Cypress Semiconductor Corporation
CYPRESS SEMICONDUCTOR CORP /DE/ (Form: 10-Q, Received: 11/01/2013 13:42:58)
Tables of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
————————————
FORM 10-Q
————————————
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10079
———————————
CYPRESS SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
————————————  
Delaware
 
94-2885898
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
198 Champion Court, San Jose, California 95134
(Address of principal executive offices and zip code)
(408) 943-2600
(Registrant’s telephone number, including area code)
  ————————————
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
The total number of outstanding shares of the registrant’s common stock as of October 24, 2013 was 151,101,454.


Tables of Contents

INDEX
 
 
 
 
 
 
Page
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Mine Safety Disclosures
Item 5.
Item 6.
 

1

Tables of Contents

PART I—FINANCIAL INFORMATION

Forward-Looking Statements
The discussion in this Quarterly Report on Form 10-Q contains statements that are not historical in nature, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, including, but not limited to, statements related to our belief that our goodwill adjustments will not be material to our full fiscal year financials, our estimated future amortization expenses, our expectation regarding dividends and stock repurchases, our expectations regarding future technology transfers and other licensing arrangements, what we expect to achieve form our restructuring activities, our expectations regarding the timing of our restructuring liabilities, our plan to sell the assets in our Texas facility, how we expected our pre-payments to Grace to be used and when we expect to receive certain payments from Grace, our plan to purchase additional preferred stock in an advanced battery storage company, the estimates used in our stock-based compensation table, our expected funding schedule for the limited partnership interest we recently acquired, our beliefs and expectations regarding our active litigation matters and our intent to defend ourselves in those matters; our foreign currency exposure and the impact exchange rates could have on our operating margins, the adequacy of our cash and working capital positions, the value and liquidity of our investments, including auction rate securities and our other debt investments, our ability to recognize certain unrecognized tax benefits within the next twelve months as well as the resolution of agreements with various foreign tax authorities, our investment strategy, our belief that liquidity provided by existing cash, cash equivalents and investments and our borrowing arrangements will provide sufficient capital to meet our requirements for at least the next twelve months, our expectations regarding our outstanding warranty liability, the impact of interest rate fluctuations on our investments, the volatility of our stock price and the impact of new accounting standards on our financial statements. We use words such as “plan,” “anticipate,” “believe,” “expect,” “future,” “intend” and similar expressions to identify forward-looking statements. Such forward-looking statements are made as of the date hereof and are based on our current expectations, beliefs and intentions regarding future events or our financial performance and the information available to management as of the date hereof. Except as required by law, we assume no responsibility to update any such forward-looking statements. Our actual results could differ materially from those expected, discussed or projected in the forward-looking statements contained in this Quarterly Report on Form 10-Q for any number of reasons, including, but not limited to, the state and future of the general economy and its impact on the markets and consumers we serve and our investments; current and future credit conditions; our ability to expand our customer base and gain acceptance of our products, our ability to effectively forecast the demand for our products and estimate our financial performance, our ability to achieve on our expected financials results of operation, 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; our ability to achieve our goals related to our restructuring activities; our success in our pending litigation matters, our ability to manage our cash and investments as well as our interest rate and exchange rate exposure; our ability to achieve the intended goal for all of our investments, capital commitments and limited partnerships; our ability to achieve liquidity in our investments, the failure or success of our Emerging Technology division and/or the materialization of one or more of the risks set forth above or in Part II, Item 1A ( Risk Factors ) in this Quarterly Report on Form 10-Q and in Part I, Item 1A ( Risk Factors ) in our Annual Report on Form 10-K for the fiscal year ended December 30, 2012.


2

Tables of Contents

ITEM 1. FINANCIAL STATEMENTS

CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 29,
2013
 
December 30,
2012
 
(In thousands, except
per-share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
76,550

 
$
63,203

Short-term investments
24,839

 
54,007

Accounts receivable, net
108,200

 
82,920

Inventories
101,031

 
127,596

Other current assets
39,367

 
41,082

Total current assets
349,987

 
368,808

Property, plant and equipment, net
259,897

 
274,427

Goodwill
65,696

 
64,194

Intangible assets, net
42,852

 
49,216

Other long-term assets
77,559

 
74,984

Total assets
$
795,991

 
$
831,629

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
52,809

 
$
58,704

Accrued compensation and employee benefits
45,103

 
38,190

Deferred margin on sales to distributors
137,958

 
131,192

Dividends payable
16,578

 
15,847

Income taxes payable
3,243

 
6,526

Other current liabilities
80,909

 
98,289

Total current liabilities
336,600

 
348,748

Other tax liabilities
25,770

 
40,928

Long-term revolving credit facility
227,000

 
232,000

Other long-term liabilities
29,079

 
33,092

Total liabilities
618,449

 
654,768

Commitments and contingencies (Note 8)

 

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

 

Common stock, $.01 par value, 650,000 and 650,000 shares authorized; 293,946 and 286,903 shares issued; 150,834 and 144,224 shares outstanding at September 29, 2013 and December 30, 2012, respectively
2,939

 
2,868

Additional paid-in-capital
2,650,629

 
2,612,579

Accumulated other comprehensive loss
(474
)
 
(444
)
Accumulated deficit
(381,320
)
 
(348,533
)
Stockholders’ equity before treasury stock
2,271,774

 
2,266,470

Less: shares of common stock held in treasury, at cost; 143,112 and 142,679 shares at September 29, 2013 and December 30, 2012, respectively
(2,090,095
)
 
(2,085,570
)
Total Cypress stockholders’ equity
181,679

 
180,900

Noncontrolling interest
(4,137
)
 
(4,039
)
Total equity
177,542

 
176,861

Total liabilities and equity
$
795,991

 
$
831,629

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

3

Tables of Contents

CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
 
(In thousands, except per-share amounts)
Revenues
$
188,723

 
$
203,015

 
$
554,917

 
$
589,404

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
97,070

 
92,959

 
292,793

 
280,798

Research and development
50,429

 
46,908

 
148,563

 
142,822

Selling, general and administrative
45,533

 
47,328

 
139,049

 
159,776

Amortization of acquisition-related intangible assets
1,987

 
707

 
5,983

 
2,169

Restructuring costs
3,693

 
66

 
15,826

 
1,283

Total costs and expenses
198,712

 
187,968

 
602,214

 
586,848

Operating income (loss)
(9,989
)
 
15,047

 
(47,297
)
 
2,556

Interest and other income (expense), net
427

 
(1,330
)
 
