Company Quick10K Filing
Quick10K
Cypress Semiconductor
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$16.57 365 $6,050
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-30 Annual: 2018-12-30
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-07-01 Quarter: 2018-07-01
10-Q 2018-04-01 Quarter: 2018-04-01
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-10-01 Quarter: 2017-10-01
10-Q 2017-07-02 Quarter: 2017-07-02
10-Q 2017-04-02 Quarter: 2017-04-02
10-K 2017-01-01 Annual: 2017-01-01
10-Q 2016-10-02 Quarter: 2016-10-02
10-Q 2016-07-03 Quarter: 2016-07-03
10-Q 2016-04-03 Quarter: 2016-04-03
10-K 2016-01-03 Annual: 2016-01-03
10-Q 2015-09-27 Quarter: 2015-09-27
10-Q 2015-06-28 Quarter: 2015-06-28
10-Q 2015-03-29 Quarter: 2015-03-29
10-K 2014-12-28 Annual: 2014-12-28
10-Q 2014-09-28 Quarter: 2014-09-28
10-Q 2014-06-29 Quarter: 2014-06-29
10-Q 2014-03-30 Quarter: 2014-03-30
10-K 2013-12-29 Annual: 2013-12-29
8-K 2019-07-17 Other Events
8-K 2019-07-11 Other Events
8-K 2019-06-25 Other Events, Exhibits
8-K 2019-06-13 Other Events, Exhibits
8-K 2019-06-03 Other Events, Exhibits
8-K 2019-06-03 Enter Agreement, Other Events, Exhibits
8-K 2019-06-03 Other Events, Exhibits
8-K 2019-05-03 Shareholder Vote
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-01-31 Earnings, Exhibits
8-K 2018-12-03 Officers, Exhibits
8-K 2018-11-08 Officers, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-10-23 Enter Agreement, Regulation FD, Exhibits
8-K 2018-09-13 Enter Agreement, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-05-11 Shareholder Vote
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-03-12 Enter Agreement, Exhibits
8-K 2018-02-01 Earnings, Exhibits
TOT Total 138,050
FCAU Fiat Chrysler Automobiles 29,160
NEWR New Relic 6,140
PAG Penske Automotive Group 3,850
SXT Sensient Technologies 2,980
SIBN SI-BONE 414
SND Smart Sand 153
CART Carolina Trust Bancshares 80
INTT inTEST 70
CHKE Cherokee 12
CY 2019-03-31
Part I-Financial Information
Item 1. Financial Statements
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Note 2. Revenue
Note 3. Balance Sheet Components
Note 4. Intangible Assets
Note 5. Assets Held for Sale
Note 6. Equity Method Investments
Note 7. Fair Value Measurements
Note 8. Restructuring
Note 9. Employee Stock Plans and Stock-Based Compensation
Note 10. Debt
Note 11. Leases
Note 12. Commitments and Contingencies
Note 13. Foreign Currency and Interest Rate Derivatives
Note 14. Net Income per Share
Note 15. Income Taxes
Note 16. Segment, Geographical and Customer Information
Note 17. Accumulated Other Comprehensive Income (Loss)
Note 18. Related Party Transactions
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.2.6 cyq12019exe1026.htm
EX-10.2.7 cyq12019exe1027.htm
EX-31.1 cyq12019exe311htm.htm
EX-31.2 cyq12019exe312htm.htm
EX-32.1 cyq12019exe321htm.htm
EX-32.2 cyq12019exe322htm.htm

Cypress Semiconductor Earnings 2019-03-31

CY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cyq1201910q.htm 10-Q Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
 ☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10079 
 
Cypress Semiconductor Corporation
(Exact name of registrant as specified in its charter) 
 
 
Delaware
 
94-2885898
 
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
198 Champion Court, San Jose, California 95134
(Address of principal executive offices and zip code)
(408) 943-2600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes     No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   ☐    No  
The total number of outstanding shares of the registrant’s common stock as of April 20, 2019 was 365,289,260.







2




PART I—FINANCIAL INFORMATION

Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not historical facts and include statements relating to, among other things, the future results, operations, strategies, and prospects of Cypress Semiconductor Corporation and its consolidated subsidiaries ("Cypress," the "Company," "we," or "us"), and can in some cases be identified by our use of words such as "may," "will," "should," "plan," "anticipate," "believe," "expect," "future," "intend," "estimate," "predict," "potential," "continue," and similar expressions. This Quarterly Report includes, among others, forward-looking statements regarding: our expectations regarding dividends, debt repayments, and stock repurchases; our expectations regarding restructuring plan costs and effects; our expectations regarding active litigation matters; the sufficiency of our cash, cash equivalents, and borrowing arrangements to meet our requirements for the next 12 months; possible recognition of certain unrecognized tax benefits within the next 12 months; and the potential impact of our indemnification obligations. Our forward-looking statements are based on the expectations, beliefs and intentions of, and the information available to, our executive management on the filing date of this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements. Except as required by law, we assume no responsibility to update our forward-looking statements.
The forward-looking statements in this Quarterly Report involve risks and uncertainties. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: potential disruptions in the international trade and investment environment, including deteriorating relationships between the U.S. government and foreign governments; the current and future state of the general economy and its impact on the markets and consumers we serve (including credit conditions); our ability to execute on our Cypress 3.0 strategy and our margin improvement plan; potential volatility in our stock price; risks related to paying down our indebtedness and meeting the covenants set forth in our debt agreements; our efforts to retain and expand our customer base (which may be adversely affected if we were to raise prices) in the intensely competitive and rapidly evolving semiconductor industry; risks related to significant supply and demand volatility in semiconductor markets (including the challenges of forecasting demand, scheduling production, and making timely delivery on customer orders); risks related to our strategy of developing and maintaining a leading portfolio of programmable microcontroller, connectivity and memory products; risks related to our flexible manufacturing strategy (and the challenge of efficiently managing a smaller number of manufacturing facilities while increasing our reliance on third-party manufacturers); our reliance on distributors and resellers; risks related to our "take or pay" agreements with certain vendors; the risk of defects, errors, or security vulnerabilities in our products; risks related to the integrity of our information systems, including the possibility of cyber-attacks, business-activity disruption, and loss or corruption of sensitive data; changes in tax law and policy; risks related to our pending tax examinations; risks related to our tax incentive/holiday arrangements in Malaysia, the Philippines, and Thailand; potential lack of liquidity for certain strategic investments (including the challenge of disposing of businesses, product lines, or assets on favorable terms in a timely manner); risks related to our joint venture for NAND flash memory products; risks related to our restructuring activities; the failure or success of the privately-held companies in which we are invested; the challenges of effectively integrating companies and assets that we acquire; the possibility of impairment charges; the challenges of attracting and retaining key personnel; risks related to our reliance on stock-based compensation; possible changes to our dividend policy; risks related to our share repurchase authorization; the uncertain nature of business outlook guidance; risks related to industry consolidation and the challenge of competing effectively against a smaller number of stronger companies; the challenges of adequately protecting our intellectual property rights and risks of intellectual property litigation; the possibilities that activist stockholders could negatively affect our business and that our deferred tax assets could be negatively impacted by changes in our stockholder base; risks associated with international operations; the challenges and costs of complying with environmental, data privacy, health/safety, and other laws; risks related to "conflict minerals" reporting; the possibility of business disruptions due to natural disasters; risks arising from indemnification commitments to our officers and directors; our ability to manage our financial investments and interest rate and exchange rate exposure; and the uncertainty and expense of pending litigation matters. These and other factors are described in more detail in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 30, 2018 (our "Annual Report"), which item is incorporated herein by reference; Part I, Item 3 (Quantitative and Qualitative Disclosures about Market Risk) in this Quarterly Report; and/or Part II, Item 1A (Risk Factors) in this Quarterly Report.

