Cypress Semiconductor Corporation
CYPRESS SEMICONDUCTOR CORP /DE/ (Form: 10-Q, Received: 08/07/2015 19:20:35)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
————————————
FORM 10-Q
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ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10079
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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 July 31, 2015 was 335,221,169 .




INDEX
 
 
 
 
 
 
Page
 
 
 
Item 1.
Condensed Consolidated Financial Statements  (Unaudited)
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Mine Safety Disclosures
Item 5.
Item 6.
 
 

1



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 manufacturing strategy; the expected timing and costs related to the integration of Cypress Semiconductor Corporation (“Cypress” or the “Company”) with Spansion Inc. (“Spansion”) as a result of our recent merger; our ability to execute on planned synergies related to the merger with Spansion; our expectations regarding dividends and stock repurchases; our expectations regarding future technology transfers and other licensing arrangements; our expectations regarding the timing and cost of our restructuring liabilities; our expectations regarding our active litigation matters and our intent to defend ourselves in those matters; the competitive advantage we believe we have with our patents as well as our proprietary programmable technologies and programmable products; our backlog as an indicator of future performance; the risk associated with our yield investment agreements; our foreign currency exposure and the impact exchange rates could have on our operating margins; the adequacy of our cash and working capital positions; the value and liquidity of our investments; including auction rate securities and our other debt investments; our ability to recognize certain unrecognized tax benefits within the next twelve months as well as the resolution of agreements with various foreign tax authorities; our investment strategy; the impact of interest rate fluctuations on our investments; the volatility of our stock price; the adequacy of our real estate properties; the utility of our non-GAAP reporting; the adequacy of our audits; the potential impact of our indemnification obligations and the impact of new accounting standards on our financial statements. We use words such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and similar expressions to identify forward-looking statements. Such forward-looking statements are made as of the date hereof and are based on our current expectations, beliefs and intentions regarding future events or our financial performance and the information available to management as of the date hereof. We assume no responsibility to update any such forward-looking statements. Our actual results could differ materially from those expected, discussed or projected in the forward-looking statements contained in this Quarterly Report on Form 10-Q for any number of reasons, including, but not limited to: the state and future of the general economy and its impact on the markets and consumers we serve and our investments; our ability to effectively integrate our company with Spansion in a timely manner; our ability to attract and retain key personnel; our ability to timely deliver new proprietary and programmable technologies and products; the current credit conditions; our ability to expand our customer base; our ability to transform our business with a leading portfolio of programmable products; the number and nature of our competitors; the changing environment and/or cycles of the semiconductor industry; foreign currency exchange rates; our ability to efficiently manage our manufacturing facilities and achieve our cost goals emanating from our flexible manufacturing strategy; our ability to achieve our goals related to our restructuring activities; our success in our pending litigation matters; our ability to manage our investments and interest rate and exchange rate exposure; changes in the law; the results of our pending tax examinations; our ability to achieve liquidity in our investments; the failure or success of our Emerging Technology division and/or the materialization of one or more of the risks set forth above or in Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q and in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014.
.



2



ITEM 1. FINANCIAL STATEMENTS
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 28,
2015
 
December 28,
2014
 
(In thousands, except
per-share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
124,140

 
$
103,736

Short-term investments
11,061

 
15,076

Accounts receivable, net
261,373

 
75,984

Inventories
300,922

 
88,227

Other current assets
99,066

 
29,288

Total current assets
796,562

 
312,311

Property, plant and equipment, net
544,144

 
237,763

Goodwill
1,741,733

 
65,696

Intangible assets, net
851,243

 
33,918

Other long-term assets
177,619

 
93,593

Total assets
$
4,111,301

 
$
743,281

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
145,286

 
$
42,678

Accrued compensation and employee benefits
75,322

 
35,182

Deferred margin on sales to distributors
133,654

 
95,187

Dividends payable
36,718

 
17,931

Income taxes payable
5,690

 
2,710

Current portion of long-term debt
6,049

 
6,143

Other current liabilities
208,056

 
75,001

Total current liabilities
610,775

 
274,832

Deferred income taxes and other tax liabilities
54,083

 
18,784

Revolving credit facility and long-term debt
586,343

 
237,107

Other long-term liabilities
45,916

 
10,693

Total liabilities
1,297,117

 
541,416

Commitments and contingencies (Note 10)

 

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

 

Common stock, $.01 par value, 650,000 and 650,000 shares authorized; 478,066 and 306,167 shares issued; 334,088 and 163,013 shares outstanding at June 28, 2015 and December 28, 2014, respectively
4,704

 
3,039

Additional paid-in-capital
5,635,503

 
2,675,170

Accumulated other comprehensive loss
(1,209
)
 
(46
)
Accumulated deficit
(716,763
)
 
(379,913
)
Stockholders’ equity before treasury stock
4,922,235

 
2,298,250

Less: shares of common stock held in treasury, at cost; 143,978 and 143,154 shares at June 28, 2015 and December 28, 2014, respectively
(2,100,877
)
 
(2,090,493
)
Total Cypress stockholders’ equity
2,821,358

 
207,757

Non-controlling interests
(7,174
)
 
(5,892
)
Total equity
2,814,184

 
201,865

Total liabilities and equity
$
4,111,301

 
$
743,281

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

3



CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
 
(In thousands, except per-share amounts)
Revenues
$
484,778

 
$
183,601

 
$
693,915

 
$
353,884

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
346,705

 
88,231

 
597,535

 
180,792

Research and development
81,227

 
40,927

 
131,749

 
86,257

Selling, general and administrative
91,840

 
42,059

 
162,300

 
84,668

Amortization of acquisition-related intangible assets
35,928

 
1,800

 
43,274

 
3,633

Restructuring and other
10,039

 

 
85,754

 
(1,014
)
Total costs and expenses
565,739

 
173,017

 
1,020,612

 
354,336

Operating income (loss)
(80,961
)
 
10,584

 
(326,697
)
 
(452
)
Interest and other income (expense), net
(5,336
)
 
239

 
(9,485
)
 
(598
)
Income (loss) before income taxes and non-controlling interest
(86,297
)
 
10,823

 
(336,182
)
 
(1,050
)
Income tax provision (benefit)
2,935

 
299

 
(1,068
)
 
(4,218
)
Equity in net loss of equity method investee
(1,459
)
 
(1,367
)
 
(3,018
)
 
(2,280
)
Net income (loss)
(90,691
)
 
9,157

 
(338,132
)
 
888

Net income (loss) attributable to non-controlling interests
640

 
370

 
1,283

 
705

Net income (loss) attributable to Cypress
$
(90,051
)
 
$
9,527

 
$
(336,849
)
 
$
1,593

Net income (loss) per share attributable to Cypress:
 
 
 
 
 
 
 
Basic
$
(0.27
)
 
$
0.06

 
$
(1.27
)
 
$
0.01

Diluted
$
(0.27
)
 
$
0.06

 
$
(1.27
)
 
$
0.01

Cash dividend declared per share
$
0.11

 
$
0.11

 
$
0.22

 
$
0.22

Shares used in net income (loss) per share calculation:
 
 
 
 
 
 
 
Basic
333,334

 
157,936

 
264,547

 
156,508

Diluted
333,334

 
164,460

 
264,547

 
163,391

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

4



CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
 
(In thousands)
Net income (loss)
$
(90,691
)
 
$
9,157

 
$
(338,132
)
 
$
888

Other comprehensive loss, net of taxes:
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on available for sale securities
(1
)
 
(10
)
 
26

 
(15
)
Net unrealized gain (loss) on cash flow hedges:
 
 
 
 
 
 
 
Net unrealized gain (loss) arising during the period
(1,549
)
 

 
(1,741
)
 

Net loss reclassified into earnings for revenue hedges (effective portion)
193

 

