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CATHERINE P. LEGO Age:63 Director Since:2017 Other Public Directorships: Lam Research Corporation IPG Photonics Corporation Guidewire Software, Inc. Former Public Directorships: Fairchild Semiconductor International, Inc. SanDisk Corporation | | | | |
Products | | Markets | | Applications |
Microcontrollers including Traveo® MCUs, PSoC® MCUs,Ms. Legois a professional director and CapSense ® capacitive-sensing controllersadvisor to young technology companies. In 1992 she founded Lego Ventures LLC, a consulting services firm and Automotive TrueTouch® touchscreen controllers
| | Automotive, industrial, consumer, computation, white goods, home automation, communications | | Automotive instrument clusters, body electronics,source of start-up capital for early stage technology companies, and served as its principal and owner until it was closed in December 2018. She previously was a partner at two venture capital funds and practiced as a certified public accountant with Coopers & Lybrand (now PricewaterhouseCoopers). Ms. Lego has served on the boards of directors of IPG Photonics Corporation, a producer of high-power fiber lasers, since 2016, where she has been the chair of the compensation committee since 2017 and a member of the audit committee since 2016; Lam Research Corporation, a wafer fabrication equipment company, since 2006, where she has been the chair of the compensation committee since 2015 and a member of the nominating and governance committee since 2014, and was chair of the audit committee from 2009 to 2014; and Guidewire Software, Inc., which offers a software platform for property and casualty insurance carriers, since September 2019, where she is the chair of the audit committee and a member of the nominating and corporate governance committee. Within the past five years, she served on the boards of directors of Fairchild Semiconductor International Inc., a fabricator of power management devices, from 2013 to 2016, where she was a member of the compensation committee and infotainment systems, factory automation, machine-to-machine systems, building management systems, smart meters, printers,nominating and governance committee, and SanDisk Corporation, a global developer of flash memory storage solutions, from 1989 to 2016, where she was the chair of the audit committee. Ms. Lego received a bachelor of arts degree in economics and biology from Williams College and a master of science degree in accounting from the New York University Stern School of Business.Committees:Audit (Chair), Nominating & Corporate Governance |
CAMILLO MARTINO Age:58 Director Since:2017 Other Public Directorships: MagnaChip Semiconductor Corporation Sensera (Australia) Former Public Directorships: Silicon Image, Inc. Silicon Mountain Holdings, Inc. MosChip (India) | Mr. Martinoserves as a board member and executive advisor to technology companies, and has been a chief executive officer and C-suite executive of several semiconductor companies. In addition to Cypress, he has served on the boards of directors of MagnaChip Semiconductor Corporation, a semiconductor manufacturing company, since August 2016, where he is chair of the compensation committee and a member of the nominating and corporate governance committee, and Sensera, a sensor and IoT platform company publicly listed on the Australian Stock Exchange, since July 2018. Mr. Martino also serves on the boards of directors of several privately held companies, including Keracel, VVDN Technologies, CyberForza and SAI Technology, Inc., a company for which Mr. Martino also served as chief operating officer from 2008 to 2010. Within the past five years, Mr. Martino served as the chief executive officer and as a director of Silicon Image, Inc., a semiconductor company, from 2010 until the completion of its sale to Lattice Semiconductor Corporation in 2015, and as a director of MosChip, a publicly listed semiconductor/systems/IoT engineering company in India, from April 2017 to May 2019. From 2005 to 2007, Mr. Martino also served as the chief executive officer and as a director of Cornice Inc., a memory supplier for consumer electronics. From 2001 to 2005, Mr. Martino served as the executive vice president and chief operating officer at Zoran Corporation, a global semiconductor company. Prior to that, Mr. Martino held multiple positions with National Semiconductor Corporation, a semiconductor company, for a total of nearly 14 years in four countries. Mr. Martino holds a bachelor of applied science degree from the University of Melbourne and a graduate diploma in digital communications from Monash University in Australia. Committees:Audit, Compensation (Chair) |
JEFFREY J. OWENS Age:65 Director Since:2017 Other Public Directorships: Rogers Corporation Former Public Directorships: None | Mr. Owensretired from his role as chief technology officer (CTO) and executive vice president at Delphi Automotive in 2017, having served in that position since 2012, where he was instrumental in transforming the company into a provider of software, electronics, and advanced safety and electrical architectures to the world’s largest automotive manufacturers. Prior to his CTO role, during his over 40-year career at Delphi he was president of Delphi’s $3 billion electronics and safety division from 2001 to 2012, and also president of Delphi Asia Pacific. Since August 2017, he has served on the board of directors of Rogers Corporation, a specialty engineered materials company, where he is a member of the audit committee (from August 2017 to present) and the compensation and organization committee (from October 2019 to present) and previously was a member of the nominating and governance committee (from August 2017 to October 2019). Since 2008, Mr. Owens has served on the board of trustees at Kettering University, including as chairman from 2015 to 2017. Mr. Owens holds a bachelor of science degree in mechanical engineering / electrical engineering from Kettering University and a master of business administration degree from Ball State University. Committees:Audit, Compensation |
JEANNINE SARGENT Age:56 Director Since:2017 Other Public Directorships: Fortive Corporation Former Public Directorships:None | Ms. Sargentis a professional director. In addition to Cypress, she serves on the board of directors of Fortive Corporation, a diversified industrial conglomerate listed on the New York Stock Exchange whose board she joined in February 2019, where she has been a member of the audit committee since February 2019 (including as its chair since January 2020), a member of the compensation committee since January 2020, and automotive control applications, digital stilla member of the nominating 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®governance committee since January 2020. Ms. Sargent also serves on the board of directors of a private company, Proterra Inc., 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,an 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.
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Analog PMICs and energy harvesting solutions | | Automotive, industrial, consumer | | Instrument clusterstorage provider, whose board she joined in 2018, where she is a member of the audit committee and the nominating and governance committee. Ms. Sargent has been the operating partner of, and a senior advisor to, Katalyst Ventures, an early-stage venture fund, since 2018. Within the past five years, Ms. Sargent has served as president of innovation and new ventures at Flex, a leading global design, engineering, and manufacturing company, from 2012 to 2017, and as a director of VUV Analytics, Inc., a vacuum UV spectroscopy private company, from late 2014 to early 2020. Prior to Flex, she served as chief executive officer of Oerlikon Solar, a thin-film silicon solar photovoltaic module manufacturer, from 2007 to 2010; as executive vice president and general manager of Veeco Instruments, a semiconductor process equipment company, from 2004 to 2007; and as chief executive officer of Voyan Technology, an embedded systems Advanced Driver Assistance Systems (ADAS), body control modules, factory automation, IoT beacons, wireless sensor nodessoftware provider to the communications and many other applications.semiconductor industries, from 1997 to 2003. She currently serves on several investment and advisory boards and is on the board of trustees at Northeastern University. She holds a bachelor of science degree in chemical engineering from Northeastern University and certificates from the executive development programs at the MIT Sloan School of Management, Harvard University, and Stanford University.Committees:Compensation, Nominating & Corporate Governance |
MICHAEL S. WISHART Age:65 Director Since:2015 Other Public Directorships: None Former Public Directorships: Spansion Inc., Brooktree Corporation | Mr. Wisharthas been the chief executive officer of Efabless Corporation, an early-stage company for community-based design of semiconductors, since 2015. Mr. Wishart co-founded Efabless in 2014 and has served on its board of directors since then. Mr. Wishart previously served as a managing director and advisory director of Goldman, Sachs & Co. from 1999 until he retired in June 2011. From 1991 to 1999, he served as a managing director, including as head of the global technology investment banking group, for Lehman Brothers. From 1978 to 1980 and from 1982 to 1991 he held various positions in the investment banking division at Smith Barney, Harris Upham & Co. He served on the board of directors of Spansion Inc. from 2013 until 2015, when it merged with Cypress, and currently serves on the board of OneD Material, a private company engaged in the technology transfer and licensing of proprietary silicon-graphite anode material to improve the performance of lithium ion batteries. In addition, Mr. Wishart has been a venture partner at Tyche Partners, a venture capital firm focused on hardware- related companies, since 2015. Mr. Wishart holds a bachelor of science degree from St. Lawrence University and a master of business administration degree from the Stanford Graduate School of Business. Committees:Nominating & Corporate Governance (Chair), Compensation |
The following table summarizes the markets and applications related to our products in the MPD segment:
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Products | | Markets | | Applications |
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NOR Flash and HyperFlash®
| | Automotive, industrial | | Automotive advanced driver assistance systems (ADAS), automotive instrument clusters, automotive infotainment systems, security systems, industrial control and automation systems, networking routers and switches and many other applications. |
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RAM: Asynchronous and Synchronous SRAM, HyperRAM®
, F-RAM and nySRAM
| | Automotive, industrial, networking, medical, telecommunications | | Automotive systems, industrial control and factory automation systems, enterprise switches and routers, servers, smart meters, aerospace and defense, medical systems, point-of-sale terminals, printers, and test equipment.
