Cypress Semiconductor Corporation
CYPRESS SEMICONDUCTOR CORP /DE/ (Form: 10-Q, Received: 05/10/2016 18:22:58)

 

 

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 3, 2016

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 May 2, 2016 was 311,760,282.

 

 

 

 


INDEX

 

 

 

Page

PART I—FINANCIAL INFORMATION

Forward-Looking Statements

3

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

4

Item 2.

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

28

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

39

Item 4.

Controls and Procedures

40

 

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

43

Item 4.

Mine Safety Disclosures

43

Item 5.

Other Information

43

Item 6.

Exhibits

43

 

Signatures

44

 

Exhibit Index

45

 

2


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 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; the stepping down of Dr. T.J. Rodgers as our President and Chief Executive Officer on April 28, 2016 and the Board’s search for a permanent replacement for President and Chief Executive Officer; 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, including in connection with Dr. T.J. Rodgers stepping down as our President and Chief Executive Officer on the April 28, 2016 and the related Board’s search and the appointment of a permanent President and Chief Executive Officer; 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 January 3, 2016.

 

3


ITEM 1. FINANCI AL STATEMENTS

CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONS OLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

April 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands, except

per-share amounts)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

86,091

 

 

$

226,690

 

Short-term investments

 

 

970

 

 

 

871

 

Accounts receivable, net

 

 

297,919

 

 

 

292,736

 

Inventories

 

 

225,752

 

 

 

243,595

 

Other current assets

 

 

102,490

 

 

 

86,880

 

Total current assets

 

 

713,222

 

 

 

850,772

 

Property, plant and equipment, net

 

 

402,520

 

 

 

425,003

 

Goodwill

 

 

1,738,882

 

 

 

1,738,882

 

Intangible assets, net

 

 

719,894

 

 

 

789,195

 

Other long-term assets

 

 

191,943

 

 

 

200,409

 

Total assets

 

$

3,766,461

 

 

$

4,004,261

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

148,278

 

 

$

143,383

 

Accrued compensation and employee benefits

 

 

54,318

 

 

 

54,850

 

Deferred margin on sales to distributors

 

 

56,250

 

 

 

73,370

 

Dividends payable

 

 

34,270

 

 

 

36,520

 

Income taxes payable

 

 

1,607

 

 

 

3,262

 

Current portion of long-term debt

 

 

13,670

 

 

 

14,606

 

Other current liabilities

 

 

185,864

 

 

 

202,405

 

Total current liabilities

 

 

494,257

 

 

 

528,396

 

Deferred income taxes and other tax liabilities

 

 

53,710

 

 

 

51,737

 

Revolving credit facility and long-term debt

 

 

752,584

 

 

 

673,659

 

Other long-term liabilities

 

 

41,984

 

 

 

37,784

 

Total liabilities

 

 

1,342,535

 

 

 

1,291,576

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

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; 485,007 and

   481,912 shares issued; 311,547 and 332,276 shares outstanding at April 3,

   2016 and January 3, 2016 respectively

 

 

4,638

 

 

 

4,637

 

Additional paid-in-capital

 

 

5,620,191

 

 

 

5,623,411

 

Accumulated other comprehensive gain / (loss)

 

 

919

 

 

 

(227

)

Accumulated deficit

 

 

(862,802

)

 

 

(758,780

)

Stockholders’ equity before treasury stock

 

 

4,762,946

 

 

 

4,869,041

 

Less: Shares of common stock held in treasury, at cost; 173,460 and 149,636 shares at

   April 3, 2016 and January 3, 2016 respectively

 

 

(2,330,726

)

 

 

(2,148,193

)

Total Cypress stockholders’ equity

 

 

2,432,220

 

 

 

2,720,848

 

Non-controlling interests

 

 

(8,294

)

 

 

(8,163

)

Total equity

 

 

2,423,926

 

 

 

2,712,685

 

Total liabilities and equity

 

$

3,766,461

 

 

$

4,004,261

 

