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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2020
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
 
amd-20200926_g1.jpg
ADVANCED MICRO DEVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware94-1692300
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

2485 Augustine Drive
Santa Clara, California 95054
(Address of principal executive offices)

(408) 749-4000
Registrant’s telephone number, including area code

N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
 Name of each exchange on which registered
Common Stock, $0.01 par value
AMD
The Nasdaq Global Select Market
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 (the Exchange Act) 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 ☑ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes ☑    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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes    No ☑
Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of October 23, 2020: 1,202,711,638



INDEX
 
  Page No.
2


PART I. FINANCIAL INFORMATION
 
ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months EndedNine Months Ended
 September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
 (In millions, except per share amounts)
Net revenue$2,801 $1,801 $6,519 $4,604 
Cost of sales1,571 1,024 3,623 2,685 
Gross profit1,230 777 2,896 1,919 
Research and development508 406 1,410 1,152 
Marketing, general and administrative273 185 687 544 
Licensing gain   (60)
Operating income449 186 799 283 
Interest expense(11)(24)(38)(76)
Other expense, net(37)(36)(32)(40)
Income before income taxes and equity income 401 126 729 167 
Income tax provision (benefit) 12 7 22 (4)
Equity income in investee1 1 2  
Net income$390 $120 $709 $171 
Earnings per share
Basic$0.33 $0.11 $0.60 $0.16 
Diluted$0.32 $0.11 $0.59 $0.15 
Shares used in per share calculation
Basic1,184 1,097 1,176 1,075 
Diluted1,215 1,117 1,208 1,107 
See accompanying notes.
3


Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 Three Months EndedNine Months Ended
 September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
 (In millions)
Net income $390 $120 $709 $171 
Other comprehensive income (loss), net of tax of zero:
Net change in unrealized gains (losses) on cash flow
hedges
9 (7)5 1 
Total comprehensive income $399 $113 $714 $172 
See accompanying notes.
4


Advanced Micro Devices, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
September 26,
2020
December 28,
2019
 (In millions, except par value amounts)
ASSETS
Current assets:
Cash and cash equivalents$1,296 $1,466 
Short-term investments475 37 
Accounts receivable, net2,134 1,859 
Inventories1,292 982 
Receivables from related parties4 20 
Prepaid expenses and other current assets299 233 
Total current assets5,500 4,597 
Property and equipment, net595 500 
Operating lease right-of-use assets215 205 
Goodwill289 289 
Investment: equity method 60 58 
Other non-current assets364 379 
Total assets$7,023 $6,028 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$752 $988 
Payables to related parties115 213 
Accrued liabilities1,478 1,084 
Other current liabilities72 74 
Total current liabilities2,417 2,359 
Long-term debt, net373 486 
Long-term operating lease liabilities205 199 
Other long-term liabilities161 157 
Contingencies (See Note 11)
Stockholders’ equity:
Capital stock:
Common stock, par value 0.01; shares authorized: 2,250; shares issued: 1,208 and 1,175; shares outstanding: 1,202 and 1,170
12 12 
Additional paid-in capital10,362 9,963 
Treasury stock, at cost (shares held: 6 and 5)
(126)(53)
Accumulated deficit(6,386)(7,095)
Accumulated other comprehensive income5  
Total stockholders’ equity 3,867 2,827 
Total liabilities and stockholders’ equity $7,023 $6,028 

See accompanying notes.
5


Advanced Micro Devices, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months Ended
 September 26,
2020
September 28,
2019
 (In millions)
Cash flows from operating activities:
Net income$709 $171 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization222 158 
Stock-based compensation 195 140 
Amortization of debt discount and issuance costs12 25 
Amortization of operating lease right-of-use assets31 27 
Loss on debt redemption, repurchase and conversion38 48 
Loss on sale/disposal of property and equipment28 34 
Other12 (13)
Changes in operating assets and liabilities:
Accounts receivable, net(287)(158)
Inventories(310)(195)
Receivables from related parties16 17 
Prepaid expenses and other assets(172)(32)
Payables to related parties(98)8 
Accounts payable, accrued liabilities and other121 (179)
Net cash provided by operating activities517 51 
Cash flows from investing activities:
Purchases of property and equipment(220)(175)
Purchases of short-term investments
(530)(284)
Proceeds from maturity of short-term investments
92 309 
Collection of deferred proceeds on sale of receivables 25 
Other 2 
Net cash used in investing activities(658)(123)
Cash flows from financing activities:
Proceeds from short-term debt borrowings200  
Repayment and extinguishment of debt(200)(331)
Proceeds from warrant exercise 449 
Proceeds from sales of common stock through employee equity plans45 38 
Common stock repurchases for tax withholding on employee equity plans
(73)(6)
Other(1) 
Net cash provided by (used in) financing activities(29)150 
Net increase (decrease) in cash, cash equivalents, and restricted cash(170)78 
Cash, cash equivalents, and restricted cash at beginning of period1,470 1,083 
Cash, cash equivalents, and restricted cash at end of period$1,300 $1,161 
Supplemental cash flow information:
Non-cash investing and financing activities:
Purchases of property and equipment, accrued but not paid$36 $120 
Issuance of common stock to settle convertible debt$156 $108 
Transfer of assets for acquisition of property and equipment$57 $ 
Issuance of treasury stock to partially settle debt$ $7 
Non-cash activities for leases:
Operating lease right-of-use assets acquired by assuming related liabilities$40 $12 
Reconciliation of cash, cash equivalents, and restricted cash
Cash and cash equivalents$1,296 $1,156 
Restricted cash included in Prepaid expenses and other current assets4 5 
Total cash, cash equivalents, and restricted cash$1,300 $1,161 
See accompanying notes.
6


Advanced Micro Devices
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
Three Months EndedNine Months Ended
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
(In millions)
Capital stock:
Common stock
Balance, beginning of period$12 $11 $12 $10 
Issuance of common stock upon warrant exercise— — — 1 
Balance, end of period$12 $11 $12 $11 
Additional paid-in capital
Balance, beginning of period$10,127 $9,325 $9,963 $8,750 
Common stock issued under employee equity plans3 3 45 38 
Stock-based compensation76 54 195 140 
Issuance of common stock upon warrant exercise— — — 449 
Issuance of common stock to settle convertible debt156 108 156 108 
Issuance of treasury stock to partially settle debt — — — 4 
Issuance of common stock warrant — 3 1 
Balance, end of period$10,362 $9,490 $10,362 $9,490 
Treasury stock
Balance, beginning of period$(54)$(50)$(53)$(50)
Issuance of treasury stock to partially settle debt — — — 3 
Common stock repurchases for tax withholding on employee equity plans
(72)(3)(73)(6)
Balance, end of period$(126)$(53)$(126)$(53)
Accumulated deficit:
Balance, beginning of period$(6,776)$(7,385)$(7,095)$(7,436)
Net income 390 120 709 171 
Balance, end of period$(6,386)$(7,265)$(6,386)$(7,265)
Accumulated other comprehensive loss:
Balance, beginning of period$(4)$ $ $(8)
     Other comprehensive income (loss)9 (7)5 1 
Balance, end of period$5 $(7)$5 $(7)
Total stockholders' equity$3,867 $2,176 $3,867 $2,176 
See accompanying notes.

