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 September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes     No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
 
 
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 October 19, 2018 was 361,950,039.





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

Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Quarterly Report") 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. Forward-looking statements are not historical facts and include statements relating to, among other things, the future results, operations, strategies, and prospects of Cypress Semiconductor Corporation and its consolidated subsidiaries ("Cypress," the "Company," "we," or "us"), and can in some cases be identified by our use of words such as "may," "will," "should," "plan," "anticipate," "believe," "expect," "future," "intend," "estimate," "predict," "potential," "continue," and similar expressions. This Quarterly Report includes, among others, forward-looking statements regarding: our expectations regarding dividends, debt repayments, and stock repurchases; our expectations regarding restructuring plan costs and effects; our expectations regarding active litigation matters; the sufficiency of our cash, and borrowing arrangements to meet our requirements for the next 12 months; possible recognition of certain unrecognized tax benefits within the next 12 months; our projected revenue from products subject to tariffs; the potential impact of our indemnification obligations; and our plans to remediate an identified material weakness in internal control over financial reporting. Our forward-looking statements are based on the expectations, beliefs and intentions of, and the information available to, our executive management on the filing date of this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements. Except as required by law, we assume no responsibility to update our forward-looking statements.
The forward-looking statements in this Quarterly Report involve risks and uncertainties. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: potential disruptions in the international trade and investment environment, including deteriorating relationships between the U.S. government and foreign governments; the current and future state of the general economy and its impact on the markets and consumers we serve (including credit conditions); our ability to execute on our Cypress 3.0 strategy and our margin improvement plan; potential volatility in our stock price; risks related to paying down our indebtedness and meeting the covenants set forth in our debt agreements; our efforts to retain and expand our customer base (which may be adversely affected if we were to raise prices) in the intensely competitive and rapidly evolving semiconductor industry; risks related to significant supply and demand volatility in semiconductor markets (including the challenges of forecasting demand, scheduling production, and making timely delivery on customer orders); risks related to our strategy of developing and maintaining a leading portfolio of programmable microcontroller, connectivity and memory products; risks related to our flexible manufacturing strategy (and the challenge of efficiently managing a smaller number of manufacturing facilities while increasing our reliance on third-party manufacturers); our reliance on distributors and resellers; risks related to our "take or pay" agreements with certain vendors; the risk of defects, errors, or security vulnerabilities in our products; risks related to the integrity of our information systems, including the possibility of cyber-attacks, business-activity disruption, and loss or corruption of sensitive data; changes in tax law and policy; risks related to our pending tax examinations; risks related to our tax incentive/holiday arrangements in Malaysia, the Philippines, and Thailand; our efforts to remediate any material weakness in our internal control over financial reporting; potential lack of liquidity for certain strategic investments (including the challenge of disposing of businesses, product lines, or assets on favorable terms in a timely manner); risks related to our restructuring activities; the failure or success of the privately-held companies in which we are invested; the challenges of effectively integrating companies and assets that we acquire; the possibility of impairment charges; the challenges of attracting and retaining key personnel; risks related to our reliance on stock-based compensation; possible changes to our dividend policy; risks related to our share repurchase authorization; the uncertain nature of business outlook guidance; risks related to industry consolidation and the challenge of competing effectively against a smaller number of stronger companies; the challenges of adequately protecting our intellectual property rights and risks of intellectual property litigation; the possibilities that activist stockholders could negatively affect our business and that our deferred tax assets could be negatively impacted by changes in our stockholder base; risks associated with international operations; the challenges and costs of complying with environmental, data privacy, health/safety, and other laws; risks related to "conflict minerals" reporting; the possibility of business disruptions due to natural disasters; risks arising from indemnification commitments to our officers and directors; our ability to manage our financial investments and interest rate and exchange rate exposure; and the uncertainty and expense of pending litigation matters. These and other factors are described in more detail in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (our "Annual Report"), which item is incorporated herein by reference; Part I, Item 3 (Quantitative and Qualitative Disclosures about Market Risk) in this Quarterly Report; and/or Part II, Item 1A (Risk Factors) in this Quarterly Report.

3




ITEM 1. FINANCIAL STATEMENTS

CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30, 2018
 
December 31, 2017
 
(In thousands, except
per-share amounts)
ASSETS
 
 
 
Current assets:
 

 
 
Cash and cash equivalents
$
204,747

 
$
151,596

Accounts receivable, net
404,561

 
295,991

Inventories
289,436

 
272,127

Other current assets
118,721

 
103,637

Total current assets
1,017,465

 
823,351

Property, plant and equipment, net
292,854

 
289,554

Equity method investments
111,641

 
122,514

Intangible assets, net
554,728

 
715,120

Goodwill
1,439,472

 
1,439,472

Other long-term assets
141,764

 
147,039

Total assets
$
3,557,924

 
$
3,537,050

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
228,159

 
$
213,101

Accrued compensation and employee benefits
64,913

 
79,275

Price adjustment and other revenue reserves
225,001

 
173,592

Dividends payable
39,772

 
38,741

Current portion of long-term debt
6,911

 
27,303

Other current liabilities
148,690

 
143,485

Total current liabilities
713,446

 
675,497

Deferred income taxes and other tax liabilities
57,283

 
52,006

Revolving credit facility and long-term portion of debt
870,574

 
956,513

Other long-term liabilities
30,133

 
35,442

Total liabilities
$
1,671,436

 
$
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; 536,392 and 525,719 shares issued; 361,665 and 352,220 shares outstanding at September 30, 2018 and December 31, 2017, respectively
5,107