3




ITEM 1. FINANCIAL STATEMENTS

CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31, 2019
 
December 30, 2018
 ASSETS
(In thousands, except
per-share amounts)
Current assets:
 

 
 
Cash and cash equivalents
$
285,119

 
$
285,720

Accounts receivable, net
266,374

 
324,274

Inventories
316,921

 
292,093

Assets held for sale
10,818

 
13,510

Other current assets
92,712

 
101,163

Total current assets
971,944

 
1,016,760

Property, plant and equipment, net
274,123

 
282,986

Operating lease right-of-use assets
45,860

 

Equity method investment
61,555

 
65,145

Intangible assets, net
438,702

 
490,590

Goodwill
1,373,750

 
1,373,750

Deferred tax assets
342,749

 
339,679

Other long-term assets
118,941

 
124,305

Total assets
$
3,627,624

 
$
3,693,215

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
181,220

 
$
210,715

Accrued compensation and employee benefits
46,966

 
61,994

Price adjustment and other revenue reserves
141,216

 
163,088

Dividend payable
40,134

 
39,748

Current portion of long-term debt
8,038

 
6,943

Other current liabilities
116,671

 
138,064

Total current liabilities
534,245

 
620,552

Deferred income taxes and other tax liabilities
53,041

 
53,469

Revolving credit facility and long-term portion of debt
851,279

 
874,235

Other long-term liabilities
69,286

 
27,920

Total liabilities
$
1,507,851

 
$
1,576,176

Commitments and contingencies (Note 12)

 

Equity:
 

 
 

Preferred stock, $0.01 par value, 5,000 shares authorized; none issued and outstanding

 

Common stock, $0.01 par value, 650,000 and 650,000 shares authorized; 541,180 and 537,327 shares issued; 364,951 and 361,452 shares outstanding at March 31, 2019 and December 30, 2018, respectively
5,412

 
5,373

Additional paid-in-capital
5,630,673

 
5,636,099

Accumulated other comprehensive income (loss)
(4,624
)
 
1,829

Accumulated deficit
(1,137,154
)
 
(1,157,115
)
Stockholders’ equity before treasury stock
4,494,307

 
4,486,186

Less: Shares of common stock held in treasury, at cost; 176,229 and 175,875 shares at March 31, 2019 and December 30, 2018, respectively
(2,375,838
)
 
(2,370,452
)
Total Cypress stockholders’ equity
2,118,469

 
2,115,734

Non-controlling interest
1,304

 
1,305

Total equity
2,119,773

 
2,117,039

Total liabilities and equity
$
3,627,624

 
$
3,693,215


The accompanying notes are an integral part of these condensed consolidated financial statements.
4





CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
 
(In thousands, except per-share amounts)
Revenues
$
539,004

 
$
582,241

Cost of revenues
336,595

 
369,849

Gross profit
202,409

 
212,392

Research and development
88,606

 
93,233

Selling, general and administrative
81,987

 
83,397

Total operating expenses
170,593

 
176,630

Operating income
31,816

 
35,762

Interest expense
(13,579
)
 
(18,859
)
Other income, net
4,335

 
705

Income before income taxes, share in net loss of equity method investee and non-controlling interest
22,572

 
17,608

Income tax provision
730

 
(5,057
)
Share in net loss of equity method investee
(3,590
)
 
(3,461
)
Net income
19,712

 
9,090

Net income (loss) attributable to non-controlling interest
2

 
(12
)
Net income attributable to Cypress
$
19,714

 
$
9,078

Net income per share attributable to Cypress:
 
 
 
Basic
$
0.05

 
$
0.03

Diluted
$
0.05

 
$
0.02

Shares used in net income per share calculation:
 
 
 
Basic
363,700

 
355,461

Diluted
373,131

 
370,592

 


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





CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 

Three Months Ended
 
March 31, 2019
 
April 1, 2018
 
(In Thousands)
Net income
$
19,712

 
$
9,090

Other comprehensive (loss) income:
 

 
 

Net unrecognized gain (loss) on defined benefit plan
(13
)
 

Net unrealized gain (loss) on cash flow hedges:
 

 
 

Net unrealized gain (loss) arising during the period
(5,938
)
 
4,464

Net (gain) loss reclassified into earnings for revenue hedges (effective portion)
(173
)
 
607

Net loss (gain) reclassified into earnings for expense hedges (effective portion)
85

 
(1,137
)
Net (gain) loss reclassified into earnings for interest rate hedges (effective portion)
(414
)
 

Net unrealized gain (loss) on cash flow hedges
(6,440
)
 
3,934

Total other comprehensive (loss) income
(6,453
)
 
3,934

Comprehensive income
13,259

 
13,024

Comprehensive income (loss) attributable to non-controlling interest
2

 
(12
)
Comprehensive income attributable to Cypress
$
13,261

 
$
13,012

 


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




CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited) 

 
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
Treasury Stock
Non-controlling Interest
Total Equity
 
Shares
 
Amount
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 30, 2018
537,327

  
$
5,373

$
5,636,099

$
1,829

$
(1,157,115
)
175,875

 
$
(2,370,452
)
$
1,305

$
2,117,039

Net income attributable to Cypress
 
 
 
 
 
19,714

 
 
 
 
19,714

Unrealized loss on defined benefit pension plan
 
 
 
 
(13
)

 
 
 
 
(13
)
Net unrealized gain on cash flow hedges and interest rate swaps
 
 
 
 
(6,440
)
247

 
 
 
 
(6,193
)
Issuance of common shares under employee stock plans, net
3,853

 
39

14,240


 
 
 
 
 
14,279

Extinguishment of 2% 2020 Exchangeable Notes
 
 
 
 
 
 
 
 
 
 

Net settlement in stock
 
 
 
 
 
 
354

 
(5,386
)
 
(5,386
)
Dividend ($0.11 per share)
 
 
 
(40,134
)
 
 
 
 
 
 
(40,134
)
Stock-based compensation
 
 
 
20,468

 
 
 
 
 
 
20,468

Non-controlling interest
 
 
 
 
 
 
 
 
 
(1
)
(1
)
 
 
  
 
 
 
 
 
 
 
 
 
Balances at March 31, 2019
541,180

  
$
5,412

$
5,630,673

$
(4,624
)
$
(1,137,154
)
176,229

 
$
(2,375,838
)
$
1,304

$
2,119,773

 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2017
525,719

  
$
4,936

$
5,659,612

$
(1,362
)
$
(1,511,706
)
173,499

 
$
(2,334,944
)
$
1,056

$
1,817,592

Net income attributable to Cypress

 



9,078


 


9,078

Changes in employee deferred compensation plan assets

 





 



Net unrealized gain on cash flow hedges and interest rate swaps

 


3,934



 


3,934

Issuance of common shares under employee stock plans, net
4,644

 
19

20,524



4

 


20,543

Extinguishment of 2% 2020 Exchangeable Notes

 

(25,696
)



 


(25,696
)
Issuance of common shares upon conversion of 2% 2020 Exchangeable Notes
1,402

 
14

25,152




 


25,166

Dividend ($0.11 per share)

 

(39,401
)



 


(39,401
)
Stock-based compensation

 

17,577




 


17,577

Non-controlling interest

 





 

12

12

 
 
  
 
 
 
 
 
 
 
 
 
Balances at April 1, 2018
531,765

  
$
4,969

$
5,657,767

$
2,572

$
(1,502,628
)
173,503

 
$
(2,334,944
)
$
1,068

$
1,828,805







7




CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
 
(In thousands)
Cash flows from operating activities:
 

