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: possible impact of future accounting rules on AMD's condensed consolidated financial statements; demand for AMD's products; the growth, change and competitive landscape of the markets in which AMD participates; international sales will continue to be a significant portion of total sales in the foreseeable future; that AMD's cash, cash equivalents and short-term investment balances together with the availability under that certain revolving credit facility (the Revolving Credit Facility) made available to AMD and certain of its subsidiaries under the Credit Agreement, 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; AMD's expectation that based on the information presently known to management, the potential liability related to AMD's current litigation will not have a material adverse effect on its financial condition, cash flows or results of operations; anticipated ongoing and increased costs related to enhancing and implementing information security controls; revenue allocated to remaining performance obligations that are unsatisfied which will be recognized over the next 12 months; all unbilled accounts receivables are expected to be billed and collected within 12 months; a small number of customers will continue to account for a substantial part of AMD's revenue in the future; that AMD may have tax audits close in the next 12 months that could materially change the balance of the uncertain tax benefits; and the acquisition of Xilinx, Inc. is currently expected to close by the end of calendar year 2021. For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements, see "Part II, Item 1A-Risk Factors" and the "Financial Condition" section set forth below, and such other risks and uncertainties as set forth in this report or detailed in our otherSecurities and Exchange Commission (SEC) reports and filings. We assume no obligation to update forward-looking statements. AMD, the AMD Arrow logo, ATI, and the ATI logo, Athlon, EPYC, Radeon, Ryzen, Threadripper and combinations thereof, are trademarks ofAdvanced Micro Devices, Inc. Microsoft and Xbox One are trademarks or registered trademarks of Microsoft Corporation inthe United States and other jurisdictions. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners. "Zen" is a code name for an AMD architecture, and is not a product name. 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 ofDecember 26, 2020 andDecember 28, 2019 , and for each of the three years for the period endedDecember 26, 2020 as filed in our Annual Report on Form 10-K for the fiscal year endedDecember 26, 2020 . Overview We are a global semiconductor company. Our products include x86 microprocessors (CPUs), accelerated processing units which integrate microprocessors and graphics (APUs), discrete graphics processing units (GPUs), semi-custom System-on-Chip (SOC) products and chipsets for the PC, gaming, datacenter and embedded markets. In addition, we provide development services and sell or license portions of our intellectual property portfolio. In this section, we will describe the general financial condition and the results of operations ofAdvanced Micro Devices, Inc. and its wholly-owned subsidiaries (collectively, "us," "our" or "AMD"), including a discussion of our results of operations for the three months endedMarch 27, 2021 compared to the prior year period, an analysis of changes in our financial condition and a discussion of our contractual obligations. Net revenue for the three months endedMarch 27, 2021 was$3.4 billion , a 93% increase compared to the prior year period. The increase was due to a 46% increase in Computing and Graphics net revenue and a 286% increase in Enterprise, Embedded and Semi-Custom net revenue. The increase in Computing and Graphics segment net 19 -------------------------------------------------------------------------------- Table of Contents revenue was primarily due to higher sales of our Ryzen™ processors and Radeon™ products. The increase in Enterprise, Embedded and Semi-Custom net revenue was primarily due to higher semi-custom revenue and EPYC™ server processor revenue. Our operating income for the three months endedMarch 27, 2021 was$662 million compared to operating income of$177 million for the prior year period. Our net income for the three months endedMarch 27, 2021 was$555 million compared to net income of$162 million for the prior year period. The increase in operating income was primarily driven by strong revenue growth which more than offset higher operating expenses. The increase in net income was primarily driven by higher operating income, partially offset by a higher income tax provision. Cash, cash equivalents and short-term investments as ofMarch 27, 2021 were$3.1 billion , compared to$2.3 billion as ofDecember 26, 2020 . The aggregate principal amount of our outstanding debt obligations was$314 million and$338 million as ofMarch 27, 2021 andDecember 26, 2020 , respectively. During the