 
4,936

Additional paid-in-capital
5,656,484

 
5,659,612

Accumulated other comprehensive income (loss)
2,854

 
(1,362
)
Accumulated deficit
(1,424,228
)
 
(1,511,706
)
Stockholders’ equity before treasury stock
4,240,217

 
4,151,480

Less: Shares of common stock held in treasury, at cost; 174,726 and 173,498 shares at September 30, 2018 and December 31, 2017, respectively
(2,354,937
)
 
(2,334,944
)
Total Cypress stockholders’ equity
1,885,280

 
1,816,536

Non-controlling interest
1,208

 
1,056

Total equity
1,886,488

 
1,817,592

Total liabilities and equity
$
3,557,924

 
$
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
 
Nine Months Ended
 
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
 
(In thousands, except per-share amounts)
Revenues
$
673,035

 
$
604,574

 
$
1,879,366

 
$
1,730,224

Cost of revenues
413,320

 
394,878

 
1,173,121

 
1,170,675

Gross profit
259,715

 
209,696

 
706,245

 
559,549

Research and development
91,691

 
90,422

 
281,617

 
268,365

Selling, general and administrative
92,943

 
78,194

 
262,940

 
254,785

Total operating expenses
184,634

 
168,616

 
544,557

 
523,150

Operating income
75,081

 
41,080

 
161,688

 
36,399

Interest expense
(17,123
)
 
(20,929
)
 
(51,559
)
 
(59,185
)
Other income, net
2,064

 
2,310

 
4,203

 
4,800

Income (loss) before income taxes and non-controlling interest
60,022

 
22,461

 
114,332

 
(17,986
)
Income tax provision
(5,618
)
 
(4,500
)
 
(15,829
)
 
(13,930
)
Share in net loss of equity method investees
(3,657
)
 
(4,931
)
 
(10,873
)
 
(14,842
)
Net income (loss)
50,747

 
13,030

 
87,630

 
(46,758
)
Net loss attributable to non-controlling interests
(52
)
 
(14
)
 
(152
)
 
(144
)
Net income (loss) attributable to Cypress
$
50,695

 
$
13,016

 
$
87,478

 
$
(46,902
)
Net income (loss) per share attributable to Cypress:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
0.04

 
$
0.24

 
$
(0.14
)
Diluted
$
0.14

 
$
0.04

 
$
0.23

 
$
(0.14
)
Cash dividend declared per share
$
0.11

 
$
0.11

 
$
0.33

 
$
0.33

Shares used in net income (loss) per share calculation:
 
 
 
 
 
 
 
Basic
361,631

 
332,873

 
358,560

 
329,787

Diluted
374,266

 
360,311

 
373,064

 
329,787

 


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
 
Nine Months Ended
 
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
 
(In Thousands)
Net income (loss)
$
50,747

 
$
13,030

 
$
87,630

 
$
(46,758
)
Other comprehensive (loss) income:
 

 
 

 
 

 
 

Net unrealized gain (loss) on cash flow hedges:
 

 
 

 
 

 
 

Net unrealized gain (loss) arising during the period
35

 
261

 
5,271

 
1,776

Net (gain) loss reclassified into earnings for revenue hedges (effective portion)
(79
)
 
(235
)
 
1,149

 
(4,106
)
Net loss (gain) reclassified into earnings for expense hedges (effective portion)
103

 
1,213

 
(2,182
)
 
9,851

Net (gain) loss reclassified into earnings for interest rate hedges (effective portion)
(22
)
 

 
(22
)
 

Provision for income tax

 

 

 
(808
)
Total other comprehensive income
37

 
1,239

 
4,216

 
6,713

Comprehensive income (loss)
50,784

 
14,269

 
91,846

 
(40,045
)
Comprehensive loss attributable to non-controlling interest
(52
)
 
(14
)
 
(152
)
 
(144
)
Comprehensive income (loss) attributable to Cypress
$
50,732

 
$
14,255

 
$
91,694

 
$
(40,189
)
 


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




CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
Nine Months Ended
 
September 30, 2018
 
October 1, 2017
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income (loss)
$
87,630

 
$
(46,758
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Stock-based compensation expense
76,561

 
68,516

Depreciation and amortization
213,163

 
196,520

Loss / (Gain) on disposal or impairment of property and equipment
7,154

 
(1,364
)
Share in net loss of equity method investees
10,873

 
14,842

Accretion of interest expense on Senior Exchangeable Notes and amortization of debt and financing costs on other debt
19,970

 
18,631

Restructuring and other adjustments
14,174

 
(2,768
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(104,124
)
 
(23,416
)
Inventories
(17,601
)
 
(869
)
Other current and long-term assets
(30,117
)
 
8,489

Price adjustment and other revenue reserves
46,963

 
33,635

Accounts payable and other liabilities
4,839

 
(63,512
)
Net cash provided by operating activities
329,485

 
201,946

Cash flows from investing activities:
 

 
 