 
390

 

Net loss reclassified into earnings for expense hedges
233

 

 
162

 

Net unrealized loss on cash flow hedges
(1,123
)
 

 
(1,189
)
 

Other comprehensive loss
(1,124
)
 
(10
)
 
(1,163
)
 
(15
)
Comprehensive income (loss)
(91,815
)
 
9,147

 
(339,295
)
 
873

Comprehensive loss attributable to non-controlling interest
640

 
370

 
1,283

 
705

Comprehensive income (loss) attributable to Cypress
$
(91,175
)
 
$
9,517

 
$
(338,012
)
 
$
1,578

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

5



CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(338,132
)
 
$
888

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Stock-based compensation expense
46,464

 
31,141

Depreciation and amortization
96,641

 
23,478

Deferred income taxes
(6,308
)
 
(6,037
)
Restructuring costs
16,913

 
(435
)
(Gain) Loss on disposal of property and equipment
9,346

 
(579
)
Equity in net loss of equity method investee
3,018

 
2,280

Other
2,150

 
273

Changes in operating assets and liabilities, net of acquisitions
 
 
 
Accounts receivable, net
(85,418
)
 
(34,721
)
Inventories
238,884

 
10,916

Other current and long-term assets
(15,519
)
 
8,205

Accounts payable and other liabilities
(67,095
)
 
17,913

Deferred margin on sales to distributors
46,040

 
16,178

Net cash provided by (used in) operating activities
(53,016
)
 
69,500

Cash flows from investing activities:
 
 
 
Proceeds from sales or maturities of available-for-sale investments
7,187

 
14,401

Purchases of marketable securities
(1,530
)
 
(8,416
)
Business acquisition, net of cash acquired
(105,130
)
 

Contribution to (distribution of) deferred compensation plan
1,270

 
(810
)
Acquisition of property, plant and equipment
(25,231
)
 
(11,378
)
Cash paid for equity method investments
(12,000
)
 
(14,400
)
Proceeds from sale of held-for-sale equipment
33

 
3,240

Other
90

 
116

Net cash used in investing activities
(135,311
)
 
(17,247
)
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
299,000

 
100,000

Repayment of revolving credit facility
(77,000
)
 
(100,000
)
Repurchase of treasury stock
(10,436
)


Withholding of common shares for tax obligations on vested restricted shares
54

 
(245
)
Payment of dividends
(54,334
)
 
(34,107
)
Proceeds from employee equity awards
33,199

 
10,709

Repayment of equipment leases and loans
(4,486
)
 
(3,458
)
Proceeds from settlement of capped calls
25,293

 

Financing costs related to revolving credit facility
(2,559
)
 

Yield enhancement structured agreements not settled

 
(9,727
)
Net cash provided by (used in) financing activities
208,731

 
(36,828
)
Net increase in cash and cash equivalents
20,404

 
15,425

Cash and cash equivalents, beginning of period
103,736

 
86,009

Cash and cash equivalents, end of period
$
124,140

 
$
101,434

Non cash investing and financing activities
 
 
 
Dividends payable
$
36,718

 
$
17,412

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

6



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

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Years

Cypress Semiconductor Corporation (“Cypress” or the “Company”) reports on a fiscal-year basis. The Company ends its quarters on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. Fiscal 2015 has 53 weeks and fiscal 2014 had 52 weeks. The second quarter of fiscal 2015 ended on June 28, 2015 and the second quarter of fiscal 2014 ended on June 29, 2014 .

Basis of Presentation
On March 12, 2015, the Company completed the merger with Spansion, Inc. (“Spansion”), a leading designer, manufacturer and developer of embedded systems semiconductors, for a total purchase consideration of approximately $2.8 billion ("the Merger"). The unaudited condensed consolidated statement of operations of Cypress for the three months ended June 28, 2015 represents the first full quarter of the combined operations after the Merger. The unaudited condensed consolidated statement of operations of Cypress for the six months ended June 28, 2015 includes the results of operations of legacy Spansion since March 12, 2015.

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The following reclassifications have been made in the presentation of Cypress’s Condensed Consolidated Balance Sheet as of December 28, 2014.
$6.1 million reclassified from other current liabilities to current portion of long-term debt, and
$10.1 million reclassified from other long-term liabilities to revolving credit facility and long-term debt.

The condensed consolidated results of operations for the three and six months ended June 28, 2015 are not necessarily indicative of the results to be expected for the full fiscal year.
During the six months ended June 29, 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 six months ended June 29, 2014 . The Company recorded these corrections in the aggregate totaling $2.6 million in the cost of revenues for the six months ended June 29, 2014. Management assessed the impact of these errors and concluded that the amounts were not material, either individually or in the aggregate, to any prior periods.
 
Business Combinations

The Company applies the provisions of Accounting Standards Codification 805, Business Combinations ("ASC 805"), in the accounting for acquisitions. It requires the Company to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the

7

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

conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the Company's Condensed Consolidated Statements of Operations. Accounting for business combinations requires the Company's management to make significant estimates and assumptions, especially at the acquisition date including estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although the Company believes the assumptions and estimates it has made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to: future expected cash flows from product sales, customer contracts and acquired technologies, expected costs to develop in-process research and development into commercially viable products and estimated cash flows from the projects when completed and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

Revenue Recognition

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

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

The Company has historically recognized a significant portion of revenue through distributors at the time the distributor resold the product to its end customer (also referred to as the sell-through basis of revenue recognition) given the difficulty in estimating the ultimate price of these product shipments and amount of potential returns. The Company continuously reassesses its ability to reliably estimate the ultimate price of these products and, over the past several years, has made investments in its systems and process around its distribution channel to improve the quality of the information it receives from its distributors. Given these ongoing investments, and based on the financial framework the Company uses for estimating potential price adjustments, beginning the fourth quarter of 2014, the Company concluded that it was able to reasonably estimate returns and pricing concessions on certain product families and with certain distributors, and recognized revenue at the time it shipped these specific products to the identified distributors, less its estimate of future price adjustments and returns. During the three months ended June 28, 2015, there were no new product families or distributors for which the Company recognized revenue at the time it shipped those products. During the six months ended June 28, 2015, the Company recognized approximately $22.7 million of incremental revenue from this change, which resulted in a benefit to net income of approximately $13.7 million for the six months ended June 28, 2015, or approximately $0.05 per basic and diluted shares. During the three months ended June 28, 2015, the Company recognized $220.7 million or 62.5% of distribution revenue on a sell-in basis. During the six months ended June 28, 2015, the Company recognized $ 329.1 million or 51.1% of distribution revenue on a sell-in basis.

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

Inventories

Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Market is based on estimated net realizable value. The Company write downs its inventories which have become obsolete or are in excess of anticipated demand or net realizable value based upon assumptions about demand forecasts, product

8

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

life cycle status, product development plans and current sales levels. Inventory reserves are not relieved until the related inventory has been sold or scrapped.

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

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

Cash Flow Hedges

The Company enters into cash flow hedges to protect non-functional currency inventory purchases and certain other operational expenses and has an on-going program of cash flow hedges to protect its non-functional currency revenues against variability in cash flows due to foreign currency fluctuations. The Company’s foreign currency forward contracts that were designated as cash flow hedges have maturities between three and eight months . The maximum original duration of any contract allowable under the Company’s hedging policy is thirteen months . All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions at the inception of the hedge. The Company recognizes derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measures them at fair value on a monthly basis. The Company records changes in the intrinsic value of its cash flow hedges in accumulated other comprehensive income on the Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. Interest charges or “forward points” on the forward contracts are excluded from the assessment of hedge effectiveness and are recorded in interest and other income (expense), net in the Condensed Consolidated Statements of Operations. When the forecasted transaction occurs, the Company reclassifies the related gain or loss on the cash flow hedge to revenue or costs, depending on the risk hedged.  In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company will reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income (expense), net in its Condensed Consolidated Statements of Operations at that time.
 
