Cypress Semiconductor Corporation
CYPRESS SEMICONDUCTOR CORP /DE/ (Form: 10-Q, Received: 08/09/2016 16:09:44)

 

 

 

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 July 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 August 2, 2016 was 321,180,733.

 

 

 

 

 


 

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

32

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

45

Item 4.

Controls and Procedures

46

 

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures

51

Item 5.

Other Information

51

Item 6.

Exhibits

52

 

Signatures

53

 

Exhibit Index

54

 

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. These statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the forward-looking statements. Forward-looking statements include, but are not limited to, statements relating to: 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 and our related restructuring activities; the anticipated timing of the payout of the remaining Spansion restructuring reserve balance; the anticipated technological feasibility of our in-process research and development; estimated further amortization expense related to intangible assets; our expectations regarding our active litigation matters and our intent to defend ourselves in those matters; events that could cause a material change in unrecognized tax benefits and our ability to recognize those benefits; the specific strategies we are pursuing to achieve our goals on revenue growth and profitability; our ability to position the Company in high-growth markets; the value of non-GAAP financial measures to investors; the estimates we make in preparing our financial statements, including but not limited to those relating to our critical accounting policies; the expected impact on our operating results of changes in market interest rates applicable to our investment portfolio;  our expectations regarding dividends and the tax treatment of dividends for recipients; our expectations regarding stock repurchases;; our foreign currency exposure and the impact exchange rates could have on our operating results; and the adequacy of our cash and working capital positions; the value and liquidity of our investments. 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: global economic and market conditions; business conditions and growth trends in the semiconductor market; our ability to compete effectively; the volatility in supply and demand conditions for our products, including but limited to the impact of seasonality on supply and demand; our ability to develop, introduce and sell new products and technologies; potential problems relating to our manufacturing activities; the impact of acquisitions, including but limited to the continuing integration of Spansion and the recent acquisition of Broadcom’s wireless IoT business; our ability to attract and retain key personnel, including a new President and Chief Executive Officer; and/or the materialization of one or more of the risks set forth 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 CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

July 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands, except

per-share amounts)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

188,333

 

 

$

226,690

 

Short-term investments

 

 

970

 

 

 

871

 

Accounts receivable, net

 

 

325,142

 

 

 

292,736

 

Inventories

 

 

220,890

 

 

 

243,595

 

Other current assets

 

 

127,670

 

 

 

86,880

 

Total current assets

 

 

863,005

 

 

 

850,772

 

Property, plant and equipment, net

 

 

402,369

 

 

 

425,003

 

Goodwill

 

 

1,250,378

 

 

 

1,738,882

 

Intangible assets, net

 

 

686,885

 

 

 

789,195

 

Other long-term assets

 

 

201,117

 

 

 

200,409

 

Total assets

 

$

3,403,754

 

 

$

4,004,261

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

174,389

 

 

$

143,383

 

Accrued compensation and employee benefits

 

 

57,390

 

 

 

54,850

 

Deferred margin on sales to distributors

 

 

19,052

 

 

 

73,370

 

Dividends payable

 

 

35,240

 

 

 

36,520

 

Income taxes payable

 

 

3,581

 

 

 

3,262

 

Current portion of debt

 

 

13,436

 

 

 

14,606

 

Price adjustment reserve for sales to distributors

 

 

102,826

 

 

 

52,712

 

Other current liabilities

 

 

127,313

 

 

 

149,693

 

Total current liabilities

 

 

533,227

 

 

 

528,396

 

Deferred income taxes and other tax liabilities

 

 

45,950

 

 

 

51,737

 

Revolving credit facility and long-term debt

 

 

820,364

 

 

 

673,659

 

Other long-term liabilities

 

 

41,163

 

 

 

37,784

 

Total liabilities

 

 

1,440,704

 

 

 

1,291,576

 

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; 494,273 and

   481,912 shares issued;320,809 and 332,276 shares outstanding at July 3,

   2016 and January 3, 2016 respectively

 

 

4,721

 

 

 

4,637

 

Additional paid-in-capital

 

 

5,679,928

 

 

 

5,623,411

 

Accumulated other comprehensive gain / (loss)

 

 

1,552

 

 

 

(227

)

Accumulated deficit

 

 

(1,382,077

)

 

 

(758,780

)

Stockholders’ equity before treasury stock

 

 

4,304,124

 