7


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 three and nine months ended September 26, 2020 shown in this report are not necessarily indicative of results to be expected for the full year ending December 26, 2020 or any other future period. 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, cash flows and stockholders’ equity. 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 fiscal year ended December 28, 2019. Certain prior period amounts have been reclassified to conform to current period presentation.
The Company uses a 52 or 53 week fiscal year ending on the last Saturday in December. The three and nine months ended September 26, 2020 and September 28, 2019 each consisted of 13 weeks and 39 weeks, respectively.
Significant Accounting Policies. Below reflects the enhanced disclosures pertaining to the Company’s accounting policy for revenue recognition. There have been no material changes to the Company’s significant accounting policies in Note 2—Summary of Significant Accounting Policies, of the Notes to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019.
Revenue Recognition. Revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. Sales, value-added, and other taxes collected concurrently with the provision of goods or services are excluded from revenue. Shipping and handling costs associated with product sales are included in cost of sales.
Nature of products and services
The Company’s microprocessors (CPUs), chipsets, graphics processing units (GPUs), data center and professional graphics products, accelerated processing units (APUs), server and embedded processors, and System-on-Chip (SoC) products may be sold as standard non-custom products, or custom products manufactured to customers’ specifications. The Company also provides development services and licenses portions of its intellectual property (IP) portfolio. Substantially all the Company’s revenue is derived from product sales, representing a single performance obligation.
Non-custom products: The Company transfers control and recognizes revenue when non-custom products are shipped to customers, which includes original equipment manufacturers (OEM) and distributors, in accordance with the shipping terms of the sale. Non-custom product arrangements generally comprise a single performance obligation. Certain OEMs may be entitled to rights of return and rebates under OEM agreements. The Company also sells to distributors under terms allowing the majority of distributors certain rights of return and price protection on unsold merchandise held by them. The Company estimates the amount of variable consideration under OEM and distributor arrangements and, accordingly, records a provision for product returns, allowances for price protection and rebates based on actual historical experience and any known events.
The Company offers incentive programs to certain customers, including cooperative advertising, marketing promotions, volume-based incentives, and special pricing arrangements. Where funds provided for such programs can be estimated, the Company recognizes a reduction to revenue at the time the related revenue is recognized; otherwise, the Company recognizes such reduction to revenue at the later of when: i) the related revenue transaction occurs; or ii) the program is offered. For transactions where the Company reimburses a customer for a portion of the customer’s cost to perform specific product advertising or marketing and promotional activities, such amounts are recognized as a reduction to revenue unless they qualify for expense recognition.
Constraints of variable consideration have not been material.
8


Custom products: Custom products which are associated with the Company’s Enterprise, Embedded, and Semi-Custom segment (semi-custom products), sold under non-cancellable purchases orders, for which the Company has an enforceable right to payment, and which have no alternative use to the Company at contract inception, are recognized as revenue, over the time of production of the products by the Company. The Company utilizes an input method (cost incurred plus estimated margin) to determine the amount of revenue to recognize for in-process, but incomplete, customer orders at a reporting date. The Company believes that a cost-based input method is the most appropriate manner to measure how the Company satisfies its performance obligations to customers because the effort and costs incurred best depict the Company’s performance in transferring control of goods or services promised to its customers (that is, the satisfaction of the Company’s performance obligation).
Sales of semi-custom products are not subject to a right of return. Custom products arrangements involve a single performance obligation. There are no variable consideration estimates associated with custom products.
Development and intellectual property licensing agreements: From time to time, the Company may enter into arrangements with customers that combine the provision of development services and a license to the right to use the IP. These arrangements are deemed to be single or multiple performance obligations based upon the nature of the arrangements. Revenue is recognized upon the transfer of control, over time or at a point in time, depending on the nature of the arrangements. The Company evaluates whether the licensing component is distinct. A licensing component is distinct if it is both (i) capable of being distinct and (ii) distinct in the context of the arrangement. If the license is not distinct it is combined with the development services as a single performance obligation and recognized over time. If the license is distinct, revenue is recognized at a point in time when the customer has the ability to benefit from the license.
From time to time, the Company may enter into arrangements with customers that solely involve the sale or licensing of its patents or IP. Generally, there are no performance obligations beyond transferring the designated license to the Company’s patents or IP. Accordingly, revenue is recognized at a point in time when the customer has the ability to benefit from the license.
There are no variable consideration estimates associated with either combined development and intellectual property arrangements or for standalone arrangements involving either the sale or licensing of IP.
Total revenue recognized over time associated with custom products and development services accounted for approximately 25% and 15% for the three and nine months ended September 26, 2020, respectively, and 17% and 24% for the three and nine months ended September 28, 2019, respectively, of the Company’s revenue.
Customers are generally required to pay for products and services within the Company’s standard contractual terms, which are typically net 30 to 60 days. The Company has determined that it does not have significant financing components in its contracts with customers.
Recently Adopted Accounting Standards
Financial Instruments. In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial InstrumentsCredit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The Company adopted this standard in the first quarter of 2020 using the modified retrospective adoption method. This standard did not have an impact on the condensed consolidated financial statements upon adoption.
Recently Issued Accounting Standards
Debt. In August 2020, the FASB issued ASU 2020-06, DebtDebt with Conversion and Other Options (Subtopic 470-20) and Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This standard simplifies the accounting for convertible instruments and its application of the derivatives scope exception for contracts in its own equity by eliminating some of the models that require separating embedded conversion features from convertible instruments. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and enhances disclosures about the terms of convertible instruments and contracts in an entity’s own equity. The standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted, and can be adopted through either a modified retrospective method with a cumulative effect adjustment to opening retained earnings or a full retrospective method. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
9


Although there were several other new accounting pronouncements issued by the FASB during the three and nine months ended September 26, 2020, the Company does not believe any of these accounting pronouncements had or will have a material impact on its condensed consolidated financial statements.

NOTE 2. Supplemental Balance Sheet Information
Short-term Investments
Short-term investments consist of time deposits and commercial paper. As of September 26, 2020, the Company had $400 million of time deposits and $75 million of commercial paper. As of December 28, 2019, the Company had $37 million of commercial paper.
Accounts Receivable, net
As of September 26, 2020 and December 28, 2019, Accounts receivable, net included unbilled accounts receivable of $115 million and $197 million, respectively. Unbilled receivables primarily represent work completed on development services recognized as revenue but not yet invoiced to customers and semi-custom products under non-cancellable purchase orders that have no alternative use to the Company at contract inception, for which revenue has been recognized but not yet invoiced to customers. All unbilled accounts receivable are expected to be billed and collected within twelve months.
Inventories
September 26,
2020
December 28,
2019
 (In millions)
Raw materials$98 $94 
Work in process990 691 
Finished goods204 197 
Total inventories$1,292 $982 
Property and Equipment, net
September 26,
2020
December 28,
2019
 (In millions)
Leasehold improvements$203 $203 
Equipment1,190 951 
Construction in progress92 114 
Property and equipment, gross1,485 1,268 
Accumulated depreciation(890)(768)
Total property and equipment, net$595 $500 
Other Non-Current Assets
September 26,
2020
December 28,
2019
(In millions)
Software technology and licenses, net$194 $210 
Other170 169 
Total other non-current assets$364 $379 
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Accrued Liabilities
September 26,
2020
December 28,
2019
 (In millions)
Accrued compensation and benefits$379 $285 
Accrued marketing programs and advertising expenses709 454 
Other390 345 
Total accrued liabilities$1,478 $1,084 
Remaining Performance Obligations
Revenue allocated to remaining performance obligations that are unsatisfied (or partially unsatisfied) as of September 26, 2020 is $375 million, which may include amounts received from customers but not yet earned and amounts that will be invoiced and recognized as revenue in future periods associated with any combination of development services, IP licensing and product revenue. The Company expects to recognize $178 million of such amounts as revenue in the next 12 months.
The revenue allocated to remaining performance obligations does not include amounts which have an original expected contractual duration of one year or less.