3,030

 
(996
)
Income (loss) before income taxes and noncontrolling interest
(9,562
)
 
13,717

 
(44,267
)
 
1,560

Income tax benefit (provision)
774

 
241

 
9,971

 
(2,741
)
Net income (loss)
(8,788
)
 
13,958

 
(34,296
)
 
(1,181
)
Adjust for net loss attributable to noncontrolling interest
430

 
374

 
1,509

 
1,030

Net income (loss) attributable to Cypress
$
(8,358
)
 
$
14,332

 
$
(32,787
)
 
$
(151
)
Net income (loss) per share attributable to Cypress:
 
 
 
 
 
 
 
Basic
$
(0.06
)
 
$
0.10

 
$
(0.22
)
 
$

Diluted
$
(0.06
)
 
$
0.09

 
$
(0.22
)
 
$

Cash dividend declared per share
$
0.11

 
$
0.11

 
$
0.33

 
$
0.33

Shares used in net income (loss) per share calculation:
 
 
 
 
 
 
 
Basic
149,679

 
147,673

 
147,551

 
151,153

Diluted
149,679

 
160,300

 
147,551

 
151,153

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

4

Tables of Contents

CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
 
(In thousands)
Net income (loss)
$
(8,788
)
 
$
13,958

 
$
(34,296
)
 
$
(1,181
)
Available for sale investments:
 
 
 
 
 
 
 
Change in net unrealized gains, net of tax benefit for the three and nine months ended September 29, 2013 and September 30, 2012, respectively
(48
)
 
(1,009
)
 
1,033

 
8,965

Net gains reclassified into earnings, net of tax effects for the three and nine months ended September 29, 2013 and September 30, 2012, respectively

 

 
(1,063
)
 
(7,446
)
Other comprehensive income (loss)
(48
)
 
(1,009
)
 
(30
)
 
1,519

Comprehensive income (loss)
(8,836
)
 
12,949

 
(34,326
)
 
338

Adjust for net loss attributable to noncontrolling interest
430

 
374

 
1,509

 
1,030

Comprehensive income (loss) attributable to Cypress
$
(8,406
)
 
$
13,323

 
$
(32,817
)
 
$
1,368

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

5

Tables of Contents

CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended
 
September 29,
2013
 
September 30,
2012
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(34,296
)
 
$
(1,181
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
52,143

 
67,068

Depreciation and amortization
36,932

 
37,877

Deferred income taxes and other tax liabilities
(15,191
)
 
448

Restructuring costs
15,826

 
1,282

Loss on sale or retirement of property and equipment, net
584

 
821

Other
(784
)
 
1,325

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(25,280
)
 
(21,678
)
Inventories
28,124

 
1,873

Other current and long-term assets
1,423

 
(10,186
)
Accounts payable and other liabilities
(19,722
)
 
21,063

Deferred margin on sales to distributors
6,766

 
18,983

Net cash provided by operating activities
46,525

 
117,695

Cash flows from investing activities:
 
 
 
Proceeds from sales or maturities of available-for-sale investments
53,461

 
112,137

Purchases of available-for-sale investments
(23,315
)
 
(97,527
)
Net employee contributions to (distribution of) deferred compensation plan
(1,247
)
 
310

Acquisition of property, plant and equipment
(27,877
)
 
(25,204
)
Cash paid for equity investments
(4,361
)
 
(7,203
)
Proceeds from sale of equity investments
2,158

 

Other
1,751

 
13

Net cash provided by (used in) investing activities
570

 
(17,474
)
Cash flows from financing activities:
 
 
 
Repurchase of common shares

 
(179,257
)
Line of credit proceeds
80,000

 
248,000

Repayment of line of credit
(85,000
)
 
(50,000
)
Withholding of common shares for tax obligations on vested restricted shares
(4,526
)
 
(20,239
)
Payment of dividends
(48,241
)
 
(47,170
)
Proceeds from issuance of common shares under employee stock plan
33,395

 
20,361

Payments of equipment leases and loans, net
(7,533
)
 
(5,009
)
Yield Enhancement structured agreements settled in cash

 
433

Repayment of other financing agreements
(3,254
)
 
(4,728
)
Cash received for investment in subsidiary
1,411

 

Net cash provided used in financing activities
(33,748
)
 
(37,609
)
Net increase in cash and cash equivalents
13,347

 
62,612

Cash and cash equivalents, beginning of period
63,203

 
99,717

Cash and cash equivalents, end of period
$
76,550

 
$
162,329

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

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Tables of Contents

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 2013 and fiscal 2012 had 52 weeks. The third quarter of fiscal 2013 ended on September 29, 2013 and the third quarter of fiscal 2012 ended on September 30, 2012.
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal, recurring items, which are necessary to state fairly the financial information included therein. The financial data should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2012.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Certain prior period balances have been reclassified to conform to the current year presentation.
The condensed consolidated results of operations for the three and nine months ended September 29, 2013 are not necessarily indicative of the results to be expected for the full fiscal year.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to the guidance on Comprehensive Income, to improve the reporting of reclassifications out of accumulated other income. This guidance requires entities to provide information about the amounts reclassified out of accumulated other income by component. The authoritative guidance also requires an entity to present, either on the face of the statement where net income (loss) is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income only if the amount reclassified is required under U.S. GAAP to be reclassified to net income (loss) in its entirety in the same reporting period. For amounts not required to be reclassified under U.S. GAAP, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted this guidance in the first quarter of fiscal 2013 and our adoption did not have a significant impact on our condensed consolidated financial statements. See Note 10 for more information.
In July 2013, the FASB issued an ASU on Income Taxes, to improve the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is expected to reduce diversity in practice and is expected to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This guidance is effective for our interim and annual periods beginning after December 15, 2013. We do not believe that the implementation of this authoritative guidance will have any material impact on our financial position or results of operations.