 

 

4,869,041

 

Less: Shares of common stock held in treasury, at cost; 173,464 and 149,636 shares at

   July 3, 2016 and January 3, 2016 respectively

 

 

(2,335,289

)

 

 

(2,148,193

)

Total Cypress stockholders’ equity

 

 

1,968,835

 

 

 

2,720,848

 

Non-controlling interests

 

 

(5,785

)

 

 

(8,163

)

Total equity

 

 

1,963,050

 

 

 

2,712,685

 

Total liabilities and equity

 

$

3,403,754

 

 

$

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

 

 

Six Months Ended

 

 

 

July 3, 2016

 

 

June 28, 2015

 

 

July 3, 2016

 

 

June 28, 2015

 

 

 

(In thousands, except per-share amounts)

 

Revenues

 

$

450,127

 

 

$

484,778

 

 

$

869,091

 

 

$

693,915

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

291,349

 

 

 

346,705

 

 

 

584,528

 

 

 

597,535

 

Research and development

 

 

70,171

 

 

 

81,227

 

 

 

144,138

 

 

 

131,749

 

Selling, general and administrative

 

 

81,836

 

 

 

91,840

 

 

 

156,336

 

 

 

162,300

 

Amortization of intangible assets

 

 

32,605

 

 

 

35,928

 

 

 

67,792

 

 

 

43,274

 

Impairment of acquisition-related intangible assets

 

 

 

 

 

 

 

 

33,944

 

 

 

 

Goodwill impairment charge

 

 

488,504

 

 

 

 

 

 

488,504

 

 

 

 

Restructuring costs

 

 

654

 

 

 

10,039

 

 

 

924

 

 

 

85,754

 

Total costs and expenses

 

 

965,119

 

 

 

565,739

 

 

 

1,476,166

 

 

 

1,020,612

 

Operating loss

 

 

(514,992

)

 

 

(80,961

)

 

 

(607,075

)

 

 

(326,697

)

Interest expense

 

 

(7,540

)

 

 

(5,041

)

 

 

(13,872

)

 

 

(7,124

)

Other income (expense), net

 

 

224

 

 

 

(295

)

 

 

305

 

 

 

(2,361

)

Loss before income taxes and non-controlling interest

 

 

(522,308

)

 

 

(86,297

)

 

 

(620,642

)

 

 

(336,182

)

Income tax benefit (provision)

 

 

5,221

 

 

 

(2,935

)

 

 

1,479

 

 

 

1,068

 

Share in net loss of equity method investee

 

 

(2,568

)

 

 

(1,459

)

 

 

(4,646

)

 

 

(3,018

)

Net loss

 

 

(519,655

)

 

 

(90,691

)

 

 

(623,809

)

 

 

(338,132

)

Net loss attributable to non-controlling interests

 

 

381

 

 

 

640

 

 

 

513

 

 

 

1,283

 

Net loss attributable to Cypress

 

$

(519,274

)

 

$

(90,051

)

 

$

(623,296

)

 

$

(336,849

)

Net loss per share attributable to Cypress:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.65

)

 

$

(0.27

)

 

$

(1.96

)

 

$

(1.27

)

Diluted

 

$

(1.65

)

 

$

(0.27

)

 

$

(1.96

)

 

$

(1.27

)

Cash dividend declared per share

 

$

0.11

 

 

$

0.11

 

 

$

0.22

 

 

$

0.22

 

Shares used in net loss per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

314,305

 

 

 

333,334

 

 

 

317,330

 

 

 

264,547

 

Diluted

 

 

314,305

 

 

 

333,334

 

 

 

317,330

 

 

 

264,547

 

 

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

 

 

Six Months Ended

 

 

 

July 3, 2016

 

 

June 28, 2015

 

 

July 3, 2016

 

 

June 28,   2015

 

 

 

(In thousands)

 

Net loss

 

$

(519,655

)

 

$

(90,691

)

 

$

(623,809

)

 

$

(338,132

)

Other comprehensive loss, net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

   securities

 

 

 

 

 

(1

)

 

 

 

 

 

26

 

Net unrealized gain (loss) on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized loss arising during the period

 

 

(7,951

)

 

 

(1,549

)

 

 

(10,629

)

 

 

(1,741

)

Net loss reclassified into earnings for revenue hedges

   (effective portion)

 

 

4,102

 

 

 

193

 

 

 

