UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 28, 2014
Or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
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)
Registrant’s telephone number, including area code: (408) 943-2600
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $.01 par value | The NASDAQ Stock Market | |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes ý No
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. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). ý Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “larger accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes ý No
The market value of voting and non-voting common stock held by non-affiliates of the registrant, based upon the closing sale price of the common stock on June 29, 2014 as reported on the NASDAQ Global Select Market, was approximately $1.7 billion. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded from the foregoing calculation in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 5, 2015, 165,333,335 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the registrant’s Annual Meeting of Stockholders to be filed pursuant to Regulation 14A for the year ended December 28, 2014 are incorporated by reference in Items 10 - 14 of Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
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Item 7 | ||
Item 7A | ||
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Item 9A | ||
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FORWARD-LOOKING STATEMENTS
The discussion in this Annual Report on Form 10-K contains statements that are not historical in nature, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, including, but not limited to, statements related to our manufacturing strategy, the expected timing and costs related to our proposed merger with Spansion, our ability to execute on planned synergies with the proposed merger, our expectation regarding dividends and stock repurchases, our expectations regarding future technology transfers and other licensing arrangements, our expectations regarding the timing and cost of our restructuring liabilities, our expectations regarding our active litigation matters, our intention to appeal the GSI ruling and our intent to defend ourselves in those matters; the competitive advantage we believe we have with our patents as well as our proprietary programmable technologies and programmable products, our backlog as an indicator of future performance, the risk associated with our yield investment agreements, our foreign currency exposure and the impact exchange rates could have on our operating margins, the adequacy of our cash and working capital positions, the value and liquidity of our investments, including auction rate securities and our other debt investments, our ability to recognize certain unrecognized tax benefits within the next twelve months as well as the resolution of agreements with various foreign tax authorities, our investment strategy, the impact of interest rate fluctuations on our investments, the volatility of our stock price, the adequacy of our real estate properties, the utility of our non-GAAP reporting, the adequacy of our audits, the potential impact of our indemnification obligations and the impact of new accounting standards on our financial statements. We use words such as “plan,” “anticipate,” “believe,” “expect,” “future,” “intend” and similar expressions to identify forward-looking statements. Such forward-looking statements are made as of the date hereof and are based on our current expectations, beliefs and intentions regarding future events or our financial performance and the information available to management as of the date hereof. Except as required by law, we assume no responsibility to update any such forward-looking statements. Our actual results could differ materially from those expected, discussed or projected in the forward-looking statements contained in this Annual Report on Form 10-K 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 reliance on regulators and shareholders to approve our proposed merger with Spansion, our ability to timely deliver our proprietary and programmable technologies and products, the current credit conditions; our ability to expand our customer base, our ability to transform our business with a leading portfolio of programmable products; the number and nature of our competitors; the changing environment and/or cycles of the semiconductor industry; foreign currency exchange rates; our ability to efficiently manage our manufacturing facilities and achieve our cost goals emanating from our flexible manufacturing strategy; our ability to achieve our goals related to our restructuring activities; our success in our pending litigation matters, our ability to manage our investments and interest rate and exchange rate exposure; changes in the law, the results of our pending tax examinations; our ability to achieve liquidity in our investments, the failure or success of our Emerging Technology division and/or the materialization of one or more of the risks set forth above or in Item 1A (Risk Factors) in this Annual Report on Form 10-K.
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PART I
ITEM 1.
General
Cypress Semiconductor Corporation (“Cypress”) delivers high-performance, mixed-signal, programmable solutions that provide customers with rapid time-to-market and exceptional system value. Cypress offerings include our flagship PSoC® 1, PSoC 3, PSoC 4 and PSoC 5LP programmable system-on-chip families. Cypress is the world leader in capacitive user interface solutions including CapSense® touch sensing, TrueTouch® touchscreens, and trackpad solutions for notebook PCs and peripherals. Cypress is also a significant participant in Universal Serial Bus (USB) controllers, which enhance connectivity and performance in a wide range of consumer and industrial products. Cypress is also the world leader in static random access memory (SRAM) and nonvolatile RAM memories. Cypress serves numerous major markets, including industrial, mobile handsets, consumer, computation, data communications, automotive, and military.
Cypress was incorporated in California in December 1982. The initial public offering took place in May 1986, at which time our common stock commenced trading on the NASDAQ National Market. In February 1987, we were reincorporated in Delaware. Our stock is listed on the NASDAQ Global Select Market under the ticker symbol “CY”.
Our corporate headquarters are located at 198 Champion Court, San Jose, California 95134, and our main telephone number is (408) 943-2600. We maintain a website at www.cypress.com . The contents of our website are not incorporated into, or otherwise to be regarded as part of, this Annual Report on Form 10-K.
Our fiscal 2014 ended on December 28, 2014, fiscal 2013 ended on December 29, 2013, and fiscal 2012 ended on December 30, 2012.
Business Segments
As of the end of fiscal 2014, our organization included the following business segments:
Business Segments | Description | |
Memory Products Division (MPD) | MPD focuses on static random access memory (SRAM), nonvolatile RAMs and general-purpose programmable clocks. Its purpose is to enhance our No. 1 position in SRAMs and nonvolatile RAMs and invent new and related products. | |
Data Communications Division (DCD) | DCD focuses on USB controllers and Bluetooth® Low Energy and WirelessUSB™ solutions for industrial, handset and consumer applications. It also includes module solutions such as Trackpads and Ovation™ Optical Navigation Sensors (ONS). | |
Programmable Systems Division (PSD) | PSD focuses primarily on our PSoC® programmable system-on-chip and PSoC-based products. This business segment focuses on (1) the PSoC platform family of devices and all derivatives, including PSoC Bluetooth Low Energy solutions for the Internet of Things, (2) PSoC-based user interface products such as CapSense® capacitive-sensing and TrueTouch® touchscreen products, and (3) automotive products. | |
Emerging Technologies Division (ETD) | Also known as our “startup” division, ETD includes subsidiaries AgigA Tech Inc. and Deca Technologies Inc. and our foundry business and other development-stage activities. | |
For additional information on our segments, see Note 20 of Notes to Consolidated Financial Statements under Item 8.
Recent Developments
On December 1, 2014, Cypress announced that it entered into a definitive agreement to merge with Spansion, Inc., a leading designer, manufacturer and developer of embedded systems semiconductors, in an all-stock, tax-free transaction. The post-merger company is expected to generate approximately $2 billion in revenue annually and realize more than $135 million in cost synergies on an annualized basis within three years, and create a leading global provider of microcontrollers and specialized memories needed in today's embedded systems. Under the terms of the agreement, Spansion shareholders will receive 2.457 Cypress shares for each Spansion share they own. The shareholders of each company will initially own
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approximately 50 percent of the post-merger company. The closing of the transaction is subject to customary conditions, including approval by Cypress and Spansion stockholders. The transaction has been unanimously approved by the boards of directors of both companies. As of the date of this report, we have successfully obtained all necessary approvals from regulators in the U.S., Germany and Japan, and our Registration Statement on Form S-4 (a joint proxy statement/prospectus) was declared effective by the United States Securities and Exchange Commission on February 5, 2015. We expect the deal to close in the first fiscal quarter of 2015. Upon consummation, we expect to account for the merger under the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standard Topic 805, Business Combinations, with Cypress treated as the accounting acquirer.
Business Strategies
Cypress is committed to managing its expenses and to maintaining a strong balance sheet. We maintain many of our business operations in low-cost centers, including India, the Philippines and China. In addition, we are using foundry partners to supplement our manufacturing needs.
In 2012, Cypress acquired Ramtron International Corporation (“Ramtron”) for a purchase price of $109.4 million. Ramtron was a leading provider of high-speed, non-volatile memory based in Colorado Springs, Colorado. Ramtron’s ferroelectric RAM (F-RAM) based products complement Cypress’s nvSRAM product line, enabling Cypress to offer the industry’s most comprehensive high-speed, non-volatile memory offering for mission-critical applications. Cypress also introduced the PSoC® 5LP Programmable System-on-Chip family of low-power, precision analog devices for a wide variety of industrial, medical and consumer applications. The Company also delivered a new TrueTouch® family called TrueTouch Gen4X, which offers the industry’s best touchscreen performance in the presence of noise sources such as low-cost phone chargers.
In 2013, Cypress introduced two key product platforms: the PSoC 4 programmable system-on-chip architecture and the TrueTouch Gen5 family of touchscreen controllers. PSoC 4 provides customers with a sophisticated 32-bit ARM® Cortex™-M0 processor and the high-performance analog and digital circuitry of PSoC 3 and PSoC 5LP, all in a small-footprint, low-power single-chip solution. The Gen5 family features patented analog sensing technology that delivers flawless touchscreen performance in the presence of electronic noise from chargers and displays.
In 2014, Cypress introduced the CapSense MBR3 mechanical button replacement family and the industry’s most integrated one-chip Bluetooth Low Energy solutions for the Internet of Things. The low-cost CapSense MBR3 capacitive touch-sensing controllers do not require coding, enabling designers to quickly implement sleek, reliable user interfaces for a broad range of markets. They offer leading noise immunity, proximity sensing and water tolerance. The new PSoC 4 BLE offers unprecedented ease-of-use and integration in a customizable solution for IoT applications, home automation, healthcare equipment, sports and fitness monitors, and other wearable devices. The PRoC™ BLE programmable radio-on-chip provides a cost-effective, turnkey solution for wireless human interface devices, remote controls and toys.
Our primary focus has been to resume revenue growth and increase profitability. For revenue growth, our revenue model is based on three underlying trends: increasing our SRAM market share and expanding our memory portfolio by introducing new products, a return to growth of our revenue from PSoC platform family of devices and derivatives, increasing our DCD revenue by introducing new products such as USB 3.0 and Bluetooth® Low Energy solutions for industrial, handset and consumer applications, and significant revenue growth from companies in ETD. For profitability, we monitor our operating expenses closely to maintain our operating leverage as driven by various company-wide initiatives, including our World Wide Cost program to continuously reduce cost line items as well as a Human Resource effort to flatten our worldwide organization to reduce cost and efficiency. In order to achieve our goals on revenue growth and profitability, Cypress will continue to pursue the following strategies:
• | Drive profitability. Cypress has implemented and maintained a tight, corporate wide focus on gross margin and operating expenses. We are committed to maintaining our current strong operating expense management even with revenue growth, continued new product development, and investments in our Emerging Technologies Division. |
• | Drive programmability, extend leadership and drive PSoC proliferation. We continue to define, design and develop new programmable products and solutions that offer our customers increased flexibility and efficiency, higher performance, and higher levels of integration with a focus on analog functionality. We continue to drive PSoC adoption in large market segments. |
• | Focus on large and growing markets. We continue to pursue business opportunities in large and growing markets, including handheld and human interface/consumer devices, personal health monitoring and other wearable technologies, industrial sensing and control, mobile accessories, automotive and system management. |
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• | Collaborate with customers to build system-level solutions. We work closely with customers from initial product design through manufacturing and delivery in order to optimize our customers’ design efforts, helping them achieve product differentiation, improve time-to-market and develop whole product solutions. |
• | Leverage flexible manufacturing. Our manufacturing strategy combines capacity from leading foundries with output from our internal manufacturing facilities allowing us to meet rapid swings in customer demand while lessening the burden of high fixed costs. |
• | Identify and exit legacy or non-strategic, underperforming businesses. We continue to monitor and, if necessary, exit certain business units that are inconsistent with our future initiatives and long-term plans so that we can focus our resources and efforts on our core programmable and proprietary business model. |
• | Pursue complementary strategic relationships. We continue to assess opportunities to develop strategic relationships through acquisitions, investments, licensing and joint development projects. We also continue to make significant investments in current ventures as well as new ventures. |
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 Item 1A.
Product/Service Overview
Programmable Solutions Division (PSD):
The Programmable Solutions Division designs and develops solutions for many of the world’s leading end-product manufacturers. Its programmable product offerings are the linchpin of our programmable solutions strategy. This division’s products include PSoC® devices, CapSense® touch-sensing controllers, TrueTouch® touchscreen solutions and automotive products. PSoC products are used in various Internet of Things applications, industrial equipment, mass storage, household appliances, laptop computers and toys. TrueTouch touchscreen products are used in mobile phones, tablets, e-readers, wearables, GPS, automobiles, digital cameras and other mobile systems. CapSense products are used in any application that employs buttons or sliders, including handsets and various other consumer, industrial and automotive applications, as well as for liquid-level sensing and proximity-sensing applications.
The following table summarizes the markets and certain applications related to our products in this segment:
Products | Markets | Applications | ||
PSoC® 1, PSoC 3, PSoC 4 and PSoC 5LP | Consumer, handsets, Industrial, medical, communications, automotive | Internet of Things applications, industrial and automotive control applications, digital still and video cameras, home appliances, handheld devices and accessories, notebook computers, LCD monitors, medical devices, mice, keyboards, toys, e-Bikes and many other applications. | ||
TrueTouch® | Handsets, consumer, computation, automotive, communication, gaming | Smartphones and superphones, tablets, e-readers, wearables, portable media players, cameras, automotive infotainment systems, video games, GPS systems, and other applications. | ||
CapSense® | Handsets, consumer, industrial, computation, white goods, communication, automotive | Notebook computers and PCs, home appliances, handheld devices, wearables, automotive control pads/media centers, digital cameras, toys, consumer products and many other applications. | ||
PSoC Programmable System-on-Chip products. Our PSoC products are highly integrated, high-performance mixed-signal devices with an on-board microcontroller, programmable analog and digital blocks, SRAM and flash memory. They provide a low-cost, single-chip solution for a variety of consumer, industrial, medical, and system management applications. A single PSoC device can potentially integrate as many as 100 peripheral functions, saving customers design time, board space, power consumption and system costs. Because of its programmability, PSoC allows customers to make modifications at any point during the design cycle, providing unmatched flexibility.
Cypress’s PSoC 1 device offers performance, programmability and flexibility with a cost-optimized 8-bit M8 CPU subsystem. PSoC 3 uses an 8-bit, Intel® 8051-based microcontroller with 7.5 times more computing power than PSoC 1. The 32-bit, ARM®-Cortex™ M3-based PSoC 5LP has 25 times more computing power than PSoC 1. The analog-to-digital converters on PSoC 3 and PSoC 5LP are 256 times more accurate and 10 to 30 times faster than PSoC 1, and there are 10 times more programmable logic gates available. PSoC 4 is based on a 32-bit ARM Cortex-M0 processor combined with precision analog circuitry, high-performance digital blocks, fully-routable I/Os and our leading CapSense capacitive touch technology. Platform PSoC is supported by the unique PSoC Creator™ design tool that allows engineers to use intuitive schematic-based capture and dozens of PSoC Components™, free embedded ICs represented by icons that can be dragged and dropped into a
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design to integrate multiple ICs and system interfaces into one PSoC. In 2013, Cypress introduced PSoC Creator 3.0, which allows designers to create reusable, customized PSoC Components and it enables export to leading ARM toolsets, including IAR, Keil and Eclipse. In 2014, Cypress introduced PSoC 4 BLE, a Bluetooth Low Energy solution that integrates a Bluetooth Smart radio and balun into the PSoC 4 architecture, offering unprecedented ease-of-use and integration for IoT applications, home automation, healthcare equipment, sports and fitness monitors, and other wearable smart devices. Cypress also announced multiple design wins with new customers. Cypress has shipped more than two billion PSoC devices.
TrueTouch Touchscreen solutions. TrueTouch offers single-chip touchscreen solutions for products such as smartphones and superphones, tablets, e-readers, wearables, portable media players, cameras, automotive infotainment systems and other products. The TrueTouch family includes devices that perform traditional touchscreen functions including interpreting multitouch operation, single touches, and gestures such as tap, double-tap, pan, pinch, scroll and rotate. In 2013, Cypress introduced the Gen5 family of TrueTouch controllers, which delivers the industry’s best noise immunity performance along with a host of advanced features, including industry-leading water resistance, proximity-sensing tracking of gloved fingers and passive stylus support. We also shipped new, low-cost single-layer sensor technologies that enable manufacturers to replace resistive screens with capacitive screens. In 2014, Cypress expanded the TrueTouch portfolio by adding solutions with advanced features such as water resistance, passive stylus support and hover functionality to its Gen5 and Gen4X families. We are shipping TrueTouch products into many of the world’s leading cell phones from Original Equipment Manufacturers (OEMs).
CapSense® solutions. Our CapSense capacitive touch-sensing solutions replace mechanical switches and buttons with simple, touch-sensitive controls by detecting the presence or absence of a conductive object (such as a finger) and measuring changes in capacitance. This technology lends itself equally well to buttons, sliders, touchpads, touchscreens and proximity sensors, taking industrial design possibilities to a much higher level. The CapSense portfolio supports all different ranges of general purpose inputs/outputs, buttons and slider devices. Cypress’s CapSense devices feature SmartSense™ technology, an automatic tuning solution that dynamically detects and adjusts a system’s capacitive-sensing parameters, eliminating the need for manual tuning. In 2013, Cypress shipped its one billionth CapSense controller. In 2014, Cypress introduced the low-cost CapSense MBR3 mechanical button replacement solution that does not require coding, enabling designers to quickly implement reliable user interfaces for a broad range of markets. MBR3 devices offer leading noise immunity, proximity sensing and water tolerance. CapSense has replaced more than 5 billion buttons, making Cypress the worldwide capacitive sensing market share leader
Data Communications Division (DCD):
The Data Communications Division focuses on USB controllers, Bluetooth® Low Energy and WirelessUSB™ solutions, and module based solutions for trackpads and other user interface applications. The division’s purpose is to enhance our position in USB. USB has expanded beyond PC and peripheral applications and is finding increased adoption rates in industrial automation imaging, security cameras, and in consumer devices such as mobile handsets and set-top boxes.
The following table summarizes the markets and applications related to our products in this segment:
Products | Markets | Applications | ||
USB controllers | Industrial, handset, PC and peripherals, consumer electronics | Printers, cameras, machine vision and other industrial equipment, mice, keyboards, handheld devices, gamepads and joysticks, VoIP phones, headsets, presenter tools, dongles, point of sale devices and bar code scanners. | ||
Bluetooth® Low Energy and WirelessUSB™ solutions | PC peripherals | Mice, keyboards, wireless headsets, consumer electronics, gamepads, remote controls, internet of things ("IOT"), toys and presenter tools. | ||
Trackpad Solutions | PCs, consumer | Cypress has applied its capacitive sensing expertise to the trackpad market for laptop computers and consumer devices. Trackpads offer cursor control and other functions, and Cypress’s solution has been adopted by multiple PC manufacturers. | ||
Optical Navigation Sensors | PC peripherals, consumer | Our Ovation ONS technology is used in smartphones, tablet PCs, remote controls, e-book readers, wired and wireless mice and industrial applications. | ||
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USB controllers. Cypress is a market leader in USB with more than one billion devices shipped. USB provides the primary connection between a PC and peripherals, including keyboards, mice, printers, joysticks, scanners and modems. It is also used to connect non-PC systems, such as smartphones, handheld games, digital still cameras and portable media players. The USB standard facilitates a “plug-and-play” architecture that enables instant recognition and interoperability when a USB-compatible peripheral is connected to a system. We offer a full range of USB solutions, including low-speed (1.5 Mbps), full-speed (12 Mbps), high-speed (480 Mbps) and now “SuperSpeed” (up to 5 Gbps) USB products. We also offer a variety of USB hubs, transceivers, serial interface engines and embedded-host products for a broad range of applications.
Bluetooth Low Energy and Wireless USB solutions. Designed for short-range wireless connectivity, WirelessUSB enables personal computer peripherals, gaming controllers, remote controls, toys, and other point-to-point or multipoint-to-point applications to “cut the cord” with a low-cost, 2.4-GHz wireless solution. The WirelessUSB system acts as a USB human interface device, so the connectivity is transparent to the designer at the operating system level. WirelessUSB also operates as a simple, cost-effective wireless link in a host of other applications including industrial, consumer, and medical markets. In late 2014, Cypress introduced the PRoC™ BLE (Programmable Radio-on-a-Chip Bluetooth Low Energy) solution, which combines a Bluetooth Smart radio, an ARM Cortex-M0 processor and CapSense capacitive touch-sensing in a single chip. The highly-integrated PRoC BLE device provides a cost-effective, turnkey solution for wireless human interface devices, remote controls and toys.
Trackpad. We design and manufacture turnkey Trackpad sensor module solutions. By leveraging the flexibility and power of Cypress touch technologies, we provide solutions ranging from low power, two-finger gesture to feature-rich, true multi-touch solutions. Our design library contains solutions that can be used off-the-shelf; in addition, we offer custom product development for specific form factors and features based on customer requirements. These products are ideal for Windows laptop, Google Chromebook, PC peripheral, and remote control applications. Trackpad modules promote fast time-to-market and cost effective solutions for touch-enable end products.
Memory Products Division (MPD):
Our Memory Products Division designs and manufactures SRAM products and nonvolatile RAMs that are used to store and retrieve data in networking, wireless infrastructure and handsets, computation, consumer, automotive, industrial and other electronic systems. Cypress is the world’s No.1 supplier of SRAMs due to its broad portfolio of high-performance, synchronous SRAMs, consolidation within the supply base and additional share gains with strategic global customers. In 2012, Cypress acquired Ramtron to add F-RAM (ferroelectric RAM) products to our nvSRAM (nonvolatile SRAM) products, giving Cypress the market’s leading non-volatile RAM portfolio. In 2013, we reaffirmed our commitment to the SRAM market with investments in new product development for next generation of high-performance synchronous SRAMs to extend the QDR architecture. In 2014, we introduced those products, the world’s first QDR-IV SRAMs, which are the market’s highest performance, standardized networking memory solution.
Our MPD Division also includes timing technology products and specialty memory offerings. The following table summarizes the markets and applications related to our products in this segment:
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Products | Markets | Applications | ||
Asynchronous SRAMs | Consumer, networking, industrial | Consumer electronics, switches and routers, test equipment, automotive and industrial electronics. | ||
Synchronous SRAMs | Base station, networking | Enterprise routers and switches, wireless base stations, high bandwidth applications and industrial and defense electronics. | ||
nvSRAMs | Servers, industrial | Redundant array of independent disk (RAID) servers, point of sale terminals, set-top boxes, copiers, industrial automation, printers, single-board computers and gaming. | ||
F-RAMs | Automotive, medical | Smart electric meters, aerospace, medical systems, automotive, industrial controls, electronic point-of-sale terminals, printers and wireless (RFID) memory. | ||
Dual-port Memories | Networking, telecommunication | Medical and instrumentation, storage, wireless infrastructure, military communications, image processors and base stations. | ||
First-in, first-out (FIFO) Memories | Video, data communications, telecommunications, networking | Video, data communications, telecommunications, and network switching/routing. | ||
Programmable clocks | Communications, computation | Set-top boxes, copiers, printers, HDTV, Industrial automation, printers, single-board computers, IP phones, storage devices, servers and routers. | ||
RoboClock® buffers | Communications | Base stations, high-end telecom equipment (switches, routers), servers and storage. | ||
Asynchronous SRAMs. We manufacture a wide selection of fast asynchronous and micropower SRAMs with densities ranging from 16 Kbits to 64 Mbits. These memories are available in many combinations of bus widths, packages and temperature ranges, and include offering for the automotive market. They are ideal for use in point-of-sale terminals, gaming machines, network switches and routers, IP phones, IC testers, DSLAM Cards and various automotive applications.
Synchronous SRAMs. Our high-speed synchronous SRAMs include standard synchronous pipelined, No Bus Latency (NoBL), Quad Data Rate (QDR®), and Double Data Rate (DDR) SRAMs, and are typically used in networking applications. NoBL synchronous SRAMs are optimized for high-speed applications that require maximum bus bandwidth up to 250 MHz, including those in the networking, instrumentation, video and simulation businesses. Double Data Rate SRAMs target network applications and servers that operate at data rates up to 633 MHz. Quad Data Rate products are targeted toward next-generation networking applications, particularly switches and routers that operate at data rates beyond 633 MHz, and offer twice the bus bandwidth of DDR SRAMs. Cypress introduced the industry’s first 65-nm QDR and DDR SRAMs. The 144-Mbit and 72-Mbit devices, developed with foundry partner UMC, feature the industry’s fastest clock speeds and operate at half the power of their 90-nm predecessors. They are ideal for networking, medical imaging and military signal processing. In 2014, Cypress introduced the industry’s first QDR-IV SRAM, which enables 100-400 Gigabit line card rates for next-generation routers and switches.
nvSRAMs. nvSRAMs are products that operate similar to standard asynchronous SRAM and reliably store data into an internal nonvolatile array during unanticipated power outages. The competitive advantage of an nvSRAM is infinite endurance and much faster read/write speed than a serial flash or EEPROM. Additionally, these high-speed nonvolatile SRAM devices can store data for more than 20 years without battery backup. These memories are ideal for redundant array of independent disks (“RAID”) storage arrays, metering applications, multifunction printers and other industrial applications, such as PLCs. Cypress offers parallel nvSRAMs with an integrated real-time clock, providing failsafe battery-free data backup in mission-critical applications.
F-RAMs. Cypress’s F-RAM memories offer extremely low power with the same non-volatility as nvSRAM products. F-RAM memory cells are immune to gamma radiation and EMI, making them well-suited to certain aerospace and medical systems. Other applications include automotive, smart electric meters, industrial controls, electronic point-of-sale terminals, printers and wireless (RFID) memory.
Dual-Port Memories. Dual ports, which can be accessed by two different processors or buses simultaneously, target shared-memory and switching applications, including networking switches and routers, cellular base stations, mass-storage devices and telecommunications equipment. We offer a portfolio of more than 250 synchronous and asynchronous dual-port interconnects ranging in densities from 8 Kbits to 36 Mbits with speeds of up to 250 MHz. Our dual ports are compelling solutions for interprocessor communication in a broad range of applications. For high-volume multiprocessor applications
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(wireless handsets, PDAs, consumer, etc.) we offer the MoBL™ (More Battery-Life™) dual port, providing a low cost, quick time-to-market interconnect solution with the industry’s lowest power-consumption.
FIFO Memories. FIFOs are used as a buffer between systems operating at different frequencies. Our high-performance FIFO products provide the ideal solution to interconnect problems such as flow control, rate matching, and bus matching. Our FIFO portfolio is comprised of more than 100 synchronous and asynchronous memories in a variety of speeds, bus widths, densities and packages. Using industry-standard pinouts, these products are easily integrated into new and existing designs. Unidirectional, bidirectional, tri-bus and double sync configurations are available with built-in expansion logic and message-passing capabilities for various markets including video, data communications, telecommunications and network switching/routing.
Programmable Clocks. Programmable timing solutions such as our InstaClock device combine high performance with the flexibility and fast time to market of field-programmable devices at a cost that is competitive against custom clocks at equivalent volumes. Working with our easy-to-use CyberClocks™ software, designers can optimize device parameters such as drive strength, phased-lock loop bandwidth and crystal input capacitive loading. Our programmable clocks are ideal for devices requiring multiple frequencies including Ethernet, PCI, USB, HDTV, and audio applications. Additionally, the FleXO™ family of high-performance clock generators can be instantly programmed in the factory or field to any frequency up to 650 MHz, accelerating time to market and improving manufacturing quality.
RoboClock™ Clock Buffers. Our RoboClock family of clock buffers features programmable output skew, programmable multiply/divide factor, and fault-tolerant, user-selectable, redundant reference clocks. Designers can control output skew and multiply and divide factors to help accommodate last-minute design changes. RoboClock offers a high-performance timing solution for designers of communications, computation and storage networking applications.
Emerging Technologies and Other (ETD):
Cypress’s Emerging Technology Division consists of businesses outside our core semiconductor business. It includes majority-owned subsidiaries AgigA Tech, Inc., Deca Technologies, Inc., foundry services, other development stage activities and certain corporate expenses.
AgigA Tech, Inc. AgigA Tech, a majority-owned and fully independent subsidiary of Cypress, is an industry pioneer in the development of high-speed, high-density, battery-free non-volatile memory solutions. Its flagship product, AGIGARAM®, merges NAND Flash, DRAM and an ultracapacitor power source into a highly reliable non-volatile memory subsystem, delivering unlimited read/write performance at RAM speeds, while also safely backing up all data when power is interrupted. The patent-pending approach couples innovations in power management, high-speed data movement and systems knowledge, while leveraging high-volume, readily available memory technologies to provide a unique non-volatile solution scalable to very high densities. In 2013, AGIGARAM earned an Edison Award for innovation. In 2014, Cypress sampled the industry’s first DDR4 Nonvolatile DIMM, which operates in the standard DIMM sockets of next-generation, Intel-based server platforms.
Deca Technologies, Inc. (“Deca”). Deca is a majority-owned and fully independent subsidiary of Cypress. Headquartered in Tempe, AZ., with global capabilities, Deca has pioneered a breakthrough approach to wafer level packaging and interconnect technology inspired by SunPower Corporation’s unique solar wafer fabrication methodology. Deca’s initial product offering includes a series of wafer level chip scale packaging (WLCSP) solutions serving several of the top 25 semiconductor producers. Deca’s approach enables industry-leading cycle times, flexibility and value for WLCSP, which is one of the semiconductor industry’s fastest growing electronic interconnect technologies. Sunpower Corporation is a minority investor in Deca. In 2014, Deca announced it has shipped its 100-millionth component.
Acquisition
On December 1, 2014, Cypress announced that it entered into a definitive agreement to merge with Spansion, Inc., a leading designer, manufacturer and developer of embedded systems semiconductors, in an all-stock, tax-free transaction. The post-merger company is expected to generate approximately $2 billion in revenue annually and realize more than $135 million in cost synergies on an annualized basis within three years, and create a leading global provider of microcontrollers and specialized memories needed in today's embedded systems. Under the terms of the agreement, Spansion shareholders will receive 2.457 Cypress shares for each Spansion share they own. The shareholders of each company will own approximately 50 percent of the post-merger company. The closing of the transaction is subject to customary conditions, including approval by Cypress and Spansion stockholders. The transaction has been unanimously approved by the boards of directors of both companies. As of the date of this report, we have successfully obtained all necessary approvals from regulators in the U.S., Germany and Japan, and our Registration Statement on Form S-4 (a joint proxy statement/prospectus) was declared effective by the United States Securities and Exchange Commission on February 5, 2015. We expect the deal to close in the first fiscal quarter of 2015. Upon consummation, we expect to account for the merger under the acquisition method of
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accounting in accordance with Financial Accounting Standards Board Accounting Standard Topic 805, Business Combinations, with Cypress treated as the accounting acquirer.
In November 2012, we completed the acquisition of Ramtron and purchased all of Ramtron’s outstanding common stock at a purchase price of $3.10 per share for a total cash payment of $102.4 million, equity consideration totaling $1.8 million and incurred direct transaction costs of $15.3 million. This $15.3 million of acquisition related expenses includes legal, banker, severance expenses and costs related to the acceleration of terminated employee stock awards. All existing Ramtron equity based incentive plans were terminated upon the completion of the acquisition. See Note 2 of Notes to Consolidated Financial Statements under Item 8 for further discussion.
Divestitures
On December 19, 2012, we completed the divestiture of our wholly-owned subsidiary Cypress Envirosystems and we received nominal consideration that is dependent upon future performance. Cypress Envirosystems was part of our ETD segment and as a result of the sale we recorded a loss of $1.6 million in “Loss on divestiture,” on the Consolidated Statement of Operations.
For additional information on this divestiture, see Note 3 of Notes to Consolidated Financial Statements under Item 8.
Manufacturing
Our core manufacturing strategy-“flexible manufacturing”-combines capacity from external foundries with output from our internal manufacturing facilities. This initiative allows us to meet rapid swings in customer demand while lessening the burden of high fixed costs, a capability that is particularly important in high-volume consumer markets that we serve with our leading programmable product portfolio.
We currently manufacture approximately 65% of our semiconductor products at our wafer manufacturing facility in Bloomington, Minnesota. External wafer foundries, mainly in Asia, manufactured the balance of our products and we expect that our wafer foundry partners will continue to increase their manufacturing as a percentage of total output.
We conduct assembly and test operations at our highly automated assembly and test facility in the Philippines. This facility accounts for approximately 33% of the total assembly output and 42% of the total test output. Various subcontractors in Asia perform the balance of the assembly and test operations.
Our facility in the Philippines performs assembly and test operations, manufacturing volume products and packages where our ability to leverage manufacturing costs is high. This facility has ten fully integrated, automated manufacturing lines enabling complete assembly and test operations (Autolines). These autolines require fewer people to run and have shorter manufacturing cycle times than conventional assembly/test operations, which enable us to respond more rapidly to changes in demand.
We have a strategic foundry partnership with HuaHong Grace Semiconductor Manufacturing Corporation (“Grace”), located in Shanghai, China. Our agreement with them transferred certain proprietary process technologies and provided additional production capacity to augment output from our manufacturing facilities. Since 2007, when we completed the transfer of our 0.35-micron SONOS, 0.13-micron SRAM and LOGIC processes and 0.09-micron SRAM, we have been purchasing products from Grace that are manufactured using these processes. In the fourth quarter of fiscal 2014, the Company, through a wholly-owned subsidiary, purchased approximately 6.9 million ordinary shares of Hua Hong Semiconductor Limited (HHSL) for an aggregate price of $10.0 million in connection with their initial public offering. HHSL is the parent company of Grace Semiconductor Manufacturing Corporation.
We also have a strategic foundry partnership with United Microelectronics Corporation (“UMC”), located in Taiwan. We use UMC’s 65nm process to produce our leading edge SRAM products which we have been shipping since 2008. Since 2008, we have continuously introduced higher density SRAM products up to 144Mb. We have also utilized UMC’s 65nm baseline to create derivative processes and products including our USB3.0 controllers and Asynchronous SRAMs. Additionally Cypress and UMC are collaborating on qualifying Cypress’s embedded non-volatile memory technology in UMC’s 55nm and 40nm flows under licensing agreement. These technologies will be used for Cypress’s future generation products and be offered as part of general foundry offering by UMC producing royalty revenue for Cypress.
As part of our acquisition of Ramtron, we acquired a commercial manufacturing agreement for F-RAM products with Texas Instruments (“TI”). Under that agreement, the Company provides certain design, testing and other activities associated with product development, and TI provides certain foundry and related services. As amended on November 30, 2012, the agreement provides for automatic renewals unless written notice of termination is given prior to the end of any renewal period. If notice of termination is given, the agreement terminates one year thereafter and the Company may place last orders
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and take delivery of product during the following year. The agreement contains various obligations of the parties, including our obligations regarding minimum orders and negotiated pricing of products we purchase.
Research and Development
Research and development efforts are focused on the development and design of new semiconductor products, as well as the continued development of advanced software platforms primarily for our programmable solutions. Also included are the consolidated costs of research and development associated with our ETD division. Our goal is to increase efficiency in order to maintain our competitive advantage. Our research and development organization works closely with our manufacturing facilities, suppliers and customers to improve our semiconductor designs and lower our manufacturing costs. During fiscal 2014, 2013, and 2012, research and development expenses totaled $164.5 million, $190.9 million, and $189.9 million, respectively.
