Cypress Semiconductor Corporation
CYPRESS SEMICONDUCTOR CORP /DE/ (Form: 10-Q, Received: 07/28/2017 16:44:45)



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 July 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 July 24, 2017 was 332,488,159.






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 various long-term strategic corporate transformation initiatives, collectively referred to as 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; 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 size and composition of our Board of Directors; 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 on 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)
 
 
July 2, 
 2017
 
January 1, 
 2017
 
(In thousands, except
per-share amounts)
Current assets:
 

 
 
Cash and cash equivalents
$
108,771

 
$
120,172

Accounts receivable, net
336,547

 
333,037

Inventories
311,774

 
287,776

Other current assets
124,038

 
122,162

Assets held for sale

 
30,796

Total current assets
881,130

 
893,943

Property, plant and equipment, net
289,458

 
297,266

Equity method investments
184,375

 
188,687

Intangible assets, net
805,428

 
904,561

Goodwill
1,439,472

 
1,439,472

Other long-term assets
144,247

 
147,942

Total assets
$
3,744,110

 
$
3,871,871

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
214,222

 
$
241,424

Accrued compensation and employee benefits
68,512

 
60,552

Price adjustment and other revenue reserves
163,281

 
154,525

Dividend payable
36,325

 
35,506

Current portion of long-term debt
30,000

 
30,152

Other current liabilities
133,504

 
180,298

Total current liabilities
645,844

 
702,457

Deferred income taxes and other tax liabilities
50,157

 
44,934

Revolving credit facility and long-term debt
1,168,851

 
1,194,979

Other long-term liabilities
34,269

 
36,749

Total liabilities
1,899,121

 
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; 505,069 and 497,055 shares issued; 331,578 and 323,583 shares outstanding at July 2, 2017 and January 1, 2017, respectively
4,764

 
4,737

Additional paid-in-capital
5,693,948

 
5,676,236

Accumulated other comprehensive loss
(3,336
)
 
(8,811
)
Accumulated deficit
(1,516,069
)
 
(1,445,033
)
Stockholders’ equity before treasury stock
4,179,307

 
4,227,129

Less: shares of common stock held in treasury, at cost; 173,491 and 173,472 shares at July 2, 2017 and January 1, 2017, respectively
(2,335,372
)
 
(2,335,301
)
Total Cypress stockholders’ equity
1,843,935

 
1,891,828

Non-controlling interest
1,054

 
924

Total equity
1,844,989

 
1,892,752

Total liabilities and equity
$
3,744,110

 
$
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
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
 
(In thousands, except per-share amounts)
Revenues
$
593,776

 
$
450,127

 
$
1,125,650

 
$
869,091

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
357,594

 
291,349

 
690,408

 
584,528

Research and development
89,736

 
70,171

 
178,217

 
144,138

Selling, general and administrative
81,243

 
81,836

 
155,090

 
156,336

Amortization of intangible assets
49,354

 
32,605

 
97,603

 
67,792

Costs and settlement charges related to shareholder matter
12,043

 

 
14,310

 

Impairment of acquisition-related intangible assets

 

 

 
33,944

Goodwill impairment charge

 
488,504

 

 
488,504

Restructuring costs
898

 
654

 
3,470

 
924

Total costs and expenses
590,868

 
965,119

 
1,139,098

 
1,476,166

Operating income (loss)
2,908

 
(514,992
)
 
(13,448
)
 
(607,075
)
Interest expense
(18,781
)
 
(7,540
)
 
(38,257
)
 
(13,872
)
Other income, net
2,374

 
224

 
2,490

 
305

Loss before income taxes and non-controlling interest
(13,499
)
 
(522,308
)
 
(49,215
)
 
(620,642
)
Income tax (provision) benefit
(4,504
)
 
5,221

 
(9,430
)
 
1,479

Share in net loss of equity method investees
(4,835
)
 
(2,568
)
 
(9,911
)
 
(4,646
)
Net loss
(22,838
)
 
(519,655
)
 
(68,556
)
 
(623,809
)
Net (income) loss attributable to non-controlling interests
(66
)
 
381

 
(130
)
 
513

Net loss attributable to Cypress
$
(22,904
)
 
$
(519,274
)
 
$
(68,686
)
 
$
(623,296
)
Net loss per share attributable to Cypress:
 
 
 
 
 
 
 
Basic
$
(0.07
)
 
$
(1.65
)
 
$
(0.21
)
 
