ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion should be read in conjunction with the consolidated financial statements as of December 31, 2022 and December 25, 2021 and for each of the three years in the period ended December 31, 2022 and related notes, which are included in this Annual Report on Form 10-K as well as with the other sections of this Annual Report on Form 10-K, “Part II, Item 8: Financial Statements and Supplementary Data.”IntroductionIn 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 2022 compared to 2021, an analysis of changes in our financial condition and a discussion of our off-balance sheet arrangements. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 25, 2021.Overview2022 was a transformative year for AMD as we took several major steps that scaled and reshaped our business. In February 2022, we completed our strategic acquisition of Xilinx, Inc. (Xilinx) which expanded our technology and product portfolio to include adaptable hardware platforms that enable hardware acceleration and rapid innovation across a variety of technologies and established AMD in multiple embedded markets where we have traditionally not had a significant presence. We now offer Field Programmable Gate Arrays (FPGAs), Adaptive SoCs, and Adaptive Compute Acceleration Platform (ACAP) products. With the acquisition of Xilinx, we have access to a new set of markets and customers, further strengthening and diversifying our business model. In May 2022, we expanded our data center solutions capabilities with the acquisition of Pensando Systems, Inc. (Pensando). We now offer high-performance data processing units (DPUs) and a software stack that complements our existing products. With the Xilinx and Pensando acquisitions, we are well positioned to provide the industry’s broadest set of leadership compute engines and accelerators to help enable best performance, security, flexibility and total cost of ownership for leading-edge data centers. Our 2022 financial results reflect the strength of our diversified business model despite the challenging PC market conditions in the second half of 2022. Net revenue for 2022 was $23.6 billion, an increase of 44% compared to 2021 net revenue of $16.4 billion. The increase in net revenue was driven by a 64% increase in Data Center segment revenue primarily due to higher sales of our EPYC™ server processors, a 21% increase in Gaming segment revenue primarily due to higher semi-custom product sales, and a significant increase in Embedded segment revenue from the prior year period driven by the inclusion of Xilinx embedded product sales. This growth was partially offset by a 10% decrease in Client segment revenue primarily due to lower processor shipments driven by a weak PC market and significant inventory correction actions across the PC supply chain. Gross margin, as a percentage of net revenue for 2022, was 45%, compared to 48% in 2021. The decrease in gross margin was primarily due to amortization of intangible assets associated with the Xilinx acquisition. Operating income for 2022 was $1.3 billion compared to operating income of $3.6 billion for 2021. The decrease in operating income was primarily driven by amortization of intangible assets associated with the Xilinx acquisition. Net income for 2022 was $1.3 billion compared to $3.2 billion in the prior year. The decrease in net income was primarily driven by lower operating income.Cash, cash equivalents and short-term investments as of December 31, 2022 were $5.9 billion, compared to $3.6 billion at the end of 2021. Our aggregate principal amount of total debt as of December 31, 2022 was $2.5 billion, compared to $313 million as of December 25, 2021.We took several actions in 2022 to strengthen our financial position. In June 2022, we issued $1.0 billion in aggregate principal amount of senior notes, consisting of $500 million in aggregate principal amount of 3.924% Senior Notes due 2032 (3.924% Notes) and $500 million in aggregate principal amount of 4.393% Senior Notes due 2052 (4.393% Notes). The 3.924% Notes will mature on June 1, 2032 and bear interest at a rate of 3.924% per annum, and the 4.393% Notes will mature on June 1, 2052 and bear interest at a rate of 4.393% per annum. The 3.924% Notes and the 4.393% Notes are senior unsecured obligations. 40Table of ContentsWe also entered into a revolving credit agreement in June 2022. The agreement provides for a five-year unsecured revolving credit facility in the aggregate principal amount of $3.0 billion. There were no funds drawn from this facility during the year ended December 31, 2022. In November 2022, we established a new commercial paper program, under which we may issue unsecured commercial paper notes up to a maximum principal amount outstanding at any time of $3.0 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, we had no commercial paper outstanding.During the twelve months ended December 31, 2022, we returned a total of $3.7 billion to shareholders through the repurchase of 36.3 million shares of common stock under our stock repurchase program. As of December 31, 2022, $6.5 billion remained available for future stock repurchases under this program. The repurchase program does not obligate us to acquire any common stock, has no termination date and may be suspended or discontinued at any time.We continued executing our product technology roadmap by delivering a number of new leadership