 

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

 

4


CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 3,

2016

 

 

March 29,

2015

 

 

 

(In thousands, except per-share amounts)

 

Revenues

 

$

418,964

 

 

$

209,137

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenues

 

 

293,179

 

 

 

250,830

 

Research and development

 

 

73,967

 

 

 

50,522

 

Selling, general and administrative

 

 

74,500

 

 

 

70,460

 

Amortization of intangible assets

 

 

35,187

 

 

 

7,346

 

Impairment of acquisition-related intangible assets

 

 

33,944

 

 

 

 

Restructuring costs

 

 

270

 

 

 

75,715

 

Total costs and expenses

 

 

511,047

 

 

 

454,873

 

Operating loss

 

 

(92,083

)

 

 

(245,736

)

Interest expense

 

 

(6,332

)

 

 

(2,083

)

Other income (expense), net

 

 

81

 

 

 

(2,066

)

Loss before income taxes and non-controlling interest

 

 

(98,334

)

 

 

(249,885

)

Income tax (provision) benefit

 

 

(3,742

)

 

 

4,003

 

Equity in net loss of equity method investee

 

 

(2,078

)

 

 

(1,559

)

Net loss

 

 

(104,154

)

 

 

(247,441

)

Net loss attributable to non-controlling interests

 

 

132

 

 

 

643

 

Net loss attributable to Cypress

 

$

(104,022

)

 

$

(246,798

)

Net loss per share attributable to Cypress:

 

 

 

 

 

 

 

 

Basic

 

$

(0.32

)

 

$

(1.26

)

Diluted

 

$

(0.32

)

 

$

(1.26

)

Cash dividend declared per share

 

$

0.11

 

 

$

0.11

 

Shares used in net loss per share calculation:

 

 

 

 

 

 

 

 

Basic

 

 

320,351

 

 

 

196,471

 

Diluted

 

 

320,351

 

 

 

196,471

 

 

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

 


5


 

CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 3,

2016

 

 

March 29,

2015

 

 

 

(In thousands)

 

Net loss

 

$

(104,154

)

 

$

(247,441

)

Other comprehensive loss, net of taxes:

 

 

 

 

 

 

 

 

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

   securities

 

 

 

 

 

26

 

Net unrealized gain (loss) on cash flow hedges:

 

 

 

 

 

 

 

 

Net unrealized loss arising during the period

 

 

(2,678

)

 

 

(192

)

Net loss reclassified into earnings for revenue hedges

   (effective portion)

 

 

1,025

 

 

 

197

 

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

 

 

11

 

 

 

 

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

 

 

2,788

 

 

 

(71

)

Net unrealized gain (loss) on cash flow hedges

 

 

1,146

 

 

 

(66

)

Other comprehensive gain (loss)

 

 

1,146

 

 

 

(40

)

Comprehensive loss

 

 

(103,008

)

 

 

(247,481

)

Comprehensive loss attributable to non-controlling interest

 

 

132

 

 

 

643

 

Comprehensive loss attributable to Cypress

 

$

(102,876

)

 

$

(246,838

)

 

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

 

 

6


CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 3,

2016

 

 

March 29,

2015

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(104,154

)

 

$

(247,441

)

Adjustments to reconcile net loss to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

23,538

 

 

 

18,797

 

Depreciation and amortization

 

 

69,951

 

 

 

22,038

 

Impairment of acquisition-related intangible assets

 

 

33,944

 

 

 

 

Restructuring costs

 

 

270

 

 

 

9,193

 

Loss (gain) on disposal of property and equipment

 

 

962

 

 

 

(897

)

Share in net loss of equity method investee

 

 

2,078

 

 

 

1,559

 

Accretion of interest expense on convertible notes

 

 

872

 

 

 

 

Loss on assets held under deferred compensation plan

 

 

561

 

 

 

1,259

 

Unrealized (gain) loss on trading securities

 

 

(471

)

 

 

461

 

Other

 

 