$
(1.96
)
Diluted
$
(0.07
)
 
$
(1.65
)
 
$
(0.21
)
 
$
(1.96
)
Cash dividend declared per share
$
0.11

 
$
0.11

 
$
0.22

 
$
0.22

Shares used in net loss per share calculation:
 
 
 
 
 
 
 
Basic
329,860

 
314,305

 
328,320

 
317,330

Diluted
329,860

 
314,305

 
328,320

 
317,330

 


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





CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
LINKED DATA
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
 
(In thousands)
Net loss
$
(22,838
)
 
$
(519,655
)
 
$
(68,556
)
 
$
(623,809
)
Other comprehensive (loss) income:
 

 
 

 
 

 
 

Net unrealized gain on cash flow hedges:
 

 
 

 
 

 
 

Net unrealized (loss) gain arising during the period
(725
)
 
(7,951
)
 
1,515

 
(10,629
)
Net (gain) loss reclassified into earnings for revenue hedges (effective portion)
(1,282
)
 
4,102

 
(3,871
)
 
5,127

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

 
(184
)
 

 
(173
)
Net loss reclassified into earnings for expense hedges (effective portion)
2,988

 
4,665

 
8,638

 
7,454

Provision for income tax

 

 
(808
)
 

Net unrealized gain on cash flow hedges
981

 
632

 
5,474

 
1,779

Other comprehensive gain
981

 
632

 
5,474

 
1,779

Comprehensive loss
(21,857
)
 
(519,023
)
 
(63,082
)
 
(622,030
)
Comprehensive (income) loss attributable to non-controlling interest
(66
)
 
381

 
(130
)
 
513

Comprehensive loss attributable to Cypress
$
(21,923
)
 
$
(518,642
)
 
$
(63,212
)
 
$
(621,517
)
 


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




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

 
 

Net loss
$
(68,556
)
 
$
(623,809
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Stock-based compensation expense
56,271

 
42,387

Depreciation and amortization
131,335

 
122,737

Impairment of acquisition-related intangible assets

 
33,944

Impairment of goodwill

 
488,504

(Gain) loss on disposal on property and equipment
(809
)
 
6,116

Share in net loss of equity method investees
9,911

 
4,646

Accretion of interest expense on Senior Exchangeable Notes and amortization of debt and financing costs on other debt
10,071

 
3,101

Other adjustments
61

 
2,793

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(3,510
)
 
(32,406
)
Inventories
(24,295
)
 
22,383

Other current and long-term assets
(4,987
)
 
(36,656
)
Price adjustment reserve for sales to distributors
8,756

 
50,114

Accounts payable and other liabilities
(56,080
)
 
(6,815
)
Deferred margin on sales to distributors

 
(54,536
)
Net cash provided by operating activities
58,168

 
22,503

Cash flows from investing activities:
 

 
 

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

 
84,317

Purchases of marketable securities

 
(80,053
)
Cash received on sale of asset held for sale
31,611

 

Proceeds from divestiture of TrueTouch® Mobile business
6,509

 

Contribution, net of distributions to deferred compensation plan
4,206

 
1,743

Acquisition of property, plant and equipment
(29,350
)
 
(25,814
)
Cash paid for equity and cost method investments
(7,893
)
 
(14,376
)
Others
1,575

 

Net cash provided by (used in) investing activities
6,658

 
(34,183
)
Cash flows from financing activities:
 

 
 

Borrowings under revolving credit facility
70,000

 
120,000

Repayment of revolving credit facility
(85,000
)
 
(202,000
)
Repayment of Term Loan A and Term Loan B
(15,000
)
 
(2,500
)
Purchase of treasury stock

 
(175,694
)
Payment of cash dividends
(71,754
)
 
(70,820
)
Proceeds from employee stock-based awards
31,841

 
40,111

Repayment of equipment leases, loans and other
(111
)
 
(6,606
)
Net proceeds from issuance of 4.50% Senior Exchangeable Notes

 
279,594

Purchase of capped calls

 
(8,165
)
Financing costs related to revolving credit facility
(6,203
)
 
(597
)
Net cash used in financing activities
(76,227
)
 
(26,677
)
Net decrease in cash and cash equivalents
(11,401
)
 
(38,357
)
Cash and cash equivalents, beginning of period
120,172

 
226,690

Cash and cash equivalents, end of period
$
108,771

 
$
188,333

Supplemental Cash Flows Disclosures:
 

 
 

