Cypress Semiconductor Corporation
CYPRESS SEMICONDUCTOR CORP /DE/ (Form: 10-Q, Received: 11/05/2015 19:11:31)

 

 

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 September 27, 2015

OR

o

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   o

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   o

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

 

o   (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   o     No   x

The total number of outstanding shares of the registrant’s common stock as of October 30, 2015 was 333,822,707.

 

 

 

 


 

INDEX

 

 

 

Page

PART I—FINANCIAL INFORMATION

Forward-Looking Statements

2

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

Item 2.

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

39

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

53

Item 4.

Controls and Procedures

54

 

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

55

Item 1A.

Risk Factors

56

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3.

Defaults Upon Senior Securities

58

Item 4.

Mine Safety Disclosures

58

Item 5.

Other Information

59

Item 6.

Exhibits

60

 

Signatures

61

 

Exhibit Index

62

 

1


 

PART I—FINANCI AL INFORMATION

Forward-Looking Statements

The discussion in this Quarterly Report on Form 10-Q contains statements that are not historical in nature, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, including, but not limited to, statements related to: our manufacturing strategy; the expected timing and costs related to the integration of Cypress Semiconductor Corporation (“Cypress” or the “Company”) with Spansion Inc. (“Spansion”) as a result of our recent merger; our ability to execute on planned synergies related to the merger with Spansion; our expectations regarding dividends and stock repurchases; our expectations regarding future technology transfers and other licensing arrangements; our expectations regarding the timing and cost of our restructuring liabilities; our expectations regarding our active litigation matters and our intent to defend ourselves in those matters; the competitive advantage we believe we have with our patents as well as our proprietary programmable technologies and programmable products; our backlog as an indicator of future performance; the risk associated with our yield investment agreements; our foreign currency exposure and the impact exchange rates could have on our operating margins; the adequacy of our cash and working capital positions; the value and liquidity of our investments; including auction rate securities 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; the impact of interest rate fluctuations on our investments; the volatility of our stock price; the adequacy of our real estate properties; the utility of our non-GAAP reporting; the adequacy of our audits; the potential impact of our indemnification obligations and the impact of new accounting standards on our financial statements. We use words such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and similar expressions to identify forward-looking statements. Such forward-looking statements are made as of the date hereof and are based on our current expectations, beliefs and intentions regarding future events or our financial performance and the information available to management as of the date hereof. We assume no responsibility to update any such forward-looking statements. Our actual results could differ materially from those expected, discussed or projected in the forward-looking statements contained in this Quarterly Report on Form 10-Q for any number of reasons, including, but not limited to: the state and future of the general economy and its impact on the markets and consumers we serve and our investments; our ability to effectively integrate our company with Spansion in a timely manner; our ability to attract and retain key personnel; our ability to timely deliver new proprietary and programmable technologies and products; 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; changes in the law; the results of our pending tax examinations; 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 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 December 28, 2014.

 

2


 

ITEM 1. FINANCI AL STATEMENTS

CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

September 27,

2015

 

 

December 28,

2014

 

 

 

(In thousands, except

per-share amounts)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

193,759

 

 

$

103,736

 

Short-term investments

 

 

871

 

 

 

15,076

 

Accounts receivable, net

 

 

293,832

 

 

 

75,984

 

Inventories

 

 

279,007

 

 

 

88,227

 

Other current assets

 

 

107,302

 

 

 

29,288

 

Total current assets

 

 

874,771

 

 

 

312,311

 

Property, plant and equipment, net

 

 

459,040

 

 

 

237,763

 

Goodwill

 

 

1,741,733

 

 

 

65,696

 

Intangible assets, net

 

 

823,436

 

 

 

33,918

 

Other long-term assets

 

 

182,952

 

 

 

93,593

 

Total assets

 

$

4,081,932

 

 

$

743,281

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

145,757

 

 

$

42,678

 

Accrued compensation and employee benefits

 

 

75,004

 

 

 

35,182

 

Deferred margin on sales to distributors

 

 

64,257

 

 

 

75,569

 

Dividends payable

 

 

36,884

 

 

 

17,931

 

Income taxes payable

 

 

5,032

 

 

 

2,710

 

Current portion of long-term debt

 

 

9,131

 

 

 

6,143

 

Other current liabilities

 

 

217,889

 

 

 

94,619

 

Total current liabilities

 

 

553,954

 

 

 

274,832

 

Deferred income taxes and other tax liabilities

 

 

57,855

 

 

 

18,784

 

Revolving credit facility and long-term debt

 

 

582,577

 

 

 

237,107

 

Other long-term liabilities

 

 

45,247

 

 

 

10,693

 

Total liabilities

 

 

1,239,633

 

 

 

541,416

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, $.01 par value, 650,000 and 650,000 shares authorized; 479,570 and

   306,167 shares issued; 335,590 and 163,013 shares outstanding at September 27,

   2015 and December 28, 2014, respectively

 

 

4,719

 

 

 

3,039

 

Additional paid-in-capital

 

 

5,633,026

 

 

 

2,675,170

 

Accumulated other comprehensive loss

 

 

(267

)

 

 

(46

)

Accumulated deficit

 

 

(686,459

)

 

 

