Cypress Semiconductor Corporation
Oct 27, 2016

Cypress Reports Third Quarter 2016 Results

- Third quarter GAAP revenue was $523.8 million and non-GAAP revenue was $530.1 million
- Third quarter GAAP margin was 37.9% and non-GAAP margin was 40.5%
- Achieved $175.8 million in realized annualized synergies from the Spansion merger, remaining ahead of plan
- Paid dividend of $35.2 million ($0.11 per share, equivalent to a 3.6% annualized yield as of September 30, 2016)
- Results include the impact of the Wireless IoT business acquired from Broadcom on July 5, 2016

SAN JOSE, Calif., Oct. 27, 2016 /PRNewswire/ -- Cypress Semiconductor Corporation (NASDAQ: CY) today announced its third quarter 2016 results.

"Cypress continued its strong execution, with third quarter non-GAAP revenue and EPS at the high end of our guidance range," said Hassane El-Khoury, President and Chief Executive Officer at Cypress. "Our gross margin improvement plan remains on track as we continue to focus on efficiency and execution.

"We are moving quickly to streamline the Company to sharpen our focus on high-growth segments in the automotive, industrial and IoT markets," El-Khoury said. "As we projected last quarter, more than half of our Q3 revenue came from markets growing faster than the overall semiconductor industry. Automotive revenue accounted for 32% of our overall revenue in the quarter and increased 25% year-on-year. We have also integrated the wireless IoT business acquired from Broadcom and are seeing strong customer demand for our solutions in that space."

Revenue and earnings for the quarter are given below, compared with those of the prior quarter:

(In thousands, except per-share data)



GAAP


NON-GAAP1



Q3 2016


Q2 2016


Q3 2016


Q2 2016

Revenue


$

523,845


$

450,127


$

530,095


$

456,377

Margin


37.9%


35.3%


40.5%


37.8%

Pretax profit margin


2.4%


(116.6%)


10.7%


9.4%

Net income (loss)


$

9,411


$

(519,274)


$

53,467


$

40,196

Diluted EPS (loss)


$

0.03


$

(1.65)


$

0.15


$

0.12

  1. See "Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures," tables included below.

BUSINESS REVIEW

+ GAAP and non-GAAP consolidated margins for the third quarter of 2016 were 37.9% and 40.5%, respectively. Margins were up from the second quarter of 2016 due to higher revenue, product mix and the Company's margin-enhancing initiatives. Excluding the Emerging Technologies Division (ETD), the core semiconductor non-GAAP margin was 40.6%, up from 38.1% in the second quarter. Fab utilization increased to 56% in the third quarter and is expected to increase through the fourth quarter of 2016 as production levels ramp to meet customer demand.  

+ Inventory at the end of the third quarter was $247.7 million, up 12% from the second quarter of 2016, due to inventory from the Broadcom Wireless IoT acquisition and an increase in MCU inventory to support end-customer demand. The Company's lean inventory initiative has resulted in a net inventory reduction of $160 million, or 41%, since the closing of the Spansion merger.

+ Third quarter results include the impact of the Wireless IoT business from the close of the acquisition on July 5, 2016. The business is operationally integrated and contributed $62.6 million in revenue, above the high end of guidance.

+ Cypress announced that its Board of Directors approved a quarterly cash dividend of $0.11 per share, payable to holders of record of the Company's common stock as of the close of business on September 29, 2016. This dividend was paid on October 20, 2016.


REVENUE SUMMARY

(In thousands, except percentages)

(Unaudited)



Three Months Ended


Three Months Ended


(GAAP)3


(Non-GAAP)5


October 2, 2016


July 3, 2016


Sequential Change


October 2, 2016


July 3, 2016


Sequential Change

Business Unit











PSD1

$

182,309


$

166,813


8%


$

182,309


$

166,813


9%

MPD1,3

233,398


238,130


(2%)


239,648


244,380


(2%)

DCD1

88,745


25,474


248%


88,745


25,474


248%

ETD2

19,393


19,710


(2%)


19,393


19,710


(2%)