NOTE 3. Related Parties — Equity Joint Ventures
ATMP Joint Ventures
The Company holds a 15% equity interest in two joint ventures (collectively, the ATMP JV) with affiliates of Tongfu Microelectronics Co., Ltd, a Chinese joint stock company. The Company has no obligation to fund the ATMP JV. The Company accounts for its equity interests in the ATMP JV under the equity method of accounting due to its significant influence over the ATMP JV. As of September 26, 2020 and December 28, 2019, the carrying value of the Company’s investment in the ATMP JV was $60 million and $58 million, respectively.
The ATMP JV provides assembly, test, mark and packaging (ATMP) services to the Company. The Company assists the ATMP JV in its management of certain raw material inventory. The purchases from and resales to the ATMP JV of inventory under the Company’s inventory management program are reported within purchases and resales with the ATMP JV and do not impact the Company’s condensed consolidated statement of operations.
The Company’s purchases from the ATMP JV during the three and nine months ended September 26, 2020 amounted to $204 million and $559 million, respectively. The Company’s purchases from the ATMP JV during the three and nine months ended September 28, 2019 amounted to $175 million and $479 million, respectively. As of September 26, 2020 and December 28, 2019, the amounts payable to the ATMP JV were $115 million and $213 million, respectively, and are included in Payables to related parties on the Company’s condensed consolidated balance sheets. The Company’s resales to the ATMP JV during the three and nine months ended September 26, 2020 amounted to $3 million and $18 million, respectively. The Company’s resales to the ATMP JV during the three and nine months ended September 28, 2019 amounted to $4 million and $47 million, respectively. As of September 26, 2020 and December 28, 2019, the Company’s receivables from the ATMP JV were $4 million and $7 million, respectively, and were included in Receivables from related parties on the Company’s condensed consolidated balance sheets.
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THATIC Joint Ventures
The Company holds equity interests in two joint ventures (collectively, the THATIC JV) with Higon Information Technology Co., Ltd. (THATIC), a third-party Chinese entity. The Company holds a majority interest in one of the joint ventures and a minority interest in the other. The Company is not a primary beneficiary of the THATIC JV and, as such, the Company does not consolidate either of these entities and accounts for its equity interests in the THATIC JV under the equity method of accounting. The Company’s share in the net losses of the THATIC JV is not recorded in the Company’s condensed consolidated statements of operations since the Company is not obligated to fund the THATIC JV’s losses in excess of the Company’s investment in the THATIC JV, which was zero as of both September 26, 2020 and December 28, 2019.
In February 2016, the Company licensed certain of its intellectual property (Licensed IP) to the THATIC JV for a total of $293 million in license fees payable over several years upon achievement of certain milestones. The Company also expects to receive a royalty based on the sales of the THATIC JV’s products to be developed on the basis of such Licensed IP. The Company classifies Licensed IP income and royalty income, associated with the February 2016 agreement, as licensing gain within operating income.
The Company recognized $60 million as licensing gain associated with the Licensed IP during the nine months ended September 28, 2019. As of September 26, 2020, the Company had no receivables from the THATIC JV. The Company’s receivables from the THATIC JV was $13 million as of December 28, 2019, and was included in Receivables from related parties on the Company’s condensed consolidated balance sheets.
In June 2019, the Bureau of Industry and Security of the United States Department of Commerce added certain Chinese entities to the Entity List, including THATIC and the THATIC JV. The Company is complying with U.S. law pertaining to the Entity List designation.

NOTE 4. Debt and Revolving Facility
Debt
The Company’s total debt as of September 26, 2020 and December 28, 2019 consisted of the following:
September 26,
2020
December 28,
2019
(In millions)
2.125% Convertible Senior Notes Due 2026 (2.125% Notes)
$86 $251 
7.50% Senior Notes Due 2022 (7.50% Notes)
312 312 
Total debt (principal amount)398 563 
Unamortized debt discount for 2.125% Notes
(23)(73)
Unamortized debt issuance costs for 2.125% Notes
(1)(3)
Unamortized debt issuance costs for 7.50% Notes
(1)(1)
Total long-term debt (net)$373 $486 

2.125% Convertible Senior Notes Due 2026
In September 2016, the Company issued $805 million in aggregate principal amount of 2.125% Convertible Senior Notes which mature on September 1, 2026. The 2.125% Notes are general unsecured senior obligations of the Company.
Holders of the 2.125% Notes may convert them at their option during certain time periods and upon the occurrence of certain events, including, during any calendar quarter, if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day (equivalent to an initial conversion price of approximately $8.00 per share of common stock). The above event was met during the third calendar quarter of 2020 and as a result, the 2.125% Notes are convertible at the option of the holder from October 1, 2020 until December 31, 2020.
During the three and nine months ended September 26, 2020, holders of the 2.125% Notes converted $165 million principal amount of these notes, for which the Company issued approximately 20 million shares of the
12


Company’s common stock at the conversion price of $8.00 per share. The Company recorded a loss of $38 million from these conversions in Other expense, net on its condensed consolidated statements of operations. As of September 26, 2020, the outstanding aggregate principal amount of the 2.125% Notes was $86 million.
The Company’s current intent is to deliver shares of its common stock upon conversion of the 2.125% Notes. The Company continued to classify the carrying value of the liability component of the 2.125% Notes as long-term debt and the equity component of the 2.125% Notes as permanent equity on its condensed consolidated balance sheet as of September 26, 2020. The effective interest rate of the liability component of the 2.125% Notes is 8%. This interest rate was based on the interest rates of similar liabilities at the time of issuance that did not have associated conversion features. The carrying amount of the equity component of the 2.125% Notes was $33 million and $95 million as of September 26, 2020 and December 28, 2019, respectively.
7.50% Senior Notes Due 2022
On August 15, 2012, the Company issued $500 million of its 7.50% Senior Notes due 2022. As of September 26, 2020, the outstanding aggregate principal amount of the 7.50% Notes was $312 million.
Revolving Credit Facility
On June 7, 2019, the Company entered into a secured revolving credit facility for up to $500 million (the Revolving Facility) pursuant to a credit agreement by and among the Company, as borrower, the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent (the Credit Agreement). The Revolving Facility consists of a $500 million, five-year secured revolving loan facility, including a $50 million swingline subfacility and a $75 million sublimit for letters of credit.
Prior to the current quarter, obligations under the Credit Agreement were secured by a lien on substantially all the Company’s property, other than intellectual property. During the three months ended September 26, 2020, as a result of upgrades of the Company’s debt ratings, the security requirements under the Credit Agreement were terminated and the liens on the Company’s collateral were released.
The Credit Agreement also provides the ability to increase the Revolving Facility or incur incremental term loans or other incremental equivalent debt by an amount not to exceed certain amounts as set forth in the Credit Agreement. The Company’s available borrowings under the Revolving Facility are also subject to reduction by an amount equal to the net cash proceeds of (i) any debt issuances not permitted by the Revolving Facility and (ii) any non-ordinary course asset sales, in excess of $250 million, if such net cash proceeds are not reinvested by the Company within twelve months of receipt.
On April 6, 2020, the Company borrowed $200 million under the Credit Agreement via the LIBOR rate loan option at an annual interest rate of 2.37%. The Company repaid the $200 million borrowing plus interest on July 6, 2020. As of September 26, 2020, the Company had $13 million of letters of credit outstanding under the Credit Agreement and the Company was in compliance with all required covenants under the Credit Agreement.
NOTE 5. Financial Instruments
Fair Value Measurements
Financial Instruments Recorded at Fair Value on a Recurring Basis
As of September 26, 2020 and December 28, 2019, the Company had $75 million and $37 million of commercial paper, respectively, included in Short-term investments on the Company’s condensed consolidated balance sheets. The commercial paper is classified within Level 2 as its fair value estimates was based on quoted prices for comparable instruments.
In addition, as of September 26, 2020 and December 28, 2019, the Company also had $42 million and $30 million, respectively, of investments in mutual funds held in a Rabbi trust established for the Company’s deferred compensation plan, which were included in Other non-current assets on the Company’s condensed consolidated balance sheets. These money market funds and mutual funds are classified within Level 1 as their fair value estimates are based on quoted prices for identical instruments in active markets. The Company is restricted from accessing these investments.
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Financial Instruments Not Recorded at Fair Value
The Company carries its financial instruments at fair value except for its long-term debt. The carrying amounts and estimated fair values of the Company’s long-term debt are as follows:
 September 26, 2020December 28, 2019
 Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
 (In millions)
Long-term debt, net$373 $1,190 $486 $1,823 

