Notes to Consolidated Financial Statements
NOTE 1 – The Company
Advanced Micro Devices, Inc. is a global semiconductor company. References herein to AMD or the Company mean Advanced Micro Devices, Inc. and its consolidated subsidiaries. AMD’s products include x86 microprocessors (CPUs) and graphics processing units (GPUs), as standalone devices or as incorporated into accelerated processing units (APUs), chipsets, data center and professional GPUs, embedded processors, semi-custom System-on-Chip (SoC) products, microprocessor and SoC development services and technology, data processing units (DPUs), Field Programmable Gate Arrays (FPGAs), and Adaptive SoC products. From time to time, the Company may also sell or license portions of its intellectual property (IP) portfolio.
On February 14, 2022 (the Xilinx Acquisition Date), the Company completed the acquisition of Xilinx, Inc. (Xilinx). On May 26, 2022 (the Pensando Acquisition Date), the Company completed the acquisition of Pensando Systems, Inc. (Pensando). See Note 5 - Business Combinations for additional information on these acquisitions.
NOTE 2 – Basis of Presentation and Significant Accounting Policies
Fiscal Year. The Company uses a 52- or 53-week fiscal year ending on the last Saturday in December. Fiscal 2022, 2021 and 2020 ended on December 31, 2022, December 25, 2021 and December 26, 2020, respectively. Fiscal 2022 consisted of 53 weeks, and fiscal 2021 and 2020 each consisted of 52 weeks.
Principles of Consolidation. The consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. Upon consolidation, all inter-company accounts and transactions have been eliminated.
Reclassification. Certain prior period amounts have been reclassified to conform to current period presentation.
Use of Estimates. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results are likely to differ from those estimates, and such differences may be material to the financial statements. Areas where management uses subjective judgment include, but are not limited to, revenue allowances, inventory valuation, valuation of goodwill and long-lived and intangible assets, and income taxes.
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. Substantially all the Company’s revenue is derived from product sales, representing a single performance obligation.
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.
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.
Custom products
Custom products which are associated with the Company’s Gaming 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 a cost-based input method, calculated as 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 satisfaction of its performance obligation.
Sales of semi-custom products are not subject to a right of return. Custom products arrangements generally 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 Company’s 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 IP arrangements or for standalone arrangements involving either the sale or licensing of IP.
Inventories
The Company values 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. In determining excess or obsolescence reserves for its products, the Company considers assumptions such as changes in business and economic conditions, other-than-temporary decreases in demand for its products, and changes in technology or customer requirements. In determining the lower of cost or net realizable value reserves, the Company considers assumptions such as recent historical sales activity and selling prices, as well as estimates of future selling prices. The Company fully reserves for inventories and non-cancellable purchase orders for inventory deemed obsolete. The Company performs periodic reviews of inventory items to identify excess inventories on hand by comparing on-hand balances and non-cancellable purchase orders to anticipated usage using recent historical activity as well as anticipated or forecasted demand. If estimates of customer demand diminish further or market conditions become less favorable than those projected by the Company, additional inventory carrying value adjustments may be required.
Business Combinations
The Company is required to use the acquisition method of accounting for business combinations. The acquisition method of accounting requires the Company to allocate the purchase consideration to the assets acquired and liabilities assumed from the acquiree based on their respective fair values as of the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future revenue growth rates and margins, future changes in technology, time to recreate customer relationships, useful lives, and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or liability. These estimates are inherently uncertain and, therefore, actual results may differ from the estimates made. As a result, during the measurement period of up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of the purchase price of an acquisition, whichever comes first, any subsequent adjustments are recorded in the Consolidated Statements of Operations.
Goodwill
The Company performs its goodwill impairment analysis as of the first day of the fourth quarter of each year and, if certain events or circumstances indicate that an impairment loss may have been incurred, on a more frequent basis. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment.
The Company has the option to first perform qualitative testing to determine if it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. Qualitative factors include industry and market considerations, overall financial performance, share price trends and market capitalization and Company-specific events. If the Company concludes it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, the Company does not proceed to perform a quantitative impairment test.
If the Company concludes it is more likely than not that the fair value of a reporting unit is less than its carrying value or elects to bypass the qualitative test, a quantitative goodwill impairment test will be performed by comparing the fair value of each reporting unit to its carrying value. The Company’s quantitative impairment analysis uses a combination of the income approach, which requires estimates of the present value of expected future cash flows of a reporting unit, and the market approach, which uses financial ratios of comparable companies to arrive at an estimated value for the reporting units. Significant estimates and assumptions used in the income approach include assessments of macroeconomic conditions, growth rates of reporting units in the near- and long-term, expectations of the Company’s ability to execute on roadmaps and projections, and the discount rate applied to cash flows. Significant estimates used in the market approach include the identification of comparable companies for each reporting unit, and the determination of the appropriate multiples to apply to a reporting unit based on adjustments and consideration of specific attributes of that reporting unit. If a reporting unit’s fair value is determined to be less than its carrying value, a goodwill impairment charge is recognized for the amount by which the reporting unit’s fair value is less than its carrying value, not to exceed the total amount of goodwill allocated to that reporting unit.
Long-Lived and Intangible Assets
Long-lived and intangible assets to be held and used are reviewed for impairment if indicators of potential impairment exist and at least annually for indefinite-lived intangible assets. Impairment indicators are reviewed on a quarterly basis. Assets are grouped and evaluated for impairment at the lowest level of identifiable cash flows.
When indicators of impairment exist and assets are held for use, the Company estimates future undiscounted cash flows attributable to the related asset groups. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the asset group or based on appraisals. Factors affecting impairment of assets held for use include the ability of the specific assets to generate separately identifiable positive cash flows.
When assets are removed from operations and held for sale, the Company estimates impairment losses as the excess of the carrying value of the assets over their fair value. Market conditions are among the factors affecting impairment of assets held for sale. Changes in any of these factors could necessitate impairment recognition in future periods for assets held for use or assets held for sale.
Cash Equivalents
Cash equivalents consist of financial instruments that are readily convertible into cash and have original maturities of three months or less at the time of purchase.
Accounts Receivable
Accounts receivable are primarily comprised of trade receivables presented net of rebates, price protection and an allowance for credit loss. Accounts receivable also include unbilled receivables, which 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 receivables are expected to be billed and collected within twelve months.
The Company manages its exposure to customer credit risk through credit limits, credit lines, ongoing monitoring procedures and credit approvals. Furthermore, the Company performs in-depth credit evaluations of all new customers and, at intervals, for existing customers. From this, the Company may require letters of credit, bank or corporate guarantees or advance payments if deemed necessary. The Company maintains an allowance for credit loss, consisting of known specific troubled accounts as well as an amount based on overall estimated potential uncollectible accounts receivable based on historical experience and review of their current credit quality. The Company does not believe the receivable balance from its customers represents a significant credit risk.
Investments
Available for Sale Debt Securities. The Company classifies its investments in debt securities at the date of acquisition as available-for-sale. Available-for-sale debt securities are reported at fair value with the related unrealized gains and losses included, net of tax, in accumulated other comprehensive income (loss), a component of stockholders’ equity. If an available-for-sale debt security’s fair value is less than its amortized cost basis, then the Company evaluates whether the decline is the result of a credit loss, in which case an impairment is recorded through an allowance for credit losses. Unrealized gains and losses not attributable to credit losses are included, net of tax, in accumulated other comprehensive income (loss), a component of stockholders’ equity. Classification of available-for-sale debt securities as current or non-current is based on the Company’s intent and belief in its ability to sell these securities and use the proceeds from sale in operations within 12 months.
Non-marketable Securities. The Company’s investments in non-marketable securities of privately-held companies are accounted for under the measurement alternative, defined as cost, less impairments, adjusted for subsequent observable price changes and are periodically assessed for impairment when events or circumstances indicate that a decline in value may have occurred. The Company's periodic assessment of impairment is made by considering available evidence, including the investee’s general market and industry conditions and product development status. The Company also assesses the investee’s ability to meet business milestones, its financial condition, and near-term prospects, including the rate at which the investee is using its cash, the investee’s need for possible additional funding at a lower valuation and any bona fide offer to purchase the investee.
Fair Value Measurements
The Company’s financial instruments are measured and recorded at fair value on a recurring basis, except for non-marketable equity investments in privately-held companies, which are generally accounted for under the measurement alternative.
Fair Value Hierarchy
The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. The guidance for fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:
Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 — Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of one to 15 years for equipment, 34 to 44 years for buildings, and leasehold improvements are measured by the shorter of the remaining terms of the leases or the estimated useful economic lives of the improvements.
Leases
Operating and finance leases are recorded as right-of-use (ROU) assets and lease liabilities on the Company’s balance sheet. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are initially recognized based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses the implicit interest rate if readily determinable. When the implicit interest rate is not readily determinable, the Company uses its incremental borrowing rate, which is based on its collateralized borrowing capabilities over a similar term of the lease payments. The Company utilizes the consolidated group incremental borrowing rate for all leases as the Company has centralized treasury operations. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The Company has elected the accounting policy to not recognize ROU assets and lease liabilities that arise from short-term (12 months or less) leases for any class of underlying asset. Operating leases are included in operating lease ROU assets, other current liabilities, and long-term operating lease liabilities on the Company’s consolidated balance sheets. The Company’s finance leases are immaterial.
Foreign Currency Translation/Transactions
The functional currency of the majority of the Company’s foreign subsidiaries is the U.S. dollar. For certain foreign subsidiaries where the local currency is the functional currency, assets and liabilities are translated from foreign currencies into U.S. dollars. Gains or losses arising from translation of foreign currency denominated assets and liabilities (i.e., cumulative translation adjustment) are included as a component of accumulated other comprehensive income (loss) in stockholders' equity.
Assets and liabilities denominated in non-U.S. dollars have been remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities and historical exchange rates for non-monetary assets and liabilities. Non-U.S. dollar denominated transactions have been remeasured at average exchange rates in effect during each period, except for those cost of sales and expense transactions related to non-monetary balance sheet amounts which have been remeasured at historical exchange rates. The gains or losses from foreign currency remeasurement are included in earnings.
Marketing and Advertising Expenses
Advertising costs are expensed as incurred. In addition, the Company’s marketing and advertising expenses include certain cooperative advertising funding obligations under customer incentive programs, which costs are recorded upon agreement with customers and vendor partners. Cooperative advertising expenses are recorded as marketing, general and administrative expense to the extent the cash paid does not exceed the estimated fair value of the advertising benefit received. Any excess of cash paid over the estimated fair value of the advertising benefit received is recorded as a reduction of revenue. Total marketing and advertising expenses for 2022, 2021 and 2020 were approximately $683 million, $578 million and $314 million, respectively.