products and technologies during 2022. For Data Center, we launched our 4th Gen AMD EPYC™ processors with next-generation architecture, technology and features, and designed to deliver optimizations across market segments and applications, while helping businesses free data center resources to create additional workload processing and accelerate output. We also unveiled our 3rd Gen AMD EPYC processors with AMD 3D V-Cache technology for leadership performance in technical computing workloads. We introduced the 7 nm Versal™ ACAP VCK5000 development card designed to offer leadership AI inference performance. We announced the availability of the AMD Instinct™ ecosystem, the new AMD Instinct MI210 accelerator and ROCm™ 5 software. Together the AMD Instinct and ROCm ecosystem offers exascale-class technology to a broad base of high performance computing (HPC) and artificial intelligence (AI) customers, designed to address the demand for compute-accelerated data center workloads and reduce the time to insights and discoveries.In the Embedded segment, we introduced the AMD Ryzen™ Embedded R2000 Series, second-generation mid-range system-on-chip processors optimized for a wide range of industrial and robotics systems, machine vision, IoT (Internet of Things) and thin-client equipment. We also introduced the Kria™ KR260 Robotics Starter Kit, the latest addition to the Kria portfolio. The kit enables rapid development of hardware-accelerated applications for robotics, machine vision and industrial communication and control.For the Client segment, we introduced the Ryzen 7000 Series Desktop processors powered by the new “Zen 4” architecture for gamers, enthusiasts, and content creators. Along with the introduction of the Ryzen 7000 Series Desktop processors, we also unveiled the new Socket AM5 platform featuring four new chipsets. These new desktop processors are designed for gamers, enthusiasts, and content creators. We introduced AMD Ryzen 7000 Mobile processors with up to 16 “Zen 4” architecture cores. We also introduced the AMD Ryzen 6000 Series Mobile processors, built on “Zen 3+” architecture and includes AMD RDNA™ 2 architecture based on integrated graphics. We launched the AMD Ryzen 5000 C-Series processors bringing “Zen 3” architecture to premium Chrome OS devices for work and collaboration. The processors offer up to eight high performance x86 cores. For workstations, we introduced the new AMD Ryzen Threadripper™ PRO 5000 WX-Series workstation processors designed for professionals to run demanding workstation applications. We also introduced the AMD Ryzen PRO 7030 Series Mobile processors built on “Zen 3” core architecture. In the Gaming segment, we unveiled the AMD Radeon™ RX 7900 XTX and the Radeon RX 7900 XT gaming graphics cards that are built on next-generation high performance, energy-efficient AMD RDNA™ 3 architecture. We announced new graphics cards to the AMD Radeon RX 6000 Series product line: the AMD Radeon RX 6950 XT, the AMD Radeon RX 6750 XT and the AMD Radeon RX 6650 XT. These new graphics cards are built on AMD RDNA 2 gaming architecture and GDDR6 memory at up to 18Gbps. We launched the new AMD Radeon PRO GPUs including the introduction of the AMD Radeon PRO W6400 graphics card built on AMD RDNA 2 architecture.Although the current COVID-19 pandemic continues to impact our business operations and practices, we experienced limited disruptions during 2022. We continue to monitor our operations and public health measures implemented by governmental authorities in response to the pandemic. We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements. 41Table of ContentsCritical Accounting EstimatesOur discussion and analysis of our financial condition and results of operations are based upon our 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 consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenue, inventories, business combination, goodwill, long-lived and intangible assets, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.Management believes the following critical accounting estimates are the most significant to the presentation of our financial statements and require the most difficult, subjective and complex judgments.Revenue Allowances. Revenue contracts with our customers include variable amounts which we evaluate under ASC 606-10-32-8 through 14 in order to determine the net amount of consideration to which we are entitled and which we recognize as revenue. We determine the net amount of consideration to which we are entitled by estimating the most likely amount of consideration we expect to receive from the customer after adjustments to the contract price for rights of return and rebates to our original equipment manufacturers (OEM) customers and rights of return, rebates and price protection on unsold merchandise to our distributor customers.We base our determination of necessary adjustments to the contract price by reference to actual historical activity and experience, including actual historical returns, rebates and credits issued to OEM and distributor customers adjusted, as applicable, to include adjustments, if any, for known events or current economic conditions, or both.Our estimates of necessary adjustments for distributor price incentives and price protection on unsold products held by distributors are based on actual historical incentives provided to distributor customers and known future price movements