Total

$

523,845


$

450,127


16%


$

530,095


$

456,377


16%












Geographic 4











China & ROW3

56%


52%


8%


55%


52%


6%

Americas

11%


12%


(8%)


12%


13%


(8%)

Europe

12%


15%


(20%)


12%


15%


(20%)

Japan

21%


21%


0%


21%


20%


5%

Total

100%


100%


0%


100%


100%


0%











Channel










Distribution3

74%


73%


1%


73%


72%


1%

Direct

26%


27%


(4%)


27%


28%


(4%)

Total

100%


100%


0%


100%


100%


0%

  1. The Programmable Systems Division (PSD), Data Communications Division (DCD) and Memory Products Division (MPD), in aggregate, comprise the Company's core semiconductor business. For the period ended October 2, 2016, DCD includes results from the IoT business acquired from Broadcom on July 5, 2016.
  2. The Emerging Technologies Division (ETD) includes businesses outside the Company's core semiconductor business named in Footnote 1. ETD includes subsidiaries AgigA Tech Inc., Deca Technologies Inc. (Deca), and the Foundry Business Unit.  Effective July 29, 2016, the Company has discontinued consolidation of Deca as a consequence of an investment made by certain third party investors in Deca.
  3. GAAP revenue for the second and third quarters of 2016 excludes $6.25 million of non-GAAP licensing revenue in MPD, China and ROW region and direct channel.
  4. Prior quarter geographic numbers have been revised to conform to current period presentation.
  5. See "Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures," below.

FOURTH QUARTER 2016 FINANCIAL OUTLOOK

For the fourth quarter of 2016, Cypress estimates financial results as follows:






GAAP

Non-GAAP

Revenue

$510 million to $540 million

Margin %

38% + / - 50 bps

40% + / - 50 bps

Diluted EPS

$(0.25) to $(0.20)

$0.12 to $0.16

A reconciliation of GAAP forward-looking estimates to non-GAAP forward-looking estimates may be found in the tables at the end of this earnings report.

The timing and amount of certain material items, including restructuring charges, asset impairments, changes in value of deferred compensation assets and liabilities, impact of stock-based compensation from modification of equity awards, and the tax impact of non-GAAP adjustments, which are needed to estimate GAAP financial measures are either inherently unpredictable or outside the control of the Company, and may have a significant impact on the Company's financial results. Accordingly, Cypress cannot provide a full quantitative reconciliation for such non-GAAP financial measures included as part of the fourth quarter 2016 financial outlook to the most directly comparable GAAP measure without unreasonable effort and additional adjustments may be reflected in our non-GAAP results for the fourth quarter of 2016. Cypress has qualitatively described below, under the section "Non-GAAP Financial Measures," the anticipated differences between the non-GAAP financial measures and the most directly comparable GAAP measures.

CONFERENCE CALL AND WEBCAST INFORMATION

Cypress will host its quarterly conference call on October 27, 2016 at 1:30 p.m. Pacific Time to discuss its third quarter 2016 results and provide an outlook for the fourth quarter of 2016.

All interested parties may dial 517-623-4671 and provide the passcode "Cypress" to listen to the call. The event will be broadcast over the Internet and may be accessed through Cypress's website at www.cypress.com/investors. The archived presentation will be available for two weeks immediately following the event.

FOLLOW CYPRESS ONLINE

Join the Cypress Developer Community, read our Core & Code blog, follow us on Twitter, Facebook and LinkedIn, and watch Cypress videos on our Video Library or YouTube.

ABOUT CYPRESS

Founded in 1982, Cypress is a leader in advanced embedded system solutions for the world's most innovative automotive, industrial, home automation and appliances, consumer electronics and medical products. Cypress's programmable systems-on-chip, general-purpose microcontrollers, analog ICs, wireless and USB-based connectivity solutions and reliable, high-performance memories help engineers design differentiated products and get them to market first. Cypress is committed to providing customers with support and engineering resources that enable innovators and out-of-the-box thinkers to disrupt markets and create new product categories. To learn more, go to www.cypress.com.

