Cypress Semiconductor Corporation
CYPRESS SEMICONDUCTOR CORP /DE/ (Form: 10-Q, Received: 10/31/2014 17:20:55)
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 28, 2014
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 26, 2014 was 161,238,508 .


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 expected future amortization expense of intangible assets and minimum lease payments; our expectations that we will continue to enter into additional licensing arrangements in the future; our expectations regarding the timing and cost of our restructuring liabilities; our expectations, beliefs and strategies regarding our active litigation matters including our intent to defend or pursue those matters rigorously and the merits of our claims; our expectations regarding pricing pressure and our ability to moderate the impact of declining selling prices; the competitive advantage we believe we have with our proprietary programmable technologies and programmable products; our expectation that we will continue to make significant investments in our current business ventures as well as new ventures; our foreign currency exposure and the impact exchange rates could have on our operating margins; the adequacy of our cash, working capital positions and borrowing arrangements to provide sufficient liquidity and capital needs of the Company and our ability to obtain alternative financing should our current financing arrangement be deemed insufficient; our ability to recognize certain unrecognized tax benefits within the next twelve months and the events that could impact such tax benefits; our ability to execute our future investment strategy; our expectation that we will continue to investigate strategic acquisition and investment transactions; the impact of interest rate fluctuations on our investments; the utility of our non-GAAP reporting; the adequacy of our audits; the potential impact of or possible payments due under our indemnification obligations; 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; our ability to timely deliver new proprietary and programmable technologies and products; the current credit conditions; our ability to expand our customer base; our ability to transform our business with a leading portfolio of programmable products; the number and nature of our competitors; the changing environment and/or cycles of the semiconductor industry; foreign currency exchange rates; our ability to efficiently manage our manufacturing facilities and achieve our cost goals; our ability to compete in our highly competitive industry and markets in the future; our ability to achieve our goals related to our restructuring activities; our success in our pending litigation matters; our ability to manage our investments and interest rate and exchange rate exposure; changes in the law; our ability to achieve liquidity in our investments; the failure or success of our Emerging Technologies Division; and/or the materialization of one or more of the risks set forth above or in Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q and in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013.




2

Tables of Contents

ITEM 1. FINANCIAL STATEMENTS
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS*
(Unaudited)
 
September 28,
2014
 
December 29,
2013
 
(In thousands, except
per-share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
105,084

 
$
86,009

Short-term investments
15,293

 
18,453

Accounts receivable, net
105,853

 
81,084

Inventories
88,790

 
100,612

Other current assets
29,094

 
33,555

Total current assets
344,114

 
319,713

Property, plant and equipment, net
244,298

 
258,585

Goodwill
65,696

 
65,696

Intangible assets, net
35,274

 
40,828

Other long-term assets
87,727

 
78,062

Total assets
$
777,109

 
$
762,884

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
33,462

 
$
47,893

Accrued compensation and employee benefits
36,310

 
38,972

Deferred margin on sales to distributors
134,726

 
122,578

Dividends payable
17,727

 
16,850

Income taxes payable
3,023

 
3,034

Other current liabilities
79,375

 
76,515

Total current liabilities
304,623

 
305,842

Deferred income taxes and other tax liabilities
19,018

 
26,831

Long-term revolving credit facility
227,000

 
227,000

Other long-term liabilities
21,661

 
27,528

Total liabilities
572,302

 
587,201

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; 304,336 and 296,346 shares issued; 161,162 and 153,214 shares outstanding at September 28, 2014 and December 29, 2013, respectively
3,027

 
2,963

Additional paid-in-capital
2,681,923

 
2,665,453

Accumulated other comprehensive loss
(204
)
 
(177
)
Accumulated deficit
(383,416
)
 
(397,849
)
Stockholders’ equity before treasury stock
2,301,330

 
2,270,390

Less: shares of common stock held in treasury, at cost; 143,158 and 143,132 shares at September 28, 2014 and December 29, 2013, respectively
(2,090,494
)
 
(2,090,233
)
Total Cypress stockholders’ equity
210,836

 
180,157

Noncontrolling interests
(6,029
)
 
(4,474
)
Total equity
204,807

 
175,683

Total liabilities and equity
$
777,109

 
$
762,884

* Amounts as of September 28, 2014 are unaudited. Amounts as of December 29, 2013 were derived from the December 29, 2013 audited consolidated financial statements.
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 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
 
(In thousands, except per-share amounts)
Revenues
$
187,516

 
$
188,723

 
$
541,400

 
$
554,917

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
90,633

 
97,070

 
271,425

 
292,793

Research and development
38,626

 
50,429

 
124,883

 
148,563

Selling, general and administrative
41,119

 
45,533

 
125,787

 
139,049

Amortization of acquisition-related intangible assets
1,701

 
1,987

 
5,334

 
5,983

Restructuring costs
(238
)
 
3,693

 
(1,252
)
 
15,826

Total costs and expenses
171,841

 
198,712

 
526,177

 
602,214

Operating income (loss)
15,675

 
(9,989
)
 
15,223

 
(47,297
)
Interest and other income (expense), net
(504
)
 
427

 
(1,102
)
 
3,030

Income (loss) before income taxes and noncontrolling interest
15,171

 
(9,562
)
 
14,121

 
(44,267
)
Income tax provision (benefit)
1,231

 
(774
)
 
(2,987
)
 
(9,971
)
Equity in net loss of equity method investees
(1,386
)
 
(471
)
 