Stock-Based Compensation
The Company estimates stock-based compensation cost for stock options at the grant date based on the option’s fair value as calculated by the Black-Scholes model. For time-based restricted stock units (RSUs), fair value is based on the closing price of the Company’s common stock on the grant date. The Company estimates the grant-date fair value of RSUs that involve a market condition using the Monte Carlo simulation model. The Company estimates the grant-date fair value of stock to be issued under the Company’s Employee Stock Purchase plan (ESPP) using the Black-Scholes model. Compensation expense is recognized over the vesting period of the applicable award using the straight-line method, except for the compensation expense related to RSUs with performance or market conditions (PRSUs), which are recognized ratably for each vesting tranche from the service inception date to the end of the requisite service period. Forfeiture rates are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Contingencies
From time to time the Company is a defendant or plaintiff in various legal actions that arise in the normal course of business. The Company is also subject to income tax, indirect tax or other tax claims by tax agencies in jurisdictions in which it conducts business. In addition, the Company is a party to environmental matters including local, regional, state and federal government clean-up activities at or near locations where the Company currently or has in the past conducted business. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of reasonably possible losses. A determination of the amount of reserves required for these commitments and contingencies that would be charged to earnings, if any, includes assessing the probability of adverse outcomes and estimating the amount of potential losses. The required reserves, if any, may change due to new developments in each matter or changes in circumstances such as a change in settlement strategy.
Income Taxes
The Company computes the provision for income taxes using the liability method and recognizes deferred tax assets and liabilities for temporary differences between financial statement and income tax bases of assets and liabilities, as well as for operating loss and tax credit carryforwards. The Company measures deferred tax assets and liabilities using tax rates applicable to taxable income in effect for the years in which those tax assets are expected to be realized or settled and provides a valuation allowance against deferred tax assets when it cannot conclude that it is more likely than not that some or all deferred tax assets will be realized. The assessment requires significant judgment and is performed in each of the applicable taxing jurisdictions. In addition, the Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that they will be sustained, based on the technical merits of the positions, on examination by the jurisdictional tax authority.
Global Intangible Low-Taxed Income (GILTI). In 2022, the Company elected to change its method of accounting for the United States GILTI tax from recording the tax impact in the period it is incurred to recognizing deferred taxes for temporary tax basis differences expected to reverse as GILTI tax in future years. The change is considered preferable based on the Company’s facts and circumstances as it provides better and more timely information of expected future income tax liabilities arising from temporary tax differences primarily associated with the Xilinx acquisition. As a result of the acquisition, the Company recorded $27.3 billion of identified intangible assets (refer to Note 5 - Business Combinations), of which $16.9 billion are related to foreign operations which will be amortized to income from operations over the assets’ estimated useful lives, but for which the Company will not receive a tax deduction under GILTI. This accounting policy change resulted in the recording of $857 million of deferred tax liabilities in connection with the Xilinx acquisition as disclosed in Note 14 - Income Taxes. In addition, for the year ended December 31, 2022, it resulted in a decrease in the income tax provision with a corresponding increase to net income of $296 million and an increase in basic and diluted earnings per share of $0.19, as compared to the computation under the previous accounting policy. This accounting policy change had no material impact on the Company’s historical consolidated financial statements.
Accrued Interest on Unrecognized Tax Benefits. Prior to 2022, the Company reported any interest expense related to unrecognized tax benefits as a component of Interest expense and reported any related penalties as a component of Income tax provision (benefit). In 2022, the Company elected to change its method of accounting for tax interest expense from Interest expense to the Income tax provision (benefit) line in the Consolidated Statements of Operations. This change in classification is considered preferable as it i) better aligns classification of tax interest with the substance of the underlying tax positions, which are managed inclusive of interest, ii) allows for greater visibility to the cost of the Company’s debt and other financing activities, and iii) better aligns with common industry practice and provides increased comparability. This accounting policy change resulted in a decrease in Interest expense and corresponding increase to i) Income before income taxes and equity income and ii) Income tax provision (benefit) as reported on the Consolidated Statements of Operations of $11 million in 2022. This accounting policy change had an immaterial effect on the Consolidated Statements of Operations in 2021 and 2020, and the Company did not revise its previously issued consolidated financial statements for these fiscal years. This accounting policy change had no impact to net income or basic and diluted earnings per share, or to financial statements besides the Consolidated Statements of Operations, for any period, as compared to the computation under the previous accounting policy.
NOTE 3 – Supplemental Financial Statement Information
Accounts Receivable, net
As of December 31, 2022 and December 25, 2021, Accounts receivable, net included unbilled accounts receivable of $1.1 billion and $329 million, respectively. Unbilled accounts receivables primarily represent work completed for development services and on custom products for which revenue has been recognized but not yet invoiced. All unbilled accounts receivable are expected to be billed and collected within 12 months.
| | | | | | | | | | | |
Inventories | December 31, 2022 | | December 25, 2021 |
| (In millions) |
Raw materials | $ | 231 | | | $ | 82 | |
Work in process | 2,648 | | | 1,676 | |
Finished goods | 892 | | | 197 | |
Total inventories | $ | 3,771 | | | $ | 1,955 | |
| | | | | | | | | | | |
Property and Equipment, net | December 31, 2022 | | December 25, 2021 |
| (In millions) |
| | | |
| | | |
Land | $ | 120 | | | $ | — | |
Building and leasehold improvements | 594 | | | 206 | |
Equipment | 2,163 | | | 1,534 | |
Construction in progress | 143 | | | 96 | |
Property and equipment, gross | 3,020 | | | 1,836 | |
Accumulated depreciation | (1,507) | | | (1,134) | |
Total property and equipment, net | $ | 1,513 | | | $ | 702 | |
Depreciation expense for 2022, 2021 and 2020 was $439 million, $296 million and $217 million, respectively.
| | | | | | | | | | | |
Other Non-current Assets | December 31, 2022 | | December 25, 2021 |
| (In millions) |
Prepaid long-term supply agreements | $ | 1,252 | | | $ | 916 | |
Software and technology licenses, net | 362 | | | 323 | |
Other | 538 | | | 239 | |
Total other non-current assets | $ | 2,152 | | | $ | 1,478 | |
Prepaid long-term supply agreements relate to payments made to vendors to secure long-term supply capacity.
| | | | | | | | | | | |
Accrued Liabilities | December 31, 2022 | | December 25, 2021 |
| (In millions) |
Accrued marketing programs | $ | 876 | | | $ | 933 | |
Accrued compensation and benefits | 701 | | | 705 | |
Customer program liabilities | 859 | | | 314 | |
Other accrued and current liabilities | 641 | | | 472 | |
Total accrued liabilities | $ | 3,077 | | | $ | 2,424 | |
Revenue
Revenue allocated to remaining performance obligations that are unsatisfied (or partially unsatisfied) include amounts received from customers and amounts that will be invoiced and recognized as revenue in future periods for development services, IP licensing and product revenue. As of December 31, 2022, the aggregate transaction price allocated to remaining performance obligations under contracts with an original expected duration of more than one year was $247 million, of which $213 million is expected to be recognized in the next 12 months. The revenue allocated to remaining performance obligations does not include amounts which have an original expected duration of one year or less.
Revenue recognized over time associated with custom products and development services accounted for approximately 24%, 23% and 18% of the Company’s revenue in 2022, 2021 and 2020, respectively.
NOTE 4 – Segment Reporting
Management, including the Chief Operating Decision Maker (CODM), 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 reportable segments based on management’s judgment. In the second quarter of fiscal year 2022, the Company updated its segment reporting structure to align financial reporting with the manner in which the Company manages its business in strategic end markets. The Company’s disclosed measure of segment operating results has been updated consistent with the revised manner in which the Company’s CODM assesses the company’s financial performance and allocates resources. All prior-period segment data have been retrospectively adjusted.
The Company’s four reportable segments are:
•the Data Center segment, which primarily includes server CPUs and GPUs, DPUs, FPGAs and Adaptive SoC products for data centers;
•the Client segment, which primarily includes CPUs, accelerated processing units that integrate microprocessors and GPUs (APUs), and chipsets for desktop and notebook personal computers;
•the Gaming segment, which primarily includes discrete GPUs, semi-custom SoC products and development services; and
•the Embedded segment, which primarily includes embedded CPUs and GPUs, FPGAs, and Adaptive SoC products.
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 the CODM does not consider these expenses and credits in evaluating the performance of the reportable segments. This category primarily includes amortization of acquisition-related intangibles, employee stock-based compensation expense, acquisition-related costs and licensing gain.
The following table provides a summary of net revenue and operating income (loss) by segment for 2022, 2021 and 2020. | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| (In millions) |
Net revenue: | | | | | |
Data Center | $ | 6,043 | | | $ | 3,694 | | | $ | 1,685 | |
Client | 6,201 | | | 6,887 | | | 5,189 | |
Gaming | 6,805 | | | 5,607 | | | 2,746 | |
Embedded | 4,552 | | | 246 | | | 143 | |
Total net revenue | $ | 23,601 | | | $ | 16,434 | | | $ | 9,763 | |
Operating income (loss): | | | | | |
Data Center | $ | 1,848 | | | $ | 991 | | | $ | 198 | |
Client | 1,190 | | | 2,088 | | | 1,608 | |
Gaming | 953 | | | 934 | | | (138) | |
Embedded | 2,252 | | | 44 | | | (11) | |
All Other | (4,979) | | | (409) | | | (288) | |
Total operating income (loss) | $ | 1,264 | | | $ | 3,648 | | | $ | 1,369 | |
The following table provides items included in All Other category: | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| (In millions) |
Operating loss: | | | | | |
Stock-based compensation expense | $ | 1,081 | | | $ | 379 | | | $ | 274 | |
Acquisition-related costs | 452 | | | 42 | | | 14 | |
Amortization of acquisition-related intangibles | 3,548 | | | — | | | — | |
Licensing gain | (102) | | | (12) | | | — | |
Total operating loss | $ | 4,979 | | | $ | 409 | | | $ | 288 | |
The Company does not discretely allocate assets to its operating segments, nor does management evaluate operating segments using discrete asset information.
