Cypress Semiconductor Corporation
CYPRESS SEMICONDUCTOR CORP /DE/ (Form: 10-Q, Received: 05/09/2012 16:11:10)
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 April 1, 2012

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 April 29, 2012 was 152,328,696.

 

 

 


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

     40   

Item 4.

  

Controls and Procedures

     41   
PART II—OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     41   

Item 1A.

  

Risk Factors

     41   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     42   

Item 3.

  

Defaults Upon Senior Securities

     42   

Item 4.

  

Mine Safety Disclosures

     42   

Item 5.

  

Other Information

     43   

Item 6.

  

Exhibits

     45   
  

Signatures

     46   

 

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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, our expectation regarding dividends and stock repurchases, our expected purchases from Grace Semiconductor, our expectations regarding future technology transfers and other licensing arrangements, 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, 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 investment strategy, our belief 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, our expectations regarding our outstanding warranty liability, the impact of interest rate fluctuations on our investments, the volatility of our stock price and the impact of new accounting standards on our financial statements. 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 and consumers 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 the failure or success of our Emerging Technology division and/or the materialization of one or more of the risks set forth above or in Part II, Item 1A ( Risk Factors ) in this Quarterly Report on Form 10-Q and in Part I, Item 1A ( Risk Factors ) in our Annual Report on Form 10-K for the fiscal year ended January 1, 2012.

 

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ITEM 1.    FINANCIAL STATEMENTS

CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS*

 

     April 1,
2012
    January 1,
2012
 
     (In thousands, except
per-share amounts)
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 61,284      $ 99,717   

Short-term investments

     47,434        66,613   

Accounts receivable, net

     102,100        103,524   

Inventories

     97,962        92,304   

Other current assets

     51,210        43,492   
  

 

 

   

 

 

 

Total current assets

     359,990        405,650   

Property, plant and equipment, net

     280,229        284,979   

Goodwill

     31,836        31,836   

Intangible assets, net

     7,356        8,626   

Other long-term assets

     82,330        78,999   
  

 

 

   

 

 

 

Total assets

   $ 761,741      $ 810,090   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 55,766      $ 52,868   

Accrued compensation and employee benefits

     41,881        41,679   

Deferred margin on sales to distributors

     127,462        150,568   

Loan payable

     50,000        —     

Dividends payable

     16,713        13,786   

Income taxes payable

     5,538        4,629   

Other current liabilities

     72,523        62,930   
  

 

 

   

 

 

 

Total current liabilities

     369,883        326,460   

Deferred income taxes and other tax liabilities

     40,381        38,610   

Other long-term liabilities

     49,570        47,178   
  

 

 

   

 

 

 

Total liabilities

     459,834        412,248   
  

 

 

   

 

 

 

Commitments and contingencies (Note 8)

    

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; 282,398 and 278,812 shares issued; 151,690 and 154,174 shares outstanding at April 1, 2012 and January 1, 2012, respectively

     2,792        2,780   

Additional paid-in-capital

     2,601,557        2,579,348   

Accumulated other comprehensive loss

     (1,738     (1,940

Accumulated deficit

     (345,623     (326,163
  

 

 

   

 

 

 

Stockholders’ equity before treasury stock, total

     2,256,988        2,254,025   

Less: shares of common stock held in treasury, at cost; 130,708 and 124,638 shares at April 1, 2012 and January 1, 2012, respectively

     (1,951,729     (1,853,758
  

 

 

   

 

 

 

Total Cypress stockholders’ equity

     305,259        400,267   

Noncontrolling interest

     (3,352     (2,425
  

 

 

   

 

 

 

Total equity

     301,907        397,842   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 761,741      $ 810,090   
  

 

 

   

 

 

 

 

* Amounts as of April 1, 2012 are unaudited. Amounts as of January 1, 2012 were derived from the January 1, 2012 audited consolidated financial statements.

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  
     April 1,
2012
    April 3,
2011
 
    

(In thousands, except

per-share amounts)

 

Revenues

   $ 185,089      $ 233,110   

Costs and expenses (credits):

    

Cost of revenues

     93,308        104,334   

Research and development

     47,968        47,865   

Selling, general and administrative

     60,494        58,652   

Amortization of acquisition-related intangible assets

     731        698   

Restructuring costs

     228        734   

Gain on divestiture

     —          (34,291
  

 

 

   

 

 

 

Total costs and expenses, net

     202,729        177,992   
  

 

 

   

 

 

 

Operating income (loss)

     (17,640     55,118   

Interest and other income, net

     334        1,422   
  

 

 

   

 

 

 

Income (loss) before income taxes and noncontrolling interest

     (17,306     56,540   

Income tax provision

     2,465        1,350   
  

 

 

   

 

 

 

Income (loss), net of taxes

     (19,771     55,190   

Adjust for net loss attributable to noncontrolling interest

     311        184   
  

 

 

   

 

 

 

Net income (loss) attributable to Cypress

   $ (19,460   $ 55,374   
  

 

 

   

 

 

 

Net income (loss) per share attributable to Cypress:

    

Basic

   $ (0.13   $ 0.32   

Diluted

   $ (0.13   $ 0.28   

Cash dividend declared per share

   $ 0.11      $ —     

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

    

Basic

     154,022        171,346   

Diluted

     154,022        199,943   

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

 

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CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

     Three Months Ended  
     April 1,     April 3,  
     2012     2011  
     (In thousands)  

Net income (loss)

   $ (19,771   $ 55,190   
  

 

 

   

 

 

 

Other comprehensive income, net of tax:

    

Change in net unrealized gains on available-for-sale investments

     202        963   

Change in unrealized net gain on derivative investments

     —          150   
  

 

 

   

 

 

 

Other comprehensive income

     202        1,113   
  

 

 

   

 

 

 

Comprehensive income (loss)

     (19,569     56,303   

Adjust for net loss attributable to noncontrolling interest

     311        184   
  

 

 

   

 

 

 

Comprehensive income (loss) attributable to Cypress

   $ (19,258   $ 56,487   
  

 

 

   

 

 

 

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)

 

     Three Months Ended  
     April 1,
2012
    April 3,
2011
 
     (In thousands)  

Cash flows from operating activities:

    

Net income (loss)

   $ (19,771   $ 55,190   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Stock-based compensation expense

     28,737        20,837   

Depreciation and amortization

     11,952        13,543   

Deferred income taxes and other tax liabilities

     1,818        696   

Impairment of non-marketable equity investments

     820        —     

Restructuring costs

     228        734   

Loss on sale or retirement of property and equipment, net

     628        524   

Contribution of asset

     —          4,000   

Gain on divestiture

     —          (34,291

Other

     673        —     

Changes in operating assets and liabilities, net of effects of a divestiture:

    

Accounts receivable

     1,424        (55,663

Inventories

     (2,269     (7,564

Other current and long-term assets

     (4,493     (15,831

Accounts payable and other liabilities

     19,686        6,744   

Deferred margin on sales to distributors

     (23,106     46,424   
  

 

 

   

 

 

 

Net cash provided by operating activities

     16,327        35,343   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

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

     36,776        78,326   

Purchases of available-for-sale investments

     (18,078     (43,385

Acquisition of property, plant and equipment

     (9,975     (19,309

Cash paid for equity investments

     (7,203     (1,013

Proceeds from divestiture

     —          14,951   

Other

     (27     1,141   
  

 

 

   

 

 

 

Net cash provided by investing activities

     1,493        30,711   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repurchase of common shares

     (78,272     (76,404

Line of credit proceeds

     50,000        —     

Withholding of common shares for tax obligations on vested restricted shares

     (19,700     (40,714

Payment of dividends

     (13,794     —     

Proceeds from issuance of common shares under employee stock plan

     6,201        23,888   

Payments of equipment leases and loans, net

     (688     —     

Yield enhancement structured agreements settled in stock

     —          (52,483

Yield enhancement structured agreements settled in cash, net

     —          46,965   

Unsettled yield enhancement structured agreements

     —          (110,891
  

 

 

   

 

 

 

Net cash used in financing activities

     (56,253     (209,639
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (38,433     (143,585

Cash and cash equivalents, beginning of period

     99,717        263,183   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 61,284      $ 119,598   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Dividends payable

   $ 16,713      $ —     

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 SIGNIFICANT ACCOUNTING POLICIES

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 2012 has 52 weeks and fiscal 2011 had 52 weeks. The first quarter of fiscal 2012 ended on April 1, 2012 and the first quarter of fiscal 2011 ended on April 3, 2011.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring items, which are 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 1, 2012.

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 months ended April 1, 2012 are not necessarily indicative of the results to be expected for the full fiscal year.

Recently Adopted Accounting Standards

In June 2011, Financial Accounting Standards Board (“FASB”) issued authoritative guidance on the presentation of comprehensive income to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The authoritative guidance also required presentation of adjustments for items that are reclassified from other comprehensive income in the statement where the components of net income and the components of other compressive income are presented, which was indefinitely deferred by the FASB in December 2011. We adopted this guidance in the first quarter of fiscal 2012 and we now present condensed consolidated statements of comprehensive income (loss) in a separate statement following the condensed consolidated statements of operations. The implementation of this authoritative guidance did not have any impact on our financial position or results of operations as it only required separate presentation of total comprehensive income (loss).

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 International Financial Reporting Standards (“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 our 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. We adopted this authoritative guidance in the first quarter of fiscal 2012 and our implementation of this authoritative guidance did not have any impact on our financial position or results of operations as it only required additional disclosures related to fair value measurements.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 2. GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The carrying amount of goodwill at April 1, 2012 was $31.8 million in the Programmable Systems Division (“PSD”) and was unchanged from the balance at January 1, 2012. PSD is the only reportable business segment with goodwill.

Goodwill is not amortized, but is reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In fiscal 2011, we adopted the authoritative guidance which allows us to use a qualitative approach to test goodwill for impairment. This authoritative guidance permits us to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment. We regularly monitor current business conditions and other factors including, but not limited to (i) change in the industry and competitive environment; (ii) market capitalization; (iii) stock price; and (iv) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods.

Intangible Assets

The following table presents details of our intangible assets:

 

     As of April 1, 2012      As of January 1, 2012  
     Gross      Accumulated
Amortization
    Net      Gross      Accumulated
Amortization
    Net  
     (In thousands)  

Acquisition-related intangible assets

   $ 95,134       $ (89,513   $ 5,621       $ 95,134       $ (88,782   $ 6,352   

Non-acquisition related intangible assets

     10,648         (8,913     1,735         10,648         (8,374     2,274   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 105,782       $ (98,426   $ 7,356       $ 105,782       $ (97,156   $ 8,626   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

As of April 1, 2012, the estimated future amortization expense of intangible assets was as follows:

 

     (In thousands)  

2012 (remaining nine months)

   $ 2,643   

2013

     3,836   

2014

     877   
  

 

 

 

Total future amortization expense

   $ 7,356   
  

 

 

 

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 3. RESTRUCTURING

For the three months ended April 1, 2012 and April 3, 2011, we recorded restructuring charges of $0.2 million and $0.7 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”). To date, we have recorded total restructuring charges of $5.0 million under the Fiscal 2011 Restructuring Plan, which was all related to personnel costs. The restructuring activities related to personnel costs, which are primarily in the U.S., are summarized as follows:

 

     (In thousands)  

Balance as of January 1, 2012

   $ 1,955   

Cash payments

     (372
  

 

 

 

Balance as of April 1, 2012

   $ 1,583   
  

 

 

 

The restructuring liability of $1.6 million as of April 1, 2012 under the Fiscal 2011 Restructuring Plan related primarily to personnel costs and is expected to be paid out within the next twelve months.