7

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

NOTE 2. 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. The carrying amount of goodwill at September 29, 2013 was $65.7 million , of which $33.9 million was in the Memory Products Division (“MPD”) and $31.8 million in the Programmable System Division (“PSD”). The carrying amount of goodwill at December 30, 2012 was $64.2 million , of which $32.4 million was in MPD and $31.8 million was in PSD. In the second quarter of fiscal of 2013, we increased the amount of goodwill attributable to the MPD reportable segment by $1.5 million as we had not recorded certain shares that were not tendered at the tender offering period in the fourth quarter of fiscal 2012. As management and the Audit Committee believe this adjustment is not material to any prior years’ financial statements, and the impact of correcting this error in the current quarter is not material to the current quarter’s consolidated financial statements and is not expected to be material to the full year fiscal 2013 consolidated financial statements, we recorded the adjustment in the second quarter of fiscal 2013.
The following table presents details of our intangible assets:
 
 
As of September 29, 2013
 
As of December 30, 2012
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
 
(In thousands)
Acquisition-related intangible assets
$
151,773

 
$
(109,824
)
 
$
41,949

 
$
151,773

 
$
(103,840
)
 
$
47,933

Non-acquisition related intangible assets
10,423

 
(9,520
)
 
903

 
10,048

 
(8,765
)
 
1,283

Total intangible assets
$
162,196

 
$
(119,344
)
 
$
42,852

 
$
161,821

 
$
(112,605
)
 
$
49,216

As of September 29, 2013 , the estimated future amortization expense of these intangible assets was as follows:
 
 
 
 
(In thousands)
2013 (remaining three months)
$
2,448

2014
7,675

2015
5,772

2016
5,772

2017
5,772

2018 and future
15,413

Total future amortization expense
$
42,852


NOTE 3. RESTRUCTURING
For the three and nine months ended September 29, 2013 , we recorded restructuring charges of $3.7 million and $15.8 million , respectively. For the three and nine months ended September 30, 2012 , we recorded restructuring charges of $0.1 million and $1.3 million , respectively. The determination of when we accrue for severance and benefits costs, and which accounting standard applies, depends on whether the termination benefits are provided under a one-time benefit arrangement or under an on-going benefit arrangement.
Fiscal 2013 Restructuring Plan
During fiscal 2013, we implemented a restructuring plan to reduce operating expenses as part of our 2013 corporate priorities. The plan includes the termination of employees and the disposal of certain equipment located in our Bloomington, Minnesota facility. To date, we have recorded total restructuring charges of $15.2 million related to the Fiscal 2013 Restructuring Plan. Of the total restructuring charge, $6.7 million was related to property, plant and equipment, $8.0 million was related to personnel costs and $0.5 million was mainly related to the amounts payable upon the termination of agreements with certain distributor representatives.


8

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The restructuring activities related to personnel costs, which are primarily in the U.S., are summarized as follows:
 
 
(In thousands)
Balance as of December 30, 2012
$

Provision
3,807

Cash payments
(495
)
Balance as of March 31, 2013
3,312

Provision
729

Cash payments
(1,318
)
Balance as of June 30, 2013
2,723

Provision
3,545

Cash payments
(604
)
Non-cash charges
23

Balance as of September 29, 2013
$
5,687

The restructuring liability as of September 29, 2013 under the Fiscal 2013 Restructuring Plan is primarily related to personnel costs and is expected to be paid out within the next twelve months.
Fiscal 2011/12 Restructuring Plan
In fiscal 2011, we initiated a restructuring plan which allowed us to continue to allocate and align our resources to the business units that we expect will drive future development and revenue growth (“Fiscal 2011 Restructuring Plan”). To date, we have recorded total restructuring charges of $9.1 million under the Fiscal 2011 Restructuring Plan, which was all related to personnel costs. The restructuring activities related to personnel costs, which are primarily in the U.S., are summarized as follows:
 
 
(In thousands)
Balance as of December 30, 2012
$
4,506

Provision
350

Cash payments
(946
)
Non-cash charges
(250
)
Balance as of March 31, 2013
3,660

Cash payments
(870
)
Non-cash charges
173

Balance as of June 30, 2013
2,963

Cash payments
(1,995
)
Balance as of September 29, 2013
$
968

The restructuring liability as of September 29, 2013 under the Fiscal 2011 Restructuring Plan related primarily to personnel costs and is expected to be paid out within the next twelve months.
Assets Held-For-Sale
Our Texas facility ceased operations in the fourth quarter of fiscal 2008. As our management has committed to a plan to sell the assets associated with the facility, we have classified the assets as held-for-sale. In fiscal 2012, due to the unfavorable economic and market conditions, management reassessed the fair value of the assets and recorded a write-down of $2.3 million to the estimated fair value of $4.6 million .
During the first quarter of 2013, we incurred a $6.0 million charge to write down certain equipment to the current fair value of $2.3 million . Management considered a third-party valuation in determining the fair value of this held-for-sale asset.
The net book value of these assets are classified as held-for-sale and included in “Other current assets” in the Condensed Consolidated Balance Sheet (see Note 4).

9

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


NOTE 4. BALANCE SHEET COMPONENTS
Accounts Receivable, Net
 
 
As of
 
September 29,
2013
 
December 30,
2012
 
(In thousands)
Accounts receivable, gross
$
112,265

 
$
87,050

Allowance for doubtful accounts receivable and sales returns
(4,065
)
 
(4,130
)
Total accounts receivable, net
$
108,200

 
$
82,920


Inventories
 
 
As of
 
September 29,
2013
 
December 30,
2012
 
(In thousands)
Raw materials
$
3,196

 
$
4,307

Work-in-process
69,007

 
62,603

Finished goods
28,828

 
60,686

Total inventories
$
101,031

 
$
127,596

Other Current Assets
 
 
As of
 
September 29,
2013
 
December 30,
2012
 
(In thousands)
Prepaid expenses
$
24,976

 
$
21,623

Assets held-for-sale
6,880

 
4,630

Prepayment to Grace
1,762

 
7,321

Other current assets
5,749

 
7,508

Total other current assets
$
39,367

 
$
41,082

Prepayment to Grace
In fiscal 2011, we made certain prepayments to Grace Semiconductor Manufacturing Corporations (“Grace”), a strategic foundry partner, to secure a certain supply of wafers. The prepayments were expected to be applied to purchases of wafers from Grace. As of September 29, 2013 and December 30, 2012 , the unapplied prepayment balances were approximately $1.8 million and $7.3 million , respectively, and were recorded as part of “Other current assets” in the Condensed Consolidated Balance Sheet. In the first quarter of fiscal 2013 of the unused prepayment, Grace paid us $3.6 million , in cash. In the third quarter of fiscal 2013, Grace made an additional cash payment of $1.8 million . We expect to receive the remaining $1.8 million by the end of fiscal 2013.