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Specialty Memories and Clocks | | Networking, telecommunication, video, data communications, computation
| | Medical and instrumentation, storage, wireless infrastructure, video, data communications, telecommunications, and network switching/routing, set-top boxes, copiers, printers, HDTV, industrial automation, printers, single-board computers, IP phones, and image processors. |
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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 fluctuations 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 and revenue growth.
As of the end of fiscal year 2019, we owned a wafer fabrication facility in Austin, Texas. External wafer foundries, mainly in Asia, manufactured approximately 60% of our wafers (8 inch equivalent) in fiscal 2019. External foundries that 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, which allows us to effectively manage our manufacturing cost. External assembly and test subcontractors in Asia accounted for approximately 72% of the total assembly output and 62% of the total test output in fiscal 2019. External assembly and test subcontractors that we partnered with during 2019 included Advanced Semiconductor Engineering, Inc., Amkor Technology, Deca Technologies Inc., Fujitsu Semiconductor Limited and United Test and Assembly Center Ltd.
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 variety 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 25% of our consolidated accounts receivable as of December 30, 2018.
Revenue generated through Arrow Electronics and Fujitsu Electronics Inc., 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. No other distributor or direct 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, 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, and consumer applications markets. Companies that compete directly with our businesses include, but are not limited to, Adesto, Broadcom, Everspin Technologies, Fujitsu, GigaDevice Semiconductor, GSI Technology, Integrated Silicon Solution, 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 jurisdictions, in addition to the 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 2019, we had approximately 2,890 issued patents and approximately 611 additional patent applications on file domestically and internationally. In addition, in fiscal 2020 we are preparing to file up to 60 new patent applications in the United States and up to approximately 80 foreign applications 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. 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 existing and new industries, 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 will be able to 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 review our intellectual property portfolio from time to time to identify opportunities to derive additional value from our assets. We may consider selling certain patents that no longer align with our patent strategies as well as employ other monetization models for our patent portfolio. From time to time we have divested patents that were not relevant to our current business. Divestiture of certain patents to third parties has generated and may continue to generate future contingent or non-contingent income.
Employees
As of December 29, 2019, we had 5,871 employees. Geographically, 1,824 employees were located in the United States, 964 in the Philippines, 821 in Thailand, 697 in India, 450 in Japan, 353 in Malaysia, 317 in Greater China (including mainland China, Hong Kong and Taiwan), 247 in Europe, and 198 in other countries. Of the total employees, 3,164 employees were associated with manufacturing, 1,524 with research and development, and 1,183 with selling, general and administrative functions.
EXECUTIVE OFFICERS
Information about our Executive Officers
Certain information regarding eachcurrent (as of April 1, 2020) executive officers appears in Item 1 of the Original Filing of our 2019 Form 10-K.All of our executive officers as of February 7, 2020 is set forth below:
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Name | | Age | | Position |
Hassane El-Khoury | | 40 | | President, Chief Executive Officer and Director |
Thad Trent | | 52 | | Executive Vice President, Finance and Administration, and Chief Financial Officer |
Sudhir Gopalswamy | | 50 | | Executive Vice President, Microcontroller and Connectivity Division |
Sam Geha | | 54 | | Executive Vice President, Memory Products Division |
Pamela Tondreau | | 60 | | Executive Vice President, Chief Legal and Human Resources Officer, and Corporate Secretary |
Hassane El-Khouryhas served as the president and chiefare expected to resign from their executive officer of Cypress, and as a member of our Board of Directors, since August 2016. From 2012 to August 2016, he waspositions upon 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 in various engineering roles with subsystem supplier Continental Automotive Systems, where he spent time based in the U.S., Germany, and Japan. He currently serves on the board of directors of the Semiconductor Industry Association, a trade association, since September 2017. Mr. El-Khoury holds a bachelor of science degree in electrical engineering from Lawrence Technological University and a master's degree in engineering management from Oakland University.
Thad Trent has served as chief financial officer and executive vice president of finance & administration at the Company since June 2014. Mr. Trent joined Cypress in 2005 and became a vice president of finance in 2010. Prior to serving as 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 currently serves on the boards of directors of SkyHigh Memory Limited, our joint venture for NAND flash memory products, and Deca Technologies Inc., one of our equity investees. Mr. Trent holds a bachelor of science degree in business administration and finance from San Diego State University.
Sudhir Gopalswamy has served as executive vice president of the microcontroller and connectivity division at the Company since February 2018, having previously served as the senior vice president of MCD from May 2016 to 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 from 2009 to 2011, the synchronous SRAM business unit from 2011 to 2014, and, as a vice president, the MCU 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, one 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 bachelor of science degree in electrical engineering from Purdue University and a master of business administration degree from Duke University.
Sam Geha, Ph.D., has served as executive vice president of the memory products division at the Company since February 2018, having previously been the 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 president of the intellectual property (IP) business unit since June 2015, having managed the IP business 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 served as vice president of Cypress's technology R&D organization since May 2007. 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. Before Cypress, he worked in various technology development functions at Motorola, a telecommunications equipment company, and National 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, a master of science degree in electrical engineering, and a Ph.D. degree in electrical engineering from the University of Arizona.
Pamela L. Tondreau serves as our executive vice president, chief legal and human resources officer, and corporate 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 to the present. In addition, Ms. Tondreau assumed oversight responsibility for the Company's human resources function in November 2017 and has served as our 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 counsel and deputy general counsel to the chief technology officer, HP labs, HP networking, IP licensing, strategic initiatives and global alliances. In addition, she supported the chief marketing officer, the chief information officer and the executive vice president of personal systems, as well as serving as corporate secretary to the technology 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 www.sec.gov.
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 pendencyClosing 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 uncertaintyInfineon, 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 pendencyAgreement. Some of the acquisition, including any adverse changes in our relationships with our customers, vendors and employees,them may continue as employees of, 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
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• | we might incur additional costs related to employee retention.
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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 or may contribute to uncertainty of our business.
We have significant customer sales both in the U.S. and internationally. We also rely 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 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 would adversely impact demand for many end products in which our products are embedded. 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 economic turmoil. High or volatile commodity prices increase the cost of doing business and adversely affect consumers' discretionary spending. As a result of the difficulty that businesses (including our customers) may have in obtaining credit and the decreased consumer spending that occurs during a recession, global economic turmoil (or uncertainty and apprehension 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 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 is 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;
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, 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 and;
Developments in and results of litigation.
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. 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. If the rate of interest we pay on our borrowings changes it could increase our debt-related 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.
The principal amount of our debt outstanding as of December 29, 2019 was $749.5 million which primarily included:
$300 million under our Revolving Credit Facility
$150 million of our 2% Convertible Senior Notes due 2023
$287.5 million of our 4.5% Convertible Senior Notes due 2022 and
$12 million of Spansion's 2% Exchangeable Senior Notes due 2020
See Note 16, Debt, of the Notes to 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 changesconsultants 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 at 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 activities 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-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 and industrial devices;
consumer electronics including wearable electronics, smartphones and other mobile devices, gaming consoles, 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, costly and 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. We 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.
We are dependent on third parties to manufacture products, market products, distribute products, generate a significant portion of our product sales, fulfill our customer orders, and transport our products. Problems in the performance or availability of these companies could seriously harm our financial performance.
We rely significantly on independent contractors to manufacture our products, which includes wafer fabrication, assembly, packaging and testing.
In March 2017, we divested a wafer fabrication facility (commonly called a fab or foundry) located in Bloomington, Minnesota, which reduced our internal manufacturing capacity though we continue to outsource manufacturing services from this facility. The purchaser operates the fabrication facility as a stand-alone business that manufactures wafers for Cypress and for other companies. Although this transaction reduced our manufacturing footprint, it increased our reliance on third-party suppliers. Accordingly, if the owner of this 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 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 alternate 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 some 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.