 
 

Net income
$
19,712

 
$
9,090

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Stock-based compensation expense
20,395

 
18,458

Depreciation and amortization
71,400

 
71,450

Loss on assets held for sale
3,532

 

Loss / (Gain) on disposal or impairment of property and equipment
(234
)
 
5,337

Share in net loss of equity method investee
3,590

 
3,461

Accretion of interest expense on Senior Exchangeable Notes and amortization of debt and financing costs on other debt
4,767

 
8,423

Restructuring and other adjustments
691

 
3,911

Accounts receivable
57,900

 
(97,312
)
Operating lease right-of-use assets
(48,564
)
 

Inventories
(25,890
)
 
(4,203
)
Other current and long-term assets
3,503

 
(6,252
)
Price adjustment and other revenue reserves
(21,871
)
 
41,037

Accounts payable and other liabilities
(30,375
)
 
(21,722
)
Asset held for sale
2,692

 

Net cash provided by operating activities
61,248

 
31,678

Cash flows from investing activities:
 

 
 

Distributions, net of contributions from deferred compensation plan
6,098

 
4,743

Acquisition of property, plant and equipment, net
(10,534
)
 
(17,267
)
Other investing
60

 
(1,649
)
Net cash used in investing activities
(4,376
)
 
(14,173
)
Cash flows from financing activities:
 

 
 

Borrowings under senior secured revolving credit facility

 
60,000

Repayment of revolving credit facility


 
(87,000
)
Repayment of term loans
(26,263
)
 
(6,826
)
Tax withholdings related to net share settlements of restricted stock units
(5,386
)
 

Finance lease payment for principal portion
(388
)
 

Payment of cash dividends
(39,748
)
 
(38,741
)
Proceeds from employee stock-based awards
14,312

 
20,543

Payment for extinguishment of 2% 2020 Spansion Exchangeable Notes

 
(10,000
)
Financing costs related to debt

 
(325
)
Net cash used in financing activities
(57,473
)
 
(62,349
)
Net decrease in cash and cash equivalents
(601
)
 
(44,844
)
Cash and cash equivalents, beginning of period
285,720

 
151,596

Cash and cash equivalents, end of period
$
285,119

 
$
106,752

 
 
 
 
Supplemental Cash Flows Disclosures:
 

 
 

Unpaid purchases of property, plant and equipment
$
3,784

 
$
20,159


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




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


NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Years
Cypress Semiconductor Corporation (together with its consolidated subsidiaries, "Cypress" or the "Company") reports on a fiscal-year basis. The Company ends its quarters on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. Fiscal years 2019 and 2018 each contain(ed) 52 weeks. The first quarter of fiscal 2019 ended on March 31, 2019 and the first quarter of fiscal 2018 ended on April 1, 2018.

Basis of Presentation

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include the accounts of Cypress Semiconductor Corporation and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments of a normal, recurring nature, which are necessary to state fairly the financial information included therein. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Cypress' Annual Report on Form 10-K for the fiscal year ended December 30, 2018. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Results reported in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full fiscal year.

Summary of Significant Accounting Policies

Leases

The Company applies the guidance in Accounting Standards Codification ("ASC") Topic 842 to individual leases of assets. When the Company receives substantially all of the economic benefits from and directs the use of specified property, plant and equipment, transactions give rise to leases.

The Company’s classes of assets include real estate leases, equipment leases, and vehicles leases.
Operating leases are included in operating lease right-of-use ("ROU") assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Finance leases are included in property and equipment, current portion of long-term debt, revolving credit facility and long-term portion of debt in our consolidated balance sheets.
The Company has elected the practical expedient within ASC Topic 842 to not separate lease and non-lease components within lease transactions for all classes of assets. Additionally, the Company has elected the short-term lease exception for all classes of assets, does not apply the recognition requirements for leases of 12 months or less, and recognizes lease payments for short-term leases as expense either straight-line over the lease term or as incurred depending on whether the lease payments are fixed or variable. These elections are applied consistently for all leases.
The Company subleases certain portions of buildings and land subject to operating leases. The terms and conditions of the subleases are commensurate with the terms and conditions within the original operating leases. The term of the subleases range from one to eight years, payments are fixed within the contracts, and there are no residual value guarantees or other restrictions or covenants in the leases.
When discount rates implicit in leases cannot be readily determined, the Company uses the applicable incremental borrowing rate at lease commencement to perform lease classification tests on lease components and to measure lease liabilities and ROU assets. The incremental borrowing rate used by the Company was based on baseline rates and adjusted by the credit spreads

9




commensurate with the Company’s secured borrowing rate, over a similar term. At each reporting period when there is a new lease initiated, the rates established for that quarter will be used.
Other significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 30, 2018.

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued Accounting Standard Update ("ASU") No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The standard modifies the disclosure requirements on fair value measurements in Topic 820 by removing the requirement to disclose the reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The standard expands the disclosure requirements for Level 3 fair value measurement, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The amendment is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." The standard is designed to improve the effectiveness of disclosures by removing and adding disclosures related to defined benefit plans. The update is effective for fiscal years ending after December 15, 2020 with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, "Leases (ASC Topic 842)". The standard introduces new requirements to increase transparency and comparability among organizations for leasing transactions for both lessees and lessors. ASU No. 2016-02 requires a lessee to record a right-of-use asset and a lease liability for all leases with terms longer than 12 months. These leases will be either finance or operating, with classification affecting the pattern of expense recognition.
In July 2018, the Board issued ASU 2018-11, which provided an alternative modified retrospective transition method. Under this method, the cumulative-effect adjustment to the opening balance of retained earnings is recognized on the date of adoption (December 31, 2018). The Company adopted ASC Topic 842, as of December 31, 2018 and applied the alternative modified retrospective transition method requiring application of the new guidance to all leases existing at, or entered into on or after, the date of adoption, i.e. December 31, 2018.
As part of applying the transition method, the Company has elected to apply the package of transition practical expedients within the new guidance. As required by the new standard, these expedients have been elected as a package and are consistently applied across the Company’s lease portfolio. Given this election, the Company need not reassess:
whether any expired or existing contracts are or contain leases
the lease classification for any expired or existing leases
treatment of initial direct costs relating to any existing leases

As a result of adoption of this standard, and election of the transition practical expedients, the Company recognized ROU assets and lease liabilities for those leases classified as operating leases under ASC Topic 840 that continued to be classified as operating leases under ASC Topic 842 at the date of initial application. Leases classified as a capital lease under ASC 840 are classified as ‘Finance lease’ under this new standard.
In applying the alternative modified retrospective transition method, the Company measured lease liabilities at the present value of the sum of remaining minimum rental payments (as defined under ASC Topic 840). The present value of lease liabilities has been measured using the Company’s incremental borrowing rates as of December 31, 2018 (the date of initial application). Additionally, ROU assets for these operating leases have been measured as the initial measurement of applicable lease liabilities adjusted for any unamortized initial direct costs, prepaid/accrued rent, unamortized lease incentives, and any ASC Topic 420 liabilities.
The adoption of this new standard at December 31, 2018, and the application of the modified retrospective transition approach resulted in the following changes:

10




(1) assets increased by $54.3 million, primarily representing the recognition of ROU assets for operating leases and finance leases partially offset by derecognition of assets for capital leases previously designated under ASC Topic 840; and
(2) liabilities increased by $57.2 million, primarily representing the recognition of lease liabilities for operating leases and finance leases partially offset by derecognition of liabilities for capital leases previously designated under ASC Topic 840.