first quarter of 2021, we expanded our mobile processor and graphics product families. InJanuary 2021 , we announced the AMD Ryzen 5000 Series Mobile Processors for the laptop market with Zen 3 core architecture designed for gamers, creators and professionals. InMarch 2021 , we introduced the AMD Radeon RX 6700 XT graphics card built on 7 nm process technology and AMD RDNA 2 gaming architecture to deliver performance and power efficiency. We also announced our new AMD EPYC 7003 Series CPUs for high-performance computing, cloud and enterprise customers. The EPYC 7003 series processors have up to 64 Zen 3 cores per processor and per-core cache memory and also include security features through AMD Infinity Guard to help drive faster times to results and improve business outcomes. InMarch 2021 , we also announced, as part of our AMD Ryzen mobile processor family, the AMD Ryzen PRO 5000 Series Mobile Processors with Zen 3 core architecture for business laptops. AMD Ryzen PRO Series Mobile Processors are built to provide powerful computing experiences with security features for demanding business environments like remote working. Amid the COVID-19 pandemic, our main priority remains the health and safety of our employees. We continue to monitor and take safety measures to protect our employees and support those employees who work from home so that they can be productive. Our offices remain open to enable critical on-site business functions in accordance with local government guidelines and the majority of our employees inChina andSingapore now work on site subject to local government health measures. However, in most other geographies, the majority of our employees continued to work from home during the first quarter of 2021. The current COVID-19 pandemic continues to impact our business operations and practices, and while we expect that it may continue to impact our business, we experienced limited financial disruption during the first quarter of 2021. We continue to monitor demand signals as we adjust our supply chain requirements based on changing customer needs and demands. As part of our strategy to establish AMD as the industry's high performance computing leader, we announced inOctober 2020 that we entered into a definitive agreement to acquire Xilinx, Inc. in an all-stock transaction. OnApril 7, 2021 , our stockholders and Xilinx's stockholders voted to approve their respective proposals relating to the pending acquisition of Xilinx by AMD. The closing of the Merger is subject to customary conditions, including regulatory approval, and is currently expected to occur by the end of calendar year 2021. We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements. Results of Operations We report our financial performance based on the following two reportable segments: the Computing and Graphics segment and the Enterprise, Embedded and Semi-Custom segment. Additional information on our reportable segments is contained in Note 11-Segment Reporting of the notes to condensed consolidated financial statements (Part I, Financial Information of this Form 10-Q). Our operating results tend to vary seasonally. Historically, our net revenue has been generally higher in the second half of the year than in the first half of the year, although market conditions and product transitions could impact these trends. 20
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Table of Contents The following table provides a summary of net revenue and operating income (loss) by segment: Three Months Ended March 27, March 28, 2021 2020 (In millions) Net revenue: Computing and Graphics$ 2,100 $ 1,438 Enterprise, Embedded and Semi-Custom 1,345 348 Total net revenue$ 3,445 $ 1,786 Operating income (loss): Computing and Graphics$ 485 $ 262 Enterprise, Embedded and Semi-Custom 277 (26) All Other (100) (59) Total operating income$ 662 $ 177 Computing and Graphics Computing and Graphics net revenue of$2.1 billion for the three months endedMarch 27, 2021 increased by 46%, compared to net revenue of$1.4 billion for the prior year period, primarily as a result of a 12% increase in unit shipments and a 32% increase in average selling price. The increase in unit shipments was primarily due to higher demand for our Ryzen processors. The increase in average selling price was primarily driven by a richer mix of Ryzen and Radeon processors. Computing and Graphics operating income was$485 million for the three months endedMarch 27, 2021 , compared to operating income of$262 million for the prior year period. The increase in operating income was primarily driven by the margin contribution from higher sales which more than offset higher operating expenses. Operating expenses increased for the reasons outlined under "Expenses" below. Enterprise, Embedded and Semi-Custom Enterprise, Embedded and Semi-Custom net revenue of$1.3 billion for the three months endedMarch 27, 2021 increased by 286%, compared to net revenue of$348 million for the prior year period, primarily driven