5,127

 

 

 

390

 

Net loss reclassified into earnings for revenue hedges

   (ineffective portion)

 

 

(184

)

 

 

 

 

 

(173

)

 

 

 

 

Net loss (gain) reclassified into earnings for expense hedges

   (effective portion)

 

 

4,665

 

 

 

233

 

 

 

7,454

 

 

 

162

 

Net unrealized gain (loss) on cash flow hedges

 

 

632

 

 

 

(1,123

)

 

 

1,779

 

 

 

(1,189

)

Other comprehensive gain (loss)

 

 

632

 

 

 

(1,124

)

 

 

1,779

 

 

 

(1,163

)

Comprehensive loss

 

 

(519,023

)

 

 

(91,815

)

 

 

(622,030

)

 

 

(339,295

)

Comprehensive loss attributable to non-controlling interest

 

 

381

 

 

 

640

 

 

 

513

 

 

 

1,283

 

Comprehensive loss attributable to Cypress

 

$

(518,642

)

 

$

(91,175

)

 

$

(621,517

)

 

$

(338,012

)

 

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

 

 

6


 

CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended

 

 

 

July 3, 2016

 

 

June 28, 2015

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(623,809

)

 

$

(338,132

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

42,387

 

 

 

46,464

 

Depreciation and amortization

 

 

122,737

 

 

 

96,641

 

Impairment of acquisition-related intangible assets

 

 

33,944

 

 

 

 

Impairment of goodwill

 

 

488,504

 

 

 

 

Loss on disposal of property and equipment

 

 

6,116

 

 

 

9,346

 

Share in net loss of equity method investee

 

 

4,646

 

 

 

3,018

 

Accretion of interest expense on Senior Exchangeable Notes

 

 

2,039

 

 

 

 

Loss (gain) on assets held under deferred compensation plan

 

 

793

 

 

 

(1,204

)

Unrealized loss on trading securities

 

 

598

 

 

 

191

 

Restructuring and other costs

 

 

2,464

 

 

 

13,768

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(32,406

)

 

 

(85,418

)

Inventories

 

 

22,383

 

 

 

238,884

 

Other current and long-term assets

 

 

(36,656

)

 

 

(15,519

)

Price adjustment reserve for sales to distributors

 

 

50,114

 

 

 

13,951

 

Accounts payable and other liabilities

 

 

(6,815

)

 

 

(67,095

)

Deferred margin on sales to distributors

 

 

(54,536

)

 

 

32,089

 

Net cash provided by (used in) operating activities

 

 

22,503

 

 

 

(53,016

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(80,053

)

 

 

(1,530

)

Proceeds from maturities of available-for-sale investments

 

 

40,000

 

 

 

7,187

 

Proceeds from sales of available-for-sale investments

 

 

44,317

 

 

 

 

Business acquisition, net of cash acquired

 

 

 

 

 

(105,130

)

Contribution, net of distributions to deferred compensation plan

 

 

1,743

 

 

 

1,270

 

Acquisition of property, plant and equipment

 

 

(25,814

)

 

 

(25,231

)

Cash paid for equity and cost method investments, and other

 

 

(14,376

)

 

 

(11,877

)

Net cash used in investing activities

 

 

(34,183

)

 

 

(135,311

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

120,000

 

 

 

299,000

 

Repayment of revolving credit facility

 

 

(202,000

)

 

 

(77,000

)

Repayment of Term Loan A

 

 

(2,500

)

 

 

 

Repurchase of treasury stock

 

 

(175,694

)

 

 

(10,382

)

Payment of dividends

 

 

(70,820

)

 

 

(54,334

)

Proceeds from employee equity awards

 

 

40,111

 

 

 

33,199

 

Repayment of equipment leases, loans, net and other

 

 

(6,606

)

 

 

(4,486

)

Net proceeds from issuance of 4.50% Senior Exchangeable Notes

 

 

279,594

 

 

 

 

Purchase of capped calls

 

 

(8,165

)

 

 

 

Proceeds from settlement of capped calls

 

 

 

 

 

25,293

 

Financing costs related to revolving credit facility

 

 

(597

)

 

 

(2,559

)

Net cash (used in) provided byfinancing activities

 

 

(26,677

)

 

 

208,731

 

Net (decrease) increase in cash and cash equivalents

 

 

(38,357

)

 

 

20,404

 