Dividends payable
$
36,325

 
$
35,240

Unpaid purchase of property, plant and equipment
$
354

 
$
3,804

Cash paid for interest
$
28,968

 
$
10,398

Cash paid for income taxes
$
4,499

 
$
4,742


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 second quarter of fiscal 2017 ended on July 2, 2017 and the second quarter of fiscal 2016 ended on July 3, 2016 .
Basis of Presentation
These condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
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, the Company 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 include the financial results of the IoT business beginning July 5, 2016. The comparability of our results for the second 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 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 second quarter of fiscal 2017 to the same period in fiscal 2016 is impacted by the said change. Refer to Note 6 and Note 21 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.
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 prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses and the related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
The Condensed Consolidated Results of Operations for the three and six months ended July 2, 2017 are not necessarily indicative of the results to be expected for the full fiscal year.
Summary of Significant Accounting Policies
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.

9





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 (Accounting Standard Update) on revenue from contracts with customers, ASU No. 2014-09, “Revenue from Contracts with Customers", which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue as control of goods or services transfers to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. It defines a five step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current guidance. The new guidance will be effective for the Company starting in the first quarter of fiscal 2018. Adoption one year early is permitted. Two methods of adoption are permitted: (a) full retrospective adoption, meaning this standard is applied to all periods presented or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized as an adjustment to the opening retained earnings balance.
The Company presently expects to select the modified retrospective transition method. 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. By the end of fiscal 2016, the Company transitioned all revenue from distributors from sell-through to the sell-in basis of accounting. Please see discussion related to the transition to sell-in-basis of accounting 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. Consequently, the Company 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 that our distributor revenues are now recognized at the time of shipment, the Company currently expects the adoption of this new guidance may impact the timing of recognition of revenue from its intellectual property portfolio, non-recurring engineering arrangements, and sales of products that do not have an alternative use under a non-cancelable arrangement. Upon adoption of the new guidance, licenses to use portions of the Company’s intellectual property portfolio may need to be recognized as revenues on a straight-line basis over the term of the license agreement. Also, the Company expects a change in the timing of revenues recognized from sales-based royalties. The Company currently recognizes sales-based royalties as revenues in the period in which such royalties are reported by licensees, which is typically after the conclusion of the quarter in which the licensees’ sales occur. Under the new guidance, the Company will be required to estimate and recognize sales-based royalties in the period in which the associated sales occur, resulting in acceleration of revenue recognition compared to the current method. The Company also expects that revenue from certain non-recurring engineering arrangements, which are currently recognized upon the achievement of contractual milestones, may need to be recognized as performance obligations are satisfied over time. Similarly, sales of products that do not have an alternative use under a non-cancelable arrangement, which are currently recognized at a point in time may need to be recognized as performance obligations are satisfied over time. Revenues from these arrangements are presently not material for the Company.
In February 2016, the FASB issued ASU 2016-02, Leases, "(Topic 842)", which replaces most current lease guidance when it becomes effective. This standard update intends to increase the transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. The new guidance will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently evaluating the timing of adoption and the effect that the new 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 and related disclosures.
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

10




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.

In May 2017 the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 amends the requirements in GAAP related to accounting in changes to stock compensation awards. The guidance in ASU 2017-09 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.


NOTE 2. BALANCE SHEET COMPONENTS

Accounts Receivable, Net
 
As of
 
July 2, 2017
 
January 1, 2017
 
(In thousands)
Accounts receivable, gross
$
341,892

 
$
338,061

Allowance for doubtful accounts receivable and sales returns
(5,345
)
 