10

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Other Long-term Assets
 
 
As of
 
September 29,
2013
 
December 30,
2012
 
(In thousands)
Employee deferred compensation plan
$
40,467

 
$
37,142

Investments:

 

Debt securities
4,434

 
5,504

Equity securities
10,361

 
7,054

Other assets
22,297

 
25,284

Total other long-term assets
$
77,559

 
$
74,984

Other Current Liabilities
 
 
As of
 
September 29,
2013
 
December 30,
2012
 
(In thousands)
Employee deferred compensation plan
$
40,202

 
$
36,244

Restructuring accrual (see Note 3)
7,331

 
5,113

Capital lease-current portion (see Note 8)
2,257

 
4,849

Equipment loan-current portion (see Note 9)
2,725

 
2,725

Advances received from sale of ARS (see Note 5)
3,140

 
3,140

Customer advances

 
10,191

Other current liabilities
25,254

 
36,027

Total other current liabilities
$
80,909

 
$
98,289

 
Other Long-term Liabilities
 
 
As of
 
September 29,
2013

December 30,
2012
 
(In thousands)
Equipment loan–long-term portion (see Note 9)
$
6,711


$
8,756

Capital lease–long-term portion (see Note 8)
10,885


12,779

Other long-term liabilities
11,483


11,557

Total other long-term liabilities
$
29,079

 
$
33,092



11

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

NOTE 5. FAIR VALUE MEASUREMENTS
Assets/Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis and our non-financial assets measured at fair value on a non-recurring basis:
 
 
As of September 29, 2013
 
As of December 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
253

 
$

 
$

 
$
253

 
$
24,187

 
$

 
$

 
$
24,187

Commercial paper

 
9,000

 

 
9,000

 

 

 

 

Total cash equivalents
253

 
9,000

 

 
9,253

 
24,187

 

 

 
24,187

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasuries

 

 

 

 
10,032

 

 

 
10,032

Corporate notes and bonds

 
19,569

 

 
19,569

 

 
28,435

 

 
28,435

Federal agency

 

 

 

 

 
3,005

 

 
3,005

Commercial paper

 
2,799

 

 
2,799

 

 
11,694

 

 
11,694

Certificates of deposit

 
2,471

 

 
2,471

 

 
840

 

 
840

Non-financial assets held-for-sale

 
6,880

 

 
6,880

 

 
4,630

 

 
4,630

Total short-term investments

 
31,719

 

 
31,719

 
10,032

 
48,604

 

 
58,636

Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auction rate securities

 

 
4,434

 
4,434

 

 

 
5,504

 
5,504

Marketable equity securities

 

 

 

 
1,054

 

 

 
1,054

Total long-term investments

 

 
4,434

 
4,434

 
1,054

 

 
5,504

 
6,558

Employee deferred compensation plan assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
5,137

 

 

 
5,137

 
3,588

 

 

 
3,588

Mutual funds
22,048

 

 

 
22,048

 
21,207

 

 

 
21,207

Equity securities
6,149

 

 

 
6,149

 
5,322

 

 

 
5,322

Fixed income
3,147

 

 

 
3,147

 
3,732

 

 

 
3,732

Money market funds

 
3,986

 

 
3,986

 
3,293

 

 

 
3,293

Total employee deferred compensation plan assets
36,481

 
3,986

 

 
40,467

 
37,142

 

 

 
37,142

Total financial assets
$
36,734

 
$
44,705

 
$
4,434

 
$
85,873

 
$
72,415

 
$
48,604

 
$
5,504

 
$
126,523

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee deferred compensation plan liability
$

 
$
40,202

 
$

 
$
40,202

 
$

 
$
36,244

 
$

 
$
36,244


12

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Valuation Techniques:
There have been no changes to our valuation techniques used to measure our assets and liabilities. For a description of our valuation techniques, refer to our Form 10-K for the year ended December 30, 2012.
Sale of Auction Rate Securities
In December 2011, we entered into a settlement and securities purchase agreement (the “Securities Agreement”) with a certain financial institution which expires on November 30, 2013 . As of September 29, 2013 , the remaining fair value of the ARS under the Securities Agreement was approximately $3.7 million .
The fair value of our total investments in ARS was approximately $4.4 million and $5.5 million as of September 29, 2013 and December 30, 2012, respectively.
As of September 29, 2013, and December 30, 2012, we performed an analysis to assess the fair value of the ARS using a valuation model based on discounted cash flows. The assumptions used were the following:
 
 
Q3-2013
 
Q4-2012
Years to liquidity
7
 
7
Discount rates *
1.18%-4.78%
 
0.90%-3.42%
Continued receipt of contractual interest which provides a premium spread for failed auctions
Yes
 
Yes
 
* Discount rates incorporate a spread for both credit and liquidity risk.
Based on these assumptions, we estimated that the ARS were valued at approximately 90.5% and 93.3% of their stated par value as of September 29, 2013 and December 30, 2012, respectively. These amounts were recorded as an unrealized loss in accumulated other comprehensive loss as of September 29, 2013 and December 30, 2012, respectively.
Level 3 Investments Measured Fair Value on a Recurring Basis
The following table presents a summary of changes in our Level 3 investments measured at fair value on a recurring basis:
 
 
Auction Rate
Securities
 
(In thousands)
Balance as of December 30, 2012
$
5,504

Unrealized loss recorded in accumulated other comprehensive loss
(70
)
Realized loss recorded in interest and other income (expense), net
(16
)
Amounts sold
(984
)
Balance as of September 29, 2013
$
4,434

Level 3 Assets Measured at Fair Value on a Nonrecurring Basis
As of September 29, 2013 , the carrying value of our line of credit was $227.0 million . The fair value of our line of credit approximate its fair value since it bears interest rates that are similar to existing market rates that would be offered to the Company and represents a Level 2 measurement.
Investments in Equity Securities
Our investments in equity securities included long-term investments in non-marketable equity securities (investments in privately-held companies) of approximately $10.4 million and no investments in marketable equity securities (investments in publicly traded companies) as of September 29, 2013 ( $6.0 million investments in non-marketable equity securities and $1.1 million investments in marketable equity securities as of December 30, 2012). Our privately-held equity investments are accounted for under the cost method and are periodically reviewed for other-than-temporary declines in fair value.

13

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

In February 2012, we entered into a Stock Purchase Agreement (the “Agreement”) with a company that designs, develops and manufactures products in the area of advanced battery storage for mobile consumer devices. As of September 29, 2013, we purchased $9.5 million of preferred stock. As of September 29, 2013 , our total investment of $9.5 million was recorded as part of our investments in non-marketable securities. During the fourth quarter of fiscal 2013, we invested an additional $4.0 million and we currently own approximately 16% of the company. Subject to the attainment of certain milestones, we plan to purchase additional preferred stock up to approximately $31 million in fiscal 2014. If our future commitments are fully funded, we could become their majority shareholder and consolidate the financial results of this company.
In the second fiscal quarter of 2013, we sold our investment in a certain marketable equity security for $2.2 million , which resulted in a realized gain of $1.1 million .
There were no significant transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the nine months ended September 29, 2013 .
 
