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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) |
| |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 29, 2019
OR
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-07882 ADVANCED MICRO DEVICES INC
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 94-1692300 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
2485 Augustine Drive | | |
Santa Clara, | | |
California | | 95054 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (408) 749-4000 Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | AMD | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | |
Large accelerated filer | | þ | | Accelerated filer | | ¨ |
| | | |
Non-accelerated filer | | ¨ | | Smaller reporting company | | ☐ |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes ☐ No þ
Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of July 26, 2019: 1,085,546,359
INDEX
PART I. FINANCIAL INFORMATION
|
| |
ITEM 1. | FINANCIAL STATEMENTS |
Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In millions, except per share amounts) |
Net revenue | $ | 1,531 |
| | $ | 1,756 |
| | $ | 2,803 |
| | $ | 3,403 |
|
Cost of sales | 910 |
| | 1,104 |
| | 1,661 |
| | 2,154 |
|
Gross profit | 621 |
| | 652 |
| | 1,142 |
| | 1,249 |
|
Research and development | 373 |
| | 357 |
| | 746 |
| | 700 |
|
Marketing, general and administrative | 189 |
| | 142 |
| | 359 |
| | 276 |
|
Licensing gain | — |
| | — |
| | (60 | ) | | — |
|
Operating income | 59 |
| | 153 |
| | $ | 97 |
| | $ | 273 |
|
Interest expense | (25 | ) | | (31 | ) | | (52 | ) | | (62 | ) |
Other income (expense), net | 3 |
| | 1 |
| | (4 | ) | | 2 |
|
Income before income taxes and equity loss | 37 |
| | 123 |
| | 41 |
| | 213 |
|
Provision (benefit) for income taxes | 2 |
| | 6 |
| | (11 | ) | | 14 |
|
Equity loss in investee | — |
| | (1 | ) | | (1 | ) | | (2 | ) |
Net income | $ | 35 |
| | $ | 116 |
| | $ | 51 |
| | $ | 197 |
|
Earnings per share | | | | | | | |
Basic | $ | 0.03 |
| | $ | 0.12 |
| | $ | 0.05 |
| | $ | 0.20 |
|
Diluted | $ | 0.03 |
| | $ | 0.11 |
| | $ | 0.05 |
| | $ | 0.19 |
|
Shares used in per share calculation | | | | | | | |
Basic | 1,084 |
| | 972 |
| | 1,064 |
| | 970 |
|
Diluted | 1,109 |
| | 1,147 |
| | 1,102 |
| | 1,043 |
|
See accompanying notes.
Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In millions) |
Net income | $ | 35 |
| | $ | 116 |
| | $ | 51 |
| | $ | 197 |
|
Other comprehensive income (loss), net of tax of zero: | | | | | | | |
Unrealized gains (losses) on cash flow hedges: | | | | | | | |
Unrealized gains (losses) arising during the period | (1 | ) | | (12 | ) | | 4 |
| | (11 | ) |
(Gains) losses reclassified into income | 2 |
| | (1 | ) | | 4 |
| | (5 | ) |
Total change in unrealized gains (losses) on cash flow hedges | 1 |
| | (13 | ) | | 8 |
| | (16 | ) |
Cumulative-effect adjustment to accumulated deficit related to the adoption of ASU 2016-01, Financial Instruments | — |
| | — |
| | — |
| | 2 |
|
Total comprehensive income | $ | 36 |
| | $ | 103 |
| | $ | 59 |
| | $ | 183 |
|
See accompanying notes.
Advanced Micro Devices, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
|
| | | | | | | |
| June 29, 2019 | | December 29, 2018 |
| (In millions, except par value amounts) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 963 |
| | $ | 1,078 |
|
Marketable securities | 165 |
| | 78 |
|
Accounts receivable, net | 1,333 |
| | 1,235 |
|
Inventories, net | 1,015 |
| | 845 |
|
Prepayments and receivables—related parties | 30 |
| | 34 |
|
Prepaid expenses and other current assets | 248 |
| | 270 |
|
Total current assets | 3,754 |
| | 3,540 |
|
Property and equipment, net | 458 |
| | 348 |
|
Operating lease right-of-use assets | 212 |
| | — |
|
Goodwill | 289 |
| | 289 |
|
Investment: equity method | 58 |
| | 58 |
|
Other assets | 331 |
| | 321 |
|
Total assets | $ | 5,102 |
| | $ | 4,556 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Short-term debt, net | $ | — |
| | $ | 136 |
|
Accounts payable | 828 |
| | 834 |
|
Payables to related parties | 201 |
| | 207 |
|
Accrued liabilities | 727 |
| | 783 |
|
Other current liabilities | 48 |
| | 24 |
|
Total current liabilities | 1,804 |
| | 1,984 |
|
Long-term debt, net | 1,031 |
| | 1,114 |
|
Long-term operating lease liabilities | 211 |
| | — |
|
Other long-term liabilities | 155 |
| | 192 |
|
Contingencies (See Note 12) |
| |
|
Stockholders’ equity: | | | |
Capital stock: | | | |
Common stock, par value $0.01; shares authorized: 2,250; shares issued: 1,091 and 1,010; shares outstanding: 1,086 and 1,005 | 11 |
| | 10 |
|
Additional paid-in capital | 9,325 |
| | 8,750 |
|
Treasury stock, at cost (shares issued: 5 and 5) | (50 | ) | | (50 | ) |
Accumulated deficit | (7,385 | ) | | (7,436 | ) |
Accumulated other comprehensive loss | — |
| | (8 | ) |
Total stockholders’ equity | 1,901 |
| | 1,266 |
|
Total liabilities and stockholders’ equity | $ | 5,102 |
| | $ | 4,556 |
|
See accompanying notes.
Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited) |
| | | | | | | |
| Six Months Ended |
| June 29, 2019 | | June 30, 2018 |
| (In millions) |
Cash flows from operating activities: | | | |
Net income | $ | 51 |
| | $ | 197 |
|
Adjustments to reconcile net income to net cash used in operating activities: | | | |
Depreciation and amortization | 98 |
| | 86 |
|
Stock-based compensation | 86 |
| | 65 |
|
Amortization of debt discount and issuance costs | 18 |
| | 20 |
|
Amortization of operating lease right-of-use assets | 18 |
| | — |
|
Loss on debt redemption | 8 |
| | 1 |
|
Loss on sale/disposal of property and equipment | 8 |
| | — |
|
Other | (4 | ) | | (1 | ) |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (98 | ) | | (693 | ) |
Inventories | (170 | ) | | (56 | ) |
Prepayments and receivables - related parties | 4 |
| | (11 | ) |
Prepaid expenses and other assets | (9 | ) | | 58 |
|
Payables to related parties | (6 | ) | | 35 |
|
Accounts payable, accrued liabilities and other | (187 | ) | | 137 |
|
Net cash used in operating activities | (183 | ) | | (162 | ) |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (120 | ) | | (89 | ) |
Purchases of available-for-sale debt securities | (231 | ) | | (35 | ) |
Proceeds from maturity of available-for-sale debt securities | 144 |
| | — |
|
Collection of deferred proceeds on sale of receivables | 25 |
| | 31 |
|
Other | 2 |
| | — |
|
Net cash used in investing activities | (180 | ) | | (93 | ) |
Cash flows from financing activities: | | | |
Repayments of short-term borrowings | (70 | ) | | — |
|
Proceeds from warrant exercise by related party | 449 |
| | — |
|
Proceeds from issuance of common stock through employee equity incentive plans | 35 |
| | 35 |
|
Repayments of long-term debt | (164 | ) | | (15 | ) |
Other | (2 | ) | | — |
|
Net cash provided by financing activities | 248 |
| | 20 |
|
Net decrease in cash, cash equivalents, and restricted cash | (115 | ) | | (235 | ) |
Cash, cash equivalents, and restricted cash at beginning of period | 1,083 |
| | 1,191 |
|
Cash, cash equivalents, and restricted cash at end of period | $ | 968 |
| | $ | 956 |
|
Supplemental cash flow information: | | | |
Non-cash activities: | | | |
Purchases of property and equipment, accrued but not paid | $ | 119 |
| | $ | 34 |
|
Issuance of treasury stock to partially settle debt | $ | 7 |
| | $ | — |
|
Deferred proceeds on sale of receivables | $ | — |
| | $ | 29 |
|
Other | $ | 9 |
| | $ | — |
|
Reconciliation of cash, cash equivalents, and restricted cash | | | |
Cash and cash equivalents | $ | 963 |
| | $ | 948 |
|
Restricted cash included in Prepaid expenses and other current assets | 5 |
| | 5 |
|
Restricted cash included in Other assets | — |
| | 3 |
|
Total cash, cash equivalents, and restricted cash | $ | 968 |
| | $ | 956 |
|
See accompanying notes.
Advanced Micro Devices
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In millions) |
Capital stock | | | | | | | |
Common stock | | | | | | | |
Balance, beginning of period | $ | 11 |
| | $ | 10 |
| | $ | 10 |
| | $ | 9 |
|
Common stock issued under employee equity incentive plans, net of tax withholding | — |
| | — |
| | — |
| | 1 |
|
Issuance of common stock upon warrant exercise | — |
| | — |
| | 1 |
| | — |
|
Balance, end of period | $ | 11 |
| | $ | 10 |
| | $ | 11 |
| | $ | 10 |
|
Additional paid-in capital | | | | | | | |
Balance, beginning of period | $ | 9,246 |
| | $ | 8,502 |
| | $ | 8,750 |
| | $ | 8,464 |
|
Common stock issued under employee equity incentive plans, net of tax withholding | 34 |
| | 29 |
| | 35 |
| | 35 |
|
Stock-based compensation | 45 |
| | 33 |
| | 86 |
| | 65 |
|
Issuance of common stock upon warrant exercise | — |
| | — |
| | 449 |
| | — |
|
Issuance of treasury stock to partially settle debt | — |
| | — |
| | 4 |
| | — |
|
Other | — |
| | — |
| | 1 |
| | — |
|
Balance, end of period | $ | 9,325 |
| | $ | 8,564 |
| | $ | 9,325 |
| | $ | 8,564 |
|
Treasury stock | | | | | | | |
Balance, beginning of period | $ | (48 | ) | | $ | (108 | ) | | $ | (50 | ) | | $ | (108 | ) |
Issuance of treasury stock to partially settle debt | — |
| | — |
| | 3 |
| | — |
|
Other | (2 | ) | | (1 | ) | | (3 | ) | | (1 | ) |
Balance, end of period | $ | (50 | ) | | $ | (109 | ) | | $ | (50 | ) | | $ | (109 | ) |
Accumulated deficit | | | | | | | |
Balance, beginning of period | $ | (7,420 | ) | | $ | (7,692 | ) | | $ | (7,436 | ) | | $ | (7,775 | ) |
Net income | 35 |
| | 116 |
| | 51 |
| | 197 |
|
Cumulative effect adjustment to accumulated deficit related to the adoption of ASU 2016-01, Financial Instruments | — |
| | — |
| | — |
| | 2 |
|
Balance, end of period | $ | (7,385 | ) | | $ | (7,576 | ) | | $ | (7,385 | ) | | $ | (7,576 | ) |
Accumulated other comprehensive income (loss) | | | | | | | |
Balance, beginning of period | $ | (1 | ) | | $ | 3 |
| | $ | (8 | ) | | $ | 6 |
|
Other comprehensive income (loss) | 1 |
| | (13 | ) | | 8 |
| | (16 | ) |
Balance, end of period | — |
| | (10 | ) | | — |
| | (10 | ) |
Total stockholders' equity | $ | 1,901 |
| | $ | 879 |
| | $ | 1,901 |
| | $ | 879 |
|
See accompanying notes.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements of Advanced Micro Devices, Inc. and its subsidiaries (the Company or AMD) have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The results of operations for the three and six months ended June 29, 2019 shown in this report are not necessarily indicative of results to be expected for the full year ending December 28, 2019. 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, cash flows and stockholders' equity. 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 fiscal year ended December 29, 2018. Certain prior period amounts have been reclassified to conform to current period presentation.