The following table summarizes sales to external customers by geographic regions based on billing location of the customer:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| (In millions) |
United States | $ | 8,049 | | | $ | 4,656 | | | $ | 2,294 | |
China (including Hong Kong) | 5,207 | | | 4,096 | | | 2,329 | |
Japan | 4,177 | | | 2,381 | | | 1,033 | |
Europe | 1,773 | | | 1,249 | | | 1,108 | |
Taiwan | 2,369 | | | 2,091 | | | 1,187 | |
Singapore | 1,380 | | | 1,389 | | | 1,096 | |
Other countries | 646 | | | 572 | | | 716 | |
Total sales to external customers | $ | 23,601 | | | $ | 16,434 | | | $ | 9,763 | |
The following table summarizes sales to major customers that accounted for at least 10% of the Company’s consolidated net revenue for the respective years:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
Customer A | 16 | % | | 14 | % | | * |
Customer B | * | | 11 | % | | * |
Sales to customers A and B consisted of sales of products from the Gaming and Client segments, respectively.
The following table summarizes Property and equipment, net by geographic areas:
| | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 |
| (In millions) |
United States | $ | 1,102 | | | $ | 486 | |
Canada | 80 | | | 105 | |
China | 42 | | | 35 | |
Singapore | 132 | | | 35 | |
India | 67 | | | 11 | |
Ireland | 48 | | | — | |
Other countries | 42 | | | 30 | |
Total property and equipment, net | $ | 1,513 | | | $ | 702 | |
NOTE 5 – Business Combinations
Pensando Acquisition
On May 26, 2022, the Company completed the acquisition of all issued and outstanding shares of Pensando, a leader in next-generation distributed computing, for a transaction valued at approximately $1.9 billion. The recorded purchase consideration of $1.7 billion is net of deferred cash compensation requiring future services and other customary closing adjustments. The acquisition of Pensando and its leading distributed services platform expands the Company’s ability to offer leadership solutions for cloud, enterprise, and edge customers.
The purchase consideration was preliminarily allocated as follows:
| | | | | |
| (In millions) |
Cash and cash equivalents | $ | 111 | |
Accounts receivable | 31 | |
Inventory | 66 | |
Prepaid expenses and other current assets | 43 | |
Property and equipment | 11 | |
Deferred tax assets | 22 | |
Acquisition-related intangibles | 349 | |
Total Assets | 633 | |
Accounts payable | 15 | |
Accrued and other liabilities | 61 | |
Total Liabilities | 76 | |
Fair value of net assets acquired | 557 | |
Goodwill | 1,098 | |
Total purchase consideration | $ | 1,655 | |
The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the preliminary estimates of their fair values, which were determined using generally accepted valuation techniques based on estimates and assumptions made by management. The fair values are subject to adjustment for up to one year after the close of the transaction as additional information is obtained. Any adjustments to the preliminary purchase price allocation identified during the measurement period are recognized in the period in which the adjustments are determined. Adjustments to the preliminary purchase price allocation since the completion of the acquisition resulted in an immaterial decrease to goodwill.
Goodwill arising from the Pensando acquisition was assigned to the Company’s Data Center segment. Goodwill was primarily attributed to expanded market opportunities expected to be achieved from the integration of Pensando. Goodwill is not expected to be deductible for income tax purposes.
Following are details of the purchase consideration allocated to acquired intangible assets:
| | | | | | | | | | | |
| Fair Value | | Weighted-average estimated useful life |
| (In millions) | | (In years) |
Developed technology (1) | $ | 60 | | | 4 years |
Customer relationships (2) | 34 | | | 3 years |
Customer backlog (3) | 16 | | | 1 year |
Product trademarks (4) | 19 | | | 5 years |
Identified intangible assets subject to amortization | 129 | | | |
In-process research and development (IPR&D) not subject to amortization (5) | 220 | | | N/A |
Total identified intangible assets acquired | $ | 349 | | | |
1.The fair value of developed technology was determined using the income approach, specifically the multi-period excess earnings method.
2.Customer relationships represent the fair value of existing contractual relationships and customer loyalty determined based on existing relationships using the income approach, specifically the with and without method.
3.Customer backlog represents the fair value of non-cancellable customer contract orders using the income approach, specifically the multi-period excess earnings method.
4.Product trademarks primarily relate to the Pensando product-related trademarks, and the fair value was determined by applying the income approach, specifically the relief from royalty method.
5.The fair value of IPR&D was determined using the income approach, specifically the multi-period excess earnings method.
The fair value of the identified intangible assets subject to amortization are amortized over the assets’ estimated useful lives based on the pattern in which the economic benefits are expected to be received to cost of sales and operating expenses.
IPR&D consists of projects that have not yet reached technological feasibility as of the acquisition date. Accordingly, the Company recorded an indefinite-lived intangible asset of $220 million for the fair value of these projects, which will initially not be amortized. Instead, these projects will be tested for impairment annually and whenever events or changes in circumstances indicate that these projects may be impaired. Once the project reaches technological feasibility, the Company will begin to amortize the intangible assets over their estimated useful lives.
From the Pensando Acquisition Date to December 31, 2022, the Consolidated Statements of Operations include immaterial revenue and operating results attributable to Pensando, which are reported under the Data Center segment.
In 2022, Pensando acquisition-related costs of $102 million was recorded under Cost of sales, Research and development, and Marketing, general and administrative expenses on the Company’s Consolidated Statements of Operations. Acquisition-related costs are primarily comprised of direct transaction costs, fair value adjustments for acquired inventory and certain compensation charges. The Company may incur additional acquisition-related costs in the future related to the acquisition.
Xilinx Acquisition
On February 14, 2022, the Company completed the acquisition of all issued and outstanding shares of Xilinx, a leading provider of adaptive computing solutions, for a total purchase consideration of $48.8 billion ($46.4 billion, net of cash acquired of $2.4 billion). The acquisition of Xilinx expands the Company’s product portfolio to include adaptable hardware platforms that enable hardware acceleration and rapid innovation across a variety of technologies. With the acquisition of Xilinx, the Company now offers FPGAs, Adaptive SoC products and ACAP products. The purchase consideration consisted of $48.5 billion of fair value of 429 million shares of the Company’s common stock issued to Xilinx stockholders and $275 million of fair value of replacement equity awards attributable to services rendered pre-combination. As the transaction closed prior to the opening of markets on the Xilinx Acquisition Date, the fair value of the common stock issued to Xilinx stockholders was based on the closing price of the Company’s common stock on February 11, 2022 of $113.18 per share.
The financial results of Xilinx are included in the Company’s consolidated financial statements from the Xilinx Acquisition Date to December 31, 2022 and are reported under the Embedded and Data Center segments.
The purchase consideration was allocated as follows: | | | | | |
| (In millions) |
Cash and cash equivalents | $ | 2,366 | |
Short-term investments | 1,582 | |
Accounts receivable | 299 | |
Inventories | 539 | |
Prepaid expenses and other current assets | 61 | |
Property and equipment | 692 | |
Operating lease right-of-use assets | 61 | |
Acquisition-related intangibles | 27,308 | |
Deferred tax assets | 15 | |
Other non-current assets | 418 | |
Total Assets | 33,341 | |
Accounts payable | 116 | |
Accrued liabilities | 634 | |
Other current liabilities | 185 | |
Long-term debt | 1,474 | |
Long-term operating lease liabilities | 45 | |
Deferred tax liabilities | 4,346 | |
Other long-term liabilities | 532 | |
Total Liabilities | 7,332 | |
Fair value of net assets acquired | 26,009 | |
Goodwill | 22,784 | |
Total purchase consideration | $ | 48,793 | |
The Company allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the estimates of their fair values, which were determined using generally accepted valuation techniques based on estimates and assumptions made by management.
Goodwill arising from the acquisition of Xilinx was assigned to the Embedded and Data Center segments. Goodwill was primarily attributed to increased synergies expected to be achieved from the integration of Xilinx. Goodwill is not expected to be deductible for income tax purposes.
Following are details of the purchase consideration allocated to acquired intangible assets: | | | | | | | | | | | |
| Fair Value | | Weighted-average estimated useful life |
| (In millions) | | (In years) |
Developed technology (1) | $ | 12,295 | | | 16 years |
Customer relationships (2) | 12,290 | | | 14 years |
Customer backlog (3) | 793 | | | 1 year |
Corporate trade name (4) | 65 | | | 1 year |
Product trademarks (4) | 895 | | | 12 years |
Identified intangible assets subject to amortization | 26,338 | | | |
In-process research and development (IPR&D) not subject to amortization (5) | 970 | | | N/A |
Total identified intangible assets acquired | $ | 27,308 | | | |
1.The fair value of developed technology was determined using the income approach, specifically, the multi-period excess earnings method.
2.Customer relationships represent the fair value of existing contractual relationships and customer loyalty determined based on existing relationships using the income approach, specifically the with and without method.
3.Customer backlog represents the fair value of non-cancellable customer contract orders using the income approach, specifically the multi-period excess earnings method.
4.Corporate trade name and product trademarks primarily relate to the Xilinx brand and product-related trademarks, respectively, and the fair values were determined by applying the income approach, specifically the relief from royalty method.
5.The fair value of IPR&D was determined using the income approach, specifically the multi-period excess earnings method.
The fair value of the identified intangible assets subject to amortization are amortized over the assets’ estimated useful lives based on the pattern in which the economic benefits are expected to be received to cost of sales and operating expenses.
IPR&D consists of projects that have not yet reached technological feasibility as of the acquisition date. Accordingly, the Company recorded an indefinite-lived intangible asset of $970 million for the fair value of these projects, which will initially not be amortized. Instead, these projects are tested for impairment annually and whenever events or changes in circumstances indicate that these projects may be impaired. Once the project reaches technological feasibility, the Company will begin to amortize the intangible assets over their estimated useful life.
The Company also assumed unvested restricted stock units with estimated fair value of $1.2 billion, of which $275 million was included as a component of the purchase consideration and $951 million will be recognized as expense subsequent to the acquisition.
The Consolidated Statements of Operations include the following revenue and operating income attributable to Xilinx in 2022:
| | | | | |
| 2022 |
| (In millions) |
Net revenue | $ | 4,612 | |
Operating income | $ | 2,247 | |
Operating income attributable to Xilinx recorded under the Embedded and Data Center segments does not include $4.2 billion of amortization of acquisition-related intangibles, employee stock-based compensation expense and acquisition-related costs, which are recorded under the “All Other” segment.
In 2022, Xilinx acquisition-related costs of $350 million were recorded under Cost of sales, Research and development, and Marketing, general and administrative expenses on the Company’s Consolidated Statements of Operations. Acquisition-related costs are primarily comprised of direct transaction costs, fair value adjustments for acquired inventory and certain compensation charges. The Company may incur additional acquisition-related costs in the future related to the Xilinx acquisition.