NOTE 6. INVESTMENTS AND EMPLOYEE DEFERRED COMPENSATION PLAN
Available-For-Sale Securities
The following tables summarize our available-for-sale and other investments:
 
 
As of September 29, 2013

As of December 30, 2012
 
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value
 
(In thousands)
Reported as cash equivalents:















Money market funds
$
253

 
$

 
$

 
$
253

 
$
24,187

 
$

 
$

 
$
24,187

Commercial paper
9,000

 

 

 
9,000

 

 

 

 

Total cash equivalents
9,253

 

 

 
9,253

 
24,187

 

 

 
24,187

Reported as short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate note and bonds
19,560

 
10

 
(1
)
 
19,569

 
28,430

 
13

 
(8
)
 
28,435

Federal agency

 

 

 

 
3,005

 

 

 
3,005

U.S. Treasuries

 

 

 

 
10,023

 
9

 

 
10,032

Commercial paper
2,799

 

 

 
2,799

 
11,692

 
2

 

 
11,694

Certificates of deposit
2,471

 

 

 
2,471

 
840

 

 

 
840

Assets held-for-sale
12,866

 

 
(5,986
)
 
6,880

 
6,913

 

 
(2,283
)
 
4,630

Total short-term investments
37,696

 
10

 
(5,987
)
 
31,719

 
60,903

 
24

 
(2,291
)
 
58,636

Reported as long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Auction rate securities (1)
4,900

 

 
(466
)
 
4,434

 
5,900

 

 
(396
)
 
5,504

Marketable equity securities

 

 

 

 
1,030

 
70

 
(46
)
 
1,054

Total long-term investments
4,900

 

 
(466
)
 
4,434

 
6,930

 
70

 
(442
)
 
6,558

Total available-for-sale securities and other investments
$
51,849

 
$
10

 
$
(6,453
)
 
$
45,406

 
$
92,020

 
$
94

 
$
(2,733
)
 
$
89,381

 
(1)
The $0.5 million and $0.4 million of gross unrealized losses were related to ARS that had been in a continuous loss position for 12 months or more, as of September 29, 2013 and December 30, 2012 , respectively


14

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

As of September 29, 2013 , the contractual maturities of our available-for-sale investments and certificates of deposit were as follows (the table below does not include our investments in marketable equity securities and our assets held-for-sale):
 
 
Cost
 
Fair Value
 
(in thousands)
Maturing within one year
$
31,837

 
$
31,844

Maturing in one to three years
2,245

 
2,248

Maturing in more than three years
4,900

 
4,434

Total
$
38,982

 
$
38,526

Realized gains from sales of available-for-sale investments during the nine months ended September 29, 2013 was approximately $1.1 million (See Note 5). Realized gains from the sales of available-for-sale investments during the nine months ended September 30, 2012 were not material.
Employee Deferred Compensation Plan
We have a deferred compensation plan which provides certain key employees, including our executive management, with the ability to defer the receipt of compensation in order to accumulate funds for retirement on a tax-deferred basis. We do not make contributions to the deferred compensation plan or guarantee returns on the investments. Participant deferrals and investment gains and losses remain as our liabilities and the underlying assets are subject to claims of general creditors.
Under the deferred compensation plan, the assets are recorded at fair value in each reporting period with the offset being recorded in “Interest and other income, net.” The liabilities are recorded at fair value in each reporting period with the offset being recorded as an operating expense or income. As of September 29, 2013 and December 30, 2012 , the fair value of the assets was $40.5 million and $37.1 million , respectively, and the fair value of the liabilities was $40.2 million and $36.2 million , respectively.
All non-cash expense and income recorded under the deferred compensation plan are included in the following line items in the Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
 
(In thousands)
Changes in fair value of assets recorded in:
 
 
 
 
 
 
 
Interest and other income, net
$
2,091

 
$
1,503

 
$
4,810

 
$
3,155

Changes in fair value of liabilities recorded in:
 
 
 
 
 
 
 
Cost of revenues
(265
)
 
(217
)
 
(718
)
 
(439
)
Research and development expenses
(548
)
 
(389
)
 
(1,462
)
 
(723
)
Selling, general and administrative expenses
(1,181
)
 
(945
)
 
(3,187
)
 
(2,016
)
Total income (expense)
$
97

 
$
(48
)
 
$
(557
)
 
$
(23
)

NOTE 7. STOCK-BASED COMPENSATION
Our equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.

15

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The following table summarizes the stock-based compensation expense, by line item recorded in the Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
 
Nine months ended
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
 
(In thousands)
Cost of revenues
$
2,804

 
$
4,526

 
$
9,701

 
$
16,324

Research and development
6,806

 
5,062

 
18,686

 
17,455

Selling, general and administrative
9,701

 
6,513

 
23,756

 
33,289

Total stock-based compensation
$
19,311

 
$
16,101

 
$
52,143

 
$
67,068


As stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The accounting guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Cash proceeds from the issuance of shares under the employee stock plans were approximately $17.8 million and $33.4 million for the three and nine months ended September 29, 2013 , respectively, and $10.4 million and $20.4 million for the three and nine months ended September 30, 2012 , respectively. We did not recognize a tax benefit from stock option exercises for the three and nine months ended September 29, 2013 or September 30, 2012 .
As of September 29, 2013 and December 30, 2012 , stock-based compensation capitalized in inventories totaled $4.4 million and $2.8 million , respectively.
The following table summarizes the stock-based compensation expense by type of awards:
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
 
(In thousands)
Stock options
$
2,234

 
$
1,588

 
$
6,645

 
$
5,511

Restricted stock units and restricted stock awards
15,600

 
12,266

 
37,415

 
54,163

Employee Stock Purchase Plan (“ESPP”)
1,477

 
2,247

 
8,083

 
7,394

Total stock-based compensation expense
$
19,311

 
$
16,101

 
$
52,143

 
$
67,068

The following table summarizes the unrecognized stock-based compensation expense, net of estimated forfeitures, by type of awards:
 
 
Nine Months Ended
 
September 29,
2013
 
Weighted-
Average
Amortization
Period
 
(In thousands)
 
(In years)
Stock options
$
13,780

 
2.21
Restricted stock units and restricted stock awards
48,018

 
1.00
ESPP
3,193

 
0.46
Total unrecognized stock-based compensation balance
$
64,991

 
1.23

16

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Valuation Assumptions
We estimated the fair value of the stock options and ESPP using the Black-Scholes valuation model with the following assumptions:
 
