Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2018
OR
 ☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10079 
 
CYPRESS SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter) 
 
 
Delaware
 
94-2885898
 
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
198 Champion Court, San Jose, California 95134
(Address of principal executive offices and zip code)
(408) 943-2600
(Registrant’s telephone number, including area code)
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      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     No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
 
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
☐  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
  Emerging Growth Company ☐
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ☐    No  
The total number of outstanding shares of the registrant’s common stock as of April 20, 2018 was 358,492,152.





INDEX 
 
 
Page
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


2




PART I—FINANCIAL INFORMATION

Forward-Looking Statements
The discussion in this Quarterly Report on Form 10-Q contains statements that are not historical in nature, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, including, but not limited to, statements related to: our pursuit of long-term growth initiatives, including various long-term strategic corporate transformational initiatives, collectively referred to as our Cypress 3.0 strategy; expected improvements in margin and our ability to successfully execute on our margin improvement plan; our manufacturing strategy including our ability to efficiently manage our manufacturing facilities and achieve our cost goals emanating from our flexible manufacturing strategy; our ability to secure supply to meet customer demand; the anticipated impact of our acquisitions, dispositions and restructuring activities; anticipated growth opportunities in the automotive, consumer and industrial markets; our expectations regarding dividends and stock repurchases; our expectations regarding future technology transfers and other licensing arrangements; our efforts to license and/or monetize our intellectual property portfolio; our expectations regarding the timing and cost of our restructuring liabilities; our expectations regarding our active litigation matters and our intent to defend ourselves in those matters; the competitive advantage we believe we have with our patents as well as our proprietary programmable technologies and programmable products; our plans for our products, pricing, and marketing efforts, including the potential impact on our customer base if we were to raise our prices; our backlog as an indicator of future performance; our ability to pay down our indebtedness and continue to meet the covenants set forth in our debt agreements; the risk associated with our yield investment agreements; our foreign currency exposure and the impact exchange rates could have on our operating margins; the adequacy of our cash and working capital positions; the value and liquidity of our investments, including auction rate securities, other debt investments, and investments in privately-held companies; the impact of U.S. tax reform efforts; our ability to recognize certain unrecognized tax benefits within the next twelve months as well as the resolution of agreements with various foreign tax authorities; our investment strategy; the impact of interest rate fluctuations on our investments; the volatility of our stock price; the impact of actions by stockholder activists; the size and composition of our Board of Directors; the adequacy of our real estate properties; the utility of our non-GAAP reporting; the adequacy of our audits; the potential impact of our indemnification obligations; our plans to remediate the identified material weakness; and the impact of new accounting standards on our financial statements and our ability to recognize revenue. We use words such as "may," "will," “should,” "plan," "anticipate," "believe," "expect," "future," "intend," "estimate," "predict," "potential," "continue," and similar expressions to identify forward-looking statements. Such forward-looking statements are made as of the date hereof and are based on our current expectations, beliefs and intentions regarding future events or our financial performance and the information available to management as of the date hereof. In addition, readers are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we assume no responsibility to update any such forward-looking statements. Our actual results could differ materially from those expected, discussed or projected in the forward-looking statements contained in this Quarterly Report on Form 10-Q for any number of reasons, including, but not limited to: the state and future of the general economy and its impact on the markets and consumers we serve and our investments; our ability to execute on our Cypress 3.0 strategy and our margin improvement plan; our ability to effectively integrate companies and assets that we acquire; our ability to attract and retain key personnel; our ability to timely deliver our proprietary and programmable technologies and products; the current credit conditions; our ability to retain and expand our customer base, which may be adversely affected if we were to raise our prices; our ability to transform our business with a leading portfolio of programmable products; the number and nature of our competitors; the changing environment and/or cycles of the semiconductor industry; foreign currency exchange rates; our ability to efficiently manage our manufacturing facilities and achieve our cost goals emanating from our flexible manufacturing strategy; our ability to achieve our goals related to our restructuring activities; the uncertainty and expense of pending litigation matters; our ability to pay down our indebtedness and continue to meet the covenants set forth in our debt agreements; our ability to manage our investments and interest rate and exchange rate exposure; changes in the law including changes to tax and intellectual property law; potential disruptions in the international trade and investment environment, including deteriorating relationships between the US government and foreign governments; the results of our pending tax examinations; our ability to achieve liquidity in our investments; the failure or success of the privately-held companies that we are invested in; our ability to remediate any material weakness; and/or the materialization of one or more of the risks set forth above or under Part I, Item 1A (Risk Factors) in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017.


3




ITEM 1. FINANCIAL STATEMENTS

CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
April 1, 2018
 
December 31, 2017
 
(In thousands, except
per-share amounts)
ASSETS
 
 
 
Current assets:
 

 
 
Cash and cash equivalents
$
106,752

 
$
151,596

Accounts receivable, net
393,303

 
295,991

Inventories
275,449

 
272,127

Other current assets
112,747

 
103,637

Total current assets
888,251

 
823,351

Property, plant and equipment, net
294,299

 
289,554

Equity method investments
119,053

 
122,514

Intangible assets, net
660,809

 
715,120

Goodwill
1,439,472

 
1,439,472

Other long-term assets
138,539

 
147,039

Total assets
$
3,540,423

 
$
3,537,050

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
236,930

 
$
213,101

Accrued compensation and employee benefits
66,917

 
79,275

Price adjustment and other revenue reserves
214,630

 
173,592

Dividend payable
39,401

 
38,741

Current portion of long-term debt
27,303

 
27,303

Other current liabilities
115,558

 
143,485

Total current liabilities
700,739

 
675,497

Deferred income taxes and other tax liabilities
54,083

 
52,006

Revolving credit facility and long-term portion of debt
920,684

 
956,513

Other long-term liabilities
36,112

 
35,442

Total liabilities
$
1,711,618

 
$
1,719,458

Commitments and contingencies (Note 10)

 

Equity:
 

 
 

Preferred stock, $.01 par value, 5,000 shares authorized; none issued and outstanding

 

Common stock, $.01 par value, 650,000 and 650,000 shares authorized; 531,765 and 525,719 shares issued; 358,262 and 352,220 shares outstanding at April 1, 2018 and December 31, 2017, respectively
4,969

 
4,936

Additional paid-in-capital
5,657,767

 
5,659,612

Accumulated other comprehensive income (loss)
2,572

 
(1,362
)
Accumulated deficit
(1,502,628
)
 
(1,511,706
)
Stockholders’ equity before treasury stock
4,162,680

 
4,151,480

Less: Shares of common stock held in treasury, at cost; 173,503 and 173,498 shares at April 1, 2018 and December 31, 2017, respectively
(2,334,943
)
 
(2,334,944
)
Total Cypress stockholders’ equity
1,827,737

 
1,816,536

Non-controlling interest
1,068

 
1,056

Total equity
1,828,805

 
1,817,592

Total liabilities and equity
$
3,540,423

 
$
3,537,050


The accompanying notes are an integral part of these condensed consolidated financial statements.
4





CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands, except per-share amounts)
Revenues
$
582,241

 
$
531,874

Cost of revenues
369,849

 
374,766

Gross profit
212,392

 
157,108

Research and development
93,233

 
89,348

Selling, general and administrative
83,397

 
81,333

Total operating expenses
176,630

 
170,681

Operating income (loss)
35,762

 
(13,573
)
Interest expense
(18,859
)
 
(19,475
)
Other income, net
705

 
116

Income (loss) before income taxes and non-controlling interest
17,608

 
(32,932
)
Income tax provision
(5,057
)
 
(4,927
)
Share in net loss of equity method investees
(3,461
)
 
(5,076
)
Net income (loss)
9,090

 
(42,935
)
Net loss attributable to non-controlling interests
(12
)
 
(64
)
Net income (loss) attributable to Cypress
$
9,078

 
$
(42,999
)
Net income (loss) per share attributable to Cypress:
 
 
 
Basic
$
0.03

 
$
(0.13
)
Diluted
$
0.02

 
$
(0.13
)
Cash dividend declared per share
$
0.11

 
$
0.11

Shares used in net income (loss) per share calculation:
 
 
 
Basic
355,461

 
326,964

Diluted
370,592

 
326,964

 