We also rely on channel partners, including distributors, resellers, and third-party sales representatives. We continue to expand and change our relationships with our channel partners. Worldwide sales through our distributors accounted for approximately 72% of our revenue in fiscal year 2019. We rely on many channel partners to assist us in creating customer demand, providing technical support and other value-added services to our customers, filling customer orders, and stocking our products. We face ongoing business risks due to our reliance on our channel partners to create and maintain customer relationships where we have a limited or no direct relationship. Should our relationships with our channel partners or their effectiveness decline, or as we choose to terminate some channel partner relationships from time to time, we face the risk of declining demand which could affect our revenue and results of operations. Such decline could be short-term, as we work to build in-house capacity or otherwise replace the affected channel partners, or long-term if the replacements are less efficient at accessing end customers. In addition, some of our channel partners are affiliated with companies from which we source materials or with which we have other business relationships, so any deterioration in our dealings with such a channel partner may disrupt the broader relationship. Our contracts with our distributors may be terminated by either party upon notice. The termination of a significant distributor, reseller, or sales representative could (a) impact our revenue and limit our access to certain end customers, (b) result in the return of a material amount of inventory held by a terminated distributor or reseller that we may not be able to resell or have to resell at a loss, and (c) jeopardize our ability to collect accounts receivable originating through a terminated distributor or reseller. In addition, our distributors are located all over the world and vary in size and financial strength. Any disruptions to our distributors’ operations such as lower sales, lower earnings, debt downgrades, the inability to access capital markets and/or higher interest rates could have an adverse impact on our business.
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 (including security vulnerabilities, defects or other errors) as well as harms caused by the devices in which our products are embedded could expose us to significant costs and damage our business.
We are subject to the risks of product defects and products liability. Our products are inherently complex and from time to time defects or errors are detected only after the products are in use. Product defects and errata (deviations from published specifications) may result from problems in our product design or our manufacturing and assembly and test processes. Components and products we purchase or license from third-party suppliers, or obtain through acquisitions, may also contain defects. The design process interface in new domains of technology and the migration to integrated circuit technologies with smaller geometric feature sizes are complex and add risk to the design and manufacturing process. The use of devices containing our products to access untrusted content can further create a risk of exposing our products to viral or malicious activities. While we continue to focus on security issues and are taking measures to safeguard our products from cybersecurity threats, (including maintaining a rapid response team to investigate and respond to reports of security vulnerabilities) device capabilities continue to evolve, enabling more data and processes and increasing the risk of security failures.
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, the 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 safety.
Because our products and services are responsible for critical functions in our customers’ products, defects or errata 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 impacts could include product liability 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. The materialization of any of these risks could have an adverse impact on our results of operations and cash 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 our reputation, and any such disruption or harm could cause a reduction in revenue, increase our expenses, negatively impact our results of operation or otherwise adversely affect our stock price.
Like most technology companies, we are subject to cyber-attacks from time to time. We face a risk that experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential and proprietary information, potentially without being detected. Computer programmers and hackers may be able to develop and deploy viruses, worms, and other malicious software
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"). 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 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, 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 enacted 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 liabilities are affected by the amounts we charge in intercompany transactions for inventory, services, licenses, funding and other items. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with these intercompany transactions or other matters and may assess additional taxes or 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 the 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 tax provision, net income and cash flows. In addition, uncertainties related to the interpretation of the Tax Cuts and Jobs Act of 2017 could materially impact our tax obligations and effective tax rate, as well as our business strategy and tax planning.
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 changes in tax laws. In addition, various tax legislation has been introduced or is being considered that could significantly impact our tax rate, the carrying value of deferred tax assets, or our deferred tax liabilities. For example, the Organization for Economic Cooperation and Development (the “OECD”) has recently recommended changes to numerous 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 may adversely impact our tax liabilities. Any of these changes could affect our financial performance.
If the tax incentive or tax holiday arrangements we have negotiated in Malaysia, 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 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 in the past and may in the future dispose of certain businesses, product lines or assets, which could adversely affect our results of operations and liquidity.
From time to time, we have divested certain businesses, product lines or assets, acquired or otherwise, that are no longer strategically important, and exited minority investments, and we may do so in the future, which could materially affect our cash flows and results of operations. If we decide to divest another 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 might engage in additional restructuring activities which could be disruptive to our 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 in which we have invested fail to launch new products or maintain key customer relationships.
We have invested in certain privately-held companies. There can be no guarantee that such businesses will perform as initially expected, 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 businesses 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 is not created or sustained, or if these or any of our other privately-held businesses 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 such investments.
In particular, there is a substantial risk that the carrying value of our investment in Deca may become further impaired. Deca's current and future revenue is dependent on a small number of significant customers. 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. 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 have 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. The process of integrating an acquired company, business, or technology has created, and may 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;
Implementation or remediation of controls, procedures, and policies at 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;
Failure to successfully further develop the acquired business or technology;
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 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, significant adverse changes in business climate, unanticipated competition, loss of key customers, changes in technology, declines in future cash flows of our reporting units, or material changes in reporting unit carrying values 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 skilled 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. 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. If any analysis or forecast that we make ultimately proves to be inaccurate, our stock 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 manufacturing initiative requires us to enter into technology transfer agreements with external partners, providing third-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 continue 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. In August 2016, we entered into a series of agreements to divest a large number of older, legacy patents and we may in the future divest patents from time to time. The divestiture of 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 become involved in intellectual property litigation from time to time, which can be expensive and divert 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 litigation are very common in our industry. Other companies or entities 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 and we may in the future divest patents from time to time. The divestiture of 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. Even though we may have meritorious defenses and claims and defend and pursue such claims vigorously, all litigation is 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.
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 our merger with Spansion Inc. ("Spansion") in March 2015. The resulting limitations accompanying the ownership change are reflected in our deferred tax 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;
the devaluation of local currencies;
political instability, and the possibility of a deteriorating relationship between the nations in which we operate and the United States;
labor issues, including collective bargaining agreements;
the impact of natural disasters on local infrastructures and economies;
changes in local economic conditions;
import and export controls;
potential shortage of power supply;
potential violations by our international employees or third party agents of international or U.S. laws relevant to foreign operations (such as FCPA, UK Bribery Act of 2010); and
changes in tax laws, tariffs and freight rates.
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 European General Data Protection Regulation (GDPR), which took effect in May 2018, applies to many of our products and services and regulates our processing of personal data of European employees, European customers, European sales leads, and other European business contacts. The GDPR provides 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.
We face risks related to "conflict minerals" reporting.
Our products contain materials that are subject to the SEC's conflict minerals 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 file such reports annually with the SEC on Form SD. Our relationships with customers and suppliers may be adversely affected if we are unable to describe our products as conflict-free. Additionally, our costs may increase if one or more of our customers demand that we change the sourcing of materials we cannot identify as conflict-free.
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 facilities, the level and/or extent of coverage might not be sufficient to 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.
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, a portion of our research and development and 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, many of which are on or 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 the Philippines was shut down for a few days due to ashfall from the Taal Volcano, located approximately 18 miles from our facility, and 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 from pandemics, from natural disasters, and from being centralized in certain geographical areas or located near major earthquake faults 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 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.
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, and by-laws require us to indemnify our officers and directors for certain liabilities that may arise in the course of their service to 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 |
surviving corporation.DELINQUENT SECTION 16(a) REPORTS
None.
Our executive offices are located in San Jose, California. The following table summarizes our primary properties as of the end of fiscal 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, Philippines* | | 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 |
* Co-owned with local investor.
There was no change in our primary properties in fiscal 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.
Information with respect to this item may be found in Note 23, Commitments and Contingencies, of the Notes to Consolidated Financial Statements under Part II, Item 8, which is incorporated herein by reference. | |
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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, and Performance Graph
Our common stock is listed on the Nasdaq Global Select Market under the trading symbol “CY."
As of February 7, 2020, there were approximately 1,222 registered holders 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 returns 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 12/28/14 in stock or index, including reinvestment of dividends. Indexes calculated on month-end basis.
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:
$450 Million Stock Buyback Program
On October 20, 2015, our Board of Directors (the “Board”) approved a share repurchase plan pursuant to which we are authorized to repurchase our common stock in an aggregate amount not to exceed $450 million. 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.
Yield Enhancement Program
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. If the agreement is settled in shares, our initial investment is treated as a repurchase and counts against the $450 million stock repurchase authorization approved by our Board in October 2015.