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 were intended to reduce the cost of our back-end manufacturing by selling our labor intensive assembly operations to a lower cost third-party subcontractor in China and by the continued shifting of these operations to our fully automated back-end processes.

To date, we have recorded total restructuring charges of $3.9 million under the Fiscal 2010 Restructuring Plan, which was all related to personnel costs. As of April 1, 2012, the outstanding restructuring liability under the Fiscal 2010 Restructuring Plan was $0.7 million and was primarily related to severance and benefits of our employees. We expect to substantially complete the activities and fully pay out the remaining restructuring liability under this program within the next twelve months.

The restructuring activities related to personnel costs are summarized as follows:

 

     (In thousands)  

Balance as of January 1, 2012

   $ 1,885   

Provision

     100   

Cash payments

     (1,291
  

 

 

 

Balance as of April 1, 2012

   $ 694   
  

 

 

 

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.

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 April 1, 2012 and January 1, 2012.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 4. BALANCE SHEET COMPONENTS

Accounts Receivable, Net

 

     As of  
     April 1,
2012
    January 1,
2012
 
     (In thousands)  

Accounts receivable, gross

   $ 105,877      $ 107,433   

Allowance for doubtful accounts receivable and sales returns

     (3,777     (3,909
  

 

 

   

 

 

 

Total accounts receivable, net

   $ 102,100      $ 103,524   
  

 

 

   

 

 

 

Inventories

 

     As of  
     April 1,
2012
     January 1,
2012
 
     (In thousands)  

Raw materials

   $ 5,306       $ 4,474   

Work-in-process

     71,406         63,552   

Finished goods

     21,250         24,278   
  

 

 

    

 

 

 

Total inventories

   $ 97,962       $ 92,304   
  

 

 

    

 

 

 

Other Current Assets

 

     As of  
     April 1,
2012
     January 1,
2012
 
     (In thousands)  

Prepaid expenses

   $ 24,259       $ 24,664   

Prepayment to Grace

     8,020         2,164   

Assets held for sale

     6,913         6,913   

Other current assets

     12,018         9,751   
  

 

 

    

 

 

 

Total other current assets

   $ 51,210       $ 43,492   
  

 

 

    

 

 

 

Prepayment to Grace

In fiscal 2011, we made certain pre-payments to Grace Semiconductor Manufacturing Corporations (“Grace”), a strategic foundry partner, to secure a certain supply of wafers. The pre-payments made in fiscal 2011 are expected to be applied to purchases of wafers from Grace. At April 1, 2012, the unapplied pre-payment balance was approximately $8.0 million and was recorded as part of “Other current assets” in the Condensed Consolidated Balance Sheet because if we do not use all the pre-payment against our purchases of wafers from Grace within the next twelve months from the first quarter ended April 1, 2012, Grace will return to us any portion of the unused pre-payment.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Other Long-Term Assets

 

     As of  
     April 1,
2012
     January 1,
2012
 
     (In thousands)  

Employee deferred compensation plan

   $ 35,443       $ 32,976   

Investments:

     

Debt securities

     19,065         19,004   

Equity securities

     12,757         6,213   

Prepayment to Grace-long-term portion

     —           5,957   

Other assets

     15,065         14,849   
  

 

 

    

 

 

 

Total other long-term assets

   $ 82,330       $ 78,999   
  

 

 

    

 

 

 

Other Current Liabilities

 

     As of  
     April 1,
2012
     January 1,
2012
 
     (In thousands)  

Employee deferred compensation plan

   $ 35,049       $ 32,485   

Patent license liability (see Note 15)

     7,100         —     

Restructuring accrual (see Note 3)

     2,498         4,061   

Capital lease-current portion (see Note 8)

     2,257         2,257   

Equipment loan-current portion (see Note 9)

     2,725         2,725   

Other current liabilities

     22,894         21,402   
  

 

 

    

 

 

 

Total other current liabilities

   $ 72,523       $ 62,930   
  

 

 

    

 

 

 

Deferred Income Taxes and Other Tax Liabilities

 

     As of  
     April 1,
2012
     January 1,
2012
 
     (In thousands)  

Deferred income taxes

   $ 112       $ 165   

Non-current tax liabilities

     40,269         38,445   
  

 

 

    

 

 

 

Total deferred income taxes and other tax liabilities

   $ 40,381       $ 38,610   
  

 

 

    

 

 

 

Other Long-term Liabilities

 

     As of  
     April 1,
2012
     January 1,
2012
 
     (In thousands)  

Advances received from the sale of Auction Rate Securities (“ARS”) (see Note 5)

   $ 16,390       $ 16,390   

Capital lease–long term portion (see Note 8)

     13,224         12,982   

Equipment loan–long term portion (see Note 9)

     10,753         11,413   

Other long term liabilities

     9,203         6,393   
  

 

 

    

 

 

 

Total other long-term liabilities

   $ 49,570       $ 47,178   
  

 

 

    

 

 

 

 

12


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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 5. FAIR VALUE MEASUREMENTS

Assets/Liabilities Measured at Fair Value on a Recurring Basis

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

 

     As of April 1, 2012      As of January 1, 2012  
     Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial Assets

                       

Cash equivalents:

                       

Money market funds

   $ 18,712       $ —         $ —         $ 18,712       $ 77,952       $ —         $ —         $ 77,952   

Corporate notes/bonds

     —           —           —           —           —           1,340         —           1,340   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total cash equivalents

     18,712         —           —           18,712         77,952         1,340         —           79,292   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments:

                       

U.S. treasuries

     10,046         —           —           10,046         10,072         —           —           10,072   

Corporate notes/bonds

     —           24,087         —           24,087         —           33,028         —           33,028   

Federal agency

     —           9,202         —           9,202         —           15,524         —           15,524   

Commercial paper

     —           3,297         —           3,297         —           7,189         —           7,189   

Certificates of deposit

     —           802         —           802         —           800         —           800   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term investments

     10,046         37,388         —           47,434         10,072         56,541         —           66,613   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Long-term investments:

                       

Auction rate securities

     —           —           19,065         19,065         —           —           19,004         19,004   

Marketable equity securities

     4,377         —           —           4,377         3,013         —           —           3,013   

Non-marketable equity securities

     —           —           1,200         1,200         —           —           1,200         1,200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term investments

     4,377         —           20,265         24,642         3,013         —           20,204         23,217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Employee deferred compensation plan:

                       

Mutual funds

     20,871         —           —           20,871         18,046         —           —           18,046   

Equity securities

     4,891         —           —           4,891         5,448         —           —           5,448   

Fixed income

     4,047         —           —           4,047         3,799         —           —           3,799   

Cash equivalents

     2,148         —           —           2,148         1,960         —           —           1,960   

Money market funds

     3,486         —           —           3,486         3,723         —           —           3,723   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total employee deferred compensation plan

     35,443         —           —           35,443         32,976         —           —           32,976   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 68,578       $ 37,388       $ 20,265       $ 126,231       $ 124,013       $ 57,881       $ 20,204       $ 202,098   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

                       

Employee deferred compensation plan

   $ 35,049       $ —         $ —         $ 35,049       $ 32,485       $ —         $ —         $ 32,485   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Valuation Techniques:

 

   

Level 1 includes instruments for which quoted prices in active markets for identical assets or liabilities that we have the ability to access. Our financial assets utilizing Level 1 inputs include U.S. treasuries, money market funds, marketable equity securities and our employee deferred compensation plan.

 

   

Level 2 includes instruments for which the valuations are based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. Level 2 assets consist of certain marketable debt instruments for which values are determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Our Level 2 instruments include certain U.S. government securities, commercial paper and corporate notes and bonds.

 

   

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Financial assets utilizing Level 3 inputs primarily include auction rate securities. We use an income approach valuation model to estimate the exit price of the auction rate securities, which is derived as the weighted-average present value of expected cash flows over various periods of illiquidity, using a risk adjusted discount rate that is based on the credit risk and liquidity risk of the securities.

Sale of Auction Rate Securities

In December 2011, we entered into a settlement and securities purchase agreement (the “Securities Agreement”) with a certain financial institution. Pursuant to the terms of the Securities Agreement, we agreed to sell to the financial institution certain of our ARS investments with an aggregate par value of approximately $19.1 million and carrying value of approximately $17.3 million at the time of sale ($17.4 million as of April 1, 2012) for an aggregate sale price of approximately $16.4 million. Under the terms of the Securities Agreement, we have the option to repurchase from the financial institution any of the ARS we sold to them until November 30, 2013 for the amount at which the related ARS were sold plus agreed upon funding costs. Because of our ability to repurchase the ARS from the date of sale through November 30, 2013, we maintain effective control of these ARS. As such, we did not account for the transaction as a sale and recognized the $16.4 million sale consideration we received as “Advances received for the sale of ARS” under “Other long-term liabilities” in the Condensed Consolidated Balance Sheets. We will continue to account for these ARS as if we never sold them until they are called or the expiration of our call option under the Securities Agreement.

The fair value of our investments in ARS was approximately $19.1 million and $19.0 million as of April 1, 2012 and January 1, 2012, respectively.

In the first quarter of fiscal 2012 and during the fourth quarter of fiscal 2011, we performed an analysis to assess the fair value of the ARS using a valuation model based on discounted cash flows. The assumptions used were the following:

 

     Q1-2012    Q4-2011

Years to liquidity

   7    7

Discount rates *

   1.49% -4.22%    1.75% -3.95%

Continued receipt of contractual interest which provides a premium spread for failed auctions

   Yes    Yes

 

* Discount rates incorporate a spread for both credit and liquidity risk.

Based on these assumptions, we estimated that the ARS were valued at approximately 91.2% and 90.9% of their stated par value as of April 1, 2012 and January 1, 2012, respectively, representing a decline in value of approximately $1.8 million and $1.9 million, respectively. These amounts were recorded as an unrealized loss in accumulated other comprehensive loss as of April 1, 2012 and January 1, 2012.

 

14


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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Level 3 Investments Measured Fair Value on a Recurring Basis

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 1, 2012

   $ 19,004   

Unrealized gain recorded in Other comprehensive loss

     61   
  

 

 

 

Balance as of April 1, 2012

   $ 19,065   
  

 

 

 

Level 3 Assets Measured at Fair Value on a Nonrecurring Basis

Certain of our assets, including intangible assets, goodwill and cost-method investments, are measured at fair value on a nonrecurring basis if impairment is indicated.

Investments in Equity Securities

Our investments in equity securities included long-term investments in non-marketable equity securities (investments in privately-held companies) of approximately $8.4 million and marketable equity securities (investments in publicly traded companies) of approximately $4.4 million as of April 1, 2012 ($3.2 million investments in non-marketable equity securities and $3.0 million investments in marketable equity securities as of January 1, 2012). Our privately-held equity investments are accounted for under the cost method as we have less than 20% ownership interest and we do not have the ability to exercise significant influence over the operations of the privately-held companies. These investments are periodically reviewed for other-than-temporary declines in fair value by considering available evidence, including general market conditions, financial condition, pricing in recent rounds of financing, if any, earnings and cash flow forecasts, recent operational performance and any other readily available market data. As a result of our recent evaluation, we determined that our investment in a certain privately-held company with an original carrying value of $2.0 million was impaired (fair value of $1.2 million). As such, we recognized an impairment loss of approximately $0.8 million in “Interest and other income, net” during three months ended April 1, 2012 and we classified the investment as Level 3 asset due to the absence of quoted market prices and inherent lack of liquidity. We had no impairment charges against our privately-held equity investments in the first quarter of fiscal 2011.

