Cypress Semiconductor Corporation
CYPRESS SEMICONDUCTOR CORP /DE/ (Form: 10-Q, Received: 05/02/2017 16:17:08)



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 April 2, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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
 
 
 
 
 
 
 
 
 
 
  Emerging Growth Company ☐
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐





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 April 27, 2017 was 329,438,101.






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, that involve risks and uncertainties, including, but not limited to, statements related to: our pursuit of long-term growth initiatives, including our Cypress 3.0 strategy; expected improvements in margin and our ability to successfully execute on our margin improvement plan; our manufacturing strategy; the anticipated impact of our acquisitions, dispositions and restructuring activities, including our acquisition of the IoT business of Broadcom Corporation in July 2016 and our integration with Spansion Inc. (“Spansion”) as a result of our 2015 merger with Spansion; our ability to execute on planned synergies related to the Spansion merger; anticipated growth opportunities in the automotive, wireless and industrial markets; our expectations regarding dividends and stock repurchases; our expectations regarding future technology transfers and other licensing arrangements; our efforts to license and/or monetize our intellectual property portfolio; 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 plans for our products, pricing, and marketing efforts, including the potential impact on our customer base if we were to raise our prices; our backlog as an indicator of future performance; our ability to pay down our indebtedness and continue to meet the covenants set forth in our debt agreements; 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 impact of actions by stockholder activists, including any related litigation proceedings; 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 and our ability to recognize revenue. We use words such as “may,” “will,” “should,” “plan,” “anticipate,” “believe,” “expect,” “future,” “intend,” “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. In addition, readers are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we assume no responsibility to update any such forward-looking statements. Our actual results could differ materially from those expected, discussed or projected in the forward-looking statements contained in this Quarterly Report on Form 10-Q for any number of reasons, including, but not limited to: the state and future of the general economy and its impact on the markets and consumers we serve and our investments; our ability to execute on our Cypress 3.0 strategy and our margin improvement plan; our ability to effectively integrate the Broadcom IoT assets; our ability to attract and retain key personnel; our ability to timely deliver our proprietary and programmable technologies and products; the current credit conditions; our ability to retain and expand our customer base, which may be adversely affected if we were to raise our prices; 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; the uncertainty and expense of pending litigation matters; our ability to pay down our indebtedness and continue to meet the covenants set forth in our debt agreements; 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 internal startups; 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 1, 2017.





4




ITEM 1. FINANCIAL STATEMENTS

CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
April 2, 
 2017
 
January 1, 
 2017
 
(In thousands, except
per-share amounts)
Current assets:
 

 
 
Cash and cash equivalents
$
121,500

 
$
120,172

Accounts receivable, net
317,276

 
333,037

Inventories
324,978

 
287,776

Assets held for sale

 
30,796

Other current assets
118,541

 
122,162

Total current assets
882,295

 
893,943

Property, plant and equipment, net
293,055

 
297,266

Goodwill
1,439,472

 
1,439,472

Intangible assets, net
855,602

 
904,561

Equity method investments
189,210

 
188,687

Other long-term assets
147,273

 
147,942

Total assets
$
3,806,907

 
$
3,871,871

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
265,524

 
$
241,424

Accrued compensation and employee benefits
63,125

 
60,552

Price adjustment and other revenue reserves
161,071

 
154,525

Dividend payable
36,217

 
35,506

Current portion of long-term debt
30,036

 
30,152

Other current liabilities
138,057

 
180,298

Total current liabilities
694,030

 
702,457

Deferred income taxes and other tax liabilities
48,419

 
44,934

Revolving credit facility and long-term debt
1,171,706

 
1,194,979

Other long-term liabilities
33,462

 
36,749

Total liabilities
1,947,617

 
1,979,119

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; 502,809 and 497,055 shares issued; 329,321 and 323,583 shares outstanding at April 2, 2017 and January 1, 2017, respectively
4,751

 
4,737

Additional paid-in-capital
5,686,440

 
5,676,236

Accumulated other comprehensive loss
(4,318
)
 
(8,811
)
Accumulated deficit
(1,493,166
)
 
(1,445,033
)
Stockholders’ equity before treasury stock
4,193,707

 
4,227,129

Less: shares of common stock held in treasury, at cost; 173,489 and 173,472 shares at April 2, 2017 and January 1, 2017, respectively
(2,335,405
)
 
(2,335,301
)
Total Cypress stockholders’ equity
1,858,302

 
1,891,828

Non-controlling interest
988

 
924

Total equity
1,859,290

 
1,892,752

Total liabilities and equity
$
3,806,907

 
$
3,871,871

 

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
 
April 2, 2017
 
April 3, 2016
 
(In thousands, except
per-share amounts)
Revenues
$
531,874

 
$
418,964

Costs and expenses:
 
 
 
Cost of revenues
332,814

 
293,179

Research and development
88,481

 
73,967

Selling, general and administrative
76,114

 
74,500

Amortization of intangible assets
48,249

 
35,187

Restructuring costs
2,572

 
270

Impairment of acquisition-related intangibles

 
33,944

Total costs and expenses
548,230

 
511,047

Operating loss
(16,356
)
 
(92,083
)
Interest expense
(19,475
)
 
(6,332
)
Other income, net
116

 
81

Loss before income taxes and non-controlling interest
(35,715
)
 
(98,334
)
Income tax provision
(4,927
)
 
(3,742
)
Share in net loss of equity method investees
(5,076
)
 
(2,078
)
Net loss
(45,718
)
 
(104,154
)
Net (income) loss attributable to non-controlling interests
(64
)
 
132

Net loss attributable to Cypress
$
(45,782
)
 
$
(104,022
)
Net loss per share attributable to Cypress:
 
 
 
Basic
$
(0.14
)
 
$
(0.32
)
Diluted
$
(0.14
)
 
$
(0.32
)
Cash dividend declared per share
$
0.11

 
$
0.11

Shares used in net loss per share calculation:
 
 
 
Basic
326,964

 
320,351

Diluted
326,964

 
320,351

 


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





CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
Net loss
$
(45,718
)
 
$
(104,154
)
Other comprehensive (loss) income:
 

 
 

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

 

Net unrealized gain on cash flow hedges:
 

 
 

Net unrealized gain (loss) arising during the period
2,240

 
(2,678
)
Net (gain) loss reclassified into earnings for revenue hedges (effective portion)
(2,589
)
 
1,025

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

 
11

Net loss reclassified into earnings for expense hedges (effective portion)
5,650

 
2,788

Provision for income tax
(808
)
 

Net unrealized gain on cash flow hedges
4,493

 
1,146

Other comprehensive gain
4,493

 
1,146

Comprehensive loss
(41,225
)
 
(103,008
)
Comprehensive (income) loss attributable to non-controlling interest
(64
)
 
132

Comprehensive loss attributable to Cypress
$
(41,289
)
 
$
(102,876
)
 


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




CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)  
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net loss
$
(45,718
)
 
$
(104,154
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Stock-based compensation expense
25,937

 
23,538

Depreciation and amortization
65,111

 
69,951

Impairment of acquisition-related intangible assets

 
33,944

Share in net loss of equity method investees
5,076

 
2,078

Accretion of interest expense on Senior Exchangeable Notes and amortization of debt and financing costs on other debt
5,051

 
872

Other adjustments
(526
)
 
2,228

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
15,761

 
(5,183
)
Inventories
(37,105
)
 
17,708

Other current and long-term assets
(3,695
)
 
(4,472
)
Price adjustment reserve for sales to distributors
6,546

 
8,258

Accounts payable and other liabilities
(10,717
)
 
(5,661
)
Deferred margin on sales to distributors

 
(25,378
)
Net cash provided by operating activities
25,721

 
13,729

Cash flows from investing activities:
 

