Cypress Semiconductor Corporation
CYPRESS SEMICONDUCTOR CORP /DE/ (Form: 10-Q, Received: 11/04/2011 17:30:01)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2011

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   x     No   ¨

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

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The total number of outstanding shares of the registrant’s common stock as of October 31, 2011 was 154,866,444.

 

 

 


Table of Contents

INDEX

 

     Page  
PART I—FINANCIAL INFORMATION   

Forward-Looking Statements

     3   

Item 1.

  

Financial Statements

     4   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     31   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     41   

Item 4.

  

Controls and Procedures

     43   
PART II—OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     44   

Item 1A.

  

Risk Factors

     44   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     44   

Item 3.

  

Defaults Upon Senior Securities

     44   

Item 4.

  

Submission of matters to a vote of security holders

     45   

Item 5.

  

Other Information

     45   

Item 6.

  

Exhibits

     46   
  

Signatures

     47   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

Forward-Looking Statements

The discussion in this Quarterly Report on Form 10-Q contains statements that are not historical in nature, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, including, but not limited to, statements related to our manufacturing strategy; the number and impact of future personnel terminations and the expenses related thereto; our expectations, including the timing and savings, related to our restructuring activities which includes the sale of our restructured assets, including the Texas property; our expectations regarding our active litigation matters and our intent to defend ourselves in those matters; our foreign currency exposure and the impact exchange rates could have on our operating margins, the adequacy of our cash and working capital positions; our expected return on our yield-enhancement program and the risks related to such an investment, our intended use of our line of credit; the value and liquidity of our investments, including auction rate securities and our other debt investments, our ability to recognize certain unrecognized tax benefits within the next twelve months as well as the resolution of agreements with various foreign tax authorities, our expectations regarding our outstanding warranty liability, the volatility of our stock price, the impact of new accounting standards on our financial statements and the impact of the credit crisis on consumers. We use words such as “plan,” “anticipate,” “believe,” “expect,” “future,” “intend” and similar expressions to identify forward-looking statements. Such forward-looking statements are made as of the date hereof and are based on our current expectations, beliefs and intentions regarding future events or our financial performance and the information available to management as of the date hereof. Except as required by law, we assume no responsibility to update any such forward-looking statements. Our actual results could differ materially from those expected, discussed or projected in the forward-looking statements contained in this Quarterly Report on Form 10-Q for any number of reasons, including, but not limited to, the state and future of the general economy and its impact on the markets we serve and our investments; the current credit conditions; our ability to expand our customer base, our ability to transform our business with a leading portfolio of programmable products; the number and nature of our competitors; the changing environment and/or cycles of the semiconductor industry; foreign currency exchange rates; our ability to efficiently manage our manufacturing facilities and achieve our cost goals emanating from our flexible manufacturing strategy; our ability to achieve our goals related to our restructuring activities; our success in our pending litigation matters, our ability to manage our investments and interest rate and exchange rate exposure; our ability to achieve liquidity in our investments and/or the materialization of one or more of the risks set forth above or in Item 1A ( Risk Factors ) in this Quarterly Report on Form 10-Q.

 

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Table of Contents

ITEM 1.    FINANCIAL STATEMENTS

CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     October 2,
2011
(unaudited)
    January 2,
2011
 
    

(In thousands, except

per-share amounts)

 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 64,260      $ 263,183   

Short-term investments

     70,743        171,078   

Accounts receivable, net

     133,924        117,726   

Inventories

     111,601        101,763   

Other current assets

     53,341        41,908   
  

 

 

   

 

 

 

Total current assets

     433,869        695,658   

Property, plant and equipment, net

     296,268        260,122   

Goodwill

     31,836        31,836   

Intangible assets, net

     9,397        12,499   

Other long-term assets

     80,116        72,686   
  

 

 

   

 

 

 

Total assets

   $ 851,486      $ 1,072,801   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 80,826      $ 59,817   

Accrued compensation and employee benefits

     51,913        43,292   

Deferred revenues less cost of revenues

     169,063        131,757   

Income taxes payable

     11,020        11,631   

Dividend payable

     13,810        —     

Other current liabilities

     60,615        65,792   
  

 

 

   

 

 

 

Total current liabilities

     387,247        312,289   

Deferred income taxes and other tax liabilities

     41,809        53,830   

Other long-term liabilities

     18,302        3,789   
  

 

 

   

 

 

 

Total liabilities

     447,358        369,908   
  

 

 

   

 

 

 

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; 275,934 and 259,394 shares issued; 155,268 and 170,753 shares outstanding at October 2, 2011 and January 2, 2011, respectively

     2,759        2,594   

Additional paid-in-capital

     2,554,306        2,401,996   

Accumulated other comprehensive loss

     (2,069     (3,203

Accumulated deficit

     (357,824     (494,002
  

 

 

   

 

 

 
     2,197,172        1,907,385   

Less: shares of common stock held in treasury, at cost; 120,666 and 88,641 shares at October 2, 2011 and January 2, 2011, respectively

     (1,790,898     (1,202,949
  

 

 

   

 

 

 

Total Cypress stockholders’ equity

     406,274        704,436   

Noncontrolling interest

     (2,146     (1,543
  

 

 

   

 

 

 

Total equity

     404,128        702,893   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 851,486      $ 1,072,801   
  

 

 

   

 

 

 

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

 

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CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     October 2,
2011
    October 3,
2010
    October 2,
2011
    October 3,
2010
 
     (In thousands, except per-share amounts)  

Revenues

   $ 264,743      $ 231,923      $ 752,832      $ 657,218   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Cost of revenues

     115,789        97,241        336,081        291,103   

Research and development

     46,266        45,753        143,409        128,908   

Selling, general and administrative

     55,453        54,384        172,587        159,812   

Amortization of acquisition-related intangibles

     731        717        2,160        2,215   

Restructuring costs

     871        3,103        5,404        3,257   

Gain on divestiture

     —          —          (34,291     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses, net

     219,110        201,198        625,350        585,295   

Operating income

     45,633        30,725        127,482        71,923   

Interest and other (expense) income, net

     (1,595     5,357        (330     4,922   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     44,038        36,082        127,152        76,845   

Income tax (benefit) provision

     4,057        1,709        (9,026     10,156   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income, net of taxes

     39,981        34,373        136,178        66,689   

Noncontrolling interest, net of taxes

     (238     (145     (602     (491
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     39,743        34,228        135,576        66,198   

Add: net income attributable to noncontrolling interest

     238        145        602        491   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Cypress

   $ 39,981      $ 34,373      $ 136,178      $ 66,689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to Cypress:

        

Basic

   $ 0.24      $ 0.22      $ 0.81      $ 0.42   

Diluted

   $ 0.22      $ 0.18      $ 0.71      $ 0.35   

Cash dividends declared per share

   $ 0.09      $ —        $ 0.18      $ —     

Shares used in net income per share calculation:

        

Basic

     163,867        158,901        167,979        159,527   

Diluted

     183,282        186,718        191,834        189,317   

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

 

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CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended  
     October 2,
2011
    October 3,
2010
 
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 135,576      $ 66,198   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     42,361        38,966   

Stock-based compensation expense

     75,412        69,863   

Contribution of asset

     4,000        —     

Gain on divestiture

     (34,291     —     

Restructuring charges

     5,404        5,649   

Loss (gain) on sale or retirement of property and equipment, net

     1,396        (1,535

Loss on write-down of building

     1,982        —     

Gain (loss) on sale of investments, net

     74        (3,906

Deferred income taxes and other tax liabilities

     (13,313     6,657   

Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:

    

Accounts receivable

     (16,198     (73,340

Inventories

     (14,285     1,546   

Other assets

     (17,424     (4,823

Accounts payable and other accrued liabilities

     10,327        27,879   

Deferred revenues less cost of revenues

     37,306        60,405   
  

 

 

   

 

 

 

Net cash provided by operating activities

     218,327        193,559   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of available-for-sale investments

     (91,877     (50,977

Proceeds from sales or maturities of available-for-sale investments

     197,510        27,028   

Net contributions (distributions) of deferred compensation plan

     2,244        764   

Acquisition of property and equipment

     (71,798     (37,120

Proceeds from sales of property and equipment

     1,176        2,990   

Proceeds from sale of equity investment

     —          4,680   

Proceeds from divestiture

     34,025        —     

Cash paid for other investments

     (3,911     (2,000
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     67,369        (54,635
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repurchase of common shares

     (363,995     —     

Payment of dividend

     (15,262     —     

Proceeds from financing equipment

     11,686        —     

Withholding of common shares for tax obligations on vested restricted shares

     (43,319     (10,932

Proceeds from issuance of common shares under employee stock plans

     56,980        51,892   

Yield enhancement structured agreements settled in cash, net

     49,927        5,054   

Yield enhancement structured agreements settled in stock

     (180,636     (114,916
  

 

 

   

 

 

 

Net cash used in financing activities

     (484,619     (68,902
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (198,923     70,022   

Cash and cash equivalents, beginning of period

     263,183        243,558   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 64,260      $ 313,580   
  

 

 

   

 

 

 

Non Cash investing and financing activities:

    

Additions to property, plant and equipment under capital lease arrangement (in thousands)

   $ 2,646        —     

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

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. SUMMARY OF BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

Fiscal Years

Cypress Semiconductor Corporation (“Cypress” or the “Company”) reports on a fiscal-year basis. We end our 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 2011 has 52 weeks and fiscal 2010 had 52 weeks. The third quarter of fiscal 2011 ended on October 2, 2011 and the third quarter of fiscal 2010 ended on October 3, 2010.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to state fairly the financial information included therein. The financial data should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2011. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The condensed consolidated results of operations for the three and nine months ended October 2, 2011 are not necessarily indicative of the results to be expected for the full fiscal year.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update to the guidance on Intangibles—Goodwill and Other—Testing Goodwill for Impairment, to simplify how entities test goodwill for impairment. This guidance allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in the guidance must be performed. The guidance is effective for the Company’s interim and annual periods beginning January 2, 2012, but is eligible for early adoption. We do not expect there will be a significant impact on our consolidated financial statements.

In June 2011, the FASB issued new accounting guidance related to the presentation of comprehensive income that increases comparability between U.S. GAAP and International Financial Reporting Standards (“IFRS”). This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity and instead requires presenting in one continuous statement or two separate but consecutive statements. This guidance is effective for the Company’s interim and annual periods beginning January 2, 2012. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements, as it only requires a change in the format of presentation.

In May 2011, the FASB issued a new standard amending U.S. generally accepted accounting principles (“GAAP”) fair value measurements and disclosures for the purpose of ensuring that fair value measurement and disclosure requirements are the same across both U.S. GAAP and IFRS. The standard contains amendments changing the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, clarifying the application of existing fair value measurement requirements and changing a particular principle for measuring fair value or for disclosing information about fair value measurements. This guidance is effective for the Company’s interim and annual periods beginning January 2, 2012. Additionally, the standard expands certain disclosure requirements, including qualitative disclosures selected to level 3 fair value measurements. Early adoption is not permitted. We do not expect this new standard to significantly impact our consolidated financial statements.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 2. DIVESTITURE

As part of Cypress’s continued efforts to focus on programmable products including our flagship PSoC ® programmable system-on-chip solutions and our TrueTouch™ touch-sensing controllers, we divested our image sensors product families and sold them to ON Semiconductor Corporation (“ON”) on February 27, 2011.

 

Product Families   

Reportable

Segment

     Buyer     

Total

Consideration

 

The image sensors product families

     Memory Products Division         ON Semiconductor       $ 34.0 million   

In connection with the divestiture, we recorded a gain of $34.3 million. We received $14.9 million in cash in March of 2011 and received the remaining $19.1 million in April 2011. The following table summarizes the components of the gain:

 

     Image Sensors  
     (In thousands)  

Cash proceeds

   $ 34,025   
  

 

 

 

Assets sold:

  

Inventories

     (3,617

Prepaid and other assets

     (2,003

Property, plant and equipment

     (1,178

Liabilities disposed of:

  

Accounts payable

     1,508   

Other liabilities

     3,416   

Taxes payable

     1,129   

Customer advances

     1,239   

Transaction and other costs

     (228
  

 

 

 

Gain on divestiture

   $ 34,291   
  

 

 

 

In connection with the divestiture of the image sensor product families, we transferred approximately 80 employees to ON Semiconductor. In addition, we have entered into a transition service agreement (“TSA”) with ON where we will act as an agent and provide certain services related to shipping, manufacturing, planning and general administrative functions including the billing and collection of shipments to ON customers and payments to vendors for manufacturing activities. As a result of the TSA, we may end up with a net payable or receivable to or from ON as we collect receivables and make payments to vendors on behalf of ON. As of October 2, 2011, the TSA resulted in a $0.2 million payable to ON by Cypress and is reflected in “Other current liabilities” in the Condensed Consolidated Balance Sheet. During the third quarter the services that we provided under the TSA ended per the terms of the agreement.