In February 2012, we entered into a Stock Purchase Agreement (the “Agreement”) with a company that works in the area of advanced battery storage. Pursuant to the terms of the Agreement, we purchased approximately $6 million of preferred stock from the company and have committed to purchase additional preferred stock in a series of subsequent closings subject to certain performance milestones that must be fulfilled within a defined and agreed upon timeline. Our future commitment to purchase additional preferred stock is approximately $0.6 million in fiscal 2012, $60.8 million in fiscal 2013 and $17.8 million in fiscal 2014 subject to the attainment of certain milestones and the timing of additional capital requests which could vary substantially. As of April 1, 2012, we own less than 10% of the company. If our future commitments are fully funded, we could become their majority shareholder. As of April 1, 2012, our initial investment of $6 million was recorded as part of our investments in non-marketable equity securities.

There were no significant transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the first quarter of fiscal 2012.

 

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 6. INVESTMENTS AND EMPLOYEE DEFERRED COMPENSATION PLAN

Available-For-Sale Securities

The following tables summarize our available-for-sale and other investments:

 

     As of April 1, 2012      As of January 1, 2012  
     Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
     Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (In thousands)  

Reported as cash equivalents:

                     

Money market funds

   $ 18,712       $ —         $ —        $ 18,712       $ 77,952       $ —         $ —        $ 77,952   

Corporate notes/bonds

     —           —           —          —           1,341         —           (1     1,340   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total cash equivalents

     18,712         —           —          18,712         79,293         —           (1     79,292   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Reported as short-term investments:

                     

Corporate notes/bonds

     24,056         37         (6     24,087         33,010         33         (15     33,028   

U.S. treasuries

     9,997         49         —          10,046         10,004         68         —          10,072   

Federal agency

     9,204         2         (4     9,202         15,526         4         (6     15,524   

Commercial paper

     3,297         —           —          3,297         7,189         1         (1     7,189   

Certificates of deposit

     802         —           —          802         801         —           (1     800   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total short-term investments

     47,356         88         (10     47,434         66,530         106         (23     66,613   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Reported as long-term investments:

                     

Auction rate securities

     20,901         —           (1,836     19,065         20,900         —           (1,896     19,004   

Marketable equity securities

     4,455         162         (240     4,377         3,253         —           (240     3,013   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term investments

     25,356         162         (2,076     23,442         24,153         —           (2,136     22,017   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities and other investments

   $ 91,424       $ 250       $ (2,086   $ 89,588       $ 169,976       $ 106       $ (2,160   $ 167,922   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

As of April 1, 2012, $1.8 million of the $2.1 million gross unrealized losses were related to ARS that had been in a continuous loss position for 12 months or more. As of January 1, 2012, $1.9 million of the $2.2 million gross unrealized losses were related to ARS that had been in a continuous loss position for 12 months or more. 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 April 1, 2012 or January 1, 2012.

 

16


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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

As of April 1, 2012, the contractual maturities of our available-for-sale investments and certificates of deposit were as follows (the table below does not include our investments in marketable equity securities):

 

     Cost      Fair Value  
     (In thousands)  

Maturing within one year

   $ 57,422       $ 57,496   

Maturing in one to three years

     8,646         4,650   

Maturing in more than three years

     20,901         19,065   
  

 

 

    

 

 

 

Total

   $ 86,969       $ 81,211   
  

 

 

    

 

 

 

Realized gains from sales of available-for-sale investments during three months ended April 1, 2012 and April 3, 2011 were not material.

Proceeds from sales or maturities of available-for-sale investments were $36.8 million and $78.3 million for the three months ended April 1, 2012 and April 3, 2011, respectively.

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 as our liabilities and the underlying 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, 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 April 1, 2012 and January 1, 2012, the fair value of the assets was $35.4 million and $33.0 million, respectively, and the fair value of the liabilities was $35.0 million and $32.5 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  
     April 1, 2012     April 3, 2011  
     (In thousands)  

Changes in fair value of assets recorded in:

    

Interest and other income, net

   $ 2,494      $ 1,473   

Changes in fair value of liabilities recorded in:

    

Cost of revenues

     (262     (203

Research and development expenses

     (423     (509

Selling, general and administrative expenses

     (1,254     (923
  

 

 

   

 

 

 

Total income (expense)

   $ 555      $ (162
  

 

 

   

 

 

 

 

17


Table of Contents

CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 7. STOCK-BASED COMPENSATION

Our equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.

The following table summarizes the stock-based compensation expense, by line item recorded in the Condensed Consolidated Statements of Operations:

 

     Three Months Ended  
     April 1,
2012
     April 3,
2011
 
     (In thousands)  

Cost of revenues

   $ 4,039       $ 6,510   

Research and development

     6,913         5,473   

Selling, general and administrative

     17,785         8,854   
  

 

 

    

 

 

 

Total Stock-based compensation

   $ 28,737       $ 20,837   
  

 

 

    

 

 

 

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 $6.2 million and $23.9 million for the three months ended April 1, 2012 and April 3, 2011, respectively. We did not recognize a tax benefit from stock option exercises for the three months ended April 1, 2012 or April 3, 2011.

As of April 1, 2012 and January 1, 2012, stock-based compensation capitalized in inventories totaled $8.0 million and $4.6 million, respectively.

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

 

     Three Months Ended  
     April 1,
2012
     April 3,
2011
 
     (In thousands)  

Stock options

   $ 1,651       $ 3,519   

Restricted stock units and restricted stock awards

     24,868         15,342   

Employee Stock Purchase Plan (“ESPP”)

     2,218         1,976   
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 28,737       $ 20,837   
  

 

 

    

 

 

 

 

18


Table of Contents

CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table summarizes the unrecognized stock-based compensation expense, net of estimated forfeitures, by type of awards as of April 1, 2012:

 

     As of April 1,
2012
     Weighted-
Average
Amortization
Period
 
     (In thousands)      (In years)  

Stock options

   $ 12,591         1.75   

Restricted stock units and restricted stock awards

     63,004         1.81   

ESPP

     6,111         0.82   
  

 

 

    

Total unrecognized stock-based compensation balance

   $ 81,706         1.73   
  

 

 

    

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
     April 1,
2012
   April 3,
2011

Expected life

   0.5-7.0 years    0.5-7.0 years

Volatility

   42.9%-46.1%    47.4%-50.3%

Risk-free interest rate

   0.2%-1.2%    0.2%-2.9%

Dividend yield

   2.8%    0.0%

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

Equity Incentive Program

As of April 1, 2012, approximately 19.2 million stock options or 10.2 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 1, 2012

     23,363      $ 6.49   

Granted

     3      $ 18.33   

Exercised

     (1,144   $ 5.42   

Forfeited or expired

     (288   $ 10.32   
  

 

 

   

Options outstanding as of April 1, 2012

     21,934      $ 6.50   
  

 

 

   

Options exercisable as of April 1, 2012

     15,447      $ 4.97   
  

 

 

   

The weighted-average grant-date fair value of the options granted during the three months ended April 1, 2012 and April 3, 2011 was not material.

 

19


Table of Contents

CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The aggregate intrinsic value of the options outstanding and options exercisable as of April 1, 2012 was approximately $206.6 million and $165.9 million, respectively. The aggregate intrinsic value represents the total pre-tax intrinsic value which would have been received by the option holders had all option holders exercised their options as of April 1, 2012 and do not include substantial tax payments.

The aggregate pre-tax intrinsic value of option exercises, which represents the difference between the exercise price and the value of Cypress common stock at the time of exercise, was $14.2 million during three months ended April 1, 2012 and $85.6 million during three months ended April 3, 2011.

The total number of exercisable in-the-money options was approximately 15.0 million shares as of April 1, 2012.

As of April 1, 2012, stock options vested and expected to vest totaled approximately 21.1 million shares, with a weighted-average remaining contractual life of 4.44 years and a weighted-average exercise price of $6.34 per share. The aggregate intrinsic value was approximately $201.6 million.

Restricted Stock Units and Restricted Stock Awards:

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

 

     Shares     Weighted-
Average
Grant
Date Fair
Value Per
Share
 
     (In thousands, except
per-share amounts)
 

Balance as of January 1, 2012

     9,005      $ 4.90   

Granted

     3,904      $ 16.07   

Released

     (3,372   $ 7.15   

Forfeited

     (1,353   $ 7.47   
  

 

 

   

Balance as of April 1, 2012

     8,184      $ 14.96   
  

 

 

   

In the first quarter of fiscal 2012, we released 3.4 million shares which included the vesting acceleration of 0.5 million performance-based awards (“PARS”). The Compensation Committee of our Board of Directors (the “Compensation Committee”) approved the acceleration of vesting of the 0.5 million shares that otherwise would have been forfeited as a result of our overachievement on the PSoC revenue milestone which well exceeded the target and achieved record revenues in fiscal 2011. As the vesting acceleration of these 0.5 million PARS was approved during the first quarter of fiscal 2012, they were treated as new awards for accounting purposes. As such, the related compensation cost of approximately $8.0 million was included in our Condensed Consolidated Statement of Operations for the three months ended April 1, 2012.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The 8.2 million outstanding restricted stock units and awards as of April 1, 2012 included approximately 3.8 million PARS granted under the Amended and Restated 1994 Stock Plan. These PARS were issued to certain senior-level employees in the first quarter of fiscal 2012 and can be earned ratably over a period of one to two years, subject to the achievement of certain performance milestones set by the Compensation Committee. These performance milestones include the following:

 

   

Core Grant – a company-wide scorecard of various individual milestones focused on financial results, cost savings, gaining additional market share, introducing new products on specific schedules and implementing various operational and customer facing systems (“Core Grant Scorecard”). Each individual milestone is assigned a specific number of points and each milestone has specific accomplishments that are documented in advance in order to achieve 100% of the milestone and scales down to a specific 0% point. The maximum number of points that can be achieved is 100 and there is no discretionary component to the Core Grant Scorecard. In order for an executive to earn 100% of the shares underlying the Core Grant, the Company must obtain 90.0 points or greater under the Core Grant Scorecard and the achievement then scales down linearly to 0% of shares earned if the Core Grant Scorecard is less than 50 points.

 

   

Tier 1 Grant – requires the Company to achieve an approved design win during calendar year 2012 at a certain large multi-national consumer electronics company utilizing certain of the Company’s new products (“Tier 1 Targeted Design Win”). In order for an executive to earn 100% of the shares underlying the Tier 1 Grant, the Tier 1 Targeted Design Win dollar value must be greater than a specified multimillion dollar amount and achievement then scales down linearly to 0% of the shares earned if the Tier 1 Targeted Grant Design Win is less than a specified dollar amount.

 

   

Tier 2 Grant – requires the Company to grow its 2012 annual revenue at a year-over-year percentage rate (“Annual Revenue Growth Rate”) greater than a group of peer companies that it directly competes with. There are ten (10) companies, including Cypress, that comprise the peer group and all companies have been agreed upon in advance by the Compensation Committee. To earn 100% of the shares underlying the Tier 2 Grant the Company would need to be ranked #1 out of 10 in the Annual Revenue Growth Rate. To earn 75%, 50% or 25% of the shares underlying the Tier 2 Grant, the Company would need to be ranked #2, #3, and #4, respectively, in the Annual Revenue Growth Rate. No shares can be earned if the Company is ranked #5 or below among the peer group or if the Company’s 2012 annual revenue change rate is negative by 10% or more regardless of how the Company ranks compared to the group of peer companies.

