ADVANCED MICRO DEVICES INC - Quarter Report: 2015 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

Form 10-Q

(Mark One)

For the quarterly period ended March 28, 2015

OR

For the transition period from             to             

Commission File Number 001-07882

ADVANCED MICRO DEVICES, INC.

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of the registrant’s common stock,  $0.01 par value, as of April 24, 2015: 778,059,809

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INDEX

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PART I. FINANCIAL INFORMATION

Advanced Micro Devices, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Advanced Micro Devices, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Advanced Micro Devices, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Advanced Micro Devices, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements of Advanced Micro Devices, Inc. and its subsidiaries (the Company or AMD) have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The results of operations for the quarter ended March 28, 2015 shown in this report are not necessarily indicative of results to be expected for the full year ending December 26, 2015. In the opinion of the Company’s management, the information contained herein reflects all adjustments necessary for a fair presentation of the Company’s results of operations, financial position and cash flows. All such adjustments are of a normal, recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 27, 2014.

The Company uses a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters ended March 28, 2015 and March 29, 2014 each consisted of 13 weeks.

Principles of Consolidation. The condensed consolidated financial statements include the Company’s accounts and those of its wholly-owned subsidiaries. Upon consolidation, all significant intercompany accounts and transactions are eliminated.

Change to Prior Period Information. During the third quarter of 2014, the Company realigned its organizational structure. As a result of this organizational change, beginning in third quarter of 2014, the Company reports its financial statements based on the new segments described in Note 7 - Segment Reporting with no other impact on the Company’s condensed consolidated financial statements. All prior-period amounts have been adjusted retrospectively to reflect the Company’s reportable segment changes.

Recently Issued Accounting Standards

Interest—Imputation of Interest. In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 will be effective for annual reporting periods beginning after December 15, 2015 and interim periods within fiscal years beginning after December 15, 2016, with early adoption permitted. The new guidance will be applied retrospectively to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of the ASU 2015-03 on its consolidated financial statements.

Disclosure of Going Concern Uncertainties. In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), which provides guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 will be effective in the fourth quarter of 2016, with early adoption permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2014-15 on its consolidated financial statements.

Share-Based Payments with Performance Targets. In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12), which requires that a performance target be treated as a performance condition if it affects vesting and could be achieved after the requisite service period is rendered. ASU 2014-12 will be effective in the first quarter of 2016, with early adoption permitted. The Company may use either of two methods: (i) prospective application to all awards granted or modified after the effective date or (ii) retrospective application to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements.

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The Company is currently evaluating the impact of its pending adoption of ASU 2014-12 on its consolidated financial statements and has not yet determined which method it will apply.

Revenue Recognition. In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), which creates a single source of revenue guidance under U.S. GAAP for all companies in all industries. The core principle of ASU 2014-09 is that revenue should be recognized in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates. ASU 2014-09 also requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used. ASU 2014-09 will be effective for the Company in the first quarter of 2017 and early adoption is not permitted. The Company may adopt ASU 2014-09 either by using a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined which approach it will apply.

NOTE 2. GLOBALFOUNDRIES

Wafer Supply Agreement. The Wafer Supply Agreement (WSA) governs the terms by which the Company purchases products manufactured by GLOBALFOUNDRIES Inc. (GF).

Fourth Amendment to Wafer Supply Agreement. On March 30, 2014, the Company entered into a fourth amendment to the WSA. The primary effect of the fourth amendment was to establish volume purchase commitments and fixed pricing for the 2014 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of the Company’s microprocessor unit, graphics processor unit and semi-custom game console products to be delivered by GF to the Company during the 2014 calendar year.

Fifth Amendment to Wafer Supply Agreement. On April 16, 2015, the Company entered into a fifth amendment to the WSA. The primary effect of the fifth amendment was to establish volume purchase commitments and fixed pricing for the 2015 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of the Company’s microprocessor unit, graphics processor unit and semi-custom products to be delivered by GF to the Company during the 2015 calendar year.

The Company’s total purchases from GF related to wafer manufacturing and research and development activities for the quarters ended March 28, 2015 and March 29, 2014 were $170 million and $260 million, respectively.

The Company currently estimates that its purchase obligations to GF for wafer manufacturing and research and development activities will be approximately $1.1 billion in fiscal 2015 and at least $70 million during the first quarter of fiscal 2016. The Company is not able to meaningfully quantify or estimate its future purchase obligations to GF other than those set forth in the fifth amendment to the WSA, but it expects that its future purchases from GF will continue to be material.

GF continues to be a related party of the Company because Mubadala Development Company PJSC (Mubadala) and Mubadala Technology Investments LLC (Mubadala Tech) are affiliated with West Coast Hitech L.P. (WCH), the Company’s largest stockholder. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala.

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NOTE 3. Supplemental Balance Sheet Information

Inventories

Property, Plant and Equipment

Other Assets

Accrued and Other Current Liabilities

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NOTE 4. Net Loss Per Share

Basic net income (loss) per share is computed based on the weighted average number of shares outstanding, and for the first quarter of 2014 also based on shares issuable upon exercise of warrants issued by the Company to WCH in connection with the GF transaction in 2009.

Diluted net income (loss) per share is computed based on the weighted average number of shares outstanding plus any potentially dilutive shares outstanding. Potentially dilutive shares include stock options and restricted stock units.