(3,666
)
 
(1,245
)
Net income (loss)
12,554

 
(9,259
)
 
13,442

 
(35,541
)
Adjust for net loss attributable to noncontrolling interests net of taxes
286

 
430

 
991

 
1,509

Net income (loss) attributable to Cypress
$
12,840

 
$
(8,829
)
 
$
14,433

 
$
(34,032
)
Net income (loss) per share attributable to Cypress:
 
 
 
 
 
 
 
Basic
$
0.08

 
$
(0.06
)
 
$
0.09

 
$
(0.23
)
Diluted
$
0.08

 
$
(0.06
)
 
$
0.09

 
$
(0.23
)
Cash dividend declared per share
$
0.11

 
$
0.11

 
$
0.33

 
$
0.33

Shares used in net income (loss) per share calculation:
 
 
 
 
 
 
 
Basic
159,759

 
149,679

 
157,594

 
147,551

Diluted
166,481

 
149,679

 
166,000

 
147,551

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 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
 
(In thousands)
Net income (loss)
$
12,554

 
$
(9,259
)
 
13,442

 
$
(35,541
)
Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on available for sale securities
(12
)
 
(48
)
 
(27
)
 
1,033

Reclassification of net realized (gains) losses on available for sale securities included in net income (loss)

 

 

 
(1,063
)
Other comprehensive income (loss)
(12
)
 
(48
)
 
(27
)
 
(30
)
Comprehensive income (loss)
12,542

 
(9,307
)
 
13,415

 
(35,571
)
Comprehensive loss attributable to noncontrolling interest
286

 
430

 
991

 
1,509

Comprehensive income (loss) attributable to Cypress
$
12,828

 
$
(8,877
)
 
$
14,406

 
$
(34,062
)
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 28,
2014
 
September 29,
2013
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
13,442

 
$
(35,541
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
43,421

 
52,143

Depreciation and amortization
35,366

 
36,932

Deferred income taxes
(7,759
)
 
(15,191
)
Restructuring costs
(1,252
)
 
15,826

(Gain) Loss on sale or retirement of property and equipment, net
(290
)
 
584

Equity in loss of investee
3,666

 
1,245

Other
272

 
(784
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(24,769
)
 
(25,280
)
Inventories
9,766

 
28,124

Other current and long-term assets
8,428

 
1,423

Accounts payable and other liabilities
(14,617
)
 
(19,722
)
Deferred margin on sales to distributors
12,148

 
6,766

Net cash provided by operating activities
77,822

 
46,525

Cash flows from investing activities:
 
 
 
Proceeds from sales or maturities of available-for-sale investments
14,401

 
53,461

Purchases of available-for-sale investments
(11,379
)
 
(23,315
)
Net employee distribution of deferred compensation plan
(810
)
 
(1,247
)
Acquisition of property, plant and equipment
(17,178
)
 
(27,877
)
Cash paid for equity investments
(18,400
)
 
(4,361
)
Proceeds from sale of equity investments

 
2,158

Proceeds from sale of held-for-sale equipment
3,240

 

Other
1,706

 
1,751

Net cash provided by (used in) investing activities
(28,420
)
 
570

Cash flows from financing activities:
 
 
 
Line of credit proceeds
172,000

 
80,000

Repayment of line of credit
(172,000
)
 
(85,000
)
Withholding of common shares for tax obligations on vested restricted shares
(245
)
 
(4,526
)
Payment of dividends
(51,520
)
 
(48,241
)
Proceeds from employee equity awards
26,664

 
33,395

Repayment of equipment leases and loans, net
(5,544
)
 
(7,533
)
Yield Enhancement structured agreements settled in cash
318

 

Repayment of other financing agreements

 
(3,254
)
Cash received for investment in subsidiary

 
1,411

Net cash used in financing activities
(30,327
)
 
(33,748
)
Net increase in cash and cash equivalents
19,075

 
13,347

Cash and cash equivalents, beginning of period
86,009

 
63,203

Cash and cash equivalents, end of period
$
105,084

 
$
76,550

Supplemental disclosures:
 
 
 
Dividends payable
$
17,727

 
$
16,578

Cash paid for taxes
$
3,220

 
$
5,386

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

6

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 2014 and fiscal 2013 had 52 weeks. The third quarter of fiscal 2014 ended on September 28, 2014 and the third quarter of fiscal 2013 ended on September 29, 2013 .

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 29, 2013 .

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 28, 2014 are not necessarily indicative of the results to be expected for the full fiscal year.
During the nine months ended September 28, 2014 , the Company recorded out-of-period correcting adjustments to write off certain manufacturing and subcontractor costs that were capitalized within other current assets in previous periods. These corrections resulted in a decrease of net income of  $2.6 million for the nine months ended September 28, 2014 . The Company recorded these corrections, in the aggregate totaling $2.6 million , in cost of revenues in the nine months ended September 28, 2014 . Management assessed the impact of these errors and concluded that the amounts were not material, either individually or in the aggregate, to any prior period or to the Q3 2014 interim or expected full year financial statements.
During the first quarter of fiscal 2014, we increased our ownership in a privately-held entity which required us to change from the cost method of accounting to the equity method of accounting for this investment. Under the equity method of accounting, we are required to record our interest in the company’s reported net income or loss each reporting period. Additionally, we are required to present our prior period financial results to reflect the equity method of accounting from the date of the initial investment in the company which resulted in an adjustment to retained earnings and a corresponding reduction to our investment. See Note 9 for more information.
Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-15, "Presentation of Financial Statements - Going Concern." The amendment requires that an entity's management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. If conditions or events raise substantial doubt about an entity's ability to continue as a going concern additional disclosure is required to enable users of the financial statements to understand the conditions or events, management's evaluation of the significance of those conditions and management's plans to that are intended to alleviate or management's plans that have alleviated substantial doubt. The amendment is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We do not believe that the adoption of this guidance will have any material impact on our financial position or results of operations.