The Company uses a 52 or 53 week fiscal year ending on the last Saturday in December. The three and six months ended June 29, 2019 and June 30, 2018 each consisted of 13 weeks and 26 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.
Significant Accounting Policies. Except for the accounting policies highlighted below, there have been no material changes to the Company's significant accounting policies in Note 2 - Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018.
Leases. The Company determines if an arrangement is a lease, or contains a lease, at the inception of the arrangement. When the Company determines the arrangement is a lease, or contains a lease, at lease inception, it then determines whether the lease is an operating lease or a finance lease at the commencement date. Operating and finance leases result in the Company recording a right-of-use (ROU) asset and lease liability on its balance sheet. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses the implicit interest rate if readily determinable. When the implicit rate is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The operating lease ROU asset is recognized net of any lease payments made and any lease incentives. Specific lease terms may include options to extend or terminate the lease when the Company believes it is reasonably certain that it will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. As allowed by the guidance, the Company has elected not to recognize ROU assets and lease liabilities that arise from short-term (12 months or less) leases for any class of underlying asset. Operating leases are included in operating lease ROU assets, other current liabilities, and long-term operating lease liabilities in the Company's condensed consolidated balance sheet. The Company's finance leases are immaterial.
Derivative Financial Instruments. The Company maintains a foreign currency hedging strategy which uses derivative financial instruments to mitigate the risks associated with changes in foreign currency exchange rates. This strategy takes into consideration all of the Company’s consolidated exposures. The Company does not use derivative financial instruments for trading or speculative purposes.
In applying its strategy, the Company uses foreign currency forward contracts to hedge certain forecasted revenue and expenses denominated in foreign currencies. The Company designates these contracts as cash flow hedges of forecasted revenue and expenses, to the extent eligible under the accounting rules, and evaluates hedge effectiveness prospectively and retrospectively. To the extent such hedges are effective, the Company records the gain or loss on these contracts as a component of accumulated other comprehensive income (loss) and it reclassifies such gains or losses to earnings in the same period during which the hedged transaction affects earnings. Such amounts are included in the same line item in earnings as the associated forecasted transaction.
The Company also uses, from time to time, foreign currency forward contracts to economically hedge recognized foreign currency exposures on the balance sheets of various subsidiaries. The Company does not designate these forward contracts as hedging instruments. Accordingly, the gain or loss associated with these contracts is immediately recorded in Other income (expense), net.
Recently Adopted Accounting Standards
Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which amends disclosure requirements for fair value measurement. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company early adopted this guidance in the first quarter of 2019 with no material impact on its consolidated financial statements.
Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations for lease recognition and disclosure. ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet, while recognizing expenses on the income statements in a manner similar to legacy guidance. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. The Company adopted the new standard using the optional adoption method in the first quarter of 2019, whereby the Company did not have to adjust comparative period financial statements for the new standard and recorded $228 million of right-of-use assets and $261 million of lease liabilities primarily related to office buildings in its consolidated balance sheet as of December 30, 2018. The Company's accounting for capital leases, now referred to as finance leases, remains unchanged. The Company's adoption of the new standard had no impact on its consolidated statement of operations or on net cash provided by or used in operating, financing, or investing activities on its consolidated statement of cash flows.
Upon adoption of ASU 2016-02, the Company elected a transition practical expedient under the new accounting standard allowing it not to separate lease and non-lease components and instead to account for each separate lease component and non-lease component as a single lease component. The Company implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
Reporting Comprehensive Income. In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify certain tax effects resulting from the 2017 Tax Cuts and Jobs Act (Tax Act), from accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018. The Company adopted this guidance in the first quarter of 2019 with no impact on its consolidated financial statements.
Derivatives and Hedging. In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance 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. The Company adopted this guidance in the first quarter of 2019 with no material impact on its consolidated financial statements.