 
 

Proceeds from maturities and sales of available-for-sale investments

 
79,986

Purchases of marketable securities

 
(80,053
)
Contribution, net of distributions to deferred compensation plan
4,427

 
1,574

Acquisition of property, plant and equipment
(13,772
)
 
(13,027
)
Cash paid for equity and cost method investments
(7,125
)
 
(7,376
)
Cash received on sale of asset held for sale
31,611

 

Proceeds from divestiture of TrueTouch® Mobile business
6,509

 

Net cash provided by (used in) investing activities
21,650

 
(18,896
)
Cash flows from financing activities:
 

 
 

Borrowings under revolving credit facility
30,000

 
110,000

Repayment of revolving credit facility
(45,000
)
 
(30,000
)
Repayment of Term Loan A and Term Loan B
(7,500
)
 
(1,250
)
Purchase of treasury stock

 
(175,694
)
Payment of cash dividend
(35,537
)
 
(36,550
)
Proceeds from employee stock-based awards
17,936

 
834

Repayment of equipment leases, loans and other
(114
)
 
(2,500
)
Financing costs related to revolving credit facility
(5,828
)
 
(272
)
Net cash used in financing activities
(46,043
)
 
(135,432
)
Net increase (decrease) in cash and cash equivalents
1,328

 
(140,599
)
Cash and cash equivalents, beginning of period
120,172

 
226,690

Cash and cash equivalents, end of period
$
121,500

 
$
86,091

Supplemental Cash Flows Disclosures:
 

 
 

Dividends payable
$
36,217

 
$
34,270

Unpaid purchase of property, plant and equipment
$
2,378

 
$
10,396

Liabilities related to license commitments
$

 
$
5,880

Cash paid for interest
$
19,741

 
$
5,594

Cash paid for income taxes
$
3,691

 
$
3,471

 

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




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 years 2017 and 2016 each contained 52 weeks. The first quarter of fiscal 2017 ended on April 2, 2017 and the first quarter of fiscal 2016 ended on April 3, 2016 .
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 1, 2017 . 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 ("GAAP").
On March 12, 2015, we completed the merger (“Merger”) with Spansion Inc. ("Spansion") pursuant to the Agreement and Plan of Merger and Reorganization, dated as of December 1, 2014 (the "Merger Agreement"), for a total consideration of approximately $2.8 billion .
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 the IoT business beginning July 5, 2016. The comparability of our results for the first quarter of fiscal 2017 to the same period in fiscal 2016 is impacted by this acquisition. Refer to Note 2 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017.
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 first quarter of fiscal 2017 to the same period in fiscal 2016 is impacted by the said change. Refer to Note 6 and Note 21of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017.
As a result of the Company's reorganization and internal reporting restructuring that became effective in the fourth quarter of fiscal 2016, the Company operates under two reportable business segments: Microcontroller and Connectivity Division ("MCD") and Memory Products Division ("MPD"). Prior to the fourth quarter of fiscal 2016, the Company reported under four reportable business segments: MPD, Programmable Systems Division ("PSD"), Data Communications Division ("DCD") and Emerging Technologies Division ("ETD").
The prior periods herein reflect this change in segment information.
Certain balances included in the 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 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 months ended April 2, 2017 are not necessarily indicative of the results to be expected for the full fiscal year.
Summary of Significant Accounting Policies
Stock-Based Compensation:
In the first quarter of fiscal 2017, the Company adopted Accounting Standards Update ("ASU") No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09). As a result

9




of this adoption, the Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures. Refer to the discussion below under Recently Adopted Accounting Pronouncements on ASU 2016-09 for additional information.
The Company's significant accounting policies are described under Note 1 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017.


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 Standards Board ("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 standard permits the use of either the retrospective or cumulative effect transition method. 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 of the Company's business segments, in addition to its business processes, compensation, information technology systems and other financial reporting and operational elements. The Company does not plan to early adopt this guidance and has not presently selected a transition method. Since, at the end of fiscal 2016, the Company has transitioned all revenue from distributors from sell-through to the sell-in basis of accounting, it does not expect the new guidance to materially impact the timing of recognition of future revenue from distributors. While we are continuing to assess all potential impacts, given our distributor revenues are now recognized at the time of shipment, we believe the most material impact of this new guidance on the Company will relate to the timing of recognition of revenue from intellectual property and non-recurring engineering arrangements.
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 October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." For public entities, ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The standard eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill.  Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted.  The Company does not anticipate the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements:
In March 2016, the FASB issued ASU No. 2016-09. ASU 2016-09 modifies several aspects of the accounting for share-based payment awards, including income tax consequences, and classification on the statement of cash flows. The Company adopted ASU 2016-09 in the first quarter of 2017. The provisions of ASU 2016-09 related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures were adopted using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of January 1, 2017. The provisions of ASU 2016-09 related to the recognition of excess tax benefits in the income statement and classification in the statement of cash flows were adopted prospectively and the prior periods were not retrospectively adjusted. The Company has elected to recognize forfeitures as they

10




occur and adopted this change using a modified retrospective approach, with a cumulative adjustment recorded to opening accumulated deficit. The Company recorded a cumulative effect adjustment to opening accumulated deficit of $2.3 million , with a commensurate increase in paid-in capital. The previously unrecognized excess tax benefits were recorded as a deferred tax asset, which was fully offset by a valuation allowance resulting in no impact to opening accumulated deficit. In addition, due to the full valuation allowance on the U.S. deferred tax assets, there was no impact to the income tax provision from excess tax benefits in the first quarter of 2017 as a result of this adoption.

NOTE 2. INVESTMENT IN EQUITY METHOD INVESTMENTS

Privately-held equity investments are accounted for under the equity method of accounting if the Company has an ownership interest of 20% or greater or if it has the ability to exercise significant influence over the operations of such companies.
The below table presents the changes in carrying value of the equity method investments.
 
 
Three Months Ended April 2, 2017
 
 
(in thousands)
 
 
Deca Technologies Inc.
 
Enovix Corporation ("Enovix")
 
Total
Carrying value as of January 1, 2017
 
$
134,327

 
$
54,360

 
$
188,687

Additional investment
 

 
5,599

 
5,599

Equity in net loss of equity method investees
 
(2,931
)
 
(2,145
)
 
(5,076
)
Carrying value as of April 2, 2017
 
$
131,396

 
$
57,814

 
$
189,210

The investment made by the Company during the first quarter of fiscal 2017, completed the Company's investment commitment in Enovix. As a result of investment in Enovix by certain third party investors, the Company's ownership in Enovix reduced from 46.6% as at January 1, 2017 to 41.2% as at April 2, 2017.

Enovix continues to be in the process of completing certain key product development milestones during 2017.  Delays or failure to complete these milestones may result in the recognition of a material impairment charge to the Company’s earnings as a result of a write-down of the carrying value of the Company’s investment in Enovix.

NOTE 3. INTANGIBLE ASSETS
The following table presents details of the Company's intangible assets:
 
 
As of April 2, 2017
 
As of January 1, 2017
 
Gross
 
Accumulated
Amortization
 
Net (a)
 
Gross
 
Accumulated
Amortization
 
Net (a)
 
(In thousands)
Developed technology and other intangible assets
 

 
 

 
 

 
 

 
 

 
 

Acquisition-related intangible assets
$
1,040,614

 
$
(343,272
)
 
$
697,342

 
$
1,021,244

 
$
(295,023
)
 
$
726,221

Non-acquisition related intangible assets
11,413

 
(8,928
)
 
2,485

 
12,000

 
(8,863
)
 
3,137

Total developed technology and other intangible assets
1,052,027

 
(352,200
)
 
699,827

 
1,033,244

 
(303,886
)
 
729,358

In-process research and development
155,775

 

 
155,775

 
175,203

 

 
175,203

Total intangible assets
$
1,207,802

 
$
(352,200
)
 
$
855,602

 
$
1,208,447

 
$
(303,886
)
 
$
904,561

 
(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 completion of 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.