The following table sets forth the components of basic and diluted loss per share:

Potential shares from stock options and restricted stock units totaling 64 million and 45 million were not included in the net loss per share calculations for the first quarters of 2015 and 2014, respectively, because their inclusion would have been anti-dilutive.

NOTE 5. Financial Instruments

Cash and Cash Equivalents and Marketable Securities

Cash and financial instruments measured and recorded at fair value on a recurring basis as of March 28, 2015 and December 27, 2014 are summarized below:

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Available-for-sale securities held by the Company as of March 28, 2015 and December 27, 2014 consisted of money market funds, commercial paper and corporate bonds. The amortized cost of available-for-sale securities approximates the fair value for all periods presented.

All contractual maturities of the Company’s available-for-sale marketable debt securities as of March 28, 2015 were within one year. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.

In addition to those amounts presented above, as of March 28, 2015 and December 27, 2014, the Company had approximately $10 million of available-for-sale investments in money market funds, used as collateral for leased buildings and letters of credit deposits, which were included in Other assets on the Company’s condensed consolidated balance sheets. These money market funds are classified within Level 1 because they are valued using quoted prices for identical instruments in active markets. Their amortized costs are the same as the fair value for all periods presented. The Company is restricted from accessing these deposits.

Also in addition to those amounts presented above, as of March 28, 2015 and December 27, 2014, the Company had approximately $14 million and $16 million, respectively, of available-for-sale investments in mutual funds held in a Rabbi trust established for the Company’s deferred compensation plan, which were also included in Other assets on the Company’s condensed consolidated balance sheets. These mutual funds are classified within Level 1 because they are valued using quoted prices for identical instruments in active markets. Their amortized cost approximates the fair value for all periods presented. The Company is restricted from accessing these investments.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis. The Company carries its financial instruments at fair value with the exception of its debt. Financial instruments that are not recorded at fair value are measured at fair value on a quarterly basis for disclosure purposes. The carrying amounts and estimated fair values of financial instruments not recorded at fair value are as follows:

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The Company’s short-term and long-term debt are classified within Level 2. The fair value of the debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of the Company’s accounts receivable, accounts payable and other short-term obligations approximate their carrying value based on existing payment terms.

Hedging Transactions and Derivative Financial Instruments

Cash Flow Hedges

The following table shows the amount of gain (loss) included in accumulated other comprehensive income (loss), the amount of gain (loss) reclassified from accumulated other comprehensive income (loss) and included in earnings related to the foreign currency forward contracts designated as cash flow hedges and the amount of gain (loss) included in other income (expense), net, related to contracts not designated as hedging instruments, which was allocated in the condensed consolidated statements of operations:

The Company’s foreign currency derivative contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates.

The following table shows the fair value amounts included in Prepaid expenses and other current assets should the foreign currency forward contracts be in a gain position or included in Accrued and other current liabilities should these contracts be in a loss position. As of March 28, 2015, the Company’s outstanding contracts were in a net loss position of $14 million. These amounts were recorded in the Company’s condensed consolidated balance sheets as follows:

For the foreign currency contracts designated as cash flow hedges, the ineffective portions of the hedging relationship and the amounts excluded from the assessment of hedge effectiveness were immaterial.

As of March 28, 2015 and December 27, 2014, the notional values of the Company’s outstanding foreign currency forward contracts were $240 million and $298 million, respectively. All the contracts mature within 12 months, and, upon

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maturity, the amounts recorded in Accumulated other comprehensive income (loss) are expected to be reclassified into earnings. The Company hedges its exposure to the variability in future cash flows for forecasted transactions over a maximum of 12 months.

Fair Value Hedges

The Company’s fair value hedge derivative contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets.

The following table shows the fair value amounts included in Other assets should the fair value hedge derivative contracts be in a gain position or included in Other long-term liabilities should these contracts be in a loss position. These amounts were recorded in the Company’s condensed consolidated balance sheets as follows:

NOTE 6. Income Taxes

In the first quarter of 2015, the Company recorded an income tax provision of $3 million due to foreign taxes in profitable locations.

In the first quarter of 2014, the Company recorded an income tax provision of $2 million due to foreign taxes in profitable locations.

As of March 28, 2015, substantially all of the Company’s U.S. and Canadian deferred tax assets, net of deferred tax liabilities, continue to be subject to a valuation allowance. The realization of these assets is dependent on substantial future taxable income which, as of March 28, 2015, in management’s estimate, is not more likely than not to be achieved.

The Company’s gross unrecognized tax benefits did not change during the first quarter of 2015. The total gross unrecognized tax benefits as of March 28, 2015 were $28 million. There were no material changes to accrued interest or penalties in the first quarter of 2015.

The Company currently expects to reduce its unrecognized tax benefits by approximately $7 million, primarily as a result of the potential settlement of tax audits with certain foreign tax authorities over the next 12 months. The Company does not believe it is reasonably possible that other unrecognized tax benefits will materially change in the next 12 months. However, the settlement, resolution or closure of tax audits are highly uncertain.