NON-GAAP FINANCIAL MEASURES

To supplement its condensed consolidated unaudited financial results presented in accordance with GAAP, Cypress uses non-GAAP financial measures listed below, which are adjusted from the most directly comparable GAAP financial measures to exclude certain items, as described in detail below.

  • Revenue;
  • Margin;
  • Margin %;
  • Research and development expenses;
  • Selling, general and administrative expenses;
  • Provision (benefit) for income taxes;
  • Pretax profit margin %;
  • Operating income (loss);
  • Net income (loss); and
  • Diluted earnings (loss) per share.

Management believes that these non-GAAP financial measures reflect an additional and useful way of viewing aspects of the Company's operations which, when viewed in conjunction with Cypress's GAAP results, provide a more comprehensive understanding of the various factors and trends affecting the Company's business and operations.

The Company presents non-GAAP financial measures because management uses these measures to analyze and assess the Company's financial results and to manage the business.

There are limitations in using non-GAAP financial measures including those discussed below. Moreover, the Company's non-GAAP measures may be calculated differently than the non-GAAP financial measures used by other companies. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP financial measures. The non-GAAP financial measures supplement and should be viewed in conjunction with GAAP financial measures.

As presented in the "Non-GAAP Results" tables in this press release, each of the non-GAAP financial measures excludes one or more of the following items:

Acquisition-related charges: Acquisition-related charges are not factored into management's evaluation of potential acquisitions or Cypress's performance after the completion of acquisitions, because they are not related to the Company's core operating performance. However, a limitation of non-GAAP measures that exclude acquisition-related charges is that these charges may represent payments that reduce the cash available to the Company for other purposes.  Acquisition-related expenses primarily include:

  • Amortization of purchased intangibles, including purchased technology, patents, customer relationships, trademarks, backlog and non-compete agreements;
  • Amortization of step-up in value of inventory recorded as part of purchase price accounting; and
  • One-time charges associated with the completion of an acquisition including items such as contract termination costs, severance and other acquisition-related restructuring costs; costs incurred in connection with integration activities, and legal and accounting costs.

Share-based compensation expense: Share-based compensation expense relates primarily to employee stock options, restricted stock units, performance stock units and the employee stock purchase plan. Share-based compensation expense is a non-cash expense that is affected by changes in market factors including the price of Cypress's common shares, which are not within the control of management. In addition, the valuation of share-based compensation is subjective, and the expense recognized by Cypress may be significantly different than the expense recognized by other companies for similar equity awards, which makes it difficult to assess Cypress's results compared to its competitors. Accordingly, management excludes this item from its internal operating forecasts and models. However, a limitation of non-GAAP measures that exclude share-based compensation expense is that they do not reflect the full costs of compensating employees.

Other adjustments: These items are excluded from non-GAAP financial measures because they are not related to the core operating activities and ongoing operating performance of Cypress. Excluding these items, which can vary significantly from quarter to quarter, allows management to better compare Cypress's period-over-period performance. However, limitations of non-GAAP measures that exclude these items include that these adjustments are often subjective and may not be comparable to similarly titled non-GAAP financial measures used by other companies. Other adjustments primarily include:

  • Revenue from an intellectual property license,
  • Changes in value of deferred compensation plan assets and liabilities,
  • Investment-related gains or losses, including equity method investments,
  • Restructuring and related costs,
  • Debt issuance costs, including imputed interest related to the equity component of convertible debt,
  • Asset impairments,
  • Tax effects of non-GAAP adjustments,
  • Certain other expenses and benefits, and
  • Diluted weighted average shares non-GAAP adjustment - for purposes of calculating non-GAAP diluted earnings per share, the GAAP diluted weighted average shares outstanding is adjusted to exclude the benefits related to share-based compensation expense.