Repurchase Activity
There was no activity, in our yield enhanced structured agreements, and no other repurchases, during fiscal 2017 and 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 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 |
|
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | 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 comparability of our results for the years ended December 29, 2019, December 30, 2018, December 31, 2017, and January 1, 2017 to the prior year is significantly impacted by this transaction. |
| |
(2) | During the fourth quarter of fiscal 2014, we started recognizing revenue for sales to certain distributors at the time of shipment (also referred to as "sell in" basis), as compared to when the products were resold by the distributor to the end customer, as we determined we could reliably estimate returns and pricing concessions on certain product families and with certain distributors. The change increased 2015 revenue by $40.9 million and decreased net loss by $25.0 million and net income per share, basic and diluted, by $0.08. The change increased 2016 revenue by $59.2 million and decreased net loss by $19.5 million and net income per share, basic and diluted, by $0.06. As at the end of fiscal 2016, 100% of the distribution revenue had been converted to the sell-in basis of revenue recognition. |
| |
(3) | The debt, net of costs, at December 29, 2019 primarily included $300.0 million related to our Senior Secured Revolving Credit Facility, $138.7 million related to our 2% Convertible Senior Notes due 2023, $266.8 million related to our 4.5% Convertible Senior Notes due 2022, and $11.8 million related to our 2% Exchangeable Senior Notes due 2020. The debt, net of costs, at December 30, 2018 primarily included $467.9 million related to our Term Loan B, $135.1 million related to our 2% Convertible Senior Notes due 2023, $256.7 million related to our 4.5% Convertible Senior Notes due 2022, and $11.4 million related to our 2% Exchangeable Senior Notes due 2020. The debt, net of costs, at December 31, 2017 primarily included $90.0 million related to our Senior Secured Revolving Credit Facility, $495.4 million related to our Term Loan B, $131.4 million related to our 2% Convertible Senior Notes due 2023, $246.6 million related to our 4.5% Convertible Senior Notes due 2022, and $20.4 million related to our 2% Exchangeable Senior Notes due 2020. The |
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 first quarter of fiscal 2019, we closed the transaction to transfer our NAND business to a newly-formed joint venture between the Company and SKHS. The comparability of our revenue for the year ended December 29, 2019 is impacted by this transaction. See Results of Operations under Part II, Item 7 for more information. |
| |
(5) | As a result of the adoption of ASU No. 2016-02, "Leases (ASC Topic 842)", our assets and liabilities increased by $56.4 million and $59.2 million, respectively, as of December 31, 2018 (the "Adoption Date"). See Note 1, Description of Business and Summary of Significant Accounting Policies, and Note 17, Leases, of the Notes to Consolidated Financial Statements under Part II, Item 8 for more information. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSISCODE 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, including those discussed under Item 1A.
EXECUTIVE SUMMARY
General
Cypress Semiconductor Corporation (together with its consolidated subsidiaries, "Cypress", "the Company", "we" or "us") manufactures and sells advanced embedded system solutions for Internet of Things (or "IoT"), automotive, industrial, and consumer applications. Cypress’ microcontroller, analog 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.
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 the Noncontrolling Interest in AgigA Tech, Inc. ("AgigA")
In September 2019, we acquired the minority shareholders' noncontrolling interest in AgigA for total cash consideration of $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 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 revenue from the NAND business for the years ended December 29, 2019, December 30, 2018 and December 31, 2017.
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 acquisition was not material.
Sale of Cypress Minnesota Incorporated
In March 2017, we completed the sale of our wafer fabrication facility in Minnesota for gross proceeds of $30.5 million.
Business Segments
We continuously evaluate our reportable business segments in accordance with the applicable accounting guidance. Consistent with the year ended December 30, 2018, we operated under two reportable business segments, MPD and MCD, for the year ended December 29, 2019.
RESULTS OF OPERATIONS
Revenues
Our total revenues decreased by $278.5 million, or 11.2%, to $2,205.3 million for the year ended December 29, 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 30, 2018, the increase was primarily driven by strength in automotive and wireless connectivity, microcontrollers, and memory products.
The following table summarizes our consolidated revenues by segments:
|
| | | | | | | | | | | |
| | 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 2019 by $2.2 million, or 0.2%, compared to fiscal 2018. The increase was primarily due to a growth in automotive and wired connectivity products, partially offset by a decline in demand for microcontrollers and wireless connectivity products.
Revenues recorded by MCD increased in fiscal 2018 by $65.2 million, or 4.6%, compared to fiscal 2017. The increase was primarily driven by growth in our microcontrollers, wired and wireless connectivity and automotive products. MCD revenue during fiscal 2018 benefited from volume increases as a result of new program ramps at certain customers.
Memory Products Division:
Revenues recorded by MPD decreased in fiscal 2019 by $280.7 million, or 27.8% compared to fiscal 2018. The decrease was primarily due to a decline in demand for NOR flash products, and 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 decrease was partially offset by the manufacturing services revenue of approximately $10.5 million generated from SkyHigh in fiscal 2019.
Revenues recorded by MPD increased in fiscal 2018 by $90.9 million, or 9.9% compared to fiscal 2017. 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 on 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 product mix toward higher density memory products, 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 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 primary drivers of the improvement in gross margin were higher fab utilization, which increased from 74.2% for the year ended December 31, 2017 to 81.2% for the year ended December 30, 2018; a reduction in the cost of certain products; a shift in the product mix towards higher density memory products and away from commoditized products; and ramping of new products at favorable margins.
Additionally, there was a reduction in write-downs of carrying value of inventory for the year ended December 30, 2018 as compared to the prior year. Write-down of inventories for the year ended December 30, 2018 was $22.3 million as compared to $34.5 million 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 off or written down aggregated to $19.5 million and $31.6 million in fiscal 2018 and fiscal 2017, respectively, which favorably impacted our gross margin by 0.8% and 1.4%, respectively.
Included in the cost of revenues are restructuring costs of $3.3 million and $0.6 million for fiscal 2018 and fiscal 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 2018 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 in fiscal 2018 is the impairment of assets held for sale of $10.9 million as a result of entering into a definitive agreement to divest the NAND products business to a joint venture with SKHS in October 2018.
Research and Development ("R&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 |
| | December 29, 2019 | | December 30, 2018 | | December 31, 2017 |
| | (In thousands) |
| R&D expenses | $ | 362,716 |
| | $ | 363,996 |
| | $ | 362,931 |
|
| As a percentage of revenues | 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 $1.1 million in fiscal 2018 compared to the fiscal 2017. The increase was mainly attributable to $5.4 million in increased labor costs mainly due to employee-related compensation expenses, a $3.6 million increase in depreciation, and $1.8 million in licensing payments to certain vendors, partially offset by $4.1 million in lower restructuring costs, a $3.8 million decrease in deferred compensation expenses, and a $1.7 million decrease in stock-based compensation expenses.
Selling, General and Administrative ("SG&A")
|
| | | | | | | | | | | |
| | Year Ended |
| | December 29, 2019 | | December 30, 2018 | | December 31, 2017 |
| | | | (In thousands) | | |
| SG&A expenses | $ | 344,046 |
| | $ | 403,031 |
| | $ | 340,910 |
|
| As a percentage of revenues | 15.6 | % | | 16.2 | % | | 14.6 | % |
SG&A expenses decreased by $59.0 million in fiscal 2019 compared to fiscal 2018. The decrease was mainly due to a loss from sale of assets related to planned sale of the NAND business of $65.7 million recognized in fiscal 2018, as well as a decrease of $17.2 million in professional fee and a decrease of $10.9 million in restructuring charges. These decreases were partially offset by an increase of $12.3 million in 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 $1.8 million in facility-related expenses.
SG&A expenses increased by $62.1 million in fiscal 2018 compared to fiscal 2017. The increase was mainly due to a loss from sale of assets related to planned sale of the NAND business of $65.7 million, a $9.1 million increase in restructuring costs, a $5.1 million increase in stock-based compensation, a $3.8 million increase in professional fees, a $3.4 million increase in advertising expenses and a $2.5 million increase in facilities expenses, partially offset by a $14.3 million decrease in shareholder litigation, a $7.9 million decrease in labor expenses, and a $5.0 million decrease in deferred compensation expenses.
Interest Expense
Interest expense for fiscal 2019 was $58.7 million and primarily represents interest payments due and amortization of debt discount and costs related to our 2% Convertible Senior Notes due 2023, 4.5% Convertible Senior Notes due 2022, 2% Exchangeable Senior Notes due 2020, and interest expense incurred on our Revolving Credit Facility, Term Loan B and other debt. In addition, of the $58.7 million, $6.4 million was related to the loss on extinguishment of Term Loan B.
Interest expense for fiscal 2018 was $65.3 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, 2% 2020 Spansion Exchangeable Notes, and interest expense incurred on our Revolving Credit Facility, Term Loan B and other debt. In addition, of the $65.3 million, $5.2 million was related to the refinancing and write-off of debt issuance costs upon the debt amendment for Term Loan B and the extinguishment of the 2% 2020 Spansion Exchangeable Notes.
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 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 of the 2% 2020 Spansion Exchangeable Notes and Term Loan A.
Refer to Note 16, Debt, of the Notes to Consolidated Financial Statements under Part II, Item 8 for more information about our credit facility and other debt.Other Income (Expense), Net
The following table summarizes the components of other income (expense), net:
|
| | | | | | | | | | | |
| | 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 |
|
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 2019, 2018 and 2017, we recognized changes in fair value of the assets under the deferred compensation plan in "Other income (expense), net" of $8.0 million, $(2.9) million, and $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 21, Employee Benefit Plans, of the Notes to Consolidated Financial Statements under Part II, Item 8 for more information about our deferred compensation plan.Share in Gain/Loss, Net 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 may 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")
We held 23.2% and 24.8% of Enovix's outstanding equity at the end of fiscal 2019 and 2018, respectively. During the fourth quarter of fiscal 2017, Enovix missed achieving certain key planned product development milestones. Consequently, we concluded that our investment in Enovix was other-than-temporarily impaired and recorded a charge of $51.2 million to write down the carrying amount of the investment to zero.