The below table presents details of the in-process research and development assets as of April 2, 2017 :

11




 
(in thousands)
As of January 1, 2017
$
175,203

Technological feasibility achieved
(19,428
)
As of April 2, 2017
$
155,775

 
In the first quarter of fiscal 2017, one project representing $19.4 million of the total capitalized IPR&D, with an estimated useful life of 4 years , had reached technological feasibility and was transferred to developed technology.
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 April 2, 2017 to attain technological feasibility by the first quarter of fiscal 2018.
The estimated future amortization expense related to developed technology and other intangible assets as of April 2, 2017 is as follows:
 
 
(In thousands)
2017 (remaining nine months)
$
144,109

2018
187,319

2019
180,091

2020
119,916

2021
29,295

2022 and future
39,097

Total future amortization expense
$
699,827

 
 
NOTE 4. 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 carrying value of these assets held for sale at the end of the quarter reflects the lower of the 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 $37.2 million during fiscal 2016 to write these assets down to their estimated fair value, less selling costs.

The sales of the wafer fabrication facility in Minnesota and the sale of the building in Austin were completed during the first quarter of fiscal 2017. During the first quarter of fiscal 2017, the Company recorded a gain of $1.3 million resulting from the change in the estimated costs to sell these assets. This gain was recorded in the selling, general and administrative line item of the Condensed Consolidated Statement of Operations.




12




NOTE 5. BALANCE SHEET COMPONENTS
Accounts Receivable, Net
 
 
As of
 
April 2, 2017
 
January 1, 2017
 
(In thousands)
Accounts receivable, gross
$
322,300

 
$
338,061

Allowance for doubtful accounts receivable and sales returns
(5,024
)
 
(5,024
)
Total accounts receivable, net
$
317,276

 
$
333,037


Inventories
 
 
As of
 
April 2, 2017
 
January 1, 2017
 
(In thousands)
Raw materials
$
15,628

 
$
15,525

Work-in-process
223,083

 
208,525

Finished goods
86,267

 
63,726

Total inventories
$
324,978

 
$
287,776

 
Other Current Assets
 
 
As of
 
April 2, 2017
 
January 1, 2017
 
(In thousands)
Prepaid tooling - current
$
21,474

 
$
21,687

Restricted cash relating to defined benefit pension plan, current
2,708

 
4,206

Advances to suppliers
17,422

 
16,549

Prepaid royalty and licenses
19,664

 
17,769

Derivative assets
5,425

 
6,605

Value added tax receivable
9,033

 
11,625

Receivable from sale of TrueTouch Mobile ® business
3,491

 
10,000

Prepaid expenses
23,338

 
22,965

Other current assets
15,986

 
10,756

Total other current assets
$
118,541

 
$
122,162



13




Other Long-term Assets
 
 
As of
 
April 2, 2017
 
January 1, 2017
 
(In thousands)
Employee deferred compensation plan
$
42,650

 
$
45,574

Prepaid tooling - non-current
13,619

 
6,054

Investment in cost method equity securities
14,856

 
13,331

Deferred tax assets
4,437

 
4,463

Long-term licenses
17,871

 
14,498

Advance to suppliers
21,509

 
25,207

Other assets
32,331

 
38,815

Total other long-term assets
$
147,273

 
$
147,942

Other Current Liabilities
 
 
As of
 
April 2, 2017
 
January 1, 2017
 
(In thousands)
Employee deferred compensation plan
$
44,120

 
$
46,359

Restructuring accrual  - current portion (See Note 7)
7,996

 
24,029

Rebate reserve
127

 
2,320

Derivative liability
10,294

 
15,582

Accrued expenses
53,202

 
73,983

Other current liabilities
22,318

 
18,025

Total other current liabilities
$
138,057

 
$
180,298

 
Other Long-term Liabilities
 
 
As of
 
April 2, 2017
 
January 1, 2017
 
(In thousands)
Long-term pension and other employee related liabilities
$
14,631

 
$
14,672

Restructuring accrual - non-current portion (See Note 7)
10,591

 
11,294

Asset retirement obligation
4,980

 
5,067

Other long-term liabilities
3,260

 
5,716

Total other long-term liabilities
$
33,462

 
$
36,749

 
 
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 April 2, 2017 and January 1, 2017 :
 

14




 
As of April 2, 2017
 
As of January 1, 2017
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
 
(In thousands)
Financial Assets
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents:
 

 
 

 
 

 
 

 
 

 
 

Money market funds  (1)
$
306

 
$

 
$
306

 
$
287

 
$

 
$
287

Total cash equivalents
306

 

 
306

 
287

 

 
287

Short-term investments:
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit (1)

 
972

 
972

 

 
972

 
972

Total short-term investments

 
972

 
972

 

 
972

 
972

 
 
 
 
 
 
 
 
 
 
 
 
Employee deferred compensation plan assets:
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents
4,048

 

 
4,048

 
3,809

 

 
3,809

Mutual funds
23,259

 

 
23,259

 
22,658

 

 
22,658

Equity securities
10,906

 

 
10,906

 
11,974

 

 
11,974

Fixed income
2,389

 

 
2,389

 
4,088

 

 
4,088

Stable value funds

 
2,048

 
2,048

 

 
3,045

 
3,045

Total employee deferred compensation plan assets
40,602

 
2,048

 
42,650

 
42,529

 
3,045

 
45,574

Foreign exchange forward contracts

 
5,425

 
5,425

 

 
6,605

 
6,605

Total financial assets
$
40,908

 
$
8,445

 
$
49,353

 
$
42,816

 
$
10,622

 
$
53,438

Financial Liabilities
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange forward contracts
$

 
$
10,294

 
$
10,294

 
$

 
$
15,582

 
$
15,582

Employee deferred compensation plan liability

 
44,120

 
44,120

 

 
46,359

 
46,359

Total financial liabilities
$

 
$
54,414

 
$
54,414

 
$

 
$
61,941

 
$
61,941

 
(1)
Available for sale securities, maturing within one year .  There were no unrealized gains or losses recorded during the first quarter of fiscal 2017 and fiscal 2016 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 April 2, 2017 and January 1, 2017 .  There were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the three months ended April 2, 2017 .

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 Note 7 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017 .
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain of the Company’s assets, including intangible assets, goodwill and cost-method investments, are measured at fair value on a nonrecurring basis if impairment is indicated. Refer to Note 3 regarding impairment of certain intangible assets during the first quarter of fiscal 2016.
As of April 2, 2017 , the carrying value of the Company's Revolving Credit Facility was $317.0 million (See Note 9). The carrying value of the Company's Revolving 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 April 2, 2017 were $136.3 million and $396.4 million , respectively.  See Note 9 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 April 2, 2017 were $239.0 million and $350.8 million , respectively.  See Note 9 for further details.