The accompanying notes are an integral part of these condensed consolidated financial statements.
5





CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 

Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
Net income (loss)
$
9,090

 
$
(42,935
)
Other comprehensive (loss) income:
 

 
 

Net unrealized (loss) gain on cash flow hedges:
 

 
 

Net unrealized gain arising during the period
4,464

 
2,240

Net (gain) loss reclassified into earnings for revenue hedges (effective portion)
607

 
(2,589
)
Net loss (gain) reclassified into earnings for expense hedges (effective portion)
(1,137
)
 
5,650

Provision for income tax

 
(808
)
Net unrealized (loss) gain on cash flow hedges
3,934

 
4,493

Other comprehensive (loss) income
3,934

 
4,493

Comprehensive income (loss)
13,024

 
(38,442
)
Comprehensive loss attributable to non-controlling interest
(12
)
 
(64
)
Comprehensive income (loss) attributable to Cypress
$
13,012

 
$
(38,506
)
 


The accompanying notes are an integral part of these condensed consolidated financial statements.
6




CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income (loss)
$
9,090

 
$
(42,935
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Stock-based compensation expense
18,458

 
23,154

Depreciation and amortization
71,450

 
65,111

(Gain) loss on disposal and impairment of property and equipment
5,337

 

Share in net loss of equity method investees
3,461

 
5,076

Accretion of interest expense on Senior Exchangeable Notes and amortization of debt and financing costs on other debt
8,423

 
5,051

Restructuring and other adjustments
3,911

 
(526
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(97,312
)
 
15,761

Inventories
(4,203
)
 
(37,105
)
Other current and long-term assets
(6,252
)
 
(3,695
)
Price adjustment reserve for sales to distributors
41,037

 
6,546

Accounts payable and other liabilities
(21,722
)
 
(10,717
)
Net cash provided by operating activities
31,678

 
25,721

Cash flows from investing activities:
 

 
 

Cash received on sale of asset held for sale

 
31,611

Proceeds from divestiture

 
6,509

Distributions (contributions), net for deferred compensation plan
4,743

 
4,427

Acquisition of property, plant and equipment
(17,267
)
 
(13,772
)
Cash paid for equity and cost method investments

 
(7,125
)
Other investing
(1,649
)
 

Net cash used in investing activities
(14,173
)
 
21,650

Cash flows from financing activities:
 

 
 

Borrowings under revolving credit facility
60,000

 
30,000

Repayment of revolving credit facility
(87,000
)
 
(45,000
)
Repayment of Term Loan A and Term Loan B
(6,826
)
 
(7,500
)
Payment of cash dividends
(38,741
)
 
(35,537
)
Proceeds from employee stock-based awards
20,543

 
17,936

Payment for extinguishment of 2% 2020 Spansion Exchangeable Notes
(10,000
)
 
(114
)
Financing costs related to debt
(325
)
 
(5,828
)
Net cash used in financing activities
(62,349
)
 
(46,043
)
Net increase (decrease) in cash and cash equivalents
(44,844
)
 
1,328

Cash and cash equivalents, beginning of period
151,596

 
120,172

Cash and cash equivalents, end of period
$
106,752

 
$
121,500

 
 
 
 
Supplemental Cash Flows Disclosures:
 

 
 

Unpaid purchase of property, plant and equipment
$
20,159

 
$
2,378


The accompanying notes are an integral part of these condensed consolidated financial statements.
7




CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Years
Cypress Semiconductor Corporation (“Cypress” or the “Company”) reports on a fiscal-year basis. The Company ends its quarters on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. Fiscal years 2018 and 2017 each contained 52 weeks. The first quarter of fiscal 2018 ended on April 1, 2018 and the first quarter of fiscal 2017 ended on April 2, 2017.

Basis of Presentation

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of Cypress and all of its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments of a normal, recurring nature, which are necessary to state fairly the financial information included therein. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Cypress's Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP").

Certain balances included on the Consolidated Balance Sheet and in the Consolidated Statement of Cash Flows for prior periods have been reclassified to conform to the current period presentation. During the quarter ended April 1, 2018, the Company allocated the amortization of acquisition-related intangible assets and restructuring costs by function in the Consolidated Statements of Operations. The Consolidated Statement of Operations for the prior period has been reclassified to conform to the current period presentation as follow:

 
 
Three months Ended April 2, 2017
 
 
As Revised
 
Reclassification
 
As Adjusted
 
 
(in Thousands)
Cost of revenues
 
331,368

 
43,398

 
374,766

Research and development
 
86,996

 
2,352

 
89,348

Selling, general and administrative
 
76,262

 
5,071

 
81,333

Amortization of intangible assets
 
48,249

 
(48,249
)
 

Restructuring costs (benefit)
 
2,572

 
(2,572
)
 


The Condensed Consolidated Statement of Operations for the three months ended April 1, 2018 is not necessarily indicative of the results to be expected for the full fiscal year.
Summary of Significant Accounting Policies
The Company's significant accounting policies are described under Note 1 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

Recent Accounting Pronouncements

The following are the recent accounting pronouncements issued but not yet adopted that may materially affect the Company’s consolidated financial statements:

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-02, Leases, ("Topic 842"), which replaces most current lease guidance when it becomes effective. This standard update intends to

8




increase the transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. The new guidance will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures.

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". The amendments in ASU 2017-12 are intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The guidance in ASU 2017-12 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". The amendments in ASU 2018-02 are intended to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The guidance in ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

Adoption of ASC 606:

In May 2014, the FASB issued an ASU on revenue from contracts with customers, ASU No. 2014-09, “Revenue from Contracts with Customers” (“Topic 606”). This standard update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The guidance is effective for annual reporting periods including interim reporting reports beginning after December 15, 2017. Collectively, we refer to Topic 606, its related amendments and Subtopic 340-40 as the “new standard”.

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to all contracts that are not completed contracts at the date of initial application (i.e., January 1, 2018). Results for reporting periods after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. There was no impact on the opening accumulated deficit as of January 1, 2018 due to the adoption of Topic 606. We reclassified the sales return reserve to current liabilities presented as "Price adjustment and other revenue reserves" from the allowance for accounts receivable due to the adoption of Topic 606.
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Sales of products with alternative use account for the majority of our revenue and are recognized at a point in time, the timing of such recognition remained the same under Topic 606.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer and deposited with the relevant government authority, are excluded from revenue. The Company's revenue arrangements do not contain significant financing components.
Revenue is recognized over a period of time when it is assessed that performance obligations are satisfied over a period rather than at a point in time. When any of the following criteria is fulfilled, revenue is recognized over a period of time:
(a)
The customer simultaneously receives and consumes the benefits provided by the performance as Cypress performs.
(b)
Cypress’ performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced.
(c)
Cypress’ performance does not create an asset with an alternative use, and Cypress has an enforceable right to payment for performance completed to date.

We then select an appropriate method for measuring progress toward complete satisfaction of the performance obligation, usually costs incurred to date relative to the total expected costs to the satisfaction of that performance obligation.

9




Sales to certain distributors are made under arrangements which provide the distributors with price adjustments, price protection, stock rotation and other allowances under certain circumstances. These adjustment and allowances are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenue recognized. We believe that there will not be significant changes to our estimates of variable consideration.

Our non-recurring engineering (“NRE”) contracts with customers may include multiple performance obligations. For NRE arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling price of intellectual properties license based on residual approach, and service based on cost plus a reasonable margin. We recognize revenue in the amount to which we have a right to invoice, if the right to consideration from the customer is in an amount that corresponds reasonably with the value to the customer of the entity’s performance completed to date.
If a customer pays consideration, or Cypress has a right to an amount of consideration that is unconditional before we transfer a good or service to the customer, those amounts are classified as deferred income/ advances received from customers which are included in other current liabilities or other long-term liabilities when the payment is made or it is due, whichever is earlier.

If the arrangement includes variable contingent consideration, the Company recognizes revenue over time if Management can reasonably measure its progress, or capable of providing reliable information that would be required to apply an appropriate method of measuring progress.

Practical Expedients and Elections

Sales commissions are owed and are recorded at the time of sell through of our products to end customers. These costs are recorded within sales and marketing expenses.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods.

