Cypress Semiconductor Corporation
CYPRESS SEMICONDUCTOR CORP /DE/ (Form: 10-Q, Received: 11/14/2016 17:49:09)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 2016
OR
 ☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10079  
 
CYPRESS SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)  
 
 
Delaware
 
94-2885898
 
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
198 Champion Court, San Jose, California 95134
(Address of principal executive offices and zip code)
(408) 943-2600
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       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      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
 
 
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  
The total number of outstanding shares of the registrant’s common stock as of November 1, 2016 was 322,699,760.











INDEX
 
 
 
Page
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 


3




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. These statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the forward-looking statements. Forward-looking statements include, but are not limited to, statements relating to: the expected timing and costs related to the integration of Cypress Semiconductor Corporation (“Cypress” or the “Company”) with Spansion Inc. (“Spansion”) as a result of our merger; our ability to execute on planned synergies related to the merger with Spansion and our related restructuring activities; the anticipated timing of the payout of the remaining Spansion restructuring reserve balance; the anticipated technological feasibility of our in-process research and development; estimated further amortization expense related to intangible assets; our expectations regarding our active litigation matters and our intent to defend ourselves in those matters; events that could cause a material change in unrecognized tax benefits and our ability to recognize those benefits; the specific strategies we are pursuing to achieve our goals on revenue growth and profitability; our ability to position the Company in high-growth markets; the value of non-GAAP financial measures to investors; the estimates we make in preparing our financial statements, including but not limited to those relating to our critical accounting policies; the expected impact on our operating results of changes in market interest rates applicable to our investment portfolio; our expectations regarding dividends and the tax treatment of dividends for recipients; our expectations regarding stock repurchases; our foreign currency exposure and the impact exchange rates could have on our operating results; the adequacy of our cash and working capital positions; and the value and liquidity of our investments. We use words such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and similar expressions to identify forward-looking statements. Such forward-looking statements are made as of the date hereof and are based on our current expectations, beliefs and intentions regarding future events or our financial performance and the information available to management as of the date hereof. We assume no responsibility to update any such forward-looking statements. Our actual results could differ materially from those expected, discussed or projected in the forward-looking statements contained in this Quarterly Report on Form 10-Q for any number of reasons, including, but not limited to: global economic and market conditions; business conditions and growth trends in the semiconductor market; our ability to compete effectively; the volatility in supply and demand conditions for our products, including but limited to the impact of seasonality on supply and demand; our ability to develop, introduce and sell new products and technologies; potential problems relating to our manufacturing activities and restructuring initiatives; the impact of acquisitions, including but limited to the continuing integration of Spansion and the recent acquisition of Broadcom’s IoT business; our ability to attract and retain key personnel; and/or the materialization of one or more of the risks set forth in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q and in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016.



4




ITEM 1. FINANCIAL STATEMENTS

CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
October 2, 
 2016
 
January 3, 
 2016
 
(In thousands, except
per-share amounts)
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
86,656

 
$
226,690

Short-term investments
990

 
871

Accounts receivable, net
349,837

 
292,736

Inventories
247,735

 
243,595

Assets held for sale
31,904

 

Other current assets
132,718

 
86,880

Total current assets
849,840

 
850,772

Property, plant and equipment, net
300,817

 
425,003

Goodwill
1,468,104

 
1,738,882

Intangible assets, net
927,454

 
789,195

Other long-term assets
343,609

 
200,409

Total assets
$
3,889,824

 
$
4,004,261

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
228,851

 
$
143,383

Accrued compensation and employee benefits
57,577

 
54,850

Price adjustment reserve for sales to distributors
121,509

 
73,370

Dividends payable
35,350

 
36,520

Current portion of debt
29,757

 
14,606

Deferred margin on sales to distributors
14,888

 
52,712

Other current liabilities
148,157

 
152,955

Total current liabilities
636,089

 
528,396

Deferred income taxes and other tax liabilities
47,311

 
51,737

Revolving credit facility and long-term debt
1,192,299

 
673,659

Other long-term liabilities
40,703

 
37,784

Total liabilities
1,916,402

 
1,291,576

Commitments and contingencies (Note 13)

 

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; 495,264 and 481,912 shares issued; and 321,799 and 332,276 shares outstanding at October 2, 2016 and January 3, 2016 respectively
4,732

 
4,637

Additional paid-in-capital
5,675,399

 
5,623,411

Accumulated other comprehensive gain / (loss)
391

 
(227
)
Accumulated deficit
(1,372,666
)
 
(758,780
)
Stockholders’ equity before treasury stock
4,307,856

 
4,869,041

Less: Shares of common stock held in treasury, at cost; 173,465 and 149,636 shares at October 2, 2016 and January 3, 2016 respectively
(2,335,310
)
 
(2,148,193
)
Total Cypress stockholders’ equity
1,972,546

 
2,720,848

Non-controlling interests
876

 
(8,163
)
Total equity
1,973,422

 
2,712,685

Total liabilities and equity
$
3,889,824

 
$
4,004,261

 

The accompanying notes are an integral part of these condensed consolidated financial statements.
5





CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
 
(In thousands, except per-share amounts)
Revenues
$
523,845

 
$
463,810

 
$
1,392,936

 
$
1,157,725

Costs and expenses:
 

 
 

 
 

 
 

Cost of revenues
325,225

 
303,434

 
909,753

 
900,969

Research and development
95,411

 
75,960

 
239,549

 
207,709

Selling, general and administrative
84,209

 
76,159

 
240,544

 
238,459

Amortization of intangible assets
54,849

 
30,827

 
122,641

 
74,101

Impairment of acquisition-related intangible assets

 

 
33,944

 

Impairment related to assets held for sale
35,259

 

 
35,259

 

Goodwill impairment charge

 

 
488,504

 

(Gain) on divestiture of TrueTouch Mobile ®  business

 
(66,472
)
 

 
(66,472
)
(Gain) related to investment in Deca Technologies Inc.
(112,774
)
 

 
(112,774
)
 

Restructuring costs
7,970

 
2,924

 
8,894

 
88,678

Total costs and expenses
490,149

 
422,832

 
1,966,314

 
1,443,444

Operating income (loss)
33,696

 
40,978

 
(573,378
)
 
(285,719
)
Interest expense
(20,698
)
 
(4,475
)
 
(34,570
)
 
(11,599
)
Other income (expense), net
3,774

 
(2,609
)
 
4,079

 
(4,970
)
Income (loss) before income taxes and non-controlling interest
16,772

 
33,894

 
(603,869
)
 
(302,288
)
Income tax provision
(3,304
)
 
(2,303
)
 
(1,825
)
 
(1,235
)
Share in net loss of equity method investee
(4,233
)
 
(1,800
)
 
(8,879
)
 
(4,818
)
Net income (loss)
9,235

 
29,791

 
(614,573
)
 
(308,341
)
Net loss attributable to non-controlling interests
176

 
521

 
689

 
1,804

Net income (loss) attributable to Cypress
$
9,411

 
$
30,312

 
$
(613,884
)
 
$
(306,537
)
Net loss per share attributable to Cypress:
 

 
 

 
 

 
 

Basic
$
0.03

 
$
0.09

 
$
(1.93
)
 
$
(1.06
)
Diluted
$
0.03

 
$
0.08

 
$
(1.93
)
 
$
(1.06
)
Cash dividend declared per share
$
0.11

 
$
0.11

 
$
0.33

 
$
0.33

Shares used in net loss per share calculation:
 

 
 

 
 

 
 

Basic
321,276

 
335,299

 
318,118

 
289,197

Diluted
343,718

 
357,657

 
318,118

 
289,197

 


The accompanying notes are an integral part of these condensed consolidated financial statements.
6





CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
 
(In thousands)
Net income (loss)
$
9,235

 
$
29,791

 
$
(614,573
)
 
$
(308,341
)
Other comprehensive (loss) income:
 

 
 

 
 

 
 

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

 
3

 

 
29

Net unrealized gain (loss) on cash flow hedges:
 

 
 

 
 

 
 

Net unrealized gain (loss) arising during the period
(78
)
 
909

 
(10,707
)
 
(832
)
Net loss reclassified into earnings for revenue hedges(effective portion)
6,116

 
(1,412
)
 
11,243

 
(1,021
)
Net loss reclassified into earnings for revenue hedges   (ineffective portion)

 
80

 
(173
)
 
80

Net loss (gain) reclassified into earnings for expense hedges (effective portion)
(6,776
)
 
1,361

 
678

 
1,523

Provision for income tax
(424
)
 

 
(424
)
 

Net unrealized gain (loss) on cash flow hedges
(1,162
)
 
938

 
617

 
(250
)
Other comprehensive gain (loss)
(1,162
)
 
941

 
617

 
(221
)
Comprehensive income (loss)
8,073

 
30,732

 
(613,956
)
 
(308,562
)
Comprehensive loss attributable to non-controlling interest
176

 
521

 
689

 
1,804

Comprehensive income (loss) attributable to Cypress
$
8,249

 
$
31,253

 
$
(613,267
)
 
$
(306,758
)
 


The accompanying notes are an integral part of these condensed consolidated financial statements.
7




CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)  
 
Nine Months Ended
 
October 2, 2016
 
September 27, 2015
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net loss
$
(614,573
)
 
$
(308,341
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Stock-based compensation expense
69,700

 
71,418

Depreciation and amortization
197,040

 
166,281

Impairment of acquisition-related intangible assets
33,944

 

Impairment related to assets held for sale
35,259

 

Impairment of goodwill
488,504

 

Loss on disposal of property and equipment
5,556

 
28

(Gain) related to investment in Deca Technologies
(112,774
)
 

(Gain) on divestiture of TrueTouch® Mobile business

 
(66,472
)
Share in net loss of equity method investees
8,879

 
4,818

Accretion of interest expense on Senior Exchangeable Notes and amortization of debt and financing costs on other debt
8,094

 
2,512

Loss on assets held under deferred compensation plan
818

 
1,120

Loss on trading securities
598

 
3,359

Restructuring and other costs
9,406

 
9,175

Changes in operating assets and liabilities, net of effects of change in the method of investment in subsidiary, acquisitions and divestitures:
 

 
 

Accounts receivable
(57,822
)
 
(117,876
)
Inventories
5,883

 
252,405

Other current and long-term assets
(28,249
)
 
(24,561
)
Price adjustment reserve for sales to distributors
68,797

 
49,655

Accounts payable and other liabilities
67,273

 
(38,990
)
Deferred margin on sales to distributors
(58,700
)
 
(37,824
)
Net cash provided by (used in) operating activities
127,633

 
(33,293
)
Cash flows from investing activities:
 

 
 

Acquisitions, net of cash acquired
(550,000
)
 
(105,130
)
Proceeds from maturities of available-for-sale investments
40,000

 
17,377

Proceeds from sales of available-for-sale investments
45,904

 

Purchases of marketable securities
(80,202
)
 
(1,530
)
Contribution, net of distributions to deferred compensation plan
(1,711
)
 
1,634

Acquisition of property, plant and equipment
(45,509
)
 
(37,979
)
Cash paid for equity and cost method investments, and other
(20,540
)
 
(17,744
)
Proceeds from divestiture of TrueTouch® Mobile business

 
88,635

Cash received on repurchase of shares by Deca Technologies
20,627

 

Deconsolidation of investment in Deca
(3,000
)
 

Net cash used in investing activities
(594,431
)
 
(54,737
)
Cash flows from financing activities:
 

 
 

Borrowings under revolving credit facility
160,000

 
398,000

Repayment of revolving credit facility
(282,000
)
 
(176,000
)
Repayment of Term Loan A
(3,750
)
 

Repurchase of common stock
(175,694
)
 
(10,382
)
Payment of dividends
(106,060
)
 
(91,081
)
Proceeds from employee equity awards
43,520

 
41,802

Borrowings under Term Loan B
450,000

 

Repayment of equipment leases, loans, net and other
(13,450
)
 
(7,020
)
Proceeds from issuance of 4.50% Senior Exchangeable Notes
286,023

 

Purchase of capped calls
(8,165
)
 

Proceeds from settlement of capped calls

 
25,293

Financing costs related to issuance of 4.50% Senior Exchangeable Notes
(6,430
)
 


The accompanying notes are an integral part of these condensed consolidated financial statements.
8




Financing costs related to Term Loan B and other debt
(17,230
)
 
(2,559
)
Net cash provided by financing activities
326,764

 
178,053

Net (decrease) increase in cash and cash equivalents
(140,034
)
 
90,023

Cash and cash equivalents, beginning of period
226,690

 
103,736

Cash and cash equivalents, end of period
$
86,656

 
$
193,759

Supplemental Cash Flows Disclosures:
 

 
 

Dividends payable
$
35,350

 
$
36,884

Unpaid purchase of property, plant and equipment
$
3,370

 
$
8,951

Cash paid for interest
$
21,310

 
$
10,123

Cash paid for income taxes
$
7,220

 
$
4,753

 

The accompanying notes are an integral part of these condensed consolidated financial statements.
9




CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Years
Cypress Semiconductor Corporation (“Cypress” or the “Company”) reports on a fiscal-year basis. The Company ends its quarters on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. Fiscal 2016 has 52 weeks and Fiscal 2015 had 53 weeks. The third quarter of fiscal 2016 ended on October 2, 2016 and the third quarter of fiscal 2015 ended on September 27, 2015.
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments of a normal, recurring nature, which are necessary to state fairly the financial information included therein. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Cypress's Annual Report on Form 10-K for the fiscal year ended January 3, 2016. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
On March 12, 2015, the Company completed the merger (“Spansion Merger”) with Spansion Inc. (“Spansion”) pursuant to the Agreement and Plan of Merger and Reorganization, as of December 1, 2014 (the "Merger Agreement"), for a total consideration of approximately $2.8 billion . Consequently, the financial condition and results of operations includes the financial results of legacy Spansion beginning March 12, 2015.  The comparability of our results for the nine months ended October 2, 2016 to the same periods in fiscal 2015 is impacted by the Spansion Merger.
On July 5, 2016, the Company completed its acquisition of certain assets primarily related to the Internet of Things business of Broadcom Corporation ("IoT business") pursuant to an Asset Purchase Agreement with Broadcom, dated April 28, 2016, for a total consideration of approximately $550 million . Consequently, the financial condition and results of operations includes the financial results of IoT business beginning July 5, 2016. The comparability of our results for the nine months ended October 2, 2016 to the same periods in fiscal 2015 is impacted by this acquisition. See Note 2 to the Notes to the Condensed Consolidated Financial Statements.
Effective as of July 29, 2016, the Company has changed the method of accounting for its investment in Deca Technologies Inc. ("Deca") from consolidation to the equity method of accounting as a result of the investment by certain third party investors in Deca. The comparability of our results for the nine months ended October 2, 2016 to the same periods in fiscal 2015 is impacted by the said change. See Note 6 for further details.
Certain balances included in the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Cash Flows for prior periods have been reclassified to conform to the current period presentation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The condensed consolidated results of operations for the three and nine months ended October 2, 2016 are not necessarily indicative of the results to be expected for the full fiscal year.

