect that this guidance will have a significant impact on its financial statements.
Income Taxes. In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to an outside party. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, including interim periods therein with early adoption permitted. Upon adoption, the Company must apply a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of this new standard on its consolidated financial statements, as well as its planned adoption date.
Statement of Cash Flows. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, provided that all of the amendments are adopted in the same period. The Company is currently evaluating the impact of its pending adoption of ASU 2016-15 on its consolidated financial statements.
Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the timing of adoption and impact of ASU 2016-13 on its consolidated financial statements.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Upon adoption, lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements. 
Financial Instruments. In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The ASU also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized

8


losses on available-for-sale debt securities. Entities will have to assess the realizability of such deferred tax assets in combination with the entities' other deferred tax assets. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 and for interim periods within that reporting period. The Company is currently evaluating the impact of its pending adoption of ASU 2016-01 on its consolidated financial statements.
Revenue Recognition. In May 2014, the FASB issued ASU 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 and replaces most existing revenue recognition guidance in U.S. GAAP. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the new standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments to the new standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations.
The new standard is effective for annual reporting periods beginning after December 15, 2017. The new standard permits companies to early adopt the new standard, but not before annual reporting periods beginning after December 15, 2016. The Company will not early adopt the new standard and therefore the new standard will be effective for the Company in the first quarter of its fiscal 2018. 
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or prospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing additional disclosures comparing results to the previous rules in the year of adoption of the new standard (the modified retrospective method or the cumulative catchup method). The Company currently anticipates adopting the standard using the full retrospective method to restate each prior reporting period presented. The Company’s ability to adopt utilizing the full retrospective method is dependent upon system readiness and the completion of its analysis of information necessary to restate prior period financial statements and the Company is progressing toward the adoption of the standard in the first quarter of fiscal 2018. As part of this plan, the Company is implementing changes to its policies, procedures and controls.
The Company currently believes that the most significant impact relates to accelerated revenue recognition for sales to its distributors, whereby revenue is expected to be recognized upon the initial sale to the Company's distributors, instead of the current recognition upon resale by the distributors to the end customers. Additionally, the Company expects the timing and financial statement classification related to the accounting for some combined development and intellectual property licensing arrangements to change. Currently some of these arrangements result in both the reduction to research and development expenses and revenue recognition based on a fair value allocation of the consideration received. Some of these arrangements may result in the classification of the entire amount as revenue under the new revenue guidance. The Company currently expects other revenue streams to remain substantially unchanged.
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).
Sixth Amendment to Wafer Supply Agreement. On August 30, 2016, the Company entered into a sixth amendment to the WSA (the WSA Sixth Amendment). The WSA Sixth Amendment modified certain terms of the WSA applicable to wafers for the Company’s microprocessor, graphics processor and semi-custom products for a five-year period from January 1, 2016 to December 31, 2020. The Company and GF also agreed to establish a comprehensive framework for technology collaboration for the 7nm technology node.
The WSA Sixth Amendment also provides the Company a limited waiver with rights to contract with another wafer foundry with respect to certain products in the 14nm and 7nm technology nodes and gives the Company greater flexibility in sourcing foundry services across its product portfolio. In consideration for these rights, the Company agreed to pay GF $100 million in installments starting in the fourth fiscal quarter of 2016 through the third fiscal quarter of 2017. During the third fiscal quarter of 2017, the Company paid GF $25 million and, as of September 30, 2017, the Company had paid GF $100 million in aggregate. Starting in 2017 and continuing through 2020, the Company also agreed to make quarterly payments to GF based on the volume of certain wafers purchased from another wafer foundry.
Further, for each calendar year during the term of the WSA Sixth Amendment, the Company and GF agreed to annual wafer purchase targets that increase from 2016 through 2020. If the Company does not meet the annual wafer purchase target for any calendar year, the Company will be required to pay to GF a portion of the difference between the Company’s actual wafer purchases and the wafer purchase target for that year. The annual targets were established based on the Company’s business and market

9



expectations and took into account the limited waiver it received for certain products. As of September 30, 2017, the Company expects to meet its 2017 wafer purchase target.
The Company and GF also agreed on fixed pricing for wafers purchased during 2016 and established a framework to agree on annual wafer pricing for the years 2017 to 2020. The Company and GF have agreed on pricing for wafer purchases for 2017.
The Company’s total purchases from GF related to wafer manufacturing, research and development activities and other for the quarters ended September 30, 2017 and September 24, 2016 were $331 million and $186 million, respectively. The Company’s total purchases from GF related to wafer manufacturing, research and development activities and other for the nine months ended September 30, 2017 and September 24, 2016 were $773 million and $479 million, respectively. Included in the total purchases for the quarter and nine months ended September 30, 2017 are amounts related to the volume of certain wafers purchased from another wafer foundry, as agreed to by the Company and GF under the WSA Sixth Amendment. As of September 30, 2017 and December 31, 2016, the amount of prepayment and other receivables related to GF was $20 million and $32 million, respectively, included in Prepayment and other receivables - related parties on the Company's condensed consolidated balance sheets. As of September 30, 2017 and December 31, 2016, the amount of payable to GF was $270 million and $255 million, respectively, included in Payables to related parties on the Company's condensed consolidated balance sheets.
Warrant Agreement. Also on August 30, 2016, in consideration for the limited waiver and rights under the WSA Sixth Amendment, the Company entered into a warrant agreement (the Warrant Agreement) with West Coast Hitech L.P. (WCH), a wholly-owned subsidiary of Mubadala Development Company PJSC (Mubadala). Under the Warrant Agreement, WCH and its permitted assigns are entitled to purchase 75 million shares of the Company’s common stock (the Warrant Shares) at a purchase price of $5.98 per share. The warrant is exercisable in whole or in part until February 29, 2020. Notwithstanding the foregoing, the Warrant Agreement will only be exercisable to the extent that Mubadala does not beneficially own, either directly through any other entities directly and indirectly owned by Mubadala or its subsidiaries, an aggregate of more than 19.99% of the Company’s outstanding capital stock after any such exercise.
GF continues to be a related party of the Company because Mubadala and Mubadala Technology Investments LLC (Mubadala Tech, a party to the WSA) are affiliated with WCH, a significant stockholder of the Company. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala.
NOTE 3. Supplemental Balance Sheet Information
Accounts Receivable, net
As of September 30, 2017 and December 31, 2016, Accounts receivable, net included unbilled accounts receivable of $16 million and $37 million, respectively. Unbilled accounts receivable represent revenue recognized but not billed as payments are deferred by customers until certain contractual milestones are met. All unbilled accounts receivable are expected to be billed and collected within twelve months.
Inventories
 
September 30,
2017
 
December 31,
2016
 
(In millions)
Raw materials
$
52

 
$
11

Work in process
521

 
564

Finished goods
221

 
176

Total inventories, net
$
794

 
$
751


10



Property, Plant and Equipment
 
September 30,
2017
 
December 31,
2016
 
(In millions)
Leasehold improvements
$
151

 
$
148

Equipment
758

 
714

Construction in progress
69

 
19

Property, plant and equipment, gross
978

 
881

Accumulated depreciation and amortization
(742
)
 
(717
)
Total property, plant and equipment, net
$
236

 
$
164

The Company incurs costs for the fabrication of masks used by its foundry partners to manufacture its products. Beginning the first fiscal quarter of 2017, the Company capitalizes mask costs that are expected to be utilized in production manufacturing as the Company’s product development process has become more predictable and thus supports capitalization of the mask. The capitalized mask costs begin depreciating to Cost of Sales once the products go into production, on a straight-line basis over the estimated useful life of two years. Previously mask sets were expensed to research and development.
Other Assets
 
September 30,
2017
 
December 31,
2016
 
(In millions)
Software technology and licenses, net
$
248

 
$
232

Other
57

 
47

Total other assets
$
305

 
$
279

Accrued Liabilities
 
September 30,
2017
 
December 31,
2016
 
(In millions)
Accrued compensation and benefits
$
147

 
$
116

Marketing programs and advertising expenses
124

 
102

Software technology and licenses payable
54

 
24

Other
135

 
149

Total accrued liabilities
$
460

 
$
391

NOTE 4. Equity Interest Purchase Agreement - ATMP Joint Venture
On April 29, 2016, the Company and certain of its subsidiaries completed the sale of a majority of the equity interests in Suzhou TF-AMD Semiconductor Co., Ltd. (formerly, AMD Technologies (China) Co., Ltd.), and TF-AMD Microelectronics (Penang) Sdn. Bhd. (formerly, Advanced Micro Devices Export Sdn. Bhd.), to affiliates of Tongfu Microelectronics Co., Ltd. (formerly, Nantong Fujitsu Microelectronics Co., Ltd.) (TFME), a Chinese joint stock company, to form two joint ventures (collectively, the ATMP JV). As a result of the sale, TFME’s affiliates own 85% of the equity interests in the ATMP JV while certain of the Company’s subsidiaries own the remaining 15%. The Company has no obligation to fund the ATMP JV.
The Company accounts for its equity interests in the ATMP JV under the equity method of accounting due to its significant influence over the ATMP JV. As of September 30, 2017 and December 31, 2016, the carrying value of the Company's investment in the ATMP JV was approximately $57 million and $59 million, respectively. The ATMP JV is a related party of the Company. The ATMP JV provides assembly, test, mark and packaging (ATMP) services to the Company. The Company currently pays the ATMP JV for ATMP services on a cost-plus basis. The Company's total purchases from the ATMP JV during the three and nine months ended September 30, 2017 amounted to approximately $131 million and $332 million, respectively. The Company's total purchases from the ATMP JV during the three and nine months ended September 24, 2016 amounted to approximately $107 million and $173 million, respectively. As of September 30, 2017 and December 31, 2016, the amount payable to the ATMP JV was $174

11



million and $128 million, respectively, included in Payables to related parties on the Company's condensed consolidated balance sheets.
During the three and nine months ended September 30, 2017, the Company recorded $2 million and $7 million, respectively, in Equity loss in investee on its condensed consolidated statements of operations, which included certain expenses incurred by the Company on behalf of the ATMP JV. During the three and nine months ended September 24, 2016, the Company recorded $5 million and $8 million, respectively, in Equity loss in investee on its condensed consolidated statements of operations, which included certain expenses incurred by the Company on behalf of the ATMP JV.
NOTE 5. Equity Joint Venture
In February 2016, the Company and Tianjin Haiguang Advanced Technology Investment Co., Ltd. (THATIC), a third-party Chinese entity (JV Partner), formed a joint venture comprised of two separate legal entities, China JV1 and China JV2 (collectively, the THATIC JV). The Company’s equity share in China JV1 and China JV2 is a majority and minority interest, respectively, funded by the Company’s contribution of certain of its patents. The JV Partner is responsible for the initial and on-going financing of the THATIC JV’s operations. The Company has no obligations to fund the THATIC JV.
The Company concluded the China JV1 and China JV2 are not operating joint ventures and are variable interest entities due to their reliance on on-going financing by JV Partner. The Company determined that it is not the primary beneficiary of either China JV1 or China JV2, as the Company does not have unilateral power to direct selling and marketing, manufacturing and product development activities related to the THATIC JV’s products. Accordingly, the Company will not consolidate either of these entities and therefore accounts for its investments in the THATIC JV under the equity method of accounting. The THATIC JV is a related party of the Company.
In February 2016, the Company licensed certain of its intellectual property (Licensed IP) to the THATIC JV for a total of approximately $293 million in license fee payable over several years contingent upon achievement of certain milestones. The Company also expects to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such Licensed IP. The Company will also provide certain engineering and technical support to the THATIC JV in connection with the product development. In March 2017, the Company entered into a development and intellectual property agreement with THATIC JV, and also expects to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such agreement. In addition, from time to time, the Company enters into certain agreements with the THATIC JV to provide other services primarily related to research and development.
The Company recognizes income related to the Licensed IP over the period commencing upon delivery of the first Licensed IP milestone through the date of the milestone that requires the Company’s continuing involvement in the product development process. Royalty payments will be recognized in income once earned. The Company classifies Licensed IP income and royalty income as other operating income. During the three and nine months ended September 30, 2017, the Company recognized zero and $52 million licensing gain associated with the Licensed IP, respectively, and development and other services fees of $7 million and $17 million, respectively, as a credit to research and development expenses. During the three and nine months ended September 24, 2016, the Company recognized $24 million and $57 million licensing gain, respectively. No credits for development and other services associated with these agreements was recognized by the Company during the three and nine months ended September 24, 2016. No royalty income was recognized by the Company during the three and nine months ended September 30, 2017 and September 24, 2016.
The Company’s total exposure to losses through its investment in the THATIC JV is limited to the Company’s investment in the THATIC JV, which was zero as of September 30, 2017. The Company’s share in the net losses of the THATIC JV for the three and nine months ended September 30, 2017 and September 24, 2016 was not material and is not recorded in the Company’s condensed consolidated statements of operations since the Company is not obligated to fund the THATIC JV’s losses in excess of the Company’s investment in the THATIC JV. The Company’s receivable from the THATIC JV for these agreements was $5 million and zero as of September 30, 2017 and December 31, 2016, respectively, included in Prepayment and other receivables - related parties on its condensed consolidated balance sheets. As of September 30, 2017, the total assets and liabilities of the THATIC JV were not material.