We have both central and division-specific design groups that focus on new product creation and improvement of design methodologies. These groups conduct ongoing efforts to reduce design cycle time and increase first pass yield through structured re-use of intellectual property blocks from a controlled intellectual property library, development of computer-aided design tools and improved design business processes. Design and related software development work primarily occurs at design centers located in the United States, Europe, India and China.
Customers, Sales and Marketing
We sell our semiconductor products through several channels: sales through global domestically-based distributors; sales through international distributors and manufacturing representative firms; and sales by our sales force to direct original equipment manufacturers and their manufacturers. Our marketing and sales efforts are organized around five regions: North Americas, Europe, Japan, Korea, and Rest of Asia. We augment our sales effort with field application engineers, specialists in our products, technologies and services who work with customers to design our products into their systems. Field application engineers also help us identify emerging markets and new products.
Outstanding accounts receivable from two of our distributors, accounted for 12% and 11%, respectively, of our consolidated accounts receivable as of December 28, 2014. Outstanding accounts receivable from three of our distributors, accounted for 17%, 12%, and 11% respectively, of our consolidated accounts receivable as of December 29, 2013.
Revenue generated through Avnet, Inc., Weikeng Industrial Co. Ltd and Future, Inc., three of our distributors, accounted for 13%, 10% and 10, respectively, of our consolidated revenue for fiscal 2014. There were no end customers whose total purchases exceeded 10% of our consolidated revenue for fiscal 2014.
Revenue generated through Avnet, Inc. and Macnica Inc., two of our distributors, accounted for 11% and 10% respectively, of our consolidated revenue for fiscal 2013. Samsung Electronics (“Samsung”), an end customer, purchased our products from our distributors and directly from Cypress and accounted for 12% of our consolidated revenue for fiscal 2013.
Revenue generated through Avnet, Inc., Macnica Inc., and Arkian, three of our distributors, accounted for 14%, 12% and 10% respectively, of our consolidated revenue for fiscal 2012. Samsung, an end customer, purchased our products from our distributors and directly from Cypress and accounted for 11% of our consolidated revenue for fiscal 2012.
Backlog
Our sales typically rely upon standard purchase orders for delivery of products with relatively short delivery lead times. Customer relationships are generally not subject to long-term contracts. However, we have entered into long-term supply agreements with certain customers. These long-term supply agreements generally do not contain minimum purchase commitments. Products to be delivered and the related delivery schedules under these long-term contracts are frequently revised to reflect changes in customer needs. Accordingly, our backlog at any particular date is not necessarily representative of actual sales for any succeeding period and we believe that our backlog is not a meaningful indicator of future revenues.
Competition
The semiconductor industry is intensely competitive and continually evolving. This intense competition results in a challenging operating environment for most companies in this industry. This environment is characterized by the potential erosion of product sale prices over the life of each product, rapid technological change, limited product life cycles, greater brand recognition and strong domestic and foreign competition in many markets. Our ability to compete successfully depends on many factors, including:
• | our success in developing new products and manufacturing technologies; |
• | delivery, performance, quality and price of our products; |
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• | diversity of our products and timeliness of new product introductions; |
• | cost effectiveness of our design, development, manufacturing and marketing efforts; |
• | quality of our customer service, relationships and reputation; |
• | overall success with which our customers market their products and solutions that incorporate our products; and |
• | number and nature of our competitors and general economic conditions. |
We face competition from domestic and foreign semiconductor manufacturers, many of which have advanced technological capabilities and have increased their participation in the markets in which we operate. We compete with a large number of companies primarily in the industrial, telecommunications, handsets, networking, data communications, computation and consumer markets. Companies who compete directly with our semiconductor businesses include, but are not limited to, Altera, Analog Devices, Atmel, Freescale, Integrated Device Technology, GSI Technology, Integrated Silicon Solution, Lattice Semiconductor, Linear Technology, Maxim Integrated Products, Microchip Technology, Renesas, Silicon Laboratories, Synaptics, Texas Instruments and Xilinx.
Environmental Regulations
We use, generate and discharge hazardous chemicals and waste in our research and development and manufacturing activities. United States federal, state and local regulations, in addition to those of other foreign countries in which we operate, impose various environmental rules and obligations, which are becoming increasingly stringent over time, intended to protect the environment and in particular regulate the management and disposal of hazardous substances. We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances that apply to specified electronic products put on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the “RoHS Directive”) and similar legislation in China and California. We are committed to the continual improvement of our environmental systems and controls. However, we cannot provide assurance that we have been, or will at all times be, in complete compliance with all environmental laws and regulations. Other laws impose liability on owners and operators of real property for any contamination of the property even if they did not cause or know of the contamination. While to date we have not experienced any material adverse impact on our business from environmental regulations, we cannot provide assurance that environmental regulations will not impose expensive obligations on us in the future, or otherwise result in the incurrence of liability such as the following:
• | a requirement to increase capital or other costs to comply with such regulations or to restrict discharges; |
• | liabilities to our employees and/or third parties; and |
• | business interruptions as a consequence of permit suspensions or revocations or as a consequence of the granting of injunctions requested by governmental agencies or private parties. |
Intellectual Property
We have an active program to obtain patent and other intellectual property protection for our proprietary technologies, products and other inventions that are aligned with our strategic initiatives. We rely on a combination of patents, copyrights, trade secrets, trademarks and proprietary information to maintain and enhance our competitive position in the domestic and international markets we serve. As of the end of fiscal 2014 we had approximately 2,027 issued patents and approximately 588 additional patent applications on file domestically and internationally. In addition, in fiscal 2015 we are preparing to file up to 36 new patent applications in the United States and up to 40 foreign applications in countries such as China, Taiwan, Korea, Europe and India. The average remaining life of our patent portfolio is approximately 10 years.
In addition to factors such as innovation, technological expertise and experienced personnel, we believe that patents are increasingly important to remain competitive in our industry, defend our position in existing markets and to facilitate the entry of our proprietary products, such as PSoC ®, into new markets. As our technologies are deployed in new applications and we face new competitors, we will likely subject ourselves to new potential infringement claims and discover third party infringement of our intellectual property. Patent litigation, if and when instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. We are committed to vigorously defending and protecting our investment in our intellectual property. Therefore, the strength of our intellectual property program, including the breadth and depth of our portfolio, will be critical to our success in the new markets we intend to pursue.
We perform an analysis of our intellectual property portfolio on an on-going basis to ensure we are deriving the full value of our assets. Accordingly, we continue to evaluate certain unaligned patents as well as other monetization models for our patent portfolio.
Financial Information about Segments and Geographic Areas
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Financial information about segments and geographic area is incorporated herein by reference to Note 20 of Notes to Consolidated Financial Statements under Item 8.
International revenues have historically accounted for a significant portion of our total revenues. Our manufacturing and certain finance operations in the Philippines, as well as our sales and support offices and design centers in other parts of the world, face risks frequently associated with foreign operations, including, but not limited to:
• | currency exchange fluctuations, including the weakening of the U.S. dollar; |
• | the devaluation of local currencies; |
• | political instability; |
• | labor issues; |
• | changes in local economic conditions; |
• | import and export controls; |
• | potential shortage of electric power supply; and |
• | changes in tax laws, tariffs and freight rates. |
To the extent any such risks materialize, our business, financial condition or results of operations could be seriously harmed.
Employees
As of December 28, 2014, we had approximately 3,350 employees. Geographically, approximately 1,200 employees were located in the United States, 900 employees were located in the Philippines, 600 employees were located in India and 700 employees were located in other countries. Of the total employees, approximately 1,800 employees were associated with manufacturing, 800 employees were associated with selling, general and administrative functions, and 800 employees were associated with research and development.
None of our employees are represented by a collective bargaining agreement, nor have we ever experienced organized work stoppages.
Executive Officers of the Registrant as of February 13, 2015
Certain information regarding each of our executive officers is set forth below:
Name | Age | Position | ||
T. J. Rodgers | 67 | President, Chief Executive Officer and Director | ||
Thad Trent | 47 | Executive Vice President, Finance and Administration and Chief Financial Officer | ||
Sabbas A. Daniel | 51 | Executive Vice President, Quality | ||
Paul D. Keswick | 56 | Executive Vice President, Marketing | ||
Badri Kothandaraman | 42 | Executive Vice President, Data Communications Division and Executive Director, Cypress India Limited | ||
J. Daniel McCranie | 71 | Executive Vice President, Sales and Applications | ||
Dana C. Nazarian | 47 | Executive Vice President, Memory Products Division | ||
J. Augusto De Oliveira | 50 | Executive Vice President, Chief Technical Officer | ||
Hassane El-Khoury | 35 | Executive Vice President, Programmable Systems Division | ||
Minh Pham | 55 | Executive Vice President, World Wide Manufacturing and Operations | ||
Andrew Wright | 40 | Executive Vice President, Design Technology | ||
T.J. Rodgers is a founder of Cypress and has been a Director and its President and Chief Executive Officer since 1982. Mr. Rodgers sits on the board of directors of Cypress’s internal subsidiaries as well as Bloom Energy, a privately held fuel cell company. Mr. Rodgers was also a member of the Board of Trustees of Dartmouth College until June 2012.
Thad Trent has been the Chief Financial Officer and Executive Vice President of Finance & Administration at Cypress Semiconductor Corporation since June 2014. Prior to his current position, Mr. Trent served as Cypress’s Vice President of Finance. Mr. Trent is a 22-year veteran of the technology industry. He held finance management roles at publicly traded companies Wind River Systems and Wyle Electronics, as well as two technology startups. Mr. Trent joined Cypress in 2005 and served as Vice President of Finance since 2010. Most recently, he has led the finance activities for business units, sales and marketing, and distribution groups, and he has supervised financial reporting, accounting, and planning and analysis.
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Sabbas A. Daniel was named Executive Vice President of Quality in 2006, and is currently responsible for the Engineering and PMO organizations in addition to Quality. Prior to his current position, Mr. Daniel has held various management positions responsible for Cypress’s reliability and field quality organizations. Mr. Daniel joined Cypress in 1998. Prior to joining Cypress, he worked at Samsung in Korea as director of Reliability in the System LSI, memory, LCD, and Alpha microprocessor operations.
Paul D. Keswick was named as Executive Vice President of Marketing in 2013. Prior to his current position Mr. Keswisk served as Executive Vice President of New Product Development, Engineering, and IT since 1996, and other management positions, including Vice President and General Manager for various business divisions. Mr. Keswick has been with Cypress since 1986.
Badri Kothandaraman started his career with Cypress in 1995 and was named Executive Vice President of the Data Communications Division in November 2011. In addition to managing DCD, Mr. Kothandaraman also serves as the Executive Director of Cypress Semiconductor Technology India Private Limited. Prior to assuming his current positions, Mr. Kothandaraman held various management roles in memory design, including serving as the Vice President of the Asynchronous, Specialty Memory, Clocks and Non-volatile products business units.
J. Daniel McCranie was named Executive Vice President of Sales and Applications in early 2014. Prior to becoming the Executive Vice President of Sales, Mr. McCranie was a member of the Cypress Board of Directors and the Audit Committee. Mr. McCranie previously served as the Chairman of the Board of Directors of ON Semiconductor, a position he has held since 2002, and chairman of the board of directors of Freescale Semiconductor, a position he held through most of fiscal year 2012. Mr. McCranie currently serves as a member of the board of directors of Mentor Graphics and ON Semiconductor. Previously, he served as Chairman of the Board of Directors for Virage Logic, Actel Corporation, and Xicor Corporation as well as a member of the Board of Directors for California Microdevices and ASAT Corporation. Mr. McCranie served as Cypress's Executive Vice President of Sales and Marketing from 1993-2001. Prior to his initial tenure with Cypress, Mr. McCranie was the Chairman of the Board, President and Chief Executive Officer of SEEQ Technology.
Dana C. Nazarian was named Executive Vice President of Memory Products Division in February 2009. Mr. Nazarian started his career with Cypress in 1988. Prior to his current position, Mr. Nazarian held various management positions, which included oversight of significant operations in our former Round Rock, Texas facility and Vice President of our Synchronous SRAM business unit.
J. Augusto De Oliveira was named Executive Vice President and Chief Technical Officer in 2012. Mr. Oliveira has more than 25 years of experience in R&D management and technology strategy for very-large-scale systems-on-chip. From 1999 to 2005, Mr. Oliveira was Chief Architect and Innovation Manager for the consumer business of Philips Semiconductors. Mr. Oliveira joined Cypress in 2007 as Senior Vice President and CTO of Cypress’s memory and data communications divisions. In late 2008, his role was expanded to include all divisions.
Hassane El-Khoury was named Executive Vice president of the Programmable Systems Division in 2012. After working as an engineer at Continental Automotive Systems, he joined Cypress’s automotive business unit and expanded the Company’s presence in the Human-Machine Interface and Body Electronics segments of the automotive marketplace. He currently is responsible for Cypress’s PSoC, touch and automotive businesses.
Minh Pham was appointed Executive Vice President of WW Manufacturing and Operations in 2012. Prior to his current position, Mr. Pham, who joined Cypress in 1995, held various management positions responsible for Cypress’s manufacturing, test and assembly operations. He ran Cypress’s former fabrication facility in Round Rock, Texas, its current Fab 4 in Bloomington, Minnesota, and the test and assembly operations in the Philippines. Prior to joining Cypress, Mr. Pham held management positions for Mostek Corporation and Philips Semiconductors.
Andrew Wright was appointed Executive Vice President of New Product Development in 2013. Prior to his current position, Mr. Wright has held various management positions, including Vice President of Design responsible for Cypress's worldwide design organization. Previous to that Mr. Wright was Director of a business unit and had led an extensive series of product developments at Cypress. Mr. Wright has been with Cypress since 1997.
The executive officers of our majority-owned subsidiaries are as follows:
Name | Age | Position | ||
Christopher A. Seams | 51 | Chief Executive Officer, Deca Technologies Inc. | ||
Ronald Sartore | 65 | Chief Executive Officer, AgigA Tech Inc. | ||
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Christopher A. Seams was named Chief Executive Officer of Deca Technologies in 2013. Prior to his current appointment, Mr. Seams was Cypress' Executive Vice President of Sales and Marketing. Mr. Seams joined Cypress in 1990 and has held a variety of positions in technical and operational management in manufacturing, development and foundry.
Ronald Sartore was appointed Chief Executive Officer of AgigA Tech, Inc. in 2007. AgigA Tech, Inc. was originally a subsidiary of Simtek Corporation, a public company Cypress acquired in 2008. Mr. Sartore has over 30 years of experience in the computer and semiconductor fields. Prior to his current role, Mr. Sartore served as an Executive Vice President and director of Simtek Corporation. Prior to tenure at Simtek, Mr. Sartore served as a Vice President of several business units at Cypress, which he joined as a result of Cypress’s 1999 acquisition of Anchor Chips, a company Mr. Sartore founded in 1995. Prior to Anchor Chips, Mr. Sartore held various engineering and management roles at Cheetah International, a developer and supplier of personal computer hardware systems, which he co-founded in 1985.
Available Information
We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, free of charge on our website at www.cypress.com, as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Additionally, copies of materials filed by us with the SEC may be accessed at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or at www.sec.gov. For information about the SEC’s Public Reference Room, contact 1-800-SEC-0330.
ITEM 1A. | RISK FACTORS |
Current unfavorable economic and market conditions, domestically and internationally, may adversely affect our business, financial condition, results of operations and cash flows.
We have significant customer sales both in the U.S. and internationally. We are also reliant upon U.S. and international suppliers, manufacturing partners and distributors. We are therefore susceptible to adverse U.S. and international economic and market conditions, including the challenging economic conditions that have prevailed and continue to prevail in the U.S. and worldwide. If any of our manufacturing partners, customers, distributors or suppliers experiences serious financial difficulties or ceases operations, our business will be adversely affected. In addition, the adverse impact of the credit crisis on consumers, including higher unemployment rates, is expected to adversely impact consumer spending, which will adversely impact demand for consumer products such as certain end products in which our products are embedded. In addition, prices of certain commodities, including oil, metals, grains and other food products, are volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations and periodic delays in delivery. High or volatile commodity prices increase the cost of doing business and adversely affect consumers’ discretionary spending. As a result of the difficulty that businesses (including our customers) may have in obtaining credit, the increasing and/or volatile costs of commodities and the decreased consumer spending that is the likely result of the weakness in the general economy, credit market crisis, unemployment and commodities’ price volatility, continued global economic and market turmoil are likely to have an adverse impact on our business, financial condition, results of operations and cash flows.
The trading price of our common stock has been and will likely continue to be volatile due to various factors, some of which are beyond our control, and each of which could adversely affect our stockholders’ value.
The trading price of our common stock has been and will likely continue to be volatile due to various factors, some of which are beyond our control, including, but not limited to:
• | Revenue fluctuations due to unexpected shifts in customer orders, especially in the handset market; |
• | Announcements about our earnings or the earnings of our competitors that are not in line with analyst expectations; |
• | Shareholder approval needed for our proposed merger with Spansion; |
• | Market perception of our proposed merger with Spansion; |
• | Our ability to achieve the planned synergies in the proposed merger with Spansion |
• | Quarterly variations in our results of operations or those of our competitors; |
• | Announcements by us, to include our proposed merger with Spansion, or our competitors of acquisitions, new products, significant contracts, design wins, commercial relationships or capital commitments; |
• | The perceptions of general market conditions in the semiconductor industry and global market conditions; |
• | Our ability to develop and market new and enhanced products on a timely basis; |
• | Any major change in our board or senior management; |
• | Changes in governmental regulations or in the status of our regulatory compliance that impact our business; |
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• | Recommendations by securities analysts or changes in earnings estimates concerning us or our customers or competitors; |
• | The volume of short sales, hedging and other derivative transactions on shares of our common stock; |
• | Economic conditions and growth expectations in the markets we serve; |
• | Credit conditions; and |
• | Changes in our policy regarding dividends or our ability to declare a dividend. |
Further, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. Finally, our executive officers, who may hold a substantial number of shares of our common stock, may from time to time, pledge all or a portion of their holdings as collateral or include such holdings in margin accounts. If our stock price were to drop suddenly, such margin accounts could be called and the shares in such accounts may be automatically sold by a third party in the open market, even during a blackout period.
We face significant volatility in supply and demand conditions for our products, and this volatility, as well as any failure by us to accurately forecast future supply and demand conditions, could materially and negatively impact our business.
The semiconductor industry has historically been characterized by wide fluctuations in the demand for, and supply of, semiconductors. Demand for our products depends in large part on the continued growth of various electronics industries that use our products, including, but not limited to:
• | consumer electronics, including mobile handsets, tablets, notebook PC’s, automotive electronics and industrial controls; |
• | wireless telecommunications equipment; |
• | computers and computer-related peripherals; |
• | memory products; and |
• | networking equipment. |
Any downturn, shift in product launch schedule or reduction in the growth of these industries could seriously harm our business, financial condition and results of operations. In particular, our TrueTouch family of products is highly concentrated in consumer handset markets which are susceptible to changes in the general economy, consumer acceptance, design wins, competition and price.
We order materials and build our products based primarily on our internal forecasts, customer and distributor forecasts and secondarily on existing orders, which may be cancelled under many circumstances. Because our markets can be volatile, are based on consumer demand and subject to rapid technological and price changes, our forecasts may be inaccurate, causing us to make too many or too few of certain products.
Also, our customers frequently place orders requesting product delivery almost immediately after the order is made, which makes forecasting customer demand even more difficult, particularly when supply is abundant. If we experience inadequate demand or a significant shift in the mix of product orders that makes our existing capacity and capability inadequate, our fixed costs per semiconductor produced will increase, which will harm our financial condition and results of operations. Alternatively, if we should experience a sudden increase in demand, we will need to quickly ramp our inventory and/or manufacturing capacity to adequately respond to our customers. If we or our manufacturing partners are unable to ramp our inventory or manufacturing capacity in a timely manner or at all, we risk losing our customers’ business, which could have a negative impact on our financial performance and reputation.
If we fail to compete successfully in our highly competitive industry and markets, our business, financial condition and results of operations will be seriously harmed.
The semiconductor industry is intensely competitive. This intense competition results in a difficult operating environment that is marked by erosion of average selling prices over the life of each product and rapid technological change resulting in limited product life cycles. In order to offset selling price decreases, we attempt to decrease the manufacturing costs of our products and to introduce new, higher priced products that incorporate advanced features. If these efforts are not successful or do not occur in a timely manner, or if our newly introduced products do not gain market acceptance, our business, financial condition and results of operations could be seriously harmed.
Our ability to compete successfully in the rapidly evolving semiconductor industry depends on many factors, including:
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• | our success in developing and marketing new products, software platforms and manufacturing technologies and bringing them to market on a timely basis; |
• | the quality and price of our products; |
• | the pace at which customers incorporate our products into their systems, as is sometimes evidenced by design wins; |
• | the diversity of our product lines; |
• | the cost effectiveness of our design, development, manufacturing, support and marketing efforts, especially as compared to our competitors; |
• | our success in developing and introducing firmware in a timely manner; |
• | our customer service and customer satisfaction; |
• | our ability to successfully execute our flexible manufacturing initiative; |
• | the number, strength and nature of our competitors, the markets they target and the rate and success of their technological advances; |
• | the success of certain of our development activity which is a part of our Emerging Technologies business segment; |
• | our ability to get competitive terms with our vendors, manufacturing partners and suppliers; |
• | general economic conditions; and |
• | our access to and the availability of working capital. |
Although we believe we currently compete effectively in the above areas to the extent they are within our control, given the pace of change in our industry, our current abilities are not guarantees of future success. If we are unable to compete successfully in this environment, our business, financial condition and results of operations will be seriously harmed.
If we fail to develop, introduce and sell new products or fail to develop and implement new technologies, our ability to compete in our end markets will suffer and our financial results could be adversely impacted.
Like many semiconductor companies, which operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products, our future success depends on our ability to develop and introduce new products that customers choose to buy. Our new products, for example PSoC® products, BLE, TrueTouch™ and our ETD companies are an important strategic focus for us and therefore, they tend to consume a significant amount of our resources. The new products the market requires tend to be increasingly complex, incorporating more functions and operating at faster speeds than old products. Increasing complexity generally requires smaller features on a chip. This makes manufacturing new generation of products substantially more difficult than prior generations.
Despite the significant amount of resources we commit to new products, there can be no guarantee that such products will perform as expected or at all, be introduced on time to meet customer schedules or gain market acceptance. If we fail to introduce new product designs or technologies in a timely manner or are unable to manufacture products according to the requirements of these designs, or if our customers do not successfully introduce new systems or products incorporating our products, or market demand for our new products does not materialize as anticipated, our business, financial condition and results of operations could be materially harmed.
The complex nature of our manufacturing activities, our broad product portfolio, and our increasing reliance on third-party manufacturers makes us highly susceptible to manufacturing problems and these problems can have a substantial negative impact on us if they occur.
Making semiconductors is a highly complex and precise process, requiring production in a tightly controlled, clean environment. Even very small impurities in our manufacturing materials, defects in the masks used to print circuits on a wafer or other problems in the wafer fabrication process can cause a substantial percentage of wafers to be rejected or numerous chips on each wafer to be non-functional. We and, similarly, our third party foundry partners, may experience problems in achieving an acceptable success rate in the manufacture of wafers and the likelihood of facing such difficulties is higher in connection with the transition to new manufacturing methods. The interruption of wafer fabrication or the failure to achieve acceptable manufacturing yields at any of our facilities, or the facilities of our third-party foundry partners, would seriously harm our business, financial condition and results of operations. We may also experience manufacturing problems in our assembly and test operations and in the introduction of new packaging materials.
We are increasingly dependent upon third parties to manufacture, distribute, generate a significant portion of our product sales, fulfill our customer orders and transport our product. Problems in the performance or availability of these companies could seriously harm our financial performance.
Although many of our products are fabricated in our manufacturing facilities located in Minnesota and the Philippines, we rely to a significant extent on independent contractors to manufacture and assemble our products. We expect to increase this reliance on third-party manufacturing in the future. In addition, if market demand for our products exceeds our internal manufacturing capacity and available capacity from our foundry partners, we may seek additional foundry manufacturing arrangements.
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A shortage in foundry manufacturing capacity, which is more likely to occur at times of increasing demand, could hinder our ability to meet demand for our products and therefore adversely affect our operating results. In addition, greater demand for wafers produced by any such foundries without an offsetting increase in foundry capacity raises the likelihood of potential wafer price increases. Our operations would be disrupted if any of our foundry partners terminates its relationship with us or has financial issues and we are unable to arrange a satisfactory alternative to fulfill customer orders on a timely basis and in a cost-effective manner. There are also only a few foundry vendors that have the capabilities to manufacture our most advanced products. If we engage alternative sources of supply, we may encounter start-up difficulties, yield issues or incur additional costs. Shipments could be delayed significantly while these sources are qualified for volume production.
While a high percentage of our products are assembled, packaged and tested at our manufacturing facility located in the Philippines, we rely on independent subcontractors to assemble, package and test the balance of our products. We cannot be certain that these subcontractors will continue to assemble, package and test products for us on acceptable economic and quality terms or at all and it might be difficult for us to find alternatives if they do not do so.
Our foundry partners and assembly and test subcontractors have operations in locations that may suffer the impact of certain natural disasters, which could impact their ability to provide us with our products. We monitor these events closely, but if one of our third party manufacturing partners were to suffer significant damage to its operations as a result of a natural disaster, our ability to timely meet consumer demand would suffer which would materially harm our financial results of operation.
Our channel partners include distributors and resellers. We continue to expand and change our relationships with our distributors. Worldwide sales through our distributors accounted for approximately 69% of our net sales in fiscal year 2014. We rely on many distributors to assist us in creating customer demand, providing technical support and other value-added services to our customers, filling customer orders and stocking our products. We face ongoing business risks due to our reliance on our channel partners to create and maintain customer relationships where we have a limited or no direct relationship. Should our relationships with our channel partners or their effectiveness decline, we face the risk of declining demand which could affect our revenue and results of operations. Our contracts with our distributor may be terminated by either party upon notice. In addition, our distributors are located all over the world and are of various sizes and financial conditions. Any disruptions to our distributors’ operations such as lower sales, lower earnings, debt downgrades, the inability to access capital markets and higher interest rates could have an adverse impact on our business.
We also rely on independent carriers and freight haulers to move our products between manufacturing plants and our customers’ facilities. Transport or delivery problems due to their error or because of unforeseen interruptions in their business due to factors such as strikes, political instability, terrorism, natural disasters or accidents could seriously harm our business, financial condition and results of operations and ultimately impact our relationship with our customers.
We may be unable to protect our intellectual property rights adequately and may face significant expenses as a result of ongoing or future litigation.
The protection of our intellectual property rights, as well as those of our subsidiaries, is essential to keeping others from copying the innovations that are critical to our existing and future products. It may be possible for an unauthorized third party to reverse-engineer or decompile our software products. The process of seeking patent protection can be long and expensive and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be respected by third parties. Furthermore, our flexible fab initiative requires us to enter into technology transfer agreements with external partners, providing third party access to our intellectual property and resulting in additional risk. In some cases, these technology transfer and/or license agreements are with foreign companies and subject our intellectual property to foreign countries which may afford less protection and/or result in increased costs to enforce such agreements or intellectual property rights. We anticipate that we will continue to enter into these kinds of licensing arrangements in the future. Consequently, we may become involved in litigation, in the United States or abroad, to enforce our patents or other intellectual property rights, to protect our trade secrets and know-how, to determine the validity or scope of the proprietary rights of others or to defend against claims of invalidity. We are also from time to time involved in litigation relating to alleged infringement by us of others’ patents or other intellectual property rights.
Moreover, a key element of our strategy is to enter new markets with our products. If we are successful in entering these new markets, we will likely be subject to additional risks of potential infringement claims against us as our technologies are deployed in new applications and face new competitors. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights, particularly in certain international markets, making misappropriation of our intellectual property more likely. Patent litigation, if necessary or if and when instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
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Other companies or entities also have commenced, and may again commence, actions seeking to establish the invalidity of our patents. For example, GSI has filed a petition for inter-partes re-examination of two of our patents with the United States Patent and Trademark Office. We intend to defend these actions vigorously, but there is no guarantee of success, and such effort takes significant financial and time resources from the Company. In the event that one or more of our patents are challenged, a court or the USPTO may invalidate the patent(s) or determine that the patent(s) is not enforceable, which could harm our competitive position. If our patents are invalidated, or if the scope of the claims in any of these patents is limited by a court or USPTO decision, we could be prevented from pursuing certain litigation matters or licensing the invalidated or limited portion of such patents. Such adverse decisions could negatively impact our future, expected revenue.
Intellectual property litigation is frequently expensive to both the winning party and the losing party and could take up significant amounts of management’s time and attention. In addition, if we lose such a lawsuit, a court could find that our intellectual property rights are invalid, enabling our competitors to use our technology, or require us to pay substantial damages and/or royalties or prohibit us from using essential technologies. For these and other reasons, this type of litigation could seriously harm our business, financial condition and results of operations. Also, although in certain instances we may seek to obtain a license under a third party’s intellectual property rights in order to bring an end to certain claims or actions asserted against us, we may not be able to obtain such a license on reasonable terms or at all. We believe we have meritorious defenses and claims in our current litigation and we intend to defend and pursue such claims vigorously. Unfortunately, such litigation and other claims are subject to inherent uncertainties.
We also rely on trade secret protection for our technology, in part through confidentiality and other written agreements with our employees, consultants and third parties. Through these and other written agreements, we attempt to control access to and distribution of our intellectual property documentation and other proprietary technology information. Despite our efforts to protect our proprietary rights, former employees, consultants or third parties may, in an unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality as our technology. Policing unauthorized use of our intellectual property rights is difficult, and nearly impossible on a worldwide basis. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriation of our technology or intellectual property rights, particularly in foreign countries where we do business or where our technology is sold or used, where the laws may not protect proprietary rights as fully as do the laws of the United States or where the enforcement of such laws is not common or effective.
We face additional problems and uncertainties associated with international operations that could seriously harm us.
International revenues historically accounted for a significant portion of our total revenues. Our manufacturing, assembly, test operations and certain finance operations located in the Philippines, as well as our international sales offices and design centers, face risks frequently associated with foreign operations including but not limited to:
• | currency exchange fluctuations; |
• | the devaluation of local currencies; |
• | political instability; |
• | labor issues; |
• | the impact of natural disasters on local infrastructures and economies; |
• | changes in local economic conditions; |
• | import and export controls; |
• | potential shortage of electric power supply; |
• | potential violations by our international employees or third party agents of international or U.S. laws relevant to foreign operations (such as FCPA) and |
• | changes in tax laws, tariffs and freight rates. |
To the extent any such risks materialize, our business, financial condition or results of operations could be seriously harmed.
We compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel would harm us.
To a greater degree than most non-technology companies, we depend on the efforts and abilities of certain key members of management and technical personnel to execute on the strategic initiatives of our business. Our future success depends, in part, upon our ability to retain such personnel and to attract and retain other highly qualified personnel, particularly product and process engineers. We compete for these individuals with certain of our competitors, other companies, academic institutions, government entities and other organizations. Competition for such personnel is intense and we may not be successful in hiring
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or retaining new or existing qualified personnel. Equity awards are critical to our ability to hire and retain such key personnel. In addition, we may also need to significantly increase our cash based compensation to retain such personnel.
Our financial results could be adversely impacted if our Emerging Technologies businesses fail to develop and successfully bring to market new and proprietary products.
We have made a financial and personnel commitment to our Emerging Technologies businesses. Despite the significant amount of resources we commit to our Emerging Technologies businesses, there can be no guarantee that such Emerging Technologies businesses will perform as expected or at all, launch new products and solutions as expected or gain market acceptance. If our Emerging Technologies businesses’ fail to introduce new product and solutions or successfully develop new technologies, or if our customers do not successfully introduce new systems or products incorporating the products or solutions offered by our Emerging Technologies businesses or market demand for the products or solutions offered by our Emerging Technologies businesses do not materialize as anticipated, our business, financial condition and results of operations could be materially harmed.
Any guidance that we may provide about our business or expected future results may differ significantly from actual results.
From time to time we have shared our views in press releases or SEC filings, on public conference calls and in other contexts about current business conditions and our expectations as to our future results of operation. Correctly identifying the key factors affecting business conditions and predicting future events is inherently an uncertain process, especially in these very uncertain economic times. Our analyses and forecasts have in the past and, given the complexity and volatility of our business, will likely in the future, prove to be incorrect and could be materially incorrect. We offer no assurance that such predictions or analyses will ultimately be accurate, and investors should treat any such predictions or analyses with appropriate caution. Any analysis or forecast that we make which ultimately proves to be inaccurate may adversely affect our stock price.
We are subject to many different environmental, health and safety laws, regulations and directives, and compliance with them may be costly.
We are subject to many different international, federal, state and local governmental laws and regulations related to, among other things, the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process, conflict mineral and data privacy legislation, as well as the health and safety regulations related to our employees. Compliance with these regulations can be costly. We cannot assure you that we have been, or will be at all times in complete compliance with such laws and regulations. If we violate or fail to comply with these laws and regulations, we could be fined or otherwise sanctioned by the regulators. Under certain environmental laws, we could be held responsible, without regard to fault, for all of the costs relating to any contamination at our or our predecessors’ past or present facilities and at third party waste disposal sites. We could also be held liable for any and all consequences arising out of human exposure to such substances or other environmental damage.
Over the last several years, there has been increased public awareness of the potentially negative environmental impact of semiconductor manufacturing operations. This attention and other factors may lead to changes in environmental regulations that could force us to purchase additional equipment or comply with other potentially costly requirements. If we fail to control the use of, or to adequately restrict the discharge of, hazardous substances under present or future regulations, we could face substantial liability or suspension of our manufacturing operations, which could seriously harm our business, financial condition and results of operations.
We face increasing complexity in our product design as we adjust to new and future requirements relating to the material composition of our products, including the restrictions on lead and other hazardous substances that apply to specified electronic products put on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the “RoHS Directive”) and similar legislation in China and California. Other countries, including at the federal and state levels in the United States, are also considering laws and regulations similar to the RoHS Directive. Certain electronic products that we maintain in inventory may be rendered obsolete if they are not in compliance with the RoHS Directive or similar laws and regulations, which could negatively impact our ability to generate revenue from those products. Our customers and other companies in the supply chain may require us to certify that our products are RoHS compliant. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, or in the worst case decreased revenue, and could even require that we redesign or change how we manufacture our products. Such redesigns result in additional costs and possible delayed or lost revenue.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our worldwide operations could be adversely affected if disrupted for any reason, including natural disasters such as earthquakes, tsunamis, floods, hurricanes, typhoons, telecommunication or information technology system failures, regulatory or political issues, power or water shortages, fires, extreme weather conditions, medical epidemics or pandemics or other man-
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made disasters or catastrophic events. While we maintain business interruption insurance for our primary foreign manufacturing operations, we are self-insured for any loss or damage to our primary manufacturing facility. As such, the occurrence of any of these business disruptions for us or our third party manufacturers, partners or customers could result in significant losses, seriously harm our revenue and financial condition, adversely affect our competitive position, increase our costs and expenses, and require substantial expenditures and recovery time in order to fully resume operations. Our corporate headquarters, and a portion of our research and development activities, are located in California, and other critical business operations and some of our suppliers are located in California and Asia, near major earthquake faults known for seismic activity. The manufacture of product components, the final assembly of our products and other critical operations are concentrated in certain geographic locations, including the Philippines, China and India. We also rely on major logistics hubs primarily in Asia to manufacture and distribute our products. The ultimate impact on us, our significant suppliers and our general infrastructure of being located near major earthquake faults and being consolidated in certain geographical areas is unknown. However in the event of a major earthquake or other natural disaster or catastrophic event, our revenue, profitability and financial condition could suffer.