Recently Issued Accounting Standards
Financial Instruments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, using a modified retrospective adoption method. The Company will adopt this standard in the first quarter of 2020 and is in the process of identifying its financial instruments that are within the scope of the standard. The Company continues to evaluate the impact of the standard on its consolidated financial statements.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326), Targeted Transition Relief, which provides entities that have certain instruments within the scope of ASC 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, with an option to irrevocably elect the fair value option for eligible instruments. The effective date and transition methodology for this standard are the same as in ASU 2016-13.
There were no other significant updates to the recently issued accounting standards other than as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018.
Although there are several other new accounting pronouncements issued or proposed by the FASB, the Company does not believe any of these accounting pronouncements had or will have a material impact on its consolidated financial statements.
NOTE 2. GLOBALFOUNDRIES
In March 2009, the Company and GLOBALFOUNDRIES Inc. (GF) entered into a Wafer Supply Agreement (the WSA) under which, among other terms, the Company would purchase wafers from GF. The WSA, which has been amended from time to time, governs the terms by which the Company purchases products manufactured by GF. On January 28, 2019, the Company entered into a seventh amendment (the Seventh Amendment) to the WSA with GF, which modifies certain purchase commitments, pricing and other terms of the WSA applicable to wafer purchases at the 12 nm technology node and above by the Company for the period commencing on January 1, 2019 and continuing through March 1, 2024. The Seventh Amendment also provides the Company with full flexibility to contract with any wafer foundry with respect to all products manufactured using 7nm and smaller technology nodes without any one-time payments or royalties by the Company to GF. Further, the Company and GF agreed to modify the annual wafer purchase targets previously agreed to for years 2019 and 2020. The parties also agreed to an annual wafer purchase target for 2021 and agreed to pricing for wafers purchased for years 2019 through 2021. If the Company does not meet the annual wafer purchase target for any of these years, 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 Company expects that its future purchases from GF will be material under the WSA, which is in place until March 1, 2024. The Company also agreed to continue to make quarterly payments to GF based on the volume of certain wafers purchased from another wafer foundry.
On August 30, 2016, in consideration for the limited waiver and rights under the WSA Sixth Amendment, the Company entered into a warrant agreement (the Warrant Agreement) with West Coast Hitech L.P. (WCH), a wholly-owned subsidiary of Mubadala Development Company PJSC (Mubadala). Under the Warrant Agreement, WCH and its permitted assigns were entitled to purchase 75 million shares of the Company’s common stock (the Warrant Shares) at a purchase price of $5.98 per share. On February 13, 2019, WCH exercised its warrant to purchase 75 million shares of the Company’s common stock at a purchase price of $5.98 per share for a total amount of $449 million.
GF was a related party of the Company because Mubadala and Mubadala Technology Investments LLC (Mubadala Tech, a party to the WSA) are affiliated with WCH, and a member of the Company's Board of Directors (the Board) was associated with Mubadala. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala. Effective May 15, 2019, the member of the Board associated with Mubadala retired from the Board, and as a result, GF was no longer considered a related party of the Company. All prior period related party classifications on the financial statements for GF have been reclassified to conform to the current period presentation.
The Company’s purchases from GF related to wafer manufacturing, research and development activities and other during the three and six months ended June 29, 2019, through May 15, 2019 were $153 million and $531 million, respectively. The Company’s total purchases from GF related to wafer manufacturing, research and development activities and other during the three and six months ended June 30, 2018 were $383 million and $781 million, respectively. Included in the total purchases during the three and six months ended June 29, 2019 and June 30, 2018 were amounts related to the volume of certain wafers purchased from another wafer foundry, as agreed by the Company and GF.
NOTE 3. Supplemental Balance Sheet Information
Accounts Receivable, net
As of June 29, 2019 and December 29, 2018, Accounts receivable, net included unbilled accounts receivable of $368 million and $308 million, respectively. Unbilled receivables primarily represent work completed on semi-custom products under non-cancellable purchase orders that have no alternative use to the Company at contract inception, for which revenue has been recognized but not yet invoiced to customers. All unbilled accounts receivable are expected to be billed and collected within twelve months.
Inventories, net
|
| | | | | | | |
| June 29, 2019 | | December 29, 2018 |
| (In millions) |
Raw materials | $ | 125 |
| | $ | 134 |
|
Work in process | 673 |
| | 354 |
|
Finished goods | 217 |
| | 357 |
|
Total inventories, net | $ | 1,015 |
| | $ | 845 |
|
Property and Equipment, net |
| | | | | | | |
| June 29, 2019 | | December 29, 2018 |
| (In millions) |
Leasehold improvements | $ | 200 |
| | $ | 179 |
|
Equipment | 897 |
| | 798 |
|
Construction in progress | 106 |
| | 78 |
|
Property and equipment, gross | 1,203 |
| | 1,055 |
|
Accumulated depreciation | (745 | ) | | (707 | ) |
Total property and equipment, net | $ | 458 |
| | $ | 348 |
|
Other Assets |
| | | | | | | |
| June 29, 2019 | | December 29, 2018 |
| (In millions) |
Software technology and licenses, net | $ | 231 |
| | $ | 226 |
|
Other | 100 |
| | 95 |
|
Total other assets | $ | 331 |
| | $ | 321 |
|
Accrued Liabilities
|
| | | | | | | |
| June 29, 2019 | | December 29, 2018 |
| (In millions) |
Accrued compensation and benefits | $ | 170 |
| | $ | 236 |
|
Marketing programs and advertising expenses | 288 |
| | 275 |
|
Software technology and licenses payable | 40 |
| | 28 |
|
Other | 229 |
| | 244 |
|
Total accrued liabilities | $ | 727 |
| | $ | 783 |
|
Other Current Liabilities |
| | | | | | | |
| June 29, 2019 | | December 29, 2018 |
| (In millions) |
Unearned revenue | $ | 1 |
| | $ | 11 |
|
Operating lease liabilities | 38 |
| | — |
|
Other | 9 |
| | 13 |
|
Total other current liabilities | $ | 48 |
| | $ | 24 |
|
Unearned revenue represents consideration received or due from customers in advance of the Company satisfying its performance obligations. The unearned revenue is associated with any combination of development services, IP licensing and product revenue. Changes in unearned revenue were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In millions) |
Beginning balance | $ | 2 |
| | $ | 147 |
| | $ | 11 |
| | $ | 85 |
|
Unearned revenue | — |
| | — |
| | 1 |
| | 86 |
|
Revenue recognized during the period | (1 | ) | | (75 | ) | | (11 | ) | | (99 | ) |
Other | — |
| | (5 | ) | | — |
| | (5 | ) |
Ending balance | $ | 1 |
| | $ | 67 |
| | $ | 1 |
| | $ | 67 |
|
Revenue allocated to remaining performance obligations that are unsatisfied (or partially unsatisfied) as of June 29, 2019 is $587 million, which may include amounts received from customers but not yet earned and amounts that will be invoiced and recognized as revenue in future periods associated with any combination of development services, IP licensing and product revenue. The Company expects to recognize $245 million in the next 12 months.