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NOTE 7. Segment Reporting

Management, including the Chief Operating Decision Maker, who is the Company’s Chief Executive Officer, reviews and assesses operating performance using segment net revenue and operating income (loss) before interest, other income (expense), net and income taxes. These performance measures include the allocation of expenses to the operating segments based on management’s judgment. In connection with the Company’s continued strategic transformation, effective July 1, 2014, the Company realigned its organizational structure. As a result of this organizational change, the Company has the following two reportable segments:

In addition to these reportable segments, the Company has an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to any of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. Also included in this category are amortization of acquired intangible assets, stock-based compensation expense, restructuring and other special charges, net and workforce rebalancing severance charges.

The following table provides a summary of net revenue and operating income (loss) by segment. All period results presented reflect the Company’s new reportable segments:

NOTE 8. Stock-Based Incentive Compensation Plans

The following table summarizes stock-based compensation expense related to employee stock options and restricted stock units, which is allocated within the Company’s condensed consolidated statements of operations as follows:

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For all periods presented, the Company did not realize any excess tax benefit related to stock-based compensation and therefore did not record any related financing cash flows.

Stock Options

The weighted average assumptions applied in the lattice-binomial model that the Company uses to estimate the fair value employee stock options are as follows:

In the first quarters of 2015 and 2014, the Company granted 0.2 million and 0.1 million shares employee stock options, respectively, with weighted average grant date fair value per share of $1.29 and $1.62, respectively.

Restricted Stock Units

In the first quarters of 2015 and 2014, the Company granted 5.3 million and 0.5 million shares restricted stock units, respectively, with weighted average grant date fair values per share of $2.53 and $3.80, respectively.

NOTE 9. Commitments and Contingencies

Warranties and Indemnities

The Company generally warrants that its products sold to its customers will conform to the Company’s approved specifications and be free from defects in material and workmanship under normal use and service for one year. Subject to certain exceptions, the Company also offers a three-year limited warranty to end users for only those central processing unit (CPU) and AMD accelerated processing unit (APU) products that are commonly referred to as “processors in a box” and for PC workstations products. The Company also offered extended limited warranties to certain customers of “tray” microprocessor products and/or workstation graphics products who have written agreements with the Company and target their computer systems at the commercial and/or embedded markets.

Changes in the Company’s estimated liability for product warranty were as follows:

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

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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.

Contingencies

Securities Class Action

On January 15, 2014, a class action lawsuit captioned Hatamian v. AMD, et al., C.A. No. 3:14-cv-00226 was filed against the Company in the United States District Court for the Northern District of California. The complaint purports to assert claims against the Company and certain individual officers for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5 of the Exchange Act. The plaintiffs seek to represent a proposed class of all persons who purchased or otherwise acquired the Company’s common stock during the period April 4, 2011 through October 18, 2012. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual officers regarding the Company’s 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to inflate artificially the price paid for the Company’s common stock during the period. The complaint seeks unspecified compensatory damages, attorneys’ fees and costs.

On July 7, 2014, the Company filed a motion to dismiss plaintiffs’ claims. On March 31, 2015, the Court denied the motion to dismiss.

Based upon information presently known to management, the Company believes that the potential liability, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations.

Shareholder Derivative Lawsuit

On March 20, 2014, a purported shareholder derivative lawsuit captioned Wessels v. Read, et al., Case No. 1:14-cv-262486 was filed against the Company (as a nominal defendant only) and certain of the Company’s directors and officers in the Santa Clara County Superior Court of the State of California. The complaint purports to assert claims against the Company and certain individual directors and officers for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by the Company and the individual directors and officers regarding the Company’s 32nm technology and “Llano” product, which statements and omissions, the plaintiffs claim, allegedly operated to inflate artificially the price paid for the Company’s common stock during the period.

The shareholder derivative lawsuit is currently stayed.

Based upon information presently known to management, the Company believes that the potential liability, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations.

Other Legal Matters

The Company is a defendant or plaintiff in various actions that arose in the normal course of business. With respect to these matters, based on the management’s current knowledge, the Company believes that the amount or range of reasonably possible loss, if any, will not, either individually or in the aggregate, have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

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NOTE 10. Restructuring and Other Special Charges, Net

2014 Restructuring Plan

In October 2014, the Company implemented a restructuring plan designed to improve operating efficiencies. The plan involved a reduction of global headcount by approximately 6% and an alignment of its real estate footprint with its reduced headcount. In the first quarter of 2015, the Company recorded a $12 million restructuring charge, which consisted of $5 million for severance and related benefits and $7 million for facilities related costs. The Company expects the plan to be largely completed by the end of the third quarter of 2015.

The following table provides a summary of the restructuring activities in the first quarter of 2015 and the related liabilities recorded in Accrued and other current liabilities and Other long-term liabilities on the Company’s condensed consolidated balance sheets as of March 28, 2015:

Dense Server Systems Business Exit

As a part of the Company’s strategy to simplify and sharpen its investment focus, the Company decided to exit the dense server systems business, formerly SeaMicro, in the first quarter of 2015. As a result of the Company’s decision to exit this business, the Company recorded a charge of $75 million in Restructuring and other special charges, net on the Company’s condensed consolidated statements of operations in the first quarter of 2015. This charge consisted of an impairment charge of $62 million related to the acquired intangible assets. The Company concluded that the carrying value of the acquired intangible assets associated with its dense server systems business was fully impaired as the Company has no current plans to utilize the related freedom fabric technology in any of its future products nor does it have any plans at this time to monetize the associated intellectual property. In addition, the exit charge consisted of a $6 million non-cash charge related to asset impairments, $4 million of severance and related benefits and $3 million for contract or program termination costs. The Company expects to complete this exit activity within 12 months.

