UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 201729, 2019
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission file number: 1-10079
__________________________________________
(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, California95134
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (408) (408) 943-2600
Securities registered pursuant to Section 12(b) of the Act:
| Title of | Trading symbol: | Name of |
| Common Stock, $.01 par value | CY | The |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x ☒Yes ¨☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨☐ Yes x ☒No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x ☒Yes ¨☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x ☒Yes ¨☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer,” “accelerated filer,” and “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x☒ 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 Act). ¨☐ Yes x☒ No
The market value of voting and non-voting common stock held by non-affiliates of the registrant, based upon the closing sale price of the common stock on July 2, 2017June 30, 2019 as reported on the NASDAQNasdaq Global Select Market, was approximately $3.6$6.0 billion. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded from the foregoing calculation in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 15, 2018, 354,988,1717, 2020, 373,644,219 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for the registrant’sits 2020 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A forwith the year endedSEC within 120 days after December 31, 201729, 2019 are incorporated by reference in Items 10 - 14 of Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
| Page | ||
| Item 1 | ||
| Item 1A | ||
| Item 1B | ||
| Item 2 | ||
| Item 3 | ||
| Item 4 | ||
| Item 5 | ||
| Item 6 | ||
| Item 7 | ||
| Item 7A | ||
| Item 8 | ||
| Item 9 | ||
| Item 9A | ||
| Item 9B | ||
| Item 10 | ||
| Item 11 | ||
| Item 12 | ||
| Item 13 | ||
| Item 14 | ||
| Item 15 | ||
| Item 16 | ||
3
This Annual Report on Form 10-K (this "Annual Report") contains statements that are not historical in nature, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risksamended. Forward-looking statements are not historical facts and uncertainties, including, but not limitedinclude statements relating to, statements related 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 pursuituse of long-term growth initiatives, including various long-term strategic corporate transformational initiatives, collectively referred to as our Cypress 3.0 strategy; expected improvements in margin and our ability to successfully execute on our margin improvement plan; our manufacturing strategy including our ability to efficiently manage our manufacturing facilities and achieve our cost goals emanating from our flexible manufacturing strategy; our ability to secure supply to meet customer demand, the anticipated impact of our acquisitions, dispositions and restructuring activities; anticipated growth opportunities in the automotive, consumer and industrial markets; our expectations regarding dividends and stock repurchases; our expectations regarding future technology transfers and other licensing arrangements; our efforts to license and/or monetize our intellectual property portfolio; our expectations regarding the timing and cost of our restructuring liabilities; our expectations regarding our active litigation matters and our intent to defend ourselves in those matters; the competitive advantage we believe we have with our patents as well as our proprietary programmable technologies and programmable products; our plans for our products, pricing, and marketing efforts, including the potential impact on our customer base if we were to raise our prices; our backlog as an indicator of future performance; our ability to pay down our indebtedness and continue to meet the covenants set forth in our debt agreements; the risk associated with our yield investment agreements; our foreign currency exposure and the impact exchange rates could have on our operating margins; the adequacy of our cash and working capital positions; the value and liquidity of our investments, including auction rate securities, other debt investments, and investments in privately-held companies; the impact of U.S. tax reform efforts; our ability to recognize certain unrecognized tax benefits within the next twelve months as well as the resolution of agreements with various foreign tax authorities; our investment strategy; the impact of interest rate fluctuations on our investments; the volatility of our stock price; the impact of actions by stockholder activists; the size and composition of our Board of Directors; the adequacy of our real estate properties; the utility of our non-GAAP reporting; the adequacy of our audits; the potential impact of our indemnification obligations; our plans to remediate the identified material weakness; and the impact of new accounting standards on our financial statements and our ability to recognize revenue. We use words such as "may," "will," “should,”"should," "plan," "anticipate," "believe," "expect," "future," "intend," "estimate," "predict," "potential," "continue," and similar expressionsexpressions. This Annual Report includes, among others, forward-looking statements regarding: the pending Merger (as defined below); 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 identify forward-looking statements. Suchmeet our requirements for the next 12 months; possible recognition of certain unrecognized tax benefits within the next 12 months; our expected receipt of a special dividend from an equity investee; and the potential impact of our indemnification obligations. Our forward-looking statements are made as of the date hereof and are based on our currentthe expectations, beliefs and intentions regarding future events or our financial performanceof, and the information available to, our executive management ason the filing date of the date hereof. In addition, readersthis Annual Report. Readers are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we assume no responsibility to update any suchour forward-looking statements. Our
The forward-looking statements in this Annual Report involve risks and uncertainties. Important factors that could cause actual results couldto differ materially from those expected, discussed or projected in the forward-looking statements contained in this Annual Report on Form 10-K for any number of reasons, including,include, but are not limited to: the stateoccurrence of any event, change or other circumstances that could give rise to the termination of the Agreement and Plan of Merger (the "Merger Agreement") dated June 3, 2019, by and among Infineon Technologies AG, a stock corporation (Aktiengesellschaft) organized under the laws of the Federal Republic of Germany ("Infineon"), IFX Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Infineon ("Merger Sub"), and the Company, pursuant to which Merger Sub will merge with and into the Company (the "Merger"), with the Company continuing as the surviving corporation in the Merger and as a wholly owned subsidiary of Infineon; the inability to complete the Merger due to the failure to satisfy conditions to completion of the Merger, including that a governmental entity may prohibit, delay or refuse to grant approval for the Merger; risks related to disruption of management’s attention from our ongoing business operations due to the Merger; the effect of the announcement of the Merger on our relationships with our customers, operating results and business generally; the risk that certain approvals or consents will not be received in a timely manner or that the Merger will not be completed in a timely manner; the impact of the Merger on our ability to retain key employees; the outcome of any legal proceedings related to the Merger; 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 consumerscustomers we serve and our investments;(including credit conditions); our ability to execute on our Cypress 3.0 strategy and our margin improvement plan; potential volatility in our abilitystock price; risks related to effectively integrate companiespaying down our indebtedness and assets that we acquire;meeting the covenants set forth in our ability to attract and retain key personnel;debt agreements; our ability to timely deliver our proprietary and programmable technologies and products; the current credit conditions; our abilityefforts to retain and expand our customer base which(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 prices; our ability to transform our business withstrategy of developing and maintaining a leading portfolio of programmable microcontroller, connectivity and memory products; the number and nature of our competitors; the changing environment and/or cycles of the semiconductor industry; foreign currency exchange rates; our abilityrisks related to efficiently manage our manufacturing facilities and achieve our cost goals emanating from our flexible manufacturing strategy;strategy (and the challenge of efficiently managing a smaller number of manufacturing facilities while increasing our abilityreliance on third-party manufacturers); our reliance on distributors and resellers; risks related to achievechanging relationships with distributors; risks related to our goals"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 uncertaintyfailure or success of the privately-held companies in which we are invested; the challenges of effectively integrating companies and expenseassets that we acquire; the possibility of pending litigation matters;impairment charges; the challenges of attracting and retaining key personnel; risks related to our abilityreliance on stock-based compensation; possible changes to pay down our indebtednessdividend policy; risks related to our share repurchase authorization; the uncertain nature of business outlook guidance; risks related to industry consolidation and continue to meet the covenants set forthchallenge 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 debt agreements;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; changesand the uncertainty and expense of pending litigation matters. These and other factors are described in the law including changes to tax and intellectual property law; the results of our pending tax examinations; our ability to achieve liquiditymore detail in our investments; the failure or success of the privately-held companies that we are invested in; our ability to remediate any material weakness; and/or the materialization of one or more of the risks set forth above or underthis Annual Report in Part I, Item 1A (Risk Factors) in this Annual Report on Form 10-K. and Part II, Item 7A Quantitative and Qualitative Disclosures about Market Risk.
5
PART I
ITEM 1. Business
General
Cypress designs, manufactures and sells advanced embedded system solutions for Internet of Things ("IoT"), automotive, industrial, home automation and appliances, consumer electronics and medical products.applications. Cypress' microcontrollers, analog ICs,integrated circuits ("ICs"), wireless and wired connectivity solutions and memories help engineers design differentiated products and help with speed to market. Cypress is committed to providing customers with quality support and engineering resources.
Cypress was incorporated in California in December 1982.1982 and reincorporated in Delaware in September 1986. Our stock is listed on the Nasdaq Global Select Market under the ticker symbol “CY”.
Our corporate headquarters are located at 198 Champion Court, San Jose, California 95134, and our main telephone number is (408) 943-2600. We maintain a website at www.cypress.com. The contents of our website are not incorporated into, or otherwise to be regarded as part of, this Annual Report on Form 10-K.
Our fiscal 2019 ended on December 29, 2019, fiscal 2018 ended on December 30, 2018, and fiscal 2017 ended on December 31, 2017, fiscal 2016 ended on January 1, 2017,2017.
Pending Acquisition by Infineon
In June 2019, we entered into a definitive Agreement and fiscal 2015 ended on January 3, 2016.
Refer to provide TrueTouch® solutionsNote 2, Merger Agreement, of the Notes to our automotive, industrialConsolidated Financial Statements under Part II, Item 8 for more information.
Mergers, Acquisitions and home appliance customers. Divestitures
In March 2017, we completed the sale of our wafer fabrication facility in Minnesota.
In August 2018, we completed the acquisition of an embedded software company focused on the IoT market.
In April 2019, we closed the transfer of our NAND flash business to a newly-formed joint venture between Cypress and SK hynix system ic Inc. ("SKHS"). The joint venture entity is called SkyHigh Memory Limited ("SkyHigh") and its headquarters are in Hong Kong, China. SkyHigh is 60-percent-owned by SKHS and 40-percent-owned by us. The NAND business was reported as part of our Memory Products Division ("MPD") segment prior to the close of the transfer. We recorded a gain of $1.2recognized $31.1 million, $167.3 million and $168.1 million in fiscal 2017 resultingrevenue from the changeNAND business for the years ended December 29, 2019, December 30, 2018 and December 31, 2017, respectively. At the time of the transfer of the NAND business, we entered into a back-end manufacturing services agreement with SKHS.
In September 2019, we acquired the minority shareholders' noncontrolling interest in AgigA Tech, Inc. ("AgigA") for total cash consideration of $3.9 million, making AgigA a wholly-owned subsidiary of Cypress. Consistent with the estimated costspresentation in prior periods, we continue to sell the assets.report AgigA's financial results under our MPD segment.
Business Strategy
Our primary focusstrategy is profitable growth inprimarily focused on becoming a solution-driven company by capitalizing on our key markets. We plan to capitalize on ourbroad connect and compute product portfolio to extend our penetration ofinto global markets such as theIoT, automotive, industrial, communications,and consumer applications markets; increasing ease of doing business; improving operating margin; deploying personnel and computation markets. resources to target market segments that are expected to grow faster than the overall semiconductor industry; and streamlining our internal processes to enable scale and growth.
Our revenue and profitability model is based on the following product and market strategies: (a) focus on providing customers with complete solutions, including multiple Cypress products where applicable, and supporting software, (b) growing revenue from our programmable solutions and derivatives, including PSoC®, Traveo™ and other microcontrollers in the automotive and industrial markets, (c) increasing our connectivity revenue through the introduction of new products such as Wi-Fi, Bluetooth® and, Bluetooth Low Energy, USB-C and USB Power Delivery solutions and SuperSpeed USB 3.0 peripheral controllers and (d) increasingmaintain profitability in our memorystorage products by leveraging our market position and expanding our portfolio with new and complementary products primarily targeted at the automotive and industrial markets.portfolio. We monitor our operating expenses closely to improve our operating leverage as driven by various company-wide initiatives.
As we continue to implement our strategies, there are many internal and external factors that could impact our ability to meet any or all of our objectives. Some of these factors are discussed under Item 1A Risk Factors.
Business Segments
We continuously evaluate our reportable business segments in accordance with the applicable accounting guidance. The Company operatesWe currently operate under two reportable business segments: Microcontroller and Connectivity Division ("MCD") and Memory Products Division ("MPD").
| Business Segments | Description | |
| Microcontroller and Connectivity Division | MCD focuses on | |
| Memory Products Division | MPD focuses on fail-safe storage and datalogging solutions for mission critical applications including the automotive end market. The portfolio includes specialized, high-performance parallel and serial NOR flash memories, memories. | |
For additional information on our segments, see Note 2124, Segment, Geographical and Customer Information, of the Notes to the Consolidated Financial Statements under Part II, Item 8.
Product Overview
The following table summarizes the markets and certain applications related to our products in the MCD segment:
| Products | Markets | Applications | ||
| Automotive, industrial, consumer, computation, white goods, home automation, communications | Automotive instrument clusters, body electronics, power management and infotainment systems, factory automation, machine-to-machine systems, building management systems, smart meters, printers, industrial and automotive control applications, digital still and video cameras, smart home appliances, handheld devices and accessories, desktop and notebook PCs and peripherals, medical devices, white goods and many other applications. | |||
Wi-Fi®, Bluetooth®, Bluetooth Low Energy and combo solutions | Automotive, industrial, consumer, white goods, home automation | IoT applications, wearables, smart home appliances, home automation, industrial automation equipment, connected cars, appliances, wireless headsets, consumer electronics, remote controls, toys, presenter tools and many other applications. | ||
EZ-PD™ controllers for USB-C with Power Delivery and USB controllers | Industrial, handset, PC and peripherals, consumer electronics, mobile devices, automotive | PCs and peripherals, smartphones, USB-C power adapters, USB-C adapter cables, monitors, docking stations, automotive applications, printers, cameras, machine vision and other industrial equipment, handheld devices, VoIP phones, headsets, presenter tools, dongles, point of sale devices and bar code scanners, and many other applications. | ||
| Analog PMICs and energy harvesting solutions | Automotive, industrial, consumer | Instrument cluster systems, Advanced Driver Assistance Systems (ADAS), body control modules, factory automation, IoT beacons, wireless sensor nodes and many other applications. | ||
The following table summarizes the markets and applications related to our products in the MPD segment:
| Products | Markets | Applications | ||
NOR Flash and | Automotive, industrial | Automotive advanced driver assistance systems (ADAS), automotive instrument | ||
RAM: Asynchronous and Synchronous SRAM, HyperRAM® , F-RAM and nySRAM | Automotive, industrial, | Automotive | ||
| Specialty Memories and Clocks | Networking, telecommunication, video, data communications, computation | Medical and instrumentation, storage, wireless infrastructure, | ||
Cypress, the Cypress logo, CapSense, HyperFlash, HyperRAM, PowerGem, PSoC, and Traveo are registered trademarks and F-RAM and EZ-PD are trademarks of Cypress Semiconductor Corporation or its subsidiaries. All other trademarks are property of their respective owners.
Manufacturing
Our "flexible manufacturing" strategy combines capacity from external foundries with output from our internal manufacturing facilities which allows us to meet swingsfluctuations in customer demand while limiting capital expenditure requirements and lessening the burden of high fixed costs, a capability that is important with our rapidly evolving product portfolio.portfolio and revenue growth.
As of the end of fiscal year 2017,2019, we owned a wafer fabrication facility in Austin, Texas. External wafer foundries, mainly in Asia, manufactured approximately 63%60% of our wafers. We expectwafers (8 inch equivalent) in fiscal 2019. External foundries that purchase of wafers as a percentage of our total wafer consumption from our wafer foundry partners will increase in 2018.we partnered with during 2019 included HuaHong Grace Semiconductor Manufacturing Corporation, Semiconductor Manufacturing International Corporation, Skywater Technologies Inc., Taiwan Semiconductor Manufacture Company, United Microelectronics Corporation and Wuhan Xinxin Semiconductor Manufacturing Corporation.
We conduct assembly and test operations at our back-end manufacturing facilities in Cavite, Philippines and Bangkok, Thailand, manufacturing volume products and packages, which contributeallows us to better leverage of
effectively manage our manufacturing cost. These facilities accountExternal assembly and test subcontractors in Asia accounted for approximately 28%72% of the total assembly output and 38%62% of the total test output. Various subcontractorsoutput in Asia perform the balance of thefiscal 2019. External assembly and test operations.
during 2019 included Advanced Semiconductor Engineering, Inc. (“ASE”) - Agreements for assembly and test services;
, Amkor Technology, Deca Technologies Inc. - Agreement for manufacturing services.
, Fujitsu Semiconductor Limited - Agreements for the supply of product wafer foundry services, sort services and assembly and test services;
United Test and Assembly Center Ltd - Agreement for assembly and test services; and.
Sales and Marketing
We sell our semiconductor products through several channels: distributors; manufacturing representative firms; and sales by our sales force directly to original equipment manufacturers and their suppliers.
Our marketing activities target customers, reference design houses and our potential partners; and include a combinationvariety of direct marketing activities, such as trade shows, events and sponsored activities. We augment our sales effort with field application engineers, specialists in our products, technologies and services who work with customers to design our products into their systems. Field application engineers also help us identify emerging markets and new products.
Outstanding accounts receivable from Arrow Electronics Inc., one of our distributors accounted for 15% of our consolidated accounts receivable as of December 29, 2019. Outstanding accounts receivable from Fujitsu Electronics Inc., one of our distributors accounted for 28%25% of our consolidated accounts receivable as of December 31, 2017 and 24%, of our consolidated accounts receivable as of January 1, 2017.30, 2018.
Revenue generated through Arrow Electronics and Fujitsu Electronics Inc. and Arrow Electronics,, two of our distributors, accounted for 16% and 10%, respectively, of our consolidated revenues for fiscal 2019, 18% and 14%, respectively, of our consolidated revenues for fiscal 2018, and 20% and 13%, respectively, of our consolidated revenues for fiscal 2017. Revenue generated through Fujitsu Electronics Inc., one of our distributors, accounted for 23% of our consolidated revenues for fiscal 2016 and 25% of our consolidated revenues for fiscal 2015. Avnet, Inc., one of our distributors, accounted for 10% of our consolidated revenues for fiscal 2015. No other distributorsdistributor or customersdirect end-customer accounts for 10% or more of our revenue. We terminated our distribution agreement with Fujitsu Electronics, Inc. in October 2019.
Backlog
Our sales typically rely upon standard purchase orders for delivery of products with relatively short delivery lead times. Customer relationships are generally not subject to long-term contracts. Although we have entered into long-term supply agreements with certain customers, products to be delivered and the related delivery schedule under these long-term contracts are frequently revised. Accordingly, we believe that our backlog is not a meaningful indicator of future revenues.
Competition
The semiconductor industry is intensely competitive and continually evolving. This intense competition results in a challenging operating environment for most companies in this industry. This environment is characterized by the potential erosion of sale prices over the life of each product, rapid technological change, limited product life cycles, greater brand recognition and strong domestic and foreign competition in many markets. Our ability to compete successfully depends on many factors, including:
•our success in developing new products and manufacturing technologies;
•delivery, performance, quality and price of our products;
•diversity of our products and timeliness of new product introductions;
•cost effectiveness of our design, development, manufacturing and marketing efforts;
•quality of our customer service, relationships and reputation;
overall success with which our customers market and sell their products and solutions that incorporate our products; and
•number and nature of our competitors and general economic conditions.
We face competition from domestic and foreign semiconductor manufacturers, many of which have advanced technological capabilities and greater brand recognition and have increased their participation in the markets in which we operate. We compete with a large number of companies primarily in the IoT, automotive, industrial, communications,and consumer computation, data communications and mobileapplications markets. Companies that compete directly with our businesses include, but are not limited to, Adesto, Broadcom, Everspin Technologies, Fujitsu, GigaDevice Semiconductor, GSI Technology, Hynix, Integrated Device Technology, Integrated Silicon Solution, Lattice Semiconductor, Macronix, Marvell, MediaTek, Microchip Technology, Micron Technology, Nordic Semiconductor, NXP Semiconductors NV, Qualcomm, Realtek, Renesas, Richtek, Semtech, Silicon Laboratories, ST Microelectronics, Texas Instruments, Toshiba, VIA Labs, XMC and Winbond.
Environmental Regulations
We use, generate and discharge hazardous chemicals and waste in our research and development and manufacturing activities. United States federal, state and local regulations,jurisdictions, in addition to those of otherthe foreign countries in which we operate, impose various environmental rules and obligations, which are becoming increasingly stringent over time, intended to protect the environment and in particular to regulate the management and disposal of hazardous substances. We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances that apply to specified electronic products put on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the “RoHS Directive”) and similar legislation in China and California. We are committed to the continual improvement of our environmental systems and controls. However, we cannot provide assurance that we have been, or will at all times be, in complete compliance with all environmental laws and regulations. Other laws impose liability on owners and operators of real property for any contamination of the property even if they did not cause or know of the contamination. While to
date we have not experienced any material adverse impact on our business from environmental regulations, we cannot provide assurance that environmental regulations will not impose expensive obligations on us in the future, or otherwise result in the incurrence of liabilities such as the following:
•a requirement to increase capital or other costs to comply with such regulations or to restrict discharges;
•liabilities to our employees and/or third parties; and
•business interruptions as a consequence of permit suspensions or revocations, or as a consequence of the
granting of injunctions requested by governmental agencies or private parties.
Intellectual Property
We have an active program to obtain patent and other intellectual property protection for our proprietary technologies, products and other inventions that are aligned with our strategic initiatives. We rely on a combination of patents, copyrights, trade secrets, trademarks and proprietary information to maintain and enhance our competitive position in the domestic and international markets we serve. As of the end of fiscal 2017,2019, we had approximately 3,6002,890 issued patents and approximately 700611 additional patent applications on file domestically and internationally. In addition, in fiscal 20182020 we are preparing to file up to 4060 new patent applications in the United States and up to approximately 5080 foreign applicationapplications predominantly in Europe and Asia. The average remaining life of our domestic patent portfolio is approximately 8.5 years.
In addition to factors such as innovation, technological expertise and experienced personnel, we believe that patents are increasingly important to remain competitive in our industry, defend our position in existing markets and to facilitate the entry of our proprietary products into new markets. As our technologies are deployed in new applications and we face new competitors, we will likely subject ourselves to new potential infringement claims and discover third-party infringement of our intellectual property. Patent litigation, if and when instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. We are committed to vigorously defending and protecting our investment in our intellectual property. Therefore,We believe the strength of our intellectual property program, including the breadth and depth of our portfolio, will be critical to our success, although, our business as a whole is not significantly dependent on any single patent, copyright, or other intellectual property right.
In addition to developing patents based on our own research and development efforts, we license some patents from third parties, and we may purchase or license additional patents from third parties. Established competitors in theexisting and new marketsindustries, as well as companies that purchase and enforce patents and other intellectual property, may obtain or already have patents that allegedly or otherwise cover products similar to ours. There is no assurance that we intendwill be able to pursue.obtain patents covering our own products or that we will be able to obtain licenses from other companies on favorable terms or at all.
We perform an analysis ofreview our intellectual property portfolio on an on-going basisfrom time to ensure we are deriving the fulltime to identify opportunities to derive additional value offrom our assets. Accordingly, we continue to evaluateWe may consider selling certain unaligned patents that no longer align with our patent strategies as well as employ other monetization models for our patent portfolio. In August 2016,From time to time we entered into a series of agreements to divest a large number of older, legacyhave divested patents that were not relevant to our current business. Divestiture of thesecertain patents will reduce our operating expenses (associated with our patent portfolio)to third parties has generated and may leadcontinue to generate future contingent revenue.or non-contingent income.
Employees
As of December 31, 2017,29, 2019, we had 6,0995,871 employees. Geographically, 1,9461,824 employees were located in the United States, 1,025 employees were located964 in the Philippines, 821 in Thailand, 910 employees were located in Philippines, 567 employees were located697 in India, 532 employees were located450 in Japan, 447 employees were located353 in Malaysia, 317 in Greater China 244 employees were located(including mainland China, Hong Kong and Taiwan), 247 in Europe, and 428 employees were located198 in other countries. Of the total employees, 3,4053,164 employees were associated with manufacturing, 1,537 employees were associated1,524 with research and development, and 1,157 employees were associated1,183 with selling, general and administrative functions.
Information about our Executive Officers of the Registrant as of December 31, 2017
Certain information regarding each of our executive officers as of February 7, 2020 is set forth below:
| Name | Age | Position | ||
| Hassane El-Khoury | President, Chief Executive Officer and Director | |||
| Thad Trent | Executive Vice President, Finance and Administration, and Chief Financial Officer | |||
| Sudhir Gopalswamy | Executive Vice President, Microcontroller and Connectivity Division | |||
| Sam Geha | Executive Vice President, Memory Products Division | |||
| Pamela Tondreau | Executive Vice President, Chief Legal and Human | |||
Hassane El-Khourywas named President, Chief Executive Officerhas served as the president and Director at the Company inchief executive officer of Cypress, and as a member of our Board of Directors, since August 2016. From 2012 to August 2016, he was the executive vice president of Cypress's Programmable Systems Division, managing the company's standard and programmable microcontroller portfolio, including its Platform PSoC family of devices, and its automotive business. Prior to that, from 2010 to 2012, he served as a senior director of Cypress's automotive business unit. Before joining Cypress, Mr. El-Khoury served as Executive Vice President, Programmablein various engineering roles with subsystem supplier Continental Automotive Systems, Division, which is now partwhere he spent time based in the U.S., Germany, and Japan. He currently serves on the board of directors of the Microcontroller & Connectivity Division (MCD), from 2012 until his appointment as President and Chief Executive Officer. From 2010 to 2012, Mr. El-Khoury served as Senior Director of the Company’s Automotive Business Unit. Prior to joining the Company, from 1999 to 2007, Mr. El-Khoury served as Senior Design Engineer at Continental Automotive Designs,Semiconductor Industry Association, a German automotive manufacturing company specializing in tires, brake systems, interior electronics, automotive safety, powertrain and chassis components, tachographs, and other parts for the automotive and transportation industry.trade association, since September 2017. Mr. El-Khoury holds a Bachelorbachelor of Sciencescience degree in Electrical Engineering
electrical engineering from Lawrence Technological University and a Master of Sciencesmaster's degree in Engineering Managementengineering management from Oakland University.
Thad Trenthas been the Chief Financial Officerserved as chief financial officer and Executive Vice Presidentexecutive vice president of Financefinance & Administrationadministration at the Company since June 2014. Mr. Trent joined Cypress in 2005 and had been Vice Presidentbecame a vice president of Finance sincefinance in 2010. Prior to serving as the Chief Financial Officer at the Company,chief financial officer, he led the strategic planning functions for the Company’s business units and worldwide operations and he managed the financial reporting, accounting, and planning and analysis functions for the Company. Before joining the Company, Mr. Trent , held finance leadership roles at publicly traded companies Wind River Systems, a developer of embedded systems software, and Wyle Electronics, a distributor of high-tech electronic components, as well as two technology startups. He alsocurrently serves as a director on AgigA Tech, Inc., a Company subsidiary,the boards of directors of SkyHigh Memory Limited, our joint venture for NAND flash memory products, and Deca Technologies Inc., a majority-owned Company subsidiary.one of our equity investees. Mr. Trent earned his Bachelorholds a bachelor of Sciencescience degree in Business Administrationbusiness administration and Finance atfinance from San Diego State University.
Sudhir Gopalswamy was named Executive Vice President has served as executive vice president of the Microcontrollermicrocontroller and Connectivity Division (MCD)connectivity division at the Company insince February 2018, having previously been namedserved as the Senior Vice Presidentsenior vice president of MCD in Septemberfrom May 2016 for which heto February 2018. In his role, Mr. Gopalswamy is responsible for all aspects of the MCD business. Mr. Gopalswamy joined the Company in 2008 and has managed a variety of business units, including the Timing Solutions Business Unit,timing solutions business unit from 2009 to 2011, the Synchronoussynchronous SRAM Business Unitbusiness unit from 2011 to 2014, and, most recentlyas a vice president, the MCU Business Unit, where he also served as a Senior Vice President.business unit from July 2014 to May 2016. Prior to joining the Company, Mr. Gopalswamy worked at Conexant Systems, Inc., a fabless semiconductor company, where he was responsible for the cable set-top box product line. Before Conexant, he spent nine years at Intel Corporation, during whichone of the world's leading semiconductor companies, where he held management and leadership roles of increasing responsibility, spanning the computing, communications/networking, and consumer electronics segments. Mr. Gopalswamy holds a BSEEbachelor of science degree in Electrical Engineeringelectrical engineering from Purdue University and an MBAa master of business administration degree from Duke University.
Sam Geha, Ph.D., was named Executive Vice Presidenthas served as executive vice president of the Memory Product Divisionmemory products division at the Company insince February 2018, having previously been namedthe senior vice president of MPD from September 2016 to February 2018. Mr. Geha is responsible for all aspects of the MPD business. Previously, he served as the Senior Vice Presidentsenior vice president of the Memory Product Division in September 2016. Previously, he was named as the Senior Vice President of the Intellectual Propertyintellectual property (IP) Business Unit inbusiness unit since June 2015, having managed the IP Business Unitbusiness unit since June 2013, where he oversaw licensing of the Company’s various embedded nonvolatile memory technologies (SONOS and eCT) to foundries, including UMC, HLMC and HH-Grace, as well as licensing of the Company’s 3D NAND technology to XMC. Prior to that, he was the Vice Presidentserved as vice president of the TechnologyCypress's technology R&D organization since May 2007. He also serves as a board member of Enovix, a Silicon-based Lithium Ion battery start-up. Mr. Geha joined the Company in 1995 and has served as the senior director of technology development for SONOS and the director of technology development for MRAM and SRAM technologies. Prior to joining the Company,Before Cypress, he worked in various technology development functions at Motorola, a telecommunications equipment company, and National Semiconductor.Semiconductor Corporation, a semiconductor manufacturer. Mr. Geha currently serves on the boards of
directors of SkyHigh Memory Limited, our joint venture for NAND flash memory products, and Enovix Corporation, which is a silicon-based lithium-ion battery start-up in which the Company has invested. He holds a bachelor of science degree in electrical engineering, (BSEE), a master of science degree in electrical engineering, (MSEE) and a philosophical doctoratePh.D. degree in electrical engineering (Ph.D.) from the University of Arizona.
Pamela L. Tondreauwas named Executive Vice President, Chief Legal serves as our executive vice president, chief legal and Human Resources Officer,human resources officer, and Corporate Secretary atcorporate secretary. She has overseen all of Cypress's legal matters since joining the Company in October 2014, initially as interim general counsel, then as senior vice president and general counsel starting in January 2015, then as senior vice president and chief legal officer starting in September 2016, and most recently as executive vice president and chief legal officer from February 2018 having previously been named asto the Chief Legal and Human Resources Officerpresent. In addition, Ms. Tondreau assumed oversight responsibility for the Company's human resources function in November 2017. Ms. Tondreau2017 and has continued to serveserved as the Corporate Secretary, having previously been named as the Chief Legal Officer and Corporate Secretary in September 2016. She joined the Company in 2014, and began serving as the Senior Vice President, General Counsel and Corporate Secretary inour corporate secretary since January 2015. Prior to joining the Company, Ms. Tondreau spent nearly 13 years at Hewlett-Packard Company (now HP Inc.), a multinational information technology company, in various roles, including Chief Intellectual Property Counselchief intellectual property counsel and Deputy General Counseldeputy general counsel to the Chief Technology Officer,chief technology officer, HP Labs,labs, HP Networking,networking, IP Licensing, Strategic Initiativeslicensing, strategic initiatives and Global Alliances.global alliances. In addition, she supported the Chief Marketing Officer,chief marketing officer, the Chief Information Officerchief information officer and the Executive Vice Presidentexecutive vice president of Personal Systems,personal systems, as well as serving as Corporate Secretarycorporate secretary to the Technology Committeetechnology committee of Hewlett-Packard’s board of directors. Prior to her time at Hewlett-Packard, Ms. Tondreau was an associate at the law firm of Thelen, Marrin, Johnson & Bridges (now Thelen LLP), serving as both a litigation and corporate attorney. Since July 2019, she has served on the board of directors of Energy Recovery, Inc., a publicly listed energy solutions provider to industrial fluid flow markets where she is a member of the compensation committee. Ms. Tondreau holds a bachelor’s degree from U.C. Berkeley and a J.D. degree from McGeorge School of Law.
Available Information
We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, free of charge on our website at www.cypress.com, as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). By referring to our website, we do not incorporate such website or its contents into this Annual Report on Form 10-K.
Additionally, copies of materials filed by us with the SEC may be accessed at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or at www.sec.gov. For information about the SEC’s Public Reference Room, contact 1-800-SEC-0330.
| ITEM 1A. | RISK FACTORS |
The announcement and pending agreement to be acquired by Infineon may adversely affect our business, financial condition, results of operations, cash flows, and stock price.
Uncertainty about the effect of our pending acquisition (the "Merger") by Infineon Technologies AG ("Infineon") on our senior leaders, employees, partners, customers, and other third parties may disrupt our sales and marketing or other key business activities and may have a material adverse effect on our business, financial condition, results of operations, cash flows, and stock price. We are subject to risks in connection with the announcement and pendency of the Merger including the following:
the uncertainty of the pending Merger may cause our existing customers to investigate alternatives and/or switch to alternate suppliers;
other parties with whom we have business relationships may experience uncertainty as to the future of those relationships and may delay or defer certain business decisions, seek alternative relationships with third parties, or seek to alter their present business relationships with us;
parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties instead of us;
current and prospective employees may experience uncertainty about their roles following the Merger and we might not be able to attract, recruit, retain, and motivate key talent, including senior leaders, to the same extent that we have previously been able to attract, recruit, retain, and motivate employees;
legal proceedings challenging the Merger may divert management time and attention, may require us to incur significant attorneys' fees and other expenses, and may result in unfavorable outcomes that could delay or prevent the Merger from being completed;
restrictions in the Agreement and Plan of Merger dated June 3, 2019, by and among Infineon, its subsidiary IFX Merger Sub, Inc., and the Company (the "Merger Agreement") may prevent us from pursuing
opportunities without Infineon’s approval or taking other actions that we might have undertaken in the absence of the Merger, and may affect our ability to execute our business strategies, respond effectively to competitive pressures and industry developments, and attain our financial and other goals (including with respect to our current and prospective employees and parties with whom we have or seek to establish business relationships);
restrictions in the Merger Agreement on our ability to pursue alternative transactions to the Merger could, in specified circumstances, require us to pay Infineon a termination fee of $330 million, and could otherwise discourage or deter a third party from considering or proposing an alternative transaction with us; and
we have diverted, and will continue to divert, significant management and other internal resources towards the completion of the Merger.
Any failure of our pending acquisition by Infineon to be completed may adversely affect our business, financial condition, results of operations, cash flows and stock price.
We face a risk that the proposed acquisition of the Company by Infineon might not be completed. Each of our and Infineon’s obligations to complete the Merger was originally subject to a number of conditions specified in the Merger Agreement, including, among others: (i) the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of Cypress common stock; (ii) the absence of any law prohibiting or order preventing the completion of the Merger; (iii) the receipt of clearance from the Committee on Foreign Investment in the United States, the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Waiting Period"), the receipt of any applicable clearance or affirmative approval by the Anti-Monopoly Bureau of the State Administration for Market Regulation in the People’s Republic of China, approval from the European Commission under the European Merger Regulation, and the expiration of any applicable waiting periods or any applicable authorizations or affirmative approvals of certain other non-U.S. governmental authorities under antitrust laws; (iv) the absence of a material adverse effect with respect to Cypress; and (v) compliance in all material respects on the part of each of Cypress and Infineon with such party’s covenants under the Merger Agreement.
As of February 19, 2020, stockholder approval for the Merger has been obtained, and the proposed transaction has received antitrust clearances from authorities in the United States, the European Union, Taiwan, the Philippines, South Korea, and Japan. The parties require approval for the proposed transaction from the Committee on Foreign Investment in the United States (CFIUS) and from China’s State Administration for Market Regulation (SAMR). There can be no assurance that the remaining conditions to the completion of the Merger will be satisfied in a timely manner or at all. If the Merger is not completed, Cypress's stockholders will not receive the proposed Merger consideration.
Regulatory and governmental entities may impose conditions on the granting of the required regulatory clearances and approvals described above. In that case, lengthy negotiations may ensue among these regulatory or governmental entities, Infineon and us, which could delay the closing (and any receipt of Merger consideration) and increase the risk that the merger might not be completed.
If the Merger is not completed, our share price could fall to the extent that our current share price reflects an assumption that the Merger will be completed. Furthermore, if the Merger is not completed, we may suffer other consequences that could adversely affect our business, financial condition, results of operations, cash flows, and stock price, including the following:
we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, and these fees and costs are payable by us regardless of whether the Merger is completed;
the failure of the Merger to be completed may result in adverse publicity and a negative impression of us in the financial markets and investment community, and negative responses from customers, partners and other third parties;
legal proceedings may be instituted against us, our directors and others relating to the transactions contemplated by the Merger Agreement;
any disruptions to our business resulting from the announcement and pendency of the acquisition, including any adverse changes in our relationships with our customers, vendors and employees, may continue or intensify in the event the Merger is not completed, and we might be unable to recover business that was lost or win back customers who migrated to other suppliers due to merger uncertainty;
we could be required to pay a termination fee of up to $330 million to Infineon under certain circumstances as described in the Merger Agreement;
we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures; and
| • | we might incur additional costs related to employee retention. |
Unfavorable economic and market conditions, domestically and internationally, have affected and may in the future adversely affect our business, financial condition, results of operations and cash flows.flows or may contribute to uncertainty of our business.
We have significant customer sales both in the U.S. and internationally. We are also reliant uponrely on U.S. and international suppliers, manufacturing partners and distributors. We are therefore susceptible to adverse U.S. and international economic and market conditions. If any of our manufacturing partners, customers, distributors or suppliers experience serious financial difficulties or cease operations, our business will be adversely affected.affected and such effects may be material. In addition, the adverse impact of an unfavorable economy on consumers, including high unemployment rates, may adversely impact consumer spending, which willwould adversely impact demand for products such as certainmany end products in which our products are embedded. In addition,Any reduction in our customers' sales of their end-products, and/or any apprehension among our distributors and customers of a possible reduction in such sales, would likely cause an indirect negative impact on our own sales. Even prior to a widespread economic downturn, the related uncertainty and the market's fear of deteriorating conditions might cause our distributors and customers to place fewer orders for our products. Moreover, commodity prices may be more volatile in times of certain commodities, including oil, metals, grains and other food products, are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations and periodic delays in delivery.economic turmoil. High or volatile commodity prices increase the cost of doing business and adversely affect consumers’consumers' discretionary spending. As a result of the difficulty that businesses (including our customers) may have in obtaining credit the increasing and/or volatile costs of commodities and the decreased consumer spending that may result from weakness in the general global economy,occurs during a recession, global economic turmoil (or uncertainty and market turmoilapprehension over the possibility of economic turmoil), are likely to have an adverse impact from time to time on our business, financial condition, results of operations and cash flows.flows and such effects may be material.
The trading price of our common stock has been and will likely continue to be volatile due to various factors, some of which are beyond our control, and each of which could adversely affect our stockholders’ value.
The trading price of our common stock has been and will likely continue to be volatile due tois influenced by various factors, some of which are beyond our control, including, but not limited to:
Revenue fluctuations due to unexpected shifts in customer demand;
Announcements about our earnings or the earnings of our competitors that are not in line with analyst expectations;
Our ability to execute on our long term strategic corporate transformation initiatives, collectively known as our Cypress 3.0 initiatives, and our gross margin improvement plan;initiatives;
Credit conditions and our ability to refinance our existing debt at commercially reasonable terms, which may limit the Company’s working capital;
Quarterly variations in our results of operations or those of our competitors;
Announcements by us or our competitors of acquisitions, new products, significant contracts, design wins, commercial relationships or capital commitments;
The perceptions of general market conditions in the semiconductor industry (including recent trends toward consolidation in the semiconductor industry) and global market conditions;
Our ability to develop and market new and enhanced products on a timely basis;
Any major change in our board or senior management;
Changes in governmental regulations or in the status of our regulatory compliance that impact our business;
Recommendations by securities analysts or changes in earnings estimates concerning us, or our customers or competitors;
The volume of short sales, hedging and other derivative transactions on shares of our common stock;
Economic conditions and growth expectations in the markets we serve;
Changes in our policy regarding dividends or our ability to declare a dividend;
Changes in our policy regarding stock repurchases or our ability to repurchase shares of our common stock;
Supply disruption or price increases from third-party manufacturing partners;
Our ability to generate sufficient cash flow to repay debt andand;
As a result of these and other factors, the trading price for our common stock has been and will likely continue to be volatile.
Further, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
We utilize debt financing and such indebtedness could adversely affect our business, financial condition, results of operations and earnings per share. We may be unable to meet our payment obligations.
We incur indebtedness to finance our operations and we have substantial amounts of outstanding indebtedness and debt service requirements. Our credit facility contains customary affirmative, negative and financial covenants, including a maximum total leverage ratio and a minimum fixed charge coverage ratio. Our ability to meet our payment and other obligations and covenants under our indebtedness depends on our ability to generate significant cash flow. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. There is no assurance that our business will generate cash flow from operations, or that future borrowings will be available to us under our existing (or any amended) credit facilities or otherwise, in an amount sufficient to enable us to meet payment obligations under any indebtedness we may incur from time to time. If we are not able to generate sufficient cash flow to service our debt obligations or meet required debt covenants, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. There is no assurance that we will be able to implement any of these alternatives on commercially reasonable terms, if at all. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under any indebtedness we owe. In addition, an inability to meet our payment obligations under any indebtedness may trigger a default, and possible acceleration of payment terms, under the applicable debt financing agreements.
Furthermore, the interest rate on certain of these instruments is tied to short term interest rate benchmarks including the Prime Rate and LIBOR. Interest rates have remained at historically low levels for a prolonged period of time and we expect interest rates to rise in the future.time. If the rate of interest we pay on our borrowings increaseschanges it wouldcould increase our debt-related expenditures.expenditures or may result in losses on our interest rate swaps. There is no assurance that our business will generate cash flow from operations, or that future borrowings will be available to us under our existing (or any amended) credit facilities or otherwise, in an amount sufficient to enable us to meet payment obligations (including any increased interest payment obligations) under any indebtedness we may incur from time to time.
$90.0300 million related tounder our Senior Secured Revolving Credit Facility
$495.4 million Term Loan B
$246.6287.5 million of our 4.5% Convertible Senior Notes due 2022 and
$12 million of Spansion's 2% Exchangeable Senior Exchangeable Notes and
due 2020See Note 1416, Debt, of the Notes to the Consolidated Financial Statements for more information regarding our debt obligations.
The exchange or conversion, as applicable, of the Spansion Notes and the 2022 Notes could dilute the ownership interest of our existing stockholders and negatively impact our financial position.
The exchange or conversion, as applicable, of some or all of Spansion's 2% Exchangeable Senior Notes due 2020 (the "Spansion Notes") or our 4.5% Convertible Senior Notes due 2022 (the "2022 Notes") could dilute the ownership interest of our existing stockholders and negatively impact our financial position. The Spansion Notes and the 2022 Notes are each exchangeable or convertible, as applicable, into shares of the Company’s common stock at the election of the holders of such series of notes upon the occurrence of certain conditions specified in the indenture governing such series of notes, including during any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the exchange or conversion price of the applicable series of notes on each applicable trading day (the "sales price condition"). Any exchange or conversion, as
applicable, of the Spansion Notes or 2022 Notes may be settled in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, in each case at our election.
The sales price condition for the Spansion Notes and the 2022 Notes was met on the last trading day of the Company's fiscal quarter ended December 29, 2019 and, as a result, holders of the Spansion Notes and the 2022 Notes, as applicable, may, at their option, exchange or convert, as applicable, their notes during the Company’s fiscal quarter ending March 29, 2020. If we elect to settle all or any portion of such exchanges or conversions of Spansion Notes or 2022 Notes, as applicable, in shares of our common stock, any sales in the public market of such common stock issued upon such exchange or conversion, as applicable, could adversely affect prevailing market prices of our common stock. Additionally, if we elect to settle all or any portion of such exchanges or conversions of Spansion Notes or 2022 Notes, as applicable, in cash, such payments of cash would reduce our available cash and negatively impact our liquidity.
The Spansion Notes and the 2022 Notes were similarly convertible during our fiscal quarters ended December 29, 2019 and September 29, 2019. During those periods, certain holders elected to convert or exchange an immaterial principle amount of such notes. We elected to settle the principal in cash and the conversion premium by issuing common stock.
Uncertainty about the continuing availability of LIBOR may adversely affect our financial condition, results of operations, and cash flows.
Borrowings under our revolving credit facility (our "Revolving Credit Facility") bear interest at a floating rate which at our option may be based on the London Inter-bank Offered Rate ("LIBOR"). We also have entered into fixed-for-floating interest rate forward swap agreements to manage our exposure to fluctuations in the LIBOR benchmark interest rate. As described in Note 13, Foreign Currency and Interest Rate Derivatives, of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report, we pay the counterparties to these swap agreements a fixed rate in return for a LIBOR-based floating rate, which we use to fund payments under our Revolving Credit Facility. The aggregate notional amount of these swap agreements is $300 million.
In July 2017, the United Kingdom’s Financial Conduct Authority (the "FCA"), which regulates LIBOR, announced that after December 31, 2021, it would no longer compel banks to submit the rates required to calculate LIBOR. We cannot predict the effect of the FCA’s decision not to sustain LIBOR or, if changes ultimately are made to LIBOR, the effect those changes may have on the interest we pay on our Revolving Credit Facility and the payments we receive under our interest rate forward swap agreements.
In anticipation of LIBOR’s discontinuation, our Revolving Credit Facility agreement, as amended on July 31, 2019, provides a transition mechanism to a LIBOR-replacement rate to be mutually agreed upon by us and our lenders. There can be no assurance, however, that we will be able to reach an agreement with our lenders on any such replacement benchmark before experiencing adverse effects due to changes in interest rates, if at all. In addition, any such changes under the Revolving Credit Facility may result in interest rates and/or payments that are higher or lower than payments we presently are obligated to make under our revolving credit facility. We also may seek to amend our swap agreements to replace the benchmark rate. There can be no assurance, however, that the counterparties to those agreements will agree to a replacement rate, and any such changes to the swap agreements may result in us receiving payments that are higher or lower than the payments we are entitled to receive under our existing swap agreements. There also can be no assurance that (a) the amounts we are entitled to receive under the swap agreements will continue to be correlated with the amounts we are required to pay under the Revolving Credit Facility or (b) transitions to new benchmarks will be concurrent across our various agreements, the failure of either or both of which could diminish the swaps’ effectiveness as hedging instruments. Any of these risks could adversely affect our financial condition, results of operations, and cash flows.
If we fail to compete successfully in our highly competitive industry and markets, our business, financial condition and results of operations will be seriously harmed.
The semiconductor industry is intensely competitive. This intense competition results in a difficult operating environment that is marked by erosion of average selling prices over the life of each product and rapid technological change resulting in limited product life cycles. In order to offset selling price decreases, we attempt to decrease the manufacturing costs of our products and to introduce new, higher priced products that incorporate differentiated and advanced features. If these efforts are not successful or do not occur in a timely manner, or if our newly introduced products do not gain market acceptance, our business, financial condition and results of operations could be seriously harmed.
Our ability to compete successfully in the rapidly evolving semiconductor industry depends on many factors, including:
our ability to successfully execute on our long term strategic corporate transformation initiatives, collectively known as our Cypress 3.0 initiatives;
our success in developing and marketing new products, software platforms and manufacturing technologies and bringing them to market on a timely basis;
the quality and price of our products, and our ability to meet the specification requirements of our customers;
the willingness of our customer base to absorb any increase in the price thatat which we sell our products;
the pace at which customers incorporate our products into their systems, as is sometimes evidenced by design wins;
the diversity of our product lines;
the cost effectiveness of our design, development, manufacturing, support and marketing efforts, especially as compared to our competitors;
our success in developing and introducing firmware in a timely manner;
our customer service and customer satisfaction;
our ability to successfully execute our flexible manufacturing strategy;
our ability to successfully execute acquisitions of other companies;
the number, strength and nature of our competitors, the markets they target and the rate and success of their technological advances;
the success of certain of our development activityactivities including our investments in internal and external development stage startups;
our ability to get competitive terms with our vendors, manufacturing partners and suppliers;
general economic conditions;
the cyclical nature of the semiconductor industry;
our ability to maintain supply of products from third partythird-party manufacturers; and
our access to and the availability of working capital.
Although we believe we currently compete effectively in the above areas to the extent they are within our control, given the pace of change in our industry (including recent trends toward consolidation in the industry), our current abilities are not guarantees of future success. If we are unable to compete successfully in this environment, our business, financial condition and results of operations will be seriously harmed.
We face significant volatility in supply and demand conditions for our products, and this volatility, as well as any failure by us to accurately forecast future supply and demand conditions, could materially and negatively impact our business.
The semiconductor industry has historically been characterized by wide fluctuations in the demand for, and supply of, semiconductors. Demand for our products depends in large part on the continued growth of various electronics industries that use our products, including, but not limited to:
automotive applications including advanced driver assistance systems (ADAS), instrument clusters, infotainment systems, body electronics, connectivity, HVAC controls, and event data recorders;
industrial systems including factory automation equipment, smart electric meters, aerospace, industrial controls, point-of-sale terminals and test equipment;
Wireless products including smart home applications, health and fitness, audio, automotive, medical device and industrial devices;
consumer electronics including wearable electronics, smartphones and other mobile devices, gaming consoles, game-pads, remote controls, toys, presenter tools, TVs, set-top boxes and fitness equipment;
wireless telecommunications equipment;
computers and computer-related peripherals;
medical equipment; and
networking equipment.
Any downturn, shift in product launch schedule or reduction in the growth of these industries could seriously harm our business, financial condition and results of operations. Further, pricing in the semiconductor industry is subject to significant volatility. As an example, pricing of memory products during fiscal 2017 was significantly impacted by industry conditions. We may be unable to anticipate or manage price volatility which may adversely impact our margins, market share, financial condition and results of our operations.
We order materials and build our products based primarily on our internal forecasts, and customer and distributor forecasts and secondarily on existing orders, which may be canceled under many circumstances. Because our markets can be volatile, based on consumer demand and subject to rapid technological changes, our forecasts may be inaccurate, causing us to make too many or too few of certain products.
Our customers frequently place orders requesting product delivery almost immediately after the order is made, which makes forecasting customer demand even more difficult, particularly when supply is abundant. In addition, demand for our products could be materially different from our expectations due to changes in customer order patterns, including order deferrals or cancellations. If we experience inadequate demand, order cancellations, or a significant shift in the mix of product orders that makes our existing capacity and capability inadequate, our fixed costs per semiconductor produced will increase, which will harm our financial condition and results of operations.
Alternatively, if we should experience a sudden increase in demand, we will need to quickly ramp our inventory and/or manufacturing capacity to adequately respond to our customers. If we or our manufacturing partners are unable to ramp our inventory or manufacturing capacity in a timely manner or at all, we risk losing our customers’ business, which could have a negative impact on our financial performance and reputation.