In the event of overachievement in the Tier 1 and Tier 2 Grant milestones and at the discretion of the Compensation Committee, the number of shares that can be earned could exceed 100% of the shares underlying the Tier 1 and Tier 2 Grants. However, under all circumstances, the total number of shares that can be earned under all three milestones cannot exceed the maximum target shares under the 2012 PARS.

Upon certification and confirmation by the Compensation Committee, the earned shares for the Core Grant and Tier 1 Grant shares will be 100% vested at the time of delivery. Tier 2 Grant shares will have a twelve-month cliff vest following certification of the milestone attainment.

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 8. COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

We lease certain facilities and equipment under non-cancelable operating lease agreements that expire at various dates through fiscal 2018. Some leases include renewal options, which would permit extensions of the expiration dates at rates approximating fair market rental values at the time of the extension.

As of April 1, 2012, future minimum lease payments under non-cancelable operating leases were as follows:

 

Fiscal Year    (In thousands)  

2012 (remaining nine months)

   $ 5,195   

2013

     4,875   

2014

     4,297   

2015

     3,590   

2016

     2,396   

2017 and thereafter

     3,369   
  

 

 

 

Total

   $ 23,722   
  

 

 

 

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 April 1, 2012, the gross value and net book value of manufacturing equipment purchased under a capital lease was approximately $17.8 million and $16.7 million, respectively. As of April 1, 2012, the total minimum lease payments under our capital leases amounted to approximately $16.6 million.

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

 

Fiscal Year    (In thousands)  

2012 (remaining 9 months)

   $ 2,011   

2013

     2,681   

2014

     2,681   

2015

     2,681   

2016 and thereafter

     6,524   
  

 

 

 

Total minimum lease payments

     16,578   

Less: amount representing interest

     1,126   
  

 

 

 

Present value of net minimum lease payments

   $ 15,452   
  

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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 recorded as an 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 reserve activities:

 

     Three Months Ended  
     April 1, 2012     April 3, 2011  
     (In thousands)  

Beginning balance

   $ 3,085      $ 3,347   

Settlements made

     (465     (220

Provisions

     436        339   
  

 

 

   

 

 

 

Ending Balance

   $ 3,056      $ 3,466   
  

 

 

   

 

 

 

Equity Investment Commitments

As disclosed in Note 5, we have committed to purchase additional preferred stock from a company that works in the area of advanced battery storage in a series of subsequent closings subject to certain performance milestones that must be fulfilled within a defined and agreed upon timeline. Our future commitment to purchase additional preferred stock is approximately $0.6 million in fiscal 2012, $60.8 million in fiscal 2013 and $17.8 million in fiscal 2014 subject to the attainment of certain milestones and the timing of additional capital requests which could vary substantially.

Litigation and Asserted Claims

On March 30, 2011, we filed a five patent infringement case against GSI Technology (“GSI”) 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 23, 2011, the International Trade Commission (ITC) instituted a formal action to enjoin the importation of GSI products that infringe four of our U.S. patents. On November 21, 2011, we expanded the scope of the ITC action to include GSI’s standard synchronous and ZBT SRAMs as well as a proprietary product made for GSI’s largest customer. We successfully completed trial in this matter on March 14, 2012 and post-trial briefing was complete as of April 6, 2012. We are currently awaiting the initial determination from the ITC, which is expected on or around July 28, 2012. We believe strongly in the merits of our ITC action, and intend to take the steps necessary to protect our intellectual property.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In July 2011, GSI filed requests for re-examination of two of our asserted U.S. Patents (Nos. 7,142,477 and 6,534,805) with the U.S. Patent and Trademark Office as well as a civil complaint with the Federal District Court in Northern California. The civil complaint accuses the QDR Consortium, of which we are a member, of certain anti-competitive activity. We filed a motion to dismiss that case which is pending, and the case is otherwise stayed. 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 civil complaint and we will vigorously defend ourselves in that 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.” The claim construction hearing in this matter is currently scheduled for May 28, 2012. CRG is seeking injunctive as well as unspecified monetary damages. As such, the possible range of losses remains unknown at this time. However, given that our PSoC5 is not yet commercially available, there are no commercial sales on which to award damages. We have investigated the claims asserted in the complaint and believe we have meritorious defenses and will vigorously defend ourselves in this matter.

On February 16, 2012, the bankruptcy trustee of the assets of Qimonda AG, a non-operating entity, filed a four-patent infringement case naming Cypress and four other defendants in the U.S. District Court of Eastern Virginia. The complaint involves an assortment of our products, including certain of our Touch products. We have reviewed the patents at issue and determined that we have both non-infringement and invalidity defenses. As such, we will defend ourselves vigorously in this matter. Qimonda is seeking injunctive relief as well as unspecified monetary damages. Because the case is at a very early stage and no specific monetary demand has been made, it is not possible for us to estimate the range of potential losses.

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.

NOTE 9. DEBT AND EQUITY TRANSACTIONS

Line of Credit

On March 28, 2012, we amended our revolving line of credit with Silicon Valley Bank to increase the available borrowing to $55 million and to extend the maturity date of the credit facility to March 27, 2013. On March 29, 2012, we borrowed $50 million with a one-year term under this line of credit. This loan was recorded as part of current liabilities and presented as “Loans payable” in the Condensed Balance Sheet as of April 1, 2012. At our option, loans made under this line of credit bear interest based upon the Wall Street Journal Prime Rate or LIBOR plus 2.5%. The line of credit agreement includes a variety of standard covenants including financial covenants with respect to an adjusted quick ratio and tangible net worth. As of April 1, 2012, 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. At April 1, 2012, the fair value of the loans payable approximated the carrying value due to the relatively short period of time to maturity.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Equipment Loans

In December 2011, we obtained equipment loans from a certain financial institution for an aggregate amount of approximately $14.1 million. These loans are collateralized by certain of our manufacturing equipment and bear interest of 3.15% to 3.18% per annum and are payable in 60 equal installments with the first installments due in January 2012. The related master loan agreement includes a variety of standard covenants including restrictions on merger with another company without consent (which shall not be unreasonably withheld), liquidation or dissolution, and distribution, lease or transfer of our ownership interest in these properties or assets. During the first quarter of fiscal 2012, we repaid approximately $0.7 million of the equipment loans. As of April 1, 2012, the outstanding balance of the equipment loans was approximately $13.5 million, of which approximately $2.7 million was recorded as part of “Other current liabilities” and $10.8 million was recorded as part of “Other long-term liabilities” in the 2012 Condensed Consolidated Balance Sheet. At April 1, 2012, the fair value of the equipment loans approximated the carrying value. The fair value was estimated using discounted cash flow analysis using relevant factors that might affect the fair value, such as present value factors and risk-free interest rates based on the U.S. Treasury yield curve.

The schedule of principal payments under our equipment loans is as follows:

 

Fiscal Year    (In thousands)  

2012 (remaining nine months)

   $ 1,997   

2013

     2,737   

2014

     2,825   

2015

     2,915   

2016

     3,004   
  

 

 

 

Total

   $ 13,478   
  

 

 

 

Stock Buyback Program:

$400 Million Program Authorized in Fiscal 2011

On September 20, 2011, our Board of Directors 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, other uses of cash, 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 the discretion of our board of directors. For the three months ended April 1, 2012, we used approximately $98 million from this program to repurchase approximately 6.1 million shares at an average share price of $16.15. Since we announced our $400 million stock buyback program in September 2011 through the end of the first quarter of fiscal 2012, we used approximately $177.8 million from this program to repurchase approximately 11.1 million shares at an average share price of $15.98. As of April 1, 2012, the total dollar value of the shares that may be repurchased under the program was approximately $222.2 million.

Dividends

On February 27, 2012, our Board approved a cash dividend of $0.11 per share payable to holders of record of our common stock at the close of business day on March 29, 2012. This cash dividend was paid on April 19, 2012 and totaled approximately $16.7 million which was accrued for in the first quarter of fiscal 2012 and shown as “Dividends payable” in the Condensed Consolidated Balance Sheet as of April 1, 2012.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 10. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss were as follows:

 

     As of  
     April 1,
2012
    January 1,
2012
 
     (In thousands)  

Accumulated net unrealized loss on available-for-sale investments

   $ (1,349   $ (1,551

Other

     (389     (389
  

 

 

   

 

 

 

Total accumulated other comprehensive loss

   $ (1,738   $ (1,940
  

 

 

   

 

 

 

NOTE 11. FOREIGN CURRENCY DERIVATIVES

We operate and sell products in various global markets and purchase capital equipment using the U.S. dollar and foreign currencies. As a result, we are exposed to risks associated with changes in foreign currency exchange rates. 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 April 1, 2012. 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 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. The aggregate notional value of outstanding forward contracts to hedge the risks associated with foreign currency denominated assets and liabilities as of April 1, 2012 and January 1, 2012 was not material.

NOTE 12. INCOME TAXES

Our income tax expense was $2.5 million for the three months ended April 1, 2012 and $1.4 million for the three months ended April 3, 2011. The tax provision for the first quarter of fiscal 2012 and fiscal 2011 was primarily attributable to non-U.S. taxes on income earned in foreign jurisdictions.

Unrecognized Tax Benefits

As of April 1, 2012 and January 1, 2012, the amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate totaled $27.9 million and $27.5 million, respectively.

Management believes events that could occur in the next 12 months and cause a material change in unrecognized tax benefits include, but are not limited to, the following:

 

   

completion of examinations by the U.S. or foreign taxing authorities; and

 

   

expiration of statute of limitations on 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 we may recognize approximately $2.5 million to $3.5 million of our existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.

Classification of Interest and Penalties

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 April 1, 2012 and January 1, 2012, the amount of accrued interest and penalties totaled $10.5 million and $9.8 million, respectively.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 13. NET INCOME (LOSS) PER SHARE

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

 

     Three Months Ended  
     April 1,
2012
    April 3,
2011
 
     (In thousands, except
per-share amounts)
 

Net income (loss) attributable to Cypress

   $ (19,460   $ 55,374   

Weighted-average common shares

     154,022        171,346   

Weighted-average diluted shares

     154,022        199,943   

Net income (loss) per share- basic

   $ (0.13   $ 0.32   

Net income (loss) per share- diluted

   $ (0.13   $ 0.28   

As a result of the net loss for the three months ended April 1, 2012, approximately 20.1 million weighted common stock equivalents were excluded in the computation of diluted net loss per share because their effect would have been anti-dilutive.

For the three months ended April 3, 2011, approximately 1.4 million weighted common stock equivalents were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive.

NOTE 14. SEGMENT, GEOGRAPHICAL AND CUSTOMER INFORMATION

Segment Information

During the three months ended April 1, 2012, we have realigned our operating segments as part of our continued efforts to better allocate key management resources and to focus on our core markets, such as our programmable products including our flagship programmable system-on-chip (“PSoC ® ”) solution and its derivatives, universal serial bus (“USB”), including the high performance West Bridge solutions, and our industry leading high performance static random access memory (“SRAM”) solutions. Accordingly, beginning with the three months ended April 1, 2012, we have reported our financial results under the following business segments:

 

Business Segments

  

Description

MPD : Memory Products Division

   An existing division that will continue to focus on our four SRAM business units, general-purpose programmable clocks and process technology licensing.