Other recently adopted pronouncements:

In October 2016, the FASB issued ASU 2016-16, “Intra- Entity Transfers of Assets Other Than Inventory.” For public entities, ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this guidance in the first quarter fiscal 2018. The adoption of this guidance did not have a material impact on its consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18 Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 (including interim periods within those periods) using a retrospective transition method to each period presented. The Company adopted the provisions of ASU 2016-18 as of January 1, 2018. There was no material impact on the Company's consolidated financial statements resulting from the adoption of this guidance.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The standard eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill.  Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance in the first quarter fiscal 2018. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting." ASU 2017-09 amends the requirements in GAAP related to accounting for changes to stock compensation awards. The guidance in ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this guidance in the first quarter fiscal 2018. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.


10




Revision of prior period financial statements

During the fiscal year ended December 31, 2017, we identified and recorded certain immaterial errors that originated in fiscal years ended January 1, 2017 and January 3, 2016. These errors consisted primarily of errors in certain assumptions and calculations used in the determination of non-cash stock-based compensation primarily relating to the Employee Share Purchase Program (“ESPP”). We determined that the errors were not material to the previously issued financial statements and disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2017 or for any quarterly periods included therein.

For the three months ended April 1, 2018, we are presenting comparative fiscal 2017 quarterly information. The fiscal 2017 results for the three months ended April 2, 2017 have been revised to reflect the quarterly impact of the adjustments described above.

The effect of the immaterial corrections on the consolidated statement of operations for the quarter ended April 2, 2017 is as follows:


 
 
Quarter Ended April 2, 2017
Revised Consolidated Statements of Operations Amounts
 
As previously reported
 
Adjustments
 
As revised
 
 
(In thousands, except per-share amounts)
Cost of revenues
 
$
332,814

 
$
(1,446
)
 
$
331,368

Research and development
 
88,481

 
(1,485
)
 
86,996

Selling, general and administrative
 
76,114

 
148

 
76,262

Total costs and expenses
 
548,230

 
(2,783
)
 
545,447

Operating loss
 
(16,356
)
 
2,783

 
(13,573
)
Loss before income taxes and non-controlling interest
 
(35,715
)
 
2,783

 
(32,932
)
Net loss
 
(45,718
)
 
2,783

 
(42,935
)
Net loss attributable to Cypress
 
$
(45,782
)
 
$
2,783

 
$
(42,999
)
Net loss per share attributable to Cypress:
 
 
 
 
 
 
Basic
 
$
(0.14
)
 
$
0.01

 
$
(0.13
)
Diluted
 
$
(0.14
)
 
$
0.01

 
$
(0.13
)

The effect of the immaterial corrections on the consolidated statement of comprehensive income (loss) for the quarter ended April 2, 2017 is as follows:

 
 
Quarter Ended April 2, 2017
Revised Consolidated Statements of Comprehensive Income (Loss):
 
As previously reported
 
Adjustments
 
As revised
 
 
(In thousands)
Net loss
 
$
(45,718
)
 
$
2,783

 
$
(42,935
)
Comprehensive loss
 
(41,225
)
 
2,783

 
(38,442
)
Comprehensive loss attributable for Cypress
 
$
(41,289
)
 
$
2,783

 
$
(38,506
)

The effect of the immaterial corrections on the consolidated statement of cash flows for the quarter ended April 2, 2017 is as follows:


11




 
 
Quarter Ended April 2, 2017
Revised Consolidated Statements of Cash Flows:
 
As previously reported
 
Adjustments
 
As revised
 
 
(In thousands)
Net (loss) income
 
$
(45,718
)
 
$
2,783

 
$
(42,935
)
Stock-based compensation expense
 
25,937

 
(2,783
)
 
23,154

Net cash provided by operating activities
 
$
25,721

 
$

 
$
25,721


The effect of the immaterial corrections on the disclosures related to stock-based compensation for the quarter ended April 2, 2017 is as follows:

 
 
Quarter Ended April 2, 2017
Revised Stock-Based Compensation Footnote:
 
As Reported
 
Adjustments
 
As Revised
 
 
(in thousands)
Cost of revenues
 
$
5,331

 
$
(1,446
)
 
$
3,885

Research and development
 
11,771

 
(1,485
)
 
10,286

Selling, general, and administrative
 
8,835

 
148

 
8,983

Total stock-based compensation expense
 
$
25,937

 
$
(2,783
)
 
$
23,154




12




NOTE 2. BALANCE SHEET COMPONENTS

Accounts Receivable, Net
 
As of
 
April 1, 2018
 
December 31, 2017
 
(In thousands)
Accounts receivable, gross
$
394,331

 
$
301,465

Allowance for doubtful accounts receivable and sales returns
(1,028
)
 
(5,474
)
Total accounts receivable, net
$
393,303

 
$
295,991


Inventories
 
As of
 
April 1, 2018
 
December 31, 2017
 
(In thousands)
Raw materials
$
16,120

 
$
15,635

Work-in-process
187,333

 
176,427

Finished goods
71,996

 
80,065

Total inventories
$
275,449

 
$
272,127



Other Current Assets
 
As of
 
April 1, 2018
 
December 31, 2017
 
(In thousands)
Prepaid tooling - current
$
22,659

 
$
21,132

Advances to suppliers
19,784

 
15,968

Prepaid royalty and licenses
22,158

 
16,630

Derivative assets
3,005

 
1,197

Value added tax receivable
11,078

 
11,412

Prepaid expenses
17,923

 
17,737

Withholding tax receivable and tax advance
4,653

 
5,790

Other current assets
11,487

 
13,771

Total other current assets
$
112,747

 
$
103,637




13




Other Long-term Assets
 
As of
 
April 1, 2018
 
December 31, 2017
 
(In thousands)
Employee deferred compensation plan
$
45,038

 
$
49,495

Investment in cost method equity securities
17,017

 
17,017

Deferred tax assets
4,145

 
4,293

Long-term licenses
6,617

 
8,654

Advance to suppliers
5,035

 
11,315

Deposit - non-current
10,114

 
9,830

Pension - non-current
7,923

 
8,026

Prepaid tooling and other non-current assets
42,650

 
38,409

Total other long-term assets
$
138,539

 
$
147,039


 
Other Current Liabilities
 
As of
 
April 1, 2018
 
December 31, 2017
 
(In thousands)
Employee deferred compensation plan
$
46,506

 
$
50,629

Restructuring accrual - current portion (See Note 6)
6,133

 
9,580

Derivative liability
1,783

 
2,033

Accrued expenses
40,355

 
47,789

Accrued interest
4,144

 
8,094

Customer advances
2,521

 
12,873

Other current liabilities
14,116

 
12,487

Total other current liabilities
$
115,558

 
$
143,485

 
Other Long-term Liabilities
 
As of
 
April 1, 2018
 
December 31, 2017
 
(In thousands)
Long-term pension and other employee related liabilities
$
17,809

 
$
16,779

Restructuring accrual - non-current portion (See Note 6)
8,214

 
8,596

Asset retirement obligation
6,040

 
5,693

Other long-term liabilities
4,049

 
4,374

Total other long-term liabilities
$
36,112

 
$
35,442


NOTE 3. INTANGIBLE ASSETS
The following table presents details of the Company's intangible assets:
 

14




 
As of April 1, 2018
 
As of December 31, 2017
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net (a)
 
(In thousands)
Developed technology and other intangible assets
 

 
 

 
 

 
 

 
 

 
 

Acquisition-related intangible assets
$
1,162,364

 
$
(543,377
)
 
$
618,987

 
$
1,072,824

 
$
(490,327
)
 
$
582,497

Non-acquisition related intangible assets
19,884

 
(12,088
)
 
7,796

 
19,884

 
(10,828
)
 
9,056

Total developed technology and other intangible assets
1,182,248

 
(555,465
)
 
626,783

 
1,092,708

 
(501,155
)
 
591,553

In-process research and development
34,026

 

 
34,026

 
123,567

 

 
123,567

Total intangible assets
$
1,216,274

 
$
(555,465
)
 
$
660,809

 
$
1,216,275

 
$
(501,155
)
 
$
715,120


The below table presents details of the in-process research and development assets as of April 1, 2018:
 
(In thousands)
As of December 31, 2017
$
123,567

Technological feasibility achieved
(89,541
)
As of April 1, 2018
$
34,026

 
During the three months ended April 1, 2018, three projects representing $89.5 million of the total capitalized in-process research and development ("IPR&D"), with estimated useful lives of 5 years, had reached technological feasibility and were transferred to developed technology.