(379,913

)

Stockholders’ equity before treasury stock

 

 

4,951,019

 

 

 

2,298,250

 

Less: shares of common stock held in treasury, at cost; 143,980 and 143,154 shares at

   September 27, 2015 and December 28, 2014, respectively

 

 

(2,101,025

)

 

 

(2,090,493

)

Total Cypress stockholders’ equity

 

 

2,849,994

 

 

 

207,757

 

Non-controlling interests

 

 

(7,695

)

 

 

(5,892

)

Total equity

 

 

2,842,299

 

 

 

201,865

 

Total liabilities and equity

 

$

4,081,932

 

 

$

743,281

 

 

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

 

3


 

CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2015

 

 

September 28,

2014

 

 

September 27,

2015

 

 

September 28,

2014

 

 

 

(In thousands, except per-share amounts)

 

Revenues

 

$

463,810

 

 

$

187,516

 

 

$

1,157,725

 

 

$

541,400

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

303,434

 

 

 

90,633

 

 

 

900,969

 

 

 

271,425

 

Research and development

 

 

75,960

 

 

 

38,626

 

 

 

207,709

 

 

 

124,883

 

Selling, general and administrative

 

 

76,159

 

 

 

41,119

 

 

 

238,459

 

 

 

125,787

 

Amortization of acquisition-related intangible assets

 

 

30,827

 

 

 

1,701

 

 

 

74,101

 

 

 

5,334

 

Restructuring and other

 

 

2,924

 

 

 

(238

)

 

 

88,678

 

 

 

(1,252

)

Gain on divestiture of TrueTouch ® Mobile business

 

 

(66,472

)

 

 

 

 

 

(66,472

)

 

 

 

Total costs and expenses

 

 

422,832

 

 

 

171,841

 

 

 

1,443,444

 

 

 

526,177

 

Operating income (loss)

 

 

40,978

 

 

 

15,675

 

 

 

(285,719

)

 

 

15,223

 

Interest and other expense, net

 

 

(7,084

)

 

 

(504

)

 

 

(16,569

)

 

 

(1,102

)

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

 

 

33,894

 

 

 

15,171

 

 

 

(302,288

)

 

 

14,121

 

Income tax provision (benefit)

 

 

2,303

 

 

 

1,231

 

 

 

1,235

 

 

 

(2,987

)

Equity in net loss of equity method investee

 

 

(1,800

)

 

 

(1,386

)

 

 

(4,818

)

 

 

(3,666

)

Net income (loss)

 

 

29,791

 

 

 

12,554

 

 

 

(308,341

)

 

 

13,442

 

Net income (loss) attributable to non-controlling interests

 

 

521

 

 

 

286

 

 

 

1,804

 

 

 

991

 

Net income (loss) attributable to Cypress

 

$

30,312

 

 

$

12,840

 

 

$

(306,537

)

 

$

14,433

 

Net income (loss) per share attributable to Cypress:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

 

$

0.08

 

 

$

(1.06

)

 

$

0.09

 

Diluted

 

$

0.08

 

 

$

0.08

 

 

$

(1.06

)

 

$

0.09

 

Cash dividend declared per share

 

$

0.11

 

 

$

0.11

 

 

$

0.33

 

 

$

0.33

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

335,299

 

 

 

159,759

 

 

 

289,197

 

 

 

157,594

 

Diluted

 

 

357,657

 

 

 

166,481

 

 

 

289,197

 

 

 

166,000

 

 

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

 

 

4


 

CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 27,

2015

 

 

September 28,

2014

 

 

September 27,

2015

 

 

September 28,

2014

 

 

 

(In thousands)

 

Net income (loss)

 

$

29,791

 

 

$

12,554

 

 

$

(308,341

)

 

$

13,442

 

Other comprehensive loss, net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains (losses) on available for sale

   securities

 

 

3

 

 

 

(12

)

 

 

29

 

 

 

(27

)

Net unrealized gain (loss) on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) arising during the period

 

 

909

 

 

 

 

 

 

(832

)

 

 

 

Net (gain) reclassified into earnings for revenue hedges

   (effective portion)

 

 

(1,412

)

 

 

 

 

 

(1,021

)

 

 

 

Net loss reclassified into earnings for expense hedges (ineffective portion)

 

 

80

 

 

 

 

 

 

 

80

 

 

 

 

 

Net loss reclassified into earnings for expense hedges (effective portion)

 

 

1,361

 

 

 

 

 

 

1,523

 

 

 

 

Net unrealized gain (loss) on cash flow hedges

 

 

938

 

 

 

 

 

 

(250

)

 

 

 

Other comprehensive gain (loss)

 

 

941

 

 

 

(12

)

 

 

(221

)

 

 

(27

)

Comprehensive income (loss)

 

 

30,732

 

 

 

12,542

 

 

 

(308,562

)

 

 

13,415

 

Comprehensive loss attributable to non-controlling interest

 

 

521

 

 

 

286

 

 

 

1,804

 

 

 

991

 

Comprehensive income (loss) attributable to Cypress

 

$

31,253

 

 

$

12,828

 

 

$

(306,758

)

 

$

14,406

 

 

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

 

 

5


 

CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 27,

2015

 