During the three months ended October 2, 2016, the Company recorded out-of-period correcting adjustments primarily related to cut-off errors for foundry manufacturing costs, errors related to stock rotation balances, prior accounting for the non-controlling interest in Deca, and the over accrual of certain employee bonuses.   For the three months ended October 2, 2016, these out-of-period corrections resulted in a $6.6 million increase in the cost of revenues, a $3.7 million decrease in research and development expenses, and a $2.1 million reduction in the recognized gain on the investment in Deca, for an aggregate reduction in net income of $5.0 million . Of the aggregate out-of-period errors, $4.0 million , $8.3 million and $4.3 million of the cost of revenues cut-off errors originated in the quarter and six months ended July 3, 2016 and the quarter ended April 3, 2016, respectively, whereas the errors related to the stock rotation balances, employee bonuses and accounting for the non-controlling interests primarily related to prior fiscal years.  The Company has assessed the impact of these errors and concluded that the amounts were not material, either individually or in the aggregate, to any prior periods financial statements and the impact of

10




correcting these errors in the three months ended October 2, 2016 is not material to the current consolidated financial statements or expected to be material to the full year fiscal 2016 financial statements.
Summary of Significant Accounting Policies
Revenue Recognition
The Company has historically recognized a significant portion of revenue through distributors at the time the distributor resold the product to its end customer (also referred to as the sell-through basis of revenue recognition) given the difficulty in estimating the ultimate price of these product shipments and amount of potential returns. The Company continuously reassesses its ability to reliably estimate the ultimate price of these products and, over the past several years, has made investments in its systems and processes around its distribution channel to improve the quality of the information it receives from its distributors. Given these ongoing investments, and based on the financial framework we use for estimating potential price adjustments, in the fourth quarter of 2014 the Company began recognizing revenue on certain product families and with certain distributors (less its estimate of future price adjustments and returns) upon shipment to the distributors (also referred to as the sell-in basis of revenue recognition).  
During the three months ended October 2, 2016 , the Company did not recognize any incremental revenue from conversion of new product families to the sell-in revenue recognition model. During the three months ended September 27, 2015 , the Company recognized an incremental $17.3 million of revenue on additional product families for which revenue was previously recognized on a sell-through basis as it determined that it could reasonably estimate returns and pricing concessions at the time of shipment to distributors. This change resulted in a benefit to net income of approximately $9.4 million for the three months ended September 27, 2015 , or $0.03 per basic and diluted share.

During the nine months ended October 2, 2016 , the Company recognized approximately $46.4 million of incremental revenue from this change in revenue recognition, which resulted in a reduction of the Company’s net loss of approximately $15.1 million for the nine months ended October 2, 2016 , or approximately $0.05 per basic and $0.04 per diluted share. During the nine months ended September 27, 2015 , the Company recognized approximately $39.1 million of incremental revenue from this change, which resulted in a benefit to net income of approximately $21.4 million for the nine months ended September 27, 2015 , or approximately $0.07 per basic and diluted share.  

During the three months ended October 2, 2016 , the Company recognized approximately $359.2 million or 93.3% of distribution revenue on a sell-in basis. During the three months ended September 27, 2015 , the Company recognized approximately $235.0 million or 71.0% of distribution revenue on a sell-in basis. During the nine months ended October 2, 2016 , the Company recognized approximately $899.2 million or 89.4% of distribution revenue on a sell-in basis. During the nine months ended September 27, 2015 , the Company recognized approximately $401.0 million or 57.0% of distribution revenue on a sell-in basis.
Net income (loss) per Share
Basic net income (loss) per share is calculated by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt, using the treasury stock method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.
Convertible debt
In accounting for each series of Senior Exchangeable Notes at issuance, the Company separated the Notes into debt and equity components according to accounting standards codification ("ASC") 470-20 for convertible debt instruments that may be fully or partially settled in cash upon conversion. The carrying amount of the debt component, which approximates its fair value, was estimated by using an interest rate for non-convertible debt, with terms similar to the Notes. The excess of the principal amount of the Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted to the carrying value of the Notes over their term as interest expense using the effective interest method. In accounting for the transaction costs incurred relating to issuance of the Notes, the Company allocated the costs of the offering in proportion to the fair value of the debt and equity recognized in accordance with the accounting standards. The transaction costs allocated to the debt are being amortized as interest expense over the term of the Notes.

11




In accounting for the cost of the capped call transaction entered in connection with the issuance of the Senior Exchangeable Notes, the Company included the cost as a net reduction to additional paid-in capital in the stockholders’ equity section of the consolidated balance sheet, in accordance with the guidance in ASC 815-40 Derivatives and Hedging-Contracts in Entity’s Own Equity.  See Note 11 for further details.

Assets Held for Sale

The Company considers properties to be assets held for sale when management approves and commits to a plan to actively market a property or group of properties for sale. Assets held for sale are recorded initially at the lower of its carrying value or its estimated fair value, less estimated costs to sell. Upon designation as an asset held for sale, the Company stops recording depreciation expense on such asset. Costs to sell a disposal group include incremental direct costs to transact the sale and represent the costs that result directly from and are essential to a sale transaction that would not have been incurred by the entity had the decision to sell not been made.

The properties that are held for sale prior to the sale date are classified as held for sale and would be presented separately in the appropriate asset and liability sections of the balance sheet, unless the Company will have continuing involvement after the sale. See Note 5 for further details.

Recent Accounting Pronouncements

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

In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, "Revenue from Contracts with Customers." This standard update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The guidance is effective for annual reporting periods including interim reporting periods beginning after December 15, 2017. Early adoption is permitted for annual reporting periods including interim reporting periods beginning after December 15, 2016. As the new standard will supersede substantially all existing revenue guidance affecting the Company under GAAP, it could impact revenue and cost recognition on sales across all the Company's business segments, in addition to its business processes and its information technology systems. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements and related disclosures and has not selected the transition method.

In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-15, "Presentation of Financial Statements - Going Concern." The amendment requires that an entity's management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. If conditions or events raise substantial doubt about an entity's ability to continue as a going concern additional disclosure is required to enable users of the financial statements to understand the conditions or events, management's evaluation of the significance of those conditions and management's plans to that are intended to alleviate or management's plans that have alleviated substantial doubt. The amendment is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company does not believe that the adoption of this guidance will have any material impact on its consolidated financial statements.
        
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. This ASU is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements and related disclosures.

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

12





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

In March 2016, the FASB issued ASU 2016-07, “Investments – Equity and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The new guidance requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. Also, for an available for sale investment, the Company should recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The new guidance will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. The Company does not believe the adoption of the guidance will have a material impact on its consolidated financial statements upon adoption.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for share-based payments transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-15, Statement of Cash Flows (Topic 320): Classification of certain cash receipts and cash payments. The updated guidance changes how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The update to the standard is effective for the Company beginning January 1, 2018, with early application permitted. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements.
 