Acquisitions, net of cash acquired
(2,655
)
 

Cash received on sale of asset held for sale

 
31,611

Proceeds from divestiture

 
10,000

Distributions, net of contributions for deferred compensation plan
3,460

 
3,435

Acquisition of property, plant and equipment, net
(58,061
)
 
(44,154
)
Cash paid for equity and cost method investments

 
(9,285
)
Cash received on sale of cost method investment
18,538

 

Other investing
(4,982
)
 

Net cash (used in) investing activities
(43,700
)
 
(8,393
)
Cash flows from financing activities:
 

 
 

Borrowings under revolving credit facility
94,000

 
90,000

Borrowings under Term Loan B

 
91,250

Repayment of revolving credit facility
(184,000
)
 
(174,000
)
Repayment of Term Loan A and Term Loan B
(34,351
)
 
(111,875
)
Repurchase of common stock
(19,993
)
 

Payment of cash dividends
(117,592
)
 
(108,079
)
Proceeds from employee stock-based awards
39,927

 
37,496

Payment for extinguishment of 2% 2020 Spansion Exchangeable Notes
(10,000
)
 

Repayment of equipment leases and other

 
(111
)
Costs related to refinancing of debt
(625
)
 
(6,843
)
Net cash used in financing activities
(232,634
)
 
(182,162
)
Net increase in cash and cash equivalents
53,151

 
11,391

Cash and cash equivalents, beginning of period
151,596

 
120,172

Cash and cash equivalents, end of period
$
204,747

 
$
131,563

 
 
 
 
Supplemental Cash Flows Disclosures:
 

 
 

Unpaid purchases of property, plant and equipment
$
3,986

 
$
1,709


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 (together with its consolidated subsidiaries, "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 contain(ed) 52 weeks. The third quarter of fiscal 2018 ended on September 30, 2018 and the third quarter of fiscal 2017 ended on October 1, 2017.

Basis of Presentation

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include the accounts of Cypress Semiconductor Corporation and 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' 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 GAAP.

Certain balances included on the Consolidated Statements of Operations for prior periods have been reclassified to conform to the current period presentation. Beginning fiscal year 2018, the Company allocated the amortization of acquisition-related intangible assets, restructuring costs and certain other expenses by function in the Consolidated Statements of Operations. The Consolidated Statements of Operations for the prior comparative periods have been reclassified to conform to the current period presentation as follow:

 
 
Three Months Ended October 1, 2017
 
 
As Revised*
 
Reclassification
 
As Adjusted
 
 
(In thousands)
Cost of revenues
 
$
351,533

 
$
43,345

 
$
394,878

Research and development
 
90,422

 

 
90,422

Selling, general and administrative
 
73,111

 
5,083

 
78,194

Amortization of intangible assets
 
48,428

 
(48,428
)
 

Operating income
 
41,080

 

 
41,080



 
 
Nine Months Ended October 1, 2017
 
 
As Revised*
 
Reclassification
 
As Adjusted
 
 
(In thousands)
Cost of revenues
 
$
1,039,662

 
$
131,013

 
$
1,170,675

Research and development
 
265,655

 
2,710

 
268,365

Selling, general and administrative
 
224,697

 
30,088

 
254,785

Amortization of intangible assets
 
146,031

 
(146,031
)
 

Costs and settlement charges related to shareholder matter
 
14,310

 
(14,310
)
 

Restructuring costs (benefit)
 
3,470

 
(3,470
)
 

Operating income
 
36,399

 

 
36,399


* See "Revision of prior period financial statements" below.

8




Results reported in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 are 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 in 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 Not Yet Adopted

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. 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. In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements," which provides clarifications and improvements to ASU 2016-02 including allowing entities to elect an additional transition method that permits changes to be applied by means of a cumulative-effect adjustment recorded in retained earnings as of the beginning of the fiscal year of adoption. Consequently, an entity’s reporting for the comparative periods presented in the year of adoption would continue to be in accordance with ASC 840, Leases (Topic 840) ("ASC 840"), including the disclosure requirements of ASC 840. The new guidance will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted.

The Company has developed a project plan to facilitate the implementation of ASU 2016-02. The Company continues to make progress on this plan which includes reaching out to the Company’s businesses, as well as assessing the Company’s portfolio of active leases. The Company has also selected a lease accounting software solution to support the new reporting requirements and continues to make progress on its configuration and assessing the design of the future lease process.

While the Company has not yet completed its evaluation of the impact the new lease accounting guidance will have on its Consolidated Financial Statements, the Company expects to recognize right of use assets and lease liabilities for its operating leases, which will have a material impact on the Consolidated Balance Sheet upon adoption. The Company does not expect the changes to have a material impact on the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows. Upon adoption, the Company expects that its financial statement disclosures will be expanded to present additional details of its leasing arrangements. The Company is currently evaluating internal controls that would be impacted by the new guidance, to ensure readiness for adoption in the first fiscal quarter of 2019.

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 for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard 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 for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting." The standard expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. Under the amended guidance, equity-classified share-based payment awards issued to nonemployees will be measured at grant date fair value. Upon transition, the entity is required to remeasure these nonemployee awards at fair value as of the adoption date.  The improvement is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.