The Company evaluates hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and records any ineffective portion of the hedge in interest and other income (expense), net in its Condensed Consolidated Statements of Operations.
  
Recent Accounting Pronouncements
    
In February 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2015-02, Amendments to the Consolidation Analysis, which is intended to improve upon and simplify the consolidation assessment required to evaluate whether organizations should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures. The new accounting guidance is effective for interim and fiscal years beginning after December 15, 2015. The Company does not believe that the adoption of this guidance will have any

9

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

material impact on its financial condition or results of operations.
In April 2015, the Financial Accounting Standards Board issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in the financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. The new accounting guidance is effective for interim and fiscal years beginning after December 15, 2015. The Company is currently evaluating the guidance to determine the impact on its balance sheet presentation.

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


NOTE 2. MERGER WITH SPANSION

Merger with Spansion

On March 12, 2015, Cypress completed its merger with Spansion ("the Merger") pursuant to the Agreement and Plan of Merger and Reorganization, as of December 1, 2014 ("the Merger Agreement") for a total purchase consideration of approximately $2.8 billion . In accordance with the terms of the Merger Agreement, Spansion shareholders received 2.457  Cypress shares for each Spansion share they owned. The Merger has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations, with Cypress treated as the accounting acquirer. The Company incurred $6.8 million and $26.3 million in Merger costs for the three and six months ended June 28, 2015,which were recorded in the selling, general and administrative expense line of the Condensed Consolidated Statement of Operations.

The total purchase consideration of approximately $2.8 billion consists of the following:
 
Purchase Consideration
 
(In thousands)
Fair value of Cypress common stock issued to Spansion shareholders
$
2,570,458

Fair value of partially vested Spansion equity awards assumed by Cypress
6,825

Fair value of vested Spansion options assumed by Cypress
89,582

Cash provided by Cypress to repay Spansion term loan
150,000

Total purchase consideration
$
2,816,865


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

10

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

 
 
Fair Values
 
 
(In thousands)
 
 
 
Cash and cash equivalents
 
$
44,870

Short-term investments
 
1,433

Accounts receivable, net
 
99,977

Inventories
 
450,634

Other current assets
 
58,959

Property, plant and equipment, net
 
356,908

Intangible assets, net
 
860,700

Goodwill
 
1,676,036

Other long-term assets
 
63,497

      Total assets acquired
 
3,613,014

Accounts payable
 
(155,336
)
Accrued compensation and benefits
 
(44,669
)
Income taxes payable
 
(1,399
)
Other current liabilities
 
(158,083
)
Deferred income taxes and other long term liabilities
 
(24,001
)
Other non current liabilities
 
(21,477
)
Long-term debt (1)
 
(391,184
)
      Total liabilities assumed
 
(796,149
)
      Fair value of net assets acquired
 
$
2,816,865

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

The table below shows the valuation of the intangible assets acquired from Spansion Inc. along with their estimated remaining useful lives:
 
As of March 12, 2015
 
 
 
Gross
 
Estimated range of lives (in years)

 
(In thousands)
 
Existing Technology
$
507,100

 
4 to 6
In-Process Research and Development Technology
212,300

 
N/A
Backlog
14,500

 
1
Customer/Distributor Relationships
97,300

 
9
License Agreements
9,400

 
3
Trade Name / Trademarks
20,100

 
10
Total intangible assets
$
860,700

 
 

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

11

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

As of June 28, 2015 , approximately $1.2 million of the total capitalized IPR&D of $212.3 million had reached technological feasibility and was transferred to developed technology. Refer Note 3 for further details. The remaining projects are proceeding on schedule and no impairments have been identified as of June 28, 2015.

The purchase price has been allocated based on the estimated net tangible and intangible assets of Spansion that existed on the date of the Merger. The fair value of identifiable intangible assets acquired was based on estimates and assumptions made by management at the time of the Merger. As additional information becomes available, such as finalization of the estimated fair values of tax accounts, the Company may revise its preliminary purchase price allocation during the remainder of the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes may be material. There have been no changes to the allocation of purchase price as of June 28, 2015 .

Identifiable intangible assets

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

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

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

Trade names and trademarks are considered a type of guarantee of a certain level of quality or performance represented by the Spansion brand. Trade names and trademarks were valued using the “relief-from-royalty income” approach. This method is based on the assumption that in lieu of ownership, a market participant would be willing to pay a royalty in order to exploit the related benefits of this asset. A discount rate of 9.0% was used to discount the cash flows to the present value.
License agreements represent the estimated fair value of Spansion’s existing license agreements under which Spansion generates revenue by licensing its intellectual property to third parties and assists its customers in developing and prototyping their designs by providing software and hardware development tools, drivers and simulation models for system-level integration. License agreements were valued using a form of the income approach known as the of “multi-period excess earnings” approach. Under this approach, the expected cash flows associated with the License agreements were projected then discounted to present value at a rate of return that considers the relative risk of achieving the cash flows and the time value of money. A discount rate of 5.0% was used to discount the cash flows to the present value.

Goodwill

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

The following unaudited pro forma consolidated results of operations for the three months and six months ended June 28, 2015 and June 29, 2014 assume as if the Merger had occurred at the acquired beginning of fiscal year 2014. The pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment,

12

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

adjustments to stock-based compensation expense, and interest expense for the incremental indebtedness incurred. The pro forma results for the three and six months ended June 29, 2014 also include amortization of the step up to fair value of acquired inventory and the Merger related expenses. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations of the combined business had the Merger actually occurred at the beginning of fiscal year 2014 or of the results of future operations of the combined business. Consequently, actual results will differ from the unaudited pro forma information presented below.

 
Three Months Ended
 
Six Months Ended
 
June 29,
2014
 
June 28,
2015
June 29,
2014
 
(in thousands, except per share amounts)
Revenues
$
498,267

 
$
882,328

$
980,300

Net loss
$
(99,519
)
 
$
(293,518
)
$
(474,538
)
 
 
 
 
 
Net loss per share attributable to Cypress
 
 
 
 
Basic
$
(0.46
)
 
$
(0.69
)
$
(2.19
)
Diluted
$
(0.46
)
 
$
(0.69
)
$
(2.19
)


NOTE 3. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. As a result of the Merger, the Company recorded an increase to goodwill of $1,676.0 million and intangible assets of $860.7 million . The carrying amount of goodwill at June 28, 2015 was $1,741.7 million , of which $773.0 million was in the Memory Products Division (MPD) and $968.7 million was in the Programmable Systems Division (PSD). The carrying amount of goodwill as of December 28, 2014 was $65.7 million , of which $33.9 million was in MPD and $31.8 million was in PSD.
The following table presents details of the Company's intangible assets:
 
 
As of June 28, 2015
 
As of December 28, 2014
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
 
(In thousands)
Acquisition-related intangible assets
$
1,012,472

 
$
(161,631
)
 
$
850,841

 
$
151,773

 
$
(118,357
)
 
$
33,416

Non-acquisition related intangible assets
10,523

 
(10,121
)
 
402

 
10,523

 
(10,021
)
 
502

Total intangible assets
$
1,022,995

 
$
(171,752
)
 
$
851,243

 
$
162,296

 
$
(128,378
)
 
$
33,918


13

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

As of June 28, 2015 , approximately $1.2 million of the total capitalized IPR&D of $212.3 million had reached technological feasibility and was transferred to developed technology and amortization of approximately $0.1 million was recorded during the three months ended June 28, 2015 for these projects. The Company expects the remaining projects to attain technological feasibility and commence commercial production by the first half of fiscal 2017.
The estimated future amortization expense as of June 28, 2015 as are as below:
 