In June 2014, the FASB issued an ASU on stock compensation, ASU No. 2014-12, " Compensation - Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." The amendment requires that a performance target that affects vesting and that

7

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

could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendment is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2015. Earlier adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of an Entity." This ASU 2014-08 amends the definition of a discontinued operation to include a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect of an entity's operations and financial results. This ASU will be effective beginning in 2015. The adoption of this ASU may have a material effect on our consolidated financial statements in the event that we were to divest of a component that meets the definition of a discontinued operation.

In May 2014, the FASB issued an ASU on revenue from contracts with customers, ASU No. 2014-09, "Revenue from Contracts with Customers." The standard update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
In July 2013, the FASB issued an ASU on Income Taxes, ASU No. 2013-11, "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 adopted this guidance in the first quarter of fiscal 2014 and our adoption did not have a significant impact on our condensed consolidated financial statements.

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 28, 2014 and at December 29, 2013 was $65.7 million , of which $33.9 million was in our Memory Products Division (MPD) and $31.8 million was in our Programmable Systems Division (PSD).
The following table presents details of our intangible assets:
 
 
As of September 28, 2014
 
As of December 29, 2013
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
 
(In thousands)
Acquisition-related intangible assets
$
151,773

 
$
(117,051
)
 
$
34,722

 
$
151,773

 
$
(111,673
)
 
$
40,100

Non-acquisition related intangible assets
10,523

 
(9,971
)
 
552

 
10,423

 
(9,695
)
 
728

Total intangible assets
$
162,296

 
$
(127,022
)
 
$
35,274

 
$
162,196

 
$
(121,368
)
 
$
40,828


8

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

As of September 28, 2014 , the estimated future amortization expense of these intangible assets was as follows:
 
 
 
 
(In thousands)
2014 (remaining three months)
1,411

2015
5,643

2016
5,246

2017
5,221

2018 and future
17,753

Total future amortization expense
$
35,274


NOTE 3. RESTRUCTURING
During fiscal 2013, we implemented a restructuring plan to reduce operating expenses as part of our 2013 corporate priorities. The plan included the termination of employees and the disposal of certain equipment located in our Bloomington, Minnesota facility. For the nine months ended September 29, 2013 , we recorded restructuring charges of $15.2 million related to the Fiscal 2013 Restructuring Plan of which $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.
The benefit recorded for the nine months ended September 28, 2014 primarily resulted from the gain on the sale of a previously restructured asset of approximately $0.6 million . 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.
The following table summarizes the restructuring activities recorded for the periods presented:
 
Three Months Ended
 
Nine Months Ended
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
 
(In thousands)
Personnel costs
$

 
$
3,568

 
$
(154
)
 
$
8,627

Impairment of property, plant and equipment

 

 

 
6,698

Other
(238
)
 
125

 
(519
)
 
501

Gain on sale of held-for-sale assets

 

 
(579
)
 

Total restructuring charges (benefit)
$
(238
)
 
$
3,693

 
$
(1,252
)
 
$
15,826


A summary of the restructuring activities related to personnel costs, which are primarily in the U.S. is summarized as follows:

 
(In thousands)
Balance as of December 29 2013
$
4,158

Release
(154
)
Cash payments
(1,311
)
Balance as of March 30, 2014
2,693

Cash payments
(896
)
Balance as of June 29, 2014
1,797

Cash payment
(188
)
Release
(238
)
Balance as of September 28, 2014
1,371


The restructuring liability as of September 28, 2014 related primarily to personnel costs and is expected to be paid out within the next twelve months.

9

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

NOTE 4. BALANCE SHEET COMPONENTS
Accounts Receivable, Net
 
 
As of
 
September 28,
2014
 
December 29,
2013
 
(In thousands)
Accounts receivable, gross
$
109,327

 
$
84,431

Allowance for doubtful accounts receivable and sales returns
(3,474
)
 
(3,347
)
Total accounts receivable, net
$
105,853

 
$
81,084


Inventories
 
 
As of
 
September 28,
2014
 
December 29,
2013
 
(In thousands)
Raw materials
$
4,848

 
$
4,026

Work-in-process
64,673

 
71,948

Finished goods
19,269

 
24,638

Total inventories
$
88,790

 
$
100,612

Other Current Assets
 
 
As of
 
September 28,
2014
 
December 29,
2013
 
(In thousands)
Prepaid expenses
$
21,106

 
$
26,364

Assets held-for-sale

 
2,260

Other current assets
7,988

 
4,931

Total other current assets
$
29,094

 
$
33,555

Other Long-term Assets
 
 
As of
 
September 28,
2014
 
December 29,
2013
 
(In thousands)
Employee deferred compensation plan
$
43,907

 
$
42,351

Investments:
 
 
 