based on our internal and external market data analysis.Our estimates of necessary adjustments for OEM price incentives utilize, in addition to known pricing agreements, actual historical rebate attainment rates and estimates of future OEM rebate program attainment based on internal and external market data analysis.We offer incentive programs through cooperative advertising and marketing promotions. Where funds provided for such programs can be estimated, we recognize a reduction to revenue at the time the related revenue is recognized; otherwise, we recognize such reduction to revenue at the later of when: i) the related revenue transaction occurs; or ii) the program is offered. For transactions where we reimburse 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.We also provide limited product return rights to certain OEMs and to most distribution customers. These return rights are generally limited to a contractual percentage of the customer’s prior quarter shipments, although, from time to time we may approve additional product returns beyond the contractual arrangements based on the applicable facts and circumstances. In order to estimate adjustments to revenue to account for these returns, including product restocking rights provided to distributor and OEM customers, we utilize relevant, trended actual historical product return rate information gathered, adjusted for actual known information or events, as applicable.Overall, our estimates of adjustments to contract price due to variable consideration under our contracts with OEM and distributor customers, based on our assumptions and include adjustments, if any, for known events, have been materially consistent with actual results; however, these estimates are subject to management’s judgment and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenue and operating results.42Table of ContentsInventory Valuation. We value inventory at standard cost, adjusted to approximate the lower of actual cost or estimated net realizable value using assumptions about future demand and market conditions. Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on specific facts and circumstances. In determining excess or obsolescence reserves for products, we consider assumptions such as changes in business and economic conditions, other-than-temporary decreases in demand for our products, and changes in technology or customer requirements. In determining the lower of cost or net realizable value reserves, we consider assumptions such as recent historical sales activity and selling prices, as well as estimates of future selling prices. If in any period we anticipate a change in assumptions such as future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in cost of sales, resulting in a negative impact to our gross margin in that period. If in any period we are able to sell inventories that had been written down to a level below the ultimate realized selling price in a previous period, related revenue would be recorded with a lower or no offsetting charge to cost of sales resulting in a net benefit to our gross margin in that period. Overall, our estimates of inventory carrying value adjustments have been materially consistent with actual results.Business Combinations. We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing developed technology, in-process research and development, customer relationships and other identifiable 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.Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.Goodwill. Goodwill is the excess of the aggregate of the consideration transferred over the identifiable assets acquired and liabilities assumed in connection with business combinations. Our reporting units are at the operating segment level. Our goodwill is contained within three reporting units: Data Center, Gaming and Embedded. We perform our 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, which occurs when the carrying value of a reporting unit exceeds its fair value. Significant judgment is required in estimating the fair value of our reporting units to determine if the fair values of those units exceed their carrying values and an impairment to goodwill is required when a quantitative goodwill impairment test is performed. We typically obtain the assistance of third-party valuation specialists to help in determining the fair value of our reporting units. The fair values of our reporting units are estimated using a combination of the income approach, which requires estimating 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 unit. Significant estimates and assumptions used in the income approach include assessments of macroeconomic conditions, growth rates of our reporting units in the near- and long-term, expectations of our ability to execute on our roadmap 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, the determination of an appropriate control premium that a market participant would apply to a reporting unit, and the determination of appropriate multiples to apply to a reporting unit based on adjustments and consideration of specific attributes of that reporting unit. 43Table of ContentsThe most significant assumptions utilized in the determination of the estimated fair values of our reporting units are the sales and earnings growth rates (including long-term growth rates) and discount rates. Long-term growth rates are dependent on overall market