12



NOTE 6. Debt and Secured Revolving Line of Credit
Debt
2.125% Convertible Senior Notes Due 2026
On September 14, 2016, the Company issued $700 million in aggregate principal amount of 2.125% Convertible Senior Notes due 2026 (2.125% Notes). The Company also granted an option to the underwriters to purchase an additional $105 million aggregate principal amount of the 2.125% Notes. On September 28, 2016, this option was exercised in full and the Company issued an additional $105 million aggregate principal amount of the 2.125% Notes.
The 2.125% Notes are general unsecured senior obligations of the Company and will mature on September 1, 2026, unless earlier repurchased or converted. Interest is payable in arrears on March 1 and September 1 of each year beginning on March 1, 2017. The 2.125% Notes are governed by the terms of a base indenture and a supplemental indenture (together the 2.125% Indentures) dated September 14, 2016 between the Company and Wells Fargo Bank, N.A., as trustee.
Holders may convert their notes at their option at any time prior to the close of business on the business day immediately preceding June 1, 2026 under the occurrence of one of the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2016 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the Measurement Period) in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 1, 2026 until the close of business on the business day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election. The first event described in (1) above was met during the third quarter of 2017 and as a result, the 2.125% Notes are convertible at the option of the holder from October 1, 2017 and remain convertible until December 31, 2017. The Company's current intent is to deliver shares of its common stock upon conversion of the 2.125% Notes. As such, the Company continued to classify the carrying value of the liability component of the 2.125% Notes as long-term debt and the equity component of the 2.125% Notes as permanent equity on its condensed consolidated balance sheet as of September 30, 2017.
The Company may not redeem the notes prior to the maturity date, and no sinking fund is provided for the 2.125% Notes.
The conversion rate is currently 125.0031 shares of common stock per $1,000 principal amount of 2.125% Notes (equivalent to an initial conversion price of approximately $8.00 per share of common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event in certain circumstances.
If the Company undergoes a fundamental change prior to the maturity date of the notes, holders may require the Company to repurchase for cash all or any portion of their 2.125% Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2.125% Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the 2.125% Notes, the Company separated the 2.125% Notes into liability and equity components. The carrying amounts of the liability component was calculated by measuring the fair value of a similar liability that does not have associated conversion features. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2.125% Notes as a whole. The excess of the principal amount of the liability component over its book value (debt discount) is accreted to interest expense over the term of the 2.125% Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the issuance costs related to the 2.125% Notes, the Company allocated the total amount of issuance costs incurred to the liability and equity components based on their relative fair values. Issuance costs attributable to the liability component are being amortized to interest expense over the term of the 2.125% Notes, and the issuance costs attributable to the equity component were netted against the equity component in additional paid-in capital. During 2016, the Company recorded issuance costs of $15 million and $9 million, for the liability and equity portions, respectively.

13



The determination of whether or not the 2.125% Notes are convertible must continue to be performed on a calendar-quarter basis.
The 2.125% Notes consisted of the following:
 
September 30,
2017
 
December 31,
2016
 
(In millions)
Principal amounts:
 
 
 
Principal
$
805

 
$
805

Unamortized debt discount(1)
(291
)
 
(308
)
Unamortized debt issuance costs
(13
)
 
(14
)
Net carrying amount
$
501

 
$
483

Carrying amount of the equity component, net(2)
$
305

 
$
305

(1) 
Included in the consolidated balance sheets within Long-term debt, net and amortized over the remaining life of the notes using the effective interest rate method.
(2) 
Included in the consolidated balance sheets within additional paid-in capital, net of $9 million of equity issuance costs.
As of September 30, 2017, the remaining life of the 2.125% Notes was approximately 108 months.
Based on the closing price of the Company's common stock of $12.75 on September 29, 2017, the last business day of the third quarter of 2017, the if-converted value of the 2.125% Notes exceeded its principal amount by approximately $478 million.
The effective interest rate of the liability component of the 2.125% Notes is 8%. This interest rate was based on the interest rates of similar liabilities at the time of issuance that did not have associated conversion features. The following table sets forth total interest expense recognized related to the 2.125% Notes:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
(In millions)
Contractual interest expense
$
4

 
$

 
$
13

 
$

Interest cost related to amortization of debt issuance costs

 

 
1

 

Interest cost related to amortization of the debt discount
$
6

 
$
1

 
$
17

 
$
1

6.75% Senior Notes Due 2019
On February 26, 2014, the Company issued $600 million of its 6.75% Senior Notes due 2019 (6.75% Notes). The 6.75% Notes are general unsecured senior obligations of the Company. Interest is payable on March 1 and September 1 of each year beginning September 1, 2014 until the maturity date of March 1, 2019. The 6.75% Notes are governed by the terms of an indenture (the 6.75% Indenture) dated February 26, 2014 between the Company and Wells Fargo Bank, N.A., as trustee.
During the first nine months of 2017, the Company settled $5 million in aggregate principal amount of its 6.75% Notes with treasury stock. As of September 30, 2017, the outstanding aggregate principal amount of the 6.75% Notes was $191 million.
7.50% Senior Notes Due 2022
On August 15, 2012, the Company issued $500 million of its 7.50% Senior Notes due 2022 (7.50% Notes). The 7.50% Notes are general unsecured senior obligations of the Company. Interest is payable on February 15 and August 15 of each year beginning February 15, 2013 until the maturity date of August 15, 2022. The 7.50% Notes are governed by the terms of an indenture (the 7.50% Indenture) dated August 15, 2012 between the Company and Wells Fargo Bank, N.A., as trustee.
During the first nine months of 2017, the Company settled $3 million in aggregate principal amount of its 7.50% Notes with treasury stock. As of September 30, 2017, the outstanding aggregate principal amount of the 7.50% Notes was $347 million.
7.00% Senior Notes Due 2024
On June 16, 2014, the Company issued $500 million of its 7.00% Senior Notes due 2024 (7.00% Notes). The 7.00% Notes are general unsecured senior obligations of the Company. Interest is payable on January 1 and July 1 of each year beginning January

14



1, 2015 until the maturity date of July 1, 2024. The 7.00% Notes are governed by the terms of an indenture (the 7.00% Indenture) dated June 16, 2014 between the Company and Wells Fargo Bank, N.A., as trustee.
During the third quarter of 2017, the Company repurchased $26 million in aggregate principal amount of its 7.00% Notes for $28 million.
During the first nine months of 2017, the Company settled $92 million in aggregate principal amount of its 7.00% Notes for $70 million in cash and $26 million in treasury stock. As of September 30, 2017, the outstanding aggregate principal amount of the 7.00% Notes was $324 million.
Subsequent to the end of the third quarter of 2017 and through November 2, 2017, the Company repurchased $13 million in aggregate principal amount of its 7.00% Notes.
Potential Repurchase of Outstanding Notes
The Company may elect to purchase or otherwise retire the 6.75% Notes, 7.50% Notes, 7.00% Notes and 2.125% Notes with cash, stock or other assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries, or by tender offer when the Company believes the market conditions are favorable.
Secured Revolving Line of Credit

Amended and Restated Loan and Security Agreement

On April 14, 2015, the Company and its subsidiaries, AMD International Sales & Service, Ltd. (AMDISS) and ATI Technologies ULC (collectively, the Loan Parties), entered into an amended and restated loan and security 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 Bank of America, N.A., acting as agent for the Lenders (the Agent).

Fifth Amendment to the Amended and Restated Loan and Security Agreement

On March 21, 2017, the Loan Parties entered into a fifth amendment to the Amended and Restated Loan Agreement (the Fifth Amendment) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders and the Agent, which modifies the Amended and Restated Loan Agreement. The Fifth Amendment amends the Amended and Restated Loan Agreement by, among other things, extending the maturity date of the Secured Revolving Line of Credit from April 14, 2020 to March 21, 2022, reducing the Applicable Margin (as defined in the Amended and Restated Loan Agreement), reducing the commitment fee, lowering the minimum threshold of Availability (as defined in the Amended and Restated Loan Agreement) required to be maintained by the Company and AMDISS in order to avoid cash dominion, amending the borrowing base reporting requirement, amending maximum dollar limits related to supply chain finance arrangements, and reducing the amount of the Secured Revolving Line of Credit available for the issuance for letters of credit from $75 million to $45 million.

The Amended and Restated Loan Agreement provides for a Secured Revolving Line of Credit for a principal amount up to $500 million with up to $45 million available for issuance of letters of credit. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible accounts receivable (90% for certain qualified eligible accounts receivable), minus specified reserves. The size of the commitments under the Secured Revolving Line of Credit may be increased by up to an aggregate amount of $200 million.

The Secured Revolving Line of Credit is secured by a first priority security interest in the Loan Parties’ accounts receivable, inventory, deposit accounts maintained with the Agent and other specified assets, including books and records.

Sixth Amendment to the Amended and Restated Loan and Security Agreement

On September 19, 2017, the Loan Parties entered into a sixth amendment to the Amended and Restated Loan Agreement (the Sixth Amendment) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders and the Agent, which modifies the Amended and Restated Loan Agreement. The Sixth Amendment amends the definition of the term “Qualified Factor Arrangement” to state that the amount held or owing or subject to repurchase is limited to (i) during the Company’s first fiscal quarter of each of its fiscal years, $220 million in the aggregate, (ii) during the Company’s second and third fiscal quarter of each of its fiscal years, $300 million in the aggregate, and (iii) (x) from the first day of the Company’s fourth fiscal quarter of each of its fiscal years to December 20 of each of its fiscal years, $300 million in the aggregate (provided, that not more than $220 million of such amount may consist of Qualified Factor Accounts (as defined in the Sixth Amendment) sold in such period) and

15



(y) from December 21 of each of the Company’s fiscal years to and including the last day of the Company’s fourth fiscal quarter of each of its fiscal years, $220 million in the aggregate.
As of September 30, 2017, the Secured Revolving Line of Credit had an outstanding loan balance of $70 million, at an interest rate of 4.75%. As of December 31, 2016, the Company did not have any borrowings outstanding under the Secured Revolving Line of Credit. As of September 30, 2017, the Company had $19 million letter of credit outstanding and up to $327 million available for future borrowings under the Secured Revolving Line of Credit. The Company reports its intra-period changes in its revolving credit balance on a net basis in its condensed consolidated statement of cash flows as the Company intends the period of the borrowings to be brief, repaying borrowed amounts within 90 days. As of September 30, 2017, the Company was in compliance with all required covenants in the Amended and Restated Loan Agreement.
NOTE 7. Net Income (Loss) Per Share
Basic net income (loss) per share is computed based on the weighted average number of shares outstanding.
Diluted net income (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, restricted stock units, shares issuable upon conversion of the 2.125% Notes and the exercise of the warrant under the Warrant Agreement.
The following table sets forth the components of basic and diluted net income (loss) per share:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
(In millions, except per share amounts)
Numerator – Net income (loss):
 
 
 
 
 
 
 
Numerator for basic and diluted net income (loss) per share
$
71

 
$
(406
)
 
$
(18
)
 
$
(446
)
Denominator - Weighted average shares
 
 
 
 
 
 
 
Denominator for basic net income (loss) per share
957

 
815

 
947

 
801

Effect of potentially dilutive shares:
 
 
 
 
 
 
 
Employee stock options and restricted stock units
44

 

 

 

Warrants
41

 

 

 

Denominator for diluted net income (loss) per share
1,042

 
815

 
947

 
801

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.07

 
$
(0.50
)
 
$
(0.02
)
 
$
(0.56
)
Diluted
$
0.07

 
$
(0.50
)
 
$
(0.02
)
 
$
(0.56
)
Potential shares from certain employee stock options, restricted stock units and the conversion of the 2.125% Notes totaling 102 million for the third quarter of 2017 and potential shares from certain employee stock options, restricted stock units, the conversion of the 2.125% Notes and the warrants under the Warrant Agreement totaling 144 million for the third quarter of 2016 were not included in the net income (loss) per share calculations because their inclusion would have been anti-dilutive.
Potential shares from certain employee stock options, restricted stock units, the conversion of the 2.125% Notes and the warrants under the Warrant Agreement totaling 193 million for the nine months ended September 30, 2017 and potential shares from certain employee stock options, restricted stock units, the conversion of the 2.125% Notes and the warrants under the Warrant Agreement totaling 217 million for the nine months ended September 24, 2016 were not included in the net loss per share calculations because their inclusion would have been anti-dilutive.
NOTE 8. Financial Instruments
Cash and Cash Equivalents
Cash and financial instruments measured and recorded at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 are summarized below:
 
September 30, 2017
 
December 31, 2016
 
(In millions)
Cash
$
118

 
$
67

Level 1(1) (2)
 
 
 
Government money market funds
$
115

 
$
50

Total level 1
$
115

 
$
50

Level 2(1) (3)
 
 
 