15




   
NOTE 7. RESTRUCTURING
2016 Restructuring Plan
In September 2016, the Company began the implementation of a reduction in workforce ("2016 Plan") which is expected to result in elimination of approximately 430 positions worldwide across various functions. The restructuring charges related to the 2016 Plan during the first quarter of fiscal 2017 were $2.6 million and consisted of personnel costs of $1.5 million and other charges related to the write-off of certain licenses of $1.1 million . The Company expects that the cash costs incurred under the 2016 Plan will be paid out through fiscal 2017.
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 restructuring charge of $0.3 million recorded during the first quarter of fiscal 2016 consists primarily of severance costs and impairment of property, plant and equipment.
Summary of restructuring costs
The following table summarizes the restructuring charges recorded in the Consolidated Statements of Operations:
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
Personnel costs
$
1,503

 
$
246

Lease termination costs

 
24

Other
1,069

 

Total restructuring costs
$
2,572

 
$
270

All restructuring costs are included in the operating expenses under "Restructuring costs" in the Condensed Consolidated Statements of Operations.
Roll-forward of the restructuring reserves
Restructuring activity under the Company's restructuring plans were as follows:
 
 
Three Months Ended
 
April 2, 2017
 
(In thousands)
 
Spansion Integration plan
 
2016 Plan
 
Total
Accrued restructuring balance as of January 1, 2017
$
14,219

 
$
21,104

 
$
35,323

Provision

 
2,572

 
2,572

Cash payments and other adjustments
(763
)
 
(18,545
)
 
(19,308
)
Accrued restructuring balance as of April 2, 2017
$
13,456

 
$
5,131

 
$
18,587

Current portion of the restructuring accrual
$
2,865

 
$
5,131

 
$
7,996

Non-current portion of the restructuring accrual
$
10,591

 
$

 
$
10,591


The Company anticipates that the remaining restructuring accrual balance of $5.1 million will be paid out in cash through the end of fiscal 2017 for employee terminations and over the remaining lease term through 2026 for the excess lease obligation of $13.5 million related to the buildings Spansion had leased prior to the Merger, which the Company decided not to occupy in the post-Merger period.


16




NOTE 8. 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
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
Cost of revenues
$
5,331

 
$
5,647

Research and development
11,771

 
6,930

Selling, general and administrative
8,835

 
10,961

Total stock-based compensation expense
$
25,937

 
$
23,538

 
As of April 2, 2017 and January 1, 2017 , stock-based compensation capitalized in inventories totaled $4.7 million and $4.6 million , respectively.
The following table summarizes the stock-based compensation expense by type of awards:
 
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
Stock options
$

 
$
298

Restricted stock units ("RSUs") and performance based restricted stock awards ("PSUs")
20,840

 
17,393

Employee Stock Purchase Plan (“ESPP”)
5,097

 
5,847

Total stock-based compensation expense
$
25,937

 
$
23,538

 
The following table summarizes the unrecognized stock-based compensation expense, by type of awards:
 
 
As of
 
 April 2, 2017
 
Weighted-
Average
Amortization
Period
 
(In thousands)
 
(In years)
Stock options
$
842

 
0.75
RSUs and PSUs
123,137

 
1.61
ESPP
9,020

 
1.49
Total unrecognized stock-based compensation expense
$
132,999

 
1.53
Equity Incentive Program
As of April 2, 2017 , approximately 18.1 million stock options, or 11.1 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 April 2, 2017 , there were 3.5 million shares of stock available for issuance under the ESPP plan.

17




Stock Options
The following table summarizes the Company's stock option activities:
 
 
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 1, 2017
7,947

 
$
10.70

 
 
 
 

Exercised
(1,076
)
 
$
8.38

 
 
 
 

Forfeited or expired
(263
)
 
$
13.73

 
 
 
 

Options outstanding as of April 2, 2017
6,608

 
$
10.96

 
2.97
 
$
22.4

Options exercisable as of April 2, 2017
5,699

 
$
10.93

 
2.78
 
$
20.0

 
There were no options granted during the three months ended April 2, 2017 .
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 1, 2017
13,780

 
$
11.83

Granted
5,311

 
$
13.19

Vested
(3,824
)
 
$
12.55

Forfeited
(1,151
)
 
$
12.21

Balance as of April 2, 2017
14,116

 
$
12.12

 
On March 16, 2017, the Compensation Committee of the Company approved the issuance of certain service-based and performance-based restricted stock units to certain employees.
The milestones for the 2017 performance based restricted stock (“PARS”) programs, approved by Compensation Committee include service and performance conditions. Approximately 54% of the grants are based on performance milestones: debt leverage milestones, profit before tax (“PBT”) milestones, strategic initiatives milestones, gross margin milestones and revenue growth milestones- over the next three years. The remaining approximately 46% are based on service milestones that vest based on continued service over three years.

18




NOTE 9. DEBT
 
Total debt is comprised of the following:
 
 
 
As of
 
 
April 2, 2017
 
January 1, 2017
 
 
(In thousands)
Current portion of long-term debt
 
 

 
 

Term Loan A
 
$
7,500

 
$
7,500

Term Loan B
 
22,500

 
22,500

Equipment loans and capital lease obligations
 
36

 
152

Current portion of long-term debt
 
30,036

 
30,152

Revolving credit facility and long-term debt
 
 

 
 

Revolving Credit facility
 
317,000

 
332,000

Term Loan A
 
82,940

 
84,838

Term Loan B
 
396,405

 
406,214

2.00% Senior Exchangeable Notes
 
136,314

 
135,401

4.50% Senior Exchangeable Notes
 
239,047

 
236,526

Revolving credit facility and long-term debt
 
1,171,706

 
1,194,979

Total debt
 
$
1,201,742

 
$
1,225,131

 
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. Refer to Note 14 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017 for further details.
 
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 calculation of the 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 amount of 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 (“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.
  
The following table includes total interest expense related to the Notes recognized during the three months ended April 2, 2017 and year ended January 1, 2017 (in thousands):
 

19




 
 
Three months ended April 2, 2017
 
Year ended January 1, 2017
Contractual interest expense
 
$
3,270

 
$
6,900

Amortization of debt issuance costs
 
319

 
700

Accretion of debt discount
 
2,202

 
4,646

Total
 
$
5,791

 
$
12,246

 
The net liability component of the Notes as of April 2, 2017 is comprised of the following (in thousands):
 
 
April 2, 2017
Net carrying amount at issuance date
$
231,180

Amortization of debt issuance costs during the year
1,019

Accretion of debt discount during the year
6,848

 
$
239,047

 
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 .
  Senior Secured Revolving Credit Facility ("Revolving Credit Facility")
On February 17, 2017, the Company amended its Senior Secured Credit Facility. The amendment reduced the applicable margins on the Term Loan B and Term Loan A from 5.50% and 5.11% respectively, to 3.75% effective February 17, 2017. Additionally, the amended financial covenants include the following conditions: 1) maximum senior secured leverage ratio of 4.25 to 1.00 through December 31, 2017, 2) maximum senior secured leverage ratio of 4.00 to 1.00 through July 1, 2018 and 3.75 to 1.00 thereafter. The Company incurred financing costs of $5.9 million to lenders of the Term Loans which has been capitalized and recognized as a reduction of the Term Loan A and 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 the Term Loans and recorded in “Interest Expense” on the Condensed Consolidated Statements of Operations.
As of April 2, 2017 , $849.4 million aggregate principal amount of loans, including Term Loan A, Term Loan B and letters of credit, were outstanding under the Revolving Credit Facility.
As of April 2, 2017 , 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 “Spansion Notes”) on March 12, 2015. They are fully and unconditionally guaranteed on a senior unsecured basis by the Company. The Spansion 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 Spansion Notes may be due and payable immediately in certain events of default.
As of April 2, 2017 , the Spansion Notes are exchangeable for 193.6 shares of common stock per $1,000 principal amount of the Notes (equivalent to an exchange price of approximately $5.16 ) subject to adjustments for dividends, anti-dilutive issuances and make-whole adjustments upon a fundamental change. Refer to Note 14 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017 for further details.