Cash and cash equivalents, beginning of period

 

 

226,690

 

 

 

103,736

 

Cash and cash equivalents, end of period

 

$

188,333

 

 

$

124,140

 

Supplemental Cash Flows Disclosures:

 

 

 

 

 

 

 

 

Dividends payable

 

$

35,240

 

 

$

36,718

 

Unpaid purchase of property, plant and equipment

 

$

3,804

 

 

$

10,578

 

Cash paid for interest

 

$

10,398

 

 

$

4,268

 

Cash paid for income taxes

 

$

4,742

 

 

$

4,220

 

 

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. 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 second quarter of fiscal 2016 ended on July 3, 2016 and the second quarter of fiscal 2015 ended on June 28, 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 six months ended July 3, 2016 to the same periods in fiscal 2015 is significantly impacted by the Merger.

Certain balances included in the Condensed Consolidated Balance Sheet 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 and six months ended July 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, in the fourth quarter of 2014 the Company began recognizing revenue on certain product families and with certain distributors (less its estimate of future price adjustments and returns) upon shipment to the distributors (also referred to as the sell-in basis of revenue recognition).  During the three months ended July 3, 2016, the Company recognized an incremental $24.2 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 reduction of the Company’s net loss of $6.8 million or $0.02 per basic and diluted share for the three months ended July 3, 2016.   During the three months ended June 28, 2015, there were no new product families or distributors for which the Company recognized revenue on a sell-in basis.

8


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

During the six months ended July 3, 2016, the Company recognized approximately $40.6 million of incremental revenue from this change in revenue recognition, which resulted in a reduction of the Company’s net loss of approximately $14.2 million for the six months ended July 3, 2016, or approximately $0.05 per basic and diluted share. Durin g the six months ended June 28, 2015, the Company recognized approximately $22.7 million of incremental revenue from this change, which resulted in a benefit to net income of approximately $13.7 million for the six months ended June 28, 2015, or approximat ely $0.05 per basic and diluted share.  During the three months ended July 3, 2016, we recognized approximately $306.5 million or 92.8% of distribution revenue on a sell-in basis. During the three months ended June 28, 2015, we recognized approximately $22 0.7million or 62.5% of distribution revenue on a sell-in basis. During the six months ended July 3, 2016, the Company recognized approximately $540.0 million or 86.9% of distribution revenue on a sell-in basis. During the six months ended June 28, 2015, we recognized approximately $329.1 million or 51.1% of distribution revenue on a sell-in basis.

Net Loss per Share

Basic net loss per share is calculated by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt, using the treasury stock method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.

Convertible debt

In accounting for the Senior Exchangeable Notes at issuance, the Company separated the Notes into debt and equity components according to accounting standards codification ("ASC") 470-20 for convertible debt instruments that may be fully or partially settled in cash upon conversion. The carrying amount of the debt component, which approximates its fair value, was estimated by using an interest rate for nonconvertible debt, with terms similar to the Notes. The excess of the principal amount of the Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted to the carrying value of the Notes over their term as interest expense using the effective interest method. In accounting for the transaction costs incurred relating to issuance of the Notes, the Company allocated the costs of the offering in proportion to the fair value of the debt and equity recognized in accordance with the accounting standards. The transaction costs allocated to the debt are being amortized as interest expense over the term of the Notes.

In accounting for the cost of the capped call transaction entered in connection with issuance of the Senior Exchangeable Notes, the Company included the cost as a net reduction to additional paid-in capital in the stockholders’ equity section of the consolidated balance sheet, in accordance with the guidance in ASC 815-40 Derivatives and Hedging-Contracts in Entity’s Own Equity.  See Note 8 for further details.

 

 

 

NOTE 2. 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 the amounts of $770.0 million and $968.8 million respectively, as of January 3, 2016.

 

During the quarter ended July 3, 2016, the Company concluded that a combination of factors, including (a) decreases in our forecasted operating results when compared with the expectations of the PSD reporting unit at the time of the Merger, primarily in consumer markets as the Company has subsequently increased its focus on the automotive and industrial end markets, (b) evaluation of business priorities due to recent changes in management, and (c) certain market conditions necessitated a quantitative impairment analysis for the carrying value of the Goodwill related to PSD which resulted in an impairment charge of $488.5 million.  