The estimated fair value of the Company’s long-term debt is based on Level 2 inputs as the fair value is based on quoted prices for the Company’s debt and comparable instruments in inactive markets. The Company’s 2.125% Notes, included in Long-term debt, net above, were convertible at the option of the holders as of September 26, 2020. The estimated fair value of the 2.125% Notes considers the relationship between the Company’s stock price of $78.055 as of September 25, 2020, the last trading day of the three months ended September 26, 2020 and the equivalent initial conversion price of approximately $8.00 per share of common stock.
The fair value of the Company’s time deposits, accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing terms.
Hedging Transactions and Derivative Financial Instruments
Cash Flow Hedges Designated as Accounting Hedges and Foreign Currency Forward Contracts Not Designated as Accounting Hedges
The Company enters into foreign currency forward contracts to hedge its exposure to foreign currency exchange rate risk related to future forecasted transactions denominated in currencies other than the U.S. Dollar. These contracts generally mature within 12 months. These cash flow hedges are designated as accounting hedges and the gains or losses on these contracts are initially deferred in other comprehensive income (loss) and reclassified to earnings in the period during which the hedged transaction affects earnings.
The Company also enters into foreign currency forward contracts to reduce the short-term effects of foreign currency fluctuations on certain receivables or payables denominated in currencies other than the U.S. Dollar. These forward contracts generally mature within 3 months. These contracts are not designated as accounting hedges and the gains or losses on these contracts are recognized in other income (expense), net in the condensed consolidated statements of operations based on the changes in fair value.
As of September 26, 2020 and December 28, 2019, the notional values of the Company’s outstanding foreign currency forward contracts were $659 million and $739 million, respectively. The fair value of these contracts was not material as of September 26, 2020 and December 28, 2019.
NOTE 6. Accumulated Other Comprehensive Income (Loss)
The table below summarizes the changes in accumulated other comprehensive Income (loss) for the three and nine months ended September 26, 2020 and September 28, 2019:
Three Months EndedNine Months Ended
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
Gains (losses) on cash flow hedges:(In millions)
Beginning balance$(4)$ $ $(8)
Net unrealized gains (losses) arising during the period11 (9)(1)(5)
Net losses (gains) reclassified into income during the period(2)2 6 6 
Total other comprehensive income (loss)9 (7)5 1 
Ending balance$5 $(7)$5 $(7)

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NOTE 7. Earnings Per Share
The following table sets forth the components of basic and diluted earnings per share:
Three Months EndedNine Months Ended
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
(In millions, except per share amounts)
Numerator
Net income for basic earnings per share$390 $120 $709 $171 
Effect of potentially dilutive shares:
        Interest expense related to the 2.125% Notes1  4  
Net income for diluted earnings per share$391 $120 $713 $171 
Denominator
Basic weighted average shares1,184 1,097 1,176 1,075 
Effect of potentially dilutive shares:
        Employee equity plans and warrants20 20 21 32 
        2.125% Notes11  11  
Diluted weighted average shares1,215 1,117 1,208 1,107 
Earnings per share:
Basic$0.33 $0.11 $0.60 $0.16 
Diluted$0.32 $0.11 $0.59 $0.15 
Potential shares from employee equity plans, and the impact from the conversion of the 2.125% Notes up to the conversion date, totaling 17 million and 20 million shares for the three and nine months ended September 26, 2020, respectively, were not included in the earnings per share calculation because their inclusion would have been anti-dilutive.
Potential shares from employee equity plans, the impact from the conversion of the 2.125% Notes up to the conversion date and the assumed conversion of the remaining outstanding 2.125% Notes, totaling 101 million and 102 million shares for the three and nine months ended September 28, 2019, respectively, were not included in the earnings per share calculation because their inclusion would have been anti-dilutive.

NOTE 8. Common Stock and Employee Equity Plans
Shares of common stock outstanding were as follows:
Three Months EndedNine Months Ended
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
(In millions)
Balance, beginning of period1,174 1,086 1,170 1,005 
Common stock issued under employee equity plans9 12 13 17 
Common stock repurchases for tax withholding on equity awards(1) (1) 
Issuance of common stock upon warrant exercise   75 
Issuance of common stock to settle convertible debt20 16 20 16 
Issuance of treasury stock to partially settle debt   1 
Balance, end of period1,202 1,114 1,202 1,114 

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Stock-based compensation expense was as follows: 
Three Months EndedNine Months Ended
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
(In millions)
Cost of sales$1 $2 $5 $5 
Research and development48 37 122 92 
Marketing, general and administrative27 15 68 43 
Total$76 $54 $195 $140 

NOTE 9. Income Taxes

For the three months ended September 26, 2020, the Company recorded an income tax provision of $12 million associated primarily with foreign income taxes. For the three months ended September 28, 2019, the Company recorded an income tax provision of $7 million, consisting primarily of $4 million of withholding taxes and $3 million of foreign income taxes in profitable locations.

For the nine months ended September 26, 2020, the Company recorded an income tax provision of $22 million associated primarily with foreign income taxes and withholding taxes. For the nine months ended September 28, 2019, the Company recorded an income tax benefit of $4 million, consisting primarily of a $13 million credit to U.S. income taxes due to the completion of certain internal tax structuring partially offset by $5 million of withholding taxes and $4 million of foreign income taxes in profitable locations.

As of September 26, 2020, substantially all the Company’s U.S. and foreign deferred tax assets, net of deferred tax liabilities, were subject to valuation allowances. After considering all available evidence, the Company determined that the valuation allowances should be maintained.

The Company’s total gross unrecognized tax benefits were $84 million as of September 26, 2020. The Company has foreign and U.S. state tax audits in process at any one point in time. It is reasonably possible the Company may have tax audits close in the next 12 months that could materially change the balance of the uncertain tax benefits; however, the timing of tax audit closures and settlements are uncertain.

NOTE 10. 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). These performance measures include the allocation of expenses to the operating segments based on management’s judgment. The Company has the following two reportable segments:
the Computing and Graphics segment, which primarily includes desktop and notebook processors and chipsets, discrete and integrated graphics processing units (GPUs), data center and professional GPUs and development services. From time to time, the Company may also sell or license portions of its IP portfolio; and

the Enterprise, Embedded and Semi-Custom segment, which primarily includes server and embedded processors, semi-custom System-on-Chip (SoC) products, development services and technology for game consoles. From time to time, the Company may also sell or license portions of its IP portfolio.
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. This category primarily includes stock-based compensation expense.
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The following table provides a summary of net revenue and operating income by segment: 
Three Months EndedNine Months Ended
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
(In millions)
Net revenue:
Computing and Graphics$1,667 $1,276 $4,472 $3,047 
Enterprise, Embedded and Semi-Custom1,134 525 2,047 1,557 
Total net revenue$2,801 $1,801 $6,519 $4,604 
Operating income (loss): 
Computing and Graphics$384 $179 $846 $217 
Enterprise, Embedded and Semi-Custom141 61 148 218 
All Other (1)
(76)(54)(195)(152)
Total operating income$449 $186 $799 $283 
(1)
For both the three months ended September 26, 2020 and September 28, 2019, all Other operating losses were related to stock-based compensation expense.

For the nine months ended September 26, 2020, All Other operating loss was related to stock-based compensation expense. All Other operating loss of $152 million for the nine months ended September 28, 2019 consisted of $140 million stock-based compensation expense and a $12 million contingent loss accrual on a legal matter.

NOTE 11. Contingencies
Shareholder Derivative Lawsuits (Wessels, Hamilton and Ha)

On March 20, 2014, a purported shareholder derivative lawsuit captioned Wessels v. Read, et al., Case No. 1:14 cv-262486 (Wessels) 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 its 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. 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 (Hamilton) 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.