Equity securities
28,314

 
15,009

Other assets
15,506

 
20,702

Total other long-term assets
$
87,727

 
$
78,062


10

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

Other Current Liabilities
 
 
As of
 
September 28,
2014
 
December 29,
2013
 
(In thousands)
Employee deferred compensation plan
$
44,225

 
$
41,605

Restructuring accrual (see Note 3)
1,371

 
4,158

Capital lease-current portion (see Note 8)
2,708

 
2,659

Equipment loan-current portion (see Note 10)
2,893

 
2,825

Rebate reserve-current portion
8,156

 
2,445

Other current liabilities
20,022

 
22,823

Total other current liabilities
$
79,375

 
$
76,515

 
Other Long-term Liabilities
 
 
As of
 
September 28,
2014

December 29,
2013
 
(In thousands)
Equipment loan–long-term portion (see Note 10)
$
3,740


$
5,918

Capital lease–long-term portion (see Note 8)
7,792


9,828

Other long-term liabilities
10,129


11,782

Total other long-term liabilities
$
21,661

 
$
27,528


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 28, 2014
 
As of December 29, 2013
 
Level 1
 
Level 2
 
 
Total
 
Level 1
 
Level 2
 
 
Total
 
(In thousands)
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
2,472

 
$

 
 
$
2,472

 
$
29,719

 
$

 
 
$
29,719

Total cash equivalents
2,472

 

 
 
2,472

 
29,719

 

 
 
29,719

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
2,997

 

 
 
2,997

 

 

 
 

Corporate notes and bonds

 
7,807

 
 
7,807

 

 
14,677

 
 
14,677

Commercial paper

 

 
 

 

 
1,300

 
 
1,300

Federal Agency

 
3,620

 
 
3,620

 

 

 
 

Certificates of deposit

 
869

 
 
869

 

 
2,476

 
 
2,476

Non-financial assets held-for-sale

 

 
 

 

 
2,260

 
 
2,260

Total short-term investments
2,997

 
12,296

 
 
15,293

 

 
20,713

 
 
20,713

Employee deferred compensation plan assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
3,364

 

 
 
3,364

 
3,941

 

 
 
3,941

Mutual funds
23,238

 

 
 
23,238

 
23,415

 

 
 
23,415

Equity securities
9,994

 

 
 
9,994

 
7,723

 

 
 
7,723

Fixed income
3,392

 

 
 
3,392

 
3,192

 

 
 
3,192

Money market funds

 
3,919

 
 
3,919

 

 
4,080

 
 
4,080

Total employee deferred compensation plan assets
39,988

 
3,919

 
 
43,907

 
38,271

 
4,080

 
 
42,351

Total financial assets
$
45,457

 
$
16,215

 
 
$
61,672

 
$
67,990

 
$
24,793

 
 
$
92,783

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee deferred compensation plan liability
$

 
$
44,225

 
 
$
44,225

 
$

 
$
41,605

 
 
$
41,605


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 29, 2013.
Assets Measured at Fair Value on a Nonrecurring Basis
As of September 28, 2014 , the carrying value of our line of credit was $227.0 million . The carrying value of our line of credit approximates 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 include long-term investments in non-marketable equity securities of privately-held companies of approximately $28.2 million and $15.0 million as of September 28, 2014 and December 29, 2013, respectively.

11

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

Included in our non-marketable equity securities is our investment in a company that designs, develops and manufactures products in the area of advanced battery storage for mobile consumer devices. As of December 29, 2013, we had cumulatively invested $13.5 million in this company and accounted for it using the cost method. During the first quarter of fiscal 2014, our ownership in this company exceeded 20% , which required us to change the method of accounting from the cost method to the equity method for this investment. Under the equity method of accounting, we are required to record our interest in the investee's company's reported net income or loss for each reporting period. During the three and nine months ended September 28, 2014 , we invested an additional $4.0 million and $15.0 million , respectively. As of September 28, 2014 , we own approximately 26.2% of the company's outstanding voting shares and continue to use the equity accounting method for this investment. See Note 9 for additional disclosure related to the equity accounting method for this investment.
The remaining privately-held equity investments are accounted for under the cost method and are periodically reviewed for other-than-temporary declines in fair value.
We did not sell any of our investments in marketable securities in the first three quarters of fiscal 2014. In the first three quarters of 2013, we sold our investment in a marketable equity security for $2.2 million , which resulted in a realized gain of $1.1 million .
There were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the three and nine months ended September 28, 2014 .
 
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 28, 2014

As of December 29, 2013
 
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
$
2,472

 
$

 
$

 
$
2,472

 
$
29,719

 
$

 
$

 
$
29,719

Total cash equivalents
2,472

 

 

 
2,472

 
29,719

 

 

 
29,719

Reported as short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
2,997

 

 

 
2,997

 

 

 

 

Corporate note and bonds
7,817

 
2

 
(12
)
 
7,807

 
14,667

 
10

 

 
14,677

Federal agency
3,620

 

 

 
3,620

 

 

 

 

Commercial paper

 

 

 

 
1,300

 

 

 
1,300

Certificates of deposit
869

 

 

 
869

 
2,476

 

 

 
2,476

Total short-term investments
15,303

 
2

 
(12
)
 
15,293

 
18,443

 
10

 

 
18,453

Total available-for-sale securities and other investments
$
17,775

 
$
2

 
$
(12
)
 
$
17,765

 
$
48,162

 
$
10

 
$

 
$
48,172

 

12

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

As of September 28, 2014 , 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
$
7,587

 
$
7,585

Maturing in one to three years
10,188

 
10,180

Maturing in more than three years

 