 

As the first step of the quantitative test (“Step 1”), the Company estimated the fair value of the net assets, including goodwill related to PSD. In estimating these fair values, a combination of a market approach and an income approach was utilized. This combination was deemed to be the most indicative of the reporting unit’s estimated fair value in an orderly transaction between market participants and is consistent with the methodology of the Company used for the goodwill impairment tests in prior years. In performing the step 1 analysis in the second quarter of fiscal 2016, the Company applied a weighting of 75% to the income approach and 25% to the market approach. Under the market approach, the Company utilizes publicly-traded comparable company information

9


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

to determine revenue and earnings multiples that are used to value the reporting units. Under the income approach, the Co mpany determines fair value based on estimated future cash flows of the reporting unit discounted by an estimated weighted-average cost of capital, reflecting the overall level of inherent risk of the reporting unit and the rate of return an outside invest or would expect to earn. The Company based cash flow projections for PSD using a forecast of cash flows and a terminal value based on the industry’s perpetuity growth model. The forecast and related assumptions were derived from a recently completed five-y ear outlook which included adjustments arising from the changes in strategic decisions as discussed above.

 

Based on the Step 1 analysis, the Company concluded that the carrying value of PSD’s net assets exceeded their estimated fair value as of June 1, 2016, the date of the analysis.

 

The Company performed an analysis as required by ASC 350 and did not note an impairment in the carrying value of the long-lived assets related to PSD.

 

The deficiency between the carrying and estimated fair value of the net assets as noted in Step 1, required the second step of the quantitative test (“Step 2”) to be performed by comparing the carrying value of the goodwill related to PSD to its implied fair value. The implied fair value is calculated by allocating all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value.

 

The Company has completed a preliminary assessment of the implied fair value of the PSD reporting unit, which resulted in a partial impairment of goodwill of $488.5 million. Due to the complexity and effort required to estimate the fair value of the reporting unit in the second step of the analysis, the fair value estimates were based on preliminary analysis and assumptions that are subject to change. The measurement of impairment will be completed in the third quarter of fiscal 2016 and further adjustments to the preliminary goodwill impairment charge, if any, may be recognized when the Company finalizes the second step of the goodwill impairment test.

 

Given the partial impairment recorded in the PSD reporting unit, it is reasonably possible that even small future changes in judgments, assumptions and estimates the Company made in assessing the implied fair value of goodwill could cause the Company to determine that some or all of the remaining goodwill of the PSD reporting unit has become impaired. In addition, a future decline in market conditions and/or changes in the Company’s market share could negatively impact the market comparables, estimated future cash flows and discount rates used in the market and income approaches to determine the fair value of the reporting unit and could result in another material impairment charge in the future.

 

During the six months ended July 3, 2016, the Company did not note any triggers that necessitated an impairment analysis for the MPD reporting unit.

The changes in the carrying amount of goodwill by reportable segment for the six months ended July 3, 2016 were as follows:

 

 

 

MPD

 

 

PSD

 

 

Total

 

 

 

(in thousands)

 

Goodwill as of January 3, 2016 (1)

 

$

770,046

 

 

$

968,836

 

 

$

1,738,882

 

Impairment

 

 

-

 

 

 

(488,504

)

 

 

(488,504

)

Goodwill as of July 3, 2016

 

$

770,046

 

 

$

480,332

 

 

$

1,250,378

 

 

(1)

The Company previously recorded an impairment charge of $351.3 million in the fourth quarter of fiscal 2008.

 

 

10


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

NOTE 3. INTANGIBLE ASSETS

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

 

 

 

As of July 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

 

$

879,709

 

 

$

(294,210

)

 

$

585,499

 

 

$

836,256

 

 

$

(226,417

)

 

$

609,839

 

Non-acquisition related intangible assets

 

 

12,714

 

 

 

(10,367

)

 

 

2,347

 

 

 

13,368

 

 

 

(10,228

)

 

 

3,140

 

Total developed technology and other intangible

   assets

 

 

892,423

 

 

 

(304,577

)

 

 

587,846

 

 

 

849,624

 

 

 

(236,645

)

 

 

612,979

 

In-process research and development

 

 

99,039

 

 

 

 

 

 

99,039

 

 

 

176,216

 

 

 

 

 

 

176,216

 

Total intangible assets

 

$

991,462

 

 

$

(304,577

)

 

$

686,885

 

 

$

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

 

 

(43,233

)

Projects impaired

 

 

(33,944

)