(5,024
)
Total accounts receivable, net
$
336,547

 
$
333,037


Inventories
 
 
As of
 
July 2, 2017
 
January 1, 2017
 
(In thousands)
Raw materials
$
15,474

 
$
15,525

Work-in-process
219,733

 
208,525

Finished goods
76,567

 
63,726

Total inventories
$
311,774

 
$
287,776



Other Current Assets
 
 
As of
 
July 2, 2017
 
January 1, 2017
 
(In thousands)
Prepaid tooling - current
$
18,937

 
$
21,687

Restricted cash relating to defined benefit pension plan, current
2,466

 
4,206

Advances to suppliers
19,388

 
16,549

Prepaid royalty and licenses
15,455

 
17,769

Derivative assets
3,794

 
6,605

Value added tax receivable
9,090

 
11,625

Receivable from sale of TrueTouch Mobile ® business
3,491

 
10,000

Prepaid expenses
39,740

 
22,965

Other current assets
11,677

 
10,756

Total other current assets
$
124,038

 
$
122,162




11




Other Long-term Assets
 
 
As of
 
July 2, 2017
 
January 1, 2017
 
(In thousands)
Employee deferred compensation plan
$
44,448

 
$
45,574

Prepaid tooling - non-current
12,827

 
6,054

Investment in cost method equity securities
15,625

 
13,331

Deferred tax assets
4,359

 
4,463

Long-term licenses
13,417

 
14,498

Advance to suppliers
19,535

 
25,207

Other assets
34,036

 
38,815

Total other long-term assets
$
144,247

 
$
147,942


 
Other Current Liabilities
 
 
As of
 
July 2, 2017
 
January 1, 2017
 
(In thousands)
Employee deferred compensation plan
$
45,774

 
$
46,359

Restructuring accrual - current portion (See Note 7)
5,599

 
24,029

Derivative liability
8,004

 
15,582

Accrued expenses
51,981

 
73,983

Other current liabilities
22,146

 
20,345

Total other current liabilities
$
133,504

 
$
180,298

 
Other Long-term Liabilities
 
 
As of
 
July 2, 2017
 
January 1, 2017
 
(In thousands)
Long-term pension and other employee related liabilities
$
16,330

 
$
14,672

Restructuring accrual - non-current portion (See Note 7)
9,908

 
11,294

Asset retirement obligation
5,371

 
5,067

Other long-term liabilities
2,660

 
5,716

Total other long-term liabilities
$
34,269

 
$
36,749


NOTE 3. INTANGIBLE ASSETS
The following table presents details of the Company's intangible assets:
 

12




 
As of July 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
$
1,059,008

 
$
(392,683
)
 
$
666,325

 
$
1,021,244

 
$
(295,023
)
 
$
726,221

Non-acquisition related intangible assets
12,000

 
(10,336
)
 
1,664

 
12,000

 
(8,863
)
 
3,137

Total developed technology and other intangible assets
1,071,008

 
(403,019
)
 
667,989

 
1,033,244

 
(303,886
)
 
729,358

In-process research and development
137,439

 

 
137,439

 
175,203

 

 
175,203

Total intangible assets
$
1,208,447

 
$
(403,019
)
 
$
805,428

 
$
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 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 July 2, 2017 :
 
(in thousands)
As of January 1, 2017
$
175,203

Technological feasibility achieved
(37,764
)
As of July 2, 2017
$
137,439

 
During the three and six months ended July 2, 2017 , two and three projects representing $18.3 million and $37.8 million , respectively, of the total capitalized IPR&D, with estimated useful lives of 4 years and 5 years , respectively, had reached technological feasibility and were 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 July 2, 2017 to attain technological feasibility by fiscal 2018.
The estimated future amortization expense related to developed technology and other intangible assets as of July 2, 2017 is as follows:
 
 
(In thousands)
2017 (remaining six months)
$
98,150

2018
191,592

2019
183,994

2020
124,073

2021
30,912

2022 and future
39,268

Total future amortization expense
$
667,989

 
 
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.


13




The carrying value of these assets held for sale at the end of fiscal 2016 reflected 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 half of fiscal 2017, the Company recorded a gain of $0.8 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 Statements of Operations.

NOTE 5. 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.
 
 
As of July 2, 2017
 
 
(in thousands)
 
 
Deca Technologies ("Deca")
 
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
 
(5,408
)
 
(4,503
)
 
(9,911
)
Carrying value as of July 2, 2017
 
$
128,919

 
$
55,456

 
$
184,375

During the first quarter of fiscal 2017, the Company made an investment of $5.6 million in Enovix, which completed the Company's investment commitment in Enovix of $85.1 million per the original agreement dated February 22, 2012 . Certain third-party investors made additional investments in Enovix in the first quarter of fiscal 2017, as a result of which, the Company's ownership in Enovix reduced from 46.6% as at January 1, 2017 to 41.2% as at April 2, 2017. As of July 2, 2017 , the Company’s ownership in Enovix was 41.2% .

The estimated fair value of the Company’s investment in Enovix, based on the enterprise value of Enovix implied from a third-party investment in Enovix, exceeds the carrying value of the said investment as at July 2, 2017. Enovix continues to be in the process of completing certain key product development milestones. Enovix’s estimated enterprise value is sensitive to its ability to achieve these milestones. Delays or failure by Enovix to complete these milestones may have an adverse impact on Enovix’s estimated enterprise value and 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.