System security risks, data protection or privacy breaches, cyber-attacks and systems integration issues could disrupt our internal operations and/or harm the reputation of the Company, and any such disruption or harm could cause a reduction in our expected revenue, increase our expenses, negatively impact our results of operation or otherwise adversely affect our stock price.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential and proprietary information, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions and delays that may impede our sales, manufacturing, distribution or other critical functions.
We manage and store various proprietary information and sensitive or confidential data relating to our business on the cloud. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions have adversely affected us in the past, and in the future could adversely affect our financial results, stock price and reputation.
We maintain self-insurance for certain indemnities we have made to our officers and directors, and if a significant payment were to arise out of such liabilities, it could harm our financial condition and results of operation.
Our certificate of incorporation, by-laws and indemnification agreements require us to indemnify our officers and directors for certain liabilities that may arise in the course of their service to us. We self-insure with respect to these indemnifiable claims. If we were required to pay a significant amount on account of these liabilities for which we self-insure, our business, financial condition and results of operations could be seriously harmed.
We utilize debt financing and such indebtedness could adversely affect our business, financial condition, results of operations, earnings per share and our ability to meet our payment obligations.
We routinely incur indebtedness to finance our operations and from time to time we have significant amounts of outstanding indebtedness and substantial debt service requirements. On October 17, 2013, we amended our senior secured revolving credit facility with a group of lenders led by Morgan Stanley Senior Funding, Inc., to reduce the amount of the facility from $430 to $300 million. The credit facility contains customary affirmative, negative and financial covenants, including a maximum senior secured leverage ratio, a maximum total leverage ratio, minimum fixed charge coverage ratio, and a minimum liquidity of at least $100 million. Our ability to meet our payment and other obligations and covenants under our indebtedness depends on our ability to generate significant cash flow. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. There is no assurance that our business will generate cash flow from operations, or that future borrowings will be available to us under our
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existing or any amended credit facilities or otherwise, in an amount sufficient to enable us to meet payment obligations under indebtedness we may under take from time to time. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under any indebtedness we owe. As of December 28, 2014, our outstanding debt included $227 million related to our recent credit facility, $10.3 million in capital leases, and $5.9 million in equipment loans. See Note 14 for more information on our Senior Secured Revolving Credit Facility and equipment loans, Note 19 for more information on capital leases and Note 5 for more information on advances received for the sale of auction rate securities.
New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.
On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the SEC adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements will require companies to do diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We have undertaken the necessary diligence to determine whether such minerals are used in the manufacture of our products. However, the implementation of these new requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, regardless of our findings, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free. The next report is due on May 31, 2015 for the 2014 calendar year.
Changes in U.S. tax legislation regarding our foreign earnings could materially impact our business.
A majority of our revenue is generated from customers located outside the U.S. and a substantial portion of our assets, including employees, are located outside the U.S. Foreign withholding taxes and U.S. income taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries, because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. In the past, the administration has considered initiatives which could substantially reduce our ability to defer U.S. taxes including: limitations on deferral of U.S. taxation of foreign earnings eliminate utilization or substantially reduce our ability to claim foreign tax credits, and eliminate various tax deductions until foreign earnings are repatriated to the U.S. If any of these proposals are constituted into law, they could have a negative impact on our financial position and results of operations.
We are subject to examination by the U.S. Internal Revenue Service (the “IRS”), and from time to time we are subject to income tax audits or similar proceedings in other jurisdictions in which we do business, and as a result we may incur additional costs and expenses or owe additional taxes, interest and penalties which will negatively impact our operating result.
We are subject to income taxes in the U.S. and certain foreign jurisdictions, and our determination of our tax liability is subject to review by applicable domestic and foreign tax authorities. The results of these US and certain foreign jurisdiction examinations may result in a decrease of our current estimate of unrecognized tax benefits or increase of actual tax liabilities which could negatively impact our financial position, results of operations and cash flows.
The accumulation of changes in our shares by “5-percent stockholders” could trigger an ownership change for U.S. income tax purposes, in which case our ability to utilize our net operating losses would be limited and therefore impact our future tax benefits.
Cypress is a publicly traded company whose stockholders can change on a daily basis. These changes are beyond our control. The U.S. Internal Revenue Code (Section 382) restricts a company’s ability to benefit from net operating losses if a “Section 382 Ownership Change” occurs. An ownership change for purposes of U.S. tax law Section 382 may result from ownership changes that increase the aggregate ownership of “5-percent stockholders,” by more than 50 percentage points over a testing period, generally three years (“Section 382 Ownership Change”). To our knowledge, we have not experienced a Section 382 Ownership Change. We cannot give any assurance that we will not experience a Section 382 Ownership Change in future years.
Acquisition and investments could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations.
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Acquisitions are an important element of our overall corporate strategy and use of capital. These transactions could be material to our financial condition and results of operations. On December 1, 2014 we announced our intent to merge with Spansion in an all-stock merger transaction. As of the date of this report, we have successfully obtained all necessary approvals from regulators in the U.S., Germany and Japan, and our Registration Statement on Form S-4 (a joint proxy statement/prospectus) was declared effective by the United States Securities and Exchange Commission on February 5, 2015. We intend to hold a special meeting of our stockholders on March 12, 2015 to ask for shareholder approval of this merger. In addition to this proposed merger, we also expect to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquired company, business, or technology has created, and will continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks include, but are not limited to:
• | Diversion of management time and focus from operating our business to integration challenges. |
• | Cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire. |
• | Successfully transitioning the current customer, supplier, foundry and other partnering relationships of the acquired company. |
• | Implementation or remediation of controls, procedures, and policies at the acquired company. |
• | Integration of the acquired company’s accounting, human resource, and other administrative systems, and coordination of product, engineering, and sales and marketing functions. |
• | In the case of acquired companies with global operations, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries. |
• | Failure to successfully further develop the acquired business or technology. |
• | Liability for activities of the acquired company before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities. |
• | Pending litigation or other known or unknown claims in connection with the acquired company, including claims by stockholders for breach of fiduciary duties, terminated employees, customers, former stockholders, or other third parties. |
Our failure to address these and other risks or other problems encountered in connection with our past or current acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business generally. Current and future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition or results. As a result, the anticipated benefit of many of our acquisitions may not be realized.
We invest in companies for strategic reasons and may not realize a return on our investments.
We make investments in companies to further our strategic objectives and support our key business initiatives. Such investments include equity instruments of private companies, and many of these instruments are non-marketable at the time of our initial investment. These companies range from early-stage companies that are often still defining their strategic direction to more mature companies with established revenue streams and business models. The success of these companies is dependent on product development, market acceptance, operational efficiency, and other key business factors as well as their ability to secure additional funding, obtain favorable investment terms for future financings, or participate in liquidity events such as public offerings, mergers, and private sales. If any of these companies fail, we could lose all or part of our investment in that company. If we determine that other-than-temporary decline in the fair value exists for an equity investment in a company in which we have invested, we write down the investment to its fair value and recognize the related write-down as an investment loss.
When the strategic objectives of an investment have been achieved, or if the investment or business diverges from our strategic objectives, we may decide to dispose of the investment. We may incur losses on the disposal of our investments. Additionally, for cases in which we are required under equity method accounting to recognize a proportionate share of another company's income or loss, such income or loss may impact our earnings. Gains or losses from equity securities could vary from expectations depending on gains or losses realized on the sale or exchange of securities, gains or losses from equity method investments, and impairment charges for equity and other investments.
There can be no assurance that our cash distributions on common stock will continue to be considered a return of capital.
In the second quarter of fiscal 2011, our Board of Directors adopted a policy pursuant to which the Company would pay quarterly cash distributions on our common stock. We intend to continue to pay such distributions subject to capital availability and periodic determinations by our Board of Directors that cash distributions are in the best interest of our shareholders and are in compliance with all laws and agreements of Cypress applicable to the declaration and payment of cash distributions. Based
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upon our lack of current earnings and profits, in the United States, these distributions have been treated for income tax purposes as a return of capital.
Future distributions may be affected by, among other factors:
• | our views on potential future capital requirements for investments in acquisitions and the funding of our research and development; |
• | stock repurchase programs; |
• | changes in federal and state income tax laws or corporate laws; and |
• | changes to our business model. |
Our distribution payments may change from time to time, and we cannot provide assurance that we will continue to declare distributions in any particular amounts or at all. In addition, we cannot provide assurance that the cash distributions will continue to be treated for income tax purposes as a return of capital. A reduction in our distribution payments or a change in the tax treatment of future distributions could have a negative effect on our stock price.
If we are unable to obtain stockholder approval of additional shares for our share-based compensation award programs in the future, we could be at a competitive disadvantage in the marketplace for qualified personnel.
Our compensation program, which includes cash and share-based compensation award components, has been instrumental in attracting, hiring, motivating, and retaining qualified personnel. Competition for qualified personnel in our industry is extremely intense, particularly for engineering and other technical personnel. Our success depends on our continued ability to attract, hire, motivate, and retain qualified personnel and our share-based compensation award programs provide us with a competitive compensatory tool for this purpose. The continued use of our share-based compensation program is necessary for us to compete for engineering and other technical personnel and professional talent. In the future, if we are unable to obtain stockholder approval of additional shares for our share-based compensation award programs, we could be at a competitive disadvantage in the marketplace for qualified personnel.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
Our executive offices are located in San Jose, California. The following tables summarize our primary properties as of the end of fiscal 2014:
Location | Square Footage | Primary Use | |||
Owned: | |||||
United States: | |||||
Bloomington, Minnesota | 337,000 | Manufacturing, research and development | |||
San Jose, California | 171,000 | Administrative offices, research and development | |||
Colorado Springs, Colorado | 70,400 | Administrative offices, research and development | |||
Lynnwood, Washington | 67,000 | Administrative offices, research and development | |||
Asia: | |||||
Cavite, Philippines | 221,000 | Manufacturing, research and development | |||
Leased: | |||||
Asia: | |||||
Bangalore, India | 193,000 | Administrative offices, research and development | |||
Shanghai, China | 29,000 | Administrative offices, research and development | |||
We have additional leases for sales offices and design centers located in the United States, Asia and Europe. We believe that our current properties are suitable and adequate for our foreseeable needs. We may need to exit facilities as we continue to evaluate our business model and cost structure.
ITEM 3. | LEGAL PROCEEDINGS |
Information with respect to this item may be found in Note 19 of Notes to Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
ITEM 4. | MINE SAFETY DISCLOSURES |
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Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information, Holders of Common Equity, Dividends and Performance Graph
On November 12, 2009, our common stock was listed on the NASDAQ Global Select Market under the trading symbol “CY.” Prior to November 12, 2009, our common stock was listed on the New York Stock Exchange. The following table sets forth the high and low per share prices for our common stock:
Low | High | ||||||
Fiscal 2014: | |||||||
Fourth quarter | $ | 14.42 | $ | 14.68 | |||
Third quarter | $ | 9.96 | $ | 10.23 | |||
Second quarter | $ | 10.42 | $ | 10.66 | |||
First quarter | $ | 10.00 | $ | 10.27 | |||
Fiscal 2013: | |||||||
Fourth quarter | $ | 8.97 | $ | 10.34 | |||
Third quarter | $ | 9.05 | $ | 13.10 | |||
Second quarter | $ | 9.60 | $ | 11.55 | |||
First quarter | $ | 9.84 | $ | 11.37 | |||
Fiscal 2012: | |||||||
Fourth quarter | $ | 8.80 | $ | 11.24 | |||
Third quarter | $ | 10.16 | $ | 13.51 | |||
Second quarter | $ | 12.14 | $ | 15.71 | |||
First quarter | $ | 14.90 | $ | 18.68 | |||
As of February 2, 2015, there were approximately 1,109 registered holders of record of our common stock.
Dividends
During fiscal 2014, we paid dividends of $69.2 million, at a rate of $0.11 per share of common stock paid in each quarter of the fiscal year.
During fiscal 2013, we paid dividends of $64.8 million, at a rate of $0.11 per share of common stock paid in each quarter of the fiscal year.
During fiscal 2012, we paid total cash dividends of $63.2 million, at a rate of $0.09 per share of common stock paid in the first quarter of the fiscal year and dividends of $0.11 per share of common stock paid in the second, third and fourth quarters of the fiscal year.
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The following line graph compares the yearly percentage change in the cumulative total stockholder return on our common stock against the cumulative total return of the Standard and Poor (“S&P”) 500 Index and the S&P Semiconductors Index for the last five fiscal years:
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cypress Semiconductor Corporation, the S&P 500 Index, and the S&P
Semiconductors Index, and a Peer Group
* $100 invested on 01/03/2010 in stock or index, including reinvestment of dividends.
Indexes calculated on month-end basis.
January 2, 2011 | January 1, 2012 | December 30, 2012 | December 29, 2013 | December 28, 2014 | |
Cypress** | $176 | $162 | $105 | $107 | $158 |
S&P 500 Index | $115 | $117 | $136 | $180 | $205 |
S&P Semiconductors Index | $111 | $114 | $110 | $149 | $201 |
Peer Group | $141 | $121 | $121 | $148 | $205 |
** | All closing prices underlying this table have been adjusted for cash dividends, stock splits and stock dividends. |
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Securities Authorized for Issuance under Equity Compensation Plans
Equity Compensation Plan Information:
The following table summarizes certain information with respect to our common stock that may be issued under the existing equity compensation plans as of December 28, 2014:
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options (a) | Weighted-Average Exercise Price of Outstanding Options (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | |||||||||
(In millions, except per-share amounts) | ||||||||||||
Equity compensation plans approved by shareholders | 19.7 | (1) | $ | 9.97 | (3) | 4.8 | (2) | |||||
Equity compensation plans not approved by shareholders | 2.6 | $ | 5.88 | — | ||||||||
Total | 22.3 | $ | 9.24 | (3) | 4.8 | |||||||
(1) | Includes 7.8 million shares of restricted stock units and restricted stock awards granted. |
(2) | Includes 1.7 million shares available for future issuance under Cypress’s 2013 Stock Plan and 38 thousand shares under the Assumed Ramtron Plan. In addition, the amount includes 3.1 million shares available for future issuance under Cypress’s Employee Stock Purchase Plan. |
(3) | Excludes the impact of 7.8 million shares of restricted stock units and restricted stock awards which have no exercise price. |
See Note 8 of Notes to Consolidated Financial Statements under Item 8 for further discussion of Cypress’s stock plans.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Stock Buyback Programs:
$400 Million Program Authorized in Fiscal 2011
On September 20, 2011, our Board of Directors (the “Board”) authorized a $400.0 million stock buyback program. The program allows us to purchase our common stock or enter into equity derivative transactions related to our common stock. The timing and actual amount expended with the new authorized funds will depend on a variety of factors including the market price of our common stock, regulatory, legal, and contractual requirements, and other market factors. The program does not obligate us to repurchase any particular amount of common stock and may be modified or suspended at any time at the discretion of our Board.
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The table below sets forth information with respect to repurchases of our common stock made during fiscal 2012, 2013 and 2014 under this program:
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Total Dollar Value of Shares That May Yet Be Purchase Under the Plans or Programs | ||||||||||
(In thousands, except per-share amounts) | |||||||||||||
Authorized fund under this Repurchase program: | — | $ | — | — | $ | 400,000 | |||||||
Repurchases in fiscal 2012: | |||||||||||||
January 2, 2012—April 1, 2012 | 6,071 | $16.15 | 6,071 | $ | 222,160 | ||||||||
April 2, 2012—July 1, 2012 | 1,523 | $13.05 | 1,523 | $ | 202,282 | ||||||||
July 2, 2012—September 30, 2012 | 7,285 | $11.20 | 7,285 | $ | 120,696 | ||||||||
October 1, 2012—December 30, 2012 | 3,163 | $10.22 | 3,163 | $ | 88,381 | ||||||||
Total repurchases in fiscal 2012 | 18,042 | 18,042 | $ | 88,381 | |||||||||
Repurchases in fiscal 2013: | |||||||||||||
December 31, 2012—March 31, 2013 | 411 | $10.49 | 411 | $ | 84,059 | ||||||||
April 1, 2013—June 30, 2013 | 10 | $10.71 | 10 | $ | 83,952 | ||||||||
July 1, 2013—September 29, 2013 | 9 | $11.41 | 9 | $ | 83,856 | ||||||||
September 30, 2013—December 29, 2013 | 23 | $9.46 | 23 | $ | 83,675 | ||||||||
Total repurchases in fiscal 2013 | 453 | 453 | $ | 83,675 | |||||||||
Repurchases in fiscal 2014: | |||||||||||||
December 30, 2013—March 30, 2014 | 18 | $10.23 | 18 | $ | 83,490 | ||||||||
March 31, 2014—June 29, 2014 | 7 | $9.72 | 7 | $ | 83,425 | ||||||||
June 30, 2014—September 28, 2014 | 3 | $10.53 | 3 | $ | 83,398 | ||||||||
September 29, 2014—December 28, 2014 | 5 | $10.27 | 5 | $ | 83,341 | ||||||||
Total repurchases in fiscal 2014 | 33 | 33 | $ | 83,341 | |||||||||
Total repurchases under this program | 18,528 | 18,528 | |||||||||||
Yield Enhancement Program (“YEP”):
In fiscal 2009, the Audit Committee approved a yield enhancement strategy intended to improve the yield on our available cash. As part of this program, the Audit Committee authorized us to enter into short-term yield enhanced structured agreements, typically with maturities of 90 days or less, correlated to our stock price. Under the agreements we have entered into to date, we pay a fixed sum of cash upon execution of an agreement in exchange for the financial institution’s obligations to pay either a pre-determined amount of cash or shares of our common stock depending on the closing market price of our common stock on the expiration date of the agreement. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our cash investment returned plus a yield substantially above the yield currently available for short-term cash investments. If the closing market price is at or below the pre-determined price, we will receive the number of shares specified at the agreement’s inception. As the outcome of these arrangements is based entirely on our stock price and does not require us to deliver either shares or cash, other than the original investment, the entire transaction is recorded in equity. The shares received upon the maturing of a yield enhancement structure are included in our “shares of common stock held in treasury” in the Consolidated Balance Sheets under Item 8.
We have entered into various yield enhanced structured agreements based upon a comparison of the yields available in the financial markets for similar maturities against the expected yield to be realized per the structured agreement and the related risks associated with this type of arrangement. We believe the risk associated with these types of agreements is no different than alternative investments available to us with equivalent counterparty credit ratings. All counterparties to a yield enhancement program have a credit rating of at least Aa2 or A as rated by major independent rating agencies. For all such agreements that matured to date, the yields of the structured agreements were far superior to the yields available in the financial markets primarily due to the volatility of our stock price and the pre-payment aspect of the agreements. The counterparty is willing to pay a premium over the yields available in the financial markets due to the structure of the agreement.
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The following table summarizes the activity of our settled yield enhanced structured agreements during fiscal 2014 and 2013:
Periods | Aggregate Price Paid | Total Cash Proceeds Received Upon Maturity | Yield Realized | Total Number of Shares Received Upon Maturity | Average Price Paid per Share | |||||||||||||
(In thousands, except per-share amounts) | ||||||||||||||||||
Fiscal 2014: | ||||||||||||||||||
Settled through cash proceeds | $ | 19,415 | $ | 19,733 | $ | 318 | — | $ | — | |||||||||
Settled through issuance of common stock | — | — | — | — | — | |||||||||||||
Total for fiscal 2014 | $ | 19,415 | $ | 19,733 | $ | 318 | — | $ | — | |||||||||
There was no activity of our yield enhanced structured agreements during fiscal 2013.
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ITEM 6. | SELECTED FINANCIAL DATA |
The following selected consolidated financial data is not necessarily indicative of results of future operations, and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7, and the Consolidated Financial Statements and Notes to Consolidated Financial Statements under Item 8:
Year Ended | |||||||||||||||||||
December 28, 2014 (2) | December 29, 2013 | December 30, 2012 | January 1, 2012 | January 2, 2011 | |||||||||||||||
(In thousands, except per-share amounts) | |||||||||||||||||||
Consolidated Statement of Operations Data: | |||||||||||||||||||
Revenues | $ | 725,497 | $ | 722,693 | $ | 769,687 | $ | 995,204 | $ | 877,532 | |||||||||
Cost of revenues | $ | 361,820 | $ | 384,121 | $ | 376,887 | $ | 448,602 | $ | 388,359 | |||||||||
Operating income (loss) | $ | 22,873 | $ | (58,195 | ) | $ | (18,915 | ) | $ | 153,719 | $ | 87,864 | |||||||
Income (loss) attributable to Cypress (3) | $ | 17,936 | $ | (48,242 | ) | $ | (23,444 | ) | $ | 167,839 | $ | 75,742 | |||||||
Noncontrolling interest, net of income taxes | $ | (1,418 | ) | $ | (1,845 | ) | $ | (1,614 | ) | $ | (882 | ) | $ | (866 | ) | ||||
Net income (loss) (3) | $ | 16,518 | $ | (50,087 | ) | $ | (25,058 | ) | $ | 166,957 | $ | 74,876 | |||||||
Adjust for net loss (income) attributable to noncontrolling interest | $ | 1,418 | $ | 1,845 | $ | 1,614 | $ | 882 | $ | 866 | |||||||||
Net income (loss) attributable to Cypress | $ | 17,936 | $ | (48,242 | ) | $ | (23,444 | ) | $ | 167,839 | $ | 75,742 | |||||||
Net income (loss) per share—basic: | |||||||||||||||||||
attributable to Cypress | $0.11 | ($0.32 | ) | ($0.16 | ) | $1.02 | $0.47 | ||||||||||||
Net income (loss) per share—basic | $0.11 | ($0.32 | ) | ($0.16 | ) | $1.02 | $0.47 | ||||||||||||
Net income (loss) per share—diluted: | |||||||||||||||||||
attributable to Cypress | $0.11 | ($0.32 | ) | ($0.16 | ) | $0.90 | $0.40 | ||||||||||||
Net income (loss) per share—diluted | $0.11 | ($0.32 | ) | ($0.16 | ) | $0.90 | $0.40 | ||||||||||||
Dividends per share: | |||||||||||||||||||
Declared | $0.44 | $0.44 | $0.44 | $0.27 | — | ||||||||||||||
Paid | $0.44 | $0.44 | $0.42 | $0.18 | — | ||||||||||||||
Shares used in per-share calculation: | |||||||||||||||||||
Basic | 159,031 | 148,558 | 149,266 | 164,495 | 161,114 | ||||||||||||||
Diluted | 169,122 | 148,558 | 149,266 | 186,895 | 191,377 | ||||||||||||||
As of | |||||||||||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | January 1, 2012 | January 2, 2011 | |||||||||||||||
(In thousands) | |||||||||||||||||||
Consolidated Balance Sheet Data: | |||||||||||||||||||
Cash, cash equivalents and short-term investments | $ | 118,812 | $ | 104,462 | $ | 117,210 | $ | 166,330 | $ | 434,261 | |||||||||
Working capital (3) | $ | 37,479 | $ | 13,871 | $ | 20,060 | $ | 79,190 | $ | 383,369 | |||||||||
Total assets (3) | $ | 743,281 | $ | 762,884 | $ | 830,554 | $ | 810,090 | $ | 1,072,801 | |||||||||
Debt (1) | $ | 243,250 | $ | 248,230 | $ | 264,942 | $ | 45,767 | $ | — | |||||||||
Stockholders’ equity (3) | $ | 201,865 | $ | 175,683 | $ | 175,786 | $ | 397,842 | $ | 702,893 | |||||||||
(1) | The debt in fiscal year 2014 primarily included $227.0 million related to our revolving credit facility, $10.3 million of capital leases, and $5.9 million of equipment loans. The debt in fiscal year 2013 primarily included $227.0 million related to our revolving credit facility, $12.5 million of capital leases, and $8.7 million of equipment loans. The debt in fiscal year 2012 included $232.0 million related to our revolving credit facility, $15.0 million of capital leases, $11.5 million of equipment loans, $3.3 million of a mortgage note related to Ramtron, and $3.1 million of advances received for the sale of certain of our auction rate securities. See Note 14 for more information on revolving credit facility, equipment loans and mortgage note, Note 18 for more information on capital leases and Note 5 for more information on advances received for the sale of auction rate securities. |
(2) | During the fourth quarter of fiscal 2014, the Company changed from recognizing revenue for sales to certain distributors at the time of shipment, as compared to when resold by the distributor to the end customer, as it determined it could reliably estimate returns and pricing concessions on certain product families and with certain distributors. This change increased fiscal 2014 revenues by $12.3 million, net income by $6.2 million and net income per share, basic and diluted, by $0.04. See additional disclosures on this change in revenue recognition in Footnote 1 to the consolidated financial statements. |
(3) | In the first quarter of fiscal 2014, the Company changed the manner in which it accounted for one of its investments in an entity from the cost method of accounting to the equity method of accounting. In accordance with generally accepted accounting principles, the Company has restated its historical financial statements for all periods presented as if the Company had accounted for its investment in the entity under the equity method of accounting. See Note 15 to the consolidated financial statements. |
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ITEM 7. | 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 contain 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 under Item 1A.
EXECUTIVE SUMMARY
General
Cypress Semiconductor Corporation (“Cypress”) delivers high-performance, mixed-signal, programmable solutions that provide customers with rapid time-to-market and exceptional system value. Cypress offerings include our flagship PSoC® 1, PSoC 3, PSoC 4 and PSoC 5LP programmable system-on-chip families. Cypress is the world leader in capacitive user interface solutions including CapSense® touch sensing, TrueTouch® touchscreens, and trackpad solutions for notebook PCs and peripherals. Cypress is also a significant participant in Universal Serial Bus (USB) controllers, which enhance connectivity and performance in a wide range of consumer and industrial products. Cypress is also the world leader in static random access memory (SRAM) and nonvolatile RAM memories. Cypress serves numerous major markets, including industrial, mobile handsets, consumer, computation, data communications, automotive, industrial and military.
On December 1, 2014, Cypress announced that it entered into a definitive agreement to merge with Spansion, Inc., a leading designer, manufacturer and developer of embedded systems semiconductors, in an all-stock, tax-free transaction. The post-merger company is expected to generate approximately $2 billion in revenue annually and realize more than $135 million in cost synergies on an annualized basis within three years, and create a leading global provider of microcontrollers and specialized memories needed in today's embedded systems. Under the terms of the agreement, Spansion shareholders will receive 2.457 Cypress shares for each Spansion share they own. The shareholders of each company will initially own approximately 50 percent of the post-merger company. The closing of the transaction is subject to customary conditions, including approval by Cypress and Spansion stockholders. The transaction has been unanimously approved by the boards of directors of both companies. As of the date of this report, we have successfully obtained all necessary approvals from regulators in the U.S., Germany and Japan, and our Registration Statement on Form S-4 (a joint proxy statement/prospectus) was declared effective by the United States Securities and Exchange Commission on February 5, 2015. We expect the deal to close in the first fiscal quarter of 2015. Upon consummation, we expect to account for the merger under the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standard Topic 805, Business Combinations, with Cypress treated as the accounting acquirer.
During the fourth quarter of fiscal 2012 we acquired Ramtron which is included in our Memory Product Division. In addition, as part of our continued efforts to better allocate key management resources and to focus on our core markets, during the first quarter of fiscal 2013, we have realigned our Data Communications Division to include our module solutions including Trackpad and Ovation™ Optical Navigation Sensors (ONS), which were previously included in our Programmable Systems Division. We evaluate our reportable business segments in accordance with the accounting guidance.
As of the end of fiscal 2014, our organization included the following business segments:
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Business Segments | Description | |
Memory Products Division (MPD) | MPD focuses on static random access memory (SRAM), nonvolatile RAMs and general-purpose programmable clocks. Its purpose is to enhance our No. 1 position in SRAMs and nonvolatile RAMs and invent new and related products. | |
Data Communications Division (DCD) | DCD focuses on USB controllers and Bluetooth® Low Energy and WirelessUSB™ solutions for industrial, handset and consumer applications. It also includes module solutions such as Trackpads and Ovation™ Optical Navigation Sensors (ONS). | |
Programmable Systems Division (PSD) | PSD focuses primarily on our PSoC® programmable system-on-chip and PSoC-based products. This business segment focuses on (1) the PSoC platform family of devices and all derivatives, including PSoC Bluetooth Low Energy solutions for the Internet of Things, (2) PSoC-based user interface products such as CapSense® capacitive-sensing and TrueTouch® touchscreen products, and (3) automotive products. | |
Emerging Technologies Division (ETD) | Also known as our “startup” division, ETD includes subsidiaries AgigA Tech Inc. and Deca Technologies Inc. and our foundry business and other development-stage activities. | |
Our primary focus has been to resume revenue growth and increase profitability. For revenue growth, our revenue model is based on the following underlying trends: increasing our SRAM market share and expanding our memory portfolio by introducing new products, a return to growth of our revenue from PSoC platform family of devices and derivatives, increasing our DCD revenue through introduction of new products such as USB 3.0 and Bluetooth® Low Energy solutions for the Internet of Things and other applications, and significant revenue growth from companies in our ETD. For profitability, we monitor our operating expenses closely to maintain our operating leverage as driven by various company-wide initiatives, including our World Wide Cost program to continuously reduce cost line items as well as a Human Resource effort to flatten our worldwide organization to reduce cost and efficiency. In order to achieve our goals on revenue growth and profitability, Cypress will continue to pursue the following strategies:
• | Drive profitability. Cypress has implemented and maintained a tight, corporate wide focus on gross margin and operating expenses. We are committed to maintaining our current strong operating expense management even with revenue growth, continued new product development, and investments in our Emerging Technologies Division. |
• | Drive programmability, extend leadership and drive PSoC proliferation. We continue to define, design and develop new programmable products and solutions that offer our customers increased flexibility and efficiency, higher performance, and higher levels of integration with a focus on analog functionality. We continue to drive PSoC adoption in large market segments. |
• | Focus on large and growing markets. We continue to pursue business opportunities in large and growing markets. |
• | Collaborate with customers to build system-level solutions. We work closely with customers from initial product design through manufacturing and delivery in order to optimize our customers’ design efforts, helping them achieve product differentiation, improve time-to-market and develop whole product solutions. |
• | Leverage flexible manufacturing. Our manufacturing strategy combines capacity from leading foundries with output from our internal manufacturing facilities allowing us to meet rapid swings in customer demand while lessening the burden of high fixed costs. |
• | Identify and exit legacy or non-strategic, underperforming businesses. We continue to monitor and, if necessary, exit certain business units that are inconsistent with our future initiatives and long-term plans so that we can focus our resources and efforts on our core programmable and proprietary business model. |
• | Pursue complementary strategic relationships. We continue to assess opportunities to develop strategic relationships through acquisitions, investments, licensing and joint development projects. We also continue to make significant investments in current ventures as well as new ventures. |
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 Item 1A.
Manufacturing Strategy
Our core manufacturing strategy—“flexible manufacturing”—combines capacity from foundries with output from our internal manufacturing facilities. This strategy is intended to allow us to meet rapid swings in customer demand while lessening the burden of high fixed costs, a capability that is particularly important in high-volume consumer markets that we serve with our leading programmable product portfolio.
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Consistent with this strategy, in fiscal 2008 we substantially completed the exit of our manufacturing facility in Texas and transferred production to our more cost-competitive facility in Minnesota and outside foundries. During 2013 we completed the sale of this manufacturing facility. See Note 7 for further information.
RESULTS OF OPERATIONS
Revenues
Our total revenues increased approximately 0.4% for the year ended December 28, 2014 compared to the prior year. The increase in revenues for the year ended December 28, 2014 compared to the prior year was driven by the increased sales in our Emerging Tech Division ("ETD"), which increased 107.3% compared to the prior year. The increase in ETD revenue for the year ended December 28, 2014 was offset by the decrease in the unit sales volume of our PSD products where we experienced weakness in our end customers’ handset/mobile business demand. The overall average selling price of our products for the year ended December 28, 2014 remained relatively stable at $1.09 compared to $1.11 for the prior year.
We have experienced, and expect to continue to experience, moderate pricing pressure in certain product lines, primarily due to competitive conditions. We have in the past been able to, and expect in the future to be able to, moderate average selling price declines in our product lines by introducing new products with more features and higher prices. We may be unable to maintain average selling prices for our products as a result of increased pricing pressure in the future, which could adversely affect our operating results.
Consistent with our accounting policies and generally accepted accounting principles, we have historically recognized a significant portion of revenue through distributors at the time the distributor resold the product to its end customer (also referred to as the sell-through basis of revenue recognition) given the difficulty in estimating the ultimate price of these product shipments and amount of potential returns. 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, we concluded that we have become able to reasonably estimate returns and pricing concessions on certain product families and with certain distributors, and recognized revenue at the time we shipped these specific products to the identified distributors, less our estimate of future price adjustments and returns. For the fourth quarter of 2014, we recognized $53.2 million of revenue on a sell-in basis which represented 41% of our distribution revenue for the quarter. Included in the $53.2 million of revenue was $12.3 million of revenue recognized from the conversion of deferred revenue (inventory) that was held by those distributors at the end of our fiscal year. The impact of this change resulted in a net income benefit of $6.2 million for fiscal 2014, or $0.04 per basic and diluted share.
The following table summarizes our consolidated revenues by segments:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Programmable Systems Division | $ | 283,206 | $ | 292,707 | $ | 345,430 | |||||
Memory Products Division | 347,887 | 338,986 | 330,504 | ||||||||
Data Communications Division | 70,378 | 79,410 | 86,591 | ||||||||
Emerging Technologies and Other | 24,026 | 11,590 | 7,162 | ||||||||
Total revenues | $ | 725,497 | $ | 722,693 | $ | 769,687 | |||||
Programmable Systems Division:
Revenues from the Programmable Systems Division in fiscal 2014 decreased by $9.5 million or 3.2% compared to fiscal 2013. Revenues from the Programmable Systems Division in fiscal 2013 decreased by $52.7 million or 15.3% compared to fiscal 2012.The revenue decrease in both fiscal 2014 and 2013 was primarily attributable to declines in sales of our TrueTouch® touchscreen products due to a decrease in revenue from our handset customers and lower average selling prices. The decrease was partially offset by an increase in sales of PSD products to industrial and automotive customers where we experienced a ramp in volume from new design wins. Fiscal 2014 revenue also included $8.2 million of incremental revenue as a result of the change in accounting for certain distributor revenues as discussed above.