As of July 3, 2016

 

$

99,039

 

 

In the first half of fiscal 2016, the Company recognized a $33.9 million impairment charge related to two IPR&D projects that were cancelled 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 July 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 July 3, 2016 is as follows:

 

 

 

(In thousands)

 

2016 (remaining six months)

 

$

65,820

 

2017

 

 

130,986

 

2018

 

 

128,440

 

2019

 

 

121,212

 

2020

 

 

85,886

 

2021 and future

 

 

55,502

 

Total future amortization expense

 

$

587,846

 

 

 

NOTE 4. BALANCE SHEET COMPONENTS

Accounts Receivable, Net

 

 

 

As of

 

 

 

July 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands)

 

Accounts receivable, gross

 

$

328,635

 

 

$

295,803

 

Allowance for doubtful accounts receivable and sales returns

 

 

(3,493

)

 

 

(3,067

)

Total accounts receivable, net

 

$

325,142

 

 

$

292,736

 

11


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

Inventories

 

 

 

As of

 

 

 

July 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands)

 

Raw materials

 

$

15,430

 

 

$

13,516

 

Work-in-process

 

 

161,494

 

 

 

192,245

 

Finished goods

 

 

43,966

 

 

 

37,834

 

Total inventories

 

$

220,890

 

 

$

243,595

 

 

Other Current Assets

 

 

 

As of

 

 

 

July 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands)

 

Prepaid tooling assets

 

$

20,771

 

 

$

19,379

 

Restricted cash relating to defined benefit pension plan, current

 

 

4,181

 

 

 

3,730

 

Foundry service prepayments - current portion

 

 

5,903

 

 

 

5,753

 

Advances to suppliers

 

 

10,844

 

 

 

10,683

 

Prepaid royalty and licenses

 

 

19,975

 

 

 

14,281

 

Derivative Asset

 

 

11,317

 

 

 

966

 

Value added tax receivable

 

 

16,867

 

 

 

12,493

 

Receivable from sale of TrueTouch Mobile ® business

 

 

10,000

 

 

 

 

Other current assets

 

 

27,812

 

 

 

19,595

 

Total other current assets

 

$

127,670

 

 

$

86,880

 

 

Other Long-term Assets

 

 

 

As of

 

 

 

July 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands)

 

Employee deferred compensation plan

 

$

40,030

 

 

$

41,249

 

Investments in equity securities

 

 

61,121

 

 

 

57,030

 

Deferred tax assets

 

 

4,199

 

 

 

4,080

 

Long-term license

 

 

25,793

 

 

 

24,079

 

Restricted cash relating to defined benefit pension plan, non current

 

 

4,377

 

 

 

3,462

 

Long-term receivable from sale of TrueTouch Mobile ® business

 

 

 

 

 

10,000

 

Foundry service prepayments - non-current portion

 

 

30,976

 

 

 

26,237

 

Other assets

 

 

34,621

 

 

 

34,272

 

Total other long-term assets

 

$

201,117

 

 

$

200,409

 

 

12


CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Other Current Liabilities

 

 

 

As of

 

 

 

July 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands)

 

Employee deferred compensation plan

 

$

40,941

 

 

$

41,457

 

Restructuring accrual  - current portion (See Note 5)

 

 

4,642

 

 

 

7,270

 

Deferred revenue on sale of True Touch mobile ® business

 

 

5,789

 

 

 

15,295

 

Rebate reserve

 

 

10,236

 

 

 

7,944

 

Derivative liability

 

 

10,358

 

 

 

1,283

 

Other current liabilities

 

 

55,347

 

 

 

76,444

 

Total other current liabilities

 

$

127,313

 

 

$

149,693

 

 

Other Long-term Liabilities

 

 

 

As of

 

 

 

July 3,

2016

 

 

January 3,

2016

 

 

 

(In thousands)

 

Long-term defined benefit pension plan liabilities

 

$

4,935

 

 

$

8,712

 

Restructuring accrual - non-current portion (See Note 5)

 

 

12,654

 

 

 

14,217

 

Asset retirement obligation

 

 

5,024

 

 

 

2,783

 

Other long-term liabilities

 

 

18,550

 

 

 

12,072

 

Total other long-term liabilities

 

$

41,163

 

 

$

37,784

 

 

 

NOTE 5. 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.

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

 

 

Six Months Ended

 

 

 

July 3,