As of January 1, 2017 and July 2, 2017 , the Company’s ownership in Deca was 52.2% .
 
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 July 2, 2017 and January 1, 2017 :
 

14




 
As of July 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 
$
362

 
$

 
$
362

 
$
287

 
$

 
$
287

Total cash equivalents
362

 

 
362

 
287

 

 
287

Other current assets
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit

 
972

 
972

 

 
972

 
972

Total other current assets

 
972

 
972

 

 
972

 
972

 
 
 
 
 
 
 
 
 
 
 
 
Employee deferred compensation plan assets:
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents
3,530

 

 
3,530

 
3,809

 

 
3,809

Mutual funds
24,196

 

 
24,196

 
22,658

 

 
22,658

Equity securities
11,375

 

 
11,375

 
11,974

 

 
11,974

Fixed income
3,063

 

 
3,063

 
4,088

 

 
4,088

Stable value funds

 
2,284

 
2,284

 

 
3,045

 
3,045

Total employee deferred compensation plan assets
42,164

 
2,284

 
44,448

 
42,529

 
3,045

 
45,574

Foreign exchange forward contracts

 
3,794

 
3,794

 

 
6,605

 
6,605

Total financial assets
$
42,526

 
$
7,050

 
$
49,576

 
$
42,816

 
$
10,622

 
$
53,438

Financial Liabilities
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange forward contracts
$

 
$
8,004

 
$
8,004

 
$

 
$
15,582

 
$
15,582

Employee deferred compensation plan liability

 
45,774

 
45,774

 

 
46,359

 
46,359

Total financial liabilities
$

 
$
53,778

 
$
53,778

 
$

 
$
61,941

 
$
61,941

 
The Company did not have any assets or liabilities measured at fair value on a recurring basis using Level 3 inputs as of July 2, 2017 and January 1, 2017 .  There were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the three and six months ended July 2, 2017 and July 3, 2016 related to these securities.

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.
Fair Value of Long-term Debt
As of July 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 secondary market for debt instruments and are categorized as a Level 2 liability. The carrying value and the estimated fair value of the said Notes as of July 2, 2017 were $137.2 million and $397.9 million , respectively.  See Note 9 for further details.
The Company’s 4.50% Senior Convertible Notes are traded in the secondary market for the debt instruments 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 July 2, 2017 were $241.6 million and $351.3 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 will result in elimination of approximately 430 positions worldwide across various functions. The restructuring charge of $0.9 million recorded for the three months ended July 2, 2017 consists of personnel costs and facilities related expenses. The restructuring charge of $3.5 million recorded for the six months ended July 2, 2017 consists of personnel costs of $1.9 million , other charges related to the write-off of certain licenses and facilities related expenses of $1.6 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 ("Spansion Integration Plan")
In March 2015, the Company implemented cost reduction and restructuring activities in connection with the Merger. The restructuring charge of $0.9 million recorded for the six months ended July 3, 2016 consists primarily of severance costs and impairment of property, plant and equipment. No restructuring charges were recorded for the three and six months ended July 2, 2017 related to the Spansion Integration Plan.
Summary of restructuring costs
The following table summarizes the restructuring charges recorded in the Consolidated Statements of Operations:
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
 
(In thousands)
Personnel costs
$
374

 
$
369

 
$
1,877

 
$
615

Lease termination costs

 
285

 

 
309

Other
524

 

 
1,593

 

Total restructuring costs
$
898

 
$
654

 
$
3,470

 
$
924

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 was as follows:
 
 
(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

Provision

 
898

 
898

Cash payments and other adjustments
(741
)
 
(3,237
)
 
(3,978
)
Accrued restructuring balance as of July 2, 2017
$
12,715

 
$
2,792

 
$
15,507

Current portion of the restructuring accrual
$
2,807

 
$
2,792

 
$
5,599

Non-current portion of the restructuring accrual
$
9,908

 
$

 
$
9,908


The Company anticipates that the remaining 2016 Plan restructuring accrual balance of $2.8 million will be paid out in cash through the end of fiscal 2017 for employee terminations and facilities related expenses, and the remaining Spansion Integration Plan accrual balance of $12.7 million will be paid over the lease term through 2026 for the excess lease obligation related to the buildings Spansion had leased prior to the Merger, which the Company decided not to occupy in the post-Merger period.