FORWARD-LOOKING STATEMENTS

Statements herein that are not historical facts and that refer to Cypress or its subsidiaries' plans and expectations for the future are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. We may use words such as "may," "will," "should," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," "future," "continue" or other wording indicating future results or expectations to identify such forward-looking statements that include, but are not limited to: statements related to our estimated non-GAAP revenue, non-GAAP margin, non-GAAP operating expenses, non-GAAP EPS, net interest expense, tax expense, capital expenditures and depreciation for the fourth quarter of fiscal 2016; the expected benefits of our acquisition of Broadcom's wireless IoT business, including revenue growth and margin improvement; sources of revenue for the fourth quarter; the expected impact of our lean inventory initiative on fab utilization, inventory levels, cash flow, pricing and profitability; estimates of certain GAAP to non-GAAP reconciling items for the fourth quarter; the demand environment for semiconductors; the expected impact of our margin improvement plan; the impact of seasonality on revenue; the CEO transition; cross-selling opportunities in the automotive business; our ability to meet our targeted range of inventory; the expected synergies related to our merger with Spansion; expected uses of cash flow, including to pay dividends; and plans to reduce excess inventory. Such statements reflect our current expectations, which are based on information and data available to our management as of the date of this press release. Our actual results may differ materially due to a variety of risks and uncertainties, including, but not limited to:  global economic and market conditions; business conditions and growth trends in the semiconductor market; our ability to compete effectively; the volatility in supply and demand conditions for our products, including but not limited to the impact of seasonality on supply and demand; our ability to develop, introduce and sell new products and technologies; potential problems relating to our manufacturing activities; the impact of acquisitions, including but not limited to the continuing integration of Spansion and the recent acquisition of Broadcom's wireless IoT business; our ability to attract and retain key personnel; and other risks and uncertainties described in the "Risk Factors" section in our most recent Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission. We assume no responsibility to update any such forward-looking statements.

Cypress and the Cypress logo are registered trademarks of Cypress Semiconductor Corporation.

 


CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)




October 2, 2016


January 3, 2016






ASSETS





Cash, cash equivalents and short-term investments


$

87,646



$

227,561


Accounts receivable, net


349,837



292,736


Inventories


247,735



243,595


Property, plant and equipment, net


332,208



425,003


Goodwill and other intangible assets, net


2,395,558



2,528,077


Other assets


476,840



287,289


Total assets


$

3,889,824



$

4,004,261


LIABILITIES AND EQUITY





Accounts payable


$

228,851



$

143,383


Deferred margin and allowance on sales to distributors


14,888



73,370


Income tax liabilities


51,520



54,999


Other liabilities


428,843



346,165


Revolving credit facility and long-term debt


1,192,299



673,659


Total liabilities


1,916,401



1,291,576


Total Cypress stockholders' equity


1,972,547



2,720,848


Non-controlling interest


876



(8,163)


Total equity


1,973,423



2,712,685


Total liabilities and equity


$

3,889,824



$

4,004,261


 


CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

ON A GAAP BASIS

(In thousands, except per-share data)

(Unaudited)




Three Months Ended



October 2, 2016


July 3, 2016

Revenues


$

523,845



$

450,127


Costs and expenses:





Cost of revenues


325,225



291,349


Research and development


95,411



70,171


Selling, general and administrative


92,179



82,490


Amortization of intangible assets


54,849



32,605


Impairment related to assets held for sale


35,259




(Gain) related to investment in Deca Technologies


(112,774)




Goodwill impairment charge




488,504


Total costs and expenses


490,149



965,119


Operating income (loss)


33,696



(514,992)


Interest and other expense, net


(16,924)



(7,316)


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


16,772



(522,308)


Income tax (provision) benefit


(3,304)



5,221


Equity in net loss of equity method investees


(4,233)



(2,568)


Net income (loss)


9,235



(519,655)


Net loss attributable to non-controlling interests


176



381


Net income (loss) attributable to Cypress


$

9,411



$

(519,274)


Net income (loss) per share attributable to Cypress:





Basic


$

0.03



$

(1.65)


Diluted


$

0.03



$

(1.65)


Cash dividend declared per share


$

0.11



$

0.11


Shares used in net income (loss) per share calculation:





Basic


321,276



314,305


Diluted


343,718



314,305


 



CYPRESS SEMICONDUCTOR CORPORATION

RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES (a)

(In thousands, except per-share data)

(Unaudited)