20




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 our 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 will pay to the holders of the Spansion Notes cash for an amount up to the aggregate principal amount of the Spansion 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 (“conversion spread”). Accordingly, for the purposes of calculation of 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 Spansion 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.
The net carrying amount of the liability component of the Spansion Notes as of April 2, 2017 consists of the following:
 
 
(in thousands)
Principal amount
$
149,990

Unamortized debt discount
(13,676
)
Net carrying value
$
136,314

 
The following table presents the interest on the Spansion Notes recognized as an expense during the three months ended April 2, 2017 and April 3, 2016 :
 
 
 
Three Months Ended
 
 
April 2, 2017
 
April 3, 2016
 
 
(in thousands)
2.00% Senior Exchangeable Notes
 
 

 
 

Contractual interest expense at 2% per annum
 
$
750

 
$
747

Accretion of debt discount
 
913

 
872

Total
 
$
1,663

 
$
1,619


Capital Leases and Equipment Loans
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. Assets purchased under all capital leases are included in “Property, plant and equipment, net” on the Company's Consolidated Balance Sheet.
As of January 1, 2017, the gross value and net book value of manufacturing equipment purchased under these capital leases were $1.8 million and $0.9 million , respectively. As of April 2, 2017, the gross value and net book value of manufacturing equipment purchased under these capital leases were $1.8 million and $0.8 million , respectively. As at end of first quarter of fiscal 2017, there is no balance outstanding against these capital leases.
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. During the first quarter of fiscal 2017, substantially all of the equipment loans have been paid off.

21




Future Debt Payments
For each of the next five years and beyond, the scheduled maturities of the Company's debts including interest as of April 2, 2017 , is as follows:
 
Fiscal Year
 
Term Loan A
 
Term Loan B
 
Revolving Credit Facility
 
2.00% Senior Exchangeable Notes
 
4.50% Senior Exchangeable Notes
 
Equipment loans
 
Total
 
 
(In thousands)
2017 (remaining nine months)
 
$
9,082

 
$
37,315

 
$
10,271

 
$
1,500

 
$
13,908

 
$
36

 
$
72,112

2018
 
10,676

 
41,871

 
10,271

 
3,000

 
13,117

 

 
78,935

2019
 
12,859

 
43,604

 
10,271

 
3,000

 
13,117

 

 
82,851

2020
 
72,625

 
50,606

 
319,568

 
152,989

 
13,153

 

 
608,941

2021 and after
 

 
347,982

 

 

 
307,230

 

 
655,212

Total
 
$
105,242

 
$
521,378

 
$
350,381

 
$
160,489

 
$
360,525

 
$
36

 
$
1,498,051


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 of April 2, 2017 , future minimum lease payments under non-cancelable operating leases were as follows:
 
Fiscal Year
(In thousands)
2017 (remaining nine months)
$
14,440

2018
13,885

2019
9,920

2020
8,506

2021
6,476

2022 and thereafter
22,270

Total
$
75,497

 
Restructuring accrual balances related to operating facility leases were $13.5 million and $14.2 million as of April 2, 2017 and January 1, 2017 , respectively.
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.

22




The following table presents the Company's warranty reserve activities:
 
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
Beginning balance
$
3,996

 
$
4,096

Settlements made
(319
)
 
(430
)
Provisions
319

 
510

Ending balance
$
3,996

 
$
4,176

 
Litigation and Asserted Claims
In a matter associated with Ramtron International Corporation (“Ramtron”), a wholly owned subsidiary of Cypress, bankruptcy proceedings are ongoing in Italy where the trustee for four bankrupt entities of Finmek S.pA. is seeking refunds of approximately $2.8 million in 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 $0.5 million , including interest and fees. The Company believes this ruling was made in error and has filed an appeal (Court of Appeal of Venice, Docket no. 2706/2015). The Company has prevailed in all other related proceedings, which the trustee may appeal (Court of Appeal of Venice, Docket Nos. 1387/2014 and 2487/2015; Tribunal of Padua Docket No. 5378/2009). Due to the current stage of the proceedings and the appellate process, the Company cannot reasonably estimate the loss or the range of possible losses, if any.
In 2013, a former employee filed a grievance against the Company with the U.S. Department of Labor (“DOL”) seeking back pay and reinstatement or forward 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 . On March 30, 2016, the ruling was affirmed by the DOL Administrative Review Board.  The Company believes both rulings were erroneous and filed an appeal in the United States Court of Appeals for the Tenth Circuit on April 29, 2016 (Case No. 16-9523). Oral argument was heard by a three-judge panel in January 2017, and a ruling is expected by the second or third quarter of 2017. The respective positions of the parties and the appellate process prevent a reasonable determination of the outcome at this time. This former employee also filed a complaint for wrongful termination in state court in El Paso County, Colorado on March 4, 2015 (Case No. 2015-cv-30632). The state court litigation is stayed pending resolution of the DOL matter. The Company believes the state court action is meritless and will defend against the allegations. Due to the current stage of the proceedings and the appellate process, the Company cannot reasonably estimate the loss or the range of possible loss, if any.
After our announcement of the merger between the Company and Spansion Inc. in December 2014, two separate putative class action complaints (Walter Jeter v. Spansion Inc., et. al. (No. 114-cv-274635) and Shiva Y. Stein v. Spansion Inc., et. al. (No. 114CV274924)) were filed in Santa Clara County Superior Court in December 2014, alleging claims of breach of fiduciary duty against 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. In January 2017, the court approved the settlement agreement, which included payment of $0.3 million in attorneys’ fees to plaintiffs’ counsel. This matter is now closed.

Since August 2014, the Company has been involved in various trademark opposition proceedings with Kingston Technology Corporation (“Kingston”) concerning Kingston’s “HYPERX” trademark and the Company’s “HYPERRAM” trademark, including Trademark Trial and Appeal Board Proceeding Nos. 91218100, 91222728, and 92061796. On April 6, 2017, the parties settled and agreed to dismiss all proceedings.

On May 17, 2016, a patent infringement case was filed by North Star Innovations, Inc. (“North Star”) against the Company and UMC Group USA (“UMC”) in the U.S. District Court for the District of Delaware (Case No. 16-cv-368).  North Star alleges that the Company infringes three patents.  On September 26, 2016, North Star filed a second case against the Company and UMC in the U.S. District Court for the Central District of California (Case No. 16-cv-01721), asserting two additional patents against the Company, as well as one of the patents asserted in the Delaware lawsuit. In December 2016, the Company settled with North Star, pursuant to which the Company obtained a license to the North Star patent portfolio. In January 2017, the Delaware lawsuit was dismissed and in February 2017, the California lawsuit was dismissed.


23




On August 15, 2016, a patent infringement lawsuit was filed by the California Institute of Technology (“Caltech”) against the Company in the U.S. District Court for the Central District of California (Case No. 16-cv-03714). The other co-defendants are Apple Inc., Avago Technologies Limited, Broadcom Corporation, and Broadcom Limited. Caltech alleges that defendants infringe four patents. The matter is still in the very early stages and the Company will defend against the allegations accordingly.  Due to the current stage of the proceedings, the Company cannot reasonably estimate the loss or the range of possible losses, if any.

In September 2016, the Company was named in a lawsuit filed by Standard Communications Pty Ltd. in Sydney, Australia, for approximately $1.1 million in costs associated with a product recall. The matter is still in the very early stages and the Company will defend against the allegations accordingly.  Due to the current stage of the proceedings, the Company cannot reasonably estimate the loss or the range of possible losses, if any.

On January 30, 2017, T.J. Rodgers, the former Chief Executive Officer and director of the Company, filed a complaint in the Delaware Court of Chancery captioned Rodgers v. Cypress Semiconductor Corp ., C.A. No. 2017-0070-AGB (Del. Ch.), seeking to inspect certain Company books and records pursuant to Section 220 of the Delaware General Corporation Law. The complaint does not seek an award of money damages. On February 20, 2017, the Company filed its answer and response to Mr. Rodgers’ complaint. On April 17, 2017, the Court ruled that Mr. Rodgers was entitled to certain books and records.