Commercial paper
$
646

 
$
1,147

Total level 2
$
646

 
$
1,147

Total
$
879

 
$
1,264


(1) 
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 30, 2017 or the year ended December 31, 2016.
(2) 
The Company's Level 1 assets are valued using quoted prices for identical instruments in active markets.
(3) 
The Company’s Level 2 assets are valued using broker reports that utilize quoted 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.
In addition to those amounts presented above, as of September 30, 2017 and December 31, 2016, the Company had approximately $2 million of investments in government money market funds, used as collateral for letters of credit deposits, which were included in Other current assets on the Company’s condensed consolidated balance sheets. These government money market funds are classified within Level 1 because they are valued using quoted prices for identical instruments in active markets. Their amortized cost approximates the fair value for all periods presented. The Company is restricted from accessing these deposits.
As of September 30, 2017 and December 31, 2016, the Company also had approximately $17 million and $15 million, respectively, of investments in mutual funds held in a Rabbi trust established for the Company's deferred compensation plan, which were included in Other assets on the Company's condensed consolidated balance sheets. These mutual funds are classified within Level 1 because they are valued using quoted prices for identical instruments in active markets. Their amortized cost approximates the fair value for all periods presented. The Company is restricted from accessing these investments.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis. The Company carries its financial instruments at fair value with the exception of its debt. Financial instruments that are not recorded at fair value are measured at fair value on a quarterly basis for disclosure purposes. The carrying amounts and estimated fair values of financial instruments not recorded at fair value are as follows:
 
September 30, 2017
 
December 31, 2016
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(In millions)
Short-term debt
$
70

 
$
70

 
$

 
$

Long-term debt, net(1)
$
1,355

 
$
2,294

 
$
1,434

 
$
2,313


(1)
Carrying amounts of long-term debt are net of unamortized debt issuance costs of $21 million as of September 30, 2017 and $25 million as of December 31, 2016, based on the adoption of ASU 2015-03 and net of unamortized debt discount associated with the 2.125% Notes of $291 million as of September 30, 2017 and $308 million as of December 31, 2016.
The Company’s long-term debt is classified within Level 2. The fair value of the debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of the Company’s accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing payment terms.

16


Hedging Transactions and Derivative Financial Instruments
Cash Flow Hedges
The following table shows the amount of gain (loss) included in accumulated other comprehensive gain (loss) and the amount of gain (loss) reclassified from accumulated other comprehensive gain (loss) and included in earnings related to the foreign currency forward contracts designated as cash flow hedges:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
(In millions)
Foreign Currency Forward Contracts - gains (losses)
 
 
 
 
 
 
 
Contracts designated as cash flow hedging instruments
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
1

 
$
(1
)
 
$
8

 
$
7

Research and development
3

 
1

 
4

 

Marketing, general and administrative
1

 

 
1

 

Contracts not designated as hedging instruments
 
 
 
 
 
 
 
Other income (expense), net
$
(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. These amounts were recorded in the Company's condensed consolidated balance sheets as follows:
 
September 30,
2017
 
December 31,
2016
 
(In millions)
Foreign Currency Forward Contracts - gains (losses)
 
 
 
Contracts designated as cash flow hedging instruments
$
6

 
$
(2
)
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 30, 2017 and December 31, 2016, the notional values of the Company’s outstanding foreign currency forward contracts were $305 million and $138 million, respectively. All the contracts mature within 12 months, and, upon maturity, the amounts recorded in Accumulated other comprehensive gain (loss) are expected to be reclassified into earnings. The Company hedges its exposure to the variability in future cash flows for forecasted transactions over a maximum of 12 months.
NOTE 9. Income Taxes
In the third quarter of 2017, the Company recorded an income tax provision of $19 million, consisting primarily of withholding taxes applicable to IP related revenue from foreign locations.
For the nine months ended September 30, 2017, the Company recorded an income tax provision of $27 million, consisting primarily of withholding taxes applicable to IP related revenue and licensing gain from foreign locations.
In the third quarter of 2016, the Company recorded an income tax provision of $4 million, consisting of $3 million for withholding taxes applicable to licensing gain from foreign locations and $1 million of foreign taxes in profitable locations.
For the nine months ended September 24, 2016, the Company recorded an income tax provision of $34 million, including $6 million of foreign taxes in profitable locations, $5 million for withholding taxes primarily applicable to licensing gain from foreign locations and $4 million of tax benefits arising from other comprehensive income and Canadian tax credits. In addition, the Company recorded the tax effect of completion of the sale of a majority equity interest in two subsidiaries comprising $21 million of income tax expense in China and $6 million of withholding tax expense associated with a future repatriation of the gain generated in China by the Chinese portion of that transaction (see Note 4. Equity Interest Purchase Agreement - ATMP Joint Venture).
The Company has not recognized the tax benefit of future foreign tax credits associated with the withholding tax expense

17



as the size and age profile of existing tax attributes does not allow it to satisfy the “more likely than not” criterion for the recognition of deferred tax assets.
As of September 30, 2017, 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 30, 2017, in management’s estimate, is not more likely than not to be achieved.
The Company's total gross unrecognized tax benefits increased from $58 million in prior quarter to $61 million as of September 30, 2017. This increase was due to additional R&D unrecognized tax benefits in foreign locations. The Company does not believe it is reasonably possible that unrecognized tax benefits will materially change in the next 12 months. However, the settlement, resolution or closure of tax audits are highly uncertain.
NOTE 10. Segment Reporting
Management, including the Chief Operating Decision Maker, who is the Company’s Chief Executive Officer, reviews and assesses operating performance using segment net revenue and operating income (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), professional graphics processors and licensing portions of its intellectual property (IP) portfolio; and

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


18



In addition to these reportable segments, the Company has an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to any of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. This category also includes employee stock-based compensation expense and restructuring and other special charges, net.
The following table provides a summary of net revenue and operating income (loss) by segment: 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
(In millions)
Net revenue:
 
 
 
 
 
 
 
Computing and Graphics
$
819

 
$
472

 
$
2,071

 
$
1,367

Enterprise, Embedded and Semi-Custom
824

 
835

 
1,778

 
1,799

Total net revenue
$
1,643

 
$
1,307

 
$
3,849

 
$
3,166

Operating income (loss):
 
 
 
 
 
 
 
Computing and Graphics
$
70

 
$
(66
)
 
$
62

 
$
(217
)
Enterprise, Embedded and Semi-Custom
84

 
136

 
135

 
236

All Other
(28
)
 
(363
)
 
(75
)
 
(388
)
Total operating income (loss)
$
126

 
$
(293
)
 
$
122

 
$
(369
)
The following table provides major items included in All Other category:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
(In millions)
Operating loss:
 
 
 
 
 
 
 
Stock-based compensation expense
$
(29
)
 
$
(23
)
 
$
(76
)
 
$
(57
)
Restructuring and other special charges, net

 

 

 
10

Charge related to the sixth amendment to the WSA with GF

 
(340
)
 

 
(340
)
Other
1

 

 
1

 
(1
)
Total operating loss
$
(28
)
 
$
(363
)
 
$
(75
)
 
$
(388
)
NOTE 11. Stock-Based Incentive Compensation Plans
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 and Nine Months Ended
 
September 30,
2017
 
September 24,
2016
Expected volatility
56.32
%
 
59.85
%
Risk-free interest rate
1.65
%
 
1.00
%
Expected dividends
0.00
%
 
0.00
%
Expected life
3.92 years

 
3.98 years

During the quarter and nine months ended September 30, 2017 and quarter and nine months ended September 24, 2016, the Company granted 0.9 million and 2.2 million shares of employee stock options, respectively, with weighted average grant date fair value per share of $5.46 and $3.10, respectively.

19



Restricted Stock Units
In the third quarter of 2017, the Company granted 8.3 million shares of restricted stock units, including 0.8 million performance-based restricted stock units (PRSUs) with market conditions discussed below, with weighted average grant date fair value per share of $13.24. In the third quarter of 2016, the Company granted 19.5 million shares of restricted stock units including, 2.0 million PRSUs with market conditions discussed below, with weighted average grant date fair value per share of $5.10.
During the nine months ended September 30, 2017, the Company granted 10.4 million shares of restricted stock units including, 0.8 million PRSUs with market conditions discussed below, with weighted average grant date fair value per share of $13.03. During the nine months ended September 24, 2016, the Company granted 26 million shares of restricted stock units including, 2.0 million PRSUs with market conditions discussed below, with weighted average grant date fair value per share of $4.55.
Performance-based Restricted Stock Units with Market Conditions
During the third quarter of 2017, 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 vesting is based on relative Total Shareholder Return (TSR) performance. The number of shares that may be earned is calculated based on the TSR of AMD's common stock as compared to the TSR of the companies included in the PHLX Semiconductor Sector Index (SOX), with the potential payout level of shares within a range from 0% to 250% of the target number of shares granted. These payout levels can be adjusted by two criteria - one based on AMD's TSR and one based on AMD's stock price during the last year of performance period; and an overall payout cap based on total value. Any shares earned shall vest upon the compensation committee's certification of the attainment of the performance level, 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 30, 2017 there were 0.8 million market-based restricted stock units with potential payout level at 100% with a grant date fair value per share of $17.18.
During the third quarter of 2016, the Company granted 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%, 150%, 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's 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 24, 2016, there were 2.0 million market-based restricted stock units with the potential payout level at 100% with a grant date fair value per share of $4.50. As of September 30, 2017, all the 2016 market-based restricted stock units achieved the 250% payout level.
NOTE 12. Commitments and Contingencies
Warranties and Indemnities
The Company generally warrants that its products sold to its customers will conform to the Company’s approved specifications and be free from defects in material and workmanship under normal use and service for one year. Subject to certain exceptions, the Company also offers a three-year limited warranty to end users for only those central processing unit (CPU) and 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 offers extended limited warranties to certain customers of “tray” microprocessor products and/or professional graphics products who have written agreements with the Company and target their computer systems at the commercial and/or embedded markets.
Changes in the Company’s estimated liability for product warranty were as follows:

20



 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
(In millions)
Beginning balance
$
10

 
$
11

 
$
12

 
$
15

New warranties issued
7

 
5

 
18

 
15

Settlements
(7
)
 
(5
)
 
(16
)
 
(13
)
Changes in liability for pre-existing warranties, including expirations
1

 

 
(3
)
 
(6
)
Ending balance
$
11

 
$
11

 
$
11

 
$
11

In addition to product warranties, the Company, from time to time in its normal course of business, indemnifies other parties, with whom it enters into contractual relationships, including customers, lessors and parties to other transactions with the Company, with respect to certain matters. In these limited matters, the Company has agreed to hold certain third parties harmless against specific types of claims or losses, such as those arising from a breach of representations or covenants, third-party claims that the Company’s products, when used for their intended purpose(s) and under specific conditions, infringe the intellectual property rights of a third party, or other specified claims made against the indemnified party. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the unique facts and circumstances that are likely to be involved in each particular claim and indemnification provision. Historically, payments made by the Company under these obligations have not been material.
Contingencies
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 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. On September 4, 2015, plaintiffs filed their motion for class certification, and on March 16, 2016, the Court granted plaintiffs' motion. A court-ordered mediation held in January 2016 did not result in a settlement of the lawsuit. The discovery process was concluded. The plaintiffs and defendants filed cross-motions for summary judgment, and briefing on those motions was completed in July 2017. On October 9, 2017, the parties signed a definitive settlement agreement resolving this matter and submitted it to the Court for approval.  Under the terms of this agreement, the settlement will be funded entirely by certain of AMD’s insurance carriers and the defendants will continue to deny any liability or wrongdoing.
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 (Wessels) was filed against the Company (as a nominal defendant only) and certain of its directors and officers in the Santa Clara County Superior Court of the State of California. The complaint purports to assert claims against the Company and certain individual directors and officers for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual directors and officers regarding its 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for the Company's common stock during the period. On April 27, 2015, a similar purported shareholder derivative lawsuit captioned Christopher Hamilton and David Hamilton v. Barnes, et al., Case No. 5:15-cv-01890 (Hamilton) was filed against the Company (as a nominal defendant only) and certain of its directors and officers in the United States District Court for the Northern District of California. The case was transferred to the judge handling the Hatamian Lawsuit and is now Case No. 4:15-cv-01890.