9





In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The standard modifies the disclosure requirements on fair value measurements in Topic 820 by removing the requirement to disclose the reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The standard expands the disclosure requirements for Level 3 fair value measurement, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.
 
In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." It is designed to improve the effectiveness of disclosures by removing and adding disclosures related to defined benefit plans. The update is effective for fiscal years ending after December 15, 2020 with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

Adoption of ASU No. 2014-09, Revenue from Contracts with Customers:

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 beginning after December 15, 2017 and for interim periods within those fiscal years. Collectively, we refer to ASU No. 2014-09, its related amendments, and Subtopic 340-40 as "Topic 606."

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.
Sales to certain distributors are made under arrangements that provide the distributors with price adjustments, price protection, stock rotation and other allowances under certain circumstances. These adjustments 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

10




determine the standalone selling price of intellectual property licenses based on the 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.
We license or sell our rights to use portions of our intellectual property ("IP") portfolio, which includes certain patent rights useful in the manufacture and sales of certain products. IP revenue recognition is dependent on the nature and terms of each agreement. We recognize IP revenue upon delivery of the IP if we have no substantive future obligation to perform under the arrangement. We defer recognition of IP revenue where future performance obligations are required to earn the revenue or the revenue is not guaranteed. Sales-based or usage-based royalties from license of our IP are recognized at the later of the period the sales or usages occur or the satisfaction of the performance obligation to which some or all of the sales-based or usage-based royalties have been allocated.

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 is capable of providing reliable information as 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 of 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 to 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. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

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 of fiscal 2018. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU No. 2018-03, "Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The corrections and improvements are effective for the Company for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years beginning after June 15, 2018. The Company adopted this guidance in the third quarter of fiscal 2018. The

11




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-based 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 of fiscal 2018. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

Revision of Prior Period Financial Statements

During the fiscal year ended December 31, 2017, the Company 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 Stock Purchase Plan ("ESPP"). The Company determined that the errors were not material to the previously issued financial statements and disclosures included in its Annual Report on Form 10-K for the year ended December 31, 2017 or for any quarterly periods included therein.

For the three and nine months ended September 30, 2018, the Company is presenting comparative fiscal 2017 quarterly information. The fiscal 2017 results for the three and nine months ended October 1, 2017 have been revised to reflect the quarterly impact of the adjustments described above.

The effect of the immaterial corrections on the Consolidated Statements of Operations for the three and nine months ended October 1, 2017 is as follows:


 
 
Three Months Ended October 1, 2017
Revised Consolidated Statements of Operations Amounts
 
As previously reported
 
Adjustments
 
As revised
 
 
(In thousands, except per-share amounts)
Cost of revenues
 
$
351,969

 
$
(436
)
 
$
351,533

Research and development
 
91,334

 
(912
)
 
90,422

Selling, general and administrative
 
73,746

 
(635
)
 
73,111

Total costs and expenses
 
565,477

 
(1,983
)
 
563,494

Operating income
 
39,097

 
1,983

 
41,080

Income before income taxes and non-controlling interest
 
20,478

 
1,983

 
22,461

Net Income
 
11,047

 
1,983

 
13,030

Net income attributable to Cypress
 
$
11,033

 
$
1,983

 
$
13,016

Net loss per share attributable to Cypress:
 
 
 
 
 
 
Basic
 
$
0.03

 
$
0.01

 
$
0.04

Diluted
 
$
0.03

 
$
0.01

 
$
0.04


12




 
 
Nine Months Ended October 1, 2017
Revised Consolidated Statements of Operations Amounts
 
As previously reported
 
Adjustments
 
As revised
 
 
(In thousands, except per-share amounts)
Cost of revenues
 
$
1,042,377

 
$
(2,715
)
 
$
1,039,662

Research and development
 
269,551

 
(3,896
)
 
265,655

Selling, general and administrative
 
228,836

 
(4,139
)
 
224,697

Total costs and expenses
 
1,704,575

 
(10,750
)
 
1,693,825

Operating loss
 
25,649

 
10,750

 
36,399

Loss before income taxes and non-controlling interest
 
(28,736
)
 
10,750

 
(17,986
)
Net loss
 
(57,508
)
 
10,750

 
(46,758
)
Net loss attributable to Cypress
 
$
(57,652
)
 
$
10,750

 
$
(46,902
)
Net loss per share attributable to Cypress:
 
 
 
 
 
 
Basic
 
$
(0.17
)
 
$
0.03

 
$
(0.14
)
Diluted
 
$
(0.17
)
 
$
0.03

 
$
(0.14
)

The effect of the immaterial corrections on the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended October 1, 2017 is as follows:

 
 
Three Months Ended October 1, 2017
Revised Consolidated Statements of Comprehensive Income (Loss):
 
As previously reported
 
Adjustments
 
As revised
 
 
(In thousands)
Net income
 
$
11,047

 
$
1,983

 
$
13,030

Comprehensive income
 
12,286

 
1,983

 
14,269

Comprehensive income attributable for Cypress
 
$
12,272

 
$
1,983

 
$
14,255


 
 
Nine Months Ended October 1, 2017
Revised Consolidated Statements of Comprehensive Income (Loss):
 
As previously reported
 
Adjustments
 
As revised
 
 
(In thousands)
Net loss
 
$
(57,508
)
 