On September 29, 2015, a similar purported shareholder derivative lawsuit captioned Jake Ha v Caldwell, et al., Case No. 3:15-cv-04485 (Ha) 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 lawsuit also seeks a court order voiding the stockholder vote on the Company’s 2015 proxy. The case was transferred to the judge handling the Hamilton Lawsuit and is now Case No. 4:15-cv-04485. The Wessels, Hamilton and Ha shareholder derivative lawsuits were stayed pending resolution of a class action lawsuit captioned Hatamian v. AMD, et al., C.A. No. 3:14-cv-00226 filed against the Company in the United States District Court for the Northern District of California (the Hatamian Lawsuit). The Hatamian Lawsuit asserted claims against the Company and certain of its officers for alleged violations of Section 10(b) of the Exchange Act of 1934, as amended (the Exchange Act), and SEC Rule 10b-5 concerning certain statements regarding its 32nm technology and “Llano” products. On October 9, 2017, the parties signed a definitive settlement agreement resolving the Hatamian Lawsuit and submitted it to the Court for approval. Under the terms of this agreement, the settlement was funded entirely by certain of the Company’s insurance carriers and the defendants continued to deny any liability or wrongdoing. On March 2, 2018, the court approved the settlement and entered a final judgment in the Hatamian Lawsuit.

On January 30, 2018, the Wessels and Hamilton plaintiffs amended their complaints. On February 2, 2018, the Ha plaintiff also filed an amended complaint. On February 22, 2018, the Company filed motions to dismiss the Hamilton and Ha plaintiffs’ amended complaints. On April 2, 2018, the Company filed a demurrer seeking to dismiss
17


the Wessels amended complaint. On July 23, 2018, the Santa Clara Superior Court sustained the Company’s demurrer in the Wessels case, dismissing all claims in that matter with prejudice. The Wessels plaintiff filed a Notice of Appeal on September 27, 2018. On October 4, 2018, the Federal Court issued an order dismissing the Hamilton and Ha amended complaints. The Hamilton plaintiffs filed a Notice of Appeal on October 8, 2018, and the Ha plaintiffs filed a Notice of Appeal on October 15, 2018. On November 19, 2018, the Hamilton and Ha plaintiffs filed a motion seeking summary reversal of the order dismissing their claims. The Company opposed this motion on December 13, 2018, and the Court denied it on February 25, 2019. On March 16, 2020, the Ninth Circuit reversed and remanded the district court’s dismissal of the Hamilton complaint and affirmed the district court’s dismissal of the Ha complaint. On August 27, 2020, the California Court of Appeal affirmed the district court’s dismissal of the Wessels complaint.

Hauck et al. Litigation

Since January 19, 2018, three putative class action complaints have been filed against the Company in the United States District Court for the Northern District of California: (1) Diana Hauck et al. v. AMD, Inc., Case No. 5:18-cv-0047, filed on January 19, 2018; (2) Brian Speck et al. v. AMD, Inc., Case No. 5:18-cv-0744, filed on February 4, 2018; and (3) Nathan Barnes and Jonathan Caskey-Medina, et al. v. AMD, Inc., Case No. 5:18-cv-00883, filed on February 9, 2018. On April 9, 2018, the court consolidated these cases and ordered that Diana Hauck et al. v. AMD, Inc. serve as the lead case. On June 13, 2018, six plaintiffs (from California, Louisiana, Florida and Massachusetts) filed a consolidated amended complaint alleging that the Company failed to disclose its processors’ alleged vulnerability to Spectre. Plaintiffs further allege that the Company’s processors cannot perform at their advertised processing speeds without exposing consumers to Spectre, and that any “patches” to remedy this security vulnerability will result in degradation of processor performance. The plaintiffs seek damages under several causes of action on behalf of a nationwide class and four state subclasses (California, Florida, Massachusetts and Louisiana) of consumers who purchased the Company’s processors and/or devices containing AMD processors. The plaintiffs also seek attorneys’ fees, equitable relief and restitution. Pursuant to the court’s order directing the parties to litigate only eight of the causes of action in the consolidated amended complaint initially, the Company filed a motion to dismiss on July 13, 2018. On October 29, 2018, after the plaintiffs voluntarily dismissed one of their claims, the court granted the Company’s motion and dismissed six causes of action with leave to amend. The plaintiffs filed their amended consolidated complaint on December 6, 2018. On January 3, 2019, the Company again moved to dismiss the subset of claims currently at issue. On April 4, 2019, the court granted the Company’s motion and dismissed all claims currently at issue with prejudice. On May 6, 2019, the court granted the parties’ stipulation and request under Fed. R. Civ. P. 54(b) to enter a partial final judgment and certify for appeal the court’s April 4, 2019 dismissal order, and on that same date, the plaintiffs voluntarily dismissed without prejudice their remaining claims pursuant to an agreement whereby, subject to certain terms and conditions, the Company agreed to toll the statute of limitations and/or statute of repose. On May 30, 2019, the plaintiffs filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth Circuit. On May 15, 2020, the Ninth Circuit affirmed the district court’s ruling dismissing the subset of claims currently at issue against the Company. On August 14, 2020, the district court dismissed the remaining claims with prejudice.

Monterey Research Litigation

On November 15, 2019, Monterey Research, LLC filed a patent infringement complaint against the Company in the United States District Court for the District of Delaware. Monterey Research alleges that the Company infringes six U.S. patents: 6,534,805 (related to SRAM cell design); 6,629,226 (related to read interface protocols); 6,651,134 (related to memory devices); 6,765,407 (related to programmable digital circuits); 6,961,807 (related to integrated circuits and associated memory systems); and 8,373,455 (related to output buffer circuits). Monterey Research seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, costs, and injunctive relief against the Company. On January 22, 2020, the Company filed a motion to dismiss part of Monterey Research’s complaint. On February 5, 2020, Monterey Research filed an amended complaint. On February 19, 2020, the Company filed a renewed motion to dismiss part of Monterey Research’s complaint. On October 13, 2020, the district court granted in part, and denied in part, the Company’s motion to dismiss.

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.

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City of Pontiac Police and Fire Retirement System Litigation

On September 29, 2020, the City of Pontiac Police and Fire Retirement System, an AMD shareholder, filed a shareholder derivative complaint (the “Complaint”) against AMD and the members of its Board of Directors (collectively, “Defendants”) in the United States District Court for the Northern District of California. See City of Pontiac Police and Fire Retirement System v. Caldwell, et al., No. 5:20-cv-6794 (N.D. Cal.). The Complaint alleges that Defendants breached their fiduciary duties, violated Section 14(a) of the Exchange Act of 1934, and were unjustly enriched by misrepresenting the Company’s commitment to diversity, particularly with respect to the composition of the membership of AMD’s Board of Directors and senior leadership team. Defendants anticipate filing a motion to dismiss the Complaint.

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 financial position, results of operations, or cash flows.