906

 

 

 

2,766

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,183

)

 

 

(16,179

)

Inventories

 

 

17,708

 

 

 

149,521

 

Other current and long-term assets

 

 

(4,472

)

 

 

(16,462

)

Accounts payable and other liabilities

 

 

(5,661

)

 

 

46,828

 

Deferred margin on sales to distributors

 

 

(17,120

)

 

 

40,849

 

Net cash provided by operating activities

 

 

13,729

 

 

 

12,292

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(80,053

)

 

 

 

Proceeds from maturities of available-for-sale investments

 

 

40,000

 

 

 

 

Proceeds from sales of available-for-sale investments

 

 

39,986

 

 

 

6,912

 

Business acquisition, net of cash acquired

 

 

 

 

 

(105,130

)

Contribution, net of distributions to deferred compensation plan

 

 

1,574

 

 

 

1,050

 

Acquisition of property, plant and equipment

 

 

(13,027

)

 

 

(6,496

)

Cash paid for equity and cost method investments, and other

 

 

(7,376

)

 

 

(7,000

)

Net cash used in investing activities

 

 

(18,896

)

 

 

(110,664

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

110,000

 

 

 

200,000

 

Repayment of revolving credit facility

 

 

(30,000

)

 

 

(77,000

)

Repayment of Term Loan A

 

 

(1,250

)

 

 

 

Repurchase of treasury stock

 

 

(175,694

)

 

 

 

Payment of dividends

 

 

(36,550

)

 

 

(17,931

)

Proceeds from employee equity awards

 

 

834

 

 

 

15,741

 

Repayment of equipment leases, loans and other

 

 

(2,500

)

 

 

(1,587

)

Proceeds from settlement of capped calls

 

 

 

 

 

25,293

 

Financing costs related to revolving credit facility

 

 

(272

)

 

 

(2,299

)

Net cash provided by (used in) financing activities

 

 

(135,432

)

 

 

142,217

 

Net (decrease) increase in cash and cash equivalents

 

 

(140,599

)

 

 

43,845

 

Cash and cash equivalents, beginning of period

 

 

226,690

 

 

 

103,736

 

Cash and cash equivalents, end of period

 

$

86,091

 

 

$

147,581

 

Supplemental Cash Flows Disclosures:

 

 

 

 

 

 

 

 

Dividends payable

 

$

34,270

 

 

$

36,382

 

Unpaid purchase of property, plant and equipment

 

$

10,396

 

 

$

7,273

 

Cash paid for interest

 

$

5,594

 

 

$

1,594

 

Cash paid for income taxes

 

$

3,471

 

 

$

999

 

Liabilities relating to license commitments

 

$

5,880

 

 

$

18,197

 

 

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

7


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Years

Cypress Semiconductor Corporation (“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 2016 has 52 weeks and Fiscal 2015 had 53 weeks. The first quarter of fiscal 2016 ended on April 3, 2016 and the first quarter of fiscal 2015 ended on March 29, 2015.

Basis of Presentation

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 January 3, 2016. 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.

On March 12, 2015, the Company completed the merger (“Merger”) with Spansion Inc. ("Spansion") pursuant to the Agreement and Plan of Merger and Reorganization, as of December 1, 2014 (the "Merger Agreement"), for a total consideration of approximately $2.8 billion. Consequently, the financial condition and results of operations includes the financial results of legacy Spansion beginning March 12, 2015.  The comparability of our results for the first quarter of fiscal 2016 to the same period in fiscal 2015 is significantly impacted by the Merger.

Certain balances included in the Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows for prior periods have been reclassified to conform to the current period presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) 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 3, 2016 are not necessarily indicative of the results to be expected for the full fiscal year.

Summary of Significant Accounting Policies

Revenue Recognition

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 processes 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 we use for estimating potential price adjustments, during the three months ended April 3, 2016 and March 29, 2015, we recognized an incremental $9.4 million and $33.5 million of revenue respectively, 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 reduction in net loss of $3.1 million or $0.01 per basic and diluted share for the three months ended April 3, 2016 and a reduction in net loss of $17.5 million or $0.09 per basic and diluted share for the three months ended March 29, 2015.

