amd-20200627

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2020


☐			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)

(408) 749-4000

Registrant’s telephone number, including area code

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 ☑ 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 ☑ 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

☑

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 ☑

Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of July 24, 2020: 1,174,056,713

INDEX


		Page No.
Part I Financial Information
Item 1	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Cash Flows	6
	Condensed Consolidated Statements of Stockholders’ Equity	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4	Controls and Procedures	24
Part II Other Information

Item 1	Legal Proceedings	25
Item 1A	Risk Factors	25
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 6	Exhibits	44
Signature			45

PART I. FINANCIAL INFORMATION


ITEM 1.			CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Advanced Micro Devices, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended						Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
	(In millions, except per share amounts)
Net revenue	$	1,932	$	1,531	$	3,718	$	2,803
Cost of sales	1,084		910		2,052		1,661
Gross profit	848		621		1,666		1,142

Research and development	460		373		902		746
Marketing, general and administrative	215		189		414		359

Licensing gain	—		—		—		(60)
Operating income	173		59		350		97

Interest expense	(14)		(25)		(27)		(52)
Other income (expense), net	1		3		5		(4)
Income before income taxes and equity income (loss)	160		37		328		41

Income tax provision (benefit)	4		2		10		(11)
Equity income (loss) in investee	1		—		1		(1)
Net income	$	157	$	35	$	319	$	51

Earnings per share
Basic	$	0.13	$	0.03	$	0.27	$	0.05
Diluted	$	0.13	$	0.03	$	0.27	$	0.05
Shares used in per share calculation
Basic	1,174		1,084		1,172		1,064
Diluted	1,227		1,109		1,225		1,102

See accompanying notes.

Advanced Micro Devices, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended						Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
	(In millions)
Net income	$	157	$	35	$	319	$	51
Other comprehensive income (loss), net of tax of zero:



Net change in unrealized gains (losses) on cash flow hedges	10		1		(4)		8
Total comprehensive income	$	167	$	36	$	315	$	59

See accompanying notes.

Advanced Micro Devices, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)


	June 27, 2020		December 28, 2019
	(In millions, except par value amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	1,775	$	1,466
Marketable securities	—		37
Accounts receivable, net	1,789		1,859
Inventories	1,324		982
Receivables from related parties	10		20
Prepaid expenses and other current assets	211		233

Total current assets	5,109		4,597
Property and equipment, net	585		500
Operating lease right-of-use assets	215		205
Goodwill	289		289
Investment: equity method	59		58
Other non-current assets	326		379
Total assets	$	6,583	$	6,028
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	200	$	—
Accounts payable	802		988
Payables to related parties	192		213
Accrued liabilities	1,172		1,084
Other current liabilities	68		74
Total current liabilities	2,434		2,359
Long-term debt, net	490		486
Long-term operating lease liabilities	204		199
Other long-term liabilities	150		157
Contingencies (See Note 11)
Stockholders’ equity:
Capital stock:
Common stock, par value 0.01; shares authorized: 2,250; shares issued: 1,179 and 1,175; shares outstanding: 1,174 and 1,170	12		12
Additional paid-in capital	10,127		9,963
Treasury stock, at cost (shares held: 5 and 5)	(54)		(53)
Accumulated deficit	(6,776)		(7,095)
Accumulated other comprehensive loss	(4)		—
Total stockholders’ equity	3,305		2,827
Total liabilities and stockholders’ equity	$	6,583	$	6,028

See accompanying notes.