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NOTE 11. Accumulated Other Comprehensive Income (Loss)

The table below summarizes the changes in accumulated other comprehensive income (loss) by component:

NOTE 12. Secured Revolving Line of Credit

Loan and Security Agreement

The Company and its subsidiary, AMD International Sales & Service, Ltd. (together, the Borrowers), entered into a loan and security agreement on November 12, 2013, as amended on December 11, 2014 (the Loan Agreement), for a secured revolving line of credit for a principal amount up to $500 million (the Secured Revolving Line of Credit), with up to $75 million available for issuance of letters of credit, with a group of lenders and Bank of America, N.A., acting as agent for the lenders (the Agent). The Secured Revolving Line of Credit matures on November 12, 2018. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible account receivable minus certain reserves. The borrowings of the Secured Revolving Line of Credit may be used for general corporate purposes, including working capital needs.

At March 28, 2015 and December 27, 2014, the Secured Revolving Line of Credit had an outstanding loan balance of $188 million and $130 million, respectively, at an interest rate of 4.25%. The Company reports its intra-period changes in its revolving credit balance on a net basis in its condensed consolidated statement of cash flows as the Company intends the period of the borrowings to be brief, repaying borrowed amounts within 90 days.

Amended and Restated Loan and Security Agreement

On April 14, 2015, the Borrowers and ATI Technologies ULC (together with the Borrowers, the Loan Parties), entered into an amended and restated loan and security agreement (the Amended and Restated Loan Agreement) by and among the Loan Parties, the financial institutions party thereto from time to time as lenders (the Lenders) and the Agent. The Amended and Restated Loan Agreement amended and restated the Loan Agreement.

The Amended and Restated Loan Agreement provides for a Secured Revolving Line of Credit with up to $75 million available for issuance of letters of credit, which remained unchanged from the Loan Agreement. Borrowings under the Secured Revolving Line of Credit are limited to up to 85% of eligible accounts receivable (90% for certain qualified eligible accounts receivable), minus specified reserves. The size of the commitments under the Secured Revolving Line of Credit may be increased by up to an aggregate amount of $200 million.

The Secured Revolving Line of Credit matures on April 14, 2020 and is secured by a first priority security interest in the Loan Parties’ accounts receivable, inventory, deposit accounts maintained with the Agent and other specified assets, including books and records.

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The Borrowers may elect a per annum interest rate equal to (a) the London Interbank Offered Rate (LIBOR) plus the applicable margin set forth in the applicable chart below (the “Applicable Margin”) as determined by the average availability under the Secured Revolving Line of Credit and the fixed charge coverage ratio for the most recently ended four-fiscal quarter period; or (b) (i) the greatest of (x) the Agent’s prime rate, (y) the federal funds rate, as published by the Federal Reserve Bank of New York plus 0.50%, and (z) LIBOR for a one-month period plus 1.00%, plus (ii) the Applicable Margin.

Applicable Margin, if average availability is equal to or greater than 66.66% of the total commitment amount and the fixed charge coverage ratio for the most recently ended four-fiscal quarter period is greater than or equal to 1.25 to 1.00, is 0.25% for Base Rate Revolver Loans and 1.25% for LIBOR Revolver Loans. Otherwise, Applicable Margin is determined in accordance with the below table:

The Secured Revolving Line of Credit may be optionally prepaid or terminated, and unutilized commitments may be reduced at any time, in each case without premium or penalty. In connection with the Secured Revolving Line of Credit, the Borrowers will pay an unused line fee equal to 0.375% per annum, payable monthly on the unused amount of the commitments under the Secured Revolving Line of Credit. The unused line fee decreases to 0.25% per annum when 35% or more of the Secured Revolving Line of Credit is utilized. The Borrowers will pay (i) a monthly fee on all letters of credit outstanding under the Secured Revolving Line of Credit equal to the applicable LIBOR margin and (ii) a fronting fee to the Agent equal to 0.125% of all such letters of credit, payable monthly in arrears.

The Amended and Restated Loan Agreement contains covenants that place certain restrictions on the Loan Parties’ ability to, among other things, allow certain of the Company’s subsidiaries that manufacture or process inventory for the Loan Parties to borrow secured debt or unsecured debt beyond a certain amount, amend or modify certain terms of any debt of $50 million or more or subordinated debt, create or suffer to exist any liens upon accounts or inventory, sell or transfer any of Loan Parties’ accounts or inventory other than certain ordinary-course transfers, make certain changes to any Loan Party’s name or form or state of organization without notifying the Agent, liquidate, dissolve, merge, amalgamate, combine or consolidate, or become a party to certain agreements restricting the Loan Parties’ ability to incur or repay debt, grant liens, make distributions, or modify loan agreements.