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2013
 
September 30, 2012
 
September 29, 2013
 
September 30, 2012
Expected life
0.5-7.27 years
 
1.2-8.0 years
 
0.5-7.27 years
 
1.2-8.0 years
Volatility
36.51%-42.7%
 
44.8%-48.3%
 
36.51%-46.3%
 
42.9%-49.6%
Risk-free interest rate
0.08%-1.85%
 
0.2%-1.3%
 
0.08%-1.85%
 
0.2%-1.5%
Dividend yield
3.82%
 
3.8%
 
3.82%-4.18%
 
2.8%-3.8%
The fair value of the restricted stock units and the restricted stock awards was based on our stock price on the date of grant.
Equity Incentive Program
As of September 29, 2013 , approximately 7.3 million stock options or 3.9 million restricted stock units and restricted stock awards were available for grant under the Amended and Restated 2013 Stock Plan and the 2012 Incentive Award Plan.
 
Stock Options:
The following table summarizes our stock option activities:
 
 
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
(In thousands, except
per-share amounts)
Options outstanding as of December 30, 2012
22,760

 
$
7.25

Granted
284

 
$
10.26

Exercised
(994
)
 
$
4.64

Forfeited or expired
(720
)
 
$
11.11

Options outstanding as of March 31, 2013
21,330

 
$
7.31

Granted
3,272

 
$
11.53

Exercised
(765
)
 
$
5.23

Forfeited or expired
(427
)
 
$
12.24

Options outstanding as of June 30, 2013
23,410

 
$
7.88

Granted
480

 
$
12.24

Exercised
(1,925
)
 
$
5.51

Forfeited or expired
(458
)
 
$
11.28

Options outstanding as of September 29, 2013
21,507

 
$
8.10

Options exercisable as of September 29, 2013
13,779

 
$
6.08

The weighted-average grant-date fair value of the options granted during the three and nine months ended September 29, 2013 was $2.88 and $2.67 , respectively. The weighted-average grant-date fair value of the options granted during the three and nine months ended September 30, 2012 was $3.32 and $3.43 , respectively.
The aggregate intrinsic value of the options outstanding and options exercisable as of September 29, 2013 was approximately $53.4 million and $51.5 million , respectively. The aggregate intrinsic value represents the total pre-tax intrinsic value which would have been received by the option holders had all option holders exercised their options as of September 29, 2013 and does not include substantial tax payments.

17

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

The aggregate pre-tax intrinsic value of option exercises, which represents the difference between the exercise price and the value of Cypress common stock at the time of exercise, was $13.1 million and $23.3 million during three and nine months ended September 29, 2013 , respectively, and $4.1 million and $27.2 million during three and nine months ended September 30, 2012 , respectively
The total number of exercisable in-the-money options was approximately 11.5 million shares as of September 29, 2013 .
As of September 29, 2013 , stock options vested and expected to vest totaled approximately 20.3 million shares, with a weighted-average remaining contractual life of 4.2 years and a weighted-average exercise price of $7.91 per share. The aggregate intrinsic value was approximately $53.1 million .
Restricted Stock Units and Restricted Stock Awards:
The following table summarizes our restricted stock unit and restricted stock award activities:
 
 
Shares
 
Weighted-
Average
Grant
Date Fair
Value Per
Share
 
(In thousands, except
per-share amounts)
Balance as of December 30, 2012
7,887

 
$
14.52

Granted
5,456

 
$
11.08

Released
(1,366
)
 
$
10.45

Forfeited
(3,019
)
 
$
15.12

Balance as of March 31, 2013
8,958

 
$
12.31

Granted
1,001

 
$
11.41

Released
(384
)
 
$
10.71

Forfeited
(242
)
 
$
14.78

Balance as of June 30, 2013
9,333

 
$
12.25

Granted
287

 
$
10.94

Released
(181
)
 
$
10.75

Forfeited
(246
)
 
$
12.88

Balance as of September 29, 2013
9,193

 
$
11.89

 
The 9.2 million outstanding restricted stock units and awards as of September 29, 2013 included approximately 4.5 million of performance-based restricted stock units (“PARS”). For more information regarding the performance milestones, refer to our Form 10-Q for the quarter ended March 31, 2013.

NOTE 8. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
We lease certain facilities and equipment under non-cancelable operating lease agreements that expire at various dates through fiscal 2018 . Some leases include renewal options, which would permit extensions of the expiration dates at rates approximating fair market rental values at the time of the extension.

18

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

As of September 29, 2013 , future minimum lease payments under non-cancelable operating leases were as follows:
 
Fiscal Year
(In thousands)
2013 (remaining three months)
$
2,172

2014
5,890

2015
5,108

2016
3,282

2017
2,739

2018 and thereafter
1,053

Total
$
20,244

Capital Lease
In 2011, we entered into a capital lease agreement which allows us to borrow up to $35.0 million to finance the acquisition of certain manufacturing equipment. Assets purchased under the capital lease are included in “Property, plant and equipment, net” as manufacturing equipment and the amortization is included in depreciation. As of September 29, 2013 , the gross value and net book value of manufacturing equipment purchased under a capital lease was approximately $20.5 million and $16.5 million , respectively. As of September 29, 2013 , the total minimum lease payments under our capital leases amounted to approximately $13.1 million .
Future minimum payments, by year and in the aggregate, under the capitalized lease consist of the following:
 
 
 
Fiscal Year
(In thousands)
2013 (remaining three months)
$
790

2014
2,936

2015
2,936

2016
6,581

2017
599

Total minimum lease payments
13,842

Less: amount representing interest
700

Total
$
13,142

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

The following table presents our warranty reserve activities:
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
 
(In thousands)
Beginning balance
$
3,360

 
$
3,091

 
$
3,360

 
$
3,085

Settlements made
(98
)
 
(135
)
 
(276
)
 