$
10,750

 
$
(46,758
)
Comprehensive loss
 
(50,795
)
 
10,750

 
(40,045
)
Comprehensive loss attributable for Cypress
 
$
(50,939
)
 
$
10,750

 
$
(40,189
)

The effect of the immaterial corrections on the Consolidated Statements of Cash Flows for the nine months ended October 1, 2017 is as follows:
 
 
Nine Months Ended October 1, 2017
Revised Consolidated Statements of Cash Flows:
 
As previously reported
 
Adjustments
 
As revised
 
 
(In thousands)
Net (loss) income
 
$
(57,508
)
 
$
10,750

 
$
(46,758
)
Stock-based compensation expense
 
79,266

 
(10,750
)
 
68,516

Net cash provided by operating activities
 
$
201,946

 
$

 
$
201,946



13




The effect of the immaterial corrections on the disclosures related to stock-based compensation for the three and nine months ended October 1, 2017 is as follows:

 
 
Three Months Ended October 1, 2017
Revised Stock-Based Compensation Footnote:
 
As Reported
 
Adjustments
 
As Revised
 
 
(In thousands)
Cost of revenues
 
$
5,156

 
$
(436
)
 
$
4,720

Research and development
 
9,604

 
(913
)
 
8,691

Selling, general, and administrative
 
8,235

 
(634
)
 
7,601

Total stock-based compensation expense
 
$
22,995

 
$
(1,983
)
 
$
21,012



 
 
Nine Months Ended October 1, 2017
Revised Stock-Based Compensation Footnote:
 
As Reported
 
Adjustments
 
As Revised
 
 
(In thousands)
Cost of revenues
 
$
15,320

 
$
(2,715
)
 
$
12,605

Research and development
 
32,650

 
(3,897
)
 
28,753

Selling, general, and administrative
 
31,296

 
(4,138
)
 
27,158

Total stock-based compensation expense
 
$
79,266

 
$
(10,750
)
 
$
68,516



NOTE 2. REVENUE

The following table presents the Company's revenue disaggregated by revenue source, segment and geographical locations:

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
 
(In thousands)
Microcontroller and Connectivity Division ("MCD")
$
413,413

 
$
373,584

 
$
1,118,649

 
$
1,052,018

Memory Products Division ("MPD")
259,622

 
230,990

 
760,717

 
678,206

Total revenues
$
673,035

 
$
604,574

 
$
1,879,366

 
$
1,730,224



Three Months Ended
 
Nine Months Ended

September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017

(In thousands)
Product revenue
$
663,776

 
$
581,944

 
$
1,844,295

 
$
1,659,643

Non-product revenue (1)
9,259

 
22,630

 
35,071

 
70,581

Total revenue
$
673,035

 
$
604,574

 
$
1,879,366

 
$
1,730,224


(1) Non-product revenue primarily includes royalty, NRE, and patent revenues.

14





Three Months Ended
 
Nine Months Ended

September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017

(In thousands)
Goods/Services transferred at a point in time
$
670,577

 
$
591,635

 
$
1,868,635

 
$
1,689,450

Goods/Services transferred over time
2,458

 
12,939

 
10,731

 
40,774

Total revenue
$
673,035

 
$
604,574

 
$
1,879,366

 
$
1,730,224


 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
 
(In thousands)
United States
$
62,825

 
$
61,138

 
$
190,282

 
$
169,231

China, Taiwan, and Hong Kong
265,758

 
245,071

 
732,687

 
742,293

Japan
164,046

 
136,378

 
448,654

 
378,713

Europe
85,370

 
76,577

 
257,807

 
220,395

Rest of the World
95,036

 
85,410

 
249,936

 
219,592

Total revenue
$
673,035

 
$
604,574

 
$
1,879,366

 
$
1,730,224





NOTE 3. BALANCE SHEET COMPONENTS

Accounts Receivable, Net
 
As of
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Accounts receivable, gross
$
405,466

 
$
301,465

Allowance for doubtful accounts receivable and sales returns
(905
)
 
(5,474
)
Total accounts receivable, net
$
404,561

 
$
295,991


Inventories
 
As of
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Raw materials
$
14,480

 
$
15,635

Work-in-process
211,176

 
176,427

Finished goods
63,780

 
80,065

Total inventories
$
289,436

 
$
272,127




15




Other Current Assets
 
As of
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Prepaid tooling - current
$
24,483

 
$
21,132

Advances to suppliers
19,361

 
15,968

Prepaid royalty and licenses
17,881

 
16,630

Derivative assets
4,272

 
1,197

Value added tax receivable
10,909

 
11,412

Prepaid expenses
20,856

 
17,737

Withholding tax receivable and tax advance
5,189

 
5,790

Other current assets
15,770

 
13,771

Total other current assets
$
118,721

 
$
103,637



Other Long-term Assets
 
As of
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Employee deferred compensation plan assets
$
48,876

 
$
49,495

Prepaid tooling - non-current
31,124

 
25,773

Investment in cost method equity securities

 
17,017

Deferred tax assets
3,553

 
4,293

Long-term licenses
5,229

 
8,654

Advance to suppliers
9,824

 
12,576

Deposit - non-current
9,702

 
9,830

Pension - non-current
7,979

 
8,026

Derivatives assets - non-current
4,592

 
607

Other non-current assets
20,885

 
10,768

Total other long-term assets
$
141,764

 
$
147,039


 
Other Current Liabilities
 
As of
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Employee deferred compensation plan liability
$
49,627

 
$
50,629

Restructuring accrual - current portion (See Note 7)
20,048

 
9,580

Derivative liability
4,771

 
2,033

Accrued expenses
48,027

 
47,789

Accrued interest
3,879

 
8,094

Other current liabilities
22,338

 
25,360

Total other current liabilities
$
148,690

 
$
143,485

 

16





Other Long-term Liabilities
 
As of
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Long-term pension and other employee related liabilities
$
21,324

 
$
16,779

Restructuring accrual - non-current portion (See Note 7)

 
8,596

Asset retirement obligation
5,716

 
5,693

Other long-term liabilities
3,093

 
4,374

Total other long-term liabilities
$
30,133

 
$
35,442


NOTE 4. INTANGIBLE ASSETS

On August 14, 2018, the Company acquired an embedded software company focused on the internet of things (or "IoT") market for cash consideration of $3 million. The purchase consideration was allocated to acquired developed technology. Pro forma results of operations of the acquired company have not been presented because the effect of the acquisition was not material.
The following table presents details of the Company's intangible assets:
 
 
As of September 30, 2018
 
As of December 31, 2017
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
 
(In thousands)
Developed technology and other intangible assets
 

 
 

 
 

 
 

 
 

 
 

Acquisition-related intangible assets
$
1,199,391

 
$
(650,327
)
 
$
549,064

 
$
1,072,824

 
$
(490,327
)
 
$
582,497

Non-acquisition related intangible assets
19,884

 
(14,220
)
 
5,664

 
19,884

 
(10,828
)
 
9,056

Total developed technology and other intangible assets
1,219,275

 
(664,547
)
 
554,728

 
1,092,708

 
(501,155
)
 
591,553

In-process research and development

 

 

 
123,567

 

 
123,567

Total intangible assets
$
1,219,275

 
$
(664,547
)
 
$
554,728

 
$
1,216,275

 
$
(501,155
)
 
$
715,120


The below table presents details of the in-process research and development ("IPR&D") assets as of September 30, 2018:
 
(In thousands)
As of December 31, 2017
$
123,567

Technological feasibility achieved
(123,567
)
As of September 30, 2018
$

 
During the three months ended September 30, 2018, two projects representing $34.0 million of the total capitalized IPR&D, with estimated useful lives of 4 years, reached technological feasibility and were transferred to developed technology. During the nine months ended September 30, 2018, five projects representing $123.6 million of the total capitalized IPR&D, with estimated useful lives of 4 - 5 years, 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:


17




 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
 
(In thousands)
Cost of revenues
$
50,229

 
$
43,345

 
$
146,433

 
$
130,782

Research and development
870

 

 
3,391

 

Selling, general and administrative
4,310

 
5,083

 
13,568

 
15,249

Total amortization expense
$
55,409

 
$
48,428

 
$
163,392

 
$
146,031

The estimated future amortization expense related to developed technology and other intangible assets as of September 30, 2018 is as follows:
 
(In thousands)
2018 (remaining three months)
55,728

2019
215,733

2020
153,773

2021
58,489

2022
33,001

2023 and thereafter
38,004

Total future amortization expense
$
554,728

 
 
NOTE 5. EQUITY METHOD INVESTMENTS

Privately-held equity investments in entities the Company does not control 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.

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, reducing its carrying value to zero as of December 31, 2017. The Company held 27.9% of Enovix's outstanding voting shares as of September 30, 2018.

Deca Technologies Inc. ("Deca")
The estimated fair value of the Company’s investment in Deca approximates carrying value of the Company’s investment in Deca as of September 30, 2018. Deca continues to be in the process of developing and testing a fan-out wafer level packaging technology. Deca’s estimated enterprise value is sensitive to its ability to achieve these product development and testing milestones. Delays or failure by Deca to complete these milestones, or secure funding needed to support the company’s growth and cash needs, may have a significant adverse impact on Deca’s estimated enterprise value and may result in the recognition of a material impairment in the carrying value of the Company’s investment in Deca.
The Company held 52.5% of Deca's outstanding voting shares as of September 30, 2018 and December 31, 2017. The Company's investment in Deca is accounted for as an equity method investment.

The below table presents the changes in carrying value of the equity method investment related to Deca.
 
 
As of September 30, 2018
 
 
Deca Technologies Inc.
 
 
(In thousands)
Carrying value as of December 31, 2017
 
$
122,514

Equity in net loss of equity method investee
 
(10,873
)
Carrying value as of September 30, 2018
 
$
111,641


18





The following table presents summarized aggregate financial information derived from the respective consolidated financial statements of Deca for the three and nine months ended September 30, 2018 and of Deca and Enovix for the three and nine months ended October 1, 2017.