 

8


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Recent Accounting Pronouncements

The following are the accounting pronouncements issued but not adopted that may materially affect the Company’s consolidated financial statements:

In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) 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. 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. In March 2016, the FASB issued ASU 2016-08 which clarifies and provides operational and implementation guidance regarding principal and agent considerations. In April 2016, the FASB issued ASU 2016-10 which clarifies and provides guidance regarding identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas as discussed in ASU 2014-09. The Company is currently evaluating the impact, if any, the adoption of this guidance will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. This ASU is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. The Company is currently evaluating the impact the guidance will have on the Company’s consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships,” a consensus of the FASB Emerging Issues Task Force. The new guidance clarifies the hedge accounting impact when there is a change in one of the counterparties to the derivative contract – i.e., a novation.  The new guidance clarifies that a change in the counterparty to a derivative contract, in and of itself, does not require the de-designation of a hedging relationship. An entity will, however, still need to evaluate whether it is probable that the counterparty will perform under the contract as part of its ongoing effectiveness assessment for hedge accounting. Therefore, a novation of a derivative to a counterparty with a sufficiently high credit risk could still result in the de-designation of the hedging relationship. The new guidance will be effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those years.  The Company is currently evaluating the impact the guidance will have on the Company’s consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-07, “Investments – Equity and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.”  The new guidance requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. Also, for an available for sale investment, the Company should recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The new guidance will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016.  The Company does not believe the adoption of the guidance will have a material impact on its consolidated financial statements upon adoption.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”  ASU 2016-09 simplifies several aspects of the accounting for share-based payments transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently evaluating the potential impact of adopting this guidance on the Company’s consolidated financial statements.

9


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Recently Adopted Accounting Pronouncement

In February 2015, the FASB issued 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 and interim periods within those fiscal years, with early adoption permitted. If adopted in an interim period, this ASU must be reflected as of the beginning of the fiscal year that includes that interim period. The Company has adopted ASU 2015-02 and this adoption did not have any effect on our financial position, results of operations or cash flows.

 

 

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 Company has four reporting units of which two, Memory Products Division (MPD) and Programmable Systems Division (PSD), carried goodwill in an amount of $770.0 million and $968.8 million as of April 3, 2016 and January 3, 2016, respectively.

 

On the first day of the fourth quarter of fiscal 2015, the Company performed a two-step quantitative goodwill impairment test for each of its reporting units (“2015 Step 1 analysis”).   Based on this test, the Company determined that no impairment was indicated as the estimated fair value of each of the reporting units exceeded its respective carrying value. Specifically, the Company estimated that the fair value of the MPD reporting unit exceeded its carrying value by 53% and that the fair value of the PSD reporting unit exceeded its carrying value by 9%.  

 

In the first quarter of fiscal 2016 we have not noted any qualitative triggers that necessitated a quantitative impairment analysis for MPD or PSD reporting unit.

 

There continues to be a risk that the PSD reporting unit may fail a two-step quantitative goodwill impairment analysis in future periods.  Declines in the Company’s stock price, relatively small declines in the future performance and cash flows of the reporting unit or small changes in other key assumptions, such as revenue growth rates and discount rates, may result in the recognition of a material impairment charge to the Company’s earnings as a result of a write-down of the carrying value of the goodwill associated with the PSD reporting unit.