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Memory Products Division:
Revenues from the Memory Products Division in fiscal 2014 and 2013 increased by $8.9 million and $8.5 million, respectively, primarily due to an increase in sales of nonvolatile products associated with our acquisition of Ramtron, offset by a decrease in SRAM products driven by a continuing decrease in demand from wireless and wireline end customers. Fiscal 2014 revenue also included $4.1 million of incremental revenue as a result of the change in accounting for certain distributor revenues as discussed above.
Data Communications Division:
Revenue for the Data Communication Division in fiscal 2014 decreased by $9.0 million or 11.4% compared to fiscal 2013 due to declining revenue in our legacy high-speed USB controllers, optical navigation and trackpad products.
Revenue for the Data Communication Division in fiscal 2013 decreased by $7.2 million or 8.3% compared to fiscal 2012 due to declining revenue in our legacy USB products offset by an increase in USB3.0 and trackpad products.
Emerging Technologies and Other:
Revenue from the Emerging Technologies Division in fiscal 2014 increased by $12.4 million or 107.3% compared to fiscal 2013 due to increased revenue in all three business - Deca Tech, Agiga Tech and our foundry business. The increase is due to the overall increase in demand as certain of our Emerging Technologies companies begin to ramp production with new customer design wins.
Revenue from the Emerging Technologies Division in fiscal 2013 increased by $4.4 million or 61.8% compared to fiscal 2012 primarily due to increase in revenue from our foundry and Deca Technologies and Agiga Tech offset by the divestiture of Cypress Envirosystems which represented $2.9 million of revenue in 2012.
Cost of Revenues/Gross Margin
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Cost of revenues | $ | 361,820 | $ | 384,121 | $ | 376,887 | |||||
Gross margin percentage | 50.1 | % | 46.8 | % | 51.0 | % | |||||
Gross margin percentage increased to 50.1% in fiscal 2014 from 46.8% in fiscal 2013 primarily driven by lower cost of revenue expenses associated with the inventory acquired in the Ramtron acquisition, higher factory absorption and product and customer mix. Charges to cost of revenue for inventory reserve provisions were $19.8 million during fiscal 2014, unfavorably impacting our gross margin by 3%. The benefit realized from sales of inventory previously reserved were $3.7 million for fiscal year 2014, favorably impacting our gross margin by 1%.
Gross margin percentage declined to 46.8% in fiscal 2013 from 51.0% in fiscal 2012 primarily driven by lower factory absorption, product and customer mix, and the impact of the negative gross margins of our ETD. Charges to cost of sales for inventory provisions were $12.8 million during fiscal 2013, unfavorably impacting our gross margin by 2%. Sales of inventory previously written-off were $5.1 million for fiscal year 2013, favorably impacting our gross margin by 1%. The overall net effect on our gross margin from charges to cost of sales for inventory provisions and sales of items previously written-off was a 1% net unfavorable impact for fiscal year 2013.
Research and Development (“R&D”)
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
R&D expenses | $ | 164,560 | $ | 190,906 | $ | 189,897 | |||||
As a percentage of revenues | 22.7 | % | 26.4 | % | 24.7 | % | |||||
R&D expenditures decreased by $26.3 million in fiscal 2014 compared to fiscal 2013. The decrease was primarily attributable to a decrease of $9.9 million in stock-based compensation and a decrease of $1.0 million in deferred compensation expense. There was an additional decrease in consulting fees and other outside services of $2.9 million and $10.0 million,
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respectively, as a result of a worldwide cost cutting effort. As a percentage of revenues, R&D expenses were lower in fiscal 2014 driven by the decrease in total expense in the same period.
R&D expenditures increased by $1.0 million in fiscal 2013 compared to fiscal 2012. The increase was primarily attributable to an increase of $4.3 million in variable bonus-related expense and an increase of $5.3 million in stock-based compensation. This amount was offset by a $4.1 million decrease in outside consulting services, license and equipment expense as a result of a worldwide cost cutting effort. As a percentage of revenues, R&D expenses were higher in fiscal 2013 driven by the decrease in total revenues in the same period.
Selling, General and Administrative (“SG&A”)
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
SG&A expenses | $ | 170,741 | $ | 182,671 | $ | 211,959 | |||||
As a percentage of revenues | 23.5 | % | 25.3 | % | 27.5 | % | |||||
SG&A expenses decreased by $11.9 million in fiscal 2014, or approximately 6.5% compared to fiscal 2013. The decrease was primarily attributable to a decrease in stock-based compensation of approximately $13.4 million, a $7.9 million decrease in headcount related expenditures, a $2.0 million decrease in deferred compensation expense, a $1.6 million decrease in variable bonus-related expense, offset by $7.3 million of acquisition related expenditures associated with our proposed merger with Spansion, an increase of $2.7 million in legal fees and $1.3 million in accrued estimated legal settlements.
SG&A expenses decreased by $29.3 million in fiscal 2013, or approximately 14% compared to fiscal 2012. The decrease was primarily attributable to (1) a decrease in non-recurring charges which occurred in 2012 including $6.9 million acquisition related expenses and a $1.6 million loss on the divestiture of Cypress Envirosystems; (2) company wide cost cutting efforts including a decrease in travel expense of $2.9 million and a $3.9 million reduction of advertising, marketing and other outside services and (3) a decrease in labor and benefit expense of $8.7 million due to restructuring and reduced headcount. These amounts were partially offset by a $2.5 million increase in bonus expense and a $2.1 million increase in deferred compensation expense.
Amortization of Acquisition-Related Intangible Assets
During fiscal 2014, amortization of acquisition-related intangible assets decreased by $1.1 million compared to fiscal 2013. The decrease is primarily related to certain intangible assets acquired during fiscal 2012 that were fully amortized during fiscal 2013.
During fiscal 2013, amortization of acquisition-related intangible assets increased by $3.8 million compared to fiscal 2012. The increase is related to our Ramtron acquisition, which occurred in the fourth quarter of fiscal 2012. The increase is directly attributable to amortizing the acquired intangible assets for an entire fiscal year during 2013.
Restructuring
During fiscal 2013, we implemented a restructuring plan to reduce operating expenses as part of our 2013 corporate priorities. The plan included the termination of employees and the disposal of certain equipment located in our Bloomington, Minnesota facility. We recorded restructuring charges of $15.4 million and $4.3 million during fiscal 2013 and 2012, respectively, and a benefit of $1.2 million from restructuring related activities in fiscal 2014. The determination of when we accrue for severance costs, and which accounting standard applies, depends on whether the termination benefits are provided under a one-time benefit arrangement or under an on-going benefit arrangement. The benefit of $1.2 million in restructuring activities in fiscal 2014 consisted mainly of a gain on the sale of restructured property, plant and equipment for approximately $0.6 million. The $15.4 million restructuring costs recognized in fiscal 2013 primarily consisted of $8 million in personnel costs and a $6.7 million in asset write-down. The $4.3 million restructuring costs recognized in fiscal 2012 consisted primarily of personnel costs and was mainly due to the restructuring program announced in fiscal 2011. Refer to Note 10 of Notes to Consolidated Financial Statements under Item 8 for more detailed discussions on our restructuring programs for fiscal 2014, 2013 and 2012.
Assets Held for Sale
During fiscal 2013, we incurred a $6.7 million charge to write down certain equipment that we intended to sell to its current fair value of $2.3 million which is included in "Other current assets" in the Consolidated Balance Sheet as of December
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29, 2013. These assets were sold during fiscal 2014 at a net gain of approximately $0.6 million. Refer to Note 7 of Notes to Consolidated Financial Statements under Item 8 for more information on our assets held for sale.
Divestitures
We did not have any divestitures during fiscal 2014 or 2013.
On December 19, 2012, we completed the divestiture of our wholly-owned subsidiary Cypress Envirosystems and we received nominal consideration that is dependent upon future performance. Cypress Envirosystems was an immaterial part of our ETD segment and as a result of the sale we recorded a loss of $1.6 million in “(Gain) loss on divestiture,” in the Consolidated Statement of Operations.
Interest and Other Income, Net
The following table summarizes the components of interest and other income, net:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Interest income | $ | 362 | $ | 301 | $ | 694 | |||||
Interest expense | (5,763 | ) | (8,112 | ) | (3,824 | ) | |||||
Changes in fair value of investments under the deferred compensation plan | 3,014 | 6,371 | 3,158 | ||||||||
Impairment of investments | — | 25 | (3,200 | ) | |||||||
Foreign currency exchange gains (losses), net | 1,382 | 2,791 | (1,460 | ) | |||||||
Unrealized loss on marketable securities | (1,495 | ) | — | — | |||||||
Gain on sale of equity investments | — | 908 | 1,601 | ||||||||
Others | 40 | (59 | ) | 286 | |||||||
Total interest and other income, net | $ | (2,460 | ) | $ | 2,225 | $ | (2,745 | ) | |||
Employee Deferred Compensation Plan
We have a deferred compensation plan, which provides certain key employees, including our executive management, with the ability to defer the receipt of compensation in order to accumulate funds for retirement on a tax-deferred basis. We do not make contributions to the deferred compensation plan and we do not guarantee returns on the investments. Participant deferrals and investment gains and losses remain as our liabilities and the underlying assets are subject to claims of general creditors. In fiscal 2014, 2013 and 2012, we recognized changes in fair value of the assets under the deferred compensation plan in “Interest and other income, net” of approximately $3.0 million, $6.4 million and $3.2 million, respectively. The increase or decrease in the fair value of the investments relates to the increased or decreased performance of the portfolio on a year over year basis. Refer to Note 17 of Notes to Consolidated Financial Statements under Item 8 for more information about our deferred compensation plan.
Interest expense
Interest expense for fiscal 2014 and fiscal 2013 was $5.8 million and $8.1 million, respectively, and represents interest expense incurred on our revolving line of credit and other term debt. Refer to Note 14 of Notes to Consolidated Financial Statements under Item 8 for more information about our credit facilities.
Impairment of Investments
We review our investments periodically for impairment and recognize an impairment loss when the carrying value of an investment exceeds its fair value and the decline in value is considered other-than-temporary. In fiscal 2013 no impairment charges were recognized. During the first quarter of fiscal 2012, two of our privately-held companies which we were invested in at a carrying value of $2.4 million, offered additional rounds of financing that we declined to participate in. Based on these new rounds of financing, we determined that our investments were impaired and wrote off the $2.4 million investment in fiscal 2012.
For more information about our investments, refer to Note 6 of Notes to Consolidated Financial Statements under Item 8.
Gain on Sale of Investments in Marketable Equity Securities
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In the second quarter of fiscal 2013, we sold our investment in a certain marketable equity security for $2.2 million, which resulted in a realized gain of $1.1 million.
In connection with the acquisition of Ramtron, we recognized a gain of $1.7 million on our initial investment in Ramtron of $3.4 million. For more information about our acquisition, refer to Note 2 of Notes to Consolidated Financial Statements under Item 8.
Unrealized loss on marketable securities
In the fourth quarter of fiscal 2014, the Company, through a wholly-owned subsidiary, purchased approximately 6.9 million ordinary shares of Hua Hong Semiconductor Limited (HHSL) for an aggregate price of $10.0 million in connection with their initial public offering. HHSL is the parent company of Grace Semiconductor Manufacturing Corporation, which is one of our strategic foundry partners. We recorded an unrealized loss on our investment in HHSL’s ordinary shares of approximately $1.5 million as a result of the decline in the fair market value of the investment as of December 28, 2014.
Equity in Net Loss of Equity Method Investee
During fiscal 2014, we invested an additional $15 million in a battery company. The additional investment in this company increased our ownership interest in the company’s outstanding stock from 17.6% to 26.2% as of December 28, 2014 and required us to change from the cost method of accounting to the equity method of accounting for this investment. Under the equity method of accounting, we are required to record our interest in the investee's reported net income or loss for each reporting period. Additionally, we are required to present our prior period financial results to reflect the equity method of accounting from the date of the initial investment in the company. Our results of operations include charges of $5.1 million, $1.9 million, and $1.1 million, respectively, for the fiscal years ended 2014, 2013, and 2012. Refer to Note 15 of Notes to Consolidated Financial Statements under Item 8 for more detailed discussion.
Income Taxes
Our income tax benefit was $1.2 million for 2014. Our income tax benefit was $7.8 million for 2013. Our income tax expense was $2.3 million in fiscal 2012. The tax benefit in fiscal 2014 was primarily attributable to a release of previously accrued taxes of approximately $8.3 million related to settlements with taxing authorities and the lapsing of statutes of limitations, primarily offset by income taxes associated with our non-U.S. operations. The tax benefit in fiscal 2013 was primarily attributable to a release of previously accrued taxes of approximately $13.8 million related to settlements with taxing authorities and the lapsing of statutes of limitation, primarily offset by income taxes associated with our non-U.S. operations. The tax expense in fiscal 2012 was primarily attributable to income taxes associated with our non-U.S. operation
Our effective tax rate varies from the U.S. statutory rate primarily due to earnings of foreign subsidiaries taxed at different rates and a full valuation allowance on net operating losses incurred in the U.S. The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We regularly assess our tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the many countries in which we and our affiliates do business.
Non-U.S. tax authorities have completed their income tax examinations of our subsidiary in India for fiscal years 2002-2008 and our subsidiary in the Philippines up to 2009. The proposed adjustments in India have been appealed, and we believe the ultimate outcome of these appeals will not result in a material adjustment to our tax liability. The Philippines examinations up to 2009 resulted in no material adjustments to our tax liabilities. Income tax examinations of our Philippine subsidiary for the 2010 fiscal year and our India subsidiary for the 2009-2010 fiscal years are in progress. We believe the ultimate outcome of these examinations will not result in a material adjustment to our tax liability.
International revenues account for a significant portion of our total revenues, such that a material portion of our pretax income is earned and taxed outside the U.S. at rates ranging from 0% to 25%. The impact on our provision for income taxes of foreign income being taxed at rates different than the U.S. federal statutory rate was a benefit of approximately $37.5 million, $15.4 million, and $26.4 million in 2014, 2013 and 2012, respectively. The foreign jurisdictions with lower tax rates as compared to the U.S. statutory federal rate that had the most significant impact on our provision for foreign income taxes in the periods presented include the Cayman Islands, China, Ireland, the Philippines and Switzerland.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our consolidated cash, cash equivalents and short-term investments and working capital:
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As of | |||||||
December 28, 2014 | December 29, 2013 | ||||||
(In thousands) | |||||||
Cash, cash equivalents and short-term investments | $ | 118,812 | $ | 104,462 | |||
Working capital | $ | 37,479 | $ | 13,871 | |||
Key Components of Cash Flows
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Net cash provided by operating activities | $ | 103,336 | $ | 67,568 | $ | 134,997 | |||||
Net cash provided by (used in) investing activities | $ | (42,156 | ) | $ | 261 | $ | (113,036 | ) | |||
Net cash used in financing activities | $ | (43,453 | ) | $ | (45,023 | ) | $ | (58,475 | ) | ||
Fiscal 2014:
Operating Activities
In fiscal 2014, net cash provided by operating activities was $103.3 million compared to $67.6 million in fiscal 2013. The increase in operating cash flows for fiscal 2014 was primarily due to an increase in net income of $66.2 million compared to fiscal 2013. Our operating cash flow for 2014 of $103.3 million was primarily due to our net income of $16.5 million, net favorable non-cash adjustments to our net income including stock-based compensation of $50.2 million and depreciation and amortization of $46.7 million, and a net change in working capital of $7.9 million.
Investing Activities
In fiscal 2014, net cash used in investing activities was $42.2 million compared to net cash used in investing activities of $0.3 million in fiscal 2013. The net cash used in our investing activities in fiscal 2014 was primarily due to investment purchases of $23.4 million, purchases of property and equipment of $20.9 million and investments made in other entities accounted for under the cost or equity method of accounting of $18.4 million, offset by the proceeds from sales of investments of $16.6 million.
Financing Activities
In fiscal 2014, net cash used in financing activities was $43.4 million compared to $45.0 million in fiscal 2013. The cash we used in our financing activities in fiscal 2014 was primarily due to payment of dividends of $69.2 million and the repayment of debt and obligations under capital leases of $6.3 million, offset by net proceeds of $32 million from the issuance of common shares under our employee stock plans.
Fiscal 2013:
Operating Activities
In fiscal 2013, net cash provided by operating activities was $67.6 million compared to $135 million in fiscal 2012. The decrease in operating cash flows for fiscal 2013 was primarily due to an increase in net loss of $24.8 million compared to fiscal 2012. Our operating cash flow for fiscal 2013 of $67.6 million was primarily due to our net loss of $50.1 million, offset by net favorable non-cash adjustments to our net loss including stock-based compensation of $73.0 million, depreciation and amortization of $48.4 million, and a net change in working capital of $5.9 million.
Investing Activities
In fiscal 2013, net cash provided by investing activities was $0.3 million compared to net cash used in investing activities of $113.0 million in fiscal 2012. The cash provided by our investing activities in fiscal 2013 was primarily due to sales of investments of $64.4 million offset by investment purchases of $23.1 million, and purchases of property and equipment of $36.6 million primarily for our Emerging Technologies Division.
Financing Activities
In fiscal 2013, net cash used in financing activities was $45.0 million compared to $58.5 million in fiscal 2012. The cash we used in our financing activities in fiscal 2013 was primarily due to payment of dividends of $64.8 million, repayment on our
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long term revolving credit facility (Credit facility) of $145.0 million and repayment of other debt of $17.1 million, partially offset by net proceeds of $38.7 million from the issuance of common shares under our employee stock plans, and borrowings of $140.0 million on our Credit facility.
Fiscal 2012:
In fiscal 2012, cash and cash equivalents decreased by approximately $36.5 million primarily due to the $113.0 million cash used in our investing activities, principally related to the cash paid for the acquisition of Ramtron. (See Note 2 for a detailed discussion of the Ramtron acquisition.) Cash and cash equivalents also decreased due to the $58.5 million cash used in our financing activities, principally related to our stock buyback program and payment of dividends, which were partially offset by cash received from our credit facility. Cash used in our investing and financing activities was partially offset by the cash generated from our operating activities of $135.0 million.
Operating Activities
In fiscal 2012, net cash provided by operating activities was $135.0 million compared to $283.8 million in fiscal 2011. Operating cash flows for fiscal 2012 were primarily due to $138.3 million in net favorable non-cash adjustments to our net loss including stock-based compensation of $74.3 million and depreciation and amortization of $50.8 million, an increase in accounts payable and other liabilities, and a decrease in accounts receivable, partially offset by decreases in deferred income on sales to our distributors.
The significant changes in our working capital, excluding the impact of the Ramtron acquisition, as of December 30, 2012 compared to January 1, 2012 were as follows:
• | Accounts receivable decreased by $23.9 million due to decreased revenue and distributor shipments. |
• | Accounts payable and other current and long-term liabilities increased by $19.4 million due to timing of purchases and payments. |
• | Deferred margin on sales to distributors decreased by $19.1 million due to lower distributor shipments. |
Investing Activities
In fiscal 2012, net cash used in investing activities was $113.0 million compared to net cash provided by investing activities of $69.1 million in fiscal 2011. The cash we used for our investing activities in fiscal 2012 was primarily due to the purchase of investments of $112.8 million, and $100.9 million for the acquisition of Ramtron, partially offset by proceeds from the sales or maturities and purchases of available for sale investments of $139.8 million.
Financing Activities
In fiscal 2012, net cash used in financing activities was $58.5 million compared to $516.4 million in fiscal 2011. The cash we used in our financing activities in fiscal 2012 was primarily due to $209.2 million cash used to repurchase shares of our stock, $22.6 million related to statutory income tax withholdings paid on vested restricted stock awards in lieu of issuing shares of stock and $63.2 million dividends paid in fiscal 2012. These amounts were partially offset by $232.0 million of borrowings under our revolving facility and line of credit, net of the repayment of our previous line of credit.
Liquidity
Stock Repurchase Programs:
On September 20, 2011, our Board authorized a new $400.0 million stock buyback program. The program allows us to purchase our common stock or enter into equity derivative transactions related to our common stock. The timing and actual amount expended with the new authorized funds will depend on a variety of factors including the market price of our common stock, regulatory, legal, and contractual requirements, alternatives uses of cash, availability of on shore cash and other market factors. The program does not obligate us to repurchase any particular amount of common stock and may be modified or suspended at any time at our discretion. From September 2011 through the end of fiscal 2014, we used approximately $316.8 million from this program to repurchase approximately 23.6 million shares at an average share price of approximately $13.43. As of December 28, 2014, $83.3 million remained available for future stock repurchases.
Yield Enhancement Program (“YEP”):
As discussed in Item 5 above and in Note 14 of the Notes to Consolidated Financial Statements under Item 8, we have periodically entered into short term yield enhanced structured agreements since fiscal 2009. In fiscal 2014, we entered into short-term yield enhanced structured agreements with maturities ranging from 30 to 45 at an aggregate price of approximately $19.4 million. Upon settlement of these agreements, we received approximately $19.7 million in cash. In fiscal 2013 we didn’t enter into any short-term yield enhanced structured agreements. In fiscal 2012, we entered into short-term yield enhanced
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structured agreements with maturities of 30 days or less for an aggregate price of approximately $14.5 million. Upon settlement of these agreements, we received approximately $14.9 million in cash.
Senior Secured Revolving Credit Facility
On June 26, 2012, we entered into a five-year senior secured revolving credit facility (“Credit Facility”) with a group of lenders led by Morgan Stanley Senior Funding, Inc. The Credit Facility enables us to borrow up to $430 million on a revolving basis. Borrowing terms vary based on the type of borrowing with all outstanding balances being due at the credit facility termination date, or June 25, 2017. Outstanding amounts may be repaid prior to maturity without penalty and are mandatory for certain asset sales and casualty events. The current outstanding borrowings bear interest at LIBOR plus 2.25% on the drawn amount. There is a commitment fee payable of 0.375% per annum on any undrawn amounts. The Credit Facility contains customary affirmative, negative and financial covenants for similarly rated companies.
On October 17, 2013, we amended our credit facility to reduce the revolving commitments to $300 million. In connection with the reduction, certain financial covenants were amended. The amended financial covenants include the following conditions: 1) maximum senior secured leverage ratio of 2.50 to 1.00 through January 1, 2017 and 2.25 to 1.00 thereafter, 2) maximum total leverage ratio of 4.25 to 1.00 through January 3, 2015, 3.5 to 1.00 through January 1, 2017 and 3.00 to 1.00 thereafter, 3) minimum fixed charge coverage ratio of 1.00 to 1.00, and 4) minimum liquidity of at least $100 million. Borrowings are collateralized by substantially all assets of the company.
At December 28, 2014, our outstanding borrowings of $227 million were recorded as part of long-term liabilities and are presented as “Long-term revolving credit facility” in the Consolidated Balance Sheet. As of December 28, 2014, we were in compliance with all of the financial covenants under the Credit Facility.
Refer to Note 14 of Notes to Consolidated Financial Statements under Item 8 for more information on our senior secured revolving credit facility.
Auction Rate Securities (“ARS”):
During fiscal 2012 ARS with a par value of $10.0 million were called for redemption at par and ARS with a par value of $5.0 million were sold at 98.25 of par, which resulted in the reversal of unrealized losses of $1.3 million.
During the first quarter of fiscal 2013, ARS with a par value of $1.0 million were sold at 98.38% of par, which resulted in the reversal of unrealized losses of $0.1 million. During the fourth quarter of fiscal 2013, we sold all remaining ARS with a par value of $4.8 million and recognized a realized loss on the sale of $0.1 million.
Refer to Note 5 of Notes to Consolidated Financial Statements under Item 8 for more information on our auction rate securities.
Contractual Obligations
The following table summarizes our contractual obligations as of December 28, 2014:
Total | 2015 | 2016 and 2017 | 2018 and 2019 | After 2019 | |||||||||||||||
(In thousands) | |||||||||||||||||||
Purchase obligations (1) | $ | 86,338 | $ | 76,023 | $ | 10,315 | $ | — | $ | — | |||||||||
Equipment loan | $ | 5,918 | 2,916 | 3,002 | — | — | |||||||||||||
Operating lease commitments | $ | 13,715 | 5,973 | 6,656 | 742 | 344 | |||||||||||||
Capital lease commitments | $ | 10,672 | 3,440 | 7,232 | — | — | |||||||||||||
Senior Secured Revolving Credit Facility | $ | 227,000 | — | — | 227,000 | — | |||||||||||||
Patent license fee commitments (2) | $ | 5,880 | — | 5,880 | — | — | |||||||||||||
Total contractual obligations | $ | 349,523 | $ | 88,352 | $ | 33,085 | $ | 227,742 | $ | 344 | |||||||||
1. | Purchase obligations primarily include non-cancelable purchase orders for materials, services, manufacturing equipment, building improvements and supplies in the ordinary course of business. Purchase obligations are defined as enforceable agreements that are legally binding on us and that specify all significant terms, including quantity, price and timing. |
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2. | On April 30, 2012, we entered into a patent license agreement whereby we paid a total patent license fee of $14.0 million in fiscal 2012 and committed to pay another $5.9 million on or before April 30, 2016 representing fees for future purchases of patents and patent related services. |
As of December 28, 2014, our unrecognized tax benefits were $11.6 million, which were classified as long-term liabilities. We believe it is possible that we may recognize approximately $1.0 million to $1.5 million of our existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.
Capital Resources and Financial Condition
Our long-term strategy is to maintain a minimum amount of cash for operational purposes and to invest the remaining amount of our cash in interest-bearing and highly liquid cash equivalents and debt securities, the purchase of our stock through our stock buyback program and payments of regularly scheduled cash dividends. In addition we may use excess cash to invest in our ETD, enter into strategic investments and partnerships and pursue acquisitions. As of December 28, 2014, in addition to $103.7 million in cash and cash equivalents, we had $15.1 million invested in short-term investments for a total cash and short-term investment position of $118.8 million that is available for use in current operations.
As of December 28, 2014, approximately 20% of our cash and cash equivalents and available for sale investments are offshore funds. While these amounts are primarily invested in U.S. dollars, a portion is held in foreign currencies. All offshore balances are exposed to local political, banking, currency control and other risks. In addition, these amounts, if repatriated may be subject to tax and other transfer restrictions.
We believe that liquidity provided by existing cash, cash equivalents and investments and our borrowing arrangements will provide sufficient capital to meet our requirements for at least the next twelve months. However, should prevailing economic conditions, debt covenants constraints, and/or financial, business and other factors beyond our control adversely affect our estimates of our future cash requirements, we could be required to fund our cash requirements by alternative financing. There can be no assurance that additional financing, if needed, would be available on terms acceptable to us or at all. We may also choose at any time to raise additional capital or debt to strengthen our financial position, facilitate growth, enter into strategic initiatives including the acquisition of other companies, repurchases of shares of stock or increase our dividends or pay a special dividend and provide us with additional flexibility to take advantage of other business opportunities that arise.
Non-GAAP Financial Measures
To supplement its consolidated financial results presented in accordance with GAAP, Cypress uses non-GAAP measures to assess the following financial measures which are adjusted from the most directly comparable GAAP financial measures:
• | Gross margin |
• | Research and development expenses |
• | Selling, general and administrative expenses |
• | Operating income (loss) |
• | Net income (loss) |
• | Diluted net income (loss) per share |
The non-GAAP measures set forth above exclude charges primarily related to stock-based compensation, which represented approximately 72% of total adjustments for the year ended December 28, 2014, as well as restructuring charges, acquisition-related expenses and other adjustments. Management believes that these non-GAAP financial measures reflect an additional and useful way of viewing aspects of Cypress’s operations that, when viewed in conjunction with Cypress’s GAAP results, provide a more comprehensive understanding of the various factors and trends affecting Cypress’s business and operations. Management uses these non-GAAP measures for strategic and business decision-making, internal budgeting, forecasting and resource allocation processes. In addition, these non-GAAP financial measures facilitate management’s internal comparisons to Cypress’s historical operating results and comparisons to competitors’ operating results. Pursuant to the requirements of Regulation G and to make clear to our investors the adjustments we make to GAAP measures, we have provided a reconciliation of the non-GAAP measures to the most directly comparable GAAP financial measures.
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Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands, except per shares amounts) | |||||||||||
Non-GAAP gross margin | $ | 381,716 | $ | 377,261 | $ | 426,693 | |||||
Non-GAAP research and development expenses | $ | 147,098 | $ | 161,764 | $ | 166,086 | |||||
Non-GAAP selling, general and administrative expenses | $ | 137,858 | $ | 143,071 | $ | 163,804 | |||||
Non-GAAP operating income | $ | 96,759 | $ | 72,426 | $ | 96,804 | |||||
Non-GAAP pretax profit | $ | 91,187 | $ | 66,013 | $ | 93,662 | |||||
Non-GAAP net income attributable to Cypress | $ | 87,291 | $ | 63,221 | $ | 91,450 | |||||
Non-GAAP diluted net income per share attributable to Cypress | $ | 0.52 | $ | 0.39 | $ | 0.55 | |||||
We believe that providing these Non-GAAP financial measures, in addition to the GAAP financial results, are useful to investors because they allow investors to see our results “through the eyes” of management as these Non-GAAP financial measures reflect our internal measurement processes. Management believes that these Non-GAAP financial measures enable investors to better assess changes in each key element of our operating results across different reporting periods on a consistent basis and provides investors with another method for assessing our operating results in a manner that is focused on the performance of our ongoing operations.
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CYPRESS SEMICONDUCTOR CORPORATION
RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES
(In thousands, except per-share data)
(Unaudited)
Year Ended | ||||||||||||||||||||
December 28, 2014 | % of Revenue | December 29, 2013 | % of Revenue | December 30, 2012 | % of Revenue | |||||||||||||||
GAAP gross margin | $ | 363,677 | 50.1 | % | $ | 338,572 | 46.8 | % | $ | 392,800 | 51.0 | % | ||||||||
Stock-based compensation expense | 13,209 | 1.8 | % | 12,789 | 1.8 | % | 18,519 | 2.4 | % | |||||||||||
Impairment of assets, restructuring and other | 4,489 | 0.6 | % | 241 | — | % | 3,581 | 0.5 | % | |||||||||||
Changes in value of deferred compensation plan (1) | 427 | 0.1 | % | 854 | 0.2 | % | 372 | — | % | |||||||||||
Patent license fee | — | — | % | — | — | % | 7,100 | 0.9 | % | |||||||||||
Acquisition costs and related amortization | (86 | ) | — | % | 24,805 | 3.4 | % | 3,545 | 0.5 | % | ||||||||||
Divestiture expenses | — | — | % | — | — | % | 776 | 0.1 | % | |||||||||||
Non-GAAP gross margin | $ | 381,716 | 52.6 | % | $ | 377,261 | 52.2 | % | $ | 426,693 | 55.4 | % | ||||||||
GAAP research and development expenses | $ | 164,560 | $ | 190,906 | $ | 189,897 | ||||||||||||||
Stock-based compensation expense | (16,187 | ) | (26,042 | ) | (19,800 | ) | ||||||||||||||
Non-cash compensation | — | — | (433 | ) | ||||||||||||||||
Changes in value of deferred compensation plan (1) | (793 | ) | (1,744 | ) | (568 | ) | ||||||||||||||
Divestiture expenses | — | — | (307 | ) | ||||||||||||||||
Acquisition costs and related amortization | — | (252 | ) | (2,703 | ) | |||||||||||||||
Impairment of assets, restructuring and other | (482 | ) | (1,104 | ) | — | |||||||||||||||
Non-GAAP research and development expenses | $ | 147,098 | $ | 161,764 | $ | 166,086 | ||||||||||||||
GAAP selling, general and administrative expenses | $ | 176,244 | $ | 182,671 | $ | 211,959 | ||||||||||||||
Stock-based compensation expense | (20,774 | ) | (34,187 | ) | (36,013 | ) | ||||||||||||||
Non-cash compensation | — | — | (500 | ) | ||||||||||||||||
Impairment of assets, restructuring and other | (97 | ) | (450 | ) | (173 | ) | ||||||||||||||
Legal and other | (1,330 | ) | — | — | ||||||||||||||||
Changes in value of deferred compensation plan (1) | (1,855 | ) | (3,795 | ) | (1,710 | ) | ||||||||||||||
Acquisition costs and related amortization | (14,330 | ) | (1,168 | ) | (9,095 | ) | ||||||||||||||
Divestiture expenses | — | — | (664 | ) | ||||||||||||||||
Non-GAAP selling, general and administrative expenses | $ | 137,858 | $ | 143,071 | $ | 163,804 | ||||||||||||||
GAAP operating income (loss) | $ | 22,873 | $ | (58,195 | ) | $ | (18,915 | ) | ||||||||||||
Stock-based compensation expense | 50,170 | 73,020 | 74,332 | |||||||||||||||||
Non-cash compensation | — | — | 933 | |||||||||||||||||
Loss on divestiture and expenses | — | — | 3,351 | |||||||||||||||||
Impairment of assets, restructuring and other | 5,067 | 17,152 | 8,016 | |||||||||||||||||
Legal and other | 1,330 | — | — | |||||||||||||||||
Changes in value of deferred compensation plan (1) | 3,075 | 6,393 | 2,650 | |||||||||||||||||
Patent license fee | — | — | 7,100 | |||||||||||||||||
Acquisition costs and related amortization | 14,244 | 34,056 | 19,337 | |||||||||||||||||
Non-GAAP operating income | $ | 96,759 | $ | 72,426 | $ | 96,804 | ||||||||||||||
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CYPRESS SEMICONDUCTOR CORPORATION
RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES
(In thousands, except per-share data)
(Unaudited)
Year Ended | ||||||||||||||||||||
December 28, 2014 | % of Revenue | December 29, 2013 | % of Revenue | December 30, 2012 | % of Revenue | |||||||||||||||
GAAP pretax profit | $ | 15,345 | 2.1 | % | $ | (57,847 | ) | (8.0 | )% | $ | (22,735 | ) | (3.0 | )% | ||||||
Stock-based compensation expense | $ | 50,170 | 6.9 | % | $ | 73,020 | 10.1 | % | $ | 74,332 | 9.7 | % | ||||||||
Non-cash compensation | — | — | % | — | — | % | 933 | 0.1 | % | |||||||||||
Loss on divestiture and expenses | — | — | % | — | — | % | 3,351 | 0.4 | % | |||||||||||
Acquisition costs and related amortization | $ | 14,244 | 2.0 | % | $ | 34,056 | 4.7 | % | $ | 19,337 | 2.5 | % | ||||||||
Changes in value of deferred compensation plan | $ | 61 | — | % | $ | 22 | — | % | $ | (507 | ) | (0.1 | )% | |||||||
Legal and other | $ | 1,330 | 0.2 | % | $ | — | — | % | $ | — | — | % | ||||||||
Impairment of assets, restructuring and other | $ | 3,737 | 0.5 | % | $ | 17,152 | 2.4 | % | $ | 8,016 | 1.0 | % | ||||||||
Tax related and other items | $ | (263 | ) | — | % | $ | (2,267 | ) | (0.3 | )% | $ | — | — | % | ||||||
Investment related losses | $ | 1,495 | 0.2 | % | $ | — | — | % | $ | 2,760 | 0.4 | % | ||||||||
Patent license fee | — | — | % | — | — | % | 7,100 | 0.9 | % | |||||||||||
Losses from equity method investment (1) | $ | 5,068 | 0.7 | % | $ | 1,877 | 0.3 | % | $ | 1,075 | 0.1 | % | ||||||||
Non-GAAP pretax profit | $ | 91,187 | 12.6 | % | $ | 66,013 | 9.2 | % | $ | 93,662 | 12.0 | % | ||||||||
GAAP net income (loss) attributable to Cypress | $ | 17,936 | $ | (48,242 | ) | $ | (23,444 | ) | ||||||||||||
Stock-based compensation expense | 50,170 | 73,020 | 74,332 | |||||||||||||||||
Non-cash compensation | — | — | 933 | |||||||||||||||||
Loss on divestiture and expenses | — | — | 3,351 | |||||||||||||||||
Investment related unrealized losses (gains) | 1,495 | — | — | |||||||||||||||||
Impairment of assets, restructuring and other | 3,737 | 17,151 | 8,016 | |||||||||||||||||
Legal and other | 1,330 | — | — | |||||||||||||||||
Changes in value of deferred compensation plan | 61 | 22 | (507 | ) | ||||||||||||||||
Acquisition costs and related amortization | 14,244 | 34,056 | 19,337 | |||||||||||||||||
Losses from equity method investment (1) | 5,068 | 1,878 | 1,074 | |||||||||||||||||
Investment-related gains | — | (2,266 | ) | 2,760 | ||||||||||||||||
Patent license fee | — | — | 7,100 | |||||||||||||||||
Tax related and other | (6,750 | ) | (12,398 | ) | (1,502 | ) | ||||||||||||||
Non-GAAP net income (loss) attributable to Cypress | $ | 87,291 | $ | 63,221 | $ | 91,450 | ||||||||||||||
GAAP net income per share attributable to Cypress—diluted | $ | 0.11 | $ | (0.31 | ) | $ | (0.15 | ) | ||||||||||||
Stock-based compensation expense | 0.30 | 0.45 | 0.45 | |||||||||||||||||
Loss on divestiture and expenses | — | — | 0.02 | |||||||||||||||||
Impairment of assets, restructuring and other | 0.02 | 0.11 | 0.05 | |||||||||||||||||
Legal and other | 0.01 | — | — | |||||||||||||||||
Acquisition costs and related amortization | 0.08 | 0.21 | 0.12 | |||||||||||||||||
Investment-related losses (gains) | 0.01 | (0.01 | ) | 0.02 | ||||||||||||||||
Patent license | — | — | 0.04 | |||||||||||||||||
Losses from equity method investment (1) | 0.03 | — | — | |||||||||||||||||
Tax related and other | (0.04 | ) | (0.08 | ) | (0.01 | ) | ||||||||||||||
Non-GAAP share count adjustment | — | 0.02 | 0.01 | |||||||||||||||||
Non-GAAP net income per share attributable to Cypress—diluted | $ | 0.52 | $ | 0.39 | $ | 0.55 | ||||||||||||||
46
(1) | In the first quarter of fiscal 2014, the Company changed the manner in which it accounted for one of its investments in an entity from the cost method of accounting to the equity method of accounting. The Company has restated is historical financial statements for all periods presented as if the Company had accounted for its investment in the entity under the equity method of accounting. See Note 15. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included in this Annual Report on Form 10-K and the data used to prepare them. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and we are required to make estimates, judgments and assumptions in the course of such preparation. Note 1 of Notes to Consolidated Financial Statements under Item 8 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. On an ongoing basis, we re-evaluate our judgments and estimates including those related to revenue recognition, allowances for doubtful accounts receivable, inventory valuation, valuation of long-lived assets, goodwill and financial instruments, stock-based compensation, and settlement costs, and income taxes. We base our estimates and judgments on historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies that are affected by significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements are as follows:
Revenue Recognition:
We generate revenues by selling products to distributors, various types of manufacturers including original equipment manufacturers (“OEMs”) and electronic manufacturing service providers (“EMSs”). We recognize revenue on sales to OEMs and EMSs provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations.