 
NOTE 2. ACQUISITION

On July 5, 2016, the Company completed its acquisition of certain assets primarily related to the IoT business of Broadcom Corporation (“Broadcom”) pursuant to an Asset Purchase Agreement, dated April 28, 2016. In connection with the closing of the transaction, the Company paid Broadcom $550 million in cash. The results of business acquired as part of this acquisition is reported in the Company’s Data Communications Division.
    The acquisition was accounted for using the purchase method of accounting. During the three months and nine months ended October 2, 2016 approximately $5.9 million and $7.0 million in expense were incurred as acquisition expenses related to the IoT business and were recorded in Selling, general and administrative line item in the Condensed Consolidated Statements of Operations.
The table below represents the preliminary allocation of the purchase price to the net assets acquired based on their estimated fair values as of July 5, 2016:

13




 
 
Fair Values
 
 
(in thousands)
Intangible assets
 
$
295,400

Property, plant and equipment
 
16,256

Inventories
 
11,655

Other current assets
 
6,532

Other long-term assets
 
4,203

Goodwill
 
217,726

Total assets acquired
 
$
551,772

Other current liabilities
 
(1,199
)
Other long-term liabilities
 
(573
)
Total liabilities assumed
 
(1,772
)
Fair value of net assets acquired
 
$
550,000



The purchase price has been allocated based on the estimated net tangible and intangible assets of the IoT business that existed on the date of the acquisition. The fair value of identifiable intangible assets acquired was based on estimates and assumptions made by management at the time of the acquisition. As additional information becomes available, the Company may revise its preliminary purchase price allocation and such revisions or changes may be material.
Identifiable intangible assets
The table below shows the valuation of the intangible assets acquired from Broadcom along with their estimated remaining useful lives:
 
 
As of October 2, 2016
 
 
Gross
 
Accumulated Amortization
 
Net
 
Estimated life
 
 
(in thousands)
 
(in years)
Existing Technology
 
$
146,600

 
$
(9,162
)
 
$
137,438

 
4
In-Process Research and Development Technology
 
101,700

 

 
101,700

 
N/A
Backlog
 
14,800

 
(11,100
)
 
3,700

 
6
Customer Relationships
 
20,000

 
(500
)
 
19,500

 
10
License Agreements
 
3,700

 
(925
)
 
2,775

 
1
Trademarks
 
8,600

 
(538
)
 
8,062

 
4
Total intangible assets
 
$
295,400

 
$
(22,225
)
 
$
273,175

 
 

In-process research and development ("IPR&D") consists of 6 projects. These projects are expected to be completed over the next 1 year. The estimated remaining costs to complete the IPR&D projects were approximately $8.9 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 which are expected to be approximately 4 years.

Goodwill
The excess of the fair value of the purchase 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. Goodwill was allocated to the Company’s Data Communications Division. The goodwill resulting from the acquisition is expected to be deductible for tax purposes.
Pro forma consolidated results of operations

14




The following unaudited pro forma consolidated results of operations for the three months and nine months ended October 2, 2016 and September 27, 2015 assume that the acquisition had occurred at the beginning of fiscal year 2015. The pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment, adjustments to stock-based compensation expense, and interest expense for the incremental indebtedness incurred, amortization of the step up to fair value of acquired inventory and the acquisition 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 acquisition actually occurred at the beginning of fiscal year 2015 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
 
Nine Months Ended
 
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
 
(in thousands, except per share amount)
Revenues
 
$
523,845

 
$
516,245

 
$
1,487,952

 
$
1,299,100

Net income (loss)
 
$
29,353


$
(688
)

$
(661,411
)

$
(438,778
)
Net loss per share attributable to Cypress:
 
 
 
 
 
 
 
 
Basic
 
$
0.09

 
$

 
$
(2.08
)
 
$
(1.52
)
Diluted
 
$
0.09

 
$

 
$
(2.08
)
 
$
(1.52
)



NOTE 3. GOODWILL
 
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company has four reporting units of which two , Memory Products Division (MPD) and Programmable Systems Division (PSD), carried goodwill in the amounts of $770.0 million and $968.8 million respectively, as of January 3, 2016.
 
During the second quarter of fiscal 2016, the Company concluded that a combination of factors, including (a) decreases in our forecasted operating results when compared with the expectations of the PSD reporting unit at the time of the Merger, primarily in consumer markets as the Company has subsequently increased its focus on the automotive and industrial end markets, (b) evaluation of business priorities due to recent changes in management, and (c) certain market conditions necessitated a quantitative impairment analysis for the carrying value of the Goodwill related to PSD which resulted in an impairment charge of $488.5 million .  
 
As the first step of the quantitative test (“Step 1”), the Company estimated the fair value of the net assets, including goodwill related to PSD. In estimating these fair values, a combination of a market approach and an income approach was utilized. This combination was deemed to be the best indication of the reporting unit’s estimated fair value in an orderly transaction between market participants and is consistent with the methodology of the Company used for the goodwill impairment tests in prior years. In performing the Step 1 analysis in the second quarter of fiscal 2016, the Company applied a weighting of 75% to the income approach and 25% to the market approach. Under the market approach, the Company utilizes publicly-traded comparable company information to determine revenue and earnings multiples that are used to value the reporting units. Under the income approach, the Company determines fair value based on estimated future cash flows of the reporting unit discounted by an estimated weighted-average cost of capital, reflecting the overall level of inherent risk of the reporting unit and the rate of return an outside investor would expect to earn. The Company based cash flow projections for PSD on a forecast of cash flows and a terminal value based on perpetuity growth model for the industry. The forecast and related assumptions were derived from a recently completed five-year outlook which included adjustments arising from the changes in strategic decisions as discussed above.
 
Based on the Step 1 analysis, the Company concluded that the carrying value of PSD’s net assets exceeded their estimated fair value as of June 1, 2016, the date of the analysis.
 
The Company then performed an analysis as of June 1, 2016, as required by ASC 350 and did not note an impairment in the carrying value of the long-lived assets related to PSD.
 

15

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


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

The Company finalized the Step 2 of the goodwill impairment test in the third quarter of fiscal 2016 with no further adjustments to the goodwill impairment charge.
 
Given the partial impairment recorded in the PSD reporting unit, it is reasonably possible that even small future changes in judgments, assumptions and estimates the Company made in assessing the implied fair value of goodwill could cause the Company to determine that some or all of the remaining goodwill of the PSD reporting unit has become impaired. In addition, a future decline in market conditions and/or changes in the Company’s market share could negatively impact the market comparables, estimated future cash flows and discount rates used in the market and income approaches to determine the fair value of the reporting unit and could result in another material impairment charge in the future.
 
During the nine months ended October 2, 2016 , the Company did not note any triggering events that necessitated an impairment analysis for the MPD reporting unit.
The changes in the carrying amount of goodwill by reportable segment for the nine months ended October 2, 2016 were as follows:
 
 
MPD
 
PSD
 
DCD
 
Total
 
(in thousands)
Goodwill as of January 3, 2016 (1)
$
770,046

 
$
968,836

 
$

 
$
1,738,882

Goodwill from acquisition of IoT Business

 

 
217,726

 
$
217,726

Impairment

 
(488,504
)
 

 
(488,504
)
Goodwill as of October 2, 2016
$
770,046

 
$
480,332

 
$
217,726

 
$
1,468,104


(1)
The Company had previously recorded an impairment charge of $351.3 million in the fourth quarter of fiscal 2008.
 
NOTE 4. INTANGIBLE ASSETS
The following table presents details of the Company's intangible assets:
 
 
As of October 2, 2016
 
As of January 3, 2016
 
Gross
 
Accumulated
Amortization
 
Net (a)
 
Gross
 
Accumulated
Amortization
 
Net (a)
 
(In thousands)
Developed technology and other intangible assets
 

 
 

 
 

 
 

 
 

 
 

Acquisition-related intangible assets
$
1,073,711

 
$
(349,058
)
 
$
724,653

 
$
836,256

 
$
(226,417
)
 
$
609,839

Non-acquisition related intangible assets
12,878

 
(10,433
)
 
2,445

 
13,368

 
(10,228
)
 
3,140

Total developed technology and other intangible assets
1,086,589

 
(359,491
)
 
727,098

 
849,624

 
(236,645
)
 
612,979

In-process research and development
200,356

 

 
200,356

 
176,216

 

 
176,216

Total intangible assets
$
1,286,945

 
$
(359,491
)
 
$
927,454

 
$
1,025,840

 
$
(236,645
)
 
$
789,195

 
(a)
Included in the intangible assets are in-process research and development (“IPR&D”) projects acquired as part of the Spansion Merger and the acquisition of the IoT business, that had not attained technological feasibility and commercial production. IPR&D assets are accounted for initially as indefinite-lived intangible assets until the completion the associated research and development efforts. Upon completion, the carrying value of every related intangible asset will be amortized over the remaining estimated life of the asset beginning in the period in which the project is completed.