If we fail to develop, introduce and sell new products or fail to develop and implement new technologies, our ability to compete in our end markets will suffer and our financial results could be adversely impacted.
Like many semiconductor companies, which operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products, our future success depends on our ability to develop and introduce new products that customers choose to buy. Our new products, for example PSoC® products, our wireless connectivity products, USB-C, and Traveo™ microcontroller products, are an important strategic focus for us and therefore, they tend to consume a significant amount of our resources. The new products the market requires tend to be increasingly complex, incorporating more functions including software and security and operating at faster speeds than old products.
Increasing complexity generally requires additional features on a smaller chip. This makes manufacturing new generations of products substantially more difficult, more costly and more time consuming than prior generations.
Despite the significant amount of resources we commit to new products, there can be no guarantee that such products will perform as expected or at all, be introduced on time to meet customer schedules or gain market acceptance. If we fail to introduce new product designs or technologies in a timely manner, or are unable to manufacture products according to these design requirements, or if our customers do not successfully introduce new systems or products incorporating our products or if market demand for our new products does not materialize as anticipated, our business, financial condition and results of operations could be materially harmed.
The complex nature of our manufacturing activities, our broad product portfolio, and our increasing reliance on third-party manufacturers makes us highly susceptible to manufacturing problems and these problems can have a substantial negative impact on us if they occur.
Manufacturing semiconductors is a highly complex and precise process, requiring production in tightly controlled, clean-room environments. Even very small impurities in our manufacturing materials, defects in the masks used to print circuits on a wafer or other problems in the wafer fabrication process can cause a substantial percentage of products to be rejected and be non-functional. We and, similarly, our third-party foundry partners, may experience problems in achieving an acceptable success rate in the manufacture of wafers and the likelihood of facing such difficulties is higher due to our broad product portfolio and also in connection with the transition to new manufacturing methods. TheWe may also experience manufacturing problems in our assembly and test operations (or the assembly and test operations of third-party partners) and in the introduction of new packaging materials.
Our long-term growth strategy depends, in large part, upon winning and maintaining business from automotive industry customers as their designs call for increasing semiconductor content per vehicle over time. Automotive industry customers have a particularly low tolerance for defective parts. If we fail to maintain high quality standards, or if we fail to correct quality problems quickly after they arise, we risk the loss of existing orders, which could cause short-term revenue shortfalls, as well as the loss of future orders and customer confidence, which could undermine our automotive growth strategy.
In general, the interruption of wafer fabrication, a reduction in available wafer supply, the failure to achieve acceptable manufacturing yields, or the inability to achieve acceptable levels of quality and security in our products as expected by our customers, including our customers in the automotive industry, at any of our facilities, or the facilities of our third-party foundry partners, would seriously harm our business, financial condition and results of operations. This risk may be exacerbated by our recent divestiture and future divestitures of any
We are dependent on third parties to manufacture products, market products, distribute products, generate a significant portion of our manufacturing facilities, as we would be increasingproduct sales, fulfill our reliancecustomer orders, and transport our products. Problems in the performance or availability of these companies could seriously harm our financial performance.
We rely significantly on third-party partners in that situation.independent contractors to manufacture our products, which includes wafer fabrication, assembly, packaging and testing.
In March 2017, we completed the sale of our semiconductordivested a wafer fabrication facility (commonly called a fab or foundry) located in Bloomington, Minnesota.
Minnesota, which reduced our internal manufacturing capacity though we continue to outsource manufacturing services from this facility. The purchaser intends to operateoperates the fabrication facility as a stand-alone business that will manufacturemanufactures wafers for Cypress and for other semiconductor manufacturers.companies. Although this transaction allows us to reducereduced our manufacturing footprint, it will increaseincreased our reliance on third-party suppliers. Accordingly, if the new owner of ourthis Bloomington fabrication facility is unable to effectively operate the facility, faces financial difficulty, or is otherwise unable to meet our product demands, our supply of components may be adversely affected. Such events could lead to difficulties in delivering products to our customers on time and have a negative impact on our revenue and financial results.
If market demand for our products exceeds our internal manufacturing capacity and available capacity from our foundry partners, we may seek additional foundry manufacturing arrangements.
A shortage in foundry manufacturing capacity, which is more likely to occur at times of increasing demand, could hinder our ability to meet demand for our products and therefore adversely affect our operating results. Suppliers may extend lead times, limit supplies or increase prices due to commodity price increases, capacity constraints or other factors, which may lead to interruption of supply interruptions which could materially harm our results of operations. In addition, greater demand for wafers produced by any such foundries without an offsetting increase in foundry capacity raises the likelihood of potential shortages and wafer price increases. Our operations would be disrupted if any of our foundry partners terminates its relationship with us, delays its shipments to us, or experiences financial difficulty and we are unable to arrange a satisfactory alternative to fulfill customer orders on a timely basis and in a cost-effective manner. There are also only a few foundry vendors that have the capabilities to manufacture our most advanced products. If we need to engage alternativealternate sources of supply, such sources may be unavailable on commercially reasonable terms, or at all. Supply chain changes in the semiconductor industry are complicated, time-consuming, and costly and may disrupt longstanding business relationships that are otherwise advantageous. Due to the difficulty of engaging alternate sources of supply, if any of our key manufacturing facility partners experiences financial difficulties, we may accelerate purchases or commit to increase our purchases in order to build up inventories as a precautionary
measure; however, this approach might increase our inventory carrying costs and expose us to inventory risks. Even if we are able to engage alternate sources of supply, we may encounter start-up difficulties or yield issues or incur additional costs. Shipments could be delayed significantly while these alternate sources are engaged and qualified for volume production.
While manysome of our products are assembled, packaged and tested at our manufacturing facilities located in the Philippines and Thailand, we rely on independent subcontractors to assemble, package and test the balance of our products. We cannot be certain that these subcontractors will continue to assemble, package and test products for us on acceptable economic and quality terms or at all and it might be difficult for us to find alternatives if they do not do so.
Our foundry partners and assembly and test subcontractors have operations in locations that may suffer the impact of certain natural disasters and political risk, which could impact their ability to provide us with our products. We monitor these events closely, but if one of our third-party manufacturing partners were to suffer significant damage to its operations as a result of a natural disaster or other catastrophic events such as a pandemic, our ability to timely meet consumer demand would suffer which would materially harm our results of operations. For example, one of our foundry partners is located in Wuhan, China, which experienced business interruptions in early 2020 due to an outbreak of the novel coronavirus.
For example, effective in October 2019 we terminated a distribution relationship in Japan with Fujitsu Electronics Inc. ("FEI") following its breach of our agreement. We face a risk that we might not be able to market our products successfully to end customers who previously purchased our products through FEI, which could cause our revenue and results of operations to decline. FEI has also initiated litigation against us in California alleging our termination of the distribution agreement to be in breach of contract; such litigation could result in substantial costs and divert our management’s attention and resources.
We also rely on independent carriers and freight haulers to move our products between manufacturing plants and our customers’ facilities. Transport or delivery problems due to their error or because of unforeseen interruptions in their business due to factors such as strikes, political instability, terrorism, natural disasters or accidents could seriously harm our business, financial condition and results of operations and ultimately impact our relationship with our customers.
Finally, our customers source a variety of materials from various suppliers in addition to Cypress. The failure by third-party suppliers to meet our customers' materials requirements on a timely basis could negatively impact our customers' manufacturing schedules and reduce or delay our customers' demand for our products. For example, in 2018 a shortage of multi-layer ceramic capacitors, or MLCCs (a necessary component on many printed circuit boards), created challenges for manufacturers in multiple end markets. To the extent our customers experience
shortages of necessary materials, they may be forced to slow production of their end products, with a corresponding decline in the rate at which they purchase materials from us.
We may not be able to consume minimum commitments under our “take or pay” agreements, which may have a material adverse impact on our earnings.
We have entered into agreements with certain vendors that include "take or pay" terms. Take or pay terms obligate us to purchase a minimum required amount of services or make specified payments in lieu of such purchase. We 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 our earnings.
Failures in our products or in the products of our customers including those resulting from(including security vulnerabilities, defects or errors,other errors) as well as harms caused by the devices in which our products are embedded could harmexpose us to significant costs and damage our business.
Under our sales terms, we generally warrant our products will conform to published specifications and be free from defects in materials and workmanship for a period of one year, and we limit product warranty remedies to a credit of the original purchase price, repair, or replacement. Risk of warranty claims may be greater from our strategic automotive customers, where quality standards are particularly high. Although our selling terms generally disclaim such liability, we face a risk that we might be held liable for other remedies, including consequential damages resulting from errors or defects in our products, that exceed our standard warranty remedies.
Further, manufacturing, testing, marketing and usethe utilization of our products (and our customers' devices in which our products are embedded) by end users entails other products liability risks. We could face risks if products that we design, manufacture, or sell, or that include our technology, cause personal injury or property damage, even where the cause is unrelated to defects or errata. These risks may increase where our products are used in medical devices or other devices or systems relating to human health and those of our customers entail the risk of product liability. safety.
Because our products and services are responsible for critical functions in our customers’ products, security failures, defects or errorserrata or security flaws in our products or services could have an adverse impact on us, on our customers and/or on the end users of our customers’ products. Such adverse impactimpacts could include product liability claims or recalls,claims; product recalls; write-offs of our inventories, property, plant and equipment and/or intangible assets; costs of providing product refunds, repairs, or replacements as well as reimbursements of customer costs; unfavorable purchase commitments; a shift of business to our competitors; a decrease in demand for our products; damage to our reputation and to our customer relationships; costs of litigation defense and and/or damages; fines imposed by regulatory agencies; and other financial liability or harm to our business. Further, security failures, defects or errors in the productsThe materialization of our customersany of these risks could have an adverse impact on our results of operations and/orand cash flows due to a delay or decrease in demand for our products generally.flows.
System security risks, data protection or privacy breaches, cyber-attacks and systems integration issues could disrupt our internal operations or the operations of our suppliers and customers and/or harm theour reputation, of the Company, and any such disruption or harm could cause a reduction in our expected revenue, increase our expenses, negatively impact our results of operation or otherwise adversely affect our stock price.
programs that attack our products or otherwise exploit any security vulnerabilities of our products. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions and delays that may impede our sales, manufacturing, distribution or other critical functions.
Similarly, cyber-attacks against our significant customers or suppliers could disrupt their ability to place orders from us or supply materials to us which could result in lost revenue and impact our ability to deliver our products to customers on a timely basis.
We manage and store various proprietary information and sensitive or confidential data relating to our business on internal networks as well as on remote internet-connected third-party servers (sometimes called the cloud."cloud"). Breaches of our security measures or those of our cloud services providers could create system disruptions or cause shutdowns or result in the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us to a risk of loss or misuse of this information, result in litigation, fines imposed by regulatory agencies, and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time.time, which may have a material impact on our business. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive than originally anticipated. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions have adversely affected us in the past, and in the future, could adversely affect our financial results, stock price and reputation.
Changes in U.S. and international tax legislation and tax policy could materially impact our business.
A majority of our revenue is generated from customers located outside the U.S. and a substantial portion of our assets, including employees, are located outside the U.S. In the past, tax administrations globally have considered initiatives which could substantially eliminate utilization or reduce our ability to claim net operating losses and foreign tax credits, and eliminate various tax deductions. If any of these proposals are constitutedenacted into law, they could have a negative impact on our financial position and results of operations.
We are subject to income and other taxes in the United States and various foreign jurisdictions. Our tax and from time to time, examinationsliabilities are affected by the U.S. Internal Revenue Service, U.S. localamounts we charge in intercompany transactions for inventory, services, licenses, funding and other items. We are subject to ongoing tax administrations,audits in various jurisdictions. Tax authorities may disagree with these intercompany transactions or other matters and similar proceedings in foreign jurisdictions in which we do business. As a result, we may incur additional costs and expenses, and oweassess additional taxes interestor adjust taxable income on our tax returns as a result. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance we will accurately predict the outcomes of these audits, and penalties which will negativelythe amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our operating resultstax provision, net income and cash flows. The results of these U.S. and certain foreign jurisdiction examinations may also decrease our current estimate of unrecognized tax benefits.
Our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities or applied. The U.S. recently enacted significantchanges in tax reform. We are still evaluatinglaws. In addition, various tax legislation has been introduced or is being considered that could significantly impact our tax rate, the impact, but certain provisions such ascarrying value of deferred tax assets, or our deferred tax liabilities. For example, the base erosion anti-abuse tax provision of the new law may adversely affect us. The Organization for Economic Co-operationCooperation and Development or OECD, also(the “OECD”) has recently released guidance covering various topics, including country-by-country reporting, definitionalrecommended changes to permanent establishmentnumerous long-standing international tax principles. If countries amend their tax laws to adopt certain parts of the OECD guidelines, this may increase tax uncertainty and Base Erosion and Profit Shifting, or BEPS, an initiative that aims to standardize and modernize globalmay adversely impact our tax policy. Depending on the final guidance, if any, there may be significant consequences for the Company due to the large scaleliabilities. Any of these changes could affect our international business activities.financial performance.
If the tax incentive or tax holiday arrangements we have negotiated in Malaysia, the Philippines, and Thailand change or cease to be in effect or applicable, in part or in whole, for any reason, or if our assumptions and
interpretations regarding tax laws and incentive or holiday arrangements prove to be incorrect, the amount of corporate income taxes we have to pay could significantly increase.
We have structured our operations to maximize the benefit from various tax incentives and tax holidays extended to the Company in various jurisdictions to encourage investment or employment. Each tax incentive is separate and distinct from the others, and may be granted, withheld, extended, modified, truncated, complied with or terminated independently without any effect on the other incentives. The tax incentives are presently scheduled to expire at various dates generally beginning in 2018,within the next five years, subject in certain cases to potential extensions, which we may or may not be able to obtain. Absent these tax incentives, the corporate income tax rate in these jurisdictions that would otherwise apply to us would be between 20% and 30%. The tax incentives that we have negotiated are also subject to our compliance with various operating and other conditions. If we cannot, or elect not to, comply with the operating conditions included in any particular tax incentive, we will lose the related tax benefits and we could be required to refund previously realized material tax benefits. Depending on the incentive at issue, we could also be required to modify our operational structure and tax strategy, which may not be as beneficial to us as the benefits provided under the present tax concession arrangements. Our interpretations and conclusions regarding the tax incentives are not binding on any taxing authority, and if our assumptions about tax and other laws are incorrect or if these tax incentives are substantially modified or rescinded we could suffer material adverse tax and other financial consequences, which could adversely affect our cash flows.
We have identified a material weakness in our internal control over financial reporting that, if not remediated, could adversely affect investor confidencethe past and our business, results of operations and stock price.
From time to time, we may divesthave divested certain businesses, product lines or assets, both acquired or otherwise, that are no longer strategically important, orand exited minority investments, and we may exit minority investments,do so in the future, which could materially affect our cash flows and results of operations. If we decide to divest aanother business, product line, or assets, we may encounter difficulty in finding or completing such divestiture opportunity (or alternative exit strategy) on acceptable terms or in a timely manner. These circumstances could delay the achievement of our strategic objectives or cause us to incur additional expenses with respect to the business, product line or assets that we seek to dispose. In addition, any delay in the timing of a divestiture transaction may negatively impact our business operations or liquidity for a period of time. Alternatively, we may dispose of businesses, product lines, or assets at prices or on terms that are less favorable than we had anticipated. Even following a divestiture, we may be contractually obligated with respect to certain continuing obligations to customers, vendors, landlords, or other third parties. Accordingly, we may be dependent on the new owner (of such business, product line or manufacturing facility) to fulfill our continuing obligations to our customers. We may also have continuing obligations for pre-existing liabilities related to the divested assets or businesses. Such obligations may have a material adverse impact on our results of operations and financial condition. Any such dispositions could also result in disruption to other parts of our business, potential loss of employees or customers (especially if the new owner is unable or unwilling to assist us in fulfilling any continuing obligations to our customers), potential loss of revenue, negative impact on our margins, exposure to unanticipated liabilities or result in ongoing obligations and liabilities to us following any such divestiture. We may also incur significant costs associated with exit or disposal activities, related impairment charges, or both.
One type of divestiture is contribution of the applicable business, product lines, or assets to a joint venture in exchange for an interest in the venture, which exposes us to the risk that the joint venture might decline in value or not meet desired objectives. The success of joint venture investments depends on various factors over which Cypress might have limited or no control and requires ongoing and effective cooperation with strategic partners. Such risks could be exacerbated by unfavorable financial market and macroeconomic conditions and, as a result, the value of any joint venture investment could be negatively impacted and lead to impairment charges.
Our joint venture for NAND flash memory products might not be successful.
On April 1, 2019, we launched a joint venture in Hong Kong with SK hynix system ic Inc. ("SKHS"), which is a wholly-owned subsidiary of SK hynix Inc. ("SKH"), a South Korean company. We contributed our NAND flash memory business to the joint venture, which is named SkyHigh Memory Limited. NAND is a commoditized product line that has traditionally experienced volatile sales results with low gross margins. Upon launch, SkyHigh entered into a wafer supply agreement with SKH, and back-end manufacturing and transition services agreements with Cypress.
SkyHigh is not under our control and we might be unaware of, or unable to correct, any operating or product issues that may develop. Any failure by SkyHigh to satisfy customer expectations could adversely impact our own relationships with such customers and/or the reputation of our brand. Any failure by SkyHigh to meet its commitments to Cypress under our back-end manufacturing agreement could cause Cypress's assembly and testing facilities to be underutilized and could adversely affect Cypress's operating margins. In addition, there can be no assurance that the joint venture will be profitable. We therefore face a risk that our investment might not generate meaningful cash flows to re-invest, for example, in higher-margin areas of our business. The success of this joint venture investment will depend on various other factors over which we may have limited or no control and will require ongoing and effective cooperation with SKHS, which might be difficult to maintain. Such risks could be exacerbated by unfavorable financial market and macroeconomic conditions, causing the value of this joint venture investment to decline and leading to impairment charges. Any failure to realize the anticipated benefits of the joint venture could adversely affect our stock price.
We cannotmight engage in additional restructuring activities which could be assured thatdisruptive to our restructuring initiatives will be successful.business and adversely impact our results of operations.
From time to time, we have implemented restructuring plans to reduce our operating costs and/or shift our expenditures to different areas of our business. However, if we have not sufficiently reduced operating expenses or if revenues are below our expectations, or if we otherwise decide to restructure our operations, we may be required to engage in additional restructuring activities, which could result in additional restructuring charges. These restructuring charges could harm our results of operations. Further, our restructuring plans could result in potential adverse effects on employee capabilities, on our ability to achieve design wins, and our ability to maintain and enhance our customer base. Such events could harm our efficiency and our ability to act quickly and effectively in the rapidly changing technology markets in which we sell our products. In addition, we may be unsuccessful in our efforts to realign our organizational structure and shift our investments and focus to our high-growth businesses.
Our financial results could be adversely impacted if privately-held companies (thatin which we have invested in) fail to develop and successfully bring to marketlaunch new and proprietary products.products or maintain key customer relationships.
We have made a financial commitment toinvested in certain investments in privately-held companies. Despite the significant amount of resources, we commit to these companies, thereThere can be no guarantee that such businesses will perform as initially expected, or at all, launch new products and solutions as initially expected, or gain or maintain market acceptance. When the value of a privately-held investment declines, we may be required to record an impairment of the investment's carrying value on our books. For example:
During the fourth quarter of fiscal 2017, we determined that our investment in Enovix Corporation, which is accounted for as an equity method investment, was other-than-temporarily impaired as Enovix did not achieve key planned product development milestones. Consequently, we recognized an impairment charge of $51.2 million related to our investment in Enovix, reducing the carrying value of such investment on our books to zero.
During the fourth quarter of fiscal 2018, we determined that our investment in Deca Technologies Inc. ("Deca") was other-than temporarily impaired due to significant delays in Deca's commercialization and achievement of scalable production of certain key products, and consequently we recognized an impairment charge of $41.5 million to write down the carrying value of our investment in Deca to $65.1 million (the estimated fair value of our investment as of the end of fiscal 2018).
During the second quarter of fiscal 2019, we determined that our investment in Deca had become further impaired due to a significant reduction in orders from Deca's key customers, and based on other objective indicators of enterprise value. Consequently, we recognized an additional impairment charge of $29.5 million to write down the carrying value of our investment in Deca to $28.6 million (the estimated fair value of our investment as of June 30, 2019).
If these or any of our other privately-held companiesbusinesses fail to introduce new products and solutions or successfully develop new technologies, or if their customers do not successfully introduce new systems or products incorporating the products or solutions offered by these businesses, or if market demand for the products or solutions offered by these businesses dois not materialize as anticipatedcreated or sustained, or if these or any of our other privately-held companiesbusinesses are not able to raise capital to fund their operations, then we might fail to realize any benefit from our investments in such privately-held companies and our business, financial condition, and results of operations could be materially harmed as a result of impairment of the carrying value of our investments in such privately-held companies.investments.
1, 2019, Deca reached a definitive agreement with nepes Corporation (“nepes”) to sell Deca’s Philippines manufacturing facility to nepes, subject to receipt of regulatory approvals and other customary closing conditions. As part of the agreement, nepes has licensed certain Deca technologies, and nepes will purchase a limited number of Deca’s shares from certain existing shareholders which may include Cypress. The agreement provides for milestone-based payments from nepes to Deca both for the Philippines manufacturing facility purchase and the technology license, which milestones are currently expected to be achieved in 2020. The transfer of Deca's manufacturing facility to nepes closed on January 1, 2020. Following the closing, Deca's remaining assets primarily consist of intellectual property and its new business model will focus on monetizing its intellectual property portfolio as well as providing engineering services. Conditions that may have a material adverse effect on Deca’s business, results of operations and financial condition or on its enterprise value include:
any delays or failure to complete product or intellectual property development milestones—similar to those previously experienced by Deca in fiscal 2018;
any inability of Deca to raise sufficient funding, if needed, for continuing its operations; and
any inability of Deca to monetize its intellectual property assets.
If any of the above risks materialize, we may be required to record further impairment charges to partially or fully write down the carrying value of our investment in Deca. As of December 29, 2019, we held 52.4% of Deca's outstanding voting shares and the carrying value of our investment in Deca was $25.1 million.
Acquisitions and investments could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations.
Acquisitions arehave been an important element of our overall corporate strategy and use of capital. We may from time to time evaluate and enter into discussions regarding a wide array of potential strategic transactions. These transactions could be material to our financial condition and results of operations. We expect to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquired company, business, or technology has created, and willmay continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks include, but are not limited to:
Diversion of management time and focus from operating our business to integration challenges;
Cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire;
Successfully transitioning the current customer, supplier, foundry and other partnering relationships of the acquired company;
Integration of the acquired company’s accounting, human resource, and other administrative systems, and coordination of product, engineering, and sales and marketing functions;
In the case of acquired companies with global operations, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries;
Liability for activities of the acquired company before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities; and
Pending litigation or other known or unknown claims in connection with the acquired company, including claims by stockholders for breach of fiduciary duties, terminated employees, customers, former stockholders, or other third parties.
To the extent a purchase agreement includes a non-competition and/or non-solicitation commitment by the seller, any breach or expiration of such commitment may expose us to additional competition if the seller decides to re-enter the relevant market or attempts to hire back its employees.
Our failure to address these and other risks or other problems encountered in connection with our past or current acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business generally. Current and future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses, or write-offs of goodwill, any of which could harm our financial condition or results. As a result, the anticipated benefit of any of our acquisitions may not be realized.
In 2016, we incurred a material impairment charge with respect to our goodwill, and we may in the future incur impairments in the value of our goodwill, intangibles and property, plant and equipment.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. We test goodwill for impairment annually, and more frequently when events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. In 2016, we conducted impairment testing on the goodwill in our legacy Programmable Solutions Division ("PSD") and recorded an impairment charge of $488.5 million. In addition, our other long-lived assets which include intangibles and property, plant and equipment are evaluated for impairments whenever events or changes in circumstances indicate the carrying value may not be recoverable. Either of these situations may occur for various reasons, including changes in actual or expected income or cash flow. During the fourth quarter of fiscal 2016, we have reorganized our reportable segments as a result of which goodwill was reallocated to new segments. We continue to evaluate current conditions to assess whether any impairment exists. Additional impairments could occur in the future if any of the following occur: deterioration in market or interest rate environments, deteriorate, significant adverse changes in business climate, unanticipated competition, loss of key customers, changes in technology, expecteddeclines in future cash flows of our reporting units, decline, or material changes in reporting unit carrying values change materially compared with changes in their respective fair values.
We compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel would harm us.
To a greater degree than most non-technology companies, we depend on the efforts and abilities of certain key members of management and technical personnel to execute on the strategic initiatives of our business. Our future success depends, in part, upon our ability to retain such personnel and to attract and retain other highly qualified personnel, particularly product and processskilled engineers. We compete for these individuals with certain of our competitors, other companies, academic institutions, government entities and other organizations. Competition for such personnel, particularly in the Silicon Valley, is intense and we may not be successful in hiring or retaining new or existing qualified personnel. Furthermore, changes in immigration and work permit laws and regulations or the administration or enforcement of such laws or regulations can also impair our ability to attract and retain qualified personnel. Equity awards are critical to our ability to hire and retain such key personnel, and any reduction in the price of our common stock (and accordingly the value of such equity awards) may reduce the willingness of key personnel to remain employed by the Company. In addition, we may also need to significantly increase our cash-based compensation to retain such personnel.
Our business may also be impacted if we lose members of our senior management team. Any disruption in management continuity could impact our results of operations and stock price and may make recruiting for future management positions more difficult. In addition, changes in key management positions may temporarily affect our financial performance and results of operations as new management becomes familiar with our business. The loss of any of our key officers or other employees, or our inability to attract, integrate and retain qualified employees, could require us to dedicate significant financial and other resources to such personnel matters, disrupt our operations and seriously harm our operations and business.
If we are unable to obtain stockholder approval of additional shares for our share-based compensation award programs in the future, we could be at a competitive disadvantage in the marketplace for qualified personnel.
Our compensation program, which includes cash and share-based compensation award components, has been instrumental in attracting, hiring, motivating, and retaining qualified personnel. Competition for qualified personnel in our industry is extremely intense, particularly for engineering and other technical personnel. Our success depends on our continued ability to attract, hire, motivate, and retain qualified personnel and our share-based compensation award programs provide us with a competitive compensatory tool for this purpose. The continued use of our share-based compensation program is necessary for us to compete for engineering and other technical personnel and professional talent. In the future, if we are unable to obtain stockholder approval of additional shares for our share-based compensation award programs, we could be at a competitive disadvantage in the marketplace for qualified personnel.
There can be no assurance we will continue to declare dividends.
Our Board of Directors previously adopted a policy pursuant to which the Company would pay quarterly cash dividends on our common stock. The declaration and payment of any dividend or distribution is subject to the approval of our Board and our dividend may be discontinued or reduced at any time. There can be no assurance that we will declare dividends or distributions in the future in any particular amounts, or at all. Future dividends or distributions, if any, and their timing and amount, may be affected by, among other factors, management’s views on potential future capital requirements for strategic transactions, including acquisitions; earnings levels; contractual restrictions; our cash position and overall financial condition; debt related payments and commitments, including restrictive covenants which may limit our ability to pay a dividend or distribution; changes in tax or corporate laws; our ability to repatriate cash into the United States; stock repurchase programs; the need to invest in research and development or other parts of our business operations; and changes to our business model. Accordingly, our dividend or other distribution payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends or other distributions in any particular amounts or at all. A reduction in our dividend payments or a change in the tax treatment of future dividends could have a negative effect on our stock price.
We may have fluctuations in the amount and frequency of our stock repurchases and there can be no assurance that we will continue to repurchase shares of our stock.
In October 2015, our Board of Directors approved a new share repurchase plan pursuant to which we are authorized to repurchase our common stock in an aggregate amount not to exceed $450 million. Although our Board of Directors has approved a share repurchase program, the share repurchase program does not obligate us to repurchase any specific dollar amount or number of shares. In addition, there can be no assurance that we will continue to repurchase shares of our stock in any particular amounts, or at all. Any stock repurchases during the pendency of the Merger would require Infineon's consent. The stock repurchase plan could affect the price of our stock and increase volatility and may be suspended or terminated at any time without prior notice and in compliance with legal and regulatory requirements, which may result in a decrease in the trading price of our common stock. Through the end the 2016 fiscal year, we repurchased a total of 29.5 million shares for a total cost of $239.2 million under the October 2015 stock repurchase plan. A substantial majority of these purchases were made prior to the start of our second quarter of 2016. In fiscal 2017, we did not repurchase any shares in the open market under the stock repurchase plan. In fiscal 2018, we repurchased 2.4 million shares for a total cost of $35 million including the Yield Enhancement Program ("YEP"). YEPs are short-term structured agreements, typically with maturities of 90 days or less, correlated to our stock price that can settle either in return of cash or delivery of our shares. In fiscal 2019, we did not repurchase any shares of our stock from the open market.
Any guidance that we may provide about our business or expected future results may differ significantly from actual results.
From time to time we have shared our views in press releases or SEC filings, on public conference calls and in other contexts about current business conditions and our expectations as to our future results of operations. Correctly identifying the key factors affecting business conditions and predicting future events is inherently an uncertain process, especially in uncertain economic times. Given the complexity and volatility of our business, our analysis and forecasts have in the past and will likely in the future, prove to be incorrect. We offer no assurance that such predictions or analysis will ultimately be accurate, and investors should treat any such predictions or analysis with appropriate caution. AnyIf any analysis or forecast that we make which ultimately proves to be inaccurate, may adversely affect our stock price.price may be adversely affected.
Industry consolidation may lead to increased competition and may harm our operating results.
There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. Industry consolidation may result in stronger companies that are better able to compete with us. This could have a material adverse effect on our business, operating results, and financial condition.
We may be unable to adequately protect our intellectual property rights.
The protection of our intellectual property rights is essential to keeping others from copying the innovations that are critical to our existing and future products. It may be possible for an unauthorized third party to reverse-engineer or decompile our software products. The process of seeking patent protection can be long and expensive and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be respected by third parties. Furthermore, our flexible fabmanufacturing initiative requires us to enter into technology transfer agreements with external partners, providing third partythird-party access to our intellectual property and resulting in additional risk. In some cases, these technology transfer and/or license agreements are with foreign companies and subject our intellectual property to regulation in foreign countries which may afford less protection and/or result in increased costs to enforce such agreements or intellectual property rights. We anticipate that we will continue to enter into these kinds of licensing arrangements in the future. Consequently, we have in the past become involved and we may becomecontinue to be involved in litigation, in the United States or abroad, to enforce our patents or other intellectual property rights, to protect our trade secrets and know-how, to determine the validity or scope of the proprietary rights of others or to defend against claims of invalidity. We may also from time to time continue to be involved in litigation relating to alleged infringement by us of others’ patents or other intellectual property rights. Patent litigation, if necessary or when instituted against us, could result in substantial costs and divert our management’s attention and resources.
Moreover, a key element of our strategy is to enter new markets with our products. If we are successful in entering these new markets, we will likely be subject to additional risks of potential infringement claims against us as our technologies are deployed in new applications and face new competitors. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights, particularly in certain international markets, making misappropriation of our intellectual property more likely. Patent litigation, if necessary or when instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. In addition, in August 2016, we entered into a series of agreements to divest a large number of older, legacy patents.patents and we may in the future divest patents from time to time. The divestiture of these patents may limit our ability to make certain legal claims, and to be successful, in future patent litigation.
We also rely on trade secret protection for our technology, in part through confidentiality and other written agreements with our employees, consultants and third parties. Through these and other written agreements, we attempt to control access to and distribution of our intellectual property documentation and other proprietary technology information. Despite our efforts to protect our proprietary rights, former employees, consultants or third parties may, in an unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality as our technology. Policing unauthorized use of our intellectual property rights is difficult, and nearly impossible on a worldwide basis. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriation of our technology or intellectual property rights, particularly in foreign countries where we do business or where our technology is sold or used, where the laws may not protect proprietary rights as fully as do the laws of the United States or where the enforcement of such laws is not common or effective.
We may bebecome involved in intellectual property litigation from time to time, which can be expensive and face significant expenses as a resultdivert management attention and resources away from our business, and in which an adverse judgment or settlement may require us to pay substantial damages or prohibit us from using essential technologies.
Intellectual property litigation and threats of ongoing or future litigation.
litigation are very common in our industry. Other companies or entities also have commenced, and may again commence, actions seeking to establish the invalidity of our patents. While we intend to defend these actions vigorously, there is no guarantee of success, and such effort takes significant financial and time resources from the Company. In the event that one or more of our patents are challenged, a court or the United States Patent and Trademark Office (USPTO) may invalidate the patent(s) or determine that the patent(s) is not enforceable, which could harm our competitive position. If our patents are invalidated, or if the scope of the claims in any of these patents is limited by a court or USPTO decision, we could be prevented from pursuing certain litigation matters or licensing the invalidated or limited portion of such patents. Such adverse decisions could negatively impact our future, expected revenue.
Intellectual property litigation is frequently expensive to both the winning party and the losing party and could take up significant amounts of management’s time and attention. In addition, if we lose such a lawsuit, a court could find that our intellectual property rights are invalid, enabling our competitors to use our technology, or require us to pay
substantial damages and/or royalties or prohibit us from using essential technologies. In addition, in August 2016, we entered into a series of agreements to divest a large number of older, legacy patents.patents and we may in the future divest patents from time to time. The divestiture of these patents may limit our ability to make certain legal claims, and to be successful, in future patent litigation. For these and other reasons, intellectual property litigation could seriously harm our business, financial condition and results
of operations. Also, although in certain instances we may seek to obtain a license under a third party’s intellectual property rights in order to bring an end to certain claims or actions asserted against us, we may be unable to obtain such a license on reasonable terms or at all. We believeEven though we may have meritorious defenses and claims in our current litigation and we intend to defend and pursue such claims vigorously. Unfortunately, suchvigorously, all litigation and other claims areis subject to inherent uncertainties and may negatively impact our business.
The accumulation of changes in our shares by “5-percent stockholders” have in the past and could again trigger an ownership change for U.S. income tax purposes, in which case our ability to utilize our net operating losses would be limited and therefore impact our future tax benefits. Our business could be negatively affected as a result of actions by activist stockholders.
We are a publicly traded company and our stockholders can change on a daily basis. These changes are beyond our control. The U.S. Internal Revenue Code (Section 382) restricts a company’s ability to benefit from net operating losses or other deferred tax assets if a “Section 382 Ownership Change” occurs. An ownership change for purposes of U.S. tax law Section 382 may result from ownership changes that increase the aggregate ownership of “5-percent stockholders,” by more than 50 percentage points over a testing period, generally three years (“Section 382 Ownership Change”). We experienced a Section 382 Ownership Change upon the mergeour merger with Spansion.Spansion Inc. ("Spansion") in March 2015. The resulting limitations accompanying the ownership change are reflected in our deferred tax assets with no permanent limitation in our ability to utilize our tax attributes.assets.
Our business could be negatively affected as a result of actions by activist stockholders.
The actions of activist stockholders, including any related legal proceedings, could adversely affect our business. Specifically:
responding to common actions of an activist stockholder, such as public proposals and requests for special meetings, nominations of candidates for election to our board of directors, requests that certain executive officers or directors depart the Company, requests to make changes to internal business operations, requests to pursue a strategic combination or other transaction or other special requests, could disrupt our operations, be costly and time-consuming or divert the attention of our management and employees;
perceived uncertainties as to our future direction in relation to the actions of an activist stockholder, including any perceived changes at the board or management level, may result in the loss of potential business opportunities or the perception that we are unstable and need to make changes, which may be exploited by our competitors and make it more difficult to attract and retain key personnel as well as consumers and service providers;
actions of an activist stockholder, especially any legal proceedings, may divert management time and attention away from execution on the Company’s business operations and cause the Company to incur significant costs, including expenses related to legal, public relations, investment banking, and/or proxy advisory services - these expenses could have a material adverse impact on our financial results;
the election to our Board of Directors of director candidates who are not supported by the Company, may create unnecessary conflict and instability on our board of directors; and
actions of an activist stockholder may cause fluctuations in our stock price based on speculative market perceptions, unflattering media coverage, or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Our settlement agreement with T.J. Rodgers, which resolved the 2017 proxy contest, expired on May 3, 2019, the date of our 2019 annual meeting of stockholders.
Geopolitical uncertainty, and changes to international trade agreements, tariffs, import and excise duties, taxes, or other governmental rules and regulations could adversely affect our business and results of operations.
A majority of our revenue is generated from customers located outside the U.S. and a substantial portion of our assets and employees are located outside the U.S. Risks associated with international operations, any of which could have a material adverse effect on our business, liquidity, financial condition and/or results of operations, include:
political instability, and the possibility of a deteriorating relationship between the nations in which we do business and the United States;
the imposition of new or modified international trade restrictions, tariffs, import and excise duties or other taxes;
import and export requirements, including restrictions on sales to certain end customers;
restrictions on foreign ownership and investments, including potential intervention by the Committee on Foreign Investment in the United States (CFIUS) or by other applicable administrative review boards to block strategic transactions that might otherwise be in our shareholders’ interests;
restrictions on repatriation of cash earned in countries outside the U.S.;
changes in local political, economic, social and labor conditions;
a less developed and less certain legal and regulatory environment in some countries, which, among other things, can create uncertainty regarding contract enforcement, intellectual property rights and liability issues;
inadequate levels of compliance with applicable anti-bribery laws, including the Foreign Corrupt Practices Act, the UK Bribery Act of 2010; and
possible disruption of business relationships if any of the above risks disrupt our suppliers or customers' operations, or lead any of our suppliers or customers to relocate some portion of their international operations (for example, we might face a risk of delayed or lost sales if a customer were to move its manufacturing operations out of China due to concerns over tariffs or inadequate respect for intellectual property rights).
The U.S. federal government or other governmental bodies may propose changes to international trade agreements, tariffs, taxes and other government rules and regulations. Any changes to the international trading system, or the emergence of an international trade dispute, could significantly impact our business and have a negative impact on our revenues. In addition, the U.S. and other countries in which we operate impose import and excise duties, tariffs and other taxes on our products in varying amounts. Any significant increases in import and excise duties or other taxes on our products could have a material adverse effect on our business, liquidity, financial condition and/or results of operations.
For example, our sales were impacted in the second quarter of 2018 when the U.S. Department of Commerce banned U.S. companies from exporting to ZTE, a Chinese telecoms equipment manufacturer (which ban was subsequently lifted in the third quarter of 2018) as part of an export controls enforcement action against ZTE. Similarly, our sales were impacted in the second quarter of 2019 when the U.S. Department of Commerce restricted sales of goods subject to U.S. jurisdiction to Huawei Technologies, a Chinese telecoms equipment and consumer electronics manufacturer. We face a risk that the U.S. might apply these or similar export controls to restrict sales to other buyers or impose additional restrictions on sales of goods to Huawei, any of which could impact our sales revenues.
Trade tensions between the U.S. and China escalated in 2018 generally, and remained high in 2019, with rounds of U.S. tariffs on Chinese goods taking effect in July, August, and September of 2018 and May and September of 2019. Further increases scheduled for October 2019 were tabled as the two nations negotiated an initial ("Phase One") agreement to resolve some of their disputed trade issues. However, the Phase One agreement signed in January 2020 left most tariffs in place to be addressed at a later stage. Further rounds of tariffs have also been threatened by U.S. and Chinese leaders.
The current U.S. tariffs on China-origin goods and the related geopolitical uncertainty between the U.S. and China have caused, and may continue to cause, decreased demand for our products from distributors and other customers, which could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
Several rounds of the U.S. tariffs apply to some of our products that are assembled in China and imported to the U.S. Specifically, the August 2018 round imposed a 25% tariff on integrated circuits, the September 2018 round imposed a 10% tariff on AgigA modules (which increased to 25% in May 2019) and the September 2019 round imposed a 15% tariff on BLE modules. As part of the Phase One agreement, the tariff on BLE modules will fall to 7.5% on February 24, 2020.
Products subject to U.S. tariffs on China-origin goods generated approximately 1.0% of our revenue for the fourth quarter of 2019. These current and any future tariffs imposed by the U.S. on products assembled in China that we sell in the U.S. could negatively impact our U.S. sales.
The August 2018 round of U.S. tariffs also imposed a 25% duty on imports of China-origin integrated circuit wafers, which are among the components we include in our products. Although we import some such wafers for testing in the U.S., we then export them overseas for final assembly and/or distribution to customers. Accordingly, we have been able to avoid the wafer tariff to date by use of the "temporary import bond" (or TIB) process established by U.S. Customs, which requires that we separately track each wafer to ensure that, within one year of import, it is either re-exported or destroyed. If we fail to so track any such wafer, we would owe a double duty on the incoming shipment of which that wafer was a part. In addition, upon any such failure, U.S. Customs could (and upon repeated extreme failures U.S. Customs likely would) disallow further use of the TIB process, which would materially increase our production costs. In that case, we might be unable to secure alternate sources for wafers on a timely basis, or at all. In the semiconductor industry, supply chain changes are complicated, time-consuming, and costly, and may disrupt longstanding business relationships that are otherwise advantageous.
Apart from wafers, the current U.S. tariffs cover only a small fraction of the materials we utilize for manufacturing of our products. We do not anticipate any material impact on our supply chain costs from the U.S. tariffs imposed to date. If the U.S. were to impose tariffs on a broader range of materials that we or our suppliers source from China for use in U.S. manufacturing (and if we were unable to avoid the tariffs by use of the TIB process or other means), such tariffs could cause our costs to increase, which could narrow the profits we earn from sales of products requiring such materials or force us to raise prices, negatively impacting our sales. As mentioned above, the process of changing suppliers in order to mitigate any such tariff costs could be complicated, time-consuming, and costly.
We believe the U.S. tariffs may cause customers to delay orders as they evaluate where to take delivery of our products in connection with their efforts to mitigate their own tariff exposure. Such delays create forecasting difficulties for us and increase the risk that orders might be canceled or might never be placed.
Some of our customers embed our products in finished goods they manufacture in China for import to the U.S. Current or future tariffs imposed by the U.S. on such goods could negatively impact our customers' sales, thereby causing an indirect negative impact on our own sales. Any reduction in our customers' sales, and/or any apprehension among distributors and customers of a possible reduction in such sales, would likely cause an indirect negative impact on our own sales. Even in the absence of further tariffs, the related uncertainty and the market's fear of an escalating trade war might cause our distributors and customers to place fewer orders for our products, which could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
To date, China's retaliatory tariffs have generally focused on other industries. However, if China were to impose tariffs on the products we sell in China, or on the finished goods our customers sell in China, such tariffs (and/or the market's related uncertainty and apprehension) could directly or indirectly reduce demand for our products, negatively impacting our sales.
We could also be affected by nationalization of our international operations, unstable governments, unfamiliar or biased legal systems or intergovernmental disputes. Any determination that our operations or activities did not comply with applicable U.S. or foreign laws or regulations could result in the imposition of fines and penalties, interruptions of business, terminations of necessary licenses and permits, and other legal and equitable sanctions.
These international economic and political uncertainties and regulatory changes could have a material adverse effect on our, or our suppliers’ and distributors’, business, liquidity, financial condition and/or results of operations.
We face additional problems and uncertainties associated with international operations that could seriously harm us.
International revenues historically accounted for a significant portion of our total revenues. Our manufacturing, assembly, and test operations and certain finance operations located outside of the United States, as well as our international sales offices and design centers, face risks frequently associated with foreign operations including but not limited to:
currency exchange fluctuations;
potential violations by our international employees or third party agents of international or U.S. laws relevant to foreign operations (such as FCPA)FCPA, UK Bribery Act of 2010); and
To the extent any such risks materialize, our business, financial condition or results of operations could be seriously harmed.
We are subject to many different environmental, data privacy, health and safety laws, regulations and directives, and compliance with them may be costly.
We are subject to many different international, federal, state and local governmental laws and regulations related to, among other things, the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process, conflict mineral and data privacy legislation, as well as the health and safety regulations related to our employees. Compliance with these regulations can be costly. There can be no assurance that we have been, or will be at all times in complete compliance with such laws and regulations. If we violate or fail to comply with these laws and regulations, we could be fined or otherwise sanctioned by regulators. Under certain environmental laws, we could be held responsible, without regard to fault, for all of the costs relating to any contamination at our or our predecessors’ past or present facilities and at third party waste disposal sites. We could also be held liable for any and all consequences arising out of human exposure to such substances or other environmental damage.
Proposed or new legislation and regulations could also significantly affect our business. There currently are a number of proposals pending before federal, state, and foreign legislative and regulatory bodies. In addition, the new European General Data Protection Regulation (GDPR) will take, which took effect in May 2018, and will applyapplies to many of our products and services that provide service in Europe. The GDPR will include operational requirements for companies that receive or processand regulates our processing of personal data of residents of the European Union that are different than those currently in place in theemployees, European Union. For example, we may be required to implement measures to change our service or limit access to our service for minors under the age of 16 for certain countries in Europe that maintain the minimum age of 16 under the GDPR. We may also be required to obtain consent and/or offer new controls to existingcustomers, European sales leads, and new users in Europe before processing data for certain aspects of our service. In addition, theother European business contacts. The GDPR will includeprovides significant penalties for non-compliance. Similarly, there are a number of legislative proposals in the United States, at both the federal and state level, that could impose new obligations in areas affecting our business, such as liability for copyright infringement by third parties. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.
Over the last several years, there has been increased public awareness of the potentially negative environmental impact of semiconductor manufacturing operations. This attention and other factors may lead to changes in environmental regulations that could force us to purchase additional equipment or comply with other potentially costly requirements. If we fail to control the use of, or to adequately restrict the discharge of, hazardous substances under present or future regulations, we could face substantial liability or suspension of our manufacturing operations, which could seriously harm our business, financial condition and results of operations.
We face increasing complexity in our product design as we adjust to new and future requirements relating to the material composition of our products, including the restrictions on lead and other hazardous substances that apply to specified electronic products put on the market in the European Union, China and California. Other countries, including at the federal and state levels in the United States, are also considering similar laws and regulations. Certain electronic products that we maintain in inventory may be rendered obsolete if they are not in compliance with such laws and regulations, which could negatively impact our ability to generate revenue from those products. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, or in the worst case decreased revenue, and could even require that we redesign or change how we manufacture our products. Such redesigns result in additional costs and possible delayed or lost revenue.
Our products contain materials that are subject to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the SEC adopted new requirements for companies that use certain minerals and metals, known asSEC's conflict minerals in their products, whether or not these products are manufactured by third parties.reporting requirements. These requirements require companies to perform ongoing diligence, and to disclose and report whether or not such minerals in their products originate from the Democratic Republic of Congo and adjoining countries. We have undertakenfile such reports annually with the necessary diligenceSEC on Form SD. Our relationships with customers and suppliers may be adversely affected if we are unable to
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our worldwide operations could be adversely affected if disrupted for any reason, including natural disasters such as earthquakes, volcanic eruptions, tsunamis, floods, hurricanes, typhoons, telecommunication or information technology system failures, regulatory or political issues, power or water shortages, fires, extreme weather conditions, medical epidemics or pandemics or other man- made disasters or catastrophic events. These risks are exacerbated by the geographic concentration of our operations and those of our suppliers. While we maintain business interruption insurance for our primary foreign manufacturing operations, we are self-insured for any loss facilities, the level and/or damageextent of coverage might not be sufficient to our primary manufacturing facility. As such,cover potential losses. Accordingly, the occurrence of any of these business disruptions for us or our third-party manufacturers, partners or customers could result in significant losses, seriously harm our revenue and financial condition, adversely affect our competitive position, increase our costs and expenses, and require substantial expenditures and recovery time in order to fully resume operations. Our
These negative effects could be particularly severe in the event of a widespread pandemic. For example, in early 2020 the novel coronavirus outbreak affected operations at one of our foundry partners in Wuhan, China, and increasingly has disrupted other product shipping and logistics operations in China. Concerns about the virus caused us to implement work-from-home rules at our facilities elsewhere in China. We also discouraged non-critical business travel worldwide and cancelled our participation in various international trade shows. As of the filing of this Annual Report, the extent to which the coronavirus will affect our business is uncertain. Even where our supply chain is unaffected, we may experience reduced demand to the extent our customers experience shortages of other necessary materials and are forced to slow production of their end products (with a corresponding decline in the rate at which they purchase materials from us) or to the extent our customers experience reduced consumer demand for their end-products as consumers curtail purchases. We may also experience delays in payments from some of our customers based in China. These risks will be exacerbated if the outbreak becomes widespread beyond China.
In regard to geographic concentration, our corporate headquarters, and a portion of our research and development activities, are located in California, and other critical business operations and some of our suppliers are located in California and Asia, near major earthquake faults known for seismic activity. The manufacture of product components,manufacturing activities, the final assembly of our products, and other critical operations are concentrated in certain geographic locations, including California, the Philippines, Thailand, Malaysia, Japan, China and India. We also relyIndia, many of which are on major logistics hubs primarilyor near the Pacific "ring of fire," which is characterized by active volcanoes, frequent earthquakes, and resulting tsunamis. In January 2020 our back-end manufacturing facility outside Manila in Asiathe Philippines was shut down for a few days due to manufactureashfall from the Taal Volcano, located approximately 18 miles from our facility, and distribute our products. this facility may continue to experience disruption if there is new volcanic activity.
The ultimate impact on us, our significant suppliers and our general infrastructure offrom pandemics, from natural disasters, and from being centralized in certain geographical areas or located near major earthquake faults and being consolidated in certain geographical areas is unknown. However, if the novel coronavirus outbreak continues or spreads, or in the event of a major earthquake or other natural disaster or catastrophic event, our revenue,ability to deliver products to customers on a timely basis may be impacted, we may see reduced demand for our products, we may incur remediation costs, and we may suffer a loss of inventory or assets, all of which may adversely impact our profitability and financial condition could suffer.condition.
Changes to Board of Directors and senior management may disrupt our operations, our strategic focus or our ability to drive stockholder value.
Our future success depends, in part, upon our ability to retain key members of our senior management team and our Board of Directors (the “Board”) and to attract and retain other highly qualified personnel for our Board and senior management positions. Turnover may disrupt our operations, our strategic focus or our ability to drive stockholder value. If we fail to attract new skilled personnel for our Board and senior management positions, our business and growth prospects could be adversely impacted.
Our governing documents provide indemnities to our officers and directors for which we have purchased insurance. If material liabilities were to arise in excess of our insurance coverage, our financial condition and results of operations could be materially impacted.