Sales to certain distributors are made under agreements which provide the distributors with price protection, other allowances and stock rotation under certain circumstances. Given the uncertainties associated with the rights given to these distributors, revenues and costs related to distributor sales are deferred until products are sold by the distributors to the end customers. Revenues are recognized from those distributors when the products have been sold to the end customers. At the time of shipment to those distributors, we record a trade receivable for the selling price since there is a legally enforceable right to receive payment, relieve inventory for the value of goods shipped since legal title has passed to the distributors, and defer the related margin as deferred margin on sales to distributors in the Consolidated Balance Sheets. The effects of distributor price adjustments are recorded as a reduction to deferred revenue at the time the distributors sell the products to the end customers.
We have historically recognized a significant portion of revenue through distributors at the time the distributor resold the product to its end customer (also referred to as the sell-through basis of revenue recognition) given the difficulty in estimating the ultimate price of these product shipments and amount of potential returns. 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, we concluded that we have become able to reasonably estimate returns and pricing concessions on certain product families and with certain distributors, and recognized revenue at the time we shipped these specific products to the identified distributors, less our estimate of future price adjustments and returns. As a result of this change, we recognized an incremental $12.3 million of revenue during the fourth quarter of fiscal 2014. The impact of this change resulted in an increase of $6.2 million to net income attributable to Cypress for fiscal 2014, or $0.04 per basic and diluted share.
We record as a reduction to revenues reserves for sales returns, price protection and allowances, based upon historical experience rates and for any specific known customer amounts. We also provide certain distributors and EMSs with volume-pricing discounts, such as rebates and incentives, which are recorded as a reduction to revenues at the time of sale. Historically these volume discounts have not been significant.
Our revenue reporting is highly dependent on receiving pertinent, accurate and timely data from our distributors. Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of our products they still have in stock. Because the data set is large and complex and because there may be errors in the reported data, we must use estimates and apply judgments to reconcile distributors’ reported inventories to their activities. Actual results could vary materially from those estimates.
Allowances for Doubtful Accounts Receivable:
47
We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers’ inability to make required payments. We make estimates of the collectability of our accounts receivable by considering factors such as historical bad debt experience, specific customer creditworthiness, the age of the accounts receivable balances and current economic trends that may affect a customer’s ability to pay. If the data we use to calculate the allowance for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and our results of operations could be materially affected.
Valuation of Inventories:
Management periodically reviews the adequacy of our inventory reserves. We record a write-down for our inventories which have become obsolete or are in excess of anticipated demand or net realizable value. We perform a detailed review of inventories each quarter that considers multiple factors including demand forecasts, product life cycle status, product development plans and current sales levels. Inventory reserves are not relieved until the related inventory has been sold or scrapped. Our inventories may be subject to rapid technological obsolescence and are sold in a highly competitive industry. If there were a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to record additional write-downs, and our gross margin could be adversely affected.
Valuation of Long-Lived Assets:
Our business requires heavy investment in manufacturing facilities and equipment that are technologically advanced but can quickly become significantly under-utilized or rendered obsolete by rapid changes in demand. In addition, we have recorded intangible assets with finite lives related to our acquisitions.
We evaluate our long-lived assets, including property, plant and equipment and purchased intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for our business, significant negative industry or economic trends, and a significant decline in our stock price for a sustained period of time. Impairments are recognized based on the difference between the fair value of the asset and its carrying value, and fair value is generally measured based on discounted cash flow analysis. If there is a significant adverse change in our business in the future, we may be required to record impairment charges on our long-lived assets.
Valuation of Goodwill:
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The carrying amount of goodwill at December 28, 2014 was $65.7 million, $33.9 million in the Memory Products Division (“MPD”) and $31.8 million in the Programmable System Division (“PSD”). The goodwill related to MPD was recorded as part of the acquisition of Ramtron in the fourth quarter of fiscal 2012. The goodwill related to PSD was unchanged from the balance at December 29, 2013. MPD and PSD are the only reportable business segments with goodwill.
We assess our goodwill for impairment on an annual basis and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. In accordance with ASU 2011-08, Testing Goodwill for Impairment, qualitative factors can be assessed to determine whether it is necessary to perform the current two-step test for goodwill impairment. If we believe, as a result of our qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required.
In fiscal 2014 and fiscal 2012, we elected to perform a qualitative analysis for impairment on goodwill rather than to perform the two-step quantitative goodwill impairment test. We assessed qualitative factors to determine whether it was necessary to perform the two-step goodwill impairment test. After assessing many qualitative factors pertinent to our Company we determined that it was more likely than not that the fair value of our reporting unit exceeds its carrying amount. In assessing the qualitative factors, we considered the impact of these key factors: 1) change in the industry and competitive environment, 2) market capitalization, 3) stock price and 4) overall financial performance. Based on the results of the testing, no goodwill impairment was recognized in fiscal 2014 and fiscal 2012.
In fiscal 2013 we elected to perform the two-step quantitative goodwill impairment test in 2013. The first step of a quantitative goodwill impairment test is to identify a potential impairment by comparing the fair value of a reporting unit with its carrying amount. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. Based on the results of the testing, no goodwill impairment was recognized in fiscal 2013.
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Fair Value of Financial Instruments:
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Our financial assets and financial liabilities that require recognition under the guidance generally include available-for-sale investments, employee deferred compensation plan and foreign currency derivatives. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. As such, fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
• | Level 1 includes instruments for which quoted prices in active markets for identical assets or liabilities that we have the ability to access. Our financial assets utilizing Level 1 inputs include U.S. treasuries, money market funds, marketable equity securities and our employee deferred compensation plan assets with the exception of our stable value funds which are considered Level 2 instruments. |
• | Level 2 includes instruments for which the valuations are based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. Level 2 assets consist of certain marketable debt instruments for which values are determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Our Level 2 instruments include certain U.S. government securities, commercial paper, corporate notes and bonds, assets held-for-sale and our employee deferred compensation plan liabilities and our stable value funds included in our deferred compensation plan assets. |
• | Level 3 includes valuations based on inputs that are unobservable and significant to the overall fair value measurement. Financial assets utilizing Level 3 inputs primarily include auction rate securities. We sold our entire investment in auction rate securities during 2013. Prior to the sale, we used an income approach valuation model to estimate the exit price of the auction rate securities, which is derived as the weighted-average present value of expected cash flows over various periods of illiquidity, using a risk adjusted discount rate that is based on the credit risk and liquidity risk of the securities. |
Availability of observable inputs can vary from instrument to instrument and to the extent that valuation is based on inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by our management in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. In regards to our auction rate securities, the income approach valuation model was based on both Level 2 (credit quality and interest rates) and Level 3 inputs. We determined that the Level 3 inputs were the most significant to the overall fair value measurement, particularly the estimates of risk adjusted discount rates and ranges of expected periods of illiquidity.
Stock-Based Compensation:
Under the fair value recognition provisions of the guidance, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest over the requisite service period of the awards. Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions, including measurement of level of achievement of performance milestones, the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, our future stock-based compensation expense could be significantly different from what we have recorded.
Accounting for Income Taxes:
Our global operations involve manufacturing, research and development and selling activities. Profits from non-U.S. activities are subject to local country taxes but are not subject to U.S. tax until repatriated to the U.S. It is our intention to permanently reinvest these earnings outside the U.S. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We consider historical levels of income, expectations and risks associated
49
with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. Should we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, we would record an adjustment to the deferred tax asset valuation allowance. This adjustment would increase income in the period such determination is made.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate tax assessment, a further charge to expense would result.
Recent Accounting Pronouncements
See "Recent Accounting Pronouncements" in Note 1 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risks
Our investment portfolio consists of a variety of financial instruments that exposes us to interest rate risk, including, but not limited to, money market funds, commercial paper and corporate securities. These investments are generally classified as available-for-sale and, consequently, are recorded on our balance sheets at fair market value with their related unrealized gain or loss reflected as a component of accumulated other comprehensive income in stockholders’ equity. Due to the relatively short-term nature of our investment portfolio, we do not believe that an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio. Since we believe we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio.
Foreign Currency Exchange Risk
We operate and sell products in various global markets and purchase capital equipment using foreign currencies but predominantly the U.S. dollar. As a result, we are exposed to risks associated with changes in foreign currency exchange rates. Changes in exchange rates between foreign currencies and the U.S. dollar may adversely affect our operating margins. For example, when foreign currencies appreciate against the U.S. dollar, inventory and expenses denominated in foreign currencies become more expensive. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive for international customers, thus potentially leading to a reduction in demand, and therefore in our sales and profitability. Furthermore, many of our competitors are foreign companies that could benefit from such a currency fluctuation, making it more difficult for us to compete with those companies. We cannot predict the impact of future exchange rate fluctuations on our business and results of operations.
We analyzed our foreign currency exposure, including our hedging strategies, to identify assets and liabilities denominated in other currencies. For those assets and liabilities, we evaluated the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar. We have determined that there would be an immaterial effect on our results of operations from such a shift.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
51
December 28, 2014 | December 29, 2013 | ||||||
(In thousands, except per-share amounts) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 103,736 | $ | 86,009 | |||
Short-term investments | 15,076 | 18,453 | |||||
Accounts receivable, net | 75,984 | 81,084 | |||||
Inventories | 88,227 | 100,612 | |||||
Other current assets | 29,288 | 33,555 | |||||
Total current assets | 312,311 | 319,713 | |||||
Property, plant and equipment, net | 237,763 | 258,585 | |||||
Goodwill | 65,696 | 65,696 | |||||
Intangible assets, net | 33,918 | 40,828 | |||||
Other long-term assets | 93,593 | 78,062 | |||||
Total assets | $ | 743,281 | $ | 762,884 | |||
LIABILITIES AND EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 42,678 | $ | 47,893 | |||
Accrued compensation and employee benefits | 35,182 | 38,972 | |||||
Deferred margin on sales to distributors | 95,187 | 122,578 | |||||
Dividends payable | 17,931 | 16,850 | |||||
Income taxes payable | 2,710 | 3,034 | |||||
Other current liabilities | 81,144 | 76,515 | |||||
Total current liabilities | 274,832 | 305,842 | |||||
Deferred income taxes and other tax liabilities | 18,784 | 26,831 | |||||
Long-term revolving credit facility | 227,000 | 227,000 | |||||
Other long-term liabilities | 20,800 | 27,528 | |||||
Total liabilities | 541,416 | 587,201 | |||||
Commitments and contingencies (Note 19) | |||||||
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; 306,167 and 296,346 shares issued; 163,013 and 153,172 shares outstanding at December 28, 2014 and December 29, 2013, respectively | 3,039 | 2,963 | |||||
Additional paid-in-capital | 2,675,170 | 2,665,453 | |||||
Accumulated other comprehensive loss | (46 | ) | (177 | ) | |||
Accumulated deficit | (379,913 | ) | (397,849 | ) | |||
Stockholders’ equity before treasury stock | 2,298,250 | 2,270,390 | |||||
Less: shares of common stock held in treasury, at cost; 143,154 and 143,132 shares at December 28, 2014 and December 29, 2013, respectively | (2,090,493 | ) | (2,090,233 | ) | |||
Total Cypress stockholders’ equity | 207,757 | 180,157 | |||||
Non-controlling interest | (5,892 | ) | (4,474 | ) | |||
Total equity | 201,865 | 175,683 | |||||
Total liabilities and equity | $ | 743,281 | $ | 762,884 | |||
The accompanying notes are an integral part of these consolidated financial statements.
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CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands, except per-share amounts) | |||||||||||
Revenues | $ | 725,497 | $ | 722,693 | $ | 769,687 | |||||
Costs and expenses: | |||||||||||
Cost of revenues | 361,820 | 384,121 | 376,887 | ||||||||
Research and development | 164,560 | 190,906 | 189,897 | ||||||||
Selling, general and administrative | 170,741 | 182,671 | 211,959 | ||||||||
Amortization of acquisition-related intangible assets | 6,683 | 7,833 | 3,996 | ||||||||
Restructuring costs (benefit) | (1,180 | ) | 15,357 | 4,258 | |||||||
Loss on divestiture | — | — | 1,605 | ||||||||
Total costs and expenses, net | 702,624 | 780,888 | 788,602 | ||||||||
Operating income (loss) | 22,873 | (58,195 | ) | (18,915 | ) | ||||||
Interest and other income (loss), net | (2,460 | ) | 2,225 | (2,745 | ) | ||||||
Income (loss) before income taxes and non-controlling interest | 20,413 | (55,970 | ) | (21,660 | ) | ||||||
Income tax provision (benefit) | (1,173 | ) | (7,761 | ) | 2,324 | ||||||
Equity in net loss of equity method investee | (5,068 | ) | (1,878 | ) | (1,074 | ) | |||||
Income (loss), net of taxes | 16,518 | (50,087 | ) | (25,058 | ) | ||||||
Adjust for loss attributable to non-controlling interest, net of taxes | 1,418 | 1,845 | 1,614 | ||||||||
Net income (loss) attributable to Cypress | 17,936 | (48,242 | ) | (23,444 | ) | ||||||
Net income (loss) per share attributable to Cypress: | |||||||||||
Basic | $ | 0.11 | $ | (0.32 | ) | $ | (0.16 | ) | |||
Diluted | $ | 0.11 | $ | (0.32 | ) | $ | (0.16 | ) | |||
Cash dividends declared per share | $ | 0.44 | $ | 0.44 | $ | 0.44 | |||||
Shares used in net income (loss) per share calculation: | |||||||||||
Basic | 159,031 | 148,558 | 149,266 | ||||||||
Diluted | 169,122 | 148,558 | 149,266 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
54
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
Net income (loss) | $ | 16,518 | $ | (50,087 | ) | $ | (25,058 | ) | |||
Other comprehensive income, net of tax: | |||||||||||
Change in net unrealized gain, net of tax effects | 131 | 267 | 1,490 | ||||||||
Net gains reclassified into earning, net of tax effects | 171 | 885 | 24 | ||||||||
Other comprehensive income | 302 | 1,152 | 1,514 | ||||||||
Comprehensive income (loss) | 16,820 | (48,935 | ) | (23,544 | ) | ||||||
Adjust for net loss attributable to noncontrolling interest | 1,418 | 1,845 | 1,614 | ||||||||
Comprehensive income (loss) attributable to Cypress | $ | 18,238 | $ | (47,090 | ) | $ | (21,930 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
55
Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Treasury Stock | Noncontrolling Interest | Total Equity | ||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||
Balances at January 2, 2012 | 278,812 | $ | 2,780 | $ | 2,579,348 | $ | (1,940 | ) | $ | (326,163 | ) | 124,638 | $ | (1,853,758 | ) | $ | (2,425 | ) | $ | 397,842 | ||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||
Net income attributable to Cypress | — | — | — | — | (23,444 | ) | — | — | — | (23,444 | ) | |||||||||||||||||||||||
Net unrealized loss on available-for-sale investments | — | — | — | 1,490 | — | — | — | — | 1,490 | |||||||||||||||||||||||||
Net unrealized gain (loss) on translation | — | — | — | 6 | — | — | — | — | 6 | |||||||||||||||||||||||||
Issuance of common shares under employee stock plans | 8,091 | 88 | 23,707 | — | — | — | — | — | 23,795 | |||||||||||||||||||||||||
Issuance of RSU's in connection with acquisition | — | — | 1,805 | — | — | — | — | — | 1,805 | |||||||||||||||||||||||||
Withholding of common shares for tax obligations on vested restricted shares | — | — | — | — | — | 1,379 | (22,625 | ) | — | (22,625 | ) | |||||||||||||||||||||||
Yield enhancement structured agreements, net | — | — | 433 | — | — | — | — | — | 433 | |||||||||||||||||||||||||
Repurchase of common shares | — | — | — | — | — | 16,662 | (209,187 | ) | — | (209,187 | ) | |||||||||||||||||||||||
Stock-based compensation | — | — | 72,573 | — | — | — | — | — | 72,573 | |||||||||||||||||||||||||
Dividends | — | — | (65,287 | ) | — | — | — | — | — | (65,287 | ) | |||||||||||||||||||||||
Noncontrolling interest | — | — | — | — | — | — | — | (1,614 | ) | (1,614 | ) | |||||||||||||||||||||||
Balances at January 2, 2013 | 286,903 | $ | 2,868 | $ | 2,612,579 | $ | (444 | ) | $ | (349,607 | ) | $ | 142,679 | $ | (2,085,570 | ) | $ | (4,039 | ) | $ | 175,787 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||
Net income attributable to Cypress | — | — | — | — | (48,242 | ) | — | — | — | (48,242 | ) | |||||||||||||||||||||||
Net unrealized gain on available-for-sale investments | — | — | — | 267 | — | — | — | — | 267 | |||||||||||||||||||||||||
Issuance of common shares under employee stock plans | 9,443 | 95 | 43,249 | — | — | — | — | — | 43,344 | |||||||||||||||||||||||||
Withholding of common shares for tax obligations on vested restricted shares | — | — | — | — | — | 453 | (4,663 | ) | — | (4,663 | ) | |||||||||||||||||||||||
Stock-based compensation | — | — | 75,447 | — | — | — | — | — | 75,447 | |||||||||||||||||||||||||
Dividends | — | — | (65,822 | ) | — | — | — | — | — | (65,822 | ) | |||||||||||||||||||||||
Noncontrolling interest | — | — | — | — | — | — | — | (435 | ) | (435 | ) | |||||||||||||||||||||||
Balances at December 29, 2013 | 296,346 | $ | 2,963 | $ | 2,665,453 | $ | (177 | ) | $ | (397,849 | ) | $ | 143,132 | $ | (2,090,233 | ) | $ | (4,474 | ) | $ | 175,683 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||
Net income attributable to Cypress | — | — | — | — | 17,936 | — | — | — | 17,936 | |||||||||||||||||||||||||
Net unrealized gain on available-for-sale investments | — | — | — | 131 | — | — | — | — | 131 | |||||||||||||||||||||||||
Yield enhancement structured agreements, net | — | — | 318 | — | — | — | — | — | 318 | |||||||||||||||||||||||||
Issuance of common shares under employee stock plans | 9,821 | 76 | 33,071 | — | — | — | — | — | 33,147 | |||||||||||||||||||||||||
Withholding of common shares for tax obligations on vested restricted shares | — | — | — | — | — | 22 | (260 | ) | — | (260 | ) | |||||||||||||||||||||||
Stock-based compensation | — | — | 46,663 | — | — | — | — | — | 46,663 | |||||||||||||||||||||||||
Dividends | — | — | (70,335 | ) | — | — | — | — | — | (70,335 | ) | |||||||||||||||||||||||
Noncontrolling interest | — | — | — | — | — | — | — | (1,418 | ) | (1,418 | ) | |||||||||||||||||||||||
Balances at December 28, 2014 | 306,167 | $ | 3,039 | $ | 2,675,170 | $ | (46 | ) | $ | (379,913 | ) | 143,154 | $ | (2,090,493 | ) | $ | (5,892 | ) | $ | 201,865 | ||||||||||||||
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CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | 16,518 | $ | (50,087 | ) | $ | (25,058 | ) | |||
Adjustments to reconcile income (loss) to net cash provided by operating activities: | |||||||||||
Stock-based compensation expense | 50,170 | 73,020 | 74,332 | ||||||||
Depreciation and amortization | 46,734 | 48,393 | 50,846 | ||||||||
Loss on divestiture | — | — | 1,605 | ||||||||
Deferred income taxes and other tax liabilities | (7,864 | ) | (14,455 | ) | 821 | ||||||
Restructuring costs | (1,180 | ) | 15,357 | 4,258 | |||||||
Loss (gain) on sale or retirement of property and equipment, net | (196 | ) | — | 3,192 | |||||||
Equity in loss of investee | 5,068 | 1,878 | 1,074 | ||||||||
Unrealized loss on investments | 1,667 | — | — | ||||||||
Impairment of investments | — | — | 3,200 | ||||||||
Other | 272 | (718 | ) | 6 | |||||||
Changes in operating assets and liabilities, net of effects of an acquisition and divestiture: | |||||||||||
Accounts receivable | 5,099 | 1,837 | 23,878 | ||||||||
Inventories | 9,140 | 29,419 | 1,351 | ||||||||
Other current and long-term assets | 10,377 | 8,712 | (4,797 | ) | |||||||
Accounts payable and other liabilities | (5,079 | ) | (37,173 | ) | 19,403 | ||||||
Deferred margin on sales to distributors | (27,390 | ) | (8,615 | ) | (19,114 | ) | |||||
Net cash provided by operating activities | 103,336 | 67,568 | 134,997 | ||||||||
Cash flows from investing activities: | |||||||||||
Proceeds from sales or maturities of available-for-sale investments | 16,556 | 64,414 | 139,825 | ||||||||
Purchases of available-for-sale investments | (23,425 | ) | (23,137 | ) | (112,808 | ) | |||||
Acquisition of property, plant and equipment | (20,947 | ) | (36,627 | ) | (33,013 | ) | |||||
Cash paid for acquisition, net of cash received | — | — | (100,889 | ) | |||||||
Proceeds from divestiture | 3,240 | — | — | ||||||||
Proceeds from sales of property and equipment | — | 6,661 | 63 | ||||||||
Cash paid for other investments | (18,400 | ) | (11,961 | ) | (7,203 | ) | |||||
Net employee contributions to (distributions from) deferred compensation plan | (1,283 | ) | (1,247 | ) | 989 | ||||||
Proceeds from sales of equity investments | — | 2,158 | — | ||||||||
Other | 2,103 | — | — | ||||||||
Net cash provided by (used in) investing activities | (42,156 | ) | 261 | (113,036 | ) | ||||||
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CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Cash flows from financing activities: | |||||||||||
Repurchase of common shares | — | — | (209,187 | ) | |||||||
Issuance of common shares under employee stock plans | 32,000 | 43,344 | 23,795 | ||||||||
Yield enhancement structured agreements settled in cash, net | 318 | — | 433 | ||||||||
Withholding of common shares for tax obligations on vested restricted shares | (245 | ) | (4,663 | ) | (22,625 | ) | |||||
Payments of dividends | (69,248 | ) | (64,819 | ) | (63,227 | ) | |||||
Proceeds from equipment leases and loans | — | — | 2,073 | ||||||||
Repayment of equipment leases and loans | (6,278 | ) | (8,880 | ) | (5,695 | ) | |||||
Borrowings under revolving credit facility and line of credit | 264,000 | 140,000 | 282,000 | ||||||||
Repayments of line of credit loan | (264,000 | ) | (145,000 | ) | (50,000 | ) | |||||
Financing costs | — | (3,276 | ) | (2,792 | ) | ||||||
Repayments of other financing agreements | — | (3,140 | ) | (13,250 | ) | ||||||
Proceeds from sale of shares to noncontrolling interest | — | 1,411 | — | ||||||||
Net cash used in financing activities | (43,453 | ) | (45,023 | ) | (58,475 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 17,727 | 22,806 | (36,514 | ) | |||||||
Cash and cash equivalents, beginning of year | 86,009 | 63,203 | 99,717 | ||||||||
Cash and cash equivalents, end of year | $ | 103,736 | $ | 86,009 | $ | 63,203 | |||||
Supplemental disclosures: | |||||||||||
Dividends payable | $ | 17,931 | $ | 16,850 | $ | 15,847 | |||||
Cash paid for income taxes | $ | 4,598 | $ | 6,921 | $ | 4,644 | |||||
Unpaid purchases of property, plant and equipment | $ | 1,688 | $ | — | $ | — | |||||
Additions to property, plant and equipment under capital lease arrangement | $ | — | $ | — | $ | 18,788 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Cypress Semiconductor Corporation (“Cypress” or the “Company”) designs, develops, manufactures and markets high-performance, mixed-signal, programmable solutions that provide customers with rapid time-to-market and system value. Our offerings include the PSoC® programmable system-on-chip, universal serial bus (“USB”) controllers, general-purpose programmable clocks and memories. We also offer wired and wireless connectivity technologies that enhance connectivity and performance in multimedia handsets. We serve numerous markets including consumer, computation, data communications, automotive, and industrial.
Our operations outside of the United States include our assembly and test plants in the Philippines, and sales offices and design centers located in various parts of the world.
On December 1, 2014, Cypress announced that it entered into a definitive agreement to merge with Spansion, Inc., a leading designer, manufacturer and developer of embedded systems semiconductors, in an all-stock, tax-free transaction. Under the terms of the agreement, Spansion shareholders will receive 2.457 Cypress shares for each Spansion share they own. The shareholders of each company will initially own approximately 50% of the post-merger company. The closing of the transaction is subject to customary conditions, including approval by Cypress and Spansion stockholders. The transaction has been unanimously approved by the boards of directors of both companies. Upon consummation, we expect to account for the merger under the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standard Topic 805, Business Combinations, with Cypress treated as the accounting acquirer.
Basis of Preparation
The Company reports on a fiscal-year basis. The Company ends its quarters on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. Fiscal 2014 ended on December 28, 2014, fiscal 2013 ended on December 29, 2013 and fiscal 2012 ended on December 30, 2012. Fiscal years 2014, 2013 and 2012 each contained 52 weeks.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and include the accounts of Cypress and all of our subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.
Certain prior year balances have been reclassified to conform to current year presentation.
During fiscal 2014, the Company recorded out-of-period correcting adjustments to write off certain manufacturing and subcontractor costs that were capitalized within other current assets in previous periods. These corrections resulted in a decrease of net income of $2.6 million for the twelve months ended December 28, 2014. The Company recorded these corrections in the aggregate totaling $2.6 million in cost of revenues in the twelve months ended December 28, 2014. Management assessed the impact of these errors and concluded that the amounts were not material, either individually or in the aggregate, to any prior periods.
During fiscal year 2014, the Company increased its ownership in a privately-held entity which required it to change from the cost method of accounting to the equity method of accounting for this investment. Under the equity method of accounting, the Company is required to record its interest in the investee's reported net income or loss each reporting period. Additionally, the Company is required to present its prior period financial results to reflect the equity method of accounting from the date of the initial investment in the investee, which resulted in an increase to the Company's accumulated deficit and a corresponding reduction to the Company's investment. See Note 15 for more information.
Fair Value of Financial Instruments
For certain of our financial instruments, including cash equivalents, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these items. See Note 5 for a detailed discussion of our fair value measurements.
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Cash and Cash Equivalents
Highly liquid investments with original or remaining maturities of ninety days or less at the date of purchase are considered cash equivalents.
Investments
All of our investments in equity securities in publicy traded companies are classified as trading securities. All of our investments in debt securities are classified as available-for-sale securities. Available-for-sale debt securities with maturities greater than twelve months are classified as short-term when they are intended for use in current operations. Investments in available-for-sale securities are reported at fair value with unrealized gains and losses, net of tax, as a component of “Accumulated other comprehensive income (loss)” in the Consolidated Balance Sheets. We also have minority equity investments in privately-held companies. Minority equity investments in which our ownership interest is less than 20% are carried at cost less any other than temporary impairment write-downs. Minority equity investments in which our ownership interest is 20% or greater are accounted for using the equity method of accounting. Under the equity method of accounting, we are required to record our interest in the investee's reported net income or loss for each reporting period. None of our equity investments are a variable interest entity. Our minority equity investments are included in “Other assets” in the Consolidated Balance Sheets.
We monitor our investments for impairment periodically and record appropriate reductions in carrying values when the declines are determined to be other-than-temporary. See Note 5 for a detailed discussion of the impairment losses recorded on our investments.
Inventories
Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Market is based on estimated net realizable value. We write down our inventories which have become obsolete or are in excess of anticipated demand or net realizable value based upon assumptions about demand forecasts, product life cycle status, product development plans and current sales levels. Inventory reserves are not relieved until the related inventory has been sold or scrapped.
Long-Lived Assets
Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets. Leasehold improvements and leasehold interests are amortized over the shorter of the estimated useful lives of the assets or the remaining term of the lease. Estimated useful lives are as follows:
Equipment | 3 to 10 years | |||
Buildings and leasehold improvements | 5 to 20 years | |||
Furniture and fixtures | 3 to 7 years | |||
We evaluate our long-lived assets, including property, plant and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of assets, significant negative industry or economic trends, and a significant decline in our stock price for a sustained period of time. Impairment is recognized based on the difference between the estimated fair value of the asset and its carrying value. Estimated fair value is generally measured based on quoted market prices, if available, appraisals or discounted cash flow analyses.
Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and are reviewed for impairment as discussed above. See Note 4 for more information.
Revenue Recognition
The Company generates revenues by selling products to distributors, various types of manufacturers including original equipment manufacturers (“OEMs”) and electronic manufacturing service providers (“EMSs”). The Company recognizes revenues on sales to OEMs and EMSs upon shipment provided that persuasive evidence of an arrangement exists, the price is
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fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no significant remaining obligations.
Sales to certain distributors are made under agreements which provide the distributors with price protection, stock rotation and other allowances under certain circumstances. Given the uncertainties associated with the rights given to these distributors, revenues and costs related to distributor sales are deferred until products are sold by the distributors to the end customers. Revenues are recognized upon receiving notification from the distributors that products have been sold to the end customers. At the time of shipment to distributors, the Company records a trade receivable for the selling price since there is a legally enforceable right to receive payment, relieves inventory for the value of goods shipped since legal title has passed to the distributors, and defers the related margin as deferred income on sales to distributors in the Consolidated Balance Sheets. The effects of distributor price adjustments are recorded as a reduction to deferred income at the time the distributors sell the products to the end customers.
The Company has historically recognized a significant portion of revenue through distributors at the time the distributor resold the product to its end customer (also referred to as the sell-through basis of revenue recognition) given the difficulty in estimating the ultimate price of these product shipments and amount of potential returns. The Company continuously reassesses its' ability to reliably estimate the ultimate price of these products and, over the past several years, has made investments in its systems and process around its distribution channel to improve the quality of the information it receives from its distributors. Given these ongoing investments, and based on the financial framework the Company uses for estimating potential price adjustments, in the fourth quarter of 2014, the Company concluded that it was able to reasonably estimate returns and pricing concessions on certain product families and with certain distributors, and recognized revenue at the time it shipped these specific products to the identified distributors, less its estimate of future price adjustments and returns. As a result of this change, the Company recognized an incremental $12.3 million of revenue during the fourth quarter of fiscal 2014. The impact of this change resulted in an increase of $6.2 million to net income attributable to Cypress for fiscal 2014, or $0.04 per basic and diluted share.