growth rates, the competitive environment and inflation. As a result, long-term growth rates could be adversely impacted by a sustained deceleration in category growth or an increased competitive environment. Discount rates, which are consistent with a weighted average cost of capital that is likely to be expected by a market participant, are based upon industry required rates of return, including consideration of both debt and equity components of the capital structure. Our discount rates may be impacted by adverse changes in the macroeconomic environment, prolonged and continuing inflationary pressures, volatility in the equity and debt markets and other factors that otherwise create or exacerbate risks in our reporting units. Changes in operating plans or adverse changes in the business or in the macroeconomic environment in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that would trigger future impairment charges of our reporting units’ goodwill. Based on our annual impairment testing, the fair values of all of our reporting units exceeded their carrying values. 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, we estimate 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, we estimate 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.Income Taxes. In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.We regularly assess the likelihood that we will be able to recover our deferred tax assets. Unless recovery is considered more-likely-than-not (a probability level of more than 50%), we will record a charge to income tax expense in the form of a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable or maintain the valuation allowance recorded in prior periods. When considering all available evidence, if we determine it is more-likely-than-not we will realize our deferred tax assets, we will reverse some or all of the existing valuation allowance, which would result in a credit to income tax expense and the establishment of an asset in the period of reversal.In determining the need to establish or maintain a valuation allowance, we consider the four sources of jurisdictional taxable income: (i) carryback of net operating losses to prior years; (ii) future reversals of existing taxable temporary differences; (iii) viable and prudent tax planning strategies; and (iv) future taxable income exclusive of reversing temporary differences and carryforwards. Through the end of 2022, we continue 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 allowances are maintained due to a lack of sufficient sources of future taxable income.In addition, the calculation of our tax liabilities involves addressing uncertainties in the application of complex, multi-jurisdictional tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing authorities. 44Table of ContentsResults of OperationsDuring the second quarter of fiscal year 2022, we changed our reporting segments to align our financial reporting with how we manage our business in strategic end markets. This is consistent with how our Chief Operating Decision Maker (CODM) assesses our financial performance and allocates resources. As a result, we report our financial performance based on the following four reportable segments: Data Center, Client, Gaming, and Embedded.Additional information on our reportable segments is contained in Note 4 – Segment Reporting of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).Our operating results tend to vary seasonally. Historically, our net revenue has been generally higher in the second half of the year than in the first half of the year, although market conditions and product transitions could impact these trends.The following table provides a summary of net revenue and operating income (loss) by segment for 2022 and 2021:Year EndedDecember 31,2022December 25,2021(In millions)Net revenue:Data Center$6,043 $3,694 Client6,201 6,887 Gaming6,805 5,607 Embedded4,552 246 Total net revenue$23,601 $16,434 Operating income (loss):Data Center$1,848 $991 Client1,190 2,088 Gaming953 934 Embedded2,252 44 All Other(4,979)(409)Total operating income (loss)$1,264 $3,648 Data CenterData Center net revenue of $6 billion in 2022 increased by 64%, compared to net revenue of $3.7 billion in 2021. The increase was primarily driven by higher sales of our EPYC server processors.Data Center operating income was $1.8 billion in 2022, compared to operating income of $991 million in 2021. The increase in operating income was primarily driven by higher revenue, partially offset by higher operating expenses. Operating expenses increased for the reasons outlined under “Expenses” below.ClientClient net revenue of $6.2 billion in 2022 decreased by 10%, compared to net revenue of $6.9 billion in 2021, primarily driven by a 24% decrease in unit shipment, partially offset by a 19% increase in average selling price. The decrease in unit shipments was due to challenging PC market conditions and significant inventory correction across the PC supply chain experienced during the second half of 2022. The increase in average selling price was primarily driven by a richer mix of Ryzen mobile processor sales.Client operating income was $1.2 billion in 2022, compared to operating income of $2.1 billion in 2021. The decrease in operating income was primarily driven by lower revenue and higher operating expenses. Operating expenses increased for the reasons outlined under “Expenses” below. 