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
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
 
(In thousands)
Cost of revenues
$
4,833

 
$
4,278

 
$
10,164

 
$
9,925

Research and development
11,275

 
5,329

 
23,046

 
12,259

Selling, general and administrative
14,226

 
9,242

 
23,061

 
20,203

Total stock-based compensation expense
$
30,334

 
$
18,849

 
$
56,271

 
$
42,387

 
As of July 2, 2017 and January 1, 2017 , stock-based compensation capitalized in inventories totaled $4.3 million and $4.6 million , respectively.
The following table summarizes the stock-based compensation expense by type of awards:
 
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
 
(In thousands)
Stock options
$
109

 
$
206

 
$
109

 
$
504

Restricted stock units ("RSUs") and performance-based restricted stock awards ("PSUs")
25,706

 
13,204

 
46,546

 
30,597

Employee Stock Purchase Plan (“ESPP”)
4,519

 
5,439

 
9,616

 
11,286

Total stock-based compensation expense
$
30,334

 
$
18,849

 
$
56,271

 
$
42,387

 
The following table summarizes the unrecognized stock-based compensation expense, by type of awards:
 
 
As of
 
July 2, 2017
 
Weighted-
Average
Amortization
Period
 
(In thousands)
 
(In years)
Stock options
$
289

 
0.67
RSUs and PSUs
100,661

 
1.45
ESPP
15,519

 
0.59
Total unrecognized stock-based compensation expense
$
116,469

 
1.34
Equity Incentive Program
As of July 2, 2017 , approximately 47.3 million stock options, or 26.7 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 July 2, 2017 , there were 2.2 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

Exercised
(270
)
 
$
8.77

 
 
 
 
Forfeited or expired
(63
)
 
$
14.98

 
 
 
 
Options outstanding as of July 2, 2017
6,275

 
$
11.01

 
 
 
 
Options exercisable as of July 2, 2017
5,589

 
$
11.00

 
2.61
 
$
18.6

 
There were no options granted during the six months ended July 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

Released
(3,824
)
 
$
12.55

Forfeited
(1,151
)
 
$
12.21

Balance as of April 2, 2017
14,116

 
$
12.12

Granted
459

 
$
13.56

Released
(673
)
 
$
11.40

Forfeited
(517
)
 
$
12.44

Balance as of July 2, 2017
13,385

 
$
12.19

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

18




NOTE 9. DEBT
 
Total debt is comprised of the following:
 
 
 
As of
 
 
July 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
 

 
152

Current portion of long-term debt
 
30,000

 
30,152

Senior secured credit facility and long-term debt
 
 

 
 

Revolving credit facility
 
317,000

 
332,000

Term Loan A
 
80,949

 
84,838

Term Loan B
 
392,086

 
406,214

2.00% Senior Exchangeable Notes
 
137,248

 
135,401

4.50% Senior Exchangeable Notes
 
241,568

 
236,526

Revolving credit facility and long-term debt
 
1,168,851

 
1,194,979

Total debt
 
$
1,198,851

 
$
1,225,131

As of July 2, 2017 , the Company was in compliance with all of the financial covenants under all of its debt facilities.
 
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 and six months ended July 2, 2017 and year ended January 1, 2017 (in thousands):
 

19




 
 
Three Months Ended July 2, 2017
 
Six Months Ended July 2, 2017
 
Year Ended January 1, 2017
Contractual interest expense
 
$
3,271

 
$
6,540

 
$
6,900

Amortization of debt issuance costs
 
320

 
639

 
700

Accretion of debt discount
 
2,202

 
4,403

 
4,646

Total
 
$
5,793

 
$
11,582

 
$
12,246

 
The net liability component of the Notes is comprised of the following (in thousands):
 