 
 
(In thousands)
2015 (remaining six months)
$
65,250

2016
113,648

2017
113,457

2018
110,968

2019
103,740

2020 and future
133,068

Total future amortization expense
$
640,131


NOTE 4. RESTRUCTURING AND OTHER

Spansion Integration-Related Restructuring Plan

In March 2015, the Company began the implementation of planned cost reduction and restructuring activities in connection with the Merger. As part of this plan, the Company expects to eliminate approximately  1,000 positions from the combined workforce across all business and functional areas on a global basis by the end of the fiscal year. The restructuring charge of $85.8 million recorded for the six months ended June 28, 2015 primarily consists of severance costs, lease termination costs and impairment of property, plant and equipment. The lease termination costs include $18.7 million relating to the lease on a San Jose, California building which was entered into by Spansion in fiscal 2014 as it was decided the Company would not occupy the building post Merger. The lease is for a period of 12 years , with two options to extend for periods of five years each after the initial lease term. The initial term of the lease commenced on January 1, 2015 and will expire on December 31, 2026. 
Consolidated Restructuring and Other
The following table summarizes the restructuring and other activities recorded in the Company’s statement of operations for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
June 29,
2014
 
(In thousands)
Personnel costs
$
11,120

 
$

 
$
55,326

$
(154
)
Lease termination costs and other related charges
(845
)
 

 
17,897


Impairment of property, plant and equipment
(236
)
 

 
12,531


Other

 

 

(281
)
Gain on sale of held-for-sale assets

 

 

(579
)
Total restructuring and other charges (benefit)
$
10,039

 
$

 
$
85,754

$
(1,014
)

A summary of the restructuring activities under the Company's restructuring plans are summarized as follows:


14

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

 
Six Months Ended
 
June 28, 2015
 
June 29, 2014
 
(In thousands)
Accrued restructuring balance, beginning of period
$
1,177

 
$
4,158

Provision
76,711

 
(1,014
)
Cash payments and other
(41,636
)
 
(1,347
)
Accrued restructuring balance, end of period
$
36,252

 
$
1,797


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

During the six months ended June 29, 2014, the Company recorded a benefit from restructuring activities of  $1.0 million , of which  $0.6 million  resulted from the gain on the sale of a previously restructured asset and  $0.2 million  resulted from a decrease in the estimate of termination benefits related to the previously announced restructuring plan in 2013.

The restructuring liability as of June 28, 2015 is primarily related to personnel costs that are expected to be paid within the next twelve months.







15

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

NOTE 5. BALANCE SHEET COMPONENTS
Accounts Receivable, Net
 
 
As of
 
June 28,
2015
 
December 28,
2014
 
(In thousands)
Accounts receivable, gross
$
265,008

 
$
79,091

Allowance for doubtful accounts receivable and sales returns
(3,635
)
 
(3,107
)
Total accounts receivable, net
$
261,373

 
$
75,984


Inventories
 
 
As of
 
June 28,
2015
 
December 28,
2014
 
(In thousands)
Raw materials
$
13,636

 
$
4,753

Work-in-process
239,346

 
64,003

Finished goods
47,940

 
19,471

Total inventories
$
300,922

 
$
88,227

Other Current Assets
 
 
As of
 
June 28,
2015
 
December 28,
2014
 
(In thousands)
Prepaid tooling assets
$
9,721

 
$
21,777

Restricted cash relating to pension (see Note 8)
4,926

 

Deferred tax assets
14,062

 
982

Prepaid expenses
40,187

 

Other current assets
30,170

 
6,529

Total other current assets
$
99,066

 
$
29,288

Other Long-term Assets
 
 
As of
 
June 28,
2015
 
December 28,
2014
 
(In thousands)
Employee deferred compensation plan
$
44,050

 
$
44,116

Investments in Equity securities
42,038

 
34,992

Deferred tax assets
1,189

 
1,187

Long term license
28,033

 

Restricted cash relating to pension (see Note 8)
7,086

 

Other assets
55,223

 
13,298

Total other long-term assets
$
177,619

 
$
93,593


16

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

Other Current Liabilities
 
 
As of
 
June 28,
2015
 
December 28,
2014
 
(In thousands)
Employee deferred compensation plan
$
44,523

 
$
43,452

Restructuring accrual (see Note 4)
20,495

 
1,177

Capital lease-current portion (see Note 10)
2,769

 
3,227

Equipment loan-current portion (see Note 11)
2,962

 
2,916

Rebate reserve-current portion
5,060

 
4,276

Obligation for Spansion's Sunnyvale property (See below)
60,220

 

License commitment
18,496

 

Other current liabilities
53,531

 
19,953

Total other current liabilities
$
208,056

 
$
75,001

 
Other Long-term Liabilities
 
 
As of
 
June 28,
2015
 
December 28,
2014
 
(In thousands)
Long-term pension liabilities
$
13,519

 
$
5,768

Long-term building lease liability
15,757

 

Other long-term liabilities
16,640

 
4,925

Total other long-term liabilities
$
45,916

 
$
10,693


Sale of Spansion's Sunnyvale property

On January 23, 2014, Spansion sold its property in Sunnyvale, California, consisting of 24.5 acres of land with approximately 471,000 square feet of buildings that included its headquarters building and submicron development center, a Pacific Gas & Electric transmission facility and a warehouse building, for net consideration of $59.0 million . Spansion concurrently leased back approximately 170,000 square feet of the headquarters building on a month-to-month basis with the option to continue the lease for up to 24 months ; thereafter, either party could terminate the lease. The first six months of the lease were rent free; thereafter, the rents were lower than the market rates. For accounting purposes, these rents were deemed to have been netted against the sale proceeds and represent prepaid rent. As such, the use of the property after its sale constituted continuing involvement and recognition of the sale of the property was deferred until the lease period ends. In the third quarter of fiscal 2015, on June 30, 2015, the Company terminated the lease on the Sunnyvale building and recognized an immaterial gain.

17

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


NOTE 6. FAIR VALUE MEASUREMENTS
Assets/Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the fair value hierarchy for the Company's financial assets and liabilities measured at fair value on a recurring basis and its non-financial liabilities measured at fair value on a non-recurring basis:
 
 
As of June 28, 2015
 
As of December 28, 2014
 
Level 1
 
Level 2
 
 
Total
 
Level 1
 
Level 2
 
 
Total
 
(In thousands)
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds and others
$
1,981

 
$

 
 
$
1,981

 
$
7,665

 
$

 
 
$
7,665

Total cash equivalents
1,981

 

 
 
1,981

 
7,665

 

 
 
7,665

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
       Marketable equity securities
1,813

 

 
 
1,813

 

 

 
 

U.S. Treasuries

 

 
 

 
4,993

 

 
 
4,993

Corporate notes and bonds

 
4,768

 
 
4,768

 

 
5,599

 
 
5,599

Federal Agency

 
3,610

 
 
3,610

 

 
3,615

 
 
3,615

Certificates of deposit

 
870

 
 
870

 

 
869

 
 
869

Total short-term investments
1,813

 
9,248

 
 
11,061

 
4,993

 
10,083

 
 
15,076

Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
       Marketable equity securities
9,519

 

 
 
9,519

 
8,493

 

 
 
8,493

       Total long-term investments
9,519

 

 
 
9,519

 
8,493

 

 
 
8,493

Employee deferred compensation plan assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
3,309

 

 
 
3,309

 
2,957

 

 
 
2,957

Mutual funds
24,968

 

 
 
24,968

 
24,114

 

 
 
24,114

Equity securities
8,432

 

 
 
8,432

 
9,352

 

 
 
9,352

Fixed income

 
3,763

 
 
3,763

 

 
3,798

 
 
3,798

Money market funds
3,878

 

 
 
3,878

 
3,895

 

 
 
3,895

Total employee deferred compensation plan assets
40,587

 
3,763

 
 
44,350

 
40,318

 
3,798

 
 
44,116

Total financial assets
$
53,900

 
$
13,011

 
 
$
66,911

 
$
61,469

 
$
13,881

 
 
$
75,350

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee deferred compensation plan liability
$

 
$
44,523

 
 
$
44,523

 
$

 
$
43,452

 
 
$
43,452

Valuation Techniques:
There have been no changes to the valuation techniques used to measure the fair value of the Company's assets and liabilities. For a description of the valuation techniques, refer to the Company's Annual report on Form 10-K for the year ended December 28, 2014 .
Liabilities Measured at Fair Value on a Nonrecurring Basis
As of June 28, 2015 , the carrying value of the Company's Revolving Credit Facility was $449.0 million (See Note 11). The carrying value of the Company's Credit Facility approximates its fair value since it bears interest rates that are similar to existing market rates that would be offered to the Company, taking into account its credit risk, and represents a Level 2 measurement.