10


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Intangible Assets  

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

 

 

 

As of April 3, 2016

 

 

As of January 3, 2016

 

 

 

Gross

 

 

Accumulated

Amortization

 

 

Net (a)

 

 

Gross

 

 

Accumulated

Amortization

 

 

Net (a)

 

 

 

(In thousands)

 

Developed technology and other intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related intangible assets

 

$

877,114

 

 

$

(261,605

)

 

$

615,509

 

 

$

836,256

 

 

$

(226,417

)

 

$

609,839

 

Non-acquisition related intangible assets

 

 

13,568

 

 

 

(10,597

)

 

 

2,971

 

 

 

13,368

 

 

 

(10,228

)

 

 

3,140

 

Total developed technology and other intangible

   assets

 

 

890,682

 

 

 

(272,202

)

 

 

618,480

 

 

 

849,624

 

 

 

(236,645

)

 

 

612,979

 

In-process research and development

 

 

101,414

 

 

 

 

 

 

101,414

 

 

 

176,216

 

 

 

 

 

 

176,216

 

Total intangible assets

 

$

992,096

 

 

$

(272,202

)

 

$

719,894

 

 

$

1,025,840

 

 

$

(236,645

)

 

$

789,195

 

 

(a)

Included in the intangible assets are in-process research and development projects acquired as part of the Merger (“IPR&D”) that had not attained technological feasibility and commercial production:

 

 

 

(In thousands)

 

As of January 3, 2016

 

$

176,216

 

Technological feasibility achieved

 

 

(40,858

)

Projects impaired

 

 

(33,944

)

As of April 3, 2016

 

$

101,414

 

In the first quarter of fiscal 2016, the Company recognized a $33.9 million impairment charge related to two IPR&D projects that were cancelled during the quarter due to changes in the Company’s product portfolio strategy.  The impairment charges are included in the “Impairment of acquisition-related intangible assets” line in the Condensed Consolidated Statements of Operations.

 

The Company expects the remaining IPR&D projects as of April 3, 2016 to attain technological feasibility by the first half of fiscal 2017.

The estimated future amortization expense related to developed technology and other intangible assets as of April 3, 2016 is as below:

 

 

 

(In thousands)

 

2016 (remaining nine months)

 

$

98,157

 

2017

 

 

130,659

 

2018

 

 

127,965

 

2019

 

 

120,737

 

2020

 

 

85,554

 

2021 and future

 

 

55,408

 

Total future amortization expense

 

$

618,480

 

 

 

NOTE 3. RESTRUCTURING

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.

11


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table summarizes the restructu ring 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

 

 

 

April 3,

2016

 

 

March 29,

2015

 

 

 

(In thousands)

 

Personnel costs

 

$

246

 

 

$

44,206

 

Lease termination costs and other related charges

 

 

24

 

 

 

18,732

 

Impairment of property, plant and equipment

 

 

 

 

 

12,777

 

Total restructuring costs

 

$

270

 

 

$

75,715

 

 

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

Restructuring activity under the Spansion Integration – Related Restructuring Plan during the three months ended April 3, 2016 was as follows:

 

 

 

Three Months Ended

 

 

 

April 3,

2016

 

 

 

(In thousands)

 

Accrued restructuring balance as of January 3, 2016

 

$

21,487

 

Provision

 

 

270

 

Cash payments and other adjustments

 

 

(3,028

)

Accrued restructuring balance as of April 3, 2016

 

$

18,729

 

Current portion of the restructuring accruals

 

$

5,273

 

Non-current portion of the restructuring accruals

 

$

13,456

 

 

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

 

 

NOTE 4. BALANCE SHEET COMPONENTS

Accounts Receivable, Net

 

 

 

As of

 

 

 

April 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands)

 

Accounts receivable, gross

 

$

300,981

 

 

$

295,803

 

Allowance for doubtful accounts receivable and sales returns

 

 

(3,062

)

 

 

(3,067

)

Total accounts receivable, net

 

$

297,919

 

 

$

292,736

 

 

Inventories

 

 

 

As of

 

 

 

April 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands)

 

Raw materials

 

$

14,160

 

 

$

13,516

 

Work-in-process

 

 

168,717

 

 

 

192,245

 

Finished goods

 

 

42,875

 

 

 

37,834

 

Total inventories

 

$

225,752

 

 

$

243,595

 

 