During fiscal 2017, we recorded $8.7 million for our share of losses recorded by Enovix. No 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 as described above.
Income Taxes
We recorded income tax provision of $2.4 million and income tax benefit of $315.6 million in fiscal 2019 and 2018, respectively, and an income tax provision of $11.2 million in fiscal 2017. The income tax provision for 2019 was primarily due to income taxes associated with our non-U.S. operation, partially offset by tax credits and excess tax benefits from stock-based compensation. The income tax benefit for 2018 was primarily due to a release of our valuation allowance previously maintained against certain deferred tax assets of $343.3 million, as discussed further below. The income tax expense for fiscal 2017 was primarily attributable to income taxes associated with our non-U.S. operations, partially offset by release of previously accrued taxes related to the lapsing of statutes of limitation.
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. 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 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 cash and cash equivalents and working capital:
|
| | | | | | | | | | | |
| | As of |
| | December 29, 2019 | | December 30, 2018 | | December 31, 2017 |
| | (In thousands) |
| Cash and cash equivalents | $ | 415,462 |
| | $ | 285,720 |
| | $ | 151,596 |
|
| Working capital, net | $ | 487,515 |
| | $ | 396,208 |
| | $ | 147,854 |
|
Key Components of Cash Flows
|
| | | | | | | | | | | |
| | Year Ended |
| | December 29, 2019 | | December 30, 2018 | | December 31, 2017 |
| | (in thousands) |
| Net cash provided by operating activities | $ | 478,915 |
| | $ | 471,700 |
| | $ | 403,487 |
|
| Net cash used in investing activities | $ | (27,311 | ) | | $ | (49,690 | ) | | (14,429 | ) |
| Net cash used in financing activities | $ | (321,862 | ) | | $ | (287,886 | ) | | $ | (357,634 | ) |
Fiscal 2019:
Operating Activities
Net cash provided by operating activities during fiscal 2019 of $478.9 million consisted of (in millions):
|
| | | | |
| 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 decrease in net cash due to changes in operating assets and liabilities during fiscal 2019 of $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 $33.9 million mainly due to timing of payments and payments related to restructuring activities;
a decrease in price adjustments and other distributor related reserves of $14.5 million; and
an increase in assets held for sale related inventories of $13.5 million due to the sale of NAND business.
Investing Activities
In fiscal 2018, we used approximately $49.7 million of cash in our investing activities primarily due to:
$68.9 million of cash used for property and equipment expenditures relating to purchases of certain laboratory and manufacturing facility equipment.
These cash outflows were partially offset by $5.8 million of cash received on the sales of property and equipment, and $18.5 million of cash received related to our investments in privately held equity interests.
Financing Activities
In fiscal 2018, we used approximately $287.9 million of cash in our financing activities, primarily related to:
$157.4 million for dividend payments;
net repayments of $90.0 million on the Senior Secured Revolving Credit Facility;
$35.6 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.
The above payments were partially offset by proceeds of $40.7 million from employee equity awards.
Liquidity and Contractual Obligations
Summary of our debt balances is included below:
|
| | | | | | | | | | | | |
| | | 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 net carrying value outstanding, $11.8 million related to 2% Exchangeable Senior Notes due 2020 and $1.9 million related to finance lease obligations were classified as current liabilities as of December 29, 2019.
|
| | | | | | | | | | | | |
| | | 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 net carrying value outstanding, $6.9 million related to Term Loan B and finance lease obligation was classified as current liabilities as of 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 Revolving Credit Facility, as amended, provides for $700 million of borrowing capacity, of which $400.0 million was undrawn as of December 29, 2019.
As of December 29, 2019, we were in compliance with all of the financial covenants under all of our debt facilities.
Refer to Note 16, Debt, of the Notes to 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 29, 2019:
|
| | | | | | | | | | | | | | | | | | | |
| | 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 timing. |
| |
(2) | The notes are presented based on scheduled payment due dates and had become exchangeable or convertible (as applicable) at the holders' options during the third and fourth quarters of fiscal 2019. |
| |
(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 certain employees, 50% of which are payable upon the closing of the Merger, and the remaining 50% of which are potentially payable six months after the closing of the Merger. |
Capital Resources and Financial Condition
Our long-term strategy is to minimize the amount of cash required for operational purposes and to utilize 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 making 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 29, 2019, a total cash and cash equivalents position of $415.5 million is available for use in current operations.
As of December 29, 2019, approximately 12.2% of our cash and cash equivalents were held 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 July 31, 2019, we amended the Revolving Credit Facility to increase the available 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 entire outstanding Term Loan B principal balance of approximately $448
million in July 2019, resulting in an extinguishment of Term Loan B, which was scheduled to mature on July 5, 2021. As a result, we 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, we repaid $147.0 million of the outstanding amended Revolving Credit Facility during fiscal 2019.
We believe that liquidity provided by existing cash, cash equivalents, 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 ability 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 using alternative financing. There can be no assurance that additional financing, if needed, would be available on terms acceptable to us if 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 provide us with additional liquidity 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 on 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 States. Note 1, Description of Business and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements under Part II, Item 8 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. We are required to make estimates, judgments and assumptions in the course of preparing our financial statements. We base our estimates, judgments and assumptions on historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. While 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 estimates and policies are as follows:
Revenue Recognition: estimates related to (i) distributor price adjustments and stock rotation, which are primarily determined based on our analysis of historical trends experienced for similar revenue transactions; and (ii) determining whether reliable information related to an arrangement with a customer that includes variable contingent consideration is available.
Valuation of Inventories: estimates related to write-down of our inventories that have become obsolete or are in excess of anticipated demand or net realizable value. Primary factors used in making this estimate include historical sales levels, demand forecast, backlog and age of the inventory items.
Share-Based Compensation: estimates related to measuring the level of achievement of performance milestones, based on forecasted operating results.
Accounting for Income Taxes: estimating reserves needed against uncertain tax positions. Such reserves are recorded primarily based on judgmental assessment of tax regulations and case law.
Recent Accounting Pronouncements
See "Recent Accounting Pronouncements" in Note 1, Description of Business and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements under Part II, Item 8 of this Annual Report on Form 10-K. | |
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, and certificates of 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 our Revolving Credit Facility and exchangeable notes. Interest on the exchangeable notes is fixed and interest on our Revolving Credit Facility is tied to short-term interest rate benchmarks including the prime rate and the London inter-bank offered rate, or LIBOR.
In December 2017, we entered into fixed-for-floating interest rate forward swap agreements with two counterparties, starting from April 2018, to swap variable interest payments on our debt for fixed interest payments. These agreements will expire in July 2021. The objective of the swap was to effectively fix the interest rate at then-current levels without having to refinance the outstanding term loan, thereby avoiding the incurrence of transaction costs. Under these arrangements, the interest rate on the variable debt became fixed in April 2018. On January 3, 2018, we 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 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.
In October 2018, the Company entered into fixed-for-floating interest rate forward swap agreements starting in July 2021 with two counterparties to swap variable interest payments on expected future 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 we 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 was $300 million. The Company has evaluated the hedge effectiveness of the interest rate swaps and has designated these swaps as cash flow hedges of debt with future changes in fair value of these swaps recognized in accumulated other comprehensive income (loss).
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 and purchase capital equipment using foreign currencies but our transactions are predominantly denominated in U.S. dollars. We are exposed to certain risks associated with changes in foreign currency exchange rates in 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 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 13, Foreign Currency and Interest Rate Derivatives, of the Notes to Consolidated Financial Statements under Part II, Item 8 for details on the contracts.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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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 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | |
| 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
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | |
| | 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.
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.
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.
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 (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, and consumer applications. Cypress' microcontroller, analog 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.
On March 1, 2017, the Company completed the 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") and 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. ("AgigA") for 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 outstanding equity of AgigA. The difference between the carrying value of the noncontrolling interest at the date of the acquisition and the total consideration was recorded as a decrease in "Additional paid-in capital" in the Consolidated Balance Sheets. Consistent with the presentation in prior periods, the Company continues to report AgigA's financial results under its Memory Products Division.
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 years 2019, 2018 and 2017 each contained 52 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 Investments
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, 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 exposure 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 risk 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 1 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 18% and 14%, respectively, of the consolidated revenues for fiscal 2018.
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.
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 assets to be held for sale when management approves and commits to a plan to dispose of an asset or group of assets. Assets held for sale are recorded initially at the lower of carrying value or 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 7, Assets Held for Sale, of the Notes to 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 the fiscal year and if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. The Company first considers qualitative factors to determine whether it is necessary to perform further assessment of goodwill impairment. If the 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 5, Goodwill, of the Notes to 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 6, Intangible Assets, of the Notes to 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% Convertible Senior 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 and Hedging-Contracts in Entity’s Own Equity". See Note 16, Debt, of the Notes to 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 then selects an appropriate method for measuring progress toward complete satisfaction of the performance obligation, usually costs incurred to date relative to the total expected costs to the satisfaction of that performance obligation.
Sales to certain distributors are made under arrangements 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 estimates 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 the customer is in an amount that corresponds reasonably with the value to the customer of the entity’s performance completed to date.
The Company licenses or sells rights to use portions of the Company's intellectual property ("IP") portfolio, which includes certain patent rights useful in the manufacture and sales of certain products. IP revenue recognition is dependent on the nature and terms of each agreement. The Company recognizes IP revenue upon delivery of the IP if the Company has no substantive future obligation to perform under the arrangement. The Company defers recognition of IP revenue where future performance obligations are required to earn the revenue or the revenue is not guaranteed. Sales-based or usage-based royalties from license of the Company's IP are recognized at the later of the period the sales or usages occur or the satisfaction of the performance obligation to which some or all of the sales-based or usage-based royalties have been allocated.
If a customer pays consideration, or the Company has a right to an amount of consideration that is unconditional before the Company transfers a good or service to the customer, those amounts are classified as deferred income/ advances received from customers which are included in other current liabilities or other long-term liabilities when the payment is made or due, whichever is earlier.
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 required to apply an appropriate method of measuring progress.
Practical Expedients and Elections
Sales commissions are owed and are recorded at the time of sell-through of our products to end customers. These costs are recorded within sales and marketing expenses.
The Company does not 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"), 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 21, Employee Benefit Plans, of the Notes to 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 9, Fair Value Measurements, of the Notes to 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 and interest rate variability. The Company does not enter into derivative securities for speculative purposes. The Company’s foreign currency forward contracts designated as cash flow hedges have tenors between three and thirteen months. The Company's interest rate swaps designated as cash flow hedges have various tenors, the longest of 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. Beginning the second quarter of 2018, the Company has been entering into foreign exchange cash flow hedges, wherein interest charges or "forward points" on the forward contracts are being included in the assessment of hedge effectiveness and are recorded in the 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 reclassifies the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to other (expense) income, net in its Consolidated Statements of Operations at that time.
The Company assesses hedge effectiveness quantitatively at the inception of the hedge relationship, and qualitatively thereafter.
See Note 13, Foreign Currency and Interest Rate Derivatives, of the Notes to Consolidated Financial Statements for further details of the contracts.
Shipping and Handling Costs
The Company records costs related to shipping and handling of 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 $5.2 million, $5.9 million and $3.2 million for fiscal years 2019, 2018 and 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 most 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. See Note 15, Other Income (Expense), Net, of the Notes to Consolidated Financial Statements for further details on the impact of foreign currency re-measurement.
Net Income (Loss) per Share
Basic net income (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share ("diluted EPS") gives effect to the exercise or conversion of all dilutive securities outstanding during the period 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 potential issuances of shares of common stock if their effect would be anti-dilutive.
Recent Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued 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 its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The standard modifies the disclosure requirements on fair value measurements in Topic 820 by removing the requirement to disclose the reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The standard expands the disclosure requirements for Level 3 fair value measurement, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The amendment is effective for fiscal years beginning after December 15, 2019. The Company 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 early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements and related disclosures.
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 guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The amendment is effective for fiscal years beginning after December 15, 2019. The Company does not expect the adoption of this standard will have a material impact on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
Lease Accounting
In February 2016, the FASB issued ASU No. 2016-02, "Leases (ASC Topic 842)." The standard introduces new requirements to increase transparency and comparability among organizations for leasing transactions for both lessees and lessors. ASU No. 2016-02 requires a lessee to record a right-of-use ("ROU") asset and a lease liability for all leases with terms longer than 12 months. These leases will be either finance or operating, with classification affecting the pattern of expense recognition.
In July 2018, the FASB issued ASU 2018-11, which provided an alternative modified retrospective transition method. Under this method, the cumulative-effect adjustment to the opening balance of retained earnings is recognized on the date of adoption. The Company adopted ASC Topic 842 as of December 31, 2018 and applied the alternative modified retrospective transition method requiring application of the new guidance to all leases existing at, or entered into on or after, the date of adoption, i.e. December 31, 2018.
As part of applying the transition method, the Company has elected to apply the package of transition practical expedients within the new guidance. As required by the new standard, these expedients have been elected as a package and are consistently applied across the Company’s lease portfolio. Given this election, the Company need not reassess:
whether any expired or existing contracts are or contain leases;
the lease classification for any expired or existing leases; 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 following 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 adopted ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" using the modified retrospective method applied to all contracts that were not completed 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 Topic 606. The Company reclassified the sales return reserve to current liabilities presented as "Price adjustment and other revenue reserves" from the allowance for accounts receivable due to the adoption of Topic 606. See Note 3, Revenue, of the Notes to Consolidated Financial Statements for further detail.
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The amendments in ASU 2017-12 are intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The Company adopted this guidance in the first quarter of fiscal 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The amendments in ASU 2018-02 are intended to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company adopted this guidance in the first quarter of fiscal 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.
In June 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting." The standard expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. Under the amended guidance, equity-classified share-based payment awards issued to nonemployees will be measured at grant date fair value. Upon transition, the entity is required to remeasure these nonemployee awards at fair value as of the adoption date. The Company adopted this guidance in the first quarter of fiscal 2019. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements and related disclosures.
NOTE 2. 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 transaction, 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 Merger (the "Effective Time"), each share of common stock of Cypress ("Cypress Common Stock") that is issued and outstanding immediately prior to the Effective Time (other than shares of Cypress 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 (d) owned by stockholders who have perfected and not withdrawn a demand 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 the holders of a majority 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 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, 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 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.
The Merger Agreement contains certain termination rights for each of Infineon and the 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 incurred 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 the acceleration of certain stock-based compensation awards as these 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 the 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 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 has entered into a back-end manufacturing services agreement with SkyHigh. Revenue related to such agreement for the fiscal year ended December 29, 2019 was $10.5 million, and was included in the Memory Products Division.
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 |
|
NOTE 4. MERGERS, ACQUISITIONS AND DIVESTITURES
Joint Venture with SK hynix system ic Inc. ("SKHS")
On April 1, 2019, the Company closed the transfer of its NAND business to a newly-formed joint venture between the Company and 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 paid $2.4 million in cash as its capital contribution in SkyHigh upon close of the transaction.
Acquisition of a Software Business
On August 14, 2018, the Company 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 acquisition on the Company's consolidated results for fiscal year 2019 was not material.
NOTE 5. GOODWILL
Annual Impairment 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 the respective reporting unit's carrying value.
In assessing the qualitative factors, the Company considers the impact of various factors, primarily: 1) change in the industry and competitive environment, 2) market capitalization, 3) stock price and 4) overall financial performance. Material adverse changes in such conditions could have the effect of changing one of the critical assumptions or estimates the Company uses to calculate the fair value of its reporting units, which could result in a decrease in fair value and require it to record goodwill impairment charges. Based on the qualitative assessment described above, the Company concluded there was 0 impairment in carrying value of goodwill during fiscal 2019.
Goodwill as of December 29, 2019 and December 31, 2018 was $1.4 billion, of which $782.9 million and $590.9 million was allocated to MCD and MPD, respectively.
Allocation of Goodwill to NAND Business
As a result of entering into a definitive agreement to divest its NAND business during the fourth quarter of fiscal 2018, the Company allocated $65.7 million of goodwill previously recorded in the MPD segment to assets held for sale. The allocation was based on the relative estimated enterprise value of the NAND business and that of the MPD business without the NAND business. See Note 7, Assets Held for Sale, of the Notes to Consolidated Financial Statements.
NOTE 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 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 |
|
NOTE 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 Company completed the sale of both of these asset groups during the first quarter of fiscal 2017 and received gross proceeds of $35.5 million. During the year ended December 31, 2017, the Company recognized a gain of $1.2 million resulting from the change in the estimated costs to sell these assets. This gain was recorded in the selling, general and administrative line item of the Consolidated Statements of Operations.