Total
$
17,775

 
$
17,765

There were no realized gains from sales and losses of available-for-sale investments during the nine months ended September 28, 2014 . Realized gains from sales and losses of available-for-sale investments during the nine months ended September 29, 2013 was approximately $1.1 million .
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 28, 2014 and December 29, 2013 , the fair value of the assets was $43.9 million and $42.4 million , respectively, and the fair value of the liabilities was $44.2 million and $41.6 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 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
 
(In thousands)
Changes in fair value of assets recorded in:
 
 
 
 
 
 
 
Interest and other income, net
$
(247
)
 
$
2,091

 
$
2,367

 
$
4,810

Changes in fair value of liabilities recorded in:
 
 
 
 
 
 
 
Cost of revenues
(4
)
 
(265
)
 
(471
)
 
(718
)
Research and development expenses
(13
)
 
(548
)
 
(921
)
 
(1,462
)
Selling, general and administrative expenses
(24
)
 
(1,181
)
 
(2,085
)
 
(3,187
)
Total income (expense)
$
(288
)
 
$
97

 
$
(1,110
)
 
$
(557
)

NOTE 7. STOCK-BASED COMPENSATION
Our equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.
The following table summarizes the stock-based compensation expense, by line item recorded in the Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
 
Nine Months Ended
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
 
(In thousands)
Cost of revenues
$
3,766

 
$
2,804

 
$
10,450

 
$
9,701

Research and development
2,089

 
6,806

 
13,633

 
18,686

Selling, general and administrative
6,427

 
9,701

 
19,338

 
23,756

Total stock-based compensation
$
12,282

 
$
19,311

 
$
43,421

 
$
52,143


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 $14.2 million and $26.7 million for the three and nine months ended September 28, 2014 and $17.8 million and $33.4 million for the three and nine
months ended September 29, 2013 . We did not recognize a tax benefit from stock option exercises for the three and nine months ended September 28, 2014 or September 29, 2013 .
As of September 28, 2014 and December 29, 2013 , stock-based compensation capitalized in inventories totaled $3.2 million and $5.3 million , respectively.
The following table summarizes the stock-based compensation expense by type of awards:
 
 
Three Months Ended
 
Nine Months Ended
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
 
(In thousands)
Stock options
$
2,380

 
$
2,234

 
$
5,101

 
$
6,645

Restricted stock units and restricted stock awards
8,720

 
15,600

 
34,297

 
37,415

Employee Stock Purchase Plan (“ESPP”)
1,182

 
1,477

 
4,023

 
8,083

Total stock-based compensation expense
$
12,282

 
$
19,311

 
$
43,421

 
$
52,143

The following table summarizes the unrecognized stock-based compensation expense, net of estimated forfeitures, by type of awards:
 
 
As of
 
September 28,
2014
 
Weighted-
Average
Amortization
Period
 
(In thousands)
 
(In years)
Stock options
$
7,428

 
1.78
Restricted stock units and restricted stock awards
33,867

 
1.21
ESPP
1,722

 
0.59
Total unrecognized stock-based compensation balance
$
43,017

 
1.28
Valuation Assumptions
We estimated the fair value of the stock options and ESPP awards using the Black-Scholes valuation model with the following assumptions:
 
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
Expected life
0.5-7.27 years
 
0.5-7.27 years
 
0.5-7.27 years
 
0.5-7.27 years
Volatility
33.6%-39.8
 
36.51%-42.7%
 
31.0%-39.8%
 
36.5%-46.3%
Risk-free interest rate
0.03%-1.8%
 
0.08%-1.9
 
0.03%-1.8%
 
0.08%-1.9%
Dividend yield
4.40%
 
3.82%
 
4.0%-4.4%
 
3.8%-4.2%
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 28, 2014 , approximately 3.5 million stock options, or 1.9 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.
 

13

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

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 29, 2013
19,060

 
$
8.33

Granted
141

 
$
10.03

Exercised
(401
)
 
$
5.59

Forfeited or expired
(289
)
 
$
11.93

Options outstanding as of March 30, 2014
18,511

 
$
8.35

Granted
88

 
$
10.31

Exercised
(388
)
 
$
5.01

Forfeited or expired
(374
)
 
$
10.86

Options outstanding as of June 29, 2014
17,837

 
$
8.38

Granted
281

 
$
10.33

Exercised
(1,985
)
 
$
3.77

Forfeited or expired
(230
)
 
$
12.31

Options outstanding as of September 28, 2014
15,903

 
$
8.94

Options exercisable as of September 28, 2014
10,680

 
$
7.56

The weighted-average grant-date fair value of the options granted during the three and nine months ended September 28, 2014 was $2.22 and $2.20 , respectively. 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 aggregate intrinsic value of the options outstanding and options exercisable as of September 28, 2014 was approximately $38.4 million and $38.1 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 28, 2014 and does not include substantial tax payments.
The aggregate pre-tax intrinsic value of option exercises, which represents the difference between the exercise price and the value of Cypress common stock at the time of exercise, was $14.0 million and $17.9 million during the three and nine months ended September 28, 2014 , respectively, and $13.1 million and $23.3 million during the three and nine months ended September 29, 2013 .
The total number of exercisable in-the-money options was approximately 5.3 million shares as of September 28, 2014 .
As of September 28, 2014 , stock options vested and expected to vest totaled approximately 15.2 million shares, with a weighted-average remaining contractual life of 4.2 years and a weighted-average exercise price of $8.84 per share.

