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CY > SEC Filings for CY > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for CYPRESS SEMICONDUCTOR CORP /DE/

Form 10-K for CYPRESS SEMICONDUCTOR CORP /DE/


27-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, which are discussed under Item 1A.

EXECUTIVE SUMMARY
General
Cypress Semiconductor Corporation ("Cypress") delivers high-performance, mixed-signal, programmable solutions that provide customers with rapid time-to-market and exceptional system value. Cypress offerings include our flagship PSoC® 1, PSoC 3, PSoC 4, and PSoC 5 programmable system-on-chip families. Cypress is the world leader in capacitive user interface solutions including CapSense® touch sensing, TrueTouch® touchscreens, and trackpad solutions for notebook PCs and peripherals. Cypress is also a significant participant in Universal Serial Bus (USB) controllers, which enhance connectivity and performance in a wide range of consumer and industrial products. Cypress is also the world leader in static random access memory (SRAM) and nonvolatile RAM memories. Cypress serves numerous major markets, including consumer, mobile handsets, computation, data communications, automotive, industrial, and military.

During the fourth quarter of fiscal 2012 we acquired Ramtron which is included in our Memory Product Division. In addition, as part of our continued efforts to better allocate key management resources and to focus on our core markets, during the first quarter of fiscal 2013, we have realigned our Data Communications Division to include our module solutions including Trackpad and Ovation™ Optical Navigation Sensors (ONS), which were previously included in our Programmable Systems Division. We evaluate our reportable business segments in accordance with the accounting guidance.
As of the end of fiscal 2013, our organization included the following business segments:

         Business Segments                            Description
MPD: Memory Products Division         MPD focuses on static random access memory
                                      (SRAM), nonvolatile RAMs and general-purpose
                                      programmable clocks.

DCD: Data Communications Division     DCD focuses on USB controllers and
                                      WirelessUSB™ peripheral controllers, also
                                      offering module solutions including
                                      Trackpads and Ovation™ Optical Navigation
                                      Sensors.

PSD: Programmable Systems Division    PSD focuses primarily on our PSoC®
                                      programmable system-on-chip and PSoC-based
                                      products. This business segment focuses on
                                      (1) the PSoC platform family of devices
                                      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, and (3) automotive products.

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

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.
Consistent with this strategy, in fiscal 2008 we substantially completed the exit of our manufacturing facility in Texas and transferred production to our more cost-competitive facility in Minnesota and outside foundries. During 2013 we completed the sale of this manufacturing facility. See Note 7 for further information.


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RESULTS OF OPERATIONS

Revenues
                                                   Year Ended
                                 December 29,      December 30,      January 1,
                                     2013              2012             2012
                                                 (In thousands)
Programmable Systems Division   $      292,707    $      345,430    $    468,190
Memory Products Division               338,986           330,504         394,832
Data Communications Division            79,410            86,591         127,388
Emerging Technologies and Other         11,590             7,162           4,794
Total revenues                  $      722,693    $      769,687    $    995,204