NOTE 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 following table presents the changes in the aggregate carrying value of the equity method 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 |
|
The following table presents summarized aggregate financial information derived from the respective consolidated financial statements of Deca and 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 | ) |
The following table represents the assets and liabilities held by Deca and SkyHigh as of December 29, 2019 and 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 |
|
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 fan-out wafer level packaging technology. The Company’s carrying value in Deca was $25.1 million and $65.1 million as of December 29, 2019 and December 30, 2018, respectively. The Company held 52.4% and 52.5% of Deca's outstanding voting shares as of December 29, 2019 and December 30, 2018, respectively. The investment in Deca is accounted for as an equity method investment because the Company does not have the power to direct the activities of Deca that most significantly impact Deca's economic performance but continues to have significant influence over Deca's financial and operating policies.
During the fourth quarter of fiscal 2018, the Company determined that its investment in Deca was other-than-temporarily impaired due to Deca's failure to achieve significant product development and testing milestones. The Company estimated the fair value of Deca using the income approach. The income approach considers a number of factors that include, but are not limited to, forecasted financial information, growth rates, terminal or residual values and discount rates and requires the Company to make certain assumptions and estimates regarding industry economic factors and the future profitability of the business. As a result, the Company recorded a charge of $41.5 million in order to write down the carrying amount of the investment to its estimated fair value as of the end of fiscal 2018. This write down was recorded in "Share in gain/loss, net and impairment of equity method 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 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 shares.
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 29, 2019.
Enovix Corporation
The Company's ownership of Enovix was 23.2% and 24.8% as of December 29, 2019 and December 30, 2018, respectively.
During the fourth quarter of fiscal 2017, the Company determined that its investment in Enovix was other-than temporarily impaired as Enovix did not achieve certain key planned product development 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 write-down was recorded in "Share in gain/loss, net and impairment of equity method investees” in the Consolidated Statements of Operations.
NOTE 9. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
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 29, 2019 and 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 |
|
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 applicable accounting guidance generally include 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 money market funds, marketable equity securities and certain employee deferred compensation plan assets.
Level 2—includes instruments for which the valuations are based on the quoted market price for similar instruments or nonbinding market prices that are corroborated by observable market data. The Company’s Level 2 instruments include certain U.S. government securities, commercial paper, corporate notes and bonds, certificates of deposit, and deferred compensation plan life 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 derivative 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 derivative 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 29, 2019 and 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 29, 2019, the contractual maturities of the Company’s 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 2 counterparties to swap variable interest payments on certain debt for fixed interest payments. 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.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain of the Company’s assets, including intangible assets, goodwill, and assets held for sale, are measured at fair value on a nonrecurring basis using Level 3 inputs if impairment is indicated.
As of December 29, 2019, the carrying value of the Company’s senior secured credit facility was $300.0 million (See Note 16, Debt, of the Notes to Consolidated Financial Statements). The carrying value of the Company's senior 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% Exchangeable Senior Notes due 2020 assumed as part of the merger with Spansion are traded in the secondary market and are categorized as Level 2. The principal and the estimated fair value of the principal of these notes as of December 29, 2019 were $12.0 million and $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 16, Debt, of the Notes to Consolidated Financial Statements for further details.The Company’s 4.5% Convertible Senior Notes due 2022 are traded in the secondary market for debt instruments and their fair value is determined using Level 2 inputs. The principal and the estimated fair value of the principal of these notes as of December 29, 2019, were $287.5 million and $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 16, Debt, of the Notes to Consolidated Financial Statements for further details.The Company’s 2% Convertible Senior Notes due 2023 are traded in the secondary market and their fair value is determined using Level 2 inputs. The principal and the estimated fair value of the principal of these notes as of December 29, 2019, were $150.0 million and $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 16, Debt, of the Notes to Consolidated Financial Statements for further details.
NOTE 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 |
|
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 |
|
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 |
|
Property, Plant and Equipment, net
|
| | | | | | | |
| | 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 |
|
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 |
|
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 |
|
Other Long-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 |
|
NOTE 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"):
The 1999 Plan expired in March 2009. There are currently 0 shares available for grant under the 1999 Plan, and there were no awards outstanding under the 1999 Plan as of December 29, 2019.
2013 Stock Plan ("2013 Plan"):
The 2013 Plan provides for (1) the discretionary granting of incentive stock options, nonstatutory stock options, stock appreciation rights ("SARs"), restricted stock awards ("RSAs"), restricted stock units ("RSUs") or performance-based restricted stock units ("PSUs") to employees, consultants and outside directors; and (2) the automatic granting of nonstatutory stock options, SARs, RSAs, RSUs or PSUs to outside directors in an amount determined by the Board. Options or SARs granted under the 2013 Stock Plan generally expire over terms not exceeding eight years from the date of grant, subject to earlier termination upon the cessation of employment or service of the recipients. The maximum aggregate number of shares authorized for issuance under the 2013 Stock Plan is 203.6 million shares. Shares issued in respect of "full-value awards" (RSAs, RSUs, PSUs, and other awards with a per share purchase price lower than 100% of the stock's fair market value on the date of grant) count against the authorized limit as 1.88 shares for every one share actually issued. As of December 29, 2019, 27.7 million stock options, or 14.7 million RSUs, PSUs and RSAs, were available for grant under the 2013 Stock Plan.
2010 Equity Incentive Award Plan ("2010 Plan"):
In connection with the Company’s merger with Spansion, the Company assumed Spansion's 2010 Plan, as amended, which reserves shares of Cypress 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 employees and consultants. The 2010 Plan provides that incentive stock options may 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. RSU awards 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 merger with Spansion and employees hired after the merger. As of December 29, 2019, a total of 0.3 million stock options, RSUs and RSAs remained available for grant under the 2010 Plan.
2012 Incentive Award Plan ("2012 Plan"):
In connection with the Company’s acquisition of Ramtron in 2012, the Company assumed Ramtron's 2012 Plan, as amended, which reserves a total of 1.2 million shares of common stock for 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, 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 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 29, 2019, 0.2 million stock options, or 0.1 million RSUs and RSAs, were available for grant under the 2012 Plan.
Employee Stock Purchase Plan ("ESPP"):
The Company’s amended and restated ESPP allows eligible employees to purchase shares of the Company's common stock through payroll deductions. Prior to January 2018, the ESPP provided for consecutive 18 month offering periods composed of 3 6-month exercise periods. Starting in January 2018, offering periods for new participants (and for continuing participants, upon the expiration of their prior offering period) are composed of only one 6-month exercise period. As of the December 31, 2018, purchase date, all 18 month offering periods have concluded. Under the ESPP's terms, at the end of each exercise period shares are purchased by participating employees at a price equal to 85% of the fair market value of the common stock at the commencement of the offering period of which such exercise period is a part or on the last day of such exercise period, whichever is lower. Purchases are limited to 10% of an employee’s eligible compensation, subject to a maximum annual employee contribution limit of $21,250.
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, 2019. As of December 29, 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 Statements 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 |
|
Aggregate cash proceeds from the issuance of shares under the employee stock plans were $38.6 million, $40.7 million and $47.2 million for fiscal 2019, 2018 and 2017, respectively. As of December 29, 2019 and December 30, 2018, stock-based compensation capitalized in inventories totaled $3.7 million and $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.
The following table summarizes the unrecognized stock-based compensation balance by type of awards as of December 29, 2019:
|
| | | | | |
| | | | Weighted-Average Amortization Period |
| | (In thousands) | | (In years) |
| RSUs and PSUs | $ | 54,881 |
| | 1.34 |
Employee Equity Award Activities
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.
Pursuant to the Merger Agreement, if the proposed Merger with Infineon is completed, each RSU, PSU, and employee or director stock option outstanding at the closing will be cancelled and converted into a right to receive an amount of cash specified in the Merger Agreement (without interest and subject to any applicable tax withholding). Such cash amounts will be payable promptly after the closing in respect of 100% of stock options (whether vested or unvested), 100% of director RSUs, and 50% of most other RSUs outstanding at the closing. Cash amounts for the remaining RSUs and all PSUs outstanding at the closing will generally be payable, subject to continued employment with the surviving corporation, according to the Cypress award’s original vesting schedule (subject to acceleration in certain circumstances). These provisions from the Merger Agreement did not have any impact on the Company's condensed consolidated financial statements for the year ended December 29, 2019.
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 was $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 index.
During the first quarter of 2018, 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 Company's revenue growth, earnings in 2018 and non-GAAP profit before tax in 2020. A portion of the LTIP awards include a milestone based on the Company's TSR relative to its peers over the period 2018-2020.
On March 16, 2017, 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 Performance Accelerated Restricted Stock ("PARS") program to certain employees. The milestones for the 2017 PARS program included a service condition and performance conditions that covered several overlapping performance and vesting periods relating to debt leverage, profit before tax, strategic initiatives, gross margin, and revenue growth relative to peers.