The Company records as a reduction to revenues reserves for sales returns, price protection and allowances based upon historical experience rates and for any specific known customer amounts. The Company also provides certain distributors and EMSs with volume-pricing discounts, such as rebates and incentives, which are recorded as a reduction to revenues at the time of sale. Historically these volume discounts have not been significant.
Shipping and Handling Costs
We record costs related to shipping and handling in cost of revenues.
Advertising Costs
Advertising costs consist of development and placement costs of our advertising campaigns and are charged to expense when incurred. Advertising expense was approximately $3.7 million, $2.9 million and $4.9 million for fiscal years 2014, 2013 and 2012, respectively.
Foreign Currency Transactions
We use the United States dollar predominately as the functional currency for most of our foreign entities. Assets and liabilities of these entities are remeasured into the United States dollar using exchange rates in effect at the end of the period, except for non-monetary assets and liabilities, such as property, plant and equipment, which are remeasured using historical exchange rates. Revenues and expenses are remeasured using average exchange rates in effect for the period, except for items related to assets and liabilities, such as depreciation, that are remeasured using historical exchange rates. The total gains (losses) from foreign currency re-measurement for fiscal years 2014, 2013 and 2012 were $1.4 million, $2.8 million and ($1.5) million, respectively and are included in “Interest and other income, net” in the Consolidated Statements of Operations. For additional details related to items included in “Interest and other income, net,” see Note 13.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk are primarily cash equivalents, debt investments and trade accounts receivable. Our investment policy requires cash investments to be placed with high-credit quality institutions and limits the amount of credit risk from any one issuer. We perform ongoing credit evaluations of our customers’ financial condition whenever deemed necessary and generally do not require collateral. We maintain an allowance for doubtful accounts based upon the expected collectability of all accounts receivable.
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Outstanding accounts receivable from two of our distributors, accounted for 12% and 11%, of our consolidated accounts receivable as of December 28, 2014. Outstanding accounts receivable from three of our distributors, accounted for 17%, 12% and 11%, respectively, of our consolidated accounts receivable as of December 29, 2013.
Revenue generated through three of our distributors, accounted for 13%, 10% and 10% respectively, of our consolidated revenue for fiscal 2014. No end customer accounted for 10% or more of our consolidated revenue for fiscal 2014.
Revenue generated through three of our distributors accounted for 11%, 10% and 9%, respectively, of our consolidated revenue for fiscal 2013. Shipments to one end customer accounted for 12% of our consolidated revenue for fiscal 2013.
Revenue generated through three of our distributors accounted for 14%, 12%, and 10%, respectively, of our consolidated revenue for fiscal 2012. Shipments to one end customer accounted for 11% of our consolidated revenue for fiscal 2012.
Income Taxes
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when management cannot conclude that it is more likely than not that a tax benefit will be realized.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
Recent Accounting Pronouncements
In June 2014, the FASB issued Accounting Standard Update ("ASU") No 2014-12, "Compensation - Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendment requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. Compensation cost should be recognized in the period in which it becomes probably that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendment is effective for annual reporting periods including interim reporting within those periods beginning after December 15, 2015. Earlier adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of an Entity." This ASU 2014-08 amends the definition of a discontinued operation to include a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. This ASU will be effective beginning in 2015. The adoption of this ASU may have a material effect on our consolidated financial statements in the event that we were to divest of a component that meets the definition of a discontinued operation.
In May 2014, the FASB issued an ASU on revenue from contracts with customers, ASU No. 2014-09, "Revenue from Contracts with Customers." This standard update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The guidance is effective for annual reporting periods including interim reporting periods within those periods beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements, including the potential impact on its business and operations and the accounting for distributor-related transactions.
NOTE 2. BUSINESS COMBINATIONS
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Ramtron International Corporation (“Ramtron”)
In November 2012, we completed the acquisition of Ramtron, a publicly traded fabless semiconductor company that designs, develops and markets specialized semiconductor memory and integrated semiconductor solutions that are used in several markets for a wide range of applications. We had previously owned 4% of Ramtron’s outstanding common stock and in November 2012, we completed a cash tender offer and purchased the remaining 96% of Ramtron’s outstanding common stock at a purchase price of $3.10 per share for a total cash payment of $102.4 million, equity consideration of $1.8 million and incurred acquisition related expenses of $15.3 million. This $15.3 million of acquisition related expenses included legal, banker, severance expenses and costs related to the acceleration of terminated employee stock awards.
The fair value of the assets acquired and liabilities assumed were recorded in our consolidated balance sheet as of the acquisition date. The results of operations of Ramtron were included in our consolidated results of operations subsequent to the acquisition date. Ramtron is included in our Memory Products Division.
Purchase Price Allocation:
The total purchase price paid for the 100% equity interest was allocated to the net identifiable assets based on the estimated fair value at the acquisition date. We engaged a third party to assist with the determination of the fair value of certain identifiable intangible assets. In determining the value of these assets, management made various estimates and assumptions. These assumptions include but are not limited to the net present value of future expected cash flow from the sale of products. The fair value of all other assets and liabilities acquired was determined based on estimated future benefits or legal obligations associated with the respective asset or liability. The excess of the purchase price over the net identifiable assets and liabilities has been recorded as goodwill on the Consolidated Balance Sheet.
The allocation of the purchase consideration was as follows, (in thousands):
Purchase price:
Cash | $ | 102,391 | |
Issuance of options and RSUs in connection with acquisition | 1,805 | ||
Fair value of previously held 4% equity interest | 5,170 | ||
Total purchase price | $ | 109,366 | |
Purchase price allocation:
Net tangible assets | $ | 29,855 | |
Acquired identifiable intangible assets: | |||
Purchased technology | 42,100 | ||
Customer relationships | 3,000 | ||
Trade name and backlog | 550 | ||
Goodwill (See Note 4) | 33,861 | ||
Total purchase consideration | $ | 109,366 | |
Remeasurement of Previously Held 4% of Equity Interest in Ramtron
In connection with the acquisition of Ramtron, the difference between the $3.4 million carrying value and $5.2 million fair value of the previously held 4% interest was recorded as a non-cash gain on investment in “Interest and other income, net” on the Consolidated Statement of Operations.
(In thousands) | |||
Fair value of previously held 4% equity interest | $ | 5,170 | |
Carrying value of previously held 4% equity interest | (3,425 | ) | |
Total gain on investment | $ | 1,745 | |
Net Tangible Assets:
Net tangible assets consist of the following:
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(In thousands) | |||
Accounts receivable, net | $ | 3,829 | |
Inventories | 40,153 | ||
Fixed assets | 3,462 | ||
Other | 6,699 | ||
Total assets acquired | 54,143 | ||
Accounts payable | 3,515 | ||
Accrued expenses, liabilities and notes payable | 20,773 | ||
Total liabilities assumed | 24,288 | ||
Total net tangible assets | $ | 29,855 | |
Acquired Identifiable Intangible Assets:
The following table presents certain information on the acquired identifiable assets:
Intangible Assets | Method of Valuation | Discount Rate Used | Estimated Useful Lives | |||
Purchased technology | Income Approach | 19%-20% | 7 –10 years | |||
Customer relationships | Income Approach | 19 | % | 10 years | ||
Trade name and backlog | Income Approach | 16%-18% | 0.75 –1 years | |||
Customer Relationships:
Customer relationships represent the fair value of projected cash flows that will be derived from the sale of products to Ramtron’s existing customers based on existing, in-process, and future versions of the underlying technology.
Goodwill:
Ramtron’s F-RAM offers a unique set of features and combines the best of RAM and ROM into a single package that outperforms other nonvolatile memories with remarkably fast writes, high endurance and ultra-low power consumption. Ramtron’s F-RAM technology complements our nvSRAM business and strengthens our overall memory portfolio. The acquisition will provide synergy with other of our offerings, including USB controllers and our PSoC line, expanding the scope of solutions that we provide. These factors primarily contributed to a purchase price that resulted in goodwill.
Conversion of Ramtron Shares
As part of the acquisition of Ramtron, we issued to Ramtron employees options to purchase 328,885 shares of our common stock, 39,432 restricted stock units (“RSUs”) and 148,242 restricted stock awards with an aggregate value of approximately $2.7 million, in exchange for their options to purchase shares, restricted stock units, and restricted stock awards of Ramtron. Of this amount, $1.8 million was earned prior to the acquisition date, and therefore, was part of the acquisition consideration. The remaining compensation expense i s approximately $0.7 million, subject to adjustment based on estimated forfeitures.
NOTE 3. DIVESTITURES
On December 19, 2012, we completed the divestiture of our wholly-owned subsidiary Cypress Envirosystems. Cypress Envirosystems was part of our ETD segment and as a result of the sale we recorded a loss of $1.6 million in “Loss on divestiture,” on the Consolidated Statement of Operations. Prior to the divestiture, Cypress Envirosystems was immaterial to the financial position and operations of Cypress; therefore, the sale did not qualify as a discontinued operation.
NOTE 4. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The carrying amount of goodwill at December 28, 2014 and at December 29, 2013 was $65.7 million, $33.9 million in the Memory Products Division (“MPD”) and $31.8 million in the Programmable System Division (“PSD”). The goodwill related to MPD was recognized as part of the acquisition of Ramtron.
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We assess our goodwill for impairment on an annual basis and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. In accordance with ASU 2011-08, Testing Goodwill for Impairment, qualitative factors can be assessed to determine whether it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required.
In fiscal 2014 and fiscal 2012, we elected to perform a qualitative analysis for impairment on goodwill rather than to perform the two-step quantitative goodwill impairment test. We assessed qualitative factors to determine whether it was necessary to perform the two-step goodwill impairment test. After assessing many qualitative factors pertinent to our Company we determined that it was more likely than not that the fair value of our reporting unit exceeds its carrying amount. In assessing the qualitative factors, we considered the impact of these key factors: 1) change in the industry and competitive environment, 2) market capitalization, 3) stock price and 4) overall financial performance. Based on the results of the testing, no goodwill impairment was recognized in fiscal 2014 and fiscal 2012.
In fiscal 2013, we elected to perform the two-step quantitative goodwill impairment test. The first step of the quantitative goodwill impairment test is to identify a potential impairment by comparing the fair value of a reporting unit with its carrying amount. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. Based on the results of the testing, no goodwill impairment was recognized in fiscal 2013.
Intangible Assets
The following tables present details of our total intangible assets:
As of December 28, 2014 | As of December 29, 2013 | ||||||||||||||||||||||
Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Acquisition-related intangible assets | $ | 151,773 | $ | (118,357 | ) | $ | 33,416 | $ | 151,773 | $ | (111,673 | ) | $ | 40,100 | |||||||||
Non-acquisition related intangible assets | 10,523 | (10,021 | ) | 502 | 10,423 | (9,695 | ) | 728 | |||||||||||||||
Total intangible assets | $ | 162,296 | $ | (128,378 | ) | $ | 33,918 | $ | 162,196 | $ | (121,368 | ) | $ | 40,828 | |||||||||
As of December 28, 2014, the estimated future amortization expense of intangible assets was as follows:
Fiscal Year | (In thousands) | |||
2015 | $ | 5,643 | ||
2016 | 5,301 | |||
2017 | 5,221 | |||
2018 | 5,221 | |||
2019 and future | $ | 12,532 | ||
Total future amortization expense | $ | 33,918 | ||
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NOTE 5. FAIR VALUE MEASUREMENTS
Assets/Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of December 28, 2014 and December 29, 2013:
As of December 28, 2014 | December 29, 2013 | ||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||
Financial Assets | |||||||||||||||||||||||||||||||
Reported as cash equivalents: | |||||||||||||||||||||||||||||||
Money market funds | $ | 7,665 | $ | — | $ | — | $ | 7,665 | $ | 29,719 | $ | — | $ | — | $ | 29,719 | |||||||||||||||
Total cash equivalents | 7,665 | — | — | 7,665 | 29,719 | — | — | 29,719 | |||||||||||||||||||||||
Reported as short-term investments: | |||||||||||||||||||||||||||||||
U.S. treasuries | 4,993 | — | — | 4,993 | — | — | — | — | |||||||||||||||||||||||
Corporate notes and bonds | — | 5,599 | — | 5,599 | — | 14,677 | — | 14,677 | |||||||||||||||||||||||
Federal agency | — | 3,615 | — | 3,615 | — | — | — | — | |||||||||||||||||||||||
Commercial paper | — | — | — | — | — | 1,300 | — | 1,300 | |||||||||||||||||||||||
Certificates of deposit | — | 869 | — | 869 | — | 2,476 | — | 2,476 | |||||||||||||||||||||||
Asset-held-for-sale | — | — | — | — | — | 2,260 | — | 2,260 | |||||||||||||||||||||||
Total short-term investments | 4,993 | 10,083 | — | 15,076 | — | 20,713 | — | 20,713 | |||||||||||||||||||||||
Reported as long-term investments: | |||||||||||||||||||||||||||||||
Marketable equity securities | 8,493 | — | — | 8,493 | — | — | — | — | |||||||||||||||||||||||
Total long-term investments | 8,493 | — | — | 8,493 | — | — | — | — | |||||||||||||||||||||||
Employee deferred compensation plan assets: | |||||||||||||||||||||||||||||||
Cash equivalents | 2,957 | — | — | 2,957 | 3,941 | — | — | 3,941 | |||||||||||||||||||||||
Mutual funds | 24,114 | — | — | 24,114 | 23,415 | — | — | 23,415 | |||||||||||||||||||||||
Equity securities | 9,352 | — | — | 9,352 | 7,977 | — | — | 7,977 | |||||||||||||||||||||||
Fixed income | — | 3,798 | — | 3,798 | — | 3,192 | — | 3,192 | |||||||||||||||||||||||
Money market funds | 3,895 | — | — | 3,895 | 4,080 | — | — | 4,080 | |||||||||||||||||||||||
Total employee deferred compensation plan assets | 40,318 | 3,798 | — | 44,116 | 39,413 | 3,192 | — | 42,605 | |||||||||||||||||||||||
Total financial assets | $ | 61,469 | $ | 13,881 | $ | — | $ | 75,350 | $ | 69,132 | $ | 23,905 | $ | — | $ | 93,037 | |||||||||||||||
Financial Liabilities | |||||||||||||||||||||||||||||||
Employee deferred compensation plan liability | $ | — | $ | 43,452 | $ | — | $ | 43,452 | $ | — | $ | 41,582 | $ | — | $ | 41,582 | |||||||||||||||
Valuation Techniques:
• | Level 1—includes instruments for which quoted prices in active markets for identical assets or liabilities that we have the ability to access. Our financial assets utilizing Level 1 inputs include U.S. treasuries, money market funds, marketable equity securities and our employee deferred compensation plan assets. |
• | Level 2—includes instruments for which the valuations are based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. Level 2 assets consist of certain marketable debt instruments for which values are determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Our Level 2 instruments include certain U.S. government securities, commercial paper, corporate notes and bonds and our employee deferred compensation plan liabilities. |
• | Level 3—includes instruments for which the valuations are based on inputs that are unobservable and significant to the overall fair value measurement. As of December 28, 2014 and December 29, 2013, we do not own any financial assets utilizing Level 3 inputs. |
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Sale of Auction Rate Securities
In December 2011, we entered into a settlement and securities purchase agreement (the “Securities Agreement”) with a certain financial institution. Pursuant to the terms of the Securities Agreement, we agreed to sell to the financial institution certain of our ARS investments with an aggregate par value of approximately $19.1 million and carrying value of approximately $17.3 million for an aggregate sale price of approximately $16.4 million. Under the terms of the Securities Agreement, we had the option to repurchase from the financial institution any of the ARS we sold to them until November 30, 2013 for the amount at which the related ARS were sold plus agreed-upon funding costs. Because of our ability to repurchase the ARS from the date of sale through November 30, 2013, we maintained effective control of these ARS. As such, we did not account for the transaction as a sale and recognized the sale consideration we received as “Advances received for the sale of ARS” under “Other long-term liabilities” in our Consolidated Balance Sheets. We accounted for these ARS as a financing arrangement until we exercised our right to purchase. During the first quarter of fiscal 2013, ARS with a par value of $1.0 million were sold at 98.38% of par, which resulted in the reversal of unrealized losses of $0.1 million. During the fourth quarter of fiscal 2013, all remaining ARS with a par value $4.9 million were sold at 96.75% of par which resulted in reversal of a $0.1 million unrealized loss.
During fiscal 2012, ARS with a par value of $10.0 million were called for redemption at par and ARS with a par value of $5.0 million were sold at 98.25% of par, which resulted in the reversal of unrealized losses of $1.3 million. These ARS were included as part of the Securities Agreement noted above. During the first quarter of fiscal 2013, ARS with a par value of $1.0 million were sold at 98.38% of par, which resulted in the reversal of unrealized losses of $0.1 million. During the fourth quarter of fiscal 2013, we sold all remaining ARS with a par value of $4.8 million and recognized a realized loss on the sale of $0.1 million.
We held no ARS at December 28, 2014 and December 29, 2013.
Level 3 Investments Measured Fair Value on a Recurring Basis
The following table presents a summary of changes in our Level 3 investments measured at fair value on a recurring basis:
Auction Rate | |||
Securities | |||
(In thousands) | |||
Balance as of December 30, 2012 | 5,504 | ||
Unrealized gain recorded in Accumulated other comprehensive loss | 396 | ||
Realized loss recorded in interest and other income, net | (149 | ) | |
Amounts settled / sold | (5,751 | ) | |
Balance as of December 29, 2013 | $ | — | |
Unrealized gain recorded in Accumulated other comprehensive loss | — | ||
Realized loss recorded in interest and other income, net | — | ||
Amounts settled / sold | — | ||
Balance as of December 28, 2014 | $ | — | |
Level 3 Assets Measured at Fair Value on a Nonrecurring Basis
Certain of our assets, including intangible assets, goodwill and cost-method investments, are measured at fair value on a nonrecurring basis if impairment is indicated.
As of December 28, 2014, the carrying value of the Company’s senior secured revolving line of credit was $227.0 million. The fair value of the Company’s line of credit approximates its fair value since it bears an interest rate that is similar to existing market rates.
Investments in Equity Securities
Privately-held equity investments are accounted for under the cost method if we have less than 20% ownership interest, and we do not have the ability to exercise significant influence over the operations of the privately-held companies. Our total investments in equity securities accounted for under the cost method included long-term investments in non-marketable equity securities (investments in privately-held companies) are approximately $5.9 million and $4.5 million, as of December 28, 2014 and December 29, 2013, respectively. Privately-held equity investments are accounted for under the equity method of accounting if we have an ownership interest of 20% or greater or if we have the ability to exercise significant influence over the operations of the privately-held companies. Out total investments in equity securities accounted for under the equity method of
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accounting are approximately $20.5 million and $10.5 million as of December 28, 2014 and December 29, 2013, respectively. As noted above, these investments are periodically reviewed for other-than-temporary declines in fair value by considering available evidence, including general market conditions, financial condition, pricing in recent rounds of financing, if any, earnings and cash flow forecasts, recent operational performance and any other readily available market data.
During fiscal 2012, a certain privately-held company which we are invested in offered an additional round of financing that we declined to participate in. Based on this new round of financing, we determined that our investment was impaired and wrote off the remaining $1.2 million investment amount. In addition, another privately-held company which we are invested in at a carrying value of $2.0 million, offered another round of financing which effectively diluted our investment. Based on this new round of financing, we determined that our initial investment was impaired and wrote off the entire $2.0 million investment amount. These impairment losses of $3.2 million were recognized in “Interest and other income, net” in fiscal 2012.
In February 2012, we entered into a Stock Purchase Agreement (the “Agreement”) with a company that designs, develops and manufactures products in the area of advanced battery storage for mobile consumer devices. Pursuant to the terms of the Agreement, we have so far purchased approximately $28.5 million of preferred voting stock from the company and have committed to purchase additional preferred stock in a series of subsequent closings subject to certain performance milestones that must be fulfilled within a defined and agreed-upon timeline. In fiscal 2015, we plan to invest approximately $20.0 million, subject to the attainment of certain milestones and the timing of additional capital requests which could vary substantially. As of December 28, 2014, and December 29, 2013, we owned approximately 26.2% and 17.6%, respectively, of the company. As a result of the Company's additional investments in this company, the Company now accounts for its investment in the company under the equity method of accounting. See Note 15 for more information.
In the fourth quarter of fiscal 2014, the Company, through its wholly-owned subsidiary, purchased approximately 6.9 million ordinary shares of Hua Hong Semiconductor Limited (HHSL) for an aggregate price of $10.0 million in connection with their initial public offering. HHSL is the parent company of Grace Semiconductor Manufacturing Corporation, which is one of our strategic foundry partners. We recorded an unrealized loss on our investment in HHSL’s ordinary shares of approximately $1.5 million "interest and other income, net" as a result of the decline in the fair market value of the investment as of December 28, 2014.
During fiscal 2013, we sold our equity investment in one publicly traded company for $2.2 million and recognized a gain of $1.1 million in “Interest and other income, net”.
There were no significant transfers between Level 1, Level 2 and Level 3 fair value hierarchies during fiscal 2014 and 2013.
NOTE 6. INVESTMENTS
Available-For-Sale Securities and Other Investments
The following tables summarize our available-for-sale securities and other investments:
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As of December 28, 2014 | As of December 29, 2013 | ||||||||||||||||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||
Reported as cash equivalents: | |||||||||||||||||||||||||||||||
Money market funds | $ | 7,665 | $ | — | $ | — | $ | 7,665 | $ | 29,719 | $ | — | $ | — | $ | 29,719 | |||||||||||||||
Total cash equivalents | 7,665 | — | — | 7,665 | 29,719 | — | — | 29,719 | |||||||||||||||||||||||
Reported as short-term investments: | |||||||||||||||||||||||||||||||
Corporate notes and bonds | 5,616 | — | (17 | ) | 5,599 | 14,667 | 10 | — | 14,677 | ||||||||||||||||||||||
Federal agency | 3,617 | — | (2 | ) | 3,615 | — | — | — | — | ||||||||||||||||||||||
U.S. treasuries | 5,002 | — | (9 | ) | 4,993 | — | — | — | — | ||||||||||||||||||||||
Commercial paper | — | — | — | — | 1,300 | — | — | 1,300 | |||||||||||||||||||||||
Certificates of deposit | 869 | — | — | 869 | 2,476 | — | — | 2,476 | |||||||||||||||||||||||
Total short-term investments | 15,104 | — | (28 | ) | 15,076 | 18,443 | 10 | — | 18,453 | ||||||||||||||||||||||
Reported as long-term investments: | |||||||||||||||||||||||||||||||
Marketable equity securities | 9,988 | — | (1,495 | ) | 8,493 | — | — | — | — | ||||||||||||||||||||||
Total long-term investments | 9,988 | — | (1,495 | ) | 8,493 | — | — | — | — | ||||||||||||||||||||||
Total available-for-sale securities and other investments | $ | 32,757 | $ | — | $ | (1,523 | ) | $ | 31,234 | $ | 48,162 | $ | 10 | $ | — | $ | 48,172 | ||||||||||||||
As of December 28, 2014, the contractual maturities of our available-for-sale investments and certificates of deposit were as follows (the table below does not include our investments in marketable equity securities):
Cost | Fair Value | ||||||
(In thousands) | |||||||
Maturing within one year | $ | 14,206 | $ | 14,199 | |||
Maturing in one to three years | 8,563 | 8,542 | |||||
Maturing in more than three years | — | — | |||||
Total | $ | 22,769 | $ | 22,741 | |||
Realized gains and realized losses from sales of available-for-sale in fiscal 2014, 2013 and 2012 were not material.
NOTE 7. ASSETS HELD FOR SALE
Fixed Assets
During fiscal 2014, certain equipment which had been classified as held for sale in fiscal 2013 was sold resulting in a gain of approximately $0.6 million. During fiscal 2013, we incurred a $6.7 million restructuring charge to write down this equipment to the then current fair value of $2.3 million, which was classified as held for sale and included in "Other current assets" in the Consolidated Balance Sheets as of December 29, 2013.
NOTE 8. EMPLOYEE STOCK PLANS AND STOCK-BASED COMPENSATION
Our equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.
We currently have the following employee stock plans:
1999 Stock Option Plan (“1999 Plan”):
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The 1999 Plan expired in March 2009. There are currently no shares available for grant under the 1999 Plan. Approximately 2.6 million shares are issued and outstanding under the 1999 Plan. Any outstanding shares cancelled or forfeited under the 1999 Plan will be available for any future grants since the 1999 Plan expired.
2013 Stock Option Plan (“2013 Plan”):
At the 2013 Annual Shareholders Meeting, our shareholders approved the extension of the 1994 Stock Plan to January 15, 2024 and renamed the plan as the 2013 Stock Plan. The 2013 Plan provides for (1) the discretionary granting of Options, Stock Appreciation Rights ("SARs"), Restricted Stock Awards ("RSAs") or Restricted Stock Units ("RSUs") to Employees, Consultants and Outside Directors, which Options may be either Incentive Stock Options (for Employees only) or NonstatutoryStock Options, as determined by the Administrator at the time of grant; and (2) the grant of Nonstatutory Stock Options, SARs, Restricted Stock or RSUs to Outside Directors pursuant to an automatic, non-discretionary formula. Options or awards granted under the 2013 Stock Plan generally expire over terms not exceeding eight years from the date of grant, subject to earlier termination upon the cessation of employment or service of the recipients. The maximum aggregate number of shares authorized for issuance under the 2013 Stock Plan is 145.2 million shares. As of December 28, 2014, approximately 1.7 million options or 0.9 million RSUs and RSAs were available for grant under the 2013 Stock Plan. We filed an amended S-4 on January 22, 2015 which included a proposal for our shareholders to approve an additional 29.3 million shares (limited to 15.6 million full value award shares, which are shares that are issued with a $0 exercise price) associated with our planned merger with Spansion.
2012 Incentive Award Plan (“2012 Plan”):
In connection with our acquisition of Ramtron, we assumed their 2012 Plan, as amended, which reserves a total of 1.2 million shares of common stock for issuance under stock option or restricted stock grants. The exercise price of all non-qualified stock options must be no less than 100% of the fair market value on the effective date of the grant under the 2012 Plan, and the maximum term of each grant is seven years. The 2012 Plan permits the issuance of incentive stock options, the issuance of restricted stock, and other types of awards. Restricted stock grants generally vest five years from the date of grant. Options granted become exercisable in full or in installments pursuant to the terms of each agreement evidencing options granted. The exercise of stock options and issuance of restricted stock and restricted stock units is satisfied by issuing authorized common stock or treasury stock. Grants from this plan are limited to employees who joined Cypress as part of the Ramtron acquisition and grants to new Cypress employees. As of December 28, 2014, approximately 38 thousand shares of stock options or 25 thousand shares of RSUs and RSAs were available for grant under the 2012 Plan.
Employee Stock Purchase Plan (“ESPP”):
At the 2013 Annual Shareholders Meeting, our shareholders approved an extension of the ESPP Plan to May 10, 2023. Our ESPP allows eligible employees to purchase shares of our common stock through payroll deductions. The ESPP contains consecutive 18-month offering periods composed of three six-month exercise periods. The shares can be purchased at the lower of 85% of the fair market value of the common stock at the date of commencement of the offering period or at the last day of each six-month exercise period. Purchases are limited to 10% of an employee’s eligible compensation, subject to a maximum annual employee contribution limit of $21,250. As of December 28, 2014, approximately 3.1 million shares were available for future issuance under the ESPP.
Stock-Based Compensation
The following table summarizes the stock-based compensation expense by line item in the Consolidated Statement of Operations:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Cost of revenues | $ | 13,209 | $ | 12,789 | $ | 18,519 | |||||
Research and development | 16,187 | 26,042 | 19,800 | ||||||||
Selling, general and administrative | 20,774 | 34,189 | 36,013 | ||||||||
Total stock-based compensation expense | $ | 50,170 | $ | 73,020 | $ | 74,332 | |||||
As stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it has been adjusted for estimated forfeitures. The accounting guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
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Consolidated cash proceeds from the issuance of shares under the employee stock plans were $32.0 million, $43.3 million, and $23.8 million for fiscal 2014, 2013 and 2012, respectively. No income tax benefit was realized from stock option exercises for fiscal 2014, 2013 and 2012. As of December 28, 2014 and December 29, 2013 stock-based compensation capitalized in inventories totaled $2.0 million and $5.3 million, respectively.
The following table summarizes the stock-based compensation expense by type of awards:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Stock options | $ | 4,717 | $ | 8,747 | $ | 7,421 | |||||
Restricted stock units and restricted stock awards | 37,837 | 54,359 | 57,865 | ||||||||
ESPP | 7,616 | 9,914 | 9,046 | ||||||||
Total stock-based compensation expense | $ | 50,170 | $ | 73,020 | $ | 74,332 | |||||
The following table summarizes the unrecognized stock-based compensation balance, net of estimated forfeitures, by type of awards as of December 28, 2014:
(In thousands) | Weighted-Average Amortization Period | ||||
(In years) | |||||
Stock options | $ | 6,130 | 1.68 years | ||
Restricted stock units and restricted stock awards | 32,518 | 0.96 years | |||
ESPP | 3,300 | 0.49 years | |||
Total unrecognized stock-based compensation balance, net of estimated forfeitures | $ | 41,948 | 1.03 years | ||
Valuation Assumptions
We estimate the fair value of our stock-based equity awards using the Black-Scholes valuation model. Assumptions used in the Black-Scholes valuation model were as follows:
Year Ended | |||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||
Stock Option Plans: | |||||
Expected life | 4.4-5.7 years | 4.24-5.27 years | 1.1-7.2 years | ||
Volatility | 39.67%-41.12% | 38.2%-41.9% | 42.9%-49.6% | ||
Risk-free interest rate | 0.26%-1.75% | 0.93%-1.85% | 0.16%-1.5% | ||
Dividend yield | 4.2%-4.4% | 3.8%-4.5% | 2.8%-4.4% | ||
ESPP: | |||||
Expected life | 0.5-1.5 years | 0.5-1.5 years | 0.5-1.5 years | ||
Volatility | 31.0%-36.1% | 38.4%-46.33% | 44.8%-47.3% | ||
Risk-free interest rate | 0.03%-0.35% | 0.08%-0.32% | 0.13%-0.24% | ||
Dividend yield | 4.2%-4.4% | 3.8%-4.5% | 2.8%-4.4% | ||
Expected life: Expected life is based on historical exercise patterns, giving consideration to the contractual terms of the awards and vesting schedules. In addition, employees who display similar historical exercise behavior are grouped separately into two classes (executive officers and other employees) in determining the expected life.
Volatility: We determined that implied volatility of publicly traded call options and quotes from option traders is more reflective of market conditions and, therefore, can reasonably be a better indicator of expected volatility than historical volatility. Therefore, our volatility is based on a blend of historical volatility of our common stock and implied volatility.
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Risk-free interest rate: The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.
Dividend yield: The expected dividend is based on our history and expected dividend payouts.
Employee Equity Award Activities
Stock Options:
The following table summarizes our stock option activities:
Year Ended | ||||||||||||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | ||||||||||||||||||
Shares | Weighted- Average Exercise Price per Share | Shares | Weighted- Average Exercise Price per Share | Shares | Weighted- Average Exercise Price per Share | |||||||||||||||
(In thousands, except per-share amounts) | ||||||||||||||||||||
Options outstanding, beginning of year | 19,060 | $8.33 | 22,760 | $7.25 | 23,363 | $6.49 | ||||||||||||||
Assumed options from Ramtron acquisition | — | — | — | — | 329 | $ | 9.91 | |||||||||||||
Granted | 522 | $10.24 | 4,122 | $11.40 | 3,322 | $11.18 | ||||||||||||||
Exercised | (4,027 | ) | $4.47 | (5,622 | ) | $5.19 | (3,236 | ) | $4.90 | |||||||||||
Forfeited or expired | (1,092 | ) | $11.59 | (2,200 | ) | $11.09 | (1,018 | ) | $11.95 | |||||||||||
Options outstanding, end of year | 14,463 | $9.24 | 19,060 | $8.33 | 22,760 | $7.25 | ||||||||||||||
Options exercisable, end of year | 9,787 | $8.05 | 12,346 | $6.39 | 15,432 | $5.50 | ||||||||||||||
The weighted-average grant-date fair value was $2.22 per share for options granted in fiscal 2014, $2.63 per share in options granted during fiscal 2013 and $2.74 per share for options granted in fiscal 2012.
The aggregate intrinsic value of the options outstanding and options exercisable as of December 28, 2014 was approximately $82.8 million and $68.0 million, respectively. The aggregate intrinsic value represents the total pre-tax intrinsic value which would have been received by the option holders had all option holders exercised their options as of December 28, 2014 and does not include substantial tax payments.
The aggregate intrinsic value of the options outstanding and options exercisable as of December 29, 2013 was approximately $57.7 million and $93.1 million, respectively. The aggregate intrinsic value represents the total pre-tax intrinsic value which would have been received by the option holders had all option holders exercised their options as of December 29, 2013 and does not include substantial tax adjustments.
The aggregate pre-tax intrinsic value of option exercises, which represents the difference between the exercise price and the value of Cypress common stock at the time of exercise, was $26.4 million in fiscal 2014, $31.9 million in fiscal 2013 and $30.7 million in fiscal 2012.
The aggregate grant date fair value of the options which vested in fiscal 2014, 2013 and 2012 was $6.9 million, $10.1 million, and $12.2 million, respectively.
The following table summarizes information about options outstanding and exercisable as of December 28, 2014:
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Options Outstanding | Options Exercisable | ||||||||||||||
Range of Exercise Price | Shares | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price per Share | Shares | Weighted- Average Exercise Price per Share | ||||||||||
(In thousands) | (In years) | (In thousands) | |||||||||||||
$2.72-$3.12 | 270 | 2.69 | $2.82 | 271 | $2.82 | ||||||||||
$3.22-$3.53 | 1,805 | 0.32 | $3.51 | 1,794 | $3.51 | ||||||||||
$3.54-$4.30 | 1,201 | 1.47 | $4.00 | 1,193 | $4.00 | ||||||||||
$4.55-$5.09 | 329 | 2.29 | $4.80 | 329 | $4.80 | ||||||||||
$5.23-$9.48 | 2,647 | 3.23 | $6.65 | 2,492 | $6.51 | ||||||||||
$9.58-$10.26 | 660 | 7.06 | $10.03 | 168 | $9.90 | ||||||||||
$10.43-$11.55 | 5,590 | 5.90 | $11.35 | 2,193 | $11.30 | ||||||||||
$11.58-$17.77 | 1,317 | 4.61 | $15.05 | 918 | $15.46 | ||||||||||
$18.86-$20.34 | 515 | 4.88 | $19.02 | 328 | $19.06 | ||||||||||
$21.59-$23.23 | 129 | 4.09 | $22.76 | 101 | $22.76 | ||||||||||
14,463 | 4.24 | $9.24 | 9,787 | $8.05 | |||||||||||
The total number of exercisable in-the-money options was approximately 6.9 million shares as of December 28, 2014.