 
July 2, 2017
 
January 1, 2017
Net carrying amount at issuance date
$
231,180

 
$
231,180

Amortization of debt issuance costs to date
1,339

 
700

Accretion of debt discount to date
9,049

 
4,646

Net carrying amount
$
241,568

 
$
236,526

 
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 an initial strike price of approximately $13.49 and an initial cap price of approximately $15.27 , in each case, subject to adjustment. The capped calls are intended to reduce the potential dilution and/or offset any cash payments the Company is required to make upon conversion of the Notes if the market price of the Company’s common stock is above the strike price of the capped calls.  If, however, the market price of the Company’s common stock is greater than the cap price of the capped calls, there would be dilution and/or no offset of such potential cash payments, as applicable, to the extent the market price of the Common Stock exceeds the cap price. The capped calls expire in January 2022 .
Senior Secured Credit Facility ("Credit Facility")
The Credit Facility is made up of the revolving credit facility, Term Loan A and Term Loan B.
On February 17, 2017, the Company amended its 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 total leverage ratio of 4.25 to 1.00 through December 31, 2017, 2) maximum total 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 have been capitalized and recognized as a reduction of the Term Loan A and Term Loan B balances in “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 are recorded in “Interest Expense” on the Condensed Consolidated Statements of Operations.
On April 7, 2017, the Company amended its 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. The Company incurred financing costs of $0.4 million to lenders of Term Loan A which has been recognized as a reduction of the Term Loan A balance in “Long-term 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 July 2, 2017 , $842.9 million aggregate principal amount of loans, including Term Loan A, Term Loan B and letters of credit, were outstanding under the revolving 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.

20




As of July 2, 2017 , the Spansion Notes are exchangeable for 195.2 shares of common stock per $1,000 principal amount of the Notes (equivalent to an exchange price of approximately $5.12 ) 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.
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 consists of the following (in thousands):
 
 
July 2, 2017
 
January 1, 2017
Principal amount
$
149,990

 
$
149,990

Unamortized debt discount
(12,742
)
 
(14,589
)
Net carrying value
$
137,248

 
$
135,401

 
The following table presents the interest on the Spansion Notes recognized as an expense during the three and six months ended July 2, 2017 and July 3, 2016 :
 
 
 
Three Months Ended
 
Six Months Ended
 
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
 
 
(in thousands)
Contractual interest expense at 2% per annum
 
$
742

 
$
742

 
$
1,492

 
$
1,489

Accretion of debt discount
 
935

 
890

 
1,848

 
1,762

Total
 
$
1,677

 
$
1,632

 
$
3,340

 
$
3,251


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 at end of second 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. As of the end of the second quarter of fiscal 2017, 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 July 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
 
Total
 
 
(In thousands)
2017 (remaining six months)
 
$
7,410

 
$
32,637

 
$
11,000

 
$
1,500

 
$
6,505

 
$
59,052

2018
 
10,862

 
42,768

 
11,000

 
3,000

 
13,117

 
80,747

2019
 
13,027

 
44,450

 
11,000

 
3,000

 
13,117

 
84,594

2020
 
72,779

 
51,383

 
319,750

 
152,990

 
13,153

 
610,055

2021
 

 
348,342

 

 

 
13,117

 
361,459

2022 and after
 
 
 
 
 
 
 
 
 
294,112

 
294,112

Total
 
$
104,078

 
$
519,580

 
$
352,750

 
$
160,490

 
$
353,121

 
$
1,490,019


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 2022 and thereafter. 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 July 2, 2017 , future minimum lease payments under non-cancelable operating leases were as follows:
 
Fiscal Year
(In thousands)
2017 (remaining six months)
$
9,745

2018
14,379

2019
10,151

2020
8,228

2021
6,402

2022 and thereafter
22,290

Total
$
71,195

 
Restructuring accrual balances related to operating facility leases were $12.7 million and $14.2 million as of July 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:
 
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
 
(In thousands)
Beginning balance
$
3,996

 
$
4,176

 
$
3,996

 
$
4,096

Settlements made
(310
)
 
(651
)
 
(629
)
 
(1,081
)
Provisions
631

 
2,439

 
950

 
2,949

Ending balance
$
4,317

 
$
5,964

 
$
4,317

 
$
5,964

 
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 approximately $0.5 million (including interest and fees) should be refunded to Finmek. The Company filed an appeal (Court of Appeal of Venice, Docket no. 2706/2015), and on July 13, 2017, the Court of Appeal reversed the decision, ruling in Ramtron’s favor. The Company has prevailed in all other related proceedings (Court of Appeal of Venice, Docket Nos. 1387/2014 and 2487/2015; Tribunal of Padua Docket No. 5378/2009), and time has expired for the trustee to appeal the 1387/2014 matter. 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 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.

Since August 2014, the Company had 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 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. On July 12, 2017, the Court issued a claim construction order. The matter is still in the 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 (Supreme Court of New South Wales, Case No. 2016/263578). On May 16, 2017, the claims against the Company were dismissed.  

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.