Table A: Revenue







Q3'16


Q2'16






GAAP revenue


$

523,845



$

450,127


Add: Revenue from Intellectual Property License


6,250



6,250


Non-GAAP revenue


$

530,095



$

456,377


 


Table B: GAAP to Non-GAAP reconciling items (Q3 2016)













Cost of
revenues


Research
and
development


SG&A


Amortization
of Intangible
assets


Impairment
related to
assets held
for sale


(Gain) related
to investment
in Deca
Technologies


Interest and
other
expense, net


Income tax
provision

GAAP [i]


$

325,225



$

95,411



$

92,179



$

54,849



$

35,259



$

(112,774)



$

21,157



$

(3,304)


[1] Stock based compensation, including costs related to modification of equity awards


4,852



12,581



9,880










[2] Changes in value of deferred compensation plan


113



365



785







(1,207)




[3] Merger, integration and related costs


192



1,937



10,390










[4] Inventory Step-up related to acquisition accounting


4,742














[5] Losses from equity method investments












4,233




[6] Imputed interest on convertible debt, equity component amortization on convertible debt and others












2,926




[7] Amortization of debt issuance costs












950




[8] Amortization of  Intangible assets








54,849








[9] (Gain) related to investment in Deca Technologies











(112,774)





[10] Impairment related to assets held for sale










35,259






[11] Restructuring costs, including executive severance






7,970










[12] Tax impact of Non-GAAP adjustments






(179)







(55)



(4)


Non - GAAP [ii]


$

315,326



$

80,528



$

63,333



$



$



$



$

14,310



$

(3,308)


Impact of reconciling items [ii - i]


$

(9,899)



$

(14,883)



$

(28,846)



$

(54,849)



$

(35,259)



$

112,774



$

(6,847)



$

(4)


 


Table C: GAAP to Non-GAAP reconciling items (Q2 2016)











Cost of
revenues


Research
and
development


SG&A


Amortization
of Intangible
assets


Goodwill
impairment
charge


Interest
and other
expense,
net


Income
tax benefit
(provision)

GAAP [i]


$

291,349



$

70,171



$

82,490



$

32,605



$

488,504



$

9,884



$

5,221


[1] Stock based compensation, including costs related to modification of equity awards


4,278



5,329



9,242










[2] Changes in value of deferred compensation plan


86



242



530







(604)




[3] Merger, integration and related costs


1,429



19



8,514










[4] Inventory Step-up related to acquisition accounting


1,720














[5] Losses from equity method investments












2,568




[6] Imputed interest on convertible debt and other












1,919




[7] Amortization of Intangible assets








32,605








[8] Restructuring costs, including CEO severance






5,153










[9] Goodwill impairment charge










488,504






[10] Tax impact of Non-GAAP adjustments






380







(292)



(8,402)


Non-GAAP [ii]


$

283,836



$

64,581



$

58,671



$



$



$

6,293



$

(3,181)


Impact of reconciling items [ii - i]


$

(7,513)



$

(5,590)



$

(23,819)



$

(32,605)



$

(488,504)



$

(3,591)



$

(8,402)


 


Table D: Operating income (loss)







Q3'16


Q2'16

GAAP operating income (loss) [i]


$

33,696



$

(514,992)


Impact of reconciling items on Revenue (see Table A)


6,250



6,250


Impact of reconciling items on Cost of revenues (see Table B, C)


9,899



7,513


Impact of reconciling items on R&D (see Table B, C)


14,883



5,590


Impact of reconciling items on SG&A (see Table B, C)


28,846



23,819


Impact of Amortization of Intangible Assets (see Table B,C)


54,849



32,605


Impact of Goodwill impairment charge (see Table C)




488,504


Impact of Impairment related to assets held for sale (see Table B)


35,259




(Gain) related to investment in Deca Technologies (see Table B)


$

(112,774)




Non-GAAP operating income [ii]


$

70,908



$

49,289


Impact of reconciling items [ii - i]


37,212



564,281


 


Table E: Pre-tax profit







Q3'16


Q2'16

GAAP Pre-tax profit


$

12,539



$

(524,876)


Impact of reconciling items on Operating income (see Table D)