16





The below table presents details of the In-process-research and development assets as of October 2, 2016:
 
(in thousands)
As of January 3, 2016
$
176,216

Intangibles related to IoT business (Note 2)
101,700

Technological feasibility achieved
(43,616
)
Projects impaired
(33,944
)
As of October 2, 2016
$
200,356

 
In the first quarter of fiscal 2016, the Company recognized a $33.9 million impairment charge related to two IPR&D projects that were cancelled due to changes in the Company’s product portfolio strategy.  The impairment charges are included in the “Impairment of acquisition-related intangible assets” line in the Condensed Consolidated Statements of Operations.
 
The Company expects the remaining IPR&D projects as of October 2, 2016 to attain technological feasibility by the third quarter of fiscal 2017.
The estimated future amortization expense related to developed technology and other intangible assets as of October 2, 2016 is as follows:
 
 
(In thousands)
2016 (remaining three months)
$
47,875

2017
174,028

2018
169,316

2019
161,578

2020
107,760

2021 and future
66,541

Total future amortization expense
$
727,098

 
 

17




NOTE 5. ASSETS HELD FOR SALE

In the third quarter of fiscal 2016, the Company committed to a plan to sell its wafer manufacturing facility located in Bloomington, Minnesota, as well as a building in Austin, Texas. The sale of both of these groups of assets is expected to be completed in the next 12 months.

The carrying value of these assets held for sale at the end of the quarter reflects the lower of carrying value or fair value, net of estimated costs to sell the assets. The Company performed an analysis and estimated the fair value of the assets, less estimated selling costs, and determined the value was lower than the carrying value of the assets. As a result, based on this analysis the Company recorded an impairment charge of $35.3 million during the third quarter of fiscal 2016 to write these assets down to their estimated fair value, less selling costs.

    



NOTE 6. INVESTMENT IN DECA TECHNOLOGIES INC.

On July 29, 2016, Deca Technologies Inc. ("Deca"), a majority owned subsidiary of the Company entered into a share purchase agreement (the "Purchase Agreement"), whereby certain third-party investors purchased 41.1% of the shares outstanding at the said date for an aggregate consideration of approximately $111.4 million . Concurrently, Deca repurchased certain of its preferred shares from Cypress.
After giving effect to the above transactions, the Company's ownership in Deca was reduced to 52.2% as of July 29, 2016. As a consequence of the substantive rights afforded to third party new investors in the Purchase Agreement, including, among other things, participation on the Board of Directors of Deca, the approval of operating plans, approval of indebtedness, the Company determined that it no longer has the power to direct the activities of Deca that most significantly impact Deca's economic performance. However, since the Company continues to have significant influence over Deca's financial and operating policies, effective July 29, 2016, the investment in Deca is being accounted for as an equity method investment and is no longer a consolidated subsidiary. The carrying value of this equity method investment was determined based on the fair value of the equity in Deca, which the Company calculated to be $142.5 million . The fair value of the remaining 52.5% investment in Deca retained by the Company was calculated with reference to the investment by the third-party investors. This represents the Company's remaining investment in Deca immediately following the investments by the third-party investors. As a result of the change in the method of accounting for the Company's investment in Deca from consolidation to the equity method of accounting, the net carrying value of the assets and liabilities related to Deca, and the adjustments related to the recognition of the initial fair value of the equity method investment resulted in a gain of $112.8 million which has been reflected as "Gain related to investment in Deca Technologies Inc." in the Condensed Consolidated Statements of Operations and was calculated as follows:

 
 
(in thousands)
Consideration received
 
 
Cash proceeds received for sale of shares in Deca
 
$
20,627

 
 
 
Add:
 
 
Fair value of retained equity method investment
 
142,508

Carrying amount of non-controlling interest
 
(6,838
)
 
 
156,297

 
 
 
Less:
 
 
Carrying amount of net assets of Deca at July 29, 2016
 
(43,523
)
Gain related to investment in Deca Technologies, Inc
 
$
112,774




18




 

NOTE 7. BALANCE SHEET COMPONENTS
Accounts Receivable, Net
 
 
As of
 
October 2, 2016
 
January 3, 2016
 
(In thousands)
Accounts receivable, gross
$
352,737

 
$
295,803

Allowance for doubtful accounts receivable and sales returns
(2,900
)
 
(3,067
)
Total accounts receivable, net
$
349,837

 
$
292,736


Inventories
 
 
As of
 
October 2, 2016
 
January 3, 2016
 
(In thousands)
Raw materials
$
15,470

 
$
13,516

Work-in-process
172,265

 
192,245

Finished goods
60,000

 
37,834

Total inventories
$
247,735

 
$
243,595

 

Other Current Assets
 
 
As of
 
October 2, 2016
 
January 3, 2016
 
(In thousands)
Prepaid tooling
$
22,533

 
$
19,379

Restricted cash relating to defined benefit pension plan, current
4,158

 
3,730

Foundry service prepayments - current portion
7,489

 
5,753

Advances to suppliers
12,712

 
10,683

Prepaid royalty and licenses
18,797

 
14,281

Derivative asset
5,601

 
966

Value added tax receivable
13,219

 
12,493

Receivable from sale of TrueTouch Mobile ® business
10,000

 

Other current assets
38,209

 
19,595

Total other current assets
$
132,718

 
$
86,880

 












19





Other Long-term Assets
 
 
As of
 
October 2, 2016
 
January 3, 2016
 
(In thousands)
Investments in equity securities
$
203,810

 
$
57,030

Employee deferred compensation plan
44,722

 
41,249

Deferred tax assets
4,083

 
4,080

Long-term license
23,148

 
24,079

Restricted cash relating to defined benefit pension plan, non-current
4,206

 
3,462

Long-term receivable from sale of TrueTouch Mobile ® business

 
10,000

Foundry service prepayments - non-current portion
28,274

 
26,237

Other assets
35,366

 
34,272

Total other long-term assets
$
343,609

 
$
200,409

Other Current Liabilities
 
 
As of
 
October 2, 2016
 
January 3, 2016
 
(In thousands)
Employee deferred compensation plan
$
45,738

 
$
41,457

Restructuring accrual  - current portion (See Note 8)
11,261

 
7,270

Deferred revenue on sale of True Touch mobile ®  business

 
15,295

Rebate reserve
4,909

 
7,944

Derivative liability
4,696

 
1,283

Other current liabilities
81,553

 
79,706

Total other current liabilities
$
148,157

 
$
152,955

 
Other Long-term Liabilities
 
 
As of
 
October 2, 2016
 
January 3, 2016
 
(In thousands)
Long-term defined benefit pension plan liabilities
$
4,277

 
$
8,712

Restructuring accrual - non-current portion (See Note 8)
11,933

 
14,217

Asset retirement obligation
4,852

 
2,783

Other long-term liabilities
19,641

 
12,072

Total other long-term liabilities
$
40,703

 
$
37,784

 
 
NOTE 8. RESTRUCTURING
Spansion Integration-Related Restructuring Plan
In March 2015, the Company began the implementation of planned cost reduction and restructuring activities in connection with the Merger.
The following table summarizes the restructuring charges recorded in the Company’s Condensed Consolidated Statements of Operations for the periods presented pursuant to the Spansion Integration-Related Restructuring Plan:

20




 
Three Months Ended
 
Nine Months Ended
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
 
(In thousands)
Personnel costs
$
208

 
$
3,073

 
$
823

 
$
57,999

Lease termination costs and other related charges
35

 
(149
)
 
343

 
18,148

Impairment of property, plant and equipment

 

 

 
12,531

Total restructuring costs
$
243

 
$
2,924

 
$
1,166

 
$
88,678

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

2016 Restructuring Plan

In September 2016, the Company began implementation of a reduction in workforce ("2016 Plan") which is expected to result in elimination of approximately 450 positions worldwide across various functions. The personnel costs related to the 2016 plan during the three months ended October 2, 2016 were $7.7 million . The Company expects that the cash costs incurred under the 2016 plan will be paid out through second quarter of fiscal 2017.