The revenue allocated to remaining performance obligations did not include amounts which have an original contractual expected duration of less than one year.
NOTE 4. Equity Interest Purchase Agreement - ATMP Joint Venture
The Company holds a 15% equity interest in two joint ventures (collectively, the ATMP JV), and as such, the ATMP JV is a related party of the Company. The Company has no obligation to fund the ATMP JV. The Company accounts for its equity interests in the ATMP JV under the equity method of accounting due to its significant influence over the ATMP JV.
The ATMP JV provides assembly, test, mark and packaging (ATMP) services to the Company. The Company assists the ATMP JV in its management of certain raw material inventory. The purchases from and resales to the ATMP JV of inventory under inventory management is reported within purchases and resales with the ATMP JV and does not impact the Company’s condensed consolidated statement of operations.
The Company’s total purchases from the ATMP JV during the three and six months ended June 29, 2019 amounted to $172 million and $304 million, respectively. The Company’s total purchases from the ATMP JV during the three and six months ended June 30, 2018 amounted to $143 million and $278 million, respectively. As of June 29, 2019 and December 29, 2018, the amount payable to the ATMP JV was $201 million and $207 million, respectively, included in Payables to related parties on the Company’s condensed consolidated balance sheets. The Company’s resales back to the ATMP JV during the three and six months ended June 29, 2019 amounted to $17 million and $43 million, respectively. The Company’s resales back to the ATMP JV during the three and six months ended June 30, 2018 amounted to $13 million and $19 million, respectively. As of June 29, 2019 and December 29, 2018, the Company had receivables from ATMP JV of $11 million and $16 million, respectively, included in Prepayments and receivables—related parties on the Company’s condensed consolidated balance sheets.
For the three and six months ended June 29, 2019, the Company recorded $0 million and $1 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. For the three and six months ended June 30, 2018, the Company recorded $1 million and $2 million, respectively, in Equity loss in investee on its condensed consolidated statements of operations, which included certain expenses incurred by the Company on behalf of the ATMP JV. As of June 29, 2019 and December 29, 2018, the carrying value of the Company’s investment in the ATMP JV was $58 million and $58 million, respectively.
NOTE 5. Equity Joint Venture
In February 2016, the Company and Higon Information Technology Co., Ltd. (THATIC), a third-party Chinese entity (JV Partner), formed a joint venture comprised of two separate legal entities, China JV1 and China JV2 (collectively, the THATIC JV). The Company’s equity share in China JV1 and China JV2 is a majority and minority interest, respectively, funded by the Company’s contribution of certain of its patents. The JV Partner is responsible for the initial and on-going financing of the THATIC JV’s operations. The Company has no obligations to fund the THATIC JV.
The Company concluded the China JV1 and China JV2 are not operating joint ventures and are variable interest entities due to their reliance on on-going financing by the JV Partner. The Company determined that it is not the primary beneficiary of either China JV1 or China JV2, as the Company does not have unilateral power to direct selling and marketing, manufacturing and product development activities related to the THATIC JV’s products. Accordingly, the Company does not consolidate either of these entities and therefore accounts for its investments in the THATIC JV under the equity method of accounting. The THATIC JV is a related party of the Company.
The Company’s share in the net losses of the THATIC JV for the three and six months ended June 29, 2019 is not recorded in the Company’s condensed consolidated statements of operations since the Company is not obligated to fund the THATIC JV’s losses in excess of the Company’s investment in the THATIC JV, which was zero as of June 29, 2019. As of June 29, 2019 and December 29, 2018, the total assets and liabilities of the THATIC JV were not material.
In February 2016, the Company licensed certain of its intellectual property (Licensed IP) to the THATIC JV for a total of $293 million in license fees payable over several years 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 classifies Licensed IP income and royalty income, associated with the February 2016 agreement, as licensing gain within operating income. The Company recognized $60 million as licensing gain associated with the Licensed IP during the six months ended June 29, 2019.