14

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

Restricted Stock Units and Restricted Stock Awards
The following table summarizes our restricted stock unit and restricted stock award activities:
 
 
Service-based Restricted Stock Units and Awards
 
Performance-based Restricted Stock Units
 
Shares
 
Weighted-
Average
Grant
Date Fair
Value Per
Share
 
(In thousands, except
per-share amounts)
Balance as of December 29, 2013
4,055

 
4,597

 
8,652

 
$
11.97

Granted
394

 
3,239

 
3,633

 
$
10.03

Released
(311
)
 
(2,342
)
 
(2,653
)
 
$
9.99

Forfeited
(117
)
 
(1,750
)
 
(1,867
)
 
$
11.12

Balance as of March 30, 2014
4,022

 
3,743

 
7,765

 
$
11.54

Granted
272

 
123

 
395

 
$
9.54

Released
(948
)
 
(39
)
 
(987
)
 
$
9.76

Forfeited
(130
)
 
(58
)
 
(188
)
 
$
12.62

Balance as of June 29, 2014
3,216

 
3,769

 
6,985

 
$
10.88

Granted
546

 
30

 
576

 
$
10.39

Released
(123
)
 
(3
)
 
(126
)
 
$
10.42

Forfeited
(69
)
 
(52
)
 
(121
)
 
$
11.57

Balance as of September 28, 2014
3,570

 
3,744

 
7,314

 
$
11.32

 
The 7.3 million outstanding restricted stock units and awards as of September 28, 2014 included approximately 3.7 million of performance-based restricted stock units (“PARS”). These PARS were issued to certain senior-level employees in the first quarter of fiscal 2014 and can be earned over a period of one to two years, subject to the achievement of certain performance milestones set by the Compensation Committee. For more information regarding the performance milestones, refer to our Form 10-Q for the quarter ended March 30, 2014.

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 2019 . 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.

15

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

As of September 28, 2014 , future minimum lease payments under non-cancelable operating leases were as follows:
Fiscal Year
(In thousands)
2014 (remaining three months)
$
1,593

2015
5,656

2016
3,641

2017
2,956

2018
520

2019 and thereafter
574

Total
$
14,940


Capital Leases

In 2011, we entered into capital lease agreements which allow us to borrow up to $35.0 million to finance the acquisition of certain manufacturing equipment. As of September 28, 2014 , the gross value and net book value of manufacturing equipment purchased under these capital leases were approximately $20.5 million and $14.4 million , respectively. As of September 28, 2014 , the total minimum lease payments under these capital leases amounted to approximately $10.5 million .

Assets purchased under all capital leases are included in “Property, plant and equipment, net” on our Condensed Consolidated Balance Sheet and the amortization is included in depreciation.
Future minimum payments by year under all the capitalized leases consist of the following:
Fiscal Year
(In thousands)
2014 (remaining three months)
$
785

2015
2,937

2016
6,582

2017
599

Total minimum lease payments
10,903

Less: amount representing interest
403

Total
$
10,500

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 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
 
(In thousands)
Beginning balance
$
3,267

 
$
3,360

 
$
2,628

 
$
3,360

Settlements made
(681
)
 
(98
)
 
(1,221
)
 
(276
)
Provisions
146

 
98

 
1,325

 
276

Ending balance
$
2,732

 
$
3,360

 
$
2,732

 
$
3,360

Equity Investment Commitments

16

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

We have committed to purchase additional preferred stock from a company that works in the area of advanced battery storage. In July 2014, we invested an additional $4.0 million in this company. Subject to the attainment of certain milestones, we intend to purchase additional preferred stock of this company.
Litigation and Asserted Claims
Our seven -patent infringement case is currently pending against GSI’s static random access memory (“SRAM”) technology in the United Stated District Court for Northern California. We are seeking damages as well as injunctive relief in the case. We have received one Markman ruling addressing disputed claim terms for two of the seven patents, and a second Markman hearing is scheduled for October 28, 2014. To defend against our claims, GSI submitted petitions for inter-partes review with the PTO on five of our asserted patents. Four of these petitions were instituted by the PTO and the district court litigation will by stayed with respect to those four patents into 2015. 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, fact discovery and expert discovery is now complete. We filed a motion for summary judgment in June 2014 and a hearing on the motion occurred on October 21, 2014. 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’s expert has opined that GSI incurred monetary damages due to delayed introduction of SigmaQuad-III. We believe strongly that we have meritorious defenses to the allegations set forth in the GSI civil antitrust complaint and we intend to defend ourselves vigorously in this matter.
With respect to the litigation stemming from our acquisition of Ramtron, both the Dent and the Weber shareholder litigation cases have been dismissed with prejudice.
In the LongPath Capital, LLC (“LongPath”) appraisal case, filed with the Court of Chancery in the State of Delaware, Petitioner LongPath 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. We believe LongPath’s petition is without merit and we are defending this matter vigorously. In June 2013, we paid the purchase price of $3.10 per share to LongPath, or approximately $1.5 million , to cut off the accrual of statutory interest on the principal. As a result, our potential exposure is limited to any premium on the purchase price that might be awarded by the court. A bench trial was held from October 7-9, 2014, in Wilmington, Delaware. The respective positions of the parties on valuation make it impossible for us to accurately estimate the potential exposure, if any, 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 six of our USB and Touch patents. In August 2014, LG filed petitions for inter-partes review of the six patents and filed a motion to stay the case pending the PTO’s review of the petitions. The motion to stay is still pending, and we are currently engaged in discovery and the claim construction phase of the case. 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, 2014. On November 4, 2013, Blackberry filed an answer to our complaint along with a counter-claim asserting three of their patents against us. On the same day, Blackberry filed a second patent infringement complaint in the Northern District of Texas, asserting two of its patents against us. We have reviewed all the asserted patents and are confident in our ability to defend ourselves. On January 31, 2014, we filed petitions for inter-partes review by the PTO on both of the patents asserted in the Northern District of Texas case, and both petitions have been instituted. In September 2014, BlackBerry filed petitions for inter-partes review with respect to all six Cypress patents. Also in September 2014, the parties agreed to dismiss the respective district court litigations without prejudice, but BlackBerry’s petitions for inter-partes review and the instituted proceedings involving the two BlackBerry patents remain pending. 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.
We are currently a party to various other legal proceedings, employee-related 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.