NOTE 3. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The carrying amount of goodwill at October 2, 2011 and January 2, 2011 was $31.8 million. The Consumer and Computation Division (“CCD”) is the only reportable business segment with goodwill.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Intangible Assets

The following tables present details of our intangible assets:

 

As of October 2, 2011

   Gross      Accumulated
Amortization
    Net  
     (In thousands)  

Acquisition-related intangible assets

   $ 95,134       $ (88,050   $ 7,084   

Non-acquisition related intangible assets

     10,148         (7,835     2,313   
  

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 105,282       $ (95,885   $ 9,397   
  

 

 

    

 

 

   

 

 

 

 

As of January 2, 2011

   Gross      Accumulated
Amortization
    Net  
   (In thousands)  

Acquisition-related intangible assets

   $ 100,134       $ (91,490   $ 8,644   

Non-acquisition related intangible assets

     10,548         (6,693     3,855   
  

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 110,682       $ (98,183   $ 12,499   
  

 

 

    

 

 

   

 

 

 

As of October 2, 2011, the estimated future amortization expense of intangible assets was as follows:

 

(In thousands)

      

2011 (remaining three months)

   $ 1,180   

2012

     4,281   

2013

     3,435   

2014

     501   
  

 

 

 

Total future amortization expense

   $ 9,397   
  

 

 

 

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 4. RESTRUCTURING

For the three and nine months ended October 2, 2011, we recorded restructuring charges of $0.9 million and $5.4 million, respectively. For the three and nine months ended October 3, 2010, we recorded restructuring charges of $3.1 million and $3.3 million, respectively. The determination of when we accrue for severance and benefits costs, and which accounting standard applies, depends on whether the termination benefits are provided under a one-time benefit arrangement or under an on-going benefit arrangement.

Fiscal 2011 Restructuring Plan

In fiscal 2011, we initiated a restructuring plan which allows us to continue to allocate and align our resources to the business units that we expect will drive future development and revenue growth (“Fiscal 2011 Restructuring Plan”). Restructuring activities related to personnel costs are summarized as follows:

 

(In thousands)

      

Provision

   $ 4,464   

Cash payments

     (1,277
  

 

 

 

Balance as of July 3, 2011

   $ 3,187   

Provision

     779   

Cash Payments

     (990
  

 

 

 

Balance as of October 2, 2011

   $ 2,976   
  

 

 

 

Restructuring balances under the 2011 Plan related primarily to personnel costs.

Fiscal 2010 Restructuring Plan

In the third quarter of fiscal 2010 we implemented a restructuring plan to exit certain of our back-end manufacturing operations located in the Philippines (“Fiscal 2010 Restructuring Plan”). These actions are intended to reduce the cost of our back-end manufacturing by selling our labor intensive assembly and test operations to lower cost third-party subcontractors in other parts of Asia and by the continued shifting of these operations to our fully automated back-end processes. Restructuring activities related to the Fiscal 2010 Restructuring Plan are summarized as follows:

 

(In thousands)

      

Balance as of January 2, 2011

   $ 2,206   

Provision

     407   

Cash payments

     (214
  

 

 

 

Balance as of April 3, 2011

     2,399   

Cash payments

     (67
  

 

 

 

Balance as of July 3, 2011

   $ 2,332   

Provision

     20   

Cash payments

     (332
  

 

 

 

Balance as of October 2, 2011

   $ 2,020   
  

 

 

 

Under the Fiscal 2010 Restructuring Plan, we recorded restructuring charges of zero and $0.4 million, respectively, for the three and nine months ended October 2, 2011. We recorded a total restructuring charge of $2.1 million in the third quarter of fiscal 2010. As of October 2, 2011, our restructuring reserve of $2.0 million was related to personnel costs associated with severance and benefits of our employees. We expect to eliminate approximately 300 manufacturing employees and 200 contractors or approximately 34% of our Philippines plant workforce by the end of fiscal 2011.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Fiscal 2008/9 Restructuring Plan

In fiscal 2008, we initiated a restructuring plan as part of a company-wide cost saving initiative which continued into 2011 aimed to reduce operating costs in response to the economic downturn (“Fiscal 2008/9 Restructuring Plan”). Restructuring actives related to personnel costs are summarized as follows:

 

(In thousands)

      

Balance as of January 2, 2011

   $ 1,106   

Provision

     322   

Non-cash

     257   

Cash payments

     (373
  

 

 

 

Balance as of April 3, 2011

     1,312   

Provision

     (733

Cash payments

     (415
  

 

 

 

Balance as of July 3, 2011

   $ 164   

Adjustment

     (13

Cash payments

     (151
  

 

 

 

Balance as of October 2, 2011

   $ 0   
  

 

 

 

As a result of the Fiscal 2008/9 Restructuring Plan, we have eliminated approximately 835 positions. In the third quarter of 2011, we have completed the remaining actions we had for this plan.

NOTE 5. ASSETS HELD FOR SALE

Texas Facility

In fiscal 2007 we had implemented a restructuring plan to exit our manufacturing facility located in Round Rock, Texas (“Fiscal 2007 Restructuring Plan”). The Texas facility ceased operations in the fourth quarter of fiscal 2008. The net book value of the remaining restructured assets that were classified as held for sale and included in “Other current assets” in the Condensed Consolidated Balance Sheets was $6.9 million as of October 2, 2011 and January 2, 2011.

We had expected to complete the disposal of the restructured assets by the fourth quarter of fiscal 2009; however, due to the downturn and uncertainty in the commercial real estate market, we were unable to secure a buyer for the Texas facility. In response, during fiscal 2010 we revised the asking price for the property. We expect to sell the facility within the next twelve months; however, there can be no assurance of this and our ability to complete the sale of any restructured assets may be impacted by economic and credit conditions.

We continue to incur expenses related to ongoing maintenance and upkeep of the Texas facility until we complete the sale of the property.

Building

In the second quarter of 2011, we vacated one of our buildings located in San Jose, California and in the third quarter of 2011 we began to market the building for sale or lease. In the third quarter of 2011, we received a letter of intent for sale of the building and the potential buyer is conducting due diligence. Based upon our analysis of other comparable building sales in the area we believe the offer from the buyer approximates the current market value of the building. The current market value of the building is less than the carrying value accordingly; we recorded a charge of $1.9 million to reduce the carrying value of the building to the estimated current market value. This asset is currently classified as held for sale and included in “Other current assets” in the Condensed Consolidated Balance Sheets. We expect to complete the sale of the building within the next twelve months.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 6. BALANCE SHEET COMPONENTS

Accounts Receivable, Net

 

     As of  
     October 2,
2011
    January 2,
2011
 
     (In thousands)  

Accounts receivable, gross

   $ 137,813      $ 121,876   

Allowance for doubtful accounts receivable and sales returns

     (3,889     (4,150
  

 

 

   

 

 

 

Total accounts receivable, net

   $ 133,924      $ 117,726   
  

 

 

   

 

 

 

Inventories

 

     As of  
     October 2,
2011
     January 2,
2011
 
     (In thousands)  

Raw materials

   $ 6,192       $ 7,350   

Work-in-process

     80,317         72,072   

Finished goods

     25,092         22,341   
  

 

 

    

 

 

 

Total inventories

   $ 111,601       $ 101,763   
  

 

 

    

 

 

 

Other Current Assets

 

     As of  
     October 2,
2011
     January 2,
2011
 
     (In thousands)  

Prepaid expenses

   $ 30,372       $ 24,004   

Assets held for sale (See Note 5)

     12,111         6,913   

Other current assets

     10,858         10,991   
  

 

 

    

 

 

 

Total other current assets

   $ 53,341       $ 41,908   
  

 

 

    

 

 

 

Other Long-Term Assets

 

     As of  
     October 2,
2011
     January 2,
2011
 
     (In thousands)  

Employee deferred compensation plan

   $ 29,970       $ 30,458   

Investments:

     

Debt securities

     19,072         23,708   

Equity securities

     6,669         2,804   

Prepaid to Grace (see Note 10)

     8,795         2,460   

Other assets

     15,610         13,256   
  

 

 

    

 

 

 

Total other long-term assets

   $ 80,116       $ 72,686   
  

 

 

    

 

 

 

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Other Current Liabilities

 

     As of  
     October 2,
2011
     January 2,
2011
 
     (In thousands)  

Employee deferred compensation plan

   $ 29,660       $ 29,974   

Restructuring accrual (See Note 4)

     5,216         3,559   

Capital lease – current portion

     2,257         —     

Payable to ON Semiconductor Corporation (see Note 2)

     173         —     

Other current liabilities

     23,309         32,259   
  

 

 

    

 

 

 

Total other current liabilities

   $ 60,615       $ 65,792   
  

 

 

    

 

 

 

Other Long-Term Liabilities

 

     As of  
     October 2,
2011
     January 2,
2011
 
     (In thousands)  

Capital lease – long term portion

   $ 11,910       $ —     

Other long term liabilities

     6,392         3,789   
  

 

 

    

 

 

 
   $ 18,302       $ 3,789   
  

 

 

    

 

 

 

Deferred Income Taxes and Other Tax Liabilities

 

     As of  
     October 2,
2011
     January 2,
2011
 
     (In thousands)  

Deferred income taxes

   $ 216       $ (1,135

Non-current tax liabilities

     41,593         54,965   
  

 

 

    

 

 

 

Total deferred income taxes and other tax liabilities

   $ 41,809       $ 53,830   
  

 

 

    

 

 

 

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 7. FAIR VALUE MEASUREMENTS

Assets/Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis:

 

     As of October 2, 2011  
   Level 1      Level 2      Level 3      Total  
   (In thousands)  

Financial Assets

           

Investments:

           

Commercial paper

   $ —         $ 5,096       $ —         $ 5,096   

Money market funds

     4,730         —           —           4,730   

Corporate notes/bonds

     —           34,054         —           34,054   

Auction rate securities

     —           —           19,072         19,072   

Federal agency

     —           13,518         —           13,518   

U.S. Treasuries

     10,068         —           —           10,068   

Marketable equity securities

     2,669         —           —           2,669   

Employee deferred compensation plan:

           

Cash and cash equivalents

     2,107         —           —           2,107   

Money market

     381         —           —           381   

Mutual funds

     19,753         —           —           19,753   

Fixed income

     2,579         —           —           2,579   

Equity securities

     5,150         —           —           5,150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 47,437       $ 52,668       $ 19,072       $ 119,177   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

           

Employee deferred compensation plan

   $ 29,660       $ —         $ —         $ 29,660   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 29,660       $ —         $ —         $ 29,660   
  

 

 

    

 

 

    

 

 

    

 

 

 
     As of January 2, 2011  
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial Assets

           

Investments:

           

Commercial paper

   $ —         $ 2,399       $ —         $ 2,399   

Money market funds

     105,058         —           —           105,058   

U.S. treasuries

     50,054         —           —           50,054   

Corporate notes/bonds

     —           52,503         —           52,503   

Federal agency

     —           25,958         —           25,958   

Auction rate securities

     —           —           23,708         23,708   

Marketable equity securities

     804         —           —           804   

Employee deferred compensation plan:

           

Cash and cash equivalents

     1,771         —           —           1,771   

Money market

     386         —           —           386   

Mutual funds

     20,579         —           —           20,579   

Fixed income

     3,045         —           —           3,045   

Equity securities

     4,677         —           —           4,677   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 186,374       $ 80,860       $ 23,708       $ 290,942   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

           

Employee deferred compensation plan

   $ 29,974       $ —         $ —         $ 29,974   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 29,974       $ —         $ —         $ 29,974   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Valuation Techniques:

We use quoted prices for identical instruments in active markets to determine the fair value for our Level 1 financial instruments, which include U.S. treasuries, money market funds and marketable equity securities. Our employee deferred compensation plan is classified as Level 1 as the plan invests mutual funds, marketable equity securities and our common stock.