DCD : Data Communications Division

   An existing division realigned to focus solely on USB controllers, WirelessUSB™ and West Bridge ® peripheral controllers for handsets, personal computers and tablets.

PSD : Programmable Systems Division

   A new division focusing primarily on our PSoC ® and PSoC-based products. This business segment focuses on (1) the PSoC platform family of devices including PSoC 1, PSoC 3 and PSoC 5 and all derivatives; (2) PSoC-based user interface products such as CapSense ® touch-sensing and TrueTouch touchscreen products; (3) PSoC-based module solutions including Trackpad and Ovation™ Optical Navigation Sensors (ONS); (4) automotive products; and (5) certain legacy product lines.

ETD : Emerging Technologies Division

   Our “startup” division, which includes Cypress Envirosystems, AgigA Tech Inc. and Deca Technologies Inc., all majority-owned subsidiaries of Cypress. ETD also includes our foundry business and other development-stage activities.

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

As a result of the change in the structure of our operating segments, the financial results we reported in prior periods under the old business segment structure have been recast to conform to the new segment presentation. This reclassification did not impact our previously reported consolidated revenues, operating income, net income, or earnings per share. Also, the change in our business operating segments did not have any impact on the reporting units that we use for goodwill impairment purposes.

The following tables set forth certain information relating to our reportable business segments under the new reporting structure:

Revenue:

 

     Three Months Ended  
     April 1,
2012
     April 3,
2011
 
     (In thousands)  

Programmable Systems Division

   $ 81,535       $ 94,848   

Memory Products Division

     81,879         104,867   

Data Communications Division

     19,946         32,812   

Emerging Technologies Division

     1,729         583   
  

 

 

    

 

 

 

Total revenue

   $ 185,089       $ 233,110   
  

 

 

    

 

 

 

Income (Loss) before Income Taxes:

 

     Three Months Ended  
     April 1,
2012
    April 3,
2011
 
     (In thousands)  

Programmable Systems Division

   $ (4,137   $ 8,584   

Memory Products Division

     31,499        39,486   

Data Communications Division

     42        6,230   

Emerging Technologies Division

     (6,447     (4,904

Unallocated items:

    

Stock-based compensation

     (28,737     (20,837

Patent license fee

     (7,100     —     

Amortization of acquisition-related intangibles

     (731     (698

Restructuring charges

     (228     (734

Changes in value of deferred compensation plan

     555        (162

Gain on divestiture

     —          34,291   

Charitable donation of building

     —          (4,125

Impairment of assets and other

     (2,022     (591
  

 

 

   

 

 

 

Income (loss) before income taxes

   $ (17,306   $ 56,540   
  

 

 

   

 

 

 

 

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Depreciation:

 

     Three Months Ended  
     April 1,
2012
     April 3,
2011
 
     (In thousands)  

Programmable Systems Division

   $ 4,284       $ 5,019   

Memory Products Division

     4,280         5,557   

Data Communications Division

     1,103         1,738   

Emerging Technologies Division

     1,015         59   
  

 

 

    

 

 

 

Total depreciation

   $ 10,682       $ 12,373   
  

 

 

    

 

 

 

Geographical Information

The following table presents our revenues by geographical locations:

 

     Three Months Ended  
     April 1,
2012
     April 3,
2011
 
     (In thousands)  

United States

   $ 27,189       $ 31,121   

Europe

     23,373         35,420   

Asia:

     

China

     59,376         79,386   

South Korea

     21,431         22,193   

Rest of the World

     53,720         64,990   
  

 

 

    

 

 

 

Total revenue

   $ 185,089       $ 233,110   
  

 

 

    

 

 

 

Property, plant and equipment, net, by geographic locations were as follows:

 

     As of  
     April 1,
2012
     January 1,
2012
 
     (In thousands)  

United States

   $ 184,283       $ 187,438   

Philippines

     73,843         75,323   

Other

     22,103         22,218   
  

 

 

    

 

 

 

Total property, plant and equipment, net

   $ 280,229       $ 284,979   
  

 

 

    

 

 

 

We track our assets by physical location. Although management reviews asset information on a corporate level and allocates depreciation expense by segment, our chief operating decision maker does not review asset information on a segment basis.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Customer Information

Outstanding accounts receivable from Arkian, Avnet, Inc. and Macnica, Inc., three of our distributors, accounted for 16.5%, 16.3% and 12.9% of our consolidated accounts receivable as of April 1, 2012, respectively. Outstanding accounts receivable from Arrow Electronics, Inc., Arkian and Avnet, Inc., three of our distributors, accounted for 14.1%, 13.9% and 11.1% of our consolidated accounts receivable as of January 1, 2012, respectively.

Revenue generated through Avnet, Inc. and Arkian accounted for 13.0% and 10.4%, respectively, of our consolidated revenue for the three months ended April 1, 2012. Samsung Electronics (“Samsung”), an end customer, purchases our products from certain of our distributors, primarily from Arkian. Shipments made by our distributors to Samsung during the three months ended April 1, 2012 accounted for 11.4% of our consolidated revenue.

Revenue generated through Avnet, Inc. and Weikeng Industrial Co. Ltd. accounted for 14.7% and 10.3%, respectively, of our consolidated revenue for the three months ended April 3, 2011. We had no end customers accounting for 10% or greater of our consolidated revenue for the three months ended April 3, 2011.

NOTE 15. Subsequent Events

On April 30, 2012, we entered into a strategic Patent License Agreement (“PLA”) with IV Global Licensing LLC (“IV”) under which we and our majority-owned subsidiaries will receive a license to IV’s substantial patent portfolio. This transaction will allow us and IV to continue to develop our strategic relationship regarding patent monetization and litigation defense. Under the terms of the PLA, we have agreed to pay a license fee and to purchase certain litigation defense services from IV in the future. In addition, in a related agreement, IV is expected to make certain patent purchases from us in the near term. The exact terms and conditions of the PLA are subject to confidentiality provisions, and are the subject of an application for confidential treatment to be filed with the SEC.

One of the benefits that we received from the PLA was the avoidance of future litigation expenses as well as future customer disruption and based upon our analysis, using a relief from royalty method, we determined that a portion of the license fee that we will pay IV represents the cumulative cost relating to prior years. As such, we recorded approximately $7.1 million charge to cost of revenues during the three months ended April 1, 2012 and we recorded a corresponding liability for the same amount which is part of “Other current liabilities” in the Condensed Consolidated Balance Sheet as of April 1, 2012.

 

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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.

Adjustment to Previously Announced Preliminary Quarterly Results

On April 19, 2012, we issued a press release announcing our preliminary quarterly results for the three months ended April 1, 2012. In the press release, we reported cost of revenues of $86.2 million, net loss of $12.4 million and $0.08 net loss per share in the Condensed Consolidated Statement of Operations for the three months ended April 1, 2012. Subsequent to the issuance of our press release, we recorded an adjustment to our reported results relating to the signing of a strategic Patent License Agreement which covers prior years. The adjustment was a charge to cost of revenues of approximately $7.1 million which increased our cost of revenues to $93.3 million, our net loss to $19.5 million and our net loss per share to $0.13 for the three months ended April 1, 2012. Refer to Note 15 of Notes to Condensed Consolidated Financial Statements under Part I, Item 1 for more information on this adjustment.

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 PSoC ® families and derivatives such as CapSense ® touch sensing and TrueTouch™ solutions for touchscreens. We are the world leader in USB controllers, including the high-performance West Bridge ® solution that enhances connectivity and performance in multimedia handsets. In addition we are the industry leader in the high-performance SRAM memory market and a market leader in programmable timing devices. We serve numerous markets including consumer, mobile handsets, computation, data communications, automotive, industrial and military. Cypress programmable products can be found in a wide array of the world’s leading end products, including cell phones, tablets, PCs and PC peripherals, audio and gaming devices, household appliances, and communications devices.

As discussed in Note 14 of Notes to Condensed Consolidated Financial Statements under Part I, Item 1 – Financial Statements , we have realigned our business segments as outlined below.

 

Business Segments

  

Description

MPD : Memory Products Division

   An existing division that will continue to focus on our four SRAM business units, general-purpose programmable clocks and process technology licensing.

DCD : Data Communications Division

   An existing division realigned to focus solely on USB controllers, WirelessUSB™ and West Bridge ® peripheral controllers for handsets, PCs and tablets.

PSD : Programmable Systems Division

   A new division focusing primarily on our PSoC ® and PSoC-based products. This business segment focuses on (1) the PSoC platform family of devices including PSoC 1, PSoC 3 and PSoC 5 and all derivatives; (2) PSoC-based user interface products such as CapSense ® touch-sensing and TrueTouch touchscreen products; (3) PSoC-based module solutions including Trackpad and Ovation™ Optical Navigation Sensors (ONS); (4) automotive products; and (5) certain legacy product lines.

ETD : Emerging Technologies Division

   Our “startup” division, which includes Cypress Envirosystems, AgigA Tech Inc. and Deca Technologies Inc., all majority-owned subsidiaries of Cypress. ETD also includes our foundry business and other development-stage activities.

 

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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.

Results of Operations

Revenues

The following table summarizes our consolidated revenues by segments under the new reporting structure:

 

     Three Months Ended  
     April 1,
2012
     April 3,
2011
 
     (In thousands)  

Programmable Systems Division

   $ 81,535       $ 94,848   

Memory Products Division

     81,879         104,867   

Data Communications Division

     19,946         32,812   

Emerging Technologies Division

     1,729         583   
  

 

 

    

 

 

 

Total Revenues

   $ 185,089       $ 233,110   
  

 

 

    

 

 

 

Programmable Systems Division:

Revenues from the Programmable Systems Division decreased by $13.3 million in the first quarter of fiscal 2012, or approximately 14%, compared to the same prior-year period. The decrease was primarily attributable to a decline in sales of our TrueTouch ® touchscreen products and a decrease in sales of our PSoC platform family of devices. The decreases were partially offset by an increase in sales of our legacy controller communication products. The decrease in our TrueTouch ® revenue stream was primarily due to a decrease in revenue from our handset customers and lower average selling prices. Memory Products Division:

Revenues from the Memory Products Division decreased by approximately $23 million in the first quarter of fiscal 2012 or approximately 21.9%, compared to the same prior-year period. The decrease in MPD revenue was primarily attributable to (1) $10.8 million decrease in revenue of our SRAM products driven by the decreased demand from wireless and wireline end customers; (2) $7.6 million decrease in revenue due to the divestiture of our Image Sensors business unit during the three months ended April 3, 2011; (3) $2.7 million decrease in revenue of our general-purpose programmable clocks; and (4) $2.1 million decrease in revenue of our dual-port memories.

Data Communications Division:

Revenues from the Data Communications Division decreased by $12.9 million in the first quarter of fiscal 2012 or approximately 39.2%, compared to the same prior-year period primarily due to the decreases in sales of our West Bridge controllers and other USB related products.

Emerging Technologies Division:

Revenues from Emerging Technologies Division increased by $1.1 million in the first quarter of fiscal 2012 compared to the same prior-year period primarily due to the overall increase in demand as certain of our Emerging Technologies have begun initial production ramps.