Other Recently Adopted Pronouncements:

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The amendments in ASU 2017-12 are intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The Company adopted this guidance in the first quarter of fiscal 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The amendments in ASU 2018-02 are intended to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company adopted this guidance in the first quarter of fiscal 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting." The standard expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. Under the amended guidance, equity-classified share-based payment awards issued to nonemployees will be measured at grant date fair value. Upon transition, the entity is required to remeasure these nonemployee awards at fair value as of the adoption date. The Company adopted this guidance in the first quarter of fiscal 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.


NOTE 2. REVENUE

The following table presents the Company's revenue disaggregated by segment, end market, revenue type and geographical locations:

 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
 
(In thousands)
Microcontroller and Connectivity Division ("MCD")
$
310,389

 
$
336,710

Memory Products Division ("MPD")
228,615

 
245,531

Total revenues
$
539,004

 
$
582,241


 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
 
(In thousands)
IoT
153,724

 
185,618

Automotive
197,814

 
200,000

Legacy
187,466

 
196,623

Total revenues
539,004

 
582,241


11





Three Months Ended

March 31, 2019
 
April 1, 2018

(In thousands)
Product revenue
$
528,558

 
$
571,430

Non-product revenue (1)
10,446

 
10,811

Total revenue
$
539,004

 
$
582,241


(1) Non-product revenue primarily includes royalty, non-recurring engineering services revenue, and revenue from intellectual property arrangements.

Three Months Ended

March 31, 2019
 
April 1, 2018

(In thousands)
Products/Services transferred at a point in time
$
537,165

 
$
578,235

Products/Services transferred over time
1,839

 
4,006

Total revenue
$
539,004

 
$
582,241


 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
 
(In thousands)
United States
$
64,320

 
$
73,662

China, Taiwan, and Hong Kong
199,907

 
215,822

Japan
117,462

 
135,354

Europe
85,328

 
87,324

Rest of the World
71,987

 
70,079

Total revenue
$
539,004

 
$
582,241





NOTE 3. BALANCE SHEET COMPONENTS

Accounts Receivable, Net
 
As of
 
March 31, 2019
 
December 30, 2018
 
(In thousands)
Accounts receivable, gross
$
267,276

 
$
325,178

Allowance for doubtful accounts receivable
(902
)
 
(904
)
Total accounts receivable, net
$
266,374

 
$
324,274



12




Inventories
 
As of
 
March 31, 2019
 
December 30, 2018
 
(In thousands)
Raw materials
$
10,329

 
$
10,004

Work-in-process
245,729

 
215,820

Finished goods
60,863

 
66,269

Total inventories
$
316,921

 
$
292,093



Other Current Assets
 
As of
 
March 31, 2019
 
December 30, 2018
 
(In thousands)
Prepaid tooling
$
25,422

 
$
25,891

Advances to suppliers
10,188

 
12,058

Prepaid royalty and licenses
11,813

 
14,863

Derivative assets
2,448

 
3,492

Value added tax receivable
8,466

 
7,652

Prepaid expenses
19,355

 
17,814

Withholding tax receivable and tax advance
1,857

 
4,236

Other current assets
13,163

 
15,157

Total other current assets
$
92,712

 
$
101,163



Other Long-term Assets
 
As of
 
March 31, 2019
 
December 30, 2018
 
(In thousands)
Employee deferred compensation plan assets
$
43,732

 
$
44,397

Long-term licenses
5,324

 
4,495

Advances to suppliers
10,982

 
11,471

Deposits
9,469

 
9,441

Pension plan assets
1,831

 
1,765

Derivative assets

 
1,419

Prepaid tooling and other non-current assets
47,603

 
51,317

Total other long-term assets
$
118,941

 
$
124,305



13




 
Other Current Liabilities
 
As of
 
March 31, 2019
 
December 30, 2018
 
(In thousands)
Employee deferred compensation plan liability
$
43,752

 
$
44,834

Restructuring accrual (See Note 8)
111

 
14,536

Derivative liability
2,017

 
1,621

Accrued expenses
39,423

 
46,592

Accrued interest
3,783

 
9,440

Customer advances
44

 
5,296

Operating lease liability
11,285

 

Other current liabilities
16,256

 
15,745

Total other current liabilities
$
116,671

 
$
138,064

 

Other Long-term Liabilities
 
As of
 
March 31, 2019
 
December 30, 2018
 
(In thousands)
Pension and other employee-related liabilities
$
14,643

 
$
14,083

Asset retirement obligation
5,876

 
5,916

Derivative liability
7,795

 
4,051

Operating lease liability
35,886

 

Other long-term liabilities
5,086

 
3,870

Total other long-term liabilities
$
69,286

 
$
27,920


NOTE 4. INTANGIBLE ASSETS

The following table presents details of the Company's intangible assets:
 
 
As of March 31, 2019
 
As of December 30, 2018
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
 
(In thousands)
Developed technology and other intangible assets
 

 
 

 
 

 
 

 
 

 
 

Acquisition-related intangible assets
$
1,188,521

 
$
(754,075
)
 
$
434,446

 
$
1,188,521

 
$
(702,883
)
 
$
485,638

Non-acquisition related intangible assets
19,884

 
(15,628
)
 
4,256

 
19,884

 
(14,932
)
 
4,952

Total intangible assets
$
1,208,405

 
$
(769,703
)
 
$
438,702

 
$
1,208,405

 
$
(717,815
)
 
$
490,590



The following table summarizes the amortization expense by line item recorded in the Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
 
(In thousands)
Cost of revenues
$
46,881

 
$
48,102

Research and development
697

 
1,261

Selling, general and administrative
4,310

 
4,948

Total amortization expense
$
51,888

 
$
54,311

The estimated future amortization expense related to developed technology and other intangible assets as of March 31, 2019 is as follows:
 
(In thousands)
2019 (remaining nine months)
155,519

2020
153,689

2021
58,489

2022
33,001

2023
28,334

2024 and thereafter
9,670

Total future amortization expense
$
438,702

 
 

14




NOTE 5. ASSETS HELD FOR SALE

Sale of NAND business

On April 1, 2019, the Company closed the transfer of its NAND business to a newly-formed joint venture between the Company and SK hynix system ic ("SKHS"). The joint venture entity will be called SkyHigh Memory Limited ("SkyHigh") and its headquarter will be in Hong Kong, China. SkyHigh will be 60-percent-owned by SKHS and 40-percent-owned by Cypress. The Company paid $2.4 million in cash as its capital contribution in SkyHigh upon close of the transaction. Additionally, Cypress will provide certain transition and back-end manufacturing services to SkyHigh.

In the fourth quarter of fiscal 2018, the Company allocated $65.7 million of goodwill previously recorded in the MPD segment to the NAND business being divested. The allocation was based on the relative estimated enterprise value of the NAND business and that of the MPD business. The intangible assets attributable to the NAND business acquired as part of a previous acquisition were $10.9 million. Based on an analysis carried out in the fourth quarter of fiscal 2018, the Company recorded an impairment charge of $76.6 million which related to the goodwill and intangible assets allocated to the NAND business and classified as held-for-sale. During the first quarter of the fiscal 2019, the Company recognized an incremental loss of $3.5 million related to adjustments in the carrying value of certain assets and estimated costs of certain transition services.

As of March 31, 2019 and December 30, 2018 inventories related to the NAND business in the amount of $10.8 million and $13.5 million, respectively, were classified as held-for-sale assets as SkyHigh has agreed to purchase such inventories. SkyHigh will pay cash consideration for these inventories to the Company of a fixed amount and a contingent amount to be determined based on the profit on sales of such inventories generated by SkyHigh, if any.