by higher semi-custom revenue and higher sales of our EPYC server processors. Enterprise, Embedded and Semi-Custom operating income was$277 million for the three months endedMarch 27, 2021 compared to operating loss of$26 million for the prior year period. The increase in operating income was due to the higher revenue which more than offset higher operating expenses. Operating expenses increased for the reasons outlined under "Expenses" below. All Other All Other operating loss of$100 million for the three months endedMarch 27, 2021 consisted of$85 million of stock-based compensation expense and$15 million of acquisition-related costs. All Other operating loss of$59 million for the prior year period consisted of stock-based compensation expense. International Sales International sales as a percentage of net revenue were 76% for the three months endedMarch 27, 2021 and 82% for the prior year period. 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 inU.S. dollars. 21 -------------------------------------------------------------------------------- Table of Contents Comparison of Gross Margin, Expenses, Licensing Gain, Interest Expense, Other Expense and Income Taxes The following is a summary of certain condensed consolidated statement of operations data for the periods indicated: Three Months Ended March 27, March 28, 2021 2020 (In millions except for percentages)
Net revenue $ 3,445$ 1,786 Cost of sales 1,858 968 Gross profit 1,587 818 Gross margin 46 % 46 % Research and development 610 442 Marketing, general and administrative 319 199 Licensing gain (4) - Interest expense (9) (13) Other income (expense), net (11) 4 Income tax provision 89 6 Equity income in investee 2 - Gross Margin Gross margin was 46% for the three months endedMarch 27, 2021 andMarch 28, 2020 . During the three months endedMarch 27, 2021 , the higher gross margin from the richer mix of our Ryzen, Radeon and EPYC processors sales was offset by a higher proportion of sales of our semi-custom products, which have a lower gross margin than the Company's average. Expenses Research and Development Expenses Research and development expenses of$610 million for the three months endedMarch 27, 2021 increased by$168 million , or 38%, compared to$442 million for the prior year period. The increase was primarily driven by an increase in product development costs in both the Computing and Graphics and Enterprise, Embedded and Semi-Custom segments due to an increase in headcount and higher annual employee incentives driven by improved financial performance. Marketing, General and Administrative Expenses Marketing, general and administrative expenses of$319 million for the three months endedMarch 27, 2021 increased by$120 million , or 60%, compared to$199 million for the prior year period. The increase was primarily due to an increase in go-to-market activities in both the Computing and Graphics and Enterprise, Embedded and Semi-Custom segments, an increase in headcount and higher annual employee incentives driven by improved financial performance. In addition, we incurred$15 million of acquisition-related costs for the three months endedMarch 27, 2021 in connection with our pending acquisition of Xilinx, Inc. Licensing Gain During the three months endedMarch 27, 2021 , we recognized$4 million of royalty income associated with the licensed IP to THATIC JV. Interest Expense Interest expense for the three months endedMarch 27, 2021 was$9 million compared to$13 million for the prior year period. The decrease was due to lower debt balances as a result of conversions by the holders of our 2.125% Convertible Senior Notes due 2026. 22 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense), Net Other expense, net was$11 million for the three months endedMarch 27, 2021 , compared to$4 million of Other income, net for the prior year period. The change was primarily due to an impairment charge of$8 million associated with an equity investment and a loss on conversion of our convertible debt instruments of$6 million in the current period. Income Tax Provision We recorded an income tax provision of$89 million and$6 million for the three months endedMarch 27, 2021 andMarch 28, 2020 , respectively, representing effective tax rates of 13.8% and 3.3%, respectively. The increase in income tax expense and effective tax rate in the current year period was due to significantly higher income inthe United States , partially offset by the foreign derived intangible income benefit, research and development tax credits, and excess tax benefit for stock-based compensation. The lower income tax expense and effective tax rate for the prior year period was due to a full valuation allowance inthe United States during 2020, a significant portion of which was released by us in the fourth quarter of 2020. As ofMarch 27, 2021 , we continue to maintain a valuation allowance for certain federal, state, and foreign tax attributes. The federal valuation allowance maintained is due to limitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. The state and foreign valuation allowance maintained is due to lack of sufficient sources of taxable income. FINANCIAL CONDITION Liquidity and Capital Resources As ofMarch 27, 2021 , our cash, cash equivalents and short-term investments were$3.1 billion , compared to$2.3 billion as ofDecember 26, 2020 . The percentage of cash, cash equivalents and short-term investments held domestically were 93% and 94% as ofMarch 27, 2021 andDecember 26, 2020 , respectively. Our operating, investing and financing activities for the three months endedMarch 27, 2021 compared to the prior year period are as described below: Three Months Ended March 27, March 28, 2021 2020 (In millions) Net cash provided by (used in): Operating activities$ 898 $ (65) Investing activities (722) (73) Financing activities (8) 2
Net increase (decrease) in cash, cash equivalents, and restricted
Our aggregate principal debt obligations were$314 million and$338 million as ofMarch 27, 2021 andDecember 26, 2020 , respectively. We believe our cash, cash equivalents and short-term investments along with our Revolving Credit Facility will be sufficient to fund current and long-term operations, including capital expenditures, over the next 12 months and beyond. We believe we will be able to access the capital markets should we require additional funds. However, we cannot assure that such funds will be available on favorable terms, or at all. Operating Activities Our working capital cash inflows and outflows from operations are primarily cash collections from our customers, payments for inventory purchases and payments for employee-related expenditures. Net cash provided by operating activities was$898 million in the three months endedMarch 27, 2021 , primarily due to our net income of$555 million , adjusted for non-cash and non-operating charges of$286 million and net cash inflows of$57 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a$466 million increase in accounts payable due to timing of payments to 23 -------------------------------------------------------------------------------- Table of Contents our suppliers, partially offset by a$112 million increase in accounts receivable driven primarily by higher revenue in the first quarter of 2021 compared to the fourth quarter of 2020, and a$254 million increase in inventories driven by an increase in product build in support of customer demand. Net cash used in operating activities was$65 million for the three months endedMarch 28, 2020 , primarily due to our net income of$162 million , adjusted for non-cash and non-operating charges of$162 million and net cash outflows of$389 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a$369 million decrease in accounts payable due to timing of payments to our suppliers and a$74 million increase in inventories primarily driven by an increase in product build in support of customer demand, partially offset by a$168 million decrease in accounts receivable driven primarily by lower revenue in the first quarter of 2020 compared to the fourth quarter of 2019. Investing Activities Net cash used in investing activities was$722 million for the three months endedMarch 27, 2021 which primarily consisted of$858 million for purchases of short-term investments and$66 million for purchases of property and equipment, partially offset by$200 million for maturities of short-term investments. Net cash used in investing activities was$73 million for the three months endedMarch 28, 2020 which primarily consisted of$55 million for purchases of short-term investments and$55 million for purchases of property and equipment, partially offset by$37 million for maturities of available-for-sale debt securities. Financing Activities Net cash used in financing activities was$8 million for the three months endedMarch 27, 2021 , which primarily consisted of common stock repurchases for tax withholding on employee equity plans of$10 million , partially offset by a cash inflow of$2 million from exercises of stock options under our employee equity plans. Net cash provided by financing activities was$2 million for the three months endedMarch 28, 2020 , which primarily consisted of a cash inflow of$3 million from exercises of stock options under our employee equity plans. Contractual Obligations There were no significant changes outside the ordinary course of business in our contractual obligations from those disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" of our Annual Report on Form 10-K for the fiscal year endedDecember 26, 2020 . 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 withU.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 revenue, inventories, goodwill 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 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 for the three months endedMarch 27, 2021 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 fiscal year endedDecember 26, 2020 . 24
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