As of December 28, 2014, stock options vested and expected to vest totaled approximately 13.9 million shares, with a weighted-average remaining contractual life of 4.1 years and a weighted-average exercise price of $9.16 per share. The aggregate intrinsic value was approximately $82.8 million.
Restricted Stock Units and Restricted Stock Awards:
The following table summarizes our restricted stock unit and restricted stock award activities:
Year Ended | ||||||||||||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | ||||||||||||||||||
Shares | Weighted- Average Grant Date Fair Value per Share | Shares | Weighted- Average Grant Date Fair Value per Share | Shares | Weighted- Average Grant Date Fair Value per Share | |||||||||||||||
(In thousands, except per-share amounts) | ||||||||||||||||||||
Non-vested, beginning of year | 8,652 | $11.97 | 7,887 | $14.52 | 9,005 | $10.43 | ||||||||||||||
Assumed from Ramtron acquisition | — | — | — | — | 188 | $ | 8.69 | |||||||||||||
Granted | 6,344 | $10.16 | 7,040 | $11.40 | 5,606 | $14.44 | ||||||||||||||
Released | (4,363 | ) | $11.58 | (2,378 | ) | $9.77 | (4,969 | ) | $8.60 | |||||||||||
Forfeited | (2,795 | ) | $11.21 | (3,897 | ) | $14.74 | (1,943 | ) | $10.26 | |||||||||||
Non-vested, end of year | 7,838 | $10.98 | 8,652 | $11.97 | 7,887 | $14.52 | ||||||||||||||
The balance as of December 28, 2014 included approximately 3.1 million performance-based restricted stock units ("PARS"). These PARS were issued to certain senior-level employees in the second quarter of fiscal 2014 and can be earned ratably over a period of one to two years, subject to the achievement of certain performance mile stones that were set by the Compensation Committee in advance. Any share not earned due to not achieving the full performance milestone are forfeited and returned to the pool.
The three milestones for the 2014 PARS Program, as approved by the Compensation Committee, are as follows:
Milestone #1-our Chief Executive Officer’s annual goals, or CSFs, include various corporate-level strategic goals focused on financial results of operation, cost savings, gaining additional market share, introducing new products on specific schedules, implementing various operational and customer-facing systems as well as achieving certain organizational best practices (“CEO CSFs”). The CEO CSFs represent the action items that are most critical to the Company’s short- and long-term success. Each individual goal is assigned a specific number of points and each goal has specific targets that are determined in advance and document what is required to achieve 100% of the goal and then scales down to a specific 0% point. The maximum number of points, or the “CSF score”, that can be achieved for the CEO CSFs is 100 and there is no discretionary component to the
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score of the CEO CSFs as each goal is specific and measurable. In order for a participant to earn 100% of the shares underlying Milestone #1, our CEO must obtain 85 points or greater under the CEO CSFs and achievement then scales down linearly to 0% of shares earned if the CEO CSF score is less than 60 points.
Milestone #2-requires the Company to achieve a specific revenue amount during fiscal year 2015. In order for a participant to earn 100% of the RSUs underlying Milestone #2, the Company must achieve a specific revenue amount level in fiscal year 2015 which scales down linearly to 0% of the shares earned if the dollar value of the specific revenue amount is less than target.
Milestone #3-requires the participant to remain employed through January 30, 2016. 75% of Milestone #3 targeted PARS vest on January 30, 2015 and the remaining 25% will vest on January 30, 2016.
Both Milestones #1 and #2 are multiplied by a Total Shareholder Return (TSR) Factor, for the applicable milestone performance period as compared to the performance of a Peer Group of Companies as detailed in our 2014 Proxy. The TSR factor which adjusts on a linear scale is .625 if Cypress is at the 10th or lower rank order percentile, 1.0 if Cypress is in the 40th and 60th rank percentile and 1.375 if Cypress is at the 90th or higher rank order percentile.
The payout amount for both Milestones #1 and #2 have the potential to earn above the targeted amount if the significantly outperform the target. In order to achieve greater than 100% of Milestone #1 a perfect score of 100 must be earned on the CEO CSFs. To achieve greater than 100% on Milestone #2 the Company must exceed the stretch revenue targets milestones by certain amounts. The potential amount that can be earned is adjusted on a linear scale and has a cap of 160% of the target.
Subsequent to December 28, 2014, approximately 0.5 million shares were earned by the plan participants under Milestone # 1. The forfeited shares were returned to our equity pool.
Release of 2013 Performance-based Restricted Stock Shares
On February 27, 2014, the Committee approved the performance milestone achievements for fiscal year 2013. Before finalizing the 2013 PARS payouts, the Committee carefully considered the overall performance of the Company and concluded it was appropriate to exercise its right of negative discretion on the payout amounts earned. Of the total 4.1 million performance-based restricted stock units earned, 2.5 million were delivered and 1.6 million were forfeited due to negative discretion. The forfeited shares were returned to our equity pool.
ESPP:
During fiscal 2014, 2013 and 2012, we issued 1.5 million, 1.5 million, and 0.7 million shares under our ESPP with weighted-average price of $8.93, $9.21, and $11.36 per share, respectively.
NOTE 9. BALANCE SHEET COMPONENTS
Accounts Receivable, Net
As of | |||||||
December 28, 2014 | December 29, 2013 | ||||||
(In thousands) | |||||||
Accounts receivable, gross | $ | 79,091 | $ | 84,431 | |||
Allowances for doubtful accounts receivable and sales returns | (3,107 | ) | (3,347 | ) | |||
Accounts receivable, net | $ | 75,984 | $ | 81,084 | |||
Inventories
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As of | |||||||
December 28, 2014 | December 29, 2013 | ||||||
(In thousands) | |||||||
Raw materials | $ | 4,753 | $ | 4,026 | |||
Work-in-process | 64,003 | 71,948 | |||||
Finished goods | 19,471 | 24,638 | |||||
Total inventories | $ | 88,227 | $ | 100,612 | |||
Other Current Assets
As of | |||||||
December 28, 2014 | December 29, 2013 | ||||||
(In thousands) | |||||||
Prepaid expenses | $ | 21,777 | $ | 26,364 | |||
Assets held for sale (see Note 7) | — | 2,260 | |||||
Other current assets | 7,511 | 4,931 | |||||
Total other current assets | $ | 29,288 | $ | 33,555 | |||
Property, Plant and Equipment, Net
As of | |||||||
December 28, 2014 | December 29, 2013 | ||||||
(In thousands) | |||||||
Land | $ | 18,570 | $ | 18,570 | |||
Equipment | 1,029,214 | 1,039,984 | |||||
Buildings, building and leasehold improvements | 221,465 | 216,076 | |||||
Furniture and fixtures | 6,902 | 7,174 | |||||
Total property, plant and equipment, gross | 1,276,151 | 1,281,804 | |||||
Less: accumulated depreciation and amortization | (1,038,388 | ) | (1,023,219 | ) | |||
Total property, plant and equipment, net | $ | 237,763 | $ | 258,585 | |||
Other Long-term Assets
As of | |||||||
December 28, 2014 | December 29, 2013 | ||||||
(In thousands) | |||||||
Employee deferred compensation plan (see Note 17) | $ | 44,116 | $ | 42,351 | |||
Investments: | |||||||
Equity securities (see Note 5) | 34,992 | 15,009 | |||||
Other assets | 14,485 | 20,702 | |||||
Total other assets | $ | 93,593 | $ | 78,062 | |||
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Other Current Liabilities
As of | |||||||
December 28, 2014 | December 29, 2013 | ||||||
(In thousands) | |||||||
Employee deferred compensation plan (see Note 17) | $ | 43,452 | $ | 41,582 | |||
Restructuring accrual (see Note 10) | 1,177 | 4,158 | |||||
Capital lease–current portion | 3,227 | 2,659 | |||||
Equipment loan–current portion (see Note 14) | 2,916 | 2,825 | |||||
Customer advances | 1,250 | — | |||||
Rebate reserve | 4,276 | 2,445 | |||||
Other current liabilities | 24,846 | 22,846 | |||||
Total other current liabilities | $ | 81,144 | $ | 76,515 | |||
Other Long-Term Liabilities
As of | |||||||
December 28, 2014 | December 29, 2013 | ||||||
(In thousands) | |||||||
Equipment loan–long term portion (see Note 14) | $ | 3,002 | $ | 5,918 | |||
Capital lease–long term portion | 7,105 | 9,828 | |||||
Other long term liabilities | 10,693 | 11,782 | |||||
$ | 20,800 | $ | 27,528 | ||||
NOTE 10. RESTRUCTURING
During fiscal 2014, we recorded a benefit from restructuring activities of $1.2 million, of which $0.6 million resulted from the gain on the sale of a previously restructured asset and $0.4 million resulted from a decrease in the estimate of termination benefits.
During fiscal 2013, we implemented a restructuring plan to reduce operating expenses as part of our 2013 corporate priorities (“Fiscal 2013 Restructuring Plan”). The plan included the termination of employees and the disposal of certain equipment located in our Bloomington, Minnesota facility. For the twelve months ended December 29, 2013, we recorded total restructuring charges of $15.4 million related to the Fiscal 2013 Restructuring Plan, of which $6.7 million was related to property, plant and equipment, $8.0 million was related to personnel costs, and $0.6 million was mainly related to the amounts payable upon the termination of agreements with certain distributor representatives.
During fiscal 2012, we recorded approximately $4.3 million of restructuring charges under a restructuring plan which we first announced in fiscal 2011 (“Fiscal 2011/2012 Restructuring Plan”). This plan allowed us to continue to allocate and align our resources to the business units that we expect will drive future development and revenue growth.
The determination of when we accrue for severance and benefits costs depends on whether the termination benefits are provided under a one-time benefit arrangement or under an on-going benefit arrangement.
The following table summarizes the restructuring charges (credits) recorded in the Consolidated Statements of Operations:
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Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Personnel costs (credits) | $ | (357 | ) | $ | 8,010 | $ | 3,958 | ||||
Impairment of property, plant and equipment | — | 6,698 | — | ||||||||
Gain on sale of held-for-sale assets | (579 | ) | — | — | |||||||
Other | (244 | ) | 649 | 300 | |||||||
Total restructuring charges (credits) | $ | (1,180 | ) | $ | 15,357 | $ | 4,258 | ||||
A summary of the restructuring activities related to personnel costs, which are primarily in the U.S., is summarized as follows:
Consolidated Restructuring Plans
(In thousands) | |||
Balance as of January 1, 2012 | $ | 3,840 | |
Provision | 3,996 | ||
Cash payments | (2,932 | ) | |
Non-cash charges | (11 | ) | |
Balance as of December 30, 2012 | 4,893 | ||
Provision | 8,431 | ||
Cash payments | (9,111 | ) | |
Non-cash charges | (55 | ) | |
Balance as of December 29, 2013 | 4,158 | ||
Provision | (357 | ) | |
Cash payments | (2,624 | ) | |
Balance as of December 28,2014 | $ | 1,177 | |
The restructuring liability as of December 28, 2014 is expected to be paid out within the next twelve months.
NOTE 11. FOREIGN CURRENCY DERIVATIVES
We operate and sell products in various global markets and purchase capital equipment using the U.S. dollar and foreign currencies. As a result, we are exposed to risks associated with changes in foreign currency exchange rates. We may use various hedge instruments from time to time to manage the exposures associated with purchases of foreign sourced equipment, net asset or liability positions of our subsidiaries and forecasted revenues and expenses. We do not enter into foreign currency derivative financial instruments for speculative or trading purposes. The counterparties to these hedging transactions are creditworthy multinational banks and the risk of counterparty nonperformance associated with these contracts is not considered to be material as of December 28, 2014. We estimate the fair value of our forward contracts based on spot and forward rates from published sources.
We record hedges of certain foreign currency denominated monetary assets and liabilities at fair value at the end of each reporting period with the related gains or losses recorded in “Interest and other income, net” in the Consolidated Statements of Operations. The gains or losses on these contracts are substantially offset by transaction gains or losses on the underlying balances being hedged. The aggregate notional amount and fair value of outstanding forward contracts to hedge the risks associated with foreign currency denominated assets and liabilities as of December 28, 2014 and December 29, 2013 were not material.
NOTE 12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of Accumulated other comprehensive loss were as follows:
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Accumulated net unrealized losses on available-for-sale investments | Cumulative translation adjustment and other | Accumulated other comprehensive loss (income) | |||||||||
Balance as of December 30, 2012 | $ | (450 | ) | $ | 6 | $ | (444 | ) | |||
Other comprehensive income attributable to Cypress | 267 | — | 267 | ||||||||
Balance as of December 29, 2013 | (183 | ) | 6 | (177 | ) | ||||||
Other comprehensive income attributable to Cypress | 131 | — | 131 | ||||||||
Balance as of December 28, 2014 | $ | (52 | ) | $ | 6 | $ | (46 | ) | |||
NOTE 13. INTEREST AND OTHER INCOME, NET
The following table summarizes the components of “Interest and other income, net,” recorded in the Consolidated Statements of Operations:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Interest income | $ | 362 | $ | 301 | $ | 694 | |||||
Interest expense | (5,763 | ) | (8,112 | ) | (3,824 | ) | |||||
Changes in fair value of investments under the deferred compensation plan | 3,014 | 6,371 | 3,158 | ||||||||
Unrealized loss on marketable securities | (1,495 | ) | — | — | |||||||
Impairment of investments | — | 25 | (3,200 | ) | |||||||
Foreign currency exchange gains (losses), net | 1,382 | 2,791 | (1,460 | ) | |||||||
Gain on sale of equity investments | — | 908 | 1,601 | ||||||||
Other | 40 | (59 | ) | 286 | |||||||
Total interest and other income, net | $ | (2,460 | ) | $ | 2,225 | $ | (2,745 | ) | |||
NOTE 14. DEBT AND EQUITY TRANSACTIONS
Mortgage Note
As part of our acquisition of Ramtron, we acquired a loan facility with a lender. We had a promissory note with the original principal amount of $4.2 million, with a maturity date of January 1, 2016, bearing interest at 6.17%. This loan was secured and collateralized with real estate located at Colorado Springs, Colorado. The outstanding balance at the end of fiscal 2012 was $3.3 million. On June 3, 2013, we terminated the loan facility and repaid the remaining $3.3 million balance of the mortgage note.
Senior Secured Revolving Credit Facility
On June 26, 2012, we entered into a five-year senior secured revolving credit facility (“Credit Facility”) with a group of lenders led by Morgan Stanley Senior Funding, Inc. The Credit Facility enabled us to borrow up to $430 million on a revolving basis. Borrowing terms vary based on the type of borrowing with all outstanding balances being due at the credit facility termination date, or June 25, 2017. Outstanding amounts may be repaid prior to maturity without penalty and are mandatory for certain asset sales and casualty events. The current outstanding borrowings bear interest at LIBOR plus 2.25% on the drawn amount. There is a commitment fee payable of 0.375% per annum on any undrawn amounts. The Credit Facility contains customary affirmative, negative and financial covenants for similarly rated companies. Borrowings are collateralized by substantially all assets of the company.
On October 17, 2013, we amended our senior secured revolving credit facility ("Credit Facility") to reduce the revolving commitments to $300 million from $430 million. In connection with the reduction, certain financial covenants were amended. The amended financial covenants include the following conditions: 1) maximum senior secured leverage ratio of 2.50 to 1.00
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through January 1, 2017 and 2.25 to 1.00 thereafter, 2) maximum total leverage ratio of 4.25 to 1.00 through January 3, 2015, 3.5 to 1.00 through January 1, 2017 and 3.00 to 1.00 thereafter, 3) minimum fixed charge coverage ratio of 1.00 to 1.00, and 4) minimum liquidity of at least $100 million. At December 28, 2014, our outstanding borrowings of $227 million were recorded as part of long-term liabilities and are presented as “Loan payable” in the Consolidated Balance Sheet. As of December 28, 2014, we were in compliance with all of the financial covenants under the Credit Facility.
Equipment Loans
In December 2011, we obtained equipment loans from a certain financial institution for an aggregate amount of approximately $14.1 million. These loans are collateralized by certain of our manufacturing equipment and bear interest of 3.15% to 3.18% per annum and are payable in 60 equal installments which commenced in January 2012. The related master loan agreement includes a variety of standard covenants. Of the $5.9 million outstanding balance as of December 28, 2014, approximately $2.9 million was recorded as part of “Other current liabilities” and $3.0 million was recorded as part of “Other long-term liabilities” in the 2014 Consolidated Balance Sheets. At December 28, 2014 and December 29, 2013, the fair value of the equipment loans approximated the carrying value. The fair value was estimated using discounted cash flow analysis using relevant factors that might affect the fair value, such as present value factors and risk-free interest rates based on the U.S. Treasury yield curve.
The schedule of principal payments under our equipment loans is as follows:
Fiscal Year | (In thousands) | ||
2015 | $ | 2,916 | |
2016 | 3,002 | ||
Total | $ | 5,918 | |
Stock Buyback Programs:
$400 million Program Authorized in Fiscal 2011
On September 20, 2011, our Board authorized a new $400.0 million stock buyback program. The program allows us to purchase our common stock or enter into equity derivative transactions related to our common stock. The timing and actual amount expended with the new authorized funds will depend on a variety of factors including the market price of our common stock, regulatory, legal, and contractual requirements, and other market factors. The program does not obligate us to repurchase any particular amount of common stock and may be modified or suspended at any time at the discretion of our board of directors. From September 2011 through the end of fiscal 2014, we used approximately $316.8 million from this program to repurchase approximately 23.6 million shares at an average share price of $13.43. As of December 28, 2014, $83.2 million remained available for future stock repurchases.
Yield Enhancement Program:
In fiscal 2009, the Audit Committee approved a yield enhancement strategy intended to improve the yield on our available cash. As part of this program, the Audit Committee authorized us to enter into short-term yield enhanced structured agreements, typically with maturities of 90 days or less, correlated to our stock price. Under the agreements we entered into to date, we pay a fixed sum of cash upon execution of an agreement in exchange for the financial institution’s obligations to pay either a pre-determined amount of cash or shares of our common stock depending on the closing market price of our common stock on the expiration date of the agreement. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our cash investment returned plus a yield substantially above the yield currently available for short-term cash investments. If the closing market price is at or below the pre-determined price, we will receive the number of shares specified at the agreement’s inception. As the outcome of these arrangements is based entirely on our stock price and does not require us to deliver either shares or cash, other than the original investment, the entire transaction is recorded in equity.
We enter into a yield enhanced structured agreement based upon a comparison of the yields available in the financial markets for similar maturities against the expected yield to be realized per the structured agreement and the related risks associated with this type of arrangement. We believe the risk associated with these types of agreements is no different than alternative investments available to us with equivalent counterparty credit ratings. All counterparties to a yield enhancement program have a credit rating of at least Aa2 or A as rated by major independent rating agencies. For all such agreements that matured to date, the yields of the structured agreements were far superior to the yields available in the financial markets primarily due to the volatility of our stock price and the pre-payment aspect of the agreements. The counterparty is willing to pay a premium over the yields available in the financial markets due to the structure of the agreement.
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We had no activity related to yield enhanced structured agreements during fiscal 2013. The following table summarizes the activity of our settled yield enhanced structured agreements during fiscal 2014:
Periods | Aggregate Price Paid | Total Cash Proceeds Received Upon Maturity | Yield Realized | Total Number of Shares Received Upon Maturity | Average Price Paid per Share | |||||||||||||
(In thousands, except per-share amounts) | ||||||||||||||||||
Fiscal 2014: | ||||||||||||||||||
Settled through cash proceeds | $ | 19,415 | $ | 19,733 | $ | 318 | — | $ | — | |||||||||
Settled through issuance of common stock | — | — | — | — | — | |||||||||||||
Total for fiscal 2014 | $ | 19,415 | $ | 19,733 | $ | 318 | — | $ | — | |||||||||
Dividends
During fiscal 2014, we paid total cash dividends of $69.2 million, consisting of dividends of $0.11 per share of common stock paid in all four quarters of the fiscal year. On November 24, 2014 our Board declared a cash dividend of $0.11 per share payable to holders of record of our common stock at the close of business day on December 26, 2014. This cash dividend was paid on January 15, 2015 and totaled approximately $17.9 million.
During fiscal 2013, we paid total cash dividends of $64.8 million, consisting of dividends of $0.11 per share of common stock paid in all four quarters of the fiscal year. On November 1, 2013 our Board declared a cash dividend of $0.11 per share payable to holders of record of our common stock at the close of business day on December 23, 2013. This cash dividend was paid on January 15, 2014 and totaled approximately $16.9 million.
During fiscal 2012, we paid total cash dividends of $63.2 million, consisting of dividends of $0.09 per share of common stock paid in the first quarter of the fiscal year and dividends of $0.11 per share of common stock paid in the second, third and fourth quarters of the fiscal year. On November 12, 2012 our Board declared a cash dividend of $0.11 per share payable to holders of record of our common stock at the close of business day on December 27, 2012. This cash dividend was paid on January 17, 2013 and totaled approximately $15.8 million.
NOTE 15. EQUITY METHOD INVESTMENT
During fiscal 2014, we invested an additional $15 million in a company that designs, develops and manufactures products in the area of advanced batter storage for mobile consumer devices. The additional investment in this company increased our ownership interest in the company’s outstanding stock from 17.6% to 26.2% as of December 28, 2014 and required us to change from the cost method of accounting to the equity method of accounting for this investment. Under the equity method of accounting, we are required to record our interest in the investee's reported net income or loss for each reporting period. Additionally, we are required to present our prior period financial results to reflect the equity method of accounting from the date of the initial investment in the company. Cypress's results of operations include charges of $5.1 million, $1.9 million, and $1.1 million, respectively, for the fiscal years ended 2014, 2013, and 2012, for this investment which were recorded in "Equity in Net loss of equity method investee" in the Company's Consolidated Statements of Operations.
The following table lists the relevant captions from our Statements of Operations, as originally presented, and after the change in accounting from the cost method to the equity method for fiscal 2013 and 2012:
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Year Ended | |||||
December 29, 2013 | December 30, 2012 | ||||
(In thousands, except per-share data) | |||||
As previously presented | |||||
Operating loss | (58,195 | ) | (18,915 | ) | |
Net loss attributable to Cypress | (46,364 | ) | (22,370 | ) | |
Net loss per share attributable to Cypress | |||||
Basic | (0.31 | ) | (0.15 | ) | |
Diluted | (0.31 | ) | (0.15 | ) | |
As adjusted | |||||
Operating loss | (58,195 | ) | (18,915 | ) | |
Pro rata share of loss from equity investments | (1,878 | ) | (1,074 | ) | |
Net loss attributable to Cypress | (48,242 | ) | (23,444 | ) | |
Net loss per share attributable to Cypress | |||||
Basic | (0.32 | ) | (0.16 | ) | |
Diluted | (0.32 | ) | (0.16 | ) | |
Cumulative effect of change in accumulated deficit | (2,952 | ) | (1,075 | ) | |
NOTE 16. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted-average common shares outstanding. Diluted net income per share is computed using the weighted-average common shares outstanding and any dilutive potential common shares. Diluted net loss per common share is computed using the weighted-average common shares outstanding and excludes all dilutive potential common shares when we are in a net loss position their inclusion would be anti-dilutive. Our dilutive securities primarily include stock options, restricted stock units and restricted stock awards.
The following table sets forth the computation of basic and diluted net income (loss) per share:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands, except per-share amounts) | |||||||||||
Net Income (Loss) per Share—Basic: | |||||||||||
Net income (loss) attributable to Cypress for basic computation | $ | 17,936 | $ | (48,242 | ) | $ | (23,444 | ) | |||
Weighted-average common shares for basic computation | 159,031 | 148,558 | 149,266 | ||||||||
Net income (loss) per share—basic | $ | 0.11 | $ | (0.32 | ) | $ | (0.16 | ) | |||
Net Income (Loss) per Share—Diluted: | |||||||||||
Net income (loss) attributable to Cypress for diluted computation | $ | 17,936 | $ | (48,242 | ) | $ | (23,444 | ) | |||
Weighted-average common shares for basic computation | 159,031 | 148,558 | 149,266 | ||||||||
Effect of dilutive securities: | |||||||||||
Stock options, restricted stock units, restricted stock awards and other | 10,091 | — | — | ||||||||
Weighted-average common shares for diluted computation | 169,122 | 148,558 | 149,266 | ||||||||
Net income (loss) per share—diluted | $ | 0.11 | $ | (0.32 | ) | $ | (0.16 | ) | |||
Anti-Dilutive Securities:
The following securities were excluded from the computation of diluted Net income (loss) per share as their impact was anti-dilutive:
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Year Ended | ||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | ||||||
(In thousands) | ||||||||
Stock options, restricted stock units and restricted stock awards | 8,708 | 8,023 | 4,458 | |||||
NOTE 17. EMPLOYEE BENEFIT PLANS
Key Employee Bonus Plan (“KEBP”)
We have a key employee bonus plan, which provides for incentive payments to certain key employees including all executive officers except the Chief Executive Officer. Payments under the plan are determined based upon certain performance measures, including our Non-GAAP actual PBT% compared to a target as well as achievement of strategic, operational and financial goals established for each key employee. We recorded total charges of $2.7 million under the plan in fiscal 2014, $7.4 million in fiscal 2013, and $0.2 million in fiscal 2012.
Performance Bonus Plan
We have a performance bonus plan which provides for incentive payments to our CEO under a shareholder approved Plan. Payments under the plan are determined based upon the attainment and certification of certain objective performance criteria established by the Committee. Under the plan, we recorded total charges of less than $0.1 million for the fiscal periods presented herein.
Performance Profit Sharing Plan (“PPSP”)
We have a performance profit sharing plan, which provides incentive payments to all our employees. Payments under the plan are determined based upon our earnings per share and the employees’ percentage of success in achieving certain performance goals. We recorded total charges of $1.1 million under the plan in fiscal 2014, $2.7 million in fiscal 2013, and $0.3 million in fiscal 2012.
Deferred Compensation Plan
We have a deferred compensation plan, which provides certain key employees, including our executive management, with the ability to defer the receipt of compensation in order to accumulate funds for retirement on a tax-deferred basis. We do not make contributions to the deferred compensation plan or guarantee returns on the investments. Participant deferrals and investment gains and losses remain our assets and are subject to claims of general creditors.
Under the deferred compensation plan the assets are recorded at fair value in each reporting period with the offset being recorded in “Other income (expense), net.” The liabilities are recorded at fair value in each reporting period with the offset being recorded as an operating expense or income. As of December 28, 2014 and December 29, 2013, the fair value of the assets was $44.1 million and $42.6 million, respectively, and the fair value of the liabilities was $43.5 million and $41.6 million, respectively.
All expense and income recorded under the deferred compensation plan were included in the following line items in the Consolidated Statements of Operations:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Changes in fair value of assets recorded in: | |||||||||||
Interest and other income, net | $ | 3,014 | $ | 6,371 | $ | 3,157 | |||||
Changes in fair value of liabilities recorded in: | |||||||||||
Cost of revenues | 427 | (854 | ) | (372 | ) | ||||||
Research and development expenses | (793 | ) | (1,744 | ) | (568 | ) | |||||
Selling, general and administrative expenses | (1,855 | ) | (3,795 | ) | (1,710 | ) | |||||
Total income (expense), net | $ | 793 | $ | (22 | ) | $ | 507 | ||||
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401(k) Plan
We sponsor a 401(k) plan which provides participating employees with an opportunity to accumulate funds for retirement on a tax deferred basis. We do not make contributions to the 401(k) plan and all employee contributions are fully vested.
Pension Plans
We sponsor defined benefit pension plans covering employees in certain of our international locations. We do not have defined-benefit pension plans for our United States-based employees. Pension plan benefits are based primarily on participants’ compensation and years of service credited as specified under the terms of each country’s plan. The funding policy is consistent with the local requirements of each country.
As of December 28, 2014 and December 29, 2013, projected benefit obligations totaled $9.0 million and $8.3 million, respectively, and the fair value of plan assets was $3.4 million and $3.4 million, respectively.
NOTE 18. INCOME TAXES
The geographic distribution of income (loss) before income taxes and the components of income tax benefit (provision) are summarized below:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
United States loss | $ | (109,307 | ) | $ | (122,162 | ) | $ | (128,606 | ) | ||
Foreign income | 124,652 | 64,314 | 105,872 | ||||||||
Income (loss) before income taxes | 15,345 | (57,848 | ) | (22,734 | ) | ||||||
Income tax benefit (provision): | |||||||||||
Current tax benefit (expense): | |||||||||||
Federal | 5,551 | 12,026 | 1,106 | ||||||||
State | (49 | ) | (120 | ) | 65 | ||||||
Foreign | (4,732 | ) | (4,292 | ) | (5,353 | ) | |||||
Total current tax benefit (expense) | 770 | 7,614 | (4,182 | ) | |||||||
Deferred tax benefit (expense): | |||||||||||
Foreign | 403 | 147 | 1,858 | ||||||||
Total deferred tax benefit (expense) | 403 | 147 | 1,858 | ||||||||
Income tax benefit (provision) | $ | 1,173 | $ | 7,761 | $ | (2,324 | ) | ||||
Income tax benefit (provision) differs from the amounts obtained by applying the statutory United States federal income tax rate to income (loss) before taxes as shown below:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Benefit (provision) at U.S. statutory rate of 35% | $ | (5,371 | ) | $ | 19,589 | $ | 7,581 | ||||
Foreign income at other than U.S. rates | 37,477 | 15,425 | 26,364 | ||||||||
Future benefits not recognized | (35,107 | ) | (41,797 | ) | (38,190 | ) | |||||
Reversal of previously accrued taxes | 8,286 | 13,872 | 3,985 | ||||||||
Tax impact of for acquisitions | (2,538 | ) | 1,061 | (1,982 | ) | ||||||
Foreign withholding taxes | (1,195 | ) | (535 | ) | (743 | ) | |||||
Refundable tax credits | — | — | 475 | ||||||||
State income taxes, net of federal benefit | (49 | ) | 93 | 65 | |||||||
Other, net | (330 | ) | 53 | 121 | |||||||
Income tax benefit (provision) | $ | 1,173 | $ | 7,761 | $ | (2,324 | ) | ||||
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The components of deferred tax assets and liabilities were as follows:
As of | |||||||
December 28, 2014 | December 29, 2013 | ||||||
(In thousands) | |||||||
Deferred tax assets: | |||||||
Credits and net operating loss carryovers | $ | 265,827 | $ | 259,613 | |||
Reserves and accruals | 55,678 | 39,525 | |||||
Excess of book over tax depreciation | 32,892 | 31,107 | |||||
Deferred income | 6,197 | 6,723 | |||||
Total deferred tax assets | 360,594 | 336,968 | |||||
Less valuation allowance | (358,424 | ) | (334,671 | ) | |||
Deferred tax assets, net | 2,170 | 2,297 | |||||
Deferred tax liabilities: | |||||||
Intangible assets arising from acquisitions | — | (349 | ) | ||||
Total deferred tax liabilities | — | (349 | ) | ||||
Net deferred tax assets | $ | 2,170 | $ | 1,948 | |||
At December 28, 2014, we had U.S. federal net operating loss carryovers of approximately $807.7 million, which, if not utilized, will expire from 2018 through 2034. Of the $807.7 million, $49.7 million relates to net operating losses of acquired subsidiaries and are subject to Section 382 limitation. We had state net operating loss carryovers of approximately $278.1 million which, if not utilized, will expire from 2015 through 2025. A portion of these net operating loss carryovers relate to net operating losses of acquired subsidiaries and are subject to certain limitations. We had U.S. federal tax credit carry-forwards of approximately $149.1 million, which, if not utilized, will expire from 2019 through 2034, and state tax credit carryforwards of approximately $83.5 million, which currently do not have any expiration date. Utilization of the net operating losses and tax credit carryovers may be limited if certain ownership changes occur subsequent to December 28, 2014.
As of December 28, 2014 of the total deferred tax assets of $360.6 million, a valuation allowance of $358.4 million has been recorded for the portion which is not more likely than not to be realized. As of December 29, 2013, of the total deferred tax assets of $337.0 million, a valuation allowance of $334.7 million has been recorded for the portion which is not more likely than not to be realized. Our determination of the need for a valuation allowance each year is based on jurisdictional assessment.
At December 29, 2013, we had U.S. federal net operating loss carryovers of approximately $760.1 million, which, if not utilized, will expire from 2018 through 2033. Of the $760.1 million, $49.7 million relates to net operating losses of acquired subsidiaries and are subject to Section 382 limitation. We had state net operating loss carryovers of approximately $263.4 million which, if not utilized, will expire from 2014 through 2024. A portion of these net operating loss carryovers relate to net operating losses of acquired subsidiaries and are subject to certain limitations. We had U.S. federal tax credit carry-forwards of approximately $155.9 million, which, if not utilized, will expire from 2019 through 2033, and state tax credit carryforwards of approximately $90.2 million, which currently do not have any expiration date. Utilization of the net operating losses and tax credit carryovers may be limited if certain ownership changes occur subsequent to December 29, 2013.
We received tax deductions from the gains realized by employees on the exercise of certain non-qualified stock options for which the benefit is recognized as a component of stockholders’ equity. When recognized, the tax benefit related to $632.6 million of our net operating loss carryforwards will be accounted for as an increase to additional paid-in capital rather than a reduction of the income tax provision.
United States income taxes and foreign withholding taxes have not been provided on a cumulative total of $298.6 million and $242.0 million of undistributed earnings for certain non-United States subsidiaries as of December 28, 2014 and December 29, 2013, respectively, because such earnings are intended to be indefinitely reinvested in the operations and potential acquisitions of our international operations. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. income taxes (subject to an adjustment for foreign tax credits). It is not practicable to determine the income tax liability that might be incurred if these earnings were to be distributed.
Our global operations involve manufacturing, research and development, and selling activities. Our operations outside the U.S. are in certain countries that impose a statutory tax rate both higher and lower than the U.S. We are subject to tax holidays in the Philippines where we manufacture and design certain of our products. These tax holidays are scheduled to expire at varying times within the next three years. Our tax benefit of these tax holidays for the year ended December 28, 2014, was $0.2
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million which had an insignificant impact on earnings per share. Overall, we expect our foreign earnings to be taxed at rates lower than the statutory tax rate in the U.S.
Unrecognized Tax Benefits
The following table is a reconciliation of unrecognized tax benefits:
(In thousands) | |||
Unrecognized tax benefits, as of January 1, 2012 | $ | 29,817 | |
Decrease related to settlements with taxing authorities | (1,807 | ) | |
Increase based on tax positions related to current year | 5,392 | ||
Decrease based on tax positions related to prior years | 1,004 | ||
Decrease related to lapsing of statutes of limitations | (2,940 | ) | |
Unrecognized tax benefits, as of December 30, 2012 | $ | 31,466 | |
Decrease related to settlements with taxing authorities | (9,216 | ) | |
Increase based on tax positions related to current year | 962 | ||
Increase based on tax positions related to prior year | 163 | ||
Decrease related to lapsing of statute of limitation | (4,762 | ) | |
Unrecognized tax benefits, as of December 29, 2013 | $ | 18,613 | |
Decrease related to settlements with taxing authorities | (6,361 | ) | |
Increase based on tax positions related to current year | 993 | ||
Decrease related to lapsing of statute of limitation | (1,638 | ) | |
Unrecognized tax benefits, as of December 28, 2014 | $ | 11,607 | |
As of December 28, 2014, December 29, 2013 and December 30, 2012, the amounts of unrecognized tax benefits that, if recognized, would affect our effective tax rate totaled $12.9 million, $17.6 million, and $28.2 million, respectively.