Further restrictions apply when certain payment conditions (the Payment Conditions) are not satisfied with respect to specified transactions, events or payments. The Payment Conditions include that (i) no default or event of default exists and (ii) at all times during the 45 consecutive days immediately prior to such transaction, event or payment and on a pro forma basis after giving effect to such transaction, event or payment and any incurrence or repayment of indebtedness in connection therewith, the Loan Parties’ Excess Cash Availability (as defined in the Amended and Restated Loan Agreement) is greater than the greater of 20% of the total commitment amount and $100 million. Such restrictions limit the Loan Parties’ ability to, among other things, create any liens upon any of the Loan Parties’ property (other than customary permitted liens and liens on up to $1.5 billion of secured credit facilities debt (which amount includes the Secured Revolving Line of Credit)), declare or make any distributions, create any encumbrance on the ability of a subsidiary to make any upstream payments, make asset dispositions other than certain ordinary course dispositions, make certain loans, make payments with respect to subordinated debt or certain borrowed money prior to its due date or become a party to certain agreements restricting the Loan Parties’ ability to enter into any non arm’s-length transaction with an affiliate.

The Loan Parties are required to repurchase, redeem, defease, repay, create a segregated account for the repayment of, or request Agent reserve a sufficient available amount under the Secured Revolving Line of Credit for the repayment of, all debt for borrowed money exceeding $50 million, by no later than 60 days prior to its maturity date (not including the Secured Revolving Line of Credit). Any reserved funds for this purpose would not be included in domestic cash calculations.

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In addition, if at any time the Loan Parties’ Excess Cash Availability is less than the greater of 15% of the total commitment amount and $75 million, the Loan Parties must maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 until (i) no event of default exists and (ii) the Loan Parties’ Excess Cash Availability is greater than the greater of 15% of the total commitment amount and $75 million for 45 consecutive days.

The events of default under the Amended and Restated Loan Agreement include, among other things, payment defaults, the inaccuracy of representations or warranties, defaults in the performance of affirmative and negative covenants, bankruptcy and insolvency related defaults, a cross-default related to indebtedness in an aggregate amount in excess of $50 million, judgments entered against a Loan Party in an amount that exceeds cumulatively $50 million, certain ERISA events and events related to Canadian defined benefits plans and a change of control. When a Payment Condition has not been satisfied, additional events of default include, among other things, a loss, theft damage or destruction with respect to any collateral if the amount not covered by insurance exceeds $50 million.

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The statements in this report include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements speak only as of the date hereof or as of the dates indicated in the statements and should not be relied upon as predictions of future events, as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma,” “estimates,” “anticipates,” or the negative of these words and phrases, other variations of these words and phrases or comparable terminology. The forward-looking statements relate to, among other things: demand for our products; the growth, change and competitive landscape of the markets in which we participate; the nature and extent of our future payments to GLOBALFOUNDRIES Inc. (GF) and the materiality of these payments; the materiality of our future purchases from GF; sales patterns of our semi-custom System-on-Chip (SoC) products; our ability to transform our business to attain revenue from high-growth markets; expected benefits and completion of our restructuring plan announced in October 2014 (the 2014 Restructuring Plan) and our exit from the dense server systems business; the level of international sales as compared to total sales; our ability to reduce our unrecognized tax benefits over the next twelve months; that other unrecognized tax benefits will not materially change in the next 12 months; that our cash and cash equivalents and marketable securities balances, the savings from our 2014 Restructuring Plan and our secured revolving line of credit will be sufficient to fund our operations including capital expenditures over the next 12 months; our ability to obtain sufficient external financing on favorable terms, or at all; our dependence on a small number of customers; our hedging strategy; and our expenditures related to environmental compliance and conflict minerals disclosure requirements. Material factors that could cause actual results to differ materially from current expectations include, without limitation, the following: Intel Corporation’s dominance of the microprocessor market and its aggressive business practices may limit our ability to compete effectively; we rely on GF to manufacture most of our microprocessor and APU products and certain of our GPU and semi-custom products. If GF is not able to satisfy our manufacturing requirements, our business could be adversely impacted; we rely on third parties to manufacture our products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, our business could be materially adversely affected; failure to achieve expected manufacturing yields for our products could negatively impact our financial results; the success of our business is dependent upon our ability to introduce products on a timely basis with features and performance levels that provide value to our customers while supporting and coinciding with significant industry transitions; if we cannot generate sufficient revenue and operating cash flow or obtain external financing, we may face a cash shortfall and be unable to make all of our planned investments in research and development or other strategic investments; we may not be able to successfully implement our business strategy to refocus our business to address markets beyond our core PC market to high-growth adjacent markets; the completion and impact of the 2014 Restructuring Plan and our transformation initiatives could adversely affect us; global economic uncertainty may adversely impact our business and operating results; we may not be able to generate sufficient cash to service our debt obligations or meet our working capital requirements; we have a substantial amount of indebtedness which could adversely affect our financial position and prevent us from implementing our strategy or fulfilling our contractual obligations; the agreements governing our notes and our secured revolving line of credit for a principal amount up to $500 million (Secured Revolving Line of Credit) impose restrictions on us that may adversely affect our ability to operate our business; the markets in which our products are sold are highly competitive; the loss of a significant customer may have a material adverse effect on us; our receipt of revenue from our semi-custom SoC products is dependent upon our technology being designed into third-party products and the success of those products; the demand for our products depends in part on the market conditions in the industries into which they are sold. Fluctuations in demand for our products or a market decline in any of these industries could have a material adverse effect on our results of operations; our ability to design and introduce new products in a timely manner is dependent upon third-party intellectual property; we depend on third-party companies for the design, manufacture and supply of motherboards, BIOS software and other computer platform components to support our business; if we lose Microsoft Corporation’s support for our products or other software vendors do not design and develop software to run on our products, our ability to sell our products could be materially adversely affected; we may incur future impairments of goodwill; uncertainties involving the ordering and shipment of our products could materially adversely affect us; our reliance on third-party distributors and AIB partners subjects us to certain risks; our inability to continue to attract and retain qualified personnel may hinder our product development programs; in the event of a change of control, we may not be able to repurchase our outstanding debt as required by the applicable indentures and our Secured Revolving Line of Credit, which would result in a default under the indentures and our Secured Revolving Line of Credit; the semiconductor industry is highly cyclical and has experienced severe downturns that have materially adversely affected, and may continue to materially adversely affect, our business in the future; our business is dependent upon the proper functioning of our internal business processes and information systems and modification or interruption of such systems may disrupt our business, processes and internal controls; data breaches and cyber-attacks could compromise our intellectual property or other sensitive information and cause significant damage to our business and reputation; our operating results are subject to quarterly and seasonal sales patterns; if essential equipment or materials are not available to manufacture our products, we could be materially adversely affected; if our products are not compatible with some or all industry-standard software and hardware, we could be materially