On April 24, 2017, Mr. Rodgers filed a second lawsuit in the Delaware Court of Chancery (C.A. No. 2017-0314-AGB), naming the Company’s directors as defendants and alleging breach of the fiduciary duty of candor. The complaint seeks an order that the Company issue additional disclosures in connection with its proxy materials at least ten days in advance of the Company’s 2017 annual shareholders meeting, and if corrective materials are not issued, an order enjoining the shareholder meeting until corrective disclosures are made. The complaint does not seek an award of money damages other than reasonable attorneys and expert fees, costs and expenses. Given the stage and nature of the litigation, the Company cannot reasonably estimate the loss or the range of possible losses, if any.
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 other parties 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 the Company customarily agrees 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 its products, title to assets sold, certain intellectual property claims, defective products, specified environmental matters and certain income taxes. In these circumstances, payment by the Company 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 the Company has made under these agreements have not had a material effect on the Company’s business, financial condition or results of operations. Management believes 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 April 2, 2017 , the Company had no reason to believe a loss exceeding amounts already recognized had been incurred.

NOTE 11. FOREIGN CURRENCY DERIVATIVES
The Company enters into multiple foreign exchange forward contracts to hedge certain operational exposures resulting from fluctuations in Japanese yen and Euro exchange rates.  The Company does not enter into derivative securities for speculative purposes. The Company’s hedging policy is designed to mitigate the impact of foreign currency exchange rate fluctuations on

24




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 as cash flow hedges or not, 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.  The maximum original duration of any contract allowable under the Company’s hedging policy is 13 months .
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 nine 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, 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, 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, net in its Condensed Consolidated Statements of Operations.
At April 2, 2017 , the Company had outstanding forward contracts to buy approximately ¥4,724.2 million for $45.3 million .
Non-designated hedges
Total notional amounts of net outstanding contracts were as summarized below:
 
Buy / Sell
 
April 2, 2017
January 1, 2017
 
 
(in millions)
US dollar / EUR
 
$9.3/€8.8
$25.0 / €23.6
Japanese Yen / US dollar
 
¥4,599 / $43.5
¥10,129/$87.9
 
The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three months ended April 2, 2017 was immaterial.
 
The gross fair values of derivative instruments on the Condensed Consolidated Balance Sheets as of April 2, 2017 and January 1, 2017 were as follows:
 
 
 
April 2, 2017
 
January 1, 2017
Balance Sheet location
 
Derivatives designated as hedging instruments
 
Derivatives not designated as hedging instruments
 
Derivatives designated as hedging instruments
 
Derivatives not designated as hedging instruments
 
 
(in thousands)
Other Current Assets
 
 

 
 

 
 

 
 

Derivative Asset
 
$
2,964

 
$
2,461

 
$
6,468

 
$
137

Other Current Liabilities
 
 

 
 

 
 

 
 

Derivative Liability
 
$
5,622

 
$
4,672

 
$
14,391

 
$
1,191

 

25




NOTE 12. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share:
 
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(In thousands, except per-share amounts)
Net loss attributable to Cypress
$
(45,782
)
 
$
(104,022
)
Weighted-average common shares
326,964

 
320,351

Weighted-average diluted shares
326,964

 
320,351

Net loss per share—basic
$
(0.14
)
 
$
(0.32
)
Net loss per share—diluted
$
(0.14
)
 
$
(0.32
)
 
For the three months ended April 2, 2017 and April 3, 2016 , approximately 1.2 million and 11.3 million , weighted average potentially dilutive securities consisting of outstanding share based awards and convertible debt, respectively, were excluded in the computation of diluted net loss per share because their effect would have been anti-dilutive.
 
 
NOTE 13. INCOME TAXES
The Company's income tax expense was $4.9 million and $3.7 million for the three months ended April 2, 2017 and April 3, 2016 , respectively.  The income tax expense for the three months ended April 2, 2017 and April 3, 2016 was primarily due to non-U.S. income taxes on income earned in foreign jurisdictions.  
Unrecognized Tax Benefits
As of April 2, 2017 and January 1, 2017 , the amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate totaled $25.2 million and $24.3 million , respectively.
Management believes events that could occur in the next 12 months which could cause a material change in unrecognized tax benefits include, but are not limited to, the following:
completion of examinations by the U.S. or foreign taxing authorities; and
expiration of statute of limitations on the Company's tax returns.
The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses the Company’s tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business. The Company believes it is reasonably possible that it may recognize up to approximately $0.4 million of its existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.
Classification of Interest and Penalties
The Company classifies interest and penalties as components of the income tax provision in the Condensed Consolidated Statements of Operations. As of April 2, 2017 and January 1, 2017 , the amounts of accrued interest and penalties totaled $9.1 million and $8.5 million , respectively.
 
NOTE 14. SEGMENT, GEOGRAPHICAL AND CUSTOMER INFORMATION
Segment Information
The Company designs, develops, manufactures and markets a broad range of solutions for embedded systems, from automotive, industrial and networking platforms to interactive consumer devices.
Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker ("CODM") is considered to be the Chief Executive Officer.

26




The prior periods herein reflect the change in segments as outlined in Note 1 of the Notes to Condensed Consolidated Financial Statements.
 
Revenue
 
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Microcontroller and Connectivity Division
$
317,901

 
$
206,822

Memory Products Division
213,973

 
212,142

Total revenues
$
531,874

 
$
418,964

 
Income (loss) before Income Taxes
 
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
Microcontroller and Connectivity Division
$
(918
)
 
$
(4,987
)
Memory Products Division
49,671

 
31,421

Unallocated items:
 
 
 
Stock-based compensation expense
(25,937
)
 
(23,538
)
Restructuring charges
(2,572
)
 
(270
)
Amortization of intangible assets
(48,249
)
 
(35,187
)
Impairment of assets

 
(33,944
)
Changes in value of deferred compensation plan
(213
)
 
(586
)
Impact of purchase accounting
(7,497
)
 
(31,243
)
Loss from operations before income taxes
$
(35,715
)
 
$
(98,334
)
 
The Company does not allocate goodwill and intangible assets impairment charges, impact of purchase accounting, IPR&D, severance and retention costs, acquisition-related costs, stock-based compensation, interest income and other, and interest expense to its segments. In addition, the Company does not allocate assets to its segments. The Company excludes these items consistent with the manner in which it internally evaluates its results of operations.
Geographical Information
The following table presents revenues by geographical locations: 1
 
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
United States
$
47,356

 
$
53,798

Europe
70,876

 
61,575

Greater China 2
233,266

 
144,247

Japan
115,138

 
113,195

Rest of the World
65,238

 
46,149

Total revenue
$
531,874

 
$
418,964

1 Prior period numbers have been revised to conform to current period presentation.  During the second quarter of fiscal 2016, the Company started presenting this information based on the location of customers to whom the sale of products was made.

27





2 Greater China includes China, Taiwan and Hong Kong.
 
Property, plant and equipment, net, by geographic locations were as follows:
 
 
As of
 
April 2, 2017
 
January 1, 2017
 
(In thousands)
United States
$
185,901

 
$
189,912

Philippines
36,806

 
37,790

Thailand
31,767

 
32,547

Japan
14,668

 
14,898

Other
23,913

 
22,119

Total property, plant and equipment, net
$
293,055

 
$
297,266

 
The Company tracks its assets by physical location. Although management reviews asset information on a corporate level and allocates depreciation expense by segment, the Company’s chief operating decision maker ("CODM") does not review asset information on a segment basis.
Customer Information
Outstanding accounts receivable from two of the Company's distributors accounted for 21.3% and 11.9% of its consolidated accounts receivable as of April 2, 2017 . Outstanding accounts receivable from one of the Company's distributors accounted for 24% of its consolidated accounts receivable as of January 1, 2017 .
Revenue earned through one of the Company's distributors accounted for 16.9% of its consolidated revenue for the three months ended April 2, 2017 .   No end customer accounted for 10% or more of the Company's revenues for the three months ended April 2, 2017 .
Revenue earned through one of the Company’s distributors accounted for 25.0% of its consolidated revenue for the three months ended April 3, 2016 . No end customer accounted for 10% or more of the Company's revenues for the three months ended April 3, 2016 .
 