Advanced Micro Devices, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended
	June 27, 2020		June 29, 2019
	(In millions)
Cash flows from operating activities:
Net income	$	319	$	51
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	140		98
Stock-based compensation	119		86
Amortization of debt discount and issuance costs	8		18
Amortization of operating lease right-of-use assets	20		18
Loss on debt redemption	—		8
Loss on sale/disposal of property and equipment	26		8
Other	8		(4)
Changes in operating assets and liabilities:
Accounts receivable, net	64		(98)
Inventories	(342)		(170)
Receivables from related parties	10		4
Prepaid expenses and other assets	(12)		(9)
Payables to related parties	(21)		(6)
Accounts payable, accrued liabilities and other	(161)		(187)
Net cash provided by (used in) operating activities	178		(183)
Cash flows from investing activities:
Purchases of property and equipment	(146)		(120)
Purchases of available-for-sale debt securities	(55)		(231)
Proceeds from maturity of available-for-sale debt securities	92		144
Collection of deferred proceeds on sale of receivables	—		25
Other	—		2
Net cash used in investing activities	(109)		(180)
Cash flows from financing activities:
Proceeds from short-term debt borrowing	200		—
Repayment of debt	—		(234)
Proceeds from warrant exercise	—		449
Proceeds from sales of common stock through employee equity plans	42		35
Other	(2)		(2)
Net cash provided by financing activities	240		248
Net increase (decrease) in cash, cash equivalents, and restricted cash	309		(115)
Cash, cash equivalents, and restricted cash at beginning of period	1,470		1,083
Cash, cash equivalents, and restricted cash at end of period	$	1,779	$	968
Supplemental cash flow information:
Non-cash investing and financing activities:
Purchases of property and equipment, accrued but not paid	$	52	$	119
Transfer of assets for the acquisition of property and equipment	$	41	$	—
Issuance of treasury stock to partially settle debt	$	—	$	7
Non-cash activities for leases:
Operating lease right-of-use assets acquired by assuming related liabilities	$	30	$	10
Reconciliation of cash, cash equivalents, and restricted cash
Cash and cash equivalents	$	1,775	$	963
Restricted cash included in Prepaid expenses and other current assets	4		5
Total cash, cash equivalents, and restricted cash	$	1,779	$	968

See accompanying notes.

Advanced Micro Devices

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Three Months Ended						Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
	(In millions)
Capital stock:
Common stock
Balance, beginning of period	$	12	$	11	$	12	$	10

Issuance of common stock upon warrant exercise	—		—		—		1

Balance, end of period	$	12	$	11	$	12	$	11
Additional paid-in capital
Balance, beginning of period	$	10,026	$	9,246	$	9,963	$	8,750
Common stock issued under employee equity plans	39		34		42		35
Stock-based compensation	60		45		119		86
Issuance of common stock upon warrant exercise	—		—		—		449
Issuance of treasury stock to partially settle debt	—		—		—		4
Issuance of common stock warrant	2		—		3		1
Balance, end of period	$	10,127	$	9,325	$	10,127	$	9,325
Treasury stock
Balance, beginning of period	$	(54)	$	(48)	$	(53)	$	(50)

Issuance of treasury stock to partially settle debt	—		—		—		3
Other	—		(2)		(1)		(3)
Balance, end of period	$	(54)	$	(50)	$	(54)	$	(50)

Accumulated deficit:
Balance, beginning of period	$	(6,933)	$	(7,420)	$	(7,095)	$	(7,436)
Net income	157		35		319		51
Balance, end of period	$	(6,776)	$	(7,385)	$	(6,776)	$	(7,385)

Accumulated other comprehensive loss:
Balance, beginning of period	$	(14)	$	(1)	$	—	$	(8)
Other comprehensive income (loss)	10		1		(4)		8
Balance, end of period	$	(4)	$	—	$	(4)	$	—

Total stockholders' equity	$	3,305	$	1,901	$	3,305	$	1,901

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 27, 2020 shown in this report are not necessarily indicative of results to be expected for the full year ending December 26, 2020 or any other future period. 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 28, 2019. 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 27, 2020 and June 29, 2019 each consisted of 13 weeks and 26 weeks, respectively.

Significant Accounting Policies. 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 28, 2019.

Recently Adopted Accounting Standards

Financial Instruments. In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. The Company adopted this standard in the first quarter of 2020 using the modified retrospective adoption method. This standard did not have an impact on the condensed consolidated financial statements upon adoption.

Recently Issued Accounting Standards

Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. This standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company will adopt this standard in the first quarter of 2021 and the adoption is not expected to have a material impact on the consolidated financial statements.