18

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

The Company's 2.00% Senior Exchangeable Notes assumed as part of the Merger is traded in the market and is categorized as Level 2. The carrying value and the estimated fair value of the debt portion of the Notes as of June 28, 2015 is $130.1 million and $316.7 million respectively. See Note 11 for further details.

Investments in Equity Securities

The Company's investments in equity securities include long-term investments in non-marketable equity securities of privately-held companies of approximately $32.5 million and $26.4 million as of June 28, 2015 and December 28, 2014 , respectively.

Included in the Company's non-marketable equity securities is an investment in a company that designs, develops and manufactures products in the area of advanced battery storage for mobile consumer devices, which is accounted for using the equity method. During the three and six months ended June 28, 2015 , the Company invested an additional $5.0 million and $ 12.0 million , which increased its cumulative total investment to $40.5 million , representing 32.3% of such investee's outstanding voting shares as of June 28, 2015.
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.
In the fourth quarter of fiscal 2014, the Company invested approximately $10 million in Hua Hong Semiconductor Limited (HHSL), a publicly traded company, which is the parent company of Grace Semiconductor Manufacturing Corporation, one of the Company's strategic foundry partners. As of June 28, 2015 , the carrying value of its publicly traded investment in HHSL is $9.5 million , which is included in long term investments on marketable equity securities.
In the second quarter of fiscal 2015, the Company purchased approximately 80,000 shares of common stock of Integrated Silicon Solution, Inc., a publicly traded company for approximately $1.5 million . As of June 28, 2015, the carrying value of this investment was $1.8 million and has been included in short-term investments on marketable equity securities.
The Company did not sell any of its investments in marketable securities in the six months ended June 28, 2015.
There were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the six months ended June 28, 2015 .
 

19

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

NOTE 7. INVESTMENTS
Available-For-Sale Securities
The following tables summarize the Company's available-for-sale and other investments:
 
 
As of June 28, 2015

As of December 28, 2014
 
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 and others
$
1,981

 
$

 
$

 
$
1,981

 
$
7,665

 
$

 
$

 
$
7,665

Total cash equivalents
1,981

 

 

 
1,981

 
7,665

 

 

 
7,665

Reported as short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries

 

 

 

 
5,002

 

 
(9
)
 
4,993

Corporate note and bonds
4,772

 
1

 
(5
)
 
4,768

 
5,616

 

 
(17
)
 
5,599

Federal agency
3,609

 
1

 

 
3,610

 
3,617

 

 
(2
)
 
3,615

Certificates of deposit
870

 

 

 
870

 
869

 

 

 
869

Total short-term investments
9,251

 
2

 
(5
)
 
9,248

 
15,104

 

 
(28
)
 
15,076

Total cash equivalents and other investments
$
11,232

 
$
2

 
$
(5
)
 
$
11,229

 
$
22,769

 
$

 
$
(28
)
 
$
22,741

 
As of June 28, 2015 , the contractual maturities of the Company's available-for-sale investments and certificates of deposit were as follows (the table below does not include investments in marketable equity securities):
 
 
Cost
 
Fair Value
 
(in thousands)
Maturing within one year
$
10,105

 
$
10,102

Maturing in one to three years
1,127

 
1,127

Total
$
11,232

 
$
11,229

There were no realized gains from sales and losses of available-for-sale investments during the three months ended June 29, 2014 . Realized gains from sales and losses of available-for-sale investments during the three months ended June 28, 2015 were not material.



20

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


NOTE 8. EMPLOYEES BENEFITS PLAN
Employee Pension Plans assumed in Spansion Merger
Spansion Innovates Group Cash balance plan (Defined Benefit Plan)    

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

Also in connection with the assumption of this pension plan liability, the Company assumed the restricted cash balance, which relates to the underfunded portion of the pension liability. The pension liability will be paid out by fiscal 2017 in annual installments according to the employee's election. As of June 28, 2015 , the Company has a pension liability of $5.1 million and $7.4 million recorded as a part of the accrued compensation and employee benefits, and other long-term liabilities, respectively, on the Condensed Consolidated Balance Sheet. As of June 28, 2015 , the Company has a restricted cash of $4.9 million and $7.1 million recorded in other current assets and other long-term assets, respectively, on the Condensed Consolidated Balance Sheet.

The plan is unfunded as of June 28, 2015 . This status is not indicative of the Company’s ability to pay ongoing pension benefits. The Company recorded a net periodic cost of $0.3 million and $0.4 million for the three and six months ended June 28, 2015 . The Company has accrued a liability of $1.3 million as of June 28, 2015 which has been recorded in other long term liabilities on the Condensed Consolidated Balance Sheets. The Company expects to contribute immaterial amounts towards the Cash Balance Plan for fiscal 2015.
    
Spansion Corporate Defined Contribution Plan

In connection with the Merger, the Company assumed a tax qualified Defined Contribution Plan to which the Company makes contributions as a percentage of base salary. The Company recorded an expense of $0.5 million and $0.6 million under this plan for the three and six months ended June 28, 2015 , and as of June 28, 2015 , the Company has an accrued contribution liability of $0.2 million .
Employee Deferred Compensation Plan
The Company has a deferred compensation plan which provides certain key employees, including its executive management, with the ability to defer the receipt of compensation in order to accumulate funds for retirement on a tax-deferred basis. The Company does not make contributions to the deferred compensation plan or guarantee returns on the investments. Participant deferrals and investment gains and losses remain as the Company's 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 June 28, 2015 and December 28, 2014 , the fair value of the assets was $44.4 million and $44.1 million , respectively, and the fair value of the liabilities was $44.5 million and $43.5 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:
 

21

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

 
Three Months Ended
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
June 29,
2014
 
(In thousands)
Changes in fair value of assets recorded in:
 
 
 
 
 
 
Interest and other income, net
$
528

 
$
1,753

 
$
1,202

$
2,612

Changes in fair value of liabilities recorded in:
 
 
 
 
 
 
Cost of revenues
(46
)
 
(248
)
 
(235
)
(466
)
Research and development expenses
(153
)
 
(483
)
 
(770
)
(907
)
Selling, general and administrative expenses
(276
)
 
(1,097
)
 
(1,386
)
(2,061
)
Total income (expense)
$
53

 
$
(75
)
 
$
(1,189
)
$
(822
)


NOTE 9. EMPLOYEE STOCK PLANS AND STOCK-BASED COMPENSATION
The Company's equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests. In the first quarter of fiscal 2015, in connection with the Merger, the shareholders of Cypress approved an increase in the number of shares issuable under the Cypress 2013 Stock Plan (the “2013 Stock Plan”) by 29.3 million shares that could be issued as full value awards (such as restricted stock units (RSUs), and performance stock units (PSUs)), or as appreciation awards (such as stock options and/or stock appreciation rights)(if awards are granted only in the form of RSUs or other full value awards, this increase in shares would allow for the issuance of only up to approximately 15.6 million shares, to a total of approximately 31.0 million reserved but unissued shares under the 2013 Stock Plan).
The following table summarizes the stock-based compensation expense, by line item recorded in the Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
 
Six months ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
 
(In thousands)
Cost of revenues
$
3,910

 
$
4,433

 
$
8,631

 
$
6,684

Research and development
6,908

 
4,362

 
12,661

 
11,545

Selling, general and administrative
16,849

 
5,523

 
25,172

 
12,912

Total stock-based compensation
$
27,667

 
$
14,318

 
$
46,464

 
$
31,141


In connection with the Merger, the Company assumed stock options and full value awards originally granted by Spansion. Stock-based compensation expense in the three and six months ended June 28, 2015 included $5.9 and $11.8 million related to assumed Spansion stock options and RSUs respectively.