21



On September 29, 2015, a similar purported shareholder derivative lawsuit captioned Jake Ha v Caldwell, et al., Case No. 3:15-cv-04485 (Ha) was filed against the Company (as a nominal defendant only) and certain of its directors and officers in the United States District Court for the Northern District of California. The lawsuit also seeks a court order voiding the stockholder vote on the Company’s 2015 proxy. The case was transferred to the judge handling the Hatamian Lawsuit and is now Case No. 4:15-cv-04485. The Wessels, Hamilton and Ha shareholder derivative lawsuits are currently stayed.
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.
ZiiLabs Litigation
On December 16, 2016, a patent lawsuit captioned ZiiLabs v. AMD, C.A. No. 2:16-cv-1418 in the United States District Court for Eastern District of Texas (the ZiiLabs Lawsuit) was filed against the Company. The complaint alleged that the Company infringed four patents related generally to graphics processors and memory controllers. The complaint sought damages, interest, and attorneys’ fees. ZiiLabs filed several similar lawsuits against other companies on the same day. On the same date, ZiiLabs also filed a complaint with the United States International Trade Commission (USITC) pursuant to Section 337 of the Tariff Act of 1930 against the Company and several other companies asserting the same four patents (USITC Proceeding). The complaint sought a limited exclusion order barring the importation of certain products that contain AMD memory controllers and graphics processors. Some of the Company’s customers are also named respondents. On January 18, 2017, the USITC announced that it would institute the investigation, entitled 337-TA-1037, In the Matter of Certain Graphics Processors, DDR Memory Controllers, and Products Containing the Same. On July 20, 2017, the Company obtained a license to the patents-in-suit. Accordingly, the USITC and the Court have dismissed the Company from the proceedings. The resulting settlement obligation was not material. The applicable amount of the patent license was capitalized on the Company's balance sheet in the third quarter of 2017 and amortized over its useful life.
Dickey Litigation
On October 26, 2015, a putative class action complaint captioned Dickey et al. v. AMD, No. 15-cv-04922 was filed against the Company in the United States District Court for the Northern District of California. Plaintiffs allege that the Company misled consumers by using the term "eight cores" in connection with the marketing of certain AMD FX CPUs that are based on the Company's “Bulldozer” core architecture. The plaintiffs allege these products cannot perform eight calculations simultaneously, without restriction. The plaintiffs seek to obtain damages under several causes of action for a nationwide class of consumers who allegedly were deceived into purchasing certain Bulldozer-based CPUs that were marketed as containing eight cores. The plaintiffs also seek attorneys' fees. On December 21, 2015, the Company filed a motion to dismiss the complaint, which was granted on April 7, 2016. The plaintiffs then filed an amended complaint with a narrowed putative class definition, which the Court dismissed upon the Company's motion on October 31, 2016. The plaintiffs subsequently filed a second amended complaint, and the Company filed a motion to dismiss the second amended complaint. On June 14, 2017, the Court issued an order granting in part and denying in part the Company's motion to dismiss, and allowing the plaintiffs to move forward with a portion of their complaint. The putative class definition does not encompass the Company's Ryzen or EYPC processors.
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, financial position and results of operations or cash flows.

22



NOTE 13. Accumulated Other Comprehensive Income (Loss)
The tables below summarize the changes in accumulated other comprehensive income (loss) by component:
 
Three Months Ended
 
September 30,
2017
 
September 24,
2016
 
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
)
 
$
1

 
$

 
$
(2
)
 
$
(1
)
 
$
(3
)
Unrealized gains arising during the period

 
6

 
6

 
1

 

 
1

Reclassification adjustment for (gains) losses realized and included in net income (loss)

 
(4
)
 
(4
)
 

 
(1
)
 
(1
)
Tax effect

 

 

 

 

 

Total other comprehensive income (loss)

 
2

 
2

 
1

 
(1
)
 

Ending balance
$
(1
)
 
$
3

 
$
2

 
$
(1
)
 
$
(2
)
 
$
(3
)

 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
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
)
 
$
(4
)
 
$
(5
)
 
$
(1
)
 
$
(7
)
 
$
(8
)
Unrealized gains (losses) arising during the period

 
14

 
14

 
(1
)
 
7

 
6

Reclassification adjustment for (gains) losses realized and included in net income (loss)

 
(5
)
 
(5
)
 

 
1

 
1

Tax effect

 
(2
)
 
(2
)
 
1

 
(3
)
 
(2
)
Total other comprehensive income (loss)

 
7

 
7

 

 
5

 
5

Ending balance
$
(1
)
 
$
3

 
$
2

 
$
(1
)
 
$
(2
)
 
$
(3
)


23



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in this report include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements speak only as of the date hereof or as of the dates indicated in the statements and should not be relied upon as predictions of future events, as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma,” “estimates,” “anticipates,” or the negative of these words and phrases, other variations of these words and phrases or comparable terminology. The forward-looking statements relate to, among other things: possible impact of future accounting rules on AMD's consolidated financial statements; demand for AMD’s products; the growth, change and competitive landscape of the markets in which AMD participates; future restructuring activities; the ability to implement new revenue recognition accounting standards; the nature and extent of AMD’s future payments to GLOBALFOUNDRIES Inc. (GF) and the materiality of these payments; the materiality of AMD’s future purchases from GF; AMD's ability to meet it's 2017 wafer purchase target; the expected amounts to be received by AMD under the IP licensing agreement and AMD's expected royalty payments from future product sales of China JVs' products to be developed on the basis of such licensed IP; sales patterns of AMD's PC products and semi-custom System-on-Chip (SoC) products for game consoles; the level of international sales as compared to total sales; international sales will continue to be a significant portion of total sales in the foreseeable future; that other unrecognized tax benefits will not materially change in the next 12 months; that AMD’s cash and cash equivalents balances together with the availability under that certain secured revolving line of credit (Secured Revolving Line of Credit) made available to AMD and certain of its subsidiaries under the Amended and Restated Loan Agreement, will be sufficient to fund AMD’s operations including capital expenditures over the next 12 months; AMD’s ability to obtain sufficient external financing on favorable terms, or at all; AMD's expectation that based on the information presently known to management, the potential liability related to AMD's current litigation will not have a material adverse effect on its financial condition, cash flows or results of operations; AMD does not expect to pay dividends in the future; a small number of customers will continue to account for a substantial part of AMD's revenue in the future; and anticipated sales in the fourth quarter of 2017. Material factors that could cause actual results to differ materially from current expectations include, without limitation, the following: Intel Corporation’s dominance of the microprocessor market and its aggressive business practices may limit AMD’s ability to compete effectively; AMD has a wafer supply agreement with GF with obligations to purchase all of its microprocessor and APU product requirements, and a certain portion of its GPU product requirements from GF with limited exceptions. If GF is not able to satisfy AMD’s manufacturing requirements, AMD's business could be adversely impacted; AMD relies on third parties to manufacture its products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, AMD’s business could be materially adversely affected; failure to achieve expected manufacturing yields for AMD’s products could negatively impact its financial results; the success of AMD’s business is dependent upon its ability to introduce products on a timely basis with features and performance levels that provide value to its customers while supporting and coinciding with significant industry transitions; if AMD cannot generate sufficient revenue and operating cash flow or obtain external financing, it may face a cash shortfall and be unable to make all of its planned investments in research and development or other strategic investments; the loss of a significant customer may have a material adverse effect on AMD; AMD’s receipt of revenue from its semi-custom SoC products is dependent upon its technology being designed into third-party products and the success of those products; global economic uncertainty may adversely impact AMD’s business and operating results; the markets in which AMD’s products are sold are highly competitive; AMD may not be able to generate sufficient cash to service its debt obligations or meet its working capital requirements; AMD has a large amount of indebtedness which could adversely affect its financial position and prevent it from implementing its strategy or fulfilling its contractual obligations; the agreements governing AMD’s notes and the Secured Revolving Line of Credit impose restrictions on AMD that may adversely affect its ability to operate its business; AMD's issuance to West Coast Hitech L.P. (WCH) of warrants to purchase 75 million shares of its common stock, if and when exercised, will dilute the ownership interests of AMD's existing stockholders, and the conversion of the 2.125% Convertible Senior Notes due 2026 (2.125% Notes) may dilute the ownership interest of AMD's existing stockholders, or may otherwise depress the price of its common stock; uncertainties involving the ordering and shipment of AMD’s products could materially adversely affect it; the demand for AMD’s products depends in part on the market conditions in the industries into which they are sold. Fluctuations in demand for AMD’s products or a market decline in any of these industries could have a material adverse effect on its results of operations; AMD’s ability to design and introduce new products in a timely manner is dependent upon third-party intellectual property; AMD depends on third-party companies for the design, manufacture and supply of motherboards, software and other computer platform components to support its business; if AMD loses Microsoft Corporation’s support for its products or other software vendors do not design and develop software to run on AMD’s products, its ability to sell its products could be materially adversely affected; AMD’s reliance on third-party distributors and AIB partners subjects it to certain risks; AMD’s inability to continue to attract and retain qualified personnel may hinder its business; in the event of a change of control, AMD may not be able to repurchase its outstanding debt as required by the applicable indentures and its Secured Revolving Line of Credit, which would result in a default under the indentures and its Secured Revolving Line of Credit; the semiconductor industry is highly cyclical and has experienced se

24



vere downturns that have materially adversely affected, and may continue to materially adversely affect its business in the future; acquisitions, divestitures and/or joint ventures could disrupt its business, harm its financial condition and operating results or dilute, or adversely affect the price of, its common stock; AMD’s business is dependent upon the proper functioning of its internal business processes and information systems and modification or interruption of such systems may disrupt its business, processes and internal controls; data breaches and cyber-attacks could compromise AMD’s intellectual property or other sensitive information, be costly to remediate and cause significant damage to its business and reputation; AMD’s operating results are subject to quarterly and seasonal sales patterns; if essential equipment, materials or manufacturing processes are not available to manufacture its products, AMD could be materially adversely affected; if AMD’s products are not compatible with some or all industry-standard software and hardware, it could be materially adversely affected; costs related to defective products could have a material adverse effect on AMD; if AMD fails to maintain the efficiency of its supply chain as it responds to changes in customer demand for its products, its business could be materially adversely affected; AMD outsources to third parties certain supply-chain logistics functions, including portions of its product distribution, transportation management and information technology support services; AMD may incur future impairments of goodwill; AMD's stock price is subject to volatility; 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; and AMD is subject to environmental laws, conflict minerals-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as a variety of other laws or regulations that could result in additional costs and liabilities.
For a discussion of factors that could cause actual results to differ materially from the forward-looking statements, see “Part II, Item 1A—Risk Factors” beginning on page 41 and “Financial Condition” beginning on page 33 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.

25


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 31, 2016 and December 26, 2015, and for each of the three years in the period ended December 31, 2016 as filed in our Annual Report on Form 10-K for the year ended December 31, 2016.
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 processors; and

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

We also license portions of our intellectual property (IP) portfolio.


In this section, we will describe the general financial condition and the results of operations of Advanced Micro Devices, Inc. and its wholly-owned subsidiaries (collectively, “us,” “our” or “AMD”), including a discussion of our results of operations for the quarter and nine months ended September 30, 2017 compared to the quarter and nine months ended September 24, 2016, an analysis of changes in our financial condition and a discussion of our contractual obligations.

Net revenue in the third quarter of 2017 was $1.64 billion, a 26% increase compared to the third quarter of 2016. The year-over-year increase was primarily due to a 74% increase in Computing and Graphics net revenue, partially offset by a 1% decrease in Enterprise, Embedded and Semi-Custom net revenue. The increase in Computing and Graphics segment net revenue was primarily due to higher sales from our graphics processors and desktop processors and IP related revenue. The decrease in Enterprise, Embedded and Semi-Custom segment net revenue was primarily driven by lower sales of our semi-custom SoCs, mostly offset by IP related revenue and revenue from our AMD EPYC™ datacenter processors. Our operating income for the third quarter of 2017 was $126 million compared to operating loss of $293 million in the third quarter of 2016. Our net income for the third quarter of 2017 was $71 million compared to a net loss of $406 million a year ago.

We introduced a number of new products in the third quarter of 2017. We released mainstream high efficiency AMD Ryzen™ 3 desktop processors, the AMD Ryzen™ 3 1300x and AMD Ryzen™ 3 1200 processors. We designed both processors to deliver optimum performance for gaming and computing applications. We also launched our Ryzen™ Threadripper™ processor, the AMD Ryzen™ Threadripper™ 1950x and Ryzen™ Threadripper™ 1920x, for the high-end desktop market. In addition, we launched our Radeon™ Pro WX 9100 and Radeon™ Pro SSG. These new professional graphics cards can help accelerate the pace of professional content creation. In August 2017, we formally launched our Radeon™ RX Vega family of graphics processors, our most sophisticated graphics processor unit architecture designed for the enthusiast-class gaming segment.

Cash and cash equivalents as of the end of the third quarter of 2017 were $879 million, compared to $1.26 billion as of the end of the fourth quarter of 2016.

We intend the discussion of our financial condition and results of operations that follows to provide information that will assist you in understanding our financial statements, the changes in certain key items in those financial statements from year to year and quarter to quarter, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements.