 

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Cost of Revenues/Gross Margins

 

     Three Months Ended  
     April 1,
2012
    April 3,
2011
 
     (In thousands)  

Cost of revenues

   $ 93,308      $ 104,334   

Gross Margin

     49.6     55.2

Gross margin percentage decreased to 49.6% in the first quarter of fiscal 2012 from 55.2% in the first quarter of fiscal 2011. Gross margin decreased by 5.6 percentage points primarily due to (i) $7.1 million patent license fee recorded during the three months ended April 1,2012 related to a Patent License Agreement discussed in Note 15 of Notes to Condensed Consolidated Financial Statements under Part I, Item 1 and (ii) the impact of the negative gross margins of our majority-owned subsidiaries (i.e., emerging technologies), particularly Deca Technologies, Inc. which has commenced revenue generating activities during the first quarter of fiscal 2012.

Research and Development (“R&D”) Expenses

 

     Three Months Ended  
     April 1, 2012     April 3, 2011  
     (In thousands)  

R&D expenses

   $ 47,968      $ 47,865   

As a percentage of revenues

     25.9     20.5

Our future operating results depend to a considerable extent on our ability to maintain a competitive advantage. Our research and development efforts are focused on the development and design of new semiconductor products, as well as the continued development of advanced software platforms primarily for our programmable solutions and investments in new products for our Emerging Technologies Division. Our goal is to increase efficiency in order to maintain our competitive advantage. R&D expenditures during the first quarter of fiscal 2012 were relatively flat compared to the same prior-year period. As a percentage of revenues, R&D expenses were higher in the first quarter of 2012 driven by the decrease in total revenues in the same quarter. We continue to make substantial investments in R&D to ensure the availability of innovative products that meet the current and projected requirements of our customers’ most advanced designs.

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

 

     Three Months Ended  
     April 1, 2012     April 3, 2011  
     (In thousands)  

SG&A expenses

   $ 60,494      $ 58,652   

As a percentage of revenues

     32.7     25.2

SG&A expenses increased by $1.8 million in the first quarter of fiscal 2012 compared to the same prior-year period. The increase was primarily attributable to $1.3 million increase in professional and legal fees due mainly to our legal efforts to protect our intellectual property and $8.8 million increase in stock-based compensation which was primarily due to the additional compensation expense related to the vesting acceleration of certain performance-based awards discussed in Note 7 of Notes to Condensed Consolidated Financial Statements under Part I, Item 1. The said increases were partially offset by (i) $4.1 million donation of a building to a charitable organization in the first quarter of fiscal 2011; (ii) $2.0 million decrease in direct and indirect labor expenses, particularly bonus-related expenses and (iii) $1.5 million decrease in marketing and advertising expenses primarily due to the annual sales conference which took place in the first quarter of fiscal 2011 which did not take place in the first quarter of fiscal 2012.

 

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Gain on Divestiture

As part of our 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 for a total cash consideration of $34.0 million during the three months ended April 3, 2011. In connection with the divestiture, we recorded a gain of $34.3 million in our Condensed Statement of Operations for the three months ended April 3, 2011. We did not have any divestitures during the three months ended April 1, 2012.

Income Taxes

Our income tax expense was $2.5 million and $1.4 million for the three months ended April 1, 2012 and April 3, 2011, respectively. The tax provision for the first quarter of fiscal 2012 and fiscal 2011 was primarily attributable to income taxes associated with our non-U.S. operations.

LIQUIDITY AND CAPITAL RESOURCES

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

 

     As of  
     April 1, 2012     January 1, 2012  
     (In thousands)  

Cash and cash equivalents

   $ 61,284      $ 99,717   

Short-term investments

     47,434        66,613   
  

 

 

   

 

 

 

Total cash, cash equivalents and short-term investments

   $ 108,718      $ 166,330   
  

 

 

   

 

 

 

Total current assets

   $ 359,990      $ 405,650   

Total current liabilities

     369,883        326,460   
  

 

 

   

 

 

 

Working capital (deficit)

   $ (9,893   $ 79,190   
  

 

 

   

 

 

 

Key Components of Cash Flows

 

     Three Months Ended  
     April 1, 2012     April 3, 2011  
     (In thousands)  

Net cash provided by operating activities

   $ 16,327      $ 35,343   

Net cash provided by investing activities

   $ 1,493      $ 30,711   

Net cash used in financing activities

   $ (56,253   $ (209,639

Three Months Ended April 1, 2012:

During the three months ended April 1, 2012, cash and cash equivalents decreased by approximately $38.4 million primarily due to the $56.3 million cash we used in our financing activities (principally related to our cash dividend and stock buyback programs), partially offset by the cash we generated from our operating and investing activities of approximately $16.3 million and $1.5 million, respectively.

 

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Operating Activities

The $16.3 million cash generated from our operating activities during the three months ended April 1, 2012 was primarily due to $44.9 million in net favorable non-cash adjustments to our net loss, an increase in accounts payable and other liabilities and a decrease in accounts receivable, partially offset by the decrease in deferred margin on sales to distributors, an increase in inventories and increase in other current and long-term assets.

The key changes in our working capital as of April 1, 2012 compared to January 1, 2012 were as follows:

 

   

Total cash, cash equivalents and short-term investments decreased by $57.6 million primarily due to cash dividend and stock buyback programs.

 

   

Deferred margin on sales to distributors decreased by $23.1 million due to the decrease in distributor shipments.

 

   

Borrowings of $50 million in the first quarter of fiscal 2012 from a line of credit.

 

   

Deferred margin on sales to distributors decreased by $23.1 million due to the decrease in distributor shipments.

 

   

Other current liabilities increased by $9.6 million primarily due to the accrual of a patent license fee related to a Patent License Agreement discussed in Note 15 of Notes to Condensed Consolidated Financial Statements under Part I, Item 1.

 

   

Dividends payable increased by $2.9 million due to the increase in dividend per share from $0.09 to $0.11.

Investing Activities

During the three months ended April 1, 2012, we generated approximately $1.5 million of cash from our investing activities which was primarily due to $18.7 million net proceeds from the sales or maturities and purchases of available for sale investments, partially offset by $10.0 million cash we used for property and equipment expenditures and $7.2 million cash used for other investing activities.

Financing Activities

During the three months ended April 1, 2012, we used approximately $56.3 million cash in our financing activities. The net cash used in our financing activities was primarily due to $78.3 million cash we used to repurchase shares of our stock in the open market, $19.7 million payment related to statutory income tax withholdings on vested restricted stock awards in lieu of issuing shares of stock (considered as part of the our stock buyback program) and $13.8 million dividends paid, partially offset by the $50.0 million cash we drew from a line of credit and $6.2 million net proceeds from the issuance of common shares under our employee stock plans.

Three Months Ended April 3, 2011:

During the three months ended April 3, 2011, cash and cash equivalents decreased by approximately $143.6 million primarily due to the $209.6 million cash we used in our financing activities (principally related to our stock buyback programs), partially offset by the cash we generated from our operating and investing activities of approximately $35.3 million and $30.7 million, respectively.

Operating Activities

The $35.3 million cash we generated from our operating activities during the three months ended April 3, 2011 was primarily driven by net income adjusted for certain non-cash items including depreciation and amortization, stock-based compensation and partially offset by the gain on the divestiture of our Image Sensors business unit.

Investing Activities

During the three months ended April 3, 2011, we generated approximately $30.7 million cash from our investing activities which was primarily due to $34.9 million net proceeds from the sales or maturities and purchases of available for sale investments, and the receipt of approximately $15.0 million from the divestiture of our Image Sensors business unit, partially offset by $19.3 million cash we used for property and equipment expenditures.

Financing Activities

During the three months ended April 3, 2011, we used approximately $209.6 million cash in our financing activities. The net cash we used in our financing activities was primarily due to $116.4 million net cash we used related to our yield enhancement program, $76.4 million to repurchase shares of our stock and $40.7 million payment related to statutory income tax withholdings on vested restricted stock awards in lieu of issuing shares of stock, partially offset by $23.9 million proceeds from the issuance of common shares under our employee stock plans.

 

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Liquidity and Contractual Obligations

Liquidity

Stock Buyback Programs:

On September 20, 2011, our Board of Directors 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, other uses of cash, 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 the discretion of our board of directors. For the three months ended April 1, 2012, we used approximately $98 million from this program to repurchase approximately 6.1 million shares at an average share price of $16.15. Since we announced the new $400 million stock buyback program in September 2012 through the end of the first quarter of fiscal 2012, we used approximately $177.8 million from this program to repurchase approximately 11.1 million shares at an average share price of $15.98. As of April 1, 2012, the total dollar value of the shares that may be repurchased under the program was approximately $222.2 million.

Contractual Obligations

The following table summarizes our contractual obligations as of April 1, 2012:

 

     Total      2012      2013 and
2014
     2015 and
2016
     After
2016
 
     (In thousands)  

Purchase obligations (1)

   $ 78,368       $ 77,392       $ 976       $ —         $ —     

Operating lease commitments

     23,722         5,195         9,172         5,986         3,369   

Capital lease commitments

     16,578         2,011         5,362         9,205         —     

Patent license fee commitments (2)

     14,000         14,000         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 132,668       $ 98,598       $ 15,510       $ 15,191       $ 3,369   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Purchase obligations 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.

 

(2) On April 30, 2012, we entered into a patent license agreement whereby we have committed to pay a total patent license fee of $14 million in fiscal 2012. We have also committed to pay another $5.8 million on or before April 30, 2016 representing fees for future purchases of patents and patent related services.

As of April 1, 2012, our unrecognized tax benefits were $27.9 million, which were classified as long-term liabilities. We believe it is possible that we may recognize approximately $2.5 million to $3.5 million of our existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.

Equity Investment Commitments

As disclosed in Note 5 of Notes to Condensed Consolidated Financial Statements under Part I, Item 1 – Financial Statements , we have committed to purchase additional preferred stock from a company that works in the area of advanced battery storage in a series of subsequent closings subject to certain performance milestones that must be fulfilled within a defined and agreed upon timeline. Our future commitment to purchase additional preferred stock is approximately $0.6 million in fiscal 2012, $60.8 million in fiscal 2013 and $17.8 million in fiscal 2014 subject to the attainment of certain milestones and the timing of additional capital requests which could vary substantially.

 

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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 and payments of regularly scheduled cash dividends. As of April 1, 2012, in addition to $61.3 million in cash and cash equivalents, we had $47.4 million invested in short-term investments for a total cash and short-term investment position of $108.7 million that is available for use in our current operations.

As of April 1, 2012, approximately 9% of our cash, cash equivalents and available-for-sale investments 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 tax and other transfer restrictions.

We believe that liquidity provided by existing cash, cash equivalents and available-for-sale 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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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  
     April 1, 2012      April 3, 2011  
     (In thousands, except per
share amounts)
 

Non-GAAP gross margin

   $ 103,182       $ 135,427   

Non-GAAP research and development expenses

   $ 40,632       $ 41,883   

Non-GAAP selling, general and administrative expenses

   $ 41,502       $ 44,750   

Non-GAAP operating income

   $ 21,048       $ 48,794   

Non-GAAP net income attributable to Cypress

   $ 20,530       $ 48,483   

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

   $ 0.12       $ 0.24   

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.

 

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CYPRESS SEMICONDUCTOR CORPORATION

RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES

(In thousands, except per-share data)

(Unaudited)

 

     Three Months Ended  
     April 1, 2012     April 3, 2011  
     (In thousands, except per
share amounts)
 

GAAP gross margin

   $ 91,781      $ 128,776   

Patent license fee

     7,100        —     

Stock-based compensation expense

     4,039        6,510   

Changes in value of deferred compensation plan

     262        203   

Impairment of assets and others

     —          (62
  

 

 

   

 

 

 

Non-GAAP gross margin

   $ 103,182      $ 135,427   
  

 

 

   

 

 

 

GAAP research and development expenses

   $ 47,968      $ 47,865   

Stock-based compensation expense

     (6,913     (5,473

Changes in value of deferred compensation plan

     (423     (509
  

 

 

   

 

 

 

Non-GAAP research and development expenses

   $ 40,632      $ 41,883   
  

 

 

   

 

 

 

GAAP selling, general and administrative expenses

   $ 60,494      $ 58,652   

Stock-based compensation expense

     (17,785     (8,854

Changes in value of deferred compensation plan

     (1,254     (923

Building donation

     —          (4,125

Impairment of assets and other

     47        —     
  

 

 

   

 

 

 

Non-GAAP selling, general and administrative expenses

   $ 41,502      $ 44,750   
  

 

 

   

 

 

 

GAAP operating income (loss)

   $ (17,640   $ 55,118   

Stock-based compensation expense

     28,737        20,837   

Patent license fee

     7,100        —     

Changes in value of deferred compensation plan

     1,939        1,635   

Acquisition-related expenses

     731        698   

Restructuring charges

     228        734   

Gain on divestiture

     —          (34,291

Building donation

     —          4,125   

Impairment of assets and others

     (47     (62
  

 

 

   

 

 

 

Non-GAAP operating income

   $ 21,048      $ 48,794   
  

 

 

   

 

 

 

 

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CYPRESS SEMICONDUCTOR CORPORATION

RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES –(Continued)

(In thousands, except per-share data)

(Unaudited)

 

GAAP net income (loss) attributable to Cypress

   $ (19,460   $ 55,374   

Stock-based compensation

     28,737        20,837   

Patent license fee

     7,100        —     

Impairment of assets and other

     2,022        (62

Acquisition-related expenses

     731        698   

Restructuring charges

     228        734   

Changes in value of deferred compensation plan

     (555     162   

Gain on divestiture

     —          (34,291

Investment-related gains/losses

     —          71   

Building donation

     —          4,125   

Tax effects

     1,727        835   
  

 

 

   

 

 

 

Non-GAAP net income attributable to Cypress

   $ 20,530      $ 48,483   
  

 

 

   

 

 

 

GAAP net income (loss) per share attributable to Cypress-diluted

   $ (0.13   $ 0.28   

Stock-based compensation expense and other

     0.17        0.10   

Patent license fee

     0.04        —     

Impairment of assets and other

     0.01        —     

Acquisition-related expenses

     0.01        0.01   

Gain on divestiture

     —          (0.17

Building donation

     —          0.02   

Tax effects

     0.01        —     

Non-GAAP share count adjustment

     0.01        —     
  

 

 

   

 

 

 

Non-GAAP net income attributable to Cypress- diluted

   $ 0.12      $ 0.24   
  

 

 

   

 

 

 

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 available-for-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.

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.

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 April 1, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

The information required by this item is included in Note 8 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

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 1, 2012.

 

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

ISSUER PURCHASES OF EQUITY SECURITIES

On September 20, 2011, our Board of Directors (the “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, other uses of cash, 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 the discretion of our Board.

The table below sets forth information with respect to repurchases of our common stock made during the first quarter of fiscal 2012 under this program:

 

     Total
Number of
Shares
Purchased
     Average
Price Paid
per Share
     Total Shares
Purchased as
Part of Publicly
Announced  Programs
     Total Dollar Value
of Shares That May Yet Be
Purchased Under the Plan
or Program
 
     (In thousands, except per-share amounts)  

Remaining balance available for purchases at the beginning of the period

            $ 320,189   

Repurchases during Q1-2012 (1):

           

January 2, 2012—January 29, 2012

     97       $ 16.90         97       $ 318,543   

January 30, 2012—February 26, 2012

     1,087         17.87         1,087       $ 299,124   

February 27, 2012—April 1, 2012

     4,887         15.75         4,887       $ 222,160   
  

 

 

       

 

 

    

Total repurchases during Q1-2012

     6,071       $ 16.15         6,071       $ 222,160   
  

 

 

       

 

 

    

 

(1) Monthly information is presented by reference to the Company’s fiscal months during the first quarter of fiscal 2012.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    MINE SAFETY DISCLOSURES

Not Applicable.

 

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Table of Contents
ITEM 5.    OTHER INFORMATION

Business Operating Segments

As discussed in Note 14 of Notes to Condensed Consolidated Financial Statements under Item 1 – Financial Statements and Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations , we have realigned our business operating segments during the first quarter of fiscal 2012. Beginning with the three months ended April 1, 2012, we have reported our financial results under the following four business operating segments: (1) Programmable Systems Division; (2) Memory Products Division; (3) Data Communications Division and (4) Emerging Technologies Division. As a result of this change, all historical financial results have been recast to conform to the new business segment presentation. This reclassification did not impact our previously reported consolidated revenues, operating income, net income, or earnings per share. Also, the change in our business operating segments did not have any impact on the reporting units that we use for goodwill impairment purposes. Had the change in our business operating segments been in effect for the years ended January 1, 2012, January 2, 2011 and January 3, 2010, financial results by reportable business segment in those years would have been the following:

Revenues

 

     Year Ended  
     January 1,
2012
     January 2,
2011
     January 3,
2010
 
     (In thousands)  

Programmable Systems Division

   $ 482,895       $ 280,616       $ 198,618   

Memory Products Division

     394,832         467,421         340,401   

Data Communications Division

     112,683         127,021         127,115   

Emerging Technologies Division

     4,794         2,474         1,652   
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 995,204       $ 877,532       $ 667,786   
  

 

 

    

 

 

    

 

 

 

Income (Loss) Before Income Taxes

 

     Year Ended  
     January 1,
2012
    January 2,
2011
    January 3,
2010
 
     (In thousands)  

Programmable Systems Division

   $ 91,639      $ 16,955      $ (25,741

Memory Products Division

     154,591        175,267        50,928   

Data Communications Division

     13,238        20,695        9,890   

Emerging Technologies Division

     (19,885     (17,755     (15,625

Unallocated items:

      

Stock-based compensation expense

     (100,781     (91,459     (141,812

Gain on divestitures

     34,291        —          —     

Restructuring charges

     (6,336     (2,975     (15,242

Charitable donation of building

     (4,125     —          —     

Amortization of acquisition-related intangibles

     (2,892     (3,028     (3,804

Impairment of assets

     (1,982     (4,927     —     

Impairment of investments

     (800     —          (2,549

Interest and non-cash expense for convertible debt

     —          —          (1,090

Other

     (1,380     1,393        (471
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 155,578      $ 94,166      $ (145,516
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Depreciation

 

     Year Ended  
     January 1,
2012
     January 2,
2011
     January 3,
2010
 
     (In thousands)  

Programmable Systems Division

   $ 23,497       $ 15,509       $ 15,524   

Memory Products Division

     19,199         25,344         25,694   

Data Communications Division

     5,564         6,829         9,264   

Emerging Technologies Division

     373         177         213   
  

 

 

    

 

 

    

 

 

 

Total depreciation

   $ 48,633       $ 47,859       $ 50,695   
  

 

 

    

 

 

    

 

 

 

Quarterly Executive Incentive Payments

There were no payments made to our executive officers under the Key Employee Bonus Plan or Performance Bonus Plan for the three months ended April 1, 2012 since the minimum financial threshold (pre-tax non-GAAP profit margin of 15%) required to make any bonus payment was not achieved.

On May 9, 2012, Cypress’s Compensation Committee of the Board of Directors approved an incentive payment to Mr. Paul Keswick, our Executive Vice President of New Product Development, amounting to $11,480. The payment made to Mr. Keswick was in accordance with the terms of our Design Bonus Plan (the “DBP”). The payment was determined based upon the performance of Mr. Keswick during the first quarter of fiscal 2012. Mr. Keswick is the only named executive officer participant to the DBP as it is a bonus plan available to our design and certain product development engineers.

 

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Table of Contents

ITEM 6.    EXHIBITS

 

Exhibit

Number

 

Description

  10.1   Amended and Restated Loan and Security Agreement with Silicon Valley Bank dated March 28, 2012
  10.2**   Key Employee Bonus Plan as Amended on May 9, 2012
  31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  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.
  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.
101.INS*   XBRL Instance Document.
101.SCH*   XBRL Taxonomy Extension Schema Document.
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document.

 

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
** This exhibit is a management contract or compensatory plan or arrangement.

 

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Table of Contents

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: May 9, 2012

  By:  

/s/    B RAD W. B USS

    Brad W. Buss
   

Executive Vice President, Finance and Administration

and Chief Financial Officer

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit

Number

 

Description

     10.1   Amended and Restated Loan and Security Agreement with Silicon Valley Bank dated March 28, 2012
     10.2 **   Key Employee Bonus Plan as Amended on May 9, 2012
     31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     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.
     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.
   101.INS*   XBRL Instance Document.
   101.SCH*   XBRL Taxonomy Extension Schema Document.
   101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document.
   101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document.
   101.LAB*   XBRL Taxonomy Extension Label Linkbase Document.
   101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document.

 

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
** This exhibit is a management contract or compensatory plan or arrangement.

Exhibit 10.1

AMENDMENT NO. 4

TO

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

T HIS A MENDMENT N O . 4 TO A MENDED AND R ESTATED L OAN AND S ECURITY A GREEMENT (this “ Amendment ”) is entered into as of this 28th day of March, 2012 (the “ Amendment Date ) , by and between C YPRESS S EMICONDUCTOR C ORPORATION , a Delaware corporation (“ Borrower ”), and S ILICON V ALLEY B ANK (“ Bank ”). Capitalized terms used herein without definition shall have the same meanings given them in the Loan Agreement (as defined below).

R ECITALS

A. Borrower and Bank have entered into that certain Amended and Restated Loan and Security Agreement dated as of March 2, 2009 (as amended to date, the “ Loan Agreement ”), pursuant to which Bank agreed to extend and make available to Borrower certain advances of money.

B. Borrower desires that Bank amend the Loan Agreement to, among other things, increase the commitment amount.

C. Subject to the representations and warranties of Borrower herein and upon the terms and conditions set forth in this Amendment, Bank is willing to so amend the Loan Agreement.

A GREEMENT

NOW, THEREFORE, in consideration of the foregoing Recitals and intending to be legally bound, the parties hereto agree as follows:

1. Amendments to Loan Agreement.

1.1 Section 2.4 (Fees). Section 2.4 of the Loan Agreement is hereby amended by adding a new subsection (c) as follows:

“(c) “A fee (the “ Unused Revolving Line Facility Fee ”), payable quarterly in arrears, in an amount equal to 10 basis points (.10%) per annum of the average unused portion of the Revolving Line, as determined by Bank. Borrower shall not be entitled to any credit, rebate or repayment of any Unused Revolving Line Facility Fee previously earned by Bank pursuant to this Section notwithstanding any termination of the Agreement or the suspension or termination of Bank’s obligation to make loans and advances hereunder.”

1.2 Section 6.7 (Financial Covenants). Subsection (b) (Adjusted Quick Ratio) of Section 6.7 is hereby amended in its entirety as follows:

“(b) Adjusted Quick Ratio. A ratio of (A) unrestricted cash, cash equivalents, short and long term Investments and accounts receivable net of reserves to (B) Current Liabilities less the current portion of deferred revenue, of not less than 0.75:1.00 for the fiscal quarter ending March 31, 2012, and not less than 1.00:1.00 for all other fiscal quarters.”

1.3 Section 13 (Definitions) . The definitions for the following terms are amended and restated in their entirety, and added, as follows:

“Committed Revolving Line” is an Advance or Advances not to exceed a principal amount outstanding at any time of $55,000,000.

“Maturity Date” is March 27, 2013.

 

1


Exhibit 10.1

AMENDMENT NO. 4

TO

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT – (Continued)

“Unused Revolving Line Facility Fee” is defined in Section 2.4(c).

2 . B ORROWER S R EPRESENTATIONS A ND W ARRANTIES . Borrower represents and warrants that:

(a) immediately upon giving effect to this Amendment (i) the representations and warranties contained in the Loan Documents are true, accurate and complete in all material respects as of the date hereof (except to the extent such representations and warranties relate to an earlier date, in which case they are true and correct as of such date), and (ii) no Event of Default has occurred and is continuing;

(b) Borrower has the corporate power and authority to execute and deliver this Amendment and to perform its obligations under the Loan Agreement, as amended by this Amendment;

(c) the certificate of incorporation, bylaws and other organizational documents of Borrower delivered to Bank on the Original Closing Date remain true, accurate and complete and have not been amended, supplemented or restated and are and continue to be in full force and effect;

(d) the execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the Loan Agreement, as amended by this Amendment, have been duly authorized by all necessary corporate action on the part of Borrower; and

(e) this Amendment has been duly executed and delivered by the Borrower and is the binding obligation of Borrower, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors’ rights.

3 . L IMITATION . The amendments and modifications set forth in this Amendment shall be limited precisely as written and shall not be deemed (a) to be a waiver or modification of any other term or condition of the Loan Agreement or of any other instrument or agreement referred to therein or to prejudice any right or remedy which Bank may now have or may have in the future under or in connection with the Loan Agreement or any instrument or agreement referred to therein; or (b) to be a consent to any future amendment or modification or waiver to any instrument or agreement the execution and delivery of which is consented to hereby, or to any waiver of any of the provisions thereof. Except as expressly amended hereby, the Loan Agreement shall continue in full force and effect.

4 . E FFECTIVENESS . This Amendment shall become effective upon the satisfaction of all the following conditions precedent:

4.1 Amendment . Borrower and Bank shall have duly executed and delivered this Amendment to Bank and Guarantor shall have duly executed and delivered a Reaffirmation in the form attached hereto.

4.2 Authorization. Borrower shall have delivered to Bank copies of resolutions of its board of directors authorizing the borrowing of the Committed Revolving Line, certified by a Responsible Officer of Borrower as of the date hereof.

 

2


Exhibit 10.1

AMENDMENT NO. 4

TO

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT – (Continued)

4.3 Payment of Bank Expenses . Borrower shall have paid all Bank Expenses (including all reasonable attorneys’ fees and reasonable expenses) incurred through the date of this Amendment.

5. C OUNTERPARTS . This Amendment may be signed in any number of counterparts, and by different parties hereto in separate counterparts, with the same effect as if the signatures to each such counterpart were upon a single instrument. All counterparts shall be deemed an original of this Amendment.

6. I NTEGRATION . This Amendment, the Loan Documents and any documents executed in connection herewith or pursuant hereto contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements, understandings, offers and negotiations, oral or written, with respect thereto and no extrinsic evidence whatsoever may be introduced in any judicial or arbitration proceeding, if any, involving this Amendment or the Loan Documents; except that any financing statements or other agreements or instruments filed by Bank with respect to Borrower shall remain in full force and effect.

7. G OVERNING L AW . THIS AMENDMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above.

 

B ORROWER :    

C YPRESS S EMICONDUCTOR C ORPORATION

a Delaware corporation

    By:  

 

    Printed Name:  

 

    Title:  

 

 

B ANK :     S ILICON V ALLEY B ANK
    By:  

 

    Printed Name:  

 

    Title:  

 

 

 

3


Exhibit 10.1

AMENDMENT NO. 4

TO

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT – (Continued)

ACKNOWLEDGEMENT, CONSENT AND

REAFFIRMATION OF GUARANTOR

The undersigned (a “ Guarantor ”) executed an Unconditional Guaranty in favor of S ILICON V ALLEY B ANK (“ Bank ”) in respect of the Loan and Security Agreement, dated as of September 25, 2003 (as amended and restated as of March 2, 2009, and as may be further amended from time to time, the “ Loan Agreement ”), by and between C YPRESS S EMICONDUCTOR C ORPORATION (“ Borrower ”) and Bank and hereby acknowledge that it has received a copy of, and has read, that certain Amendment No. 4 to Amended and Restated Loan and Security Agreement (“ Amendment ”) dated as of March 28, 2012, between Borrower and Bank. Guarantor (i) consents to all amendments and modifications made by the Amendment, (ii) reconfirms and ratifies the Unconditional Guaranty to which Guarantor is a party and (iii) agrees that such Unconditional Guaranty shall remain in full force and effect with respect to the Loan Agreement as amended by the Amendment and all obligations thereunder; and that the consent, amendments and modifications shall not act as a limitation on Guarantor’s liability under its Unconditional Guaranty.

Dated: March 28, 2012

 

Guarantor:     C YPRESS S EMICONDUCTOR (M INNESOTA ), I NC .
    By:  

 

    Name:  

 

    Title:  

 

 

4

Exhibit 10.2

CYPRESS SEMICONDUCTOR CORPORATION

THE KEY EMPLOYEE BONUS PLAN

(as amended on May 9, 2012)

Section 1 Plan Objective and Participants

The Key Employee Bonus Plan (“KEBP” or the “Plan”) is designed to provide a variable performance-based cash incentive to employees who play a key role in driving the future success of Cypress Semiconductor Corporation (“Cypress”).

Section 2 Effective Date

This Plan is effective as of January 4, 2010. Each fiscal quarter and one annual payment period constitute the five performance periods (“Performance Period”) for each fiscal year. Payouts under the Plan will be made for each Performance Period, if applicable.

Section 3 Participation Eligibility

Executive vice presidents may recommend to the President/CEO for his approval specific employees and target incentive levels as set forth below in Section 6. The President/CEO will approve the list of participants, at his discretion.

At the beginning of each fiscal year, the Human Resources Department will notify participants of their eligibility to participate and their target incentive level percentage for the fiscal year.

Newly hired employees may be added as participants during a Performance Period, and their payout will be prorated based on the number of months of participation in the Performance Period.

Participation in the Plan does not guarantee any right to Plan payouts or continued employment at Cypress. The President/CEO and the Compensation Committee of the Board of Directors reserve the right to modify or cancel the Plan, cancel any payment due or earned under the Plan, or discontinue participation of any employee in the Plan, at any time and for any reason, at their discretion.

Section 4 Plan Payment Calculation

The following formula applies to the determination of each participant’s payout for each Performance Period:

 

Annual Base
Pay

  ×  

Incentive
Level%

   ×    Financial
Performance
Metric %
Achievement
   ×    CSF Score    x    EO Factor
    5                  

“Financial Performance Metric” (“FPM”) represents a certain financial performance milestone established by the Compensation Committee. The achievement on the FPM can range from 0% to 200%. The minimum FPM for any Performance Period will be pre-determined by the Compensation Committee in their sole discretion and can be revised at any time by the Compensation Committee.

“CSF” means a participant’s Critical Success Factor, or quarterly or annual performance goals, for the applicable Performance Period.

“EO Factor” means a factor based on the CSF score, taken as a percentage, of the CEO and an executive officer or executive manager the participant reports to (the “Executive Manager”) as set forth in Section 7.3.

The President/CEO may recommend for approval by the Compensation Committee of the Board of Directors, changes in any metrics that apply to the Plan formula.

 

1


Exhibit 10.2

CYPRESS SEMICONDUCTOR CORPORATION

THE KEY EMPLOYEE BONUS PLAN

(as amended on May 9, 2012) – (Continued)

Section 5 Annual Base Pay

The base pay in each payment calculation is the participant’s annual base pay as of the last business day of the Performance Period being measured.

Section 6 Incentive Level Percentage

The standard target incentive levels are 20%, 30%, 50% or 80% of annual base pay and may vary. The incentive level determines the percentage of that individual’s base salary he or she is eligible to earn in each Performance Period.

Section 7 Multiplier Factors

Participant’s CSFs Score: If the minimum financial performance metric is achieved, subject to the EO Factor, the amount that a participant is eligible to earn is multiplied by the participant’s CSF score for the Performance Period.

Every participant will work with his or her manager to prepare his or her quarterly and annual CSFs. The CSFs for the President/CEO are approved by the Compensation Committee and/or the Board of Directors. The President/CEO approves all CSFs for all executive vice presidents.

EO Factor: The CSF score of the President/CEO and each Executive Manager can negatively impact the payout to himself and to other participants in his organization in accordance with the following metrics:

The EO Factor is determined by using the lower of the CEO CSF score or the Executive Manager CSF score to determine an EO Factor. The EO Factor is determined as follows:

 

If the LOWER of the CEO CSF score and Executive Manager CSF score is:

   Then the EO Factor is:  

80.00 or higher

     100

65.00 or higher, and less than 80.00

     50

Less than 65.00

     0

An Executive Manager whose total CSF score is below 65.00% forfeits the payout for the Performance Period even if the minimum FPM is achieved. In addition, all participants within the Executive Manager’s organization also forfeit their payout.

An Executive Manager whose total CSF score is between 65.00% and 79.99% will only receive a payout of 50% of his or her target payout for the Performance Period, even if the minimum FPM is achieved. In addition, all participants in the Executive Manager’s organization will also receive 50% of their target payout for the applicable Performance Period.

The President/CEO’s CSF score can also affect the Executive Manager’s payout and the payout of all participants in the Plan. If the President/CEO’s total CSF score is below 65.00%, there will be no payout to him and all other participants for the Performance Period, even if all other factors are achieved. A total CSF score between 65.00% and 79.99% results in a payout of 50% of the target amount to the President/CEO and all other participants for the Performance Period.

 

2


Exhibit 10.2

CYPRESS SEMICONDUCTOR CORPORATION

THE KEY EMPLOYEE BONUS PLAN

(as amended on May 9, 2012) – (Continued)

Any exemptions from the application of the EO Factor must be approved by the President/CEO.

Additional Factors: Cypress management, in its discretion, may consider other factors in the final calculation of a participant’s payout.

Section 8 Termination

No bonus will be paid to Plan participants who terminate (voluntarily, for cause or through a reduction in force) prior to the payment date for the performance period.

 

3

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: May 9, 2012     By:  

/s/    T. J. RODGERS

      T. J. Rodgers
      President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

I, Brad W. Buss, 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: May 9, 2012     By:  

/s/    BRAD W. BUSS

      Brad W. Buss
     

Executive Vice President, Finance and Administration

and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

I, T. J. Rodgers, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Cypress Semiconductor Corporation for the quarter ended April 1, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Cypress Semiconductor Corporation.

 

Dated: May 9, 2012     By:   /s/    T. J. RODGERS
      T. J. Rodgers
      President and Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

I, Brad W. Buss, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Cypress Semiconductor Corporation for the quarter ended April 1, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Cypress Semiconductor Corporation.

 

Dated: May 9, 2012     By:  

/s/    BRAD W. BUSS

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