If quoted prices in active markets for identical assets or liabilities are not available to determine the fair value of our financial instruments, then we use observable inputs including benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. These investments are classified as Level 2 and primarily consist of federal agency, commercial paper and corporate notes/bonds. In addition, we have derivative instruments that are classified as Level 2 financial assets. We determine the fair value of these instruments based on modeling techniques that include inputs such as market volatilities, spot rates and interest differentials from published sources.

Our Level 3 financial assets include investments in auction rate securities. The valuation techniques are described as follows:

Auction Rate Securities:

As of October 2, 2011, all of our auction rate securities are classified as Level 3 financial instruments. Auction rate securities are investments with contractual maturities generally between 20 and 30 years and are usually found in the form of municipal bonds, preferred stock, and a pool of student loans or collateralized debt obligations with interest rates resetting every seven to 49 days through an auction process. At the end of each reset period, investors can sell or continue to hold the securities at par. The auction rate securities held by us are backed by student loans originated under the Federal Family Education Loan Program (FFELP), which are guaranteed by the U.S. Federal Department of Education.

As of October 2, 2011, all of our auction rate securities held by us were rated as either AAA, Aaa or A3 by the major independent rating agencies and all of our auction rate securities have experienced failed auctions due to sell orders exceeding buy orders. These failures are not believed to be a credit issue with the underlying investments, but rather caused by a lack of liquidity. Under the contractual terms, the issuer is obligated to pay penalty rates should an auction fail. The funds associated with failed auctions are not expected to be accessible until one of the following occurs: a successful auction occurs, the issuer redeems the issue or a buyer is found outside of the auction process or the underlying securities have matured. Given these circumstances and the lack of liquidity, we have classified our auction rate securities totaling $19.1 million as long-term investments as of October 2, 2011.

Quarterly we perform an analysis to assess the fair value of the auction rate securities. In the absence of a liquid market to value these securities, we prepared a valuation model based on discounted cash flows. The assumptions used at October 2, 2011 were as follows:

 

   

7 years to liquidity

 

   

continued receipt of contractual interest which provides a premium spread for failed auctions; and

 

   

discount rates of 1.78% – 4.04%, which incorporates a spread for both credit and liquidity risk.

Based on these assumptions, we estimated that the auction rate securities would be valued at approximately 91% of their stated par value as of October 2, 2011, representing a decline in value of approximately $1.9 million which was recorded in accumulated other comprehensive loss as an unrealized loss.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table presents a summary of changes in our Level 3 investments measured at fair value on a recurring basis:

 

     Auction Rate
Securities
 
     (in thousands)  

Balance as of January 2, 2011

   $ 23,708   

Unrealized gain recorded in Other comprehensive loss

     664   

Realized loss

     (75

Amount settled at par

     (5,225
  

 

 

 

Balance as of October 2, 2011

   $ 19,072   
  

 

 

 

 

     Level 1      Level 2      Level 3      Total as of
October 2,
2011
 

Non-marketable equity securities (in thousands)

   $ —         $ —         $ 4,000       $ 4,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 8. INVESTMENTS

Cash Equivalents, Available-For-Sale Securities, Equity Securities and other investments

The following tables summarize our cash equivalents, available-for-sale securities, equity securities and other investments:

 

       Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
As of October 2, 2011    (In thousands)  

Cash equivalents:

          

Money market funds

   $ 4,730       $ —         $ —        $ 4,730   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total cash equivalents

     4,730         —           —          4,730   
  

 

 

    

 

 

    

 

 

   

 

 

 

Short-term investments:

          

Certificate of deposit

     8,007         —           —          8,007   

U.S. treasuries

     9,990         78         —          10,068   

Corporate notes/bonds

     34,039         41         (26     34,054   

Federal agency

     13,525         3         (10     13,518   

Commercial paper

     5,096         —           —          5,096   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total short-term investments

     70,657         122         (36     70,743   
  

 

 

    

 

 

    

 

 

   

 

 

 

Long-term investments:

          

Auction rate securities

     21,000         —           (1,928     19,072   

Marketable equity securities

     2,992         —           (323     2,669   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term investments

     23,992         —           (2,251     21,741   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total cash equivalents, available-for-sale securities, equity securities and other investments

   $ 99,379       $ 122       $ (2,287   $ 97,214   
  

 

 

    

 

 

    

 

 

   

 

 

 
       Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
As of January 2, 2011    (In thousands)  

Cash equivalents:

          

Money market funds

   $ 105,058       $ —         $ —        $ 105,058   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total cash equivalents

     105,058         —           —          105,058   
  

 

 

    

 

 

    

 

 

   

 

 

 

Short-term investments:

          

Certificate of deposit

     40,163         —           —          40,163   

U.S. treasuries

     50,053         2         (1     50,054   

Corporate notes/bonds

     52,390         135         (22     52,503   

Federal agency

     25,983         5         (30     25,958   

Commercial paper

     2,400         —           —          2,400   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total short-term investments

     170,989         142         (53     171,078   
  

 

 

    

 

 

    

 

 

   

 

 

 

Long-term investments:

          

Auction rate securities

     26,300         —           (2,592     23,708   

Marketable equity securities

     1,187         —           (383     804   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term investments

     27,487         —           (2,975     24,512   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total cash equivalents, available-for-sale securities, equity securities and other investments

   $ 303,534       $ 142       $ (3,028   $ 300,648   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

17


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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The available-for-sale debt investments that we hold are all high investment grade. The unrealized losses on our investments are due primarily to changes in interest rates and market conditions of the underlying securities. Because we do not intend to sell and it is likely we will not be required to sell before recovering our cost, which may be at maturity, except for the impairment recorded in the respective periods, we did not consider these investments to be other-than-temporarily impaired as of October 2, 2011 and January 2, 2011.

For individual marketable equity securities with unrealized losses, we evaluated the near-term prospects in relation to the severity and duration of the impairment. Based on that evaluation and our ability and intent to hold these investments for a reasonable period of time, we did not consider these investments to be other-than-temporarily impaired as of October 2, 2011 and January 2, 2011.

As of October 2, 2011, contractual maturities of our available-for-sale, non-equity investments were as follows:

 

     Cost      Fair Value  
     (In thousands)  

Maturing within one year

   $ 53,871       $ 53,878   

Maturing in one to three years

     21,516         21,595   

Maturing in more than three years

     21,000         19,072   
  

 

 

    

 

 

 

Total

   $ 96,387       $ 94,545   
  

 

 

    

 

 

 

Realized gains and losses from sales of available-for-sale and non-equity investments were immaterial for all periods presented. Proceeds from sales or maturities of available-for-sale investments were $197.5 million and $27.0 million for the nine months ended October 2, 2011 and October 3, 2010, respectively.

Investments in Equity Securities

The following table summarizes our equity investments:

 

     As of  
     October 2,
2011
     January 2,
2011
 
     (In thousands)  

Long-term investments:

     

Marketable equity securities

   $ 2,669       $ 804   

Non-marketable equity securities

     4,000         2,000   
  

 

 

    

 

 

 

Total investment in equity long-term investments

   $ 6,669       $ 2,804   
  

 

 

    

 

 

 

We did not sell any equity investments during the nine months ended October 2, 2011 and January 2, 2011.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Employee Deferred Compensation Plan

We have a deferred compensation plan, which provides certain key employees, including our executive management, with the ability to defer the receipt of compensation in order to accumulate funds for retirement on a tax-deferred basis. We do not make contributions to the deferred compensation plan or guarantee returns on the investments. Participant deferrals and investment gains and losses remain with us and the assets are subject to claims of general creditors.

Under the deferred compensation plan, the assets are recorded at fair value in each reporting period with the offset being recorded in “Interest and other income (expense), net.” The liabilities are recorded at fair value in each reporting period with the offset being recorded as an operating expense or income. As of October 2, 2011 and January 2, 2011, the fair value of the assets was $30.0 million and $30.5 million, respectively, and the fair value of the liabilities was $29.7 million and $30.0 million, respectively.

All non-cash expense and income recorded under the deferred compensation plan were included in the following line items in the Condensed Consolidated Statements of Operations:

 

     Three Months Ended     Nine Months Ended  
     October 2,
2011
    October 3,
2010
    October 2,
2011
    October 3,
2010
 
     (In thousands)  

Changes in fair value of assets recorded in:

        

Interest and other (expense) income, net

   $ (4,347   $ 2,305      $ (2,867   $ 963   

Changes in fair value of liabilities recorded in:

        

Cost of revenues

     560        (327     358        (174

Research and development expenses

     1,204        (738     638        (380

Selling, general and administrative expenses

   $ 2,464        (1,457     1,544        (814
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income (expense)

   $ (119   $ (217   $ (327   $ (405
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 9. 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  
     October 2,
2011
     October 3,
2010
     October 2,
2011
     October 3,
2010
 
     (In thousands)  

Cost of revenues

   $ 5,002       $ 5,110       $ 18,226       $ 18,333   

Research and development

     5,894         5,332         18,308         15,749   

Selling, general and administrative

     13,939         11,568         38,878         35,781   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 24,835       $ 22,010       $ 75,412       $ 69,863   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

As stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The accounting guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Consolidated cash proceeds from the issuance of shares under the employee stock plans were approximately $57.0 million and $51.9 million for the nine months ended October 2, 2011 and October 3, 2010, respectively. We did not recognize a tax benefit from stock option exercises for the nine months ended October 2, 2011 or October 3, 2010.

As of October 2, 2011 and January 2, 2011, stock-based compensation capitalized in inventories totaled $5.3 million and $6.2 million, respectively.

The following table summarizes the stock-based compensation expense by type of award:

 

     Three Months Ended      Nine Months Ended  
     October 2,
2011
     October 3,
2010
     October 2,
2011
     October 3,
2010
 
     (In thousands)  

Stock options

   $ 2,954       $ 4,368       $ 10,514       $ 15,930   

Restricted stock units and restricted stock awards

     20,888         15,784         60,163         49,981   

ESPP

     993         1,858         4,735         3,952   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 24,835       $ 22,010       $ 75,412       $ 69,863   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the unrecognized stock-based compensation balance by type of award:

 

     As of
October 2,
2011
     Weighted-Average
Amortization
Period
 
     (In thousands)      (In years)  

Stock options

   $ 17,259         1.95   

Restricted stock units and restricted stock awards

     68,510         1.57   

ESPP

     1,123         0.37   
  

 

 

    

Total unrecognized stock-based compensation balance

   $ 86,892         1.63   
  

 

 

    

Valuation Assumptions

We estimated the fair value of the stock options and ESPP using the Black-Scholes valuation model with the following assumptions:

 

     Three Months Ended    Nine Months Ended
     October 2,
2011
   October 3,
2010
   October 2,
2011
   October 3,
2010

Expected life

   0.5 - 7.3 years    0.5 -7.0 years    0.5 - 7.3 years    0.5 -7.0 years

Volatility

   47.7% -51.3%    47.4% -51.2%    37.6% - 51.3%    42.2% -54.5%

Risk-free interest rate

   0.1% -1.5%    0.2% -2.0%    0.1% - 2.9%    0.1% -3.1%

Dividend yield

   2.2%    —      1.7%- 2.2%    —  

The fair value of the restricted stock units and the restricted stock awards was based on our stock price on the date of grant.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Equity Incentive Program

As of October 2, 2011, approximately 26.4 million stock options or 14.0 million restricted stock units and restricted stock awards were available for grant under the Amended and Restated 1994 Stock Plan.

