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CY > SEC Filings for CY > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for CYPRESS SEMICONDUCTOR CORP /DE/

Form 10-Q for CYPRESS SEMICONDUCTOR CORP /DE/


2-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, which are discussed in the "Forward-Looking Statements" section under Part I of this Quarterly Report on Form 10-Q. As more fully detailed in the "Subsequent Events" section of the notes to condensed consolidated financial statements of this Quarterly Report, on October 10, 2012, we acquired a controlling interest in Ramtron International Corporation ("Ramtron"). We have entered into a merger agreement, pursuant to which we have agreed to purchase the remaining outstanding shares of common stock for a cash purchase price of $3.10 per share. We expect to close on the Ramtron acquisition on or about November 20, 2012. For clarity, despite our majority ownership in Ramtron, aside from transaction costs incurred, the management's discussion, analysis and financial results to follow do not reflect or incorporate Ramtron's financial results of operations for the third quarter of 2012 or operations going forward. Please see Ramtron's Quarterly Report on Form 10Q for further information.

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. Our offerings include the flagship PSoC ® families and derivatives such as CapSense® touch sensing and TrueTouch™ solutions for touchscreens. We are the world leader in USB controllers, including the high-performance West Bridge ® solution that enhances connectivity and performance in multimedia handsets. In addition we are the industry leader in the high-performance SRAM memory market and a market leader in programmable timing devices. We serve numerous markets including consumer, mobile handsets, computation, data communications, automotive, industrial and military. Cypress programmable products can be found in a wide array of the world's leading end products, including cell phones, tablets, PCs and PC peripherals, audio and gaming devices, household appliances, and communications devices.

As discussed in Note 14 of Notes to Condensed Consolidated Financial Statements under Part I, Item 1-Financial Statements, we have realigned our business segments as outlined below.

           Business Segments                            Description

MPD: Memory Products Division              An existing division that will
                                           continue to focus on our four SRAM
                                           business units, general-purpose
                                           programmable clocks and process
                                           technology licensing.

DCD: Data Communications Division          An existing division realigned to
                                           focus solely on USB controllers,
                                           WirelessUSB™ and West Bridge®
                                           peripheral controllers for handsets,
                                           PCs and tablets.

PSD: Programmable Systems Division         A new 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) PSoC-based
                                           module solutions including Trackpad
                                           and Ovation™ Optical Navigation
                                           Sensors (ONS); (4) automotive
                                           products; and (5) certain legacy
                                           product lines.

ETD: Emerging Technologies Division        Our "startup" division, which includes
                                           Cypress Envirosystems, AgigA Tech Inc.
                                           and Deca Technologies Inc., all
                                           majority-owned subsidiaries of
                                           Cypress. ETD also includes our foundry
                                           business and other development-stage
                                           activities.

Manufacturing Strategy

Our core manufacturing strategy-"flexible manufacturing"-combines capacity from foundries with output from our internal manufacturing facilities. This initiative 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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Results of Operations

Revenues

The following table summarizes our consolidated revenues by segments under the
new reporting structure:



                                             Three Months Ended                      Nine Months Ended
                                       September 30,        October 2,        September 30,        October 2,
                                           2012                2011               2012                2011
                                                                   (In thousands)
Programmable Systems Division         $        93,634      $    131,644      $       271,285      $    350,526
Memory Products Division                       88,254           102,474              253,082           304,742
Data Communications Division                   18,809            28,881               59,163            93,896
Emerging Technologies Division                  2,318             1,744                5,874             3,668

Total Revenues                        $       203,015      $    264,743      $       589,404      $    752,832

Programmable Systems Division:

Revenues from the Programmable Systems Division decreased by $38.0 million in the third quarter of fiscal 2012 and $79.2 million in the first three quarters of fiscal 2012, or approximately 28.9% and 22.6%, respectively, compared to the same prior-year periods. These decreases were primarily attributable to a decline in sales of our PSoC platform family of devices and a decline in sales of our TrueTouch® touchscreen products. The decrease in our TrueTouch ® revenue stream was primarily due to a decrease in revenue from our handset and tablet customers and lower average selling prices.

Memory Products Division:

Revenues from the Memory Products Division decreased by approximately $14.2 million in the third quarter of fiscal 2012 and $51.7 million in the first three quarters of fiscal 2012, or approximately 13.9% and 17.0%, respectively, compared to the same prior-year periods. The decrease in MPD revenue in the third quarter of fiscal 2012 and the first three quarters of fiscal 2012 was primarily attributable to a $16.2 million and $38.9 million decrease in revenue of our SRAM products driven by the decreased demand from wireless and wireline end customers, a $7.6 million decrease in revenue due to the divestiture of our Image Sensors business unit during the three months ended April 3, 2011.

Data Communications Division:

Revenues from the Data Communications Division decreased by $10.1 million in the third quarter of fiscal 2012 and $34.7 million in the first three quarters of fiscal 2012, or approximately 34.9% and 37.0%, respectively, compared to the same prior-year periods primarily due to the decreases in sales of our West Bridge controllers and other USB-related products.

Emerging Technologies Division:

Revenues from Emerging Technologies Division increased by $0.6 million in the third quarter of fiscal 2012 and $2.2 million in the first three quarters of fiscal 2012, respectively, compared to the same prior-year periods primarily due to the overall increase in demand as certain of our Emerging Technologies have begun initial production ramps.

Cost of Revenues/Gross Margins



                           Three Months Ended                      Nine Months Ended
                     September 30,        October 2,        September 30,        October 2,
                         2012                2011               2012                2011
                                                 (In thousands)
 Cost of revenues   $        92,959      $    115,789      $       280,798      $    336,081
 Gross Margin                  54.2 %            56.3 %               52.4 %            55.4 %

Gross margin percentage decreased to 54.2% in the third quarter of fiscal 2012 from 56.3% in the third quarter of fiscal 2011 and decreased to 52.4% in the first three quarters of fiscal 2012 from 55.4% in the first three quarters of fiscal 2011. In the third quarter of fiscal 2012 gross margin decreased by 2.1 percentage points compared to the third quarter of fiscal 2011 primarily due to product mix and lower fixed cost absorption in our factories.

In the first three quarters of fiscal 2012 gross margin decreased by 3.0 percentage points compared to the first three quarters of fiscal 2011 primarily due to (i) $7.5 million patent license fee recorded during the first three quarters of fiscal 2012 related to a Patent


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License Agreement discussed in Note 8 of Notes to Condensed Consolidated Financial Statements under Part I, Item 1 and (ii) the impact of the negative gross margins of our majority-owned subsidiaries (i.e., Emerging Technologies), particularly Deca Technologies, Inc. which has commenced revenue generating activities during the first three quarters of fiscal 2012.

Research and Development ("R&D") Expenses

                                             Three Months Ended                           Nine Months Ended
                                      September 30,           October 2,          September 30,          October 2,
                                          2012                   2011                 2012                  2011
                                                                     (In thousands)
R&D expenses                        $          46,908        $     46,266        $       142,822        $    143,409
As a percentage of revenues                      23.1 %              17.5 %                 24.2 %              19.0 %

R&D expenditures increased by $0.6 million in the third quarter of fiscal 2012 compared to the same prior-year period. The decrease was primarily attributable to a decrease in variable bonus-related expenses of $2.3 million. These decreases were partially offset by a $1.6 million expense recorded for the increase in value of deferred compensation plan. As a percentage of revenues, R&D expenses were higher in the third quarter of fiscal 2012 driven by the decrease in total revenues in the same quarter.

R&D expenditures decreased by $0.6 million in the first three quarters of fiscal 2012 compared to the same prior-year period. The decrease was primarily attributable to a decrease in direct and indirect labor expenses, particularly variable bonus-related expenses. As a percentage of revenues, R&D expenses were higher in the first three quarters of fiscal 2012 driven by the decrease in total revenues in the same period.

Our future operating results depend to a considerable extent on our ability to maintain a competitive advantage. Our 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 and investments in new products for our Emerging Technologies Division. Our goal is to increase efficiency in order to maintain our competitive advantage. We continue to make substantial investments in R&D to ensure the availability of innovative products that meet the current and projected requirements of our customers' most advanced designs.

Selling, General and Administrative ("SG&A") Expenses

                                             Three Months Ended                           Nine Months Ended
                                      September 30,           October 2,          September 30,          October 2,
                                          2012                   2011                 2012                  2011
                                                                     (In thousands)
SG&A expenses                       $          47,328        $     55,453        $       159,776        $    172,587
As a percentage of revenues                      23.3 %              20.9 %                 27.1 %              22.9 %

SG&A expenses decreased by $8.1 million in the third quarter of fiscal 2012 compared to the same prior-year period. The decrease was primarily attributable to a $7.4 million decrease in stock-based compensation and a $6.2 million decrease in direct and indirect labor expenses, particularly $2.1 in variable bonus-related expenses. These decreases were partially offset by an increase of $3.4 million expenses related to an increase in value of the deferred compensation plan.

SG&A expenses decreased by $12.8 million in the first three quarters of fiscal 2012 compared to the same prior-year period. The decrease was primarily attributable to $10.0 million decrease in direct and indirect labor expenses, particularly a $5.6 million decrease in variable bonus-related expenses and a $5.6 million decrease in stock-based compensation due to lower stock price. These direct and indirect labor costs were partially offset by an increase of $3.6 million expenses related to increase in value of deferred compensation plan


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Gain on Divestiture

As part of our continued efforts to focus on programmable products including our flagship PSoC ® programmable system-on-chip solutions and our TrueTouch™ touch-sensing controllers, we divested our image sensors product families by selling them to ON Semiconductor Corporation for a total cash consideration of $34.0 million during the three months ended April 3, 2011. In connection with the divestiture, we recorded a gain of $34.3 million in our Condensed Consolidated Statement of Operations for the three months ended April 3, 2011. We did not have any divestitures during the nine months ended September 30, 2012.

Income Taxes

Our income tax benefit was $0.2 million for the three months ended September 30, 2012 and tax expense was $4.1 million for the three months ended October 2, 2011. Our income tax expense was $2.7 million and our tax benefit was $9.0 million for the nine months ended September 30, 2012 and October 2, 2011, respectively. The tax provision for the third quarter of fiscal 2012 and first nine months of fiscal 2012 was primarily attributable to non-U.S. taxes on income earned in foreign jurisdictions, partially offset by release of previously accrued income taxes due to expired statute of limitations in foreign jurisdictions and an operating tax benefit due to tax expense recorded in other comprehensive income. The tax expense for the third quarter and the tax benefit for the first nine months of fiscal 2011 was primarily attributable to a release of previously accrued taxes and interest of $18.4 million due to the completion of an income tax examination, and expired statutes of limitations in foreign jurisdictions, partially offset by non-U.S. taxes on income earned in foreign jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes information regarding our cash and investments
and working capital:



                                                                     As of
                                                 September 30, 2012            January 1, 2012
                                                                (In thousands)
Cash and cash equivalents                       $            162,329          $          99,717
Short-term investments                                        57,116                     66,613

Total cash, cash equivalents and
short-term investments                          $            219,445          $         166,330


Total current assets                            $            482,929          $         405,650
Total current liabilities                                    362,904                    326,460

Working capital                                 $            120,025          $          79,190

Key Components of Cash Flows



                                                              Nine Months Ended
                                                September 30, 2012             October 2, 2011
                                                                (In thousands)
Net cash provided by operating
activities                                     $            117,695           $         218,327
Net cash provided by (used in)
investing activities                           $            (17,474 )         $          67,369
Net cash used in financing activities          $            (37,609 )         $        (484,619 )

Nine Months Ended September 30, 2012:

During the nine months ended September 30, 2012, cash and cash equivalents increased by approximately $62.6 million primarily due to the cash we generated from our operating activities of approximately $117.7 million. This increase was partially offset by the $55.1 million cash we used in our financing and investing activities, primarily related to the repurchase of our common stock and purchases of property plant and equipment.

Operating Activities

The $117.7 million cash generated from our operating activities during the nine months ended September 30, 2012 was primarily due to $108.8 million in net favorable non-cash adjustments to our net income, an increase in accounts payable and other liabilities and deferred income on sales to distributors, partially offset by the increase in accounts receivable and other current and long-term.


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The key changes in our working capital as of September 30, 2012 compared to January 1, 2012 were as follows:

• Total cash, cash equivalents and short-term investments increased by $62.6 million primarily due to the line of credit and Credit Facility proceeds.

• Accounts receivable increased by $21.7 million primarily due to an increase in distributor shipments.

• Other current and long- term assets increased by $10.2 million primarily due to an increase in miscellaneous receivables and prepaid expenses.

• Net borrowings of $198 million in fiscal 2012 from the Credit Facility.

• Other current liabilities increased by $11.8 million primarily due to the accrual of a patent license fee related to a Patent License Agreement discussed in Note 8 of Notes to Condensed Consolidated Financial Statements under Part I, Item 1.

Investing Activities

During the nine months ended September 30, 2012, we used approximately $17.5 million of cash from our investing activities primarily due to $97.5 million of purchases of available-for-sale investments, $25.2 million of cash used for property and equipment expenditures and $7.2 million of cash was used for other investing activities, partially offset from net proceeds from the sales or maturities of investments totaling $112.1 million.

