UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
 
Form 10-Q
 
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number 001-07882
 
 
 
 
ADVANCED MICRO DEVICES, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
94-1692300
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
One AMD Place
Sunnyvale, California
 
94088
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (408) 749-4000
 
 
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of July 24, 2015: 779,177,660




INDEX
 
 
 
Page No.
 
 
 
Condensed Consolidated Statements of Operations – Three Months and Six Months Ended June 27, 2015 and June 28, 2014
 
Condensed Consolidated Statements of Comprehensive Loss – Three Months and Six Months Ended June 27, 2015 and June 28, 2014
 
Condensed Consolidated Balance Sheets – June 27, 2015 and December 27, 2014
 
Condensed Consolidated Statements of Cash Flows – Three Months and Six Months Ended June 27, 2015 and June 28, 2014
 
 
Item 1
Legal Proceedings

2



PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In millions, except per share amounts)
Net revenue
$
942

 
$
1,441

 
$
1,972

 
$
2,838

Cost of sales
710

 
943

 
1,414

 
1,853

Gross margin
232

 
498

 
558

 
985

Research and development
235

 
277

 
477

 
556

Marketing, general and administrative
134

 
154

 
265

 
310

Amortization of acquired intangible assets

 
4

 
3

 
7

Restructuring and other special charges, net

 

 
87

 

Operating income (loss)
(137
)
 
63

 
(274
)
 
112

Interest expense
(40
)
 
(46
)
 
(80
)
 
(93
)
Other expense, net
(3
)
 
(49
)
 
(3
)
 
(69
)
Loss before income taxes
(180
)
 
(32
)
 
(357
)
 
(50
)
Provision for income taxes
1

 
4

 
4

 
6

Net loss
$
(181
)
 
$
(36
)
 
$
(361
)
 
$
(56
)
Net loss per share
 
 
 
 
 
 
 
Basic
$
(0.23
)
 
$
(0.05
)
 
$
(0.46
)
 
$
(0.07
)
Diluted
$
(0.23
)
 
$
(0.05
)
 
$
(0.46
)
 
$
(0.07
)
Shares used in per share calculation:
 
 
 
 
 
 
 
Basic
778

 
764

 
778

 
762

Diluted
778

 
764

 
778

 
762

See accompanying notes to condensed consolidated financial statements.


3



Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In millions)
Net loss
$
(181
)
 
$
(36
)
 
$
(361
)
 
$
(56
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period, net of tax effects of $0
3

 
3

 
(8
)
 

Reclassification adjustment for (gains) losses realized and included in net loss, net of tax effects of $0
4

 
1

 
8

 
3

Total other comprehensive income
7

 
4

 

 
3

Total comprehensive loss
$
(174
)
 
$
(32
)
 
$
(361
)
 
$
(53
)
See accompanying notes to condensed consolidated financial statements.


4



Advanced Micro Devices, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
June 27,
2015
 
December 27,
 2014*
 
(In millions, except par value amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
829

 
$
805

Marketable securities

 
235

Accounts receivable, net of allowances of $0 and $0
687

 
818

Inventories, net
799

 
685

Prepayments to GLOBALFOUNDRIES
19

 
113

Prepaid expenses and other current assets
117

 
80

Total current assets
2,451

 
2,736

Property, plant and equipment, net
289

 
302

Acquisition related intangible assets, net

 
65

Goodwill
320

 
320

Other assets
321

 
344

Total assets
$
3,381

 
$
3,767

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
235

 
$
177

Accounts payable
454

 
415

Payable to GLOBALFOUNDRIES
197

 
218

Accrued and other current liabilities
462

 
558

Deferred income on shipments to distributors
51

 
72

Total current liabilities
1,399

 
1,440

Long-term debt
2,034

 
2,035

Other long-term liabilities
89

 
105

Commitments and contingencies (See Note 9)
 
 
 
Stockholders’ equity (deficit):
 
 
 
Capital stock:
 
 
 
Common stock, par value $0.01; 1,500 shares authorized on June 27, 2015 and December 27, 2014; shares issued: 791 shares on June 27, 2015 and 788 shares on December 27, 2014; shares outstanding: 779 shares on June 27, 2015 and 776 shares on December 27, 2014
8

 
8

Additional paid-in capital
6,984

 
6,949

Treasury stock, at cost (12 shares on June 27, 2015 and December 27, 2014)
(121
)
 
(119
)
Accumulated deficit
(7,007
)
 
(6,646
)
Accumulated other comprehensive loss
(5
)
 
(5
)
Total stockholders’ equity (deficit)
(141
)
 
187

Total liabilities and stockholders’ equity (deficit)
$
3,381

 
$
3,767

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

5



Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
(In millions)
Cash flows from operating activities:
 
 
 
Net loss
$
(361
)
 
$
(56
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
91

 
106

Deferred income taxes

 
1

Stock-based compensation expense
34

 
44

Non-cash interest expense
6

 
9

Loss on debt redemptions

 
64

Restructuring and other special charges, net
72

 

Other
1

 
(5
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
129

 
(40
)
Inventories
(117
)
 
(76
)
Prepayments to GLOBALFOUNDRIES
94

 
(67
)
Prepaid expenses and other assets
(73
)
 
(17
)
Accounts payable, accrued liabilities and other
(86
)
 
(126
)
Payable to GLOBALFOUNDRIES
(21
)
 
(69
)
Net cash used in operating activities
(231
)
 
(232
)
Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(227
)
 
(618
)
Purchases of property, plant and equipment
(39
)
 
(44
)
Proceeds from maturities of available-for-sale securities
462

 
488

Net cash provided by (used in) investing activities
196

 
(174
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
1

 
2

Proceeds from borrowings, net
100

 
1,080

Net proceeds from grants
4

 
2

Repayments of long-term debt and capital lease obligations
(44
)
 
(1,042
)
Other
(2
)
 
(2
)
Net cash provided by financing activities
59

 
40

Net increase (decrease) in cash and cash equivalents
24

 
(366
)
Cash and cash equivalents at beginning of period
805

 
869

Cash and cash equivalents at end of period
$
829

 
$
503

See accompanying notes to condensed consolidated financial statements.


6


Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements of Advanced Micro Devices, Inc. and its subsidiaries (the Company or AMD) have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The results of operations for the quarter ended June 27, 2015 shown in this report are not necessarily indicative of results to be expected for the full year ending December 26, 2015. In the opinion of the Company’s management, the information contained herein reflects all adjustments necessary for a fair presentation of the Company’s results of operations, financial position and cash flows. All such adjustments are of a normal, recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 27, 2014.
The Company uses a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters and six months ended June 27, 2015 and June 28, 2014 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 intercompany accounts and transactions are eliminated.
Change to Prior Period Information. During the third quarter of 2014, the Company realigned its organizational structure. As a result of this organizational change, beginning in third quarter of 2014, the Company reports its financial statements based on the new segments described in Note 7 - Segment Reporting with no other impact on the Company’s condensed consolidated financial statements. All prior-period amounts have been adjusted retrospectively to reflect the Company's reportable segment changes.
Recently Issued Accounting Standards
Interest—Imputation of Interest. In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 will be effective for annual reporting periods beginning after December 15, 2015 and interim periods within fiscal years beginning after December 15, 2016, with early adoption permitted. The new guidance will be applied retrospectively to each prior period presented. The Company plans to adopt ASU 2015-03 in the first quarter of 2016, at which time the Company will reclassify approximately $30 million of debt issuance costs associated with the Company's long-term debt from other non-current assets to long-term debt. A reclassification will also be applied retrospectively to each prior period presented.
Disclosure of Going Concern Uncertainties. In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), which provides guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 will be effective in the fourth quarter of 2016, with early adoption permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2014-15 on its consolidated financial statements.
Share-Based Payments with Performance Targets. In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12), which requires that a performance target be treated as a performance condition if it affects vesting and could be achieved after the requisite service period is rendered. ASU 2014-12 will be effective in the first quarter of 2016, with early adoption permitted. The Company may use either of two methods: (i) prospective application to all awards granted or modified after the effective date or (ii) retrospective application to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. The Company is currently evaluating the impact of its pending adoption of ASU 2014-12 on its consolidated financial statements and has not yet determined which method it will apply.
Revenue Recognition. In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), which creates a single source of revenue guidance under U.S. GAAP for all companies in all industries. The core principle of ASU 2014-09 is that revenue should be recognized in a manner that depicts

7


the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates. ASU 2014-09 also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used. In July 2015, FASB announced a decision to defer the effective date for this ASU. ASU 2014-09 will be effective for the Company in the first quarter of 2018 with early adoption permitted (for annual reporting periods beginning after December 15, 2016). The Company may adopt ASU 2014-09 either by using a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined which approach it will apply.
NOTE 2. GLOBALFOUNDRIES
Wafer Supply Agreement. The Wafer Supply Agreement (WSA) governs the terms by which the Company purchases products manufactured by GLOBALFOUNDRIES Inc. (GF).
Fourth Amendment to Wafer Supply Agreement. On March 30, 2014, the Company entered into a fourth amendment to the WSA. The primary effect of the fourth amendment was to establish volume purchase commitments and fixed pricing for the 2014 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of the Company’s microprocessor unit, graphics processor unit and semi-custom game console products to be delivered by GF to the Company during the 2014 calendar year.
Fifth Amendment to Wafer Supply Agreement. On April 16, 2015, the Company entered into a fifth amendment to the WSA. The primary effect of the fifth amendment was to establish volume purchase commitments and fixed pricing for the 2015 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of the Company's microprocessor unit, graphics processor unit and semi-custom products to be delivered by GF to the Company during the 2015 calendar year.
The Company’s total purchases from GF related to wafer manufacturing and research and development activities for the quarters ended June 27, 2015 and June 28, 2014 were $246 million and $293 million, respectively. The Company's total purchases from GF related to wafer manufacturing and research and development activities for the six months ended June 27, 2015 and June 28, 2014 were $416 million and $553 million, respectively.
The Company currently estimates that its purchase obligations to GF for wafer manufacturing and research and development activities will be approximately $1.1 billion in fiscal 2015 and at least $75 million during the first quarter of fiscal 2016. The Company is not able to meaningfully quantify or estimate its future purchase obligations to GF other than those set forth in the fifth amendment to the WSA, but it expects that its future purchases from GF will continue to be material. The Company is currently in discussions with GF regarding the re-profiling of our wafer commitments under the fifth amendment to the WSA. The Company is unable to quantify the outcome of its negotiations with GF.
GF continues to be a related party of the Company because Mubadala Development Company PJSC (Mubadala) and Mubadala Technology Investments LLC (Mubadala Tech) are affiliated with West Coast Hitech L.P. (WCH), the Company’s largest stockholder. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala.

8



NOTE 3. Supplemental Balance Sheet Information
Inventories
 
June 27,
2015
 
December 27,
2014
 
(In millions)
Raw materials
$
33

 
$
40

Work in process
515

 
431

Finished goods
251

 
214

Total inventories, net
$
799

 
$
685

Property, Plant and Equipment
 
June 27,
2015
 
December 27,
2014
 
(In millions)
Land and land improvements
2

 
4

Buildings and leasehold improvements
230

 
246

Equipment
1,407

 
1,416

Construction in progress
23

 
14

 
1,662

 
1,680

Accumulated depreciation and amortization
(1,373
)
 
(1,378
)
Total property, plant and equipment, net
$
289

 
$
302

Other Assets
 
June 27,
2015
 
December 27,
2014
 
(In millions)
Software and technology licenses, net
$
213

 
$
219

Other
108

 
125

Total other assets
$
321

 
$
344

Accrued and Other Current Liabilities
 
June 27,
2015
 
December 27,
2014
 
(In millions)
Accrued compensation and benefits
$
96

 
$
139

Marketing programs and advertising expenses
107

 
141

Software and technology licenses payable
43

 
39

Other
216

 
239

Total accrued and other current liabilities
$
462

 
$
558



9



NOTE 4. Net Loss Per Share
Basic net loss per share is computed based on the weighted average number of shares outstanding.
Diluted net loss per share is computed based on the weighted average number of shares outstanding plus any potentially dilutive shares outstanding. Potentially dilutive shares include stock options and restricted stock units.
The following table sets forth the components of basic and diluted loss per share:
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In millions, except per share amounts)
Numerator – Net loss:
 
 
 
 
 
 
 
Numerator for basic and diluted net loss per share
$
(181
)
 
$
(36
)
 
$
(361
)
 
$
(56
)
Denominator – Weighted average shares
 
 
 
 
 
 
 
Denominator for basic and diluted net loss per share
778

 
764

 
778

 
762

Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.23
)
 
$
(0.05
)
 
$
(0.46
)
 
$
(0.07
)
Diluted
$
(0.23
)
 
$
(0.05
)
 
$
(0.46
)
 
$
(0.07
)
Potential shares from stock options and restricted stock units totaling 51 million and 39 million were not included in the net loss per share calculations for the second quarters of 2015 and 2014, respectively, because their inclusion would have been anti-dilutive.
Potential shares from employee stock options and restricted stock units totaling 63 million and 45 million were not included in the net loss per share calculation for the six months ended June 27, 2015 and June 28, 2014, because their inclusion would have been anti-dilutive.
NOTE 5. Financial Instruments
Cash and Cash Equivalents and Marketable Securities
Cash and financial instruments measured and recorded at fair value on a recurring basis as of June 27, 2015 and December 27, 2014 are summarized below:
 
Total Fair
Value
 
Cash and
Cash
Equivalents
 
(In millions)
June 27, 2015
 
 
 
Cash
$
352

 
$
352

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

 
$
2

Total level 1
$
2

 
$
2

Level 2(2) (3)
 
 
 
Commercial paper
475

 
475

Total level 2
475

 
475

Total
$
829

 
$
829


10


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

 
$
391

 
$

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

 
4

 

Total level 1
4

 
4

 

Level 2(2) (3)
 
 
 
 
 
Commercial paper
618

 
410

 
208

Corporate bonds
27

 

 
27

Total level 2
645

 
410

 
235

Total
$
1,040

 
$
805

 
$
235


(1) 
The Company’s Level 1 assets are valued using quoted prices for identical instruments in active markets.
(2) 
The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the quarter and six months ended June 27, 2015 or the year ended December 27, 2014.
(3) 
The Company’s Level 2 short-term investments are valued using broker reports that utilize quoted market prices for identical or comparable instruments. Brokers gather observable inputs for all of the Company’s fixed income securities from a variety of industry data providers and other third-party sources. The Company’s Level 2 long-term investments were valued using broker reports that utilize a third-party professional pricing service that gathers information from multiple market sources and integrates relevant credit information, observed market movements and sector news into their pricing evaluation. The Company validated, on a sample basis, the derived prices provided by the brokers by comparing their assessment of the fair values of the Level 2 long-term investments against the fair values of the portfolio balances of another third-party professional’s pricing service, other than that utilized by the brokers, that use a similar technique as the brokers to derive pricing as described above.
Available-for-sale securities held by the Company as of June 27, 2015 consisted of money market funds and commercial paper and as of December 27, 2014 also consisted of corporate bonds. The amortized cost of available-for-sale securities approximated the fair value for all periods presented.
In addition to those amounts presented above, as of June 27, 2015 and December 27, 2014, the Company had approximately $11 million and $10 million, respectively, of available-for-sale investments in money market funds, used as collateral for leased buildings and letters of credit deposits, which were included in Other assets on the Company’s condensed consolidated balance sheets. These money market funds are classified within Level 1 because they are valued using quoted prices for identical instruments in active markets. Their amortized costs are the same as the fair value for all periods presented. The Company is restricted from accessing these deposits.
Also in addition to those amounts presented above, as of June 27, 2015 and December 27, 2014, the Company had approximately $16 million of available-for-sale investments in mutual funds held in a Rabbi trust established for the Company's deferred compensation plan, which were also included in Other assets on the Company's condensed consolidated balance sheets. These mutual funds are classified within Level 1 because they are valued using quoted prices for identical instruments in active markets. Their amortized cost approximates the fair value for all periods presented. The Company is restricted from accessing these investments.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis. The Company carries its financial instruments at fair value with the exception of its debt. Financial instruments that are not recorded at fair value are measured at fair value on a quarterly basis for disclosure purposes. The carrying amounts and estimated fair values of financial instruments not recorded at fair value are as follows:
 
June 27, 2015
 
December 27, 2014
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(In millions)
Short-term debt (excluding capital leases)
$
230

 
$
230

 
$
172

 
$
173

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

 
$
1,789

 
$
2,025

 
$
1,858

The Company’s short-term and long-term debt are classified within Level 2. The fair value of the debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the

11


same remaining maturities. The fair value of the Company’s accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing payment terms.
Hedging Transactions and Derivative Financial Instruments
Cash Flow Hedges
The following table shows the amount of gain (loss) included in accumulated other comprehensive income (loss), the amount of gain (loss) reclassified from accumulated other comprehensive income (loss) and included in earnings related to the foreign currency forward contracts designated as cash flow hedges and the amount of gain (loss) included in other income (expense), net, related to contracts not designated as hedging instruments, which was allocated in the condensed consolidated statements of operations:
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In millions)
Foreign Currency Forward Contracts - gains (losses)
 
 
 
 
 
 
 
Contracts designated as cash flow hedging instruments
 
 
 
 
 
 
 
Other comprehensive income
$
7

 
$
5

 
$

 
$
4

Cost of sales

 

 
(1
)
 

Research and development
(2
)
 
(1
)
 
(4
)
 
(2
)
Marketing, general and administrative
(2
)
 

 
(3
)
 
$
(1
)
Contracts not designated as hedging instruments
 
 
 
 
 
 
 
Other income (expense), net
$

 
$
1

 
$
(1
)
 
$

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 Prepaid expenses and other current assets should the foreign currency forward contracts be in a gain position or included in Accrued and other current liabilities should these contracts be in a loss position. As of June 27, 2015, the Company’s outstanding contracts were in a net loss position of $7 million. These amounts were recorded in the Company's condensed consolidated balance sheets as follows:
 
June 27,
2015
 
December 27,
2014
 
(In millions)
Foreign Currency Forward Contracts - gains (losses)
 
 
 
Contracts designated as cash flow hedging instruments
$
(6
)
 
$
(6
)
Contracts not designated as hedging instruments
$
(1
)
 
$
(1
)
For the foreign currency contracts designated as cash flow hedges, the ineffective portions of the hedging relationship and the amounts excluded from the assessment of hedge effectiveness were immaterial.
As of June 27, 2015 and December 27, 2014, the notional values of the Company’s outstanding foreign currency forward contracts were $218 million and $298 million, respectively. All the contracts mature within 12 months, and, upon maturity, the amounts recorded in Accumulated other comprehensive income (loss) are expected to be reclassified into earnings. The Company hedges its exposure to the variability in future cash flows for forecasted transactions over a maximum of 12 months.
Fair Value Hedges
The Company’s fair value hedge derivative contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets.
The following table shows the fair value amounts included in Other assets should the fair value hedge derivative contracts be in a gain position or included in Other long-term liabilities should these contracts be in a loss position. These amounts were recorded in the Company’s condensed consolidated balance sheets as follows:

12


 
 
June 27,
2015
 
December 27,
2014
 
 
(In millions)
Interest Rate Swap Contracts - gains (losses)
 
 
 
 
Contracts designated as fair value hedging instruments
 
$
6

 
$
3

NOTE 6. Income Taxes
In the second quarter of 2015, the Company recorded an income tax provision of $1 million due principally to foreign taxes in profitable locations. For the six months ended June 27, 2015, the Company recorded an income tax provision of $4 million due to foreign taxes in profitable locations.
In the second quarter of 2014, the Company recorded an income tax provision of $4 million, consisting of $5 million of foreign taxes in profitable locations, partially offset by $1 million of tax benefits arising from other comprehensive income and Canadian tax credits. For the six months ended June 28, 2014, the Company recorded an income tax provision of $6 million arising from $8 million of foreign taxes in profitable locations, partially offset by $2 million of tax benefits arising from other comprehensive income and Canadian tax credits.
As of June 27, 2015, substantially all of the Company’s U.S. and Canadian deferred tax assets, net of deferred tax liabilities, continue to be subject to a valuation allowance. The realization of these assets is dependent on substantial future taxable income which, as of June 27, 2015, in management’s estimate, is not more likely than not to be achieved.
The Company's total gross unrecognized tax benefits as of June 27, 2015 were $29 million. The Company does not believe it is reasonably possible that other unrecognized tax benefits will materially change in the next 12 months. However, the settlement, resolution or closure of its tax audits is highly uncertain.
NOTE 7. Segment Reporting
Management, including the Chief Operating Decision Maker, who is the Company’s Chief Executive Officer, reviews and assesses operating performance using segment net revenue and operating income (loss) before interest, other income (expense), net and income taxes. These performance measures include the allocation of expenses to the operating segments based on management’s judgment. In connection with the Company’s continued strategic transformation, effective July 1, 2014, the Company realigned its organizational structure. As a result of this organizational change, the Company has the following two reportable segments:
the Computing and Graphics segment, which primarily includes desktop and notebook processors and chipsets, discrete graphics processing units (GPUs) and professional graphics; and
the Enterprise, Embedded and Semi-Custom segment, which primarily includes server and embedded processors, semi-custom System-on-Chip (SoC) products, engineering services and royalties.
In addition to these reportable segments, the Company has an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to any of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. Also included in this category are amortization of acquired intangible assets, employee stock-based compensation expense, restructuring and other special charges, net and workforce rebalancing severance charges.
The following table provides a summary of net revenue and operating income (loss) by segment. All period results presented reflect the Company's reportable segments:
 

13



 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In millions)
Net revenue:
 
 
 
 
 
 
 
Computing and Graphics
$
379

 
$
828

 
$
911

 
$
1,689

Enterprise, Embedded and Semi-Custom
563

 
613

 
1,061

 
1,149

Total net revenue
$
942

 
$
1,441

 
$
1,972

 
$
2,838

Operating income (loss):
 
 

 
 
 

Computing and Graphics
$
(147
)
 
$
(6
)
 
$
(222
)
 
$
(3
)
Enterprise, Embedded and Semi-Custom
27

 
97

 
72

 
182

All Other
(17
)
 
(28
)
 
(124
)
 
(67
)
Total operating income (loss)
$
(137
)
 
$
63

 
$
(274
)
 
$
112


NOTE 8. Stock-Based Incentive Compensation Plans
The following table summarizes stock-based compensation expense related to employee stock options and restricted stock units, which is allocated within the Company’s condensed consolidated statements of operations as follows:
 
Three Months Ended
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In millions)
Cost of sales
$
1

 
$
1

 
$
2

 
$
2

Research and development
10

 
11

 
20

 
23

Marketing, general and administrative
6

 
9

 
12

 
19

Stock-based compensation expense, net of tax of $0
$
17

 
$
21

 
$
34

 
$
44

For all periods presented, the Company did not realize any excess tax benefit related to stock-based compensation and therefore did not record any related financing cash flows.
Stock Options
The weighted average assumptions applied in the lattice-binomial model that the Company uses to estimate the fair value employee stock options are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Expected volatility
54.86
%
 
51.68
%
 
54.43
%
 
53.36
%
Risk-free interest rate
1.15
%
 
1.12
%
 
1.21
%
 
1.09
%
Expected dividends
0.00
%
 
0.00
%
 
0.00
%
 
0.00
%
Expected life
3.91 years

 
3.86 years

 
3.91 years

 
3.86 years

In the second quarters of 2015 and 2014, the Company granted 0.5 million and 0.1 million shares of employee stock options, respectively, with weighted average grant date fair value per share of $1.06 and $1.66, respectively. For the six months ended June 27, 2015 and June 28, 2014, the Company granted 0.7 million and 0.2 million employee stock options, respectively, with weighted average grant date fair values per share of $1.12 and 1.65, respectively.
Restricted Stock Units
In the second quarters of 2015 and 2014, the Company granted 4.1 million and 1.7 million restricted stock units, respectively, with weighted average grant date fair values per share of $2.46 and $4.00, respectively. For the six months ended June 27, 2015 and June 28, 2014, the Company granted 9.4 million and 2.2 million restricted stock units, respectively, with weighted average grant date fair values per share of $2.50 and $3.96, respectively.

14



NOTE 9. Commitments and Contingencies
Warranties and Indemnities
The Company generally warrants that its products sold to its customers will conform to the Company’s approved specifications and be free from defects in material and workmanship under normal use and service for one year. Subject to certain exceptions, the Company also offers a three-year limited warranty to end users for only those central processing unit (CPU) and AMD accelerated processing unit (APU) products that are commonly referred to as “processors in a box” and for certain server CPU products. The Company also offered extended limited warranties to certain customers of “tray” microprocessor products and/or professional graphic products who have written agreements with the Company and target their computer systems at the commercial and/or embedded markets.
Changes in the Company’s estimated liability for product warranty were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In millions)
Beginning balance
$
21

 
$
18

 
$
19

 
$
17

New warranties issued
6

 
8

 
14

 
16

Settlements
(6
)
 
(10
)
 
(15
)
 
(19
)
Changes in liability for pre-existing warranties, including expirations
(4
)
 
3

 
(1
)
 
5

Ending balance
$
17

 
$
19

 
$
17

 
$
19

In addition to product warranties, the Company, from time to time in its normal course of business, indemnifies other parties, with whom it enters into contractual relationships, including customers, lessors and parties to other transactions with the Company, with respect to certain matters. In these limited matters, the Company has agreed to hold certain third parties harmless against specific types of claims or losses, such as those arising from a breach of representations or covenants, third-party claims that the Company’s products when used for their intended purpose(s) and under specific conditions infringe the intellectual property rights of a third party, or other specified claims made against the indemnified party. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the unique facts and circumstances that are likely to be involved in each particular claim and indemnification provision. Historically, payments made by the Company under these obligations have not been material.
Contingencies
Securities Class Action
On January 15, 2014, a class action lawsuit captioned Hatamian v. AMD, et al., C.A. No. 3:14-cv-00226 was filed against the Company in the United States District Court for the Northern District of California. The complaint purports to assert claims against the Company and certain individual officers for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5 of the Exchange Act. The plaintiffs seek to represent a proposed class of all persons who purchased or otherwise acquired the Company's common stock during the period April 4, 2011 through October 18, 2012. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual officers regarding the Company's 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for the Company's common stock during the period. The complaint seeks unspecified compensatory damages, attorneys’ fees and costs.
On July 7, 2014, the Company filed a motion to dismiss plaintiffs’ claims. On March 31, 2015, the Court denied the motion to dismiss. On May 14, 2015, the Company filed its answer to plaintiffs’ corrected amended complaint. The discovery process has commenced.
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.