NOTE 6. EQUITY METHOD INVESTMENTS

Privately-held equity investments in entities the Company does not control are accounted for under the equity method of accounting if the Company has an ownership interest of 20% or greater or if it has the ability to exercise significant influence over the operations of such companies.

Deca Technologies Inc. ("Deca")
Deca continues to be in the process of developing and testing a fan-out wafer level packaging technology. Deca’s estimated enterprise value is sensitive to its ability to achieve key product development and testing milestones. Additional delays or failure by Deca to complete these milestones - similar to those previously experienced by Deca in fiscal 2018 - may have a significant adverse impact on Deca’s estimated enterprise value. In addition, Deca’s current and future revenues are dependent on a small number of significant customers. The loss of, material delay in placing orders by, or significant decrease in demand from any of its key customers would have a material adverse effect on Deca’s business, results of operations and financial condition. Deca may need to secure additional funding to support its growth and cash needs. Failure to secure such funding, if needed, will impact its ability to continue as a going concern.
 
Deca management is currently working with its significant customers to secure their long-term commitment to use Deca’s technology given the current downturn in the semiconductor industry and is in the process of evaluating certain alternative strategic options.
 
During the fourth quarter of fiscal 2018, the Company determined that its investment in Deca was other-than temporarily impaired and recognized a charge of $41.5 million in order to write down the carrying amount of the investment in Deca to the estimated fair value as of the end of fiscal 2018. Given the factors described above, there continues to be a substantial risk that the carrying value of our investment in Deca may become impaired in the future. If Deca is unable to (a) secure sufficient orders from its existing significant customers or other new customers, (b) raise sufficient funding, if needed, for continuing its operations, (c) consummate a strategic transaction that allows realization of its economic value, Cypress will be required to partially or fully impair the carrying value of its investment in Deca. The Company’s carrying value in Deca was $61.6 million and $65.1 million as of March 31, 2019 and December 30, 2018, respectively.

The Company held 52.5% of Deca's outstanding voting shares as of March 31, 2019 and December 30, 2018. The Company's investment in Deca is accounted for as an equity method investment.

The below table presents the changes in carrying value of the equity method investment related to Deca.

15




 
 
As of March 31, 2019
 
 
Deca Technologies Inc.
 
 
(In thousands)
Carrying value as of December 30, 2018
 
$
65,145

Share in net loss of equity method investee
 
(3,590
)
Carrying value as of March 31, 2019
 
$
61,555


The following table presents summarized aggregate financial information derived from the respective consolidated financial statements of Deca for the three months ended March 31, 2019 and April 1, 2018, respectively.
 
 
March 31, 2019
 
April 1, 2018
 
 
(In thousands)
Operating data:
 
 
 
 
  Revenue
 
$
4,621

 
$
4,149

  Gross loss
 
(1,926
)
 
(2,322
)
  Loss from operations
 
(6,462
)
 
(6,749
)
  Net loss
 
(6,843
)
 
(6,640
)
  Net loss attributable to Cypress
 
$
(3,590
)
 
$
(3,461
)

The following table represents the assets and liabilities held by Deca as of March 31, 2019 and December 30, 2018.

 
 
March 31, 2019
 
December 30, 2018
 
 
(In thousands)
Balance Sheet Data:
 
 
 
 
  Current assets
 
$
19,727

 
$
25,865

  Long-term assets
 
49,297

 
51,176

  Current liabilities
 
8,400

 
9,635

  Long-term liabilities
 
$
904

 
$
877


NOTE 7. FAIR VALUE MEASUREMENTS
Assets/Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the fair value hierarchy for the Company's financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 30, 2018:
 

16




 
March 31, 2019
 
December 30, 2018
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
 
(In thousands)
Financial Assets
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents:
 

 
 

 
 

 
 

 
 

 
 

Money market funds 
$
188,613

 
$

 
$
188,613

 
$
171,777

 
$

 
$
171,777

Other current assets:
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit

 
870

 
870

 

 
870

 
870

Total cash equivalents other current assets
188,613

 
870

 
189,483

 
171,777

 
870

 
172,647

Employee deferred compensation plan assets
16,375

 
27,357

 
43,732

 
18,648

 
25,749

 
44,397

Interest rate swap

 
802

 
802

 

 
2,548

 
2,548

Foreign exchange forward contracts

 
1,646

 
1,646

 

 
2,362

 
2,362

Total financial assets
$
204,988

 
$
30,675

 
$
235,663

 
$
190,425

 
$
31,529

 
$
221,954

Financial Liabilities
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange forward contracts

 
2,017

 
2,017

 

 
1,621

 
1,621

 Interest rate swap

 
7,795

 
7,795

 

 
4,051

 
4,051

Total financial liabilities
$

 
$
9,812

 
$
9,812

 
$

 
$
5,672

 
$
5,672

 
The Company did not have any material assets or liabilities measured at fair value on a recurring basis using Level 3 inputs as of March 31, 2019 and December 30, 2018.  

Valuation Techniques:
There have been no changes to the valuation techniques used to measure the fair value of the Company's assets and liabilities. For a description of the valuation techniques, refer to Note 8 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 30, 2018.
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain of the Company’s assets, including intangible assets, goodwill and assets held for sale, are measured at fair value on a nonrecurring basis using Level 3 inputs if impairment is indicated.

Fair Value of Long-Term Debt
As of March 31, 2019, the carrying value of the Company's senior secured credit facility was $442.5 million (See Note 10). The carrying value of the Company's senior secured credit facility approximates its fair value since it bears an interest rate that is comparable to rates on similar credit facilities and is determined using Level 2 inputs.
The Company's 2% 2020 Spansion Exchangeable Notes assumed as part of the Company's merger with Spansion Inc. ("Spansion") are traded in the secondary market for debt instruments and are categorized as Level 2 inputs. The principal and the estimated fair value of the principal of these notes as of March 31, 2019 were $12.0 million and $37.6 million, respectively. See Note 10 for further details.
The Company’s 4.5% 2022 Senior Exchangeable Notes are traded in the secondary market for debt instruments and the fair value is determined using Level 2 inputs. The principal and the estimated fair value of the principal of these notes as of March 31, 2019 were $287.5 million and $363.3 million, respectively.  See Note 10 for further details.
The Company's 2% 2023 Exchangeable Notes are traded in the secondary market and the fair value is determined using Level 2 inputs. The principal and the estimated fair value of the principal of these notes as of March 31, 2019 were $150.0 million and $152.7 million, respectively. See Note 10 for further details.
  
NOTE 8. RESTRUCTURING

Since 2016, the Company has launched certain long-term strategic corporate transformation initiatives which required restructuring activities to streamline internal processes and redeploy personnel and resources to target markets as discussed below:

17





2018 Restructuring Plan
In fiscal 2018, the Company began implementation of a reduction in workforce (the "2018 Plan") which resulted in the elimination of approximately 130 positions across various functions. The Company anticipates that the remaining restructuring accrual balance of $0.1 million will be paid out in cash through the second quarter of fiscal 2019.

2017 Restructuring Plan
In December 2017, the Company began implementation of a reduction in workforce (the "2017 Plan") which resulted in the elimination of approximately 80 positions worldwide across various functions. The restructuring accrual has been fully settled in the first quarter of fiscal 2019.

Spansion Integration-Related Restructuring Plan ("Spansion Integration Plan")

In March 2015, the Company began implementation of cost reduction and restructuring activities in connection with its merger with Spansion. The restructuring charge of $90.1 million recorded for the fiscal year ended January 3, 2016 primarily consists of severance costs, lease termination costs and impairment of property, plant and equipment.