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

NOTE 2. Supplemental Balance Sheet Information

Accounts Receivable, net

As of June 27, 2020 and December 28, 2019, Accounts receivable, net included unbilled accounts receivable of $222 million and $197 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


	June 27, 2020		December 28, 2019
	(In millions)
Raw materials	$	102	$	94
Work in process	936		691
Finished goods	286		197
Total inventories	$	1,324	$	982

Property and Equipment, net


	June 27, 2020		December 28, 2019
	(In millions)
Leasehold improvements	$	201	$	203
Equipment	1,073		951
Construction in progress	148		114
Property and equipment, gross	1,422		1,268
Accumulated depreciation	(837)		(768)
Total property and equipment, net	$	585	$	500

Other Non-Current Assets


	June 27, 2020		December 28, 2019
	(In millions)
Software technology and licenses, net	$	174	$	210
Other	152		169
Total other non-current assets	$	326	$	379

Accrued Liabilities


	June 27, 2020		December 28, 2019
	(In millions)
Accrued compensation and benefits	$	260	$	285
Marketing programs and advertising expenses	603		454
Other	309		345
Total accrued liabilities	$	1,172	$	1,084

Remaining Performance Obligations

Revenue allocated to remaining performance obligations that are unsatisfied (or partially unsatisfied) as of June 27, 2020 is $417 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 $180 million of such amounts as revenue in the next 12 months.

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

NOTE 3. Related Parties — Equity Joint Ventures

ATMP Joint Ventures

The Company holds a 15% equity interest in two joint ventures (collectively, the ATMP JV) with affiliates of Tongfu Microelectronics Co., Ltd, a Chinese joint stock 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. As of June 27, 2020 and December 28, 2019, the carrying value of the Company’s investment in the ATMP JV was $59 million and $58 million, respectively.

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 the Company’s inventory management program are reported within purchases and resales with the ATMP JV and do not impact the Company’s condensed consolidated statement of operations.

The Company’s purchases from the ATMP JV during the three and six months ended June 27, 2020 amounted to $204 million and $355 million, respectively. The Company’s purchases from the ATMP JV during the three and six months ended June 29, 2019 amounted to $172 million and $304 million, respectively. As of June 27, 2020 and December 28, 2019, the amounts payable to the ATMP JV were $192 million and $213 million, respectively, and are included in Payables to related parties on the Company’s condensed consolidated balance sheets. The Company’s resales to the ATMP JV during the three and six months ended June 27, 2020 amounted to $8 million and $15 million, respectively. The Company’s resales to the ATMP JV during the three and six months ended June 29, 2019 amounted to $17 million and $43 million, respectively. As of June 27, 2020 and December 28, 2019, the Company’s receivable from the ATMP JV was $7 million for both periods, and was included in Receivables from related parties on the Company’s condensed consolidated balance sheets.

THATIC Joint Ventures

The Company holds equity interests in two joint ventures (collectively, the THATIC JV) with Higon Information Technology Co., Ltd. (THATIC), a third party Chinese entity. The Company holds a majority interest in one of the joint ventures and a minority interest in the other. The Company is not a primary beneficiary of the THATIC JV and, as such, the Company does not consolidate either of these entities and accounts for its equity interests in the THATIC JV under the equity method of accounting. The Company’s share in the net losses of the THATIC JV 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 both June 27, 2020 and December 28, 2019.

In February 2016, the Company licensed certain of its intellectual property (Licensed IP) to the THATIC JV for a total of $293 million in license fees payable over several years upon achievement of certain milestones. The Company also expects to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such Licensed IP. The Company classifies Licensed IP income and royalty income, associated with the February 2016 agreement, as licensing gain within operating income.

The Company recognized $60 million as licensing gain associated with the Licensed IP during the six months ended June 29, 2019. The Company’s receivable from the THATIC JV was $3 million and $13 million as of June 27, 2020 and December 28, 2019, respectively, and was included in Receivables from related parties on the Company’s condensed consolidated balance sheets.

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

NOTE 4. Debt and Secured Revolving Facility

Debt

The Company’s total debt as of June 27, 2020 and December 28, 2019 consisted of the following:


	June 27, 2020		December 28, 2019
	(In millions)
2.125% Convertible Senior Notes Due 2026 (2.125% Notes)	$	251	$	251
7.50% Senior Notes Due 2022 (7.50% Notes)	312		312
Borrowing under Secured Revolving Facility	200		—
Total debt (principal amount)	763		563
Unamortized debt discount for 2.125% Notes	(69)		(73)
Unamortized debt issuance costs for 2.125% Notes	(3)		(3)
Unamortized debt issuance costs for 7.50% Notes	(1)		(1)
Total debt (net)	690		486
Less: short term debt	(200)		—
Total long-term debt (net)	$	490	$	486

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 which mature on September 1, 2026. The 2.125% Notes are general unsecured senior obligations of the Company.