Supplemental Unaudited Pro Forma Information
Following are the supplemental consolidated financial results of the Company, Xilinx and Pensando on an unaudited pro forma basis, as if the acquisitions had been consummated as of the beginning of the fiscal year 2021 (i.e., December 27, 2020).
| | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 |
| (in millions) |
Net revenue | $ | 24,117 | | | $ | 20,150 | |
Net income | $ | 2,311 | | | $ | 8 | |
The Company’s fiscal year ends on the last Saturday in December of each year, Xilinx’s fiscal year ended on the Saturday nearest March 31 of each year and Pensando’s fiscal year ended on January 31 of each year. The unaudited pro forma information above is presented on the basis of the Company’s fiscal year and combines the historical results of the fiscal periods of the Company with the following historical results of Xilinx and Pensando: the twelve months ended December 31, 2022 includes Xilinx results for the twelve-month period beginning January 2, 2022 through December 31, 2022 and Pensando results for the twelve-month period beginning January 1, 2022 through December 31, 2022; and the twelve months ended December 25, 2021 includes Xilinx results for the twelve months ended January 1, 2022 and Pensando results for the twelve months ended December 31, 2021.
The unaudited pro forma financial information presented is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the Xilinx and Pensando acquisitions were completed at the beginning of fiscal year 2021 and are not indicative of the future operating results of the combined company. The pro forma results include adjustments related to purchase accounting, primarily amortization of acquisition-related intangible assets, fixed asset depreciation expense and expense from assumed stock-based compensation awards. The pro forma results also include amortization expense of acquired Xilinx inventory fair value step-up of $184 million in fiscal year 2021 and no Xilinx inventory fair value step-up expense in fiscal year 2022.
NOTE 6 – Acquisition-related Intangible Assets and Goodwill
Acquisition-related Intangible Assets
Acquisition-related intangibles as of December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Weighted-average Remaining Useful Life | December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | (In millions) |
Developed technology | 15 years | $ | 12,360 | | | $ | (738) | | | $ | 11,622 | |
Customer relationships | 13 years | 12,324 | | | (1,973) | | | 10,351 | |
Customer backlog | 1 month | 809 | | | (712) | | | 97 | |
Corporate trade name | 1 month | 65 | | | (57) | | | 8 | |
Product trademarks | 11 years | 914 | | | (68) | | | 846 | |
Identified intangible assets subject to amortization | | 26,472 | | | (3,548) | | | 22,924 | |
IPR&D not subject to amortization | N/A | 1,194 | | | — | | | 1,194 | |
Total acquisition-related intangible assets | | $ | 27,666 | | | $ | (3,548) | | | $ | 24,118 | |
Acquisition-related intangible asset balance as of December 25, 2021 was not material.
Acquisition-related intangible amortization expense was $3.5 billion in fiscal year 2022.
Based on the carrying value of acquisition-related intangibles recorded as of December 31, 2022, and assuming no subsequent impairment of the underlying assets, the estimated annual amortization expense for acquisition-related intangibles is expected to be as follows:
| | | | | |
Fiscal Year | (In millions) |
2023 | $ | 2,804 | |
2024 | 2,286 | |
2025 | 2,061 | |
2026 | 1,951 | |
2027 | 1,844 | |
2028 and thereafter | 11,978 | |
Total | $ | 22,924 | |
Goodwill
In the second quarter of fiscal year 2022, the Company reassigned goodwill balances among the updated reportable segments to reflect changes in its segment reporting structure. The Company performed a goodwill impairment test immediately prior to and after the segment change and determined that no indicators of impairment to goodwill existed.
The carrying amount of goodwill as of December 31, 2022 and December 25, 2021 was $24.2 billion and $289 million, respectively, and was assigned to reporting units within the following reportable segments:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 25, 2021 | | Acquisitions | | Adjustments and Reassignment due to segment change | | December 31, 2022 |
| (In millions) |
Reportable segments before segment change: | | | | | | |
Enterprise, Embedded and Semi-Custom | $ | 289 | | | $ | — | | | $ | (289) | | | $ | — | |
Xilinx | — | | | 22,794 | | | (22,794) | | | — | |
Reportable segments after segment change: | | | | | | |
Data Center | — | | | 1,094 | | | 1,790 | | | 2,884 | |
Gaming | — | | | — | | | 238 | | | 238 | |
Embedded | — | | | — | | | 21,055 | | | 21,055 | |
Total | $ | 289 | | | $ | 23,888 | | | $ | — | | | $ | 24,177 | |
During the fourth quarter of fiscal years 2022 and 2021, the Company conducted its annual impairment tests of goodwill and concluded that there was no goodwill impairment with respect to its reporting units.
NOTE 7 – 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.
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 consolidated statement of operations.
The Company’s purchases from the ATMP JV during 2022 and 2021 amounted to $1.7 billion and $1.1 billion, respectively. As of December 31, 2022 and December 25, 2021, the amounts payable to the ATMP JV were $463 million and $85 million, respectively, and are included in Payables to related parties on the Company’s consolidated balance sheets. The Company’s resales to the ATMP JV during 2022 and 2021 amounted to $15 million and $28 million, respectively. As of December 31, 2022 and December 25, 2021, the Company had receivables from ATMP JV of $2 million for each year, included in Receivables from related parties on the Company’s consolidated balance sheets.
During 2022, 2021 and 2020, the Company recorded gains of $14 million, $6 million and $5 million in Equity income in investee on its consolidated statement of operations, respectively. As of December 31, 2022 and December 25, 2021, the carrying value of the Company’s investment in the ATMP JV was approximately $83 million and $69 million, respectively.
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. As of December 31, 2022 and December 25, 2021, the carrying value of the investment was zero.
In February 2016, the Company licensed certain of its intellectual property (Licensed IP) to the THATIC JV, payable over several years upon achievement of certain milestones. The Company also receives a royalty based on the sales of the THATIC JV’s products developed on the basis of such Licensed IP. The Company classifies Licensed IP and royalty income associated with the February 2016 agreement as Licensing gain within operating income. During 2022 and 2021, the Company recognized $102 million in licensing gain from a milestone achievement and royalty income and $12 million of licensing gain from royalty income under the agreement, respectively. As of December 31, 2022 and December 25, 2021, the Company had no receivables from the THATIC JV.
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 8 – Debt and Revolving Credit Facility
Debt
The Company’s total debt as of December 31, 2022 and December 25, 2021 consisted of:
| | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 |
| (In millions) |
7.50% Senior Notes Due August 2022 (7.50% Notes) | $ | — | | | $ | 312 | |
2.950% Senior Notes Due 2024 (Xilinx 2024 Notes) | 750 | | | — | |
2.125% Convertible Senior Notes Due 2026 (2.125% Notes) | 1 | | | 1 | |
2.375% Senior Notes Due 2030 (Xilinx 2030 Notes) | 750 | | | — | |
3.924% Senior Notes Due 2032 (3.924% Notes) | 500 | | | — | |
4.393% Senior Notes Due 2052 (4.393% Notes) | 500 | | | — | |
Total debt (principal amount) | 2,501 | | | 313 | |
Unamortized debt discount and issuance costs | (34) | | | — | |
Total debt (net) | 2,467 | | | 313 | |
Less: current portion of long-term debt | — | | | (312) | |
Total long-term debt | $ | 2,467 | | | $ | 1 | |
In August 2022, the Company repaid its $312 million 7.50% Senior Notes.
Assumed Xilinx Notes
In connection with the acquisition of Xilinx, the Company assumed $1.5 billion in aggregate principal of Xilinx’s 2.95% Notes and 2.375% Notes (together, the Assumed Xilinx Notes) which were recorded at fair value as of the Xilinx Acquisition Date. The difference between the fair value at the Xilinx Acquisition Date and the principal outstanding of the Assumed Xilinx Notes is being amortized through interest expense over the remaining term of the debt. The Assumed Xilinx Notes are general unsecured senior obligations of the Company with semi-annual fixed interest payments due on June 1 and December 1. The indentures governing the Assumed Xilinx Notes contain various covenants which limit the Company’s ability to, among other things, create certain liens on principal property or the capital stock of certain subsidiaries, enter into certain sale and leaseback transactions with respect to principal property, and consolidate or merge with, or convey, transfer or lease all or substantially all of the Company’s assets to another person.
3.924% Senior Notes Due 2032 and 4.393% Senior Notes Due 2052
On June 9, 2022, the Company issued $1.0 billion in aggregate principal amount of 3.924% Notes and 4.393% Notes. The 3.924% Notes and 4.393% Notes are general unsecured senior obligations of the Company. The interest is payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 2022. The 3.924% and 4.393% Notes are governed by the terms of an indenture dated June 9, 2022 between the Company and US Bank Trust Company, National Association as trustee. As of December 31, 2022, the outstanding aggregate principal amount of the 3.924% Notes and 4.393% Notes was $1.0 billion.
The Company may redeem some or all of the 3.924% Notes and 4.393% Notes prior to March 1, 2032 and December 1, 2051, respectively, at a price equal to the greater of the present value of the principal amount and future interest through the maturity of the 3.924% Notes or 4.393% Notes or 100% of the principal amount plus accrued and unpaid interest. Holders have the right to require the Company to repurchase all or a portion of the 3.924% Notes or 4.393% Notes in the event that the Company undergoes a change of control as defined in the indenture, at a repurchase price of 101% of the principal amount plus accrued and unpaid interest. Additionally, an event of default may result in the acceleration of the maturity of the 3.924% Notes and 4.393% Notes.
2.125% Notes
During 2022, activity on the 2.125% Notes was immaterial.
7.50% Senior Notes Due 2022
On August 15, 2012, the Company issued $500 million of its 7.50% Senior Notes due 2022 (7.50% Notes). These notes matured on August 15, 2022.
Future Payments on Total Debt
As of December 31, 2022, the Company’s future debt payment obligations were as follows: | | | | | | | | |
| Term Debt (Principal only) | | | |
Year | (In millions) |
2023 | $ | — | | | | |
2024 | 750 | | | | |
2025 | — | | | | |
2026 | 1 | | | | |
2027 | — | | | | |
2028 and thereafter | 1,750 | | | | |
Total | $ | 2,501 | | | | |
Revolving Credit Facility
On April 29, 2022, the Company entered into a Credit Agreement (Revolving Credit Agreement) with Wells Fargo Bank, N.A. as administrative agent and the other banks identified therein as lenders. The Revolving Credit Agreement provides for a five-year revolving credit facility in an aggregate principal amount not to exceed $3.0 billion (subject to certain terms and conditions).