26


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 graphics processors, professional graphics processors and licensing portions of our IP portfolio; and

the Enterprise, Embedded and Semi-Custom segment, which primarily includes server and embedded processors, semi-custom SoC products, development services, technology for game consoles and licensing portions of our IP portfolio.
In addition to these reportable segments, we have an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to any of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. This category also includes employee stock-based compensation expense and restructuring and other special charges, net.
We use a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters ended September 30, 2017 and September 24, 2016 each consisted of 13 weeks. The nine months ended September 30, 2017 and September 24, 2016 each consisted of 39 weeks.
Our operating results tend to vary seasonally with the markets in which our products are sold. For example, historically, first quarter PC product sales are generally lower than fourth quarter sales. 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 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
 
(In millions)
Net revenue:
 
 
 
 
 
 
 
 
Computing and Graphics
 
$
819

 
$
472

 
$
2,071

 
$
1,367

Enterprise, Embedded and Semi-Custom
 
824

 
835

 
1,778

 
1,799

Total net revenue
 
$
1,643

 
$
1,307

 
$
3,849

 
$
3,166

Operating income (loss):
 
 
 
 
 
 
 
 
Computing and Graphics
 
$
70

 
$
(66
)
 
$
62

 
$
(217
)
Enterprise, Embedded and Semi-Custom
 
84

 
136

 
135

 
236

All Other
 
(28
)
 
(363
)
 
(75
)
 
(388
)
Total operating income (loss)
 
$
126

 
$
(293
)
 
$
122

 
$
(369
)
Computing and Graphics
Computing and Graphics net revenue of $819 million in the third quarter of 2017 increased by 74%, compared to net revenue of $472 million in the third quarter of 2016, primarily as a result of a 61% increase in average selling price and a 1% increase in unit shipments. The increase in average selling price was primarily due to a richer mix of higher-end Radeon™ graphics processors and Ryzen™ desktop processors. The increase in unit shipments was primarily attributable to strong demand for our Radeon™ graphics processors and Ryzen™ desktop processors. In addition, Computing and Graphics net revenue in the third quarter of 2017 included IP related revenue.
Computing and Graphics net revenue of $2,071 million in the first nine months of 2017 increased by 51%, compared to net revenue of $1,367 million in the first nine months of 2016, primarily as a result of a 40% increase in average selling price and a 4% increase in unit shipments. The increase in average selling price was primarily due to a shift in product mix to higher-end Radeon™ graphics processors and Ryzen™ desktop processors. The increase in unit shipments was primarily attributable to higher demand for our graphics processors and Ryzen™ desktop processors.

27



Computing and Graphics operating income was $70 million in the third quarter of 2017, compared to an operating loss of $66 million in the third quarter of 2016. The improvement in operating results was primarily due to the increase in net revenue referenced above, partially offset by the related increase in cost of sales and a $30 million increase in operating expenses. Operating expenses increased for the reasons set forth under “Expenses” below.
Computing and Graphics operating income was $62 million in the first nine months of 2017, compared to an operating loss of $217 million in the first nine months of 2016. The improvement in operating results was primarily due to the increase in net revenue referenced above, partially offset by the related increase in cost of sales and a $57 million increase in operating expenses. Operating expenses increased for the reasons set forth under “Expenses” below.
Enterprise, Embedded and Semi-Custom
Enterprise, Embedded and Semi-Custom net revenue of $824 million in the third quarter of 2017 decreased by 1%, compared to net revenue of $835 million in the third quarter of 2016. The decrease in net revenue was primarily due to lower sales of our semi-custom SoC products, mostly offset by IP related revenue and sales of our AMD EPYC™ datacenter processors.
Enterprise, Embedded and Semi-Custom net revenue of $1,778 million in the first nine months of 2017 decreased by 1%, compared to net revenue of $1,799 million in the first nine months of 2016. The decrease in net revenue was primarily due to a decrease in non-recurring engineering (NRE) revenue and lower sales of our semi-custom SoC products, mostly offset by IP related revenue and sales of our AMD EPYC™ datacenter processors.
Enterprise, Embedded and Semi-Custom operating income was $84 million in the third quarter of 2017 compared to operating income of $136 million in the third quarter of 2016. The decline in operating results was primarily due to costs associated with the WSA for certain wafers purchased at another foundry, a $36 million increase in operating expenses and $24 million of THATIC JV licensing gain in the third quarter of 2016, partially offset by the benefit from IP related revenue. Operating expenses increased for the reasons set forth under “Expenses” below.
Enterprise, Embedded and Semi-Custom operating income was $135 million in the first nine months of 2017, compared to operating income of $236 million in the first nine months of 2016. The decline in operating results was primarily due to an $81 million increase in operating expenses driven primarily by datacenter-related operating expenses, and costs associated with the WSA for certain wafers purchased at another foundry, partially offset by IP related revenue. Operating expenses increased for the reasons set forth under “Expenses” below.
All Other
All Other operating loss of $28 million in the third quarter of 2017 was related to stock-based compensation expense. All Other operating loss of $363 million in the third quarter of 2016 included a charge of $340 million, consisting of the $100 million payment under the sixth amendment to the Wafer Supply Agreement with GF (WSA Sixth Amendment) and the $240 million value of the warrant under a warrant agreement with WCH (Warrant Agreement) and stock-based compensation expense of $23 million.
All Other operating loss of $75 million in the first nine months of 2017 was primarily related to stock-based compensation expense. All Other operating loss of $388 million in the first nine months of 2016 primarily included a charge of $340 million, consisting of the $100 million payment under the WSA Sixth Amendment and the $240 million value of the warrant under the Warrant Agreement and stock-based compensation expense of $57 million, partially offset by restructuring reversals of $10 million.
International Sales
International sales as a percentage of net revenue were 72% in the third quarter of 2017 and 73% in the third quarter of 2016. The decrease in international sales as a percentage of net revenue in the third quarter of 2017 compared to the third quarter of 2016 was primarily driven by a higher proportion of revenue from domestic sales of our products from the Computing and Graphics segment.
International sales as a percentage of net revenue were 75% in the first nine months of 2017 and 78% in the first nine months of 2016. The decrease in international sales as a percentage of net revenue in the first nine months of 2017 compared to the first nine months of 2016 was primarily driven by a higher proportion of revenue from domestic sales of our desktop processors, graphics processors and 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.

28



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: 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
 
(In millions except for percentages)
Cost of sales
 
$
1,070

 
$
1,248

 
$
2,541

 
$
2,519

Gross margin
 
573

 
59

 
1,308

 
647

Gross margin percentage
 
35
%
 
5
%
 
34
%
 
20
%
Research and development
 
315

 
259

 
860

 
744

Marketing, general and administrative
 
132

 
117

 
378

 
339

Restructuring and other special charges, net
 

 

 

 
(10
)
Licensing gain
 

 
(24
)
 
(52
)
 
(57
)
Interest expense
 
(31
)
 
(41
)
 
(95
)
 
(122
)
Other income (expense), net
 
(3
)
 
(63
)
 
(11
)
 
87

Provision for income taxes
 
19

 
4

 
27

 
34

Equity loss in investee
 
$
(2
)
 
$
(5
)
 
$
(7
)
 
$
(8
)
Gross Margin
Gross margin as a percentage of net revenue was 35% in the third quarter of 2017, compared to 5% in the third quarter of 2016 and 34% in the first nine months of 2017, compared to 20% in the first nine months of 2016. The gross margins in the quarter and nine months ended September 24, 2016 were negatively impacted by a charge of $340 million consisting of the $100 million payment under the WSA Sixth Amendment and the value of the warrant of $240 million under the Warrant Agreement. The impact of the charge in the quarter and nine months ended September 24, 2016 accounted for 26 and 11 percentage points, respectively. Substantially all of the resulting gross margin increase for the third quarter of 2017 compared with the third quarter of 2016 was driven by the benefit from IP related revenue and also a richer revenue mix from the Computing and Graphics segment, which were partially offset by costs associated with the WSA for certain wafers purchased at another foundry. The resulting increase in gross margin for the nine months ended September 30, 2017 compared to the nine months ended September 24, 2016 was primarily due to richer mix from Computing and Graphics segment and the benefit from IP related revenue, partially offset by costs associated with the WSA for certain wafers purchased at another foundry.
Expenses
Research and Development Expenses
Research and development expenses of $315 million in the third quarter of 2017 increased by $56 million, or 22%, compared to $259 million in the third quarter of 2016. The increase was primarily due to an increase in research and development expenses, mainly product engineering and design costs, and annual employee incentives driven by improved financial performance.
Research and development expenses of $860 million in the first nine months of 2017 increased by $116 million, or 16%, compared to $744 million in the first nine months of 2016. The increase was primarily due to an increase in research and development expenses, mainly product engineering and design related costs driven primarily by higher datacenter related investments, and annual employee incentives driven by improved financial performance.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses of $132 million in the third quarter of 2017 increased by $15 million, or 13%, compared to $117 million in the third quarter of 2016. The increase was due to increase in expenses related to annual employee incentives driven by our improved financial performance, increases in general and administrative and sales and marketing expenses primarily attributable to our Enterprise, Embedded and Semi-Custom segment.
Marketing, general and administrative expenses of $378 million in the first nine months of 2017 increased by $39 million, or 12%, compared to $339 million in the first nine months of 2016. The increase was due to increase in expenses related to annual employee incentives driven by our improved financial performance, increases in general and administrative and sales and marketing expenses primarily attributable to our Enterprise, Embedded and Semi-Custom segment.
Interest Expense
Interest expenses for the third quarter and the first nine months of 2017 were $31 million and $95 million, respectively, compared to interest expenses for the third quarter and the first nine months of 2016 were $41 million and $122 million, respectively. The decreases are primarily due to lower weighted average interest rates and lower debt balances.
Other Income (expense), Net
Other expense, net of $3 million in the third quarter of 2017, decreased by $60 million, compared to $63 million in the third quarter of 2016, primarily due to the $61 million total loss on debt repurchases in the third quarter of 2016.
Other expense, net of $11 million in the first nine months of 2017, changed by $98 million, compared to $87 million Other income, net in the first nine months of 2016, primarily due to the gain on sale of equity interests in ATMP JV of $150 million, partially offset by the $61 million total loss on debt repurchases in the first nine months of 2016 and $9 million total loss on debt redemption in the first nine months of 2017.
Income Taxes
In the third quarter of 2017, we recorded an income tax provision of $19 million, consisting primarily of withholding taxes applicable to IP related revenue from foreign locations.
For the nine months ended September 30, 2017, we recorded an income tax provision of $27 million, consisting primarily of withholding taxes applicable to IP related revenue and licensing gain from foreign locations.
In the third quarter of 2016, we recorded an income tax provision of $4 million, consisting of $3 million for withholding taxes applicable to licensing gain from foreign locations and $1 million of foreign taxes in profitable locations.
For the nine months ended September 24, 2016, we recorded an income tax provision of $34 million, including $6 million of foreign taxes in profitable locations, $5 million for withholding taxes primarily applicable to licensing gain from foreign locations and $4 million of tax benefits arising from other comprehensive income and Canadian tax credits. In addition, we recorded the tax effect of completion of the sale of a majority equity interest in two subsidiaries comprising $21 million of income tax expense in China and $6 million of withholding tax expense associated with a future repatriation of the gain generated in China by the Chinese portion of that transaction (see Note 4. Equity Interest Purchase Agreement - ATMP Joint Venture).
We have not recognized the tax benefit of future foreign tax credits associated with the withholding tax expense as the size and age profile of existing tax attributes does not allow us to satisfy the “more likely than not” criterion for the recognition of deferred tax assets.
As of September 30, 2017, 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 as of September 30, 2017, in our estimate, is not more likely than not to be achieved.
Our total gross unrecognized tax benefits increased from $58 million in the prior quarter to $61 million as of September 30, 2017. This increase was due to additional R&D unrecognized tax benefits in foreign locations. We do not believe it is reasonably possible that unrecognized tax benefits will materially change in the next 12 months. However, the settlement, resolution or closure of 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 our condensed consolidated statements of operations as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 24,
2016
 
September 30,
2017
 
September 24,
2016
 
(In millions)
Cost of sales
$
1

 
$

 
$
2

 
$
1

Research and development
18

 
15

 
45

 
34

Marketing, general and administrative
10

 
8

 
29

 
22

Stock-based compensation expense, net of tax of $0
$
29

 
$
23

 
$
76

 
$
57

For all periods presented, we did not realize any excess tax benefit related to stock-based compensation and therefore did not record any related operating cash flows.
Stock-based compensation expense of $29 million in the third quarter of 2017 increased by $6 million, compared to $23 million in the third quarter of 2016. Stock-based compensation expense of $76 million in the first nine months of 2017 increased by $19 million, compared to $57 million in the first nine months of 2016. The increase was primarily due to a higher weighted average grant date fair value of unvested restricted stock units in the three and nine months ended September 30, 2017, compared to the three and nine months ended September 24, 2016. The increase was also driven by fewer actual forfeitures in 2017 compared to 2016.
GLOBALFOUNDRIES
Wafer Supply Agreement. The Wafer Supply Agreement (WSA) governs the terms by which we purchase products manufactured by GLOBALFOUNDRIES Inc. (GF).
Sixth Amendment to Wafer Supply Agreement. On August 30, 2016, we entered into a sixth amendment to the WSA (the WSA Sixth Amendment). The WSA Sixth Amendment modified certain terms of the WSA applicable to wafers for our microprocessor, graphics processor and semi-custom products for a five-year period from January 1, 2016 to December 31, 2020. AMD and GF also agreed to establish a comprehensive framework for technology collaboration for the 7nm technology node.
The WSA Sixth Amendment also provides us a limited waiver with rights to contract with another wafer foundry with respect to certain products in the 14nm and 7nm technology nodes and gives us greater flexibility in sourcing foundry services across our product portfolio. In consideration for these rights, we agreed to pay GF $100 million in installments starting in the fourth fiscal quarter of 2016 through the third fiscal quarter of 2017. During the third fiscal quarter of 2017, we paid GF $25 million and, as of September 30, 2017, we had paid GF $100 million in aggregate. Starting in 2017 and continuing through 2020, we also agreed to make quarterly payments to GF based on the volume of certain wafers purchased from another wafer foundry.
Further, for each calendar year during the term of the WSA Sixth Amendment, AMD and GF agreed to annual wafer purchase targets that increase from 2016 through 2020. If we do not meet the annual wafer purchase target for any calendar year, we will be required to pay to GF a portion of the difference between our actual wafer purchases and the wafer purchase target for that year. The annual targets were established based on our business and market expectations and took into account the limited waiver we received for certain products. As of September 30, 2017, we expect to meet our 2017 wafer purchase target.
AMD and GF also agreed on fixed pricing for wafers purchased during 2016 and established a framework to agree on annual wafer pricing for the years 2017 to 2020. AMD and GF have agreed on pricing for wafer purchases for 2017.