Holders of the 2.125% Notes may convert them at their option during certain time periods and upon the occurrence of certain events, including, during any 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). The above event was met during the second calendar quarter of 2020 and as a result, the 2.125% Notes are convertible at the option of the holder from July 1, 2020 until September 30, 2020.

The Company’s current intent is to deliver shares of its common stock upon conversion of the 2.125% Notes. 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 27, 2020. 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 carrying amount of the equity component of the 2.125% Notes was $95 million as of both June 27, 2020 and December 28, 2019.

7.50% Senior Notes Due 2022

On August 15, 2012, the Company issued $500 million of its 7.50% Senior Notes due 2022. As of June 27, 2020, the outstanding aggregate principal amount of the 7.50% Notes was $312 million.

Secured Revolving Facility

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

The Credit Agreement also provides the ability to increase the Secured Revolving Facility or incur incremental term loans or other incremental equivalent debt by an amount not to exceed certain amounts as set forth in the

Credit Agreement. The Company’s available borrowings under the Secured Revolving Facility are also subject to reduction by an amount equal to the net cash proceeds of (i) any debt issuances not permitted by the Secured Revolving Facility and (ii) any non-ordinary course asset sales, in excess of $250 million, if such net cash proceeds are not reinvested by the Company within twelve months of receipt.

On April 6, 2020, the Company borrowed $200 million under the Credit Agreement via the LIBOR rate loan option at an annual interest rate of 2.37% through the maturity date of July 6, 2020. As of June 27, 2020, the Company had $13 million of letters of credit outstanding under the Credit Agreement and the Company was in compliance with all required covenants under the Credit Agreement.

Subsequent to quarter end, the Company repaid the $200 million borrowing plus interest upon maturity on July 6, 2020.

NOTE 5. Financial Instruments

Fair Value Measurements

Financial Instruments Recorded at Fair Value on a Recurring Basis

The Company did not have material financial instruments measured and recorded at fair value on a recurring basis as of June 27, 2020. As of December 28, 2019, the Company had $37 million of commercial paper included in Marketable securities on the Company’s condensed consolidated balance sheets, which was classified within Level 2 as their fair value estimates were based on quoted prices for comparable instruments.

In addition, as of June 27, 2020 and December 28, 2019, the Company also had $36 million and $30 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 non-current assets on the Company’s condensed consolidated balance sheets. These money market funds and mutual funds are classified within Level 1 as their fair value estimates are based on quoted prices for identical instruments in active markets. The Company is restricted from accessing these investments.

Financial Instruments Not Recorded at Fair Value

The Company carries its financial instruments at fair value with the exception of its long-term debt. The carrying amounts and estimated fair values of the Company’s long-term debt are as follows:


	June 27, 2020						December 28, 2019
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(In millions)

Long-term debt, net	$	490	$	1,932	$	486	$	1,823

The estimated fair value of the Company’s long-term debt is based on Level 2 inputs as the fair value is based on quoted prices for the Company’s debt or comparable instruments in inactive markets. The Company’s 2.125% Notes, included in Long-term debt, net above, were convertible at the option of the holder as of June 27, 2020. The estimated fair value of the 2.125% Notes considers the relationship between the Company’s stock price of $50.10 as of June 26, 2020, the last trading day of the three months ended June 27, 2020 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, including short-term debt, approximate their carrying value based on existing payment terms.

Hedging Transactions and Derivative Financial Instruments

Cash Flow Hedges Designated as Accounting Hedges and Foreign Currency Forward Contracts Not Designated as Accounting Hedges

The Company enters into foreign currency forward contracts to hedge its exposure to foreign currency exchange rate risk related to future forecasted transactions denominated in currencies other than the U.S. Dollar. These contracts generally mature within 12 months. These cash flow hedges are designated as accounting hedges and the gains or losses on these contracts are initially deferred in other comprehensive income (loss) and reclassified to earnings in the period during which the hedged transaction affects earnings.

The Company also enters into foreign currency forward contracts to reduce the short-term effects of foreign currency fluctuations on certain receivables or payables denominated in currencies other than the U.S. Dollar. These forward contracts generally mature within 3 months. These contracts are not designated as accounting hedges and the gains or losses on these contracts are recognized in other income (expense), net in the condensed consolidated statements of operations based on the changes in fair value.

As of June 27, 2020 and December 28, 2019, the notional values of the Company’s outstanding foreign currency forward contracts were $599 million and $739 million, respectively. The fair value of these contracts was not material as of June 27, 2020 and December 28, 2019.

NOTE 6. Accumulated Other Comprehensive Loss

The table below summarizes the changes in accumulated other comprehensive loss for the three and six months ended June 27, 2020 and June 29, 2019:


	Three Months Ended						Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Gains (losses) on cash flow hedges:	(In millions)
Beginning balance	$	(14)	$	(1)	$	—	$	(8)
Net unrealized gains (losses) arising during the period	5		(1)		(12)		4
Net losses reclassified into income during the period	5		2		8		4

Total other comprehensive income (loss)	10		1		(4)		8
Ending balance	$	(4)	$	—	$	(4)	$	—

NOTE 7. Earnings Per Share

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


	Three Months Ended						Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
	(In millions, except per share amounts)
Numerator
Net income for basic earnings per share	$	157	$	35	$	319	$	51
Effect of potentially dilutive shares:
Interest expense related to the 2.125% Notes	3		—		7		—
Net income for diluted earnings per share	$	160	$	35	$	326	$	51
Denominator
Basic weighted average shares	1,174		1,084		1,172		1,064
Effect of potentially dilutive shares:
Employee equity plans and warrants	22		25		22		38
2.125% Notes	31		—		31		—
Diluted weighted average shares	1,227		1,109		1,225		1,102
Earnings per share:
Basic	$	0.13	$	0.03	$	0.27	$	0.05
Diluted	$	0.13	$	0.03	$	0.27	$	0.05

Potential shares from employee equity plans and the conversion of the 2.125% Notes totaling 102 million and 103 million shares for the three and six months ended June 29, 2019, respectively, were not included in the earnings per share calculation because their inclusion would have been anti-dilutive.

NOTE 8. Common Stock and Employee Equity Plans

Shares of common stock outstanding were as follows:


	Three Months Ended			Six Months Ended
	June 27, 2020	June 29, 2019	June 27, 2020	June 29, 2019
	(In millions)
Balance, beginning of period	1,171	1,082	1,170	1,005
Common stock issued under employee equity plans	3	4	4	5
Issuance of common stock upon warrant exercise	—	—	—	75
Issuance of treasury stock to partially settle debt	—	—	—	1
Balance, end of period	1,174	1,086	1,174	1,086

Stock-based compensation expense was as follows:


	Three Months Ended						Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
	(In millions)
Cost of sales	$	2	$	2	$	4	$	3
Research and development	37		28		74		55
Marketing, general and administrative	21		15		41		28
Total	$	60	$	45	$	119	$	86

NOTE 9. Income Taxes

For the three months ended June 27, 2020, the Company recorded an income tax provision of $4 million associated with foreign income taxes and withholding taxes. For the three months ended June 29, 2019, the Company recorded an income tax provision of $2 million, consisting primarily of foreign income taxes in profitable locations.

For the six months ended June 27, 2020, the Company recorded an income tax provision of $10 million associated with foreign income taxes and withholding taxes. For the six months ended June 29, 2019, the Company recorded an income tax benefit of $11 million, consisting primarily of a $13 million credit to U.S. income taxes due to the completion of certain internal tax structuring and $2 million of foreign income taxes in profitable locations.

As of June 27, 2020, substantially all the Company’s U.S. and foreign deferred tax assets, net of deferred tax liabilities, were subject to valuation allowances. After evaluating all available evidence, the Company determined that the valuation allowances should be maintained.

The Company’s total gross unrecognized tax benefits were $79 million as of June 27, 2020. The Company has foreign and U.S. state tax audits in process at any one point in time. It is reasonably possible the Company may have tax audits close in the next 12 months that could materially change the balance of the uncertain tax benefits; however, the timing of tax audit closures and settlements are 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). These performance measures include the allocation of expenses to the operating segments based on management’s judgment. The Company has the following two reportable segments:

•the Computing and Graphics segment, which primarily includes desktop and notebook processors and chipsets, discrete and integrated graphics processing units (GPUs), data center and professional GPUs and development services. The Company also licenses portions of its IP portfolio; and

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

In addition to these reportable segments, the Company has an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to any of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. This category primarily includes stock-based compensation expense.

The following table provides a summary of net revenue and operating income by segment:


	Three Months Ended						Six Months Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
	(In millions)
Net revenue:
Computing and Graphics	$	1,367	$	940	$	2,805	$	1,771
Enterprise, Embedded and Semi-Custom	565		591