Revolving loans under the Revolving Credit Agreement can be Secure Overnight Financing Rate (SOFR) Loans or Base Rate Loans (each as defined in the Revolving Credit Agreement) at the Company's option. Each SOFR Loan will bear interest at a rate per annum equal to the applicable SOFR Rate plus a margin based on the Company's Debt Ratings (as defined in the Revolving Credit Agreement) from time to time of between 0.625% and 1.250%. Each Base Rate Loan will bear interest at a rate per annum equal to the Base Rate (as defined in the Revolving Credit Agreement) plus a margin based on the Company's Debt Ratings from time to time of between 0.000% and 0.250%. In addition, the Company has agreed to pay a commitment fee based on the Company's Debt Ratings from time to time of between 0.050% and 0.125% (as defined in the Revolving Credit Agreement). The Revolving Credit Agreement also contains a sustainability-linked pricing component which provides for interest rate and facility fee reductions or increases based on the Company meeting or missing targets related to environmental sustainability, specifically greenhouse gas emissions.
The Revolving Credit Agreement contains customary representations and warranties, and affirmative and negative covenants and events of default applicable to the Company and its subsidiaries. As of December 31, 2022, the Company was in compliance with these covenants.
As of December 31, 2022, the Company had no outstanding borrowings under this revolving credit facility but may borrow in the future and use the proceeds for payment of expenses in connection with working capital and general corporate expenses.
Commercial Paper
On November 3, 2022, the Company established a new commercial paper program, under which the Company may issue unsecured commercial paper notes up to a maximum principal amount outstanding at any time of $3 billion with a maturity of up to 397 days from the date of issue. The commercial paper will be sold at a discount from par or, alternatively, will be sold at par and bear interest at rates that will vary based on market conditions at the time of issuance. As of December 31, 2022, the Company had no commercial paper outstanding.
NOTE 9 – Financial Instruments
Financial Instruments Recorded at Fair Value on a Recurring Basis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 |
(In millions) | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
Cash equivalents | | | | | | | | | | | |
Money market funds | $ | 3,017 | | | $ | — | | | $ | 3,017 | | | $ | 4 | | | $ | — | | | $ | 4 | |
Commercial paper | — | | | 224 | | | 224 | | | — | | | 45 | | | 45 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Time deposits and certificates of deposits | — | | | 159 | | | 159 | | | — | | | — | | | — | |
Short-term investments | | | | | | | | | | | |
Commercial paper | — | | | 441 | | | 441 | | | — | | | 880 | | | 880 | |
Time deposits and certificates of deposits | — | | | — | | | — | | | — | | | 193 | | | 193 | |
Asset-backed and mortgage-backed securities | — | | | 39 | | | 39 | | | — | | | — | | | — | |
U.S. Treasury and agency securities | 466 | | | — | | | 466 | | | — | | | — | | | — | |
Foreign government and agency securities | — | | | 74 | | | 74 | | | — | | | — | | | — | |
Other non-current assets | | | | | | | | | | | |
Time deposits and certificates of deposits | — | | | 9 | | | 9 | | | — | | | — | | | — | |
Equity investments | 8 | | | — | | | 8 | | | 66 | | | — | | | 66 | |
Deferred compensation plan investments | 90 | | | — | | | 90 | | | 72 | | | — | | | 72 | |
Total assets measured at fair value | $ | 3,581 | | | $ | 945 | | | $ | 4,526 | | | $ | 142 | | | $ | 1,118 | | | $ | 1,260 | |
The Company did not have any financial instruments measured at fair value on a recurring basis within Level 3 fair value measurements as of December 31, 2022 or December 25, 2021.
Deferred compensation plan investments are primarily mutual fund investments held in a Rabbi trust established to maintain the Company’s executive deferred compensation plan.
The following is a summary of cash equivalents and short-term investments: | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Cost/ Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| (in millions) |
Asset-backed and mortgage-backed securities | $ | 42 | | | $ | — | | | $ | (3) | | | $ | 39 | |
Commercial paper | 669 | | | — | | | (4) | | | 665 | |
Money market funds | 3,017 | | | — | | | — | | | 3,017 | |
Time deposits and certificates of deposits | 159 | | | — | | | | | 159 | |
U.S. Treasury and agency securities | 471 | | | — | | | (5) | | | 466 | |
Foreign government and agency securities | 74 | | | — | | | — | | | 74 | |
| $ | 4,432 | | | $ | — | | | $ | (12) | | | $ | 4,420 | |
As of December 31, 2022, the Company did not have material available-for-sale debt securities which had been in a continuous unrealized loss position of more than twelve months.
The contractual maturities of investments classified as available-for-sale are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| (In millions) | | (In millions) |
Due within 1 year | $ | 1,224 | | | $ | 1,218 | | | $ | 1,118 | | | $ | 1,118 | |
Due in 1 year through 5 years | 159 | | | 156 | | | — | | | — | |
Due in 5 years and later | 41 | | | 38 | | | — | | | — | |
| $ | 1,424 | | | $ | 1,412 | | | $ | 1,118 | | | $ | 1,118 | |
Financial Instruments Not Recorded at Fair Value
The carrying amounts and estimated fair values of the Company’s long-term debt are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| (In millions) |
| | | | | | | |
Current portion of long-term debt, net | $ | — | | | $ | — | | | $ | 312 | | | $ | 326 | |
Long-term debt, net of current portion | 2,467 | | | 2,281 | | | 1 | | | 15 | |
The estimated fair value of the Company’s long-term debt is based on Level 2 inputs of quoted prices for the Company’s debt and comparable instruments in inactive markets.
The fair value of the Company’s accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing terms.
Financial Instruments Measured at Fair Value on a Non-Recurring Basis
As of December 31, 2022, the Company had non-marketable securities in privately-held companies of $137 million. The balance of non-marketable securities in privately-held companies as of December 25, 2021 was not material.
Hedging Transactions and Derivative Financial Instruments
Foreign Currency Forward Contracts 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 24 months and are designated as accounting hedges. As of December 31, 2022 and December 25, 2021, the notional value of the Company’s outstanding foreign currency forward contracts designated as cash flow hedges was $1.9 billion and $894 million, respectively. The fair value of these contracts, recorded as a liability, was $27 million as of December 31, 2022. The fair value of these contracts as of December 25, 2021 was not material.
Foreign Currency Forward Contracts Not Designated as Accounting Hedges
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 and are not designated as accounting hedges. As of December 31, 2022 and December 25, 2021, the notional value of these outstanding contracts was $485 million and $291 million, respectively. The fair value of these contracts was not material as of December 31, 2022 and December 25, 2021.
The cash flows associated with derivative instruments as cash flow hedging instruments are classified in the same category in the Consolidated Statement of Cash Flows as the cash flows of the related items.
NOTE 10 – Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of investments in time deposits, available-for-sale debt securities and trade receivables.
The Company places its investments with high credit quality financial institutions. At the time an investment is made, investments in commercial paper of industrial firms and financial institutions are rated A1, P1, F1 or better. The Company invests in bonds that are rated A, A2 or better and repurchase agreements, each of which have securities of the type and quality listed above as collateral.
The Company believes that concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company’s customer base, thus diluting the trade credit risk. One customer accounted for approximately 18% of the total consolidated accounts receivable balance as of December 31, 2022. Two customers each accounted for approximately 20% and 15% of the total consolidated accounts receivable balance as of December 25, 2021. However, the Company does not believe the receivable balance from these customers represents a significant credit risk based on past collection experience and review of their current credit quality.
The Company is exposed to credit losses from nonperformance by counterparties on foreign currency hedge contracts. These counterparties are large global institutions, and to date, no such counterparty has failed to meet its financial obligations to the Company.
NOTE 11 – Earnings Per Share
Basic earnings per share is computed based on the weighted-average number of shares outstanding.
Diluted earnings per share is computed based on the weighted-average number of shares outstanding plus potentially dilutive shares outstanding during the period. Potentially dilutive shares are determined by applying the treasury stock method to the Company’s stock options, RSUs (including PRSUs), common stock to be issued under the ESPP and warrants. Potentially dilutive shares issuable upon conversion of the 2.125% Convertible Senior Notes due 2026 (2.125% Notes) are calculated using the if-converted method.
The following table sets forth the components of basic and diluted earnings per share: | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| (In millions, except per share amounts) |
Numerator | | | | | |
Net income for basic earnings per share | $ | 1,320 | | | $ | 3,162 | | | $ | 2,490 | |
Effect of potentially dilutive shares: | | | | | |
Interest expense related to the 2.125% Notes | — | | | — | | | 1 | |
Net income for diluted earnings per share | $ | 1,320 | | | $ | 3,162 | | | $ | 2,491 | |
Denominator | | | | | |
Basic weighted-average shares | 1,561 | | | 1,213 | | | 1,184 | |
Effect of potentially dilutive shares: | | | | | |
Employee equity plans and warrants | 10 | | | 16 | | | 20 | |
2.125% Notes | — | | | — | | | 3 | |
Diluted weighted-average shares | 1,571 | | | 1,229 | | | 1,207 | |
Earnings per share: | | | | | |
Basic | $ | 0.85 | | | $ | 2.61 | | | $ | 2.10 | |
Diluted | $ | 0.84 | | | $ | 2.57 | | | $ | 2.06 | |
Potential shares from employee equity plans and the impact from the conversion of the 2.125% Notes up to the conversion date, totaling 16 million and 2 million shares for 2022 and 2021, respectively, were not included in the earnings per share calculation because their inclusion would have been anti-dilutive.
NOTE 12 – Common Stock and Stock-Based Compensation
Common Stock
Shares of common stock outstanding were as follows: | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| (In millions) |
Balance, beginning of period | 1,207 | | | 1,211 | | | 1,170 | |
Common stock issued in the acquisition of Xilinx | 429 | | | — | | | — | |
Common stock issued under employee equity plans | 17 | | | 12 | | | 14 | |
Repurchases of common stock | (36) | | | (17) | | | — | |
Common stock repurchases for tax withholding on equity awards | (5) | | | (2) | | | (1) | |
| | | | | |
Issuance of common stock to settle convertible debt | — | | | 3 | | | 28 | |
| | | | | |
Balance, end of period | 1,612 | | | 1,207 | | | 1,211 | |
Stock Repurchase Program
In May 2021, the Company’s Board of Directors approved a stock repurchase program authorizing up to $4 billion of the Company’s common stock (Existing Repurchase Program). In February 2022, the Company’s Board of Directors approved a new stock repurchase program in addition to the Existing Repurchase Program to purchase up to $8 billion of outstanding common stock in the open market (collectively referred to as the “Repurchase Program”).
