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. 26, 2020

Share-based Payment Arrangement [Abstract]

Common Stock and Stock-Based Incentive Compensation Plans

Common Stock and Stock-Based Compensation

Common Stock

Shares of common stock outstanding were as follows:


	Year Ended
	December 26, 2020	December 28, 2019	December 29, 2018
	(In millions)
Balance, beginning of period	1,170	1,005	967
Common stock issued under employee equity plans	14	20	31
Common stock repurchases for tax withholding on equity awards	(1)	—	—
Issuance of common stock upon warrant exercise	—	75	—
Issuance of common stock to settle convertible debt	28	69	—
Issuance of treasury stock to partially settle debt	—	1	7
Balance, end of period	1,211	1,170	1,005

Stock-Based Compensation

The Company’s employee equity 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, as amended and restated (the 2004 Plan). In the fourth quarter of 2017, the Company introduced the 2017 Employee Stock Purchase Plan, as amended and restated (the 2017 Plan).

Under the 2004 Plan, stock options generally vest and become exercisable over a three-year period from the date of grant and expire within seven 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 PRSUs.

Stock Options. 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.

PRSUs. 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.

ESPP. Under the 2017 Plan, eligible employees who participate in an offering period may have up to 10% of their eligible 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 26, 2020, the Company had 57 million shares of common stock that were available for future grants and 22 million shares reserved for issuance upon the exercise of outstanding stock options or the vesting of unvested RSUs, including PRSUs, under the 2004 Plan. In addition, the Company had 40 million shares of common stock that were available for issuance under the 2017 plan.

Valuation and Expense

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


	2020		2019		2018
	(In millions)
Cost of sales	$	6	$	6	$	4
Research and development	173		129		91
Marketing, general, and administrative	95		62		42
Total stock-based compensation expense before income taxes	274		197		137
Income tax benefit	(42)		—		—
Total stock-based compensation expense, net of income taxes	$	232	$	197	$	137

Stock Options. The weighted-average estimated fair value of employee stock options granted for the years ended December 26, 2020, December 28, 2019 and December 29, 2018 was $38.49, $13.31 and $7.62 per share, respectively, using the following assumptions:


	2020		2019		2018
Expected volatility	57.87	%	52.60% - 56.51%		51.51% - 60.46%
Risk-free interest rate	0.18	%	1.53% - 2.51%		2.20% - 2.83%
Expected dividends	—	%	—	%	—	%
Expected life (in years)	4.3		3.94 - 3.95		3.92 - 3.94

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. 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.

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 28, 2019	10	$	7.56
Granted	—	$	84.85

Exercised	(3)	$	3.62
Balance as of December 26, 2020	7	$	12.91	$	589	2.92
Exercisable December 26, 2020	6	$	7.01	$	538	2.43

The total intrinsic value of stock options exercised for 2020, 2019 and 2018 was $180 million, $84 million and $67 million, respectively.

As of December 26, 2020, the Company had $19 million of total unrecognized compensation expense related to stock options, which will be recognized over the weighted-average period of 1.66 years.

Time-based RSUs. The weighted-average grant date fair values of time-based RSUs granted during 2020, 2019 and 2018 were $78.59, $32.52 and $17.66 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 28, 2019	18	$	22.93
Granted	4	$	78.59
Forfeited	(1)	$	30.82
Vested	(9)	$	20.67
Unvested shares as of December 26, 2020	12	$	43.98	$	1,078	1.13

The total fair value of time-based RSUs vested during 2020, 2019 and 2018 was $642 million, $395 million and $315 million, respectively.

As of December 26, 2020, the Company had $462 million of total unrecognized compensation expense related to time-based RSUs, which will be recognized over the weighted-average period of 1.69 years.

PRSUs. The weighted-average grant date fair values of PRSUs granted during 2020, 2019 and 2018 were $122.95, $50.00 and $21.67, respectively, using the following assumptions:


	2020		2019		2018
Expected volatility	55.74% - 60.10%		60.54% - 62.52%		63.77% - 67.97%
Risk-free interest rate	0.14% - 1.41%		1.56% - 2.49%		2.06% - 2.82%
Expected dividends	—	%	—	%	—	%
Expected term (in years)	2.48 - 3.00		2.48 - 5.00		2.48 - 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 requisite service periods of these PRSUs.

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 28, 2019	3	$	36.13
Granted	1	$	122.95
Forfeited	—	$	45.25
Vested	(1)	$	16.45
Unvested shares as of December 26, 2020	3	$	55.63	$	248	2.25

The total fair value of PRSUs vested during 2020, 2019 and 2018 was $76 million, $65 million and $84 million, respectively.

As of December 26, 2020, the Company had $102 million of total unrecognized compensation expense related to PRSUs, which will be recognized over the weighted-average period of 1.73 years.

ESPP. The weighted-average grant date fair value for the ESPP during 2020, 2019 and 2018 was $20.97, $9.96 and $4.71 per share, respectively, using the following assumptions:


	2020		2019		2018
Expected volatility	55.16% - 66.53%		48.95% - 67.02%		45.88% - 66.66%
Risk-free interest rate	0.11% - 0.15%		1.58% - 2.46%		2.05% - 2.52%
Expected dividends	—	%	—	%	—	%
Expected term (in years)	0.50		0.50		0.50

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 six-month offering period.

During 2020, 2 million shares of common stock were purchased under the ESPP at a purchase price of $37.81 resulting in aggregate cash proceeds of $75 million. As of December 26, 2020, the Company had $12 million of total unrecognized compensation expense related to the ESPP, which will be recognized over the weighted-average period of 0.37 years.