37,212



564,281


Interest and other expense, net (see Table B,C)


6,847



3,591


Non-GAAP Pre-tax  income


$

56,598



$

42,996


 


Table F: Net income (loss)







Q3'16


Q2'16

GAAP Net income (loss)


$

9,411



$

(519,274)


Impact of reconciling items on Operating income (see Table D)


37,212



564,281


Interest and other expense, net (see Table B,C)


6,847



3,591


Income tax provision (see Table B,C)


(4)



(8,402)


Non-GAAP Net income


$

53,467



$

40,196


 


Table G: Margin %











Q3'16


Q2'16



GAAP


Non-GAAP


GAAP


Non-GAAP

Revenue (See Table A) [i]


$

523,845



$

530,095



$

450,127



$

456,377


Cost of revenues (See Table B, C) [ii]


325,225



315,326



291,349



283,836


Margin [iii] [ii - i]


$

198,620



$

214,769



$

158,778



$

172,541


Margin % [iii / i]


37.9%



40.5%



35.3%



37.8%


 


Table H: Pretax profit margin %











Q3'16


Q2'16



GAAP


Non-GAAP


GAAP


Non-GAAP

Revenue (See Table A) [i]


$

523,845



$

530,095



$

450,127



$

456,377


Pre-tax profit (see Table E)  [ii]


$

12,539



$

56,598



$

(524,876)



$

42,996


Pre-tax profit margin % [ii / i]


2.4%



10.7%



(116.6)%



9.4%


 


Table I: Weighted-average shares, diluted











Q3'16


Q2'16



GAAP


Non-GAAP


GAAP


Non-GAAP

Weighted-average common shares outstanding, basic


321,276



321,276



314,305



314,305


Effect of dilutive securities:









Stock options, unvested restricted stock and other


7,017



14,008





12,858


Impact of convertible bond


15,425



15,425





12,577


Weighted-average common shares outstanding, diluted


343,718



350,709



314,305



339,740


 

Table J: Net income (loss) Per Share











Q3'16


Q2'16



GAAP


Non-GAAP


GAAP


Non-GAAP

Net income (loss) (see Table F)


$

9,411



$

53,467



$

(519,274)



$

40,196


Add: Interest expense on convertible bond


1,640



746





742


Net income for earnings per share - Diluted [i]


$

11,051



$

54,213



(519,274)



$

40,938


Weighted-average common shares outstanding (see Table I) [ii]


343,718



350,709



314,305



339,740


Non-GAAP earnings per share - Diluted [i/ii]


$

0.03



$

0.15



$

(1.65)



$

0.12


 


CYPRESS SEMICONDUCTOR CORPORATION

SUPPLEMENTAL FINANCIAL DATA

(In thousands)

(Unaudited)




Three Months Ended



October 2, 2016


July 3, 2016

Selected Cash Flow Data (Preliminary):





Net cash provided by (used in) operating activities


$

105,130



$

8,774


Net cash provided by (used in) investing activities


$

(560,248)



$

(15,287)


Net cash provided by (used in) financing activities


$

353,441



$

108,755


Other Supplemental Data (Preliminary):





Capital expenditures


$

19,695



$

12,787


Depreciation


$

19,454



$

19,558


Payment of dividend


$

35,240



$

34,270


Dividend paid per share


$

0.11



$

0.11


 


CYPRESS SEMICONDUCTOR CORPORATION

RECONCILIATION OF GAAP FORWARDING LOOKING ESTIMATES TO NON-GAAP FORWARD LOOKING ESTIMATES











Forward looking
GAAP estimate
(A)


Adjustments (B)


Forward looking
Non-GAAP
estimate
(C)=(A)+(B)





Amortization of
intangibles


Share-based
compensation
expense


Restructuring


Other
items



Margin %


 38% + / - 50 bps


%


0.9

%


%


0.60

%


 40% + / - 50 bps

Diluted earnings per share


 $(0.25) to $(0.20)


$

0.15



$

0.08



$

0.11



$

0.03



 $0.12 to $0.16






















 

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SOURCE Cypress Semiconductor Corporation

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