As part of this restructuring plan, the Company exited an office space leased by Spansion and recorded a reserve related to excess lease obligation for the building. During the fourth quarter of fiscal 2018, the Company signed a termination agreement with the building’s owner. The lease termination cost was approximately $19.0 million. The Company paid $4.7 million during the fiscal 2018 and paid the remaining $14.3 million during the first quarter of fiscal 2019.

Summary of Restructuring Costs
The following table summarizes the restructuring charges recorded in the Consolidated Statements of Operations:
 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
 
(In thousands)
Personnel costs
$
7

 
$
4,096

Lease termination costs
89

 

Total restructuring costs
$
96

 
$
4,096


The following table summarizes the restructuring costs by line item recorded in the Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
 
(In thousands)
Cost of goods sold
$

 
$
1,887

Research and development

 
293

Selling, general and administrative
96

 
1,916

Total restructuring costs
$
96

 
$
4,096


Roll-Forward of the Restructuring Reserves
Restructuring activity under the Company's restructuring plans was as follows:
 

18




 
(In thousands)
 
2018 Plan
 
2017 Plan
 
Spansion Integration Plan
 
Total
Accrued restructuring balance as of December 30, 2018
$
248

 
$
30

 
$
14,258

 
$
14,536

Provision
7

 

 
89

 
96

Cash payments and other adjustments
(144
)
 
(30
)
 
(14,347
)
 
(14,521
)
Accrued restructuring balance as of March 31, 2019
$
111

 
$

 
$

 
$
111

Current portion of the restructuring accrual
$
111

 
$

 
$

 
$
111



NOTE 9. EMPLOYEE STOCK PLANS AND STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation expense by line item recorded in the Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
 
(In thousands)
Cost of revenues
$
2,684

 
$
3,584

Research and development
6,680

 
6,713

Selling, general and administrative
11,031

 
8,161

Total stock-based compensation expense
$
20,395

 
$
18,458

 
As of March 31, 2019 and December 30, 2018, stock-based compensation capitalized in inventory totaled $2.6 million and $2.5 million, respectively.
The following table summarizes the stock-based compensation expense by type of awards:
 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
 
(In thousands)
Stock options
$

 
$
96

Restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs")
18,638

 
17,249

Employee Stock Purchase Plan (“ESPP”)
1,757

 
1,113

Total stock-based compensation expense
$
20,395

 
$
18,458

 
The following table summarizes the unrecognized stock-based compensation balance, by type of award as of March 31, 2019:
 
 
 
Weighted-
Average
Amortization
Period
 
(In thousands)
 
(In years)
RSUs and PSUs
$
128,091

 
1.56
ESPP
1,748

 
0.24
Total unrecognized stock-based compensation expense
$
129,839

 
1.54


19




Equity Incentive Program
As of March 31, 2019, approximately 29.8 million stock options, or 16.0 million RSUs and PSUs, were available for grant as stock-based awards under the 2013 Stock Plan, the 2010 Equity Incentive Award Plan and the 2012 Incentive Award Plan.  As of March 31, 2019, there were 7.9 million shares of stock available for issuance under the ESPP plan.

Stock Options
The following table summarizes the Company's stock option activities: 
 
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted Average Remaining Contractual term
 
Aggregate Intrinsic Value
 
(In thousands, except
per-share amounts)
 
(In years)
 
($ in millions)
Options outstanding as of December 30, 2018
2,639

 
$
11.75

 
 
 
 

Exercised
(379
)
 
$
8.14

 
 
 
 

Forfeited or expired
(66
)
 
$
21.59

 
 
 
 

Options outstanding as of March 31, 2019
2,194

 
$
12.07

 
1.94
 
$
7.3

Options exercisable as of March 31, 2019
2,182

 
$
12.08

 
1.93
 
$
7.2

 
No options were granted during the three months ended March 31, 2019 and April 1, 2018.

RSUs and PSUs
The following table summarizes the Company's RSU and PSU activities:
 
 
Shares
 
Weighted-
Average
Grant
Date Fair
Value Per
Share
 
(In thousands, except
per-share amounts)
Balance as of December 30, 2018
10,175

 
$
14.42

Granted
6,026

 
15.08

Released
(2,437
)
 
14.38

Forfeited
(172
)
 
12.80

Balance as of March 31, 2019
13,592

 
$
14.64

 
2019 Long-Term Incentive Program
During the first quarter of 2019, the Compensation Committee of the Company's Board of Directors approved the issuance of service-based and performance-based restricted stock units under the Company's Long-Term Incentive Program ("LTIP") to certain employees. The performance goals for the performance-based 2019 LTIP grants relate to non-GAAP operating margin and achievement of our customer experience plan milestones for fiscal 2019 and include a multiplier based on our total stockholder return relative to an index.

Dividend
On February 19, 2019, the Company's Board of Directors approved a cash dividend of $0.11 per share payable to holders of record of its common stock at the close of the business day on March 28, 2019. This cash dividend was paid on April 18, 2019 and totaled $40.1 million which was accrued for and shown as "Dividends payable" on the Condensed Consolidated Balance Sheets as of March 31, 2019.


20




NOTE 10. DEBT
 
Total debt, including finance lease obligations, is comprised of the following as of March 31, 2019 and December 30, 2018:
 
 
 
March 31, 2019
 
December 30, 2018
 
 
(In thousands)
Current portion of long-term debt
 
 

 
 

Senior Secured Credit Facility:
 
 
 
 
Term Loan B
 
$
6,314

 
$
5,051

Finance lease obligations
 
1,724

 
1,892

Current portion of long-term debt
 
8,038

 
6,943

Revolving credit facility and long-term portion of debt
 
 

 
 

Senior Secured Credit Facility:
 
 
 
 
Revolving Credit Facility
 

 

Term Loan B
 
436,221

 
462,868

2% 2020 Spansion Exchangeable Notes
 
11,520

 
11,438

4.5% 2022 Senior Exchangeable Notes
 
259,283

 
256,726

2% 2023 Exchangeable Notes
 
135,968

 
135,057

Finance lease obligations
 
8,287

 
8,146

Credit facility, finance lease obligations, and long-term debt
 
851,279

 
874,235

Total debt
 
$
859,317

 
$
881,178


As of March 31, 2019, the Company was in compliance with all of the financial covenants under all of its debt facilities.

Senior Secured Credit Facility: Revolving Credit Facility and Term Loan B
On March 18, 2019, the Company repaid $25.0 million of the outstanding Term Loan B principal in addition to the scheduled quarterly principal payment of $1.3 million.

Interest expense related to the contractual interest expense, the amortization of the debt issuance costs and the amortization of debt discounts was $6.9 million and $11.3 million during the fiscal quarter ended March 31, 2019 and April 1, 2018, respectively.

As of March 31, 2019 and December 30, 2018, $450.0 million and $476.3 million aggregate principal amount of loans, which is related to Term Loan B, is outstanding under the Credit Facility, respectively.

2% 2020 Spansion Exchangeable Notes
Pursuant to the merger with Spansion, Cypress assumed Spansion's 2% 2020 Spansion Exchangeable Notes (the "Spansion Notes"). The Spansion Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Company. The Spansion Notes will mature on September 1, 2020, unless earlier repurchased or converted, and bear interest of 2% per year payable semi-annually in arrears on March 1 and September 1. The Spansion Notes may be due and payable immediately upon certain events of default.