23




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 sought 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. On June 1, 2017, the Court of Chancery granted Mr. Rodgers’ motion for a preliminary injunction and ordered that the Company make several additional disclosures in its proxy materials and delay the annual shareholders meeting by at least ten days. The parties entered into a settlement agreement, with an effective date of June 30, 2017, to resolve and dismiss with prejudice all ongoing litigation and claims relating to the subject matter of the Section 220 and breach of fiduciary duty actions. The settlement includes a standstill through the earlier of May 31, 2019 or the June 2019 shareholders’ meeting, subject to certain conditions, and provides for reimbursement of up to $3.5 million in documented fees, costs, and expenses incurred by Mr. Rodgers in connection with the lawsuits and the 2017 proxy contest. This charge was recorded in the Costs and settlement charges related to the shareholder matter line item of the Condensed Consolidated Statements of Operations. The said reimbursement of $3.5 million was paid to Mr. Rodgers on July 24, 2017 . On July 26, 2017, the litigations were dismissed with prejudice.
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 July 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 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

24




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 July 2, 2017 , the Company had outstanding forward contracts to buy approximately ¥5,659 million for $52.3 million .
Non-designated hedges
Total notional amounts of net outstanding contracts were as summarized below:
 
Buy / Sell
 
July 2, 2017
January 1, 2017
 
 
(in millions)
US dollar / EUR
 
$10.2/€9.1
$25.0 / €23.6
Japanese Yen / US dollar
 
¥5,080 / $47.6
¥10,129/$87.9
 
The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three and six months ended July 2, 2017 was immaterial.
 
The gross fair values of derivative instruments on the Condensed Consolidated Balance Sheets as of July 2, 2017 and January 1, 2017 were as follows:
 
 
 
July 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
 
$
1,735

 
$
2,059

 
$
6,468

 
$
137

Other Current Liabilities
 
 

 
 

 
 

 
 

Derivative Liability
 
$
3,308

 
$
4,696

 
$
14,391

 
$
1,191

 
NOTE 12. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share:
 

25




 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
 
(In thousands, except per-share amounts)
Net loss attributable to Cypress
$
(22,904
)
 
$
(519,274
)
 
$
(68,686
)
 
$
(623,296
)
Weighted-average common shares
329,860

 
314,305

 
328,320

 
317,330

Weighted-average diluted shares
329,860

 
314,305

 
328,320

 
317,330

Net loss per share—basic
$
(0.07
)
 
$
(1.65
)
 
$
(0.21
)
 
$
(1.96
)
Net loss per share—diluted
$
(0.07
)
 
$
(1.65
)
 
$
(0.21
)
 
$
(1.96
)
 
For the three months ended July 2, 2017 and July 3, 2016 , approximately 1.1 million and 7.7 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. For the six months ended July 2, 2017 and July 3, 2016 , approximately 0.9 million and 8.9 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 $4.5 million and income tax benefit was $5.2 million for the three months ended July 2, 2017 and July 3, 2016 , respectively. The Company's income tax expense was $9.4 million and the Company's income tax benefit was $1.5 million for the six months ended July 2, 2017 and July 3, 2016 , respectively. The income tax expense for the three and six months ended July 2, 2017 was primarily due to non-U.S. income taxes on income earned in foreign jurisdictions.  The tax benefit for the three and six months ended July 3, 2016 was primarily attributable to a release of previously accrued taxes related to the lapsing of statutes of limitation, primarily offset by income taxes associated with the Company's non-US operations.
Unrecognized Tax Benefits
As of July 2, 2017 and January 1, 2017 , the amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate totaled $25.8 million and $24.3 million , respectively.
Management believes events that could occur in the next 12 months which could cause a 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 $0.2 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 July 2, 2017 and January 1, 2017 , the amounts of accrued interest and penalties totaled $9.4 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

26




resources and assess performance. The Company’s chief operating decision maker ("CODM") is considered to be the Chief Executive Officer.
The prior periods herein reflect the change in segments as described in Note 1 of the Notes to Condensed Consolidated Financial Statements.
 
Revenues
 
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
 
(In thousands)
Microcontroller and Connectivity Division
$
360,533

 
$
208,453

 
$
678,434

 
$
415,275

Memory Products Division
233,243

 
241,674

 
447,216

 
453,816

Total revenues
$
593,776

 
$
450,127

 
$
1,125,650

 
$
869,091

 
Income (loss) before Income Taxes
 
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
 
(In thousands)
Microcontroller and Connectivity Division
$
13,141

 
$
(4,944
)
 
$
12,223

 
$
(9,931
)
Memory Products Division
64,711

 
47,939

 
114,382

 
79,360

Unallocated items: