Advanced Micro Devices, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Common Stock and Stock-Based Incentive Compensation Plans

Common Stock and Stock-Based Incentive Compensation Plans

12 Months Ended

Dec. 28, 2019

Share-based Payment Arrangement [Abstract]

Common Stock and Stock-Based Incentive Compensation Plans

Shares Outstanding

Shares of common stock outstanding were as follows:



	Year Ended
	December 28, 2019	December 29, 2018	December 30, 2017
	(In millions)
Number of shares
Balance, beginning of period	1,005	967	935
Common stock issued under employee equity incentive plans, net of tax withholding	20	31	32
Issuance of common stock upon warrant exercise	75	—	—
Issuance of common stock to partially settle convertible debt	69	—	—
Issuance of treasury stock to partially settle debt	1	7	—
Balance, end of period	1,170	1,005	967

The Company’s stock-based incentive programs are intended to attract, retain and motivate highly qualified employees. On April 29, 2004, the Company’s stockholders approved the 2004 Equity Incentive Plan (the 2004 Plan). The Company introduced the Employee Stock Purchase Plan (ESPP) in the fourth quarter of 2017.

Under the 2004 Plan, stock options generally vest and become exercisable over a three-year period from the date of grant and expire within ten years after the grant date. Unvested shares that are reacquired by the Company from forfeited outstanding equity awards become available for grant and may be reissued as new awards.

Under the 2004 Plan, the Company can grant (i) stock options, and (ii) RSUs, including time-based RSUs and Performance-based Restricted Stock Units (PRSUs).

Stock Options. A stock option is the right to purchase shares of the Company’s common stock at a fixed exercise price for a fixed period of time. Under the 2004 Plan, nonstatutory and incentive stock options may be granted. The exercise price of the shares subject to each nonstatutory stock option and incentive stock option cannot be less than 100% of the fair market value of the Company’s common stock on the date of the grant. The exercise price of each option granted under the 2004 Plan must be paid in full at the time of the exercise.

Time-based RSUs. Time-based RSUs are awards that can be granted to any employee, director or consultant and that obligate the Company to issue a specific number of shares of the Company’s common stock in the future if the vesting terms and conditions are satisfied. The purchase price for the shares is $0.00 per share.

Performance-based Restricted Stock Units. Performance-based Restricted Stock Units (PRSUs) can be granted to certain of the Company’s senior executives. The performance metrics can be financial performance, non-financial performance and/or market conditions. Each PRSU award reflects a target number of shares (Target Shares) that may be issued to an award recipient before adjusting based on the Company’s financial performance, non-financial performance and/or market conditions. The actual number of shares that a grant recipient receives at the end of the period may range from 0% to 250% of the Target Shares granted, depending upon the degree of achievement of the performance target designated by each individual award.

Employee Stock Purchase Plan. Under the ESPP, eligible employees who participate in an offering period may have up to 10% of their earnings withheld, up to certain limitations, to purchase shares of common stock at 85% of the lower of the fair market value on the first or the last business day of the six-month offering period. The offering periods commence in May and November each year.

As of December 28, 2019, the Company had 61 million shares of common stock that were available for future grants and 30 million shares reserved for issuance upon the exercise of outstanding stock options or the vesting of unvested restricted stock units. In addition, the Company had 42 million shares of common stock that were available for issuance under the ESPP.

Valuation and Expense

Stock-based compensation expense was allocated in the consolidated statements of operations as follows:



	2019		2018		2017
	(In millions)
Cost of sales	$	6	$	4	$	2
Research and development	129		91		57
Marketing, general, and administrative	62		42		38
Total stock-based compensation expense, net of tax of $0	$	197	$	137	$	97

During 2019, 2018 and 2017, the Company did not realize any excess tax benefits related to stock-based compensation and therefore the Company did not record any related financing cash flows.

Stock Options. The weighted-average estimated fair value of employee stock options granted for the years ended December 28, 2019, December 29, 2018 and December 30, 2017 was $13.31, $7.62 and $5.46 per share, respectively, using the following assumptions:



	2019		2018		2017
Expected volatility	52.60% - 56.51%		51.51% - 60.46%		57.26	%
Risk-free interest rate	1.53% - 2.51%		2.20% - 2.83%		1.68	%
Expected dividends	—	%	—	%	—	%
Expected life (in years)	3.94 - 3.95		3.92 - 3.94		3.92

The Company uses a combination of the historical volatility of its common stock and the implied volatility for publicly traded options on the Company’s common stock as the expected volatility assumption required by the lattice-binomial model. The risk-free interest rate is based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the option grant at the date closest to the option grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the near future. The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the lattice-binomial model.

The following table summarizes stock option activity and related information:



	Outstanding Number of Shares		Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life (in years)
	(In millions, except share price)
Balance as of December 29, 2018	13		$	5.33
Granted	1		$	32.86
Canceled	(1	)	$	17.52
Exercised	(3	)	$	3.74
Balance as of December 28, 2019	10		$	7.56	$	226	3.20
Exercisable December 28, 2019	9		$	4.56	$	215	2.72

The total intrinsic value of stock options exercised for 2019, 2018 and 2017 was $84 million, $67 million and $27 million, respectively.

As of December 28, 2019, the Company had $12 million of total unrecognized compensation expense related to stock options, which will be recognized over the weighted-average period of 1.87 years.

Time-based RSUs. The weighted-average grant date fair values of time-based RSUs granted during 2019, 2018 and 2017 were $32.52, $17.66 and $12.65 per share, respectively.

The following table summarizes time-based RSU activity and related information:



	Number of Shares		Weighted- Average Fair Value		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life (in years)
	(In millions except share price)
Unvested shares as of December 29, 2018	24		$	12.86
Granted	8		$	32.52
Forfeited	(2	)	$	16.49
Vested	(12	)	$	10.39
Unvested shares as of December 28, 2019	18		$	22.93	$	503	1.19

The total fair value of time-based RSUs vested during 2019, 2018 and 2017 was $395 million, $315 million and $294 million, respectively.

As of December 28, 2019, the Company had $322 million of total unrecognized compensation expense related to time-based RSUs, which will be recognized over the weighted-average period of 1.80 years.

PRSUs. The weighted-average grant date fair values of PRSUs granted during 2019, 2018 and 2017 were $50.00, $21.67 and $17.18, respectively, using the following assumptions:



	2019		2018		2017
Expected volatility	60.54% - 62.52%		63.77% - 67.97%		64.39	%
Risk-free interest rate	1.56% - 2.49%		2.06% - 2.82%		1.50	%
Expected dividends	—	%	—	%	—	%
Expected term (in years)	2.48 - 5.00		2.48 - 3.00		3.00

The Company uses the historical volatility of its common stock and risk-free interest rate based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the PRSUs grant at the date closest to the grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the near future. The expected term of PRSUs represents the weighted-average period the PRSUs are expected to remain outstanding.

The following table summarizes PRSU activity and related information:



	Number of Shares		Weighted- Average Fair Value		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life (in years)
	(In millions except share price)
Unvested shares as of December 29, 2018	2		$	14.58
Granted	2		$	50.00
Forfeited	—		$	22.39
Vested	(1	)	$	3.60
Unvested shares as of December 28, 2019	3		$	36.13	$	90	2.56

The total fair value of PRSUs vested during 2019, 2018 and 2017 was $65 million, $84 million and $34 million, respectively.

As of December 28, 2019, the Company had $85 million of total unrecognized compensation expense related to PRSUs, which will be recognized over the weighted-average period of 2.56 years.

ESPP. The weighted-average grant date fair value for the ESPP during 2019, 2018 and 2017 was $9.96, $4.71 and $3.46 per share, respectively, using the following assumptions:



	2019		2018		2017
Expected volatility	48.95% - 67.02%		45.88% - 66.66%		56.07	%
Risk-free interest rate	1.58% - 2.46%		2.05% - 2.52%		1.36	%
Expected dividends	—	%	—	%	—	%
Expected term (in years)	0.50		0.50		0.49

The Company uses the historical volatility of its common stock and the risk-free interest rate based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the ESPP grant at the date closest to the ESPP grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the near future. The expected term of the ESPP represents the weighted-average period the ESPP is expected to remain outstanding.

During 2019, 1.8 million and 1.4 million shares of common stock were purchased in each of the two six-month offering periods under the ESPP at a purchase price of $16.18 and $23.77 per share, respectively, resulting in aggregate cash proceeds of $62 million. As of December 28, 2019, the Company had $9 million of total unrecognized compensation expense related to the ESPP, which will be recognized over the weighted-average period of 0.37 years.