Stock Options:

The following table summarizes our stock option activities:

 

     Shares     Weighted-Average
Exercise  Price
Per Share
 
    

(In thousands, except

per-share amounts)

 

Options outstanding as of January 2, 2011

     36,070      $ 5.51   

Granted

     278      $ 21.50   

Exercised

     (5,128   $ 4.66   

Forfeited or expired

     (540   $ 7.72   
  

 

 

   

Options outstanding as of April 3, 2011

     30,680      $ 5.76   

Granted

     38      $ 20.22   

Exercised

     (3,921   $ 4.09   

Forfeited or expired

     (382   $ 8.85   
  

 

 

   

Options outstanding as of July 3, 2011

     26,415      $ 5.98   

Granted

     52      $ 19.20   

Exercised

     (1,899   $ 4.60   

Forfeited or expired

     (362   $ 9.44   
  

 

 

   

Options outstanding as of October 2, 2011

     24,206      $ 6.07   
  

 

 

   

Options exercisable as of October 2, 2011

     15,977      $ 4.61   
  

 

 

   

Restricted Stock Units and Restricted Stock Awards:

The following table summarizes our restricted stock unit and restricted stock award activities:

 

     Shares     Weighted-Average
Fair  Value

per Share
 
    

(In thousands, except

per-share amounts)

 

Balance as of January 2, 2011

     14,970      $ 4.90   

Granted

     94      $ 21.25   

Vested

     (4,635   $ 21.27   

Forfeited

     (679   $ 8.16   
  

 

 

   

Balance as of April 3, 2011

     9,750      $ 2.95   

Granted

     735      $ 19.25   

Vested

     (486   $ 21.22   

Forfeited

     (699   $ 9.36   
  

 

 

   

Balance as of July 3, 2011

     9,300      $ 8.95   

Granted

     268      $ 18.08   

Vested

     (495   $ 16.21   

Forfeited

     (318   $ 9.72   
  

 

 

   

Balance as of October 2, 2011

     8,755      $ 9.40   
  

 

 

   

 

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(Unaudited)

 

The balance as of October 2, 2011 included approximately 4.4 million performance-based restricted stock units and restricted stock awards granted under the 1994 Amended and Restated Plan. These performance-based awards (“PARS”) were issued to certain senior-level employees in fiscal 2007 and 2011 and can be earned ratably over fiscal 2011, subject to the achievement of certain performance milestones set by the Compensation Committee of the Board of Directors (“Board”). These performance milestones can include:

 

   

stock appreciation target against the Philadelphia Semiconductor Sector Index (“SOXX”);

 

   

certain levels of non-GAAP free cash flows, non-GAAP operating income, non-GAAP operating expense, non-GAAP gross margin percentage, non-GAAP profit-before-taxes percentage; and

 

   

annual revenue growth and revenue growth in certain products.

If the milestones are not achieved, the shares are forfeited and cannot be earned in future periods.

We estimated the fair value of the shares granted with the market-condition milestone using a Monte Carlo valuation model with the following weighted-average assumptions:

 

     Nine
Months Ended
 
     October 2,
2011
    October 3,
2010
 

Volatility of our common stock

     35.7     39.8

Volatility of the SOXX

     25.2     30.3

Correlation coefficient

     0.77        0.77   

Risk-free interest rate

     0.2     0.3

The fair value of the shares with the performance-related milestones was equivalent to the grant-date fair value of our common stock. In addition, we granted other performance-based and service-based restricted stock units whose fair value is typically equivalent to the grant-date fair value of our common stock.

NOTE 10. COMMITMENTS AND CONTINGENCIES

Grace

During the fourth quarter of fiscal 2010 and the first three quarters of fiscal 2011, we advanced $2.5 million and $13.1 million, respectively, in pre-payments to Grace Semiconductor Manufacturing Corporations (“Grace”), a strategic foundry partner, to secure a certain supply of wafers. The pre-payments are expected to be applied to purchases of wafers from Grace over an estimated period of 12 to 18 months but no longer than the next two years. At October 2, 2011, the unapplied pre-payment balance was $8.8 million.

Product Warranties

We generally warrant our products against defects in materials and workmanship for a period of one year and that product warranty is generally limited to a refund of the original purchase price of the product or a replacement part. We estimate our warranty costs based on historical warranty claim experience. Warranty returns are included in the allowance for sales returns. The allowance for sales returns is reviewed quarterly to verify that it properly reflects the remaining obligations based on the anticipated returns over the balance of the obligation period.

The following table presents our warranty activities, including amounts recorded in the allowance for sales returns:

 

     Three Months Ended     Nine Months Ended  
     October 2,
2011
    October 3,
2010
    October 2,
2011
    October 3,
2010
 
     (In thousands)  

Beginning balance

   $ 3,120      $ 4,113      $ 3,347      $ 3,151   

Settlements made

     (1,322     (1,379     (1,977     (4,233

Provisions

     1,286        669        1,714        4,485   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,084      $ 3,403      $ 3,084      $ 3,403   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Capital Lease

On July 19, 2011, we entered into a capital lease agreement which allows us to borrow up to $35.0 million to finance the acquisition of certain manufacturing equipment. We have the option of purchasing the tools from the lessor at specified intervals during the lease term. The master lease contains standard covenants requiring us to insure and maintain the equipment in accordance with the manufacturers’ recommendations and comply with other customary terms to protect the leased assets. In addition, the master lease agreement contains provisions in the event of default. Assets purchased under the capital lease are included in Property, plant and equipment, net as manufacturing equipment and the amortization is included in depreciation. As of October 2, 2011, we have financed $14.3 million under this agreement.

Future minimum payments, by year and in the aggregate, under the capitalized lease consist of the following:

 

Fiscal Year    (In thousands)  

2011

   $ 564   

2012

     2,256   

2013

     2,256   

2014

     2,256   

2015

     2,256   

Thereafter

     5,331   

Total minimum lease payments

     14,919   

Less: amount representing interest

     1,096   
  

 

 

 

Present value of net minimum lease payments

   $ 13,823   
  

 

 

 

Charitable Donation of Building

On April 1, 2011, we sold a building to a charitable organization for $4.0 million in exchange for a promissory note. The promissory note will be paid over the next four years in $1.0 million annual payments and is reflected in our Condensed Consolidated Balance Sheet as “Other current assets” and “Other long-term assets”. In addition, we made a $4.0 million unconditional pledge to the same charitable organization to be paid in four $1.0 million installments over the next four years. This amount is reflected in “Other current liabilities” and “Other non-current liabilities.

Litigation and Asserted Claims

On August 21, 2009, XPoint Technologies Inc. filed a single patent infringement case against us and 29 other defendants in the U.S. District Court in Delaware. The patent at issue covers XPoint’s technology for data transfer between storage devices and network devices without the use of a CPU or memory. On August 4, 2011, we were dismissed from the case with prejudice.

On January 21, 2011, Avago Technologies Inc. filed a patent infringement case against us in the U.S. District Court in Delaware. The three patents at issue cover Avago’s touch technology, including finger navigation. Avago has made no specific demand for relief in this matter. Accordingly, the possible range of losses is unknown at this time. On July 20, 2011, our request for inter partes re-examination of Avago’s U.S. Patent No. 7,189,985 by the U.S. Patent and Trademark Office was accepted. We continue to believe we have meritorious defenses to the allegations set forth in the complaint and will vigorously defend ourselves in this matter.

On March 30, 2011, we filed a five patent infringement case against GSI Technology in the U.S. District Court in Minnesota. The five patents at issue cover GSI’s static random access memory (SRAM) technology, including GSI’s Sigma DDR and SigmaQuad II and III families of memory products. We are seeking damages as well as injunctive relief from the court. On July 23rd, the International Trade Commission (ITC) instituted a formal action to enjoin the importation of GSI products that infringe four of our U.S. patents. The parties are currently engaged in discovery and the hearing is currently scheduled to being in April 2012. On July 22nd, GSI filed a request for re-examination of our U.S. Patent No. 7,142,477 with the U.S. Patent and Trademark Office as well

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

as a civil complaint with the Federal District Court in Northern California. The complaint accuses the QDR Consortium, of which we are a member, of certain anti-competitive activity. Aside from injunctive relief, GSI has made no specific monetary demand in the anti-trust matter. Accordingly, the possible range of monetary loss in the matter, if any is demanded in the future, is unknown at this time. We believe we have meritorious defenses to the allegations set forth in the GSI complaint and will vigorously defend ourselves in this matter.

On July 26, 2011, Commonwealth Research Group, LLC (“CRG”) filed a single patent infringement case naming Cypress and 12 other defendants in the U.S. District Court in Delaware. As a non-practicing entity, CRG does not sell or produce any products or services to the public. The complaint accuses our PSoC5 of infringing CRG’s patent for a “system for conserving energy among electrical components.” CRG is seeking injunctive as well as unspecified monetary damages. However, given that our PSoC5 is not yet commercially available, there are no commercial sales on which to award damages. We are currently investigating the claims asserted in the complaint and intend to vigorously defend ourselves in this matter. CRG has made no specific demand for relief in this matter.

We are currently a party to various other legal proceedings, claims, disputes and litigation arising in the ordinary course of business. Based on our own investigations, we believe the ultimate outcome of our current legal proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operation or cash flows. However, because of the nature and inherent uncertainties of the litigation, should the outcome of these actions be unfavorable, our business, financial condition, results of operations or cash flows could be materially and adversely affected.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 11. DEBT AND EQUITY TRANSACTIONS

Line of Credit

In March 2011, we amended our revolving line of credit with Silicon Valley Bank to extend the maturity of the credit facility to February 28, 2012 and to reduce, at our request, the commitment amount from $25.0 million to $15.0 million. Loans made under the line of credit bear interest based upon the Wall Street Journal Prime Rate (3.25% as of October 2, 2011) or LIBOR plus 2.5% (2.87% as of October 2, 2011). The line of credit agreement includes a variety of standard covenants including restrictions on the incurrence of indebtedness, incurrence of loans, the payment of dividends or distribution on our capital stock, and transfers of assets and financial covenants with respect to an adjusted quick ratio and tangible net worth. As of October 2, 2011, we were in compliance with all of the financial covenants under the line of credit. Our obligations under the line of credit are guaranteed and collateralized by the common stock of certain of our business entities. We intend to use the line of credit on an as-needed basis to fund working capital and capital expenditures. To date, there have been no borrowings under the line of credit.

Stock Repurchase Program

On October 21, 2010, our Board authorized a $600 million stock buyback program which was completed during the third quarter of fiscal 2011. We extinguished this program by repurchasing 32.6 million shares.

On September 20, 2011, our Board authorized a new $400 million stock buyback program. The program allows us to purchase our common stock or enter into equity derivative transactions related to our common stock. The timing and actual amount expended with the new authorized funds will depend on a variety of factors including the market price of our common stock, regulatory, legal, and contractual requirements, cash balances and anticipated uses and other market factors. The program does not obligate us to repurchase any particular amount of common stock and may be modified or suspended at any time at our discretion. As of October 2, 2011, we have used $35.4 million to repurchase 2.4 million shares with $364.6 million remaining under the program available for additional repurchases.

Dividends

Our Board declared our first cash dividend of $0.09 per share payable to holders of record of our common stock at the close of business on June 24, 2011. This dividend was paid on July 21, 2011 and totaled $15.3 million. On August 19, 2011, our Board declared a cash dividend of $0.09 per share payable to holders of record of our common stock at the close of business on October 6, 2011. This dividend was paid on October 20, 2011 and totaled $13.8 million. No dividends were paid in fiscal 2010 or the first two quarters of fiscal 2011.

Yield Enhancement Program

The Audit Committee has approved a yield enhancement strategy intended to improve the yield on our available cash. As part of this program, the Audit Committee authorized us to enter into short-term yield enhanced structured agreements, typically with maturities of 90 days or less, correlated to our stock price. Under the agreements we have entered into to date, we pay a fixed sum of cash upon execution of an agreement in exchange for the financial institution’s obligations to pay either a predetermined amount of cash or shares of our common stock depending on the closing market price of our common stock on the expiration date of the agreement. The shares received upon the maturing of a yield enhancement structure are included in our “shares of common stock held in treasury” in the accompanying Condensed Consolidated Balance Sheet.