NOTE 12. Subsequent Event
On October 26, 2020, the Company entered into an Agreement and Plan of Merger (the Merger Agreement), by and among the Company, Thrones Merger Sub, Inc. (Merger Sub), a Delaware corporation and wholly owned subsidiary of the Company and Xilinx, Inc., a Delaware corporation (Xilinx), pursuant to which, subject to the terms and conditions set forth therein, Merger Sub will merge with and into Xilinx (the Merger), with Xilinx surviving such Merger as a wholly owned subsidiary of the Company. Under the Merger Agreement, at the effective time of the Merger (the Effective Time), each share of common stock, par value $0.01 per share, of Xilinx (Xilinx Common Stock) issued and outstanding immediately prior to the Effective Time (other than treasury shares and any shares of Xilinx Common Stock held directly by the Company or Merger Sub) will be converted into the right to receive 1.7234 of a fully paid and non-assessable share of common stock, par value $0.01 per share, of the Company and, if applicable, cash in lieu of fractional shares, subject to any applicable withholding, which as of the signing of the Merger Agreement, the transaction was valued at $35 billion. The closing of the Merger is subject to customary conditions, including regulatory approval and approval by the stockholders of both the Company and Xilinx. The transaction is currently expected to close by the end of calendar year 2021.
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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,” “designed,” 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: the proposed merger between AMD and Xilinx, Inc. and the expected closing by the end of 2021; demand for AMD’s products; the growth, change and competitive landscape of the markets in which AMD participates; expected seasonality trends; that unbilled accounts receivables are expected to be billed and collected within twelve months; the expected amounts to be received by AMD under the IP licensing agreement and AMD’s expected royalty payments from future product sales of China JVs’ products to be developed on the basis of such licensed IP; the level of international sales as compared to total sales; that AMD’s cash, cash equivalents and short-term investments balances together with the availability under that certain revolving credit facility (Revolving 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 or external financing on favorable terms; 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; that the COVID-19 pandemic will continue to impact our business; ongoing and increase in costs related to IT network security; and a small number of customers will continue to account for a substantial part of AMD’s revenue in the future. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. 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 such other risks and uncertainties as set forth below in this report or detailed in our other Securities and Exchange Commission (SEC) reports and filings. Many of these risks and uncertainties may be exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. We assume no obligation to update forward-looking statements, except as may be required by law.
AMD, the AMD Arrow logo, ATI, and the ATI logo, Athlon, EPYC, Radeon, Ryzen, Threadripper and combinations thereof, are trademarks of Advanced Micro Devices, Inc. Microsoft and Xbox One are trademarks or registered trademarks of Microsoft Corporation in the 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 codename 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 of December 28, 2019 and December 30, 2018, and for each of the three years for the period ended December 28, 2019 as filed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019.
Overview
We are a global semiconductor company primarily offering:
x86 microprocessors, as standalone devices or as incorporated into an accelerated processing unit (APU), chipsets, discrete and integrated graphics processing units (GPUs), data center and professional GPUs, and development services; and

server and embedded processors, semi-custom System-on-Chip (SoC) products, development services and technology for game consoles.
From time to time, we may also sell or license portions of our intellectual property (IP) portfolio.
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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 three and nine months ended September 26, 2020 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 ended September 26, 2020 was $2.8 billion, a 56% increase compared to the prior year period. The increase was due to a 31% increase in Computing and Graphics net revenue and a 116% increase in Enterprise, Embedded and Semi-Custom net revenue. The increase in Computing and Graphics segment net revenue was primarily due to higher sales of our Ryzen™ processors. 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 ended September 26, 2020 was $449 million compared to operating income of $186 million for the prior year period. Our net income for the three months ended September 26, 2020 was $390 million compared to net income of $120 million for the prior year period. The increase in operating income and net income was primarily driven by strong revenue growth which more than offset higher operating expenses.
Cash, cash equivalents and short-term investments as of September 26, 2020 were $1.8 billion, compared to $1.5 billion as of December 28, 2019. The aggregate principal amount of our outstanding debt obligations was $398 million and $563 million as of September 26, 2020 and December 28, 2019, respectively.
During the third quarter of 2020, we expanded our desktop and mobile processor families. In July 2020, we introduced the AMD Ryzen Threadripper™ PRO Processor line-up designed for professional workstations from OEMs to system integrators and AMD Ryzen 4000 Series desktop processors with Radeon™ graphics for consumers, gamers, streamers and creators. We also introduced AMD Athlon™ 3000 Series desktop processors using the same Zen core architecture and built-in Radeon graphics as the AMD Ryzen desktop processor family. In August 2020, we announced the availability of the new AMD Radeon Pro 5000 series GPUs for the updated 27-inch iMac bringing a wide variety of graphically intensive applications and workloads to consumer and professional users. Also, in September 2020, we announced the AMD Ryzen 3000 C-Series mobile processors and the AMD Athlon 3000 C-Series mobile processors for Chromebook platforms designed for multi-tasking and content creation in distance learning and remote working.
During the third quarter of 2020, we continued to monitor the ongoing novel coronavirus (COVID-19) situation and to take measures to protect the health and safety of our employees. While many of our offices remained open to enable critical on-site business functions in accordance with local government guidelines, most of our employees worked from home during the third quarter of 2020. We continue to take measures to support our employees so that they can be productive as they work from home. During the third quarter of 2020, the majority of our employees in China worked at the office and we maintained normal business operations subject to local government health measures. While COVID-19 has impacted our business operations and practices, and we expect that it may continue to impact our business, we experienced limited financial disruption during the third quarter of 2020 from COVID-19. We monitor demand signals as we adjust our supply chain requirements based on changing customer needs and demands. We also assess our product schedules and roadmaps to make any adjustments that may be necessary to support remote working requirements and address the geographic and market demand shifts caused by COVID-19.
On October 26, 2020, we entered into an Agreement and Plan of Merger (the Merger Agreement), by and among us, Thrones Merger Sub, Inc. (Merger Sub), a Delaware corporation and wholly owned subsidiary of ours, and Xilinx, Inc., a Delaware corporation (Xilinx), pursuant to which, subject to the terms and conditions set forth therein, Merger Sub will merge with and into Xilinx (the Merger), with Xilinx surviving such merger as a wholly owned subsidiary of ours. Under the Merger Agreement, at the effective time of the Merger (the Effective Time), each share of common stock, par value $0.01 per share, of Xilinx (Xilinx Common Stock) issued and outstanding immediately prior to the Effective Time (other than treasury shares and any shares of Xilinx Common Stock held directly by us or Merger Sub) will be converted into the right to receive 1.7234 of a fully paid and non-assessable share of common stock, par value $0.01 per share, of AMD and, if applicable, cash in lieu of fractional shares, subject to any applicable withholding, which as of the signing of the Merger Agreement, the transaction was valued at $35 billion. The closing of the Merger is subject to customary conditions, including regulatory approval and approval by the stockholders of both AMD and Xilinx. The transaction is currently expected to close by the end of calendar year 2021.
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We intend the discussion of our financial condition and results of operations that follows to provide information that will assist you in understanding our financial statements, the changes in certain key items in those financial statements from year to year and quarter to quarter, 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 10—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.
The following table provides a summary of net revenue and operating income (loss) by segment:
Three Months EndedNine Months Ended
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
(In millions)
Net revenue:
Computing and Graphics$1,667 $1,276 $4,472 $3,047 
Enterprise, Embedded and Semi-Custom1,134 525 2,047 1,557 
Total net revenue$2,801 $1,801 $6,519 $4,604 
Operating income (loss): 
Computing and Graphics$384 $179 $846 $217 
Enterprise, Embedded and Semi-Custom141 61 148 218 
All Other(76)(54)(195)(152)
Total operating income$449 $186 $799 $283 

Computing and Graphics
Computing and Graphics net revenue of $1.7 billion for the three months ended September 26, 2020 increased by 31%, compared to net revenue of $1.3 billion for the prior year period, primarily as a result of a 44% increase in unit shipments, partially offset by a 7% decrease in average selling price. The increase in unit shipments was primarily due to higher demand for our Ryzen processors. The decrease in average selling price was primarily driven by lower average selling price for our Radeon channel products due to product cycle timing.
Computing and Graphics net revenue of $4.5 billion for the nine months ended September 26, 2020 increased by 47%, compared to net revenue of $3.0 billion for the prior year period, primarily as a result of a 39% increase in unit shipments and a 5% 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 client processors from higher sales of our Ryzen processors which have a higher average selling price, partially offset by lower average selling price for our Radeon products due to product cycle timing.
Computing and Graphics operating income was $384 million for the three months ended September 26, 2020, compared to operating income of $179 million for the prior year period. Computing and Graphics operating income was $846 million for the nine months ended September 26, 2020, compared to operating income of $217 million for the prior year period. The increase in operating income for both periods 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 $1.1 billion for the three months ended September 26, 2020 increased by 116%, compared to net revenue of $525 million for the prior year period, primarily driven by higher semi-custom revenue and sales of our EPYC server processors.
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Enterprise, Embedded and Semi-Custom net revenue of $2.0 billion for the nine months ended September 26, 2020 increased by 31%, compared to net revenue of $1.6 billion for the prior year period, primarily driven by higher sales of our EPYC server processors, partially offset by lower semi-custom revenue.
Enterprise, Embedded and Semi-Custom operating income was $141 million for the three months ended September 26, 2020 compared to operating income of $61 million for the prior year period. The increase in operating income was primarily driven by the margin contribution from higher revenue which more than offset higher operating expenses. Operating expenses increased for the reasons outlined under “Expenses” below.
Enterprise, Embedded and Semi-Custom operating income was $148 million for the nine months ended September 26, 2020 compared to operating income of $218 million for the prior year period. The decrease in operating income was primarily due to the recognition of a $60 million licensing gain in the prior year period and higher operating expenses which more than offset the margin contribution from the increase in revenue. Operating expenses increased for the reasons outlined under “Expenses” below.