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adversely affected; costs related to defective products could have a material adverse effect on us; if we fail to maintain the efficiency of our supply chain as we respond to changes in customer demand for our products, our business could be materially adversely affected; we outsource to third parties certain supply-chain logistics functions, including portions of our product distribution, transportation management and information technology support services; acquisitions could disrupt our business, harm our financial condition and operating results or dilute, or adversely affect the price of, our common stock; our worldwide operations are subject to political, legal and economic risks and natural disasters, which could have a material adverse effect on us; worldwide political conditions may adversely affect demand for our products; unfavorable currency exchange rate fluctuations could adversely affect us; our inability to effectively control the sales of our products on the gray market could have a material adverse effect on us; if we cannot adequately protect our technology or other intellectual property in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, we may lose a competitive advantage and incur significant expenses; we are party to litigation and may become a party to other claims or litigation that could cause us to incur substantial costs or pay substantial damages or prohibit us from selling our products; a variety of environmental laws that we are subject to could result in additional costs and liabilities; higher health care costs and labor costs could adversely affect our business; and, our business is subject to potential tax liabilities.

For a discussion of factors that could cause actual results to differ materially from the forward-looking statements, see “Part II, Item 1A—Risk Factors” beginning on page 41 and “Financial Condition” beginning on page 32 and other risks and uncertainties set forth below in this report or detailed in our other Securities and Exchange Commission (SEC) reports and filings. We assume no obligation to update forward-looking statements.

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AMD, the AMD Arrow logo, ATI, the ATI logo and SeaMicro, and combinations thereof, are trademarks of Advanced Micro Devices, Inc. Microsoft is a registered trademark of Microsoft Corporation in the United States and other jurisdictions. Sony is a trademark of Sony Corporation. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this report and our audited consolidated financial statements and related notes as of December 27, 2014 and December 28, 2013, and for each of the three years in the period ended December 27, 2014 as filed in our Annual Report on Form 10-K for the year ended December 27, 2014.

Overview

We are a global semiconductor company with facilities around the world. Within the global semiconductor industry, we offer primarily:

In this section, we will describe the general financial condition and the results of operations of Advanced Micro Devices, Inc. and its wholly-owned subsidiaries (collectively, “us,” “our” or “AMD”), including a discussion of our results of operations for the quarter ended March 28, 2015 compared to the quarter ended December 27, 2014 and the quarter ended March 29, 2014, an analysis of changes in our financial condition and a discussion of our contractual obligations.

Weaker than expected PC market conditions contributed to a challenging business environment during the first quarter of 2015. Net revenue in the first quarter of 2015 was $1.0 billion, a 17% decrease compared to the fourth quarter of 2014 and a 26% decrease compared to the first quarter of 2014. Gross margin was also impacted by weak PC market conditions. Gross margin, as a percentage of net revenue, for the first quarter of 2015 was 32% compared to 29% in the fourth quarter of 2014, and 36% in the first quarter of 2014. Gross margin in the fourth quarter of 2014 included a $58 million charge from a lower of cost or market inventory adjustment, which accounted for five gross margin percentage points.

Despite the challenging business environment we faced during the first quarter of 2015, we continued to closely manage our operating expenses. Operating expenses were $463 million in the first quarter of 2015 compared to $690 million in the fourth quarter of 2014 and $438 million in the first quarter of 2014. Operating expenses in the first quarter of 2015 included restructuring and other special charges, net of $87 million related to our decision to exit the dense server systems business, formerly SeaMicro, and our restructuring plan (2014 Restructuring Plan) designed to improve operating efficiencies. Operating expenses in the fourth quarter of 2014 included a goodwill impairment charge of $233 million related to our Computing and Graphics segment and restructuring and other special charges, net of $71 million associated with our 2014 Restructuring Plan. Operating expenses in the first quarter of 2014 included the impact of workforce rebalancing severance charges of $14 million associated with the reduction of our global workforce as part of our transformation and diversification strategy.

Cash and cash equivalents and marketable securities as of the end of the first quarter of 2015 were $906 million compared to $1.0 billion as of the end of the fourth quarter of 2014. Total debt as of the end of the first quarter of 2015 was $2.3 billion compared to $2.2 billion at the end of the fourth quarter of 2014.