NOTE 15. SUBSEQUENT EVENTS
Amendment to Credit and Guarantee Agreement
On April 7, 2017, the Company amended its Revolving Credit Facility. The amendment reduced the applicable margins on the Company's Term Loan A from 3.75% to 2.75% effective April 7, 2017.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in this Quarterly Report on Form 10-Q contains 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, which are discussed in the “Forward-Looking Statements” section under Part I of this Quarterly Report on Form 10-Q.
EXECUTIVE SUMMARY
Overview
Cypress Semiconductor Corporation (“Cypress” or “the Company”) manufactures and sells advanced embedded system solutions for automotive, industrial, home automation and appliances, consumer electronics and medical products. Cypress’s programmable systems-on-chip, general-purpose microcontrollers, analog ICs, wireless and wired connectivity solutions and memories help engineers design differentiated products and help with speed to market. Cypress is committed to providing customers with quality support and engineering resources.

28




Acquisitions and Divestitures
Acquisition of Broadcom Corporation’s Internet of Things business (the “IoT business”)
On July 5, 2016, we completed the acquisition of certain assets primarily related to the IoT business of Broadcom Corporation ("Broadcom") pursuant to an Asset Purchase Agreement with Broadcom, dated April 28, 2016, for a total consideration of $550 million. The following MD&A includes the financial results of the IoT business beginning July 5, 2016.
The comparability of our results for the quarter ended April 2, 2017 to the same prior year periods is significantly impacted by these transactions.
Investment in Deca Technologies Inc.
On July 29, 2016, Deca Technologies Inc. ("Deca"), our majority-owned subsidiary, 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 us.
In our discussion and analysis of comparative periods, we have quantified the contribution of additional revenue or expense resulting from these transactions wherever such amounts were material and identifiable. While identified amounts may provide indications of general trends, the analysis cannot completely address the effects attributable to integration efforts.
Business Segments
We continuously evaluate our reportable business segments in accordance with the applicable accounting guidance. As a result of the Company's reorganization and change in internal reporting restructuring effective fourth quarter of fiscal 2016, the Company operates under two reportable business segments: Microcontroller and Connectivity Division ("MCD") and Memory Products Division ("MPD"). Prior to the fourth quarter of fiscal 2016, the Company reported under four reportable business segments: MPD, Programmable Systems Division ("PSD"), Data Communications Division ("DCD") and Emerging Technologies Division ("ETD"). Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended January 1, 2017 for further details.
The prior periods herein reflect this change in segment information.
 
Business Segments
 
Description
 
 
 
Microcontroller and Connectivity Division
 
MCD focuses on high-performance microcontroller (MCU), analog and wireless and wired connectivity solutions. The portfolio includes Traveo™   automotive MCUs, PSoC ®  programmable system-on-chip MCUs, ARM ®  Cortex ® -M4, -M3, -M0+ MCUs and R4 CPUs, analog PMIC Power Management ICs, CapSense ®  capacitive-sensing controllers, TrueTouch ®  touchscreen and fingerprint reader products, Wi-Fi ® , Bluetooth ® , Bluetooth Low Energy and ZigBee ®  radios and WICED ®  development platform for the Internet of Things, and USB controllers, including solutions for the USB-C and USB Power Delivery ("PD") standards. MCD includes wireless connectivity solutions acquired from Broadcom effective July 5, 2016. This division also includes our intellectual property ("IP") foundry business. The historical results of MCD include our subsidiary Deca Technologies, Inc.
 
 
 
Memory Products Division
 
MPD focuses on high-performance parallel and serial NOR flash memories, NAND flash memories, static random access memory (SRAM), F-RAM™   ferroelectric memory devices and other specialty memories. This division also includes our subsidiary AgigA, Tech Inc.
 
Business Strategy

Refer to Item 1. Business in our Annual Report on Form 10-K for the year ended January 1, 2017 for a discussion of our strategies.

29




As we continue to implement our strategies, there are many internal and external factors that could impact our ability to meet any or all of our objectives. Some of these factors are discussed under Part I Item 1A in our Annual Report on Form 10-K for the year ended January 1, 2017 as well as in Part II Item 1A in this Quarterly Report on Form 10-Q.
Results of Operations
Revenues
Our total revenues increased by $112.9 million , or 26.9% , to $531.9 million for the three month period ended April 2, 2017 compared to the same period in the prior year. For the three months ended April 2, 2017 , $93.9 million of the increase was attributable to revenue contributions from the acquired IoT business which is included in the MCD division.
Consistent with our accounting policies and generally accepted accounting principles, prior to fiscal 2014 we 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. We continually reassess our ability to reliably estimate the ultimate price of these products and, over the past several years, we have made investments in our systems and processes around our distribution channel to improve the quality of the information we receive from our 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). As of April 2, 2017 , with the exception of consignment sales, the Company is recognizing all revenue upon shipment.
During the three months ended April 3, 2016 , we recognized an incremental $9.4 million of revenue on new product families or distributors for which we recognized revenue on a sell-in basis. This change resulted in a reduction to net loss of approximately $3.2 million for the three months ended April 3, 2016 , or $0.01 per basic and diluted share.
The following table summarizes our consolidated revenues by segments:
 
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
Microcontroller and Connectivity Division
$
317,901

 
$
206,822

Memory Products Division
213,973

 
212,142

Total revenues
$
531,874

 
$
418,964

 
Microcontroller and Connectivity Division:
Revenues recorded by MCD increased by $111.1 million , or 53.7% , in the three months ended April 2, 2017 compared to the same prior year period. The increase was primarily driven by the acquisition of the IoT business from Broadcom. In the first quarter of fiscal 2017, revenue recorded by our wireless business, which includes the acquired IoT business was $101.3 million. Additionally, MCD revenues increased in the three months ended April 2, 2017 as compared to the same prior year period, due to increased revenue from the automotive segment. The overall average selling price of our products for MCD for the three months ended April 2, 2017 was $1.11 which increased by $0.04, compared with the same prior year period. The increase is attributed to the higher ASPs of the wireless products.
Memory Products Division:
Revenues recorded by MPD increased by $1.8 million , or 0.9% , in the three months ended April 2, 2017 compared to the same prior year period. The increase was primarily due to $7.9 million of revenue contribution from the Flash memory business, which grew primarily in the automotive and consumer segments. This was partially offset by $6.1 million of decrease in revenue from our RAM business. The overall average selling prices (ASP’s) of our products for MPD for the three months ended April 2, 2017 was $1.25, which decreased by $0.02, compared with the same prior year period. The decrease is attributed to lower ASPs in the overall memory segment, particularly in NAND and SRAM families.