15



Shareholder Derivative Lawsuit
On March 20, 2014, a purported shareholder derivative lawsuit captioned Wessels v. Read, et al., Case No. 1:14 cv-262486 was filed against the Company (as a nominal defendant only) and certain of its directors and officers in the Santa Clara County Superior Court of the State of California. The complaint purports to assert claims against the Company and certain individual directors and officers for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual directors and officers regarding our 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for its common stock during the period. On April 27, 2015, a similar purported shareholder derivative lawsuit captioned Christopher Hamilton and David Hamilton v. Barnes, et al., Case No. 5:15-cv-01890 was filed against the Company (as a nominal defendant only) and certain of its directors and officers in the United States District Court for the Northern District of California. The case was transferred to the judge handling the Hatamian Lawsuit and is now Case No. 4:15-cv-01890.
Both of the 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.
Other Legal Matters
The Company is a defendant or plaintiff in various actions that arose in the normal course of business. With respect to these matters, based on the management’s current knowledge, the Company believes that the amount or range of reasonably possible loss, if any, will not, either individually or in the aggregate, have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.
NOTE 10. Restructuring and Other Special Charges, Net
2014 Restructuring Plan
In October 2014, the Company implemented a restructuring plan designed to improve operating efficiencies. The plan involved a reduction of global headcount by approximately 6% and an alignment of its real estate footprint with its reduced headcount. In the first six months ended June 27, 2015, the Company recorded an $11 million restructuring charge, which consisted of $4 million for severance and related benefits and $7 million for facilities related costs. The Company expects the plan to be largely completed by the end of the third quarter of 2015.
The following table provides a summary of the restructuring activities in the first six months of 2015 and the related liabilities recorded in Accrued and other current liabilities and Other long-term liabilities on the Company’s condensed consolidated balance sheets as of June 27, 2015:
 
Severance
and related
benefits
 
Other exit
related
costs
 
Total
 
(In millions)
Balance as of December 27, 2014
$
26

 
$
13

 
$
39

Charges
4

 
7

 
11

Cash payments
(19
)
 
(4
)
 
(23
)
Non-cash charges

 
(3
)
 
(3
)
Balance as of June 27, 2015
$
11

 
$
13

 
$
24

Dense Server Systems Business Exit
As a part of the Company’s strategy to simplify and sharpen its investment focus, the Company decided to exit the dense server systems business, formerly SeaMicro, in the first quarter of 2015. As a result of the Company’s decision to exit this business, the Company recorded a charge of $76 million in Restructuring and other special charges, net on the Company’s condensed consolidated statements of operations in the first six months of 2015. This charge consisted of an impairment charge of $62 million related to the acquired intangible assets. The Company concluded that the carrying value of the acquired intangible assets associated with its dense server systems business was fully impaired as the Company has no current plans to

16



utilize the related freedom fabric technology in any of its future products nor does it have any plans at this time to monetize the associated intellectual property. In addition, the exit charge consisted of a $7 million non-cash charge related to asset impairments, $4 million of severance and related benefits and $3 million for contract or program termination costs. The Company expects to complete this exit activity by the end of the first quarter of 2016.
NOTE 11. Accumulated Other Comprehensive Income (Loss)
The tables below summarize the changes in accumulated other comprehensive income (loss) by component:
 
Three Months Ended
 
June 27,
2015
 
June 28,
2014
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized gains (losses) on cash flow hedges
 
Total
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized gains (losses) on cash flow hedges
 
Total
 
(In millions)
Beginning balance
$
1

 
$
(13
)
 
$
(12
)
 
$
1

 
$
(4
)
 
$
(3
)
Unrealized gains (losses) arising during the period, net of tax

 
3

 
3

 

 
3

 
3

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

 
4

 
4

 

 
1

 
1

Total other comprehensive income (loss)

 
7

 
7

 

 
4

 
4

Ending balance
$
1

 
$
(6
)
 
$
(5
)
 
$
1

 
$

 
$
1

 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized gains (losses) on cash flow hedges
 
Total
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized gains (losses) on cash flow hedges
 
Total
 
(In millions)
Beginning balance
$
1

 
$
(6
)
 
$
(5
)
 
$
1

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

 
(8
)
 
(8
)
 

 

 

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

 
8

 
8

 

 
3

 
3

Total other comprehensive income (loss)

 

 

 

 
3

 
3

Ending balance
$
1

 
$
(6
)
 
$
(5
)
 
$
1

 
$

 
$
1




17



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

18



accounts or inventory other than certain ordinary-course transfers, make certain changes to any Loan Party’s name or form or state of organization without notifying the Agent, liquidate, dissolve, merge, amalgamate, combine or consolidate, or become a party to certain agreements restricting the Loan Parties’ ability to incur or repay debt, grant liens, make distributions, or modify loan agreements.
Further restrictions apply when certain payment conditions (the Payment Conditions) are not satisfied with respect to specified transactions, events or payments. The Payment Conditions include that (i) no default or event of default exists and (ii) at all times during the 45 consecutive days immediately prior to such transaction, event or payment and on a pro forma basis after giving effect to such transaction, event or payment and any incurrence or repayment of indebtedness in connection therewith, the Loan Parties’ Excess Cash Availability (as defined in the Amended and Restated Loan Agreement) is greater than the greater of 20% of the total commitment amount and $100 million. Such restrictions limit the Loan Parties’ ability to, among other things, create any liens upon any of the Loan Parties’ property (other than customary permitted liens and liens on up to $1.5 billion of secured credit facilities debt (which amount includes the Secured Revolving Line of Credit), declare or make any distributions, create any encumbrance on the ability of a subsidiary to make any upstream payments, make asset dispositions other than certain ordinary course dispositions, make certain loans, make payments with respect to subordinated debt or certain borrowed money prior to its due date or become a party to certain agreements restricting the Loan Parties’ ability to enter into any non arm’s-length transaction with an affiliate.
The Loan Parties are required to repurchase, redeem, defease, repay, create a segregated account for the repayment of, or request Agent to reserve a sufficient available amount under the Secured Revolving Line of Credit for the repayment of, all debt for borrowed money exceeding $50 million, by no later than 60 days prior to its maturity date (not including the Secured Revolving Line of Credit). Any reserved funds for this purpose would not be included in domestic cash calculations.
In addition, if at any time the Loan Parties’ Excess Cash Availability is less than the greater of 15% of the total commitment amount and $75 million, the Loan Parties must maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 until (i) no event of default exists and (ii) the Loan Parties’ Excess Cash Availability is greater than the greater of 15% of the total commitment amount and $75 million for 45 consecutive days.
The events of default under the Amended and Restated Loan Agreement include, among other things, payment defaults, the inaccuracy of representations or warranties, defaults in the performance of affirmative and negative covenants, bankruptcy and insolvency related defaults, a cross-default related to indebtedness in an aggregate amount in excess of $50 million, judgments entered against a Loan Party in an amount that exceeds cumulatively $50 million, certain ERISA events and events related to Canadian defined benefits plans and a change of control. When a Payment Condition has not been satisfied, additional events of default include, among other things, a loss, theft damage or destruction with respect to any collateral if the amount not covered by insurance exceeds $50 million.
First Amendment to Amendment and Restated Loan and Security Agreement
On June 10, 2015, the Loan Parties entered into a First Amendment to the Amended and Restated Loan and Security Agreement (the “First Amendment”) by and among the Loan Parties, the Lenders and the Agent, which modifies the Amended and Restated Loan and Security Agreement. Amendments to the Amended and Restated Loan Agreement effected by the First Amendment include the addition of exceptions to the liens and asset sale covenants to permit the Loan Parties to enter into certain supply chain finance arrangements, as well as the addition of certain definitions related thereto.
At June 27, 2015 and December 27, 2014, the Secured Revolving Line of Credit had an outstanding loan balance of $230 million and $130 million, respectively, at an interest rate of 3.75% and 4.25%, respectively. At June 27, 2015, the Secured Revolving Line of Credit also had $16 million related to outstanding Letters of Credit, and up to $222 million available for future borrowings. The Company reports its intra-period changes in its revolving credit balance on a net basis in its condensed consolidated statement of cash flows as the Company intends the period of the borrowings to be brief, repaying borrowed amounts within 90 days. As of June 27, 2015, the Company was in compliance with all required covenants stated in the Loan Agreement.

19



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in this report include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements speak only as of the date hereof or as of the dates indicated in the statements and should not be relied upon as predictions of future events, as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma,” “estimates,” “anticipates,” or the negative of these words and phrases, other variations of these words and phrases or comparable terminology. The forward-looking statements relate to, among other things: demand for AMD's products; the growth, change and competitive landscape of the markets in which AMD participates; future restructuring activities; the nature and extent of AMD's future payments to GLOBALFOUNDRIES Inc. (GF) and the materiality of these payments; AMD's ability to negotiate a re-profiling of its wafer purchase commitments with GF; the materiality of AMD's future purchases from GF; sales patterns of AMD's semi-custom System-on-Chip (SoC) products; AMD's ability to transform its business to attain revenue from high-growth markets; expected completion of its restructuring plan announced in October 2014 (the 2014 Restructuring Plan) and the expected completion of its exit from the dense server systems business; the level of international sales as compared to total sales; its ability to reduce the unrecognized tax benefits over the next 12 months; that other unrecognized tax benefits will not materially change in the next 12 months; that AMD's cash and cash equivalents and marketable securities balances, the savings from the 2014 Restructuring Plan and the Secured Revolving Line of Credit will be sufficient to fund AMD's operations including capital expenditures over the next 12 months; AMD's ability to obtain sufficient external financing on favorable terms, or at all; its dependence on a small number of customers for a substantial part of its revenue; its hedging strategy; and its expenditures related to environmental compliance and conflict minerals disclosure requirements. Material factors that could cause actual results to differ materially from current expectations include, without limitation, the following: Intel Corporation’s dominance of the microprocessor market and its aggressive business practices may limit AMD's ability to compete effectively; AMD relies on GF to manufacture most of its microprocessor and APU products and certain of its GPU and semi-custom products. If GF is not able to satisfy AMD's manufacturing requirements, its business could be adversely impacted; AMD relies on third parties to manufacture its products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, AMD's business could be materially adversely affected; failure to achieve expected manufacturing yields for AMD's products could negatively impact its financial results; the success of AMD's business is dependent upon its ability to introduce products on a timely basis with features and performance levels that provide value to its customers while supporting and coinciding with significant industry transitions; if AMD cannot generate sufficient revenue and operating cash flow or obtain external financing, it may face a cash shortfall and be unable to make all of its planned investments in research and development or other strategic investments; AMD may not be able to successfully implement its business strategy to refocus its business to address markets beyond its core PC market to high-growth adjacent markets; the loss of a significant customer may have a material adverse effect on us; global economic uncertainty may adversely impact AMD's business and operating results; AMD may not be able to generate sufficient cash to service its debt obligations or meet its working capital requirements; AMD has a substantial amount of indebtedness which could adversely affect its financial position and prevent it from implementing its strategy or fulfilling its contractual obligations; the agreements governing AMD's notes and its Secured Revolving Line of Credit for a principal amount up to $500 million (Secured Revolving Line of Credit) impose restrictions on AMD that may adversely affect its ability to operate its business; the markets in which AMD's products are sold are highly competitive; uncertainties involving the ordering and shipment of AMD's products could materially adversely affect it; the completion and impact of the 2014 Restructuring Plan, its transformation initiatives and any future restructuring actions could adversely affect it; AMD's receipt of revenue from its semi-custom SoC products is dependent upon its technology being designed into third-party products and the success of those products; the demand for AMD's products depends in part on the market conditions in the industries into which they are sold. Fluctuations in demand for AMD's products or a market decline in any of these industries could have a material adverse effect on its results of operations; AMD's ability to design and introduce new products in a timely manner is dependent upon third-party intellectual property; AMD depends on third-party companies for the design, manufacture and supply of motherboards and other computer platform components to support its business; if AMD loses Microsoft Corporations support for its products or other software vendors do not design and develop software to run on AMD's products, its ability to sell its products could be materially adversely affected; AMD may incur future impairments of goodwill; AMD's reliance on third-party distributors and AIB partners subjects it to certain risks; AMD's inability to continue to attract and retain qualified personnel may hinder its product development programs; in the event of a change of control, AMD may not be able to repurchase its outstanding debt as required by the applicable indentures and its Secured Revolving Line of Credit, which would result in a default under the indentures and its Secured Revolving Line of Credit; the semiconductor industry is highly cyclical and has experienced severe downturns that have materially adversely affected, and may continue to materially adversely affect, its business in the future; AMD's business is dependent upon the proper functioning of its internal business processes and information systems and modification or interruption of such systems

20



may disrupt its business, processes and internal controls; data breaches and cyber-attacks could compromise AMD's intellectual property or other confidential, sensitive information and cause significant damage to its business, competitive position and reputation while subjecting it to potential litigation; AMD's operating results are subject to quarterly and seasonal sales patterns; if essential equipment or materials are not available to manufacture its products, AMD could be materially adversely affected; if AMD's products are not compatible with some or all industry-standard software and hardware, it could be materially adversely affected; costs related to defective products could have a material adverse effect on AMD; if AMD fails to maintain the efficiency of its supply chain as it responds to changes in customer demand for its products, its business could be materially adversely affected; AMD outsources to third parties certain supply-chain logistics functions, including portions of its product distribution, transportation management and information technology support services; acquisitions could disrupt its business, harm its financial condition and operating results or dilute, or adversely affect the price of its common stock; AMD's worldwide operations are subject to political, legal and economic risks and natural disasters, which could have a material adverse effect on it; worldwide political conditions may adversely affect demand for AMD's products; unfavorable currency exchange rate fluctuations could adversely affect AMD; AMD's inability to effectively control the sales of its products on the gray market could have a material adverse effect on it; if AMD cannot adequately protect its technology or other intellectual property in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, it may lose a competitive advantage and incur significant expenses; AMD is a party to litigation and may become a party to other claims or litigation that could cause it to incur substantial costs or pay substantial damages or prohibit it from selling its products; AMD's business is subject to potential tax liabilities; a variety of environmental laws including conflict mineral rules that AMD is subject to could result in additional costs and liabilities; and higher health care costs and labor costs could adversely affect AMD's business.
For a discussion of factors that could cause actual results to differ materially from the forward-looking statements, see “Part II, Item 1A—Risk Factors” beginning on page 41 and “Financial Condition” beginning on page 32 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.