The following table summarizes the amortization expense by line item recorded in the Condensed Consolidated Statements of Operations:

 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
Cost of revenues
$
48,102

 
$
43,166

Selling, general and administrative
4,948

 
5,083

Total amortization expense
$
53,050

 
$
48,249




The estimated future amortization expense related to developed technology and other intangible assets as of April 1, 2018 is as follows:
 
(In thousands)
2018 (remaining nine months)
159,795

2019
205,726

2020
144,527

2021
49,982

2022
28,747

2023 and thereafter
38,006

Total future amortization expense
$
626,783

 
 
NOTE 4. INVESTMENT IN EQUITY METHOD INVESTMENTS
Privately-held equity investments are accounted for under the equity method of accounting if the Company has an ownership interest of 20% or greater or if it has the ability to exercise significant influence over the operations of such companies.


15




Enovix Corporation ("Enovix")
During the fourth quarter of fiscal 2017, the Company determined that its investment in Enovix, which is accounted for as an equity method investment, had suffered an other-than temporary impairment primarily because Enovix had not achieved certain key planned product development milestones. Consequently, the Company recognized a charge of $51.2 million during the fourth quarter of fiscal 2017. The Company held 41.2% of Enovix's outstanding voting shares as of April 1, 2018.

Deca Technologies Inc. ("Deca")
The Company held 52.5% of Deca's outstanding voting shares as of April 1, 2018 and December 31, 2017.

The below table presents the changes in carrying value of the equity method investments related to Deca.
 
 
As of April 1, 2018
 
 
Deca Technologies Inc. ("Deca")
 
 
(in thousands)
Carrying value as of December 31, 2017
 
$
122,514

Equity in net loss of equity method investees
 
(3,461
)
Carrying value as of April 1, 2018
 
$
119,053




 
NOTE 5. FAIR VALUE MEASUREMENTS
Assets/Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the fair value hierarchy for the Company's financial assets and liabilities measured at fair value on a recurring basis as of April 1, 2018 and December 31, 2017:
 

16




 
As of April 1, 2018
 
As of December 31, 2017
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
 
(In thousands)
Financial Assets
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents:
 

 
 

 
 

 
 

 
 

 
 

Money market funds 
$
105

 
$

 
$
105

 
$
20,477

 
$

 
$
20,477

Total cash equivalents
105

 

 
105

 
20,477

 

 
20,477

Other current assets:
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit

 
993

 
993

 

 
972

 
972

Total other current assets

 
993

 
993

 

 
972

 
972

 
 
 
 
 
 
 
 
 
 
 
 
Employee deferred compensation plan assets:
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents
2,197

 

 
2,197

 
3,561

 

 
3,561

Mutual funds
27,781

 

 
27,781

 
27,321

 

 
27,321

Equity securities
9,426

 

 
9,426

 
12,994

 

 
12,994

Fixed income
3,747

 

 
3,747

 
3,415

 

 
3,415

Stable value funds

 
1,887

 
1,887

 

 
2,204

 
2,204

Total employee deferred compensation plan assets
43,151

 
1,887

 
45,038

 
47,291

 
2,204

 
49,495

 Interest swap

 
3,298

 
3,298

 

 

 

Foreign exchange forward contracts

 
3,005

 
3,005

 

 
1,197

 
1,197

Total financial assets
$
43,256

 
$
9,183

 
$
52,439

 
$
67,768

 
$
4,373

 
$
72,141

Financial Liabilities
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange forward contracts
$

 
$
1,757

 
$
1,757

 
$

 
$
1,426

 
$
1,426

Employee deferred compensation plan liability
44,619

 
1,887

 
46,506

 
48,425

 
2,204

 
50,629

 Interest swap
$

 
$
27

 
$
27

 
$

 
$

 
$

Total financial liabilities
$
44,619

 
$
3,671

 
$
48,290

 
$
48,425

 
$
3,630

 
$
52,055

 
The Company did not have any material assets or liabilities measured at fair value on a recurring basis using Level 3 inputs as of April 1, 2018 and December 31, 2017.  There were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the three months ended April 1, 2018 and April 2, 2017 related to these securities.

Valuation Techniques:
There have been no changes to the valuation techniques used to measure the fair value of the Company's assets and liabilities. For a description of the valuation techniques, refer to Note 7 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain of the Company’s assets, including intangible assets, goodwill and cost-method investments, are measured at fair value on a nonrecurring basis if impairment is indicated.

Fair Value of Long-term Debt
As of April 1, 2018, the carrying value of the Company's revolving credit facility was $63.0 million (See Note 8). The carrying value of the Company's revolving credit facility approximates its fair value since it bears an interest rate that is comparable to rates on similar credit facilities and is determined using Level 2 inputs.
The Company's 2% 2020 Spansion Exchangeable Notes assumed as part of the Company's merger with Spansion Inc. (Spansion"), which was completed on March 12, 2015 (the "Merger"), are traded in the secondary market for debt instruments and are categorized as a Level 2 liability. The principal of the Notes and the estimated fair value as of April 1, 2018 were $12.0 million and $38.5 million, respectively.  See Note 8 for further details.
The Company’s 4.5% 2022 Senior Exchangeable Notes are traded in the secondary market for debt instruments and the fair value is determined using Level 2 inputs. The principal of the Notes and the estimated fair value as of April 1, 2018 were $287.5 million and $391.7 million, respectively.  See Note 8 for further details.

17




The Company's 2% 2023 Exchangeable Notes are traded in the secondary market and the fair value is determined using Level 2 inputs. The principal of the Notes and the estimated fair value of the principal as of April 1, 2018 were $150.0 million and $161.6 million, respectively. See Note 8 for further details.
  
NOTE 6. RESTRUCTURING

Since 2016, the Company has launched certain long-term strategic corporate transformation initiatives which have required certain restructuring activities to streamline our internal processes and redeploy personnel and resources to target markets as discussed below:

2018 Restructuring Plan
During the first quarter of fiscal 2018, the Company began implementation of a reduction in workforce ("2018 Plan") which will result in elimination of approximately 75 positions in various functions. The restructuring charge of $1.6 million during the three months ended April 1, 2018 consists of personnel costs. The Company anticipates that the remaining restructuring accrual balance of $1.6 million will be paid out in cash through fiscal 2018.

2017 Restructuring Plan
In December 2017, the Company began implementation of a reduction in workforce ("2017 Plan") which resulted in the elimination of approximately 80 positions worldwide across various functions. The restructuring charge of $2.5 million during the three months ended April 1, 2018 consists of personnel costs. The Company anticipates that the remaining restructuring accrual balance of $1.9 million will be paid out in cash through fiscal 2018.

2016 Restructuring Plan
In September 2016, the Company began the implementation of a reduction in workforce ("2016 Plan") which resulted in the elimination of approximately 430 positions worldwide across various functions. No restructuring charges were recorded for the three months ended April 1, 2018 related to the 2016 Plan. The personnel costs related to the 2016 Plan during the three months ended April 2, 2017 were $2.6 million. The Company anticipates that the remaining restructuring accrual balance of $0.3 million which consists of personnel costs will be paid out in cash through fiscal 2018.

Spansion Integration-Related Restructuring Plan ("Spansion Integration Plan")
In March 2015, the Company implemented cost reduction and restructuring activities in connection with the Merger. No restructuring charges were recorded for the three months ended April 1, 2018 related to the Spansion Integration Plan. The Company anticipates that the remaining restructuring accrual balance of $10.6 million, which relates to an excess lease obligation, will be paid out in cash over the remaining lease term through fiscal 2026.