 

September 28,

2014

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(308,341

)

 

$

13,442

 

Adjustments to reconcile net income (loss) to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

71,418

 

 

 

43,421

 

Depreciation and amortization

 

 

166,281

 

 

 

35,366

 

Deferred income taxes

 

 

9,226

 

 

 

(7,759

)

Restructuring costs

 

 

17,032

 

 

 

(1,252

)

(Gain) Loss on disposal of property and equipment

 

 

9,421

 

 

 

(290

)

Gain on divestiture of TrueTouch® Mobile business

 

 

(66,472

)

 

 

 

Equity in net loss of equity method investee

 

 

4,817

 

 

 

3,666

 

Accretion of interest expense on convertible notes

 

 

1,643

 

 

 

 

Unrealized loss from deferred compensation plan

 

 

1,120

 

 

 

1,110

 

Unrealized  loss from trading securities

 

 

3,359

 

 

 

 

Other

 

 

1,614

 

 

 

272

 

Changes in operating assets and liabilities, net of acquisition and divestiture

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(117,876

)

 

 

(24,769

)

Inventories

 

 

252,405

 

 

 

9,766

 

Other current and long-term assets

 

 

(21,486

)

 

 

7,318

 

Accounts payable and other liabilities

 

 

(69,285

)

 

 

(14,617

)

Deferred margin on sales to distributors

 

 

11,831

 

 

 

12,148

 

Net cash provided by (used in) operating activities

 

 

(33,293

)

 

 

77,822

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

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

 

 

17,377

 

 

 

14,401

 

Purchases of marketable securities

 

 

(1,530

)

 

 

(11,379

)

Business acquisition, net of cash acquired

 

 

(105,130

)

 

 

 

Contribution to (distribution of) deferred compensation plan

 

 

1,634

 

 

 

(810

)

Acquisition of property, plant and equipment

 

 

(37,979

)

 

 

(17,178

)

Cash paid for equity method investments

 

 

(18,000

)

 

 

(18,400

)

Proceeds from divestiture of TrueTouch® Mobile business

 

 

88,635

 

 

 

 

Proceeds from sale of held-for-sale equipment

 

 

100

 

 

 

3,240

 

Other

 

 

156

 

 

 

1,706

 

Net cash used in investing activities

 

 

(54,737

)

 

 

(28,420

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

398,000

 

 

 

172,000

 

Repayment of revolving credit facility

 

 

(176,000

)

 

 

(172,000

)

Repurchase of treasury stock

 

 

(10,436

)

 

 

 

Withholding of common shares for tax obligations on vested restricted shares

 

 

54

 

 

 

(245

)

Payment of dividends

 

 

(91,081

)

 

 

(51,520

)

Proceeds from employee equity awards

 

 

41,802

 

 

 

26,664

 

Repayment of equipment leases and loans

 

 

(7,020

)

 

 

(5,544

)

Proceeds from settlement of capped calls

 

 

25,293

 

 

 

318

 

Financing costs related to revolving credit facility

 

 

(2,559

)

 

 

 

Net cash provided by (used in) financing activities

 

 

178,053

 

 

 

(30,327

)

Net increase in cash and cash equivalents

 

 

90,023

 

 

 

19,075

 

Cash and cash equivalents, beginning of period

 

 

103,736

 

 

 

86,009

 

Cash and cash equivalents, end of period

 

$

193,759

 

 

$

105,084

 

Non cash investing and financing activities

 

 

 

 

 

 

 

 

Dividends payable

 

$

36,884

 

 

$

17,727

 

Liabilities recorded for purchase of property, plant and equipment

 

$

8,951

 

 

$

1,491

 

Supplemental Cash Flows Disclosures

 

 

 

 

 

 

 

 

6


 

Cash paid for taxes

 

$

4,753

 

 

$

3,220

 

 

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

7


 

CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Years

Cypress Semiconductor Corporation (“Cypress” or the “Company”) reports on a fiscal-year basis. The Company ends its quarters on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. Fiscal 2015 has 53 weeks and fiscal 2014 had 52 weeks. The third quarter of fiscal 2015 ended on September 27, 2015 and the third quarter of fiscal 2014 ended on September 28, 2014.

Basis of Presentation

On March 12, 2015, the Company completed the merger with Spansion, Inc. (“Spansion”), a leading designer, manufacturer and developer of embedded systems semiconductors, for a total purchase consideration of approximately $2.8 billion ("the Merger"). The Company’s Condensed Consolidated Statements of Operations for the three months ended September 27, 2015 include a full quarter of the combined operations and the nine months ended September 27, 2015 includes the results of operations of legacy Spansion since March 12, 2015.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments of a normal, recurring nature, which are necessary to state fairly the financial information included therein. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Cypress's Annual Report on Form 10-K for the fiscal year ended December 28, 2014. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

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 following reclassifications have been made in the presentation of Cypress’s Condensed Consolidated Balance Sheet as of December 28, 2014.

 

·

$6.1 million reclassified from other current liabilities to current portion of long-term debt, and

 

·

$10.1 million reclassified from other long-term liabilities to revolving credit facility and long-term debt.

The condensed consolidated results of operations for the three and nine months ended September 27, 2015 are not necessarily indicative of the results to be expected for the full fiscal year.