45Table of ContentsGamingGaming net revenue of $6.8 billion in 2022 increased by 21%, compared to net revenue of $5.6 billion in 2021. The increase in net revenue was driven by higher semi-custom product sales due to higher demand for gaming console SoCs, partially offset by lower gaming graphics sales due to a decrease in unit shipments driven by soft consumer demand given weakened macroeconomic conditions experienced in the second half of 2022.Gaming operating income was $953 million in 2022, compared to operating income of $934 million in 2021. The increase in operating income was primarily driven by higher revenue, partially offset by higher operating expenses. Operating expenses increased for the reasons outlined under “Expenses” below.EmbeddedEmbedded net revenue of $4.6 billion in 2022 increased significantly, compared to net revenue of $246 million in 2021. The significant increase in net revenue was primarily driven by the inclusion of Xilinx embedded product revenue as a result of the acquisition of Xilinx in February 2022. Embedded operating income was $2.3 billion in 2022, compared to operating income of $44 million in 2021. The significant increase in operating income was primarily driven by the inclusion of Xilinx embedded product revenue.All OtherAll Other operating loss of $5.0 billion in 2022 primarily consisted of $3.5 billion of amortization of acquisition-related intangibles, $1.1 billion of stock-based compensation expense, and $452 million of acquisition-related costs, which primarily include transaction costs, amortization of Xilinx inventory fair value step-up adjustment, and depreciation related to the Xilinx fixed assets fair value step-up adjustment, certain compensation charges related to the acquisitions of Xilinx and Pensando, and licensing gain. All Other operating loss of $409 million in 2021 primarily consisted of $379 million of stock-based compensation expense and $42 million of acquisition-related costs.Comparison of Gross Margin, Expenses, Licensing Gain, Interest Expense, Other Income (Expense) and Income TaxesThe following is a summary of certain consolidated statement of operations data for 2022 and 2021:December 31, 2022December 25, 2021 (In millions, except for percentages)Net revenue$23,601 $16,434 Cost of sales11,550 8,505 Amortization of acquisition-related intangibles1,448 — Gross profit10,603 7,929 Gross margin45 %48 %Research and development5,005 2,845 Marketing, general and administrative2,336 1,448 Amortization of acquisition-related intangibles2,100 — Licensing gain(102)(12)Interest expense(88)(34)Other income, net8 55 Income tax provision (benefit)(122)513 Gross MarginGross margin as a percentage of net revenue was 45% in 2022 compared to 48% in 2021. The decrease in gross margin was primarily due to amortization of intangible assets associated with the Xilinx acquisition.46Table of ContentsExpensesResearch and Development ExpensesResearch and development expenses of $5.0 billion in 2022 increased by $2.2 billion, or 76%, compared to $2.8 billion in 2021. The increase was primarily driven by strategic investments across all of our segments, including an increase in headcount through acquisitions and organic growth. Marketing, General and Administrative ExpensesMarketing, general and administrative expenses of $2.3 billion in 2022 increased by $888 million, or 61%, compared to $1.4 billion in 2021. The increase was primarily due to an increase in headcount through acquisitions and organic growth, go-to-market activities, and acquisition-related costs.Amortization of Acquisition-Related IntangiblesIn 2022, cost of sales and operating expense included $1.4 billion and $2.1 billion, respectively, of amortization expense from intangible assets acquired as a result of the acquisitions of Xilinx and Pensando.Licensing GainDuring 2022, we recognized $102 million of licensing gain from milestone achievement and royalty income associated with the licensed IP to the THATIC JV, our two joint ventures with Higon Information Technology Co., Ltd., a third-party Chinese entity. We recognized a licensing gain from royalty income of $12 million for the year ended December 25, 2021. Interest ExpenseInterest expense of $88 million in 2022 increased by $54 million compared to $34 million in 2021, primarily due to interest expense from the 2.95% Senior Notes due 2024 and the 2.375% Senior Notes due 2030 (together, the Assumed Xilinx Notes) and the 3.924% Notes and 4.393% Notes issued in 2022.Other Income (Expense), netOther income (expense), net is primarily comprised of interest income from short-term investments, changes in valuation of equity investments and foreign currency transaction gains and losses.Other income, net was $8 million in 2022 compared to $55 million of Other income, net in 2021. The change was primarily due to a $62 million decrease in the fair value of equity investments in 2022 compared to an increase in fair value of $56 million from equity investments in 2021, partially offset by $65 million of interest income driven mainly by rising interest rates in 2022 compared to losses from conversion of our convertible debt of $7 million in 2021.Income Tax Provision (Benefit)We 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 foreign-derived intangible income tax benefit and $241 million of research and development tax credits.Through the end of fiscal year 2022, we 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.International SalesInternational sales as a percentage of net revenue were 66% in 2022 and 72% in 2021. 