29


Our total purchases from GF related to wafer manufacturing, research and development activities and other for the quarters ended September 30, 2017 and September 24, 2016 were $331 million and $186 million, respectively. Our total purchases from GF related to wafer manufacturing, research and development activities and other for the nine months ended September 30, 2017 and September 24, 2016 were $773 million and $479 million, respectively. Included in the total purchases for the quarter and nine months ended September 30, 2017 are amounts related to the volume of certain wafers purchased from another wafer foundry, as agreed to by us and GF under the WSA Sixth Amendment. As of September 30, 2017 and December 31, 2016, the amount of prepayment and other receivables related to GF was $20 million and $32 million, respectively, included in Prepayment and other receivables - related parties on our condensed consolidated balance sheets. As of September 30, 2017 and December 31, 2016, the amount payable to GF was $270 million and $255 million, respectively, included in Payable to related parties on our condensed consolidated balance sheets.
Warrant Agreement. Also on August 30, 2016, in consideration for the limited waiver and rights under the WSA Sixth Amendment, we entered into a warrant agreement (the Warrant Agreement) with West Coast Hitech L.P. (WCH), a wholly-owned subsidiary of Mubadala Development Company PJSC (Mubadala). Under the Warrant Agreement, WCH and its permitted assigns are entitled to purchase 75 million shares of our common stock (the Warrant Shares) at a purchase price of $5.98 per share. The warrant is exercisable in whole or in part until February 29, 2020. Notwithstanding the foregoing, the Warrant Agreement will only be exercisable to the extent that Mubadala does not beneficially own, either directly through any other entities directly and indirectly owned by Mubadala or its subsidiaries, an aggregate of more than 19.99% of our outstanding capital stock after any such exercise.
GF continues to be a related party of AMD because Mubadala and Mubadala Technology Investments LLC (Mubadala Tech, a party to the WSA) are affiliated with WCH, a significant stockholder of ours. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala.
Equity Interest Purchase Agreement - ATMP Joint Venture
On April 29, 2016, we and certain of our subsidiaries completed the sale of a majority of the equity interests in Suzhou TF-AMD Semiconductor Co., Ltd. (formerly, AMD Technologies (China) Co., Ltd.), and TF-AMD Microelectronics (Penang) Sdn. Bhd. (formerly, Advanced Micro Devices Export Sdn. Bhd.), to affiliates of Tongfu Microelectronics Co., Ltd. (formerly, Nantong Fujitsu Microelectronics Co., Ltd.) (TFME), a Chinese joint stock company, to form two joint ventures (collectively, the ATMP JV). As a result of the sale, TFME’s affiliates own 85% of the equity interests in the ATMP JV while certain of our subsidiaries own the remaining 15%. We have no obligation to fund the ATMP JV.
We account for our equity interests in the ATMP JV under the equity method of accounting due to our significant influence over the ATMP JV. As of September 30, 2017 and December 31, 2016, the carrying value of our investment in the ATMP JV was approximately $57 million and $59 million, respectively. The ATMP JV is a related party of ours. The ATMP JV provides assembly, test, mark and packaging (ATMP) services to us. We currently pay the ATMP JV for ATMP services on a cost-plus basis. Our total purchases from the ATMP JV during the three and nine months ended September 30, 2017 amounted to approximately $131 million and $332 million, respectively. Our total purchases from the ATMP JV during the three and nine months ended September 24, 2016 amounted to approximately $107 million and $173 million, respectively. As of September 30, 2017 and December 31, 2016, the amount payable to the ATMP JV was $174 million and $128 million, respectively, included in Payables to related parties on our condensed consolidated balance sheets.
During the three and nine months ended September 30, 2017, we recorded $2 million and $7 million, respectively, in Equity loss in investee on our condensed consolidated statements of operations, which included certain expenses incurred by us on behalf of the ATMP JV. During the three and nine months ended September 24, 2016, we recorded a loss of $5 million and $8 million, respectively, in Equity loss in investee on our condensed consolidated statements of operations, which included certain expenses incurred by us on behalf of the ATMP JV.
Equity Joint Venture
In February 2016, we and Tianjin Haiguang Advanced Technology Investment Co., Ltd. (THATIC), a third-party Chinese entity (JV Partner), formed a joint venture comprised of two separate legal entities, China JV1 and China JV2 (collectively, the THATIC JV). Our equity share in China JV1 and China JV2 is a majority and minority interest, respectively, funded by our contribution of certain of our patents. The JV Partner is responsible for the initial and on-going financing of the THATIC JV’s operations. We have no obligations to fund the THATIC JV.
We concluded the China JV1 and China JV2 are not operating joint ventures and are variable interest entities due to their reliance on on-going financing by the JV Partner. We determined that we are not the primary beneficiary of either China JV1 or China JV2, as we do not have unilateral power to direct selling and marketing, manufacturing and product development activities related to the THATIC JV’s products. Accordingly, we will not consolidate either of these entities and therefore account for our investments in the THATIC JV under the equity method of accounting. The THATIC JV is a related party of ours.
In February 2016, we licensed certain of our intellectual property (Licensed IP) to the THATIC JV for a total of approximately $293 million in license fee payable over several years contingent upon achievement of certain milestones. We also expect to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such Licensed IP. We will also provide certain engineering and technical support to the THATIC JV in connection with the product development. In March 2017, we entered into a development and intellectual property agreement with THATIC JV, and also expect to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such agreement. In addition, from time to time, we enter into certain agreements with the THATIC JV to provide other services primarily related to research and development.

30


We recognize income related to the Licensed IP over the period commencing upon delivery of the first Licensed IP milestone through the date of the milestone that requires our continuing involvement in the product development process. Royalty payments will be recognized in income once earned. We classify Licensed IP income and royalty income as other operating income. During the three and nine months ended September 30, 2017, we recognized zero and $52 million licensing gain associated with the Licensed IP, respectively, and development and other services fees of $7 million and $17 million, respectively, as a credit to research and development expenses. During the three and nine months ended September 24, 2016, we recognized $24 million and $57 million licensing gain, respectively. No credits for development and other services associated with these agreements was recognized by us during the three and nine months ended September 24, 2016. No royalty income was recognized during the three and nine months ended September 30, 2017 and September 24, 2016.
Our total exposure to losses through our investment in the THATIC JV is limited to our investment in the THATIC JV, which was zero as of September 30, 2017. Our share in the net losses of the THATIC JV for the three and nine months ended September 30, 2017 and September 24, 2016 was not material and is not recorded in our condensed consolidated statements of operations since we are not obligated to fund the THATIC JV’s losses in excess of our investment in the THATIC JV. Our receivable from THATIC JV for these agreements was $5 million and zero as of September 30, 2017 and December 31, 2016, respectively, included in Prepayment and other receivables - related parties on our condensed consolidated balance sheets. As of September 30, 2017, the total assets and liabilities of the THATIC JV were not material.
FINANCIAL CONDITION
Liquidity and Capital Resources    
As of September 30, 2017, our cash and cash equivalents were $879 million, compared to $1.26 billion as of December 31, 2016. The decrease in the nine months of 2017 was due to net cash used in our operating and investing activities as described below. The percentage of cash and cash equivalents held domestically was 93% as of September 30, 2017, compared to 98% at December 31, 2016.
The following is a summary of our cash flows for the periods indicated: 
 
 
Nine Months Ended
 
 
September 30,
2017
 
September 24,
2016
 
 
(In millions )
Net cash provided by (used in):
 
 
 
 
Operating activities
 
$
(315
)
 
$
(98
)
Investing activities
 
(71
)
 
293

Financing activities
 
1

 
278

Our aggregate debt obligations of $1.43 billion, net of unamortized debt issuance costs and unamortized debt discount associated with the 2.125% Convertible Senior Notes Due 2026 (2.125% Notes) as of September 30, 2017, decreased from $1.44 billion at December 31, 2016.

31



We believe our cash and cash equivalents balance along with our Secured Revolving Line of Credit will be sufficient to fund operations, including capital expenditures, over the next 12 months. We believe that in the event we decide to obtain external funding, we may be able to access the capital markets on terms and in amounts adequate to meet our objectives.
Should we require additional funding, such as to meet payment obligations of our long-term debt when due, we may need to raise the required funds through borrowings or public or private sales of debt or equity securities, which may be issued from time to time under an effective registration statement, through the issuance of securities in a transaction exempt from registration under the Securities Act of 1933 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 $315 million in the nine months ended September 30, 2017 compared to $98 million in the nine months ended September 24, 2016. The increase in cash used in operating activities was primarily due to changes in working capital, largely driven by higher wafer purchases, higher labor costs, payments to GF in aggregate of $75 million for a limited waiver with rights under the WSA Sixth Amendment and timing of accounts payable payments, partially offset by higher cash collection primarily due to higher revenue and lower interest payment resulting from debt reductions.
Investing Activities
Net cash used in investing activities was $71 million in the nine months ended September 30, 2017, which consisted primarily of $69 million for purchases of property, plant and equipment.
Net cash provided by investing activities was $293 million in the nine months ended September 24, 2016, which consisted of net cash inflow of $346 million from sale of equity interests in the ATMP JV, partially offset by a cash outflow of $56 million for purchases of property, plant and equipment.
Financing Activities
Net cash provided by financing activities was $1 million in the nine months ended September 30, 2017, which consisted of a cash inflow of net proceeds from borrowings pursuant to our Secured Revolving Line of Credit of $70 million and $15 million for proceeds from issuance of common stock from the exercise of employee stock options, partially offset by a cash outflow of $70 million to repurchase a portion of our 7.00% Notes and $14 million for tax withholding on the vesting of restricted stock. The Secured Revolving Line of Credit has a lower interest rate than the long-term debt.
Net cash provided by financing activities was $278 million in the nine months ended September 24, 2016, primarily due to $681 million net proceeds from the new issued 2.125% Notes, the $668 million net proceeds from the sale of 115 million shares of our common stock and $12 million of proceeds from the issuance of common stock under our stock-based compensation equity plans, partially offset by the repurchases of an aggregate principal amount of $796 million of our outstanding 6.75% Senior Notes due 2019 (6.75% Notes), 7.75% Senior Notes due 2020, 7.50% Senior Notes due 2022 (7.50% Notes) and 7.00% Senior Notes due 2024 (7.00% Notes) for $848 million in cash and repayments in aggregate of $230 million of our Secured Revolving Line of Credit.