During the first quarter of 2015, we continued to focus on our engineering milestones related to the diversification of our business. In February 2015, we disclosed architecture details regarding two new 2015 AMD Mobile APUs, our first high performance SoC, codenamed “Carrizo,” and our mainstream SoC, codenamed “Carrizo-L”. In March 2015, we announced our LiquidVR™ initiative designed to deliver the next-generation of virtual reality capable of delivering immersive awareness where situations, objects, or characters within the virtual world seem “real.”

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GLOBALFOUNDRIES

Wafer Supply Agreement. The Wafer Supply Agreement (WSA) governs the terms by which we purchase products manufactured by GLOBALFOUNDRIES Inc. (GF).

Fourth Amendment to Wafer Supply Agreement. On March 30, 2014, we entered into a fourth amendment to the WSA. The primary effect of the fourth amendment was to establish volume purchase commitments and fixed pricing for the 2014 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of our microprocessor unit, graphics processor unit and semi-custom game console products to be delivered by GF to us during the 2014 calendar year.

Fifth Amendment to Wafer Supply Agreement. On April 16, 2015, we entered into a fifth amendment to the WSA. The primary effect of the fifth amendment was to establish volume purchase commitments and fixed pricing for the 2015 calendar year as well as to modify certain other terms of the WSA applicable to wafers for some of our microprocessor unit, graphics processor unit and semi-custom products to be delivered by GF to us during the 2015 calendar year.

Our total purchases from GF related to wafer manufacturing and research and development activities for the quarters ended March 28, 2015 and March 29, 2014 were $170 million and $260 million, respectively.

We currently estimate that our purchase obligations to GF for wafer manufacturing and research and development activities will be approximately $1.1 billion in fiscal 2015 and at least $70 million during the first quarter of fiscal 2016. We are not able to meaningfully quantify or estimate our future purchase obligations to GF other than those set forth in the fifth amendment to the WSA, but we expect that our future purchases from GF will continue to be material.

GF continues to be a related party of AMD because Mubadala Development Company PJSC (Mubadala) and Mubadala Technology Investments LLC (Mubadala Tech) are affiliated with West Coast Hitech L.P. (WCH), our largest stockholder. GF, WCH and Mubadala Tech are wholly-owned subsidiaries of Mubadala.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our condensed consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our net revenue, inventories, asset impairments and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of our assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.

Management believes there have been no significant changes during the first quarter of 2015 to the items that we disclosed as our critical accounting estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 27, 2014.

We will perform an annual goodwill impairment as of the first day of the fourth quarter of 2015 pursuant to our accounting policy. However, we will also test for goodwill impairment at any time during the year if there are indicators of impairment present. If there are declines in our market capitalization, business climate or operating results, we may incur impairment charges that could be material.

Results of Operations

Management, including the Chief Operating Decision Maker, who is our Chief Executive Officer, reviews and assesses our operating performance using segment net revenue and operating income (loss) before interest, other income (expense), net and income taxes. These performance measures include the allocation of expenses to the operating segments based on management’s judgment. In connection with our continued strategic transformation, effective July 1, 2014, we realigned our organizational structure. As a result of this organizational change, we have the following two reportable segments:

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In addition to these reportable segments, we have an All Other category, which is not a reportable segment. This category primarily includes certain expenses and credits that are not allocated to any of the reportable segments because management does not consider these expenses and credits in evaluating the performance of the reportable segments. Also included in this category are amortization of acquired intangible assets, employee stock-based compensation expense, restructuring and other special charges, net, workforce rebalancing severance charges, goodwill impairment charge and significant or unusual lower of cost or market inventory adjustments.

We use a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters ended March 28, 2015, December 27, 2014 and March 29, 2014 each consisted of 13 weeks.

Our operating results tend to vary seasonally. For example, historically, first quarter PC product sales are generally lower than fourth quarter sales. In addition, with respect to our semi-custom SoC products for game consoles, we expect sales patterns to follow the seasonal trends of a consumer business with sales in the first half of the year being lower than sales in the second half of the year.

The following table provides a summary of net revenue and operating income (loss) by segment. All period results presented reflect these new reportable segments.

Computing and Graphics

Computing and Graphics net revenue of $532 million in the first quarter of 2015 decreased by 38%, compared to net revenue of $861 million in the first quarter of 2014, as a result of a 36% decrease in unit shipments. The decrease in unit shipments was primarily attributable to lower unit shipments of our microprocessor products for desktop PCs and chipsets and our channel GPU products due to challenging PC market conditions and our efforts to rebalance our channel inventory and our chipsets being integrated into our APU products. Average selling price was relatively flat in the first quarter of 2015 compared to the first quarter of 2014, primarily attributable to an increase in average selling price of our microprocessors for notebook PCs, partially offset by a decrease in average selling price of our microprocessors for desktop PCs and chipsets and our GPU products. Average selling price of our microprocessors products increased primarily due to a favorable shift in our product mix of our microprocessors for notebook PCs. Average selling price of microprocessors for desktop PCs and chipsets and GPU products decreased primarily due to a shift in our product mix to lower end products.