Programmable Systems Division:
Revenues from the Programmable Systems Division decreased by $52.7 million or 15.3% compared to fiscal 2012. The revenue decrease was primarily attributable to declines in sales of our TrueTouch® touchscreen products and CapSense® and a decline in sales of our PSoC platform family of devices. The decline in our True Touch and CapSense revenue was primarily due to a decrease in revenue from our handset customers and lower average selling prices.
Revenues from the Programmable Systems Division decreased by $122.8 million in fiscal 2012, or approximately 26.2% compared to fiscal 2011. The revenue decrease was primarily attributable to a decline in sales of our TrueTouch® touchscreen products and a decline in sales of our PSoC platform family of devices. The decrease in our TrueTouch® revenue 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 increased by $8.5 million or 2.6% as compared to fiscal 2012 primarily due to an increase in sales of nonvolatile products associated with our acquisition of Ramtron, offset by a decrease in SRAM products driven by a continuing decrease in demand from wireless and wireline end customers.
Revenues from the Memory Products Division decreased by $64.3 million in fiscal 2012, or approximately 16.3%, compared to fiscal 2011. The revenue decrease was primarily due to the decrease in sales of our SRAM products driven by decreased demand from wireless and wireline end customers and due to the sale of our image sensor business unit during the first quarter of fiscal 2011 which accounted for $7.6 million of the decrease in revenue in fiscal 2012 compared to fiscal 2011. Data Communications Division:
Revenue for the Data Communication Division decreased by $7.2 million or 8.3% compared to fiscal 2012 due to declining revenue in our legacy USB products offset by an increase in USB3.0 and trackpad products.
Revenues from the Data Communications Division decreased by $40.8 million in fiscal 2012, or approximately 32.0%, compared to fiscal 2011. The decrease in revenue was primarily attributable to a decrease in sales of our West Bridge controllers and other USB-related products. Emerging Technologies and Other:
Revenue from the Emerging Technologies Division increased by $4.4 million or 61.8% compared to fiscal 2012 primarily due to increase in revenue from our foundry and Deca Technologies and Agiga Tech offset by the divestiture of Cypress Envirosystems which represented $2.9 million of revenue in 2012. Revenues from Emerging Technologies increased by $2.4 million in fiscal 2012, or approximately 49.4%, compared to fiscal 2011. The revenue increase was primarily due to the overall increase in demand as certain of our Emerging Technologies begun having initial production ramps.


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Cost of Revenues/Gross Margin

                                           Year Ended
                         December 29,      December 30,      January 1,
                             2013              2012             2012
                                         (In thousands)
Cost of revenues        $     384,121     $     376,887     $  448,602
Gross margin percentage          46.8 %            51.0 %         54.9 %

Gross margin percentage declined to 46.8% in fiscal 2013 from 51.0% in fiscal 2012 primarily driven by lower factory absorption, product and customer mix, and the impact of the negative gross margins of our ETD. Charges to cost of sales for inventory provisions were $12.8 million during fiscal 2013, unfavorably impacting our gross margin by 2%. Sales of inventory previously written-off were $5.1 million for fiscal year 2013, favorably impacting our gross margin by 1%. The overall net effect on our gross margin from charges to cost of sales for inventory provisions and sales of items previously written-off was a 1% net unfavorable impact for fiscal year 2013.
Gross margin percentage declined to 51.0% in fiscal 2012 from 54.9% in fiscal 2011 primarily due to (i) $7.7 million patent license fee recorded in fiscal 2012 related to a Patent License Agreement (See Note 18 of Notes to Consolidated Financial Statements) 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 in fiscal 2012 as well as lower average selling prices, product mix and lower factory absorption. We incurred $8.3 million in cost of revenues related to Ramtron. Research and Development ("R&D")

                                               Year Ended
                             December 29,      December 30,      January 1,
                                 2013              2012             2012
                                             (In thousands)
R&D expenses                $     190,906     $     189,897     $  189,970
As a percentage of revenues          26.4 %            24.7 %         19.1 %

R&D expenditures increased by $1.0 million in fiscal 2013 compared to fiscal 2012. The increase was primarily attributable to an increase of $4.3 million in variable bonus-related expense and an increase of $5.3 million in stock-based compensation. This amount was offset by a $4.1 million decrease in outside consulting services, license and equipment expense as a result of a worldwide cost cutting effort. As a percentage of revenues, R&D expenses were higher in fiscal 2013 driven by the decrease in total revenues in the same period. R&D expenditures decreased by $0.1 million in fiscal 2012, compared to fiscal 2011. The decrease was primarily attributable to a decrease in direct and indirect labor expenses, particularly variable bonus-related expenses, offset by $4.1 million in Ramtron related R&D expenses. As a percentage of revenues, R&D expenses were higher in fiscal 2012 driven by the decrease in total revenues in the same period.
Selling, General and Administrative ("SG&A")

                                               Year Ended
                             December 29,      December 30,      January 1,
                                 2013              2012             2012
                                             (In thousands)
SG&A expenses               $     182,671     $     211,959     $  227,976
As a percentage of revenues          25.3 %            27.5 %         22.9 %