All Other
All Other operating loss of $76 million and $54 million for the three months ended September 26, 2020 and prior year period, respectively, were related to stock-based compensation expense.
All Other operating loss consisted of $195 million of stock-based compensation expense for the nine months ended September 26, 2020. All Other operating loss of $152 million for the prior year period consisted of $140 million stock-based compensation expense and $12 million contingent loss accrual on a legal matter.

International Sales
International sales as a percentage of net revenue were 72% for both the three months ended September 26, 2020 and September 28,2019. International sales as a percentage of net revenue were 77% for the nine months ended September 26, 2020 and 73% 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 in U.S. dollars.

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 EndedNine Months Ended
 September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
 (In millions except for percentages)
Net Revenue$2,801 $1,801 $6,519 $4,604 
Cost of sales1,571 1,024 3,623 2,685 
Gross profit1,230 777 2,896 1,919 
Gross margin44 %43 %44 %42 %
Research and development508 406 1,410 1,152 
Marketing, general and administrative273 185 687 544 
Licensing gain— — — (60)
Interest expense(11)(24)(38)(76)
Other expense, net(37)(36)(32)(40)
Income tax provision (benefit) 12 22 (4)
Equity income in investee— 
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Gross Margin
Gross margin was 44% for the three months ended September 26, 2020, compared to 43% for the prior year period. Gross margin was 44% for the nine months ended September 26, 2020, compared to 42% for the prior year period. The increase in gross margin for both periods was primarily driven by sales of Ryzen and EPYC processors, which have a higher gross margin than the corporate average, partially offset by sales of semi-custom products which have a lower gross margin than the corporate average.

Expenses
Research and Development Expenses
Research and development expenses of $508 million for the three months ended September 26, 2020 increased by $102 million, or 25%, compared to $406 million for the prior year period. Research and development expenses of $1.4 billion for the nine months ended September 26, 2020 increased by $0.2 billion, or 22%, compared to $1.2 billion for the prior year period. The increase for both periods was primarily driven by an increase in product development costs in both the Computing and Graphics and Enterprise and 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 $273 million for the three months ended September 26, 2020 increased by $88 million, or 48%, compared to $185 million for the prior year period. Marketing, general and administrative expenses of $687 million for the nine months ended September 26, 2020 increased by $143 million, or 26%, compared to $544 million for the prior year period. The increase for both periods was primarily due to an increase in go to market activities in both the Computing and Graphics and Enterprise and Embedded and Semi-Custom segments, and an increase in headcount and higher annual employee incentives driven by improved financial performance.
Licensing Gain
During the nine months ended September 28, 2019, we recognized $60 million as licensing gain associated with licensed IP to the THATIC JV. See Note 3—Related Parties—Equity Joint Ventures of the Notes to Condensed Consolidated Financial Statements (Part 1, Financial Information of this Form 10-Q) for additional information. We did not recognize a licensing gain in the three and nine months ended September 26, 2020.

Interest Expense
Interest expense for the three months ended September 26, 2020 was $11 million compared to $24 million for the prior year period. Interest expense for the nine months ended September 26, 2020 was $38 million compared to $76 million for the prior year period. The decrease for both periods was due to lower debt balances.
Other Expense, Net
Other expense, net was $37 million for the three months ended September 26, 2020, compared to Other income, net of $36 million for the prior year period.
Other expense, net was $32 million for the nine months ended September 26, 2020, compared to Other expense, net of $40 million for the prior year period.
Other expense, net for all periods primarily comprised of losses on redemptions, repurchases and conversions of our outstanding debt and convertible debt instruments.

Income Tax Provision (Benefit)
For the three months ended September 26, 2020, we recorded an income tax provision of $12 million associated primarily with foreign income taxes. For the prior year period, we recorded an income tax provision of $7 million, consisting primarily of $4 million of withholding taxes and $3 million of foreign income taxes in profitable locations.

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For the nine months ended September 26, 2020, we recorded an income tax provision of $22 million associated primarily with foreign income taxes and withholding taxes. For the prior year period, we recorded an income tax benefit of $4 million, consisting primarily of a $13 million credit to U.S. income taxes due to the completion of certain internal tax structuring partially offset by $5 million of withholding taxes and $4 million of foreign income taxes in profitable locations.
We regularly evaluate the realizability of our net deferred tax assets. As of September 26, 2020, substantially all our U.S. and foreign deferred tax assets, net of deferred tax liabilities, were subject to valuation allowances. If our financial results continue to improve and we conclude that estimates of our future taxable income are objectively verifiable, our assessment of the realization of our net deferred tax assets could result in the release of a significant portion of the valuation allowances, with the exception of net operating losses subject to potential limitation, including limitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. Such a release would result in a material non-cash income tax benefit in our condensed consolidated statement of operations in the period of release and the recording of additional deferred tax assets on our condensed consolidated balance sheet. There is a reasonable possibility that within the next several quarters, sufficient positive evidence becomes available to reach a conclusion that a significant portion of the valuation allowances against our U.S. net deferred tax assets would no longer be required.

FINANCIAL CONDITION
Liquidity and Capital Resources    
As of September 26, 2020, our cash, cash equivalents and short-term investments were $1.8 billion, compared to $1.5 billion as of December 28, 2019. The percentage of cash, cash equivalents and short-term investments held domestically was 91% as of September 26, 2020 and 90% as of December 28, 2019.
Our operating, investing and financing activities for the nine months ended September 26, 2020 compared to the prior year period are as described below:
 Nine Months Ended
 September 26,
2020
September 28,
2019
 (In millions)
Net cash provided by (used in):
Operating activities$517 $51 
Investing activities$(658)$(123)
Financing activities$(29)$150 
The aggregate principal amount of our outstanding debt obligations was $398 million and $563 million as of September 26, 2020 and December 28, 2019, respectively.
We believe our cash, cash equivalents and short-term investments along with our Revolving Facility will be sufficient to fund operations, including capital expenditures, over the next 12 months. 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 $517 million in the nine months ended September 26, 2020, primarily due to our net income of $709 million, adjusted for non-cash and non-operating charges of $538 million and net cash outflows of $730 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $287 million increase in accounts receivable driven primarily by higher revenue in the third quarter of 2020 compared to the fourth quarter of 2019, partially offset by higher collections due to better revenue linearity in the third quarter of 2020 compared to the fourth quarter of 2019, a $310 million increase in inventories driven by an increase in product build, and a $172 million increase in prepaid expenses and other assets due primarily to an increase in vendor credits.
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Net cash provided by operating activities was $51 million for the nine months ended September 28, 2019, primarily due to our net income of $171 million, adjusted for non-cash and non-operating charges of $419 million and net cash outflows of $539 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $158 million increase in accounts receivable driven primarily by higher revenue in the third quarter of 2019 compared to the fourth quarter of 2018 partially offset by lower unbilled receivables, and a $195 million increase in inventories primarily driven by an increase in wafer purchases during the third quarter of 2019 compared to the fourth quarter of 2018, a $179 million decrease in accounts payable, accrued liabilities and other primarily driven by less inventory purchases in the latter half of the third quarter of 2019 compared to the fourth quarter of 2018.
Investing Activities
Net cash used in investing activities was $658 million for the nine months ended September 26, 2020, which primarily consisted of $530 million for purchases of short-term investments and $220 million for purchases of property and equipment, partially offset by $92 million for maturities of short-term investments.
Net cash used in investing activities was $123 million for the nine months ended September 28, 2019, which primarily consisted of $284 million for purchases of available-for-sale debt securities and $175 million for purchases of property and equipment, partially offset by $309 million for maturities of available-for-sale debt securities.
Financing Activities
Net cash used in financing activities was $29 million for the nine months ended September 26, 2020, which primarily consisted of common stock repurchased for tax withholding on employee equity plans of $73 million, partially offset by proceeds from the issuance of common stock under our employee equity plans of $45 million. We borrowed $200 million short-term debt and paid off the balance during the nine months ended September 26, 2020.
Net cash provided by financing activities was $150 million for the nine months ended September 28, 2019, which primarily consisted of a cash inflow of $449 million from the warrant exercised by West Coast Hitech L.P. and $38 million from the issuance of common stock under our employee equity plans, partially offset by $331 million cash outflows for the redemption of our 6.75% Senior Notes due 2019, repurchase of some of our 7.50% Senior Notes due 2020 and 7.00% Senior Notes due 2024, and repayment of our outstanding loan balance of $70 million when we terminated our secured revolving line of credit under the Amended and Restated Loan and Security Agreement dated as of April 14, 2015.