(641
)
Provisions
98

 
135

 
276

 
647

Ending balance
$
3,360

 
$
3,091

 
$
3,360

 
$
3,091


19

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Equity Investment Commitments
As disclosed in Note 5, we have committed to purchase additional preferred stock from a company that works in the area of advanced battery storage. As of September 29, 2013, we purchased $9.5 million of preferred stock which was recorded as part of our investments in non-marketable securities. During the fourth quarter of fiscal 2013, we invested an additional $4.0 million . Subject to the attainment of certain milestones, we plan to purchase additional preferred stock of approximately $31 million in fiscal 2014.
Litigation and Asserted Claims
In August 2013, our five-patent infringement case against GSI’s static random access memory (“SRAM”) technology in the United Stated District Court of Minnesota was unstayed, allowing us to dismiss the case in Minnesota and consolidate certain of the asserted patents in that case with our pending five -patent infringement case in the Northern District of California. We are seeking damages as well as injunctive relief in the now seven patent case assigned to Judge Tigar in the Northern District of California. Our initial infringement contentions on all seven patents have been filed in the case and discovery is underway. We believe strongly in the merits of our patent infringement claims, and intend to take the steps necessary to protect our intellectual property.
With respect to the civil antitrust case filed by GSI in the United States District Court for the Northern California, we remain engaged in the discovery stage of this case. GSI’s case, which only names Cypress as a defendant, accuses the QDR Consortium, which was comprised of several other semiconductor companies, of certain anti-competitive behavior. Aside from injunctive relief, GSI has made no specific monetary demand in the antitrust matter. Accordingly, the possible range of monetary loss that might be demanded in the future in the matter, if any, is unknown at this time. We believe strongly that we have meritorious defenses to the allegations set forth in the GSI civil antitrust complaint and we will vigorously defend ourselves in that matter.
With respect to the litigation stemming from our acquisition of Ramtron, both the Dent and the Weber shareholder litigation case remain inactive. We have motions to dismiss pending in each of those cases. We believe strongly that these cases are without merit, and in the event either plaintiff chooses to take further action, we will defend ourselves vigorously. Because the case is at a very early stage and no specific monetary demand has been made, it is not possible for us to estimate the potential loss or range of potential losses for either case.
On December 11, 2012, LongPath Capital, LLC (“LongPath”) filed an appraisal petition with the Court of Chancery in the State of Delaware in connection with our acquisition of Ramtron. Specifically, the petition seeks an appraisal of the fair value of the common stock shares held by LongPath, and an order that Ramtron pay such fair value, plus interest and attorney’s fees. We believe LongPath’s petition is without merit and we intend to defend this matter vigorously. We are currently engaged in the discovery process in this case. Given that the case is still in its early stages and LongPath has not demanded a specific valuation; it is not possible for us to estimate the potential exposure for this matter.
After extended licensing discussions were effectively abandoned by LG Electronics, Inc. (“LG”) and Blackberry Limited/Blackberry Corporation (“Blackberry”), on August 29, 2013, we filed a patent infringement complaint against LG in the federal district court in the Northern District of California, accusing certain of their products of infringing our six of our USB and Touch patents. We filed a second complaint in the Northern District of California with respect to the same six USB and Touch patents against Blackberry on September 10 th . We are awaiting the answers of both defendants. We are seeking damages as well as injunctive relief in both cases. We believe strongly in the merits of our patent infringement claims, and intend to take the steps necessary to protect our intellectual property as well as the business interests of our non-infringing customers.
On September 24, 2013, we filed a three -patent infringement case against Silego Technology, Inc. (“Silego”) in federal district court in the Northern District of California. Silego has yet to file an answer in the case. We are seeking damages as well as injunctive relief in this case. We believe strongly in the merits of our patent infringement claims, and intend to take the steps necessary to protect our intellectual property against misappropriation.
We are currently a party to various other legal proceedings, claims, disputes and litigation arising in the ordinary course of business. Based on our own investigations, we believe the ultimate outcome of our current legal proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operation or cash flows. However, because of the nature and inherent uncertainties of the litigation, should the outcome of these actions be unfavorable, our business, financial condition, results of operations or cash flows could be materially and adversely affected.

20

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

NOTE 9. DEBT AND EQUITY TRANSACTIONS
Mortgage Note and Loan Facility
As part of our acquisition of Ramtron, we acquired a loan facility and a mortgage note related to our building in Colorado Springs, Colorado. On June 3, 2013, we terminated the loan facility and repaid the remaining $3.3 million balance of the mortgage note.
Senior Secured Revolving Credit Facility
Outstanding amounts under our five -year senior secured revolving credit facility (“Credit Facility”) may be repaid prior to maturity without penalty and are mandatory for certain asset sales and casualty events. The Credit Facility contains certain covenants for similarly rated companies, including: 1) maximum senior secured leverage ratio of 2.00 to 1.00, 2) maximum total leverage ratio of 3.50 to 1.00 through June 30, 2013 and 3.00 to 1.00 thereafter, 3) minimum fixed charge coverage ratio of 1.20 to 1.00, and 4) minimum liquidity of at least $150 million . Borrowings are collateralized by substantially all assets of the Company. In the second quarter of fiscal 2013, the Company repaid $5.0 million of the outstanding borrowing. At September 29, 2013 , our remaining outstanding borrowings of $227.0 million were recorded as part of long-term liabilities and are presented as “Long-term revolving credit facility” in the Condensed Consolidated Balance Sheet. As of September 29, 2013 and December 30, 2012, we were in compliance with all of the financial covenants under the Credit Facility.
On October 17, 2013, the Company executed an Amendment to the Credit Facility Agreement. See Note 15 for more information.
Equipment Loans
In December 2011, we obtained equipment loans from a financial institution for an aggregate amount of approximately $14.1 million which are collateralized by certain manufacturing equipment. Of the $9.4 million outstanding balance as of September 29, 2013 , approximately $2.7 million was recorded as part of “Other current liabilities” and $6.7 million was recorded as part of “Other long-term liabilities” in the Condensed Consolidated Balance Sheet. The fair value was estimated using a discounted cash flow analysis using factors, such as present value factors and risk-free interest rates based on the U.S. Treasury yield curve.
The schedule of principal payments under our equipment loans is as follows:
 
 
 
Fiscal Year
(In thousands)
2013 (remaining three months)
$
692

2014
2,825

2015
2,915

2016
3,003

Total
$
9,435

Stock Buyback Program:
$400 million Program Authorized in Fiscal 2011
For the three months ended September 29, 2013 , repurchases made under this program were immaterial. Since we announced our $400 million stock buyback program in September 2011 through the end of the third quarter of fiscal 2013, we used approximately $316.3 million from this program to repurchase approximately 23.5 million shares at an average share price of $13.44 . As of September 29, 2013 , the total remaining dollar amount of shares that may be repurchased under the program was approximately $83.7 million .
Dividends
On August 2, 2013, our Board of Directors approved a cash dividend of $0.11 per share payable to holders of record of our common stock at the close of business day on September 26, 2013. This cash dividend was paid on October 17, 2013 and totaled approximately $16.6 million which was accrued for in the third quarter of fiscal 2013 and shown as “Dividends payable” in the Condensed Consolidated Balance Sheet as of September 29, 2013 .