The following table summarizes the restructuring charges recorded in the Company’s Condensed Consolidated Statements of Operations for the periods presented pursuant to the 2016 Plan:
Restructuring activity under the Spansion Integration – Related Restructuring Plan and the 2016 Plan, during the nine months ended October 2, 2016 was as follows:
 
 
Nine Months Ended
 
October 2, 2016
 
(In thousands)
 
Spansion Integration plan
 
2016 Plan
 
Total
Accrued restructuring balance as of January 3, 2016
$
21,487

 

 
$
21,487

Provision
270

 

 
270

Cash payments and other adjustments
(3,028
)
 

 
(3,028
)
Accrued restructuring balance as of April 3, 2016
$
18,729

 
$

 
$
18,729

Provision
$
654

 

 
654

Cash payments and other adjustments
(2,087
)
 

 
(2,087
)
Accrued restructuring balance as of July 3, 2016
$
17,296

 
$

 
$
17,296

Provision
$
243

 
7,727

 
7,970

Cash payments and other adjustments
(1,264
)
 
(808
)
 
(2,072
)
Accrued restructuring balance as of October 2, 2016
$
16,275

 
$
6,919

 
$
23,194

Current portion of the restructuring accrual
$
4,342

 
$
6,919

 
$
11,261

Non-current portion of the restructuring accrual
$
11,933

 

 
$
11,933

 
The Company anticipates that the remaining restructuring accrual balance will be paid out in cash through the second quarter of fiscal 2017 for employee terminations and over the remaining lease term through 2026 for the excess lease obligation related to the buildings Spansion had leased prior to the Merger, which the Company decided not to occupy in the post-Merger period.


21




NOTE 9. 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 October 2, 2016 and January 3, 2016:
 
 
As of October 2, 2016
 
As of January 3, 2016
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
 
(In thousands)
Financial Assets
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents:
 

 
 

 
 

 
 

 
 

 
 

Money market funds  (1)
$
103

 
$

 
$
103

 
$
119

 
$

 
$
119

Total cash equivalents
103

 

 
103

 
119

 

 
119

Short-term investments:
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit (1)

 
990

 
990

 

 
871

 
871

Total short-term investments

 
990

 
990

 

 
871

 
871

Long-term investments:
 

 
 

 
 

 
 

 
 

 
 

Marketable equity securities

 

 

 
6,516

 

 
6,516

Total long-term investments

 

 

 
6,516

 

 
6,516

Employee deferred compensation plan assets:
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents
4,255

 

 
4,255

 
3,333

 

 
3,333

Mutual funds
21,904

 

 
21,904

 
22,023

 

 
22,023

Equity securities
10,880

 

 
10,880

 
8,624

 

 
8,624

Fixed income

 
4,315

 
4,315

 

 
3,227

 
3,227

Money market funds
3,368

 

 
3,368

 
4,042

 

 
4,042

Total employee deferred compensation plan assets
40,407

 
4,315

 
44,722

 
38,022

 
3,227

 
41,249

Foreign exchange forward contracts

 
5,600

 
5,600

 

 
966

 
966

Total financial assets
$
40,510

 
$
10,905

 
$
51,415

 
$
44,657

 
$
5,064

 
$
49,721

Financial Liabilities
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange forward contracts
$

 
$
4,696

 
$
4,696

 
$

 
$
1,283

 
$
1,283

Employee deferred compensation plan liability

 
45,738

 
45,738

 

 
41,457

 
41,457

Total financial liabilities
$

 
$
50,434

 
$
50,434

 
$

 
$
42,740

 
$
42,740

 
(1)
Available for sale securities, maturing within one year .  There were no unrealized gains or losses recorded during the three and nine months ended October 2, 2016 and September 27, 2015 related to these securities.
The Company did not have any assets or liabilities measured at fair value on a recurring basis using level 3 inputs as of October 2, 2016 and January 3, 2016.  There were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the nine months ended October 2, 2016 .

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 Note 5 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 3, 2016.
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain of the Company’s assets, including Intangible Assets and Goodwill are carried at historical cost but are re-measured on a non-recurring basis and are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment).  For the nine months ended October 2, 2016 , the Company recorded a $33.9 million impairment charge related to two IPR&D projects acquired in the Merger. During the same period the Company recorded a $488.5 million goodwill impairment charge related to the PSD reporting unit based on a fair value measurement that included

22




level 3 inputs. During the three months ended October 2, 2016, the Company recorded a $35.3 million impairment charge related to assets held for sale based on a fair value measurement that included level 3 inputs. See Note 5 for further details. There were no impairment charges recorded for the three and nine months ended September 27, 2015 .
As of October 2, 2016 , the carrying value of the Company's Revolving Credit Facility was $327.0 million (See Note 11). The carrying value of the Company's Credit Facility approximates its fair value since it bears an interest rate that is comparable to rates on similar credit facilities and is determined using Level 2 inputs.
The Company's 2.00% Senior Exchangeable Notes assumed as part of the Merger are traded in the market and are categorized as a Level 2 liability. The carrying value and the estimated fair value of the said Notes as of October 2, 2016 were $134.5 million and $343.9 million , respectively.  See Note 11 for further details.
The Company’s 4.50% Senior Convertible Notes are traded in the secondary market and the fair value is determined using Level 2 inputs.  The carrying value and the estimated fair value of the debt portion of the said Notes as of October 2, 2016 were $234.0 million and $325.8 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 with carrying values of approximately $203.8 million and $50.5 million as of October 2, 2016 and January 3, 2016, respectively.
Included in the Company's non-marketable equity securities recorded within “Other long-term assets” line item of the Condensed Consolidated Balance Sheet is an investment in Enovix Corporation (“Enovix”).  This investment is being accounted for using the equity method. During the three and nine months ended October 2, 2016 , the Company invested an additional $6.0 million and $18.0 million , respectively, in Enovix, which increased the Company’s cumulative total investment to $74.5 million .  This represented 44.8% of the investee's outstanding voting shares as of October 2, 2016 . The Company held 38.7% of this investee’s voting shares as of January 3, 2016.  Also included in the Company's “Other long-term assets” line item of the Condensed Consolidated Balance Sheet is the Company's investment in Deca. Effective as of July 29, 2016, the Company has changed the method of accounting for its investment in Deca from consolidation to equity method of accounting as a result of investment by certain third party investors in Deca.  The Company held 52.2% of Deca's outstanding voting shares as of October 2, 2016. See Note 6 for further details.
The Company’s total investments in equity securities accounted for under the cost method included in long-term investments in non-marketable equity securities (investments in privately-held companies) are $11.4 million and $9.2 million , as of October 2, 2016 and January 3, 2016, respectively.

   
NOTE 10. 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.
The following table summarizes the stock-based compensation expense by line item recorded in the Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
 
Nine months ended
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
 
(In thousands)
Cost of revenues
$
4,852

 
$
4,426

 
$
14,777

 
$
13,057

Research and development
12,581

 
7,089

 
24,840

 
19,750

Selling, general and administrative
9,880

 
13,439

 
30,083

 
38,611

Total stock-based compensation expense
$
27,313

 
$
24,954

 
$
69,700

 
$
71,418

 
As of October 2, 2016 and January 3, 2016, stock-based compensation capitalized in inventories totaled $4.1 million and $4.3 million , respectively.