Our certificate of incorporation, by-laws and indemnification agreementsby-laws require us to indemnify our officers and directors for certain liabilities that may arise in the course of their service to us.us, including their service at our request on the boards of other companies in which we invest such as Deca, SkyHigh, and Enovix. If we were required to pay a significant amount on account of these liabilities, or such liabilities were not covered by insurance coverage, our business, financial condition and results of operations could be seriously harmed.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
35
| ITEM 2. | PROPERTIES |
Our executive offices are located in San Jose, California. The following tables summarizetable summarizes our primary properties as of the end of fiscal 2017:2019:
| Location | Square Footage | Primary Use | |||
| Owned: | |||||
United States: | |||||
| San Jose, California | 171,370 | Administrative offices, research and development | |||
| Austin, Texas | 1,294,000 | Manufacturing, research and development and administrative offices | |||
| Lynnwood, Washington | 67,000 | Administrative offices, research and development | |||
Asia: | |||||
| Cavite, | 221,000 | Manufacturing, research and development | |||
| Bangkok, Thailand | 253,300 | Manufacturing, research and development | |||
| Penang, Malaysia | 175,900 | Manufacturing, research and development and administrative offices | |||
There was no change in our primary properties in fiscal 2017, we have added 105,300 square feet of leased space for research and development, administrative, sales offices and design centers located in the United States, Asia and Europe.2019. We believe that our current properties are suitable and adequate for our foreseeable needs. We may need to exit facilities as we continue to evaluate our business model and cost structure.
| ITEM 3. | LEGAL PROCEEDINGS |
Information with respect to this item may be found in Note 2023, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements under Part II, Item 8, which is incorporated herein by reference.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
36
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information, Holders of Common Equity, Dividends and Performance Graph
| Low | High | |||||||
| Fiscal 2017: | ||||||||
| Fourth quarter | $ | 14.55 | $ | 17.42 | ||||
| Third quarter | $ | 12.50 | $ | 15.11 | ||||
| Second quarter | $ | 12.68 | $ | 14.58 | ||||
| First quarter | $ | 10.99 | $ | 14.98 | ||||
| Fiscal 2016: | ||||||||
| Fourth quarter | $ | 9.63 | $ | 12.22 | ||||
| Third quarter | $ | 9.79 | $ | 12.48 | ||||
| Second quarter | $ | 8.02 | $ | 11.22 | ||||
| First quarter | $ | 6.30 | $ | 9.73 | ||||
| Fiscal 2015: | ||||||||
| Fourth quarter | $ | 8.11 | $ | 10.96 | ||||
| Third quarter | $ | 8.55 | $ | 12.46 | ||||
| Second quarter | $ | 11.65 | $ | 14.46 | ||||
| First quarter | $ | 13.39 | $ | 16.25 | ||||
As of February 15, 2018,7, 2020, there were approximately 1,3001,222 registered holders of record of our common stock.
The following line graph compares the yearly percentage change in the cumulative total stockholder return on our common stock against the cumulative total returnreturns of the Standard and Poor (“S&P”) 500 Index and the S&P Semiconductors Select Industry Index for the last five fiscal years:
* $100 invested on 12/30/1228/14 in stock or 12/29/12 in index, including reinvestment of dividends. Indexes calculated on month-end basis.
December 30, 2012 | December 29, 2013 | December 28, 2014 | January 3, 2016 | January 1, 2017 | December 31, 2017 | |||||||
| Cypress** | 100.00 | 97.00 | 132.00 | 90.00 | 106.00 | 141.00 | ||||||
| S&P 500 Index | 100.00 | 130.00 | 144.00 | 143.00 | 157.00 | 187.00 | ||||||
| S&P Semiconductors Index | 100.00 | 136.00 | 177.00 | 194.00 | 249.00 | 310.00 | ||||||
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | |||||||
| (In millions, except per-share amounts) | ||||||||||
| Equity compensation plans approved by shareholders | 9.8 | (1) | $ | 12.8 | (3) | 46.5 | (6) | |||
| Equity compensation plans not approved by shareholders | 6.8 | (2) | $ | 6.7 | (4) | 2.8 | (7) | |||
| Total | 16.6 | $ | 11.6 | (5) | 49.3 | |||||
Recent Sales of Unregistered Securities
In the fourth quarter of 2019, we issued 1,108 shares of Cypress common stock upon exchange or conversion, by their holders, of outstanding Spansion Notes and 2022 Notes, in accordance with the indentures under which such notes were issued. We issued these shares in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Stock Buyback Programs:
On October 20, 2015, our Board of Directors (the “Board”) approved a new share repurchase plan pursuant to which we are authorized to repurchase our common stock in an aggregate amount not to exceed $450 million. In connection with the approval of this new share repurchase plan, the share repurchase plan previously approved in September 2011 was terminated. The share
repurchase program does not obligate us to repurchase any specific number of shares and may be suspended or terminated at any time without prior notice and in compliance with legal and regulatory requirements.
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Total Dollar Value of Shares That May Yet Be Purchase Under the Plans or Programs | ||||||||||
| (In thousands, except per-share amounts) | |||||||||||||
| Authorized fund under 2011 Repurchase program: | — | $ | — | — | $ | 400,000 | |||||||
| Repurchases in fiscal 2015: | |||||||||||||
| December 29, 2014—March 29, 2015 | 6 | $ | 14.66 | 6 | $ | 83,252 | |||||||
| March 30, 2015—June 28, 2015 | 818 | $ | 12.75 | 818 | $ | 72,672 | |||||||
| June 29, 2015—September 27, 2015 | 2 | $ | 10.62 | 2 | $ | 72,648 | |||||||
| Total repurchases in fiscal 2015 | 826 | 826 | $ | 72,648 | |||||||||
| Total repurchases under this program | 859 | 1,312 | |||||||||||
| Authorized fund under 2015 Repurchase program: | $ | 450,000 | |||||||||||
| September 28, 2015—January 3, 2016 | 5,658 | $ | 9.99 | 5,658 | $ | 393,475 | |||||||
| Total repurchases in fiscal 2015 | 5,658 | 5,658 | $ | 393,475 | |||||||||
| Repurchases in fiscal 2016: | |||||||||||||
| January 4, 2016—April 3, 2016 | 23,822 | $ | 7.66 | 23,822 | $ | 210,968 | |||||||
| April 4, 2016—July 3, 2016 | 4 | $ | 9.74 | 4 | $ | 210,931 | |||||||
| July 4, 2016—October 2, 2016 | 2 | $ | 11.46 | 2 | $ | 210,913 | |||||||
| October 3, 2016—January 1, 2017 | 7 | $ | 10.59 | 7 | $ | 210,844 | |||||||
| Total repurchases in fiscal 2016 | 23,835 | 23,835 | $ | 210,844 | |||||||||
| Total repurchases under this program | 29,493 | 29,493 | |||||||||||
Yield Enhancement Program (“YEP”):
In fiscal 2009, the Audit Committee approved a yield enhancement strategy intended to improve the yield on our available cash. As part of this program, the Audit Committee authorized us to enter into short-term yield enhanced structured agreements, typically with maturities of 90 days or less, correlated to our stock price. Under the agreements we have entered into to date, we pay a fixed sum of cash upon execution of an agreement in exchange for the financial institution’s obligations to pay either a pre-determined amount of cash or shares of our common stock depending on the closing market price of our common stock on the expiration date of the agreement. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our cash investment returned plus a yield substantially above the yield currently available for short-term cash investments. If the closing market price is at or below the pre-determined price, we will receive the number of shares specified at the agreement’s inception. As the outcome of these arrangements is based entirely on our stock price and does not require us to deliver either shares or cash, other than the original investment, the entire transaction is recorded in equity. The shares received upon the maturing of a yield enhancement structure are included in our “shares of common stock held in treasury” on the Consolidated Balance Sheets under Item 8.
Repurchase Activity
| Periods | Aggregate Price Paid | Total Cash Proceeds Received Upon Maturity | Yield Realized | Total Number of Shares Received Upon Maturity | Average Price Paid per Share | |||||||||||||
| Fiscal 2015: | (in thousands) | |||||||||||||||||
| Settled through cash proceeds | $ | 28,966 | $ | 29,353 | $ | 387 | — | $ | — | |||||||||
| Settled through issuance of common stock | 9,601 | — | — | 1,000,000 | $ | 9.60 | ||||||||||||
| Total for fiscal 2015 | $ | 38,567 | $ | 29,353 | $ | 387 | 1,000,000 | $ | 9.60 | |||||||||
There was no activity, in our yield enhanced structured agreements, and no other repurchases, during fiscal 20162017 and 2017.2019.
The table below sets forth information with respect to repurchases of our common stock made outside of the yield enhancement program and, separately, the repurchase activity under our yield enhancement program, during fiscal 2018.
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Total Dollar Value of Shares That May Yet Be Purchase Under the Plans or Programs | ||||||||||
| (In thousands, except per-share amounts) | |||||||||||||
| Repurchases in fiscal 2018: | |||||||||||||
| April 2, 2018—July 1, 2018 | 610 | $ | 16.38 | 610 | $ | 200,845 | |||||||
| July 2, 2018—September 30, 2018 | 598 | $ | 16.73 | 598 | $ | 190,846 | |||||||
| October 1, 2018—December 30, 2018 | 885 | $ | 13.21 | 885 | $ | 179,157 | |||||||
| Total repurchases in fiscal 2018 | 2,093 | 2,093 | $ | 179,157 | |||||||||
| Yield enhancement program in fiscal 2018 | |||||||||||||
| October 1, 2018—December 30, 2018 | 250 | $ | 13.37 | 250 | $ | 175,815 | |||||||
| Total repurchases under this program | 31,836 | 31,836 | |||||||||||
| ITEM 6. | SELECTED FINANCIAL DATA |
The following selected consolidated financial data is not necessarily indicative of results of future operations, and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7, and the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements under Part II, Item 8:
| Year Ended | |||||||||||||||||||
| December 29, 2019 (4) | December 30, 2018 | December 31, 2017 | January 1, 2017 (2) | January 3, 2016 (2) | |||||||||||||||
| (in thousands, except per-share amounts) | |||||||||||||||||||
| Consolidated Statement of Operations Data: | |||||||||||||||||||
| Revenues | $ | 2,205,314 | $ | 2,483,840 | $ | 2,327,771 | $ | 1,923,108 | $ | 1,607,853 | |||||||||
| Operating income (loss) | 123,263 | 164,428 | 78,093 | (608,738 | ) | (323,330 | ) | ||||||||||||
Net income (loss) (1) | 40,413 | 354,831 | (80,783 | ) | (683,877 | ) | (367,563 | ) | |||||||||||
| Net loss (gain) attributable to non-controlling interest, net of taxes | 15 | (239 | ) | (132 | ) | 643 | 2,271 | ||||||||||||
| Net income (loss) attributable to Cypress | $ | 40,428 | $ | 354,592 | $ | (80,915 | ) | $ | (683,234 | ) | $ | (365,292 | ) | ||||||
| Net income (loss) attributable to Cypress per share—basic | $ | 0.11 | $ | 0.99 | $ | (0.24 | ) | $ | (2.14 | ) | $ | (1.21 | ) | ||||||
| Net income (loss) attributable to Cypress per share—diluted | $ | 0.11 | $ | 0.95 | $ | (0.24 | ) | $ | (2.14 | ) | $ | (1.21 | ) | ||||||
| Dividends per share: | |||||||||||||||||||
| Declared and paid | $ | 0.44 | $ | 0.44 | $ | 0.44 | $ | 0.44 | $ | 0.44 | |||||||||
| Shares used in net income (loss) per-share calculation: | |||||||||||||||||||
| Basic | 367,308 | 359,324 | 333,451 | 319,522 | 302,036 | ||||||||||||||
| Diluted | 384,670 | 372,178 | 333,451 | 319,522 | 302,036 | ||||||||||||||
| December 31, 2017 | January 1, 2017 (2) (4) | January 3, 2016 (2) (4) | December 28, 2014 (2) | December 29, 2013 | |||||||||||||||
| (in thousands, except per-share amounts) | |||||||||||||||||||
| Consolidated Statement of Operations Data: | |||||||||||||||||||
| Revenues | $ | 2,327,771 | $ | 1,923,108 | $ | 1,607,853 | $ | 725,497 | $ | 722,693 | |||||||||
| Cost of revenues | 1,370,309 | 1,235,540 | 1,204,196 | $ | 361,820 | $ | 384,121 | ||||||||||||
| Operating income (loss) | 78,093 | (608,738 | ) | (323,330 | ) | $ | 22,873 | $ | (58,195 | ) | |||||||||
| Net income (loss) (3) | (80,783 | ) | (683,877 | ) | (367,563 | ) | $ | 16,518 | $ | (50,087 | ) | ||||||||
| Adjust for net loss (income) attributable to noncontrolling interest | $ | (132 | ) | $ | 643 | $ | 2,271 | $ | 1,418 | $ | 1,845 | ||||||||
| Net income (loss) attributable to Cypress | $ | (80,915 | ) | $ | (683,234 | ) | $ | (365,292 | ) | $ | 17,936 | $ | (48,242 | ) | |||||
| Net income (loss) attributable to Cypress per share—basic | $ | (0.24 | ) | $ | (2.14 | ) | $ | (1.21 | ) | $ | 0.11 | $ | (0.32 | ) | |||||
| Net income (loss) attributable to Cypress per share—diluted | $ | (0.24 | ) | $ | (2.14 | ) | $ | (1.21 | ) | $ | 0.11 | $ | (0.32 | ) | |||||
| Dividends per share: | |||||||||||||||||||
| Declared | $ | 0.44 | $ | 0.44 | $ | 0.44 | $ | 0.44 | $ | 0.44 | |||||||||
| Paid | $ | 0.44 | $ | 0.44 | $ | 0.44 | $ | 0.44 | $ | 0.44 | |||||||||
| Shares used in per-share calculation: | |||||||||||||||||||
| Basic | 333,451 | 319,522 | 302,036 | 159,031 | 148,558 | ||||||||||||||
| Diluted | 333,451 | 319,522 | 302,036 | 169,122 | 148,558 | ||||||||||||||
| December 31, 2017 | January 1, 2017 (4) | January 3, 2016 (4) | December 28, 2014 | December 29, 2013 | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||
| Cash, cash equivalents and short-term investments | $ | 151,596 | $ | 121,144 | $ | 227,561 | $ | 118,812 | $ | 104,462 | |||||||||
| Working capital (3) | $ | 147,854 | $ | 191,486 | $ | 326,114 | $ | 37,479 | $ | 13,871 | |||||||||
| Total assets (3) | 3,537,050 | $ | 3,871,871 | 4,004,261 | $ | 743,281 | $ | 762,884 | |||||||||||
| Debt (1) | $ | 983,816 | $ | 1,225,131 | $ | 688,265 | $ | 243,250 | $ | 248,230 | |||||||||
| Stockholders’ equity (3) | $ | 1,817,592 | $ | 1,892,752 | 2,716,423 | $ | 201,865 | $ | 175,683 | ||||||||||
| As of | |||||||||||||||||||
| December 29, 2019 (5) | December 30, 2018 | December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||
| Cash, cash equivalents and short-term investments | $ | 415,462 | $ | 285,720 | $ | 151,596 | $ | 121,144 | $ | 227,561 | |||||||||
Working capital (1) | $ | 487,515 | $ | 396,208 | $ | 147,854 | $ | 191,486 | $ | 326,114 | |||||||||
Total assets (1) | $ | 3,556,114 | $ | 3,693,215 | $ | 3,537,050 | $ | 3,871,871 | $ | 4,004,261 | |||||||||
Debt (3) | $ | 726,423 | $ | 881,178 | $ | 983,816 | $ | 1,225,131 | $ | 688,265 | |||||||||
Stockholders’ equity (1) | $ | 2,100,255 | $ | 2,117,039 | $ | 1,817,592 | 1,892,752 | $ | 2,716,423 | ||||||||||
| (1) | Our Consolidated Financial Statements include the financial results of the wireless IoT business acquired from Broadcom beginning July 5, 2016. The is significantly impacted by this transaction. |
| (2) | During the fourth quarter of fiscal 2014, |
| (3) |
debt, net of costs, at January 1, 2017 primarily included $332.0 million related to our Senior Secured Revolving Credit Facility, $95.0 million related to our Term Loan A, $444.4 million related to our Term Loan B, $287.5 million related to our 4.5% Convertible Senior Notes due 2022, and $150.0 million related to our 2% Exchangeable Senior Notes due 2020. The debt, net of costs, at January 3, 2016 primarily included $449.0 million related to our Senior Secured Revolving Credit Facility, $97.2 million related to our Term Loan A, $150.0 million related to our 2% Exchangeable Senior Notes due 2020, $7.2 million related to our finance leases and $3.0 million related to our equipment loans. See Note 16, Debt, of the Notes to Consolidated Financial Statements under Part II, Item 8 for more information on our Credit Facility and other debt.
| (4) | During the |
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 ("MD&A") should be read in conjunction with the financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The MD&A 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 areincluding those discussed under Item 1A.
EXECUTIVE SUMMARY
General
Cypress Semiconductor Corporation (“Cypress”(together with its consolidated subsidiaries, "Cypress", "the Company", "we" or “the Company”"us") manufactures and sells advanced embedded system solutions for Internet of Things (or "IoT"), automotive, industrial, home automation and appliances, consumer electronics and medical products.applications. Cypress’ microcontrollers,microcontroller, analog ICs,integrated circuits ("ICs"), wireless and wired connectivity solutions and memory productsmemories help engineers design differentiated products and help with speed to market. Cypress is committed to providing customers with quality support and engineering resources.
The Company operates on a 52 or 53-week fiscal year ending on the Sunday nearest to December 31. Fiscal years 2019, 2018 and 2017 each contained 52 weeks.
Pending Acquisition by Infineon
In June 2019, we entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") with Infineon Technologies AG, a stock corporation (Aktiengesellschaft) organized under the laws of the Federal Republic of Germany ("Infineon") and IFX Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Infineon ("Merger Sub"). Subject to approval by the relevant regulatory bodies as well as other customary closing conditions, the Merger Agreement provides for Merger Sub to merge with and into Cypress, with Cypress continuing as the surviving corporation in the Merger and as a wholly owned subsidiary of Infineon.
Refer to Note 2, Merger Agreement, of the Notes to Consolidated Financial Statements under Part II, Item 8 for more information.
Mergers, Acquisitions and Divestitures
Acquisition of Broadcom Corporation’s Internetthe Noncontrolling Interest in AgigA Tech, Inc. ("AgigA")
In September 2019, we acquired the minority shareholders' noncontrolling interest in AgigA for total cash consideration of Things$3.9 million, making AgigA a wholly-owned subsidiary of Cypress.
Joint Venture with SK hynix system ic Inc. ("SKHS")
In April 2019, we closed the transfer of our NAND flash business (“IoT business”to a newly-formed joint venture between Cypress and SKHS. The joint venture entity is named SkyHigh Memory Limited ("SkyHigh") and its headquarters are in Hong Kong, China. SkyHigh is 60-percent-owned by SKHS and 40-percent-owned by us. The NAND business was reported as part of our MPD segment prior to the close of the transfer. We recognized $31.1 million, $167.3 million
and $168.1 million in fiscal 2015 is significantly impacted by the acquisition. To date, we have incurred approximately $9.2 million of acquisition related costs, including professional fees and other costs associated with the acquisition.
Acquisition of a software business
In August 2018, we acquired an embedded software company focused on the Internet of things market for cash consideration of $3.0 million. The purchased assets were primarily developed technology. Pro forma results of operations of this acquired company are not presented because the effect of the deferred revenue.acquisition was not material.
Sale of CMI
Cypress Minnesota Incorporated
In fiscalMarch 2017, we completed the sale of our wafer fabrication facility in Minnesota for gross proceeds from the sale of $30.5 million.
Business Segments
We continuously evaluate our reportable business segments in accordance with the applicable accounting guidance. Pursuant to reorganization and internal reporting structure effective fourth quarter,Consistent with the Company operatesyear ended December 30, 2018, we operated under two reportable business segments:segments, MPD and MCD. Prior to the fourth quarter of fiscal 2016, the Company reported under four reportable business segments: MPD, Programmable Systems Division ("PSD"), Data Communications Division ("DCD") and Emerging Technologies Division ("ETD").
RESULTS OF OPERATIONS
Revenues
Our total revenues increaseddecreased by $404.7$278.5 million, or 21.04%11.2%, to $2,327.8$2,205.3 million for the year ended December 31, 201729, 2019 compared to the prior fiscal year. The decrease was attributable in part to the divestiture of our NAND flash business, which was completed on April 1, 2019. Revenue from the NAND flash business decreased by $136.2 million to $31.1 million in fiscal 2019 compared to the prior fiscal year. The remainder of the decrease was primarily due to demand softening across our NOR flash, microcontroller and wireless connectivity businesses.
Our total revenues increased by $156.1 million, or 6.7%, to $2,483.8 million for the year ended December 30, 2018 compared to the prior fiscal year. For the year ended December 31, 2017,30, 2018, the increase was primarily attributable to increasedriven by strength in sales of products in our microcontroller, automotive IoT Wireless Connectivity and Wired families included in MCD.wireless connectivity, microcontrollers, and memory products.
The following table summarizes our consolidated revenues by segments:
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| MCD | $ | 1,409,265 | $ | 994,482 | $ | 731,279 | |||||
| MPD | 918,506 | 928,626 | 876,574 | ||||||||
| Total revenues | $ | 2,327,771 | $ | 1,923,108 | $ | 1,607,853 | |||||
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Microcontroller and Connectivity Division ("MCD") | $ | 1,476,655 | $ | 1,474,442 | $ | 1,409,265 | |||||
| Memory Products Division ("MPD") | 728,659 | 1,009,398 | 918,506 | ||||||||
| Total revenues | $ | 2,205,314 | $ | 2,483,840 | $ | 2,327,771 | |||||
Microcontroller and Connectivity Division:
Revenues recorded by MCD increased in fiscal 20172019 by $414.8$2.2 million, or 41.7%0.2%, compared to fiscal 2016. We acquired the IoT business acquired from Broadcom on July 5, 2016. Consequently, fiscal 2016 revenue included only2018. The increase was primarily due to a partial periodgrowth in automotive and wired connectivity products, partially offset by a decline in demand for the results from the IoT business. Additionallymicrocontrollers and wireless connectivity products.
Revenues recorded by MCD revenues increased in fiscal 2017 as2018 by $65.2 million, or 4.6%, compared to fiscal 2016, due to increased revenue from2017. The increase was primarily driven by growth in our microcontrollers, wired and wireless connectivity and PSoCautomotive products.
Memory Products Division:
Revenues recorded by MPD decreased in fiscal 20172019 by $10.1$280.7 million, or 1.1%27.8% compared to fiscal 2016.2018. The decrease was primarily due to declinesa decline in revenuedemand for NOR flash products, and the divestiture of our NAND flash business, which was completed on April 1, 2019. Revenue from the NAND productsflash business decreased by $136.2
million to $31.1 million in fiscal 2019 compared to the prior fiscal year. The decrease was partially offset by strengththe manufacturing services revenue of approximately $10.5 million generated from SkyHigh in revenue from NOR products.fiscal 2019.
Revenues fromrecorded by MPD increased in fiscal 20162018 by $52.1$90.9 million, or 5.9%9.9% compared to fiscal 2015. The increase was2017. MPD revenue increased over fiscal 2017 primarily due to a shift in product mix towards high density NOR products, as well as an increase in revenue contribution fromon NAND products.
Gross Profit & Margin
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Revenues | $ | 2,205,314 | $ | 2,483,840 | $ | 2,327,771 | |||||
| Less: Cost of revenues | 1,375,289 | 1,552,385 | 1,545,837 | ||||||||
| Gross profit | $ | 830,025 | $ | 931,455 | $ | 781,934 | |||||
| Gross margin (%) | 37.6 | % | 37.5 | % | 33.6 | % | |||||
Our gross margin remained relatively constant at 37.6% in fiscal 2019 as compared to 37.5% in fiscal 2018. Improvements to gross margin were offset by items having an unfavorable impact to gross margin. Favorable items included a shift in the Flashproduct mix toward higher density memory products, which grew primarily in the automotive and consumer segments. This was partially offset by a decrease in sales of commoditized products, which was due in part to the divestiture of the NAND business effective the second quarter of fiscal 2019. Additionally, a loss from sale of assets related to planned sale of the NAND business in the amount of $1.9 million and $10.9 million was recorded in the cost of goods sold in fiscal 2019 and 2018 respectively. A primary unfavorable item was the decrease in revenue in fiscal 2019 compared to fiscal 2018 causing an increase in amortization expense from SRAM products.intangible assets as a percentage of revenue. Amortization of intangible assets included in cost of revenue was $187.5 million or 8.5% of revenues in fiscal 2019 compared to $196.0 million or 7.9% of revenues in fiscal 2018.
Our gross margin improved from 33.6% in fiscal 2017 to 37.5% in fiscal 2018. The overall average selling prices (ASPs)primary drivers of our products for MPDthe improvement in gross margin were higher fab utilization, which increased from 74.2% for the year ended December 31, 2017 was $1.39, which increased by $0.14, compared with the prior year. The increase is primarily attributed to the higher ASPs of certain products in the Flash memory products.
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| Cost of revenues | $ | 1,370,309 | $ | 1,235,540 | $ | 1,204,196 | |||||
| As a percentage of revenue | 58.9 | % | 64.2 | % | 74.9 | % | |||||
Additionally, our cost of revenue ratio improved due to the sale of products from the acquired IoT business, which havethere was a lower cost of revenue ratio than the company average. This was partially offset by higher write downsreduction in write-downs of carrying value of inventory duringfor the year ended December 31, 201730, 2018 as compared to the prior year. Write-down of inventories during fiscal 2017for the year ended December 30, 2018 was $34.5$22.3 million as compared to $25.3$34.5 million in fiscal 2016.for the year ended December 31, 2017. Write-down of inventories unfavorably impacted our gross margin by 0.9% and 1.5% for the year ended December 30, 2018 and for the year ended December 31, 2017, respectively. Sale of inventory that was previously written-offwritten off or written-downwritten down aggregated to $31.6$19.5 million for fiscal 2017 as compared to $65.7and $31.6 million in fiscal 2016.
Included in the cost of revenues for fiscal 2015 was a $133.0are restructuring costs of $3.3 million write-down of carrying value of inventory assumed as a part of the Spansion Merger as well as a write down of $19.5 million of certain other inventories. In comparison, write-down of inventories during fiscal 2016 was $25.3 million. Sale of inventory that was previously written-off or written-down aggregated to $65.7and $0.6 million for fiscal 20162018 and $6.4fiscal 2017, respectively. The increase in restructuring costs is primarily due to the 2018 Plan (as defined below), which we began implementing in the first quarter of 2018.
Included in cost of revenues is the amortization of intangible assets of $196.0 million and $175.0 million for fiscal 2015, which favorably impacted our2018 and fiscal 2017, respectively. The increase of the amortization of intangible assets is mainly due to the capitalization of in-process research and development ("IPR&D") projects.
Included in cost of revenues ratio in fiscal 2016. This impact was partially offset by lower fab utilization which was 56%2018 is the impairment of assets held for fiscal 2016sale of $10.9 million as compareda result of entering into a definitive agreement to 62%divest the NAND products business to a joint venture with SKHS in fiscal 2015.October 2018.
Research and Development (“("R&D”&D")
Our R&D efforts are focused on the development and design of new semiconductor products and design methodologies, as well as the continued development of advanced software platforms. Our R&D organization works with our manufacturing facilities, suppliers and customers to improve our semiconductor designs and lower our manufacturing costs.
Our R&D groups conduct ongoing efforts to reduce design cycle time and increase first pass yield through structured re-use of intellectual property blocks from a controlled intellectual property library, development of computer-aided design tools and improved design business processes. Design and related software development work primarily occurs at design centers located in the United States, Ukraine, Ireland, Germany, Israel, India, Japan, China and Malaysia.
| Year Ended | Year Ended | |||||||||||||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||
| R&D expenses | $ | 357,016 | $ | 331,175 | $ | 274,813 | $ | 362,716 | $ | 363,996 | $ | 362,931 | ||||||||||
| As a percentage of revenues | 15.3 | % | 17.2 | % | 17.1 | % | 16.4 | % | 14.7 | % | 15.6 | % | ||||||||||
R&D expenditures decreased by $1.3 million in fiscal 2019 compared to the prior year. The decrease was mainly attributable to a $14.7 million decrease in labor costs due to reductions in variable compensation expenses and a $1.4 million decrease in stock-based compensation. These decreases were partially offset by $6.7 million increase in outside services, $5.1 million increase in other compensation, $2.9 million increase in software expenses and $0.1 million increase in other expenses.
R&D expenditures increased by $25.8$1.1 million in fiscal 20172018 compared to the same prior-year period.fiscal 2017. The increase was mainly attributable to $40.3$5.4 million of expensesin increased labor costs mainly due to the IoT business acquisition, primarily comprised of $28.2employee-related compensation expenses, a $3.6 million of increase in labor costs due to increased headcountdepreciation, and an increase of $12.1$1.8 million in expensed assets. The above increases werelicensing payments to certain vendors, partially offset by $4.1 million in lower restructuring costs, a $1.4$3.8 million decrease in deferred compensation expenses, and a $1.7 million decrease in stock-based compensation expense and a $13.1 million decrease in other R&D expenses, mainly due to lower labor cost due to Cypress 3.0 restructuring and project spending.
Selling, General and Administrative (“("SG&A”&A")
| Year Ended | Year Ended | |||||||||||||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||
| SG&A expenses | $ | 303,651 | $ | 317,362 | $ | 320,227 | $ | 344,046 | $ | 403,031 | $ | 340,910 | ||||||||||
| As a percentage of revenues | 13.0 | % | 16.5 | % | 19.9 | % | 15.6 | % | 16.2 | % | 14.6 | % | ||||||||||
SG&A expenses decreased by $13.7$59.0 million in fiscal 20172019 compared to fiscal 2016.2018. The decrease was mainly due to lower acquisition costa loss from sale of $15.4 millionassets related to planned sale of the IoT acquisition, a $5.0NAND business of $65.7 million decrease due to executive severance costs incurredrecognized in fiscal 2016,2018, as well as a decrease of $17.2 million in professional fee and $10.0a decrease of $10.9 million decrease in non-recurring costs,restructuring charges. These decreases were partially offset by higher labor costs of $8.2 million, an increase of $5.4$12.3 million related to IoT operatingin merger-related expenses, a $12.5 million increase in stock-based compensation expense, a $8.2 million increase in labor expenses and an increase of $3.1$1.8 million in stock-based compensationfacility-related expenses.
SG&A expenses decreasedincreased by $2.9$62.1 million in fiscal 20162018 compared to fiscal 2015. The decrease was mainly due to lower acquisition expenses of $14.1 million primarily related to merger of Spansion, a $5.7 million decrease in stock-based compensation expenses, offset by acquisition costs associated with the IoT acquisition of $8.9 million, and IoT operating expenses of $9.8 million primarily related to labor.
Interest Expense
Interest expense for fiscal 2019 was $58.7 million and primarily represents interest payments due and amortization of the intangibles acquired in connection with the IoT business acquisition as well as the amortizationdebt discount and costs related to certain in-process researchour 2% Convertible Senior Notes due 2023, 4.5% Convertible Senior Notes due 2022, 2% Exchangeable Senior Notes due 2020, and development projects, which had reached technological feasibilityinterest expense incurred on our Revolving Credit Facility, Term Loan B and were transferred to developed technology, capitalized during 2017.
Interest expense for fiscal 2018 was $65.3 million and primarily represents interest payments due and amortization of the equity method investment resulted in a gain of $112.8 million which has been reflected as "Gain related to investment in Deca Technologies Inc." in the Consolidated Statements of Operations.
2% 2020 Spansion Integration-Related Restructuring Plan
Interest expense for fiscal 2017 was $80.2 million and primarily represents interest payments due and amortization of debt discount and costs related to our 2% 2023 Exchangeable Notes, 4.5% 2022 Senior Exchangeable Notes, and 2% 2020 Spansion Exchangeable Notes, and interest expense incurred on our Senior Secured Revolving Credit Facility, Term Loan B and other debt. In addition, of the $80.2 million, $7.2 million was related to the debt extinguishment forof the 2% 2020 Spansion Exchangeable Notes and Term Loan A.
Refer to Note 1416, Debt, of the Notes to the Consolidated Financial Statements under Part II, Item 8 for more information about our credit facilitiesfacility and other debt.
Other Income (expense)(Expense), Net
The following table summarizes the components of other income (expense), net:
| Year Ended | Year Ended | |||||||||||||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||
| Interest income | $ | 568 | $ | 1,836 | $ | 885 | $ | 5,367 | $ | — | $ | 568 | ||||||||||
| Changes in fair value of investments under the deferred compensation plan | 6,087 | 2,326 | (1,354 | ) | 7,991 | (2,904 | ) | 6,087 | ||||||||||||||
| Unrealized (loss) gain on marketable securities | — | 325 | (4,655 | ) | ||||||||||||||||||
| Foreign currency exchange (losses) gains, net | (1,838 | ) | (4,251 | ) | 744 | |||||||||||||||||
| (Loss) gain on sale of investments | — | (265 | ) | 276 | ||||||||||||||||||
| Foreign currency exchange and other (losses) gains, net | (1,135 | ) | (340 | ) | (1,838 | ) | ||||||||||||||||
| Other | (549 | ) | 342 | 335 | 1,945 | 726 | (549 | ) | ||||||||||||||
| Other income (expense), net | $ | 4,268 | $ | 313 | $ | (3,769 | ) | $ | 14,168 | $ | (2,518 | ) | $ | 4,268 | ||||||||
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 2017, 20162019, 2018 and 2015,2017, we recognized changes in fair value of the assets under the deferred compensation plan in “Other"Other income (expense), net”net" of $6.1$8.0 million, $2.3$(2.9) million, and $(1.4)$6.1 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 1821, Employee Benefit Plans, of the Notes to the Consolidated Financial Statements under Part II, Item 8 for more information about our deferred compensation plan.
Share in Gain/Loss, Net Loss and Impairment of Equity Method Investees
Deca Technologies Inc. ("Deca")
Cypress held 52.4% and 52.5% of Deca's outstanding voting shares as of December 29, 2019 and December 30, 2018, respectively. Our investment in Deca is accounted for as an equity method investment.
During the fourth quarter of fiscal 2018, we determined that our investment in Deca was other-than-temporarily impaired due to Deca's failure to achieve significant product development and testing milestones. As a result, we recognized a charge of $41.5 million in order to write down the carrying amount of the investment to the estimated fair value as of the end of fiscal 2018.
During the second quarter of fiscal 2019, certain key customers notified Deca management of their intention to significantly reduce their previously estimated orders from Deca for 2019. Additionally, preliminary conversations between Deca and certain potential investors during the second quarter of fiscal 2019 had indicated that the enterprise value of Deca was lower than Cypress’s previous estimates. As a result, we recognized a charge of $29.5 million in order to write down the carrying amount of the investment to the estimated fair value as of the end of the second quarter of fiscal 2019.
During fiscal 2019 and 2018, we recorded $10.5 million and $15.8 million, respectively, for our share of losses recorded by Deca.
On October 1, 2019, Deca reached a definitive agreement with nepes Corporation (“nepes”) to sell Deca’s Philippines manufacturing facility to nepes, subject to receipt of regulatory approvals and other customary closing conditions. As part of the agreement, nepes has licensed certain Deca technologies, and nepes will purchase a limited number of Deca’s shares from certain existing shareholders which may include Cypress. The agreement provides for milestone-based payments from nepes to Deca both for the Philippines manufacturing facility purchase and the technology license, which milestones are currently expected to be achieved in 2020. The transfer of Deca's manufacturing facility to nepes closed on January 1, 2020. Following the closing, Deca's remaining assets primarily consist of intellectual property and its new business model will focus on monetizing its intellectual property portfolio as well as providing engineering services.
Given the factors described above, there continues to be a substantial risk that the carrying value of our investment in Deca may be further impaired in the future. Conditions that may have a material adverse effect on Deca’s business, results of operations and financial condition or on its enterprise value include:
any delays of failure to complete product or intellectual property development milestones-similar to those previously experienced;
any inability of Deca to raise sufficient funding, if needed, for continuing its operations; and
any inability of Deca to monetize its intellectual property assets.
We have been making investmentsmay be required to record further impairments resulting in partial or full write down of the carrying value of our investment in Deca if any of the conditions described above were to materialize.
SkyHigh
On April 1, 2019, we closed the transfer of our NAND business to a newly-formed joint venture between Cypress and SK hynix system ic Inc. ("SKHS"). The joint venture entity is named SkyHigh Memory Limited ("SkyHigh") and its headquarters are in Hong Kong, China. SkyHigh is 60-percent-owned by SKHS and 40-percent-owned by Cypress. We paid $2.4 million in cash as our capital contribution in SkyHigh upon close of the transaction. Our investment in SkyHigh is accounted for as an equity method investment.
During fiscal 2019, we recorded $4.1 million for our share of income recorded by SkyHigh.
Enovix Corporation ("Enovix"), a privately
We held development stage company. We invested $5.6 million, $23.0 million23.2% and $28.0 million in Enovix during 2017, 2016 and 2015 respectively. Our investment holding comprised24.8% of 41.2%, 46.6% and 38.7% of Enovix's outstanding equity at the end of fiscal 2017, 20162019 and 2015,2018, respectively. SinceDuring the fourth quarter of 2014 we have been accounting for our investment in Enovix using the equity method of accounting. During the fourth quarter offiscal 2017, Enovix missed achieving certain key planned product development milestones. We considered various factors in determining whether to recognize an impairment charge, including the expectations of the investee's future cash flows and capital needs, the length of time the investee has been in a loss position, the ability to achieve milestones, and the near-term prospect of the investee and its exit strategy. Enovix’s estimated enterprise value is sensitive to its ability to achieve these milestones. Consequently, we believeconcluded that our investment in Enovix has suffered an other-than-temporary impairmentwas other-than-temporarily impaired and we recorded a charge of $51.2 million.million to write down the carrying amount of the investment to zero.
During fiscal 2017, 2016 and 2015, we recorded $8.7 million $9.9 million and $7.1 million respectively for our share of losses recorded by Enovix. DuringNo further share in losses of Enovix have been recorded since the full impairment of the carrying value of our investment in Enovix in the fourth quarter of fiscal 2017 and 2016, we recorded $11.8 million and $8.2 million respectively for our share of losses recorded by Deca.as described above.
Income Taxes
A valuation allowance is established or maintained when, based on currently available information and other factors, it is more likely than not that all or a portion of the deferred tax assets will not be realized. We regularly assess our valuation allowance against deferred tax assets on a jurisdiction by jurisdiction basis. We consider all available positive and negative evidence, including future reversals of temporary differences, projected future taxable income, tax planning strategies and recent financial results. During the fourth quarter of 2018, we released $343.3 million of the valuation allowance attributable to certain U.S. deferred tax assets. As of December 29, 2019, for certain federal and state attributes, a valuation allowance of $176.0 million has been recorded for the portion that is not more likely than not to be realized. We will continue to evaluate all evidence in future periods to determine if a further release of the valuation allowance is warranted.
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.rates. 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,treaties, and regulatory and judicial developments in the many countries in which we and our affiliates do business.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes information regarding our consolidated cash and cash equivalents and short-term investments and working capital:
| As of | As of | |||||||||||||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||
| Cash, cash equivalents and short-term investments | $ | 151,596 | $ | 121,144 | $ | 227,561 | ||||||||||||||||
| Cash and cash equivalents | $ | 415,462 | $ | 285,720 | $ | 151,596 | ||||||||||||||||
| Working capital, net | $ | 147,854 | $ | 191,486 | $ | 326,114 | $ | 487,515 | $ | 396,208 | $ | 147,854 | ||||||||||
Key Components of Cash Flows
| Year Ended | Year Ended | |||||||||||||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||
| Net cash provided by operating activities | $ | 403,487 | $ | 217,419 | $ | 8,801 | $ | 478,915 | $ | 471,700 | $ | 403,487 | ||||||||||
| Net cash used in investing activities | $ | (14,429 | ) | $ | (613,439 | ) | $ | (79,087 | ) | $ | (27,311 | ) | $ | (49,690 | ) | (14,429 | ) | |||||
| Net cash provided by (used in) financing activities | $ | (357,634 | ) | $ | 289,502 | $ | 193,240 | |||||||||||||||
| Net cash used in financing activities | $ | (321,862 | ) | $ | (287,886 | ) | $ | (357,634 | ) | |||||||||||||
Fiscal 2017:2019:
Operating Activities
Net cash provided by operating activities during fiscal 2017 was $403.5 million. The net loss2019 of $80.8$478.9 million included net non-cash itemsconsisted of $463.2 million. Net cash provided by operating activities benefited from a $21.1 million decrease in net operating assets and liabilities. The non-cash items primarily consisted of:
| Net income | $ | 40.4 | ||
| Non-cash items | ||||
| Stock-based compensation expenses | 106.0 | |||
| Depreciation and amortization | 284.7 | |||
| Loss on sale of NAND business to joint venture | 1.5 | |||
| Gain on sale or retirement of property and equipment, net | (0.5 | ) | ||
| Share in gain/loss, net and impairment of equity method investees | 35.9 | |||
Accretion of interest expense on Senior Exchangeable Notes and amortization of debt and financing costs on other debt | 17.9 | |||
| Loss on extinguishment of debt | 6.4 | |||
| Restructuring and other costs | 3.9 | |||
| Changes in operating asset and liability accounts | (17.3 | ) | ||
| $ | 478.9 | |||
The increasedecrease in net cash due to changes in operating assets and liabilities during fiscal 20172019 of $21.1$17.3 million was primarily due to a decrease in accounts payable and accrued and other liabilities of $101.0 million mainly due to timing of payments to vendors. This was partially offset by an increase of $67.5 million in price adjustments and other revenue reserves for sales to distributors (the "DPA Reserve") mainly due to a transition of business between distributors in Japan during the third quarter of fiscal 2019. Other changes that impacted the operating assets and liabilities included the following:
$56.0 million in operating lease right-of-use assets recorded due to the adoption of ASU No. 2016-02, "Leases (ASC Topic 842)," partially offset by $44.6 million of operating lease liability;
a decrease in accounts receivable of $23.4 million due to timing of invoicing and collections; and
an increase in inventories of $3.0 million primarily due to inventory builds to support certain supplier transitions.
Investing Activities
In fiscal 2019, we used approximately $27.3 million of cash in our investing activities primarily due to:
property and equipment expenditures of $41.2 million relating to purchases of manufacturing facility equipment;
cash paid for purchase of noncontrolling interest in AgigA of $3.7 million; and
cash paid for equity method investments of $2.4 million.
These cash outflows were partially offset by proceeds of $13.6 million from our sale of the NAND business to a joint venture and $5.8 million in net distributions for the deferred compensation plan.
Financing Activities
In fiscal 2019, we used approximately $321.9 million of cash in our financing activities, primarily related to:
payments of $476.3 million on Term Loan B;
dividend payments of $160.9 million;
payments of $147.0 million on our Revolving Credit Facility;
payments of $19.4 million on net shares settlement of restricted stock units; and
payments of $1.7 million on finance lease liabilities.
These payments were partially offset by proceeds of $447.0 million from draws on our Revolving Credit Facility and proceeds of $38.6 million from employee equity awards.
Fiscal 2018:
Operating Activities
Net cash provided by operating activities during fiscal 2018 of $471.7 million consisted of (in millions):
| Net income | $ | 354.8 | ||
| Non-cash items | ||||
| Stock-based compensation expenses | 96.0 | |||
| Depreciation and amortization | 283.0 | |||
| Impairment of assets held for sale | 76.6 | |||
| Loss on sale or retirement of property and equipment, net | 7.5 | |||
| Share in gain/loss, net and impairment of equity method investees | 57.4 | |||
Accretion of interest expense on Senior Exchangeable Notes and amortization of debt and financing costs on other debt | 19.5 | |||
| Release of valuation allowance | (343.3 | ) | ||
| Loss on extinguishment of debt | 5.2 | |||
| Restructuring and other costs | 16.1 | |||
| Changes in operating asset and liability accounts | (101.1 | ) | ||
| $ | 471.7 | |||
The decrease in net cash due to changes in operating assets and liabilities during fiscal 2018 of $101.1 million was primarily due to the following:
an increase in accounts receivable of $23.8 million mainly due to an increase in revenue;
an increase in inventories of $20.8 million;
an increase in other current and long-term assets of $5.4 million;
a decrease in accounts payable and accrued and other liabilities of $59.0$33.9 million mainly due to timing of payments and payments related to restructuring activities;
an increase in accounts receivablesassets held for sale related inventories of $37.0$13.5 million mainly due to an increase in revenue.the sale of NAND business.
Investing Activities
In fiscal 2017,2018, we used approximately $14.4$49.7 million of cash in our investing activities primarily due to:
$35.5 million of cash received on the sale of the wafer manufacturing facility located in Bloomington, Minnesota and a building in Austin, Texas,
These cash outflows were partially offset by $5.8 million of cash received on the sales of property and equipment, and $9.3$18.5 million of cash received related to our investments in privately held equity method and cost method investments.interests.
Financing Activities
In fiscal 2017,2018, we used approximately $357.6$287.9 million of cash in our financing activities, primarily related to:
$144.7157.4 million for dividend payments,payments;
net repayments of $242.0$90.0 million on the Senior Secured Revolving Credit Facility,Facility;
$128.035.6 million for repayment of Term Loan B;
$35.0 million for stock repurchase; and
$10.0 million for repayment of 2% 2020 Spansion Exchangeable Notes, andNotes.
proceeds of $43.9$40.7 million from employee equity awards.
Liquidity and Contractual Obligations
Summary of our debt balances is included below:
| December 31, 2017 | ||||||||||||
| Principal amount outstanding | Less: Unamortized discount and issuance costs | Net carrying value outstanding | ||||||||||
| (in thousand) | ||||||||||||
| Senior Secured Revolving Credit Facility | $ | 90,000 | $ | — | $ | 90,000 | ||||||
| Term Loan B | 511,924 | 16,541 | 495,383 | |||||||||
| 2% 2020 Spansion Exchangeable Notes | 21,990 | 1,615 | 20,375 | |||||||||
| 4.5% 2022 Senior Exchangeable Notes | 287,500 | 40,864 | 246,636 | |||||||||
| 2% 2023 Exchangeable Notes | 150,000 | 18,578 | 131,422 | |||||||||
| Total Debt | $ | 1,061,414 | $ | 77,598 | $ | 983,816 | ||||||
| December 29, 2019 | ||||||||||||
| Principal amount outstanding | Less: Unamortized discount and issuance costs | Net carrying value outstanding | ||||||||||
| (in thousands) | ||||||||||||
| Revolving Credit Facility | $ | 300,000 | $ | — | $ | 300,000 | ||||||
| 2% Exchangeable Senior Notes due 2020 | 11,984 | 223 | 11,761 | |||||||||
| 4.5% Convertible Senior Notes due 2022 | 287,495 | 20,685 | 266,810 | |||||||||
| 2% Convertible Senior Notes due 2023 | 150,000 | 11,301 | 138,699 | |||||||||
| Finance lease obligations | 9,153 | — | 9,153 | |||||||||
| Total debt | $ | 758,632 | $ | 32,209 | $ | 726,423 | ||||||
Of the total principal amountnet carrying value outstanding, $27.3$11.8 million related to the total Term Loan B is2% Exchangeable Senior Notes due 2020 and $1.9 million related to finance lease obligations were classified as current liabilities as of December 31, 2017.
29, 2019.
| January 1, 2017 | ||||||||||||
| Principal amount outstanding | Less: Unamortized discount and issuance costs | Net carrying value outstanding | ||||||||||
| (in thousand) | ||||||||||||
| Senior Secured Revolving Credit Facility | $ | 332,000 | $ | — | $ | 332,000 | ||||||
| Term Loan B | 444,375 | 15,661 | 428,714 | |||||||||
| Term Loan A | 95,000 | 2,662 | 92,338 | |||||||||
| Capital lease obligations | 40 | — | 40 | |||||||||
| Equipment loans | 112 | — | 112 | |||||||||
| 2% 2020 Spansion Exchangeable Notes | 149,990 | 14,589 | 135,401 | |||||||||
| 4.5% 2022 Senior Exchangeable Notes | 287,500 | 50,974 | 236,526 | |||||||||
| Total Debt | $ | 1,309,017 | $ | 83,886 | $ | 1,225,131 | ||||||
| December 30, 2018 | ||||||||||||
| Principal amount outstanding | Less: Unamortized discount and issuance costs | Net carrying value outstanding | ||||||||||
| (in thousands) | ||||||||||||
| Term Loan B | $ | 476,310 | $ | 8,391 | $ | 467,919 | ||||||
| 2% Exchangeable Senior Notes due 2020 | 11,990 | 552 | 11,438 | |||||||||
| 4.5% Convertible Senior Notes due 2022 | 287,500 | 30,774 | 256,726 | |||||||||
| 2% Convertible Senior Notes due 2023 | 150,000 | 14,943 | 135,057 | |||||||||
| Finance lease obligations | 10,038 | — | 10,038 | |||||||||
| Total debt | $ | 935,838 | $ | 54,660 | $ | 881,178 | ||||||
Of the total principal amountnet carrying value outstanding, $22.5$6.9 million related to Term Loan B $7.5 million related to Term Loan A, $0.1 million related to Equipment loans, and $40 thousand related to Capitalfinance lease obligation werewas classified as current liabilities as of January 1, 2017.December 30, 2018.
On March 12, 2015, we entered into an Amended and Restated Credit and Guaranty Agreement with Morgan Stanley Bank, N.A., as issuing bank, and other lenders (as amended, the "Credit Agreement"). The Credit Agreement establishes a credit facility (the "Credit Facility" or the "Senior Secured Credit Facility") that includes a revolving loan facility (the "Revolving Credit Facility") and provides for the possibility of term loans.
The Senior Secured Revolving Credit Facility, as amended, provides for a $540$700 million Senior Secured Revolving Credit Facilityof borrowing capacity, of which $450$400.0 million was undrawn as atof December 31, 2017.29, 2019.
As of December 31, 2017,29, 2019, we were in compliance with all of the financial covenants under the Senior Secured Revolving Credit Facility.all of our debt facilities.
Refer to Note 1416, Debt, of the Notes to the Consolidated Financial Statements under Part II, Item 8 for more information on our debt obligations.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2017:29, 2019:
| Total | 2018 | 2019 and 2020 | 2021 and 2022 | After 2022 | |||||||||||||||
| (In thousands) | |||||||||||||||||||
| Purchase obligations (1) | $ | 455,075 | $ | 200,421 | $ | 247,957 | $ | 6,697 | $ | — | |||||||||
| Operating lease commitments (2) | 66,392 | 15,258 | 21,764 | 12,306 | 17,064 | ||||||||||||||
| 2% 2023 Exchangeable Notes | 150,000 | — | — | — | 150,000 | ||||||||||||||
| 4.5% 2022 Senior Exchangeable Notes | 287,500 | — | — | 287,500 | — | ||||||||||||||
| 2% 2020 Spansion Exchangeable Notes | 21,990 | — | 21,990 | — | — | ||||||||||||||
| Term Loan B | 511,924 | 27,303 | 71,669 | 412,952 | — | ||||||||||||||
| Interest payment on debt | 146,450 | 39,436 | 78,639 | 28,120 | 255 | ||||||||||||||
| Senior Secured Revolving Credit Facility | 90,000 | — | 90,000 | — | — | ||||||||||||||
| Asset retirement obligations | $ | 5,693 | $ | 223 | $ | 3,274 | $ | 1,857 | $ | 339 | |||||||||
| Total contractual obligations | $ | 1,735,024 | $ | 282,641 | $ | 535,293 | $ | 749,432 | $ | 167,658 | |||||||||
| Total | 2020 | 2021 and 2022 | 2023 and 2024 | After 2024 | |||||||||||||||
| (In thousands) | |||||||||||||||||||
Purchase obligations (1) | $ | 193,749 | $ | 95,136 | $ | 65,709 | $ | 32,904 | $ | — | |||||||||
| Operating lease commitments | 55,599 | 16,244 | 15,949 | 9,945 | 13,461 | ||||||||||||||
| Finance lease commitments | 10,081 | 2,196 | 4,380 | 2,583 | 922 | ||||||||||||||
2% Exchangeable Senior Notes due 2020 (2) | 11,984 | 11,984 | — | — | — | ||||||||||||||
4.5% Convertible Senior Notes due 2022 (2) | 287,495 | 9 | 287,486 | — | — | ||||||||||||||
2% Convertible Senior Notes due 2023(2) | 150,000 | — | — | 150,000 | — | ||||||||||||||
| Revolving credit facility | 300,000 | — | 300,000 | — | — | ||||||||||||||
Interest and commitment fee due on debt (3) | 54,766 | 26,459 | 26,661 | 1,632 | 14 | ||||||||||||||
| Asset retirement obligations | 5,959 | 1,876 | 3,710 | 340 | 33 | ||||||||||||||
Total contractual obligations (4) | $ | 1,069,633 | $ | 153,904 | $ | 703,895 | $ | 197,404 | $ | 14,430 | |||||||||
| (1) | Purchase obligations primarily include commitments under "take or pay" arrangements, 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 |
| (2) |
| (3) | Interest and commitment fees due on variable debt is based on the effective interest rates as of December 29, 2019. |
| (4) | Total contractual obligations do not include transaction fees of approximately $63 million which are contingently payable upon the completion of the proposed Merger with Infineon. If the proposed Merger does not close under circumstances in which we receive a reverse break-up fee, transaction fees of approximately $22.2 million are contingently payable by us. Additionally, the contractual obligations do not include $10.2 million in retention bonuses awarded to |
Capital Resources and Financial Condition
Our long-term strategy is to maintain a minimumminimize the amount of cash required for operational purposes and to investutilize the remaining amount of our cash for investments in interest-bearing and highly liquid cash equivalents and debt securities, repayment of debt, the purchase of our stock through our stock buyback program and payments of regularly scheduled cash dividends. In addition, we may use excess cash to invest in strategic investments and partnerships and pursue acquisitions. Our investment policy defines three main objectives when buyingmaking investments: security of principal, liquidity, and maximization of after-tax yield. We invest excess cash in various financial securities subject to certain requirements including security type, duration, concentration limits, and credit rating profile.
As of December 31, 2017,29, 2019, a total cash and short-term investmentcash equivalents position of $151.6$415.5 million is available for use in current operations.
As of December 31, 2017,29, 2019, approximately 20%12.2% of our cash and cash equivalents and available-for-sale investments arewere held outside of the United States.by our non-U.S. subsidiaries. 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.
On February 17, 2017,July 31, 2019, we amended ourthe Revolving Credit Facility which includesto increase the Senior Securedavailable amount from $540 million to $700 million and extend its maturity from March 12, 2020 to January 31, 2021. We may, at our sole discretion, extend the maturity for another six months to July 31, 2021. The financial covenants were amended to increase the maximum total leverage ratio from 3.75 to 4.0. Subject to the terms and conditions set forth in the amended Revolving Credit Facility, the completion of the Merger will trigger the change of control provision of the Revolving Credit Facility causing the debt to become payable immediately. We borrowed $447 million under the amended Revolving Credit Facility and repaid the Term Loans. The amendment reduced the applicable margins on theentire outstanding Term Loan B and Term Loan A from 5.50% and 5.11%, respectively, to 3.75% effective February 17, 2017. Additionally, the amended financial covenants include the following conditions: 1) maximum total leverage ratioprincipal balance of 4.25 to 1.00 through December 31, 2017 and 2) maximum total leverage ratioapproximately $448
million in July 2019, resulting in an extinguishment of 4.00 to 1.00 through July 1, 2018 and 3.75 to 1.00 thereafter. We incurred financing costs of $5.9 million to lenders of the Term Loans which were capitalized and recognized as a reduction of the Term Loan A and Term Loan B, balances in “Credit Facility and long-term debt”which was scheduled to mature on the Consolidated Balance Sheets. These costs will be amortized over the life of the Term Loans and are recorded in “Interest Expense” on the Consolidated Statements of Operations.
We believe that liquidity provided by existing cash, cash equivalents, and investments, our cash from operations and our borrowing arrangements will provide sufficient capital to meet our requirements for at least the next twelve months. However, if economic conditions deteriorate, debt covenants unexpectedly impact our business, and/or financial, businessability to borrow and other factors beyond our control adversely affect our estimates of our future cash requirements, we could be required to fund our cash requirements byusing alternative financing. There can be no assurance that additional financing, if needed, would be available on terms acceptable to us orif at all. We may also choose at any time to raise additional capital or debt to strengthen our financial position, facilitate growth, enter into strategic initiatives including the acquisition of other companies, repurchase shares of our stock, increase our dividends and/or pay a special dividend and provide us with additional flexibilityliquidity to take advantage of other business opportunities that arise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based uponon our consolidated financial statements included in this Annual Report on Form 10-K and the data used to prepare them. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United StatesStates. Note 1, Description of Business and we are required to make estimates, judgments and assumptions in the courseSummary of such preparation. Note 1Significant Accounting Policies, of the Notes to the Consolidated Financial Statements under Part II, Item 8 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. On an ongoing basis, we re-evaluate ourWe are required to make estimates, judgments and estimates including those related to revenue recognition, allowances for doubtful accounts receivable, inventory valuation, valuationassumptions in the course of long-lived assets, goodwill andpreparing our financial instruments, stock-based compensation, and settlement costs, and income taxes.statements. We base our estimates, judgments and judgmentsassumptions on historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. ActualWhile we believe that our estimates, judgments and assumptions are reasonable, actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies that are affected by significant estimates assumptions and judgments used in the preparation of our consolidated financial statementspolicies are as follows:
Revenue Recognition:
Valuation of 2014 we began recognizing revenue on certain product families and with certain distributors (less its estimate of future price adjustments and returns) upon shipmentInventories: estimates related to the distributors (also referred to as the sell-in basis of revenue recognition).
Accounting for Income Taxes: estimating reserves needed against uncertain tax positions. Such reserves are recorded primarily based on judgmental assessment of the share-based payment awardstax regulations and stock price volatility. The assumptions usedcase law.
Recent Accounting Pronouncements
See "Recent Accounting Pronouncements" in calculating the fair valueNote 1, Description of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertaintiesBusiness and the applicationSummary of management judgment. Through fiscal 2016, we estimated the expected forfeiture rate and only recognized the expense for those shares expected to vest. Beginning fiscal 2017, with the adoption of ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentSignificant Accounting" the Company elected to recognize forfeitures as they occurred and adopted these changes using a modified retrospective approach, with a cumulative adjustment recorded to opening accumulative deficit. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risks
Our investment portfolio consists of a variety of financial instruments that expose us to interest rate risk, including, but not limited to, money market funds, certificateand certificates of deposit and corporate securities. These investments are generally classified as available-for-sale and, consequently, are recorded on our balance sheets at fair market value with their related unrealized gain or loss reflected as a component of accumulated other comprehensive income (loss) in stockholders’ equity.deposit. Due to the relatively short-term nature of our
investment portfolio, we do not believe that an immediate increase in interest rates would have a material effect on the fair market value of our portfolio.
Our debt obligations consist of a variety of financial instruments that expose us to interest rate risk, including, but not limited to the Senior Secured Revolving Credit Facility (expiring March 2020) and the Term Loan (expiring July 2021). Interest on our Senior Secured Revolving Credit Facility and Term Loanexchangeable notes. Interest on the exchangeable notes is at a variable rate. Thefixed and interest rate on each of these instrumentsour Revolving Credit Facility is tied to short termshort-term interest rate benchmarks including the Prime Rateprime rate and the London inter-bank offered rate, or LIBOR.
In December 2017, we entered into fixed-for-floating interest rate forward swap agreements (expiring July 2021) with two counterparties, starting from April 2018, to swap variable interest payments on our debt for fixed interest payments; thesepayments. These agreements will expire onin July 2021. The objective of the swap was to effectively fix the interest rate at currentthen-current levels without having to refinance the outstanding term loan, thereby avoiding the incurrence of transaction costs. TheUnder these arrangements, the interest rate on the variable debt will continue to float until it becomesbecame fixed in April 2018. As of December 31, 2017, these swaps were not designated as hedging instruments. As of December 31, 2017, the aggregate notional amount of these interest rate swaps was $300 million. The gross asset and liability at fair value as well as the net impact to the Consolidated Statements of Operations was immaterial. Subsequent to year-end, onOn January 3, 2018, we have evaluated the hedge effectiveness of the interest rate swaps and have designated these swaps as hedging instruments. Upon designation as hedge instruments, future changes in fair value of these swaps will be recognized in accumulated other comprehensive loss.income (loss). As of December 29, 2019, these swaps were designated as hedging instruments, and the aggregate notional amount of these interest rate swaps was $300 million.
Our long-term operating results and cash flows may be materially affected to a significant degree by a sudden change in market interest rates.
Foreign Currency Exchange Risk
We operate and sell products in various global markets generating revenue primarily in USD and Yen and incur costspurchase capital equipment using foreign currencies but our transactions are predominantly denominated in many currencies including USD, Yen, Euro, Renminbi, Thai Baht, Philippine Peso, Indian Rupee, Malaysian Ringgit and several other non-material currencies but predominantly the U.S. dollar.dollars. We are exposed to certain risks associated with changes in foreign currency exchange rates in all these non-U.S. locations.the Japanese yen, the Euro and other foreign currencies.
Example of our foreign currency transactions including:
sales of our products to Japanese distributors are denominated in U.S. dollars, Japanese yen and Euros;
some of our manufacturing costs are denominated in Japanese yen and other foreign currencies such as the Thai Baht, Philippine Peso and Malaysian Ringgit; and
some fixed asset purchases and sales are denominated in other foreign currencies.
Consequently, movements in exchange rates could cause our revenues and our expenses to fluctuate, affecting our profitability and cash flows. We use foreign currency forward contracts to reduce our foreign exchange exposure on our foreign currency denominated assets and liabilities. We also hedge a percentage of our forecasted revenue and expenses denominated in Japanese yen with foreign currency forward contracts. The objective of these contracts is to mitigate impact of foreign currency exchange rate movements to our operating results on a short-term basis. We do not use these contracts for speculative or trading purposes.
We analyzed our foreign currency exposure, including our hedging strategies, to identify assets and liabilities denominated in other currencies. For those assets and liabilities, we evaluated the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar. We have determined that there would be an immaterial effect on our results of operations from such a shift. Please see Note 1113, Foreign Currency and Interest Rate Derivatives, of the Notes to the Consolidated Financial Statements under Part II, Item 8 for details on the contracts.
52
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||
| Supplemental Financial Data - Quarterly Data (Unaudited) | 114 | |
53
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
| December 29, 2019 | December 30, 2018 | ||||||
| ASSETS | (In thousands, except per-share amounts) | ||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 415,462 | $ | 285,720 | |||
| Accounts receivable, net | 301,755 | 324,274 | |||||
| Inventories | 297,904 | 292,093 | |||||
| Assets held for sale | — | 13,510 | |||||
| Other current assets | 87,348 | 101,163 | |||||
| Total current assets | 1,102,469 | 1,016,760 | |||||
| Property, plant and equipment, net | 258,748 | 282,986 | |||||
| Operating lease right-of-use assets | 42,941 | — | |||||
| Goodwill | 1,373,750 | 1,373,750 | |||||
| Intangible assets, net | 283,183 | 490,590 | |||||
| Equity method investments | 31,644 | 65,145 | |||||
| Deferred tax assets | 348,622 | 339,679 | |||||
| Other long-term assets | 114,757 | 124,305 | |||||
| Total assets | $ | 3,556,114 | $ | 3,693,215 | |||
| LIABILITIES AND EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 151,393 | $ | 210,715 | |||
| Accrued compensation and employee benefits | 54,245 | 61,994 | |||||
| Price adjustments and other distributor related reserves | 230,559 | 163,088 | |||||
| Dividends payable | 40,978 | 39,748 | |||||
| Current portion of long-term debt | 13,615 | 6,943 | |||||
| Other current liabilities | 124,164 | 138,064 | |||||
| Total current liabilities | 614,954 | 620,552 | |||||
| Income taxes payable | 54,941 | 53,469 | |||||
| Credit facility and long-term debt | 712,808 | 874,235 | |||||
| Other long-term liabilities | 73,156 | 27,920 | |||||
| Total liabilities | 1,455,859 | 1,576,176 | |||||
| Commitments and contingencies (Note 23) | — | — | |||||
| Stockholder's Equity: | |||||||
| Preferred stock, $.01 par value, 5,000 shares authorized; none issued and outstanding | — | — | |||||
| Common stock, $.01 par value, 650,000 and 650,000 shares authorized; 549,545 and 537,327 shares issued; 372,704 and 361,452 shares outstanding at December 29, 2019 and December 30, 2018, respectively | 5,495 | 5,373 | |||||
| Additional paid-in-capital | 5,617,075 | 5,636,099 | |||||
| Accumulated other comprehensive (loss) income | (16,039 | ) | 1,829 | ||||
| Accumulated deficit | (1,116,438 | ) | (1,157,115 | ) | |||
| Stockholders’ equity before treasury stock | 4,490,093 | 4,486,186 | |||||
| Less: shares of common stock held in treasury, at cost; 176,841 and 175,875 shares at December 29, 2019 and December 30, 2018, respectively | (2,389,838 | ) | (2,370,452 | ) | |||
| Total Cypress stockholders’ equity | 2,100,255 | 2,115,734 | |||||
| Non-controlling interest | — | 1,305 | |||||
| Total equity | 2,100,255 | 2,117,039 | |||||
| Total liabilities and equity | $ | 3,556,114 | $ | 3,693,215 | |||
| December 31, 2017 | January 1, 2017 | ||||||
| ASSETS | (In thousands, except per-share amounts) | ||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 151,596 | $ | 120,172 | |||
| Accounts receivable, net | 295,991 | 333,037 | |||||
| Inventories | 272,127 | 287,776 | |||||
| Assets held for sale | — | 30,796 | |||||
| Other current assets | 103,637 | 122,162 | |||||
| Total current assets | 823,351 | 893,943 | |||||
| Property, plant and equipment, net | 289,554 | 297,266 | |||||
| Goodwill | 1,439,472 | 1,439,472 | |||||
| Intangible assets, net | 715,120 | 904,561 | |||||
| Equity method investments | 122,514 | 188,687 | |||||
| Other long-term assets | 147,039 | 147,942 | |||||
| Total assets | 3,537,050 | 3,871,871 | |||||
| LIABILITIES AND EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | 213,101 | 241,424 | |||||
| Accrued compensation and employee benefits | 79,275 | 60,552 | |||||
| Price adjustments and other distributor related reserves | 173,592 | 154,525 | |||||
| Dividends payable | 38,741 | 35,506 | |||||
| Current portion of long-term debt | 27,303 | 30,152 | |||||
| Other current liabilities | 143,485 | 180,298 | |||||
| Total current liabilities | 675,497 | 702,457 | |||||
| Deferred income taxes and other tax liabilities | 52,006 | 44,934 | |||||
| Credit facility and long-term debt | 956,513 | 1,194,979 | |||||
| Other long-term liabilities | 35,442 | 36,749 | |||||
| Total liabilities | 1,719,458 | 1,979,119 | |||||
| Commitments and contingencies (Note 20) | — | — | |||||
| Stockholder's Equity: | |||||||
| Preferred stock, $.01 par value, 5,000 shares authorized; none issued and outstanding | — | — | |||||
| Common stock, $.01 par value, 650,000 and 650,000 shares authorized; 525,719 and 497,055 shares issued; 352,220 and 323,583 shares outstanding at December 31, 2017 and January 1, 2017, respectively | 4,936 | 4,737 | |||||
| Additional paid-in-capital | 5,659,612 | 5,659,644 | |||||
| Accumulated other comprehensive loss | (1,362 | ) | (8,811 | ) | |||
| Accumulated deficit | (1,511,706 | ) | (1,428,441 | ) | |||
| Stockholders’ equity before treasury stock | 4,151,480 | 4,227,129 | |||||
| Less: shares of common stock held in treasury, at cost; 173,498 and 173,472 shares at December 31, 2017 and January 1, 2017, respectively | (2,334,944 | ) | (2,335,301 | ) | |||
| Total Cypress stockholders’ equity | 1,816,536 | 1,891,828 | |||||
| Non-controlling interest | 1,056 | 924 | |||||
| Total equity | 1,817,592 | 1,892,752 | |||||
| Total liabilities and equity | $ | 3,537,050 | $ | 3,871,871 | |||
The accompanying notes are an integral part of these consolidated financial statements.
54
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands, except per-share amounts) | |||||||||||
| Revenues | $ | 2,327,771 | $ | 1,923,108 | $ | 1,607,853 | |||||
| Costs and expenses: | |||||||||||
| Cost of revenues | 1,370,309 | 1,235,540 | 1,204,196 | ||||||||
| Research and development | 357,016 | 331,175 | 274,813 | ||||||||
| Selling, general and administrative | 303,651 | 317,362 | 320,227 | ||||||||
| Amortization of acquisition-related intangible assets | 195,304 | 174,745 | 108,335 | ||||||||
| Costs and settlement charges related to shareholder matter | 14,310 | — | — | ||||||||
| Impairment of acquisition-related intangible assets | — | 33,944 | — | ||||||||
| Impairment related to assets held for sale | — | 37,219 | — | ||||||||
| Goodwill impairment charge | — | 488,504 | — | ||||||||
| Restructuring costs | 9,088 | 26,131 | 90,084 | ||||||||
| (Gain) related to investment in Deca Technologies Inc. | — | (112,774 | ) | — | |||||||
| (Gain) on divestiture of TrueTouch® Mobile business | — | — | (66,472 | ) | |||||||
| Total costs and expenses | 2,249,678 | 2,531,846 | 1,931,183 | ||||||||
| Operating income (loss) | 78,093 | (608,738 | ) | (323,330 | ) | ||||||
| Interest expense | (80,215 | ) | (55,192 | ) | (16,356 | ) | |||||
| Other income (expense), net | 4,268 | 313 | (3,769 | ) | |||||||
| Loss before income taxes and non-controlling interest | 2,146 | (663,617 | ) | (343,455 | ) | ||||||
| Income tax (provision) | (11,157 | ) | (2,616 | ) | (16,960 | ) | |||||
| Share in net loss and impairment of equity method investees | (71,772 | ) | (17,644 | ) | (7,148 | ) | |||||
| Net loss | (80,783 | ) | (683,877 | ) | (367,563 | ) | |||||
| Net (gain) loss attributable to non-controlling interest, net of taxes | (132 | ) | 643 | 2,271 | |||||||
| Net loss attributable to Cypress | $ | (80,915 | ) | $ | (683,234 | ) | $ | (365,292 | ) | ||
| Net loss per share attributable to Cypress: | |||||||||||
| Basic | $ | (0.24 | ) | $ | (2.14 | ) | $ | (1.21 | ) | ||
| Diluted | $ | (0.24 | ) | $ | (2.14 | ) | $ | (1.21 | ) | ||
| Cash dividends declared per share | $ | 0.44 | $ | 0.44 | $ | 0.44 | |||||
| Shares used in net (loss) per share calculation: | |||||||||||
| Basic | 333,451 | 319,522 | 302,036 | ||||||||
| Diluted | 333,451 | 319,522 | 302,036 | ||||||||
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands, except per-share amounts) | |||||||||||
| Revenues | $ | 2,205,314 | $ | 2,483,840 | $ | 2,327,771 | |||||
| Costs and expenses: | |||||||||||
| Cost of revenues | 1,375,289 | 1,552,385 | 1,545,837 | ||||||||
| Research and development | 362,716 | 363,996 | 362,931 | ||||||||
| Selling, general and administrative | 344,046 | 403,031 | 340,910 | ||||||||
| Total costs and expenses | 2,082,051 | 2,319,412 | 2,249,678 | ||||||||
| Operating income | 123,263 | 164,428 | 78,093 | ||||||||
| Interest expense | (58,745 | ) | (65,327 | ) | (80,215 | ) | |||||
| Other income (expense), net | 14,168 | (2,518 | ) | 4,268 | |||||||
| Income before income taxes, share in gain/loss, net and impairment of equity method investees and non-controlling interest | 78,686 | 96,583 | 2,146 | ||||||||
| Income tax (provision) benefit | (2,372 | ) | 315,618 | (11,157 | ) | ||||||
| Share in gain/loss, net and impairment of equity method investees | (35,901 | ) | (57,370 | ) | (71,772 | ) | |||||
| Net income (loss) | 40,413 | 354,831 | (80,783 | ) | |||||||
| Net loss (income) attributable to non-controlling interest, net of taxes | 15 | (239 | ) | (132 | ) | ||||||
| Net income (loss) attributable to Cypress | $ | 40,428 | $ | 354,592 | $ | (80,915 | ) | ||||
| Net income (loss) per share attributable to Cypress: | |||||||||||
| Basic | $ | 0.11 | $ | 0.99 | $ | (0.24 | ) | ||||
| Diluted | $ | 0.11 | $ | 0.95 | $ | (0.24 | ) | ||||
| Shares used in net income (loss) per share calculation: | |||||||||||
| Basic | 367,308 | 359,324 | 333,451 | ||||||||
| Diluted | 384,670 | 372,178 | 333,451 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements
55
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Twelve Months Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| Net loss | (80,783 | ) | (683,877 | ) | (367,563 | ) | |||||
| Other comprehensive (loss) income: | |||||||||||
| Net change in unrealized (losses) gains on available for sale securities | — | — | 28 | ||||||||
| Net unrecognized gain on defined benefit plan | 324 | (1,214 | ) | 26 | |||||||
| Net unrealized gain (loss) on cash flow hedges: | — | — | — | ||||||||
| Net unrealized gain (loss) arising during the period | 511 | (5,186 | ) | (1,651 | ) | ||||||
| Net loss reclassified into earnings for revenue hedges (effective portion) | (4,634 | ) | 13,650 | (1,678 | ) | ||||||
| Net loss reclassified into earnings for revenue hedges (ineffective portion) | — | (173 | ) | — | |||||||
| Net loss reclassified into earnings from expense hedges (ineffective portion) | — | — | 80 | ||||||||
| Net loss (gain) reclassified into earnings for expense hedges (effective portion) | 10,586 | (15,661 | ) | 3,014 | |||||||
| Provision for income tax | 662 | — | — | ||||||||
| Net unrealized gain (loss) on cash flow hedges | 7,125 | (7,370 | ) | (235 | ) | ||||||
| Other comprehensive gain (loss) | 7,449 | (8,584 | ) | (181 | ) | ||||||
| Comprehensive income (loss) | (73,334 | ) | (692,461 | ) | (367,744 | ) | |||||
| Comprehensive loss attributable to non-controlling interest | (132 | ) | 643 | 2,271 | |||||||
| Comprehensive income (loss) attributable to Cypress | $ | (73,466 | ) | $ | (691,818 | ) | $ | (365,473 | ) | ||
| Common Stock | Additional Paid-In | Accumulated Other Comprehensive | Accumulated | Treasury Stock | Noncontrolling | Total | ||||||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | Shares | Amount | Interest | Equity | ||||||||||||||||||||||||||
| (in thousands, except share amounts) | ||||||||||||||||||||||||||||||||||
| Balances at December 28, 2014 | 306,167 | $ | 3,039 | $ | 2,675,170 | $ | (46 | ) | $ | (379,913 | ) | 143,154 | $ | (2,090,493 | ) | $ | (5,892 | ) | $ | 201,865 | ||||||||||||||
| Net loss attributable to Cypress | — | — | — | — | (365,292 | ) | — | — | — | (365,292 | ) | |||||||||||||||||||||||
| Net unrealized gain (loss) on available-for-sale investments | — | — | — | (181 | ) | — | — | — | — | (181 | ) | |||||||||||||||||||||||
| Changes in employee deferred compensation plan assets | — | — | — | — | — | — | (227 | ) | — | (227 | ) | |||||||||||||||||||||||
| Yield enhancement structured agreements, net | — | (96 | ) | (9,118 | ) | — | — | 1,000 | — | — | (9,214 | ) | ||||||||||||||||||||||
| Assumption of stock options and awards related to Spansion Merger | 163,932 | — | 2,666,865 | — | — | — | — | — | 2,666,865 | |||||||||||||||||||||||||
| Assumption of 2.00% Spansion Exchangeable Notes related to Spansion Merger | — | — | 287,362 | — | — | — | — | — | 287,362 | |||||||||||||||||||||||||
| Issuance of common shares under employee stock plans | 11,813 | 1,694 | 53,863 | — | — | — | — | — | 55,557 | |||||||||||||||||||||||||
| Withholding of common shares for tax obligations on vested restricted shares | — | — | — | — | — | 234 | (2,455 | ) | — | (2,455 | ) | |||||||||||||||||||||||
| Repurchase of common shares | — | — | — | — | — | 5,248 | (55,018 | ) | — | (55,018 | ) | |||||||||||||||||||||||
| Stock-based compensation | — | — | 85,977 | — | — | — | — | — | 85,977 | |||||||||||||||||||||||||
| Dividends | — | — | (146,545 | ) | — | — | — | — | — | (146,545 | ) | |||||||||||||||||||||||
| Noncontrolling interest | — | — | — | — | — | — | — | (2,271 | ) | (2,271 | ) | |||||||||||||||||||||||
| Balances at January 3, 2016 | 481,912 | $ | 4,637 | $ | 5,613,574 | $ | (227 | ) | $ | (745,205 | ) | 149,636 | $ | (2,148,193 | ) | $ | (8,163 | ) | $ | 2,716,423 | ||||||||||||||
| Net loss attributable to Cypress | — | — | — | — | (683,234 | ) | — | — | — | (683,234 | ) | |||||||||||||||||||||||
| Net unrealized gain (loss) on available-for-sale investments | — | — | — | (7,344 | ) | (2 | ) | — | — | (7,346 | ) | |||||||||||||||||||||||
| Unrealized gain (loss) on defined benefit pension plan | — | — | — | (1,240 | ) | — | — | — | — | (1,240 | ) | |||||||||||||||||||||||
| Changes in employee deferred compensation plan assets | — | — | — | — | — | — | (94 | ) | — | (94 | ) | |||||||||||||||||||||||
| Issuance of common shares under employee stock plans | 15,143 | 100 | 48,166 | — | — | — | — | — | 48,266 | |||||||||||||||||||||||||
| Withholding of common shares for tax obligations on vested restricted shares | — | — | — | — | — | 887 | (11,320 | ) | — | (11,320 | ) | |||||||||||||||||||||||
| Repurchase of common shares | — | — | — | — | — | 22,949 | (175,694 | ) | — | (175,694 | ) | |||||||||||||||||||||||
| Stock-based compensation | — | — | 98,781 | — | — | — | — | — | 98,781 | |||||||||||||||||||||||||
| Issuance of 4.5% 2022 Senior Exchangeable Notes | — | — | 47,686 | — | — | — | — | — | 47,686 | |||||||||||||||||||||||||
| Purchase of capped calls related to 4.5% 2022 Senior Exchangeable Notes | — | — | (8,165 | ) | — | — | — | — | — | (8,165 | ) | |||||||||||||||||||||||
| Dividends | — | — | (140,398 | ) | — | — | — | — | — | (140,398 | ) | |||||||||||||||||||||||
| Deconsolidation of Deca | — | — | — | — | — | — | — | 6,838 | 6,838 | |||||||||||||||||||||||||
| Noncontrolling interest | — | — | — | — | — | — | — | 2,249 | 2,249 | |||||||||||||||||||||||||
| January 1, 2017 | 497,055 | 4,737 | 5,659,644 | (8,811 | ) | (1,428,441 | ) | 173,472 | (2,335,301 | ) | 924 | $ | 1,892,752 | |||||||||||||||||||||
| Net loss attributable to Cypress | — | — | — | — | (80,915 | ) | — | — | — | (80,915 | ) | |||||||||||||||||||||||
| Net unrealized gain (loss) on available-for-sale and other investments | — | — | — | 7,125 | — | — | — | — | 7,125 | |||||||||||||||||||||||||
| Unrealized gain (loss) on defined benefit pension plan | — | — | — | 324 | — | — | — | — | — | 324 | ||||||||||||||||||||||||
| Changes in employee deferred compensation plan assets | — | — | — | — | — | — | 477 | — | 477 | |||||||||||||||||||||||||
| Adoption of ASU 2016-09 | — | 2,350 | — | (2,350 | ) | — | — | — | ||||||||||||||||||||||||||
| Issuance of common shares under employee stock plans | 11,316 | 26 | 47,245 | — | — | — | — | — | 47,271 | |||||||||||||||||||||||||
| Issuance of common shares upon conversion of 2% 2020 Spansion Exchangeable Notes | 17,348 | 173 | 283,634 | — | — | 27 | — | — | 283,807 | |||||||||||||||||||||||||
| Withholding of common shares for tax obligations on vested restricted shares | — | — | — | — | — | — | (120 | ) | — | (120 | ) | |||||||||||||||||||||||
| Stock-based compensation | — | — | 90,261 | — | — | — | — | — | 90,261 | |||||||||||||||||||||||||
| Issuance of 2% 2023 Exchangeable Notes | — | — | 15,028 | — | — | — | — | — | 15,028 | |||||||||||||||||||||||||
| Extinguishment of 2% 2020 Spansion Exchangeable Notes | — | — | (290,591 | ) | — | — | — | — | — | (290,591 | ) | |||||||||||||||||||||||
| Dividends | — | — | (147,959 | ) | — | — | — | — | — | (147,959 | ) | |||||||||||||||||||||||
| Noncontrolling interest | — | — | — | — | — | — | — | 132 | 132 | |||||||||||||||||||||||||
| Balances at December 31, 2017 | 525,719 | $ | 4,936 | $ | 5,659,612 | $ | (1,362 | ) | $ | (1,511,706 | ) | 173,498 | $ | (2,334,944 | ) | $ | 1,056 | $ | 1,817,592 | |||||||||||||||
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (80,783 | ) | $ | (683,877 | ) | $ | (367,563 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Stock-based compensation expenses | 91,581 | 98,513 | 83,690 | ||||||||
| Depreciation and amortization | 264,905 | 265,922 | 241,584 | ||||||||
| Impairment of acquisition-related intangible assets | — | 33,944 | — | ||||||||
| Impairment related to assets held for sale | — | 37,219 | — | ||||||||
| Impairment of goodwill | — | 488,504 | — | ||||||||
| (Gain) on divestitures | (1,245 | ) | — | (66,472 | ) | ||||||
| (Gain) related to investment in Deca Technologies | — | (112,774 | ) | — | |||||||
| (Gain) loss on sale or retirement of property and equipment, net | (1,165 | ) | 7,375 | 424 | |||||||
| Share in net loss and impairment of equity method investees | 71,772 | 17,644 | 7,148 | ||||||||
| Accretion of interest expense on Senior Exchangeable Notes and amortization of debt and financing costs on other debt | 21,091 | 13,139 | 2,537 | ||||||||
| Loss on trading securities | — | 598 | 3,191 | ||||||||
| Loss on extinguishment of debt | 7,246 | — | — | ||||||||
| Restructuring and other costs | 8,997 | 27,235 | 11,623 | ||||||||
| Changes in operating assets and liabilities, net of effects of acquisitions and divestiture: | |||||||||||
| Accounts receivable | 37,046 | (41,022 | ) | (117,371 | ) | ||||||
| Inventories | 14,327 | (33,677 | ) | 288,264 | |||||||
| Other current and long-term assets | 9,629 | (12,225 | ) | (5,977 | ) | ||||||
| Price adjustments and other distributor related reserves | 19,067 | 100,389 | 31,705 | ||||||||
| Accounts payable and other liabilities | (58,981 | ) | 79,476 | (89,737 | ) | ||||||
| Deferred margin on sales to distributors | — | (68,964 | ) | (14,245 | ) | ||||||
| Net cash provided by operating activities | 403,487 | 217,419 | 8,801 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions, net of cash acquired | — | (550,000 | ) | (105,130 | ) | ||||||
| Proceeds from maturities of available-for-sale investments | — | 40,000 | 800 | ||||||||
| Proceeds from sales of available-for-sale investments | — | 45,904 | 16,584 | ||||||||
| Purchases of available-for-sale securities | — | (80,202 | ) | (1,530 | ) | ||||||
| Contributions, net of distributions to deferred compensation plan | 2,562 | (1,857 | ) | 1,511 | |||||||
| Acquisition of property, plant and equipment | (54,284 | ) | (57,398 | ) | (47,206 | ) | |||||
| Proceeds from sales of property and equipment | 2,340 | — | — | ||||||||
| Investment in Deca Technologies Inc. | — | 17,627 | — | ||||||||
| Cash paid for equity and cost method investments | (9,285 | ) | (27,149 | ) | (34,126 | ) | |||||
| Proceeds from divestitures | 45,500 | — | 88,635 | ||||||||
| Other | (1,262 | ) | (364 | ) | 1,375 | ||||||
| Net cash used in investing activities | (14,429 | ) | (613,439 | ) | (79,087 | ) | |||||
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| Cash flows from financing activities: | |||||||||||
| Repurchase of common stock | — | (175,694 | ) | (55,018 | ) | ||||||
| Proceeds from employee stock-based awards | 47,153 | 43,850 | 52,857 | ||||||||
| Yield enhancement structured agreements settled in cash, net | — | — | 387 | ||||||||
| Yield enhancement structured agreements settled in stock, net | — | — | (9,601 | ) | |||||||
| Payments of cash dividends | (144,749 | ) | (141,410 | ) | (127,995 | ) | |||||
| Purchase of capped calls | — | (8,165 | ) | — | |||||||
| Proceeds from settlement of capped calls | — | — | 25,293 | ||||||||
| Repayment of equipment leases, loans and other | (112 | ) | (11,061 | ) | (9,420 | ) | |||||
| Borrowings under senior secured revolving credit facility | 190,000 | 195,000 | 537,000 | ||||||||
| Borrowings under Term Loans | 91,250 | 450,000 | 97,228 | ||||||||
| Repayments of senior secured revolving credit facility | (432,000 | ) | (312,000 | ) | (315,000 | ) | |||||
| Repayment of Term Loans | (118,701 | ) | (10,625 | ) | — | ||||||
| Financing costs related to debt | (12,475 | ) | (27,893 | ) | (2,491 | ) | |||||
| Payment for extinguishment of 2% 2020 Spansion Exchangeable Notes | (128,000 | ) | — | — | |||||||
| Proceeds from issuance of Exchangeable Notes | 150,000 | 287,500 | — | ||||||||
| Net cash provided by (used in) financing activities | (357,634 | ) | 289,502 | 193,240 | |||||||
| Net increase (decrease) in cash and cash equivalents | 31,424 | (106,518 | ) | 122,954 | |||||||
| Cash and cash equivalents, beginning of year | 120,172 | 226,690 | 103,736 | ||||||||
| Cash and cash equivalents, end of year | 151,596 | 120,172 | 226,690 | ||||||||
| Supplemental disclosures: | |||||||||||
| Dividends payable | $ | 38,741 | $ | 35,506 | $ | 36,549 | |||||
| Cash paid for income taxes | 6,576 | 8,288 | 8,736 | ||||||||
| Cash paid for interest | 53,131 | 32,625 | 9,670 | ||||||||
| Unpaid purchases of property, plant and equipment | 14,291 | 3,960 | 6,663 | ||||||||
| Twelve Months Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Net income (loss) | $ | 40,413 | $ | 354,831 | $ | (80,783 | ) | ||||
| Other comprehensive income (loss): | |||||||||||
| Net unrecognized (loss) gain on defined benefit plan | (2,798 | ) | 3,456 | 324 | |||||||
| Net unrealized (loss) gain on cash flow hedges: | |||||||||||
| Net unrealized (loss) gain arising during the period | (14,056 | ) | (644 | ) | 511 | ||||||
| Net gain reclassified into earnings for revenue hedges | (739 | ) | (37 | ) | (4,634 | ) | |||||
| Net loss (gain) reclassified into earnings for expense hedges | 499 | (335 | ) | 10,586 | |||||||
| Net gain reclassified into earnings for interest rate hedges | (774 | ) | (162 | ) | — | ||||||
| Provision for income tax | — | 913 | 662 | ||||||||
| Net unrealized (loss) gain on cash flow hedges | (15,070 | ) | (265 | ) | 7,125 | ||||||
| Other comprehensive (loss) income | (17,868 | ) | 3,191 | 7,449 | |||||||
| Comprehensive income (loss) | 22,545 | 358,022 | (73,334 | ) | |||||||
| Comprehensive income (loss) attributable to non-controlling interest | 15 | (239 | ) | (132 | ) | ||||||
| Comprehensive income (loss) attributable to Cypress | $ | 22,560 | $ | 357,783 | $ | (73,466 | ) | ||||
The accompanying notes are an integral part of these consolidated financial statements.
56
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Stock | Additional Paid-In | Accumulated Other Comprehensive | Accumulated | Treasury Stock | Non-controlling | Total | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Deficit | Shares | Amount | Interest | Equity | |||||||||||||||||||||||||
| (in thousands, except share amounts) | |||||||||||||||||||||||||||||||||
| Balances at January 1, 2017 | 497,055 | $ | 4,737 | $ | 5,659,644 | $ | (8,811 | ) | $ | (1,428,441 | ) | 173,472 | $ | (2,335,301 | ) | $ | 924 | $ | 1,892,752 | ||||||||||||||
| Net loss attributable to Cypress | — | — | — | — | (80,915 | ) | — | — | — | (80,915 | ) | ||||||||||||||||||||||
| Net unrealized loss on cash flow hedges | — | — | — | 7,125 | — | — | — | — | 7,125 | ||||||||||||||||||||||||
| Unrealized gain on defined benefit pension plan | — | — | — | 324 | — | — | — | — | 324 | ||||||||||||||||||||||||
| Changes in employee deferred compensation plan assets | — | — | — | — | — | — | 477 | — | 477 | ||||||||||||||||||||||||
| Adoption of ASU 2016-09 | — | 2,350 | — | (2,350 | ) | — | — | — | |||||||||||||||||||||||||
| Issuance of common shares under employee stock plans, net | 11,316 | 26 | 47,245 | — | — | — | — | — | 47,271 | ||||||||||||||||||||||||
| Issuance of common shares upon conversion of 2% Exchangeable Senior Notes due 2020 | 17,348 | 173 | 283,634 | — | — | — | — | — | 283,807 | ||||||||||||||||||||||||
| Withholding of common shares for tax obligations on vested restricted shares | — | — | — | — | — | 27 | (120 | ) | — | (120 | ) | ||||||||||||||||||||||
| Stock-based compensation | — | — | 90,261 | — | — | — | — | — | 90,261 | ||||||||||||||||||||||||
| Issuance of 2% Convertibles Senior Notes due 2023 | — | — | 15,028 | — | — | — | — | — | 15,028 | ||||||||||||||||||||||||
| Extinguishment of 2% Exchangeable Senior Notes due 2020 | — | — | (290,591 | ) | — | — | — | — | — | (290,591 | ) | ||||||||||||||||||||||
| Dividend | — | — | (147,959 | ) | — | — | — | — | — | (147,959 | ) | ||||||||||||||||||||||
| Non-controlling interest | — | — | — | — | — | — | — | 132 | 132 | ||||||||||||||||||||||||
| Balances at 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 | — | — | — | — | 354,592 | — | — | — | 354,592 | ||||||||||||||||||||||||
| Net unrealized loss on cash flow hedges and interest rate swaps | — | — | — | (265 | ) | (1 | ) | — | — | — | (266 | ) | |||||||||||||||||||||
| Unrealized gain on defined benefit pension plan | — | — | — | 3,456 | — | — | — | — | 3,456 | ||||||||||||||||||||||||
| Changes in employee deferred compensation plan assets | — | — | — | — | — | — | 20 | — | 20 | ||||||||||||||||||||||||
| Issuance of common shares under employee stock plans, net | 10,206 | 412 | 40,230 | — | — | 33 | (504 | ) | — | 40,138 | |||||||||||||||||||||||
| Stock-based compensation | — | — | 95,173 | — | — | — | — | — | 95,173 | ||||||||||||||||||||||||
| Issuance of common shares upon conversion of 2% Exchangeable Senior Notes due 2020 | 1,402 | 14 | 25,152 | — | — | — | — | — | 25,166 | ||||||||||||||||||||||||
| Extinguishment of 2% Exchangeable Senior Notes due 2020 | — | — | (25,696 | ) | — | — | — | — | — | (25,696 | ) | ||||||||||||||||||||||
| Dividend | — | — | (158,372 | ) | — | — | — | — | — | (158,372 | ) | ||||||||||||||||||||||
| Repurchase of common shares | — | — | — | — | — | 2,093 | (31,681 | ) | — | (31,681 | ) | ||||||||||||||||||||||
| Yield enhancement structured agreements, net | — | — | — | — | — | 250 | (3,343 | ) | — | (3,343 | ) | ||||||||||||||||||||||
| Non-controlling interest | — | 11 | — | — | — | — | — | 249 | 260 | ||||||||||||||||||||||||
| 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 | — | — | — | — | 40,428 | — | — | — | 40,428 | ||||||||||||||||||||||||
| Unrealized loss on defined benefit pension plan | — | — | — | (2,798 | ) | — | — | — | — | (2,798 | ) | ||||||||||||||||||||||
| Net unrealized (loss) gain on cash flow hedges and interest rate swaps | — | — | — | (15,070 | ) | 249 | — | — | — | (14,821 | ) | ||||||||||||||||||||||
| Issuance of common shares under employee stock plans, net | 12,218 | 122 | 38,460 | — | — | — | — | 38,582 | |||||||||||||||||||||||||
| Extinguishment of 2% Exchangeable Senior Notes due 2020 and 4.5% Convertible Senior Notes due 2022 | — | — | 14 | — | — | — | — | — | 14 | ||||||||||||||||||||||||
| Dividend | — | — | (162,080 | ) | — | — | — | — | — | (162,080 | ) | ||||||||||||||||||||||
| Withholding of common shares for tax obligations on vested restricted shares | — | — | — | — | — | 966 | (19,386 | ) | — | (19,386 | ) | ||||||||||||||||||||||
| Stock-based compensation | — | — | 107,165 | — | — | — | — | — | 107,165 | ||||||||||||||||||||||||
| Acquisition of noncontrolling interest | — | — | (2,583 | ) | — | — | — | — | (1,290 | ) | (3,873 | ) | |||||||||||||||||||||
| Non-controlling interest | — | — | — | — | — | — | — | (15 | ) | (15 | ) | ||||||||||||||||||||||
| Balances at December 29, 2019 | 549,545 | $ | 5,495 | $ | 5,617,075 | $ | (16,039 | ) | $ | (1,116,438 | ) | 176,841 | $ | (2,389,838 | ) | $ | — | $ | 2,100,255 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
58
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 40,413 | $ | 354,831 | $ | (80,783 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Stock-based compensation expense | 105,982 | 95,965 | 91,581 | ||||||||
| Depreciation and amortization | 284,656 | 282,985 | 264,905 | ||||||||
| Loss on sale of NAND business to joint venture | 1,534 | — | — | ||||||||
| Impairment of assets held for sale | — | 76,591 | — | ||||||||
| Gain on divestitures | — | — | (1,245 | ) | |||||||
| (Gain) loss on sale or retirement of property and equipment, net | (460 | ) | 7,505 | (1,165 | ) | ||||||
| Share in gain/loss, net and impairment of equity method investees | 35,901 | 57,370 | 71,772 | ||||||||
| Accretion of interest expense on Senior Exchangeable Notes and amortization of debt and financing costs on other debt | 17,892 | 19,513 | 21,091 | ||||||||
| Release of valuation allowance | — | (343,274 | ) | — | |||||||
| Loss on extinguishment of debt | 6,417 | 5,169 | 7,246 | ||||||||
| Restructuring and other costs | 3,871 | 16,128 | 8,997 | ||||||||
| Changes in operating assets and liabilities, net of effects of acquisitions and divestiture: | |||||||||||
| Accounts receivable | 23,396 | (23,836 | ) | 37,046 | |||||||
| Inventories | (2,955 | ) | (20,757 | ) | 14,327 | ||||||
| Asset held for sale | — | (13,510 | ) | — | |||||||
| Other current and long-term assets, net | (4,226 | ) | 5,379 | 9,629 | |||||||
| Price adjustments and other distributor related reserves | 67,471 | (14,487 | ) | 19,067 | |||||||
| Accounts payable and other liabilities | (100,977 | ) | (33,872 | ) | (58,981 | ) | |||||
| Net cash provided by operating activities | 478,915 | 471,700 | 403,487 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions, net of cash acquired | — | (2,655 | ) | — | |||||||
| Purchase of noncontrolling interest | (3,709 | ) | — | — | |||||||
| Distributions, net of contribution from deferred compensation plan | 5,785 | 2,541 | 2,562 | ||||||||
| Acquisition of property, plant and equipment | (41,168 | ) | (68,899 | ) | (54,284 | ) | |||||
| Proceeds from sales of property and equipment | 482 | 5,769 | 2,340 | ||||||||
| Cash paid for equity and cost method investments | (2,400 | ) | — | (9,285 | ) | ||||||
| Cash received on cost method investments | — | 18,538 | — | ||||||||
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Proceeds from divestitures | 13,639 | — | 45,500 | ||||||||
| Other investing | 60 | (4,984 | ) | (1,262 | ) | ||||||
| Net cash used in investing activities | (27,311 | ) | (49,690 | ) | (14,429 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Repurchase of common stock | — | (31,682 | ) | — | |||||||
| Yield enhancement structured agreements settled in stock, net | — | (3,262 | ) | — | |||||||
| Tax withholdings related to net share settlements of restricted stock units | (19,386 | ) | — | — | |||||||
| Proceeds from employee stock-based awards | 38,582 | 40,661 | 47,153 | ||||||||
| Payments of cash dividends | (160,850 | ) | (157,364 | ) | (144,749 | ) | |||||
| Repayment of finance leases, loans and other | (1,730 | ) | — | (112 | ) | ||||||
| Borrowings under senior secured revolving credit facility | 447,000 | 94,000 | 190,000 | ||||||||
| Borrowings under Term Loans | — | — | 91,250 | ||||||||
| Repayments of senior secured revolving credit facility | (147,000 | ) | (184,000 | ) | (432,000 | ) | |||||
| Repayment of Term Loans | (476,310 | ) | (35,614 | ) | (118,701 | ) | |||||
| Financing costs related to debt | (2,157 | ) | (625 | ) | (12,475 | ) | |||||
| Payment for extinguishment of 2% Exchangeable Senior Notes due 2020 and 4.5% Convertible Senior Notes due 2022 | (11 | ) | (10,000 | ) | (128,000 | ) | |||||
| Proceeds from issuance of 2% Convertible Senior Notes due 2023 | — | — | 150,000 | ||||||||
| Net cash used in financing activities | (321,862 | ) | (287,886 | ) | (357,634 | ) | |||||
| Net increase in cash and cash equivalents | 129,742 | 134,124 | 31,424 | ||||||||
| Cash and cash equivalents, beginning of year | 285,720 | 151,596 | 120,172 | ||||||||
| Cash and cash equivalents, end of year | $ | 415,462 | $ | 285,720 | $ | 151,596 | |||||
| Supplemental disclosures: | |||||||||||
| Dividends payable | $ | 40,978 | $ | 39,748 | $ | 38,741 | |||||
| Cash paid for income taxes, net | 7,999 | 9,080 | 6,576 | ||||||||
| Cash paid for interest | 34,822 | 39,504 | 53,131 | ||||||||
| Unpaid purchases of property, plant and equipment | 3,855 | 5,875 | 14,291 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
60
CYPRESS SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Cypress Semiconductor Corporation ("Cypress"(together with its consolidated subsidiaries, "Cypress" or the "Company") designs, manufactures and sells advanced embedded system solutions for Internet of Things (or "IoT"), automotive, industrial, home automation and appliances, consumer electronics and medical products.applications. Cypress' microcontrollers,microcontroller, analog integrated circlescircuits ("ICs"), wireless and wired connectivity solutions and memories help engineers design differentiated products and help them with speed to market. Cypress is committed to providing customers with quality support and engineering resources.
On March 12, 2015,1, 2017, the Company completed the merger (“Spansion Merger”sale of its wafer fabrication facility in Minnesota for gross proceeds of $30.5 million.
On August 14, 2018, the Company acquired an embedded software company focused on the IoT market for cash consideration of $3.0 million. The purchase consideration was allocated to acquired developed technology.
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 Inc. ("SKHS"). The joint venture entity is named SkyHigh Memory Limited ("SkyHigh") with Spansionand its headquarters are in Hong Kong, China. SkyHigh is 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 is providing certain transition and back-end manufacturing services to SkyHigh.
On September 29, 2019, the Company acquired the minority shareholders' noncontrolling interest in AgigA Tech, Inc. (“Spansion”("AgigA") pursuantfor total cash consideration of $3.9 million, making AgigA a wholly-owned subsidiary of the Company. Substantially all of such consideration was paid in the fourth quarter of fiscal 2019. Prior to this acquisition, Cypress held 94.4% of the Agreementoutstanding equity of AgigA. The difference between the carrying value of the noncontrolling interest at the date of the acquisition and Plan of Merger and Reorganization, as of December 1, 2014, (the "Merger Agreement"), for athe total consideration of approximately $2.8 billion.
The comparability of results for the periods presented is significantly impacted by these transactions.