30




Cost of Revenues
 
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
Cost of revenues
$
332,814

 
$
293,179

As a percentage of revenue
62.6
%
 
70.0
%

 Our cost of revenue ratio representing cost of revenue as a percentage of revenue is significantly impacted by the mix of products we sell, which is often difficult to forecast with accuracy. Therefore, if we achieve significant revenue growth in our lower margin product lines, or if we are unable to earn as much revenue as we expect from higher margin product lines, our gross margin may be negatively impacted.
Our cost of revenue ratio declined to 62.6% in the first quarter fiscal 2017 from 70.0% in the first quarter of fiscal 2016. The primary driver of the improvement in the cost of revenue ratio was lower Spansion acquisition-related expenses, which declined $14.9 million in the first quarter of 2017 compared to the first quarter of 2016. Another major contributor in the improvement in the cost of revenue ratio was higher fab utilization which increased from 52% in the first quarter of 2016 to 63% in the first quarter of 2017. This was partially offset by higher write downs of carrying value of inventory during the first quarter of fiscal 2017 as compared to the same prior year period. Write-down of inventories during the first quarter of fiscal 2017 was $10.5 million as compared to $8.9 million in the first quarter of fiscal 2016, which unfavorably impacted our cost of revenue ratio by 2.0% and 2.1%, respectively. Sale of inventory that was previously written off or written down aggregated to $7.6 million and $8.2 million for the first quarters of fiscal years 2017 and 2016, which favorably impacted our cost of revenue ratio by 1.4% and 2.0%, respectively.  
Research and Development (“R&D”) Expenses
 
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
R&D expenses
$
88,481

 
$
73,967

As a percentage of revenues
16.6
%
 
17.7
%
 
R&D expenditures increased by $ 14.5 million in the three months ended April 2, 2017 compared to the same prior-year period. The increase was mainly attributable to $18.6 million of expenses due to the IoT business acquisition, primarily comprised of $5.6 million increase in R&D expenses primarily relating to material costs for certain projects, other overhead expenses and $13.0 increase in labor costs due to increased headcount. Additionally, there was an increase of $ 4.8 million in stock-based compensation expense. The above increases were offset by $3.5 million decrease in miscellaneous R&D expenses and $3.2 million decrease in repair and maintenance expenses and other allocated operating expenses.
Selling, General and Administrative (“SG&A”) Expenses
 
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
SG&A expenses
$
76,114

 
$
74,500

As a percentage of revenues
14.3
%
 
17.8
%
 
SG&A expenses increased by $ 1.6 million in the three months ended April 2, 2017 compared to the same prior-year period. The increase was primarily due to higher labor expenses as a result of increased headcount from the IoT business acquisition. These increases were offset by $ 2.1 million decrease in stock-based compensation expense.

31




Amortization of Acquisition-Related Intangible Assets
Amortization expense increased by $13.1 million in the first quarter of fiscal 2017 compared to the same period in the prior year. The increase was mainly due to the amortization of the intangibles acquired in connection with the IoT business acquisition and the Spansion Merger, as well as the capitalization of certain in-process research and development projects.
Impairment of Acquisition-Related Intangible Assets
During the first quarter of fiscal 2016, we recognized $33.9 million of impairment charges related to two IPR&D projects that were canceled due to certain changes in our long-term product portfolio strategy during fiscal 2016.
There were no impairment charges of acquisition-related intangibles during the first quarter of fiscal 2017.
Restructuring
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 430 positions worldwide across various functions. The restructuring charges related to the 2016 Plan during the first quarter of fiscal 2017 were $2.6 million and consisted primarily of personnel costs of $1.5 million and other charges related to the write-off of certain licenses of $1.1 million . The Company expects that the cash costs incurred under the 2016 Plan will be paid out through fiscal 2017.
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 restructuring charge of $0.3 million recorded for the three months ended April 3, 2016 consists primarily of severance costs and impairment of property, plant and equipment.
We anticipate that the remaining restructuring liability balance of $5.1 million will be paid out in cash through fiscal 2017 for employee terminations and over the remaining lease term through 2026 for the excess lease obligation of $13.5 million related to the buildings Spansion had leased prior to the Merger, which the Company decided not to occupy in the post-Merger period.
Income Taxes
Our income tax expense was $ 4.9 million and $ 3.7 million for the three months ended April 2, 2017 and April 3, 2016 , respectively.   The tax expense for the first quarter of fiscal 2017 and first quarter of fiscal 2016 was primarily attributable to non-U.S. taxes on income earned in foreign jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes information regarding our cash and cash equivalents and short-term investments and working capital:
 
 
As of
 
April 2, 2017
 
January 1, 2017
 
(In thousands)
Cash, cash equivalents and short-term investments
$
122,472

 
$
121,144

Working capital
$
188,265

 
$
191,486

 
Key Components of Cash Flows
 
 
 Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
(In thousands)
Net cash provided by operating activities
$
25,721

 
$
13,729

Net cash provided by (used in) investing activities
$
21,650

 
$
(18,896
)
Net cash used in financing activities
$
(46,043
)
 
$
(135,432
)

32




Operating Activities
Net cash provided by operating activities of $25.7 million during the three months ended April 2, 2017 was primarily due to a net loss of $45.7 million offset by net non-cash items of $100.6 million and $29.2 million decrease in cash due to changes in operating assets and liabilities.  The non-cash items primarily consisted of:
depreciation and amortization of $65.1 million ,
stock-based compensation expense of $25.9 million ,
restructuring costs of $2.6 million ,
accretion of interest expense on Senior Exchangeable Notes and amortization of debt and financing costs on other debt of $5.1 million , and
share in net loss of equity method investees of $5.1 million .
Decrease in net cash due to changes in operating assets and liabilities for the three months ended April 2, 2017 of $29.2 million was primarily due to the following:

a decrease in accounts receivable of $15.8 million mainly due to collection efforts which reduced the days sales outstanding for the first quarter of fiscal 2017 to 54 days as compared to 61 days in the first quarter of fiscal 2016,
a decrease in accounts payable and accrued and other liabilities of $10.7 million mainly due to timing of payments and payments related to restructuring activities,
an increase in inventories of $37.1 million to support expected demand of IoT and MCD products during remainder of fiscal 2017, and
an increase of $6.5 million in price adjustments and other revenue reserves for sales to distributors due to the change in revenue recognition for certain product families on a sell-in basis, which required us to record a reserve for distributor price adjustments based on our estimate of historical experience rates.
Investing Activities
During the three months ended April 2, 2017 , we generated approximately $21.7 million of cash in our investing activities primarily due to $31.6 million of cash received on sale of assets held for sale and receipt of $6.5 million of previously escrowed consideration from the divestiture of our TrueTouch® mobile touchscreen business. Such increases were offset by $13.8 million of cash used for property and equipment expenditures relating to purchases of certain tooling, laboratory and manufacturing facility equipment and $7.1 million cash paid for certain investments, of which $5.6 million related to our investment in Enovix.
Financing Activities
During the three months ended April 2, 2017 , we used approximately $46.0 million of cash in our financing activities primarily related to $35.5 million dividend payment, net repayments of $15.0 million on the revolving credit facility, and $7.5 million of scheduled repayment of Term Loan A and Term Loan B. Such borrowings were offset by $17.9 million of proceeds from employee equity awards.

33




Liquidity and Contractual Obligations
Contractual Obligations
The following table summarizes our contractual obligations as of April 2, 2017 :
 
 
Total
 
2017
 
2018 and 2019
 
2020 and 2021
 
After 2021
 
(In thousands)
Purchase obligations (1)
$
492,948

 
$
252,496

 
$
163,531

 
$
76,921

 
$

Operating lease commitments (2)
75,497

 
14,440

 
23,805

 
14,982

 
22,270

Capital lease obligations and Equipment loans
36

 
36

 

 

 

2.00% Senior Exchangeable Notes
149,990

 

 

 
149,990

 

4.50% Senior Exchangeable Notes
287,500

 

 

 

 
287,500

Term Loan A
93,125

 
5,625

 
17,500

 
70,000

 

Term Loan B
438,750

 
16,875

 
47,835

 
374,040

 

Interest payment on debt
211,650

 
49,575