17

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

Indemnification Obligations
We are a party to a variety of agreements pursuant to which we may be obligated to indemnify another party to such agreements with respect to certain matters. Typically, these obligations arise in the context of contracts we have entered into, under which we customarily agree to hold the other party harmless against losses arising from a breach of representations and covenants or terms and conditions related to such matters as the sale and/or delivery of our products, title to assets sold, certain intellectual property claims, defective products, specified environmental matters and certain income taxes. In these circumstances, payment by us is customarily conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow us to challenge the other party’s claims and vigorously defend ourselves and the third party against such claims. Further, our obligations under these agreements may be limited in terms of time, amount or the scope of our responsibility and in some instances, we may have recourse against third parties for certain payments made under these agreements.
It is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments we have made under these agreements have not had a material effect on our business, financial condition or results of operations. We believe that if we were to incur a loss in any of these matters, such loss would not have a material effect on our business, financial condition, cash flows or results of operations, although there can be no assurance of this. As of September 28, 2014 , we had no reason to believe a loss exceeding amounts already recognized had been incurred.

NOTE 9. EQUITY METHOD INVESTMENT

During the first fiscal quarter of fiscal 2014, we invested an additional $4.0 million in a battery company. The additional investment in this company increased our ownership interest in the company’s outstanding stock from 17.2% to 20.3% and required us to change from the cost method of accounting to the equity method of accounting for this investment. Under the equity method of accounting, we are required to record our interest in the company’s reported net income or loss for each reporting period. Additionally, we are required to present our prior period financial results to reflect the equity method of accounting from the date of the initial investment in the company which resulted in a $3.0 million adjustment to retained earnings and a corresponding reduction to our investment. During the three and nine months ended September 28, 2014 , we invested an additional $4.0 million and $15.0 million , respectively. As of September 28, 2014 , we own approximately 26.2% of the company's outstanding voting shares and continue to use the equity accounting method for this investment. Cypress's results of operations for the three months and nine months ended September 28, 2014 include a charge of $1.4 million and $3.7 million , respectively, for this investment. Cypress's recognized loss from this investment for the three months and nine months ended September 29, 2013 was $0.5 million and $1.2 million , respectively. These investee losses for fiscal 2014 and fiscal 2013 were recorded in "Other Income and Expense" on our Condensed Consolidated Statements of Operations.

The following table lists the relevant captions from our statements of operations, as originally presented, and after the change in accounting method:


18

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

 
Q1'12
 
Q2'12
 
Q3'12
 
Q4'12
 
FY'12
 
Q1'13
 
Q2'13
 
Q3'13
 
Q4'13
 
FY'13
As previously presented
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income from Operations
(17,640
)
 
5,148

 
15,047

 
(21,470
)
 
(18,915
)
 
(29,175
)
 
(8,132
)
 
(9,989
)
 
(10,899
)
 
(58,195
)
Interest and other income (expense), net
334

 
1

 
(1,330
)
 
(1,750
)
 
(2,745
)
 
483

 
2,119

 
427

 
(804
)
 
2,225

Equity Impairment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income/Loss
(19,460
)
 
4,977

 
14,332

 
(22,219
)
 
(22,370
)
 
(28,195
)
 
3,766

 
(8,358
)
 
(13,577
)
 
(46,364
)
EPS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
(0.13
)
 
0.03

 
0.1

 
(0.15
)
 
(0.15
)
 
(0.19
)
 
0.03

 
(0.06
)
 
(0.09
)
 
(0.31
)
Diluted
(0.13
)
 
0.03

 
0.09

 
(0.15
)
 
(0.15
)
 
(0.19
)
 
0.02

 
(0.06
)
 
(0.09
)
 
(0.31
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As adjusted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income from Operations
(17,640
)
 
5,148

 
15,047

 
(21,470
)
 
(18,915
)
 
(29,175
)
 
(8,132
)
 
(9,989
)
 
(10,899
)
 
(58,195
)
Pro rata share of (loss) from equity investments
(242
)
 
(279
)
 
(278
)
 
(276
)
 
(1,075
)
 
(284
)
 
(490
)
 
(471
)
 
(632
)
 
(1,877
)
Interest and other income (expense), net
334

 
1

 
(1,330
)
 
(1,750
)
 
(2,745
)
 
483

 
2,119

 
427

 
(804
)
 
2,225

Equity Impairment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income/Loss
(19,702
)
 
4,698

 
14,054

 
(22,495
)
 
(23,445
)
 
(28,479
)
 
