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

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 28, 2013

The provision (benefit) for income taxes consists of:



	2013			2012			2011
	(In millions)
Current:
U.S. Federal	$	(2	)	$	—		$	(3	)
U.S. State and Local	—			—			1
Foreign National and Local	10			6			4
Total	8			6			2
Deferred:
U.S. Federal	3			(37		)	—
Foreign National and Local	(2		)	(3		)	(6		)
Total	1			(40		)	(6		)
Provision (benefit) for income taxes	$	9		$	(34	)	$	(4	)

Income (loss) before income taxes consists of the following:



	2013			2012			2011
	(In millions)
U.S.	$	(397	)	$	(1,242	)	$	318
Foreign	323			25			173
Total pre-tax income (loss)	$	(74	)	$	(1,217	)	$	491

Deferred income taxes reflect the net tax effects of tax carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the balances for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 28, 2013 and December 29, 2012 are as follows:



	December 28, 2013			December 29, 2012
	(In millions)
Deferred tax assets:
Net operating loss carryovers	$	1,701		$	1,455
Deferred distributor income	49			55
Inventory valuation	32			53
Accrued expenses not currently deductible	113			118
Acquired intangibles	343			385
Tax deductible goodwill	271			323
Federal and state tax credit carryovers	321			395
Foreign capitalized research and development costs	22			36
Foreign research and development ITC credits	305			316
Discount of convertible notes	65			40
Other	217			291
Total deferred tax assets	3,439			3,467
Less: valuation allowance	(3,375		)	(3,401		)
Total deferred tax assets, net of valuation allowance	64			66
Deferred tax liabilities:
Acquired intangibles	(28		)	(33		)
Other	(17		)	(16		)
Total deferred tax liabilities	(45		)	(49		)
Net deferred tax assets	$	19		$	17

The breakdown between current and long-term deferred tax assets and deferred tax liabilities as of December 28, 2013 and December 29, 2012 is as follows:



	December 28, 2013			December 29, 2012
	(In millions)
Current deferred tax assets	$	2		$	1
Non-current deferred tax assets	18			16
Current deferred tax liabilities	(1		)	—
Net deferred tax assets	$	19		$	17

Current deferred tax assets and current deferred tax liabilities are included in captions “Prepaid expenses and other current assets” and “Accrued and other current liabilities,” respectively, on the consolidated balance sheets. Non-current deferred tax assets are included in the caption “Other assets” on the consolidated balance sheets.

As of December 28, 2013, substantially all of the Company’s U.S. and foreign deferred tax assets, net of deferred tax liabilities, continued to be subject to a valuation allowance. The realization of these assets is dependent on substantial future taxable income which, at December 28, 2013, in management’s estimate, is not more likely than not to be achieved. In 2013, the net valuation allowance decreased by $26 million primarily for decreases in deferred tax assets related to the utilization of net operating losses due to pre-tax book income in Canada. In 2012, the net valuation allowance increased by $423 million primarily for increases in deferred tax assets related to the net operating losses generated from pre-tax book losses net of the benefit relating to the SeaMicro acquisition. Purchase accounting for the SeaMicro acquisition required the establishment of a deferred tax liability related to the book tax basis differences of identifiable intangible assets that increased goodwill. The deferred tax liability created an additional source of U.S. future taxable income which resulted in a release of a portion of the Company's U.S. valuation allowance. In 2011, the net valuation allowance decreased by $245 million primarily for decreases in deferred tax assets related to the utilization of net operating losses due to pre-tax book income and a change in the book to tax basis in investments.

As of December 28, 2013 and December 29, 2012, the Company had $191 million and $192 million, respectively, of deferred tax assets subject to a valuation allowance that related to excess stock option deductions, which are not presented in the deferred tax asset balances. As of December 28, 2013 and December 29, 2012, $10 million of deferred tax assets subject to valuation allowance related to a deductible discount for tax only associated with the Company’s 6.00% Convertible Senior Notes due 2015 (the 6.00% Notes). The tax benefit from these deductions will increase capital in excess of par when realized.

The following is a summary of the various tax attribute carryforwards the Company had as of December 28, 2013. The amounts presented below include amounts related to excess stock option deductions, as discussed above.



Carryforward	Federal		State / Provincial		Expiration
	(In millions)
U.S.-net operating loss carryovers	$	4,598	$	269	2018 to 2033
U.S.-credit carryovers	$	399	$	188	2018 to 2033
Canada-net operating loss carryovers	$	355	$	355	2025 to 2028
Canada-credit carryovers	$	387	$	34	2021 to 2033
Canada-R&D pools	$	82	$	82	no expiration
Barbados-net operating loss carryovers	$	287	N/A		2014 to 2017
Other foreign net operating loss carryovers	$	8	N/A		various

Utilization of $17 million of the Company’s U.S. federal net operating loss carryforwards are subject to annual limitations as a result of the ATI Technologies (ATI) acquisition.