The following table summaries the activity and settlements of our yield enhancement program in the first three quarters of fiscal 2011:

 

Period    Aggregate
Price Paid
     Total Proceeds
Received Upon
Maturity
     Total Number of
Shares Received
Upon Maturity
     Average Price Paid
per Share
 
     (In thousands, except per-share amounts)  

Q1 2011

   $ 96,409       $ 46,965         2,500       $ 20.99   

Q2 2011

     169,222         96,833         4,000       $ 18.84   

Q3 2011

     52,803         —           3,000       $ 17.60   
  

 

 

    

 

 

    

 

 

    

Total

   $ 318,434       $ 143,798         9,500      
  

 

 

    

 

 

    

 

 

    

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 12. ACCUMULATED OTHER COMPREHENSIVE INCOME AND COMPREHENSIVE LOSS

The components of accumulated other comprehensive income (loss) were as follows:

 

     As of  
     Oct 2,
2011
    Jan 2,
2011
 
     (In thousands)  

Accumulated net unrealized losses on available-for-sale investments

   $ (2,032   $ (2,698

Other

     (37     (505
  

 

 

   

 

 

 

Total accumulated other comprehensive loss

   $ (2,069   $ (3,203
  

 

 

   

 

 

 

The components of comprehensive income (loss) were as follows:

 

     Three Months Ended     Nine Months Ended  
     October 2,
2011
    October 3,
2010
    October 2,
2011
     October 3,
2010
 
     (In thousands)  

Net income attributable to Cypress

   $ 39,981      $ 34,373      $ 136,178       $ 66,689   

Net unrealized (losses) gains on available-for-sale investments

     (255     (1,045     664         (2,083

Change in prior service cost

     168        204        468         (324
  

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income

   $ 39,894      $ 33,532      $ 137,310       $ 64,282   
  

 

 

   

 

 

   

 

 

    

 

 

 

NOTE 13. FOREIGN CURRENCY DERIVATIVES

We operate and sell products in various global markets and purchase capital equipment using foreign currencies. As a result, we are exposed to risks associated with changes in foreign currency exchange rates primarily focused on the Euro and Yen. We may use various hedge instruments from time to time to manage the exposures associated with purchases of foreign sourced equipment, net asset or liability positions of our subsidiaries and forecasted revenues and expenses. We do not enter into foreign currency derivative financial instruments for speculative or trading purposes. The counterparties to these hedging transactions are creditworthy multinational banks and the risk of counterparty nonperformance associated with these contracts is not considered to be material as of October 2, 2011.

As of October 2, 2011 and January 2, 2011, our hedging instruments consisted primarily of foreign currency forward contracts. We estimate the fair value of our forward contracts based on spot and forward rates from published sources.

We record hedges of certain foreign currency denominated monetary assets and liabilities at fair value at the end of each reporting period with the related gains or losses recorded in “Interest and other income, net” in the Condensed Consolidated Statements of Operations. The gains or losses on these contracts are substantially offset by transaction gains or losses on the underlying balances being hedged. As of October 2, 2011, we had an outstanding forward contract with an aggregate notional value of $0.7 million to hedge the risks associated with foreign currency denominated assets and liabilities. As of January 2, 2011, we had outstanding forward contracts with an aggregate notional value of $0.4 million to hedge the risks associated with foreign currency denominated assets and liabilities.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 14. INCOME TAXES

Our income tax expense was $4.1 million and $1.7 million for the three months ended October 2, 2011 and October 3, 2010, respectively. Our income tax benefit was $9.0 million and tax expense was $10.2 million for the nine months ended October 2, 2011 and October 3, 2010, respectively. The tax provision for the third quarter of fiscal 2011 is primarily attributable to non-U.S. income taxes on income earned in foreign jurisdictions. The tax benefit for the first three quarters of fiscal 2011 was primarily attributable to a release of previously accrued taxes and interest of $19.0 million due to the completion of an income tax examination and expired statutes of limitations in foreign jurisdictions, partially offset by non-U.S. taxes on income earned in foreign jurisdictions. The tax provision for the third quarter of fiscal 2010 and the first three quarters of fiscal 2010 is primarily attributable to non-U.S. income taxes on income earned in foreign jurisdictions.

Unrecognized Tax Benefits

As of October 2, 2011 and January 2, 2011, the amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate totaled $27.8 million and $43.6 million, respectively.

Management believes events that could occur in the next twelve months and cause a material change in our unrecognized tax benefits include, but are not limited to, the following:

 

   

completion of examinations by the foreign taxing authorities; and

 

   

expiration of statutes of limitations on our tax returns.

The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses our tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which we do business. We believe it is possible that within the next twelve months we may recognize approximately $5 to $7 million of our existing unrecognized tax benefits.

Classification of Interest and Penalties

Our policy is to classify interest and penalties, if any, as components of the income tax provision in the Condensed Consolidated Statements of Operations. As of October 2, 2011 and January 2, 2011, accrued interest and penalties totaled $10.6 million and $10.1 million, respectively.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Tax Examinations

The IRS has completed its examination of fiscal years 2006-2008. The examination resulted in no material adjustments to our tax liabilities. In addition, non-U.S. tax authorities have completed their income tax examinations of our subsidiary in India for fiscal years 2002-2006 and our subsidiary in the Philippines for 2007. The proposed adjustments in India have been appealed, and we believe the ultimate outcome of these appeals will not result in a material adjustment to our tax liability. The Philippines examination for 2007 resulted in no material adjustments to our tax liabilities. Income tax examinations of our Philippine subsidiary for the 2008 -2010 fiscal years and our India subsidiary for the 2007 fiscal year are in progress. We believe the ultimate outcome of these examinations will not result in a material adjustment to our tax liability.

NOTE 15. NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share:

 

     Three Months Ended      Nine Months Ended  
     October 2,
2011
     October 3,
2010
     October 2,
2011
     October 3,
2010
 
     (In thousands, except per-share amounts)  

Net income attributable to Cypress

   $ 39,981       $ 34,373       $ 136,178       $ 66,689   

Weighted-average common shares

     163,867         158,901         167,979         159,527   

Weighted-average diluted shares

     183,282         186,718         191,834         189,317   

Net income per share – basic

   $ 0.24       $ 0.22       $ 0.81       $ 0.42   

Net income per share – diluted

   $ 0.22       $ 0.18       $ 0.71       $ 0.35   

Anti-dilutive securities excluded from net income per share- diluted computation

     1,891         2,115         1,634         1,500   

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 16. SEGMENT, GEOGRAPHICAL AND CUSTOMER INFORMATION

Segment Information

The following tables set forth certain information relating to our reportable business segments:

Revenues:

 

     Three Months Ended      Nine Months Ended  
     October 2,
2011
     October 3,
2010
     October 2,
2011
     October 3,
2010
 
     (In thousands)  

Consumer and Computation Division

   $ 142,126       $ 91,877       $ 380,928       $ 242,300   

Data Communications Division

     23,648         28,961         77,351         85,241   

Memory Products Division (1)

     92,515         105,024         271,572         315,775   

Emerging Technologies and Other

     6,454         6,061         22,981         13,902   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 264,743       $ 231,923       $ 752,832       $ 657,218   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Memory Product Division included our image sensors product line that was divested in the first quarter of 2011 which included $7.6 million in the three months ended October 3, 2010 and $7.6 million and $21.8 million for the nine months ended October 2, 2011 and October 3, 2010, respectively.

Income from Continuing Operations before Income Taxes:

 

     Three Months Ended     Nine Months Ended  
     October 2,
2011
    October 3,
2010
    October 2,
2011
    October 3,
2010
 
     (In thousands)  

Consumer and Computation Division

   $ 36,940      $ 14,078      $ 84,094      $ 23,720   

Data Communications Division

     8,121        11,489        24,542        30,559   

Memory Products Division

     34,662        38,420        97,580        112,356   

Emerging Technologies and Other

     (8,923     (4,715     (22,937     (17,395

Unallocated items:

        

Amortization of acquisition-related intangibles

     (731     (717     (2,160     (2,215

Restructuring (charges) credits

     (871     (3,103     (5,404     (3,257

Stock-based compensation

     (24,835     (22,010     (75,412     (69,863

Gain on sale of marketable equity investments

     —          3,628        —          3,628  

Gain on divestiture

     —          —          34,291        —     

Charitable donation of building

     —          —          (4,125     —     

Loss on write down of building

     (1,982     —          (1,982     —     

Other

     1,657        (988     (1,335     (688
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 44,038      $ 36,082      $ 127,152      $ 76,845   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Geographical Information

The following table presents our revenues by geographical locations:

 

     Three Months Ended      Nine Months Ended  
     October 2,
2011
     October 3,
2010
     October 2,
2011
     October 3,
2010
 
     (In thousands)  

United States

   $ 32,462       $ 41,113       $ 91,768       $ 116,184   

Europe

     31,962         34,203         97,787         97,164   

Asia:

           

China

     63,107         58,437         186,915         151,128   

South Korea

     43,480         10,063         74,584         19,990   

Hong Kong

     18,798         16,472         98,146         48,063   

Rest of World

     74,934         71,635         203,632         224,689   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 264,743       $ 231,923       $ 752,832       $ 657,218   
  

 

 

    

 

 

    

 

 

    

 

 

 

Customer Information

For the three and nine months ended October 2, 2011, two global distributors accounted for 10.9% and 11.5% and one distributor accounted for 11.3% respectively, of our total revenues. For the three months ended October 2, 2011, one end customer accounted for 11.8% of our total revenues. For the three and nine months ended October 3, 2010, two global distributors accounted for 14.1% and 11.5%, and 14.5% and 10.7%, respectively, of our total revenues and no one end customer accounted for more than 10% of our total revenues.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report of Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, which are discussed in the “Forward-Looking Statements” section under Part I of this Quarterly Report on Form 10-Q.

EXECUTIVE SUMMARY

General

Cypress Semiconductor Corporation (“Cypress”) delivers high-performance, mixed-signal, programmable solutions that provide customers with rapid time-to-market and exceptional system value. Our offerings include the flagship Programmable System-on-Chip (“PSoC”) families and derivatives such as CapSense touch sensing and TrueTouch TM solutions for touchscreens. We are the world leader in universal serial bus (“USB”) controllers, including the high-performance West Bridge solution that enhances connectivity and performance in multimedia handsets. We are also a leader in high-performance memories and programmable timing devices. We serve numerous markets including consumer, mobile handsets, computation, data communications, automotive, industrial and military.

As of the end of the first three quarters of fiscal 2011, our organization included the following business segments:

 

Business Segments   

Description

Consumer and Computation Division

   A product division focusing on PSoC, touch-sensing and touchscreen solutions, USB and timing solutions.

Data Communications Division

   A product division focusing on data communication devices for wireless handset and professional video systems.

Memory Products Division

   A product division focusing on static random access memories and nonvolatile memories.

Emerging Technologies and Other

   Includes Cypress Envirosystems Inc. and AgigA Tech, Inc., both majority-owned subsidiaries of Cypress, the Optical Navigation Systems (“ONS”) business unit, China business unit, foundry-related services, other development stage companies and certain corporate expenses.

Sale of Image Sensors Product Family

As part of Cypress’s continued efforts to focus on programmable products including our flagship PSoC programmable system-on-chip solution and our TrueTouch TM touch-sensing controllers, we divested our image sensors product family by selling it to ON Semiconductor Corporation on February 27, 2011. The name of our Memory and Image Sensor Division was changed to Memory Products Division, (“MPD”) to reflect the change in our business.

Customers, Sales and Marketing

We sell our semiconductor products through several channels: sales through global domestically-based distributors; sales through international distributors, trading companies and manufacturing representative firms; and sales by our sales force to direct original equipment manufacturers. Our marketing and sales efforts are organized around four regions: North America, Europe, Japan and Asia/Pacific. We also have a strategic-account group and a contract-manufacturing group which are responsible for specific customers with worldwide operations. We augment our sales effort with field application engineers, specialists in our products, technologies and services who work with customers to design our products into their systems. Field application engineers also help us to identify emerging markets and new products.

One customer, Samsung, accounted for 11.8% of total revenue for the three months ended October 2, 2011. No one customer accounted for more than 10% of total revenue for the nine months ended October 2, 2011. For the three months ended October 2, 2011 two global distributors, Avnet, Inc. and Arkian Co., LTD, accounted for 10.9% and 11.5%, respectively, of our total revenues. One global distributor, Avnet, Inc., accounted for 11.3% of our total revenues for the nine months ended October 2, 2011.

For the three and nine months ended October 3, 2010, no one end customer accounted for more than 10% of our total revenues. For the three and nine months ended October 3, 2010, two global distributors, Avnet Inc. and Arrow Electronics accounted for 15.4% and 10.8% and 14.8% and 10.7%, respectively, of our total revenues.

Manufacturing Strategy

Our core manufacturing strategy—“flexible manufacturing”—combines capacity from foundries with output from our internal manufacturing facilities. This initiative is intended to allow us to meet rapid swings in customer demand while lessening the burden of high fixed costs, a capability that is particularly important in high-volume consumer markets that we serve with our leading programmable product portfolio.