During the year ended December 31, 2022, the Company repurchased 36.3 million shares of its common stock under the Repurchase Program for $3.7 billion. As of December 31, 2022, $6.5 billion remained available for future stock repurchases under this program. This Repurchase Program does not obligate the Company to acquire any common stock, has no termination date and may be suspended or discontinued at any time.
Stock-Based Compensation
The Company’s employee equity programs are intended to attract, retain and motivate highly qualified employees. On April 29, 2004, the Company’s stockholders approved the 2004 Equity Incentive Plan, as amended and restated (the 2004 Plan). In the fourth quarter of 2017, the Company introduced the 2017 ESPP, as amended and restated (the 2017 Plan).
Under the 2004 Plan, stock options generally vest and become exercisable over a three-year period from the date of grant and expire within seven years after the grant date. Unvested shares that are reacquired by the Company from forfeited outstanding equity awards become available for grant and may be reissued as new awards.
Under the 2004 Plan, the Company can grant (i) stock options, and (ii) RSUs, including time-based RSUs and PRSUs.
Stock Options. Under the 2004 Plan, nonstatutory and incentive stock options may be granted. The exercise price of the shares subject to each nonstatutory stock option and incentive stock option cannot be less than 100% of the fair market value of the Company’s common stock on the date of the grant. The exercise price of each option granted under the 2004 Plan must be paid in full at the time of the exercise.
Time-based RSUs. Time-based RSUs are awards that can be granted to any employee, director or consultant and that obligate the Company to issue a specific number of shares of the Company’s common stock in the future if the vesting terms and conditions are satisfied.
PRSUs. PRSUs can be granted to certain of the Company’s senior executives. The performance metrics can be financial performance, non-financial performance and/or market conditions. Each PRSU award reflects a target number of shares (Target Shares) that may be issued to an award recipient before adjusting based on the Company’s financial performance, non-financial performance and/or market conditions. The actual number of shares that a grant recipient receives at the end of the period may range from 0% to 250% of the Target Shares granted, depending upon the degree of achievement of the performance target designated by each individual award.
ESPP. Under the 2017 Plan, eligible employees who participate in an offering period may have up to 15% of their eligible earnings withheld, up to certain limitations, to purchase shares of common stock at 85% of the lower of the fair market value on the first or the last business day of the six-month offering period. The offering periods commence in May and November each year.
As of December 31, 2022, the Company had 32 million shares of common stock that were available for future grants and 28 million shares reserved for issuance upon the exercise of outstanding stock options or the vesting of unvested RSUs, including PRSUs, under the 2004 Plan. In addition, the Company had 36 million shares of common stock that were available for issuance under the 2017 plan. With the acquisition of Xilinx, the Company assumed the Xilinx, Inc. 2007 Equity Incentive Plan (2007 Plan) and may grant stock options and awards under this plan. As of December 31, 2022, the Company had 18 million shares of common stock that were available for future grants under the 2007 Plan.
Valuation and Expense
Stock-based compensation expense was allocated in the consolidated statements of operations as follows: | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| (In millions) |
Cost of sales | $ | 29 | | | $ | 5 | | | $ | 6 | |
Research and development | 697 | | | 246 | | | 173 | |
Marketing, general, and administrative | 355 | | | 128 | | | 95 | |
Total stock-based compensation expense before income taxes | 1,081 | | | 379 | | | 274 | |
Income tax benefit | (179) | | | (58) | | | (42) | |
Total stock-based compensation expense, net of income taxes | $ | 902 | | | $ | 321 | | | $ | 232 | |
| | | | | |
| | | | | |
Stock Options. The weighted-average estimated fair value of employee stock options granted during 2022, 2021 and 2020 was $44.35, $46.07 and $38.49 per share, respectively, using the following assumptions:
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
Expected volatility | 51.28 | % | | 51.77 | % | | 57.87 | % |
Risk-free interest rate | 3.00 | % | | 0.69 | % | | 0.18 | % |
Expected dividends | — | % | | — | % | | — | % |
Expected life (in years) | 4.75 | | 4.55 | | 4.30 |
The Company uses a combination of the historical volatility of its common stock and the implied volatility for publicly traded options on the Company’s common stock as the expected volatility assumption. The risk-free interest rate is based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the option grant at the date closest to the option grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the near future. The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding.
The following table summarizes stock option activity and related information:
| | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding Number of Shares | | Weighted- Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Life (in years) |
| (In millions, except share price) | | |
Balance as of December 25, 2021 | 5 | | | $ | 23.98 | | | | | |
Granted | 1 | | | $ | 95.54 | | | | | |
| | | | | | | |
Exercised | (2) | | | $ | 4.27 | | | | | |
Balance as of December 31, 2022 | 4 | | | $ | 42.35 | | | $ | 130 | | | 3.17 |
Exercisable December 31, 2022 | 3 | | | $ | 25.67 | | | $ | 130 | | | 2.27 |
The total intrinsic value of stock options exercised for 2022, 2021 and 2020 was $139 million, $277 million and $180 million, respectively.
As of December 31, 2022, the Company had $35 million of total unrecognized compensation expense related to stock options, which will be recognized over the weighted-average period of 2.74 years.
Time-based RSUs. The weighted-average grant date fair values of time-based RSUs granted during 2022, 2021 and 2020 were $92.92, $78.59 and $32.52 per share, respectively.
The following table summarizes time-based RSU activity and related information:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| Number of Shares | | Weighted- Average Grant Date Fair Value | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Life (in years) |
| (In millions except share price) | | |
Unvested shares as of December 25, 2021 | 10 | | | $ | 79.03 | | | | | |
Assumed with acquisition of Xilinx | 12 | | | $ | 103.35 | | | | | |
Granted | 17 | | | $ | 92.92 | | | | | |
Forfeited | (2) | | | $ | 98.06 | | | | | |
Vested | (9) | | | $ | 86.27 | | | | | |
Unvested shares as of December 31, 2022 | 28 | | | $ | 95.49 | | | $ | 1,810 | | | 1.67 |
The total fair value of time-based RSUs vested during 2022, 2021 and 2020 was $889 million, $678 million and $642 million, respectively.
As of December 31, 2022, the Company had $2.0 billion of total unrecognized compensation expense related to time-based RSUs, which will be recognized over the weighted-average period of 1.67 years.
PRSUs. The weighted-average grant date fair values of PRSUs granted during 2022, 2021 and 2020 were $121.12, $153.89 and $122.95, respectively, using the following assumptions:
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
Expected volatility | 50.65% - 53.51% | | 57.75 | % | | 55.74% - 60.10% |
Risk-free interest rate | 1.14% - 3.17% | | 0.43 | % | | 0.14% - 1.41% |
Expected dividends | — | % | | — | % | | — | % |
Expected term (in years) | 2.07 - 3.07 | | 3.00 | | 2.48 - 3.00 |
The Company uses the historical volatility of its common stock and risk-free interest rate based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the PRSUs grant at the date closest to the grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the near future. The expected term of PRSUs represents the requisite service periods of these PRSUs.
The following table summarizes PRSU activity and related information:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Number of Shares | | Weighted-Average Grant Date Fair Value | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Life (in years) |
| (In millions except share price) | | |
Unvested shares as of December 25, 2021 | 2 | | | $ | 78.59 | | | | | |
Granted | 1 | | | $ | 121.12 | | | | | |
Forfeited | — | | | $ | — | | | | | |
Vested | (1) | | | $ | 51.77 | | | | | |
Unvested shares as of December 31, 2022 | 2 | | | $ | 110.31 | | | $ | 118 | | | 1.76 |
The total fair value of PRSUs vested during 2022, 2021 and 2020 was $254 million, $98 million and $76 million, respectively.
As of December 31, 2022, the Company had $101 million of total unrecognized compensation expense related to PRSUs, which will be recognized over the weighted-average period of 1.76 years.
ESPP. The weighted-average grant date fair value for the ESPP during 2022, 2021 and 2020 was $24.71, $27.27 and $20.97 per share, respectively, using the following assumptions:
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 | | December 28, 2020 | | | | |
Expected volatility | 58.15% - 63.76% | | 36.90% - 39.39% | | 55.16% - 66.53% | | | | |
Risk-free interest rate | 1.43% - 4.52% | | 0.04% - 0.07% | | 0.11% - 0.15% | | | | |
Expected dividends | — | % | | — | % | | — | % | | | | |
Expected term (in years) | 0.50 | | 0.50 | | 0.50 | | | | |
The Company uses the historical volatility of its common stock and the risk-free interest rate based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the ESPP grant at the date closest to the ESPP grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the near future. The expected term of the ESPP represents the six-month offering period.
During 2022, 3 million shares of common stock were purchased under the ESPP at a purchase price of $59.29 resulting in aggregate cash proceeds of $160 million. As of December 31, 2022, the Company had $37 million of total unrecognized compensation expense related to the ESPP, which will be recognized over the weighted-average period of 0.36 years.
Xilinx Replacement Awards
In connection with the acquisition of Xilinx, the Company issued equity awards as replacement for assumed equity awards to Xilinx employees. The replacement awards include restricted stock units of approximately 12 million shares with a weighted average fair value of $103.35 per share and have terms that are substantially the same as the assumed Xilinx awards. The fair value of replacement awards related to services rendered up to the Xilinx Acquisition Date was recognized as a component of the total purchase consideration while the remaining fair value of replacement awards attributable to post-combination services is being recognized as stock-based compensation expense over the remaining post-acquisition vesting period.
NOTE 13 – Retirement Benefit Plans
The Company provides retirement benefit plans in the United States and certain foreign countries. The Company has a 401(k) retirement plan that allows participating employees in the United States to contribute as defined by the plan and subject to Internal Revenue Service limitations. The Company matches 75% of employees’ contributions up to 6% of their eligible compensation. The Company’s contributions to the 401(k) plan for 2022, 2021 and 2020 were approximately $47 million, $35 million and $29 million, respectively.