3,276

 
(8,829
)
 
(14,209
)
 
(48,241
)
EPS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
(0.13
)
 
0.03

 
0.10

 
(0.16
)
 
(0.16
)
 
(0.20
)
 
0.02

 
(0.06
)
 
(0.09
)
 
(0.32
)
Diluted
(0.13
)
 
0.03

 
0.09

 
(0.16
)
 
(0.16
)
 
(0.20
)
 
0.02

 
(0.06
)
 
(0.09
)
 
(0.32
)
Cumulative effect of change in retained earnings
(242
)
 
(521
)
 
(799
)
 
(1,075
)
 
(1,075
)
 
(1,359
)
 
(1,849
)
 
(2,320
)
 
(2,952
)
 
(2,952
)



19

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

NOTE 10. DEBT AND EQUITY TRANSACTIONS
Senior Secured Revolving Credit Facility

We have a  $300 million  senior secured revolving credit facility ("Credit Facility") in which the borrowings are collateralized by substantially all assets of the Company. The financial covenants include the following conditions: 1) maximum senior secured leverage ratio of 2.50 to 1.00 through January 1, 2017 and 2.25 to 1.0 thereafter, 2) maximum total leverage ratio of 4.25 to 1.00 through January 3, 2015, 3.50 to 1.00 through January 1, 2017, and 3.00 to 1.00 thereafter, 3) minimum fixed charge coverage ratio of 1.00 to 1.00, and 4) minimum liquidity of at least $100 million . At September 28, 2014 , our 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 28, 2014 and December 29, 2013, we were in compliance with all of the financial covenants under the Credit Facility.
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 and bear interest of 3.15% to 3.18% per annum payable in 60 equal installments with the first installment due January 2012. Of the $6.6 million outstanding balance as of September 28, 2014 , approximately $2.9 million was recorded as part of “Other current liabilities” and $3.7 million was recorded as part of “Other long-term liabilities” in the Condensed Consolidated Balance Sheet.
The schedule of principal payments under our equipment loans is as follows:
 
 
 
Fiscal Year
(In thousands)
2014 (remaining three months)
$
715

2015
2,915

2016
3,003

Total
$
6,633

$400 Million Stock Buyback Program:
For the three and nine months ended September 28, 2014 , 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 2014, we used approximately $316.7 million from this program to repurchase approximately 23.6 million shares at an average share price of $13.43 . As of September 28, 2014 , the total remaining dollar amount of shares that may be repurchased under the program was approximately $83.3 million .
Yield Enhancement Program
During the nine months ended September 28, 2014, we entered into two separate short-term yield enhanced structured agreements by paying $9.7 million in cash for each agreement. Both agreements had an average maturity of 41 days or less and matured in the third quarter of 2014. Upon maturity, we received cash of $9.9 million and $9.8 million from each agreement and recognized an aggregate income of $0.3 million during the three months ended September 28, 2014. Such income was recorded as interest and other income in our statement of operations for the three months ended September 28, 2014.
Dividends
On August 15, 2014, 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 25, 2014. This cash dividend was paid on October 16, 2014 and totaled approximately $17.7 million which was accrued for and shown as “Dividends payable” in the Condensed Consolidated Balance Sheet as of September 28, 2014 .

NOTE 11. 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 29, 2013
$
(183
)
 
$
6

 
$
(177
)
Other comprehensive income attributable to Cypress
(27
)
 

 
(27
)
Balance as of September 28, 2014
$
(210
)
 
$
6

 
$
(204
)

NOTE 12. 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 December 29, 2013 was not material to our condensed consolidated financial statements. There were no outstanding forward contracts as of September 28, 2014 .

NOTE 13. INCOME TAXES

Our income tax expense was $1.2 million for the three months ended September 28, 2014 , and tax benefit was $0.8 million for the three months ended September 29, 2013 . Our income tax benefit was $3.0 million and $10.0 million for the nine months ended September 28, 2014 and September 29, 2013 , respectively. The tax expense for the third quarter was related to non-U.S. taxes on income earned in foreign jurisdictions, and the tax benefit for the first nine months of fiscal 2014 was primarily attributable to a release of previously accrued taxes and interest for the resolution of a foreign examination and expired statutes of limitations in domestic and foreign jurisdictions, offset by non-U.S. taxes on income earned in foreign jurisdictions. The tax benefit for the third quarter and first nine months of fiscal 2013 was primarily attributable to a release of previously accrued taxes and interest for the resolution of a foreign examination and expired statutes of limitations in domestic and foreign jurisdictions, offset by non-U.S. taxes on income earned in foreign jurisdictions.

Unrecognized Tax Benefits

As of September 28, 2014 and December 29, 2013, the amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate totaled $12.1 million and $17.6 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 reasonably possible that we may recognize approximately $1.0 million to $1.5 million of our existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.

Classification of Interest and Penalties
Our policy is to classify interest and penalties, if any, as components of the income tax provision in the Condensed Consolidated Statements of Operations. As of September 28, 2014 and December 29, 2013, the amount of accrued interest and penalties totaled $2.7 million and $5.8 million , respectively.


20

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

NOTE 14. 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 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
 
(In thousands, except per-share amounts)
Net income (loss) attributable to Cypress
$
12,840

 
$
(8,829
)
 
$
14,433

 
$
(34,032
)
Weighted-average common shares
159,759

 
149,679

 
157,594

 
147,551

Weighted-average diluted shares
166,481

 
149,679