We currently manufacture approximately 50% of our semiconductor products at our wafer manufacturing facility in Bloomington, Minnesota. External wafer foundries, mainly in Asia, manufactured the balance of our products and we expect that our wafer foundry partners will continue to increase as a percentage of total output.

We conduct assembly and test operations at our highly automated assembly and test facility in the Philippines. This facility accounts for approximately 35% to 45% of the total assembly output and 40% - 50% of the total test output. Various subcontractors in Asia performed the balance of the assembly and test operations.

Our facility in the Philippines performs assembly and test operations manufacturing volume products and packages where our ability to leverage manufacturing costs is high. This facility has nine fully integrated, automated manufacturing lines enabling complete assembly and test operations with minimal human intervention. These autolines have shorter manufacturing cycle times than conventional assembly/test operations, which enable us to respond more rapidly to changes in demand.

 

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Results of Operations

Revenues

The following table summarizes our consolidated revenues by segments:

 

     Three Months Ended      Nine Months Ended  
     October 2,
2011
     October 3,
2010
     October 2,
2011
     October 3,
2010
 
     (In thousands)  

Consumer and Computation Division

   $ 142,126       $ 91,877       $ 380,928       $ 242,300   

Data Communications Division

     23,648         28,961         77,351         85,241   

Memory Products Division

     92,515         105,024         271,572         315,775   

Emerging Technologies and Other

     6,454         6,061         22,981         13,902   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 264,743       $ 231,923       $ 752,832       $ 657,218   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer and Computation Division:

Revenues from the Consumer and Computation Division increased by $50.2 million in the third quarter of fiscal 2011 and $138.6 million in the first three quarters of fiscal 2011, or approximately 54.6% and 57.2% respectively, compared to the same prior-year periods. The increases were primarily attributable to increases in sales of our PSOC family of products mainly due to higher demand in our capacitive and touchscreen applications in mobile devices. Our PSOC product families, including our touchscreen family, continued to gain new design wins, expanded our customer base and increased market penetration in a variety of end-market applications including mobile handsets, tablet computers, cameras, global positioning system devices “GPS” and other products.

Data Communications Division:

Revenues from the Data Communications Division decreased by $5.3 million in the third quarter of fiscal 2011 and $7.9 million in the first three quarters of fiscal 2011, or approximately 18.3% and 9.3% respectively, compared to the same prior-year periods. The revenue decreases were primarily attributable to a decrease in sales of our communications products offset by increases in sales of our West Bridge controllers and other products.

Memory Products Division:

Revenues from the Memory Products Division decreased by $12.5 million in the third quarter of fiscal 2011 and $44.2 million in the first three quarters of fiscal 2011, or approximately 11.9% and 14.0%, respectively, compared to the same prior-year periods. The revenue decreases were primarily attributable to decreases in sales of our SRAM products driven by decreased demand from wireless and wireline end customers and due to the sale of our image sensor business unit during the first quarter of fiscal 2011 which accounted for a decrease of $7.6 million and $14.2 million in the third quarter and first three quarters of , respectively.

Emerging Technologies and Other:

Revenues from Emerging Technologies and Other increased by $0.4 million in the third quarter of fiscal 2011 and $9.1 million in the first three quarters of fiscal 2011, or approximately 6.6% and 65.5%, respectively, compared to the same prior-year periods. The revenue increases were primarily attributable to an overall increase in demand as certain of the Emerging Technologies divisions are beginning initial production ramps.

 

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Table of Contents

Cost of Revenues/Gross Margins

 

     Three Months Ended     Nine Months Ended  
     October 2,
2011
    October 3,
2010
    October 2,
2011
    October 3,
2010
 
     (In thousands, except percentages)  

Cost of revenues

   $ 115,789      $ 97,241      $ 336,081      $ 291,103   

Gross margin

     56.3     58.1     55.4     55.7

Gross margin percentage declined slightly to 56.3% in the third quarter of 2011 from 58.1% in the third quarter of fiscal 2010 and improved to 55.4% in the first three quarters of fiscal 2011 from 55.7% in the first three quarters of fiscal 2010. The gross margin decreases were primarily due to unfavorable product mix and offset by increased factory utilization resulting from increased production when compared to the same prior-year periods.

Research and Development (“R&D”) Expenses

 

     Three Months Ended     Nine Months Ended  
     October 2,
2011
    October 3,
2010
    October 2,
2011
    October 3,
2010
 
     (In thousands, except percentages)  

R&D expenses

   $ 46,266      $ 45,753      $ 143,409      $ 128,908   

As a percentage of revenues

     17.5     19.7     19.0     19.6

R&D expenditures increased by $0.5 million in the third quarter of fiscal 2011 compared to the same prior-year period. The increase was primarily attributable to a $1.0 million increase in labor, a $0.6 million increase in stock-based compensation expense and a $0.8 million increase in certain payroll taxes as a result of option exercises and stock-based award deliveries. These amounts were offset by a $1.9 million decrease in executive deferred compensation costs and $0.8 million decrease in certain variable bonus programs.

R&D expenditures increased by $14.5 million in the first three quarters of fiscal 2011 compared to same prior-year period. The increase was primarily attributable to a $4.3 million increase in labor, $3.0 million increase in certain variable bonus programs, a $2.6 million increase each in stock-based compensation expense and an increase of $1.0 million in consulting fees to support new product introductions. These amounts were offset by a $1.0 million decrease in executive deferred compensation costs.

Selling, General and Administrative (“SG&A”) Expenses

 

     Three Months Ended     Nine Months Ended  
     October 2,
2011
    October 3,
2010
    October 2,
2011
    October 3,
2010
 
     (In thousands, except percentages)  

SG&A expenses

   $ 55,453      $ 54,384      $ 172,587      $ 159,812   

As a percentage of revenues

     20.9     23.4     22.9     24.3

SG&A expenses increased by $1.1 million in the third quarter of fiscal 2011 compared to the same prior-year period. The increase was primarily attributable to a $2.4 million increase in stock-based compensation expense, a $2.0 million charge related to write down of an asset held for sale, and a $1.6 million increase in labor costs. These amounts were offset by a $3.9 million decrease in executive deferred compensation costs and a $0.7 million decrease in certain bonus programs

SG&A expenses increased by $12.8 million in the first three quarters of fiscal 2011 compared to the same prior-year period. The increase was primarily attributable to $4.1 million donation to a charitable organization, a $3.1 million increase in stock compensation expense and a $2.4 million increase in executive deferred compensation costs.

Restructuring 2011

For the three and nine months ended October 2, 2011, we recorded restructuring charges of $0.9 million and $5.4 million, respectively. For the three and nine months ended October 3, 2010, we recorded restructuring charges of $3.1 million and $3.3 million, respectively. In the third quarter of 2010, we recorded a $2.4 million gain on the sale of certain equipment in our Texas facility.

 

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Table of Contents

Fiscal 2011 Restructuring Plan

In fiscal 2011, we initiated a restructuring plan which allows us to continue to allocate and align our resources to the business units that we expect to drive future development and revenue growth (“Fiscal 2011 Restructuring Plan”). Restructuring activities related to personnel costs are summarized as follows:

 

(In thousands)

      

Provision

   $ 4,464   

Cash payments

     (1,277
  

 

 

 

Balance as of July 3, 2011

     3,187   

Provision

     779   

Cash payments

     (990
  

 

 

 

Balance as of October 2, 2011

   $ 2,976   
  

 

 

 

Restructuring balances under this Plan related primarily to personnel costs.

Fiscal 2010 Restructuring Plan

During the third quarter of fiscal 2010, we implemented a restructuring plan to exit certain of our back-end manufacturing operations located in the Philippines (“Fiscal 2010 Restructuring Plan”). These actions are intended to reduce the cost of our back-end manufacturing by selling our labor intensive assembly and test operations to lower cost third-party subcontractors in Asia and by the continued shifting of these operations to our fully automated back-end processes.

 

(In thousands)

      

Balance as of January 2, 2011

   $ 2,206   

Provision

     407   

Cash payments

     (214
  

 

 

 

Balance as of April 3, 2011

     2,399   

Cash payments

     (67
  

 

 

 

Balance as of July 3, 2011

     2,332   

Provision

     20   

Cash payments

     (332
  

 

 

 

Balance as of October 2, 2011

   $ 2,020   
  

 

 

 

As of October 2, 2011, we recorded total restructuring charges of $2.7 million under the Fiscal 2010 Restructuring Plan, which was all related to personnel costs. As of October 2, 2011, our restructuring provision was $2.0 million. We expect to eliminate approximately 300 manufacturing employees and 200 contractors or approximately 34% of our Philippines plant workforce by the end of fiscal 2011. Upon completion of all of our actions, we anticipate our annual savings impacting cost of goods sold after fiscal 2011 to be approximately $1.0 million, although there can be no assurance of this.

 

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Table of Contents

Fiscal 2008/9 Restructuring Plan

In fiscal 2008, we initiated a restructuring plan as part of a company-wide cost saving initiative which continued into 2010 aimed to reduce operating costs in response to the economic downturn (“Fiscal 2008/9 Restructuring Plan”).

Restructuring activities related to personnel costs are summarized as follows:

 

(In thousands)

      

Balance as of January 2, 2011

   $ 1,106   

Provision

     322   

Non-cash

     257   

Cash payments

     (373
  

 

 

 

Balance as of April 3, 2011

     1,312   

Provision

     (733

Cash payments

     (415
  

 

 

 

Balance as of July 3, 2011

     164   

Adjustment

     (13

Cash payments

     (151
  

 

 

 

Balance as of October 2, 2011

   $ 0   
  

 

 

 

As a result of the 2008/9 Restructuring Plan, we eliminated approximately 835 positions. In the third quarter of 2011, we have completed the remaining actions we had for this plan.

During fiscal 2010, our annual savings from our actions taken was approximately $70.0 million and proportionately impacted cost of goods sold by 50%, research and development expense by 25% and sales, general and administrative expense by 25%.

Fiscal 2007 Restructuring Plan

During fiscal 2007, we implemented a restructuring plan to exit our manufacturing facility located in Round Rock, Texas (“Fiscal 2007 Restructuring Plan”). The Fiscal 2007 Restructuring Plan included the termination of employees and the planned disposal of assets, primarily consisting of land, building and manufacturing equipment, located in the Texas facility.

The actions related to the 2007 Restructuring Plan were substantially completed in fiscal 2009. In the third quarter of 2010, we recorded a $2.4 million gain on the sale of certain equipment in our Texas facility. On a quarterly basis we continue to incur expenses related to ongoing maintenance and upkeep of the Texas facility until we complete the sale of the property.

Assets Held For Sale

The Texas facility ceased operations in the fourth quarter of fiscal 2008. As our management has committed to a plan to sell the assets associated with the facility, we have classified the assets as held for sale and recorded the assets at the lower of their carrying amount or estimated fair value less cost to sell. Fair value was determined by an analysis of market prices for similar assets. In the third quarter of fiscal 2010, we recorded a $1.5 million write-down to the estimated fair value related to these assets.

The net book value of the remaining restructured assets that were classified as held for sale and included in “Other current assets” in the Condensed Consolidated Balance Sheets was $6.9 million as of October 2, 2011 and January 2, 2011.

We had expected to complete the disposal of the restructured assets by the fourth quarter of fiscal 2009; however, due to the downturn and uncertainty in the commercial real estate market we were unable to secure a buyer for the Texas facility. In response, during fiscal 2010 we revised the asking price for the property. We expect to sell the facility within the next twelve months; however, there can be no assurance of this and our ability to complete the sale of any restructured assets may be impacted by the current economic and credit conditions.

In the second quarter of 2011, we vacated one of our buildings located in San Jose, California and in the third quarter of 2011 we began to market the building for sale or lease. In the third quarter of 2011, we received a letter of intent for sale of the building and the potential buyer is conducting due diligence. Based upon our analysis of other comparable building sales in the area we believe the offer from the buyer approximates the current market value of the building. The current market value of the building is less than the carrying value accordingly; we recorded a charge of $1.9 million to reduce the carrying value of the building to the estimated current market value. This asset is currently classified as held for sale and included in “Other current assets” in the Condensed Consolidated Balance Sheets. We expect to complete the sale within the next twelve months.