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Computing and Graphics net revenue of $532 million in the first quarter of 2015 decreased by 20%, compared to $662 million in the fourth quarter of 2014, as a result of a 19% decrease in unit shipments. Unit shipments of all categories of products decreased due to challenging PC market conditions and our chipsets being integrated into our APU products. Average selling price was relatively flat in the first quarter of 2015 compared to the fourth quarter of 2014, primarily attributable to an increase in average selling price of our GPU products, which was partially offset by a decrease in average selling price of our microprocessor products. Average selling price of our GPU products increased primarily due to a favorable shift in the product mix to higher end GPU products, especially for our channel GPU and professional graphics products. Average selling price of our microprocessor products decreased due to a shift in our product mix to lower end microprocessor products.

Computing and Graphics operating loss was $75 million in the first quarter of 2015 compared to operating income of $3 million in the first quarter of 2014. The decline in operating results was primarily due to the decrease in net revenue referenced above, partially offset by a $196 million decrease in cost of sales, a $41 million decrease in research and development expenses and a $14 million decrease in marketing, general and administrative expenses. Cost of sales decreased primarily due to lower unit shipments in the first quarter of 2015 compared to the first quarter of 2014. Research and development expenses and marketing, general and administrative expenses decreased for the reasons set forth under “Expenses” below.

Computing and Graphics operating loss was $75 million in the first quarter of 2015 compared to operating loss of $56 million in the fourth quarter of 2014. The decline in operating results was primarily due to the decrease in net revenue referenced above, partially offset by an $88 million decrease in cost of sales, a $15 million decrease in marketing, general and administrative expenses and a $7 million decrease in research and development expenses. Cost of sales decreased primarily due to lower unit shipments in the first quarter of 2015 compared to the fourth quarter of 2014. Marketing, general and administrative expenses and research and development expenses decreased for the reasons set forth under “Expenses” below.

Enterprise, Embedded and Semi-Custom

Enterprise, Embedded and Semi-Custom net revenue of $498 million in the first quarter of 2015 decreased by 7% compared to net revenue of $536 million in the first quarter of 2014. The decrease was primarily due to a decrease in net revenue received in connection with lower unit shipments of our server products, a decrease in game console royalties and lower unit shipments of our dense server systems products.

Enterprise, Embedded and Semi-Custom net revenue of $498 million in the first quarter of 2015 decreased by 14% compared to net revenue of $577 million in the fourth quarter of 2014. The decrease was primarily due to a decrease in net revenue received in connection with seasonally lower unit shipments of our semi-custom SoC products, a decrease in game console royalties and a decrease in net revenue of our embedded products.

Enterprise, Embedded and Semi-Custom operating income was $45 million in the first quarter of 2015 compared to operating income of $85 million in the first quarter of 2014. The decline in operating results was primarily due to the decrease in net revenue referenced above and a $15 million increase in research and development expenses, partially offset by a $10 million decrease in cost of sales and a $3 million decrease in marketing, general and administrative expenses. The decrease in cost of sales was primarily due to a decrease in unit shipments of our server products in the first quarter of 2015 compared to the first quarter of 2014. Research and development expenses increased and marketing, general and administrative expenses decreased for the reasons set forth under “Expenses” below.

Enterprise, Embedded and Semi-Custom operating income was $45 million in the first quarter of 2015 compared to operating income of $109 million in the fourth quarter of 2014. The decline in operating results was primarily due to the decrease in net revenue referenced above and a $13 million increase in research and development expenses, partially offset by a $30 million decrease in cost of sales. The decrease in cost of sales was primarily due to a decrease in unit shipments of our semi-custom SoC products in the first quarter of 2015 compared to the fourth quarter of 2014. Research and development expenses increased for the reasons set forth under “Expenses” below.

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All Other

All Other operating loss of $107 million in the first quarter of 2015 included restructuring and other special charges, net of $87 million, stock-based compensation expense of $17 million and $3 million related to amortization of acquired intangible assets. Restructuring and other special charges, net of $87 million included $75 million related to our decision to exit from the dense server systems business and $12 million related to our 2014 Restructuring Plan.

All Other operating loss of $39 million in the first quarter of 2014 included stock-based compensation expense of $23 million, $14 million related to workforce rebalancing severance charges and $3 million related to amortization of acquired intangible assets. In the first quarter of 2014, we incurred workforce rebalancing severance charges as part of our transformation and diversification strategy.

All Other operating loss of $383 million in the fourth quarter of 2014 included a goodwill impairment charge of $233 million, restructuring and other special charges, net of $71 million, lower of cost or market inventory adjustment of $58 million, stock-based compensation expense of $16 million and $4 million related to amortization of acquired intangible assets.

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International Sales

International sales as a percentage of net revenue were 75% in the first quarter of 2015, 81% in the first quarter of 2014 and 80% in the fourth quarter of 2014. The decrease in international sales as a percentage of net revenue in the first quarter of 2015 compared to the first and fourth quarters of 2014 was primarily driven by a higher proportion of revenue from domestic sales of our semi-custom SoC products.

We expect that international sales will continue to be a significant portion of total sales in the foreseeable future. Substantially all of our sales transactions were denominated in U.S. dollars.

Comparison of Gross Margin, Expenses, Interest Expense, Other Income (Expense), Net, and Income Taxes

The following is a summary of certain condensed consolidated statement of operations data for the periods indicated: