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CY > SEC Filings for CY > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for CYPRESS SEMICONDUCTOR CORP /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CYPRESS SEMICONDUCTOR CORP /DE/


1-Nov-2013

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.

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 Programmable System-on-Chip ("PSoC®") families and derivatives such as CapSense® touch sensing and TrueTouch® solutions for touchscreens. We are the world leader in universal serial bus ("USB") controllers. We are also a leader in high-performance memories and programmable timing devices. We serve numerous markets including consumer, mobile handsets, computation, data communications, automotive, industrial and military.


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We evaluate our reportable business segments in accordance with the accounting guidance. We operate in the following four reportable business segments:

         Business Segments                            Description

                                      A division that focuses on our four static
                                      random access memory ("SRAM") business
                                      units, non-volatile memory's,
                                      general-purpose programmable clocks and
MPD: Memory Products Division         process technology licensing

                                      A division focused on USB controllers and
                                      WirelessUSB™ for handsets, PCs, industrial,
                                      consumer and tablets. Also includes Trackpad
                                      module solutions focused on the notebook and
DCD: Data Communications Division     adjacent markets.

                                      A division focusing primarily on our
                                      PSoC® and PSoC-based products. This business
                                      segment focuses on (1) the PSoC platform
                                      family of devices including PSoC 1, PSoC 3,
                                      PSoC 4 and PSoC 5 and all derivatives, (2)
                                      PSoC-based user interface products such as
                                      CapSense® touch-sensing and
                                      TrueTouch® touchscreen products, (3) and
                                      automotive products and certain legacy
PSD: Programmable Systems Division    products.

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

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.
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 29, 2013       September 30, 2012       September 29, 2013       September 30, 2012
                                                                        (In thousands)
Programmable Systems Division  $            78,135     $             91,207     $            224,961     $            264,026
Memory Products Division                    88,743                   88,254                  259,098                  253,082
Data Communications Division                18,884                   21,236                   62,927                   66,420
Emerging Technologies Division               2,961                    2,318                    7,931                    5,876
Total revenue                  $           188,723     $            203,015     $            554,917     $            589,404

Programmable Systems Division:
Revenues from the Programmable Systems Division decreased by $13.1 million in the third quarter of fiscal 2013 and $39.1 million in the first three quarters of fiscal 2013, or approximately 14.3% and 14.8%, respectively, compared to the same prior-year periods. The decreases were primarily attributable to a decline in sales of our TrueTouch® touchscreen and Capsense products and a decrease in sales of certain legacy communication products. The decrease in our TrueTouch® and Capsense revenue was primarily due to a decrease in revenue from our handset customers and lower average selling prices.

Memory Products Division:
Revenues from the Memory Products Division increased by approximately $0.5 million in the third quarter of fiscal 2013 and $6.0 million in the first three quarters of fiscal 2013, or 0.6% and 2.4%, respectively, compared to the same prior-year periods. The increases in MPD revenue were primarily attributable to an increase in revenue of our non-volatile products due to the Ramtron acquisition, partially offset by declines in sales of our SRAMs.


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Data Communications Division:
Revenues from the Data Communications Division decreased by $2.4 million in the third quarter of fiscal 2013 and $3.5 million in the first three quarters of fiscal 2013, or approximately 11.1% and 5.3%, respectively, compared to the same prior-year periods primarily due to the decreases in sales of our USB-related products partially offset by increases in sales of our trackpad modules due to new design wins moving into production.
Emerging Technologies Division:
Revenues from the Emerging Technologies Division increased by $0.6 million in the third quarter of fiscal 2013 and $2.1 million in the first three quarters of fiscal 2013, or approximately 27.7% and 35.0% respectively, compared to the same prior-year periods primarily due to the overall increase in demand as certain of our Emerging Technologies companies had design wins that moved into production. This increase was partially offset by the loss in revenue from Cypress Envirosystems as we had divested this subsidiary in fiscal 2012. Cost of Revenues/Gross Margins

                                         Three Months Ended                             Nine Months Ended
                              September 29, 2013     September 30, 2012     September 29, 2013     September 30, 2012
                                                                  (In thousands)
Cost of revenues             $          97,070      $           92,959     $         292,793      $         280,798
Gross margin                              48.6 %                  54.2 %                47.2 %                 52.4 %

Gross margin percentage decreased to 48.6% in the third quarter of fiscal 2013 from 54.2% in the third quarter of fiscal 2012 and decreased to 47.2% in the first three quarters of fiscal 2013 from 52.4% in the first three quarters of fiscal 2012. In the third quarter and the first three quarters of fiscal 2013, gross margin decreased by 5.6 and 5.2 percentage points, respectively, primarily due to product and customer mix, and certain manufacturing expenses related to Ramtron. Additionally, in the first three quarters of fiscal 2013, gross margin also decreased due to lower utilization in our factories. Research and Development ("R&D") Expenses

                                        Three Months Ended                             Nine Months Ended
                             September 29, 2013     September 30, 2012     September 29, 2013     September 30, 2012
                                                                 (In thousands)
R&D expenses                $          50,429      $           46,908     $         148,563      $         142,822
As a percentage of revenues              26.7 %                  23.1 %                26.8 %                 24.2 %

R&D expenditures increased by $3.5 million in the third quarter of fiscal 2013 compared to the same prior-year period. The increase was primarily attributable to an increase in variable bonus-related expense and stock-based compensation expense of $4.1 million. As a percentage of revenues, R&D expenses were higher in the third quarter of fiscal 2013 driven by the decrease in total revenues in the same prior-year period.
R&D expenditures increased by $5.7 million in the first three quarters of fiscal 2013 compared to the same prior-year period. The increase was primarily attributable to an increase in indirect labor expenses, particularly variable bonus-related expenses, of $4.5 million, and an increase in professional services of $3.9 million. These increases were partially offset by decreases in outside services of $2.1 million and purchased technology of $1.8 million. As a percentage of revenues, R&D expenses were higher in the first three quarters of fiscal 2013 driven by the decrease in total revenues in the same period.

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

                                        Three Months Ended                             Nine Months Ended
                             September 29, 2013     September 30, 2012     September 29, 2013     September 30, 2012
                                                                 (In thousands)
SG&A expenses               $          45,533      $           47,328     $         139,049      $         159,776
As a percentage of revenues              24.1 %                  23.3 %                25.1 %                 27.1 %


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SG&A expenses decreased by $1.8 million in the third quarter of fiscal 2013 compared to the same prior-year period. The decrease was primarily attributable to a $3.1 million decrease in acquisition-related expenses and a $3.4 million decrease in headcount related expenses which was driven by a company-wide effort to reduce costs. These decreases were partially offset by an increase in stock-based compensation expense of $3.2 million due to an increase in certain performance-based awards and an increase in variable bonus-related expenses of $1.1 million. As a percentage of revenues, SG&A expenses were higher in the third quarter of fiscal 2013 driven by the decrease in total revenues in the same quarter.
SG&A expenses decreased by $20.7 million in the first three quarters of fiscal 2013 compared to the same prior-year period. The decrease was primarily attributable to a $9.5 million decrease in stock-based compensation expense related to performance-based stock awards, a $5.7 million decrease in headcount related expenses which was driven by a company-wide effort to reduce costs, a $3.5 million decrease in acquisition-related expenses and a decrease of $1.5 million in marketing and advertising expenses. These decreases were partially offset by an increase in variable bonus-related expenses of $3.1 million. As a percentage of revenues, SG&A expenses were lower in the third quarter and nine months of fiscal 2013 driven by a company-wide effort to reduce overall operating expenses.
Amortization of acquisition-related intangible assets For the three and nine months ended September 29, 2013, we recorded amortization expense of acquisition-related intangibles assets of $2.0 million and $6.0 million, respectively. For the three and nine months ended September 30, 2012, we recorded amortization expense of acquisition-related intangibles assets of $0.7 million and $2.2 million, respectively. The increase in the amortization expense in 2013 is related to the increase in intangible assets as part of our acquisition of Ramtron in the fourth fiscal quarter of 2012. Restructuring
For the three and nine months ended September 29, 2013, we recorded restructuring charges of $3.7 million and $15.8 million, respectively. For the three and nine months ended September 30, 2012, we recorded restructuring charges of $0.1 million and $1.3 million, respectively. The determination of when we accrue for severance and benefits costs, and which accounting standard applies, depends on whether the termination benefits are provided under a one-time benefit arrangement or under an on-going benefit arrangement. Fiscal 2013 Restructuring Plan
During the first quarter of fiscal 2013, we implemented a restructuring plan to reduce operating expenses as part of our 2013 corporate priorities. The plan includes the termination of employees and the disposal of certain equipment located in our Bloomington, Minnesota facility. To date, we have recorded total restructuring charges of $15.2 million related to the Fiscal 2013 Restructuring Plan. Of the total restructuring charge, $6.7 million was related to property, plant and equipment, $8.0 million was related to personnel costs and $0.5 million was mainly related to the amounts payable upon the termination of agreements with certain distributor representatives.

The restructuring activities related to personnel costs, which are primarily in the U.S., are summarized as follows:

                                  (In thousands)
Balance as of December 30, 2012  $           -
Provision                                3,807
Cash payments                             (495 )
Balance as of March 31, 2013             3,312
Provision                                  729
Cash payments                           (1,318 )
Balance as of June 30, 2013              2,723
Provision                                3,545
Cash payments                             (604 )
Non-cash charges                            23
Balance as of September 29, 2013 $       5,687

The restructuring liability as of September 29, 2013 under the Fiscal 2013 Restructuring Plan is primarily related to personnel costs and is expected to be paid out within the next twelve months.


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Fiscal 2011/12 Restructuring Plan
In fiscal 2011, we initiated a restructuring plan which allowed us to continue
to allocate and align our resources to the business units that we expect will
drive future development and revenue growth ("Fiscal 2011 Restructuring Plan").
To date, we have recorded total restructuring charges of $9.1 million under the
Fiscal 2011 Restructuring Plan, which was all related to personnel costs. The
restructuring activities related to personnel costs, which are primarily in the
U.S., are summarized as follows:


                                  (In thousands)
Balance as of December 30, 2012  $       4,506
Provision                                  350
Cash payments                             (946 )
Non-cash charges                          (250 )
Balance as of March 31, 2013             3,660
Cash payments                             (870 )
Non-cash charges                           173
Balance as of June 30, 2013              2,963
Cash payments                           (1,995 )
Balance as of September 29, 2013 $         968

The restructuring liability as of September 29, 2013 under the Fiscal 2011 Restructuring Plan related primarily to personnel costs and is expected to be paid out within the next twelve months.
Assets Held-For-Sale
Our Texas facility ceased operations in the fourth quarter of fiscal 2008. As our management has committed to a plan to sell the assets associated with the facility, we have classified the assets as held-for-sale. In fiscal 2012, due to the unfavorable economic and market conditions, management reassessed the fair value of the assets and recorded a write-down of $2.3 million to the estimated fair value of $4.6 million. We expect to complete a sale of this facility in fourth quarter of fiscal 2013.
During the first quarter of 2013, we incurred a $6.0 million charge to write down certain equipment to the current fair value of $2.3 million. Management considered a third-party valuation in determining the fair value of this held-for-sale asset.
Income Taxes
Our income tax benefit was $0.8 million for the three months ended September 29, 2013 and tax benefit was $0.2 million for the three months ended September 30, 2012. Our income tax benefit was $10.0 million and tax expense was $2.7 million for the nine months ended September 29, 2013 and September 30, 2012, respectively. The tax benefit for the third quarter and first three quarters of fiscal 2013 was primarily attributable to a release of previously accrued taxes and interest due to the expired statutes of limitations in foreign jurisdictions, offset by non-U.S. taxes on income earned in foreign jurisdictions. The tax benefit for the third quarter of fiscal 2012 was primarily attributable to non-U.S. taxes on income earned in foreign jurisdictions, offset by a release of previously accrued taxes and interest due to the expired statutes of limitations in foreign jurisdictions, and the tax expense for the first three quarters of fiscal 2012 was primarily attributable to non-U.S. taxes on income earned in foreign jurisdictions.