SG&A expenses decreased by $29.3 million in fiscal 2013, or approximately 14% compared to fiscal 2012. The decrease was primarily attributable to (1) a decrease in non-recurring charges which occurred in 2012 including $6.9 million acquisition related expenses and a $1.6 million loss on the divestiture of Cypress Envirosystems; (2) company wide cost cutting efforts including a decrease in travel expense of $2.9 million and a $3.9 million reduction of advertising, marketing and other outside services and (3) a decrease in labor and benefit expense of $8.7 million due to restructuring and reduced headcount. These amounts were partially offset by a $2.5 million increase in bonus expense and a $2.1 million increase in deferred compensation expense.


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SG&A expenses decreased by $16.0 million in fiscal 2012, or approximately 7%, compared to fiscal 2011. The decrease was primarily attributable to $7.6 million decrease in direct and indirect labor expenses, particularly a $6.2 million decrease in variable bonus-related expenses, and a $16.7 million decrease in stock-based compensation due to our lower stock price in 2012. These direct and indirect labor costs were partially offset by an increase of $2.2 million expense primarily related to an increase in the value of our deferred compensation plan. We incurred $7.2 million in SG&A expenses related to Ramtron. Restructuring
We recorded restructuring charges of $15.4 million, $4.3 million and $6.3 million during fiscal 2013, 2012 and 2011, respectively. The determination of when we accrue for severance costs, and which accounting standard applies, depends on whether the termination benefits are provided under a one-time benefit arrangement or under an on-going benefit arrangement. The $15.4 million restructuring costs recognized in fiscal 2013 primarily consisted of $8 million in personnel costs and a $6.7 million in asset write-down. The $4.3 million restructuring costs recognized in fiscal 2012 consisted primarily of personnel costs and was mainly due to the restructuring program announced in fiscal 2011. The $6.3 million restructuring costs recognized in fiscal 2011 consisted primarily of personnel costs and was mainly due to the restructuring program announced in fiscal 2011. Refer to Note 10 of Notes to Consolidated Financial Statements under Item 8 for more detailed discussions on our restructuring programs for fiscal 2013, 2012 and 2011. Assets Held for Sale
Our Texas facility ceased operations in the fourth quarter of fiscal 2008 and the sale of the facility was completed during the fourth quarter fiscal 2013 for $4.7 million. The net book value of the remaining assets that were classified as held for sale and included in "Other current assets" in the Consolidated Balance Sheet as of December 30, 2012 was $4.6 million.
During fiscal 2013, we incurred a $6.7 million charge to write down certain equipment that we intend to sell to its current fair value of $2.3 million which is included in "Other current assets" in the Consolidated Balance Sheet as of December 29, 2013. Refer to Note 7 of Notes to Consolidated Financial Statements under Item 8 for more information on our assets held for sale. Divestitures
We did not have any divestitures during fiscal 2013.
On December 19, 2012, we completed the divestiture of our wholly-owned subsidiary Cypress Envirosystems and we received nominal consideration that is dependent upon future performance. Cypress Envirosystems was an immaterial part of our ETD segment and as a result of the sale we recorded a loss of $1.6 million in "(Gain) loss on divestiture," on the Consolidated Statement of Operations.
In fiscal 2011, we divested our image sensors product families and sold them to ON for a total cash consideration of $34.0 million. In connection with the divestiture, we recorded a gain of $34.3 million. We transfered approximately 80 employees to ON as part of this divestiture. Refer to Note 3 of Notes to Consolidated Financial Statements under Item 8 for more information on this transaction.
Interest and Other Income, Net
The following table summarizes the components of interest and other income, net:

                                                                  Year Ended
                                                 December 29,     December 30,     January 1,
                                                     2013             2012            2012
                                                                (In thousands)
Interest income                                 $        301     $        694     $     1,466
Interest expense                                      (8,112 )         (3,824 )          (115 )
Changes in fair value of investments under the
deferred compensation plan                             6,371            3,158            (862 )
Impairment of investments                                 25           (3,200 )          (800 )
Foreign currency exchange gains (losses), net          2,791           (1,460 )         1,124
Gain on sale of equity investments                       908            1,601               -
Others                                                   (59 )            286           1,046
Total interest and other income, net            $      2,225     $     (2,745 )   $     1,859


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Employee Deferred Compensation Plan
We have a deferred compensation plan, which provides certain key employees, including our executive management, with the ability to defer the receipt of compensation in order to accumulate funds for retirement on a tax-deferred basis. We do not make contributions to the deferred compensation plan and we do not guarantee returns on the investments. Participant deferrals and investment gains and losses remain as our liabilities and the underlying assets are subject to claims of general creditors. In fiscal 2013, 2012 and 2011, we recognized changes in fair value of the assets under the deferred compensation plan in "Interest and other income, net" of approximately $6.4 million, $3.2 million and $(0.9) million, respectively. The increase or decrease in the fair value of the investments relates to the increased or decreased performance of the portfolio on a year over year basis. Refer to Note 16 of Notes to Consolidated Financial Statements under Item 8 for more information about our deferred compensation plan.
Impairment of Investments
We review our investments periodically for impairment and recognize an impairment loss when the carrying value of an investment exceeds its fair value and the decline in value is considered other-than-temporary. After temporary, in fiscal 2013 no impairment charges were recognized. During the first quarter of fiscal 2012, two of our privately-held companies which we were invested in at a carrying value of $2.4 million, offered additional rounds of financing that we declined to participate in. Based on these new rounds of financing, we determined that our investments were impaired and wrote off the $2.4 million investment. In fiscal 2011, we recognized impairment charges totaling approximately $0.8 million. The impairment expense recognized in fiscal 2011 was related to the decline in value of our investments in non-marketable equity securities which was considered other-than-temporary.
For more information about our investments, refer to Note 6 of Notes to Consolidated Financial Statements under Item 8. Gain on Sale of Investments in Marketable Equity Securities In the second quarter of fiscal 2013, we sold our investment in a certain marketable equity security for $2.2 million, which resulted in a realized gain of $1.1 million.
In connection with the acquisition of Ramtron, we recognized a gain of $1.7 million on our initial investment in Ramtron of $3.4 million. For more information about our acquisition, refer to Note 2 of Notes to Consolidated Financial Statements under Item 8.
There were no investments in marketable equity securities that were sold in fiscal 2011.
Income Taxes
Our income tax benefit was $7.8 million for 2013. Our income tax expense was $2.3 million for 2012. Our income tax benefit was $11.4 million in fiscal 2011. The tax expense in fiscal 2013 was primarily attributable to a release of previously accrued taxes of approximately $13.8 million related to settlements with taxing authorities and the lapsing of statutes of limitations, partially offset by income taxes associated with our non-U.S. operations. The tax expense in fiscal 2012 was primarily attributable to income taxes associated with our non-U.S. operation. The tax benefit in fiscal 2011 was primarily attributable to a release of previously accrued taxes of approximately $22.4 million related to settlements with taxing authorities and the lapsing of statutes of limitation, partially offset by income taxes associated with our non-U.S. operations. Our effective tax rate varies from the U.S. statutory rate primarily due to earnings of foreign subsidiaries taxed at different rates and a full valuation allowance on net operating losses incurred in the U.S. The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We regularly assess our tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the many countries in which we and our affiliates do business.
Non-U.S. tax authorities have completed their income tax examinations of our subsidiary in India for fiscal years 2002-2006 and our subsidiary in the Philippines for 2009. The proposed adjustments in India have been appealed, and we believe the ultimate outcome of these appeals will not result in a material adjustment to our tax liability. The Philippines examinations for 2009 resulted in no material adjustments to our tax liabilities. Income tax examinations of our Philippine subsidiary for the 2010 fiscal year and our India subsidiary for the 2009-2010 fiscal years are in progress. We believe the ultimate outcome of these examinations will not result in a material increase to our tax liability.