During the nine months ended September 28, 2014, the Company recorded out-of-period correcting adjustments to write off certain manufacturing and subcontractor costs that were capitalized within other current assets in previous periods. These corrections resulted in a decrease of net income of $2.6 million for the nine months ended September 28, 2014. The Company recorded these corrections in the aggregate totaling $2.6 million in the cost of revenues for the nine months ended September 28, 2014. Management assessed the impact of these errors and concluded that the amounts were not material, either individually or in the aggregate, to any prior periods.

 

 

 

8


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Business Combinations

The Company applies the provisions of Accounting Standards Codification 805, Business Combinations ("ASC 805"), in the accounting for acquisitions. It requires the Company to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the Company's Condensed Consolidated Statements of Operations. Accounting for business combinations requires the Company's management to make significant estimates and assumptions, especially at the acquisition date including estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although the Company believes the assumptions and estimates it has made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to: future expected cash flows from product sales, customer contracts and acquired technologies, expected costs to develop in-process research and development into commercially viable products and estimated cash flows from the projects when completed and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

Revenue Recognition

The Company generates revenues by selling products to distributors, various types of manufacturers including original equipment manufacturers (“OEMs”) and electronic manufacturing service providers (“EMSs”). The Company recognizes revenues on sales to distributors, OEMs and EMSs upon shipment provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no significant remaining obligations.

Sales to certain distributors are made under agreements which provide the distributors with price protection, stock rotation and other allowances under certain circumstances. When the Company determines that the uncertainties exist for the rights given to these distributors, revenues and costs related to distributor sales are deferred until products are sold by the distributors to the end customers. In those circumstances, revenues are recognized upon receiving notification from the distributors that products have been sold to the end customers.  In these cases, at the time of shipment to distributors, the Company records a trade receivable for the selling price since there is a legally enforceable right to receive payment, relieves inventory for the value of goods shipped since legal title has passed to the distributors, and defers the related margin and price adjustment as deferred income on sales to distributors on the Consolidated Balance Sheets. Any effects of distributor price adjustments are recorded as a reduction to deferred income at the time the distributors sell the products to the end customers and the distributor submits a valid claim for the price adjustment.

 

The Company has historically recognized a significant portion of revenue through distributors at the time the distributor resold the product to its end customer (also referred to as the sell-through basis of revenue recognition) given the difficulty in estimating the ultimate price of these product shipments and amount of potential returns. The Company continuously reassesses its ability to reliably estimate the ultimate price of these products and, over the past several years, has made investments in its systems and process around its distribution channel to improve the quality of the information it receives from its distributors. Given these ongoing investments, and based on the financial framework the Company uses for estimating potential price adjustments, beginning the fourth quarter of 2014, the Company concluded that it was able to reasonably estimate returns and pricing concessions on certain product families and with certain distributors, and recognized revenue at the time it shipped these specific products to the identified distributors, less its estimate of future price adjustments and returns. During the three months ended September 27, 2015, the Company recognized an incremental $17.3 million of revenue on additional product families for which revenue was previously recognized on a sell-through basis as it determined that it could reasonably estimate returns and pricing concessions at the time of shipment to distributors.   This change resulted in a benefit to net income of approximately $9.4 million for the three months ended September 27, 2015, or $0.03 per basic and diluted share.

9


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

During the nine months ended September 27, 2015, the Company recognized approximately $ 39.1 million of incremental revenue from this change in revenue recognition , which resulted in a benefit to net income of approximately $ 21.4 million for the nine mont hs ended September 27, 2015, or approximately $ 0.07 per basic and diluted shares.   During the three months ended September 27, 2015, we recognized approximately $235.0 million or 71.0% of distribution revenue on a sell-in basis.  During the nine months end ed September 27, 2015, we recognized approximately $401.0 million or 57.0% of distribution revenue on a sell-in basis.

The Company records as a reduction to revenues reserves for sales returns, price protection and allowances based upon historical rates and for any specific known customer amounts. The Company also provides certain distributors and EMSs with volume-pricing discounts, such as rebates and incentives, which are recorded as a reduction to revenues at the time of sale. Historically these volume discounts have not been significant.

Inventories

Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Market is based on estimated net realizable value. The Company write downs its inventories which have become obsolete or are in excess of anticipated demand or net realizable value based upon assumptions about demand forecasts, product life cycle status, product development plans and current sales levels. Inventory reserves are not relieved until the related inventory has been sold or scrapped.

Situations that may result in excess or obsolete inventory include changes in business strategy and economic conditions, changes in consumer confidence caused by changes in market conditions, sudden and significant decreases in demand for its products, inventory obsolescence because of rapidly changing technology and customer requirements, failure to estimate customer demand properly for older products as newer products are introduced, or unexpected competitive pricing actions by its competition. In addition, cancellation or deferral of customer purchase orders could result in the Company holding excess inventory. Also, because the Company often sells a substantial portion of its products in the last month of each quarter, the Company may not be able to reduce its inventory purchase commitments in a timely manner in response to customer cancellations or deferrals.