21

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


NOTE 10. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss were as follows:
 
 
Net unrealized
gains (loss) on
investments
 
Cumulative
translation
adjustment and
other
 
Accumulated other
comprehensive loss
(income)
Balance as of December 30, 2012 (1)
$
(450
)
 
$
6

 
$
(444
)
Other comprehensive income attributable to Cypress
(30
)
 

 
(30
)
Balance as of September 29, 2013
$
(480
)
 
$
6

 
$
(474
)
 
(1)
For defined benefit pension items, please see Note 16, Employee Benefit Plan, in our Consolidated Financial Statements, in our Annual Report on Form 10-K for the year ended December 30, 2012.

NOTE 11. FOREIGN CURRENCY DERIVATIVES
The aggregate notional and fair value of outstanding forward contracts to hedge the risks associated with foreign currency denominated assets and liabilities as of September 29, 2013 and December 30, 2012 was not material to our consolidated financial statements.

NOTE 12. INCOME TAXES
Our income tax benefit was $0.8 million for the three months ended September 29, 2013 and tax benefit was $0.2 million for the three months ended September 30, 2012. Our income tax benefit was $10.0 million and tax expense was $2.7 million for the nine months ended September 29, 2013 and September 30, 2012, respectively. The tax benefit for the third quarter and first three quarters of fiscal 2013 was primarily attributable to a release of previously accrued taxes and interest due to the expired statutes of limitations in foreign jurisdictions, offset by non-U.S. taxes on income earned in foreign jurisdictions. The tax benefit for the third quarter of fiscal 2012 was primarily attributable to non-U.S. taxes on income earned in foreign jurisdictions, offset by a release of previously accrued taxes and interest due to the expired statutes of limitations in foreign jurisdictions, and the tax expense for the first three quarters of fiscal 2012 was primarily attributable to non-U.S. taxes on income earned in foreign jurisdictions.
Unrecognized Tax Benefits
As of September 29, 2013 and December 30, 2012, the amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate totaled $16.7 million and $28.2 million , respectively.
Management believes events that could occur in the next 12 months and cause a material change in unrecognized tax benefits include, but are not limited to, the following:
completion of examinations by the U.S. or foreign taxing authorities; and
expiration of statute of limitations on our tax returns.
The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses our tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which we do business. We believe it is possible that we may recognize approximately $1.8 million to $2.0 million of our existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.
Classification of Interest and Penalties
Our policy is to classify interest and penalties, if any, as components of the income tax provision in the Condensed Consolidated Statements of Operations. As of September 29, 2013 and December 30, 2012, the amount of accrued interest and penalties totaled $5.3 million and $11.6 million , respectively.


22

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

NOTE 13. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income (loss) per share:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
 
 
(In thousands, except per-share amounts)
Net income (loss) attributable to Cypress
 
$
(8,358
)
 
$
14,332

 
$
(32,787
)
 
$
(151
)
Weighted-average common shares
 
149,679

 
147,673

 
147,551

 
151,153

Weighted-average diluted shares
 
149,679

 
160,300

 
147,551

 
151,153

Net income (loss) per share—basic
 
$
(0.06
)
 
$
0.10

 
$
(0.22
)
 
$

Net income (loss) per share—diluted
 
$

 
$

 
$
(0.22
)
 
$

 
For the three and nine months ended September 29, 2013 , approximately 8.8 million and 7.6 million weighted average potentially dilutive securities, respectively, were excluded in the computation of diluted net income (loss) per share because their effect would have been anti-dilutive.
For the three and nine months ended September 30, 2012 , approximately 8.3 million and 6.2 million weighted average potentially dilutive securities, respectively, were excluded in the computation of diluted net income (loss) per share because their effect would have been anti-dilutive.

NOTE 14. SEGMENT, GEOGRAPHICAL AND CUSTOMER INFORMATION
Segment Information
We design, develop, manufacture and market a broad range of programmable system solutions for various markets including consumer, computation, data communications, automotive and industrial. We evaluate our reportable business segments in accordance with the accounting guidance. We operate in the following four reportable business segments:
 
Business Segments
 
Description
 
 
MPD : Memory Products Division
 
A division that focuses on our four static random access memory (“SRAM”) business units, non-volatile memory’s, general-purpose programmable clocks and process technology licensing.
 
 
DCD : Data Communications Division
 
A division focused on USB controllers and WirelessUSB™ for handsets, PCs, industrial, consumer and tablets. Also includes Trackpad module solutions focused on the notebook and adjacent markets.
 
 
PSD : Programmable Systems Division
 
A division focusing primarily on our PSoC ®  and PSoC-based products. This business segment focuses on (1) the PSoC platform family of devices including PSoC 1, PSoC 3, PSoC 4 and PSoC 5 and all derivatives, (2) PSoC-based user interface products such as CapSense ®  touch-sensing and TrueTouch ®  touchscreen products, (3) and automotive products and certain legacy products.
 
 
ETD : Emerging Technologies Division
 
Our “startup” division, which includes AgigA Tech Inc. and Deca Technologies Inc., all majority-owned subsidiaries of Cypress and our foundry services business.


23

CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

Revenue:
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
 
(In thousands)
Programmable Systems Division
$
78,135

 
$
91,207

 
$
224,961

 
$
264,026

Memory Products Division
88,743

 
88,254

 
259,098

 
253,082

Data Communications Division
18,884

 
21,236

 
62,927

 
66,420

Emerging Technologies Division
2,961

 
2,318

 
7,931

 
5,876

Total revenue
$
188,723

 
$
203,015

 
$
554,917

 
$
589,404


Income (Loss) before Income Taxes:
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2013
 
September 30,
2012
 
September 29,
2013
 
September 30,
2012
 
(In thousands)
Programmable Systems Division
$
246

 
$
4,309

 
$
(16,763
)
 
$
7,362

Memory Products Division
30,345

 
38,319

 
86,346

 
102,934

Data Communications Division
(2,192
)
 
(3,279
)
 
(5,170
)
 
(6,716
)
Emerging Technologies Division
(4,720
)
 
(5,396
)
 
(14,202
)
 
(17,773
)
Unallocated items:
 
 
 
 
 
 
 
Stock-based compensation
(19,311
)
 
(16,101
)
 
(52,143
)
 
(67,068
)
Patent license fee

 

 

 
(7,100
)
Amortization of acquisition-related intangibles
(2,817
)
 
(707
)
 
(9,142
)