Pending Acquisition by Infineon
On June 3, 2019, the Company entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") with Infineon Technologies AG, a stock corporation (Aktiengesellschaft) organized under the laws of the Federal Republic of Germany ("Infineon") and IFX Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Infineon ("Merger Sub"). Subject to approval by the relevant regulatory bodies as well as other customary closing conditions, the Merger Agreement provides for Merger Sub to merge with and into the Company (the "Merger"), with the Company continuing as the surviving corporation in the Merger and as a wholly owned subsidiary of Infineon.
Refer to Note 2, Merger Agreement, of the Notes to Consolidated Financial Statements for further details.
Basis of Preparation
The Company reports on a fiscal-year basis. The Company ends its quarters on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. Fiscal 2019 ended on December 29, 2019, fiscal 2018 ended on December 30, 2018 and fiscal 2017 ended on December 31, 2017, fiscal 2016 ended on January 1, 2017 and fiscal 2015 ended on January 3, 2016.2017. Fiscal years 20172019, 2018 and 20162017 each contained 52 weeks. Fiscal 2015 contained 53 weeks.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of Cypress and all of its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Cash Equivalents and Cash EquivalentsInvestments
Highly liquid investments with original or remaining maturities of ninety days or less at the date of purchase are considered cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash and cash equivalents, debt investments,foreign exchange hedges, interest rate swap obligations, trade accounts receivable and the capped calls. The Company’s investment policy requires cash and debt investments to be placed with high-credit quality institutions and limits the amount of credit risk fromexposure with any one issuer. The Company performs ongoing credit evaluations of its customers’ financial condition whenever deemed necessary and generally does not require collateral. The Company mitigates its exposure to credit risk to the extent that its counterparties for hedging transactions may be unable to meet the terms of the transactions. The Company mitigates this risk by diversifying and limiting its counterparties to major financial institutions.
Outstanding accounts receivable from one1 of the Company's distributors accounted for 15% and 25% as of
December 29, 2019 and December 30, 2018, respectively, of the Company's consolidated accounts receivable on such dates.
Revenue generated through transactions with 2 of the Company's distributors accounted for 16% and 10%, respectively, of the Company's consolidated revenues for fiscal 2019.
Revenue generated through transactions with 2 of the Company’s distributors accounted for 28% of the consolidated accounts receivable as of December 31, 2017. Outstanding accounts receivable from one of the Company's distributors, accounted for 24% of the consolidated accounts receivable as of January 1, 2017.
Revenue generated through transactions with 2 of the Company’s distributors accounted for 20% and 13% of the consolidated revenues for fiscal 2017.
Inventories
Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or net realizable value. The Company writes down its inventories which have become obsolete or are in excess of anticipated demand or net realizable value based upon assumptions about demand forecasts, product life cycle status, product development plans and current sales levels.value.
Long-Lived Assets
Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets. Leasehold improvements and leasehold interests are amortized over the shorter of the estimated useful lives of the assets or the remaining term of the lease. Estimated useful lives are as follows:
| Equipment | 3 to 10 years |
| Buildings and leasehold improvements | 5 to 20 years |
| Furniture and fixtures | 3 to 7 years |
The Company evaluates its long-lived assets, including property, plant and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors considered important that could result in an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of assets, significant negative industry or economic trends, and a significant decline in the Company’s stock price for a sustained period of time. Impairment is recognized based on the difference between
the estimated fair value of the asset and its carrying value. Estimated fair value is generally measured based on quoted market prices, if available, appraisals or discounted cash flow analysis.
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 and equipment leases.
Operating leases are included in operating lease right-of-use ("ROU") assets, other current liabilities, and operating lease liabilities in the Company's consolidated balance sheets. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's 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 the Company's 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 terms 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 commensurate with the Company’s secured borrowing rate, over a similar lease term in an economic environment of the applicable country or region. At each reporting period when there is a new lease initiated, the rates established for that quarter are used.
Assets Held for Sale
The Company considers propertiesassets to be assets held for sale when management approves and commits to a plan to dispose of a propertyan asset or group of properties.assets. Assets held for sale are recorded initially at the lower of its carrying value or its estimated fair value, less estimated costs to sell. Upon designation as an asset held for sale, the Company stops recording depreciation and amortization expense on such assets. Costs to sell a disposal group include incremental direct costs to transact the sale and represent the costs that result directly from and are essential to a sale transaction that would not have been incurred by the entity had the decision to sell not been made.
The properties that are held for sale prior to the sale date are classified as held for sale and are presented separately in the appropriate asset and liability sections of the balance sheet. See Note 57, Assets Held for Sale, of the Notes to the Consolidated Financial Statements for more information.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
The Company assesses goodwill for impairment on an annual basis on the first day of the fourth quarter of ourthe fiscal year and if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. In accordance with ASU 2011-8, Testing Goodwill for Impairment,The Company first considers qualitative factors may be assessed to determine whether it is necessary to perform the current two-step test forfurther assessment of goodwill impairment. If an entitythe Company believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative
impairment test is required. Otherwise, no further testing is required. See Note 35, Goodwill, of the Notes to the Consolidated Financial Statements for more information.
Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and are reviewed for impairment as discussed above. See Note 46, Intangible Assets, of the Notes to the Consolidated Financial Statements for more information.
Convertible debt
In accounting for each series of Senior Exchangeable or Convertible Notes (as described in Note 16, Debt, of the Notes to Consolidated Financial Statements) at issuance, the Company separated the Notes into debt and equity components according to accounting standards codification ("ASC") 470-20 for convertible debt instruments that may be fully or partially settled in cash upon conversion. The carrying amount of the debt component, which approximates its fair value, was estimated by using an interest rate for non-convertible debt, with terms similar to the Notes. The excess of the principal amount of the Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted to the carrying value of the Notes over their term as interest expense using the effective interest method. In accounting for the transaction costs incurred relating to issuance of the Notes, the Company allocated the costs of the offering in proportion to the fair value of the debt and equity recognized in accordance with the accounting standards. The transaction costs allocated to the debt are being amortized as interest expense over the term of the Notes.
The fair value of debt immediately prior to its derecognition is calculated based on the remaining expected life of the debt instrument and an updated current non-convertible debt rate assumption. The gain or loss on extinguishment equaling the difference between the calculated fair value of the debt immediately prior to its derecognition and the carrying amount of the debt components, including the remaining unamortized debt discount, is recorded in the Consolidated Statements of Operations. The remainder of the consideration relates to the reacquisition of the equity component and is recorded as an adjustment to additional paid-in-capital.
In accounting for the cost of the capped call transaction entered into in connection with the issuance of the 4.5% 2022Convertible Senior Exchangeable Notes due 2022, the Company included the cost as a net reduction to additional paid-in capital in the stockholders’ equity section of the consolidated balance sheet, in accordance with the guidance in ASC 815-40 Derivatives"Derivatives and Hedging-Contracts in Entity’s Own Equity.Equity". See Note 1416, Debt, of the Notes to the Consolidated Financial Statements for more information.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Sales of products with alternative use account for the majority of the Company's revenue and are recognized at a point in time.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and that are collected by the Company from a customer and deposited with the relevant government authority are excluded from revenue. The Company's revenue arrangements do not contain significant financing components.
Revenue is recognized over a period of time when it is assessed that performance obligations are satisfied over a period rather than at a point in time. When any of the following criteria is fulfilled, revenue is recognized over a period of time:
| (a) | The customer simultaneously receives and consumes the benefits provided by the performance as Cypress performs; |
| (b) | Cypress’ performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced; or |
| (c) | Cypress’ performance does not create an asset with an alternative use, and Cypress has an enforceable right to payment for performance completed to date. |
The Company generates revenues by selling productsthen selects an appropriate method for measuring progress toward complete satisfaction of the performance obligation, usually costs incurred to distributors, various typesdate relative to the total expected costs to the satisfaction of manufacturers including original equipment manufacturers (“OEMs”) and electronic manufacturing service providers (“EMSs”). The Company recognizes revenues on sales to OEMs and EMSs upon shipment provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no significant remaining obligations.performance obligation.
Sales to certain distributors are made under agreements whicharrangements that provide the distributors with price adjustments, price protection, stock rotation and other allowances under certain circumstances. These adjustments and allowances are accounted for as variable consideration. The Company typicallyestimates these amounts based on the expected amount to be provided to customers and reduces revenue recognized. The Company believes that there will not be significant changes to its estimates of variable consideration.
The Company's non-recurring engineering ("NRE") contracts with customers may include multiple performance obligations. For NRE arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines the standalone selling price of intellectual property licenses based on the residual approach, and of service based on cost plus a reasonable margin. The Company recognizes revenue in the amount to which it has a right to invoice, if the right to consideration from salesthe customer is in an amount that corresponds reasonably with the value to the customer of its productsthe entity’s performance completed to distributors upon shipment. An allowance for estimated distributor credits covering price adjustments is recorded based on historical experience rates as well as economic conditions and contractual terms. Any effects of change in estimates related to distributor price adjustments are recorded as an adjustment to revenue.date.
The Company had historically recognized a significant portion of revenue through distributors at the time the distributor resold the productlicenses or sells rights to its end customer (also referred to as the sell-through basis of revenue recognition). The Company continuously reassesses its ability to reliably estimate the ultimate price of these products and, over the past several years, has made investments in its systems and processes around its distribution channel to improve the quality of the information it receives from its distributors. Given these ongoing investments, and based on financial framework used for estimating potential price adjustments, in the fourth quarter of 2014 the Company began recognizing revenue on certain product and with certain distributors (less its estimate of future price adjustments and returns) upon shipment to the distributors (also referred to as the sell-in basis of revenue recognition).
If the arrangement includes variable contingent consideration, the Company recognizes revenue over time if management can reasonably measure its progress or is capable of providing reliable information as a reductionrequired to revenuesapply an appropriate method of measuring progress.
Practical Expedients and Elections
Sales commissions are owed and are recorded at the time of sale. Historically these volume discounts havesell-through of our products to end customers. These costs are recorded within sales and marketing expenses.
The Company does not been significant.disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.
The Company has elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods.
See Note 3, Revenue, of the Notes to Consolidated Financial Statements for further discussion on Revenues.
Employee Benefit Plans
A defined benefit pension plan is accounted for on an actuarial basis, which requires the selection of various assumptions such as turnover rates, discount rates and other factors. The discount rate assumption is determined by comparing the projected benefit payments to the corporate bonds yield curve as of end of the most recently completed fiscal year. The benefit obligation is the projected benefit obligation (PBO)("PBO"), which represents the actuarial present value of benefits expected to be paid upon retirement. This liability is recorded in other long-term liabilities on the Consolidated Balance Sheets. Net periodic pension cost is recorded in the Consolidated Statements of Operations and includes service cost. Service cost represents the actuarial present value of
participant benefits earned in the current year. Interest cost represents the time value of money associated with the passage of time on the PBO. Gains or losses resulting from a change in the PBO if actual results differ from actuarial assumptions will be accumulated and amortized over the future life of the plan participants if they exceed 10% of the PBO, being the corridor amount. If the amount of a net gain or loss does not exceed the corridor amount, it will be recorded to other comprehensive income (loss). See Note 1821, Employee Benefit Plans, of the Notes to the Consolidated Financial Statements for further details of the pension plans.
Investments in Equity Interests
Investments in the stock of entities in which the Company exercises significant influence but does not own a majority equity interest or otherwise control are accounted for using the equity method and are included as equity method investments in its Consolidated Balance Sheets. The Company records its share of the results of those companies within share in gain/loss, net and impairment of equity method investees in its Consolidated Statements of Operations. Investments in privately held equity interests in which the Company does not exercise significant influence are equity securities without readily determinable fair values. The Company has elected to account for these investments using the measurement method of accounting (that is, cost less impairment adjusted for observable price changes). These investments are included in other long-term assets on the Consolidated Balance Sheets.
The Company reviews its investments for other-than-temporary impairment whenever events or changes in business circumstances indicate that the carrying value of the investment may not be fully recoverable. Investments identified as having an indication of impairment are subject to further analysis to determine if the impairment is other-than-temporary and this analysis requires estimating the fair value of the investment. The determination of fair value of the investment involves considering factors such as current economic and market conditions, the operating performance of the entities including current earnings trends and forecasted cash flows, and other company and industry specific information.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these items. See Note 79, Fair Value Measurements, of the Notes to the Consolidated Financial Statements for a detailed discussion of fair value measurements.
Cash Flow Hedges
The Company has an on-going cash flow hedge program and enters into cash flow hedges to protect non-functional currency revenue, inventory purchases and certain operating expenses from foreign currency fluctuation.fluctuation and interest rate variability. The Company does not enter into derivative securities for speculative purposes. The Company’s foreign currency forward contracts that were designated as cash flow hedges have maturitiestenors between three and 12thirteen months. The maximum original durationCompany's interest rate swaps designated as cash flow hedges have various tenors, the longest of any contract allowable under the Company’s hedging policy is thirteen months.which matures December 2024. 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 Consolidated Balance Sheets, until the forecasted transaction occurs. InterestBeginning the second quarter of 2018, the Company has been entering into foreign exchange cash flow hedges, wherein interest charges or “forward points”"forward points" on the forward contracts are excluded frombeing included in the assessment of hedge effectiveness and are recorded in other income (expense), netthe underlying hedged items in the Consolidated Statements of Operations. When the forecasted transaction occurs, the Company reclassifies the related gain or loss on the cash flow hedge from accumulated other comprehensive income (loss) 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 reclassifyreclassifies the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to other (expense) income, (expense), net in its Consolidated Statements of Operations at that time.
The Company evaluatesassesses hedge effectiveness quantitatively at the inception of the hedge prospectively as well as retrospectivelyrelationship, and records any ineffective portionqualitatively thereafter.
See Note 13, Foreign Currency and Interest Rate Derivatives, of the hedge in other income (expense), net in its Consolidated Statements of Operations.
Shipping and Handling Costs
The Company records costs related to shipping and handling of our products in cost of revenues.
Advertising Costs
Advertising costs consist of development and placement costs of the Company’s advertising campaigns and are charged to expense when incurred. Advertising expense was $3.2$5.2 million, $3.1$5.9 million and $5.0$3.2 million for fiscal years 2017, 20162019, 2018 and 2015,2017, respectively.
Income Taxes
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when management cannot conclude that it is more likely than not that a tax benefit will be realized.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. The Company recognizes potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
Foreign Currency Transactions
The Company uses the United States dollar as the functional currency for allmost of its foreign entities. Assets and liabilities of these entities are remeasured into the United States dollar using exchange rates in effect at the end of the period, except for non-monetary assets and liabilities, such as property, plant and equipment, which are remeasured using historical exchange rates. Revenues and expenses are remeasured using average exchange rates in effect for the period, except for items related to assets and liabilities, such as depreciation, that are remeasured using historical exchange rates. The total gains (losses) from foreign currency re-measurement for fiscal years 2017, 2016 and 2015 were $(1.8) million, $(4.3) million and $0.7 million respectively and are included in "Other income (expense)See Note 15, net," in the Consolidated Statements of Operations. For additional details related to items included in “Other income (expense)Other Income (Expense), net,” see Note 13Net, of the Notes to the Consolidated Financial Statements.Statements for further details on the impact of foreign currency re-measurement.
Net lossIncome (Loss) per Share
Basic net lossincome (loss) per share is calculated by dividing net lossincome (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPSnet income (loss) per share ("diluted EPS") gives effect to the exercise or conversion of all dilutive potential of shares of common stocksecurities outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and exchangeable notes, using the treasury stock method. The Company's dilutive securities primarily include stock options, restricted stock units, Employee Stock Purchase Plan ("ESPP") purchase rights and convertible debt. Diluted EPS excludes all dilutive potential issuances of shares of common stock if their effect iswould be anti-dilutive.
In May 2014,December 2019, the Financial Accounting Standards Board ("FASB")FASB issued an Accounting Standard Update ("ASU") No. 2019-12, "Income Taxes (Topic 740)." The standard simplifies the accounting for incomes taxes by removing certain exceptions to the general principles in Topic 740. The standard also improves consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendment is effective for fiscal years, and interim period within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on revenue from contracts with customers,its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2014-09, "Revenue from Contracts2018-13, "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 expects that the adoption of this standard will not have significant impact 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." It 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 Customers" ("ASC 606") which outlines a comprehensive revenue recognition modelearly adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and supersedes most current revenue recognition standards.related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The standard changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new standard requires a company to recognize revenue as control of goods or services transfers to a customer at an amount that reflectsguidance also modifies the expected consideration to be received in exchangeimpairment models for those goods or services. It defines a five-step approachavailable-for-sale debt securities and for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current standard.purchased financial assets with credit deterioration since their origination. The new standard will beamendment is effective for the Company starting in the first quarter of fiscal 2018. Two methods of adoption are permitted: (a) full retrospective adoption, meaning this standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance.
Recently Adopted Accounting Pronouncements
Lease Accounting
In February 2016, the FASB issued ASU No. 2016-02, Leases, (""Leases (ASC Topic 842"), which replaces most current lease guidance when it becomes effective. This842)." The standard update intendsintroduces new requirements to increase the transparency and improve comparability by requiring entitiesamong organizations for leasing transactions for both lessees and lessors. ASU No. 2016-02 requires a lessee to recognize assetsrecord a right-of-use ("ROU") asset and liabilities on the balance sheeta lease liability for all leases with certain exceptions. The new standard states that a lesseeterms longer than 12 months. These leases will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. The new guidance will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures.recognition.
In October 2016,July 2018, the FASB issued ASU 2016-16, “Intra- Entity Transfers2018-11, which provided an alternative modified retrospective transition method. Under this method, the cumulative-effect adjustment to the opening balance of Assets Other Than Inventory.” For public entities, ASU 2016-16retained earnings is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.recognized on the date of adoption. The Company will adoptadopted 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 guidanceelection, the Company need not reassess:
whether any expired or existing contracts are or contain leases;
the lease classification for any expired or existing leases; and/or
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 capital leases under ASC 840 are classified as "finance leases" 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 first quarter fiscal 2018. Thefollowing changes:
assets increased by $56.4 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
liabilities increased by $59.2 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:
On January 1, 2018, the Company doesadopted ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" using the modified retrospective method applied to all contracts that were not anticipatecompleted contracts at the date of initial application (i.e., January 1, 2018). Results for reporting periods after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 605. There was no impact on the opening accumulated deficit as of January 1, 2018 due to the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
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 ASU 2017-12 is effective for annual periods beginning after December 15, 2018, and interim periods within thosethe first quarter of fiscal years, with early2019. The adoption permitted. The Company is evaluating the impactof this guidance willdid not have a material impact on itsthe Company's consolidated financial statements and related disclosures.
In March 2016,February 2018, the FASB issued ASU 2016-09, “CompensationNo. 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 EmployeeNonemployee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects" 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 accounting for share-based payments transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.adoption date. The Company adopted ASU 2016-09 asthis 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. MERGER AGREEMENT
On June 3, 2019, Infineon, Merger Sub and the Company entered into the Merger Agreement, which provides for Merger Sub, upon the closing of the first daytransaction, to merge with and into the Company, with the Company continuing as the surviving corporation in the Merger and as a wholly owned subsidiary of Infineon.
Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the 2017 fiscal year. The provisionsMerger (the "Effective Time"), each share of ASU 2016-09 relatedcommon stock of Cypress ("Cypress Common Stock") that is issued and outstanding immediately prior to the timingEffective Time (other than shares of when excess tax benefits are recognized, minimum statutory withholding requirementsCypress Common Stock (a) owned by Infineon, Merger Sub or any other direct or indirect wholly owned subsidiary of Infineon, (b) owned by Cypress,
including any shares held in treasury by Cypress, (c) owned by any direct or indirect wholly owned subsidiary of Cypress and forfeitures were adopted using(d) owned by stockholders who have perfected and not withdrawn a modified retrospective transition methoddemand for appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware) will be converted into the right to receive $23.85 in cash, without interest.
Completion of the Merger is subject to the satisfaction of several conditions, including, among others: (i) the adoption of the Merger Agreement by meansthe holders of a cumulative-effect adjustmentmajority of the outstanding shares of Cypress Common Stock; (ii) the absence of any law prohibiting or order preventing the consummation of the Merger, (iii) the receipt of clearance from the Committee on Foreign Investment in the United States, the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Waiting Period"), the receipt of any applicable clearance or affirmative approval by the Anti-Monopoly Bureau of the State Administration for Market Regulation in the People’s Republic of China, approval from the European Commission under the European Merger Regulation, and the expiration of any applicable waiting periods or any applicable authorizations or affirmative approvals of certain other non-U.S. governmental authorities under antitrust laws; (iv) the absence of a material adverse effect with respect to equity asCypress; and (v) compliance in all material respects on the part of January 2, 2017.each of Cypress and Infineon with such party’s covenants under the Merger Agreement.
As of February 19, 2020, stockholder approval for the Merger has been obtained, the applicable HSR Waiting Period has been terminated, and the Merger has received clearance from the European Commission and from antitrust regulators in Taiwan, the Philippines, South Korea, and Japan. The provisions of ASU 2016-09 relatedparties require approval for the proposed transaction from the Committee on Foreign Investment in the United States (CFIUS) and from China’s State Administration for Market Regulation (SAMR). There can be no assurance, that the remaining conditions to the recognitioncompletion of excess benefitsthe Merger will be satisfied in the income statement and classification in the statementa timely manner or at all.
The Merger Agreement contains certain termination rights for each of cash flows were adopted prospectivelyInfineon and the prior periods were not retrospectively adjusted. Company. The Company would have been required to pay Infineon a termination fee of $330 million in order to accept a superior proposal or if the Company’s Board of Directors had changed its recommendation that stockholders vote in favor of the Merger. Infineon will be required to pay to the Company a termination fee equal to $425 million under certain specified circumstances upon termination of the Merger Agreement.
The Company has electedincurred approximately $12.8 million in bankers fees, legal fees, employee-related costs and travel expenses in connection with the proposed Merger during the year ended December 29, 2019. These costs have been included as part of selling, general and administrative expenses on the Consolidated Statements of Operations.
As of December 29, 2019, the Company has not accrued for certain bankers fees, employee retention cash bonuses and expense relating to recognize forfeituresthe acceleration of certain stock-based compensation awards as they occurthese expenditures are contingent on the completion of the Merger. Bankers fees of approximately $63.0 million are contingently payable upon the completion of the proposed Merger with Infineon. If the proposed Merger does not close, under circumstances in which the Company receives a reverse break-up fee, bankers fees of approximately $22.2 million are contingently payable by Cypress. Additionally, as of December 29, 2019, employee retention cash bonus commitments have been extended to certain employees in the aggregate amount of $10.2 million, 50% of which will be payable upon the closing of the Merger, and adopted this change usingthe remaining 50% of which will potentially be payable six months after the closing of the Merger.
NOTE 3. REVENUE
The following tables presents the Company's revenue disaggregated by segment, end use, revenue type and geographical locations. Product revenue associated with the NAND business unit (which was divested to a modified retrospective approach, with a cumulative adjustment recorded to opening accumulated deficit.newly formed joint venture named SkyHigh Memory Limited ("SkyHigh") on April 1, 2019) for fiscal years ended December 29, 2019, December 30, 2018 and December 31, 2017 was $31.1 million, $167.3 million and $168.1 million, respectively, and was included in the Memory Products Division. The Company recordedhas entered into a cumulative effect adjustmentback-end manufacturing services agreement with SkyHigh. Revenue related to opening accumulated deficit of $2.3 million, with a commensurate increase in paid-in capital. The previously unrecognized tax benefits were recorded as deferred tax asset of $138.0 million, which was fully offset by a valuation allowance resulting in no impact to opening accumulated deficit. In addition, due to the full valuation allowance on the U.S. deferred tax assets, there was no impact to the income tax provision from excess tax benefits in fiscal 2017 as a result of this adoption.
Revenue by Segment:
| For The Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Microcontroller and Connectivity Division ("MCD") | $ | 1,476,655 | $ | 1,474,442 | $ | 1,409,265 | |||||
| Memory Products Division ("MPD") | 728,659 | 1,009,398 | 918,506 | ||||||||
| Total revenues | $ | 2,205,314 | $ | 2,483,840 | $ | 2,327,771 | |||||
Revenue by End Use:
| For The Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| IoT | $ | 822,548 | $ | 840,630 | $ | 782,045 | |||||
| Automotive | 829,490 | 815,748 | 721,827 | ||||||||
| Legacy | 553,276 | 827,462 | 823,899 | ||||||||
| Total | $ | 2,205,314 | $ | 2,483,840 | $ | 2,327,771 | |||||
Revenue by Type:
| For The Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Product revenue | $ | 2,144,630 | $ | 2,439,373 | $ | 2,239,056 | |||||
Non-product revenue (1) | 60,684 | 44,467 | 88,715 | ||||||||
| Total revenue | $ | 2,205,314 | $ | 2,483,840 | $ | 2,327,771 | |||||
(1) Non-product revenue primarily includes royalties, NRE services revenue, back-end manufacturing services and revenue from intellectual property arrangements.
| For The Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Goods/Services transferred at a point in time | $ | 2,185,999 | $ | 2,470,270 | $ | 2,282,200 | |||||
| Goods/Services transferred over time | 19,315 | 13,570 | 45,571 | ||||||||
| Total revenue | $ | 2,205,314 | $ | 2,483,840 | $ | 2,327,771 | |||||
Revenue by Geographical Location:
| For The Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| United States | $ | 212,812 | $ | 253,420 | $ | 220,128 | |||||
| China, Taiwan, and Hong Kong | 829,519 | 972,869 | 980,670 | ||||||||
| Japan | 574,791 | 589,818 | 515,622 | ||||||||
| Europe | 293,648 | 329,436 | 291,948 | ||||||||
| Rest of the World | 294,544 | 338,297 | 319,403 | ||||||||
| Total revenue | $ | 2,205,314 | $ | 2,483,840 | $ | 2,327,771 | |||||
71
NOTE 4. MERGERS, ACQUISITIONS AND DIVESTITURES
Joint Venture with SK hynix system ic Inc. ("SKHS")
On April 1, 20172019, the Company closed the transfer of its NAND business to a newly-formed joint venture between the Company and January 3, 2016 were identified.SKHS. The joint venture entity is named SkyHigh and its headquarters are in Hong Kong, China. SkyHigh is 60-percent-owned by SKHS and 40-percent-owned by Cypress. The Company assessedpaid $2.4 million in cash as its capital contribution in SkyHigh upon close of the materialitytransaction.
Acquisition of these errors in accordance with the SEC guidance on considering the effects of prior-period misstatements based on an analysis of quantitative and qualitative factors on both the annual and interim period financial statements. Based on this analysis,a Software Business
On August 14, 2018, the Company determined that these errorsacquired an embedded software company focused on the Internet of things market for cash consideration of $3.0 million. The purchased assets were immaterial to each of the prior fiscal years and interim periods within those fiscal years. However, the Company has concluded that correcting these errors in its fiscal 2017 financial statements would materially understate the net loss for the year ending December 31, 2017. Accordingly, the Company has reflected the correction of these prior period errors in the periods in which they originated and revised its consolidated balance sheet as of January 1, 2017, and its consolidated statementprimarily developed technology. Pro forma results of operations and comprehensive income (loss), its consolidated statement of stockholders’ equity, and its consolidated statement of cash flows for the years ended January 1, 2017 and January 3, 2016.
| As of January 1, 2017 | |||||||||
| (In thousands) | |||||||||
| Revised Consolidated Balance Sheet Amounts: | As previously reported | Adjustments | As revised | ||||||
| Additional paid-in-capital | $ | 5,676,236 | $ | (16,592 | ) | $ | 5,659,644 | ||
| Accumulated deficit | $ | (1,445,033 | ) | $ | 16,592 | $ | (1,428,441 | ) | |
| Year Ended January 1, 2017 | Year Ended January 3, 2016 | ||||||||||||||||||
| Revised Consolidated Statements of Operations Amounts | As previously reported | Adjustments | As revised | As previously reported | Adjustments | As revised | |||||||||||||
| (In thousands, except per-share amounts) | |||||||||||||||||||
| Cost of revenues | $ | 1,237,974 | $ | (2,434 | ) | $ | 1,235,540 | $ | 1,207,850 | $ | (3,654 | ) | $ | 1,204,196 | |||||
| Research and development | 331,737 | (562 | ) | 331,175 | 281,391 | (6,578 | ) | 274,813 | |||||||||||
| Selling, general and administrative | 317,383 | (21 | ) | 317,362 | 323,570 | (3,343 | ) | 320,227 | |||||||||||
| Total costs and expenses | 2,534,863 | (3,017 | ) | 2,531,846 | 1,944,758 | (13,575 | ) | 1,931,183 | |||||||||||
| Operating loss | (611,755 | ) | 3,017 | (608,738 | ) | (336,905 | ) | 13,575 | (323,330 | ) | |||||||||
| Loss before income taxes and non-controlling interest | (666,634 | ) | 3,017 | (663,617 | ) | (357,030 | ) | 13,575 | (343,455 | ) | |||||||||
| Net loss | (686,894 | ) | 3,017 | (683,877 | ) | (381,138 | ) | 13,575 | (367,563 | ) | |||||||||
| Net loss attributable to Cypress | $ | (686,251 | ) | $ | 3,017 | $ | (683,234 | ) | $ | (378,867 | ) | $ | 13,575 | $ | (365,292 | ) | |||
| Net loss per share attributable to Cypress: | |||||||||||||||||||
| Basic | $ | (2.15 | ) | $ | 0.01 | $ | (2.14 | ) | $ | (1.25 | ) | $ | 0.04 | $ | (1.21 | ) | |||
| Diluted | $ | (2.15 | ) | $ | 0.01 | $ | (2.14 | ) | $ | (1.25 | ) | $ | 0.04 | $ | (1.21 | ) | |||
| Year Ended January 1, 2017 | Year Ended January 3, 2016 | ||||||||||||||||||
| Revised Consolidated Statements of Comprehensive Income (Loss): | As previously reported | Adjustments | As revised | As previously reported | Adjustments | As revised | |||||||||||||
| (In thousands) | |||||||||||||||||||
| Net loss | $ | (686,894 | ) | $ | 3,017 | $ | (683,877 | ) | $ | (381,138 | ) | $ | 13,575 | $ | (367,563 | ) | |||
| Comprehensive loss | (695,478 | ) | 3,017 | (692,461 | ) | (381,319 | ) | 13,575 | (367,744 | ) | |||||||||
| Comprehensive loss attributable for Cypress | $ | (694,835 | ) | $ | 3,017 | $ | (691,818 | ) | $ | (379,048 | ) | $ | 13,575 | $ | (365,473 | ) | |||
Revised Consolidated Statement of Stockholders' Equity: | |||||||||||||||||||||||
| Year Ended January 1, 2017 | |||||||||||||||||||||||
| As previously reported | Adjustments | As revised | |||||||||||||||||||||
| Additional Paid-In Capital | Accumulated Deficit | Additional Paid-In Capital | Accumulated Deficit | Additional Paid-In Capital | Accumulated Deficit | ||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net loss attributable to Cypress | $ | — | $ | (686,251 | ) | $ | — | $ | 3,017 | $ | — | $ | (683,234 | ) | |||||||||
| Stock-based compensation | $ | 105,536 | $ | — | $ | (6,755 | ) | $ | — | $ | 98,781 | $ | — | ||||||||||
Revised Consolidated Statement of Stockholders' Equity: | |||||||||||||||||||||||
| Year Ended January 3, 2016 | |||||||||||||||||||||||
| As previously reported | Adjustments | As revised | |||||||||||||||||||||
| Additional Paid-In Capital | Accumulated Deficit | Additional Paid-In Capital | Accumulated Deficit | Additional Paid-In Capital | Accumulated Deficit | ||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net income attributable to Cypress | $ | — | $ | (378,867 | ) | $ | — | $ | 13,575 | $ | — | $ | (365,292 | ) | |||||||||
| Stock-based compensation | $ | 95,814 | $ | — | $ | (9,837 | ) | $ | — | $ | 85,977 | $ | — | ||||||||||
| Year ended January 1, 2017 | Year ended January 3, 2016 | ||||||||||||||||||
| Revised Consolidated Statements of Cash Flows: | As previously reported | Adjustments | As revised | As previously reported | Adjustments | As revised | |||||||||||||
| (In thousands) | |||||||||||||||||||
| Net (loss) income | $ | (686,894 | ) | $ | 3,017 | $ | (683,877 | ) | $ | (381,138 | ) | $ | 13,575 | $ | (367,563 | ) | |||
| Stock-based compensation expense | 105,268 | (6,755 | ) | 98,513 | 93,527 | (9,837 | ) | 83,690 | |||||||||||
| Changes in accounts payable and other liabilities | 76,699 | 2,777 | 79,476 | (86,960 | ) | (2,777 | ) | (89,737 | ) | ||||||||||
| Changes in price adjustment reserve for sales to distributors | 99,428 | 961 | 100,389 | 32,666 | (961 | ) | 31,705 | ||||||||||||
| Net cash provided by operating activities | $ | 217,419 | $ | — | $ | 217,419 | $ | 8,801 | $ | — | $ | 8,801 | |||||||
| Year Ended January 1, 2017 | Year Ended January 3, 2016 | ||||||||||||||||||
| Revised Stock-Based Compensation Footnote: | As previously reported | Adjustments | As revised | As previously reported | Adjustments | As revised | |||||||||||||
| (In thousands) | |||||||||||||||||||
| Cost of revenues | $ | 21,366 | $ | (3,395 | ) | $ | 17,971 | $ | 16,459 | $ | (2,693 | ) | $ | 13,766 | |||||
| Research and development | 41,528 | (3,339 | ) | 38,189 | 25,719 | (3,801 | ) | 21,918 | |||||||||||
| Selling, general, and administrative | 42,374 | (21 | ) | 42,353 | 51,349 | (3,343 | ) | 48,006 | |||||||||||
| Total stock-based compensation expense | $ | 105,268 | $ | (6,755 | ) | $ | 98,513 | $ | 93,527 | $ | (9,837 | ) | $ | 83,690 | |||||
| Year Ended January 1, 2017 | Year Ended January 3, 2016 | ||||||||||||||||||
| Revised Stock-Based Compensation Footnote: | As previously reported | Adjustments | As revised | As previously reported | Adjustments | As revised | |||||||||||||
| (In thousands) | |||||||||||||||||||
| Stock options | $ | 700 | $ | — | $ | 700 | $ | 1,920 | $ | — | $ | 1,920 | |||||||
| Restricted stock units and restricted stock awards | 81,905 | 3,265 | 85,170 | 74,897 | — | 74,897 | |||||||||||||
| ESPP | 22,663 | (10,020 | ) | 12,643 | 16,710 | (9,837 | ) | 6,873 | |||||||||||
| Total stock-based compensation expense | $ | 105,268 | $ | (6,755 | ) | $ | 98,513 | $ | 93,527 | $ | (9,837 | ) | $ | 83,690 | |||||
| Year Ended January 1, 2017 | |||||||||
| Revised income tax footnote disclosures: | As previously reported | Adjustments | As revised | ||||||
| (In thousands) | |||||||||
| Credits and net operating loss carryovers | $ | 493,879 | $ | 2,569 | $ | 496,448 | |||
| Reserves and accruals | 133,614 | (13,161 | ) | 120,453 | |||||
| Excess of book over tax depreciation | 35,886 | — | 35,886 | ||||||
| Deferred income | 26,457 | — | 26,457 | ||||||
| Total deferred tax assets | 689,836 | (10,592 | ) | 679,244 | |||||
| Less valuation allowance | (458,674 | ) | 13,644 | (445,030 | ) | ||||
| Deferred tax assets, net | 231,162 | 3,052 | 234,214 | ||||||
| Deferred tax liabilities: | |||||||||
| Foreign earnings and others | (160,862 | ) | (3,052 | ) | (163,914 | ) | |||
| Intangible assets arising from acquisitions | (71,960 | ) | — | (71,960 | ) | ||||
| Total deferred tax liabilities | (232,822 | ) | (3,052 | ) | (235,874 | ) | |||
| Net deferred tax assets | $ | (1,660 | ) | $ | — | $ | (1,660 | ) | |
NOTE 2. MERGERS AND ACQUISITIONS
| Final allocation as of January 1, 2017 | |||
| Intangible assets | $ | 324,000 | |
| Property, plant and equipment | 16,270 | ||
| Inventories | 11,655 | ||
| Other current assets | 6,550 | ||
| Other long-term assets | 4,203 | ||
| Goodwill | 189,094 | ||
| Total assets acquired | $ | 551,772 | |
| Other current liabilities | (1,199 | ) | |
| Other long-term liabilities | (573 | ) | |
| Total liabilities assumed | (1,772 | ) | |
| Fair value of net assets acquired | $ | 550,000 | |
| Amount | Estimated life | |||||
| (in thousands) | (in years) | |||||
| Existing Technology | $ | 189,300 | 4 | |||
In-Process Research and Development Technology Arrangement | 88,900 | N/A | ||||
| Backlog | 13,500 | <1 | ||||
| Customer Relationships | 20,000 | 10 | ||||
| License Agreements | 3,700 | 1 | ||||
| Trademarks | 8,600 | 4 | ||||
| Total intangible assets | $ | 324,000 | ||||
| Amount | |||
| (In thousands) | |||
| Fair value of Cypress common stock issued to Spansion shareholders | $ | 2,570,458 | |
| Fair value of partially vested Spansion equity awards assumed by Cypress | 6,825 | ||
| Fair value of vested Spansion options assumed by Cypress | 89,582 | ||
| Cash provided by Cypress to repay Spansion term loan | 150,000 | ||
| Total purchase consideration | $ | 2,816,865 | |
| Final allocation as of January 3, 2016 | ||||
| Cash and cash equivalents | $ | 44,870 | ||
| Short-term investments | 1,433 | |||
| Accounts receivable, net | 99,387 | |||
| Inventories | 450,634 | |||
| Other current assets | 56,630 | |||
| Property, plant and equipment, net | 356,908 | |||
| Intangible assets, net | 860,700 | |||
| Goodwill | 1,673,186 | |||
| Other long-term assets | 63,497 | |||
| Total assets acquired | $ | 3,607,245 | ||
| Accounts payable | (155,336 | ) | ||
| Accrued compensation and benefits | (44,669 | ) | ||
| Income taxes payable | (1,399 | ) | ||
| Other current liabilities | (158,113 | ) | ||
| Deferred income taxes and other long term liabilities | (18,202 | ) | ||
| Other non current liabilities | (21,477 | ) | ||
| Long-term debt (1) | (391,184 | ) | ||
| Total liabilities assumed | $ | (790,380 | ) | |
| Fair value of net assets acquired | $ | 2,816,865 | ||
| Amount | Estimated range of lives | ||||
| (In thousands) | (in years) | ||||
| Existing Technology | $ | 507,100 | 4 to 6 | ||
| In-Process Research and Development Technology | 212,300 | N/A | |||
| Backlog | 14,500 | 1 | |||
| Customer/Distributor Relationships | 97,300 | 9 | |||
| License Agreements | 9,400 | 3 | |||
| Trade Name / Trademarks | 20,100 | 10 | |||
| Total intangible assets | $ | 860,700 | |||
| Years Ended | |||||||
January 1, 2017 | January 3, 2016 | ||||||
| (In thousands, except per-share amounts) | |||||||
| Revenues | $ | 2,018,124 | $ | 1,982,824 | |||
| Net loss | $ | (722,342 | ) | $ | (491,969 | ) | |
| Net loss per share attributable to Cypress | |||||||
| Basic | $ | (2.26 | ) | $ | (1.63 | ) | |
| Diluted | $ | (2.26 | ) | $ | (1.63 | ) | |
Annual impairment assessmentImpairment Assessment
Goodwill is subject to an annual impairment test during the Company’s fourth quarter of each fiscal year, or earlier if indicators of potential impairment exist, using either a qualitative or a quantitative assessment. The Company's impairment review process compares the fair value of the reporting unit in which the goodwill resides to itsthe respective reporting unit's carrying value.
Goodwill as atof December 29, 2019 and December 31, 2017 and January 1, 20172018 was $1.4 billion, of which $782.9 million and $656.6$590.9 million was allocated to Microcontroller & Connectivity Division (“MCD”)MCD and Memory Products Division (“MPD”)MPD, respectively.
Allocation of Goodwill to NAND Business
As a result of the IoTentering into a definitive agreement to divest its NAND business acquisition during the third quarter of fiscal 2016, the DCD reporting unit recorded $189.1 million in goodwill.
| MPD | PSD | DCD | MCD | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Goodwill as of January 3, 2016 (1) | $ | 770,046 | $ | 968,836 | $ | — | $ | — | $ | 1,738,882 | |||||||||
| Goodwill impairment | (488,504 | ) | (488,504 | ) | |||||||||||||||
| Goodwill from acquisition of IoT Business | — | — | 217,726 | — | 217,726 | ||||||||||||||
| Measurement period adjustments | — | — | (28,632 | ) | — | (28,632 | ) | ||||||||||||
| Reallocation of goodwill | (113,447 | ) | (480,332 | ) | (189,094 | ) | 782,873 | — | |||||||||||
| Goodwill as of January 1, 2017 and December 31, 2017(2) | $ | 656,599 | $ | — | $ | — | $ | 782,873 | $ | 1,439,472 | |||||||||
NOTE 4.6. INTANGIBLE ASSETS
The following table presents details of the Company’s total intangible assets:
| As of December 30, 2019 | As of December 31, 2018 | ||||||||||||||||||||||
| Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Acquisition-related intangible assets | $ | 1,188,521 | $ | (907,646 | ) | $ | 280,875 | $ | 1,188,521 | $ | (702,883 | ) | $ | 485,638 | |||||||||
| Non-acquisition related intangible assets | 19,884 | (17,576 | ) | 2,308 | 19,884 | (14,932 | ) | 4,952 | |||||||||||||||
| Total intangible assets | $ | 1,208,405 | $ | (925,222 | ) | $ | 283,183 | $ | 1,208,405 | $ | (717,815 | ) | $ | 490,590 | |||||||||
| As of December 31, 2017 | As of January 1, 2017 | ||||||||||||||||||||||
| Gross | Accumulated Amortization | Net (a) | Gross | Accumulated Amortization | Net (a) | ||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Developed technology and other intangible assets | |||||||||||||||||||||||
| Acquisition-related intangible assets | $ | 1,072,824 | $ | (490,327 | ) | $ | 582,497 | $ | 1,021,244 | $ | (295,023 | ) | $ | 726,221 | |||||||||
| Non-acquisition related intangible assets | 19,884 | (10,828 | ) | 9,056 | 12,000 | (8,863 | ) | 3,137 | |||||||||||||||
| Total developed technology and other intangible assets | $ | 1,092,708 | $ | (501,155 | ) | 591,553 | $ | 1,033,244 | $ | (303,886 | ) | $ | 729,358 | ||||||||||
| In-process research and development | 123,567 | — | 123,567 | 175,203 | — | 175,203 | |||||||||||||||||
| Total intangible assets | $ | 1,216,275 | $ | (501,155 | ) | $ | 715,120 | $ | 1,208,447 | $ | (303,886 | ) | $ | 904,561 | |||||||||
| (in thousands) | |||
| As of January 3, 2016 | $ | 176,216 | |
| Intangibles acquired as part of IoT business (Note 2) | 88,900 | ||
| Technological feasibility achieved | (55,969 | ) | |
| Projects impaired | (33,944 | ) | |
| As of January 1, 2017 | 175,203 | ||
| Technological feasibility achieved | (51,636 | ) | |
| As of December 31, 2017 | $ | 123,567 | |
As of December 31, 2017,29, 2019, the estimated future amortization expense related to developed technology and other intangible assets was as follows:
| Fiscal Year | (In thousands) | |||
| 2020 | $ | 153,689 | ||
| 2021 | 58,489 | |||
| 2022 | 33,000 | |||
| 2023 | 28,334 | |||
| 2024 | 6,252 | |||
| Thereafter | 3,419 | |||
| Total future amortization expense | $ | 283,183 | ||
| Fiscal Year | (In thousands) | |||
| 2018 | $ | 198,495 | ||
| 2019 | 190,114 | |||
| 2020 | 128,784 | |||
| 2021 | 34,499 | |||
| 2022 and future | 39,661 | |||
| Total future amortization expense | $ | 591,553 | ||
NOTE 5.7. ASSETS HELD FOR SALE
Sale of NAND Business
In the fourth quarter of fiscal 2018, the Company entered into a definitive agreement to transfer its NAND business to a newly-formed joint venture between the Company and SKHS. The transaction closed on April 1, 2019.
In the fourth quarter of fiscal 2018, upon the execution of the definitive agreement with SKHS, 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 segment. The carrying value of 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.
Inventories related to the NAND business were classified as held-for-sale assets at December 30, 2018 in the amount of $13.5 million. The inventories remaining as of April 1, 2019 were purchased by SkyHigh upon the closing of the transaction for $11.9 million, plus future contingent consideration based on any profits SkyHigh earns on these inventories.
During the year ended December 29, 2019, the Company recognized a net incremental loss of $1.5 million attributed to contingent consideration related to inventories, offset by adjustments in the carrying value of certain assets and reserves recorded for estimated costs of transition services.
Sale of Manufacturing Facility Located in Minnesota
In fiscal 2016, the Company committed to a plan to sell its wafer manufacturing facility located in Bloomington, Minnesota, as well as a building in Austin, Texas. The carrying value of these assets held for sale as at the end of fiscal 2016 reflected the lower of the carrying value or fair value, net of estimated costs to sell the assets. The Company performed an analysis and estimated the fair value of the assets, less estimated selling costs, and determined the fair value was lower than the carrying value of the assets. As a result, based on this analysis the Company recorded an impairment charge of $37.2 million during fiscal 2016 to write these assets down to their estimated fair value, less selling costs.
NOTE 6.8. INVESTMENT IN EQUITY METHOD INVESTMENTS
Privately-held equity investments 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.
The belowfollowing table presents the changes in the aggregate carrying value of the equity method investments.
investments in Deca and SkyHigh (in thousands):
| Carrying value as of December 31, 2017 | $ | 122,514 | ||
| Share in gain/(loss) of equity method investees, net | (15,849 | ) | ||
| Impairment of investment | (41,520 | ) | ||
| Carrying value as of December 30, 2018 | 65,145 | |||
| Additional investment | 2,400 | |||
| Share in gain/(loss) of equity method investees, net | (6,396 | ) | ||
| Impairment of investment | (29,505 | ) | ||
| Carrying value as of December 29, 2019 | $ | 31,644 | ||
| As of December 31, 2017 | ||||||||||||
| (In thousands) | ||||||||||||
| Deca Technologies Inc. ("Deca") | Enovix Corporation ("Enovix") | Total | ||||||||||
| Carrying value as of January 3, 2016 | $ | — | $ | 41,330 | $ | 41,330 | ||||||
| Fair value at change in basis of accounting | 142,508 | — | 142,508 | |||||||||
| Additional investment | — | 23,000 | 23,000 | |||||||||
| Equity in net loss of equity method investees | (8,181 | ) | (9,970 | ) | (18,151 | ) | ||||||
| Carrying value as of January 1, 2017 | 134,327 | 54,360 | 188,687 | |||||||||
| Additional investment | — | 5,600 | 5,600 | |||||||||
| Equity in net loss of equity method investees | (11,813 | ) | (8,773 | ) | (20,586 | ) | ||||||
| Impairment in investment | — | (51,187 | ) | (51,187 | ) | |||||||
| Carrying value as of December 31, 2017 | $ | 122,514 | $ | — | $ | 122,514 | ||||||
The following table presents summarized aggregate financial information derived from the respective consolidated financial statements of Deca and Enovix.
SkyHigh for the year ended December 29, 2019, of Deca for the year ended December 30, 2018, and of Deca and Enovix for the year ended December 31, 2017:
| Year Ended | ||||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | ||||||||||
| (in thousands) | ||||||||||||
| Operating data: | ||||||||||||
| Revenue | $ | 78,586 | $ | 18,562 | $ | 15,500 | ||||||
| Gross profit (loss) | 12,874 | (11,605 | ) | (8,964 | ) | |||||||
| Loss from operations | (9,691 | ) | (29,619 | ) | (44,415 | ) | ||||||
| Net loss | (12,267 | ) | (30,212 | ) | (43,589 | ) | ||||||
| Net loss attributable to Cypress | $ | (6,396 | ) | $ | (15,849 | ) | $ | (20,586 | ) | |||
| Year Ended | ||||||||
| December 31, 2017 | January 1, 2017 | |||||||
| (in thousands) | ||||||||
| Operating data: | ||||||||
| Revenue | $ | 15,500 | $ | 15,529 | ||||
| Gross loss | (8,964 | ) | (13,555 | ) | ||||
| Loss from operations | (44,415 | ) | (44,401 | ) | ||||
| Net loss | (43,589 | ) | (44,881 | ) | ||||
| Net loss attributable to Cypress | $ | (20,586 | ) | $ | (18,151 | ) | ||
The following table represents the assets and liabilities held by Deca and EnovixSkyHigh as of December 31, 201729, 2019 and January 1, 2017.
by Deca as of December 30, 2018:
| For the Year Ended | ||||||||
| December 29, 2019 | December 30, 2018 | |||||||
| (in thousands) | ||||||||
| Balance Sheet Data: | ||||||||
| Current Assets | $ | 52,808 | $ | 25,865 | ||||
| Long-term Assets | 41,531 | 51,176 | ||||||
| Current Liabilities | 37,010 | 9,635 | ||||||
| Long-term Liabilities | $ | 6,779 | $ | 877 | ||||
| For the Year Ended | ||||||||
| December 31, 2017 | January 1, 2017 | |||||||
| (in thousands) | ||||||||
| Balance Sheet Data: | ||||||||
| Current Assets | $ | 70,101 | $ | 90,842 | ||||
| Long-term Assets | $ | 55,673 | $ | 45,686 | ||||
| Current Liabilities | $ | 15,615 | $ | 10,764 | ||||
| Long-term Liabilities | $ | 1,859 | $ | 2,906 | ||||
The Company’s investments are periodically reviewed for other-than-temporary declines in fair value by considering available evidence, including general market conditions, financial condition, pricing in recent rounds of financing, if any, earnings and cash flow forecasts, recent operational performance and any other readily available market data.
Deca Technologies Inc.
Deca continues to be in the process of developing and testing a majority owned subsidiary of the Company entered into a share purchase agreement (the "Purchase Agreement"), whereby certain third-party investors purchased 41.1% of the shares outstanding at the said date for an aggregate consideration of approximately $111.4 million. Concurrently, Deca repurchased certain of its preferred shares from Cypress.
During the fourth quarter of fiscal 2018, the Company determined that its investment in Deca is being accounted for as an equity method investmentwas other-than-temporarily impaired due to Deca's failure to achieve significant product development and is no longer a consolidated subsidiary.testing milestones. The carrying value of this equity method investment as of July 29, 2016 was determined based onCompany estimated the fair value of Deca using the equity in Deca, which was estimatedincome approach. The income approach considers a number of factors that include, but are not limited to, be $142.5 million. This representsforecasted financial information, growth rates, terminal or residual values and discount rates and requires the Company's remaining investment in Deca immediately followingCompany to make certain assumptions and estimates regarding industry economic factors and the investments byfuture profitability of the third-party investors.business. As a result, the Company recorded a charge of $41.5 million in order to write down the carrying amount of the changeinvestment to its estimated fair value as of the end of fiscal 2018. This write down was recorded in the method"Share in gain/loss, net and impairment of accounting for the Company's investment in Deca from consolidation to the equity method of accounting, the net carrying value of the assets and liabilities related to Deca, and the adjustments related to the recognition of the initial fair value of the equity method investment resulted in a gain of $112.8 million which has been reflected as "Gain related to investment in Deca Technologies Inc."investees" in the Consolidated Statements of Operations.
Deca’s current and future revenues are dependent on a small number of significant customers. During the second quarter of fiscal 2019, certain of these key customers notified Deca management of their intention to significantly reduce their previously estimated orders from Deca for 2019. During the first half of fiscal 2019, Deca began evaluating its strategic alternatives, including having discussions with certain third-party investors. The preliminary conversations between Deca and potential investors during the second quarter of fiscal 2019 indicated that the enterprise value of Deca was lower than Cypress’s previous estimates. As a result of the significant reduction in orders from customers, as well as the other objective indicators of enterprise value, during the second quarter of fiscal 2019 the Company held 52.5%determined that its investment in Deca was other-than-temporarily impaired and recorded a charge of $29.5 million in order to write down the carrying amount of the investment in Deca to its estimated fair value as of the end of the second quarter of fiscal 2019. This write down was recorded in "Share in gain/loss, net and impairment of equity method investees" in the Consolidated Statements of Operations.
On October 1, 2019, Deca reached a definitive agreement with nepes Corporation (“nepes”) to sell Deca’s Philippines manufacturing facility to nepes, subject to receipt of regulatory approvals and other customary closing conditions. As part of the agreement, nepes has licensed certain Deca technologies, and nepes will purchase a limited number of Deca’s shares from certain existing shareholders which may include Cypress. The agreement provides for milestone-based payments from nepes to Deca both for the Philippines manufacturing facility purchase and the technology license, which milestones are currently expected to be achieved in 2020.
Subsequent to fiscal 2019:
the transfer of Deca's manufacturing facility to nepes closed in January 2020;
nepes completed the purchase of 10% of Deca’s outstanding shares from Deca’s existing shareholders in January 2020. As part of this transaction, nepes paid the Company approximately $3.1 million to purchase a portion of the Company’s shareholding in Deca;
one third-party investor's shareholding in Deca was modified to reflect changes in its preferential rights; and
Deca declared a special dividend of approximately $19.6 million, which is expected to be paid in the first quarter of fiscal 2020. Of this amount, the Company is expected to receive approximately $9.9 million.
As a result of the subsequent events described above, the Company’s shareholding in Deca was reduced to approximately 42.5% of Deca's outstanding voting sharesshares.
Following the closing, Deca's remaining assets primarily consist of intellectual property and its new business model will focus on monetizing its intellectual property portfolio as well as providing engineering services.
Given the factors described above, there continues to be a substantial risk that the carrying value of the Company's investment in Deca may be further impaired in the future. Conditions that may have a material adverse effect on Deca’s business, results of operations and financial condition or on its enterprise value include:
| • | any delays or failure to complete product or intellectual property development milestones—similar to those previously experienced by Deca in fiscal 2018; |
any inability of Deca to raise sufficient funding, if needed, for continuing its operations; and
any inability of Deca to monetize its intellectual property assets.
The Company may be required to record further impairments resulting in partial or full write down of the carrying value of its investment in Deca if any of the conditions described above were to materialize.
SkyHigh
The Company’s carrying value in SkyHigh was $6.5 million as of December 31, 2017 and January 1, 2017.29, 2019.
Enovix Corporation
During the fourth quarter of fiscal 2017, the Company determined that its investment in Enovix which is accounted for as an equity method investment, was other-than temporarily impaired as itEnovix did not achieve certain key planned product development milestones. The Company considered various factors in determining whether to recognize an impairment charge, including the expectations of the investee's future cash flows and capital needs, the length of time the investee has been in a loss position, the ability to achieve milestones, and the near-term prospect of the investee and its exit strategy. Enovix’s estimated enterprise value is sensitive to its ability to achieve these milestones. Consequently, the Company recognized a charge of $51.2 million in order to write down the carrying amount of the investment to zero. This amountwrite-down was recorded in "Share in gain/loss, net loss and impairment of equity method investees” in the Consolidated Statements of Operations.
NOTE 7.9. FAIR VALUE MEASUREMENTS
The following table presents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 201729, 2019 and January 1, 2017:
December 30, 2018:
| As of December 29, 2019 | As of December 30, 2018 | ||||||||||||||||||||||
| Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Financial Assets | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | 267,617 | $ | — | $ | 267,617 | $ | 171,777 | $ | — | $ | 171,777 | |||||||||||
| Other current assets: | |||||||||||||||||||||||
| Certificates of deposit | — | 243 | 243 | — | 870 | 870 | |||||||||||||||||
| Total cash equivalents and other current assets | 267,617 | 243 | 267,860 | 171,777 | 870 | 172,647 | |||||||||||||||||
| Employee deferred compensation plan assets | 18,258 | 30,062 | 48,320 | 18,648 | 25,749 | 44,397 | |||||||||||||||||
| Interest rate swaps | — | — | — | — | 2,548 | 2,548 | |||||||||||||||||
| Foreign exchange forward contracts | — | 1,043 | 1,043 | — | 2,362 | 2,362 | |||||||||||||||||
| Total financial assets | $ | 285,875 | $ | 31,348 | $ | 317,223 | $ | 190,425 | $ | 31,529 | $ | 221,954 | |||||||||||
| Financial Liabilities | |||||||||||||||||||||||
| Foreign exchange forward contracts | $ | — | $ | 1,151 | $ | 1,151 | $ | — | $ | 1,621 | $ | 1,621 | |||||||||||
| Interest rate swaps | — | 16,001 | 16,001 | — | 4,051 | 4,051 | |||||||||||||||||
| Total financial liabilities | $ | — | $ | 17,152 | $ | 17,152 | $ | — | $ | 5,672 | $ | 5,672 | |||||||||||
| As of December 31, 2017 | As of January 1, 2017 | ||||||||||||||||||||||
| Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Financial Assets | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | 20,477 | $ | — | $ | 20,477 | $ | 287 | $ | — | $ | 287 | |||||||||||
| Other current assets: | |||||||||||||||||||||||
| Certificates of deposit | — | 972 | 972 | — | 972 | 972 | |||||||||||||||||
| Total Cash equivalents and other current assets | 20,477 | 972 | 21,449 | 287 | 972 | 1,259 | |||||||||||||||||
| Employee deferred compensation plan assets: | |||||||||||||||||||||||
| Cash equivalents | 3,561 | — | 3,561 | 3,809 | — | 3,809 | |||||||||||||||||
| Mutual funds | 27,321 | — | 27,321 | 22,658 | — | 22,658 | |||||||||||||||||
| Equity securities | 12,994 | — | 12,994 | 11,974 | — | 11,974 | |||||||||||||||||
| Fixed income | 3,415 | — | 3,415 | 4,088 | — | 4,088 | |||||||||||||||||
| Stable Value Funds | 2,204 | 2,204 | — | 3,045 | 3,045 | ||||||||||||||||||
| Total employee deferred compensation plan assets | 47,291 | 2,204 | 49,495 | 42,529 | 3,045 | 45,574 | |||||||||||||||||
| Foreign Exchange Forward Contracts | — | 1,197 | 1,197 | — | 6,605 | 6,605 | |||||||||||||||||
| Total financial assets | $ | 67,768 | $ | 4,373 | $ | 72,141 | $ | 42,816 | $ | 10,622 | $ | 53,438 | |||||||||||
| Financial Liabilities | |||||||||||||||||||||||
| Foreign Exchange Forward Contracts | — | 1,426 | 1,426 | — | 15,582 | 15,582 | |||||||||||||||||
| Employee deferred compensation plan liability | 48,425 | 2,204 | 50,629 | 43,314 | 3,045 | 46,359 | |||||||||||||||||
| Total financial liabilities | $ | 48,425 | $ | 3,630 | $ | 52,055 | $ | 43,314 | $ | 18,627 | $ | 61,941 | |||||||||||
Fair Value of Financial Instruments:
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company's financial assets and financial liabilities that require recognition under theapplicable accounting guidance generally include available-for-sale investments, employee deferred compensation plans and foreign currency derivatives. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. As such, fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1—includes instruments for which quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. The Company’s financial assets utilizing Level 1 inputs include U.S. treasuries, money market funds, marketable equity securities and ourcertain employee deferred compensation plan assets.
Level 2—includes instruments for which the valuations are based on the quoted pricesmarket price for similar assetsinstruments or liabilities, quotednonbinding market prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.market data. The Company’s Level 2 instruments include certain U.S. government securities, commercial paper, corporate notes and bonds, certificates of deposit, and our employee deferred compensation plan liabilities. Foreign currency forwardlife insurance assets. The Company determines the fair values of such instruments by using inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, custody bank, third-party pricing vendors, or other sources. Derivative hedging contracts are classified as Level 2 because the valuation inputs are based on observable market data of similar instruments. The Company principally executes its foreign currencyderivative hedging contracts in the retail market in an over-the-counter environment with a relatively high level of price transparency. The market participants and the Company’s counterparties are large money center banks and regional banks. The valuation inputs for the Company’s foreign currencyderivative hedging contracts are based on observable market data from public data sources (specifically, spot rates, forward points, LIBOR rates, volatilities and credit default rates at commonly quoted intervals) and do not involve management judgment.
Level 3—includes instruments for which the valuations are based on inputs that are unobservable and significant to the overall fair value measurement. As of December 31, 201729, 2019 and January 1, 2017,December 30, 2018, the Company did not own any material financial assets utilizing Level 3 inputs on a recurring basis.
The Company determines the basis of the cost of a security sold or the amount reclassified out of accumulated other comprehensive income (loss) into earnings using the specific identification method.
As of December 31, 2017,29, 2019, the contractual maturities of the Company’s available-for-sale investments and certificates of deposit were less than a year.
In December 2017, the Company entered into fixed-for-floating interest rate forward swap agreements starting April 2018 with two counter parties,2 counterparties to swap variable interest payments on certain debt for fixed interest payments. In fiscal 2017,October 2018, the gross asset and liability at fair value was $0.6 million and the net impactCompany entered into fixed-for-floating interest rate forward swap agreements starting in July 2021 with 2 counterparties to the Consolidated Statement of Operations was immaterial. See Note 11 of the Note to the Consolidated Financial Statementsswap future variable interest payments on existing debt for a detail discussion.fixed interest payments; these agreements will expire in December 2024.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain of the Company’s assets, including intangible assets, goodwill, and cost-method investments,assets held for sale, are measured at fair value on a nonrecurring basis using Level 3 inputs if impairment is indicated.
As of December 31, 2017,29, 2019, the carrying value of the Company’s Senior Secured Revolving Facilitysenior secured credit facility was $90.0$300.0 million (See Note 1416), Debt, of the Notes to Consolidated Financial Statements). The carrying value of the Company's Senior Secured Revolving Facilitysenior secured revolving 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 Senior Notes due 2020 assumed as part of the Merger ismerger with Spansion are traded in the secondary market and isare categorized as Level 2. The principal of the Notes and the estimated fair value of the principal of these notes as of December 31, 2017 is $22.029, 2019 were $12.0 million and $66.4$58.0 million respectively. The principal and the estimated fair value of the principal of these notes as of December 30, 2018 were $12.0 million and $30.9 million, respectively. See Note 1416, Debt, of the Notes to the Consolidated Financial Statements for further details.
The Company’s 4.50%4.5% Convertible Senior Notes due 2022 Senior Exchangeable Notes are traded in the secondary market for debt instruments and itstheir fair value is determined using Level 2 inputs. The principal of the Notes and the estimated fair value of the principal of these notes as of December 31, 2017,29, 2019, were $287.5 million and $378.1$493.2 million, respectively. The principal and the estimated fair value of the principal of these notes as of December 30, 2018 were $287.5 million and $336.6 million respectively. See Note 1416, Debt, of the Notes to the Consolidated Financial Statements for further details.
The Company’s 2.00%2% Convertible Senior Notes due 2023 Exchangeable Notes are traded in the secondary market and itstheir fair value is determined using Level 2 inputs. The principal of the Notes and the estimated fair value of the principal of these notes as of December 31, 2017,29, 2019, were $150.0 million and $159.8$184.1 million, respectively. The principal and the estimated fair value of
the principal of these notes as of December 30, 2018, were $150.0 million and $140.6 million, respectively. See Note 1416, Debt, of the Notes to the Consolidated Financial Statements for further details.
NOTE 8.10. BALANCE SHEET COMPONENTS
Accounts Receivable, net
| As of | |||||||
| December 29, 2019 | December 30, 2018 | ||||||
| (In thousands) | |||||||
| Accounts receivable, gross | $ | 302,657 | $ | 325,178 | |||
| Allowances for doubtful accounts receivable | (902 | ) | (904 | ) | |||
| Accounts receivable, net | $ | 301,755 | $ | 324,274 | |||
| As of | |||||||
| December 31, 2017 | January 1, 2017 | ||||||
| (In thousands) | |||||||
| Accounts receivable, gross | $ | 301,465 | $ | 338,061 | |||
| Allowances for doubtful accounts receivable and sales returns | (5,474 | ) | (5,024 | ) | |||
| Accounts receivable, net | $ | 295,991 | $ | 333,037 | |||
Inventories
| As of | |||||||
| December 29, 2019 | December 30, 2018 | ||||||
| (In thousands) | |||||||
| Raw materials | $ | 10,856 | $ | 10,004 | |||
| Work-in-process | 231,769 | 215,820 | |||||
| Finished goods | 55,279 | 66,269 | |||||
| Total inventories | $ | 297,904 | $ | 292,093 | |||
| As of | |||||||
| December 31, 2017 | January 1, 2017 | ||||||
| (In thousands) | |||||||
| Raw materials | $ | 15,635 | $ | 15,525 | |||
| Work-in-process | 176,427 | 208,525 | |||||
| Finished goods | 80,065 | 63,726 | |||||
| Total inventories | $ | 272,127 | $ | 287,776 | |||
Other Current Assets
| As of | |||||||
| December 29, 2019 | December 30, 2018 | ||||||
| (In thousands) | |||||||
| Prepaid tooling | $ | 24,459 | $ | 25,891 | |||
| Advance to suppliers | 3,652 | 12,058 | |||||
| Prepaid royalty and licenses | 9,959 | 14,863 | |||||
| Derivative assets | 1,043 | 3,492 | |||||
| Value added tax receivable | 18,626 | 7,652 | |||||
| Prepaid expenses | 17,145 | 17,814 | |||||
| Withholding tax receivable and tax advance | 1,153 | 4,236 | |||||
| Other current assets | 11,311 | 15,157 | |||||
| Total other current assets | $ | 87,348 | $ | 101,163 | |||
| As of | |||||||
| December 31, 2017 | January 1, 2017 | ||||||
| (In thousands) | |||||||
| Prepaid tooling | $ | 21,132 | $ | 21,687 | |||
| Restricted cash | 996 | 4,206 | |||||
| Advance to suppliers | 15,968 | 16,549 | |||||
| Prepaid royalty and licenses | 16,630 | 17,769 | |||||
| Derivative assets | 1,197 | 6,605 | |||||
| Value added tax receivable | 11,412 | 11,625 | |||||
Receivable from sale of TrueTouch®Mobile business | — | 10,000 | |||||
| Prepaid expenses | 17,737 | 22,965 | |||||
| Withholding tax receivable and tax advance | 5,790 | 3,384 | |||||
| Other current assets | 12,775 | 7,372 | |||||
| Total other current assets | $ | 103,637 | $ | 122,162 | |||
Property, Plant and Equipment, Netnet
| As of | |||||||
| December 29, 2019 | December 30, 2018 | ||||||
| (In thousands) | |||||||
| Land | $ | 28,898 | $ | 28,898 | |||
| Equipment | 622,879 | 607,849 | |||||
| Buildings, building and leasehold improvements | 174,849 | 170,588 | |||||
| Construction in progress | 14,101 | 15,489 | |||||
| Leased assets | 9,583 | — | |||||
| Furniture and fixtures | 4,927 | 4,885 | |||||
| Total property, plant and equipment, gross | 855,237 | 827,709 | |||||
| Less: Accumulated depreciation and amortization | (596,489 | ) | (544,723 | ) | |||
| Total property, plant and equipment, net | $ | 258,748 | $ | 282,986 | |||
| As of | |||||||
| December 31, 2017 | January 1, 2017 | ||||||
| (In thousands) | |||||||
| Land | $ | 29,813 | $ | 29,844 | |||
| Equipment | 559,573 | 493,498 | |||||
| Buildings, building and leasehold improvements | 174,559 | 175,589 | |||||
| Construction in progress | 17,836 | 36,066 | |||||
| Furniture and fixtures | 5,117 | 6,728 | |||||
| Total property, plant and equipment, gross | 786,898 | 741,725 | |||||
| Less: Accumulated depreciation and amortization | (497,344 | ) | (444,459 | ) | |||
| Total property, plant and equipment, net | $ | 289,554 | $ | 297,266 | |||
Other Long-term Assets
| As of | |||||||
| December 29, 2019 | December 30, 2018 | ||||||
| (In thousands) | |||||||
| Employee deferred compensation plan | $ | 48,320 | $ | 44,397 | |||
| Long-term licenses | 4,631 | 4,495 | |||||
| Advances to suppliers | 11,484 | 11,471 | |||||
| Deposits | 9,536 | 9,441 | |||||
| Pension plan assets | 1,691 | 1,765 | |||||
| Derivatives assets | — | 1,419 | |||||
| Prepaid tooling | 28,733 | 34,948 | |||||
| Other non-current assets | 10,362 | 16,369 | |||||
| Total other long-term assets | $ | 114,757 | $ | 124,305 | |||
| As of | |||||||
| December 31, 2017 | January 1, 2017 | ||||||
| (In thousands) | |||||||
| Employee deferred compensation plan | $ | 49,495 | $ | 45,574 | |||
| Investments in cost method equity securities | 17,017 | 13,331 | |||||
| Deferred tax assets | 4,293 | 4,463 | |||||
| Long-term licenses | 8,654 | 14,498 | |||||
| Advances to suppliers | 11,315 | 25,207 | |||||
| Deposit - non-current | 9,830 | 4,698 | |||||
| Pension - non-current | 8,026 | 6,792 | |||||
| Prepaid tooling and other non-current assets | 38,409 | 33,379 | |||||
| Total other long-term assets | $ | 147,039 | $ | 147,942 | |||
Other Current Liabilities
| As of | |||||||
| December 29, 2019 | December 30, 2018 | ||||||
| (In thousands) | |||||||
| Employee deferred compensation plan | $ | 48,295 | $ | 44,834 | |||
| Restructuring accrual (see Note 12) | 6 | 14,536 | |||||
| Derivative liability | 2,550 | 1,621 | |||||
| Accrued expenses | 31,544 | 46,592 | |||||
| Accrued interest | 8,226 | 9,440 | |||||
| Customer advances | 1,945 | 5,296 | |||||
| Operating lease liability | 13,692 | — | |||||
| Other current liabilities | 17,906 | 15,745 | |||||
| Total other current liabilities | $ | 124,164 | $ | 138,064 | |||
| As of | |||||||
| December 31, 2017 | January 1, 2017 | ||||||
| (In thousands) | |||||||
| Employee deferred compensation plan | $ | 50,629 | $ | 46,359 | |||
| Restructuring accrual - current portion (see Note 10) | 9,580 | 24,029 | |||||
| Derivative liability | 2,033 | 15,582 | |||||
| Accrued expenses | 47,789 | 67,933 | |||||
| Accrued interest | 8,094 | 10,422 | |||||
| Customer advances | 12,873 | 332 | |||||
| Other current liabilities | 12,487 | 15,641 | |||||
| Total other current liabilities | $ | 143,485 | $ | 180,298 | |||
Other Long-TermLong-term Liabilities
| As of | |||||||
| December 29, 2019 | December 30, 2018 | ||||||
| (In thousands) | |||||||
| Pension and other employee-related liabilities | $ | 16,831 | $ | 14,083 | |||
| Asset retirement obligation | 5,959 | 5,916 | |||||
| Derivative liability | 14,602 | 4,051 | |||||
| Operating lease liability | 30,912 | — | |||||
| Other long-term liabilities | 4,852 | 3,870 | |||||
| Total other long-term liabilities | $ | 73,156 | $ | 27,920 | |||
| As of | |||||||
| December 31, 2017 | January 1, 2017 | ||||||
| (In thousands) | |||||||
| Long-term pension and other employee-related liabilities | $ | 16,779 | $ | 14,672 | |||
| Restructuring accrual - non-current portion (see Note 10) | 8,596 | 11,294 | |||||
| Asset retirement obligation | 5,693 | 5,067 | |||||
| Other long-term liabilities | 4,374 | 5,716 | |||||
| Total other long-term liabilities | $ | 35,442 | $ | 36,749 | |||
NOTE 9.11. EMPLOYEE STOCK PLANS AND STOCK-BASED COMPENSATION
The Company’s equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.
The Company currently has the following employee stock plans:
1999 Stock Option Plan (“("1999 Plan”Plan"):
The 1999 Plan expired in March 2009. There are currently no0 shares available for grant under the 1999 Plan. Under the 1999 Plan, 0.6 million shares are issued and outstanding. Anythere were no awards outstanding shares cancelled or forfeited under the 1999 Plan will not be available for any future grants since the 1999 Plan has expired.as of December 29, 2019.
2013 Stock Option Plan (“("2013 Plan”Plan"):
2010 Equity Incentive Award Plan (“("2010 Plan”Plan"):
In connection with the Company’s Mergermerger with Spansion, itthe Company assumed theirSpansion's 2010 Plan, as amended, which reserves a totalshares of 16.0 million shares ofCypress common stock for issuance under stock options, stock appreciation rights, restricted stock units, restricted stock, performance awards, stock payments, dividend equivalents and deferred stock to its employees consultants and non-employee members of its Board of Directors.consultants. The 2010 Plan provides that incentive stock options may only be granted only to employees of the Company or its subsidiaries. All stock options expire if not exercised by the seventh anniversary of the grant date. Annual RSU awards granted generally vest over a period of two to four years. Options granted become exercisable in full or in installments pursuant to the terms of each agreement evidencing options granted. The exercise of stock options and issuance of restricted stock and restricted stock units is satisfied by issuing authorized common stock or treasury stock. Shares that are subject to or underlie awards that expire or for any reason are canceled, terminated or forfeited, or fail to vest will again be available for grant under the 2010 Plan. Grants from this plan are limited to employees who joined Cypress as part of the Mergermerger with Spansion and grants to new Cypress' employees.employees hired after the merger. As of December 31, 2017, 2.729, 2019, a total of 0.3 million shares of stock options, or RSUs and RSAs wereremained available for grant under the 2010 Plan.
2012 Incentive Award Plan (“("2012 Plan”Plan"):
In connection with the Company’s acquisition of Ramtron in 2012, itthe Company assumed theirRamtron's 2012 Plan, as amended, which reserves a total of 1.2 million shares of common stock for issuance under stock option or restricted stock grants.issuance. The exercise price of all non-qualified stock options must be no less than 100% of the fair market value on the effective date of the grant under the 2012 Plan, and the maximum term of each grant is seven years. The 2012 Plan permits the issuance of incentive stock options, the issuance of restricted stock, and other types of awards. Restricted stock grants generally vest five years from the date of grant. Options granted become exercisable in full or in installments pursuant to the terms of each agreement evidencing options granted. The exercise of stock options and issuance of restricted stock and restricted stock units is satisfied by issuing authorized common stock or treasury stock. Grants from this plan are limited to employees who joined Cypress as part of the Ramtron acquisition and grants to new Cypress employees.employees hired after the acquisition. Shares issued in respect of full-value awards count against the plan's limit as 1.53 shares for every one share actually issued. As of December 31, 2017, 154 thousand shares of29, 2019, 0.2 million stock options, or 101 thousand0.1 million RSUs and RSAs, were available for grant under the 2012 Plan.
Employee Stock Purchase Plan (“ESPP”("ESPP"):
The Company’s stockholders approved an amendment to the ESPP in May 2018 to increase the number of shares of common stock reserved for issuance under the ESPP by 7.0 million shares. The amendment became effective on January 1, 2018, the Company is changing its offering period from 18 months to six months composed of one six-month exercise period. The employees currently enrolled in the ESPP program will have a transition period wherein their ESPP benefit will continue on the old plan.2019. As of December 31, 2017, 2.229, 2019, 6.8 million shares were available for future issuance under the ESPP.
The Merger Agreement provides that no new offering periods under the ESPP will commence during the period between the date of the Merger Agreement and the Effective Time and the ESPP will terminate as of immediately prior to the Effective Time. Accordingly, the Company suspended the ESPP for all participants following the June 28, 2019 share purchase.
Stock-Based Compensation
The following table summarizes stock-based compensation expense by line item in the Consolidated StatementStatements of Operations:
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Cost of revenues | $ | 15,443 | $ | 16,531 | $ | 15,605 | |||||
| Research and development | 33,702 | 35,115 | 36,804 | ||||||||
| Selling, general and administrative | 56,837 | 44,319 | 39,172 | ||||||||
| Total stock-based compensation expense | $ | 105,982 | $ | 95,965 | $ | 91,581 | |||||
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| Cost of revenues | $ | 15,606 | $ | 17,971 | $ | 13,766 | |||||
| Research and development | 36,803 | 38,189 | 21,918 | ||||||||
| Selling, general and administrative | 39,172 | 42,353 | 48,006 | ||||||||
| Total stock-based compensation expense | $ | 91,581 | $ | 98,513 | $ | 83,690 | |||||
Aggregate cash proceeds from the issuance of shares under the employee stock plans were $47.2$38.6 million, $43.9$40.7 million and $52.9$47.2 million for fiscal 2019, 2018 and 2017, fiscal 2016 and 2015, respectively. No income tax benefit was realized from stock option exercises for fiscal 2017, 2016 and 2015. As of December 31, 201729, 2019 and January 1, 2017December 30, 2018, stock-based compensation capitalized in inventories totaled $3.3$3.7 million and $4.6$2.5 million, respectively.
The following table summarizes stock-based compensation expense by type of awards:
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Stock options | $ | — | $ | 96 | $ | 163 | |||||
| RSUs and PSUs | 102,588 | 90,655 | 82,946 | ||||||||
| ESPP | 3,394 | 5,214 | 8,472 | ||||||||
| Total stock-based compensation expense | $ | 105,982 | $ | 95,965 | $ | 91,581 | |||||
In connection with the proposed Merger, in December 2019, the Company modified the equity awards held by certain executives, including accelerating the vesting of 1.9 million shares underlying RSUs and PSUs that were otherwise scheduled to vest in January and February of 2020, subject to recoupment (or "clawback") provisions. The Company recognized additional stock-based compensation of approximately $9.8 million related to the impact of these modifications during fiscal 2019.
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| Stock options | $ | 163 | $ | 700 | $ | 1,920 | |||||
| Restricted stock units and restricted stock awards | 82,946 | 85,170 | 74,897 | ||||||||
| ESPP | 8,472 | 12,643 | 6,873 | ||||||||
| Total stock-based compensation expense | $ | 91,581 | $ | 98,513 | $ | 83,690 | |||||
The following table summarizes the unrecognized stock-based compensation balance net of estimated forfeitures, by type of awards as of December 31, 2017:29, 2019:
Weighted-Average Amortization Period | |||||
| (In thousands) | (In years) | ||||
| RSUs and PSUs | $ | 54,881 | 1.34 | ||
| (In thousands) | Weighted-Average Amortization Period | ||||
| (In years) | |||||
| Stock options | $ | 123 | 0.60 | ||
| Restricted stock units and restricted stock awards | 67,870 | 1.47 | |||
| ESPP | 4,104 | 0.78 | |||
| Total unrecognized stock-based compensation balance, net of estimated forfeitures | $ | 72,097 | 1.43 | ||
As of December 29, 2019, 28.2 million stock options, or 15.2 million RSUs and PSUs, were available for grant as stock-based awards under the 2013 Plan, the 2010 Plan and the 2012 Plan.
Stock Options
The following table summarizes the Company’s stock option activities:
| Year Ended | ||||||||||||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | ||||||||||||||||||
| Shares | Weighted- Average Exercise Price per Share | Shares | Weighted- Average Exercise Price per Share | Shares | Weighted- Average Exercise Price per Share | |||||||||||||||
| (In thousands, except per-share amounts) | ||||||||||||||||||||
| Options outstanding, beginning of year | 2,639 | $ | 11.75 | 4,627 | $ | 11.63 | 7,947 | $ | 10.70 | |||||||||||
| Exercised | (1,370 | ) | $ | 11.63 | (1,547 | ) | $ | 9.81 | (2,898 | ) | $ | 8.80 | ||||||||
| Forfeited or expired | (93 | ) | $ | 21.38 | (441 | ) | $ | 17.29 | (422 | ) | $ | 13.58 | ||||||||
| Options outstanding, end of year | 1,176 | $ | 11.11 | 2,639 | $ | 11.75 | 4,627 | $ | 11.63 | |||||||||||
| Options exercisable, end of year | 1,176 | $ | 11.11 | 2,612 | $ | 11.76 | 4,340 | $ | 11.66 | |||||||||||
There were 0 options granted during fiscal 2019, 2018 and 2017.
The aggregate intrinsic value of the options outstanding and options exercisable as of December 29, 2019 was $14.5 million and $14.5 million respectively. Aggregate intrinsic value on any given date represents the total pre-tax intrinsic value which would have been received by the option holders had all option holders exercised their options as of such date.
The aggregate intrinsic value of the options outstanding and options exercisable as of December 30, 2018 was $4.6 million and $4.5 million, respectively.
The aggregate intrinsic value of option exercises, which represents the difference between the exercise price and the value of Cypress common stock at the time of exercise, was $10.8 million in fiscal 2019, $11.2 million in fiscal 2018 and $16.2 million in fiscal 2017.
The aggregate grant date fair value of the options which vested in fiscal 2019, 2018 and 2017 iswas $0.1 million, $0.8 million and $2.7 million, respectively.
The following table summarizes information about options outstanding and exercisable as of December 29, 2019:
| Options Outstanding | Options Exercisable | ||||||||||||||
| Range of Exercise Price | Shares | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price per Share | Shares | Weighted- Average Exercise Price per Share | ||||||||||
| (in thousands) | (In years) | (in thousands) | |||||||||||||
| $4.98 - $10.92 | 220 | 1.91 | $ | 9.25 | 220 | $ | 9.25 | ||||||||
| $11.27 - $11.27 | 336 | 0.97 | $ | 11.27 | 336 | $ | 11.27 | ||||||||
| $11.40 - $11.40 | 3 | 1.70 | $ | 11.40 | 3 | $ | 11.40 | ||||||||
| $11.55 - $11.55 | 525 | 1.42 | $ | 11.55 | 525 | $ | 11.55 | ||||||||
| $12.34 - $12.77 | 92 | 1.53 | $ | 12.49 | 92 | $ | 12.49 | ||||||||
| 1,176 | 1.39 | $ | 11.11 | 1,176 | $ | 11.11 | |||||||||
All exercisable options were in-the-money as of December 29, 2019.
RSUs and PSUs
The following table summarizes the Company’s RSU and PSU activities:
| Year Ended | ||||||||||||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | ||||||||||||||||||
| Shares | Weighted- Average Grant Date Fair Value per Share | Shares | Weighted- Average Grant Date Fair Value per Share | Shares | Weighted- Average Grant Date Fair Value per Share | |||||||||||||||
| (In thousands, except per-share amounts) | ||||||||||||||||||||
| Non-vested, beginning of year | 10,175 | $ | 14.42 | 11,976 | $ | 12.44 | 13,780 | $ | 11.83 | |||||||||||
| Granted | 7,378 | $ | 15.66 | 6,344 | $ | 16.37 | 6,488 | $ | 13.40 | |||||||||||
| Released | (8,956 | ) | $ | 13.91 | (6,601 | ) | $ | 12.92 | (6,248 | ) | $ | 12.17 | ||||||||
| Forfeited | (721 | ) | $ | 14.11 | (1,544 | ) | $ | 13.49 | (2,044 | ) | $ | 12.22 | ||||||||
| Non-vested, end of year | 7,876 | $ | 15.22 | 10,175 | $ | 14.42 | 11,976 | $ | 12.44 | |||||||||||
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 customer experience plan milestones for fiscal 2019 and include a multiplier based on the Company's total stockholder return ("TSR") relative to an amountindex.
During the first quarter of $4.3 million related2018, the Compensation Committee of the Company's Board of Directors approved the issuance of service-based and performance-based restricted stock units under the LTIP to certain employees. The milestones for the 2018 LTIP grants include a service condition and performance conditions linked to the impactCompany's revenue growth, earnings in 2018 and non-GAAP profit before tax in 2020. A portion of the said modifications.LTIP awards include a milestone based on the Company's TSR relative to its peers over the period 2018-2020.
The fair value of new or modified awards with performance conditions is equal to the grant date fair market value of the Company's common stock, net of the estimated dividend credit. The compensation cost is recognized over the requisite service period when it is probable that the performance condition will be satisfied. For new or modified awards with market conditions, the compensation cost is recognized regardless of whether the conditions are satisfied and based on the grant date fair value of these awards using a Monte Carlo simulation valuation model.
ESPP
The Company estimates the fair value of its stock-based equity awardsESPP participation rights using the Black-Scholes valuation model. Assumptions used in the Black-Scholes valuation model were as follows:
| Year Ended | |||||||
| December 2019 | 2018 | 2017 | |||||
| ESPP: | |||||||
| Expected life | 0.5-1.5 years | 0.5-1.5 years | |||||
| Volatility | |||||||
| Risk-free interest rate | |||||||
| Dividend yield | 2.78%-3.87% | ||||||
Expected life: The expected term represents the average term from the first day of the offering period to the purchase date.
Volatility: The Company determined that implied volatility of publicly traded call options and quotes from option traders on its common stock is more reflective of market conditions and, therefore, can reasonably be a better indicator of expected volatility than historical volatility. Therefore, volatility is based on a blend of historical volatility of the Company’s common stock and implied volatility.
Risk-free interest rate:The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.
Dividend yield:The expected dividend is based on the Company’s history, and expected dividend payouts.
| Year Ended | ||||||||||||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | ||||||||||||||||||
| Shares | Weighted- Average Exercise Price per Share | Shares | Weighted- Average Exercise Price per Share | Shares | Weighted- Average Exercise Price per Share | |||||||||||||||
| (In thousands, except per-share amounts) | ||||||||||||||||||||
| Options outstanding, beginning of year | 7,947 | $ | 10.70 | 16,840 | $ | 7.99 | 14,463 | $ | 9.24 | |||||||||||
| Options assumed as a part of the Merger | — | $ | — | — | $ | — | 8,976 | $ | 12.86 | |||||||||||
| Exercised | (2,898 | ) | $ | 8.80 | (8,255 | ) | $ | 5.03 | (5,391 | ) | $ | 5.71 | ||||||||
| Forfeited or expired | (422 | ) | $ | 13.58 | (638 | ) | $ | 12.54 | (1,208 | ) | $ | 12.75 | ||||||||
| Options outstanding, end of year | 4,627 | $ | 11.63 | 7,947 | $ | 10.70 | 16,840 | $ | 7.99 | |||||||||||
| Options exercisable, end of year | 4,340 | $ | 11.66 | 6,736 | $ | 10.62 | 14,366 | $ | 7.40 | |||||||||||
| Options Outstanding | Options Exercisable | ||||||||||||||
| Range of Exercise Price | Shares | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price per Share | Shares | Weighted- Average Exercise Price per Share | ||||||||||
| (in thousands) | (In years) | (in thousands) | |||||||||||||
| $2.72-$11.55 | 3,583 | 2.75 | $ | 10.12 | 3,320 | $ | 10.07 | ||||||||
| $11.58-$17.77 | 695 | 1.54 | $ | 15.39 | 672 | $ | 15.47 | ||||||||
| $18.86-$21.63 | 299 | 1.80 | $ | 19.06 | 298 | $ | 19.06 | ||||||||
| $22.88-$22.88 | 42 | 1.04 | $ | 22.88 | 42 | $ | 22.88 | ||||||||
| $23.23-$23.23 | 8 | 1.52 | $ | 23.23 | 8 | $ | 23.23 | ||||||||
| 4,627 | 2.49 | $ | 11.63 | 4,340 | $ | 11.66 | |||||||||
| Year Ended | ||||||||||||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | ||||||||||||||||||
| Shares | Weighted- Average Grant Date Fair Value per Share | Shares | Weighted- Average Grant Date Fair Value per Share | Shares | Weighted- Average Grant Date Fair Value per Share | |||||||||||||||
| (In thousands, except per-share amounts) | ||||||||||||||||||||
| Non-vested, beginning of year | 13,780 | $ | 11.83 | 11,053 | $ | 13.43 | 7,838 | $ | 10.98 | |||||||||||
| Granted and assumed | 6,488 | $ | 13.40 | 11,318 | $ | 11.19 | 10,172 | $ | 14.78 | |||||||||||
| Released | (6,248 | ) | $ | 12.17 | (5,890 | ) | $ | 13.36 | (3,594 | ) | $ | 5.60 | ||||||||
| Forfeited | (2,044 | ) | $ | 12.22 | (2,701 | ) | $ | 12.36 | (3,363 | ) | $ | 11.66 | ||||||||
| Non-vested, end of year | 11,976 | $ | 12.44 | 13,780 | $ | 11.83 | 11,053 | $ | 13.43 | |||||||||||
During fiscal 2017, 20162019, 2018 and 2015,2017, the Company issued 2.42.1 million, 1.22.3 million and 2.62.4 million shares under its ESPP with a weighted-average price of $8.48, $8.34$10.87, $11.24 and $8.69$8.48 per share, respectively.
NOTE 10.12.RESTRUCTURING
Since 2015, the Company has launched various long-term strategic corporate transformation initiatives that required restructuring activities to streamline internal processes and redeploy personnel and resources as discussed below:
2019 Restructuring Plan
In the second quarter of fiscal 2019, the Company began implementation of a reduction in workforce (the "2019 Plan") which resulted in the elimination of approximately 90 positions across various functions. The 2019 Plan is not expected to result in a reduction of overall costs as the savings from the positions eliminated will be redeployed. The restructuring cost of a $3.0 million recorded during the year ended December 29, 2019 consisted of personnel costs. The Company anticipates that the restructuring activities under this plan will be completed and fully settled by the first quarter of fiscal 2020.
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 restructuring costs of $4.9 million were recorded during the year ended December 30, 2018 and consisted of personnel costs. The restructuring activities under this plan were completed and the related accruals were fully settled in the third quarter of fiscal 2019.
2017 Restructuring Plan
In December 2017, the Company began implementation of a reduction in workforce ("2017 Plan") which will resultresulted in the elimination of approximately 80 positions worldwide across various functions. The restructuring charge of $6.5$2.4 million recorded during the year ended December 31, 2017 consists30, 2018 consisted of personnel costs.
Spansion Integration-Related Restructuring Plan
In March 2015, the Company implemented cost reduction and restructuring activities in connection with its merger with Spansion. As part of this restructuring plan, the Merger. The restructuring charge of $90.1 millionCompany exited an office space leased by Spansion and had recorded a reserve related to excess lease obligation for the building. During the fourth quarter of fiscal year ended January 3, 2016 primarily consists of severance costs, lease2018, the Company signed a termination costs and impairment of property, plant and equipment.agreement with the building’s owner. The lease termination costs includecost was approximately $18.0 million relating to$19.0 million. The restructuring activities under this plan were completed and the buildings Spansion had leased prior to the Merger, which the Company decided not to occupyrelated accrual was fully settled in the post-merger period. The initial termfirst quarter of the lease commenced on January 1, 2015 and will expire on December 31, 2026.fiscal 2019.
Summary of Restructuring Costs
The following table summarizes the nature of restructuring charges recorded in the Consolidated Statements of Operations:
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (in thousands) | |||||||||||
| Personnel Costs | $ | 3,006 | 7,085 | $ | 7,479 | ||||||
| Lease termination costs and other related charges | — | 9,757 | 540 | ||||||||
| Other | — | — | 1,069 | ||||||||
| Total restructuring and other charges | $ | 3,006 | $ | 16,842 | $ | 9,088 | |||||
The following table summarizes the restructuring chargescosts by line item recorded in the Consolidated Statements of Operations:
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (in thousands) | |||||||||||
| Cost of revenues | $ | 928 | $ | 3,271 | $ | 548 | |||||
| Research and development | 1,160 | 1,786 | 5,915 | ||||||||
| Selling, general and administrative | 918 | 11,785 | 2,625 | ||||||||
| Total restructuring costs | $ | 3,006 | $ | 16,842 | $ | 9,088 | |||||
| Year Ended | |||||||||||
| (In thousands) | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| Personnel Costs | $ | 7,479 | 26,131 | $ | 58,972 | ||||||
| Lease termination costs and other related charges | 540 | — | 18,016 | ||||||||
| Impairment of property, plant and equipment | — | — | 12,531 | ||||||||
| Other | 1,069 | — | 565 | ||||||||
| Total restructuring and other charges | $ | 9,088 | $ | 26,131 | $ | 90,084 | |||||
Roll-forward of the restructuring reservesRestructuring Reserves
Restructuring activity under the Company's various restructuring plan was as follows:
follows (in thousands):
| 2019 Plan | 2018 Plan | 2017 Plan | 2016 Plan | Spansion Integration Plan | Total | ||||||||||||||||||
| Accrued balance as of January 1, 2017 | $ | — | $ | — | $ | — | $ | 21,104 | $ | 14,219 | $ | 35,323 | |||||||||||
| Provision | — | — | 6,464 | 2,624 | — | 9,088 | |||||||||||||||||
| Cash payments and other adjustments | — | — | (325 | ) | (22,985 | ) | (2,922 | ) | (26,232 | ) | |||||||||||||
| Accrued balance as of December 31, 2017 | — | — | 6,139 | 743 | 11,297 | 18,179 | |||||||||||||||||
| Provision | — | 4,898 | 2,421 | (234 | ) | 9,757 | 16,842 | ||||||||||||||||
| Cash payments and other adjustments | — | (4,650 | ) | (8,530 | ) | (509 | ) | (6,796 | ) | (20,485 | ) | ||||||||||||
| Accrued balance as of December 30, 2018 | — | 248 | 30 | — | 14,258 | 14,536 | |||||||||||||||||
| Provision | 3,014 | (97 | ) | — | — | 89 | 3,006 | ||||||||||||||||
| Cash payments and other adjustments | (3,008 | ) | (151 | ) | (30 | ) | — | (14,347 | ) | (17,536 | ) | ||||||||||||
| Accrued balance as of December 29, 2019 | $ | 6 | $ | — | $ | — | $ | — | $ | — | $ | 6 | |||||||||||
| Year Ended | |||||||||||||||
| December 31, 2017 | |||||||||||||||
| (In thousands) | |||||||||||||||
| 2017 Plan | 2016 Plan | Spansion Integration plan | Total | ||||||||||||
| Provision | $ | — | $ | — | $ | 81,041 | $ | 81,041 | |||||||
| Cash payments and other adjustments | — | — | (59,554 | ) | (59,554 | ) | |||||||||
| Accrued restructuring balance as of January 3, 2016 | — | — | 21,487 | 21,487 | |||||||||||
| Provision | — | 26,261 | (130 | ) | 26,131 | ||||||||||
| Cash payments and other adjustments | — | (5,157 | ) | (7,138 | ) | (12,295 | ) | ||||||||
| Accrued restructuring balance as of January 1, 2017 | — | 21,104 | 14,219 | 35,323 | |||||||||||
| Provision | 6,464 | 2,624 | — | 9,088 | |||||||||||
| Cash payments and other adjustments | (325 | ) | (22,985 | ) | (2,922 | ) | (26,232 | ) | |||||||
| Accrued restructuring balance as of December 31, 2017 | $ | 6,139 | $ | 743 | $ | 11,297 | $ | 18,179 | |||||||
NOTE 11.13. FOREIGN CURRENCY AND INTEREST RATE DERIVATIVES
The Company enters into multiple foreign exchange forward contracts to hedge certain operational exposuresforeign currency risk resulting from fluctuations in Japanese yen (¥) and Euro (€) exchange rates. In addition, the Company entered into fixed-for-floating 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.
The effect of derivative instruments in the Consolidated Statements of Operations for fiscal 2019 and fiscal 2018 was $0.3 million and $0.8 million of gains, respectively. The effect of derivative instruments in the Consolidated Statements of Operations for fiscal 2017 was $12.3 million of losses.
The effect of derivative instruments on the Consolidated Statements of Operations for the year ended December 29, 2019 was as follows:
| Year Ended | ||||||||||||||||
| December 29, 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 | $ | 2,205,314 | $ | 1,375,289 | $ | 706,762 | $ | 58,745 | ||||||||
| 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 | $ | — | $ | — | $ | — | $ | 774 | ||||||||
| Foreign exchange contracts | ||||||||||||||||
| Amount of gain or (loss) reclassified from AOCI into income | $ | 739 | $ | (466 | ) | $ | (33 | ) | $ | — | ||||||
The gross fair values of derivative instruments on the Consolidated Balance Sheets as of December 29, 2019 and December 30, 2018 were as follows:
| December 29, 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 | $ | 698 | $ | 345 | $ | 2,767 | $ | 725 | ||||||||
| Non-current Assets | ||||||||||||||||
| Derivative Asset | $ | — | $ | — | $ | 1.419 | $ | — | ||||||||
| Other Current Liabilities | ||||||||||||||||
| Derivative Liability | $ | 2,095 | $ | 455 | $ | 1,210 | $ | 411 | ||||||||
| Non-Current Liabilities | ||||||||||||||||
| Derivative Liability | $ | 14,602 | $ | — | $ | 4,051 | $ | — | ||||||||
Designated Cash Flow Hedges
Interest Rate Swaps
In December 2017, the Company entered into fixed-for-floating interest rate forward swap agreements starting in April 2018 with 2 counterparties, to swap future variable interest payments on certain debt for fixed interest payments; these agreements will expire in July 2021. The objective of the swaps was to effectively fix the interest rate at then-current levels without having to refinance the outstanding floating rate debt, thereby avoiding the incurrence of transaction costs. The aggregate notional amount of these interest rate swaps is $300 million. 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 2 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 that was available when the Company entered into the swap agreements in order 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 is $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. Accordingly, future changes in fair value of these swaps is recognized in accumulated other comprehensive income (loss).
In the fourth quarter of fiscal 2019, we de-designated approximately $14.3 million of the hedged amount of interest rate swaps maturing on July 5, 2021 due to changes in the levels of outstanding floating rate debt. Other comprehensive income at de-designation will be amortized to income on a straight-line basis and all further gains/losses on the de-designated portion of the swap will be recorded in income (loss) each period. The impact of this partial de-designation on the Consolidated Statements of Operations was immaterial.
For the years ended December 29, 2019 and December 30, 2018, the Company recorded a loss in other comprehensive income of $16.1 millionand$1.3 million, respectively, for these interest rate swaps.
The gross liability at fair value was $16.0 million at December 29, 2019 and the net impact to the Consolidated Statements of Operations was $0.6 million of gains. The gross asset and liability at fair value was $2.5 million and $4.1 million, respectively, at December 30, 2018 and the net impact to the Consolidated Statements of Operations was 0.2 million of losses.
Foreign Currency Forward Contracts
The Company enters into cash flow hedges to protect non-functional currency inventory purchases and certain other operational expenses, in addition to its on-goingongoing 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 ninethirteen 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 Consolidated Balance Sheets, until the forecasted transaction occurs. InterestPrior to the second quarter of 2018, interest charges or “forward points”"forward points" on the forward contracts arewere excluded from the assessment of hedge effectiveness and were recorded in interest and other income, net in the Condensed Consolidated Statements of Operations. Commencing in the second quarter of 2018, interest charges or "forward points" on the newly entered forward contracts are included in the assessment of hedge effectiveness, and are recorded in other income (expense), netthe 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, (expense), net in its Condensed Consolidated Statements of Operations at that time. For the year December 29, 2019 and December 30, 2018, the Company had a net loss of $0.4 million and a net gain of $0.2 million, which was related to foreign currency forward contracts, recorded in other comprehensive income (loss), respectively. As of December 29, 2019 and December 30, 2018, the accumulated other comprehensive income (loss) related to foreign currency forward contracts was a gain of $1,000 and $0.4 million, 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 (expense), net in its Consolidated Statements of Operations.
At December 31, 2017,29, 2019, the Company had zero net designated forward contracts. At December 30, 2018, the Company had net outstanding forward contracts to buy ¥3,335¥5,977 million for $298$54.4 million.