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 $17.4 million and $33.2 million for the three and six months ended June 28, 2015 and $1.9 million and $10.7 million for the three and six months ended June 29, 2014 . The Company did not recognize a tax benefit from stock option exercises for the three and six months ended June 28, 2015 or June 29, 2014 .
As of June 28, 2015 and December 28, 2014 , stock-based compensation capitalized in inventories totaled $3.0 million and $2.0 million , respectively.
The following table summarizes the stock-based compensation expense by type of awards:
 

22

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

 
Three Months Ended
 
Six months ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
 
(In thousands)
Stock options
$
572

 
$
1,272

 
$
1,268

 
$
2,721

Restricted stock units
23,882

 
11,207

 
38,770

 
25,579

Employee Stock Purchase Plan (“ESPP”)
3,213

 
1,839

 
6,426

 
2,841

Total stock-based compensation expense
$
27,667

 
$
14,318

 
$
46,464

 
$
31,141

The following table summarizes the unrecognized stock-based compensation expense, net of estimated forfeitures, by type of awards:
 
 
As of
 
June 28,
2015
 
Weighted-
Average
Amortization
Period
 
(In thousands)
 
(In years)
Stock options
$
4,022

 
1.47
Restricted stock units
288,542

 
2.11
ESPP
3,524

 
0.76
Total unrecognized stock-based compensation balance
$
296,088

 
2.09
Equity Incentive Program
As of June 28, 2015 , approximately 33.7 million stock options, or 22.6 million RSUs/PSUs, were available for grant under the 2013 Stock Plan, the 2010 Equity Incentive Award Plan (formerly the Spansion 2010 Equity Incentive Award Plan) and the 2012 Incentive Award Plan (formerly the Ramtron Plan).
 
Stock Options
As a part of the Merger, Cypress assumed all outstanding Spansion options and these options were converted into options to purchase Cypress common stock at the agreed upon conversion ratio. The exercise price per share for each assumed Spansion option is equal to exercise price per share of Spansion option divided by 2.457 .
The following table summarizes the Company's stock option activities:
 
 
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
(In thousands, except
per-share amounts)
Options outstanding as of December 28, 2014
14,463

 
$
9.24

Options assumed as a part of the Merger
8,976

 
$
12.86

Exercised
(1,649
)
 
$
5.88

Forfeited or expired
(140
)
 
$
10.92

Options outstanding as of March 29, 2015
21,650

 
$
7.83

Granted

 
$

Exercised
(3,092
)
 
$
5.63

Forfeited or expired
(272
)
 
$
13.45

Options outstanding as of June 28, 2015
18,286

 
$
8.12

Options exercisable as of June 28, 2015
14,745

 
$
7.27

The weighted-average grant-date fair value of the options granted during the three and six months ended June 29, 2014 was $2.01 and $2.17 , respectively. There were no options granted for the three and six months ended June 28, 2015 .

23

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

The aggregate intrinsic value of the options outstanding and options exercisable as of June 28, 2015 was approximately $76.0 million and $73.9 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 June 28, 2015 .
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 approximately $23.7 million and $38.7 million during the three and six months ended June 28, 2015 , and approximately $2.0 million and $3.9 million during the three and six months ended June 29, 2014 .
The total number of exercisable in-the-money options was approximately 11.5 million shares as of June 28, 2015 .
As of June 28, 2015 , stock options vested and expected to vest totaled approximately 17.9 million shares, with a weighted-average remaining contractual life of 3.5 years and a weighted-average exercise price of $8.06 per share.
Restricted Stock Units (RSUs) and Performance-Based Restricted Stock Units (PSUs)
The following table summarizes the Company's RSU/PSU activities:
 
 
 
Shares
 
Weighted-
Average
Grant
Date Fair
Value Per
Share
 
(In thousands, except
per-share amounts)
Balance as of December 28, 2014
 
7,835

 
$
10.98

Granted and assumed
 
6,982

 
$
15.45

Released
 
(1,362
)
 
$
14.54

Forfeited
 
(1,768
)
 
$
10.71

Balance as of March 29, 2015
 
11,687

 
$
12.82

Granted
 
2,523

 
$
14.49

Released
 
(847
)
 
$
13.10

Forfeited
 
(606
)
 
$
11.92

Balance as of June 28, 2015
 
12,757

 
$
13.23

 

The PSUs and RSUs under Cypress's 2014 PARS Program 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 service and performance milestones set by the Compensation Committee.

The PSUs and RSUs under Cypress’s 2015 PARS Program were granted by the Company in the first and second quarters of fiscal 2015 with an extended measurement period of three years . These awards were issued to certain senior-level employees and the PSU portion of the award can be earned over a period of  one  to  three years , subject to the achievement of certain performance milestones that were set by the Compensation Committee in advance. Each participating employee is given a target number of PSUs under each milestone, which can be earned independent of the outcomes of other milestones. Any portion of PSUs not earned due to not achieving the performance milestone is forfeited and returned to the pool. The following milestones for the 2015 PSUs were approved by the Compensation Committee:

Total Shareholder Return (TSR) Factor, for the applicable measurement period of one , two and three years as compared to a group of peer companies chosen by the Compensation Committee. If the Company ranks in the 65th percentile of peers, 100% of the target PSUs is earned by employees. If the Company exceeds a 65th percentile ranking, employees can earn as high as 200% of the target RSUs. If the Company ranks in the 25th percentile or less, no PSUs are earned by employees under this milestone. If TSR is negative for the measurement period, only 50% of target PSUs are earned.


24

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

Realization of an annualized target Merger synergy over the three year period from fiscal 2015 to fiscal 2017. Employees are eligible to earn their target PSUs if the cost synergies associated with the Merger achieves the stated goal for each of the years between fiscal 2015 and 2017. The payouts under this milestone are adjusted on a linear scale between the 0% payout and the 100% payout and then between the 100% payout to 200% maximum payout, depending on the achievement of synergy savings target as specified in the grant agreement.

Achievement of target non-GAAP earnings per share (EPS). Employees are eligible to earn their target PSUs if the Company achieves the target non-GAAP EPS for the specified periods. The payouts under this milestone are adjusted on a linear scale between the 0% payout and the 100% payout and then between the 100% payout to 200% maximum payout, depending on the achievement of this milestone. The measurement period will be for the Company’s reported non-GAAP EPS in the fourth quarter of 2015 and 2016 as well as an annual non-GAAP EPS for fiscal 2017.