NOTE 14 – Income Taxes
Income before income taxes consists of the following: | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| (In millions) |
U.S. | $ | 2,093 | | | $ | 3,528 | | | $ | 1,213 | |
Non-U.S. | (895) | | | 147 | | | 67 | |
Total pre-tax income including equity income in investee | $ | 1,198 | | | $ | 3,675 | | | $ | 1,280 | |
The income tax provision (benefit) consists of: | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| (In millions) |
Current: | | | | | |
U.S. federal | $ | 1,191 | | | $ | 112 | | | $ | — | |
U.S. state and local | 31 | | | 11 | | | 5 | |
Non-U.S. | 161 | | | 82 | | | 8 | |
Total | 1,383 | | | 205 | | | 13 | |
Deferred: | | | | | |
U.S. federal | (1,365) | | | 320 | | | (1,193) | |
U.S. state and local | (26) | | | (7) | | | (28) | |
Non-U.S. | (114) | | | (5) | | | (2) | |
Total | (1,505) | | | 308 | | | (1,223) | |
Income tax provision (benefit) | $ | (122) | | | $ | 513 | | | $ | (1,210) | |
The table below displays the reconciliation between statutory federal income taxes and the total income tax provision (benefit).
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| (In millions) |
Statutory federal income tax expense at 21% | $ | 252 | | | $ | 772 | | | $ | 269 | |
State taxes (benefit) | (3) | | | 1 | | | (6) | |
Foreign rate detriment (benefit) | 195 | | | 71 | | | (3) | |
GILTI and other foreign inclusion | (105) | | | — | | | — | |
Foreign-Derived Intangible Income (FDII) deduction | (261) | | | (147) | | | — | |
Research credits | (241) | | | (78) | | | (57) | |
Stock-based and non-deductible compensation | 10 | | | (125) | | | (116) | |
Valuation allowance change | — | | | 3 | | | (1,301) | |
Other | 31 | | | 16 | | | 4 | |
Income tax provision (benefit) | $ | (122) | | | $ | 513 | | | $ | (1,210) | |
The Company recorded an income tax benefit of $122 million in 2022 and an income tax provision of $513 million in 2021, representing effective tax rates of (10%) and 14%, respectively. The reduction in income tax expense in 2022 was primarily due to the lower pre-tax income coupled with a $261 million FDII tax benefit and $241 million of research and development (R&D) tax credits.
Beginning in 2022, provisions in the U.S. Tax Cuts and Jobs Act of 2017 require the Company to capitalize and amortize R&D expenditures rather than deducting the costs as incurred. The capitalization resulted in an increase in 2022 taxable income which also increased the income eligible for the FDII tax benefit. Additionally, there was a pre-tax loss incurred outside of the U.S. primarily due to the GAAP amortization of Xilinx acquisition-related items and therefore, the Company recorded a corresponding tax benefit associated with the reversal of the previously established GILTI deferred tax liability.
As a part of the Xilinx acquisition and as a result of certain employment and operational commitments the Company has made in Singapore, the Company has been granted a Development and Expansion Incentive (DEI) that is effective through 2031. The DEI reduces the local tax on Singapore income from a statutory rate of 17% to 5% through 2031. Due to the current year pre-tax loss, the Company did not receive any income tax or EPS benefit.
The Company recorded an income tax provision of $513 million in 2021 and an income tax benefit of $1.2 billion in 2020, representing effective tax rates of 14% and (95)% respectively. The income tax provision in 2021 was a result of higher income in the U.S. and increase in foreign taxes, partially offset by $147 million of FDII benefit, $78 million of R&D tax credits, and $125 million of excess tax benefit for stock-based compensation net of non-deductible officers’ compensation.
The income tax benefit in 2020 was primarily due to $1.3 billion of tax benefit from the valuation allowance release in the U.S. This benefit was partially offset by approximately $10 million of withholding tax expense related to cross-border transactions, $13 million of state and foreign taxes and $75 million increase in valuation allowance against certain state and foreign tax credits, which are reflected as part of the state taxes and foreign rate benefit in the reconciliation table above.
Deferred income taxes reflect the net tax effects of tax carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the balances for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2022 and December 25, 2021 were as follows:
| | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 |
| (In millions) |
Deferred tax assets: | | | |
Net operating loss carryovers | $ | 1,031 | | | $ | 920 | |
Accruals and reserves not currently deductible | 835 | | | 631 | |
Employee benefits not currently deductible | 214 | | | 164 | |
Federal and state tax credit carryovers | 631 | | | 319 | |
Foreign R&D and investment tax credits | 578 | | | 547 | |
Capitalized costs | 65 | | | 121 | |
Lease liability | 161 | | | 124 | |
Capitalized R&D | 943 | | | — | |
Other | 85 | | | 27 | |
Total deferred tax assets | 4,543 | | | 2,853 | |
Less: valuation allowance | (2,078) | | | (1,735) | |
Total deferred tax assets, net of valuation allowance | 2,465 | | | 1,118 | |
Deferred tax liabilities: | | | |
Acquired intangibles | (3,430) | | | (50) | |
Right-of-use assets | (151) | | | (110) | |
Undistributed foreign earnings | (35) | | | (24) | |
GILTI | (633) | | | — | |
Other | (92) | | | (15) | |
Total deferred tax liabilities | (4,341) | | | (199) | |
Net deferred tax assets (liabilities) | $ | (1,876) | | | $ | 919 | |
As a result of the acquisition of Xilinx, the Company recorded $4.3 billion of net deferred tax liabilities primarily on the excess of book basis over the tax basis of the acquired intangible assets, including $857 million of GILTI net deferred tax liability.
Additionally, as the result of the new R&D capitalization tax law effective in 2022, the capitalized amounts resulted in increased current year taxable income, but which are deductible as amortized in future periods. Therefore, the Company recorded a deferred tax asset for the capitalized R&D expenditures.
The movement in the deferred tax valuation allowance was as follows:
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| (In millions) |
Balance at beginning of year | $ | 1,735 | | | $ | 1,576 | | | $ | 2,867 | |
Charges (reductions) to income tax expense and other accounts* | 112 | | | 3 | | | (1,301) | |
Acquisition-related | 231 | | | — | | | — | |
Net recoveries+ | — | | | 156 | | | 10 | |
Balance at end of year | $ | 2,078 | | | $ | 1,735 | | | $ | 1,576 | |
| | | | | |
* | Amounts recorded in 2020 reflect release of valuation allowances. |
+ | The net recoveries for all were primarily related to net originating deferred tax assets and newly generated tax credits. |
Under current U.S. tax law, the impact of future distributions of undistributed earnings that are indefinitely reinvested are anticipated to be subject to withholding taxes from local jurisdictions and non-conforming U.S. state jurisdictions. The amount of cumulative undistributed earnings that are permanently reinvested that could be subject to withholding taxes are $460 million as of December 31, 2022.
Through the end of fiscal year 2022, the Company continued to maintain a valuation allowance of approximately $2.1 billion for certain federal, state, and foreign tax attributes. The federal valuation allowance maintained is due to limitations under Internal Revenue Code Section 382 or 383, separate return loss year rules, or dual consolidated loss rules. Certain state and foreign valuation allowance maintained is due to lack of sufficient sources of future taxable income.
The Company’s U.S. federal and state net operating losses carryforwards as of December 31, 2022, were $435 million and $476 million, respectively. Net operating losses (NOLs) may be subject to limitations by the Internal Revenue Code and similar provisions. $71 million of U.S. federal NOLs will expire between 2023 and 2037, and $364 million of federal NOLs have no expiration date, and the state NOLs will expire at various dates through 2042. The difference between the amount of federal NOLs which are recorded on the Company’s balance sheet as deferred tax assets and their related valuation allowance, and the amounts reported on the Company’s tax returns are the result of uncertain tax positions the Company has taken during the current year and for which an income tax reserve has been recorded. The federal tax credits of $12 million will expire at various dates between 2023 and 2042. The state tax credits of $722 million will expire at various dates between 2023 through 2038 except for California R&D credit, which does not expire. The Company also has $595 million of credit carryforward in Canada that will expire between 2026 and 2040.
The Company also recorded $142 million of current tax payable as of the Xilinx acquisition date. Additionally, the Company assumed $203 million of long-term liabilities for uncertain tax positions, including $12 million of interest, as well as $321 million of long-term liabilities for transition tax payable over three years. Included in the assumed liabilities for uncertain tax positions is a tax position with respect to whether stock-based compensation from Xilinx’s cost sharing arrangement should be shared among cost share participants. The Company has concluded that the law was unsettled and believes the current uncertain tax position liability is sufficient and will continue to monitor developments in relevant tax court cases.
A reconciliation of the Company's gross unrecognized tax benefits was as follows: | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| (In millions) |
Balance at beginning of year | $ | 275 | | | $ | 119 | | | $ | 65 | |
Increases for tax positions taken in the current year | 748 | | | 156 | | | 30 | |
Increases for tax positions taken in prior years | 104 | | | 14 | | | 41 | |
Decreases for tax positions taken in prior years | (12) | | | (9) | | | (15) | |
Increases to tax positions taken in prior years through acquisitions | 252 | | | — | | | — | |
Decreases for settlements with taxing authorities and statute of limitation lapses | (6) | | | (5) | | | (2) | |
Balance at end of year | $ | 1,361 | | | $ | 275 | | | $ | 119 | |
The amount of unrecognized tax benefits that would impact the effective tax rate if recognized was $1.2 billion, $215 million and $77 million as of December 31, 2022, December 25, 2021 and December 26, 2020, respectively. The Company’s policy is to include interest and penalties related to income tax liabilities within the provision for income taxes on the Consolidated Statements of Operations. The Company had $81.3 million of accrued penalties and interest related to unrecognized tax benefits as of December 31, 2022 including $12 million assumed from the Xilinx acquisition. The Company had no material amounts of accrued interest and accrued penalties related to unrecognized tax benefits as of December 25, 2021 and December 26, 2020. As of December 31, 2022 and December 25, 2021, the Company had long-term income tax liabilities of $1.3 billion and $189 million, respectively, recorded under Other long-term liabilities in the Consolidated Balance Sheets.
The Company is subject to taxation in the U.S. and foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The material jurisdiction in which the Company is subject to potential examination by the taxing authority is the United States, where tax years from 2008 are open for audit. Pre-acquisition Xilinx U.S. tax returns for fiscal years 2018 and 2019 are currently under audit by the IRS.
It is 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 highly uncertain. The Company and its subsidiaries have several foreign and U.S. state audits in process at any one point in time.