In March 2017, the Company entered into a development and intellectual property agreement (Development and IP) with the THATIC JV, and also expects to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such agreement. The Company classifies Development and IP income and royalty income, associated with the March 2017 agreement, as revenue once earned.
In addition, from time to time, the Company enters into certain agreements with the THATIC JV to provide other services primarily related to research and development.
The Company’s receivable from the THATIC JV for the above agreements was $19 million and $18 million as of June 29, 2019 and December 29, 2018, respectively, included in Prepayments and receivables—related parties on its condensed consolidated balance sheets.
In June 2019, the U.S. Commerce Department’s Bureau of Industry and Security added five Chinese entities to the Entity List, including THATIC and the THATIC JV. As a result of the Entity List designation, the Company is complying with U.S. law pertaining to the Entity List designation.
NOTE 6. Debt, Secured Revolving Facility and Secured Revolving Line of Credit
Debt
2.125% Convertible Senior Notes Due 2026
In September 2016, the Company issued $805 million, in aggregate, principal amount of 2.125% Convertible Senior Notes due 2026 (2.125% Notes). The 2.125% Notes are general unsecured senior obligations of the Company. The interest is payable semi-annually in March and September of each year, commencing in March 2017. As of June 29, 2019, the Company had $805 million principal amount outstanding.
The 2.125% Notes mature on September 1, 2026. However, as outlined in the indenture governing the 2.125% Notes, holders of the 2.125% Notes may convert them at their option during certain time periods and upon the occurrence of one of the following circumstances:
(1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2016 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day (equivalent to an initial conversion price of approximately $8.00 per share of common stock);
(2) during the five business day period after any ten consecutive trading day period (the Measurement Period) in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or
(3) upon the occurrence of specified corporate events.
On or after June 1, 2026 until the close of business on the business day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election.
The first event described in (1) above was met during the second quarter of 2019 and as a result, the 2.125% Notes are convertible at the option of the holder from July 1, 2019 until September 30, 2019.
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 June 29, 2019.
The 2.125% Notes consisted of the following: |
| | | | | | | |
| June 29, 2019 | | December 29, 2018 |
| (In millions) |
Principal amounts: | | | |
Principal | $ | 805 |
| | $ | 805 |
|
Unamortized debt discount(1) | (249 | ) | | (262 | ) |
Unamortized debt issuance costs | (10 | ) | | (11 | ) |
Net carrying amount | $ | 546 |
| | $ | 532 |
|
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 June 29, 2019, the remaining life of the 2.125% Notes was approximately 87 months.
Based on the closing price of the Company’s common stock of $30.37 on June 28, 2019, the last trading day of the three months ended June 29, 2019, the if-converted value of the 2.125% Notes exceeded its principal amount by $2,251 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 | | Six Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In millions) |
Contractual interest expense | $ | 4 |
| | $ | 4 |
| | $ | 8 |
| | $ | 9 |
|
Interest cost related to amortization of debt issuance costs | — |
| | — |
| | 1 |
| | 1 |
|
Interest cost related to amortization of the debt discount | $ | 6 |
| | $ | 6 |
| | $ | 12 |
| | $ | 12 |
|
6.75% Senior Notes Due 2019
On February 26, 2014, the Company issued $600 million of its 6.75% Senior Notes due March 1, 2019 (6.75% Notes). The 6.75% Notes were general unsecured senior obligations of the Company. Interest was payable on March 1 and September 1 of each year beginning September 1, 2014 until the maturity date of March 1, 2019. During the first three months of 2019, the Company redeemed the remaining $66 million in aggregate principal amount of its 6.75% Notes with a combination of cash and treasury stock.
7.50% Senior Notes Due 2022
On August 15, 2012, the Company issued $500 million of its 7.50% Senior Notes due 2022 (7.50% Notes). The 7.50% Notes are general unsecured senior obligations of the Company. Interest is payable on February 15 and August 15 of each year beginning February 15, 2013 until the maturity date of August 15, 2022. The 7.50% Notes are governed by the terms of an indenture (the 7.50% Indenture) dated August 15, 2012 between the Company and Wells Fargo Bank, N.A., as trustee.
During the six months ended June 29, 2019, the Company repurchased $25 million in aggregate principal amount of its 7.50% Notes in cash. As of June 29, 2019, the outstanding aggregate principal amount of the 7.50% Notes was $312 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 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 six months ended June 29, 2019, the Company repurchased $74 million in aggregate principal amount of its 7.00% Notes with a combination of cash and treasury stock. As of June 29, 2019, the outstanding aggregate principal amount of the 7.00% Notes was $176 million.
In aggregate, for the six months ended June 29, 2019, the Company recorded an $8 million loss on extinguishment of debt associated with the various debt redemptions and repurchases noted above.
Potential Repurchase of Outstanding Notes
The Company may elect to purchase or otherwise retire the 7.50% Notes and 7.00% Notes with cash or other assets and the 2.125% Notes with stock from time to time in the open market or through privately negotiated transactions, either directly or through intermediaries, or by tender offer when the Company believes the market conditions are favorable.
Secured Revolving Facility
On June 7, 2019, the Company entered into a secured revolving credit facility for up to $500 million (the Secured Revolving Facility) pursuant to a credit agreement by and among the Company, as borrower, the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent (the Credit Agreement). The Secured Revolving Facility consists of a $500 million, five-year secured revolving loan facility, including a $50 million swingline subfacility and a $75 million sublimit for letters of credit.