Employee Benefit Plans

In connection with the Merger, the Company assumed the Spansion Innovates Group Cash Balance Plan (a defined benefit pension plan) in Japan. A defined benefit pension plan is accounted for on an actuarial basis, which requires the selection of various assumptions such as turnover rates, discount rates and other factors. The discount rate assumption is determined by comparing the projected benefit payments to the Japanese corporate bonds yield curve as of end of the most recently completed fiscal year. The benefit obligation is the projected benefit obligation (PBO), which represents the actuarial present value of benefits expected to be paid upon retirement. This liability is recorded in other long term liabilities on the Condensed Consolidated Balance Sheets. Net periodic pension cost is recorded in the Condensed Consolidated Statements of Operations and includes service cost. Service cost represents the actuarial present value of participant benefits earned in the current year. Interest cost represents the time value of money associated with the passage of time on the PBO. Gains or losses resulting from a change in the PBO if actual results differ from actuarial assumptions will be accumulated and amortized over the future life of the plan participants if they exceed 10% of the PBO, being the corridor amount. If the amount of a net gain or loss does not exceed the corridor amount, it will be recorded to other comprehensive income (loss). See Note 8 for further details of the pension plans.

10


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Cash Flow Hedges

The Company enters into cash flow hedges to protect non-functional currency inventory purchases and certain other operational expenses and has an on-going program of cash flow hedges to protect its non-functional currency revenues against variability in cash flows due to foreign currency fluctuations.  The Company does not enter into derivative securities for speculative purposes.  The Company’s foreign currency forward contracts that were designated as cash flow hedges have maturities between three and eight months. The maximum original duration of any contract allowable under the Company’s hedging policy is thirteen months. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions at the inception of the hedge. The Company recognizes derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measures them at fair value on a monthly basis. The Company records changes in the intrinsic value of its cash flow hedges in accumulated other comprehensive income on the Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. Interest charges or “forward points” on the forward contracts are excluded from the assessment of hedge effectiveness and are recorded in interest and other income (expense), net in the Condensed Consolidated Statements of Operations. When the forecasted transaction occurs, the Company reclassifies the related gain or loss on the cash flow hedge to revenue or costs, depending on the risk hedged.  In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company will reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income (expense), net in its Condensed Consolidated Statements of Operations at that time.

The Company evaluates hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and records any ineffective portion of the hedge in interest and other income (expense), net in its Condensed Consolidated Statements of Operations.

Recent Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2015-02, Amendments to the Consolidation Analysis, which is intended to improve upon and simplify the consolidation assessment required to evaluate whether organizations should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures. The new accounting guidance is effective for interim and fiscal years beginning after December 15, 2015. The Company does not believe that the adoption of this guidance will have any material impact on its financial condition or results of operations.

In April 2015, the Financial Accounting Standards Board issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in the financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. The new accounting guidance is effective for interim and fiscal years beginning after December 15, 2015. The Company is currently evaluating the guidance to determine the impact on its balance sheet presentation.   In August 2015, FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting”. FASB ASU No. 2015-15 amends subtopic 835-30 to include that the SEC would not object to the deferral and presentation of debt issuance costs as an asset and subsequent amortization of the deferred costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

In May 2014, the FASB issued an ASU on revenue from contracts with customers, ASU No. 2014-09, "Revenue from Contracts with Customers." This standard update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The guidance is effective for annual reporting periods including interim reporting periods beginning after December 15, 2017. Early adoption is permitted for annual reporting periods including interim reporting periods beginning after December 15, 2016.  The Company is currently evaluating the impact, if any, the adoption of this standard will have on its Consolidated Financial Statements. As the new standard will supersede substantially all existing revenue guidance affecting the Company under GAAP, it could impact revenue and cost recognition on sales across all the Company's business segments, in addition to its business processes and its information technology systems. As a result, the Company's evaluation of the effect of the new standard will extend over future periods.

11


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should meas ure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out ("LIFO"). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently evaluating the impact the pronouncement will have on the Company’s financial statements and related disclosures.

In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments.” This ASU simplifies the treatment of adjustments to provisional amounts recognized in the period for items in a business combination for which the accounting is incomplete at the end of the reporting period. The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2015 and for interim periods therein. The Company is currently evaluating the impact the pronouncement will have on the Company’s financial statements and related disclosures.

 

 

 

NOTE 2. MERGER WITH SPANSION

Merger with Spansion

On March 12, 2015, Cypress completed its merger with Spansion ("the Merger") pursuant to the Agreement and Plan of Merger and Reorganization, as of December 1, 2014 ("the Merger Agreement") for a total purchase consideration of approximately $2.8 billion. In accordance with the terms of the Merger Agreement, Spansion shareholders received 2.457 Cypress shares for each Spansion share they owned. The Merger has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations, with Cypress treated as the accounting acquirer. The Company incurred $3.1 million and $29.4 million in Merger costs for the three and nine months ended September 27, 2015, which were recorded in the selling, general and administrative expense line of the Condensed Consolidated Statements of Operations.