The table below displays reconciliation between statutory federal income taxes and the total provision (benefit) for income taxes.



	2013			2012			2011
	(In millions)
Statutory federal income tax provision (benefit) at 35% rate	$	(26	)	$	(426	)	$	172
State taxes, net of federal benefit	1			1			1
Foreign income at other than U.S. rates	15			(13		)	(2		)
U.S. valuation allowance generated (utilized)	22			406			(171		)
Credit monetization	(3		)	(2		)	(4		)
Provision (benefit) for income taxes	$	9		$	(34	)	$	(4	)

The Company has made no provision for U.S. income taxes on approximately $354 million of cumulative undistributed earnings of certain foreign subsidiaries through December 28, 2013 because it is the Company’s intention to permanently reinvest such earnings. If such earnings were distributed, the Company would incur additional income taxes of approximately $124 million (after an adjustment for foreign tax credits). These additional income taxes may not result in income tax expense or a cash payment to the Internal Revenue Service, but may result in the utilization of deferred tax assets that are currently subject to a valuation allowance.

The Company's operations in Malaysia currently operate under a tax holiday, which will expire in 2018. This tax holiday may be extended if specific conditions are met. The net impact of the tax holiday was to decrease the Company's net loss by $1 million in 2013, less than $.01 per share, diluted. The net impact of tax holidays decreased the Company's net loss by $11 million in 2012, less than $.02 per share, diluted, and increased the Company's net income by $9 million in 2011, less than $.01 per share, diluted.

A reconciliation of the gross unrecognized tax benefits is as follows:



	2013			2012			2011
	(In millions)
Balance at beginning of year	$	56		$	69		$	42
Increases for tax positions taken in prior years	1			3			28
Decreases for tax positions taken in prior years	(2		)	(4		)	(4		)
Increases for tax positions taken in the current year	4			3			8
Decreases for settlements with taxing authorities	(7		)	(15		)	(5		)
Balance at end of year	$	52		$	56		$	69

The amount of unrecognized tax benefits that would impact the effective tax rate was $3 million, $2 million, and $4 million as of December 28, 2013, December 29, 2012 and December 31, 2011, respectively. The Company had no accrued interest related to unrecognized tax benefits as of December 28, 2013 and accrued interest related to unrecognized tax benefits of $2 million as of December 29, 2012 and December 31, 2011. The Company had no accrued penalties related to unrecognized tax benefits as of December 28, 2013, December 29, 2012 and December 31, 2011. The Company recognizes potential accrued interest and penalties to unrecognized tax benefits as interest expense and income tax expense, respectively.

The Company recorded a reduction of interest expense of $2 million and no charge related to penalty expense in its consolidated statement of operations in 2013. The Company had no charge related to interest expense or penalty expense in its consolidated statement of operations in 2012. The Company recorded a reduction of interest expense of $2 million and a decrease of $1 million of penalty expense in its consolidated statement of operations in 2011. During the 12 months beginning December 29, 2013, the Company expects to reduce its unrecognized tax benefits by $31 million primarily as a result of the settlement of tax audits with certain foreign tax authorities. The Company does not believe it is reasonably possible that other unrecognized tax benefits will materially change in the next 12 months. However, the resolutions and/or closure of open audits are highly uncertain.

As of December 25, 2010, the Canada Revenue Agency, or CRA, had completed its audit of ATI for the years 2000 through 2004 and issued its final Notice of Assessment. The CRA is currently auditing international transactions for the years 2005 through 2010. During the second quarter of 2010 the U.S. Internal Revenue Service completed its audit of the U.S. Federal income tax returns for the years ending 2004 through 2006 inclusive. As of December 31, 2011 the German tax authorities completed their audit of the Company’s former German subsidiaries for the tax years 2004 through 2007. The German tax authorities conducted an audit for the tax years 2008 through 2011 in 2013. The Company is not currently aware of any adjustments as a result of this audit. The Company and its subsidiaries have several foreign, foreign provincial, and U.S. state audits in process at any one point in time. The Company has provided for uncertain tax positions that require a liability under the adopted method to account for uncertainty in income taxes. The Company has not recognized any current or long-term deferred tax assets under a valuation allowance as a result of the application of uncertainty in income taxes in ASC 740 for unrecognized tax benefits as of December 28, 2013.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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