32


Contractual Obligations
The following table summarizes our consolidated principal contractual obligations, as of September 30, 2017, and is supplemented by the discussion following the table:
 
Payments due by period as of September 30, 2017
(In millions)
Total
 
Remainder of 2017
 
2018
 
2019
 
2020
 
2021
 
2022 and
thereafter
6.75% Notes
$
191

 
$

 
$

 
$
191

 
$

 
$

 
$

7.50% Notes
347

 

 

 

 

 

 
347

7.00% Notes
324

 

 

 

 

 

 
324

2.125% Notes
805

 

 

 

 

 

 
805

Secured Revolving Line of Credit
70

 
70

 

 

 

 

 

Other long-term liabilities (1)
134

 
18

 
52

 
51

 
8

 
3

 
2

Aggregate interest obligation (2)
468

 

 
80

 
74

 
67

 
67

 
180

Operating leases
265

 
10

 
40

 
35

 
31

 
29

 
120

Purchase obligations (3)
313

 
255

 
42

 
12

 
3

 
1

 

Obligations to GF (4)
2,931

 
335

 
1,052

 
764

 
780

 

 

Total contractual obligations (5)
$
5,848

 
$
688

 
$
1,266

 
$
1,127

 
$
889

 
$
100

 
$
1,778


(1) 
Amounts largely represent future fixed and non-cancelable cash payments associated with software technology and licenses and IP licenses, including the payments due within the next 12 months.
(2) 
Represents estimated aggregate interest obligations for our outstanding debt obligations that are payable in cash, excluding non-cash amortization of debt issuance costs and debt discount.
(3) 
We have purchase obligations for goods and services where payments are based, in part, on the volume or type of services we acquire. In those cases, we only included the minimum volume of purchase obligations in the table above. Purchase orders for goods and services that are cancelable upon notice and without significant penalties are not included in the amounts above.
(4) 
Includes our currently expected purchases from GF for the remainder of 2017 for wafer manufacturing and research and development activities and minimum purchase obligations for wafer purchases for years 2018 through 2020. We cannot meaningfully quantify or estimate our future purchase obligations to GF beyond 2020 but expect that our future purchases from GF will continue to be material.
(5) 
Total amount excludes contractual obligations already recorded on our condensed consolidated balance sheets except for debt obligations and other liabilities related to software and technology licenses and IP licenses.
The expected timing of payments of the obligations in the preceding table is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.
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).
During the first nine months of 2017, we settled $5 million in aggregate principal amount of our 6.75% Notes with treasury stock. As of September 30, 2017, the outstanding aggregate principal amount of our 6.75% Notes was $191 million.
7.50% Senior Notes Due 2022
On August 15, 2012, we issued $500 million of our 7.50% Notes. Our 7.50% Notes are our general unsecured senior obligations. Interest is payable on February 15 and August 15 of each year beginning February 15, 2013 until the maturity date of August 15, 2022. 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.
Prior to August 15, 2022, we may redeem some or all of our 7.50% Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a “make whole” premium (as set forth in the 7.50% Indenture).

33



During the first nine months of 2017,, we settled $3 million in aggregate principal amount of our 7.50% Notes with treasury stock. As of September 30, 2017, the outstanding aggregate principal amount of our 7.50% Notes was $347 million.
7.00% Senior Notes Due 2024
On June 16, 2014, we issued $500 million of our 7.00% Notes. The 7.00% Notes are our general unsecured senior obligations. Interest is payable on January 1 and July 1 of each year beginning January 1, 2015 until the maturity date of July 1, 2024. The 7.00% Notes are governed by the terms of an indenture (the 7.00% Indenture) dated June 16, 2014 between us and Wells Fargo Bank, N.A., as trustee.
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
%
During the third quarter of 2017, we repurchased $26 million in aggregate principal amount of our 7.00% Notes for $28 million.
During the first nine months of 2017, we settled $92 million in aggregate principal amount of its 7.00% Notes for $70 million in cash and $26 million in treasury stock. As of September 30, 2017, the outstanding aggregate principal amount of our 7.00% Notes was $324 million.
2.125% Convertible Senior Notes Due 2026
On September 14, 2016, we issued $700 million in aggregate principal amount of our 2.125% Notes. We also granted an option to the underwriters to purchase up to an additional $105 million aggregate principal amount of our 2.125% Notes. On September 28, 2016, this option was exercised in full and we issued an additional $105 million aggregate principal amount of our 2.125% Notes.
Our 2.125% Notes are our general unsecured senior obligations and will mature on September 1, 2026, unless earlier repurchased or converted. Interest is payable in arrears on March 1 and September 1 of each year beginning on March 1, 2017. Our 2.125% Notes are governed by the terms of a base indenture and a supplemental indenture (together the 2.125% Indentures) dated September 14, 2016 between us and Wells Fargo Bank, N.A., as trustee.
Holders may convert their notes at their option at any time prior to the close of business on the business day immediately preceding June 1, 2026 under the occurrence of one of the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2016 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the Measurement Period”) in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less
than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 1, 2026 until the close of business on the business day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of the our common stock, at our election. The first event described in (1) above was met during the third quarter of 2017 and as a result, the 2.125% Notes are convertible at the option of the holder as of October 1, 2017 and remain convertible until December 31, 2017. Our current intent is to deliver shares of our common stock upon conversion of the 2.125% Notes. As such, we continued to classify the carrying value of the liability component of the 2.125% Notes as long-term debt and the equity component of the 2.125% Notes as permanent equity on our condensed consolidated balance sheet as of September 30, 2017.
We may not redeem the notes prior to the maturity date, and no sinking fund is provided for the 2.125% Notes.
The conversion rate is currently 125.0031 shares of common stock per $1,000 principal amount of 2.125% Notes (equivalent to an initial conversion price of approximately $8.00 per share of common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, we will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event in certain circumstances.
If we undergo a fundamental change prior to the maturity date of the notes, holders may require us to repurchase for cash all or any portion of their 2.125% Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2.125% Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
As of September 30, 2017, the outstanding aggregate principal amount of our 2.125% Notes was $805 million.
Potential Repurchase of Outstanding Notes
We may elect to purchase or otherwise retire all or a portion of our 6.75% Notes, 7.50% Notes, 7.00% Notes and 2.125% Notes with cash, stock or other assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries, or by tender offer when we believe the market conditions are favorable.
Secured Revolving Line of Credit

Amended and Restated Loan and Security Agreement

On April 14, 2015, AMD and its subsidiaries, AMD International Sales & Service, Ltd. (AMDISS) and ATI Technologies ULC (collectively, the Loan Parties), entered into an amended and restated loan and security 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 Bank of America, N.A., acting as agent for the Lenders (the Agent).

Fifth Amendment to the Amended and Restated Loan and Security Agreement

On March 21, 2017, the Loan Parties entered into a fifth amendment to the Amended and Restated Loan Agreement (the Fifth Amendment) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders and the Agent, which modifies the Amended and Restated Loan Agreement. The Fifth Amendment amends the Amended and Restated Loan Agreement by, among other things, extending the maturity date of the Secured Revolving Line of Credit from April 14, 2020 to March 21, 2022, reducing the Applicable Margin (as defined in the Amended and Restated Loan Agreement), reducing the commitment fee, lowering the minimum threshold of Availability (as defined in the Amended and Restated Loan Agreement) required to be maintained by AMD and AMDISS in order to avoid cash dominion, amending the borrowing base reporting requirement, amending maximum dollar limits related to supply chain finance arrangements, and reducing the amount of the Secured Revolving Line of Credit available for the issuance for letters of credit from $75 million to $45 million.

The Amended and Restated Loan Agreement provides for a Secured Revolving Line of Credit for a principal amount up to $500 million with up to $45 million available for issuance of letters of credit. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible accounts receivable (90% for certain qualified eligible accounts receivable), minus specified reserves. The size of the commitments under the Secured Revolving Line of Credit may be increased by up to an aggregate amount of $200 million.


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The Secured Revolving Line of Credit is secured by a first priority security interest in the Loan Parties’ accounts receivable, inventory, deposit accounts maintained with the Agent and other specified assets, including books and records.

Sixth Amendment to the Amended and Restated Loan and Security Agreement

On September 19, 2017, the Loan Parties entered into a sixth amendment to the Amended and Restated Loan Agreement (the Sixth Amendment) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders and the Agent, which modifies the Amended and Restated Loan Agreement. The Sixth Amendment amends the definition of the term “Qualified Factor Arrangement” to state that the amount held or owing or subject to repurchase is limited to (i) during AMD's first fiscal quarter of each of its fiscal years, $220 million in the aggregate, (ii) during AMD's second and third fiscal quarter of each of its fiscal years, $300 million in the aggregate, and (iii) (x) from the first day of the AMD's fourth fiscal quarter of each of its fiscal years to December 10 of each of its fiscal years, $300 million in the aggregate (provided, that not more than $220 million of such amount may consist of Qualified Factor Accounts (as defined in the Sixth Amendment) sold in such period) and (y) from December 21 of each of AMD's fiscal years to and including the last day of AMD's fourth fiscal quarter of each of its fiscal years, $220 million in the aggregate.
As of September 30, 2017, the Secured Revolving Line of Credit had an outstanding loan balance of $70 million, at an interest rate of 4.75%. As of December 31, 2016, we did not have any borrowings outstanding under the Secured Revolving Line of Credit. As of September 30, 2017, we had $19 million letters of credit outstanding and up to $327 million available for future borrowings under the Secured Revolving Line of Credit. We report our intra-period changes in our revolving credit balance on a net basis in our condensed consolidated statement of cash flows as we intend the period of the borrowings to be brief, repaying borrowed amounts within 90 days. As of September 30, 2017, we were in compliance with all required covenants in the Amended and Restated Loan Agreement.
The agreements governing our 6.75% Notes, 7.50% Notes, 7.00% Notes, 2.125% Notes and Secured Revolving Line of Credit contain cross-default provisions whereby a default under one agreement would likely result in cross defaults under agreements covering other borrowings. The occurrence of a default under any of these borrowing arrangements would permit the applicable note holders or the lenders under the Secured Revolving Line of Credit to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable.
Operating Leases
We lease certain of our facilities 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 30, 2017 were $265 million, including $222 million of future lease payments and estimated operating costs related to the real estate transactions that occurred in Austin, Texas; Sunnyvale and Santa Clara, California; Markham, Ontario, Canada; and Singapore. During the second quarter of 2016, we signed an amendment to the lease agreement associated with our headquarters in Sunnyvale, California so that the lease expires in December 2017. In connection with the amendment, the lease payments were reduced for 2017. During the third quarter of 2016, we entered into a 10 year operating lease to occupy 220,000 square feet of new headquarters office space in Santa Clara, California. As of September 30, 2017, we have paid approximately $1 million for base rent and the total estimate of future base rent payments over the life of the lease are approximately $103 million. In addition to base rent payments, we will be obligated to pay certain customary amounts for our share of operating expenses and tax obligations. We will also incur costs for capital projects on the new office space. We have the option to extend the term of the lease for two additional five-year periods.
Purchase Obligations
Our purchase obligations primarily include our obligations to purchase wafers and substrates from third parties, excluding our wafer purchase commitments to GF under the WSA. As of September 30, 2017, total non-cancelable purchase obligations were $313 million.
Obligations to GF
Our currently expected purchases from GF for the remainder of 2017 for wafer and research and development activities, and minimum purchase obligations for wafer purchases for years 2018 through 2020 are approximately $2.9 billion. We are not able to meaningfully quantify or estimate our future purchase obligations to GF beyond this amount but expect that our future purchases from GF will continue to be material.
Off-Balance Sheet Arrangements
As of September 30, 2017, we had no off-balance sheet arrangements.

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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 30, 2017 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 31, 2016.
We will perform an annual goodwill impairment analysis as of the first day of the fourth quarter of 2017 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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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 31, 2016.
There have not been any material changes in market risk since December 31, 2016.
ITEM 4.
CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports made under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of September 30, 2017, 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 2017 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 us 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. On September 4, 2015, plaintiffs filed their motion for class certification, and on March 16, 2016, the Court granted plaintiffs’ motion. A court-ordered mediation held in January 2016 did not result in a settlement of the lawsuit. The discovery process was concluded. The plaintiffs and defendants filed cross-motions for summary judgment, and briefing on those motions was completed in July 2017.  On October 9, 2017, the parties signed a definitive settlement agreement resolving this matter and submitted it to the Court for approval.  Under the terms of this agreement, the settlement will be funded entirely by certain of AMD’s insurance carriers and the defendants will continue to deny any liability or wrongdoing.
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 (Wessels) was filed against us (as a nominal defendant only) and certain of our directors and officers in the Santa Clara County Superior Court of the State of California. The complaint purports to assert claims against us and certain individual directors and officers for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by us and the individual directors and officers regarding our 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for our common stock during the period. On April 27, 2015, a similar purported shareholder derivative lawsuit captioned Christopher Hamilton and David Hamilton v. Barnes, et al., Case No. 5:15-cv-01890 (Hamilton) was filed against us (as a nominal defendant only) and certain of our directors and officers in the United States District Court for the Northern District of California. The case was transferred to the judge handling the Hatamian Lawsuit and is now Case No. 4:15-cv-01890.
On September 29, 2015, a similar purported shareholder derivative lawsuit captioned Jake Ha v Caldwell, et al., Case No. 3:15-cv-04485 (Ha) was filed against us (as a nominal defendant only) and certain of our directors and officers in the United States District Court for the Northern District of California. The lawsuit also seeks a court order voiding the stockholder vote on our 2015 proxy. The case was transferred to the judge handling the Hatamian Lawsuit and is now Case No. 4:15-cv-04485. The Wessels, Hamilton and Ha shareholder derivative lawsuits are currently stayed.
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.
ZiiLabs Litigation
On December 16, 2016, a patent lawsuit captioned ZiiLabs v. AMD, C.A. No. 2:16-cv-1418 in the United States District Court for Eastern District of Texas (the ZiiLabs Lawsuit) was filed against us. The complaint alleges that we infringed four patents related generally to graphics processors and memory controllers. The complaint seeks damages, interest, and attorneys’ fees. ZiiLabs filed several similar lawsuits against other companies on the same day. On the same date, ZiiLabs also filed a complaint with the United States International Trade Commission (USITC) pursuant to Section 337 of the Tariff Act of 1930 against us and several other companies asserting the same four patents (USITC Proceeding). The complaint seeks a limited exclusion order barring the importation of certain products that contain AMD memory controllers and graphics processors. Some of AMD’s customers are also named respondents. On January 18, 2017, the USITC announced that it would institute the investigation, entitled 337-TA-1037, In the Matter of Certain Graphics Processors, DDR Memory Controllers, and Products Containing the Same. On July 20, 2017, we obtained a license to the patents-in-suit. Accordingly, the USITC and the Court have dismissed AMD from the proceedings. The resulting settlement obligation was not material.