Financing Activities

During the nine months ended September 30, 2012, we used approximately $37.6 million of cash in our financing activities. The net cash used by our financing activities was primarily due to $179.3 million of cash we used to repurchase shares of our stock in the open market, $59.7 million used to repay equipment leases and loans, $47.2 million dividends paid and $20.2 million payments related to statutory income tax withholdings on vested restricted stock awards in lieu of issuing shares of stock (considered as part of our stock buyback program). This amount was partially offset by $248.0 million of cash we drew from our line of credit and Credit Facility and $20.4 million of net proceeds from the issuance of common shares under our employee stock plans.

Nine Months Ended October 2, 2011:

Operating Activities

During the nine months ended October 2, 2011, net cash provided by operating activities was $218.3 million which was primarily driven by higher net income adjusted for certain non-cash items including depreciation and amortization, stock-based compensation and partially offset by the gain on divestiture and changes in our working capital.

Investing Activities

During the nine months ended October 2, 2011, we generated approximately $67.4 million of cash from our investing activities which was primarily due to $105.6 million of net proceeds from the sales or maturities and purchases of available-for-sale investments and $34 million in proceeds from the sale of our Image Sensors business unit, partially offset by $71.8 million of property and equipment expenditures.

Financing Activities

During the nine months ended October 2, 2011, we used approximately $484.6 million of cash in our financing activities. The net cash used in our financing activities was primarily due to $364.0 million of cash we used to repurchase shares of our stock in the open market and $15.3 million we paid in cash dividends, partially offset by $56.9 million net proceeds from the issuance of common shares under our employee stock plans.

Liquidity and Contractual Obligations

Liquidity

Stock Buyback Programs:

On September 20, 2011, our Board of Directors authorized a new $400 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, other uses of 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 the discretion of our board of


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directors. For the three months ended September 30, 2012, we used approximately $81.6 million from this program to repurchase approximately 7.3 million shares at an average share price of $11.20. Since we announced the new $400 million stock buyback program in September 2011 through the end of the third quarter of fiscal 2012, we used approximately $279.3 million from this program to repurchase approximately 19.9 million shares at an average share price of $14.01. As of September 30, 2012, the remaining authorized amount that can be used to repurchase shares under the program was approximately $120.7 million.

Contractual Obligations

The following table summarizes our contractual obligations as of September 30,
2012:



                                                                        2013 and      2015 and       After
                                               Total         2012         2014          2016         2016
                                                                     (In thousands)
Purchase obligations (1)                     $  73,940     $ 72,781     $   1,159     $      -      $    -
Operating lease commitments                     23,425        4,400        10,084         6,083       2,858
Capital lease commitments                       16,724          734         5,872         9,517         601
Patent license fee commitments (2)              12,800        7,000            -          5,800          -

Total contractual obligations                $ 126,889     $ 84,915     $  17,115     $  21,400     $ 3,459

(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.

(2) On April 30, 2012, we entered into a patent license agreement whereby we have committed to pay a total patent license fee of $14.0 million in fiscal 2012. We have also committed to pay another $5.8 million on or before April 30, 2016 representing fees for future purchases of patents and patent related services.

Equity Investment Commitments

As disclosed in Note 5 of Notes to Condensed Consolidated Financial Statements under Part I, Item 1-Financial Statements, we have committed to purchase additional preferred stock from a company in a series of subsequent closings subject to certain performance milestones that must be fulfilled within a defined and agreed upon timeline. Our future commitment to purchase additional preferred stock is approximately $0.6 million in fiscal 2012, $60.8 million in fiscal 2013 and $17.8 million in fiscal 2014 subject to the attainment of certain milestones and the timing of additional capital requests which could vary substantially.

Capital Resources and Financial Condition

Our long-term strategy is to maintain a minimum amount of cash and cash equivalents for operational purposes and to invest the remaining cash in interest-bearing and highly liquid cash equivalents, debt securities and the purchase of our stock through our stock buyback program and payments of regularly scheduled cash dividends. As of September 30, 2012, in addition to $162.3 million in cash and cash equivalents, we had $57.1 million invested in short-term investments for a total cash and short-term investment position of $219.4 million that is available for use in our current operations.

As of September 30, 2012, approximately 41% of our cash, cash equivalents and available-for-sale investments are funds held outside the United States. 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 available-for-sale investments and our borrowing arrangements will provide sufficient capital to meet our requirements for at least the next twelve months. . . .

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