Summary of Restructuring Costs
The following table summarizes the restructuring charges recorded in the Consolidated Statements of Operations:
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
Personnel costs
$
4,096

 
$
1,503

Other

 
1,069

Total restructuring costs
$
4,096

 
$
2,572


The following table summarizes the restructuring costs by line item recorded in the Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
Cost of goods sold
$
1,887

 
$
231

Research and development
293

 
2,353

Selling, general and administrative
1,916

 
(12
)
Total restructuring costs
$
4,096

 
$
2,572



18




Roll-forward of the Restructuring Reserves
Restructuring activity under the Company's restructuring plans was as follows:
 
 
(In thousands)
 
2018 Plan
 
2017 Plan
 
2016 Plan
 
Spansion Integration plan
 
Total
Accrued restructuring balance as of December 31, 2017
$

 
$
6,139

 
$
743

 
$
11,297

 
$
18,179

Provision
1,555

 
2,541

 

 

 
4,096

Cash payments and other adjustments

 
(6,796
)
 
(426
)
 
(706
)
 
(7,928
)
Accrued restructuring balance as of April 1, 2018
$
1,555

 
$
1,884

 
$
317

 
$
10,591

 
$
14,347

Current portion of the restructuring accrual
$
1,555

 
$
1,884

 
$
317

 
$
2,377

 
$
6,133

Non-current portion of the restructuring accrual
$

 
$

 
$

 
$
8,214

 
$
8,214



NOTE 7. EMPLOYEE STOCK PLANS AND STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation expense by line item recorded in the Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
Cost of revenues
$
3,584

 
$
3,885

Research and development
6,713

 
10,286

Selling, general and administrative
8,161

 
8,983

Total stock-based compensation expense
$
18,458

 
$
23,154

 
As of April 1, 2018 and December 31, 2017, stock-based compensation capitalized in inventory totaled $2.4 million and $3.3 million, respectively.
The following table summarizes the stock-based compensation expense by type of awards:
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
Stock options
$
96

 
$

Restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs")
17,249

 
21,965

Employee Stock Purchase Plan (“ESPP”)
1,113

 
1,189

Total stock-based compensation expense
$
18,458

 
$
23,154

 
The following table summarizes the unrecognized stock-based compensation expense, by type of awards:

19




 
As of
 
April 1, 2018
 
Weighted-
Average
Amortization
Period
 
(In thousands)
 
(In years)
RSUs and PSUs
136,095

 
1.82
ESPP
2,344

 
0.57
Total unrecognized stock-based compensation expense
$
138,439

 
1.79
Equity Incentive Program
As of April 1, 2018, approximately 45.1 million stock options, or 25.1 million RSUs/PSUs were available for grant as share-based awards under the 2013 Stock Plan, the 2010 Equity Incentive Award Plan (formerly the Spansion 2010 Equity Incentive Award Plan) and the 2012 Incentive Award Plan (formerly the Ramtron Plan).  As of April 1, 2018, there were 3.1 million shares of stock available for issuance under the ESPP plan.
Stock Options
The following table summarizes the Company's stock option activities: 
 
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted Average Remaining Contractual term
 
Aggregate Intrinsic Value
 
(In thousands, except
per-share amounts)
 
(In years)
 
($ in millions)
Options outstanding as of December 31, 2017
4,627

 
$
11.63

 
 
 
 

Exercised
(875
)
 
$
9.86

 
 
 
 

Forfeited or expired
(41
)
 
$
15.86

 
 
 
 

Options outstanding as of April 1, 2018
3,711

 
$
12.00

 
2.37
 
$
19.6

Options exercisable as of April 1, 2018
3,543

 
$
12.05

 
2.32
 
$
18.6

 
There were no options granted during the three months ended April 1, 2018.
Restricted Stock Units (“RSUs”) and Performance-Based Restricted Stock Units (“PSUs”)
The following table summarizes the Company's RSU/PSU activities:
 
 
Shares
 
Weighted-
Average
Grant
Date Fair
Value Per
Share
 
(In thousands, except
per-share amounts)
Balance as of December 31, 2017
11,976

 
$
12.44

Granted
5,310

 
$
16.55

Released
(2,707
)
 
$
12.75

Forfeited
(666
)
 
$
12.85

Balance as of April 1, 2018
13,913

 
$
13.92

 
2018 Long-Term Incentive Program

20




During the first quarter of 2018, the Compensation Committee of the Company approved the issuance of service-based and performance-based restricted stock units under the Company's Long-term Incentive Plan ("LTIP") to certain employees. The milestones for the 2018 LTIP grants include service and performance conditions based on revenue growth, and profit milestones over the next 3 years. A portion of the LTIP awards include a multiplier based certain market conditions.

NOTE 8. DEBT
 
Total debt is comprised of the following:
 
 
 
As of
 
 
April 1, 2018
 
December 31, 2017
 
 
(In thousands)
Current portion of long-term debt
 
 

 
 

Senior Secured Credit Facility:
 
 
 
 
Term Loan B
 
$
27,303

 
$
27,303

Revolving Credit facility and long-term portion of debt
 
 

 
 

Credit Facility
 
 
 
 
Senior Revolving Credit Facility
 
63,000

 
90,000

Term Loan B
 
464,995

 
468,080

2% 2020 Spansion Exchangeable Notes
 
11,191

 
20,375

4.5% 2022 Senior Exchangeable Notes
 
249,166

 
246,636

2% 2023 Exchangeable Notes
 
132,332

 
131,422

Credit facility and long-term debt
 
920,684

 
956,513

Total debt
 
$
947,987

 
$
983,816

As of April 1, 2018, the Company was in compliance with all of the financial covenants under all of its debt facilities.

Senior Secured Revolving Credit Facility and Term Loan B

On March 12, 2018, the Company amended and restated its Credit and Guaranty Agreement. The amendment reduces the applicable margins on the Senior Secured Revolving Credit Facility and Term Loan B. After giving effect to the amendment, the Term Loan B bears interest, at the option of the Company, at the base rate plus an applicable margin of 1.25% or the Eurodollar rate plus an applicable margin of 2.25%. The Senior Secured Revolving Credit Facility bears interest, at the option of the Company, at the base rate plus an applicable margin of either 0.75% or 1.00%, depending on the Company's secured leverage ratio, or the Eurodollar rate plus an applicable margin of 1.75% or 2.00%, depending on the Company's secured leverage ratio. The amendment removed the fixed charge coverage ratio financial covenants. In addition, for Term Loan B, the amendment removed the total leverage ratio covenant and changed the required amortization payments to 1% per annum and waived the excess cash flow mandatory repayment for fiscal 2017.

As of April 1, 2018, $568.1 million aggregate principal amount of loans, including the revolving credit facility and Term Loan B, were outstanding under the Credit Facility.

2% 2020 Spansion Exchangeable Notes

Pursuant to the Merger, Cypress assumed Spansion's 2% 2020 Spansion Exchangeable Notes (the “Spansion Notes”) on March 12, 2015. They are fully and unconditionally guaranteed on a senior unsecured basis by the Company. The Spansion Notes will mature on September 1, 2020, unless earlier repurchased or converted, and bear interest of 2% per year payable semi-annually in arrears on March 1 and September 1. The Spansion Notes may be due and payable immediately in certain events of default.

On March 7, 2018, the Company entered into a privately negotiated agreement to induce the extinguishment of a portion of the Spansion Notes. The Company paid the holders of the Spansion Notes cash for the aggregate principal of $10 million and delivered 1.4 million shares of common stock for the conversion spread. The Company recorded $0.2 million in loss on extinguishment and a reduction in additional paid-in capital of $25.7 million towards the deemed repurchase of the equity component of the notes. The loss on extinguishment is recorded in "Interest Expense" in the Condensed Consolidated Statement of Operations.

21





The 2% 2020 Spansion Exchangeable Notes consisted of the following:
 
 
As of
 
April 1, 2018
 
December 31, 2017
 
(in thousands)
Equity component
$
22,971

 
$
42,130

Liability component:


 

  Principal
11,990

 
21,990

  Less debt discount and debt issuance costs, net
(797
)
 
(1,615
)
    Net carrying amount
$
11,193

 
$
20,375

 
The following table summarizes the components of the total interest on the Spansion Notes recognized as an expense:
 
 
 
Three Months Ended April 1, 2018
 
Three Months Ended April 2, 2017
 
 
(in thousands)
Contractual interest expense at 2% per annum
 
$
43

 
$
750

Accretion of debt discount
 
59

 
913

Total
 
$
102

 
$
1,663


 4.5% 2022 Senior Exchangeable Notes
 
On June 23, 2016, the Company issued, at face value, $287.5 million of Senior Exchangeable Notes due in 2022 (the “Notes”) in a private placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The Notes are governed by an Indenture (“Indenture”), dated June 23, 2016, between the Company and U.S. Bank National Association, as Trustee. The Notes will mature on January 15, 2022, unless earlier repurchased or converted, and bear interest of 4.5% per year payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2017. The Notes may be due and payable immediately in certain events of default.
 