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Dickey Litigation
On October 26, 2015, a putative class action complaint captioned Dickey et al. v. AMD, No. 15-cv-04922 was filed against us in the United States District Court for the Northern District of California. The plaintiffs allege that we misled consumers by using the term "eight cores" in connection with the marketing of certain AMD FX CPUs that are based on our “Bulldozer” core architecture. The plaintiffs allege these products cannot perform eight calculations simultaneously, without restriction. The plaintiffs seek to obtain damages under several causes of action for a nationwide class of consumers who allegedly were deceived into purchasing certain Bulldozer-based CPUs that were marketed as containing eight cores. The plaintiffs also seek attorneys' fees. On December 21, 2015, we filed a motion to dismiss the complaint, which was granted on April 7, 2016. The plaintiffs then filed an amended complaint with a narrowed putative class definition, which the Court dismissed upon our motion on October 31, 2016. The plaintiffs subsequently filed a second amended complaint, and we filed a motion to dismiss the second amended complaint. On June 14, 2017, the Court issued an order granting in part and denying in part our motion to dismiss, and allowing the plaintiffs to move forward with a portion of their complaint. The putative class definition does not encompass our Ryzen™ or EPYC™ processors.
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.

ITEM 1A.
RISK FACTORS

The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In addition, you should consider the interrelationship and compounding effects of two or more risks occurring simultaneously.
Intel Corporation’s dominance of the microprocessor market and its aggressive business practices may limit our ability to compete effectively.
Intel Corporation has been the market share leader for microprocessors for many years. Intel’s market share, margins and significant financial resources enable it to market its products aggressively, to target our customers and our channel partners with special incentives and to influence customers who do business with us. These aggressive activities have in the past and are likely in the future to result in lower unit sales and a lower average selling price for many of our products and adversely affect our margins and profitability.
Intel exerts substantial influence over computer manufacturers and their channels of distribution through various brand and other marketing programs. As a result of Intel’s position in the microprocessor market, Intel has been able to control x86 microprocessor and computer system standards and benchmarks and to dictate the type of products the microprocessor market requires of us. Intel also dominates the computer system platform, which includes core logic chipsets, graphics chips, motherboards and other components necessary to assemble a computer system. Additionally, Intel is able to drive de facto standards and specifications for x86 microprocessors that could cause us and other companies to have delayed access to such standards.
Intel has substantially greater financial resources than we do and accordingly spends substantially greater amounts on marketing and research and development than we do. We expect Intel to maintain its market position and to continue to invest heavily in marketing, research and development, new manufacturing facilities and other technology companies. To the extent Intel manufactures a significantly larger portion of its microprocessor products using more advanced process technologies, or introduces competitive new products into the market before we do, we may be more vulnerable to Intel’s aggressive marketing and pricing strategies for microprocessor products. For example, Intel has introduced microprocessors for low-cost notebooks, similar to products that we offer for low-cost notebooks
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;
de facto control over industry standards, and heavy influence on PC manufacturers and other PC industry participants, including motherboard, memory, chipset and basic input/output system, or BIOS, suppliers and software companies as well as the graphics interface for Intel platforms; and

39



marketing and advertising expenditures in support of positioning the Intel brand over the brand of its original equipment manufacturer OEM customers.
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.
We have a wafer supply agreement with GF with obligations to purchase all of our microprocessor and APU product requirements, and a certain portion of our GPU product requirements from GF, with limited exceptions. If GF is not able to satisfy our manufacturing requirements, our business could be adversely impacted.
The WSA governs the terms by which we purchase products manufactured by GF. The WSA is in place until 2024. Pursuant to the WSA, we are required to purchase all of our microprocessor and APU product requirements, and a portion of our GPU product requirements from GF with limited exceptions. If GF is unable to achieve anticipated manufacturing yields, remain competitive using or implementing advanced leading-edge process technologies needed to manufacture future generations of our products, manufacture our products on a timely basis at competitive prices or meet our capacity requirements, then we may experience delays in product launches, supply shortages for certain products or increased costs and our business could be materially adversely affected. Moreover, if GF is unable to satisfy our manufacturing requirements and we are unable to secure from GF additional exceptions allowing us to contract with another wafer foundry to satisfy those requirements, then our business could be materially adversely affected.
In August 2016, we entered into the sixth amendment to the WSA (WSA Sixth Amendment) pursuant to which we agreed to certain annual wafer purchase targets through 2020, and if we fail to meet the agreed wafer purchase target during a calendar year we will be required to pay to GF a portion of the difference between our actual wafer purchases and the applicable annual purchase target. If our actual wafer requirements are less than the number of wafers required to meet the applicable annual wafer purchase target, we could have excess inventory or higher inventory unit costs, both of which may adversely impact our gross margin and our results of operations.
In addition, GF has relied on Mubadala Technology Investments LLC (Mubadala Tech) for its funding needs. If Mubadala Tech fails to adequately fund GF on a timely basis, or at all, GF’s ability to manufacture products for us could be materially adversely affected.
We rely on third parties to manufacture our products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, our business could be materially adversely affected.
We rely on third-party wafer foundries to fabricate the silicon wafers for all of our products. We also rely on third-party manufacturers to assemble, test, mark and pack (ATMP) our products. It is important to have reliable relationships with all of these third-party manufacturing suppliers to ensure adequate product supply to respond to customer demand.
We cannot guarantee that these manufacturers or our other third-party manufacturing suppliers will be able to meet our near-term or long-term manufacturing requirements. If we experience supply constraints from our third-party manufacturing suppliers, we may be required to allocate the affected products amongst our customers, which could have a material adverse effect on our relationships with these customers and on our financial condition. In addition, if we are unable to meet customer demand due to fluctuating or late supply from our manufacturing suppliers, it could result in lost sales and have a material adverse effect on our business.
We do not have long-term commitment contracts with some of our third-party manufacturing suppliers. We obtain some of these manufacturing services on a purchase order basis and these manufacturers are not required to provide us with any specified minimum quantity of product beyond the quantities in an existing purchase order. Accordingly, we depend on these suppliers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs, to produce products of acceptable quality and at acceptable manufacturing yields and to deliver those products to us on a timely basis and at acceptable prices. The manufacturers we use also fabricate wafers and ATMP products for other companies, including certain of our competitors. They could choose to prioritize capacity for other customers, increase the prices that they charge us on short notice or reduce or eliminate deliveries to us, which could have a material adverse effect on our business.
Other risks associated with our dependence on third-party manufacturers include limited control over delivery schedules and quality assurance, lack of capacity in periods of excess demand, misappropriation of our intellectual property, dependence on several small undercapitalized subcontractors and limited ability to manage inventory and parts. Moreover, if any of our third-party manufacturers suffer any damage to facilities, lose benefits under material agreements, experience power outages, lack

40



sufficient capacity to manufacture our products, encounter financial difficulties, are unable to secure necessary raw materials from their suppliers or suffer any other disruption or reduction in efficiency, we may encounter supply delays or disruptions. If we are unable to secure sufficient or reliable supplies of products, our ability to meet customer demand may be adversely affected and this could materially affect our business.
If we transition the production of some of our products to new manufacturers, we may experience delayed product introductions, lower yields or poorer performance of our products. If we experience problems with product quality or are unable to secure sufficient capacity from a particular third-party manufacturer, or if we for other reasons cease utilizing one of those suppliers, we may be unable to secure an alternative supply for any specific product in a short time frame. We could experience significant delays in the shipment of our products if we are required to find alternative third-party manufacturers, which could have a material adverse effect on our business.
In April 2016, we consummated a transaction with Tongfu Fujitsu Microelectronics Co., Ltd. (formerly, Nantong Fujitsu Microelectronics Co., Ltd.) (TFME), under which we sold to TFME 85% of the equity interests in our ATMP facilities consisting of Suzhou TF-AMD Semiconductor Co., Ltd. (formerly AMD Technologies (China) Co., Ltd.) and TF-AMD Microelectronics (Penang) Sdn. Bhd. (formerly Advanced Micro Devices Export Sdn. Bhd.) thereby forming two joint ventures (collectively, the JVs). The majority of our ATMP services will be provided by the JVs and there is no guarantee that the JVs will be able to fulfill our long-term ATMP requirements. If we are unable to meet customer demand due to fluctuating or late supply from the JVs, it could result in lost sales and have a material adverse effect on our business.
Failure to achieve expected manufacturing yields for our products could negatively impact our financial results.
Semiconductor manufacturing yields are a result of both product design and process technology, which is typically proprietary to the manufacturer, and low yields can result from design failures, process technology failures or a combination of both. Our third-party foundries, including GF, are responsible for the process technologies used to fabricate silicon wafers. If our third-party foundries experience manufacturing inefficiencies or encounter disruptions, errors or difficulties during production, we may fail to achieve acceptable yields or experience product delivery delays. We cannot be certain that our third-party foundries will be able to develop, obtain or successfully implement leading-edge process technologies needed to manufacture future generations of our products profitably or on a timely basis or that our competitors will not develop new technologies, products or processes earlier. Moreover, during periods when foundries are implementing new process technologies, their manufacturing facilities may not be fully productive. A substantial delay in the technology transitions to smaller process technologies could have a material adverse effect on us, particularly if our competitors transition to more cost effective technologies before us. Any decrease in manufacturing yields could result in an increase in per unit costs, which would adversely impact our gross margin and/or force us to allocate our reduced product supply amongst our customers, which could harm our relationships and reputation with our customers and materially adversely affect our business.
The success of our business is dependent upon our ability to introduce products on a timely basis with features and performance levels that provide value to our customers while supporting and coinciding with significant industry transitions.
Our success depends to a significant extent on the development, qualification, implementation and acceptance of new product designs and improvements that provide value to our customers. Our ability to develop, qualify and distribute, and have manufactured, new products and related technologies to meet evolving industry requirements, at prices acceptable to our customers and on a timely basis are significant factors in determining our competitiveness in our target markets. For example, a large portion of our Computing and Graphics revenue is focused on consumer desktop PC and notebook. While overall growth in Computing and Graphics is stabilizing, the areas within Computing and Graphics are changing. Our ability to take advantage of the opportunities within the areas of Computing and Graphics is based on foreseeing those changes and making timely investments in the form factors that serve those areas. As consumers adopt new form factors, have new product feature preferences or have different requirements than those consumers in the PC market, PC sales could be negatively impacted, which could adversely impact our business. Our product roadmap includes AMD Ryzen™ and AMD EPYC™ processors based on our new x86 processor core codenamed “Zen” to help drive our re-entry into high-performance and server computing. We cannot assure you that our efforts to execute our product roadmap and address markets beyond our core PC market will result in innovative products and technologies that provide value to our customers. If we fail to or are delayed in developing, qualifying or shipping new products or technologies that provide value to our customers and address these new trends or if we fail to predict which new form factors consumers will adopt and adjust our business accordingly, we may lose competitive positioning, which could cause us to lose market share and require us to discount the selling prices of our products. Although we make substantial investments in research and development, we cannot be certain that we will be able to develop, obtain or successfully implement new products and technologies on a timely basis or that they will be well-received by our customers. Moreover, our investments in new products and technologies involve certain risks and uncertainties and could disrupt our ongoing business. New investments may not generate sufficient revenue, may incur unanticipated liabilities and may divert our limited resources and distract management from our current operations. We

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cannot be certain that our ongoing investments in new products and technologies will be successful, will meet our expectations and will not adversely affect our reputation, financial condition and operating results.
Delays in developing, qualifying or shipping new products can also cause us to miss our customers’ product design windows or, in some cases, breach contractual obligations or cause us to pay penalties. If our customers do not include our products in the initial design of their computer systems or products, they will typically not use our products in their systems or products until at least the next design configuration. The process of being qualified for inclusion in a customer’s system or product can be lengthy and could cause us to further miss a cycle in the demand of end-users, which also could result in a loss of market share and harm our business. In addition, market demand requires that products incorporate new features and performance standards on an industry-wide basis. Over the life of a specific product, the sale price is typically reduced over time. The introduction of new products and enhancements to existing products is necessary to maintain the overall corporate average selling price. If we are unable to introduce new products with sufficiently high sale prices or to increase unit sales volumes capable of offsetting the reductions in the sale prices of existing products over time, our business could be materially adversely affected.
If we cannot generate sufficient revenue and operating cash flow or obtain external financing, we may face a cash shortfall and be unable to make all of our planned investments in research and development or other strategic investments.
Our ability to fund research and development expenditures depends on generating sufficient revenue and cash flow from operations and the availability of external financing, if necessary. Our research and development expenditures, together with ongoing operating expenses, will be a substantial drain on our cash flow and may decrease our cash balances. If new competitors, technological advances