In addition to PSUs subject to the milestones specified above, a portion of the grants under the 2015 PARS Program are RSUs which have service-based vesting terms under which employees are eligible to earn 100% of their RSUs if they remain an employee of the Company through specified dates between fiscal 2016 and 2018.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases certain facilities and equipment under non-cancelable operating lease agreements that expire at various dates through fiscal 2020 . 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.
As a part of the Merger, the Company has assumed the leases that were entered into by Spansion. This includes Spansion's lease for office space in San Jose, California for a new headquarters entered into on May 22, 2014, which is no longer required. The lease is for a period of 12 years , with two options to extend for periods of five years each after the initial lease term. The initial term of the lease commenced on January 1, 2015 and expires on December 31, 2026. During the six months ended June 28, 2015, the Company accrued $17.8 million for the remaining lease obligations, net of estimated sublease income, for this facility as it decided it would not occupy it and the facility would have no future economic benefit to the Company. The charges related to this accrual are included in Restructuring and Other in the Company’ Condensed Consolidated Statement of Operations for the six months ended June 28, 2015.
As of June 28, 2015 , future minimum lease payments under non-cancelable operating leases were as follows:
Fiscal Year
(In thousands)
2015 (remaining six months)
$
8,275

2016
13,086

2017
9,733

2018
5,489

2019
3,623

2020 and thereafter
24,218

Total
$
64,424


Capital Leases

In 2011, the Company entered into capital lease agreements which allow it to borrow up to $35.0 million to finance the acquisition of certain manufacturing equipment. As of June 28, 2015 , the gross value and net book value of manufacturing equipment purchased under these capital leases were approximately $20.5 million and $12.9 million , respectively. As of June 28, 2015 , the total minimum lease payments under these capital leases amounted to approximately $8.7 million .

Assets purchased under all capital leases are included in “Property, plant and equipment, net” on the Company's Condensed Consolidated Balance Sheet.
Future minimum payments by year under all the capitalized leases consist of the following:

25

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

Fiscal Year
(In thousands)
2015 (remaining six months)
$
1,521

2016
6,580

2017
600

Total minimum lease payments
8,701

Less: amount representing interest
225

Total
$
8,476

Product Warranties
The Company generally warrants its 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. The Company estimates its warranty costs based upon its 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 the Company's warranty reserve activities:
 
 
Three Months Ended
 
Six Months Ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
 
(In thousands)
Beginning balance
$
2,370

 
$
2,628

 
$
2,370

 
$
2,628

Warranties assumed as part of the Merger
1,220

 

 
1,254

 

Settlements made
(427
)
 
(208
)
 
(552
)
 
(541
)
Provisions
871

 
847

 
962

 
1,180

Ending balance
$
4,034

 
$
3,267

 
$
4,034

 
$
3,267

Equity Investment Commitments
The Company has committed to purchase additional preferred stock from a company that works in the area of advanced battery storage. In the second quarter of fiscal 2015, the Company invested an additional $5.0 million in this company. Subject to the attainment of certain milestones, the Company intends to purchase additional preferred stock of this company.
Litigation and Asserted Claims
    
On May 6, 2015, the Company entered into a confidential settlement agreement with GSI Technology, Inc. under which all outstanding patent and antitrust disputes and actions between the companies were settled. As a part of the settlement, both companies agreed to dismiss with prejudice all pending litigation. 

In the LongPath Capital, LLC (“LongPath”) appraisal case, Petitioner LongPath sought an appraisal of the fair value of the common stock shares held by LongPath prior to the Company's acquisition of Ramtron in 2012. In June 2013, the Company 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, the Company's potential exposure was limited to any premium on the purchase price that might be awarded by the court plus the interest accrued prior to June 2013. On June 30, 2015, the Delaware Court of Chancery ruled that the fair value of Ramtron as of the merger date was $3.07 per share, $0.03 below the deal price, rejecting LongPath's claim that Ramtron should have been valued at over $4.00 per share.

In a separate matter associated with Ramtron, bankruptcy proceedings are ongoing in Italy where the trustee for four bankrupt entities of Finmek S.pA. is seeking refunds of payments made by Finmek to Ramtron prior to Finmek’s bankruptcy in 2004. In November 2014, one of the courts presiding over these proceedings found that two payments should be refunded to Finmek, which currently total approximately $0.6 million , including interest and fees. We believe this ruling was made in error and intend to appeal this decision. The current stage of the proceedings and appellate process prevent an accurate prediction of the amount of an award, if any, in the trustee’s favor.


26

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

In 2013, a former employee filed a grievance against the Company seeking back pay and reinstatement or front pay. That matter was tried before an administrative law judge in July 2014. In December 2014, the administrative law judge issued a ruling in favor of the former employee for amounts totaling approximately $1.3 million . We believe the ruling was erroneous and are currently appealing the decision. The respective positions of the parties and the appellate process prevent an accurate prediction of the outcome of this matter at this time.

The Company's six-patent infringement case against LG Electronics, Inc. (“LG”) (Case No. 13-cv-04034-SBA), which was filed in August 2013, was stayed during the quarter pending the resolution of the petitions filed by LG for inter-partes review of the six patents. Pursuant to a confidential settlement agreement between the parties these matters were settled effective as of July 28, 2015. For information with respect to the settlement refer to Subsequent Events in Note 17 of Consolidated Financial Statements.

The Company has reached a settlement in the pending class action claims in three Canadian provinces relating to the original SRAM class action case that was resolved in the United States in 2010. As with the case in the United States, the Company is confident that it has not engaged in any antitrust activity, however given that it was the last remaining defendant and the cost of continued litigation would far exceed the cost of a nominal settlement, the Company agreed to settle the case and court approval of that settlement is in progress.

After our announcement of the Merger in December 2014, two separate putative class action complaints (Walter Jeter v. Spansion Inc., et. al. (No. 114CV274635) and Shiva Y. Stein v. Spansion Inc., el. al. (No. 114CV274924)) were filed in Santa Clara County Superior Court, alleging claims of breach of fiduciary duty against the Spansion’s board of directors and naming Cypress as a defendant for aiding and abetting the alleged breach of fiduciary duty. While Cypress believes these lawsuits to be meritless, Spansion and Cypress entered into a memorandum of understanding with plaintiffs, the terms of which required additional disclosures by the Company and payment of nominal attorneys’ fees to the class counsel. Final resolution of these litigations will require court approval of a final settlement agreement.

The Company is currently a party to various other legal proceedings, claims, disputes and litigation arising in the ordinary course of business. Based on its own investigations, the Company believes the ultimate outcome of the current legal proceedings, individually and in the aggregate, will not have a material adverse effect on its 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, the Company's business, financial condition, results of operations or cash flows could be materially and adversely affected.
Indemnification Obligations

The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify another party to such agreements with respect to certain matters. Typically, these obligations arise in the context of contracts that the Company has 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 the Company to challenge the other party’s claims and vigorously defend itself and the third party against such claims. Further, the Company's obligations under these agreements may be limited in terms of time, amount or the scope of its responsibility and in some instances, the Company 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 the Company's 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. Management believe that if the Company were to incur a loss in any of these matters, such loss would not have a material effect on its business, financial condition, cash flows or results of operations, although there can be no assurance of this. As of June 28, 2015 , the Company had no reason to believe a loss exceeding amounts already recognized had been incurred.
NOTE 11. DEBT AND EQUITY TRANSACTIONS
Senior Secured Revolving Credit Facility


27

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

On March 12, 2015, the Company amended and restated its existing senior secured revolving credit facility ("Credit Facility") and increased the size of the Credit Facility from $300 million to $450 million . The restated agreement also contains an option permitting the Company to arrange additional commitments of $250 million and specifies that the proceeds of these loans may be used for working capital, acquisitions, stock repurchases and general corporate purposes. The borrowings under the Credit Facility will bear interest, at the Company's option, at an adjusted base rate plus a spread of 1.25% , or an adjusted LIBOR rate plus a spread of 2.25% . The borrowings under the Credit Facility are collateralized by substantially all of the Company's assets. The financial covenants were amended to include the following conditions: 1) maximum total leverage ratio of 3.50 to 1.00 through January 1, 2017, and 3.00 to 1.00 thereafter, 2) minimum fixed charge coverage ratio of 1.00 to 1.00 . At June 28, 2015 , the Company's outstanding borrowings of $449.0 million were recorded as part of long-term liabilities and are presented as “Long-term revolving credit facility” in the Condensed Consolidated Balance Sheet. During the quarter ended June 28, 2015, the Company drew down $99.0 million under the credit facility. In connection with the amendment and restatement on March 12, 2015 , the Company wrote-off the capitalized financing costs relating to its previous facility and recorded $0.9 million in restructuring charges. The Company also incurred financing costs of $2.3 million to the new lenders of the Credit Facility which has been capitalized and recognized in other long-term assets on the Condensed Consolidated Balance Sheet. These costs will be amortized over the life of the Credit Facility.