The 4.5% 2022 Senior Exchangeable Notes consisted of the following:
 
 
As of
 
April 1, 2018
 
December 31, 2017
 
(in thousands)
Equity component
$
47,686

 
$
47,686

Liability component:


 

  Principal
287,500

 
287,500

  Less debt discount and debt issuance costs, net
(38,334
)
 
(40,864
)
     Net carrying amount
$
249,166

 
$
246,636


The following table summarizes the components of the total interest expense related to the Notes recognized as expense:
 
 
 
Three Months Ended April 1, 2018
 
Three Months Ended April 2, 2017
 
 
(in thousands)
Contractual interest expense
 
$
3,234

 
$
3,270

Amortization of debt issuance costs
 
320

 
319

Accretion of debt discount
 
2,209

 
2,202

Total
 
$
5,763

 
$
5,791

 

22




Capped Calls
 
In connection with the issuance of the Notes, the Company entered into capped call transactions with certain bank counterparties to reduce the risk of potential dilution of the Company’s common stock upon the exchange of the Notes. The capped call transactions have an initial strike price of approximately $13.49 and an initial cap price of approximately $15.27, in each case, subject to adjustment. The capped calls expire in January 2022.
 
2% 2023 Exchangeable Notes

On November 6, 2017, the Company, issued at face value, $150.0 million of Senior Exchangeable Notes due in 2023 (the "2% 2023 Exchangeable Notes") in a private placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The 2% 2023 Exchangeable Notes are governed by an indenture ("2017 Indenture"), dated November 6, 2017, between the Company and U.S. Bank National Association, as Trustee. The 2% 2023 Exchangeable Notes will mature on February 1, 2023 unless earlier repurchased or converted, and bear interest of 2% per year payable semi-annually.

The 2% 2023 Exchangeable Notes consisted of the following:
 
 
As of

 
April 1, 2018
 
December 31, 2017
 
 
(In thousands)
Equity component
 
15,028

 
15,028

Liability component:
 

 

  Principal
 
150,000

 
150,000

  Less debt discount and debt issuance costs, net
 
(17,668
)
 
(18,578
)
    Net carrying amount
 
$
132,332

 
$
131,422


The following table summarizes the component of the total interest expense related to the 2% 2023 Exchangeable Notes recognized as an expense:
 
 
Three Months Ended April 1, 2018
 
Three Month Ended April 2, 2017
 
 
(In thousands)
Contractual interest expense at 2% Per annum
 
$
748

 
$

Amortization of debt issuance costs
 
175
 

Accretion of debt discount
 
735
 

Total
 
$
1,658

 
$


Future Debt Payments
The future scheduled principal payments for the outstanding Company's debt as of April 1, 2018, were as follows:
 
Fiscal Year
 
Total
 
 
 
2018 (remaining nine months)
 
$
20,477

2019
 
30,715

2020
 
115,944

2021
 
412,952

2022 and after
 
437,500

Total
 
$
1,017,588


NOTE 9. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments

23




The Company leases certain facilities and equipment under non-cancelable operating lease agreements that expire at various dates through fiscal 2022 and thereafter. Some leases include renewal options, which would permit extensions of the expiration dates at rates approximating fair market rental values at the time of the extension.
As of April 1, 2018, future minimum lease payments under non-cancelable operating leases were as follows:
 
Fiscal Year
(In thousands)
2018 (remaining nine months)
$
14,251

2019
15,955

2020
13,989

2021
10,250

2022
9,061

2023 and thereafter
17,498

Total
$
81,004

 
Restructuring accrual balances related to operating facility leases were $10.6 million and $11.5 million as of April 1, 2018 and December 31, 2017, respectively.
Product Warranties
The Company generally warrants its products against defects in materials and workmanship for a period of one year and that product warranty is generally limited to a refund of the original purchase price of the product or a replacement part. The Company estimates its warranty costs based upon its historical warranty claim experience. Warranty returns are recorded as an allowance for sales returns. The allowance for sales returns is reviewed quarterly to verify that it reflects the remaining obligations based on the anticipated returns over the balance of the obligation period.
The following table presents the Company's warranty reserve activities:
 
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
Beginning balance
$
4,445

 
$
3,996

Settlements made
(1,948
)
 
(319
)
Provisions
1,948

 
319

Ending balance
$
4,445

 
$
3,996

Contractual Obligations

The Company has entered into agreements with certain vendors that include “take or pay” terms. Take or pay terms obligate the Company to purchase a minimum required amount of materials or services or make specified payments in lieu of such purchase. The Company may not be able to consume minimum commitments under these take or pay terms, requiring payments to vendors, which may have a material adverse impact on the Company’s earnings.

Litigation and Asserted Claims

On August 15, 2016, a patent infringement lawsuit was filed by the California Institute of Technology (“Caltech”) against the Company in the U.S. District Court for the Central District of California (Case No. 16-cv-03714). The other co-defendants are Apple Inc., Avago Technologies Limited, Broadcom Corporation, and Broadcom Limited. Caltech alleges that defendants infringe four patents. On July 12, 2017, the Court issued a claim construction order. Trial will likely not occur until at least the first quarter of 2019, and the Company will defend against the allegations accordingly.  Due to the current stage of the proceedings, the Company cannot reasonably estimate the loss or the range of possible losses, if any.
The Company is currently a party to various other legal proceedings, claims, disputes and litigation arising in the ordinary course of business. Based on its own investigations, the Company believes the ultimate outcome of the current legal

24




proceedings, individually and in the aggregate, will not have a material adverse effect on its financial position, results of operation or cash flows. However, because of the nature and inherent uncertainties of the litigation, should the outcome of these actions be unfavorable, the Company's business, financial condition, results of operations or cash flows could be materially and adversely affected.
Indemnification Obligations
The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify other parties to such agreements with respect to certain matters. Typically, these obligations arise in the context of contracts that the Company has entered into, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants or terms and conditions related to such matters as the sale and/or delivery of its products, title to assets sold, certain intellectual property claims, defective products, specified environmental matters and certain income taxes. In these circumstances, payment by the Company is customarily conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims and vigorously defend itself and the third party against such claims. Further, the Company's obligations under these agreements may be limited in terms of time, amount or the scope of its responsibility and in some instances, the Company may have recourse against third parties for certain payments made under these agreements.
It is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments the Company has made under these agreements have not had a material effect on the Company’s business, financial condition or results of operations. Management believes that if the Company were to incur a loss in any of these matters, such loss would not have a material effect on its business, financial condition, cash flows or results of operations, although there can be no assurance of this. As of April 1, 2018, the Company had no reason to believe a loss exceeding amounts already recognized would be incurred.

NOTE 10. FOREIGN CURRENCY AND INTEREST RATE DERIVATIVES

The Company enters into multiple foreign exchange forward contracts to hedge certain operational exposures resulting from fluctuations in Japanese yen and Euro exchange rates. The Company does not enter into derivative securities for speculative purposes. The Company’s hedging policy is designed to mitigate the impact of foreign currency exchange rate fluctuations on its operating results. Some foreign currency forward contracts are considered to be economic hedges that were not designated as hedging instruments while others were designated as cash flow hedges. Whether designated or undesignated as cash flow hedges or not, these forward contracts protect the Company against the variability of forecasted foreign currency cash flows resulting from revenues, expenses and net asset or liability positions designated in currencies other than the U.S. dollar. The maximum original duration of any contract allowable under the Company’s hedging policy is 13 months for foreign currency hedging contracts.
Cash Flow Hedges
The Company enters into cash flow hedges to protect non-functional currency inventory purchases and certain other operational expenses, in addition to its on-going program of cash flow hedges to protect its non-functional currency revenues against variability in cash flows due to foreign currency fluctuations. The Company’s foreign currency forward contracts that were designated as cash flow hedges have maturities between three and twelve months. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions at the inception of the hedge. The Company recognizes derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measures them at fair value on a monthly basis. The Company records changes in the intrinsic value of its cash flow hedges in accumulated other comprehensive income on the Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. Interest charges or “forward points” on the forward contracts are excluded from the assessment of hedge effectiveness and are recorded in interest and other income, net in the Condensed Consolidated Statements of Operations. When the forecasted transaction occurs, the Company reclassifies the related gain or loss on the cash flow hedge to revenue or costs, depending on the risk hedged.  In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company will reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income, net in its Condensed Consolidated Statements of Operations at that time. At April 1, 2018, the Company has a gain of $0.9 million, which is related to cash flow hedge, recorded in other comprehensive income.
The Company evaluates hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and records any ineffective portion of the hedge in interest and other income, net in its Condensed Consolidated Statements of Operations.