 

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Table of Contents

Interest and Other Income, Net

The following table summaries the components of interest and other income, net

 

     Three Months Ended     Nine Months Ended  
     October 2,
2011
    October 3,
2010
    October 2,
2011
    October 3,
2010
 
     (In thousands)  

Interest income

   $ 367      $ 683      $ 1,274      $ 1,823   

Interest expense

     (31     (3     (31     (12

Foreign currency exchange gain (loss), net

     140        (471     (431     (1,298

Changes in fair value of investment under the employee deferred compensation plan

     (4,347     2,305        (2,867     963   

Gain on sale of marketable equity investments

     2        3,628        (40     3,628   

Others

     2,274        (785     1,765        (182
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and other income, net

   $ (1,595   $ 5,357      $ (330   $ 4,922   
  

 

 

   

 

 

   

 

 

   

 

 

 

Employee Deferred Compensation Plan

We have a deferred compensation plan, which provides certain key employees, including our executive management, with the ability to defer the receipt of compensation in order to accumulate funds for retirements on a tax-free basis. We do not make contributions to the deferred compensation plan and we do not guarantee returns on the investments. Participant deferrals and investment gains and losses remain as our liabilities and the underlying assets are subject to claims of general creditors.

The increase or decrease in the fair value of the investments relates to the increased or decreased performance of the portfolio on a year over year basis.

Income Taxes

Our income tax expense was $4.1 million and $1.7 million for the three months ended October 2, 2011 and October 3, 2010, respectively. Our income tax benefit was $9.0 million and tax expense was $10.2 million for the nine months ended October 2, 2011 and October 3, 2010, respectively. The tax provision for the third quarter of fiscal 2011 is primarily attributable to non-U.S. income taxes on income earned in foreign jurisdictions. The tax benefit for the first three quarters of fiscal 2011 was primarily attributable to a release of previously accrued taxes and interest of $19.0 million due to the completion of an income tax examination and expired statutes of limitations in foreign jurisdictions, partially offset by non-U.S. taxes on income earned in foreign jurisdictions. The tax provision for the third quarter of fiscal 2010 and the first three quarters of fiscal 2010 is primarily attributable to non-U.S. income taxes on income earned in foreign jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes information regarding our cash and investments and working capital:

 

     As of  
(In thousands)    October 2,
2011
     January 2,
2011
 

Cash, cash equivalents and short-term investments

   $ 135,003       $ 434,261   

Working capital

   $ 46,622       $ 383,369   

 

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Table of Contents

Key Components of Cash Flows

 

     Nine Months Ended  
(In thousands)    October 2,
2011
    October 3,
2010
 

Net cash provided by operating activities

   $ 218,327      $ 193,559   

Net cash provided by (used in) investing activities

   $ 67,369      $ (54,635

Net cash used in financing activities

   $ (484,619   $ (68,902

During the nine months ended October 2, 2011, net cash provided by operating activities was $218.3 million compared to net cash provided by operating activities of $193.6 million for the nine months ended October 3, 2010. Operating cash flows for the nine months ended October 2, 2011, were primarily driven by higher net income adjusted for certain non-cash items including depreciation and amortization, stock-based compensation and partially offset by changes in our working capital. The changes in our working capital as of October 2, 2011 compared to January 2, 2011 were as follows:

 

   

Accounts receivable decreased by $16.2 million due to lower distributor shipments.

 

   

Inventories increased by $6.6 million due to slightly lower shipments to our direct customers and distributors.

 

   

Accounts payable increased by $21.0 million due to timing of purchases and payments.

 

   

Dividend payable increased by $13.8 million due to dividend declared in third quarter.

 

   

Deferred revenues less cost of revenues decreased by $53.3 million due to lower distributor shipments.

During the nine months ended October 2, 2011, net cash provided by investing activities was $67.4 million compared to net cash used in investing activities of $54.6 million for the nine months ended October 3, 2010. For the nine months ended October 2, 2011, our investing activities primarily included $71.8 million of property and equipment expenditures and $105.6 million of purchases of our investments, net of proceeds from sales and maturities.

During the nine months ended October 2, 2011, net cash used in financing activities was $484.6 million compared to net cash used in financing activities of $68.9 million for the nine months ended October 3, 2010. For the nine months ended October 2, 2011, we used $364.0 million to repurchase shares of Cypress stock, a net of $130.7 million on the yield enhancement structured agreements and we paid a cash dividend of $15.3 million compared to $109.9 million used on yield enhancement structured agreements for the nine months ended October 3, 2010. These amounts were offset by net proceeds of $56.9 million for the nine month ended October 2, 2011 and $51.90 million for the nine month ended October 3, 2010 from the issuance of common shares under our employee stock plans.

Liquidity and Contractual Obligations

Auction Rate Securities:

As of October 2, 2011, all of our auction rate securities have experienced failed auctions due to sell orders exceeding buy orders. Currently, these failures are not believed to be a credit issue with the underlying investments, but rather caused by a lack of liquidity. We have classified our auction rate securities totaling $19.1 million as long-term investments as of October 2, 2011.

During the third quarter of fiscal 2011, we performed analyses to assess the fair value of the auction rate securities. In the absence of a liquid market to value these securities, we prepared a valuation model based on discounted cash flows. Based on the discounted cash flows, we estimated that the value of our auction rate securities is approximately 91% of their stated par value as of October 2, 2011.

 

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Table of Contents

Stock Repurchase Program:

On October 21, 2010, our Board authorized a $600 million stock buyback program which was completed during the third quarter of fiscal 2011. We extinguished the $600.0 million by repurchasing 32.6 million shares. To date our purchase program has included direct market repurchases, settlements under our yield enhancement program and common shares withheld for tax obligation on vested restricted shares.

On September 20, 2011 our Board authorized a $400 million stock buyback program. The program allows us to purchase our common stock or enter into equity derivative transactions related to our common stock. The timing and actual amount expended with the new authorized funds will depend on a variety of factors including the market price of our common stock, regulatory, legal, and contractual requirements, cash balances and anticipated uses and other market factors. The program does not obligate us to repurchase any particular amount of common stock and may be modified or suspended at any time at our discretion. As of October 2, 2011, we have used $35.4 million to repurchase 2.4 million shares with $364.6 million remaining under the program available for additional repurchases.

During the nine months ended October 2, 2011 we used $407.3 million for direct market repurchases, $180.6 million for shares settled under our yield enhancement program and $46.4 million for common shares withheld for tax obligations on vested restricted shares.

Yield Enhancement Program:

The audit committee has approved a yield enhancement strategy intended to improve the yield on our available cash. Upon the expiration of each short term yield enhanced structured agreement we receive either our cash back in addition to a yield or shares of our stock.

The amount that we commit to our yield enhancement program strategy takes into account a variety of factors including our cash needs, market price of our common stock, contractual requirements and other market factors. This program can be modified or suspended at anytime at our discretion.

On August 5, 2011 we entered into a short-term yield enhanced structured agreement with a maturity of less than 90 days at an aggregate price of approximately $52.8 million. On September 14, 2011, we settled this agreement and received 3.0 million shares of our common stock.

Purchase Obligations:

We have outstanding purchase obligations, which primarily include non-cancelable purchase orders for materials, services, manufacturing equipment, building improvements and supplies in the ordinary course of business. Purchase obligations are defined as enforceable agreements that are legally binding on us and that specify all significant terms, including quantity, price and timing. As of October 2, 2011, non-cancelable purchase obligations totaled approximately $80.1 million.

Capital Resources and Financial Condition

Our long-term strategy is to maintain a minimum amount of cash and cash equivalents for operational purposes and to invest the remaining amount of our cash in interest-bearing and highly liquid cash equivalents, debt securities and the purchase of our stock through our stock buyback program. As of October 2, 2011, in addition to $64.3 million in cash and cash equivalents, we had $70.7 million invested in short-term investments for a total cash and short-term investment position of $135.0 million that is available for use in our current operations. In addition, we had $19.1 million of long-term investments primarily consisting of auction rate securities.

As of October 2, 2011, approximately 33% of our cash and cash equivalents are offshore funds. While these amounts are primarily invested in U.S. dollars, a portion is held in foreign currencies. All offshore balances are exposed to local political, banking, currency control and other risks. In addition, these amounts, if repatriated may be subject to income tax in the United States and other transfer restrictions. We believe that liquidity provided by existing cash, cash equivalents and investments and our borrowing arrangements will provide sufficient capital to meet our requirements for at least the next twelve months. However, should prevailing economic conditions and/or financial, business and other factors beyond our control adversely affect the estimates of our future cash requirements, we could be required to fund our cash requirements by alternative financing. There can be no assurance that additional financing, if needed, would be available on terms acceptable to us or at all. We may choose at any time to raise additional capital or debt to strengthen our financial position, facilitate growth, enter into strategic initiatives including the acquisition of other companies and provide us with additional flexibility to take advantage of other business opportunities that arise.

 

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Table of Contents

Non-GAAP Financial Measures

Regulation G, conditions for use of Non-Generally Accepted Accounting Principles (“Non-GAAP”) financial measures, and other SEC regulations define and prescribe the conditions for use of certain Non-GAAP financial information. To supplement our condensed consolidated financial results presented in accordance with GAAP, we use Non-GAAP financial measures which are adjusted from the most directly comparable GAAP financial measures to exclude certain items, as described below. Management believes that these Non-GAAP financial measures reflect an additional and useful way of viewing aspects of our operations that, when viewed in conjunction with our GAAP results, provide a more comprehensive understanding of the various factors and trends affecting our business and operations. Non-GAAP financial measures used by us include gross margin, research and development expenses, selling, general and administrative expenses, operating income or loss, net income or loss and basic and diluted net income or loss per share.

Our Non-GAAP measures primarily exclude stock-based compensation, acquisition-related charges, impairments to goodwill, gain or losses on divestiture, investment-related gains and losses, discontinued operations, restructuring costs and other special charges and credits. Management believes these Non-GAAP financial measures provide meaningful supplemental information regarding our strategic and business decision making, internal budgeting, forecasting and resource allocation processes. In addition, these Non-GAAP financial measures facilitate management’s internal comparisons to our historical operating results and comparisons to competitors’ operating results.

We use each of these Non-GAAP financial measures for internal managerial purposes, when providing our financial results and business outlook to the public, to facilitate period-to-period comparisons and are used to formulate our formula driven cash bonus plan and any milestone based stock awards. Management believes that these Non-GAAP measures provide meaningful supplemental information regarding our operational and financial performance of current and historical results. Management uses these Non-GAAP measures for strategic and business decision making, internal budgeting, forecasting and resource allocation processes. In addition, these Non-GAAP financial measures facilitate management’s internal comparisons to our historical operating results and comparisons to competitors’ operating results.

The following table shows our Non-GAAP financial measures:

 

     Three Months Ended  
     October 2,
2011
     October 3,
2010
 
    

(In thousands, except per

share amounts)

 

Non-GAAP gross margin

   $ 153,396       $ 140,033   

Non-GAAP research and development expenses

     41,576         39,683   

Non-GAAP selling, general and administrative expenses

     41,996         41,364   

Non-GAAP operating income

     69,824         58,987   

Non-GAAP net income attributable to Cypress

     69,237         53,486   

Non-GAAP net income per share attributable to Cypress—diluted

   $ 0.37       $ 0.28   

We believe that providing these Non-GAAP financial measures, in addition to the GAAP financial results, are useful to investors because they allow investors to see our results “through the eyes” of management as these Non-GAAP financial measures reflect our internal measurement processes. Management believes that these Non-GAAP financial measures enable investors to better assess changes in each key element of our operating results across different reporting periods on a consistent basis and provides investors with another method for assessing our operating results in a manner that is focused on the performance of our ongoing operations.