NOTE 15 – Other Income (Expense), Net
The following table summarizes the components of Other income (expense), net: | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2022 | | December 25, 2021 | | December 26, 2020 |
| (In millions) |
Interest income | $ | 65 | | | $ | 8 | | | $ | 8 | |
Loss on debt redemption, repurchase and conversion | — | | | (7) | | | (54) | |
Gains (losses) on equity investments, net | (62) | | | 56 | | | 2 | |
Other income (expense) | 5 | | | (2) | | | (3) | |
Other income (expense), net | $ | 8 | | | $ | 55 | | | $ | (47) | |
NOTE 16 – Commitments and Guarantees
Operating Leases
The Company has entered into operating and finance leases for its corporate offices, data centers, research and development facilities and certain equipment. The leases expire at various dates through 2031, some of which include options to extend the lease for up to ten years.
For 2022, 2021 and 2020, the Company recorded $118 million, $71 million and $59 million, respectively, of operating lease expense, including short-term lease expense. For 2022 and 2021, the Company recorded $40 million and $26 million, respectively, of variable lease expense, which primarily included operating expenses and property taxes associated with the usage of facilities under the operating leases. For 2022 and 2021, cash paid for operating leases included in operating cash flows was $108 million and $67 million, respectively. The Company’s finance and short-term leases are immaterial to the Company’s consolidated financial statements.
Supplemental information related to leases is as follows: | | | | | |
| December 31, 2022 |
Weighted-average remaining lease term in years – operating leases | 5.98 |
Weighted-average discount rate – operating leases | 3.83 | % |
Future minimum lease payments under non-cancellable operating lease liabilities as of December 31, 2022 are as follows:
| | | | | |
Year | (In millions) |
2023 | $ | 109 | |
2024 | 99 | |
2025 | 88 | |
2026 | 77 | |
2027 | 59 | |
2028 and thereafter | 113 | |
Total minimum lease payments | 545 | |
Less: interest | (56) | |
Present value of net minimum lease payments | 489 | |
Less: current portion | (93) | |
Total long-term operating lease liabilities | $ | 396 | |
Certain other operating leases contain provisions for escalating lease payments subject to changes in the consumer price index.
Commitments
The Company’s purchase commitments primarily include the Company’s obligations to purchase wafers and substrates from third parties and future payments related to certain software and technology licenses and IP licenses. Purchase commitments include obligations made under noncancellable purchase orders and contractual obligations requiring minimum purchases or for which cancellation would lead to significant penalties.
Total future unconditional purchase commitments as of December 31, 2022 were as follows:
| | | | | |
Year | (In millions) |
2023 | $ | 6,489 | |
2024 | 1,434 | |
2025 | 271 | |
2026 | 129 | |
2027 | 85 | |
2028 and thereafter | 202 | |
Total unconditional purchase commitments | $ | 8,610 | |
On an ongoing basis, the Company works with suppliers on the timing of payments and deliveries of purchase commitments, taking into account business conditions.
Warranties and Indemnities
The Company generally warrants that its products sold to its customers will conform to its approved specifications and be free from defects in material and workmanship under normal use and conditions for one year. The Company may also offer one to three-year limited warranties based on product type and negotiated warranty terms with certain customers. The Company accrues warranty costs to Cost of sales at the time of sale of warranted products.
Changes in the Company’s estimated liability for product warranty during 2022 and 2021 are as follows:
| | | | | | | | | | | |
| December 31, 2022 | | December 25, 2021 |
| (In millions) |
Beginning balance | $ | 51 | | | $ | 37 | |
Provisions during the period | 115 | | | 106 | |
Settlements during the period | (101) | | | (92) | |
| | | |
Ending balance | $ | 65 | | | $ | 51 | |
In addition to product warranties, the Company from time to time in its normal course of business indemnifies other parties with whom it enters into contractual relationships, including customers, lessors and parties to other transactions with the Company, with respect to certain matters. In these limited matters, the Company has agreed to hold certain third parties harmless against specific types of claims or losses such as those arising from a breach of representations or covenants, third-party claims that the Company’s products when used for their intended purpose(s) and under specific conditions infringe the intellectual property rights of a third party, or other specified claims made against the indemnified party. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the unique facts and circumstances that are likely to be involved in each particular claim and indemnification provision. Historically, payments made by the Company under these obligations have not been material. In addition, the impact from changes in estimates for pre-existing warranties has been immaterial.
NOTE 17 – Contingencies
Quarterhill Inc. Litigation
On July 2, 2018, three entities named Aquila Innovations, Inc. (Aquila), Collabo Innovations, Inc. (Collabo), and Polaris Innovations, Ltd. (Polaris), filed separate patent infringement complaints against the Company in the United States District Court for the Western District of Texas. Aquila alleges that the Company infringes two patents (6,239,614 and 6,895,519) relating to power management; Collabo alleges that the Company infringes one patent (7,930,575) related to power management; and Polaris alleges that the Company infringes two patents (6,728,144 and 8,117,526) relating to control or use of dynamic random-access memory, or DRAM. Each of the three complaints seeks unspecified monetary damages, interest, fees, expenses, and costs against the Company; Aquila and Collabo also seek enhanced damages. Aquila, Collabo, and Polaris each appear to be related to a patent assertion entity named Quarterhill Inc. (formerly WiLAN Inc.).
On May 14, 2020, at the request of Polaris, the Court dismissed all claims related to one of the two patents in suite in the Polaris case. On June 10, 2020, the Court granted AMD’s motions to stay the Polaris and Aquila cases pending the completion of inter partes review of each of the patents-in-suit in those cases by the Patent Trial and Appeal Board. On February 22, 2021, February 26, 2021, and March 10, 2021, the Patent Trial and Appeal Board issued final written decisions in inter partes reviews invalidating all asserted claims of the remaining Polaris and Aquila patents.
On May 10, 2021, Aquila filed a notice of appeal to the Court of Appeals for the Federal Circuit for the IPR decision regarding U.S. Patent No. 6,895,519. On April 30, 2021, Polaris filed a notice of appeal to the Court of Appeals for the Federal Circuit for the IPR decision regarding U.S. Patent No. 8,117,526. On May 14, 2021, AMD filed a notice of cross-appeal to the Court of Appeals for the Federal Circuit for the IPR decision regarding U.S. Patent No. 8,117,526. On July 18, 2022, the Court of Appeals for the Federal Circuit affirmed the Patent Trial and Appeal Board’s decision.
On February 8, 2022, Polaris filed a lawsuit against Xilinx, Inc. alleging infringement of four patents related to memory chips and memory interfaces. On February 22, 2022, the Company was served with the complaint. On April 14, 2022, the Company filed a motion to dismiss the complaint. On April 28, 2022, Polaris filed an amended complaint. On May 12, 2022, the Company filed an answer to the amended complaint.
On June 1, 2022, Polaris filed two lawsuits against the Company and Hewlett-Packard GmbH, HP Deutschland GmbH in the Hamburg and Munich Courts in Germany, alleging infringement of two patents related to memory chips and memory interfaces. On July 15, 2022, Polaris filed a lawsuit against the Company, ASUSTeK Computer Inc., and ASUS Computer GmbH, alleging infringement of a patent related to memory chips and memory interfaces.
Based upon information presently known to management, the Company believes that the potential liability of the above listed legal proceeding, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations.
Monterey Research Litigation
On November 15, 2019, Monterey Research, LLC (Monterey) filed a patent infringement complaint against the Company in the United States District Court for the District of Delaware. Monterey 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). On August 12, 2021, Monterey filed two patent infringement complaints in the United States District Court for the Western District of Texas. In the first complaint, Monterey alleges that the Company infringes two patents (8,694,776 and 9,767,303) related to memory controllers, three patents (8,572,297, 7,609,799, and 7,899,145) related to circuit designs, and one patent (6,979,640) related to semiconductor processing. In the second complaint, Monterey alleges that the Company infringes one patent (6,680,516) related to semiconductor processing. On March 31, 2022, the Company entered into an agreement which will provide the Company a license to the Monterey Research patents. The agreement did not have a material adverse effect on the Company’s financial condition, cash flows, or results of operation.
Analog Devices Litigation
On December 5, 2019, Analog Devices, Inc. (ADI) filed a lawsuit against Xilinx alleging infringement of eight patents related to switching circuits, comparators, analog to digital convertors, signal conditioners, and switched capacitors. On January 21, 2020, Xilinx filed its answer and counterclaims alleging infringement by ADI of eight patents related to digital to analog converters, serializing data paths, transceivers, networks on chip, termination circuits, and data transmitters. In November 2022, the Company and Analog Devices, Inc. resolved all ongoing patent litigations, based on mutually agreed upon terms. As part of this resolution, the two companies have committed to pursue technology collaborations to bring next generation solutions to their communications and data center customers. The agreement did not have a material adverse effect on the Company’s financial condition, cash flows, or results of operations.
Future Link Systems Litigation
On December 21, 2020, Future Link Systems, LLC (Future Link) filed a patent infringement complaint against the Company in the United States District Court for the Western District of Texas. Future Link alleges that the Company infringes three U.S. patents: 7,983,888 (related to simulated PCI express circuitry); 6,363,466 (related to out of order data transactions); and 6,622,108 (related to interconnect testing). On December 21, 2021, Future Link filed a lawsuit alleging infringement of two U.S. patents (8,099,614 and 7,685,439) related to power management. On December 28, 2021, Future Link filed a complaint at the United States International Trade Commission alleging infringement of the same two power management patents. Several of the Company’s customers were also named as respondents. On March 31, 2022, the Company entered into an agreement which will provide the Company a license to the Future Link patents. The agreement did not have a material adverse effect on the Company’s financial condition, cash flows, or results of operations.
Environmental Matters
The Company is named as a responsible party on Superfund clean-up orders for three sites in Sunnyvale, California that are on the National Priorities List. Since 1981, the Company has discovered hazardous material releases to the groundwater from former underground tanks and proceeded to investigate and conduct remediation at these three sites. The chemicals released into the groundwater were commonly used in the semiconductor industry in the United States in the wafer fabrication process prior to 1979.
In 1991, the Company received Final Site Clean-up Requirements Orders from the California Regional Water Quality Control Board relating to the three sites. The Company has entered into settlement agreements with other responsible parties on two of the orders. During the term of such agreements, other parties have agreed to assume most of the foreseeable costs as well as the primary role in conducting remediation activities under the orders. The Company remains responsible for additional costs beyond the scope of the agreements as well as all remaining costs in the event that the other parties do not fulfill their obligations under the settlement agreements.
To address anticipated future remediation costs under the orders, the Company has computed and recorded an estimated environmental liability of approximately $3.9 million and has not recorded any potential insurance recoveries in determining the estimated costs of the cleanup. The progress of future remediation efforts cannot be predicted with certainty and these costs may change. The Company believes that any amount in addition to what has already been accrued would not be material.
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.