The Spansion Notes consisted of the following as of March 31, 2019 and December 30, 2018 (in thousands):
 
 
March 31, 2019
 
December 30, 2018
Equity component
$
22,971

 
$
22,971

Liability component:


 

Principal
11,990

 
11,990

Less debt discount and debt issuance costs, net
(470
)
 
(552
)
Net carrying amount
$
11,520

 
$
11,438

 
The following table summarizes the components of the total interest expenses on the Spansion Notes recognized during the three months ended March 31, 2019 and April 1, 2018 (in thousands):

21




 
 
 
March 31, 2019
 
April 1, 2018
Contractual interest expense at 2% per annum
 
$
61

 
$
43

Accretion of debt discount
 
82

 
59

Total
 
$
143

 
$
102


 4.5% 2022 Exchangeable Notes
On June 23, 2016, the Company issued, at face value, $287.5 million of Senior Exchangeable Notes due in 2022 (the "2022 Notes") in a private placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended.
 
The 2022 Notes consisted of the following as of March 31, 2019 and December 30, 2018 (in thousands):
 
 
March 31, 2019
 
December 30, 2018
Equity component
$
47,686

 
$
47,686

Liability component:


 

Principal
287,500

 
287,500

Less debt discount and debt issuance costs, net
(28,217
)
 
(30,774
)
Net carrying amount
$
259,283

 
$
256,726


The following table includes total interest expense related to the 4.5% 2022 Senior Exchangeable Notes recognized during the first quarter ended March 31, 2019 and April 1, 2018, respectively (in thousands):
 
 
 
March 31, 2019
 
April 1, 2018
Contractual interest expense
 
$
3,270

 
$
3,234

Amortization of debt issuance costs
 
324

 
320

Accretion of debt discount
 
2,233

 
2,209

Total
 
$
5,827

 
$
5,763

 
Capped Calls
In connection with the issuance of the 2022 Notes, the Company entered into capped call transactions with certain bank counterparties to reduce the risk of potential dilution of the Company’s common stock upon the exchange of the 2022 Notes. The capped call transactions have an initial strike price of approximately $13.49 and an initial cap price of approximately $15.27, in each case, subject to adjustment. The capped calls expire in January 2022.
 
2% 2023 Exchangeable Notes
On November 6, 2017, the Company, issued at face value, $150.0 million of Senior Exchangeable Notes due in 2023 (the "2023 Notes") in a private placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended.

The 2% 2023 Exchangeable Notes consisted of the following as of March 31, 2019 and December 30, 2018 (in thousands):

 
March 31, 2019
 
December 30, 2018
Equity component
 
$
15,028

 
$
15,028

Liability component:
 

 

Principal
 
150,000

 
150,000

Less debt discount and debt issuance costs, net
 
(14,032
)
 
(14,943
)
Net carrying amount
 
$
135,968

 
$
135,057



22




The following table includes total interest expense related to the 2% 2023 Exchangeable Notes recognized during the first quarter ended March 31, 2019 and April 1, 2018 (in thousands):
 
 
March 31, 2019
 
April 1, 2018
Contractual interest expense
 
$
748

 
$
748

Amortization of debt issuance costs
 
175

 
175

Accretion of debt discount
 
736

 
735

Total
 
$
1,659

 
$
1,658


Future Debt Payments
The future scheduled principal payments for the Company's outstanding debt as of March 31, 2019, were as follows (in thousands):
Fiscal Year
 
Total
2019 (remaining nine months)
 
$
3,788

2020
 
17,041

2021
 
441,209

2022
 
287,500

2023
 
150,000

Thereafter
 

Total (excluding finance leases)
 
$
899,538

Finance lease liabilities
 
10,011

Total debt
 
$
909,549



23




NOTE 11. LEASES
The Company has operating and finance leases for corporate offices, research and development facilities, and certain equipment. The Company's leases have remaining lease terms of 1 year to 8 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within the lease terms.

Supplemental balance sheet information related to leases was as follows (in thousands):
 
As of
 
March 31, 2019
Finance Leases
 
Property and equipment, at cost
$
9,108

Accumulated depreciation
(636
)
    Property and equipment, net
$
8,472

 
 
Current portion of long-term debt
$
1,724

Revolving credit facility and long-term portion of debt
8,287

    Total finance lease liabilities
$
10,011

 
 
Operating Leases
 
   Operating lease right-of-use assets
$
45,860

Other current liabilities
11,285

Other long-term liabilities
35,886

    Total operating lease liabilities
$
47,171


The component of lease costs was as follows (in thousands):
 
March 31, 2019
Lease cost
 
Finance lease cost
$
410

Amortization of right-of-use assets
413

Interest on lease liabilities
102

Operating lease cost
3,370

Short term lease cost
338

Variable lease cost
559

Total lease cost
$
5,192



24




Other information related to leases were as follows (in thousands):
 
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
    Operating cash flows from finance leases
$
101

    Operating cash flows from operating leases
$
3,402

    Financing cash flows from finance leases
$
388

Right-of-use assets obtained in exchange for new finance lease liabilities

Right-of-use assets obtained in exchange for new operating lease liabilities

Weighted-average remaining lease term:
 
    Finance leases
5.68

    Operating leases
5.72

Weighted-average discount rate:
 
    Finance leases
3.97
%
    Operating leases
6.91
%
As of March 31, 2019, the maturities of the Company's operating lease liabilities are as follows:
 
Operating lease liabilities
Finance lease liabilities
Fiscal Year
(In thousands)
2019 (remaining nine months)
$
10,512

$
1,578

2020
13,895

2,062

2021
7,262

2,083

2022
5,699

2,085

2023
4,537

1,963

2024 and thereafter
17,977

1,384

Total undiscounted future cash flows
$
59,882

$
11,155

Less: Imputed interest
$
12,711

$
1,144

Present value of undiscounted future cash flows
$
47,171

$
10,011

 
 
 
Presentation on statement of financial position
 
 
Current
$
11,285

$
1,724

Non-current
$
35,886

$
8,287


ASC 840 Disclosures

As of December 30, 2018, future minimum lease payments under non-cancelable operating leases were as follows:
Fiscal Year
(In thousands)
2019
$
29,315

2020
12,860

2021
8,176

2022
6,241

2023
2,476

Thereafter
3,808

Total
$
62,876


NOTE 12. COMMITMENTS AND CONTINGENCIES
 
Product Warranties

25




The Company generally warrants its products against defects in materials and workmanship for a period of one year, and that product warranty is generally limited to a refund of the original purchase price of the product or a replacement part. The Company estimates its warranty costs based upon its historical warranty claim experience. Warranty returns are recorded as an allowance for sales returns. The allowance for sales returns is reviewed quarterly to verify that it reflects the remaining obligations based on the anticipated returns over the balance of the obligation period.
The following table presents the Company's warranty reserve activities:
 
 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
 
(In thousands)
Beginning balance
$
3,982

 
$
4,445

Settlements made
(1,754
)
 
(1,948
)
Provisions
1,327

 
1,948

Ending balance
$
3,555

 
$
4,445

Contractual Obligations
The Company has entered into agreements with certain vendors that include "take or pay" terms. Take or pay terms obligate the Company to purchase a minimum required amount of materials or services or make specified payments in lieu of such purchase. The Company may not be able to consume minimum commitments under these take or pay terms, requiring payments to vendors, which may have a material adverse impact on the Company’s earnings.

Litigation and Asserted Claims

The Company is currently involved in various legal proceedings, claims, and disputes arising in the ordinary course of business, including intellectual property claims and other matters.

For many legal matters, particularly those in early stages, the Company cannot reasonably estimate the possible loss (or range of loss), if any. The Company records an accrual for legal matters at the time or times it determines that a loss is both probable and reasonably estimable. Amounts accrued as of March 31, 2019 were not material. Regarding matters for which no accrual has been made (including the potential for losses in excess of amounts accrued), the Company currently believes, based on its own investigations, that any losses (or ranges of losses) that are reasonably possible and estimable will not, in the aggregate, have a material adverse effect on its financial position, results of operations, or cash flows. However, the ultimate outcome of legal proceedings involves judgments, estimates, and inherent uncertainties and cannot be predicted with certainty. Should the ultimate outcome of any legal matter be unfavorable, the Company's business, financial condition, results of operations, or cash flows could be materially and adversely affected. The Company may also incur substantial legal fees, which are expensed as incurred, in defending against legal claims.