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International revenues account for a significant portion of our total revenues, such that a material portion of our pretax income is earned and taxed outside the U.S. at rates ranging from 0% to 25%. The impact on our provision for income taxes of foreign income being taxed at rates different than the U.S. federal statutory rate was a benefit of approximately $15.4 million, $26.4 million, and $43.6 million in 2013, 2012 and 2011, respectively. The foreign jurisdictions with lower tax rates as compared to the U.S. statutory federal rate that had the most significant impact on our provision for foreign income taxes in the periods presented include the Cayman Islands, China, Ireland, the Philippines, and Switzerland.

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

                                                                As of
                                                   December 29,      December 30,
                                                       2013              2012
                                                           (In thousands)
Cash, cash equivalents and short-term investments $      104,462    $      117,210
Working capital                                   $       13,871    $       20,060


Key Components of Cash Flows
                                                                       Year Ended
                                                     December 29,      December 30,      January 1,
                                                         2013              2012             2012
                                                                     (In thousands)
Net cash provided by operating activities           $      67,568     $     134,997     $  283,808
Net cash provided by (used in) investing activities $         261     $    (113,036 )   $   69,100
Net cash used in financing activities               $     (45,023 )   $     (58,475 )   $ (516,374 )


Fiscal 2013:
Operating Activities

In fiscal 2013, net cash provided by operating activities was $67.6 million compared to $135 million in fiscal 2012. Operating cash flows for fiscal 2013 were primarily due to net favorable non-cash adjustments to our net loss including stock-based compensation of $73.0 million and depreciation and amortization of $48.4 million, and a decrease in inventory of $29.4 million. The significant changes in our working capital as of December 29, 2013 compared to December 30, 2012 were as follows:
• Accounts payable and other current and long-term liabilities decreased by $37.1 million due to timing of purchases and payments.

• Deferred margin on sales to distributors decreased by $8.8 million due to lower distributor shipments.

• Inventory decreased by $29.4 million primarily due to sale of inventory acquired with the acquisition of Ramtron.

Investing Activities
In fiscal 2013, net cash provided by investing activities was $0.3 million compared to net cash used in investing activities of $113.0 million in fiscal 2012. The cash provided by our investing activities in fiscal 2013 was primarily due to sales of investments of $64.4 million offset by investment purchases of $23.1 million, and purchases of property and equipment of $36.6 million primarily for our Emerging Technologies Division. Financing Activities
In fiscal 2013, net cash used in financing activities was $45.0 million compared to $58.5 million in fiscal 2012. The cash we used in our financing activities in fiscal 2013 was primarily due to payment of dividends of $64.8 million, repayment on our long term revolving credit facility (Credit facility) of $145.0 million and repayment of other debt of $17.1 million, partially offset by net proceeds of $38.7 million from the issuance of common shares under our employee stock plans, and borrowings of $140.0 million on our Credit facility. Fiscal 2012:


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In fiscal 2012, cash and cash equivalents decreased by approximately $36.5 million primarily due to the $113.0 million cash used in our investing activities, principally related to the cash paid for the acquisition of Ramtron. (See Note 2 for a detailed discussion of the Ramtron acquisition.) Cash and cash equivalents also decreased due to the $58.5 million cash used in our financing activities, principally related to our stock buyback program and payment of dividends, which were partially offset by cash received from our credit facility. Cash used in our investing and financing activities was partially offset by the cash generated from our operating activities of $135.0 million. Operating Activities
In fiscal 2012, net cash provided by operating activities was $135.0 million compared to $283.8 million in fiscal 2011. Operating cash flows for fiscal 2012 were primarily due to $138.3 million in net favorable non-cash adjustments to our net loss including stock-based compensation of $74.3 million and depreciation and amortization of $50.8 million, an increase in accounts payable and other liabilities, and a decrease in accounts receivable, partially offset by decreases in deferred income on sales to our distributors.
The significant changes in our working capital, excluding the impact of the . . .

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