Management believes events that could occur in the next 12 months and cause a material change in unrecognized tax benefits include, but are not limited to, the following:
• | completion of examinations by the U.S. or foreign taxing authorities; and |
• | expiration of statute of limitations on our tax returns. |
The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses our tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which we do business. We believe it is possible that we may recognize approximately$1.0 million to $1.5 million of our existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.
Classification of Interest and Penalties
Our policy is to classify interest expense and penalties, if any, as components of income tax provision in the Consolidated Statements of Operations. As of December 28, 2014, December 29, 2013 and December 30, 2012, the amount of accrued interest and penalties totaled $3.0 million, $5.8 million and $11.6 million, respectively. We recorded a charge or (benefit) from interest and penalties of approximately ($2.8) million, $1.9 million and $1.8 million during fiscal 2014, 2013 and 2012, respectively.
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Tax Examinations
The following table summarizes our major tax jurisdictions and the tax years that remain subject to examination by such jurisdictions as of December 28, 2014:
Tax Jurisdictions | Tax Years | |
United States | 2010 and onward | |
Philippines | 2010 and onward | |
India | 2009 and onward | |
Switzerland | 2008 and onward | |
California | 2010 and onward | |
Non-U.S. tax authorities have completed their income tax examinations of our subsidiary in India for fiscal years 2002-2006 and our subsidiary in the Philippines up to 2009. The proposed adjustments in India have been appealed, and we believe the ultimate outcome of these appeals will not result in a material adjustment to our tax liability. The Philippines examinations for 2008 and 2009 resulted in no material adjustments to our tax liabilities. Income tax examinations of our Philippine subsidiary for the 2010 fiscal year and our India subsidiary for the 2009-2010 fiscal years are in progress. We believe the ultimate outcome of these examinations will not result in a material increase to our tax liability.
NOTE 19. COMMITMENTS AND CONTINGENCIES
Product Warranties
We generally warrant our products against defects in materials and workmanship for a period of one year and that product warranty is generally limited to a refund of the original purchase price of the product or a replacement part. We estimate our warranty costs based on historical warranty claim experience. Warranty returns are recorded as an allowance for sales returns. The allowance for sales returns is reviewed quarterly to verify that it properly reflects the remaining obligations based on the anticipated returns over the balance of the obligation period.
The following table presents our warranty reserve activities:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Beginning balance | $ | 2,628 | $ | 3,360 | $ | 3,085 | |||||
Provisions | 1,449 | 390 | 1,179 | ||||||||
Settlements made | (1,707 | ) | (1,122 | ) | (904 | ) | |||||
Ending balance | $ | 2,370 | $ | 2,628 | $ | 3,360 | |||||
Patent License Agreement
On April 30, 2012, we entered into a strategic Patent License Agreement (“PLA”) with IV Global Licensing LLC (“IV”) under which we and our majority-owned subsidiaries received a license to IV’s substantial patent portfolio. This transaction allowed us and IV to continue to develop our strategic relationship regarding patent monetization and litigation defense. Under the terms of the PLA, we paid a license fee of approximately $14 million and to purchase certain litigation defense services from IV in the future. In addition, in a related agreement, IV is expected to make certain patent purchases from us in the near term. The exact terms and conditions of the PLA are subject to confidentiality provisions, and are the subject of an application for confidential treatment to be filed with the SEC.
One of the benefits that we received from the PLA was the avoidance of future litigation expenses as well as future customer disruption and based upon our analysis, using a relief from royalty method, we determined that a portion of the license fee that we will pay IV represents the cumulative cost relating to prior years. As such, we recorded approximately, $7.1 million which was recorded as a charge to cost of revenues in fiscal 2012. We originally capitalized approximately $6.9 million in the Consolidated Balance Sheet and are amortizing over the purchased life of the patent portfolio. Amortization expense was approximately $0.8 million, $0.8 million, and $0.6 million in fiscal years December 28, 2014, December 29, 2013 and December 30, 2012, respectively. The remaining capitalized balance of the PLA is approximately $0.8 million and $0.8
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million in Current assets, and $3.8 million and $4.7 million in Long-term assets in the Consolidated Balance Sheet as of December 28, 2014 and December 29, 2013, respectively. We paid the entire $14.0 million liability in fiscal 2012.
Capital Lease
On July 19, 2011, we entered into a capital lease agreement which allows us to borrow up to $35.0 million to finance the acquisition of certain manufacturing equipment. We have the option of purchasing the tools from the lessor at specified intervals during the lease term. The master lease contains standard covenants. Assets purchased under the capital lease are included in “Property, plant and equipment, net” as manufacturing equipment and the amortization is included in depreciation. As of December 28, 2014, the gross value and net book value of manufacturing equipment purchased under capital lease was approximately $20.5 million and $13.7 million, respectively. As of December 28, 2014, the total minimum lease payments under our capital leases amounted to approximately $10.7 million.
Future minimum payments, by year and in the aggregate, under the capitalized lease consist of the following:
Fiscal Year | (In thousands) | |||
2015 | $ | 3,440 | ||
2016 | 6,633 | |||
2017 | 599 | |||
Total minimum lease payments | 10,672 | |||
Less: amount representing interest | 340 | |||
Present value of net minimum lease payments | $ | 10,332 | ||
Operating Lease Commitments
We lease certain facilities and equipment under non-cancelable operating lease agreements that expire at various dates through fiscal 2018. Some leases include renewal options, which would permit extensions of the expiration dates at rates approximating fair market rental values.
As of December 28, 2014, future minimum lease payments under non-cancelable operating leases were as follows:
Fiscal Year | (In thousands) | |||
2015 | 5,973 | |||
2016 | 3,743 | |||
2017 | 2,913 | |||
2018 | 512 | |||
2019 | 230 | |||
2020 and Thereafter | 344 | |||
Total | $ | 13,715 | ||
Rental expenses totaled approximately $6.8 million,, $7.2 million and $7.7 million in fiscal 2014, 2013 and 2012, respectively.
Equity Investment Commitments
We have committed to purchase additional preferred stock from a company that works in the area of advanced battery storage. In fiscal 2014, we invested $15 million in this company. Subject to the attainment of certain milestones, we intend to purchase additional preferred stock in this company.
Litigation and Asserted Claims
Our seven-patent infringement case against GSI’s static random access memory (“SRAM”) technology is currently pending in the United Stated District Court for Northern California. We are seeking damages as well as injunctive relief in the case, which has been assigned to Judge Tigar. We have received two claim construction rulings, discovery is ongoing, and trial is currently scheduled for January 2016. In defense of our claims, GSI filed petitions for inter-partes review with the PTO on five of our asserted patents, and four of those petitions were instituted and are currently pending before the PTO. We believe
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strongly in the merits of our patent infringement claims, and intend to take the steps necessary to protect our intellectual property.
With respect to the civil antitrust case filed by GSI in the United States District Court for the Northern California, fact discovery and expert discovery are now complete. We filed a motion for summary judgment in June 2014, and the motion was denied in January 2015. Trial is expected to occur in the second or third quarter of 2015. GSI’s case, which only names Cypress as a defendant, accuses the QDR Consortium, which was comprised of several other semiconductor companies, of certain anti-competitive behavior. Aside from injunctive relief, GSI’s expert has opined that GSI incurred monetary damages due to delayed introduction of SigmaQuad-III. We believe strongly that we have meritorious defenses to GSI’s allegations and we intend to defend ourselves vigorously in this matter. Accordingly, the possible range and amount of monetary loss that might occur in the future in this matter, if any, is unknown at this time.
With respect to the litigation stemming from our acquisition of Ramtron, both the Dent and the Weber shareholder litigation cases have been dismissed with prejudice. In the LongPath Capital, LLC (“LongPath”) appraisal case, filed with the Court of Chancery in the State of Delaware, Petitioner LongPath seeks an appraisal of the fair value of the common stock shares held by LongPath, and an order that Ramtron pay such fair value, plus interest. We believe LongPath’s petition is without merit and we are defending this matter vigorously. In June 2013, we paid the purchase price of $3.10 per share to LongPath, or approximately $1.5 million, to cut off the accrual of statutory interest on the principal. As a result, our potential exposure is limited to any premium on the purchase price that might be awarded by the court. A bench trial was held from October 7-9, 2014, in Wilmington, Delaware. Post-trial oral argument is expected to occur in March 2015, and a ruling is expected to occur later this year. The respective positions of the parties on valuation make it impossible for us to accurately estimate the potential exposure, if any, for this matter.
In a separate matter associated with Ramtron, bankruptcy proceedings are ongoing in Italy where the trustee for four bankrupt entities of Finmek S.pA. is seeking refunds of payments made by Finmek to Ramtron prior to Finmek’s bankruptcy in 2004. In November 2014, one of the courts presiding over these proceedings found that two payments should be refunded to Finmek, which currently total approximately $0.6 million, including interest and fees. We believe this ruling was made in error and intend to appeal this decision. The current stage of the proceedings and appellate process prevent an accurate prediction of the amount of an award, if any, in the trustee’s favor.
In 2013, a former employee filed a grievance against the Company seeking back pay and reinstatement or front pay. That matter was tried before an administrative law judge in July 2014. In December 2014, the administrative law judge issued a ruling in favor of the former employee for amounts totaling approximately $1.3 million. We believe the ruling was erroneous and are currently appealing the decision. The respective positions of the parties and the appellate process prevent an accurate prediction of the outcome of this matter at this time.
After extended licensing discussions were effectively abandoned by LG Electronics, Inc. (“LG”) and Blackberry Limited/Blackberry Corporation (“Blackberry”), on August 29, 2013, we filed a patent infringement complaint against LG in the federal district court in the Northern District of California, accusing certain of their products of infringing six of our USB and Touch patents. In August 2014, LG filed petitions for inter-partes review of the six patents and filed a motion to stay the case pending the PTO’s review of the petitions. The motion to stay was granted in October 2014. We filed a second complaint in the Northern District of California with respect to the same six USB and Touch patents against Blackberry on September 10, 2014. On November 4, 2013, Blackberry filed an answer to our complaint along with a counter-claim asserting three of their patents against us. On the same day, Blackberry filed a second patent infringement complaint in the Northern District of Texas, asserting two of its patents against us. On January 31, 2014, we filed petitions for inter-partes review by the PTO on both of the patents asserted in the Northern District of Texas case, and both petitions were instituted. In September 2014, BlackBerry filed petitions for inter-partes review with respect to all six Cypress patents. Also in September 2014, the parties agreed to dismiss the respective district court litigations without prejudice, and in November 2014 the parties agreed to dismiss the respective petitions for inter-partes review, and there is no active litigation currently pending between Cypress and Blackberry. We believe strongly in the merits of our patent infringement claims, and intend to take the steps necessary to protect our intellectual property as well as the business interests of our non-infringing customers.
On September 24, 2013, we filed a three-patent infringement case against Silego Technology, Inc. in federal district court in the Northern District of California. That lawsuit was settled in May 2014 and the matter has been dismissed with prejudice.
We have reached a settlement in the pending class action claims in three Canadian provinces relating to the original SRAM class action case that was resolved in the United States in 2010. As with the case in the United States, we are confident that we have not engaged in any antitrust activity, however given that we are the last remaining defendant and the cost of continued litigation would far exceed the cost of a nominal settlement, we have agreed to settle the case.
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After our announcement of the merger with Spansion in December 2014, two separate putative class action complaints were filed in Santa Clara County Superior Court, alleging claims of breach of fiduciary duty against the Spansion board of directors and naming Cypress as a defendant for aiding and abetting the alleged breach of fiduciary duty. The plaintiffs seek to injunctive relief and unspecified damages. We believe these actions are meritless and intend to defend ourselves vigorously. The possible range of monetary loss that might occur in the future in this matter, if any, is unknown at this time.
We are currently a party to various other legal proceedings, claims, disputes and litigation arising in the ordinary course of business. Based on our own investigations, we believe the ultimate outcome of our current legal proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operation or cash flows. However, because of the nature and inherent uncertainties of the litigation, should the outcome of these actions be unfavorable, our business, financial condition, results of operations or cash flows could be materially and adversely affected.
Indemnification Obligations
We are a party to a variety of agreements pursuant to which we may be obligated to indemnify another party to such agreements with respect to certain matters. Typically, these obligations arise in the context of contracts we have entered into, under which we customarily agree to hold the other party harmless against losses arising from a breach of representations and covenants or terms and conditions related to such matters as the sale and/or delivery of our products, title to assets sold, certain intellectual property claims, defective products, specified environmental matters and certain income taxes. In these circumstances, payment by us is customarily conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow us to challenge the other party’s claims and vigorously defend ourselves and the third party against such claims. Further, our obligations under these agreements may be limited in terms of time, amount or the scope of our responsibility and in some instances, we may have recourse against third parties for certain payments made under these agreements.
It is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments we have made under these agreements have not had a material effect on our business, financial condition or results of operations. We believe that if we were to incur a loss in any of these matters, such loss would not have a material effect on our business, financial condition, cash flows or results of operations, although there can be no assurance of this. As of December 28, 2014, we had no reason to believe a loss exceeding amounts already recognized had been incurred.
NOTE 20. SEGMENT, GEOGRAPHICAL AND CUSTOMER INFORMATION
Segment Information
We design, develop, manufacture and market a broad range of programmable system solutions for various markets including consumer, computation, data communications, automotive and industrial. We evaluate our reportable business segments in accordance with the accounting guidance. We operate in the following four reportable business segments:
Business Segments | Description | |
PSD: Programmable Systems Division | A division focusing primarily on our PSoC® and PSoC-based products. This business segment focuses on (1) the PSoC platform family of devices including PSoC 1, PSoC 3 and PSoC 5 and all derivatives; (2) PSoC-based user interface products such as CapSense® touch-sensing and TrueTouch touchscreen products; (3) automotive products; and (4) certain legacy product lines. | |
MPD: Memory Products Division | A division that will continue to focus on our SRAM, FRAM and non-volatile business units and general-purpose programmable clocks. | |
DCD: Data Communications Division | A division to focusing on USB controllers and WirelessUSB™ peripheral controllers, also offering module solutions including Trackpads and Ovation™ Optical Navigation Sensors. | |
ETD: Emerging Technologies Division | Our “startup” division includes, AgigA Tech Inc. and Deca Technologies Inc., both majority-owned subsidiaries of Cypress. ETD also includes our foundry business and other development-stage activities. | |
The following tables set forth certain information relating to the reportable business segments:
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Revenues:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Programmable Systems Division | $ | 283,206 | $ | 292,707 | $ | 345,430 | |||||
Memory Products Division | 347,887 | 338,986 | 330,504 | ||||||||
Data Communications Division | 70,378 | 79,410 | 86,591 | ||||||||
Emerging Technologies and Other | 24,026 | 11,590 | 7,162 | ||||||||
Total revenues | $ | 725,497 | $ | 722,693 | $ | 769,687 | |||||
Income (Loss) from Operations before Income Taxes:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Programmable Systems Division | $ | (18,981 | ) | $ | (20,105 | ) | $ | 2,732 | |||
Memory Products Division | 134,283 | 111,667 | 124,275 | ||||||||
Data Communications Division | (10,130 | ) | (7,452 | ) | (9,970 | ) | |||||
Emerging Technologies and Other | (13,992 | ) | (20,860 | ) | (23,375 | ) | |||||
Unallocated items: | |||||||||||
Stock-based compensation expense | (50,170 | ) | (73,020 | ) | (74,332 | ) | |||||
Loss on divestitures and expenses | — | — | (3,351 | ) | |||||||
Patent license fee | — | — | (7,100 | ) | |||||||
Restructuring (charges) benefit | 1,180 | (15,357 | ) | (4,258 | ) | ||||||
Amortization of intangibles and other acquisition-related costs | (13,955 | ) | (34,056 | ) | (19,337 | ) | |||||
Impairment of assets and other | (7,760 | ) | (1,795 | ) | (3,758 | ) | |||||
Other | (62 | ) | 5,008 | (2,253 | ) | ||||||
Non-cash compensation | — | — | (933 | ) | |||||||
Income (loss) from operations before income taxes | $ | 20,413 | $ | (55,970 | ) | $ | (21,660 | ) | |||
Depreciation:
Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
Programmable Systems Division | $ | 13,613 | $ | 14,642 | $ | 18,025 | |||||
Memory Products Division | 15,998 | 16,332 | 18,265 | ||||||||
Data Communications Division | 3,234 | 3,851 | 4,768 | ||||||||
Emerging Technologies and Other | 6,960 | 4,680 | 4,483 | ||||||||
Total depreciation | $ | 39,805 | $ | 39,505 | $ | 45,541 | |||||
Geographical Information
The following table presents our total revenues by geographical locations:
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Year Ended | |||||||||||
December 28, 2014 | December 29, 2013 | December 30, 2012 | |||||||||
(In thousands) | |||||||||||
United States | $ | 89,521 | $ | 75,052 | $ | 101,674 | |||||
Europe | 100,510 | 61,003 | 78,216 | ||||||||
Asia: | |||||||||||
China | 294,655 | 254,993 | 334,113 | ||||||||
South Korea | 82,089 | 96,811 | 94,672 | ||||||||
Japan | 64,926 | 81,856 | 67,270 | ||||||||
Rest of the world | 93,796 | 152,978 | 93,742 | ||||||||
Total revenues | $ | 725,497 | $ | 722,693 | $ | 769,687 | |||||
Property, plant and equipment, net, by geographic locations were as follows:
As of | |||||||
December 28, 2014 | December 29, 2013 | ||||||
(In thousands) | |||||||
United States | $ | 128,544 | $ | 152,628 | |||
Philippines | 90,641 | 59,873 | |||||
Other | 18,578 | 46,084 | |||||
Total property, plant and equipment, net | $ | 237,763 | $ | 258,585 | |||
We track our assets by physical location. Although management reviews asset information on a corporate level and allocates depreciation expense by segment, our chief operating decision maker does not review asset information on a segment basis.
Customer Information
Outstanding accounts receivable from three of our distributors, accounted for 12%, 11% and 9%, respectively, of our consolidated accounts receivable as of December 28, 2014. Outstanding accounts receivable from three of our distributors, accounted for 17%, 12% and 11%, respectively, of our consolidated accounts receivable as of December 29, 2013.
Revenue generated through three of our distributors, accounted for 13%, 10% and 10% respectively, of our consolidated revenue for fiscal 2014.
Revenue generated through two of our distributors accounted for 11%, and 10%, respectively, of our consolidated revenue for fiscal 2013. One end customer purchases our products both from our distributors and directly from us. Shipments to this end customer accounted for 12% of our consolidated revenue for fiscal 2013.
Revenue through three of our distributors accounted for 14%, 12% and 10%, respectively, of our consolidated revenue for fiscal 2012. Shipments to one end customer accounted for 11% of our consolidated revenue for fiscal 2012.
NOTE 21. SUBSEQUENT EVENT
Subsequent to the year ended December 28, 2014, we invested an additional $7.0 million in a company that designs, develops and manufactures products in the area of advanced battery storage for mobile consumer devices. We account for this investment under the equity method of accounting (see Note 15 for additional information). The additional investment in this company increased our ownership interest in this entity to approximately 30%.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Cypress Semiconductor Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Cypress Semiconductor Corporation and its subsidiaries (the “Company”) at December 28, 2014 and December 29, 2013 and the results of their operations and their cash flows for each of the three years in the period ended December 28, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2014, based on criteria established in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 13, 2015
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UNAUDITED QUARTERLY FINANCIAL DATA
Fiscal 2014
Three Months Ended | |||||||||||||||
December 28, 2014 (3) | September 28, 2014 | June 29, 2014 | March 30, 2014 (2) | ||||||||||||
(In thousands, except per-share amounts) | |||||||||||||||
Revenues | $ | 184,097 | $ | 187,516 | $ | 183,601 | $ | 170,283 | |||||||
Gross margin | $ | 93,702 | $ | 96,883 | $ | 95,370 | $ | 77,723 | |||||||
Net income (loss) | $ | 3,076 | $ | 12,554 | $ | 9,157 | $ | (8,269 | ) | ||||||
Adjust for net loss attributable to non-controlling interest | 426 | 286 | 370 | 335 | |||||||||||
Net income (loss) attributable to Cypress | $ | 3,502 | $ | 12,840 | $ | 9,527 | $ | (7,934 | ) | ||||||
Net income (loss) per share–basic | $ | 0.02 | $ | 0.08 | $ | 0.06 | $ | (0.05 | ) | ||||||
Net income (loss) per share–diluted | $ | 0.02 | $ | 0.08 | $ | 0.06 | $ | 0.05 | |||||||
Fiscal 2013
Three Months Ended | |||||||||||||||
December 29, 2013 (2) | September 29, 2013 (2) | June 30, 2013 (1) (2) | March 31, 2013 (2) | ||||||||||||
(In thousands, except per-share amounts) | |||||||||||||||
Revenues | $ | 167,776 | $ | 188,723 | $ | 193,466 | $ | 172,728 | |||||||
Gross margin | $ | 76,448 | $ | 91,653 | $ | 91,425 | $ | 79,046 | |||||||
Net income | $ | (14,546 | ) | $ | (9,259 | ) | $ | 2,840 | $ | (29,122 | ) | ||||
Adjust for net loss attributable to non-controlling interest | 337 | 430 | 436 | 643 | |||||||||||
Net income attributable to Cypress | $ | (14,209 | ) | $ | (8,829 | ) | $ | 3,276 | $ | (28,479 | ) | ||||
Net income per share–basic | $ | (0.09 | ) | $ | (0.06 | ) | $ | 0.03 | $ | (0.19 | ) | ||||
Net income per share–diluted | $ | (0.09 | ) | $ | (0.06 | ) | $ | 0.02 | $ | (0.19 | ) | ||||
(1) | The results for the three months ended June 30, 2013 included approximately $1.5 of non-recurring charges for goodwill attributable to the MPD reportable segment in connection with the acquisition of Ramtron. |
(2) | In the first quarter of fiscal 2014, the Company changed the manner in which it accounted for one of its investments in an entity from the cost method of accounting to the equity method of accounting. The Company has restated is historical financial statements for all periods presented as if the Company had accounted for its investment in the entity under the equity method of accounting. See Note 15 of the notes to the consolidated financial statements. |
(3) | During the fourth quarter of fiscal 2014, the Company changed from recognizing revenue for sales to certain distributors at the time of shipment, as compared to when resold by the distributor to the end customer, as it determined it could reliably estimate returns and pricing concessions on certain product families and with certain distributors. This change increased revenues in the fiscal fourth quarter by $12.3 million, net income by $6.2 million and net income per share, basic and diluted, by $0.04. See additional disclosures on this change in revenue recognition in Footnote 1 to the consolidated financial statements. |
Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and can only provide reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting as of December 28, 2014. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013). Based on our assessment using those criteria, our management (including our Chief Executive Officer and Chief Financial Officer) concluded that our internal control over financial reporting was effective as of December 28, 2014.
Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued a report on our internal control over financial reporting. The report on the audit of internal control over financial reporting appears on page 91 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
None.
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PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K. We will file a definitive proxy statement pursuant to Regulation 14A (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information included therein is incorporated herein by reference.
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item will be included under the caption “Directors, Executive Officers and Corporate Governance” in our Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 28, 2014 (2014 Proxy Statement) and is incorporated herein by reference. The information required by this item regarding delinquent filers pursuant to Item 405 of Regulation S-K will be included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2014 Proxy Statement and is incorporated herein by reference.
We have adopted a code of ethics that applies to all of our directors, officers and employees. We have made the code of ethics available, free of charge, on our website at www.cypress.com.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this item concerning executive compensation is incorporated by reference from the information set forth in the section titled “Executive Compensation” in our 2015 Proxy Statement and is incorporated herein by reference.
The information required by this item concerning compensation of directors is incorporated by reference from the information set forth in the section titled “Board Structure and Compensation” in our 2015 Proxy Statement and is incorporated herein by reference.
The information required by this item concerning our compensation committee is incorporated by reference from the information set forth in the sections titled “Compensation Committee Interlocks and Insider Participation” and “Report of the Compensation Committee of the Board of Directors” in our in our 2015 Proxy Statement and is incorporated herein by reference.
Quarterly Executive Incentive Payments
There was approximately $0.1 million of performance incentive payments earned by our executive officers in accordance with the terms of our Key Employee Bonus Plan (the “KEBP”) and the Performance Bonus Plan (the “PBP”) for the fourth quarter and the annual portion of fiscal 2014.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item regarding security ownership of certain beneficial owners, directors and executive officers is incorporated by reference from the information set forth in the section titled “Security Ownership of Certain Beneficial Owners and Management” in our 2015 Proxy Statement.
The information required by this item regarding our equity compensation plans is incorporated by reference from Item 5 of this Annual Report on Form 10-K.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this item regarding transactions with certain persons is incorporated by reference from the information set forth in the section titled “Certain Relationships and Related Transactions” in our 2015 Proxy Statement.
The information required by this item regarding director independence is incorporated by reference from the information set forth in the section titled “Board Structure and Compensation” in our Proxy Statement.
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ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item regarding fees and services is incorporated by reference from the information set forth in the section titled “Proposal Two—Ratification of the Selection of Independent Registered Public Accounting Firm” in our Proxy Statement.
The information required by this item regarding the audit committee’s pre-approval policies and procedures is incorporated by reference from the information set forth in the section titled “Report of the Audit Committee of the Board of Directors” in our Proxy Statement.
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PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULE |
(a) | The following documents are filed as a part of this Annual Report on Form 10-K: |
1. | Financial Statements: |
2. | Financial Statement Schedule: |
The exhibits listed below are required to be filed as exhibits to Cypress Semiconductor Annual Report on Form 10-K for the year ended December 28, 2014. For administrative convenience and to avoid further increasing the size of the 10-K, we are filing the Documents as exhibits to this optional Current Report on Form 8-K and will incorporate the Documents into the 10-K by reference hereto.
3. | Exhibits: |
Incorporated by Reference | ||||||||
Exhibit Number | Exhibit Description | Form | Filing Date/ Period End Date | Filed Herewith | ||||
2.1 | Agreement and Plan of Merger and Reorganization, dated as of December 1, 2014, by and among Cypress Semiconductor Corporation, a Delaware corporation, Mustang Acquisition Corporation, a wholly owned subsidiary of Cypress Semiconductor Corporation and a Delaware corporation, and Spansion Inc., a Delaware corporation. | 8-K | 12/1/2014 | |||||
3.1 | Second Restated Certificate of Incorporation of Cypress Semiconductor Corporation. | 10-K | 12/31/2000 | |||||
3.2 | Amended and Restated Bylaws of Cypress Semiconductor Corporation. | 8-K | 3/31/2006 | |||||
3.3 | Certificate of Amendment to Amended and Restated Bylaws of Cypress Semiconductor Corporation | 8-K | 5/28/2009 | |||||
3.4 | Certificate of Amendment to Amended and Restated Bylaws of Cypress Semiconductor Corporation | 8-K | 5/18/2010 | |||||
3.5 | Amendment to Amended and Restated By-Laws of Cypress Semiconductor Corporation | 8-K | 12/1/2014 | |||||
10.1 | Form of Indemnification Agreement. | S-1 | 3/4/1987 | |||||
10.2 + | Cypress Semiconductor Corporation Non-Qualified Deferred Compensation Plan I. | S-8 | 9/6/2002 | |||||
10.3 + | Cypress Semiconductor Corporation Non-Qualified Deferred Compensation Plan II. | S-8 | 9/6/2002 | |||||
10.4 | Lease Agreement dated as of June 27, 2003 between Wachovia Development Corporation and Cypress Semiconductor Corporation. | 10-Q | 6/29/2003 | |||||
10.5 | Participation Agreement dated as of June 27, 2003 by and among Cypress Semiconductor Corporation, Wachovia Development Corporation and Wachovia Bank, National Association. | 10-Q | 6/29/2003 | |||||
10.6 + | SMaL Camera Technologies, Inc. 2000 Stock Option and Incentive Plan. | S-8 | 3/8/2005 | |||||
10.7 | First Amendment to Certain Operative Agreements dated March 28, 2005 between Wachovia Development Corporation and Cypress Semiconductor Corporation. | 10-Q | 4/3/2005 | |||||
10.8 + | Cypress Semiconductor Corporation 2006 Key Employee Bonus Plan (KEBP) Summary. | 10-K | 1/1/2006 | |||||
10.9 + | Cypress Semiconductor Corporation Performance Profit Sharing Plan (PPSP) Summary. | 10-K | 1/1/2006 | |||||
10.10 | Memorandum of Agreement between GNPower Ltd. Co. and Cypress Manufacturing Ltd. | 10-Q | 10/1/2006 | |||||
10.11 | Letter of Agreement between Cypress Semiconductor Corporation and SunPower Corporation. | 8-K | 11/16/2006 | |||||
10.12 | Letter of Agreement between Cypress Semiconductor Corporation and PowerLight Corporation. | 8-K | 11/16/2006 | |||||
10.13 | Amended Letter of Agreement between Cypress Semiconductor Corporation and PowerLight Corporation. | 8-K | 1/5/2007 | |||||
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Incorporated by Reference | ||||||||
Exhibit Number | Exhibit Description | Form | Filing Date/ Period End Date | Filed Herewith | ||||
10.14 | Guaranty dated December 12, 2006 by and between Grace Semiconductor USA, Inc., CIT Technologies Corporation and Cypress Semiconductor Corporation. | 10-K | 12/31/2006 | |||||
10.15 | Guaranty dated February 1, 2007 by and between Grace Semiconductor USA, Inc., CIT Technologies Corporation and Cypress Semiconductor Corporation. | 10-K | 12/31/2006 | |||||
10.16 | Guaranty dated March 19, 2007 by and between Grace Semiconductor USA, Inc., CIT Technologies Corporation and Cypress Semiconductor Corporation. | 10-Q | 4/1/2007 | |||||
10.17 | Guaranty dated May 15, 2007 by and between Grace Semiconductor USA, Inc., CIT Technologies Corporation and Cypress Semiconductor Corporation. | 10-Q | 7/1/2007 | |||||
10.18 | Guaranty dated June 15, 2007 by and between Grace Semiconductor USA, Inc., CIT Technologies Corporation and Cypress Semiconductor Corporation. | 10-Q | 7/1/2007 | |||||
10.19 | Guaranty dated December 15, 2007 by and between Grace Semiconductor USA, Inc., CIT Technologies Corporation and Cypress Semiconductor Corporation. | 10-K | 12/30/2007 | |||||
10.20 | Guaranty, dated March 24, 2008, by and between Grace Semiconductor USA, Inc., CIT Technologies Corporation and Cypress Semiconductor Corporation. | 10-Q | 3/30/2008 | |||||
10.21 | Amendment No. 1 to Tax Sharing Agreement, dated as of August 12, 2008, by and between Cypress Semiconductor Corporation and SunPower Corporation. | 8-K | 8/11/2008 | |||||
10.22 + | 1999 Non-Statutory Stock Option Plan, as amended and restated. | S-8 | 10/24/2008 | |||||
10.23 + | Employee Qualified Stock Purchase Plan, as amended and restated. | S-8 | 10/24/2008 | |||||
10.24 + | International Microcircuits Inc. 2000 Nonstatutory Stock Option Plan. | S-8 | 10/24/2008 | |||||
10.25 | Amended and Restated Loan and Security Agreement with Silicon Valley Bank dated March 2, 2009 | 10-Q | 3/29/2009 | |||||
10.26 | Amendment No. 1 to Amended and Restated Loan and Security Agreement with Silicon Valley Bank dated March 1, 2010. | 10-K | 3/3/2010 | |||||
10.27 + | 1994 Stock Plan, as amended and Restated | 8-K | 6/2/2011 | |||||
10.28 | Amended and Restated Loan and Security Agreement. | 10-Q | 5/9/2012 | |||||
10.29 + | 2012 Incentive Award Plan, as amended and restated. | S-8 | 12/12/2012 | |||||
10.30 | Form of Cypress Support Agreement | 8-K | 12/1/2014 | |||||
10.31 | Form of Spansion Support Agreement | 8-K | 12/1/2014 | |||||
10.32 + | Thad Trent Employment Agreement | X | ||||||
10.33 + | J. Daniel McCranie Employment Agreement | X | ||||||
21.1 | Subsidiaries of Cypress Semiconductor Corporation. | 10-K | 2/28/2013 | |||||
23.1 | Consent of Independent Registered Public Accounting Firm. | X | ||||||
24.1 | Power of Attorney (reference is made to the signature page of this Annual Report on Form 10-K). | |||||||
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||
101.INS* | XBRL Instance Document. | |||||||
101.SCH* | XBRL Taxonomy Extension Schema Document. | |||||||
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
+ Identifies a management contract or compensatory plans or arrangements required to be filed as an exhibit.
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Beginning of Period | Charges (Releases) to Expenses/Revenues | Deductions | Balance at End of Period | ||||||||||||
(In thousands) | |||||||||||||||
Allowance for doubtful accounts receivable: | |||||||||||||||
Year ended December 28, 2014 | $ | 719 | $ | 39 | $ | (20 | ) | $ | 738 | ||||||
Year ended December 29, 2013 | $ | 769 | $ | 51 | $ | (101 | ) | $ | 719 | ||||||
Year ended December 30, 2012 | $ | 824 | $ | 571 | $ | (626 | ) | $ | 769 | ||||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
CYPRESS SEMICONDUCTOR CORPORATION | ||
Date: February 12, 2015 | By: | /S/ Thad Trent |
Thad Trent Executive Vice President, Finance and Administration and Chief Financial Officer | ||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints T.J. Rodgers and Thad Trent, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/S/ T. J. RODGERS | President, Chief Executive Officer and Director (Principal Executive Officer) | February 12, 2015 | ||
T. J. Rodgers | ||||
/S/ THAD TRENT | Executive Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) | February 12, 2015 | ||
Thad Trent | ||||
/S/ W. STEVE ALBRECHT | Director | February 12, 2015 | ||
W. Steve Albrecht | ||||
/S/ ERIC A. BENHAMOU | Director | February 12, 2015 | ||
Eric A. Benhamou | ||||
/S/ ROBERT Y.L. MAO | Director | February 12, 2015 | ||
Robert Y.L. Mao | ||||
/S/ JAMES R. LONG | Director | February 12, 2015 | ||
James R. Long | ||||
/S/ J.D. SHERMAN | Director | February 12, 2015 | ||
J.D. Sherman | ||||
/S/ WILBERT G.M. VAN DEN HOEK | Director | February 12, 2015 | ||
Wilbert G.M. Van Den Hoek | ||||
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