21


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

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

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

In this section, we will describe the general financial condition and the results of operations of Advanced Micro Devices, Inc. and its wholly-owned subsidiaries (collectively, “us,” “our” or “AMD”), including a discussion of our results of operations for the quarter and six months ended June 27, 2015 compared to the quarter ended March 28, 2015 and the quarter and six months ended June 28, 2014, an analysis of changes in our financial condition and a discussion of our contractual obligations.

The continued volatility in the consumer PC market contributed to a challenging quarter as we experienced reduced demand from our Original Equipment Manufacturers ("OEM") customers late in the second quarter of 2015. The demand for our products was adversely impacted because of a reluctance on the part of our OEM customers to build inventory in advance of the launch of Microsoft Windows®10, as OEMs worked through their existing Microsoft Windows®8 based inventory. The contrasting improvement in our Enterprise Embedded Semi-Custom segment, which saw an increase in revenue of 13% over the first quarter of 2015, was not enough to offset the impact of a weak consumer PC market and lower demand from OEMs. We largely completed our channel inventory corrective actions in the second quarter of 2015. We continue to monitor our expenses and are actively considering actions to better align our expenses with our near-term revenue profile. We anticipate restructuring charges associated with those actions, however, based on information presently available, we are unable to quantify the charges.
Net revenue in the second quarter of 2015 was $942 million, an 8% decrease compared to the first quarter of 2015 and a 35% decrease compared to the second quarter of 2014. Gross margin was also impacted by weak PC market conditions. Gross margin for the second quarter of 2015 was 25% compared to 32% in the first quarter of 2015, and 35% in the second quarter of 2014. Gross margin in the second quarter of 2015 was adversely impacted by a higher proportion of revenue from our Enterprise, Embedded and Semi-Custom segment products, which have lower average gross margins. In addition, gross margin in the second quarter of 2015 included a technology node transition charge of $33 million which accounted for three gross margin percentage points.
In the second quarter of 2015, we introduced several new products, secured multiple embedded-design wins across our target markets and continued to see strength in our semi-custom business. We continued to focus on our graphics technology leadership and modular SoC design capabilities. We disclosed details of our upcoming x86 processor core (codenamed “Zen”) for high-performance client and server computing. We also introduced the industry’s first graphics chip to combine die-stacked high-bandwidth memory (HBM) with the new AMD Radeon R9 Fury X GPU. We announced our 6th Generation AMD A-Series mobile processors (formerly codenamed "Carrizo") in a SoC design and introduced a desktop A-series processor, the AMD A 10-7870K APU designed to support best-in-class experience for eSports and online gaming.
Cash, cash equivalents and marketable securities as of June 27, 2015 were $829 million, a decrease of $77 million compared to March 28, 2015 driven by lower sales primarily related to the Computing and Graphics segment in the quarter. Our total debt level remained unchanged from first quarter of 2015 at $2.27 billion and included an additional $42 million draw on our Secured Revolving Line of Credit used to extinguish our 6.00% Convertible Senior Notes (6.00% Notes) that were due May 1, 2015.


22


GLOBALFOUNDRIES
Wafer Supply Agreement. The Wafer Supply Agreement (WSA) governs the terms by which we purchase products manufactured by GLOBALFOUNDRIES Inc. (GF).
Fourth Amendment to Wafer Supply Agreement. On March 30, 2014, we entered into a fourth amendment to the WSA. The primary effect of the fourth amendment was to establish volume purchase commitments and fixed pricing for the 2014 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of our microprocessor unit, graphics processor unit and semi-custom game console products to be delivered by GF to us during the 2014 calendar year.
Fifth Amendment to Wafer Supply Agreement. On April 16, 2015, we entered into a fifth amendment to the WSA. The primary effect of the fifth amendment was to establish volume purchase commitments and fixed pricing for the 2015 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of our microprocessor unit, graphics processor unit and semi-custom products to be delivered by GF to us during the 2015 calendar year.
Our total purchases from GF related to wafer manufacturing and research and development activities for the quarters ended June 27, 2015 and June 28, 2014 were $246 million and $293 million, respectively. Our total purchases from GF related to wafer manufacturing and research and development activities for the six months ended June 27, 2015 and June 28, 2014 were $416 million and $553 million, respectively.
We currently estimate that our purchase obligations to GF for wafer manufacturing and research and development activities will be approximately $1.1 billion in fiscal 2015 and at least $75 million during the first quarter of fiscal 2016. We are not able to meaningfully quantify or estimate our future purchase obligations to GF other than those set forth in the fifth amendment to the WSA, but we expect that our future purchases from GF will continue to be material. We are currently in discussions with GF regarding the re-profiling of our wafer commitments under the fifth amendment to the WSA. We are unable to quantify the outcome of our negotiations with GF.
GF continues to be a related party of AMD because Mubadala Development Company PJSC (Mubadala) and Mubadala Technology Investments LLC (Mubadala Tech) are affiliated with West Coast Hitech L.P. (WCH), our largest stockholder. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our condensed consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our net revenue, inventories, asset impairments and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of our assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
Management believes there have been no significant changes during the quarter and six months ended June 27, 2015 to the items that we disclosed as our critical accounting estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 27, 2014.
We will perform an annual goodwill impairment as of the first day of the fourth quarter of 2015 pursuant to our accounting policy. However, we will also test for goodwill impairment at any time during the year if there are indicators of impairment present. If there are declines in our market capitalization, business climate or operating results, we may incur impairment charges that could be material.
Results of Operations

23


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. In connection with our continued strategic transformation, effective July 1, 2014, we realigned our organizational structure. As a result of this organizational change, we have the following two reportable segments:
the Computing and Graphics segment, which primarily includes desktop and notebook processors and chipsets, discrete GPUs and professional graphics; and
the Enterprise, Embedded and Semi-Custom segment, which primarily includes server and embedded processors, semi-custom SoC products, engineering services and royalties.
In addition to these reportable segments, we have an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to any of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. Also included in this category are amortization of acquired intangible assets, employee stock-based compensation expense, restructuring and other special charges, net, workforce rebalancing severance charges.
We use a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters ended June 27, 2015 and June 28, 2014 each consisted of 13 weeks. The six months ended June 27, 2015 and June 28, 2014 each consisted of 26 weeks.
Our operating results tend to vary seasonally. For example, historically, first quarter PC product sales are generally lower than fourth quarter sales. In addition, with respect to our semi-custom SoC products for game consoles, we expect sales patterns to follow the seasonal trends of a consumer business with sales in the first half of the year being lower than sales in the second half of the year.
The following table provides a summary of net revenue and operating income (loss) by segment. All period results presented reflect these new reportable segments.  
 
 
Three Months Ended
 
Six Months Ended
 
 
June 27,
2015
 
March 28,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
 
(In millions)
Net revenue:
 
 
 
 
 
 
 
 
 
 
Computing and Graphics
 
$
379

 
$
532

 
$
828

 
$
911

 
$
1,689

Enterprise, Embedded and Semi-Custom
 
563

 
498

 
613

 
1,061

 
1,149

Total net revenue
 
$
942

 
$
1,030

 
$
1,441

 
$
1,972

 
$
2,838

Operating income (loss):
 
 
 
 
 
 
 
 
 
 
Computing and Graphics
 
$
(147
)
 
$
(75
)
 
$
(6
)
 
$
(222
)
 
$
(3
)
Enterprise, Embedded and Semi-Custom
 
27

 
45

 
97

 
72

 
182

All Other
 
(17
)
 
(107
)
 
(28
)
 
(124
)
 
(67
)
Total operating income (loss)
 
$
(137
)
 
$
(137
)
 
$
63

 
$
(274
)
 
$
112


Computing and Graphics
Computing and Graphics net revenue of $379 million in the second quarter of 2015 decreased by 54%, compared to net revenue of $828 million in the second quarter of 2014, as a result of a 58% decrease in unit shipments, partially offset by a 10% increase in average selling price. The decrease in unit shipments of all categories of products was due to lower demand and lower unit shipments of our chipset products was due to our chipsets being integrated into our APU products.The increase in average selling price was primarily attributable to an increase in average selling price of our microprocessors for notebook PCs and our GPU products due to a favorable shift in the product mix, partially offset by a decrease in average selling price of our microprocessors for desktop PCs due to challenging PC market conditions.
Computing and Graphics net revenue of $379 million in the second quarter of 2015 decreased by 29%, compared to net revenue of $532 million in the first quarter of 2015, as a result of a 31% decrease in unit shipments. Unit shipments of all categories of products decreased with the exception of professional graphics. The decrease in unit shipments was primarily due to lower demand from OEMs. Average selling price was slightly up in the second quarter of 2015 compared to the first quarter

24



of 2015, primarily attributable to an increase in average selling price of our microprocessor products due to a richer product mix.
Computing and Graphics net revenue of $911 million in the first six months of 2015 decreased by 46%, compared to $1,689 million in the first six months of 2014, as a result of a 47% decrease in unit shipments, partially offset by a 5% increase in average selling price. The decrease in unit shipments of all categories of products was due to lower demand and lower unit shipments of our chipset products was due to our chipsets being integrated into our APU products.The increase in average selling price was primarily attributable to an increase in average selling price of our microprocessors for notebook PCs due to a favorable shift in our product mix, partially offset by a decrease in average selling price of our microprocessors for desktop PCs due to challenging PC market conditions and a decrease in average selling price of our GPU products due to a shift in our product mix.
Computing and Graphics operating loss was $147 million in the second quarter of 2015 compared to operating loss of $6 million in the second quarter of 2014. The decline in operating results was primarily due to the decrease in net revenue referenced above, partially offset by a $252 million decrease in cost of sales, a $46 million decrease in research and development expenses and a $10 million decrease in marketing, general and administrative expenses. Cost of sales decreased primarily due to lower unit shipments in the second quarter of 2015 compared to the second quarter of 2014. Research and development expenses and marketing, general and administrative expenses decreased for the reasons set forth under “Expenses” below.
Computing and Graphics operating loss was $147 million in the second quarter of 2015 compared to operating loss of $75 million in the first quarter of 2015. The decline in operating results was primarily due to the decrease in net revenue referenced above and a $3 million increase in marketing, general and administrative expenses, partially offset by an $82 million decrease in cost of sales and a $4 million decrease in research and development expenses. Cost of sales decreased primarily due to lower unit shipments in the second quarter of 2015 compared to the first quarter of 2015. Marketing, general and administrative expenses increased and research and development expenses decreased for the reasons set forth under “Expenses” below.
Computing and Graphics operating loss was $222 million in the first six months of 2015 compared to operating loss of $3 million in the first six months of 2014. The decline in operating results was primarily due to the decrease in net revenue referenced above, partially offset by a $448 million decrease in cost of sales, an $87 million decrease in research and development expenses and a $24 million decrease in marketing, general and administrative expenses. Cost of sales decreased primarily due to lower unit shipments in the first six months of 2015, compared to the first six months of 2014. Research and development expenses and marketing, general and administrative expenses decreased for the reasons set forth under “Expenses” below.
Enterprise, Embedded and Semi-Custom
Enterprise, Embedded and Semi-Custom net revenue of $563 million in the second quarter of 2015 decreased by 8% compared to net revenue of $613 million in the second quarter of 2014. The decrease was primarily due to a decrease in net revenue received in connection with lower unit shipments of our server products and a decrease in our non-recurring engineering revenue (NRE).
Enterprise, Embedded and Semi-Custom net revenue of $563 million in the second quarter of 2015 increased by 13% compared to net revenue of $498 million in the first quarter of 2015. The increase was primarily due to an increase in net revenue received in connection with higher unit shipments of our semi-custom SoC products, partially offset by a decrease in our NRE revenue.
Enterprise, Embedded and Semi-Custom net revenue of $1,061 million in the first six months of 2015 decreased by 8% compared to net revenue of $1,149 million in the first six months of 2014. The decrease was primarily due to a decrease in net revenue received in connection with lower unit shipments of our server products and a decrease in our NRE revenue.
Enterprise, Embedded and Semi-Custom operating income was $27 million in the second quarter of 2015 compared to operating income of $97 million in the second quarter of 2014. The decline in operating results was primarily due to the decrease in net revenue referenced above, a $19 million increase in cost of sales and a $5 million increase in research and development expenses, partially offset by a $4 million decrease in marketing, general and administrative expenses. The increase in cost of sales was primarily due to a technology node transition charge of $33 million in the second quarter of 2015, partially offset by lower manufacturing cost due to lower sales. Research and development expenses increased and marketing, general and administrative expenses decreased for the reasons set forth under “Expenses” below.

25



Enterprise, Embedded and Semi-Custom operating income was $27 million in the second quarter of 2015 compared to operating income of $45 million in the first quarter of 2015. The decline in operating results was primarily due to an $88 million increase in cost of sales, partially offset by an increase in net revenue referenced above and a $3 million decrease in research and development expenses. The increase in cost of sales was primarily due to a technology node transition charge of $33 million and higher unit shipments of our semi-custom SoC products in the second quarter of 2015. Research and development expenses for the reasons set forth under “Expenses” below.
Enterprise, Embedded and Semi-Custom operating income was $72 million in the first six months of 2015 compared to operating income of $182 million in the first six months of 2014. The decline in operating results was primarily due to the decrease in net revenue referenced above, a $19 million increase in research and development expenses and a $9 million increase in cost of sales, partially offset by a $6 million decrease in marketing, general and administrative expenses. The increase in cost of sales was primarily due to a technology node transition charge of $33 million in the first six months of 2015, partially offset by a decrease in unit shipments of our server products in the first six months of 2015 compared to the first six months of 2014. Research and development expenses increased and marketing, general and administrative expenses decreased for the reasons set forth under “Expenses” below.
All Other
All Other operating loss of $17 million in the second quarter of 2015 included stock-based compensation expense of $17 million. All Other operating loss of $28 million in the second quarter of 2014 included stock-based compensation expense of $21 million, $4 million related to amortization of acquired intangible assets and $3 million related to other expenses.
All Other operating loss of $17 million in the second quarter of 2015 included stock-based compensation expense of $17 million. All Other operating loss of $107 million in the first quarter of 2015 included restructuring and other special charges, net of $87 million, stock-based compensation expense of $17 million and $3 million related to amortization of acquired intangible assets. Restructuring and other special charges, net of $87 million included $75 million related to our decision to exit from the dense server systems business and $12 million related to our 2014 Restructuring Plan.
All Other operating loss of $124 million in the first six months of 2015 included restructuring and other special charges, net of $87 million, stock-based compensation expense of $34 million and $3 million related to amortization of acquired intangible assets. Restructuring and other special charges, net of $87 million included $76 million related to our decision to exit from the dense server systems business and $11 million related to our 2014 Restructuring Plan. All Other operating loss of $67 million in the first six months of 2014 included stock-based compensation expense of $44 million, $14 million related to workforce rebalancing severance charges, $7 million related to amortization of acquired intangible assets and $3 million related to other expenses.
International Sales
International sales as a percentage of net revenue were 75% in the second quarter of 2015 and 82% in the second quarter of 2014. The decrease in international sales as a percentage of net revenue in the second quarter of 2015 compared to the second quarter of 2014 was primarily driven by a higher proportion of revenue from domestic sales of our semi-custom SoC products.
International sales as a percentage of net revenue were 75% in the second and first quarters of 2015.
International sales as a percentage of net revenue were 75% in the first six months of 2015 and 81% in the first six months of 2014. The decrease in international sales as a percentage of net revenue in the first six months of 2015 compared to the first six months of 2014 was primarily driven by a higher proportion of revenue from domestic sales of our semi-custom SoC products.
We expect that international sales will continue to be a significant portion of total sales in the foreseeable future. Substantially all of our sales transactions were denominated in U.S. dollars.
Comparison of Gross Margin, Expenses, Interest Expense, Other Income (Expense), Net, and Income Taxes
The following is a summary of certain condensed consolidated statement of operations data for the periods indicated: 

26



 
 
Three Months Ended
 
Six Months Ended
 
 
June 27,
2015
 
March 28,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
 
(In millions except for percentages)
Cost of sales
 
$
710

 
$
704

 
$
943

 
$
1,414

 
$
1,853

Gross margin
 
232

 
326

 
498

 
558

 
985

Gross margin percentage
 
25
%
 
32
%
 
35
%
 
28
%
 
35
%
Research and development
 
235

 
242

 
277

 
477

 
556

Marketing, general and administrative
 
134

 
131

 
154

 
265

 
310

Amortization of acquired intangible assets
 

 
3

 
4

 
3

 
7

Restructuring and other special charges, net
 

 
87

 

 
87

 

Interest expense
 
(40
)
 
(40
)
 
(46
)
 
(80
)
 
(93
)
Other income (expense), net
 
(3
)
 

 
(49
)
 
(3
)
 
(69
)
Provision for income taxes
 
1

 
3

 
4

 
4

 
6

Gross Margin
Gross margin as a percentage of net revenue was 25% in the second quarter of 2015 compared to 35% in the second quarter of 2014. Gross margin in the second quarter of 2015 was adversely impacted by a higher proportion of revenue from our Enterprise, Embedded and Semi-Custom segment products, which have lower average gross margins, and a shift in our product mix to lower average gross margin products. Gross margin in the second quarter of 2015 was also adversely impacted by lower than anticipated Computing and Graphics segment sales primarily due to weaker than expected product demand. In addition, gross margin in the second quarter of 2015 included a technology node transition charge of $33 million, which accounted for three gross margin percentage points.
Gross margin as a percentage of net revenue was 25% in the second quarter of 2015 compared to 32% in the first quarter of 2015. Gross margin in the second quarter of 2015 was adversely impacted by a higher proportion of revenue from our Enterprise, Embedded and Semi-Custom segment products, which have lower average gross margins, and a shift in our product mix to lower average gross margin products. Gross margin in the second quarter of 2015 was also adversely impacted by lower than anticipated Computing and Graphics segment sales primarily due to weaker than expected OEM PC product demand. In addition, gross margin in the second quarter of 2015 included a technology node transition charge of $33 million, which accounted for three gross margin percentage points.
Gross margin as a percentage of net revenue was 28% in the first six months of 2015 compared to 35% in the first six months of 2014. Gross margin in the first six months of 2015 was adversely impacted by a higher proportion of revenue from our Enterprise, Embedded and Semi-Custom segment products, which have lower average gross margins, and a shift in our product mix to lower average gross margin products and lower game console royalties. Gross margin in the first six months of 2015 was also adversely impacted by lower than anticipated Computing and Graphics segment sales primarily due to weaker than expected product demand. In addition, gross margin in the first six months of 2015 included a technology node transition charge of $33 million, which accounted for two gross margin percentage points.
Expenses
Research and Development Expenses
Research and development expenses of $235 million in the second quarter of 2015 decreased by $42 million, or 15%, compared to $277 million in the second quarter of 2014. The decrease was primarily due to a $46 million decrease in research and development expenses attributable to our Computing and Graphics segment, partially offset by a $5 million increase in research and development expenses attributable to our Enterprise, Embedded and Semi-Custom segment. Research and development expenses attributable to our Computing and Graphics segment decreased primarily due to a $34 million decrease in product engineering and design costs and a $12 million decrease in other employee compensation and benefit expenses. Research and development expenses attributable to our Enterprise, Embedded and Semi-Custom segment increased primarily due to an $8 million increase in product engineering and design costs, offset by a $3 million decrease in other employee compensation and benefit expenses.
Research and development expenses of $235 million in the second quarter of 2015 decreased by $7 million, or 3%, compared to $242 million in the first quarter of 2015. The decrease was primarily due to a $4 million decrease in research and development expenses attributable to our Computing and Graphics segment and a $3 million decrease in research and development expenses attributable to our Enterprise, Embedded and Semi-Custom segment. The decrease in research and

27



development expenses in our Computing and Graphics segment and our Enterprise, Embedded and Semi-Custom segment were primarily due to a decrease in product engineering and design costs.
Research and development expenses of $477 million in the first six months of 2015 decreased by $79 million, or 14%, compared to $556 million in the first six months of 2014. The decrease was primarily due to an $87 million decrease in research and development expenses attributable to our Computing and Graphics segment and a $9 million decrease in the All Other category related to workforce rebalancing severance charges recorded in the first quarter of 2014, partially offset by a $19 million increase in research and development expenses attributable to our Enterprise, Embedded and Semi-Custom segment. Research and development expenses attributable to our Computing and Graphics segment decreased primarily due to a $72 million decrease in product engineering and design costs and a $15 million decrease in other employee compensation and benefit expenses. Research and development expenses attributable to our Enterprise, Embedded and Semi-Custom segment increased primarily due to a $22 million increase in product engineering and design costs, offset by $3 million decrease in other employee compensation and benefit expenses.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses of $134 million in the second quarter of 2015 decreased by $20 million, or 13%, compared to $154 million in the second quarter of 2014. The decrease was primarily due to a $10 million decrease in marketing, general and administrative expenses attributable to our Computing and Graphics segment, a $4 million decrease in marketing, general and administrative expenses attributable to our Enterprise, Embedded and Semi-Custom segment and a $3 million decrease in stock-based compensation recorded in the All Other category. Marketing, general and administrative expenses attributable to our Computing and Graphics segment decreased primarily due to an $8 million decrease in other general and administrative expenses and a $2 million decrease in sales and marketing activities. Marketing, general and administrative expenses attributable to our Enterprise, Embedded and Semi-Custom segment decreased primarily due to a $4 million decrease in other general and administrative expenses.
Marketing, general and administrative expenses of $134 million in the second quarter of 2015 decreased by $3 million, or 1%, compared to $131 million in the first quarter of 2015. The decrease was primarily due to a decrease in marketing, general and administrative expenses attributable to our Computing and Graphics segment as a result of a decrease in sales and marketing activities.
Marketing, general and administrative expenses of $265 million in the first six months of 2015 decreased by $45 million, or 15%, compared to $310 million in the first six months of 2014. The decrease was primarily due to a $24 million decrease in marketing, general and administrative expenses attributable to our Computing and Graphics segment, a $6 million decrease in marketing, general and administrative expenses attributable to our Enterprise, Embedded and Semi-Custom segment, a $7 million decrease in stock-based compensation recorded in the All Other category and a $5 million decrease in the All Other category related to workforce rebalancing severance charges recorded in the first quarter of 2014. Marketing, general and administrative expenses attributable to our Computing and Graphics segment decreased primarily due to a $13 million decrease in other general and administrative expenses and an $11 million decrease in sales and marketing activities. Marketing, general and administrative expenses attributable to our Enterprise, Embedded and Semi-Custom segment decreased primarily due to a $7 million decrease in other general and administrative expenses.
Restructuring and Other Special Charges, Net
2014 Restructuring Plan
In October 2014, we implemented a restructuring plan designed to improve operating efficiencies. The plan involved a reduction of global headcount by approximately 6% and an alignment of our real estate footprint with our reduced headcount. In the first six months ended June 27, 2015, we recorded an $11 million restructuring charge, which consisted of $4 million for severance and related benefits and $7 million for facilities related costs. We expect the plan to be largely completed by the end of the third quarter of 2015.
The following table provides a summary of the restructuring activities in the first six months of 2015 and the related liabilities recorded in Accrued and other current liabilities and Other long-term liabilities on our condensed consolidated balance sheets as of June 27, 2015:

28



 
Severance
and related
benefits
 
Other exit
related
costs
 
Total
 
(In millions)
Balance at December 27, 2014
$
26

 
$
13

 
$
39

Charges
4

 
7

 
11

Cash payments
(19
)
 
(4
)
 
(23
)
Non-cash charges

 
(3
)
 
(3
)
Balance as of June 27, 2015
$
11

 
$
13

 
$
24

Dense Server Systems Business Exit
As a part of our strategy to simplify and sharpen our investment focus, we decided to exit the dense server systems business, formerly SeaMicro, in the first quarter of 2015. As a result of our decision to exit this business, we recorded a charge of $76 million in Restructuring and other special charges, net on our condensed consolidated statements of operations in the first six months of 2015. This charge consisted of an impairment charge of $62 million related to the acquired intangible assets. We concluded that the carrying value of the acquired intangible assets associated with our dense server systems business was fully impaired as we have no current plans to utilize the related freedom fabric technology in any of our future products nor do we have any plans at this time to monetize the associated intellectual property. In addition, the exit charge consisted of a $7 million non-cash charge related to asset impairments, $4 million of severance and related benefits and $3 million for contract or program termination costs. We expect to complete this exit activity by the end of the first quarter of 2016.
Interest Expense
Interest expense of $40 million in the second quarter of 2015 decreased by $6 million compared to $46 million in the second quarter of 2014, primarily due to the timing of the issuance of new debt and repurchase of other debt in the second quarter of 2014.
Interest expense of $40 million in the second quarter of 2015 was flat as compared to the first quarter of 2015.
Interest expense of $80 million in the first six months of 2015 decreased by $13 million compared to $93 million in the first six months of 2014, primarily due to the timing of the issuances of new debt and repurchases of other debt in the first half of 2014.
Other Expense, Net
Other expense, net of $3 million in the second quarter of 2015 decreased by $46 million compared to $49 million of other expense, net in the second quarter of 2014 resulted primarily from a $49 million loss from debt repurchases made during the second quarter of 2014.
Other expense, net of $3 million in the second quarter of 2015 was flat as compared to the first quarter of 2015
Other expense, net, of $3 million in the first six months of 2015 decreased by $66 million compared to $69 million of other expense, net, in the first six months of 2014, primarily as a result of a $64 million loss from debt repurchases during the first six months of 2014.
Income Taxes
In the second quarter of 2015, we recorded an income tax provision of $1 million due principally to foreign taxes in profitable locations. For the six months ended June 27, 2015, we recorded an income tax provision of $4 million due to foreign taxes in profitable locations.
In the second quarter of 2014, we recorded an income tax provision of $4 million consisting of $5 million of foreign taxes in profitable locations, partially offset by $1 million of tax benefits arising from other comprehensive income and Canadian tax credits. For the six months ended June 28, 2014, we recorded an income tax provision of $6 million arising from $8 million of foreign taxes in profitable locations, partially offset by $2 million of tax benefits arising from other comprehensive income and Canadian tax credits.
As of June 27, 2015, substantially all of our U.S. and Canadian deferred tax assets, net of deferred tax liabilities, continue to be subject to a valuation allowance. The realization of these assets is dependent on substantial future taxable income, which at June 27, 2015, in our estimate, is not more likely than not to be achieved.
Our gross unrecognized tax benefits as of June 27, 2015 were $29 million. We do not believe it is reasonably possible that

29



other unrecognized tax benefits will materially change in the next 12 months. However, the settlement, resolution or closure of our tax audits is highly uncertain.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense related to employee stock options and restricted stock units, which we allocated in the condensed consolidated statements of operations:
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
March 28,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
(In millions)
Cost of sales
$
1

 
$
1

 
$
1

 
$
2

 
$
2

Research and development
10

 
10

 
11

 
20

 
23

Marketing, general and administrative
6

 
6

 
9

 
12

 
19

Stock-based compensation expense, net of tax of $0
$
17

 
$
17

 
$
21

 
$
34

 
$
44

For all periods presented, we did not realize any excess tax benefit related to stock-based compensation and therefore did not record any related financing cash flows.
Stock-based compensation expense of $17 million in the second quarter of 2015 decreased by $4 million compared to $21 million in the second quarter of 2014. The decrease was primarily due to a lower weighted average grant date fair value and the effect of the 2014 Restructuring Plan.
Stock-based compensation expense of $17 million in the second quarter of 2015 remained flat as compared to the first quarter of 2015.
Stock-based compensation expense of $34 million in the first six months of 2015 decreased by $10 million compared to $44 million in the first six months of 2014. The decrease was primarily due to a lower weighted average grant date fair value and the effect of the 2014 Restructuring Plan.

30



FINANCIAL CONDITION
Liquidity and Capital Resources    
Our cash and cash equivalents and marketable securities consisted of money market funds and commercial paper. As of June 27, 2015, our cash and cash equivalents and marketable securities of $829 million were lower compared to $1.0 billion as of December 27, 2014. The decrease was primarily due to lower sales and the timing of related collections, as well as the timing of accounts payable payments made during the second quarter of 2015. During the first six months of 2015, we used $39 million for purchases of property, plant and equipment. The percentage of cash and cash equivalents held domestically increased from 89% as of December 27, 2014 to 92% as of June 27, 2015, as a result of the repatriation of cash from China.
Our debt and capital lease obligations as of June 27, 2015 were $2.3 billion compared to $2.2 billion as of December 27, 2014. During the first six months of 2015, we received $100 million net proceeds from our Secured Revolving Line of Credit, of which $42 million was used to extinguish our 6.00% Notes.
We believe our cash and cash equivalents and marketable securities balance along with the savings from our 2014 Restructuring Plan and our Secured Revolving Line of Credit will be sufficient to fund operations, including capital expenditures, over the next 12 months. We believe that in the event we decide to obtain external funding, we may be able to access the capital markets on terms and in amounts adequate to meet our objectives.
Over the longer term, should additional funding be required, such as to meet payment obligations of our long-term debt when due, we may need to raise the required funds through borrowings or public or private sales of debt or equity securities, which may be issued from time to time under an effective registration statement, through the issuance of securities in a transaction exempt from registration under the Securities Act of 1933, as amended, or a combination of one or more of the foregoing. Uncertain global economic conditions have in the past adversely impacted, and may in the future adversely impact, our business. If market conditions deteriorate, we may be limited in our ability to access the capital markets to meet liquidity needs on favorable terms or at all, which could adversely affect our liquidity and financial condition, including our ability to refinance maturing liabilities.
Operating Activities
Net cash used in operating activities of $231 million in the first six months of 2015 was flat compared to $232 million in the first six months of 2014. The decrease in cash collections during the first six months of 2015, driven by lower sales compared to the first six months of 2014, was offset by lower labor cost and other operating expenses as a result of restructuring actions and the absence of the final $200 million cash payment made in the first quarter of 2014 related to GF’s waiver of a portion of our obligations for wafer purchase commitments.
Investing Activities
Net cash provided by investing activities was $196 million in the first six months of 2015, which consisted of a net cash inflow of $235 million from maturities of available-for-sale securities, partially offset by a cash outflow of $39 million for purchases of property, plant and equipment.
Net cash used in investing activities was $174 million in the first six months of 2014, which consisted of a net cash outflow of $130 million from purchases and maturities of available for sale securities and a cash outflow of $44 million for purchases of property, plant and equipment.
Financing Activities
Net cash provided by financing activities was $59 million in the first six months of 2015, primarily due to $100 million net proceeds from our Secured Revolving Line of Credit borrowings, of which $42 million was used to repay the remaining aggregate principal amount of our 6.00% Notes of $42 million during the second quarter of 2015.
Net cash provided by financing activities was $40 million in the first six months of 2014, primarily due to net proceeds from borrowings pursuant to our 6.75% Notes of $589 million and our 7.00% Senior Notes due 2024 (7.00% Notes) of $491 million, partially offset by $518 million in payments to repurchase a portion of our 6.00% Notes, $522 million in payments to repurchase our 8.125% Senior Notes due 2017 and $2 million in payments for capital lease obligations.
During the first six months of 2015 and 2014, we did not realize any excess tax benefit related to stock-based compensation. Therefore, we did not record any effects relating to financing cash flows for these periods.


31


Contractual Obligations
The following table summarizes our consolidated principal contractual obligations, as of June 27, 2015, and is supplemented by the discussion following the table:
 
Payments due by period as of June 27, 2015
(In millions)
Total
 
Remainder of 2015
 
2016
 
2017
 
2018
 
2019
 
2020 and
thereafter
6.75% Notes
600

 

 

 

 

 
600

 

7.75% Notes
450

 

 

 

 

 

 
450

7.50% Notes
475

 

 

 

 

 

 
475

7.00% Notes
500

 

 

 

 

 

 
500

Secured Revolving Line of Credit
230

 
230

 

 

 

 

 

Other long-term liabilities
54

 

 
16

 
32

 
4

 

 
2

Aggregate interest obligation (1)
962

 
75

 
148

 
148

 
148

 
126

 
317

Capital lease obligations (2)
8

 
2

 
5

 
1

 

 

 

Operating leases
287

 
24

 
47

 
46

 
42

 
24

 
104

Purchase obligations (3)
504

 
396

 
90

 
16

 
2

 

 

Obligations to GF (4)
777

 
702

 
75

 

 

 

 

Total contractual obligations (5)
$
4,847

 
$
1,429

 
$
381

 
$
243

 
$
196

 
$
750

 
$
1,848


(1) 
Represents estimated aggregate interest obligations for our outstanding debt obligations that are payable in cash, excluding capital lease obligations. Also excludes non-cash amortization of debt issuance costs.
(2) 
Includes principal and imputed interest.
(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. In addition, we have obligations for software technology and licenses where payments are fixed and non-cancelable which are also included in the table above.
(4) 
Includes our purchase obligations to GF for wafer manufacturing and research and development activities. The obligation for fiscal 2016 of at least $75 million represents our purchases under the fifth amendment to the WSA during the first quarter of fiscal 2016. We negotiate our purchase commitments with GF on an annual basis and as such we cannot meaningfully quantify or estimate our future purchase obligations to GF other than those set forth in the fifth amendment to the WSA, but we expect that our future purchases from GF will continue to be material.
(5) 
Total amount excludes contractual obligations already recorded on our condensed consolidated balance sheets except for debt obligations and other long-term liabilities.

32



6.00% Convertible Senior Notes Due 2015

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

33



7.00% Senior Notes Due 2024
On June 16, 2014, we issued $500 million of 7.00% Notes. The 7.00% Notes are our general unsecured senior obligations. Interest is payable on January 1 and July 1 of each year beginning January 1, 2015 until the maturity date of July 1, 2024. The 7.00% Notes are governed by the terms of an indenture (the 7.00% Indenture) dated June 16, 2014 between us and Wells Fargo Bank, N.A., as trustee.
At any time before July 1, 2017, we may redeem up to 35% of the aggregate principal amount of the 7.00% Notes within 90 days of the closing of an equity offering with the net proceeds thereof at a redemption price equal to 107.000% of the principal amount thereof, together with accrued and unpaid interest to but excluding the date of redemption. Prior to July 1, 2019, we may redeem some or all of the 7.00% Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a “make whole” premium (as set forth in the 7.00% Indenture).
Starting July 1, 2019, we may redeem our 7.00% Notes for cash at the following specified prices plus accrued and unpaid interest: 
Period
Price as
Percentage of
Principal Amount
Beginning on July 1, 2019 through June 30, 2020
103.500
%
Beginning on July 1, 2020 through June 30, 2021
102.333
%
Beginning on July 1, 2021 through June 30, 2022
101.167
%
On July 1, 2022 and thereafter
100.000
%
As of June 27, 2015, the outstanding aggregate principal amount of our 7.00% Notes was $500 million.
Potential Repurchase of Outstanding Notes
We may elect to purchase or otherwise retire 6.75% Notes, 7.75% Notes, 7.50% Notes and 7.00% Notes with cash, stock or other assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries, or by tender offer when we believe the market conditions are favorable to do so.
Secured Revolving Line of Credit
Loan and Security Agreement
AMD and its subsidiary, AMD International Sales & Service, Ltd. (together, the Borrowers), entered into a loan and security agreement on November 12, 2013, as amended on December 11, 2014, (the Loan Agreement) for a secured revolving line of credit for a principal amount of up to $500 million (the Secured Revolving Line of Credit), with up to $75 million available for issuance of letters of credit, with a group of lenders and Bank of America, N.A., acting as agent for the lenders (the Agent). The Secured Revolving Line of Credit matures on November 12, 2018. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible account receivable minus certain reserves. The borrowings of the Secured Revolving Line of Credit may be used for general corporate purposes, including working capital needs.
Amended and Restated Loan and Security Agreement
On April 14, 2015, the Borrowers and ATI Technologies ULC (together with the Borrowers, the Loan Parties), 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 the Agent.
The Amended and Restated Loan Agreement provides for a Secured Revolving Line of Credit for a principal amount up to $500 million with up to $75 million available for issuance of letters of credit, which remained unchanged from the Loan Agreement. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible accounts receivable (90% for certain qualified eligible accounts receivable), minus specified reserves. The size of the commitments under the Secured Revolving Line of Credit may be increased by up to an aggregate amount of $200 million.
The Secured Revolving Line of Credit matures on April 14, 2020 and is secured by a first priority security interest in the Loan Parties’ accounts receivable, inventory, deposit accounts maintained with the Agent and other specified assets, including books and records.

34



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

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

35



until (i) no event of default exists and (ii) the Loan Parties’ Excess Cash Availability is greater than the greater of 15% of the total commitment amount and $75 million for 45 consecutive days.
The events of default under the Amended and Restated Loan Agreement include, among other things, payment defaults, the inaccuracy of representations or warranties, defaults in the performance of affirmative and negative covenants, bankruptcy and insolvency related defaults, a cross-default related to indebtedness in an aggregate amount in excess of $50 million, judgments entered against a Loan Party in an amount that exceeds cumulatively $50 million, certain ERISA events and events related to Canadian defined benefits plans and a change of control. When a Payment Condition has not been satisfied, additional events of default include, among other things, a loss, theft damage or destruction with respect to any collateral if the amount not covered by insurance exceeds $50 million.
First Amendment to Amendment and Restated Loan and Security Agreement
On June 10, 2015, the Loan Parties entered into a First Amendment to the Amended and Restated Loan and Security Agreement (the “First Amendment”) by and among the Loan Parties, the Lenders and the Agent, which modifies the Amended and Restated Loan and Security Agreement. Amendments to the Amended and Restated Loan Agreement effected by the First Amendment include the addition of exceptions to the liens and asset sale covenants to permit the Loan Parties to enter into certain supply chain finance arrangements, as well as the addition of certain definitions related thereto.
As of June 27, 2015 and December 27, 2014, our Secured Revolving Line of Credit had an outstanding loan balance of $230 million and $130 million, respectively, at an interest rate of 3.75% and 4.25%, respectively. At June 27, 2015, the Secured Revolving Line of Credit also had $16 million related to outstanding Letters of Credit, and up to $222 million available for future borrowings. The Company reports its intra-period changes in its revolving credit balance on a net basis in its condensed consolidated statement of cash flows as the Company intends the period of the borrowings to be brief, repaying borrowed amounts within 90 days. As of June 27, 2015, we were in compliance with all required covenants stated in the Loan Agreement.
The agreements governing our 6.75% Notes, 7.75% Notes, 7.50% Notes, 7.00% Notes and our Secured Revolving Line of Credit contain cross-default provisions whereby a default under one agreement would likely result in cross defaults under agreements covering other borrowings. The occurrence of a default under any of these borrowing arrangements would permit the applicable note holders or the lenders under the Secured Revolving Line of Credit to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable.
Other Long-Term Liabilities
Other long-term liabilities in the contractual obligations table above primarily consists of $52 million of payments due under certain software and technology licenses that will be paid through 2018.
Other long-term liabilities in the contractual obligations table above exclude amounts recorded on our condensed consolidated balance sheet that do not require us to make cash payments, which, as of June 27, 2015, primarily consisted of $15 million of deferred gains resulting from certain real estate transactions that occurred in Sunnyvale, California in 1998, in Markham, Ontario, Canada in 2008 and in Singapore in 2013. Accruals related to facility consolidation and site closure costs under our restructuring plans of $6 million and deferred rent related to our facilities in Sunnyvale, California of $6 million are excluded from other long-term liabilities in the contractual obligations table above as they are included in the operating leases obligations. Also excluded from other long-term liabilities in the contractual obligations table above are $4 million of environmental reserves and $4 million of non-current unrecognized tax benefits, which represent potential cash payments that could be payable by us upon settlements with the related authorities. We have not included these amounts in the contractual obligations table above because we cannot make reasonably reliable estimates regarding the timing of the settlements with the related authorities, if any.
Capital Lease Obligations
As of June 27, 2015, we had aggregate outstanding capital lease obligations of $8 million for one of our facilities in Canada, which is payable in monthly installments through 2017.
Operating Leases
We lease certain of our facilities and, in some jurisdictions, we lease the land on which our facilities are built under non-cancelable lease agreements that expire at various dates through 2025. We lease certain office equipment for terms ranging from one to five years. Total future non-cancelable lease obligations as of June 27, 2015 were $287 million, including $222 million of future lease payments and estimated operating costs related to the real estate transactions that occurred in Austin, Texas, Sunnyvale, California, and Singapore.

36



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 June 27, 2015, total non-cancelable purchase obligations were $504 million.
Obligations to GF
Obligations to GF included our purchase obligations to GF for wafer manufacturing and research and development activities. As of June 27, 2015, we currently estimate the remaining contractual obligations to GF will be $702 million through the end of the fiscal 2015 and at least $75 million during the first quarter of fiscal 2016. We are not able to meaningfully quantify or estimate our future purchase obligations to GF other than those set forth in the fifth amendment to the WSA, but we expect that our future purchases from GF will continue to be material. We are currently in discussions with GF regarding the re-profiling of our wafer commitments under the fifth amendment to the WSA.  We are unable to quantify the outcome of our negotiations with GF.
Off-Balance Sheet Arrangements
As of June 27, 2015, we had no off-balance sheet arrangements.

37



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

38




ITEM 4.
CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports made under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of June 27, 2015, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
There was no change in our internal controls over financial reporting during our second quarter of 2015 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

39



PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS

Securities Class Action
On January 15, 2014, a class action lawsuit captioned Hatamian v. AMD, et al., C.A. No. 3:14-cv-00226 (the “Hatamian Lawsuit”) was filed against us in the United States District Court for the Northern District of California. The complaint purports to assert claims against AMD and certain individual officers for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5 of the Exchange Act. The plaintiffs seek to represent a proposed class of all persons who purchased or otherwise acquired our common stock during the period April 4, 2011 through October 18, 2012. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by us and the individual officers regarding our 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for our common stock during the period. The complaint seeks unspecified compensatory damages, attorneys’ fees and costs.
On July 7, 2014, we filed a motion to dismiss plaintiffs’ claims. On March 31, 2015, the Court denied the motion to dismiss. On May 14, 2015, we filed our answer to plaintiffs’ corrected amended complaint. The discovery process has commenced.
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 Lawsuit
On March 20, 2014, a purported shareholder derivative lawsuit captioned Wessels v. Read, et al., Case No. 1:14-cv-262486 was filed against us (as a nominal defendant only) and certain of our directors and officers in the Santa Clara County Superior Court of the State of California. The complaint purports to assert claims against us and certain individual directors and officers for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by us and the individual directors and officers regarding our 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to artificially inflate the price paid for our common stock during the period. On April 27, 2015, a similar purported shareholder derivative lawsuit captioned Christopher Hamilton and David Hamilton v. Barnes, et al., Case No. 5:15-cv-01890 was filed against us (as a nominal defendant only) and certain of our directors and officers in the United States District Court for the Northern District of California. The case was transferred to the judge handling the Hatamian Lawsuit and is now Case No. 4:15-cv-01890.
Both of the 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.
 


40



ITEM 1A.
RISK FACTORS

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

Intel’s position in the microprocessor market and integrated graphics chipset market, its introduction of competitive new products, its existing relationships with top-tier OEMs and its aggressive marketing and pricing strategies could result in lower unit sales and a lower average selling price for our products, which could have a material adverse effect on us.
We rely on GF to manufacture most of our microprocessor and APU products and certain of our GPU and semi-custom products. 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. Pursuant to the WSA, we are required to purchase all of our microprocessor and APU 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

41



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.

On April 16, 2015, we entered into a fifth amendment to the WSA with GF. The primary effect of the fifth amendment was to establish volume purchase commitments and fixed pricing for the 2015 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of AMD’s microprocessor unit, graphics processor unit and semi-custom products to be delivered by GF to us during the 2015 calendar year. If our requirements are less than the number of wafers that we committed to purchase, we could have excess inventory or higher inventory unit costs, both of which will adversely impact our gross margin and our results of operations. We are currently in discussions with GF regarding the re-profiling of our wafer commitments under the fifth amendment to the WSA.  We are unable to quantify the outcome of our negotiations with GF. The outcome of such negotiations is uncertain and could have a material adverse effect on our business and financial results.
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 certain of 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 assemble, test and package 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 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.
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

42



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, form factor devices continue to shift from desktop PCs and notebooks to smaller form factor devices. A large portion of our Computing and Graphics revenue is focused on consumer desktop PC and notebook segments, which have and continue to experience a decline driven by the adoption of smaller form factors and increased competition. 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 negatively impact our business. 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.
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.
Moreover, 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 by existing competitors or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. If we are required to invest significantly greater resources than anticipated in research and development efforts without an increase in revenue, our operating results could decline.
We regularly assess markets for external financing opportunities, including debt and equity financing. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms. The health of the credit markets may adversely impact our ability to obtain financing when needed. Any downgrades from credit rating agencies such as Moody’s or Standard & Poor’s may adversely impact our ability to obtain external financing or the terms of such financing. In July 2015, Moody’s lowered our corporate credit rating to Caa1 from B3 and our senior unsecured debt

43



rating to Caa2 from Caa1. Furthermore, in the first quarter of 2015, Standard & Poor's lowered our corporate credit rating and our senior unsecured debt rating to B- from B.
Credit agency downgrades or concerns regarding our credit worthiness may impact relationships with our suppliers, who may limit our credit lines. Our inability to obtain needed financing or to generate sufficient cash from operations may require us to abandon projects or curtail planned investments in research and development or other strategic initiatives. If we curtail planned investments in research and development or abandon projects, our products may fail to remain competitive and our business would be materially adversely affected.
We may not be able to successfully implement our business strategy to refocus our business to address markets beyond our core PC market to high-growth adjacent markets.
We are implementing a business strategy to refocus our business to address markets beyond our core PC market to high-growth adjacent markets. One of the goals of our strategy is to derive approximately 50% of our revenue from high growth adjacent markets by the end of 2015. However, if demand for products from high growth adjacent markets is below our expectations or if we are not able to improve cost or operational efficiencies of this business model, we may not realize benefits from our business strategy. Despite our efforts, we may not be able to effectively implement our strategy in a timely manner to exploit potential market opportunities, achieve the goals of our business strategy or meet competitive challenges.
Moreover, our business strategy is dependent on creating products that anticipate customer requirements and emerging industry trends. For example, our product roadmap includes a new x86 processor core codenamed "Zen" to help drive our re-entry into high-performance and server computing. We cannot assure you that our new strategic direction, including our efforts to address markets beyond our core PC market and our efforts to create ARM-based products, will result in innovative products and technologies that provide value to our customers. In addition, we may be entering markets where current and new competitors may be able to adapt more quickly to customer requirements and emerging technologies. We cannot assure you that we will be able to compete successfully against current or new competitors who may have stronger positions in these new markets. We may face delays or disruptions in research and development efforts, or we may be required to significantly invest greater resources in research and development than anticipated.
The loss of a significant customer may have a material adverse effect on us.
Collectively, our top five customers accounted for approximately 68% of our net revenue in the second quarter of 2015. On a segment basis, during the second quarter of 2015, five customers accounted for approximately 48% of the net revenue of our Computing and Graphics segment and five customers accounted for approximately 95% of the net revenue of our Enterprise, Embedded and Semi-Custom segment. We expect that a small number of customers will continue to account for a substantial part of revenue of our businesses in the future. If one of our key customers decides to stop buying our products, or if one of these customers materially reduces or reorganizes its operations or its demand for our products, our business would be materially adversely affected.
Global economic uncertainty may adversely impact our business and operating results.
Uncertain global economic conditions have in the past and may in the future adversely impact our business. Uncertainty in the worldwide economic environment may negatively impact consumer confidence and spending causing our customers to postpone purchases. In addition, during challenging economic times, our current or potential future customers may experience cash flow problems and as a result may modify, delay or cancel plans to purchase our products. Additionally, if our customers are not successful in generating sufficient revenue or are unable to secure financing, they may not be able to pay, or may delay payment of, accounts receivable that they owe us. The risk related to our customers’ potentially defaulting on or delaying payments to us is increased because we expect that a small number of customers will continue to account for a substantial part of our revenue. Any inability of our current or potential future customers to pay us for our products may adversely affect our earnings and cash flow. Moreover, our key suppliers may reduce their output or become insolvent, thereby adversely impacting our ability to manufacture our products. In addition, uncertain economic conditions may make it more difficult for us to raise funds through borrowings or private or public sales of debt or equity securities.
We may not be able to generate sufficient cash to service our debt obligations or meet our working capital requirements.
Our ability to make payments on and to refinance our debt will depend on our financial and operating performance, which may fluctuate significantly from quarter to quarter, and is subject to prevailing economic conditions and financial, business and other factors, many of which are beyond our control. We cannot assure you that we will be able to generate cash flow or that we will be able to borrow funds, including under our secured revolving line of credit for a principal amount up to $500 million (our Secured Revolving Line of Credit), in amounts sufficient to enable us to service our debt or to meet our working capital requirements. If we are not able to generate sufficient cash flow from operations or to borrow sufficient funds

44



to service our debt, we may be required to sell assets or equity, reduce expenditures, refinance all or a portion of our existing debt or obtain additional financing. We cannot assure you that we will be able to refinance our debt, sell assets or equity, borrow funds under our Secured Revolving Line of Credit or borrow more funds on terms acceptable to us, if at all.
We have a substantial amount of indebtedness which could adversely affect our financial position and prevent us from implementing our strategy or fulfilling our contractual obligations.
Our total debt as of June 27, 2015 was $2.27 billion. Our substantial indebtedness may:
make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments;
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions and general corporate and other purposes;
limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general corporate purposes;
require us to use a substantial portion of our cash flow from operations to make debt service payments;
place us at a competitive disadvantage compared to our competitors with relatively less debt; and
increase our vulnerability to the impact of adverse economic and industry conditions.
We enter into interest rate swap agreements from time to time to manage our exposure to interest rate risk. These swap agreements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements, the risk that these arrangements may not be effective in reducing our exposure to changes in interest rates and the risk that our exposure to interest rates may increase if interest rates increase.
The agreements governing our notes and our Secured Revolving Line of Credit impose restrictions on us that may adversely affect our ability to operate our business.
The indentures governing our 7.75% Senior Notes due 2020 (7.75% Notes), 7.50% Senior Notes due 2022 (7.50% Notes), 7.00% Senior Notes due 2024 (7.00% Notes) and 6.75% Senior Notes due 2019 (6.75% Notes) contain various covenants which limit our ability to, among other things:
incur additional indebtedness;
pay dividends and make other restricted payments;
make certain investments, including investments in our unrestricted subsidiaries;
 
create or permit certain liens;
create or permit restrictions on the ability of certain restricted subsidiaries to pay dividends or make other distributions to us;
use the proceeds from sales of assets;
enter into certain types of transactions with affiliates; and
consolidate or merge or sell our assets as an entirety or substantially as an entirety.
Our Secured Revolving Line of Credit also contains various covenants which limit our ability to, among other things, make certain investments, merge or consolidate with other entities and permit certain subsidiaries from incurring indebtedness. In addition, further restrictions apply when certain payment conditions (the Payment Conditions) are not satisfied with respect to specified transactions, events or payments. The Payment Conditions include that (i) no default or event of default exists and (ii) at all times during the 45 consecutive days immediately prior to such transaction, event or payment and on a pro forma basis after giving effect to such transaction, event or payment and any incurrence or repayment of indebtedness in connection therewith, the Loan Parties’ Excess Cash Availability (as defined in the First Amended and Restated Loan Agreement) available cash is greater than the greater of 20% of the total commitment amount and $100 million. If Payment Conditions are not satisfied under certain circumstances, we will become subject to various additional covenants which limit our ability to, among other things:
allow certain subsidiaries that manufacture or process inventory for us, AMD International Sales & Service, Ltd. or ATI Technologies ULC (collectively, the Loan Parties) to borrow secured debt or unsecured debt beyond a certain amount;
create any liens upon any of the Loan Parties’ property (other than customary permitted liens and liens on up to $1.5 billion of secured credit facilities debt (which amount includes our Secured Revolving Line of Credit));

45



declare or make any distributions;
create any encumbrance on the ability of a subsidiary to make any upstream payments;
make asset dispositions other than certain ordinary course dispositions;
make certain loans, make payments with respect to subordinated debt or certain borrowed money prior to its due date;
become a party to certain agreements restricting the Loan Parties’ ability to incur or repay debt, grant liens, make distributions; and
become party to certain agreements restricting the Loan Parties' ability to enter into any non-arm’s-length transaction with an affiliate.
The agreements governing our notes and our Secured Revolving Line of Credit contain cross-default provisions whereby a default under one agreement would likely result in cross defaults under agreements covering other borrowings. For example, the occurrence of a default with respect to any indebtedness or any failure to repay debt when due in an amount in excess of $50 million would cause a cross default under the indentures governing our 7.75% Notes, 7.50% Notes, 7.00% Notes and 6.75% Notes, as well as under our Secured Revolving Line of Credit. The occurrence of a default under any of these borrowing arrangements would permit the applicable note holders or the lenders under our Secured Revolving Line of Credit to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable. If the note holders or the trustee under the indentures governing our 7.75% Notes, 7.50% Notes, 7.00% Notes, 6.75% Notes or the lenders under our Secured Revolving Line of Credit accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings.

The markets in which our products are sold are highly competitive.
The markets in which our products are sold are very competitive and delivering the latest and best products to market on a timely basis is critical to achieving revenue growth. We believe that the main factors that determine our product competitiveness are timely product introductions, product quality (including enabling state-of-the-art visual experience), power consumption (including battery life), reliability, processor clock speed, performance, size (or form factor), selling price, cost, adherence to industry standards (and the creation of open industry standards), level of integration, software and hardware compatibility and stability, brand recognition and availability.
We expect that competition will continue to be intense due to rapid technological changes, frequent product introductions by our competitors or new competitors of products that may provide better performance/experience or may include additional features that render our products uncompetitive. We may also face aggressive pricing by competitors, especially during challenging economic times. Some competitors may have greater access or rights to companion technologies, including interface, processor and memory technical information. With the introduction of our APU products and other competing solutions, we believe that demand for additional discrete graphic cards may decrease in the future due to both the improvement of the quality of our competitor’s integrated graphics and the graphics performance of our APUs. If competitors introduce competitive new products into the market before us, demand for our products could be adversely impacted and our business could be adversely affected.
We are implementing a long-term business strategy to refocus our business to address markets beyond our core PC market to the high-growth adjacent markets. However, we are entering markets with new and different competitors who may be able to adapt more quickly to customer requirements and emerging technologies. We cannot assure you that we will be able to compete successfully against current or new competitors who may have stronger positions in these new markets or superior ability to anticipate customer requirements and emerging industry trends.
Uncertainties involving the ordering and shipment of our products could materially adversely affect us.
We typically sell our products pursuant to individual purchase orders. We generally do not have long-term supply arrangements with our customers or minimum purchase requirements except that orders generally must be for standard pack quantities. Generally, our customers may cancel orders for standard products more than 30 days prior to shipment without incurring significant fees. We base our inventory levels in part on customers’ estimates of demand for their products, which may not accurately predict the quantity or type of our products that our customers will want in the future or ultimately end up purchasing. Our ability to forecast demand is even further complicated when our products are sold indirectly through downstream channel distributors and customers, as our forecasts for demand are then based on estimates provided by multiple parties throughout the downstream channel.
PC and consumer markets are characterized by short product lifecycles, which can lead to rapid obsolescence and price erosion. In addition, our customers may change their inventory practices on short notice for any reason. We may build

46



inventories during periods of anticipated growth, and the cancellation or deferral of product orders or overproduction due to failure of anticipated orders to materialize, could result in excess or obsolete inventory, which could result in write-downs of inventory and an adverse effect on gross margins.
Factors that may result in excess or obsolete inventory, which could result in write-downs of the value of our inventory, a reduction in the average selling price or a reduction in our gross margin include:
a sudden or significant decrease in demand for our products;
a production or design defect in our products;
a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements;
a failure to accurately estimate customer demand for our products, including for our older products as our new products are introduced; or
our competitors taking aggressive pricing actions.
Because market conditions are uncertain, these and other factors could materially adversely affect our business.
The completion and impact of the 2014 Restructuring Plan, our transformation initiatives and any future restructuring actions could adversely affect us.
In October 2014, we implemented a restructuring plan (the 2014 Restructuring Plan) designed to improve operating efficiencies. The 2014 Restructuring Plan involved a reduction of global headcount by approximately 6% and an alignment of our real estate footprint with the reduced headcount.The Company expects the 2014 Restructuring Plan to be largely completed by the end of the third quarter of 2015. These restructuring actions and any future restructuring actions could have an adverse impact on our business as a result of decreases in employee morale and the failure to meet operational targets due to the loss of employees. We cannot be sure that we will realize operational savings or any other benefits from the 2014 Restructuring Plan or any future restructuring actions. Any operating savings are subject to assumptions, estimates and significant economic, competitive and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays or if other unforeseen events occur, our business and financial results could be adversely affected.
Any transformation intiatives or future restructuring actions we undertake may fail to achieve the anticipated results and may materially adversely affect our business and financial results.
Our receipt of revenue from our semi-custom SoC products is dependent upon our technology being designed into third-party products and the success of those products.
The revenue that we receive from our semi-custom SoC products is in the form of non-recurring engineering fees charged to third parties for design and development services and revenue received in connection with sales of our semi-custom SoC products to these third parties. As a result, our ability to generate revenue from our semi-custom products depends on our ability to secure customers for our semi-custom design pipeline and our semi-custom SoC products being incorporated into those customer’s products. Any revenue from sales of our semi-custom SoC products is directly related to sales of the third-party’s products and reflective of their success in the market. Moreover, we have no control over the marketing efforts of these third parties, and we cannot make any assurances that sales of their products will be successful in current or future years. Consequently, the semi-custom SoC product revenue expected by us may not be fully realized and our operating results may be adversely affected.

 
The demand for our products depends in part on the market conditions in the industries into which they are sold. Fluctuations in demand for our products or a market decline in any of these industries could have a material adverse effect on our results of operations.
Industry-wide fluctuations in the computer marketplace have materially adversely affected us in the past and may materially adversely affect us in the future. A large portion of our Computing and Graphics revenue is focused on the consumer desktop PC and notebook segments, which have and continue to experience a decline driven by the adoption of smaller form factors and increased competition. The success of our semi-custom SoC products is dependent on securing customers for our semi-custom design pipeline and consumer market conditions, including the success of the Sony PlayStation®4 and Microsoft Xbox One game console systems worldwide.
Our ability to design and introduce new products in a timely manner is dependent upon third-party intellectual property.
In the design and development of new products and product enhancements, we rely on third-party intellectual property such as software development tools and hardware testing tools. Furthermore, certain product features may rely on intellectual

47



property acquired from third parties. The design requirements necessary to meet consumer demand for more features and greater functionality from semiconductor products may exceed the capabilities of the third-party intellectual property or development tools available to us. If the third-party intellectual property that we use becomes unavailable, is not available in the time frame or price point needed for our new products or fails to produce designs that meet customer demands, our business could be materially adversely affected.
We depend on third-party companies for the design, manufacture and supply of motherboards, software and other computer platform components to support our business.
We depend on third-party companies for the design, manufacture and supply of motherboards, software (e.g. BIOS, operating systems) and other components that our customers utilize to support our microprocessor, GPU and APU offerings. We also rely on AIBs to support our GPU and APU products. In addition, our microprocessors are not designed to function with motherboards and chipsets designed to work with Intel microprocessors. If the designers, manufacturers, AIBs and suppliers of motherboards, software and other components decrease their support for our product offerings, our business could be materially adversely affected.
If we lose Microsoft Corporation’s support for our products or other software vendors do not design and develop software to run on our products, our ability to sell our products could be materially adversely affected.
Our ability to innovate beyond the x86 instruction set controlled by Intel depends partially on Microsoft designing and developing its operating systems to run on or support our x86-based microprocessor products. With respect to our graphics products, we depend in part on Microsoft to design and develop its operating system to run on or support our graphics products. Similarly, the success of our products in the market, such as our APU products, is dependent on independent software providers designing and developing software to run on our products. If Microsoft does not continue to design and develop its operating systems so that they work with our x86 instruction sets or does not continue to develop and maintain their operating systems to support our graphics products, independent software providers may forego designing their software applications to take advantage of our innovations and customers may not purchase PCs with our products. In addition, some software drivers sold with our products are certified by Microsoft. If Microsoft did not certify a driver, or if we otherwise fail to retain the support of Microsoft or other software vendors, our ability to market our products would be materially adversely affected.
 

We may incur future impairments of goodwill.
We perform our annual goodwill impairment analysis as of the first day of the fourth quarter of each year. Based on the annual goodwill impairment analysis that we conducted during the fourth quarter of 2014, we concluded that the carrying amount of goodwill assigned to our Computing and Graphics reporting unit exceeded its estimated fair value, and accordingly, we recorded a goodwill impairment charge of $233 million, which represented the entire goodwill balance within this reporting unit. Subsequent to our annual goodwill impairment analysis, we monitor for any events or changes in circumstances, such as significant adverse changes in business climate or operating results, changes in management’s business strategy, an inability to successfully introduce new products in the marketplace, an inability to successfully achieve internal forecasts or significant declines in our stock price, which may represent an indicator of goodwill impairment. The occurrence of any of these events may require us to record goodwill impairment charges in the future.
Our reliance on third-party distributors and AIB partners subjects us to certain risks.
We market and sell our products directly and through third-party distributors and AIB partners pursuant to agreements that can generally be terminated for convenience by either party upon prior notice to the other party. These agreements are non-exclusive and permit both our distributors and AIBs to offer our competitors’ products. We are dependent on our distributors and AIBs to supplement our direct marketing and sales efforts. If any significant distributor or AIB or a substantial number of our distributors or AIBs terminated their relationship with us, decided to market our competitors’ products over our products or decided not to market our products at all, our ability to bring our products to market would be impacted and we would be materially adversely affected. If we are unable to manage the risks related to the use of our third-party distributors and AIB partners or offer appropriate incentives to focus them on the sale of our products, our business could be materially adversely affected.
Additionally, distributors and AIBs typically maintain an inventory of our products. In most instances, our agreements with distributors protect their inventory of our products against price reductions, as well as provide return rights for any product that we have removed from our price book and that is not more than 12 months older than the manufacturing code date. Some agreements with our distributors also contain standard stock rotation provisions permitting limited levels of product returns. Our agreements with AIBs protect their inventory of our products against price reductions. We defer the gross margins on our sales to distributors and AIBs, resulting from both our deferral of revenue and related product costs, until the applicable products are re-sold by the distributors or the AIBs. However, in the event of a significant decline in the price of our products,

48



the price protection rights we offer would materially adversely affect us because our revenue and corresponding gross margin would decline.
Our inability to continue to attract and retain qualified personnel may hinder our product development programs.
Much of our future success depends upon the continued service of numerous qualified engineering, marketing, sales and executive personnel. If we are not able to continue to attract, train and retain qualified personnel necessary for our business, the progress of our product development programs could be hindered, and we could be materially adversely affected. To help attract, retain and motivate qualified personnel, we use share-based incentive awards such as employee stock options and non-vested share units (restricted stock units). If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate personnel could be weakened, which could harm our results of operations. In addition, our current and any future restructuring plans may adversely impact our ability to attract and retain key employees.
In the event of a change of control, we may not be able to repurchase our outstanding debt as required by the applicable indentures and our Secured Revolving Line of Credit, which would result in a default under the indentures and our Secured Revolving Line of Credit.
Upon a change of control, we will be required to offer to repurchase all of our 7.75% Notes, 7.50% Notes, 7.00% Notes and 6.75% Notes then outstanding at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, up to, but excluding, the repurchase date. In addition, a change of control would be an event of default under our Secured Revolving Line of Credit. As of June 27, 2015, $230 million was outstanding under our Secured Revolving Line of Credit and $2.0 billion was outstanding under our notes. Future debt agreements may contain similar provisions. We may not have the financial resources to repurchase our outstanding notes and prepay all of our outstanding obligations under our Secured Revolving Line of Credit.
The semiconductor industry is highly cyclical and has experienced severe downturns that have materially adversely affected, and may continue to materially adversely affect, our business in the future.
The semiconductor industry is highly cyclical and has experienced significant downturns, often in conjunction with constant and rapid technological change, wide fluctuations in supply and demand, continuous new product introductions, price erosion and declines in general economic conditions. We have incurred substantial losses in recent downturns, due to:
substantial declines in average selling prices;
the cyclical nature of supply and demand imbalances in the semiconductor industry;
a decline in demand for end-user products (such as PCs) that incorporate our products; and
excess inventory levels.
Industry-wide fluctuations in the computer marketplace have materially adversely affected us in the past and may materially adversely affect us in the future. For example, form factor devices continue to shift from desktop PCs and notebooks to smaller form factor devices. A large portion of our Computing and Graphics revenue is focused on consumer desktop PC and notebook segments, which have and continue to experience a decline driven by the adoption of smaller form factors and increased competition.
Global economic uncertainty and weakness have also impacted the semiconductor market as consumers and businesses have deferred purchases, which negatively impacted demand for our products. Our financial performance has been, and may in the future be, negatively affected by these downturns.
The growth of our business is also dependent on continued demand for our products from high-growth adjacent emerging global markets. Our ability to be successful in such markets depends in part on our ability to establish adequate local infrastructure, as well as our ability to cultivate and maintain local relationships in these markets. If demand from these markets is below our expectations, sales of our products may decrease, which would have a material adverse effect on us.
Our business is dependent upon the proper functioning of our internal business processes and information systems and modification or interruption of such systems may disrupt our business, processes and internal controls.
We rely upon a number of internal business processes and information systems to support key busine