23




The following table summarizes the stock-based compensation expense by type of awards:
 
 
Three Months Ended
 
Nine months ended
 
October 2, 2016
 
September 27, 2015
 
October 2, 2016
 
September 27, 2015
 
(In thousands)
Stock options
$
123

 
$
341

 
$
627

 
$
1,609

Restricted stock units ("RSUs"), including Performance-Based Restricted Stock Units ("PSUs")
21,438

 
20,038

 
52,035

 
58,808

Employee Stock Purchase Plan (“ESPP”)
5,752

 
4,575

 
17,038

 
11,001

Total stock-based compensation expense
$
27,313

 
$
24,954

 
$
69,700

 
$
71,418

 
The following table summarizes the unrecognized stock-based compensation expense, net of estimated forfeitures, by type of awards:
 
 
As of
 
October 2, 2016
 
Weighted-
Average
Amortization
Period
 
(In thousands)
 
(In years)
Stock options
$
1,091

 
0.93
RSUs including PSUs
104,802

 
1.33
ESPP
11,295

 
0.57
Total unrecognized stock-based compensation expense
$
117,188

 
1.25
 

During the second quarter of fiscal 2016, the Company, as part of the severance agreement executed with Dr. T.J. Rodgers, accelerated the vesting of the PSU’s previously granted and modified the vesting conditions such that 100% of such awards effective date of his termination which was April 28, 2016. During the third quarter of fiscal 2016, as part of the severance agreements executed with two executives, the Company accelerated vesting of options, RSU's and PSU's previously granted and modified the vesting conditions. Included in the stock-based compensation expense for the nine months ended October 2, 2016 is an amount of $4.3 million related to the impact of the said modifications.
Equity Incentive Program
As of October 2, 2016 , approximately 24.4 million stock options, or 15.1 million RSUs/PSUs were available for grant as share based awards 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).  As of October 2, 2016 , there were 2.6 million shares of stock available for issuance under the ESPP plan.
Stock Options
The following table summarizes the Company's stock option activities:
 

24




 
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted Average Remaining Contractual term
 
Aggregate Intrinsic Value
 
(In thousands, except
per-share amounts)
 
(In years)
 
($ in millions)
Options outstanding as of January 3, 2016
16,840

 
$
7.99

 
 
 
 

Exercised
(191
)
 
$
4.19

 
 
 
 

Forfeited or expired
(163
)
 
$
11.35

 
 
 
 

Options outstanding as of April 3, 2016
16,486

 
$
8.00

 
 
 
 

Exercised
(7,069
)
 
$
4.85

 
 
 
 

Forfeited or expired
(97
)
 
$
12.88

 
 
 
 

Options outstanding as of July 3, 2016
9,320

 
$
10.35

 
 
 
 
Exercised
(533
)
 
$
6.31

 
 
 
 
Forfeited or expired
(108
)
 
$
13.77

 
 
 
 
Options outstanding as of October 2, 2016
8,679

 
$
10.55

 
3.24
 
$
20.30

Options exercisable as of October 2, 2016
7,145

 
$
10.41

 
2.96
 
$
18.70

 
There were no options granted for the three and nine months ended October 2, 2016 .
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 January 3, 2016
11,053

 
$
13.43

Granted
1,957

 
$
10.97

Vested
(2,903
)
 
$
14.53

Forfeited
(1,304
)
 
$
12.66

Balance as of April 3, 2016
8,803

 
$
12.63

Granted
1,316

 
$
9.31

Released
(1,073
)
 
$
12.56

Forfeited
(199
)
 
$
12.17

Balance as of July 3, 2016
8,847

 
$
12.16

Granted
7,166

 
$
11.64

Released
(591
)
 
$
12.67

Forfeited
(486
)
 
$
12.42

Balance as of October 2, 2016
14,936

 
$
11.88

 
The increase in shares granted in the third quarter of fiscal 2016 is primarily due to stock issued in connection with the acquisition of the IoT business.
On April 1, 2016, the Compensation Committee of the Company approved the grant of 0.9 million awards of restricted stock units to certain of the Company’s executive officers (the “2016 Grants”). Approximately 57% of the 2016 Grants are in the form of PSUs which vest based on achievement of two performance milestones: product development and production milestones and Gross Margin goals—over the next two years .  Such PSU grants will be capped at target levels if Cypress’s total shareholder return (TSR) is negative, even if the product development and production or Gross Margin performance milestones

25




are achieved at above-target or maximum levels. The remaining 43% of the 2016 Grants are in the form of RSUs which cliff vest based on continued service over two years .
In addition to PSUs subject to the milestones specified above, a portion of the grants under the 2015 performance based restricted stock (“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 11. DEBT
 
Total debt is comprised of the following:
 
 
 
As of
 
 
October 2, 2016
 
January 3, 2016
 
 
(In thousands)
Current portion of long-term debt
 
 

 
 

Capital lease obligations
 
$
40

 
$
6,603

Equipment loans
 
342

 
3,003

Term Loan A
 
6,875

 
5,000

Term Loan B
 
22,500

 

Current portion of long-term debt
 
29,757

 
14,606

Revolving credit facility and long-term debt
 
 

 
 

Senior Secured Credit facility
 
327,000

 
449,000

Term Loan A
 
86,505

 
92,228

Term Loan B
 
410,289

 

2.00% Senior Exchangeable Notes
 
134,500

 
131,845

4.50% Senior Exchangeable Notes
 
234,005

 

Capital lease obligations
 

 
586

Revolving credit facility and long-term debt
 
1,192,299

 
673,659

Total debt
 
$
1,222,056

 
$
688,265

 
4.50% Senior Exchangeable Notes
 
On June 23, 2016, the Company, issued at face value, $287.5 million of Senior Exchangeable Notes due in 2022 (the “Notes”) in a private placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The Notes are governed by an Indenture (“Indenture”), dated June 23, 2016, between the Company and U.S. Bank National Association, as Trustee. The Notes will mature on January 15, 2022 , unless earlier repurchased or converted, and bear interest of 4.50% per year payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2017. The Notes may be due and payable immediately in certain events of default.
 
The Notes are exchangeable for an initial exchange rate of 74.1372 shares of common stock per $1,000 principal amount of the Notes (equivalent to an initial exchange price of approximately $13.49 per share) subject to adjustments for 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. Prior to October 15, 2021, the Notes will be exchangeable under certain specified circumstances as described in the Indenture.  On or after October 15, 2021, until the close of business on the second scheduled trading day immediately preceding the maturity date, the Notes will be convertible in multiples of $1,000 principal amount regardless of the foregoing circumstances.  
 
Upon conversion, the Company may pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of its common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a pre-defined conversion value.
 
It is the Company’s intent that upon conversion, the Company would pay the holders of the Notes cash for an amount up to the aggregate principal the Notes. If the conversion value exceeds the principal amount, the Company intends to deliver shares of its common stock in respect to the remainder of its conversion obligation in excess of the aggregate principal amount

26




(“conversion spread”). Accordingly, for the purposes of calculating diluted earnings per share, there would be no adjustment to the numerator in the net income per common share computation for the cash settled portion of the Notes, as that portion of the debt liability is expected to be settled in cash. The conversion spread, will be included in the denominator for the computation of diluted net income per common share, using the treasury stock method.
 
In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. Such amount was based on the contractual cash flows discounted at an appropriate market rate for non-convertible debt at the date of issuance, which was determined to be 82.9% of the par value of the Notes or $238.3 million . The carrying amount of the equity component of $49.2 million representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is accreted to interest expense over the term of the Notes using the effective interest method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.
 