The following is a reconciliation of Non-GAAP measures to GAAP measures:

 

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Table of Contents

CYPRESS SEMICONDUCTOR CORPORATION

RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES

(In thousands, except per-share data)

(Unaudited)

 

     Three Months Ended  
     October 2,
2011
    October 3,
2010
 

GAAP gross margin

   $ 148,954      $ 134,682   

Stock-based compensation expense

     5,002        5,024   

Changes in value of deferred compensation plan

     (560     327  
  

 

 

   

 

 

 

Non-GAAP gross margin

   $ 153,396      $ 140,033   
  

 

 

   

 

 

 

GAAP research and development expenses

   $ 46,266      $ 45,753   

Stock-based compensation expense

     (5,894     (5,332

Changes in value of deferred compensation plan

     1,204        (738
  

 

 

   

 

 

 

Non-GAAP research and development expenses

   $ 41,576      $ 39,683   
  

 

 

   

 

 

 

GAAP selling, general and administrative expenses

   $ 55,453      $ 54,384   

Stock-based compensation expense

     (13,939     (11,568

Other acquisition-related expense

     —          5   

Changes in value of deferred compensation plan

     2,464        (1,457

Impairment of assets and other

     (1,982     —     
  

 

 

   

 

 

 

Non-GAAP selling, general and administrative expenses

   $ 41,996      $ 41,364   
  

 

 

   

 

 

 

GAAP operating income

   $ 45,633      $ 30,725   

Stock-based compensation expense

     24,835        21,924   

Other acquisition-related expense

     731        712   

Changes in value of deferred compensation plan

     (4,228     2,523   

Restructuring charges (credits)

     871        3,103   

Loss on sale of asset

     —          —     

Impairment of assets and other

     1,982        —     
  

 

 

   

 

 

 

Non-GAAP operating income

   $ 69,824      $ 58,987   
  

 

 

   

 

 

 

GAAP net income attributable to Cypress

   $ 39,981      $ 34,373   

Stock-based compensation expense

     24,835        21,924   

Other acquisition-related expense

     731        712   

Changes in value of deferred compensation plan

     119        219   

Restructuring charges (credits)

     871        3,103   

Investment-related gains/losses

     (1,538     (3,894

Impairment of assets and other

     1,982        —     

Tax effects

     2,256        (2,951
  

 

 

   

 

 

 

Non-GAAP net income attributable to Cypress

   $ 69,237      $ 53,486   
  

 

 

   

 

 

 

GAAP net income per share attributable to Cypress—diluted

   $ 0.22      $ 0.18   

Stock-based compensation expense

     0.13        0.11   

Restructuring charges (credits)

     0.01        0.02   

Investment-related gains/losses

     (0.01     (0.02

Impairment of assets and other

     0.01        —     

Loss on sale of asset

     —          —     

Tax effects

     0.01        (0.01
  

 

 

   

 

 

 

Non-GAAP net income per share attributable to Cypress—diluted

   $ 0.37        0.28   
  

 

 

   

 

 

 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risks

Our investment portfolio consists of a variety of financial instruments that exposes us to interest rate risk, including, but not limited to, money market funds, commercial paper and corporate securities. These investments are generally classified as availablefor-sale and, consequently, are recorded on our balance sheets at fair market value with their related unrealized gain or loss reflected as a component of accumulated other comprehensive income in stockholders’ equity. Due to the relatively short-term nature of our investment portfolio, we do not believe that an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio. Since we believe we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio.

Auction Rate Securities

As of October 2, 2011, all our auction rate securities are classified as Level 3 financial instruments. Auction rate securities are investments with contractual maturities generally between 20 and 30 years. The auction rate securities held by us are backed by student loans originated under the Federal Family Education Loan Program (FFELP), which are guaranteed by the U.S. Federal Department of Education.

As of October 2, 2011, all of our auction rate securities held by us were rated as either AAA, Aaa or A3 by the major independent rating agencies and all of our auction rate securities have experienced failed auctions due to sell orders exceeding buy orders. These failures are not believed to be a credit issue with the underlying investments, but rather caused by a lack of liquidity. Under the contractual terms, the issuer is obligated to pay penalty rates should an auction fail. The funds associated with failed auctions are not expected to be accessible until one of the following occurs: a successful auction occurs, the issuer redeems the issue, a buyer is found outside of the auction process or the underlying securities have matured. Given these circumstances and the lack of liquidity, we have classified our auction rate securities totaling $19.1 million as long-term investments as of October 2, 2011. If the financial market continues to deteriorate, future downgrades could potentially impact the rating of our auction rate securities.

On a quarterly basis we performed analyses to assess the fair value of the auction rate securities. In the absence of a liquid market to value these securities, we prepared a valuation model based on discounted cash flows. The assumptions used at October 2, 2011 were as follows:

 

   

7 years to liquidity;

 

   

continued receipt of contractual interest which provides a premium spread for failed auctions; and

 

   

discount rates of 1.78%—4.04%, which incorporates a spread for both credit and liquidity risk.

Based on these assumptions, we estimated that the auction rate securities would be valued at approximately 91% of their stated par value as of October 2, 2011, representing a decline in value of approximately $1.9 million.

As a result of our adoption of the amended other-than-temporary impairment guidance on debt securities in the second quarter of fiscal 2009, we reclassified the non-credit portion of the previously recognized other-than-temporary impairment losses related to our auction rate securities of $5.3 million from accumulated deficit to accumulated other comprehensive loss.

 

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The following table summarizes certain information related to our auction rate securities as of October 2, 2011:

 

     Fair Value      Fair Value Given a 100
Basis Point
Increase in Interest Rates
     Fair Value Given a 100
Basis Point
Decrease in Interest Rates
 
     (In thousands)  

Auction rate securities

   $ 19,072       $ 20,979       $ 17,165   

Investments in Publicly Traded and Privately Held Companies

We have equity investments in certain publicly traded companies. The marketable equity securities are classified as available-for-sale investments and are recorded at fair value with unrealized gain (loss) reported as a component in “Accumulated other comprehensive income (loss)” in the Condensed Consolidated Balance Sheets. The fair value of the common stock is subject to market price volatility. The following table summarizes certain information related to these investments as of October 2, 2011:

 

Investments

   Fair Value      Fair Value Given a 10%
Increase in Stock Prices
     Fair Value Given a 10%
Decrease in Stock Prices
 
   (In thousands)  

Marketable equity securities

   $ 2,669       $ 2,936       $ 2,402   

We also have equity investments in several privately held companies, many of which are start-ups or in development stages. These investments are inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never materialize. As our equity investments generally do not permit us to exert significant influence or control, these amounts generally represent our cost of the investments, less any adjustments we make when we determine that an investment’s net realizable value is less than its carrying cost. As of October 2, 2011, the carrying value of our investments in privately held companies was $4.0 million.

Foreign Currency Exchange Risk

We operate and sell products in various global markets and purchase capital equipment using foreign currencies but predominantly the U.S. dollar. As a result, we are exposed to risks associated with changes in foreign currency exchange rates. Changes in exchange rates between foreign currencies and the U.S. dollar may adversely affect our operating margins. For example, when foreign currencies appreciate against the U.S. dollar, inventory and expenses denominated in foreign currencies become more expensive. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive for international customers, thus potentially leading to a reduction in demand, and therefore in our sales and profitability. Furthermore, many of our competitors are foreign companies that could benefit from such a currency fluctuation, making it more difficult for us to compete with those companies. We cannot predict the impact of future exchange rate fluctuations on our business and results of operations.

We analyzed our foreign currency exposure, including our hedging strategies, to identify assets and liabilities denominated in other currencies. For those assets and liabilities, we evaluated the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar. We have determined that there would be an immaterial effect on our results of operations from such a shift.

 

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three month period ended October 2, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this item is included in Note 10 of Notes to Condensed Consolidated Financial Statements under Item 1, Part 1 of this Quarterly Report on Form 10-Q and is incorporated herein by reference.

ITEM 1A. RISK FACTORS

With the exception of the update to the risk factors set forth in this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended January 2, 2011, and amended in our Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2011.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period (1)    Total Number of Shares
Purchased
     Average Price Paid Per
Share
     Total Number of Shares
Purchased as Part of Publicaly
Announded Plan
     Approximate Dollar
Value of Shares that May
Yet Be Purchased Under
the Plan (2), (3)
 
     (in thousands, except per-share amounts)  

July 4-July 31, 2011

     —         $ —           —        

August 1-August 28, 2011

     13,328       $ 17.42        13,328         300.2   

August 29 -October 2, 2011

     1,903       $ 15.79         4,903      

Total

     15,231       $ 17.35         18,231         364.6   

 

(1) Monthly information is presented by reference to the Company’s fiscal months during the third quarter of fiscal 2011.
(2) On October 21, 2010, we announced our Board’s authorization for stock repurchases to $600 million which ended in the third quarter of fiscal 2011.
(3) On September 20, 2011, we announced our Board’s authorization of a new stock repurchase program of $400 million.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The information required by this item is published Form 8-K, filed May 16, 2011, file number 001-10079, and is incorporated herein by reference.

ITEM 5. OTHER INFORMATION

On Novemeber 3, 2011, Cypress’s Compensation Committee of the Board of Directors (the “Compensation Committee”) approved the incentive payments to our executive officers for the third quarter of fiscal 2011 performance incentive plans. These payments were earned in accordance with the terms of our Key Employee Bonus Plan (the “KEBP”) and the Performance Bonus Plan (the “PBP”).

The payments were determined based upon the financial performance of Cypress and each executive’s performance. The performance measures under the KEBP include our non-GAAP profit-before-taxes percentage as well as individual strategic, operational and financial goals established for each executive. The following table sets forth the cash payments to our Named Executive Officers (as determined in our Proxy Statement filed with the Securities and Exchange Commission on March 29, 2011) under the KEBP and the PBP in the third quarter of fiscal 2011:

 

Named Executive Officers

   KEBP      PBP  

T.J. Rodgers, President and Chief Executive Officer

     —         $ 211,531   

Christopher Seams, Executive Vice President, Sales, Marketing and Operations

   $ 68,137         —     

Brad W. Buss, Executive Vice President, Finance & Administration and Chief Financial Officer

   $ 59,953         —     

Paul Keswick, Executive Vice President, New Product Development

   $ 22,010         —     

Norman Taffe, Executive Vice President, Consumer and Computation Division

   $ 48,123         —     

Additionally, the Compensation Committee authorized quarterly and annual incentive payments under the KEBP, totaling $329,728, to seven other senior executive officers who are not Named Executive Officers.

 

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ITEM 6. EXHIBITS

 

         Incorporated by References  

Exhibit
Number

 

Description

   Form      Filing
Date
     File
No.
     Filed
Herewith
 
  31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      —           —           —           X   
  31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      —           —           —           X   
  32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002      —           —           —           X   
  32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002      —           —           —           X   
  10.45 *   Compensation Committee of the Board of Directors salary increase authorization dated May 31, 2011by and between Registrant and Brad W. Buss.      8-K         6/1/11         0001-10079         —     
  10.46 *   1994 Stock Plan, as amended and restated.      S-8         6/2/11         333-174673         —     
101 **   The following financial statements from the Company’s 10-Q for the fiscal quarter ended July 3, 2011, formatted in XBRL: (i) Condensed Consolidated Statements of Earnings, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Cash Flows (iv) Notes to Condensed Consolidated Financial Statements      —           —           —           —     

 

* Denotes a management contract or compensatory plan or arrangement
** Furnished herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    CYPRESS SEMICONDUCTOR CORPORATION
Date: November 4, 2011     By:  

/ S / B RAD W. B USS

      Brad W. Buss
      Executive Vice President, Finance and Administration
      and Chief Financial Officer

 

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EXHIBIT INDEX

 

         Incorporated by References  

Exhibit
Number

 

Description

   Form      Filing
Date
     File
No.
     Filed
Herewith
 
  31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      —           —           —           X   
  31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      —           —           —           X   
  32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.      —           —           —           X   
  32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.      —           —           —           X   
  10.45 *   Compensation Committee of the Board of Directors salary increase authorization dated May 31, 2011by and between Registrant and Brad W. Buss.      8-K         6/1/11         0001-10079         —     
  10.46 *   1994 Stock Plan, as amended and restated.      S-8         6/2/11         333-174673         —     
101 **   The following financial statements from the Company’s 10-Q for the fiscal quarter ended October 2, 2011, formatted in XBRL: (i) Condensed Consolidated Statements of Earnings, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Cash Flows (iv) Notes to Condensed Consolidated Financial Statements.      —           —           —           —     

 

* Denotes a management contract or compensatory plan or arrangement
** Furnished herewith.

 

48

Exhibit 31.1

CERTIFICATION

PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

I, T.J. Rodgers, certify that:

 

  1. I have reviewed this Quarterly Report on Form 10-Q of Cypress Semiconductor Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: November 4, 2011   By:  

/s/ T. J. RODGERS

    T. J. Rodgers
    President and Chief Executive Officer