Indemnification Obligations
The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify other parties to such agreements with respect to certain matters. Typically, these obligations arise in the context of contracts that the Company has entered into, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants or terms and conditions related to such matters as the sale and/or delivery of its products, title to assets sold, certain intellectual property claims, defective products, specified environmental matters and certain income taxes. With respect to the sale of a manufacturing facility or subsidiary business, such indemnification may also cover tax matters and the Company's management of the facility or business prior to the sale. In the foregoing circumstances, payment by the Company is customarily conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims and vigorously defend itself and the other party against related third-party claims. Further, the Company's obligations under these agreements may be limited in terms of time, amount or the scope of its responsibility and in some instances, the Company may have recourse against third parties for certain payments made under these agreements.
It is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments the Company has made under these agreements have not had a material effect on the Company’s business, financial

26




condition or results of operations. As of March 31, 2019, management believes that if the Company were to incur a loss (in excess of amounts already recognized) in any of these matters, such loss would not have a material effect on its business, financial condition, cash flows or results of operations, though there can be no assurance in this regard.

NOTE 13. FOREIGN CURRENCY AND INTEREST RATE DERIVATIVES

The Company enters into multiple foreign exchange forward contracts to hedge certain foreign currency risk resulting from fluctuations in Japanese yen (¥) and Euro (€) exchange rates. In addition, the Company entered into fixed-for-interest rate forward swap agreements and has designated these swaps as hedging instruments. The Company does not enter into derivative securities for speculative purposes. The Company’s hedging policy is designed to mitigate the impact of foreign currency exchange rate fluctuations on its operating results. Some foreign currency forward contracts are considered to be economic hedges that were not designated as hedging instruments while others were designated as cash flow hedges. Whether designated or undesignated as cash flow hedges or not, these forward contracts protect the Company against the variability of forecasted foreign currency cash flows resulting from revenues, expenses and net asset or liability positions designated in currencies other than the U.S. dollar. The maximum original duration of any contract allowable under the Company’s hedging policy is thirteen months for foreign currency hedging contracts.

Cash Flow Hedges
The Company enters into cash flow hedges to protect non-functional currency inventory purchases and certain other operational expenses, in addition to its ongoing program of cash flow hedges to protect its non-functional currency revenues against variability in cash flows due to foreign currency fluctuations. The Company’s foreign currency forward contracts that were designated as cash flow hedges generally have maturities between three and thirteen months. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions at the inception of the hedge. The Company recognizes derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measures them at fair value on a monthly basis. The Company records changes in the intrinsic value of its cash flow hedges in accumulated other comprehensive income on the Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. Prior to the second quarter of 2018, interest charges or "forward points" on the forward contracts are excluded from the assessment of hedge effectiveness and were recorded in interest and other income, net in the Condensed Consolidated Statements of Operations. In the second quarter of 2018, the Company entered into cash flow hedges, in which interest charges or "forward points" on the forward contracts are included in the assessment of hedge effectiveness, and are recorded in the underlying hedged items in the Condensed Consolidated Statements of Operations. When the forecasted transaction occurs, the Company reclassifies the related gain or loss on the cash flow hedge to revenue or costs, depending on the risk hedged. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company will reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income, net in its Condensed Consolidated Statements of Operations at that time. For the three months ended March 31, 2019 and April 1, 2018, the Company had a loss of $0.8 million and a gain of $0.9 million, which was related to cash flow hedges, recorded in other comprehensive income, respectively.

The Company evaluates hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and records any ineffective portion of the hedge in other income, net in its Condensed Consolidated Statements of Operations.

Designated Hedges
Total notional amounts of net outstanding contracts were as summarized below:
Buy / Sell
 
March 31, 2019
December 30, 2018
 
 
(In millions)
U.S. dollar / Japanese Yen
 
$47.7 / ¥5,120
$44.5 / ¥4,850
Japanese Yen / U.S. dollar
 
¥9,277 / $85.9
¥10,827 / $98.8

Non-designated hedges
Total notional amounts of net outstanding contracts were as summarized below:
 
Buy / Sell
 
March 31, 2019
December 30, 2018
 
 
(In millions)
U.S. dollar / EUR
 
$3.2/ €2.8
$9.1 / €8.0
U.S. dollar / Japanese Yen
 
$12.4 / ¥1,350
$13.2 / ¥1,430
Japanese Yen / U.S. dollar
 
¥4,840 / $44.0
¥4,210 / $38.0
 
In December 2017, the Company entered into fixed-for-floating interest rate forward swap agreements starting April 2018 with two counterparties to swap future variable interest payments on certain debt for fixed interest payments; these agreements will

27




expire in July 2021. The objective of the swaps was to effectively fix the interest rate at current levels without having to refinance the outstanding term loan, thereby avoiding the incurrence of transaction costs. The interest rate on the variable debt was fixed in December 2017 and became effective in April 2018.

On January 3, 2018, the Company evaluated the hedge effectiveness of the interest rate swaps and designated these swaps as hedging instruments. Upon designation as cash flow hedge instruments, future changes in fair value of these swaps are recognized in accumulated other comprehensive income (loss).

In October 2018, the Company entered into fixed-for-floating interest rate forward swap agreements starting in July 2021 with two counterparties to swap future variable interest payments on existing debt for fixed interest payments; these agreements will expire in December 2024. The objective of the swaps was to effectively fix the future interest rate at the level currently available to avoid the uncertainty in financing cost for a portion of debt due to future interest rate fluctuations. The aggregate notional amount of these interest rate swaps was $300 million. The Company has evaluated the hedge effectiveness of the interest rate swaps and has designated these swaps as cash flow hedges of the debt with future changes in fair value of these swaps to be recognized in accumulated other comprehensive income (loss).

For the three months ended March 31, 2019, the Company has recognized a loss in other comprehensive income of $7.1 million for these interest rate swaps.

The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 was as follows:
 
 
Three Months Ended
 
 
March 31, 2019
 
 
(In thousands)
 
 
Revenue
 
Cost of Goods Sold
 
Operating Expenses
 
Interest Expense
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value and cash flow hedges are recorded
 
539,004

 
336,595

 
170,593

 
13,579

 
 
 
 
 
 
 
 
 
Gain or (loss) on cash flow hedge relationships in Subtopic ASC 815-20:
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
Amount of gain or (loss) reclassified from AOCI into income
 

 

 

 
414

Foreign exchange contracts
 
 
 
 
 
 
 
 
Amount of gain or (loss) reclassified from AOCI into income
 
173

 
(127
)
 
42

 


The gross fair values of derivative instruments on the Condensed Consolidated Balance Sheets as of March 31, 2019 and December 30, 2018 were as follows:

28




 
 
March 31, 2019
 
December 30, 2018
Balance Sheet location
 
Derivatives designated as hedging instruments
 
Derivatives not designated as hedging instruments
 
Derivatives designated as hedging instruments
 
Derivatives not designated as hedging instruments
 
 
(In thousands)
Other Current Assets
 
 

 
 

 
 

 
 

Derivative Asset
 
$
2,096

 
$
352

 
$
2,767

 
$
725

 
 
 
 
 
 
 
 
 
Non-Current Assets
 
 
 
 
 
 
 
 
Derivative Asset
 
$