25




At April 1, 2018, the Company had outstanding forward contracts to buy approximately ¥1,785 million for $16.0 million.
In December 2017, the Company entered into fixed-for-floating interest rate forward swap agreements with two counterparties, to swap variable interest payments on certain debt for fixed interest payments; these agreements will expire on July 2021. The objective of the swap was to effectively fix the interest rate at current levels without having to refinance the outstanding term loan, thereby avoiding the incurrence of transaction costs. The interest rate on the variable debt becomes fixed in April 2018.

On January 3, 2018, the Company evaluated the hedge effectiveness of the interest rate swaps and has designated these swaps as hedging instruments. Upon designation as cash flow hedge instruments, future changes in fair value of these swaps are recognized in accumulated other comprehensive income. At April 1, 2018, the Company has a gain of $3.0 million, which is related to interest rate swaps, recorded in other comprehensive income.
Non-designated hedges
Total notional amounts of net outstanding contracts were as summarized below:
 
Buy / Sell
 
April 1, 2018
December 31, 2017
 
 
(In millions)
US dollar / EUR
 
$2.7 / €2.2
$8.8 / €7.4
US dollar / Japanese Yen
 
  $11.3 / ¥1,245
$15.9 / ¥1,744
Japanese Yen / US dollar
 
 ¥2,163 / $19.6
¥4,790 / $43.0
 
The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three months ended April 1, 2018 was immaterial.


 
The gross fair values of derivative instruments on the Condensed Consolidated Balance Sheets as of April 1, 2018 and December 31, 2017 were as follows:
 
 
 
April 1, 2018
 
December 31, 2017
Balance Sheet location
 
Derivatives designated as hedging instruments
 
Derivatives not designated as hedging instruments
 
Derivatives designated as hedging instruments
 
Derivatives not designated as hedging instruments
 
 
(In thousands)
Other Current Assets
 
 

 
 

 
 

 
 

Derivative Asset
 
$
2,258

 
$
747

 
$
805

 
$
392

 
 
 
 
 
 
 
 
 
Non-current Assets
 
 
 
 
 
 
 
 
Derivative Asset
 
3,298

 

 

 
607

 
 
 
 
 
 
 
 
 
Other Current Liabilities
 
 

 
 

 
 

 
 

Derivative Liability
 
$
1,336

 
$
447

 
$
775

 
$
1,258

 

26




NOTE 11. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income (loss) per share:
 
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands, except per-share amounts)
Net income (loss) attributable to Cypress
$
9,078

 
$
(42,999
)
Weighted-average common shares
355,461

 
326,964

Weighted-average diluted shares
370,592

 
326,964

Net income (loss) per share—basic
$
0.03

 
$
(0.13
)
Net income (loss) per share—diluted
$
0.02

 
$
(0.13
)
 
For the three months ended April 1, 2018 and April 2, 2017, approximately 2.5 million and 23.5 million, weighted average potentially dilutive securities consisting of outstanding share based awards and convertible debt, respectively, were excluded in the computation of diluted net loss per share because their effect would have been anti-dilutive.
 
 
NOTE 12. INCOME TAXES

The Company's income tax expense was $5.1 million and $4.9 million for the three months ended April 1, 2018 and April 2, 2017, respectively. The income tax expense for the three months ended April 1, 2018 and April 2, 2017 were primarily attributable to non-U.S. taxes associated with the Company's non-U.S. operations.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code effective for tax years beginning after December 31, 2017. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21%, the repeal of corporate alternative minimum tax, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. For the three months ended April 1, 2018, the Company did not obtain any additional information affecting the provisional amount initially recorded at December 31, 2017. Additional work is still necessary for a more detailed analysis of the Company’s historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 in which the analysis is complete.

The Company intends to continue maintaining a full valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, considering the Company's current assessment of the probability of maintaining profitability, there is a reasonable possibility that, within the next year, sufficient positive evidence may become available to reach a conclusion that a significant portion, or all, of the valuation allowance will no longer be needed. As such, the Company may release a significant portion, or all, of its valuation allowance against its deferred tax assets within the next 12 months. This release, if any, would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period such release is recorded.

Unrecognized Tax Benefits
As of April 1, 2018 and December 31, 2017, the amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate totaled $29.6 million and $28.9 million, respectively.
Management believes events that could occur in the next 12 months which could cause a change in unrecognized tax benefits include, but are not limited to the following:
completion of examinations by the U.S. or foreign taxing authorities; and
expiration of statute of limitations on the Company's tax returns.


27




The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses the Company’s tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business. The Company believes it is reasonably possible that it may recognize up to approximately $1.3 million of of its existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.

Classification of Interest and Penalties
The Company classifies interest and penalties as components of the income tax provision in the Condensed Consolidated Statements of Operations. As of April 1, 2018 and December 31, 2017, the amounts of accrued interest and penalties totaled $11.6 million and $11.0 million, respectively.
 
NOTE 13. SEGMENT, GEOGRAPHICAL AND CUSTOMER INFORMATION
Segment Information
The Company designs, develops, manufactures and markets a broad range of solutions for embedded systems, from automotive, industrial and networking platforms to interactive consumer devices.
Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker ("CODM") is considered to be the Chief Executive Officer.

 
Revenues
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
Microcontroller and Connectivity Division ("MCD")
$
336,710

 
$
317,901

Memory Products Division ("MPD")
245,531

 
213,973

Total revenues
$
582,241

 
$
531,874

 
Income (loss) before Income Taxes
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
MCD
$
13,484

 
$
(918
)
MPD
89,838

 
49,671

Unallocated items:
 
 
 
Stock-based compensation expense
(18,458
)
 
(23,154
)
Restructuring charges
(4,096
)
 
(2,572
)
Amortization of intangible assets
(54,588
)
 
(48,249
)
Changes related to debt extinguishment
630

 

Changes in value of deferred compensation plan
(417
)
 
(213
)
Other adjustments
(8,785
)
 
(7,497
)
Income (Loss) from operations before income taxes
$
17,608

 
$
(32,932
)
 
The Company does not allocate goodwill and intangible assets impairment charges, impact of purchase accounting, IPR&D impairment, severance and retention costs, acquisition-related costs, stock-based compensation, interest income and other, and interest expense to its segments. In addition, the Company does not allocate assets to its segments. The Company excludes these items consistent with the manner in which it internally evaluates its results of operations.

28




Geographical Information
The following table presents revenues by geographical locations:
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
United States
$
73,662

 
$
47,356

Europe
87,324

 
70,876

Greater China (includes China, Taiwan and Hong Kong)
215,822

 
233,266

Japan
135,354

 
115,138

Rest of the World
70,079

 
65,238

Total revenue
$
582,241

 
$
531,874



Three Months Ended

April 1, 2018
 
April 2, 2017

(In thousands)
Product revenue
$
571,430

 
$
505,014

Non-product revenue
10,811

 
26,860

Total revenue
$
582,241

 
$
531,874



Three Months Ended

April 1, 2018
 
April 2, 2017

(In thousands)
Goods/Services transferred at a point in time
$
578,235

 
$
508,635

Goods/Services transferred over time
4,006

 
23,239

Total revenue
$
582,241

 
$
531,874


Property, plant and equipment, net, by geographic locations were as follows:
 
As of
 
April 1, 2018
 
December 31, 2017
 
(In thousands)
United States
$
183,493

 
$
186,824

Philippines
36,946

 
36,747

Thailand
35,676

 
29,151

Japan
11,092

 
12,211

Other
27,092

 
24,621

Total property, plant and equipment, net
$
294,299

 
$
289,554

 
The Company tracks its assets by physical location. Although management reviews asset information on a corporate level and allocates depreciation expense by segment, the Company’s CODM does not review asset information on a segment basis.
Customer Information
Outstanding accounts receivable from two of the Company's distributors accounted for 21.1% and 14.9% of its consolidated accounts receivable as of April 1, 2018. Outstanding accounts receivable from one of the Company's distributors accounted for 28.0% of its consolidated accounts receivable as of December 31, 2017.
Revenue earned through two of the Company's distributors accounted for 19.4% and 13.5% of its consolidated revenue for the three months ended April 1, 2018No other distributors or customers accounted for 10% or more of the Company's revenues for the three months ended April 1, 2018.