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LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes information regarding our cash and investments
and working capital:

                                                                          As of
                                                                                   December 30,
                                                           September 29, 2013          2012
                                                                      (In thousands)
Cash and cash equivalents                                $             76,550     $      63,203
Short-term investments                                                 24,839            54,007
Total cash, cash equivalents and short-term investments  $            101,389     $     117,210
Total current assets                                     $            349,987     $     368,808
Total current liabilities                                             336,600           348,748
Working capital                                          $             13,387     $      20,060



Key Components of Cash Flows

                                                                      Nine Months Ended
                                                          September 29, 2013     September 30, 2012
                                                                       (In thousands)
Net cash provided by operating activities                $          46,525      $         117,695
Net cash provided by (used in) investing activities      $             570      $         (17,474 )
Net cash used in financing activities                    $         (33,748 )    $         (37,609 )

Nine Months Ended September 29, 2013:
During the nine months ended September 29, 2013, cash and cash equivalents increased by approximately $13.3 million primarily due to the cash we generated from our operating and investing activities of approximately $46.5 million and $0.6 million, respectively. This increase was partially offset by the $33.7 million cash we used in our financing activities, principally related to our dividend payments of $48.2 million.
Operating Activities
The $46.5 million cash generated from our operating activities during the nine months ended September 29, 2013 was primarily due to $89.5 million in net favorable non-cash adjustments to our net loss, an increase in deferred margin on sales to distributors, and decreases in inventories and other assets, partially offset by increases in accounts receivable and a decrease in accounts payable and other liabilities.
The key changes in our working capital as of September 29, 2013 compared to December 30, 2012 were as follows:
• Total cash, cash equivalents and short-term investments decreased by $15.8 million primarily due to our cash dividend.

• Accounts receivable increased by $25.3 million primarily due to an increase in distributor shipments.

• Deferred margin on sales to distributors increased by $6.8 million due to an increase in distributor shipments.

• Inventories decreased by $28.1 million compared to December 30, 2012 due in part to reduced wafer starts to manage our production and an increase in distributor shipments in the latter-half of the quarter.

Investing Activities
During the nine months ended September 29, 2013, we generated approximately $0.6 million of cash from our investing activities primarily due to $53.5 million the sales or maturities of investments totaling, partially offset by $27.9 million of cash used for property and equipment expenditures, $23.3 million used for purchases of available-for-sale investments, and $4.4 million cash paid as an additional investment in certain non-marketable equity securities. Financing Activities


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During the nine months ended September 29, 2013, we used approximately $33.7 million of cash from our financing activities primarily related to $48.2 million for our dividend payment, $7.5 million of cash used to repay equipment leases and loan, $80.0 million of cash used to partially repay our revolver, $4.5 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), and $3.3 million to pay off the remaining mortgage note related to the Ramtron acquisition. These decreases were partially offset by net proceeds from the issuance of common shares under our employee stock plans of $33.4 million.
Nine Months Ended September 30, 2012:
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.
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.

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. Liquidity and Contractual Obligations
Liquidity
Stock Buyback Programs:
On September 20, 2011, our Board of Directors authorized a $400 million stock buyback program. For the three months ended September 29, 2013, repurchases made under this program were immaterial. As of September 29, 2013, the total remaining dollar value of the shares that may be repurchased under the program was approximately $83.7 million.


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Contractual Obligations
The following table summarizes our contractual obligations as of September 29,
2013:

                               Total           2013         2014 and 2015       2016 and 2017       After 2017
                                                               (In thousands)
Purchase obligations (1)    $   77,390     $   72,440     $         4,950     $             -     $          -
Operating lease commitments     20,244          2,172              10,998               6,021            1,053
Capital lease commitments       13,842            790               5,872               7,180                -
Patent license fee
commitments (2)                  5,880              -                   -               5,880                -
Total contractual
obligations                 $  117,356     $   75,402     $        21,820     $        19,081     $      1,053

(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 paid a total patent license fee of $14.0 million in fiscal 2012 and committed to pay another $5.9 million on or before April 30, 2016 representing fees for future purchases of patents and patent related services.

As of September 29 2013, our unrecognized tax benefits were $16.7 million, which were classified as long-term liabilities. We believe it is possible that we may recognize approximately $1.8 million to $2.0 million of our existing . . .

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