The Company incurred transaction costs of approximately $8.63 million relating to the issuance of the Notes.  The transaction costs of $8.63 million include $7.91 million of financing fees paid to the initial purchasers of the Notes, and other estimated offering expenses payable by the Company. In accounting for these costs, the Company allocated the costs of the offering in proportion to the fair value of the debt and equity recognized in accordance with the accounting standards. The transaction costs allocated to the debt component of approximately $7.2 million and are being amortized as interest expense over the term of the Notes using the effective yield method. The transaction costs allocated to the equity component of approximately $1.5 million were recorded as a reduction of additional paid-in capital.  
 
At the debt issuance date, the Convertible Notes, net of issuance costs, consisted of the following (in thousands):
 
 
June 23, 2016
Liability component
 
Principal
$
238,338

Less: Issuance cost
(7,158
)
Net carrying amount
$
231,180

Equity component
 

Allocated amount
$
49,163

Less: Issuance cost
(1,477
)
Net carrying amount
$
47,686

Convertible Notes, net of issuance costs
$
278,866

 
The following table includes total interest expense related to the Notes recognized during the three and nine months ended October 2, 2016 (in thousands):
 
 
 
Three months ended October 2, 2016
 
Nine months ended October 2, 2016
Contractual interest expense
 
$
3,270

 
$
3,624

Amortization of debt issuance costs
 
347

 
381

Accretion of debt discount
 
2,202

 
2,444

Total
 
$
5,819

 
$
6,449

 
The net liability component of the Notes as of October 2, 2016 is comprised of the following (in thousands):
 

27




 
October 2, 2016
Net carrying amount at issuance date
$
231,180

Amortization of debt issuance costs during the year
381

Accretion of debt discount during the year
2,444

 
$
234,005

 
Capped Calls
 
In connection with the issuance of the Notes, the Company entered into capped call transactions with certain bank counterparties to reduce the risk of potential dilution of the Company’s common stock upon the exchange of the Notes. The capped call transactions have a strike price of approximately $13.49 and a cap price of approximately $15.27 , and are exercisable when and if the Notes are converted. If upon conversion of the Notes, the price of the Company’s common stock is above the strike price of the capped calls, the counterparties will deliver shares of the Company’s common stock and/or cash with an aggregate value approximately equal to the difference between the price of the Company’s common stock at the conversion date (as defined, with a maximum price for purposes of this calculation equal to the cap price) and the strike price, multiplied by the number of shares of the Company’s common stock related to the capped call transactions being exercised. The capped calls expire in January 2022 . The Company paid $8.2 million for these capped calls which was recorded as a reduction of additional paid-in capital.
  Senior Secured Revolving Credit Facility
On April 27, 2016, the Company amended and restated its existing senior secured revolving credit facility ("Credit Facility") of $540 million . The borrowings under the Credit Facility 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 guaranteed by certain present and future wholly-owned material domestic subsidiaries of the Company (the “Guarantors”) and are secured by a security interest in substantially all assets of the Company and the Guarantors. The financial covenants include the following conditions: 1) maximum total leverage ratio of 4.50 x through October 2016, 4.25 x until January 1, 2017, 4.00 x until April 2, 2017 and 3.75 x thereafter, and 2) minimum fixed charge coverage ratio of 1.00 x. The Company incurred financing costs of $2.6 million related to 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 and recorded in “Interest Expense” on the Condensed Consolidated Statement of Operations.
 
As per the terms of the Credit Facility, the Company entered into a Joinder Agreement on December 22, 2015 under which the Company borrowed an additional $100 million (“Term Loan A”). Term Loan A is subject to, at the Company’s option, either an interest rate equal to (i) 3.25% over LIBOR or (ii) an interest rate equal to 2.25% over the greater of (x) the prime lending rate published by the Wall Street Journal, (y) the federal funds effective rate plus 0.50% , and (z) the LIBOR rate for a one month interest period plus 1% . The Company paid a 1.00% upfront fee in connection with the Term Loan A. Such Term Loan A is payable in quarterly installments equal to 1.25% of the principal per quarter for 2016, 1.875% of the principal per quarter for 2017 and 2018, and 2.50% of the principal per quarter thereafter, with the remaining outstanding principal amount due at final maturity on March 12, 2020 . It may be voluntarily prepaid at the Company’s option and is subject to mandatory prepayments equal to (i) 50% of excess cash flow, as defined in the agreement, (stepping down to 25% and 0% based on a decrease in total leverage ratio over time) at the end of each fiscal year, (ii) the net cash proceeds from certain asset sales (subject to certain reinvestment rights) and (iii) the proceeds from any debt issuances not otherwise permitted under the Credit Agreement. The Company incurred financing costs of $2.8 million to the lenders of Term Loan A which has been capitalized and recognized as a deduction of the Term Loan A balance in “Long-term revolving credit facility and long term debt” on the Consolidated Balance Sheet. These costs will be amortized over the life of Term Loan A and recorded in “Interest Expense” on the Condensed Consolidated Statement of Operations.

On July 5, 2016 the Company entered into a Joinder and Amendment Agreement with the guarantors party thereto, the initial incremental term loan lenders party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent . The Joinder Agreement supplements the Company’s existing Amended and Restated Credit and Guaranty Agreement, dated as of March 12, 2015, by and among the Company, the guarantors, the lenders, the Agent, and Morgan Stanley Bank, N.A., as issuing bank and others.
The Joinder and Amendment Agreement provides for the incurrence by the Company of an incremental term loan in an aggregate principal amount of $450.0 million (“Term Loan B”). The incurrence of Term Loan B is permitted as an incremental loan under the Credit Agreement and is subject to the terms of the Credit Agreement and to additional terms set forth in the Joinder and Amendment Agreement. Term Loan B will initially bear interest at (i) an adjusted LIBOR rate loan

28




plus an applicable margin of 5.50% or (ii) an adjusted base rate loan plus an applicable margin of 4.50% . Following the delivery of the Compliance Certificate and the financial statements for the period ending the last day of the third Fiscal Quarter of 2016, Term Loan B shall bear interest, at the Company’s option, at (i) an adjusted LIBOR rate plus an applicable margin of either 5.25% or 5.50% , or (ii) an adjusted base plus an applicable margin of either 4.25% or 4.50% , with the applicable margin in each case determined based on the Company’s total net leverage ratio for the trailing twelve month period ended as of the last day of the Company’s most recently ended fiscal quarter. The Company paid an upfront fee to the initial incremental lenders in an amount equal to 1.5% of the aggregate principal amount of the Incremental Term Loan funded. The Company is required to pay a prepayment premium of 1% of the principal amount prepaid if it prepays the Incremental Term Loan in certain circumstances prior to the date that is twelve months after the Closing Date. Term Loan B was fully funded on the Closing Date and matures on July 5, 2021.The Company incurred financing costs of $11.5 million to the lenders of Term Loan B which has been capitalized and recognized as a deduction of the Term Loan B balance in “Long-term revolving credit facility and long term debt” on the Condensed Consolidated Balance Sheet. These costs will be amortized over the life of Term Loan B and recorded in “Interest Expense” on the Condensed Consolidated Statement of Operations.
 
As of October 2, 2016 , $873.9 million aggregate principal amount of loans, including Term Loan A, Term Loan B and letters of credit, were outstanding under the Credit Facility.
As of October 2, 2016 , 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 “Assumed Notes”) on March 12, 2015. They are fully and unconditionally guaranteed on a senior unsecured basis by the Company. The Assumed 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. The Assumed Notes may be due and payable immediately in certain events of default.
As of October 2, 2016 , the Assumed Notes are exchangeable for 190.3 shares of common stock per $1,000 principal amount of the Notes (equivalent to an exchange price of approximately $5.26 ) 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 Assumed Notes will be exchangeable under certain specified circumstances as described in the Indenture.
Upon conversion, the Company may pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of its common stock, at its election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of our common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a pre-