29




Revenue earned through one of the Company’s distributors accounted for 16.9% of its consolidated revenue for the three months ended April 2, 2017. No other distributors or customers accounted for 10% or more of the Company's revenues for the three months ended April 2, 2017.
 
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE INCOME

The changes in accumulated other comprehensive loss, net of tax, by components are as follows (in thousands):

 
Accumulated net unrealized losses on available-for-sale investments
 
Cumulative translation adjustment and other
 
Unrecognized Gain on the Defined Benefit Plan
 
Accumulated other comprehensive loss (income)
Balance as of December 31, 2017
(504
)
 
6

 
(864
)
 
(1,362
)
Other comprehensive income (loss) before reclassification
4,464

 

 

 
4,464

Amounts reclassified to other income (expense), net
(530
)
 

 

 
(530
)
Balance as of April 1, 2018
$
3,430

 
$
6

 
$
(864
)
 
$
2,572



NOTE 15. RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company purchased from, or sold to several entities, for which one of its directors or executive officers also serves or served as a director or entities that are otherwise affiliated with one of the Company's directors or executive officers.

The following table provides the transactions with these parties for the indicated periods for the time period such parties were a related party of the Company:

 
 
Three Months Ended
 
 
April 1, 2018
 
April 2, 2017
 
 
(in thousands)
Total revenues
 
$
3,277

 
$
281

Total purchases
 
$
16,088

 
$
4,156


As of April 1, 2018 and April 2, 2017, total receivable balances with these parties totaled $0.5 million and $3.8 million, respectively, and total payable balances with these parties totaled $8.9 million and $2.7 million, respectively.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, which are discussed in the “Forward-Looking Statements” section under Part I of this Quarterly Report on Form 10-Q.

EXECUTIVE SUMMARY

Overview

Cypress Semiconductor Corporation (“Cypress” or “the Company”) manufactures and sells advanced embedded system solutions for automotive, industrial, smart home appliances, consumer electronics and medical products. Cypress' microcontrollers, analog ICs, wireless and wired connectivity solutions and memories help engineers design differentiated products and help with speed to market. Cypress is committed to providing customers with quality support and engineering resources.

30





Business Segments

We continuously evaluate our reportable business segments in accordance with the applicable accounting guidance. The Company operates under two reportable business segments: Microcontroller and Connectivity Division ("MCD") and Memory Products Division ("MPD").
 
Business Segments
 
Description
 
 
 
Microcontroller and Connectivity Division
 
MCD focuses on high-performance microcontroller (MCU), analog and wireless and wired connectivity solutions. The portfolio includes Traveo™ automotive MCUs, PSoC® programmable MCUs and general-purpose MCUs with ARM® Cortex®-M4, -M3, -M0+ and R4 CPUs, analog PMIC Power Management ICs, CapSense® capacitive-sensing controllers, TrueTouch® touchscreen, Wi-Fi®, Bluetooth®, Bluetooth Low Energy and ZigBee® solutions and the WICED® development platform, and a broad line of USB controllers, including solutions for the USB-C and USB Power Delivery (PD) standards. This division also includes our intellectual property (IP) business.





 
 
 
Memory Products Division
 
MPD focuses on specialized, high-performance parallel and serial NOR flash memories, NAND flash memories, static random access memory (SRAM), F-RAM™ ferroelectric memory devices, non-volatile SRAM (nvSRAM), other specialty memories and timing solutions. This division also includes our subsidiary AgigA Tech Inc.
 
Business Strategy

Refer to Part I Item 1. Business in our Annual Report on Form 10-K for the year ended December 31, 2017 for a discussion of our strategies.
As we continue to implement our strategies, there are many internal and external factors that could impact our ability to meet any or all of our objectives. Some of these factors are discussed under Part I Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2017 as well as in Part II Item 1A in this Quarterly Report on Form 10-Q.
Results of Operations
Revenues
Our total revenues increased by $50.4 million, or 9.5%, to $582.2 million for the three-month period ended April 1, 2018 compared to the same period in the prior year. The increase was primarily driven by strength in the memory products.
The following table summarizes our consolidated revenues by segments:
 
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
Microcontroller and Connectivity Division ("MCD")
$
336,710

 
$
317,901

Memory Products Division ("MPD")
245,531

 
213,973

Total revenues
$
582,241

 
$
531,874

 
Microcontroller and Connectivity Division:
Revenues recorded by MCD increased by $18.8 million, or 5.9%, in the three months ended April 1, 2018 compared to the same prior year period. The increase was primarily driven by the growth in the USB-C, IoT/Wireless Connectivity and microcontroller products. The overall average selling price of our products for MCD for the three months ended April 1, 2018 was $1.01 which decreased by $0.11, compared with the same prior year period primarily due to changes in product mix.

Memory Products Division:

31




Revenues recorded by MPD increased by $31.6 million, or 14.7%, in the three months ended April 1, 2018 compared to the same prior year period. The increase was primarily due to $28.5 million of revenue growth from the Flash memory products. The overall ASP of our products for MPD for the three months ended April 1, 2018 was $1.64, which increased by $0.38, compared with the same prior year period. The increase is primarily attributed to higher ASPs for Flash memory products and changes in product mix.

Gross Margin
 
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
Gross profit
212,392

 
157,108

Gross margin (%)
36.5
%
 
29.5
%

Our gross margin improved to 36.5% in the three months ended April 1, 2018 from 29.5% in the three months ended April 2, 2017. One of the primary drivers of the improvement in gross margin was higher fab utilization which increased from 63% in the three months ended April 2, 2017 to 74% in the three months ended April 1, 2018 and a reduction in the cost of certain products. Favorable pricing and a shift to higher margin business also contributed to the gross margin improvement. Additionally, there was a reduction in write-downs of carrying value of inventory during the three months ended April 1, 2018 as compared to the same prior year period. Write-down of inventories during the three months ended April 1, 2018 was $7.0 million as compared to $10.5 million in the three months ended April 2, 2017. Write-down of inventories unfavorably impacted our gross margin by 1.2% and 2.0% for the three months ended April 1, 2018 and April 2, 2017, respectively. Sale of inventory that was previously written off or written down aggregated to $9.0 million and $7.6 million for the first quarters of fiscal years 2018 and 2017, which favorably impacted our gross margin by 1.6% and 1.4%, respectively. Included in the cost of revenues are restructuring charges of $1.9 million and $0.2 million for the first quarters of fiscal years 2018 and 2017 respectively. During first quarter of 2018, we initiated the 2018 Plan restructuring plan which will contribute towards increasing longer term operational efficiency. The 2018 plan will result in a reduction of approximately 75 positions, which is expected to favorably impact costs starting second half of 2018. Included in the cost of revenues are amortization of intangible assets of $48.1 million and $43.2 million for the first quarters of fiscal years 2018 and 2017 respectively.

Research and Development (“R&D”) Expenses
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
R&D expenses
$
93,233

 
$
89,348

As a percentage of revenues
16.0
%
 
16.8
%
 
R&D expenses increased by $3.9 million in the three months ended April 1, 2018 compared to the same prior-year period. The increase was mainly attributable to $3.5 million of higher labor costs from an increase in headcount and variable incentive increases and $4.0 million of non-labor spending, offset by $3.6 million of lower stock compensation.
Selling, General and Administrative (“SG&A”) Expenses
 
Three Months Ended
 
April 1, 2018
 
April 2, 2017
 
(In thousands)
SG&A expenses
$
83,397

 
$