Total notional amounts of net outstanding contracts were as summarized below:
| Buy / Sell | December 29, 2019 | December 30, 2018 | ||
| (In millions) | ||||
| US dollar / Japanese Yen | $59.6 / ¥6,400 | $44.5 / ¥4,850 | ||
| Japanese Yen / US dollar | ¥6,400 / $59.6 | ¥10,827 / $98.8 | ||
Non-designated hedgesHedges
Total notional amounts of net outstanding contracts were as summarized below. The duration or each contract is approximately thirty days:
| Buy / Sell | December | December 30, 2018 | ||
| ( | ||||
| EUR / US dollar | €3.6 / $4.0 | $9.1 / €8.0 | ||
| US dollar / | $ | $13.2 / | ||
| Japanese Yen / US dollar | | ¥4,210 / | ||
| December 31, 2017 | January 1, 2017 | |||||||||||||||
| 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 | $ | 805 | $ | 392 | $ | 6,468 | $ | 137 | ||||||||
| Non-current Assets | ||||||||||||||||
| Derivative Asset | $ | — | $ | 607 | $ | — | $ | — | ||||||||
| Other Current Liabilities | ||||||||||||||||
| Derivative Liability | $ | 775 | $ | 1,258 | $ | 14,391 | $ | 1,191 | ||||||||
NOTE 12.14. ACCUMULATED OTHER COMPREHENSIVE LOSSINCOME (LOSS)
The components of accumulated other comprehensive lossincome (loss) were as follows:
Accumulated net unrealized income (loss) on cash flow hedges and other | Accumulated unrecognized gain (loss) on the defined benefit plan | Accumulated other comprehensive income (loss) | |||||||||
| (in thousands) | |||||||||||
| Balance as of December 31, 2017 | $ | (498 | ) | $ | (864 | ) | $ | (1,362 | ) | ||
| Other comprehensive income (loss) before reclassification | (644 | ) | — | (644 | ) | ||||||
| Amounts reclassified to operating income | 379 | — | 379 | ||||||||
| Net unrecognized gain (loss) on the defined benefit plan | — | 3,456 | 3,456 | ||||||||
| Balance as of December 30, 2018 | (763 | ) | 2,592 | 1,829 | |||||||
| Other comprehensive income (loss) before reclassification | (14,056 | ) | — | (14,056 | ) | ||||||
| Amounts reclassified to operating income | (1,014 | ) | — | (1,014 | ) | ||||||
| Net unrecognized gain (loss) on the defined benefit plan | — | (2,798 | ) | (2,798 | ) | ||||||
| Balance as of December 29, 2019 | $ | (15,833 | ) | $ | (206 | ) | $ | (16,039 | ) | ||
| Accumulated net unrealized losses on available-for-sale investments and other | Unrecognized Gain on the Defined Benefit Plan | Accumulated other comprehensive loss (income) | |||||||||
| (in thousands) | |||||||||||
| Balance as of January 3, 2016 | $ | (253 | ) | $ | 26 | $ | (227 | ) | |||
| Other comprehensive income (loss) before reclassification | (5,186 | ) | — | (5,186 | ) | ||||||
| Amounts reclassified to other income (expense), net | (2,184 | ) | $ | — | (2,184 | ) | |||||
| Net unrecognized gain (loss) on the defined benefit plan | — | (1,214 | ) | (1,214 | ) | ||||||
| Balance as of January 1, 2017 | (7,623 | ) | (1,188 | ) | (8,811 | ) | |||||
| Other comprehensive income (loss) before reclassification | 511 | — | 511 | ||||||||
| Amounts reclassified to other income (expense), net | 6,614 | — | 6,614 | ||||||||
| Net unrecognized gain (loss) on the defined benefit plan | — | 324 | 324 | ||||||||
| Balance as of December 31, 2017 | $ | (498 | ) | $ | (864 | ) | $ | (1,362 | ) | ||
NOTE 13.15. OTHER INCOME (EXPENSE), NET
The following table summarizes the components of “other income (expense), net,” recorded in the Consolidated Statements of Operations:
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Interest income | $ | 5,367 | $ | — | $ | 568 | |||||
| Changes in fair value of investments under the deferred compensation plan | 7,991 | (2,904 | ) | 6,087 | |||||||
| Foreign currency exchange and other (losses) gains, net | (1,135 | ) | (340 | ) | (1,838 | ) | |||||
| Other | 1,945 | 726 | (549 | ) | |||||||
| Other income (expense), net | $ | 14,168 | $ | (2,518 | ) | $ | 4,268 | ||||
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| Interest income | $ | 568 | $ | 1,836 | $ | 885 | |||||
| Changes in fair value of investments under the deferred compensation plan | 6,087 | 2,326 | (1,354 | ) | |||||||
| Unrealized (loss) gain on marketable securities | — | 325 | (4,655 | ) | |||||||
| Foreign currency exchange (losses) gains, net | (1,838 | ) | (4,251 | ) | 744 | ||||||
| (Loss) gain on sale of investments | — | (265 | ) | 276 | |||||||
| Other | (549 | ) | 342 | 335 | |||||||
| Other income (expense), net | $ | 4,268 | $ | 313 | $ | (3,769 | ) | ||||
NOTE 14.16. DEBT
| December 31, 2017 | January 1, 2017 | |||||||
| (in thousands) | ||||||||
| Current portion of long-term debt | ||||||||
| Credit Facility: | ||||||||
| Term Loan A | $ | — | $ | 7,500 | ||||
| Term Loan B | 27,303 | 22,500 | ||||||
| Equipment loans and capital lease obligations | — | 152 | ||||||
| Current portion of long-term debt | 27,303 | 30,152 | ||||||
| Credit facility and long-term portion of debt | ||||||||
| Credit Facility | ||||||||
| Senior Revolving Credit Facility | 90,000 | 332,000 | ||||||
| Term Loan A | — | 84,838 | ||||||
| Term Loan B | 468,080 | 406,214 | ||||||
| 2% 2020 Spansion Exchangeable Notes | 20,375 | 135,401 | ||||||
| 4.5% 2022 Senior Exchangeable Notes | 246,636 | 236,526 | ||||||
| 2% 2023 Exchangeable Notes | 131,422 | — | ||||||
| Credit facility and long-term debt | 956,513 | 1,194,979 | ||||||
| Total debt | $ | 983,816 | $ | 1,225,131 | ||||
| November 6, 2017 | ||||
| Liability component | ||||
| Principal | $ | 134,550 | ||
| Less: Issuance cost | (3,678 | ) | ||
| Net carrying amount | $ | 130,872 | ||
| Equity component | ||||
| Allocated amount | $ | 15,450 | ||
| Less: Issuance cost | (422 | ) | ||
| Net carrying amount | $ | 15,028 | ||
| Exchangeable Notes, net of issuance costs | $ | 145,900 | ||
| Year ended December 31, 2017 | ||||
| Contractual interest expense | $ | 452 | ||
| Amortization of debt issuance costs | 106 | |||
| Accretion of debt discount | 444 | |||
| Total | $ | 1,002 | ||
| December 31, 2017 | January 1, 2017 | |||||||
| Equity component (1) | $ | 15,028 | $ | — | ||||
| Liability component: | ||||||||
| Principal | $ | 150,000 | $ | — | ||||
| Less debt discount and debt issuance costs, net (2) | (18,578 | ) | — | |||||
| Net carrying amount | $ | 131,422 | $ | — | ||||
| December 29, 2019 | December 30, 2018 | |||||||
| (in thousands) | ||||||||
| Current portion of long-term debt | ||||||||
| Senior Secured Credit Facility: | ||||||||
| Term Loan B | $ | — | $ | 5,051 | ||||
| 2.0% Exchangeable Senior Notes due 2020 | 11,761 | — | ||||||
| Finance Lease Obligations | 1,854 | 1,892 | ||||||
| Current portion of long-term debt | 13,615 | 6,943 | ||||||
| Revolving credit facility and long-term portion of debt | ||||||||
| Senior Secured Credit Facility: | ||||||||
| Revolving Credit Facility | 300,000 | — | ||||||
| Term Loan B | — | 462,868 | ||||||
| 2.0% Exchangeable Senior Notes due 2020 | — | 11,438 | ||||||
| 4.5% Convertible Senior Notes due 2022 | 266,810 | 256,726 | ||||||
| 2.0% Convertible Senior Notes due 2023 | 138,699 | 135,057 | ||||||
| Finance lease obligations | 7,299 | 8,146 | ||||||
| Credit facility, finance lease obligations, and long-term debt | 712,808 | 874,235 | ||||||
| Total debt | $ | 726,423 | $ | 881,178 | ||||
On June 23,March 12, 2015, the Company entered into an Amended and Restated Credit and Guaranty Agreement with Morgan Stanley Bank, N.A., as issuing bank, and other lenders (as amended, the "Credit Agreement"). The Credit Agreement establishes a credit facility (the "Credit Facility" or the "Senior Secured Credit Facility") that includes a revolving loan facility (the "Revolving Credit Facility") and provides for the possibility of term loans.
On July 5, 2016, the Company issued at face value, $287.5 million ofentered into a Joinder and Amendment Agreement with the initial incremental term loan lenders party thereto and Morgan Stanley Senior Exchangeable Notes due in 2022 (the “4.5% 2022 Senior Exchangeable Notes”) in a private placement to qualified institutional buyers under Rule 144A ofFunding, Inc., as administrative agent and collateral agent. The Joinder Agreement supplements the Securities Act of 1933, as amended.Company’s existing Credit Agreement. The 4.5% 2022 Senior Exchangeable Notes are governedJoinder and Amendment Agreement provides for the incurrence by an Indenture (“2016 Indenture”), dated June 23, 2016, between the Company and U.S. Bank National Association, as Trustee. The 4.5% 2022 Senior Exchangeable Notes will mature on January 15, 2022, unless earlier repurchased or converted, and bear interest of 4.50% per year payable semi-annuallyan incremental term loan in arrears on January 15 and July 15, commencing on January 15, 2017. The 4.5% 2022 Senior Exchangeable Notes may be due and payable immediately in certain events of default.
costs were amortized over the life of Term Loan B and recorded in "Interest expense" in the Consolidated Statements of Operations.
On February 17, 2017, the Company intendsamended its Credit Agreement. The amendment reduced the applicable margins on Term Loan B and a prior outstanding term loan, Term Loan A, from 5.50% and 5.11%, respectively, to deliver shares of its common stock in respect to3.75% effective February 17, 2017. Additionally, the remainder of its conversion obligation in excess of the aggregate principal amount (“conversion spread”). Accordingly, for the purposes of calculating diluted earnings per share, there would be no adjustment to the numerator in the net income per common share computation for the portion of the 4.5%
| June 23, 2016 | |||
| Liability component | |||
| Principal | $ | 238,338 | |
| Less: Issuance cost | (7,158 | ) | |
| Net carrying amount | $ | 231,180 | |
| Equity component | |||
| Allocated amount | $ | 49,163 | |
| Less: Issuance cost | (1,477 | ) | |
| Net carrying amount | $ | 47,686 | |
| Exchangeable Notes, net of issuance costs | $ | 278,866 | |
| Year ended | ||||||||
| December 31, 2017 | January 1, 2017 | |||||||
| Contractual interest expense | $ | 13,009 | $ | 6,900 | ||||
| Amortization of debt issuance costs | 1,289 | 700 | ||||||
| Accretion of debt discount | 8,885 | 4,646 | ||||||
| Total | $ | 23,183 | $ | 12,246 | ||||
| December 31, 2017 | January 1, 2017 | |||||||
| Equity component (1) | $ | 47,686 | $ | 47,686 | ||||
| Liability component: | ||||||||
| Principal | $ | 287,500 | $ | 287,500 | ||||
| Less debt discount and debt issuance costs, net (2) | (40,864 | ) | (50,974 | ) | ||||
| Net carrying amount | $ | 246,636 | $ | 236,526 | ||||
On March 12, 2018, the Company amended its Credit Agreement. The amendment reduced the applicable margins on the Revolving Credit Facility and Term Loan B. After giving effect to the amendment, Term Loan B bore interest, at the option of the Company, at the base rate plus an applicable margin of 1.25% or the Eurodollar rate plus an applicable margin of 2.25%; and the Revolving Credit Facility bore interest, at the option of the Company, at the base rate plus an applicable margin of either 0.75% or 1.00%, depending on the Company's secured leverage ratio, or the Eurodollar rate plus an applicable margin of 1.75% or 2.00%, depending on the Company's secured leverage ratio. The amendment removed the fixed charge coverage ratio financial covenants. In addition, for Term Loan B, the amendment removed the total leverage ratio covenant, changed the required amortization payments to 1% per annum, and waived the excess cash flow mandatory repayment for fiscal 2017.
On September 13, 2018, the Company again amended its Credit Agreement. The amendment reduces the applicable margin for Term Loan B. After giving effect to the amendment, Term Loan B bore interest, at the option of the Company, at the base rate plus an applicable margin of 1.00% or the Eurodollar rate plus an applicable margin of 2.00%. As part of the transaction, the Company repaid $25.0 million of outstanding Term Loan B principal.
On July 31, 2019, the Company again amended its Credit Agreement. The amendment increased the available amount under the Revolving Credit Facility from $540 million to $700 million and extended its maturity from March 12, 2020 to January 31, 2021. The Company may, at its sole discretion, extend the maturity for another six months to July 31, 2021. The financial covenants were amended to increase the maximum total leverage ratio from 3.75 to 4.0. Subject to the terms and conditions set forth in the amended Credit Agreement, at the Effective Time, the Merger will trigger the change of control provision of the Credit Agreement causing the debt to become payable immediately. The Company borrowed $447 million under the amended Revolving Credit Facility and repaid the entire outstanding Term Loan B principal balance of approximately $448 million as of July 31, 2019, resulting in an extinguishment of Term Loan B, which was scheduled to mature on July 5, 2021. As a result, the Company recorded a debt extinguishment loss of $6.4 million in connection with the write-off of unamortized debt discount and issuance costs, which was recorded in "Interest expense" in the Consolidated Statements of Operations. Subsequently, the Company repaid $147.0 million of the 4.5% 2022 Senior Exchangeable Notes,outstanding amended Revolving Credit Facility during the remainder of fiscal 2019.
Interest expenses related to contractual interest expenses, amortization of debt issuance costs and amortization of debt discounts were $28.4 million, $34.3 million and $45.2 million during the fiscal years ended December 29, 2019, December 30, 2018 and December 31, 2017, respectively.
As of December 29, 2019, and December 30, 2018, aggregate principal amount of borrowings outstanding under the Credit Facility, all of which related to the Revolving Credit Facility and Term Loan B, was $300.0 million and $476.3 million, respectively.
As of December 29, 2019, the Company entered into capped call transactionswas in compliance with certain bank counterparties to reduce the risk of potential dilutionall of the Company’s common stock uponfinancial covenants under the exchange of the 4.5% 2022 Senior Exchangeable 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 are intended to reduce the potential dilution and/or offset any cash payments the Company is required to make upon conversion of the 4.5% 2022 Senior Exchangeable Notes if the market price of the Company's common stock is above the strike price of the capped calls. If, however, the market price of the Company’s common stock is greater than the cap price of the capped calls, there would be dilution and/or no offsetCredit Facility.
2% 2020 Spansion Exchangeable Senior Notes due 2020
Pursuant to the Merger,its merger with Spansion, Cypress assumed Spansion's outstanding 2% Exchangeable Senior Notes due 2020 Spansion Exchangeable Notes ("Spansion(the "Spansion Notes") on March 12, 2015. The Spansion Notes are governed by a Supplemental Indenture, dated March 12, 2015, between the Company, Spansion and Wells Fargo Bank, National Association, as Trustee. They areTrustee, and 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, commencing on March 1, 2014. The Spansion Notes may be due and payable immediately in certain events of default. The net carrying amount related to the Spansion Notes was reported as a component of current liabilities as of the end of fiscal 2019.
As of December 31, 2017,29, 2019, the Spansion Notes are exchangeable for 198.16208.3448 shares of common stock per $1,000 principal amount of the Spansion Notes (equivalent to an exchange price of $5.05)approximately $4.80 per share) subject to adjustments foradjustment upon the occurrence of certain events, including dividends, anti-dilutive issuances and, in certain circumstances, a make-whole adjustmentsadjustment upon a fundamental change. A fundamental changePursuant to the terms of the indenture governing the Spansion Notes (as amended, the "Spansion Notes Indenture"), a "fundamental change" includes a change in control, delisting of the Company’s stock anda liquidation, consolidation, or merger of the Company. AccordingCompany or a delisting of the Company’s common stock. Pursuant to the terms of the Spansion Notes Indenture, a fundamental change will not be deemed to have occurred in control occurs whenthe case of a person or group becomesbecoming the beneficial owner, directly or indirectly, of more than 50% of the Company’s common stock. Instock or in the case of a liquidation, consolidation or merger of the Company if, in either case, 90% of the surviving entity continues to be listed, no changeconsideration paid in such transaction consists of control will be triggered. shares of common equity traded on The New York Stock Exchange or Nasdaq. (See "—Effect of Proposed Merger on the Notes," below).
Prior to June 1, 2020, the Spansion Notes will beare exchangeable only under certain specified circumstances as described in the Spansion Notes Indenture.
On November 1, 2017, the Company entered into a privately negotiated agreement to induce the extinguishment of a portion of the Spansion Notes. The Company paid the holders of the Spansion Notes cash for the aggregate principal of $128 million and delivered 17.3 million shares of common stock for the conversion spread. The Company recorded $4.3 million in loss on extinguishment, which included $1.2 million paid in cash as an inducement premium and a reduction in additional paid-in capital of $290.6 million towards the deemed repurchase of the equity component of the notes. The loss on extinguishment is recorded in "Interest Expense""Other income (expense), net" in the Consolidated Statement of Operations. See Note 1315, Other Income (Expense), Net, of the Notes to the Consolidated Financial Statements for further details.
On March 7, 2018, the Company entered into a privately negotiated agreement to induce the extinguishment of $10 million of the remaining $22 million of Spansion Notes outstanding. The Company paid the holders of the Spansion Notes cash for the aggregate principal of $10 million and delivered 1.4 million shares of common stock for the conversion spread. The Company recorded $0.2 million in loss on extinguishment and a reduction in additional paid-in capital of $25.7 million towards the deemed repurchase of the equity component of the notes. The loss on extinguishment was recorded in "Interest Expense" in the Consolidated Statements of Operations.
The following table presents the interest expense recognized on the Spansion Notes during the fiscal yearyears ended December 29, 2019, December 30, 2018, and December 31, 2017 and January 1, 2017:(in thousands):
| Year Ended | ||||||||||||||||||
| December 31, 2017 | January 1, 2017 | Year Ended | ||||||||||||||||
| (in thousands) | December 29, 2019 | December 28, 2018 | December 31, 2017 | |||||||||||||||
| Contractual interest expense at 2% per annum | $ | 2,880 | $ | 2,989 | $ | 242 | $ | 242 | $ | 2,880 | ||||||||
| Accretion of debt discount | 3,149 | 3,556 | 329 | 329 | 3,149 | |||||||||||||
| Total | $ | 6,029 | $ | 6,545 | $ | 571 | $ | 571 | $ | 6,029 | ||||||||
The 2% 2020 Spansion Exchangeable Notes consisted of the following as of December 29, 2019 and December 30, 2018 (in thousands):
| December 29, 2019 | December 28, 2018 | |||||||
Equity component (1) | $ | 22,971 | $ | 22,971 | ||||
| Liability component: | ||||||||
| Principal | $ | 11,984 | $ | 11,990 | ||||
Less debt discount, net (2) | (223 | ) | (552 | ) | ||||
| Net carrying amount | $ | 11,761 | $ | 11,438 | ||||
(1) Included on the consolidated balance sheets within additional paid-in-capital
(2) Included on the consolidated balance sheets within credit facility and long-term debt and is amortized over the remaining life of the Spansion Notes.
4.5% Convertible Senior Notes due 2022
On June 23, 2016, the Company issued, at face value, $287.5 million of 4.5% Convertible Senior Notes due 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 are governed by an Indenture ("2022 Notes Indenture"), dated June 23, 2016, between the Company and U.S. Bank National Association, as Trustee. The 2022 Notes will mature on January 15, 2022, unless earlier repurchased or converted, and bear interest of 4.5% per year payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2017. The 4.5% 2022 Senior Exchangeable Notes may be due and payable immediately in certain events of default.
The 2022 Notes are convertible at an initial conversion rate of 74.1372 shares of common stock per $1,000 principal amount of the 2022 Notes (equivalent to an initial conversion price of approximately $13.49 per share) subject to adjustments upon the occurrence of certain events, including anti-dilutive issuances and, in certain circumstances, a make-whole adjustment upon a fundamental change. Pursuant to the terms of the 2022 Notes Indenture, a fundamental change includes a change in control, liquidation, consolidation, or merger of the Company or a delisting of the Company's stock (see "—Effect of Proposed Merger on the Notes," below).
Prior to October 15, 2021, the 2022 Notes are convertible only under certain specified circumstances as described in the 2022 Notes Indenture. One such circumstance is that the 2022 Notes will be convertible during any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day. Such condition was met as of the last trading day of each of the Company's fiscal quarters ended June 30, 2019, September 29, 2019 and December 29, 2019 and, accordingly, the 2022 Notes were convertible at the option of their holders during the third and fourth quarters of fiscal 2019 and will be convertible during the first quarter of fiscal 2020.During the fiscal quarters ended September 29, 2019 and December 29, 2019, the Company received conversion notices representing an immaterial principal amount of 2022 Notes from holders. The Company paid cash to settle the principle balance, and delivered shares to settle the conversion premium related to the 2022 Notes.
Upon conversion, the Company may pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of its common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on
a pre-defined conversion value. Accordingly, the Company continued to classify the 2022 Notes as long-term debt on the Consolidated Balance Sheets as of December 29, 2019.
It is the Company’s intent that upon conversion, the Company would pay the holders of the 2022 Notes cash for an amount up to the aggregate principal amount of the 2022 Notes. If the conversion value exceeds the principal amount, the Company intends to deliver shares of its common stock in respect to the remainder of its conversion obligation in excess of the aggregate principal amount ("conversion spread"). Accordingly, for the purposes of calculating diluted earnings per share, there would be no adjustment to the numerator in the net income per common share computation for the portion of the 2022 Notes intended to be settled in cash. The conversion spread will be included in the denominator for the computation of diluted net income per common share, using the treasury stock method.
At the debt issuance date, the 2022 Notes, net of issuance costs, consisted of the following (in thousands):
| June 23, 2016 | |||
| Liability component | |||
| Principal | $ | 238,338 | |
| Less: Issuance cost | (7,158 | ) | |
| Net carrying amount | $ | 231,180 | |
| Equity component | |||
| Allocated amount | $ | 49,163 | |
| Less: Issuance cost | (1,477 | ) | |
| Net carrying amount | $ | 47,686 | |
| Exchangeable Notes, net of issuance costs | $ | 278,866 | |
The following table includes total interest expense related to the 2022 Notes recognized during the fiscal years ended December 29, 2019, December 30, 2018 and December 31, 2017 and January 1, 2017 (in Thousands)thousands):
| December 31, 2017 | January 1, 2017 | |||||||
| Equity component (1) | $ | 42,130 | $ | 287,362 | ||||
| Liability component: | ||||||||
| Principal | $ | 21,990 | $ | 149,990 | ||||
| Less debt discount and debt issuance costs, net (2) | (1,615 | ) | (14,589 | ) | ||||
| Net carrying amount | $ | 20,375 | $ | 135,401 | ||||
| Year ended | ||||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | ||||||||||
| Contractual interest expense | $ | 12,902 | $ | 12,902 | $ | 13,009 | ||||||
| Amortization of debt issuance costs | 1,278 | 1,278 | 1,289 | |||||||||
| Accretion of debt discount | 8,811 | 8,811 | 8,885 | |||||||||
| Total | $ | 22,991 | $ | 22,991 | $ | 23,183 | ||||||
The 2022 Notes consisted of the following as of December 29, 2019 and December 30, 2018 (in thousands):
| December 29, 2019 | December 30, 2018 | |||||||
Equity component (1) | $ | 47,686 | $ | 47,686 | ||||
| Liability component: | ||||||||
| Principal | $ | 287,495 | $ | 287,500 | ||||
Less debt discount and debt issuance costs, net (2) | (20,685 | ) | (30,774 | ) | ||||
| Net carrying amount | $ | 266,810 | $ | 256,726 | ||||
(1) Included in the consolidated balance sheets within additional paid-in-capital
(2) Included in the consolidated balance sheets within Creditcredit facility and long-term debt and is amortized over the remaining life of the 2% 2020 Exchangeable2022 Notes.
Capped Calls, 2% 2020 Spansion Exchangeable4.5% Convertible Senior Notes due 2022
In connection with the Spansionissuance of the 4.5% Convertible Senior Notes, Spansion hadthe Company entered into capped call transactions in fiscal 2013 with certain bank counterparties to reduce the risk of potential dilution to theirof the Company’s common stock upon the exchange of the Spansion4.5% Convertible Senior Notes. In March 2015,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 are intended to reduce the potential dilution and/or offset any cash payments the Company is required to make upon conversion of the 4.5% Convertible Senior Notes if the market price of the Company's common stock is above the strike price of the capped calls. If, however, the market price of the Company’s common stock is greater than the cap price of the capped calls, there would be dilution and/or no offset of such potential cash payments, as applicable, to the extent the market price of the common stock exceeds the cap price. The capped calls expire in January 2022.
2.0% Convertible Senior Notes due 2023
On November 6, 2017, the Company, issued at face value, $150.0 million of 2.0% Convertible Senior Notes due 2023 (the " 2023 Notes") in a private placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The 2023 Notes are governed by an Indenture ("2017 Indenture"), dated November 6, 2017, between the Company and U.S. Bank National Association, as Trustee. The 2023 Notes will mature on February 1, 2023 unless earlier repurchased or converted, and bear interest of 2% per year payable semi-annually in arrears on February 1 and August 1, commencing on February 1, 2018. The 2023 Notes may be due and payable immediately in certain events of default.
The 2023 Notes are convertible at an initial exchange rate of 46.7099 shares of common stock per $1,000 principal amount of the 2023 Notes (equivalent to an initial exchange price of approximately $21.41 per share) subject to adjustments upon the counterparties agreed to terminateoccurrence of certain events, including anti-dilutive issuances and, unwindin certain circumstances, a make-whole adjustment upon a fundamental change. A fundamental change includes a change in control, delisting of the capped callsCompany’s stock, and liquidation, consolidation, or merger of the Company received a cash settlement(see "—Effect of $25.3 million which has beenProposed Merger on the fair valueNotes," below). Prior to November 1, 2022, the 2023 Notes are convertible only under certain specified circumstances as described in the 2017 Indenture. On or after November 1, 2022, until the close of business on the second scheduled trading day immediately preceding the maturity date, the 2023 Notes will be convertible in multiples of $1,000 principal amount regardless of the capped call assumed as a part of the Merger and recorded as an increase to additional paid-in-capital on the Consolidated Balance Sheet as of January 3, 2016.foregoing circumstances.
It is the end of each fiscal year, (ii) the net cash proceeds from certain asset sales (subject to certain reinvestment rights) and (iii) the proceeds from any debt issuances not otherwise permitted under the Credit Agreement. The Company incurred financing costs of $2.8 million to the lenders of Term Loan A which have been capitalized and recognized as a deduction of the Term Loan A balance in “Credit facility and long term debt” on the Consolidated Balance Sheet.
In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company is requiredseparated the 2023 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. Such amount was based on the contractual cash flows discounted at an appropriate market rate for non-convertible debt at the date of issuance, which was determined to paybe 89.7% of the par value of the 2023 Notes or $134.6 million. The carrying amount of the equity component of $15.5 million representing the conversion option was determined by deducting the fair value of the liability component from the face value of the 2023 Notes as a prepayment premium of 1%whole. The excess of the principal amount prepaid if it prepays the Incremental Term Loan in certain circumstances prior to the date that is twelve months after the Closing Date. Term Loan B was fully funded on the Closing Date and matures on July 5, 2021.The Company incurred financing costs of $11.5 million to the lenders of Term Loan B which has been capitalized and recognized as a deduction of the Term Loan B balance in “Long-term revolving credit facility and long term debt” on the Consolidated Balance Sheet. These costs will be amortizedliability component over its carrying amount ("debt discount") is accreted to interest expense over the lifeterm of Term Loan B and recorded in “Interest Expense” inthe 2023 Notes using the Consolidated Statement of Operations.effective interest method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.
The Company incurred financingtransaction costs of $5.9approximately $4.1 million relating to lendersthe issuance of the 2023 Notes. The transaction costs of $4.1 million include $3.4 million of financing fees paid to the initial purchasers of the 2023 Notes, and other estimated offering expenses payable by the Company. In accounting for these costs, the Company allocated the costs of the Term Loans whichoffering in proportion to the fair value of the debt and equity recognized in accordance with the accounting standards. The transaction costs allocated to the debt component of approximately
$3.7 million are being amortized as interest expense over the term of the 2023 Notes using the effective yield method. The transaction costs allocated to the equity component of approximately $0.4 million were capitalized and recognizedrecorded as a reduction of additional paid-in-capital.
At the Term Loan Adebt issuance date, the 2023 Notes, net of issuance costs, consisted of the following (in thousands):
| November 6, 2017 | ||||
| Liability component | ||||
| Principal | $ | 134,550 | ||
| Less: Issuance cost | (3,678 | ) | ||
| Net carrying amount | $ | 130,872 | ||
| Equity component | ||||
| Allocated amount | $ | 15,450 | ||
| Less: Issuance cost | (422 | ) | ||
| Net carrying amount | $ | 15,028 | ||
| Exchangeable Notes, net of issuance costs | $ | 145,900 | ||
The following table includes total interest expense related to the 2023 Notes recognized during the fiscal years ended December 29, 2019, December 30, 2018, and Term Loan B balancesDecember 31, 2017 (in thousands):
| Year ended | ||||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | ||||||||||
| Contractual interest expense | $ | 2,992 | $ | 2,992 | $ | 452 | ||||||
| Amortization of debt issuance costs | 701 | 700 | 106 | |||||||||
| Accretion of debt discount | 2,940 | 2,940 | 444 | |||||||||
| Total | $ | 6,633 | $ | 6,632 | $ | 1,002 | ||||||
The 2023 Notes consisted of the following as of December 29, 2019 and December 30, 2018 (in thousands):
| December 29, 2019 | December 30, 2018 | |||||||
Equity component (1) | $ | 15,028 | $ | 15,028 | ||||
| Liability component: | ||||||||
| Principal | $ | 150,000 | $ | 150,000 | ||||
Less debt discount and debt issuance costs, net (2) | (11,301 | ) | (14,943 | ) | ||||
| Net carrying amount | $ | 138,699 | $ | 135,057 | ||||
(1) Included in “Creditthe consolidated balance sheets within additional paid-in-capital
(2) Included in the consolidated balance sheets within credit facility and long term debt” on the Consolidated Balance Sheet. These costs will belong-term debt and is amortized over the remaining life of the Term Loans and are recorded in “Interest Expense”2023 Notes.
Effect of Proposed Merger on the Consolidated Statements of Operations.Notes
The amendment reduced the applicable margins on the Company's Term Loan A from 3.75% to 2.75% effective April 7, 2017. The Company incurred financing costs of $0.4 million to lenders of Term Loan A which were recognized asproposed Merger will constitute a reduction“fundamental change” (as defined in each of the Term Loan A balance in “Long-term credit facilityindentures governing the Spansion Notes, 2022 Notes and long term debt” on the Consolidated Balance Sheet.
Future Debt Payments
The future scheduled principal payments for the Company's outstanding Company's debt as of December 31, 201729, 2019 were as follows (in thousands):
| Fiscal Year | Total | |||
2020(1) | $ | 11,993 | ||
| 2021 | 300,000 | |||
2022(1) | 287,486 | |||
| 2023 | 150,000 | |||
| Total (excluding finance leases) | $ | 749,479 | ||
| Finance lease liabilities | 9,153 | |||
| Total Debt | $ | 758,632 | ||
(1) The future principal payments of the Spansion Notes and the 2022 Notes are presented in the above table based on scheduled due dates. Such notes have become exchangeable or convertible (as applicable) at the option of their holders during the third and fourth quarters of fiscal 2019.
NOTE 17. 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 | |||
| December 29, 2019 | |||
| Finance Leases | |||
| Property and equipment, at cost | $ | 9,583 | |
| Accumulated depreciation | (1,924 | ) | |
| Property and equipment, net | $ | 7,659 | |
| Finance leases included in current portion of long-term debt | $ | 1,854 | |
| Finance leases included in revolving credit facility and long-term portion of debt | 7,299 | ||
| Total finance lease liabilities | $ | 9,153 | |
| Operating Leases | |||
| Operating lease right-of-use assets | $ | 42,941 | |
| Operating leases included in other current liabilities | 13,692 | ||
| Operating leases included in other long-term liabilities | 30,912 | ||
| Total operating lease liabilities | $ | 44,604 | |
The component of lease costs was as follows (in thousands):
| Year Ended | |||
| December 29, 2019 | |||
| Lease cost | |||
| Finance lease cost | |||
| Amortization of right-of-use assets | $ | 1,700 | |
| Interest on lease liabilities | 394 | ||
| Operating lease cost | 15,928 | ||
| Short-term lease cost | 605 | ||
| Variable lease cost | 1,886 | ||
| Total lease cost | $ | 20,513 | |
Other information related to leases were as follows:
| Year Ended | |||
| December 29, 2019 | |||
| Cash paid for amounts included in the measurement of lease liabilities | (In thousands) | ||
| Operating cash flows from finance leases | $ | 394 | |
| Operating cash flows from operating leases | $ | 11,732 | |
| Financing cash flows from finance leases | $ | 1,730 | |
| Weighted-average remaining lease term (in years): | December 29, 2019 | ||
| Finance leases | 4.92 | ||
| Operating leases | 5.32 | ||
| Weighted-average discount rate: | |||
| Finance leases | 3.99 | % | |
| Operating leases | 6.89 | % | |
As of December 29, 2019, the maturities of the Company's lease liabilities are as follows:
| Operating lease liabilities | Finance lease liabilities | ||||||
| Fiscal Year | (In thousands) | ||||||
| 2020 | $ | 16,244 | $ | 2,196 | |||
| 2021 | 9,055 | 2,189 | |||||
| 2022 | 6,894 | 2,191 | |||||
| 2023 | 4,734 | 2,069 | |||||
| 2024 | 5,211 | 514 | |||||
| Thereafter | 13,461 | 922 | |||||
| Total undiscounted future cash flows | $ | 55,599 | $ | 10,081 | |||
| Less: Imputed interest | $ | 10,995 | $ | 928 | |||
| Present value of undiscounted future cash flows | $ | 44,604 | $ | 9,153 | |||
| Presentation on statement of financial position | |||||||
| Current | $ | 13,692 | $ | 1,854 | |||
| Non-current | $ | 30,912 | $ | 7,299 | |||
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 | |
| Fiscal Year | Total | |||
| 2018 | $ | 27,303 | ||
| 2019 | 30,715 | |||
| 2020 | 152,944 | |||
| 2021 | 412,952 | |||
| 2022 and beyond | 437,500 | |||
| Total | $ | 1,061,414 | ||
As of December 29, 2019, there was 0 restructuring accrual balances related to operating facility leases. As of December 30, 2018, restructuring accrual balances related to operating facility leases was $14.3 million.
NOTE 15.18. EQUITY TRANSACTIONS
$450 million Stock Buyback Program:Program
On October 20, 2015, the Company’s Board authorized a $450 million stock buyback program. The program allows the Company to purchase its common stock or enter into equity derivative transactions related to ourits 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 the Company’s common stock, regulatory, legal, and contractual requirements, alternative uses of cash, availability of on shore cash and other market factors. The program does not obligate the Company to repurchase any particular amount of common stock and may be modified or suspended at any time at the Company’s discretion. Under the program through the end of fiscal 2017,2018, the Company used $239.2$274.1 million to repurchase 29.531.8 million shares at an average price of $8.11. $8.62. NaN open market repurchases were made during fiscal 2019.
Yield Enhancement Program:Program
In fiscal 2009, the Audit Committee approved a yield enhancement strategy intended to improve the yield on the Company’s available cash. As part of this program, the Audit Committee authorized the Company to enter into short-term yield enhanced structured agreements, typically with maturities of 90 days or less, correlated to the Company’s stock price. Under the agreements that the Company has entered into to date, it pays a fixed sum of cash upon execution of an agreement in exchange for the financial institution’s obligations to pay either a pre-determined amount of cash or shares of the Company’s common stock depending on the closing market price of the Company’s common stock on the expiration date of the agreement. Upon expiration of each agreement, if the closing market price of the Company’s common stock is above the pre-determined price, the Company will have its cash investment returned plus a yield substantially above the yield currently available for short-term cash investments. If the closing market price is at or below the pre-determined price, the Company will receive the number of shares specified at the agreement’s inception. As the outcome of these arrangements is based entirely on the Company’s stock price and does not require the Company to deliver either shares or cash, other than the original investment, the entire transaction is recorded in equity. If the agreement is settled in shares, our initial investment is treated as a stock repurchase and counts against the $450 million stock repurchase authorization approved by the Board in October 2015.
The Company had no0 activity related to yield enhanced structured agreements during fiscal 2016 and 2017.2017 or fiscal 2019. The following table summarizes the activity of the Company’s settled yield enhanced structured agreements during fiscal 2015:
2018:
Aggregate Price Paid | Total Number of Shares Received Upon Maturity | Average Price Paid per Share | ||||||||
| Fiscal 2018: | (in thousands, except per share amounts) | |||||||||
| Settled through issuance of common stock | $ | 3,262 | 250 | $ | 13 | |||||
| Total for fiscal 2018 | $ | 3,262 | 250 | $ | 13 | |||||
| Periods | Aggregate Price Paid | Total Cash Proceeds Received Upon Maturity | Cash Yield Realized | Total Number of Shares Received Upon Maturity | Average Price Paid per Share | |||||||||||||
| Fiscal 2015: | (in thousands) | |||||||||||||||||
| Settled through cash proceeds | $ | 28,966 | $ | 29,353 | $ | 387 | — | $ | — | |||||||||
| Settled through issuance of common stock | 9,601 | — | — | 1,000,000 | 9.6 | |||||||||||||
| Total for fiscal 2015 | $ | 38,567 | $ | 29,353 | $ | 387 | 1,000,000 | $ | 9.6 | |||||||||
.
Dividends
During fiscal 2017,2019, the Company paid total cash dividends of $144.7$160.9 million consisting of dividends of $0.11 per share of common stock paid in all four quarters of the fiscal year. On November 7, 2017,11, 2019, the Company’s Board declared a cash dividend of $0.11 per share payable to holders of record of the Company’s common stock at the close of business day on December 28, 2017.26, 2019. This cash dividend was paid on January 18, 201816, 2020 and totaled $38.7$41.0 million.
During fiscal 2016,2018, the Company paid total cash dividends of $141.4$157.4 million, consisting of dividends of $0.11 per share of common stock paid in all foureach of the quarters of the fiscal year.
During fiscal 2015,2017, the Company paid total cash dividends of $128.0$144.7 million, consisting of dividends of $0.11 per share of common stock paid in all foureach of the quarters of the fiscal year.
NOTE 16. RELATED PARTY19. RELATED-PARTY TRANSACTIONS
| Year ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (in thousands) | |||||||||||
| Total revenues | $ | 11,125 | $ | 224 | $ | 4,713 | |||||
| Total purchases | $ | 10,925 | $ | 12,995 | $ | 54,236 | |||||
| Year ended | ||||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | ||||||||||
| (in thousands) | ||||||||||||
| Total revenues | $ | 4,713 | $ | 2,965 | $ | 1,684 | ||||||
| Total purchases | $ | 54,236 | $ | 7,936 | $ | 3,963 | ||||||
As of December 31, 201729, 2019 and January 1, 2017, total receivable balances withDecember 30, 2018, amounts due from these parties totaled $4.8$3.0 million and $6.9$0.1 million, respectively, and total payable balances withamounts due to these parties totaled $9.9$1.8 million and $0.2$1.9 million, respectively.
100
NOTE 17.20. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income (loss) per share:
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands, except per-share amounts) | |||||||||||
| Net Income (Loss) per Share—Basic: | |||||||||||
| Net income (loss) attributable to Cypress for basic computation | $ | 40,428 | $ | 354,592 | $ | (80,915 | ) | ||||
| Weighted-average common shares for basic computation | 367,308 | 359,324 | 333,451 | ||||||||
| Net income (loss) per share—basic | $ | 0.11 | $ | 0.99 | $ | (0.24 | ) | ||||
| Net income (loss) attributable to Cypress for diluted computation | $ | 40,428 | $ | 354,592 | $ | (80,915 | ) | ||||
| Weighted-average common shares for basic computation | 367,308 | 359,324 | 333,451 | ||||||||
| Effect of dilutive securities: | |||||||||||
| Stock options, restricted stock units, ESPP purchase rights, convertible notes, and other | 17,362 | 12,854 | — | ||||||||
| Weighted-average common shares for diluted computation | 384,670 | 372,178 | 333,451 | ||||||||
| Net income (loss) per share—diluted | $ | 0.11 | $ | 0.95 | $ | (0.24 | ) | ||||
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands, except per-share amounts) | |||||||||||
| Net Income (Loss) per Share—Basic: | |||||||||||
| Net (loss) attributable to Cypress for basic and diluted computation | $ | (80,915 | ) | $ | (683,234 | ) | $ | (365,292 | ) | ||
| Weighted-average common shares for basic computation | 333,451 | 319,522 | 302,036 | ||||||||
| Net (loss) per share—basic | $ | (0.24 | ) | $ | (2.14 | ) | $ | (1.21 | ) | ||
| Net (Loss) per Share—Diluted: | |||||||||||
| Net income (loss) attributable to Cypress for diluted computation | $ | (80,915 | ) | $ | (683,234 | ) | $ | (365,292 | ) | ||
| Weighted-average common shares for basic computation | 333,451 | 319,522 | 302,036 | ||||||||
| Effect of dilutive securities: | |||||||||||
| Stock options, restricted stock units, restricted stock awards and other | — | — | — | ||||||||
| Weighted-average common shares for diluted computation | 333,451 | 319,522 | 302,036 | ||||||||
| Net income (loss) per share—diluted | $ | (0.24 | ) | $ | (2.14 | ) | $ | (1.21 | ) | ||
The following securities calculated on a weighted average basis were excluded from the computation of diluted net income (loss) per share as their impact was anti-dilutive:
Anti-Dilutive Securities:
| Year Ended | ||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | ||||||
| (in thousands) | ||||||||
| Stock options and restricted stock units | 44 | 693 | 8,375 | |||||
| Convertible Notes | 593 | 2,464 | 17,732 | |||||
| Year Ended | ||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | ||||||
| (in thousands) | ||||||||
| Stock options, restricted stock units and restricted stock awards | 8,375 | 6,226 | 11,316 | |||||
| Exchangeable Notes | 17,732 | 13,844 | 15,210 | |||||
NOTE 18.21. EMPLOYEE BENEFIT PLANS
Pension Plans
The Company sponsors defined benefit pension plans covering employees in certain of its international locations.India, Japan, Philippines, South Korea, Taiwan and Thailand. The Company does not have defined-benefit pension plans for its United States-based employees. Pension plan benefits are based primarily on participants’ compensation and years of service credited as specified under the terms of each country’s plan. The funding policy is consistent with the local requirements of each country.
As of December 31, 201729, 2019 and January 1, 2017,December 30, 2018, projected benefit obligations, net of plan assets totaled $10.7$17.0 million and $9.7$13.4 million, respectively, and the fair value of plan assets was $3.3$3.6 million and $3.2$3.1 million, respectively.
Cypress Incentive Plan
The Company has an employee incentive plan, which provides for cash incentive payments to certain employees including all named executive officers. Payments under the plan are determined based up onupon certain performance measures, including the Company’s Non-GAAP actual revenue and EPSpre-bonus pre-tax profit margin as well as the achievement of strategic, operational and financial goals established for the company and for each employee. In December 2019, the Board approved accelerated payment of plan bonuses at their target levels to certain executives. The Company recorded total charges of approximately $61.0$42.1 million under the plan in fiscal 2017.2019.
Deferred Compensation Plans
The Company hasmaintains deferred compensation plans, which providesprovide certain key employees, including its executive management, with the ability to defer the receipt of compensation in order to accumulate funds for retirement on a tax-deferred basis. The Company does not make contributions to the deferred compensation plans or guarantee returns on the investments. Participant deferrals and investment gains and losses remain the Company’s assets and are subject to claims of general creditors.
Under the deferred compensation plans, the assets are recorded at fair value in each reporting period with the offset being recorded in “Other income (expense), net.” The liabilities are recorded at fair value in each reporting period with the offset being recorded as an operating expense or income. As of December 31, 201729, 2019 and January 1, 2017,December 30, 2018, the fair value of the assets was $49.5$48.3 million and $45.6$44.4 million, respectively, and the fair value of the liabilities was $50.6$48.3 million and $46.4$44.8 million, respectively.
All non-cash expense and income recorded under the deferred compensation plans were included in the following line items in the Consolidated Statements of Operations:
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (in thousands) | |||||||||||
| Changes in fair value of assets recorded in: | |||||||||||
| Other income (expense), net | $ | 7,991 | $ | (2,904 | ) | $ | 6,087 | ||||
| Changes in fair value of liabilities recorded in: | |||||||||||
| Cost of revenues | (808 | ) | 168 | (602 | ) | ||||||
| Research and development expenses | (4,116 | ) | 971 | (2,826 | ) | ||||||
| Selling, general and administrative expenses | (4,120 | ) | 1,036 | (3,936 | ) | ||||||
| Total expense, net | $ | (1,053 | ) | $ | (729 | ) | $ | (1,277 | ) | ||
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (in thousands) | |||||||||||
| Changes in fair value of assets recorded in: | |||||||||||
| Other income (expense), net | $ | 6,087 | $ | 2,326 | $ | (1,353 | ) | ||||
| Changes in fair value of liabilities recorded in: | |||||||||||
| Cost of revenues | (602 | ) | (288 | ) | 38 | ||||||
| Research and development expenses | (2,826 | ) | (884 | ) | 233 | ||||||
| Selling, general and administrative expenses | (3,936 | ) | (1,889 | ) | 260 | ||||||
| Total income (expense), net | $ | (1,277 | ) | $ | (735 | ) | $ | (822 | ) | ||
401(k) Plan
The Company sponsors a 401(k) plan which provides participating employees with an opportunity to accumulate funds for retirement on a tax deferred basis. As ofPrior to December 31, 2017,2018, the Company did not makematched contributions to the 401(k) plan and all employee contributions are fully vested.Effective January 1, 2018, Cypress has initiated an employer matching contribution equal to 50% of the first $2,000 that the employees contributeeach employee contributed to the Plan for both pre-tax and Roth deferrals. Effective December 31, 2018, the Company increased the employer's matching contribution to 50% of the first $4,000 that each employee contributes to the Plan for both pre-tax and Roth deferrals.
102
NOTE 19.22. INCOME TAXES
The geographic distribution of income (loss) before income taxes and the components of income tax benefit (provision) are summarized below:
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| United States loss | $ | (31,621 | ) | $ | (98,546 | ) | $ | (108,146 | ) | ||
| Foreign income | 74,421 | 137,520 | 38,388 | ||||||||
| Income (loss) before income taxes | 42,800 | 38,974 | (69,758 | ) | |||||||
| Income tax benefit (provision): | |||||||||||
| Current tax benefit (expense): | |||||||||||
| Federal | 43 | (3,859 | ) | (1,358 | ) | ||||||
| State | (15 | ) | (372 | ) | (125 | ) | |||||
| Foreign | (11,151 | ) | (20,498 | ) | (15,081 | ) | |||||
| Total current tax benefit (expense) | (11,123 | ) | (24,729 | ) | (16,564 | ) | |||||
| Deferred tax benefit (expense): | |||||||||||
| Federal | 7,675 | 334,453 | 4,341 | ||||||||
| State | 1,956 | 5,236 | (67 | ) | |||||||
| Foreign | (880 | ) | 658 | 1,133 | |||||||
| Total deferred tax benefit (expense) | 8,751 | 340,347 | 5,407 | ||||||||
| Income tax benefit (provision) | $ | (2,372 | ) | $ | 315,618 | $ | (11,157 | ) | |||
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| United States loss | $ | (108,146 | ) | $ | (786,610 | ) | $ | (460,168 | ) | ||
| Foreign income | 38,388 | 105,992 | 111,836 | ||||||||
| Income (loss) before income taxes | (69,758 | ) | (680,618 | ) | (348,332 | ) | |||||
| Income tax benefit (provision): | |||||||||||
| Current tax benefit (expense): | |||||||||||
| Federal | (1,358 | ) | (1,144 | ) | 219 | ||||||
| State | (125 | ) | 204 | 55 | |||||||
| Foreign | (15,081 | ) | (926 | ) | (17,189 | ) | |||||
| Total current tax benefit (expense) | (16,564 | ) | (1,866 | ) | (16,915 | ) | |||||
| Deferred tax benefit (expense): | |||||||||||
| Federal | 4,341 | (556 | ) | (610 | ) | ||||||
| State | (67 | ) | (31 | ) | (155 | ) | |||||
| Foreign | 1,133 | (163 | ) | 720 | |||||||
| Total deferred tax benefit (expense) | 5,407 | (750 | ) | (45 | ) | ||||||
| Income tax benefit (provision) | $ | (11,157 | ) | $ | (2,616 | ) | $ | (16,960 | ) | ||
Income tax benefit (provision) differs from the amounts obtained by applying the statutory United States federal income tax rate to income (loss) before taxes as shown below:
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Benefit (provision) at U.S. statutory rate (21% for 2019 and 2018, and 35% for 2017) | $ | (8,988 | ) | $ | (8,185 | ) | $ | 24,415 | |||
| Valuation allowance release (excluding rate items below) | — | 363,057 | — | ||||||||
| Foreign income at other than U.S. rates¹ | (10,555 | ) | (16,447 | ) | (3,981 | ) | |||||
| Future benefits not recognized | (1,547 | ) | (4,475 | ) | 24,125 | ||||||
| Goodwill and asset impairment | (8,497 | ) | (26,478 | ) | — | ||||||
| Reversal of previously accrued taxes | 9,534 | — | 1,447 | ||||||||
| US taxes on foreign earnings¹ | 3,280 | (162 | ) | (67,422 | ) | ||||||
| State income taxes, net of federal benefit | (742 | ) | (372 | ) | (192 | ) | |||||
| Tax credit¹ | 5,663 | 10,129 | 11,421 | ||||||||
| Stock based compensation¹ | 6,196 | 181 | — | ||||||||
| Legal entity restructuring¹ | 3,961 | 1,607 | — | ||||||||
| Meals and entertainment¹ | (826 | ) | (375 | ) | (147 | ) | |||||
| Other, net¹ | 149 | (2,862 | ) | (823 | ) | ||||||
| Income tax benefit (provision) | $ | (2,372 | ) | $ | 315,618 | $ | (11,157 | ) | |||
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| Benefit (provision) at U.S. statutory rate of 35% | $ | 24,415 | $ | 238,216 | $ | 121,916 | |||||
| Foreign income at other than U.S. rates | (67,685 | ) | (36,552 | ) | (22,385 | ) | |||||
| Future benefits not recognized | 29,762 | (29,207 | ) | (121,300 | ) | ||||||
| Goodwill impairment | — | (181,987 | ) | — | |||||||
| Reversal of previously accrued taxes | 1,447 | 13,371 | 10,939 | ||||||||
| Tax impact of acquisitions | — | — | (6,457 | ) | |||||||
| Foreign withholding taxes | (3,718 | ) | (2,018 | ) | (243 | ) | |||||
| State income taxes, net of federal benefit | (192 | ) | (87 | ) | (138 | ) | |||||
| Tax credit refund | 5,637 | — | — | ||||||||
| Other, net | (823 | ) | (4,352 | ) | 708 | ||||||
| Income tax benefit (provision) | $ | (11,157 | ) | $ | (2,616 | ) | $ | (16,960 | ) | ||
| 1. | Certain balances included on the Income tax benefit (provision) for prior periods have been reclassified to conform to the current period presentation. |
The components of deferred tax assets and liabilities were as follows:
| As of | |||||||
| December 29, 2019 | December 30, 2018 | ||||||
| (In thousands) | |||||||
| Deferred tax assets: | |||||||
| Credits and net operating loss carryovers | $ | 393,121 | $ | 429,800 | |||
| Reserves and accruals | 100,349 | 82,990 | |||||
| Excess of book over tax depreciation | 6,845 | 5,614 | |||||
| Deferred income | 49,754 | 34,347 | |||||
| Total deferred tax assets | 550,069 | 552,751 | |||||
| Less valuation allowance | (176,005 | ) | (158,535 | ) | |||
| Deferred tax assets, net | 374,064 | 394,216 | |||||
| Deferred tax liabilities: | |||||||
| Foreign earnings and others | (13,106 | ) | (7,396 | ) | |||
| Intangible assets arising from acquisitions | (12,336 | ) | (47,141 | ) | |||
| Total deferred tax liabilities | (25,442 | ) | (54,537 | ) | |||
| Net deferred tax assets | $ | 348,622 | $ | 339,679 | |||
| As of | |||||||
| December 31, 2017 | January 1, 2017 | ||||||
| (In thousands) | |||||||
| Deferred tax assets: | |||||||
| Credits and net operating loss carryovers | $ | 460,329 | $ | 496,448 | |||
| Reserves and accruals | 92,655 | 120,453 | |||||
| Excess of book over tax depreciation | 11,744 | 35,886 | |||||
| Deferred income | 39,367 | 26,457 | |||||
| Total deferred tax assets | 604,095 | 679,244 | |||||
| Less valuation allowance | (513,191 | ) | (445,030 | ) | |||
| Deferred tax assets, net | 90,904 | 234,214 | |||||
| Deferred tax liabilities: | |||||||
| Foreign earnings and others | (68,013 | ) | (163,914 | ) | |||
| Intangible assets arising from acquisitions | (24,477 | ) | (71,960 | ) | |||
| Total deferred tax liabilities | (92,490 | ) | (235,874 | ) | |||
| Net deferred tax assets | $ | (1,586 | ) | $ | (1,660 | ) | |
The Company has the following tax loss and credit carryforwards available to offset future income tax liabilities:
| Carryforward | Amount | Expiration Date | ||||
| ($ in thousands) | ||||||
| Federal net operating loss carryforward | $ | 722,572 | 2027-Indefinite | |||
| Federal research credit carryforward | $ | 131,638 | 2020-2039 | |||
| International foreign tax credit carryforward | $ | 8,941 | 2020-2023 | |||
| State research credit carryforward | $ | 112,899 | Indefinite | |||
| State net operating loss carryforward | $ | 325,399 | 2020-2037 | |||
| State research credit carryforward | $ | 3,191 | 2020-2038 | |||
| Carryforward | Amount | Expiration Date | ||||
| ($ in millions) | ||||||
| Federal net operating loss carryforward | $ | 1,195 | 2022-2037 | |||
| Federal research credit carryforward | $ | 118 | 2018-2037 | |||
| International foreign tax credit carryforward | $ | 8 | 2018-2023 | |||
| State research credit carryforward | $ | 97 | Indefinite | |||
| State net operating loss carryforward | $ | 434 | 2018-2036 | |||
The federal and state net operating loss carryforward is subject to limitations under Internal Revenue Code Section 382.