As of June 28, 2015 , the Company was in compliance with all of the financial covenants under the Credit Facility.

2.00% Senior Exchangeable Notes
 
Pursuant to the Merger, Cypress assumed Spansion's 2.00% Senior Exchangeable Notes (the Notes) on March 12, 2015. The Notes are governed by a Supplemental Indenture, dated March 12, 2015, between the Company, Spansion and Wells Fargo Bank, National Association, as Trustee. They are fully and unconditionally guaranteed on a senior unsecured basis by the Company. The Notes will mature on September 1, 2020, unless earlier repurchased or converted, and bear interest of 2.00% per year payable semi-annually in arrears on March 1 and September 1, commencing on March 1, 2014. The Notes may be due and payable immediately in certain events of default.
 
As of June 28, 2015, the Notes are exchangeable for 179.9474 shares of common stock per $1,000 principal amount of the Notes (equivalent to an exchange price of approximately $5.56 ) subject to adjustments for dividends, anti-dilutive issuances and make-whole adjustments upon a fundamental change. A fundamental change includes a change in control, delisting of the Company’s stock and liquidation, consolidation or merger of the Company. According to the Indenture, a change in control occurs when a person or group becomes the beneficial owner directly or indirectly, of more than 50% of the Company’s common stock. In the case of a consolidation or merger, if the surviving entity continues to be listed, no change of control will be triggered. Prior to June 1, 2020, the Notes will be exchangeable under certain specified circumstances as described in the Indenture.

The Notes were valued as of March 12, 2015 as a part of the Merger and the Company separated the Notes into debt and equity components according to the accounting guidance for convertible debt instruments that may be fully or partially settled in cash upon conversion. The carrying amount of the debt component, which approximates its fair value, was estimated by using an interest rate for nonconvertible debt, with terms similar to the Notes. The excess of the principal amount of the Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted to the carrying value of the Notes over their term as interest expense using the interest method. The amount recorded to additional paid-in capital will not to be remeasured as long as it continues to meet the conditions for equity classification. As of March 12, 2015, as a part of the Merger valuation, the Company recorded $129.3 million as debt and $287.3 million as additional paid-in capital in stockholders’ equity. On June 9, 2015, the Company settled ten of the Notes in both cash and shares owing to a receipt of notice of conversion in the first quarter of fiscal 2015.
 
The net carrying amount of liability component of the Notes as of June 28, 2015 consists of the following:

 
(in thousands)

Principal amount
$
149,990

Unamortized debt discount
(19,862
)
Net carrying value
$
130,128


28

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

The following table presents the interest expense recognized on the Notes during the three and six months ended June 28, 2015 :
 
Three Months Ended
 
Six Months Ended
 
June 28, 2015
 
(in thousands)
Contractual interest expense at 2% per annum
$
742

 
$
889

Accretion of debt discount
820

 
983

Total
$
1,562

 
$
1,872


Capped Calls

In connection with the Notes, Spansion had entered into capped call transactions in fiscal 2013 with certain bank counterparties to reduce the potential dilution to their common stock upon exchange of the Notes. The fair value of the capped call assumed as a part of the Merger was $25.3 million . In March 2015, the Company and the counterparties agreed to terminate and unwind the capped calls and the Company received a cash settlement of $25.3 million which has been recorded as a credit to additional paid-in-capital on the Condensed Consolidated Balance Sheet as of June 28, 2015 .
Equipment Loans
In December 2011, the Company 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 $4.5 million outstanding balance as of June 28, 2015 , approximately $3.0 million was recorded as part of “Other current liabilities” and $ 1.5 million was recorded as part of “Other long-term liabilities” on the Condensed Consolidated Balance Sheet.
The schedule of principal payments under these equipment loans is as follows:
 
 
 
Fiscal Year
(In thousands)
2015 (remaining six months)
$
2,962

2016
1,511

Total
$
4,473

$400 Million Stock Buyback Program:
For the three months and six months ended June 28, 2015 , the Company made repurchases under this program of approximately $10.4 million and $10.5 million , respectively. Since the Company announced its $400 million stock buyback program in September 2011 through the end of the second quarter of fiscal 2015, it used approximately $327.3 million from this program to repurchase approximately 24.4 million shares at an average share price of $13.41 . As of June 28, 2015 , the total remaining dollar amount of shares that may be repurchased under the program was approximately $72.7 million .
Dividends
On May 13, 2015, the Company's Board of Directors approved a cash dividend of $0.11 per share payable to holders of record of its common stock at the close of business day on June 25, 2015. This cash dividend was paid on July 16, 2015 and totaled approximately $36.7 million which was accrued for and shown as “Dividends payable” on the Condensed Consolidated Balance Sheet as of June 28, 2015 .
Future Debt Payments
For each of the next five years and beyond, the scheduled maturities of the Company's debt including interest as of June 28, 2015, are as follows:

29

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

Fiscal Year
(In thousands)
2015 (remaining six months)
$
6,978

2016
13,955

2017
13,955

2018
13,955

2019
13,955

2020 and beyond
601,992

Total
$
664,790


NOTE 12. 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 income (loss)
 
 (in thousands)
Balance as of December 28, 2014
$
(52
)
 
$
6

 
$
(46
)
Other comprehensive income (loss) before reclassification
(1,715
)
 

 
(1,715
)
Amounts reclassified to earnings
552

 

 
552

Balance as of June 28, 2015
$
(1,215
)
 
$
6

 
$
(1,209
)

NOTE 13. FOREIGN CURRENCY DERIVATIVES

The Company entered into multiple foreign exchange forward contracts to hedge certain operational exposures resulting from movements in Japanese yen and euro exchange rates. The Company’s hedging policy is designed to mitigate the impact of foreign currency exchange rate movements on its operating results. Some foreign currency forward contracts were considered to be economic hedges that were not designated as hedging instruments while others were designated as cash flow hedges. Whether designated or undesignated, these forward contracts protect the Company against the variability of forecasted foreign currency cash flows resulting from revenues, expenses and net asset or liability positions designated in currencies other than the U.S. dollar and they are not speculative in nature.

Cash Flow Hedges

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

30

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

The Company evaluates hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and records any ineffective portion of the hedge in interest and other income (expense), net in its Condensed Consolidated Statements of Operations.
  
At June 28, 2015 , the Company had outstanding forward contracts to buy approximately ¥3,396.0 million for $28.7 million .

Non-designated hedges

Total notional amounts of outstanding contracts were as summarized below:
        
Buy / Sell
June 28, 2015
 
 
(in millions)
Japanese Yen / US dollar
¥94.0 / $0.8
 
US dollar / EUR
$4.0 /€4.3
 

The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three months and six months ended June 28, 2015 was immaterial. The gross fair values of derivative instruments on the Condensed Consolidated Balance Sheets as of June 28, 2015 was immaterial.