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 are denominated in U.S. dollars.47Table of ContentsFINANCIAL CONDITIONLiquidity and Capital ResourcesAs of December 31, 2022, our cash, cash equivalents and short-term investments were $5.9 billion compared to $3.6 billion as of December 25, 2021. The increase in cash, cash equivalents and short-term investments was primarily driven by the $2.4 billion of cash and $1.6 billion of short-term investments acquired from the Xilinx acquisition, $1.0 billion from the debt issuance of our 3.924% Notes and 4.393% Notes, and cash flows from operations, partially offset by stock repurchases and cash paid for the acquisition of Pensando. The percentage of cash and cash equivalents held domestically was 73% as of December 31, 2022, and 91% as of December 25, 2021.Our operating, investing and financing cash flow activities for 2022 and 2021 were as follows:December 31, 2022December 25, 2021 (In millions)Net cash provided by (used in):Operating activities$3,565 $3,521 Investing activities1,999 (686)Financing activities(3,264)(1,895)Net increase in cash and cash equivalents$2,300 $940 Our aggregate principal debt obligations were $2.5 billion as of December 31, 2022, which consisted primarily of $1.5 billion of the Xilinx Notes assumed as part of the Xilinx acquisition and $1.0 billion of 3.924% Notes and 4.393% Notes issued during the year, compared to $313 million as of December 25, 2021, respectively. We repaid $312 million of our 7.50% Senior Notes that matured in August 2022. On April 29, 2022, we entered into a revolving credit agreement (Revolving Credit Agreement) with Wells Fargo Bank, N.A. as administrative agent and other banks identified therein as lenders. The Revolving Credit Agreement provides for a five-year unsecured revolving credit facility in the aggregate principal amount of $3.0 billion. There were no funds drawn from this facility during the year ended December 31, 2022. On November 3, 2022, we established a new commercial paper program where we may issue unsecured commercial paper notes up to a maximum principal amount outstanding at any time of $3.0 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, we had no commercial paper outstanding.As of December 31, 2022, we had unconditional purchase commitments of approximately $8.6 billion, of which $6.5 billion are in fiscal year 2023. On an ongoing basis, we work with our suppliers on the timing of payments and deliveries of purchase commitments, taking into account business conditions.We believe our cash, cash equivalents, short-term investments and cash flows from operations along with our Revolving Credit Facility and commercial paper program will be sufficient to fund operations, including capital expenditures and purchase commitments, over the next 12 months and beyond. We believe we will be able to access the capital markets should we require additional funds. However, we cannot assure that such funds will be available on favorable terms, or at all.Operating ActivitiesOur working capital cash inflows and outflows from operations consist primarily of cash collections from our customers, payments for inventory purchases and payments for employee-related expenditures.48Table of ContentsNet cash provided by operating activities was $3.6 billion in 2022, primarily due to our net income of $1.3 billion in 2022, adjusted for non-cash adjustments of $4.1 billion and net cash outflows of $1.8 billion from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $1.4 billion increase in inventories driven primarily by build of advanced process nodes to support the ramp of new products, a $1.1 billion increase in accounts receivable driven primarily by higher revenue in the fourth quarter of 2022 compared to the fourth quarter of 2021, and a $1.2 billion increase in prepaid expenses and other assets due primarily to prepayments under long-term supply agreements in 2022, offset by an $931 million increase in accounts payable primarily due to timing of payments to our suppliers, and a $546 million increase in accrued liabilities and other driven mainly by higher customer-related accruals.Net cash provided by operating activities was $3.5 billion in 2021, primarily due to our higher net income of $3.2 billion in 2021, adjusted for non-cash adjustments of $1.1 billion and net cash outflows of $774 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $640 million increase in accounts receivable driven primarily by $1.6 billion higher revenue in the fourth quarter of 2021 compared to the fourth quarter of 2020, a $556 million increase in inventories driven by our continued increase in product build in support of customer demand, and a $920 million increase in prepaid expenses and other assets due primarily to prepayments under long-term supply agreements in 2021, offset by an $801 million increase in accounts payable primarily due to timing of payments to our suppliers, and a $526 million increase in accrued liabilities and other, both of which were driven mainly by higher marketing accruals, and higher accrued annual employee incentives due to improved financial performance.Investing ActivitiesNet cash provided by investing activities was $2 billion in 2022, which primarily consisted of higher cash provided by maturities of short-term investments of $4.3 billion and cash acquired as part of the acquisition of Xilinx of $2.4 billion, partially offset by higher cash used for purchases of short-term investments of $2.7 billion, cash used in the acquisition of Pensando of $1.5 billion and $450 million for purchases of property and equipment.Net cash used in investing activities was $686 million in 2021, which primarily consisted of higher cash used for purchases of short-term investments of $2.1 billion and $301 million for purchases of property and equipment, partially offset by higher cash provided by maturities of short-term investments of $1.7 billion.Financing ActivitiesNet cash used in financing activities was $3.3 billion in 2022, which primarily consisted of common stock repurchases of $3.7 billion under the Repurchase Program, higher repurchases to cover tax withholding on employee equity plans of $406 million and repayment of debt of $312 million, partially offset by proceeds from the issuance of debt of $991 million and higher proceeds from the issuance of common stock under our employee equity plans of $167 million. Net cash used in financing activities was $1.9 billion in 2021, which primarily consisted of common stock repurchases of $1.8 billion under the Repurchase Program and higher repurchases to cover tax withholding on employee equity plans of $237 million, partially offset by higher proceeds from the issuance of common stock under our employee equity plans of $104 million. Off-Balance Sheet ArrangementsAs of December 31, 2022, we had no off-balance sheet arrangements.49Table of ContentsITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and long-term debt. We usually invest our cash in investments with short maturities or with frequent interest reset terms. Accordingly, our interest income fluctuates with short-term market conditions. As of December 31, 2022, our investment portfolio consisted of fixed income instruments, time deposits and commercial paper. Our primary aim with our investment portfolio is to invest available cash while preserving principal and meeting liquidity needs. In accordance with our investment policy, we place investments with high credit quality issuers and limit the amount of credit exposure to any one issuer based upon the issuer's credit rating. These securities are subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical 50 basis-point (half percentage point) increase or decrease in interest rates compared to rates at December 31, 2022 would have affected the fair value of our cash equivalent and investment portfolio by approximately $2.9 million. As of December 31, 2022, all of our outstanding long-term debt had fixed interest rates. Consequently, our exposure to market risk for changes in interest rates on reported interest expense and corresponding cash flows is minimal.We will continue to monitor our exposure to interest rate risk.Default Risk. We mitigate default risk in our investment portfolio by investing in only high credit quality securities and by constantly positioning our portfolio to respond to a significant reduction in a credit rating of any investment issuer or guarantor. Our portfolio includes investments in marketable debt securities with active secondary or resale markets to ensure portfolio liquidity. We are averse to principal loss and strive to preserve our invested funds by limiting default risk and market risk.We actively monitor market conditions and developments specific to the securities and security classes in which we invest. We believe that we take a conservative approach to investing our funds in that we invest only in highly-rated debt securities with relatively short maturities and do not invest in securities which we believe involve a higher degree of risk. As of December 31, 2022, substantially all of our investments in debt securities were A-rated by at least one of the rating agencies. While we believe we take prudent measures to mitigate investment-related risks, such risks cannot be fully eliminated as there are circumstances outside of our control.Foreign Exchange Risk. As a result of our foreign operations, we incur costs and we carry assets and liabilities that are denominated in foreign currencies, while sales of products are primarily denominated in U.S. dollars. We maintain a foreign currency hedging strategy which uses derivative financial instruments to mitigate the risks associated with changes in foreign currency exchange rates. This strategy takes into consideration all of our exposures. We do not use derivative financial instruments for trading or speculative purposes. The following table provides information about our foreign currency forward contracts as of December 31, 2022 and December 25, 2021. All of our foreign currency forward contracts mature within 18 months. December 31, 2022December 25, 2021NotionalAmountAverageContractRateEstimatedFair ValueGain (Loss)NotionalAmountAverageContractRateEstimatedFair ValueGain (Loss) (In millions except contract rates)Foreign currency forward contracts:Chinese Renminbi$599 6.7848 $(3)$360 6.5693 $6 Canadian Dollar607 1.3137 (16)416 1.2646 (6)Indian Rupee516 82.1493 (9)162 77.3309 1 Taiwan Dollar207 29.1231 (4)122 27.2725 (1)Singapore Dollar259 1.3600 4 71 1.3489 — Euro142 0.9334 1 47 0.8444 (2)Pound Sterling88 0.8204 (1)6 0.7317 — Japanese Yen2 133.7593 — 1 114.3214 — Australian Dollar1 1.4689 — — 1.3809 — Total$2,421 $(28)$1,185 $(2)50Table of Contents