12


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Other Current Assets

 

 

 

As of

 

 

 

April 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands)

 

Prepaid tooling assets

 

$

19,991

 

 

$

19,379

 

Restricted cash relating to defined benefit pension plan

 

 

3,892

 

 

 

3,730

 

Foundry service prepayments - current portion

 

 

4,269

 

 

 

5,753

 

Prepaid expenses

 

 

60,973

 

 

 

30,934

 

Receivable from sale of TrueTouch Mobile ® business

 

 

10,000

 

 

 

 

Other current assets

 

 

3,365

 

 

 

27,084

 

Total other current assets

 

$

102,490

 

 

$

86,880

 

 

Other Long-term Assets

 

 

 

As of

 

 

 

April 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands)

 

Employee deferred compensation plan

 

$

39,573

 

 

$

41,249

 

Investments in equity securities

 

 

62,089

 

 

 

57,030

 

Deferred tax assets

 

 

4,147

 

 

 

4,080

 

Long-term license

 

 

22,252

 

 

 

24,079

 

Restricted cash relating to defined benefit pension plan

 

 

3,718

 

 

 

3,462

 

Long-term receivable from sale of TrueTouch Mobile ® business

 

 

 

 

 

10,000

 

Foundry service prepayments - non-current portion

 

 

32,831

 

 

 

26,237

 

Other assets

 

 

27,333

 

 

 

34,272

 

Total other long-term assets

 

$

191,943

 

 

$

200,409

 

 

Other Current Liabilities

 

 

 

As of

 

 

 

April 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands)

 

Employee deferred compensation plan

 

$

40,443

 

 

$

41,457

 

Restructuring accrual  - current portion (See Note 3)

 

 

5,273

 

 

 

7,270

 

Deferred revenue on sale of True Touch mobile ® business

 

 

9,468

 

 

 

15,295

 

Deferred liability - distributor price adjustments

 

 

60,970

 

 

 

52,712

 

Other current liabilities

 

 

69,710

 

 

 

85,671

 

Total other current liabilities

 

$

185,864

 

 

$

202,405

 

 

Other Long-term Liabilities

 

 

 

As of

 

 

 

April 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands)

 

Long-term defined benefit pension plan liabilities

 

$

9,063

 

 

$

8,712

 

Restructuring accrual - non-current portion (See Note 3)

 

 

13,456

 

 

 

14,217

 

Other long-term liabilities

 

 

19,465

 

 

 

14,855

 

Total other long-term liabilities

 

$

41,984

 

 

$

37,784

 

13


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 the Company's financial assets and liabilities measured at fair value on a recurring basis and its non-financial liabilities measured at fair value on a non-recurring basis as of April 3, 2016 and January 3, 2016:

 

 

 

As of April 3, 2016

 

 

As of January 3, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Total

 

 

 

(In thousands)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds  (1)

 

$

126

 

 

$

 

 

$

126

 

 

$

119

 

 

$

 

 

$

119

 

Total cash equivalents

 

 

126

 

 

 

 

 

 

126

 

 

 

119

 

 

 

 

 

 

119

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit (1)

 

 

970

 

 

 

 

 

 

970

 

 

 

 

 

 

871

 

 

 

871

 

Total short-term investments

 

 

970

 

 

 

 

 

 

970

 

 

 

 

 

 

871

 

 

 

871

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

 

6,987

 

 

 

 

 

 

6,987

 

 

 

6,516

 

 

 

 

 

 

6,516

 

Total long-term investments

 

 

6,987

 

 

 

 

 

 

6,987

 

 

 

6,516

 

 

 

 

 

 

6,516

 

Employee deferred compensation plan assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

3,818

 

 

 

 

 

 

3,818

 

 

 

3,333

 

 

 

 

 

 

3,333

 

Mutual funds

 

 

22,200

 

 

 

 

 

 

22,200

 

 

 

22,023

 

 

 

 

 

 

22,023

 

Equity securities

 

 

8,267