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
 
 
(In thousands)
Operating data:
 
 
 
 
 
 
 
 
  Revenue
 
$
5,421

 
$
4,213

 
$
14,023

 
$
11,623

  Gross loss
 
(2,297
)
 
(2,176
)
 
(7,674
)
 
(6,117
)
  Loss from operations
 
(6,628
)
 
(11,550
)
 
(20,468
)
 
(31,561
)
  Net loss
 
(6,971
)
 
(9,392
)
 
(20,726
)
 
(32,289
)
  Net loss attributable to Cypress
 
(3,657
)
 
(4,931
)
 
(10,873
)
 
(14,842
)

The following table represents the assets and liabilities held by Deca as of September 30, 2018, and by Deca and Enovix as of December 31, 2017.

 
 
As of
 
As of
 
 
September 30, 2018
 
December 31, 2017
 
 
(In thousands)
Balance Sheet Data:
 
 
 
 
  Current Assets
 
$
31,907

 
$
70,101

  Long-term Assets
 
54,551

 
55,673

  Current Liabilities
 
9,791

 
15,615

  Long-term Liabilities
 
824

 
1,859


NOTE 6. FAIR VALUE MEASUREMENTS
Assets/Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the fair value hierarchy for the Company's financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017:
 

19




 
As of September 30, 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 
$
134,149

 
$

 
$
134,149

 
$
20,477

 
$

 
$
20,477

Total cash equivalents
134,149

 

 
134,149

 
20,477

 

 
20,477

Other current assets:
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit

 
870

 
870

 

 
972

 
972

Total other current assets

 
870

 
870

 

 
972

 
972

 
 
 
 
 
 
 
 
 
 
 
 
Employee deferred compensation plan assets:
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents
2,309

 

 
2,309

 
3,561

 

 
3,561

Mutual funds
31,411

 

 
31,411

 
27,321

 

 
27,321

Equity securities
9,473

 

 
9,473

 
12,994

 

 
12,994

Fixed income

 
3,730

 
3,730

 
3,415

 

 
3,415

Stable value funds

 
1,953

 
1,953

 

 
2,204

 
2,204

Total employee deferred compensation plan assets
43,193

 
5,683

 
48,876

 
47,291

 
2,204

 
49,495

Interest rate swap

 
6,030

 
6,030

 

 

 

Foreign exchange forward contracts

 
2,834

 
2,834

 

 
1,197

 
1,197

Total financial assets
$
177,342

 
$
15,417

 
$
192,759

 
$
67,768

 
$
4,373

 
$
72,141

Financial Liabilities
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange forward contracts
$

 
$
4,788

 
$
4,788

 
$

 
$
1,426

 
$
1,426

Employee deferred compensation plan liability
43,857

 
5,770

 
49,627

 
48,425

 
2,204

 
50,629

Total financial liabilities
$
43,857

 
$
10,558

 
$
54,415

 
$
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 September 30, 2018 and December 31, 2017.  

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 6 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 September 30, 2018, the carrying value of the Company's senior secured credit facility was $468.3 million (See Note 9). The carrying value of the Company's senior secured 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 determined using Level 2 inputs. The principal and the estimated fair value of the principal of these notes as of September 30, 2018 were $12.0 million and $34.6 million, respectively.  See Note 9 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 and the estimated fair value of the principal of these notes as of September 30, 2018 were $287.5 million and $362.6 million, respectively.  See Note 9 for further details.

20




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 and the estimated fair value of the principal of these notes as of September 30, 2018 were $150.0 million and $149.0 million, respectively. See Note 9 for further details.
  
NOTE 7. RESTRUCTURING

Since 2016, the Company has launched certain long-term strategic corporate transformation initiatives which required restructuring activities to streamline 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 (the "2018 Plan") which will result in elimination of approximately 75 positions across various functions. Additionally as part of the 2018 Plan, in the third quarter of fiscal 2018, the Company increased the reduction in workforce by approximately 50 positions across various functions. The restructuring costs of $0.2 million and $3.4 million during the three and nine months ended September 30, 2018, respectively, consist of personnel costs. The Company anticipates that the remaining restructuring accrual balance of $1.0 million will be paid out in cash through the first quarter of fiscal 2019.

2017 Restructuring Plan
In December 2017, the Company began implementation of a reduction in workforce (the "2017 Plan") which resulted in the elimination of approximately 80 positions worldwide across various functions. A restructuring cost of $2.4 million for the nine months ended September 30, 2018, consists of personnel costs. The Company anticipates that the remaining restructuring accrual balance of $30 thousand will be paid out in cash through the first quarter of fiscal 2019.

2016 Restructuring Plan
In September 2016, the Company began the implementation of a reduction in workforce (the "2016 Plan") which resulted in the elimination of approximately 430 positions worldwide across various functions. No restructuring cost was recorded for the three and nine months ended September 30, 2018 related to the 2016 Plan. There was no restructuring cost related to the 2016 Plan during the three months ended October 1, 2017. The restructuring cost of $3.4 million recorded for the nine months ended October 1, 2017 consists of personnel costs of $1.8 million, and other charges related to the write-off of certain licenses and facilities-related expenses of $1.6 million. The Company had paid out the remaining restructuring cost of $0.5 million, which consisted of personnel costs, by July 1, 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. As part of this restructuring plan, the Company exited an office space leased by Spansion and had recorded a reserve related to excess lease obligation for the building. During the third quarter of fiscal 2018, the Company began negotiating a termination agreement with the building’s owner and, consequently, in the third quarter of fiscal 2018, the Company recorded $9.8 million of additional restructuring reserve based on estimated termination costs.