The Credit Agreement also provides the ability to increase the Secured Revolving Facility or incur incremental term loans or other incremental equivalent debt by an amount, subject to certain customary deductions and limits, not to exceed certain amounts as set forth in the Credit Agreement. The funding of any such incremental facilities is subject to receipt of lender commitments and satisfaction of customary conditions precedent.
Borrowings under the Secured Revolving Facility bear interest at a variable rate based upon, at the Company’s option, either at the LIBOR rate, or the base rate (in each case, as customarily defined) plus an applicable margin. The applicable margin for LIBOR rate loans ranges, based on an applicable total leverage ratio, from 1.00% to 1.75% per annum and the applicable margin for base rate loans ranges from 0.00% to 0.75% per annum. The Company is required to pay a fee on the undrawn portion available under the Secured Revolving Facility and pay variable per annum fees in respect of outstanding letters of credit.
The Company's available borrowings under the Secured Revolving Facility are subject to reduction by an amount equal to the net cash proceeds of (i) any debt issuances not permitted by the Secured Revolving Facility and (ii) any non-ordinary course asset sales (including insurance or condemnation events), in excess of $250 million, if such net cash proceeds are not reinvested by the Company within twelve months of receipt.
The Company’s obligations under the Credit Agreement are secured by a lien on substantially all of the Company’s property, other than intellectual property.
The Credit Agreement contains customary affirmative and negative covenants, as well as a total leverage covenant requiring the Company to maintain a maximum ratio of consolidated funded debt to consolidated EBITDA of 4.00:1.00 and an interest coverage covenant requiring the Company to maintain a minimum ratio of consolidated EBITDA to consolidated cash interest expense of 3.00:1.00.
The Credit Agreement also contains customary events of default, which if occur, could result in the termination of commitments under the Secured Revolving Facility, the declaration that all outstanding loans are immediately due and payable in whole or in part and the requirement of cash collateral deposits in respect of outstanding letters of credit.
As of June 29, 2019, there were no borrowings outstanding under the Credit Agreement, and the Company was in compliance with all required covenants under the Credit Agreement. As of June 29, 2019, the Company had $14 million of letters of credit outstanding under the Credit Agreement.
Secured Revolving Line of Credit
On June 7, 2019, in connection with entering into the Credit Agreement as described above, the Company repaid its outstanding loan balance of $70 million under the secured revolving line of credit (Secured Revolving Line of Credit) and terminated the Amended and Restated Loan and Security Agreement dated as of April 14, 2015, as amended (the Agreement) among the Company, a group of lenders, and Bank of America, N.A., acting as agent for the lenders.
NOTE 7. Earnings Per Share
Basic earnings per share is computed based on the weighted average number of common shares outstanding.
Diluted earnings per share is computed based on the weighted average number of common shares outstanding plus potentially dilutive shares outstanding during the period using the average market price for the respective period. Potentially dilutive shares are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding RSUs, and the assumed exercise of the warrant under the Warrant Agreement with WCH prior to the exercise of the warrant on February 13, 2019. Potentially dilutive shares issuable upon conversion of the 2.125% Notes are calculated using the if-converted method.
The following table sets forth the components of basic and diluted earnings per share:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
| (In millions, except per share amounts) |
Numerator | | | | | | | |
Net income | $ | 35 |
| | $ | 116 |
| | $ | 51 |
| | $ | 197 |
|
Effect of assumed conversion of Convertible 2.125% Notes: | | | | | | | |
Interest expense related to Convertible 2.125% Notes | — |
| | 11 |
| | — |
| | — |
|
Numerator for diluted earnings per share | $ | 35 |
| | $ | 127 |
| | $ | 51 |
| | $ | 197 |
|
Denominator | | | | | | | |
Basic weighted-average shares | 1,084 |
| | 972 |
| | 1,064 |
| | 970 |
|
Effect of potentially dilutive shares: | | | | | | | |
Employee equity incentive plans and warrants | 25 |
| | 74 |
| | 38 |
| | 73 |
|
Convertible 2.125% Notes | — |
| | 101 |
| | — |
| | — |
|
Diluted weighted-average shares | 1,109 |
| | 1,147 |
| | 1,102 |
| | 1,043 |
|
Earnings per share: | | | | | | | |
Basic | $ | 0.03 |
| | $ | 0.12 |
| | $ | 0.05 |
| | $ | 0.20 |
|
Diluted | $ | 0.03 |
| | $ | 0.11 |
| | $ | 0.05 |
| | $ | 0.19 |
|
Potential shares from employee equity incentive plans and the conversion of the 2.125% Notes totaling 102 million for the three months ended June 29, 2019 were not included in the earnings per share calculation because their inclusion would have been anti-dilutive. Potential shares from employee equity incentive plans totaling 2 million for the three months ended June 30, 2018 were not included in the earnings per share calculation because their inclusion would have been anti-dilutive.
Potential shares from employee equity incentive plans and the conversion of the 2.125% Notes totaling 103 million for the six months ended June 29, 2019 and June 30, 2018, respectively, were not included in the earnings per share calculation because their inclusion would have been anti-dilutive.