The Company recorded an income tax expense of $2.4 million in 2019, an income tax benefit of $315.6 million in 2018, and an income tax expense of $11.2 million in 2017. The tax provision for 2019 was lower than the tax provision to be expected based on the federal statutory rate primarily due to deductions for stock-based compensation and generation of U.S. research tax credit. The income tax benefit for fiscal year 2018 is primarily attributable to the release of valuation allowance against certain U.S. deferred tax assets.
A valuation allowance is established or maintained when, based on currently available information and other factors, it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company regularly assesses our valuation allowance against deferred tax assets on a jurisdiction by jurisdiction basis. The Company considers all available positive and negative evidence, including future reversals of temporary differences, projected future taxable income, tax planning strategies and recent financial results. During the fourth quarter of 2018, the Company emerged from a cumulative loss position over the previous three years. The cumulative three-year pre-tax income is considered positive evidence which is objective and verifiable and thus received significant weighting. The continued pattern of income before tax, the global restructuring executed in fiscal 2018 and projected future operating income in the U.S. provided additional positive evidence. As a result, the Company released $343.3 million of the valuation allowance attributable to certain U.S. deferred tax assets during 2018. Please refer to Schedule II for the adjustments to valuation allowance balances.
As of December 31, 2017, of the total deferred tax assets of $604.1 million,29, 2019, for certain federal and state attributes, a valuation allowance of $513.2$176.0 million has been recorded for the portion that is not more likely than not to be realized. As of January 1, 2017,December 30, 2018, the Company released $343.3 million of the totalvaluation allowance attributable to certain U.S. deferred tax assets of $679.2 million,and set up a valuation allowance of $445.0$158.5 million has been recorded for the portion which iswas not more likely than not to be realized.realized, based upon the Company’s evaluation at the time. The Company’s determinationCompany will continue to evaluate all evidence in future periods to determine if a further release of the need for a valuation allowance each year is based on a jurisdictional assessment.warranted.
The Company’s global operations involve manufacturing, research and development, and selling activities. The Company’s operations outside the U.S. are in certain countries that impose a statutory tax rate lower than the U.S. The Company isCompany's foreign operations are subject to tax holidays in Malaysia and Thailand where it manufactures and designs certain products. These tax holidays are scheduled to expire at varying times within the next fivesix years. The Company’s tax benefit of these tax holidays for the year ended December 31, 201729, 2019 had an insignificant impact on the tax provision and earnings per share. Overall, the Company expects its foreign earnings to be taxed at rates lower than the statutory tax rate in the U.S.
Unrecognized Tax Benefits
| (In thousands) | |||
| Unrecognized tax benefits, as of January 1, 2017 | $ | 146,324 | |
| Decrease related to lapsing of statute of limitation | (1,108 | ) | |
| Increase based on tax positions related to current year | 4,475 | ||
| Increases in balances related to tax positions taken during prior periods | 1,631 | ||
| Decrease in balances due to the Tax Reform corporate tax rate change from 35% to 21% | (36,087 | ) | |
| Unrecognized tax benefits, as of December 31, 2017 | $ | 115,235 | |
| Decrease related to partial settlements with taxing authorities | (358 | ) | |
| Increase based on tax positions related to current year | 4,270 | ||
| Increases in balances related to tax positions taken during prior periods | 2,729 | ||
| Unrecognized tax benefits, as of December 30, 2018 | $ | 121,876 | |
| Decrease related to lapsing of statute of limitation | (3,165 | ) | |
| Decrease based on tax positions related to prior year | — | ||
| Increase based on tax positions related to current year | 10,103 | ||
| Increases in balances related to tax positions taken during prior periods | 7,225 | ||
| Unrecognized tax benefits, as of December 29, 2019 | $ | 136,039 | |
| (In thousands) | |||
| Unrecognized tax benefits, as of December 28, 2014 | $ | 11,607 | |
| Decrease related to settlements with taxing authorities | (838 | ) | |
| Decrease related to lapsing of statute of limitation | (818 | ) | |
| Decrease based on tax positions related to prior year | (10,272 | ) | |
| Increase based on tax positions related to current year | 6,487 | ||
| Increases in balances related to tax positions taken during prior periods (including those related to acquisitions made during the year) | 108,677 | ||
| Unrecognized tax benefits, as of January 3, 2016 | $ | 114,843 | |
| Decrease related to lapsing of statute of limitation | (7,190 | ) | |
| Decrease based on tax positions related to prior year | — | ||
| Increase based on tax positions related to current year | 5,639 | ||
| Increases in balances related to tax positions taken during prior periods | 33,032 | ||
| Unrecognized tax benefits, as of January 1, 2017 | $ | 146,324 | |
| Decrease related to lapsing of statute of limitation | (1,108 | ) | |
| Decrease based on tax positions related to prior year | — | ||
| Increase based on tax positions related to current year | 4,475 | ||
| Increases in balances related to tax positions taken during prior periods | 1,631 | ||
| Decrease in balances due to the Tax Reform corporate tax rate change from 35% to 21% | (36,087 | ) | |
| Unrecognized tax benefits, as of December 31, 2017 | $ | 115,235 | |
Gross unrecognized tax benefits decreasedincreased by $31.1$14.2 million during fiscal year 2017,2019, resulting in gross unrecognized tax benefits of $115.2$136.0 million as of December 31, 2017.29, 2019.
During fiscal year 2017,2019, the Company recognized $1.1$3.2 million of previously unrecognized tax benefits as a result of either the expiration of the statute of limitations for certain audit periods or settlement with taxing authorities.
The Company recognized interest and penalties related to unrecognized tax benefits within the provision for income taxes line in the accompanying consolidated statementsConsolidated Statements of operations.Operations. The Company recognized approximately $2.2$2.7 million of benefitexpense related to interest and penalties in fiscal year 2017.2019. Accrued interest and penalties are included within other long-term liabilities in the consolidated balance sheets.Consolidated Balance Sheets. As of December 31, 201729, 2019 and January 1, 2017,December 30, 2018, the combined amount of cumulative accrued interest and penalties was approximately $11.0$15.6 million and $8.5$13.0 million, respectively.
As of December 31, 201729, 2019 and January 1, 2017,December 30, 2018, the amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate totaled $28.9$71.7 million and $24.3$65.8 million, respectively.
Management believes events that could occur in the next 12 months and cause a material change in unrecognized tax benefits include, but are not limited to, the following:
completion of examinations by the U.S. or foreign taxing authorities; and
expiration of statutestatutes of limitations on the Company’s tax returns.returns; and
resolution of competent authority claims.
The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. The Company regularly assesses its tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which it does business. The Company believesGiven the uncertainty in the development of ongoing tax examinations and tax correspondence with taxing authorities, it is reasonably possible that it may recognize up to approximately $0.2 millionthe Company’s balance of its existinggross unrecognized tax benefits withincould materially change in the next twelve months as12 months. As a result, the Company is unable to estimate the full range of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.
possible adjustments to this balance.
Classification of Interest and Penalties
The Company's policy is to classify interest expense and penalties, if any, as components of income tax provision in the Consolidated Statements of Operations. As of December 31, 201729, 2019, December 30, 2018 and January 1,December 31, 2017, the amount of accrued interest and penalties totaled $11.0$15.6 million, $13.0 million and $8.5$11.0 million, respectively. The Company recorded a charge or (benefit) from interest and penalties of $2.2$2.7 million, ($3.4)$2.4 million and $9.1$2.2 million during fiscal 2017, 20162019, 2018 and 2015,2017, respectively.
Tax Examinations
The following table summarizes the Company’s major tax jurisdictions and the tax years that remain subject to examination by such jurisdictions as of December 31, 2017:29, 2019:
| Tax Jurisdictions | Tax Years | |
| United States | ||
| California | 2008 and onward | |
| Philippines | 2014 and onward | |
| Israel | 2014 and onward | |
| India | 2004 and onward | |
| Thailand | ||
| Malaysia | 2007 and onward | |
| Switzerland | ||
| Japan | ||
Income tax examinations of the Company’s Malaysian subsidiary for the fiscal years 2007Company' subsidiaries in India, Malaysia, Philippines, Taiwan, Israel, and Germany are in progress. In addition, sales tax examinations in California and Texas are to 2013 and our Philippine subsidiary forbe expected in fiscal year 2014 are in progress.2020. The Company does not believe the ultimate outcome of these examinations will result in a material increase to its tax liability.liability.
NOTE 20.23. COMMITMENTS AND CONTINGENCIES
Product Warranties
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 onupon 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 properly 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:
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Beginning balance | $ | 3,982 | $ | 4,445 | $ | 3,996 | |||||
| Provisions & prior warranty estimates | 5,571 | 5,325 | 2,947 | ||||||||
| Settlements made | (5,998 | ) | (5,788 | ) | (2,498 | ) | |||||
| Ending balance | $ | 3,555 | $ | 3,982 | $ | 4,445 | |||||
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| Beginning balance | $ | 3,996 | $ | 4,096 | $ | 2,370 | |||||
| Warranties assumed as part of the Spansion merger | — | — | 1,254 | ||||||||
| Provisions & prior warranty estimates | 2,947 | 5,261 | 2,820 | ||||||||
| Settlements made | (2,498 | ) | (5,361 | ) | (2,348 | ) | |||||
| Ending balance | $ | 4,445 | $ | 3,996 | $ | 4,096 | |||||
| Fiscal Year | (In thousands) | |||
| 2018 | $ | 15,258 | ||
| 2019 | 11,854 | |||
| 2020 | 9,910 | |||
| 2021 | 6,685 | |||
| 2022 | 5,621 | |||
| 2023 and Thereafter | 17,064 | |||
| Total | $ | 66,392 | ||
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 material 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.Consolidated Statements of Operations. As of December 29, 2019, the Company had approximately $193.7 million in non-cancelable purchase obligations with suppliers.
Litigation and Asserted Claims
Following the public announcement of the Merger Agreement, purported stockholders of the Company filed 9 lawsuits against the Company and the members of our Board of Directors. Each of these suits has now been dismissed: Wang v. Cypress Semiconductor Corp. et al., 19-cv-03855 (N.D. Cal., filed July 3, 2019; dismissed September 9, 2019); Wheby v. Cypress Semiconductor Corp. et al., 19-cv-01267 (D. Del., filed July 8, 2019; dismissed December 16, 2019); Baxter v. Cypress Semiconductor Corp. et al., 19-cv-03944 (N.D. Cal., filed July 9, 2019; dismissed October 4, 2019); Salpeter-Levy v.Cypress Semiconductor Corp. et al., 19-cv-06369 (S.D.N.Y., filed July 10, 2019; dismissed September 13, 2019); Jeweltex Mfg. Inc. Ret. Plan v. Cypress Semiconductor Corp. et al., 19-cv-03978 (N.D. Cal., filed July 11, 2019; dismissed October 8, 2019); Hatt v.Cypress Semiconductor Corp. et al., 19-cv-15400 (D.N.J., filed July 15, 2016,2019; dismissed October 16, 2019); Starosciak v. Cypress Semiconductor Corporation et al., 19-cv-01315 (D. Del., filed on July 16, 2019, dismissed February 3, 2020); Fredericks v. Cypress Semiconductor Corporation et al., 19-cv-04139 (N.D. Cal., filed on July 18, 2019; dismissed September 18, 2019); and Nozawa v.Cypress Semiconductor Corporation et al., 19-cv-06821 (S.D.N.Y., filed on July 23, 2019; dismissed October 3, 2019). Wheby, Nazawa, and Baxter were purported class actions. NaN of the complaints contended, among other things, that the Company’s preliminary proxy statement on Schedule 14A, filed July 2, 2019, misstated or failed to disclose certain allegedly material information in violation of federal securities laws (and 1 complaint, Fredericks, alleged similar theories based on the Company’s definitive proxy statement on Schedule 14A, filed July 16, 2019). Each complaint sought equitable relief, including an injunction of the Merger, among other remedies. NaN of the 9 complaints were voluntarily dismissed by their respective plaintiffs with prejudice (which means they cannot be refiled), Hatt and Wheby were voluntarily dismissed by their respective plaintiffs without prejudice, and Starosciak was dismissed by order of the court. Plaintiffs in the dismissed cases reserved the right to file motions for "mootness fees."
On September 23, 2019, a patent infringement lawsuit was filed by Bandspeed LLC (Case No. 19-cv-00936, W.D. Tex.) against the California InstituteCompany, alleging infringement of Technology8 patents and seeking an unspecified amount of damages and an award of attorneys’ fees and costs.
On October 4, 2019, a patent infringement lawsuit was filed by Sentient Sensors, LLC (Case No. 19-cv-01868, D. Del.) against the Company, alleging infringement of a single patent and seeking an unspecified amount of damages, declaratory relief, injunctive relief, and an award of attorneys’ fees and costs.
On November 25, 2019, a lawsuit was filed by Fujitsu Electronics Inc. (“Caltech”FEI”) against the Company in the U.S. DistrictSanta Clara County Superior Court for the Central District of California (Case No. 16-cv-03714). The other co-defendants are Apple Inc.19-cv-359055), Avagoalleging that the Company’s termination of a distribution agreement with FEI was improper. FEI seeks an unspecified amount of damages and an award of attorneys’ fees and costs.
On December 20, 2019, a patent infringement lawsuit was filed by Innovative Foundry Technologies Limited, Broadcom Corporation, and Broadcom Limited. Caltech alleges that defendants infringe four patents. On July 12, 2017, the Court issued a claim construction order. Trial will not occur until at least the third quarter of 2018, andLLC (Case No. 19-cv-00719, W.D. Tex.) against the Company, will defendalleging infringement of four patents and seeking an unspecified amount of damages and an award of attorneys’ fees and costs.
On January 9, 2020, the Company filed a lawsuit against Fujitsu Semiconductor Limited (“FSL”, Case No. 20-cv-00193 (N.D. Cal.)), seeking an injunction to preserve photomasks utilized at foundries formerly owned by FSL while the allegations accordingly. Dueparties determine ownership and rights to the current stage of the proceedings,photomasks.
For many legal matters, particularly those in early stages, the Company cannot reasonably estimate the possible loss or the(or range of possibleloss), 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 December 29, 2019 were not material. Regarding matters for which no accrual has been made (including the potential for losses if any.
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 thesethe 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 thirdother party against suchrelated 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 condition or results of operations. ManagementAs of December 29, 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, althoughthough there can be no assurance of this. As of December 31, 2017, the Company had no reason to believe a loss exceeding amounts already recognized had been incurred.in this regard.
NOTE 21.24. SEGMENT, GEOGRAPHICAL AND CUSTOMER INFORMATION
Segment Information
The Company designs, develops, manufactures and markets a broad range of high-performancesells advanced embedded system solutions for embedded systems, fromIoT, automotive, industrial, and networking platforms to interactive consumer devices
applications. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker ("CODM"),
or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker ("CODM")CODM is considered to be the Chief Executive Officer.
The following tables set forth certain information relating to the reportable business segments:Company's segments are its Microcontroller and Connectivity Division (or MCD) and its Memory Products Division (or MPD).
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| Microcontroller and Connectivity Division ("MCD") | $ | 1,409,265 | $ | 994,482 | $ | 731,279 | |||||
| Memory Products Division ("MPD") | 918,506 | 928,626 | 876,574 | ||||||||
| Total revenues | $ | 2,327,771 | $ | 1,923,108 | $ | 1,607,853 | |||||
Income (Loss) from Operations beforeBefore Income Taxes:
| Year Ended | |||||||||||
| December 29, 2019 | December 30, 2018 | December 31, 2017 | |||||||||
| (In thousands) | |||||||||||
| Microcontroller and Connectivity Division | $ | 170,891 | $ | 149,347 | $ | 56,314 | |||||
| Memory Products Division | 261,914 | 375,123 | 279,129 | ||||||||
| Unallocated items: | |||||||||||
| Stock-based compensation expense | (105,982 | ) | (95,965 | ) | (91,581 | ) | |||||
| Restructuring charges, including executive severance | (3,006 | ) | (16,842 | ) | (9,088 | ) | |||||
| Reimbursement payment in connection with the cooperation and settlement agreement | — | — | (3,500 | ) | |||||||
| Amortization of intangibles and other acquisition-related costs | (206,912 | ) | (218,149 | ) | (204,448 | ) | |||||
| Merger-related expenses | (12,754 | ) | — | — | |||||||
| Impairment related to assets held for sale | — | (76,590 | ) | — | |||||||
| Loss on sale of NAND business to joint venture | (1,534 | ) | — | — | |||||||
| Loss on extinguishment of debt | (6,417 | ) | (5,169 | ) | (7,246 | ) | |||||
| Imputed interest on convertible debt, equity component amortization on convertible debt, and amortization of debt issuance cost | (15,750 | ) | (19,947 | ) | (20,538 | ) | |||||
| Gain on divestiture | — | — | 1,245 | ||||||||
| Changes in value of deferred compensation plan | (1,053 | ) | (728 | ) | (1,277 | ) | |||||
| Gain on sale of cost method investment | — | 1,521 | — | ||||||||
| Impact of purchase accounting and other adjustments | (711 | ) | 3,982 | 3,136 | |||||||
| Income (loss) from operations before income taxes | $ | 78,686 | $ | 96,583 | $ | 2,146 | |||||
| Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| Microcontroller and Connectivity Division | $ | 56,314 | $ | (12,674 | ) | $ | (67,572 | ) | |||
| Memory Products Division | 279,129 | 192,066 | 83,054 | ||||||||
| Unallocated items: | |||||||||||
| Stock-based compensation expense | (91,581 | ) | (98,513 | ) | (83,690 | ) | |||||
| Restructuring (charges) benefit, including executive severance | (9,088 | ) | (30,631 | ) | (90,084 | ) | |||||
| Reimbursement payment in connection with the cooperation and settlement agreement | (3,500 | ) | — | — | |||||||
| Amortization of intangibles and other acquisition-related costs | (204,448 | ) | (210,513 | ) | (143,487 | ) | |||||
| Impairment of assets and other | — | (33,944 | ) | — | |||||||
| Impairment related to assets held for sale | — | (37,219 | ) | — | |||||||
| Loss on extinguishment of debt | (7,246 | ) | — | — | |||||||
| Gain on divestiture | 1,245 | — | 66,472 | ||||||||
| Changes in value of deferred compensation plan | (1,277 | ) | (735 | ) | (820 | ) | |||||
| Gain related to investment in Deca Technologies Inc. | — | 112,774 | — | ||||||||
| Goodwill impairment charge | — | (488,504 | ) | — | |||||||
| Impact of purchase accounting and other | (17,402 | ) | (55,724 | ) | (107,328 | ) | |||||
| Income (loss) from operations before income taxes | $ | 2,146 | $ | (663,617 | ) | $ | (343,455 | ) | |||
The Company does not allocate goodwill andstock-based compensation, changes in value of deferred compensation plan, amortization of intangible assets, impairmentmerger-related expenses, imputed interest on convertible debt, amortization of debt issuance cost, restructuring charges, loss on extinguishment of debt, loss on assets held for sale, and impact of purchase accounting, IPR&D, severance and retention costs, settlement agreements, acquisition-related costs, stock-based compensation, interest income and other, and interest expense to its segments. In addition, the Company does not allocate assets to its segments. The Company excludes these items consistent with the manner in which it internally evaluates its results of operations.
Geographical Information
| For The Year Ended | |||||||||||
| December 31, 2017 | January 1, 2017 | January 3, 2016 | |||||||||
| (In thousands) | |||||||||||
| United States | $ | 220,128 | $ | 199,294 | $ | 199,527 | |||||
| Europe | 291,948 | 255,604 | 208,525 | ||||||||
| Greater China (includes China, Taiwan and Hong Kong) | 980,670 | 819,200 | 525,274 | ||||||||
| Japan | 515,622 | 420,869 | 464,673 | ||||||||
| Rest of the World | 319,403 | 228,141 | 209,854 | ||||||||
| Total revenue | $ | 2,327,771 | $ | 1,923,108 | $ | 1,607,853 | |||||
Property, plant and equipment, net, by geographic locations were as follows:
| As of | |||||||
| December 29, 2019 | December 30, 2018 | ||||||
| (In thousands) | |||||||
| United States | $ | 156,174 | $ | 173,973 | |||
| Philippines | 31,036 | 33,413 | |||||
| Thailand | 30,103 | 34,581 | |||||
| Japan | 10,012 | 11,251 | |||||
| Other | 31,423 | 29,768 | |||||
| Total property, plant and equipment, net | $ | 258,748 | $ | 282,986 | |||
| As of | |||||||
| December 31, 2017 | January 1, 2017 | ||||||
| (In thousands) | |||||||
| United States | $ | 186,824 | $ | 189,912 | |||
| Philippines | 36,747 | 37,790 | |||||
| Thailand | 29,151 | 32,547 | |||||
| Japan | 12,211 | 14,898 | |||||
| Other | 24,621 | 22,119 | |||||
| Total property, plant and equipment, net | $ | 289,554 | $ | 297,266 | |||
The Company tracks its assets by physical location. Although management reviews asset information on a corporate level and allocates depreciation expense by segment, the Company's CODM does not review asset information on a segment basis.
Customer Information
Outstanding accounts receivable from one1 of the Company's distributors, accounted for 28%15% and 24%, respectively,25% of Company'sits consolidated accounts receivable as of December 31, 201729, 2019 and January 1, 2017.December 30, 2018, respectively.
Revenue generated through two2 of the Company's distributors, accounted for 20% and 13%, respectively, of Company's consolidated revenues for fiscal 2017.
Revenue generated through 2 of the Company's distributors, accounted for 18% and 14%, respectively, of the Company's consolidated revenues for fiscal 2018.
Revenue generated through 2 of the Company's distributors accounted for 20% and 13% of the Company's consolidated revenues for fiscal 2017.
110
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Stockholders of Cypress Semiconductor Corporation:
Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Cypress Semiconductor Corporation and its subsidiaries ("the Company"(the “Company”) as of December 31, 201729, 2019 and January 1, 2017,December 30, 2018, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2017,29, 2019, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017,29, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 201729, 2019 and January 1, 2017,December 30, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 201729, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain,maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,29, 2019, based on criteria established in Internal Control - Integrated Framework (2013)issued by the COSO because a material weaknessin internal control over financial reporting related to the calculation of stock-based compensation expenseexisted as of that date.
COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management's report referred to above.Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Write-down for Excess or Obsolete Inventories
As described in Note 1 to the consolidated financial statements, the Company writes down its inventories which have become obsolete or are in excess of anticipated demand or net realizable value. As disclosed by management, primary factors used in making this estimate of the write-down for excess or obsolete inventories include historical sales levels, demand forecast, backlog, and age of the inventory items. The net overall inventories balance was $298 million as of December 29, 2019.
The principal considerations for our determination that performing procedures relating to the write-down of excess or obsolete inventories is a critical audit matter are that the valuation involved a significant amount of judgment by management in the application of assumptions, including demand forecast. This in turn resulted in significant auditor judgment, subjectivity, and effort in performing audit procedures and in evaluating audit evidence relating to the demand forecast.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s write-down for excess or obsolete inventories, including controls over the data and assumptions, including demand forecast. These procedures also included, among others, testing management’s process for developing the estimate of the write-down for excess or obsolete inventories, testing the completeness and accuracy of underlying data used in the estimate, and evaluating management’s assumptions, including demand forecast. Evaluating management’s demand forecast for reasonableness involved considering historical sales by product and whether the demand forecast used was consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 26, 201821, 2020
We have served as the Company’s auditor since 1982.
112
UNAUDITED QUARTERLY FINANCIAL DATA
Fiscal 2017
| Three Months Ended December 31, 2017 (1) (3) | Three Months Ended October 1, 2017 | |||||||||||||||
| Revised Consolidated and Condensed Statements of Operations Amounts: | As previously reported | Adjustments | As revised | |||||||||||||
| Revenues | $ | 597,547 | $ | 604,574 | $ | — | $ | 604,574 | ||||||||
| Gross Margin | $ | 266,900 | $ | 252,605 | $ | 436 | $ | 253,041 | ||||||||
| Net income (loss) | $ | (34,024 | ) | $ | 11,047 | $ | 1,983 | $ | 13,030 | |||||||
| Adjust for net loss attributable to non-controlling interest | $ | 12 | $ | (14 | ) | $ | — | $ | (14 | ) | ||||||
| Net income (loss) attributable to Cypress | $ | (34,012 | ) | $ | 11,033 | $ | 1,983 | $ | 13,016 | |||||||
| Net income (loss) per share - basic | $ | (0.10 | ) | $ | 0.03 | $ | 0.01 | $ | 0.04 | |||||||
| Net income (loss) per share - diluted | $ | (0.10 | ) | $ | 0.03 | $ | 0.01 | $ | 0.04 | |||||||
| Three Months Ended July 2, 2017 (1) (2) | Three Months Ended April 2, 2017 (1) | |||||||||||||||||||||||
| Revised Consolidated and Condensed Statements of Operations Amounts: | As previously reported | Adjustments | As revised | As previously reported | Adjustments | As revised | ||||||||||||||||||
| Revenues | $ | 593,776 | $ | — | $ | 593,776 | $ | 531,874 | $ | — | $ | 531,874 | ||||||||||||
| Gross Margin | $ | 236,182 | $ | 833 | $ | 237,015 | $ | 199,060 | $ | 1,446 | $ | 200,506 | ||||||||||||
| Net income (loss) | $ | (22.838 | ) | $ | 5,984 | $ | (16,854 | ) | $ | (45,718 | ) | 2,783 | $ | (42,935 | ) | |||||||||
| Adjust for net loss attributable to non-controlling interest | $ | (66 | ) | $ | — | $ | (66 | ) | $ | (64 | ) | $ | — | $ | (64 | ) | ||||||||
| Net income (loss) attributable to Cypress | $ | (22,904 | ) | $ | 5,984 | $ | (16,920 | ) | $ | (45,782 | ) | $ | 2,783 | $ | (42,999 | ) | ||||||||
| Net income (loss) per share - basic | $ | (0.07 | ) | $ | 0.02 | $ | (0.05 | ) | $ | (0.14 | ) | $ | — | $ | (0.13 | ) | ||||||||
| Net income (loss) per share - diluted | $ | (0.07 | ) | $ | 0.02 | $ | (0.05 | ) | $ | (0.14 | ) | $ | — | $ | (0.13 | ) | ||||||||
| Three Months Ended January 1, 2017 (7) (8) (9) | Three Months Ended October 2, 2016 (7) (9) | Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| Revised Consolidated and Condensed Statements of Operations Amounts: | As previously reported | Adjustments | As revised | As previously reported | Adjustments | As revised | ||||||||||||||||||||||||||||||||||
| December 29, 2019 (1) (5) | September 29, 2019 (1) (2) (5) | June 30, 2019 (1) (3) (4) (5) | March 31, 2019 (1) | |||||||||||||||||||||||||||||||||||||
| (In thousands, except per-share amounts) | ||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 530,172 | $ | — | $ | 530,172 | $ | 523,845 | $ | — | $ | 523,845 | $ | 559,568 | $ | 574,521 | $ | 532,221 | $ | 539,004 | ||||||||||||||||||||
| Gross Margin | $ | 201,952 | $ | 1,204 | $ | 203,156 | $ | 198,620 | $ | 7,880 | $ | 206,500 | $ | 212,418 | $ | 216,441 | $ | 198,758 | $ | 202,409 | ||||||||||||||||||||
| Net income (loss) | $ | (72,320 | ) | $ | 1,512 | $ | (70,808 | ) | $ | 9,235 | $ | 6,649 | $ | 15,884 | $ | 20,760 | $ | 12,673 | $ | (12,733 | ) | $ | 19,712 | |||||||||||||||||
| Adjust for net loss attributable to non-controlling interest | $ | (46 | ) | $ | — | $ | (46 | ) | $ | 176 | $ | — | $ | 176 | $ | — | $ | 10 | $ | 4 | $ | 2 | ||||||||||||||||||
| Net income (loss) attributable to Cypress | $ | (72,366 | ) | $ | 1,512 | $ | (70,854 | ) | $ | 9,411 | $ | 6,649 | $ | 16,060 | $ | 20,760 | $ | 12,683 | $ | (12,729 | ) | $ | 19,714 | |||||||||||||||||
| Net income (loss) per share - basic | $ | (0.22 | ) | $ | — | $ | (0.22 | ) | $ | 0.03 | $ | 0.02 | $ | 0.05 | $ | 0.06 | $ | 0.03 | $ | (0.03 | ) | $ | 0.05 | |||||||||||||||||
| Net income (loss) per share - diluted | $ | (0.22 | ) | $ | — | $ | (0.22 | ) | $ | 0.03 | $ | 0.02 | $ | 0.05 | $ | 0.05 | $ | 0.03 | $ | (0.03 | ) | $ | 0.05 | |||||||||||||||||
Fiscal 2018
| Three Months Ended July 3, 2016 (5) (6) (9) | Three Months Ended April 3, 2016 (4) (9) | |||||||||||||||||||||||
| Revised Consolidated and Condensed Statements of Operations Amounts: | As previously reported | Adjustments | As revised | As previously reported | Adjustments | As revised | ||||||||||||||||||
| Revenues | $ | 450,127 | $ | — | $ | 450,127 | $ | 418,964 | $ | — | $ | 418,964 | ||||||||||||
| Gross Margin | $ | 158,778 | $ | (3,522 | ) | $ | 155,256 | $ | 125,785 | $ | (3,128 | ) | $ | 122,657 | ||||||||||
| Net income (loss) | $ | (519,655 | ) | $ | (2,925 | ) | $ | (522,580 | ) | $ | (104,154 | ) | $ | (2,219 | ) | $ | (106,373 | ) | ||||||
| Adjust for net loss attributable to non-controlling interest | $ | 381 | $ | — | $ | 381 | $ | 132 | $ | — | $ | 132 | ||||||||||||
| Net income (loss) attributable to Cypress | $ | (519,274 | ) | $ | (2,925 | ) | $ | (522,199 | ) | $ | (104,022 | ) | $ | (2,219 | ) | $ | (106,241 | ) | ||||||
| Net income (loss) per share - basic | $ | (1.65 | ) | $ | (0.01 | ) | $ | (1.66 | ) | $ | (0.32 | ) | $ | (0.01 | ) | $ | (0.33 | ) | ||||||
| Net income (loss) per share - diluted | $ | (1.65 | ) | $ | (0.01 | ) | $ | (1.66 | ) | $ | (0.32 | ) | $ | (0.01 | ) | $ | (0.33 | ) | ||||||
| Three Months Ended | ||||||||||||||||
| December 30, 2018 (6) | September 30, 2018 (7) (8) | July 1, 2018 (7) (8) | April 1, 2018 (7) (8) | |||||||||||||
| (In thousands, except per-share amounts) | ||||||||||||||||
| Revenues | $ | 604,474 | $ | 673,035 | $ | 624,090 | $ | 582,241 | ||||||||
| Gross Margin | $ | 225,209 | $ | 259,715 | $ | 234,148 | $ | 212,392 | ||||||||
| Net income | $ | 267,201 | $ | 50,747 | $ | 27,794 | $ | 9,090 | ||||||||
| Adjust for net loss attributable to non-controlling interest | $ | (87 | ) | $ | (52 | ) | $ | (88 | ) | $ | (12 | ) | ||||
| Net income attributable to Cypress | $ | 267,114 | $ | 50,695 | $ | 27,706 | $ | 9,078 | ||||||||
| Net income per share - basic | $ | 0.74 | $ | 0.14 | $ | 0.08 | $ | 0.03 | ||||||||
| Net income per share - diluted | $ | 0.72 | $ | 0.14 | $ | 0.07 | $ | 0.02 | ||||||||
| (1) | During the first, second, and |
| (2) | During the |
| (3) | During the |
| (4) | During the |
| (5) | During the second, |
| (6) |
| (7) |
During the first, second, third and fourth quarters of fiscal |
| (8) | During the first, second, third and fourth quarters of fiscal 2018, the |
Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.
113
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Based on theirour evaluation as of the end of the period covered by this Annual Report on Form 10-K and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 29, 2019 our disclosure controls and procedures were not effective at the reasonable assurance level as a result of the material weakness related to stock-based compensation describedlevel.
Changes in Management's Report on Internal Control overOver Financial Reporting below.
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 29, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) ofunder the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those written policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles;
provide reasonable assurance that receipts and expenditures are being made only in accordance with management and director authorization; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, who audited the consolidated financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of our internal control over financial reporting as of December 29, 2019, as stated in their report which appears under Item 8 of this Annual Report on Form 10-K.
| ITEM 9B. | OTHER INFORMATION |
115
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K.Report. We intend to file a definitive proxy statement pursuant to Regulation 14A (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information included therein is incorporated herein by reference.reference as stated below.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item concerning directors is incorporated by reference fromto the information set forth in the section titled “Proposal One - Election of Directors” in ourCompany's Proxy Statement for the 2018its 2020 Annual Meeting of Stockholders, which we intendShareholders to filebe filed with the SEC within 120 days after the end of theour fiscal year ended December 31, 201729, 2019 (the “2018“2020 Proxy Statement”).
The information required by this item concerning executive officers is incorporated by reference fromto Item 1 of this Annual Report on Form 10-K.Report.
We have adopted a codeCode of ethics thatBusiness Conduct and Ethics (our "Code of Ethics"), which applies to all of our directors, officers and employees. We have made the codeCode of ethicsEthics available, free of charge, on our website at www.cypress.com. The Code of Ethics may be found as follows: from the web address listed above, first click on "About Cypress," then on "Investors," and then “Corporate Governance.” The Code of Ethics appears on that page as the “Code of Business Conduct.” By referring to our website, we do not incorporate such website or its contents into this Annual ReportReport.
Our Code of Ethics applies to our directors and employees, including our chief executive officer, chief financial officer, principal accounting officer and controller, and to contractors of the Company. The Code of Ethics sets forth the fundamental principles and key policies and procedures that govern the conduct of our business. Our employees receive training on Form 10-K.the Code of Ethics. We intend to disclose any amendment to, or waiver from, the Code of Ethics for our directors and executive officers, including our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, to the extent disclosure is required by applicable rules of the SEC and the NASDAQ Stock Market LLC by posting such information on our website, on the same page as our Code of Ethics as specified above.
A print copy of the Code of Ethics is available to any stockholder upon written request to: Corporate Secretary, Cypress Semiconductor Corporation, 198 Champion Court, San Jose, California 95134.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this item concerning executive compensation is incorporated by reference fromto the information set forth in2020 Proxy Statement to be filed with the sections titled “Compensation Discussion and Analysis” and “Executive Compensation Tables” inSEC within 120 days after the end of our 2018 Proxy Statement.fiscal year ended December 29, 2019.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item concerning security ownership of certain beneficial owners, directors and executive officers is incorporated by reference fromto the information set forth in2020 Proxy Statement to be filed with the section titled “Security OwnershipSEC within 120 days after the end of Certain Beneficial Owners and Management” in our 2018 Proxy Statement.fiscal year ended December 29, 2019.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this item concerning transactions with certain persons is incorporated by reference fromto the information set forth in2020 Proxy Statement to be filed with the sections titled "Policies and Procedures with Respect to Related Person Transactions” and “Certain Relationships and Related Transactions” inSEC within 120 days after the end of our 2018 Proxy Statement.fiscal year ended December 29, 2019.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this item regarding the audit committee’s pre-approval policies and procedures is incorporated by reference fromto the information set forth in2020 Proxy Statement to be filed with the section titled “Proposal Two—RatificationSEC within 120 days after the end of the Selection of Independent Registered Public Accounting Firm” in our 2018 Proxy Statement.fiscal year ended December 29, 2019.
117
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULE |
| (a) | The following documents are filed as a part of this Annual Report on Form 10-K: |
| 1. | Financial Statements: |
| Page | ||
| Consolidated Balance Sheets as of December | 54 | |
| Consolidated Statements of Operations for the | 55 | |
| Consolidated Statements of Comprehensive Income (Loss) | 56 | |
| Consolidated Statements of Stockholders’ Equity | 57 | |
| Consolidated Statements of Cash Flows | 59 | |
| Notes to Consolidated Financial Statements | 61 | |
| 2. | Financial Statement Schedule (Valuation and Qualifying Accounts) for the years ended December 29, 2019 December 30, 2018 and December 31, |
| Page | ||
| Schedule II—Valuation and Qualifying Accounts | 123 | |
| 3. | Exhibits: |
The documents listed below are filed (or furnished, as noted) as exhibits to this Annual Report on Form 10-K.10-K:
| EXHIBIT INDEX | ||||||||||
| Incorporated by Reference to: | ||||||||||
Exhibit Number | Exhibit Description | Form* | Filing Date | Exhibit | Filed Herewith | |||||
| 2.1 | 8-K | 2014-12-01 | 2.1 | |||||||
| 2.2 | 10-Q | 2016-05-10 | 10.1 | |||||||
| 2.3 | 10-K | 2019-02-27 | 2.3 | |||||||
| 2.4 | 8-K | 2019-06-03 | 2.1 | |||||||
| 3.1.1 | Second Restated Certificate of Incorporation of Cypress Semiconductor Corporation, dated June 12, 2000 (included in Exhibit 3.1.2 below) | |||||||||
| 3.1.2 | 10-Q | 2017-05-02 | 3.1 | |||||||
| 3.2 | 8-K | 2017-09-25 | 3.1 | |||||||
| 4.1.1 | Form of 2% Spansion Exchangeable Note due 2020 (included in exhibit 4.1.2 below). | |||||||||
| 4.1.2 | 8-K (a) | 2013-08-26 | 4.1 | |||||||
| 4.1.3 | 8-K | 2015-03-12 | 4.1 | |||||||
| 4.2.1 | Form of 4.50% Senior Exchangeable Note due 2022 (included in Exhibit 4.2.2 below). | |||||||||
| 4.2.2 | 8-K | 2016-06-23 | 4.1 | |||||||
| 4.3 | 10-Q | 2016-08-09 | 4.1 | |||||||
| 4.4.1 | Form of 2.00% Senior Convertible Note due 2023 (included in Exhibit 4.4.2 below). | |||||||||
| 4.4.2 | 8-K | 2017-11-06 | 4.1 | |||||||
| 4.5 | X | |||||||||
| 10.1.1 | Amended and Restated Credit and Guaranty Agreement, dated as of March 12, 2015, among Cypress Semiconductor Corporation, the guarantors party thereto, the lenders party thereto, Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, East West Bank, Silicon Valley Bank, and SunTrust Bank, as syndication agents and documentation agents, and Morgan Stanley Bank, N.A., as Issuing Bank (included as Annex III to Exhibit 10.1.2 below). | |||||||||
| 10.1.2 | 8-K | 2015-03-12 | 10.1 | |||||||
| 10.1.3 | 8-K | 2015-03-12 | 10.3 | |||||||
| 10.1.4 | 10-Q | 2015-11-05 | 10.4 | |||||||
| 10.1.5 | 8-K | 2016-01-11 | 10.1 | |||||||
| 10.1.6 | 8-K | 2016-01-11 | 10.2 | |||||||
| 10.1.7 | 10-Q | 2016-05-10 | 10.3 | |||||||
| 10.1.8 | 10-Q | 2016-05-10 | 10.4 | |||||||
| 10.1.9 | 10-Q | 2016-05-10 | 10.2 | |||||||
| 10.1.10 | 8-K | 2016-07-05 | 10.1 | |||||||
| 10.1.11 | 8-K | 2017-02-21 | 10.1 | |||||||
| 10.1.12 | 8-K | 2017-04-10 | 10.1 | |||||||
| 10.1.13 | 8-K | 2017-08-18 | 10.1 | |||||||
| 10.1.14 | 8-K | 2018-03-15 | 10.1 | |||||||
| 10.1.15 | 8-K | 2018-09-17 | 10.1 | |||||||
| 10.1.16 | 8-K | 2019-08-01 | 10.1 | |||||||
| 10.2.1+ | 10-Q | 2017-07-28 | 10.1 | |||||||
| 10.2.2+ | 10-Q | 2018-04-30 | 10.3 | |||||||
| 10.2.3+ | 10-Q | 2015-11-05 | 10.2 | |||||||
| 10.2.4+ | 10-K | 2019-02-27 | 10.2.4 | |||||||
| 10.2.5+ | 10-K | 2019-02-27 | 10.2.5 | |||||||
| 10.2.6+ | 10-Q | 2019-04-26 | 10.2.6 | |||||||
| 10.2.7+ | 10-Q | 2019-04-26 | 10.2.7 | |||||||
| 10.2.8+ | 10-Q | 2019-08-02 | 10.2.8 | |||||||
| 10.3.1+ | 10-K | 2019-02-27 | 10.3.1 | |||||||
| 10.3.2+ | 10-K | 2019-02-27 | 10.3.2 | |||||||
| 10.3.3+ | 10-K | 2019-02-27 | 10.3.3 | |||||||
| 10.4.1+ | S-8 (b) | 2012-12-12 | 10.4 | |||||||
| 10.4.2+ | 10-Q | 2018-04-30 | 10.2 | |||||||
| 10.5+ | S-8 (c) | 2008-10-27 | 10.2 | |||||||
| 10.6.1+ | S-8 (d) | 2018-06-20 | 4.3 | |||||||
| 10.6.2+ | S-8 (d) | 2018-06-20 | 4.4 | |||||||
| 10.7.1+ | 10-K | 2019-02-27 | 10.7.1 | |||||||
| 10.7.2+ | 10-K | 2019-02-27 | 10.7.2 | |||||||
| 10.7.3+ | 10-K | 2019-02-27 | 10.7.3 | |||||||
| 10.7.4+ | 10-K | 2019-02-27 | 10.7.4 | |||||||
| 10.8+ | 8-K | 2016-02-25 | ||||||||
| 10.9.1+ | 8-K | 2016-08-12 | 10.1 | |||||||
| 10.9.2+ | 10-K | 2017-03-01 | 10.41 | |||||||
| 10.9.3+ | 8-K | 2018-12-03 | 10.2 | |||||||
| 10.10+ | 10-K | 2019-02-27 | 10.10 | |||||||
| 10.11+ | 10-K | 2019-02-27 | 10.11 | |||||||
| 10.12+ | 10-K | 2019-02-27 | 10.12 | |||||||
| 10.13+ | 10-K | 2019-02-27 | 10.13 | |||||||
| 10.14+ | 8-K | 2018-12-03 | 10.1 | |||||||
| 10.15 | 8-K | 2017-06-12 | 10.1 | |||||||
| 10.16 | 8-K | 2017-07-06 | 10.1 | |||||||
| 10.17+ | X | |||||||||
| 21.1 | X | |||||||||
| 23.1 | X | |||||||||
| 24.1 | Power of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K). | X | ||||||||
| 31.1 | X | |||||||||
| 31.2 | X | |||||||||
32.1(e) | X | |||||||||
32.2(e) | X | |||||||||
| 101.INS | iXBRL (Inline eXtensible Business Reporting Language) Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | X | ||||||||
| 101.SCH | iXBRL Taxonomy Extension Schema Document. | X | ||||||||
| 101.CAL | iXBRL Taxonomy Extension Calculation Linkbase Document. | X | ||||||||
| 101.DEF | iXBRL Taxonomy Extension Definition Linkbase Document. | X | ||||||||
| 101.LAB | iXBRL Taxonomy Extension Label Linkbase Document. | X | ||||||||
| 101.PRE | iXBRL Taxonomy Extension Presentation Linkbase Document. | X | ||||||||
| 104 | Cover Page Interactive Data File (contained in Exhibit 101) | X | ||||||||
| * | Unless otherwise noted, Commission File Number for incorporated documents is 001-10079. |
| + | Management contract or compensatory plan or arrangement. |
| (a) | Filed by Spansion, Inc., Commission File Number 001-34747. |
| (b) | Form S-8 filed 2012-12-12 Commission File Number is 333-185439. |
| (c) | Form S-8 filed 2008-10-27 Commission File Number is 333-154748. |
| (d) | Form S-8 filed 2018-06-20 Commission File Number is 333-225759. |
| (e) | Exhibits 32.1 and 32.2 are furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing. |
ITEM 16. FORM 10-K SUMMARY
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
| Balance at Beginning of Period | Additions Charged to Expenses or Other Accounts | Deductions Credited to Expenses or Other Accounts | Balance at End of Period | ||||||||||||
| (In thousands) | |||||||||||||||
| Allowance for doubtful accounts receivable: | |||||||||||||||
| Year ended December 29, 2019 | $ | 904 | $ | — | $ | (2 | ) | $ | 902 | ||||||
| Year ended December 30, 2018 | $ | 1,028 | $ | — | $ | (124 | ) | $ | 904 | ||||||
| Year ended December 31, 2017 | $ | 1,028 | $ | — | $ | — | $ | 1,028 | |||||||
| Deferred tax valuation allowance | |||||||||||||||
| Year ended December 29, 2019 | $ | 158,535 | $ | 17,469 | $ | — | $ | 176,004 | |||||||
| Year ended December 30, 2018 | $ | 513,191 | $ | — | $ | (354,656 | ) | (1) | $ | 158,535 | |||||
| Year ended December 31, 2017 | $ | 445,030 | $ | 68,161 | $ | — | $ | 513,191 | |||||||
| Balance at Beginning of Period | Additions Charged to Expenses or Other Accounts | Deductions Credited to Expenses or Other Accounts | Balance at End of Period | ||||||||||||
| (In thousands) | |||||||||||||||
| Allowance for doubtful accounts receivable: | |||||||||||||||
| Year ended December 31, 2017 | $ | 1,028 | $ | — | $ | — | $ | 1,028 | |||||||
| Year ended January 1, 2017 | $ | 1,189 | $ | 490 | $ | (651 | ) | $ | 1,028 | ||||||
| Year ended January 3, 2016 | $ | 738 | $ | 576 | $ | (125 | ) | $ | 1,189 | ||||||
| Deferred tax valuation allowance | |||||||||||||||
| Year ended December 31, 2017 | $ | 445,030 | $ | 68,161 | (1),(2) | $ | — | $ | 513,191 | ||||||
| Year ended January 1, 2017 | $ | 512,975 | $ | — | $ | (67,945 | ) | (1) | $ | 445,030 | |||||
| Year ended January 3, 2016 | $ | 358,424 | $ | 154,551 | (1) | $ | — | $ | 512,975 | ||||||
| (1) | Includes the 2018 change in valuation allowance previously recorded primarily related to certain federal and state deferred tax assets of $343.3 millionthat management has determined more likely than not |
123
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
| CYPRESS SEMICONDUCTOR CORPORATION | ||
| Date: February | By: | / S / Thad Trent |
Thad Trent Executive Vice President, Finance and Administration and Chief Financial Officer | ||
124
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Hassane El-Khoury and Thad Trent, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
/S/ HASSANE EL-KHOURY | President, Chief Executive Officer and Director (Principal Executive Officer) | February | ||
| Hassane El-Khoury | ||||
/S/ THAD TRENT | Executive Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) | February | ||
Thad Trent | ||||
/S/ W. STEVE ALBRECHT | Chairman of the Board of Directors | February | ||
W. Steve Albrecht | ||||
/S/ OH CHUL KWON | Director | February | ||
Oh Chul Kwon | ||||
| /s/ CATHERINE P. LEGO | Director | February | ||
| Catherine P. Lego | ||||
| /s/ CAMILLO MARTINO | Director | February | ||
| Camillo Martino | ||||
| /s/ JEFFREY J. OWENS | Director | February | ||
| Jeffrey J. Owens | ||||
| /s/ JEANNINE P. SARGENT | Director | February | ||
| Jeannine P. Sargent | ||||
/S/ MICHAEL S. WISHART | Director | February | ||
| Michael S. Wishart | ||||
125