The Company anticipates that the remaining restructuring accrual balance of $19.0 million, which is recorded as part of Other Current Liabilities in the Condensed Balance Sheet, will be paid out in cash through the end of the first quarter of fiscal 2019.

Summary of Restructuring Costs
The following table summarizes the restructuring charges recorded in the Consolidated Statements of Operations:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
 
(In thousands)
Personnel costs
$
234

 
$

 
$
5,569

 
$
1,877

Lease termination costs
9,757

 

 
9,757

 

Other

 

 

 
1,593

Total restructuring costs
$
9,991

 
$

 
$
15,326

 
$
3,470


21





The following table summarizes the restructuring costs by line item recorded in the Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
 
(In thousands)
Cost of goods sold
$
(340
)
 
$

 
$
3,136

 
$
231

Research and development
516

 

 
842

 
2,710

Selling, general and administrative
9,815

 

 
11,348

 
529

Total restructuring costs
$
9,991

 
$

 
$
15,326

 
$
3,470


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
3,382

 
2,421

 
(234
)
 
9,757

 
15,326

Cash payments and other adjustments
(2,364
)
 
(8,530
)
 
(509
)
 
(2,054
)
 
(13,457
)
Accrued restructuring balance as of September 30, 2018
$
1,018

 
$
30

 
$

 
$
19,000

 
$
20,048

Current portion of the restructuring accrual
$
1,018

 
$
30

 
$

 
$
19,000

 
$
20,048



NOTE 8. 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
 
Nine Months Ended
 
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
 
(In thousands)
Cost of revenues
$
5,120

 
$
4,720

 
$
12,689

 
$
12,605

Research and development
8,206

 
8,691

 
28,720

 
28,753

Selling, general and administrative
10,869

 
7,601

 
35,152

 
27,158

Total stock-based compensation expense
$
24,195

 
$
21,012

 
$
76,561

 
$
68,516

 
As of September 30, 2018 and December 31, 2017, stock-based compensation capitalized in inventory totaled $3.0 million and $3.3 million, respectively.

22




The following table summarizes the stock-based compensation expense by type of awards:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
October 1, 2017
 
September 30, 2018
 
October 1, 2017
 
(In thousands)
Stock options
$

 
$
45

 
$
96

 
$
155

Restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs")
23,345

 
17,920

 
72,366

 
62,937

Employee Stock Purchase Plan (“ESPP”)
850

 
3,047

 
4,099

 
5,424

Total stock-based compensation expense
$
24,195

 
$
21,012

 
$
76,561

 
$
68,516

 
The following table summarizes the unrecognized stock-based compensation expense, by type of award as of September 30, 2018:
 
 
 
Weighted-
Average
Amortization
Period
 
(In thousands)
 
(In years)
RSUs and PSUs
$
79,973

 
1.44
ESPP
944

 
0.25
Total unrecognized stock-based compensation expense
$
80,917

 
1.42

Equity Incentive Program
As of September 30, 2018, approximately 38.4 million stock options, or 21.6 million RSUs and PSUs, were available for grant as stock-based awards under the 2013 Stock Plan, the 2010 Equity Incentive Award Plan and the 2012 Incentive Award Plan.  As of September 30, 2018, there were 1.9 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

 
 
 
 
Exercised
(266
)
 
$
9.87

 
 
 
 
Forfeited or expired
(20
)
 
$
15.35

 
 
 
 
Options outstanding as of July 1, 2018
3,425

 
$
12.15

 
 
 
 
Exercised
(314
)
 
$
10.36

 
 
 
 
Forfeited or expired
(27
)
 
$
17.66

 
 
 
 
Options outstanding as of September 30, 2018
3,084

 
$
12.28

 
1.97
 
9.5

Options exercisable as of September 30, 2018
3,028

 
$
12.31

 
1.95
 
$
9.3

 
No options were granted during the three or nine months ended September 30, 2018 and October 1, 2017.


23




RSUs and PSUs
The following table summarizes the Company's RSU and 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

Granted
432

 
16.52

Released
(1,022
)
 
12.99

Forfeited
(324
)
 
13.12

Balance as of July 1, 2018
12,999

 
14.03

Granted
315

 
16.68

Released
(2,038
)
 
12.39

Forfeited
(258
)
 
14.14

Balance as of September 30, 2018
11,018

 
14.41

 
2018 Long-Term Incentive Program
During the first quarter of 2018, the Compensation Committee of the Company's Board of Directors approved the issuance of service-based and performance-based restricted stock units under the Company's Long-Term Incentive Program ("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 on certain market conditions.


24




NOTE 9. DEBT
 
Total debt is comprised of the following:
 
 
 
As of
 
 
September 30, 2018
 
December 31, 2017
 
 
(In thousands)
Current portion of long-term debt
 
 

 
 

Senior Secured Credit Facility:
 
 
 
 
Term Loan B
 
$
5,051

 
$
27,303

Capital lease obligations
 
1,860

 

Current portion of long-term debt
 
6,911

 
27,303

Revolving credit facility and long-term portion of debt
 
 

 
 

Senior Secured Credit Facility:
 
 
 
 
Revolving Credit Facility