The total purchase consideration of approximately $2.8 billion consists of the following:

 

 

 

Purchase

Consideration

 

 

 

(In thousands)

 

Fair value of Cypress common stock issued to Spansion shareholders

 

$

2,570,458

 

Fair value of partially vested Spansion equity awards assumed by Cypress

 

 

6,825

 

Fair value of vested Spansion options assumed by Cypress

 

 

89,582

 

Cash provided by Cypress to repay Spansion term loan

 

 

150,000

 

Total purchase consideration

 

$

2,816,865

 

 

In connection with the Merger, the Company assumed stock options and RSUs originally granted by Spansion and converted them into Cypress stock options and RSUs. The fair value of the stock options assumed were determined using a Black-Scholes valuation model with market-based assumptions. The fair value of partially vested Spansion equity awards is $15.68 per share, the Cypress closing stock price on March 12, 2015. The fair value of unvested equity awards relating to future services, and not yet earned, will be recorded as operating expenses over the remaining service periods. Option pricing models require the use of highly subjective market assumptions, including expected stock price volatility, which if changed can materially affect fair value estimates.

12


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The table below represents the preliminary allocation of the purchase price to the net assets acquired based on their estimated fair values as of March 12, 2015.

 

 

 

Fair Values

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

44,870

 

Short-term investments

 

 

1,433

 

Accounts receivable, net

 

 

99,977

 

Inventories

 

 

450,634

 

Other current assets

 

 

58,959

 

Property, plant and equipment, net

 

 

356,908

 

Intangible assets, net

 

 

860,700

 

Goodwill

 

 

1,676,036

 

Other long-term assets

 

 

63,497

 

Total assets acquired

 

 

3,613,014

 

Accounts payable

 

 

(155,336

)

Accrued compensation and benefits

 

 

(44,669

)

Income taxes payable

 

 

(1,399

)

Other current liabilities

 

 

(158,083

)

Deferred income taxes and other long term liabilities

 

 

(24,001

)

Other non current liabilities

 

 

(21,477

)

Long-term debt (1)

 

 

(391,184

)

Total liabilities assumed

 

 

(796,149

)

Fair value of net assets acquired

 

$

2,816,865

 

 

(1)

Includes the fair value of the debt and equity components of Spansion's Exchangeable 2.00% Senior Notes assumed by the Company.

The table below shows the valuation of the intangible assets acquired from Spansion Inc. along with their estimated remaining useful lives:

 

 

 

As of March 12, 2015

 

 

 

 

 

 

 

Gross

 

 

Estimated

range of lives

(in years)

 

 

 

(In thousands)

 

 

 

 

 

Existing Technology

 

$

507,100

 

 

4 to 6

 

In-Process Research and Development Technology

 

 

212,300

 

 

N/A

 

Backlog

 

 

14,500

 

 

 

1

 

Customer/Distributor Relationships

 

 

97,300

 

 

 

9

 

License Agreements

 

 

9,400

 

 

 

3

 

Trade Name / Trademarks

 

 

20,100

 

 

 

10

 

Total intangible assets

 

$

860,700

 

 

 

 

 

 

In-process research and development ("IPR&D") consists of 21 projects, primarily relating to the development of process technologies to manufacture NOR, NAND, Analog, and MCU products. The projects are expected to be completed over the next 2 years. The estimated remaining costs to complete the IPR&D projects were approximately $15.3 million as of the acquisition date. The acquired IPR&D will not be amortized until completion of the related products which is determined by when the underlying projects reach technological feasibility and commence commercial production. Upon completion, each IPR&D project will be amortized over its useful life; useful lives for IPR&D are expected to range between 4 years and 6 years.

As of September 27, 2015, four out of 21 projects originally identified, representing approximately $15.2 million of the total capitalized IPR&D of $212.3 million, had reached technological feasibility and were transferred to developed technology.  Refer Note 3 for further details.  The remaining projects are on schedule and no impairments have been identified as of September 27, 2015.

13


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The purchase price has been allocated based on the estimated net tangible and intangible assets of Spansion that existed on the date of the Merger. The fair value of identifiable intangible assets acquired was based on estimates and assumptions made by management at the time of the Merger. As additional information becomes available, such as finalization of the estimated fair values of tax accounts, the Company may revise its preliminary purchase price alloc ation during the remainder of the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes may be material. There have been no changes to the allocation of purchase price as of September 27, 2015.

Identifiable intangible assets

Developed technologies acquired primarily consist of Spansion's existing technologies related to embedded systems semiconductors, which include flash memory, microcontroller, mixed-signal and analog products. An income approach was used to value Spansion’s developed technologies. Using this approach, the estimated fair value was calculated using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return. A discount rate of 7.5% was used to discount the cash flows to the present value.

Customer relationships represent the fair value of projected cash flows that will be derived from the sale of products to Spansion’s existing customers based on existing, in-process, and future versions of the existing technology. Customer relationships were valued utilizing a form of the income approach known as the “distributor” method since the primary income producing asset of the business was determined to be the technology assets. Under this premise, the margin a distributor owns is deemed to be the margin attributable to the customer relationships. This isolates the cash flows attributable to the customer relationships that a market participant would be willing to pay for.

IPR&D, represents the estimated fair values of incomplete Spansion research and development projects that had not reached technological feasibility as of the date of Merger. In the future, the fair value of each project at the Merger date will be either amortized or impaired depending on whether the projects are completed or abandoned. The fair value of IPR&D was determined using the multi-period excess earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows.  A discount rate of 10.5% was used to discount the cash flows to the present value.

Trade names and trademarks are considered a type of guarantee of a certain level of quality or performance represented by the Spansion brand. Trade names and trademarks were valued using the “relief-from-royalty income” approach. This method is based on the assumption that in lieu of ownership, a market participant would be willing to pay a royalty in order to exploit the related benefits of this asset. A discount rate of 9.0% was used to discount the cash flows to the present value.

License agreements represent the estimated fair value of Spansion’s existing license agreements under which Spansion generates revenue by licensing its intellectual property to third parties and assists its customers in developing and prototyping their designs by providing software and hardware development tools, drivers and simulation models for system-level integration. License agreements were valued using a form of the income approach known as the of “multi-period excess earnings” approach. Under this approach, the expected cash flows associated with the License agreements were projected then discounted to present value at a rate of return that considers the relative risk of achieving the cash flows and the time value of money. A discount rate of 5.0% was used to discount the cash flows to the present value.

Goodwill

The excess of the fair value of the Merger consideration over the fair values of these identifiable assets and liabilities was recorded as goodwill. The goodwill recognized is primarily attributable to the assembled workforce, a reduction in costs and other synergies, and an increase in product development capabilities. The goodwill resulting from the Merger is not expected to be deductible for tax purposes. Goodwill has been allocated to the reporting units expected to benefit from the Merger.

14


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Pro forma consolidated results of operations

The following unaudited pro forma consolidated results of operations for the three months and nine months ended September 27, 2015 and September 28, 2014 assume as if the Merger had occurred at the beginning of fiscal year 2014. The pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment, adjustments to stock-based compensation expense, and interest expense for the incremental indebtedness incurred. The pro forma results for the three and nine months ended September 28, 2014 also include amortization of the step up to fair value of acquired inventory and the Merger related expenses. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations of the combined business had the Merger actually occurred at the beginning of fiscal year 2014 or of the results of future operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 28,

2014

 

 

September 27,

2015

 

 

September 28,

2014

 

 

 

(in thousands, except per share amounts)

 

Revenues

 

$

503,446

 

 

$

1,346,138

 

 

$

1,483,746

 

Net loss

 

$

(46,139

)

 

$

(263,207

)

 

$

(520,700

)

Net loss per share attributable to Cypress

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.21

)

 

$

(0.58

)

 

$

(2.39

)

Diluted

 

$

(0.21

)

 

$

(0.58

)

 

$

(2.39

)

 

 

NOTE 3. GOODWILL AND INTANGIBLE ASSETS

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. As a result of the Merger, the Company recorded an increase to goodwill of $1,676.0 million and intangible assets of $860.7 million in the first quarter of fiscal 2015. The carrying amount of goodwill at September 27, 2015 was $1,741.7 million, of which $773.0 million was in the Memory Products Division (MPD) and $968.7 million was in the Programmable Systems Division (PSD). The carrying amount of goodwill as of December 28, 2014 was $65.7 million, of which $33.9 million was in MPD and $31.8 million was in PSD.

 

The following table presents details of the Company's intangible assets:

 

 

 

As of September 27, 2015

 

 

As of December 28, 2014

 

 

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

 

 

(In thousands)

 

Acquisition-related intangible assets (a)

 

$

1,012,472

 

 

$

(192,458

)

 

$

820,014

 

 

$

151,773

 

 

$

(118,357

)

 

$

33,416

 

Non-acquisition related intangible assets (b)

 

 

13,596

 

 

 

(10,174

)

 

$

3,422

 

 

 

10,523

 

 

 

(10,021

)

 

 

502

 

Total intangible assets

 

$

1,026,068

 

 

$

(202,632

)

 

$

823,436

 

 

$

162,296

 

 

$

(128,378

)

 

$

33,918

 

 

(a)

Refer Note 2 for details on valuation of the intangible assets acquired from Spansion Inc.

(b)

The increase in the Gross Carrying value relates to new license agreement entered into during the third quarter of fiscal 2015.

 

As of September 27, 2015, approximately $15.2 million of the total capitalized IPR&D of $212.3 million had reached technological feasibility and was transferred to developed technology, to be amortized over the estimated useful life of 5 years and amortization of approximately $0.8 million and $0.9 million was recorded during the three and nine months ended September 27, 2015 for these projects. The Company expects the remaining projects to attain technological feasibility and commence commercial production by the first half of fiscal 2017.

 

15


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The estimated future amortization expense as of September 27, 2015 as are as below:

 

 

 

(In thousands)

 

2015 (remaining three months)

 

$

31,376

 

2016

 

 

121,587

 

2017

 

 

116,772

 

2018

 

 

114,283

 

2019

 

 

107,055

 

2020 and future

 

 

135,273

 

Total future amortization expense

 

$

626,346

 

 

 

 

NOTE 4. RESTRUCTURING AND OTHER

Spansion Integration-Related Restructuring Plan

In March 2015, the Company began the implementation of planned cost reduction and restructuring activities in connection with the Merger. As part of this plan, the Company expects to eliminate approximately 1,000 positions from the combined workforce across all business and functional areas on a global basis.  The restructuring charge of $88.7 million recorded for the nine months ended September 27, 2015 primarily consists of severance costs, lease termination costs and impairment of property, plant and equipment. The lease termination costs include approximately $18 million relating to the buildings Spansion had leased prior to the Merger, which the Company decided not to occupy in the post-merger period.  The initial term of the lease commenced on January 1, 2015 and will expire on December 31, 2026. 

The following table summarizes the restructuring charges recorded in the Company’s Condensed Consolidated Statements of Operations for the periods presented pursuant to the Spansion Integration-Related Restructuring Plan:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 27,

2015

 

 

 

September 27,

2015

 

 

 

 

(In thousands)

Personnel costs

 

$

3,073

 

 

 

$

57,999

 

 

Lease termination costs and other related charges

 

 

119

 

 

 

 

18,016

 

 

Impairment of property, plant and equipment

 

 

 

 

 

 

12,531

 

 

Other

 

 

(268

)

 

 

 

132

 

 

Total restructuring and other charges (benefit)

 

$

2,924

 

 

 

$

88,678

 

 

 

 

All restructuring costs are included in operating expenses line under "Restructuring and other" of the Condensed Consolidated Statements of Operations.


16


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Restructuring activity under the Spansion Integration – Related Restructuring Plan during the nine months ended September 27, 2015 was as follows:

 

 

 

Nine Months Ended

 

 

September 27,

2015

 

 

 

 

(In thousands)

Accrued restructuring balance as of December 28, 2014

 

$

 

 

Provision

 

 

75,715

 

 

Cash payments and other

 

 

(12,582

)

 

Accrued restructuring balance as of March 29, 2015

 

$

63,133

 

 

Provision

 

$

996

 

 

Cash payments and other

 

 

(29,054

)

 

Accrued restructuring balance as of June 28, 2015

 

$

35,075

 

 

Provision

 

$

2,924

 

 

Cash payments and other

 

 

(10,496

)

 

Accrued restructuring balance as of September 27, 2015

 

$

27,503

 

 

 

 

The provision for restructuring expense in the table above does not include the charge to write off certain leasehold improvements from the first quarter of 2015, which totaled approximately $9.0 million.

 

The Company anticipates that the remaining restructuring reserve balance will be paid out in cash through the first quarter of 2016 for employee terminations and over the remaining lease term through 2026 for the excess lease obligation.

Sale of TrueTouch® Mobile touchscreen business

On August 1, 2015, the Company completed the sale of the TrueTouch® Mobile touchscreen business to Parade Technologies (“Parade”) for total cash proceeds of approximately $98.6 million pursuant to the definitive agreement signed on June 11, 2015.  Of the total cash proceeds, $10.0 million are held in an escrow account until January 2017 subject to any indemnity claims on post-closing adjustments, per the terms of the agreement.  In connection with the transaction, the Company sold certain assets associated with the disposed business mostly consisting of inventory with a net book value of approximately $10.5 million and recognized a total gain of approximately $66.5 million in the third fiscal quarter of 2015. This gain has been presented as a separate line item "Gain on divestiture of TrueTouch ® Mobile business" in the Condensed Consolidated Statements of Operations.

Also in connection with the transaction, the Company entered into a Manufacturing Service Agreement (MSA) in which the Company agreed to sell finished products and devices to Parade during the one-year period following the close of the transaction.  The terms of the MSA indicated that the Company would sell finished wafers to Parade at agreed-upon prices that were considered below fair market value, indicating that there was an embedded fair value that would be realized by Parade through those terms.  Accordingly, the Company has allocated approximately $19.9 million out of the $98.6 million proceeds to the fair value of the MSA based on the forecasted wafer sales to Parade for the subsequent one-year period.  Such amount was deferred on the Company’s consolidated balance sheet initially and is being amortized to revenue as the Company sells products to Parade.  During the three months ended September 27, 2015, the Company recognized approximately $1.2 million of revenue from amortization of such deferred revenue.

 

The following table summarizes the components of the gain:

 

 

17


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In thousands

 

Cash Proceeds (a)

$

98,635

 

Deferred Revenue

 

(19,867

)

Assets Sold:

 

 

 

Property, plant and equipment, net

 

(69

)

Inventories

 

(9,290

)

Prepaids

 

(1,115

)

Transaction and other costs

 

(1,822

)

Gain on Divestiture

$

66,472

 

 

(a)

Includes $10.0 million held in escrow account until January 2017 per the terms of the agreement.

 

 

NOTE 5. BALANCE SHEET COMPONENTS

Accounts Receivable, Net

 

 

 

As of

 

 

 

September 27,

2015

 

 

December 28,

2014

 

 

 

(In thousands)

 

Accounts receivable, gross

 

$

297,391

 

 

$

79,091

 

Allowance for doubtful accounts receivable and sales returns

 

 

(3,559

)

 

 

(3,107

)

Total accounts receivable, net

 

$

293,832

 

 

$

75,984

 

 

Inventories

 

 

 

As of

 

 

 

September 27,

2015

 

 

December 28,

2014

 

 

 

(In thousands)

 

Raw materials

 

$

12,576

 

 

$

4,753

 

Work-in-process

 

 

229,327