NOTE 8. Financial Instruments
Cash, Cash Equivalents, and Marketable Securities
Cash and financial instruments measured and recorded at fair value as of June 29, 2019 and December 29, 2018 are summarized below:
|
| | | | | | | | | | | |
| Total Fair Value | | Cash and Cash Equivalents | | Short-Term Marketable Securities |
| (In millions) |
June 29, 2019 | | | | | |
Cash | $ | 942 |
| | $ | 942 |
| | $ | — |
|
Level 1(1) | | | | | |
Government money market funds | $ | 1 |
| | $ | 1 |
| | $ | — |
|
Total level 1 | $ | 1 |
| | $ | 1 |
| | $ | — |
|
Level 2(2) | | | | | |
Commercial paper | $ | 185 |
| | $ | 20 |
| | $ | 165 |
|
Total level 2 | $ | 185 |
| | $ | 20 |
| | $ | 165 |
|
Total | $ | 1,128 |
| | $ | 963 |
| | $ | 165 |
|
|
| | | | | | | | | | | |
| Total Fair Value | | Cash and Cash Equivalents | | Short-Term Marketable Securities |
| (In millions) |
December 29, 2018 | | | | | |
Cash | $ | 315 |
| | $ | 315 |
| | $ | — |
|
Level 1(1) | | | | | |
Government money market funds | $ | 275 |
| | $ | 275 |
| | $ | — |
|
Total level 1 | $ | 275 |
| | $ | 275 |
| | $ | — |
|
Level 2(2) | | | | | |
Commercial paper | $ | 566 |
| | $ | 488 |
| | $ | 78 |
|
Total level 2 | $ | 566 |
| | $ | 488 |
| | $ | 78 |
|
Total | $ | 1,156 |
| | $ | 1,078 |
| | $ | 78 |
|
| |
(1) | The Company’s Level 1 assets are valued using quoted prices for identical instruments in active markets. |
| |
(2) | The Company’s Level 2 assets are valued using broker reports that utilize quoted prices for identical instruments in markets that are not active or comparable instruments in active markets. Brokers gather observable inputs for all of the Company’s fixed income securities from a variety of industry data providers and other third-party sources. |
In addition to the amounts presented above, as of both June 29, 2019 and December 29, 2018, the Company had $5 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.
As of June 29, 2019 and December 29, 2018, the Company also had $25 million and $21 million, respectively, of investments in mutual funds held in a Rabbi trust established for the Company’s deferred compensation plan, which were included in Other assets on the Company’s 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:
|
| | | | | | | | | | | | | | | |
| June 29, 2019 | | December 29, 2018 |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| (In millions) |
Short-term debt, net | $ | — |
| | $ | — |
| | $ | 136 |
| | $ | 136 |
|
Long-term debt, net(1) | $ | 1,031 |
| | $ | 3,656 |
| | $ | 1,114 |
| | $ | 2,428 |
|
| |
(1) | Carrying amounts of long-term debt are net of unamortized debt issuance costs of $14 million as of June 29, 2019 and $16 million as of December 29, 2018, and net of unamortized debt discount associated with the 2.125% Notes of $249 million as of June 29, 2019 and $262 million as of December 29, 2018. |
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 Company’s 2.125% Notes, included in Long-term debt, net above, were convertible at the option of the holder as of June 29, 2019. The estimated fair value of the 2.125% Notes take into account the value between the Company’s stock price as of the end of the quarter and the equivalent initial conversion price of approximately $8.00 per share of common stock.
The fair value of the Company’s accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing payment terms.
Hedging Transactions and Derivative Financial Instruments
Cash Flow Hedges and Foreign Currency Forward Contracts not Designated as Accounting Hedges
The following table shows the impact of gains (losses) resulting from cash flow hedges and foreign currency forward contracts not designated as accounting hedges on the respective condensed consolidated statement of operations line items:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gains (Losses) Recognized in Income |
| Three Months Ended |
| June 29, 2019 | | June 30, 2018 |
| Research and development | | Marketing, general and administrative | | Other income (expense), net | | Research and development | | Marketing, general and administrative | | Other income (expense), net |
| (In millions) |
Amounts presented in the condensed consolidated statements of operations in which the effects of cash flow hedges were recorded | $ | 373 |
| | $ | 189 |
| | $ | 3 |
| | $ | 357 |
| | $ | 142 |
| | $ | 1 |
|
| | | | | | | | | | | |
Foreign Currency Forward Contracts - gains (losses) | | | | | | | | | | | |
Contracts designated as cash flow hedging instruments | | | | | | | | | | | |
Gains (losses) reclassified from OCI into income | (2 | ) | | — |
| | — |
| | 1 |
| | — |
| | — |
|
Contracts not designated as hedging instruments | | | | | | | | | | | |
Gains (losses) recognized in income | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
|
Total gains (losses) | $ | (2 | ) | | $ | — |
| | $ | (1 | ) | | $ | 1 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gains (Losses) Recognized in Income |
| Six Months Ended |
| June 29, 2019 | | June 30, 2018 |
| Research and development | | Marketing, general and administrative | | Other income (expense), net | | Research and development | | Marketing, general and administrative | | Other income (expense), net |
| (In millions) |
Amounts presented in the condensed consolidated statements of operations in which the effects of cash flow hedges were recorded | $ | 746 |
| | $ | 359 |
| | $ | (4 | ) | | $ | 700 |
| | $ | 276 |
| | $ | 2 |
|
| | | | | | | | | | | |
Foreign Currency Forward Contracts - gains (losses) | | | | | | | | | | | |
Contracts designated as cash flow hedging instruments | | | | | | | | | | | |
Gains (losses) reclassified from OCI into income | (4 | ) | | — |
| | — |
| | 4 |
| | 1 |
| | — |
|