Contractual Obligations
Other than the conversion of $165 million principal amount of our 2.125% Notes, there were no other material changes outside the ordinary course of business in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019.
Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 for details of our contractual obligations.

Off-Balance Sheet Arrangements
As of September 26, 2020, we had no off-balance sheet arrangements.

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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.
The following reflect updates to our disclosures of certain of our critical accounting estimates compared 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 ended December 28, 2019.
Revenue Allowances. Revenue contracts with our customers include variable amounts which we evaluate under ASC 606-10-32-8 through 14 in order to determine the net amount of consideration to which we are entitled and which we recognize as revenue. We determine the net amount of consideration to which we are entitled by estimating the most likely amount of consideration we expect to receive from the customer after adjustments to the contract price for rights of return and rebates to our OEM customers and rights of return, rebates and price protection on unsold merchandise to our distributor customers.
We base our determination of necessary adjustments to the contract price by reference to actual historical activity and experience, including actual historical returns, rebates and credits issued to OEM and distributor customers adjusted, as applicable, to include adjustments, if any, for known events or current economic conditions, or both.
Our estimates of necessary adjustments for distributor price incentives and price protection on unsold products held by distributors are based on actual historical incentives provided to distributor customers and known future price movements based on our internal and external market data analysis.
Our estimates of necessary adjustments for OEM price incentives utilize, in addition to known pricing agreements, actual historical rebate attainment rates and estimates of future OEM rebate program attainment based on internal and external market data analysis.
We also provide limited product return rights to certain OEMs and to most distribution customers. These return rights are generally limited to a contractual percentage of the customer’s prior quarter shipments, although, from time to time we may approve additional product returns beyond the contractual arrangements based on the applicable facts and circumstances. In order to estimate adjustments to revenue to account for these returns, including product restocking rights provided to distributor and OEM customers, we utilize relevant, trended actual historical product return rate information gathered, adjusted for actual known information or events, as applicable.
Overall our estimates of adjustments to contract price due to variable consideration under our contracts with OEM and distributor customers, based on our assumptions and include adjustments, if any, for known events, have been materially consistent with actual results; however, these estimates are subject to management’s judgment and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenue and operating results.
Inventory Valuation. We value inventory at standard cost, adjusted to approximate the lower of actual cost or estimated net realizable value using assumptions about future demand and market conditions. Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on specific facts and circumstances. In determining excess or obsolescence reserves for products, we consider assumptions such as changes in business and economic conditions, other-than-temporary decreases in demand for our products, and changes in technology or customer requirements. In determining the lower of cost or net realizable value reserves, we consider assumptions such as recent historical sales activity and selling prices, as well as estimates of future selling prices. If in any period we anticipate a change in assumptions such as future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in cost of sales, resulting in a negative impact to our gross margin in that
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period. If in any period we are able to sell inventories that had been written down to a level below the ultimate realized selling price in a previous period, related revenue would be recorded with a lower or no offsetting charge to cost of sales resulting in a net benefit to our gross margin in that period.
The impact from applying the above assumptions in calculating inventory carrying value adjustments was immaterial for each of the periods presented on the condensed consolidated statements of operations.
Income Taxes. In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.
We must assess the likelihood that we will be able to recover our deferred tax assets. Unless recovery is considered more-likely-than-not (a probability level of more than 50%), we will record a charge to income tax expense in the form of a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable or maintain the valuation allowance recorded in prior periods. When considering all available evidence, if we determine we can more-likely-than-not realize our deferred tax assets, we will reverse some or a significant portion of the existing valuation allowance, which would result in a credit to income tax expense and the establishment of an asset in the period of reversal.
In determining the need to establish or maintain a valuation allowance, we considered the four sources of jurisdictional taxable income: (i) future reversals of existing taxable temporary differences; (ii) future taxable income exclusive of reversing temporary differences and carryforwards; (iii) carryback of net operating losses to prior years; and (iv) tax planning strategies. Given the lack of available taxable income from three of the other sources, our determination of taxable income sufficient to realize our deferred tax assets is based on estimated future taxable income. The incremental recognition of deferred tax assets is based upon estimated future taxable income through objectively verifiable forecasts of future income. The highly competitive landscape and cyclical nature of the semiconductor industry makes it difficult to create an objectively verifiable forecast for those companies not in a dominant position and, as a result, sustained profitability is difficult to forecast.
We regularly evaluate the realizability of our net deferred tax assets. We have a history of generating periods of substantial losses. Our recent three-year period of modest profitability was preceded by six years of substantial losses. Given the magnitude of our tax attributes, our position in the highly competitive semiconductor industry dominated by two larger competitors, the cyclical nature of the industry, and our underlying history of uncertainty for sustained product performance, market acceptance and the resulting financial impact, we do not have objectively verifiable forecasts. We are developing and have released new products with large market potential in areas such as server processors, mobile processors, and game consoles. We currently have positive momentum with our new consumer and commercial product offerings. We are building high-performance computing leadership. However, given our historical earnings patterns, additional market success and a higher level of confidence in related profits are needed to establish the sustained profitability to objectively verify our forecasts of future taxable income. As a result, substantially all our U.S. and foreign deferred tax assets, net of deferred tax liabilities, are subject to valuation allowances, subject to other jurisdictional limitations on the timing of utilization of certain deferred tax asset attributes, including net operating loss carryforwards.
Our sustained profitability is dependent on the continued positive momentum of our consumer and commercial products including our newly released mobile processors, greater market acceptance for our server products, the successful adoption of our new game console products, and our continued development of high-performance computing products leadership. In assessing the realizability of the deferred tax assets, we will continue to monitor the highly dynamic and competitive landscape of our industry, the continued performance and market acceptance of our new products, and the impact of such market acceptance on profitability. If our financial results continue to improve and we conclude that estimates of our future taxable income are objectively verifiable, our assessment of the realization of our net deferred tax assets could result in the release of some or a significant portion of the valuation allowances.
In addition, the calculation of our tax liabilities involves addressing uncertainties in the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing authorities. If our estimates of these taxes are greater or less than actual results, an additional tax benefit or charge will result. We recognize the interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively.
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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 fiscal year ended December 28, 2019.
There have not been any material changes in interest rate risk, default risk or foreign exchange risk since December 28, 2019.

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 SEC 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 September 26, 2020, 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