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 ESPP participation rights using the Black-Scholes valuation model. Assumptions used in the Black-Scholes valuation model were as follows:
|
| | | | | |
| Year Ended |
| December 29,
2019 | | December 30,
2018 | | December 31,
2017 |
ESPP: | | | | | |
Expected life | 0.5 years | | 0.5-1.5 years | | 0.5-1.5 years |
Volatility | 39.45% | | 31.94%-38.13% | | 34.8%-38.1% |
Risk-free interest rate | 2.48% | | 1.06%-2.14% | | 0.65%-1.28% |
Dividend yield | 3.36% | | 2.78%-3.87% | | 3.22%-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.
During fiscal 2019, 2018 and 2017, the Company issued 2.1 million, 2.3 million and 2.4 million shares under its ESPP with a weighted-average price of $10.87, $11.24 and $8.48 per share, respectively.
NOTE 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 resulted in the elimination of approximately 80 positions worldwide across various functions. The restructuring charge of $2.4 million recorded during the year ended December 30, 2018 consisted of personnel costs. NaN charges were recorded during fiscal 2019. The restructuring activities under this plan were completed and the related accrual was fully settled in the first quarter of fiscal 2019.
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 Company 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 2018, the Company signed a termination agreement with the building’s owner. The lease termination cost was approximately $19.0 million. The restructuring activities under this plan were completed and the related accrual was fully settled in the first quarter of 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 costs 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 |
|
Roll-forward of the Restructuring Reserves
Restructuring activity under the Company's various restructuring plan was as 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 |
|
NOTE 13. FOREIGN CURRENCY AND INTEREST RATE DERIVATIVES
The Company enters into multiple foreign exchange forward contracts to hedge certain foreign currency risk resulting from fluctuations in Japanese yen (¥) and Euro (€) exchange rates. In addition, the Company entered into fixed-for-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 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 ongoing program of cash flow hedges to protect its non-functional currency revenues against variability in cash flows due to foreign currency fluctuations. The Company’s foreign currency forward contracts that were designated as cash flow hedges generally have maturities between three and thirteen months. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions at the inception of the hedge. The Company recognizes derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measures them at fair value on a monthly basis. The Company records changes in the intrinsic value of its cash flow hedges in accumulated other comprehensive income on the Consolidated Balance Sheets, until the forecasted transaction occurs. Prior to the second quarter of 2018, interest charges or "forward points" on the forward contracts were 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 the underlying hedged items in the Condensed Consolidated Statements of Operations. When the forecasted transaction occurs, the Company reclassifies the related gain or loss on the cash flow hedge to revenue or costs, depending on the risk hedged. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company will reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income, net in its Condensed Consolidated Statements of Operations at that time. For the 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 29, 2019, the Company had zero net designated forward contracts. At December 30, 2018, the Company had net outstanding forward contracts to buy ¥5,977 million for $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 Hedges
Total notional amounts of net outstanding contracts were as summarized below. The duration or each contract is approximately thirty days:
|
| | | | |
Buy / Sell | | December 29, 2019 | | December 30, 2018 |
| | (In millions) |
EUR / US dollar | | €3.6 / $4.0 | | $9.1 / €8.0 |
US dollar / Japanese Yen | | $7.6 / ¥800 | | $13.2 / ¥1,430 |
Japanese Yen / US dollar | | ¥1,800 / $16.9 | | ¥4,210 / $38.0 |
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (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 | ) |
NOTE 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 |
|
NOTE 16. DEBT
Total debt, including finance lease obligations, is comprised of the following as of December 29, 2019 and December 30, 2018:
|
| | | | | | | | |
| | | 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 |
|
Senior Secured Credit Facility: Revolving Credit Facility and Term Loan B
On 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 entered into a Joinder and Amendment Agreement with the initial incremental term loan lenders party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent. The Joinder Agreement supplements the Company’s existing Credit Agreement. The Joinder and Amendment Agreement provides for the incurrence by the Company of an incremental term loan in an aggregate principal amount of $450.0 million ("Term Loan B"). The incurrence of Term Loan B is permitted as an incremental loan under the Credit Agreement and is subject to the terms of the Credit Agreement and to additional terms set forth in the Joinder and Amendment Agreement. Term Loan B was fully funded and was scheduled to mature on July 5, 2021. The Company incurred financing costs of $11.5 million to the lenders of Term Loan B which were capitalized. These
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 amended 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 3.75% effective February 17, 2017. Additionally, the amended financial covenants included the following conditions: 1) maximum total leverage ratio of 4.25 to 1.00 through December 31, 2017 and 2) maximum total leverage ratio of 4.00 to 1.00 through July 1, 2018 and 3.75 to 1.00 thereafter. The Company 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" on the Consolidated Balance Sheets. These costs were amortized over the life of the term loans and recorded in "Interest expense" in the Consolidated Statements of Operations.
On August 18, 2017, Term Loan B was increased by $91.3 million to replace Term Loan A. Previously unamortized debt issuance costs of $3.0 million related to Term Loan A were written off and recorded as "Interest expense" in the Consolidated Statements of Operations in fiscal 2017. The additional incremental term loan was subject to the terms of the Credit Agreement and the additional terms set forth in the amendment. The amendment also reduced the applicable margins on Term Loan B from 3.75% to 2.75% effective August 18, 2017. The Company incurred financing costs of $0.6 million to the lenders of the term loans which were capitalized and recognized as a reduction of the Term Loan B balances in "Credit facility and long term debt" on the Consolidated Balance Sheets. These costs were amortized over the life of the term loans and recorded in "Interest expense" on the Consolidated Statements of Operations.
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 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 was in compliance with all of the financial covenants under the Credit Facility.
2% Exchangeable Senior Notes due 2020
Pursuant to its merger with Spansion, Cypress assumed Spansion's outstanding 2% Exchangeable Senior Notes due 2020 (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, 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 29, 2019, the Spansion Notes are exchangeable for 208.3448 shares of common stock per $1,000 principal amount of Spansion Notes (equivalent to an exchange price of approximately $4.80 per share) subject to adjustment upon the occurrence of certain events, including dividends, anti-dilutive issuances and, in certain circumstances, a make-whole adjustment upon a fundamental change. Pursuant to the terms of the indenture governing the Spansion Notes (as amended, the "Spansion Notes Indenture"), a "fundamental change" includes a change in control, a liquidation, consolidation, or merger of the Company 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 the case of a person or group becoming the beneficial owner, directly or indirectly, of more than 50% of the Company’s common stock or in the case of a liquidation, consolidation or merger of the Company if, in either case, 90% of the consideration paid in such transaction consists of 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 are exchangeable only under certain specified circumstances as described in the Spansion Notes Indenture. One such circumstance is that the Spansion Notes will be exchangeable during any fiscal quarter (and only during such fiscal quarter), if the closing 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 130% of the exchange 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 Spansion Notes were exchangeable at the option of their holders during the third and fourth quarters of fiscal 2019 and will be exchangeable during the first quarter of fiscal 2020. During the fiscal quarters ended September 29, 2019 and December 29, 2019, the Company received exchange notices representing an immaterial principal amount of Spansion Notes from holders. The Company paid cash to settle the principle balance, and delivered shares to settle the conversion premium related to the Spansion Notes.
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 "Other income (expense), net" in the Consolidated Statement of Operations. See Note 15, Other Income (Expense), Net, of the Notes to 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 years ended December 29, 2019, December 30, 2018, and December 31, 2017 (in thousands):
|
| | | | | | | | | | | | |
| | | Year Ended |
| | | December 29, 2019 | | December 28, 2018 | | December 31, 2017 |
| Contractual interest expense at 2% per annum | | $ | 242 |
| | $ | 242 |
| | $ | 2,880 |
|
| Accretion of debt discount | | 329 |
| | 329 |
| | 3,149 |
|
| Total | | $ | 571 |
| | $ | 571 |
| | $ | 6,029 |
|
The Spansion 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 (in thousands):
|
| | | | | | | | | | | | |
| | | 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 credit facility and long-term debt and is amortized over the remaining life of the 2022 Notes.
Capped Calls, 4.5% Convertible Senior Notes due 2022
In connection with the issuance of the 4.5% Convertible Senior Notes, the Company entered into capped call transactions with certain bank counterparties to reduce the risk of potential dilution of the Company’s common stock upon the exchange of the 4.5% Convertible Senior 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% 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 occurrence of certain events, including anti-dilutive issuances and, in certain circumstances, a make-whole adjustment upon a fundamental change. A fundamental change includes a change in control, delisting of the Company’s stock, and liquidation, consolidation, or merger of the Company (see "—Effect of Proposed Merger on the Notes," 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 foregoing circumstances.
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.
It is the Company’s intent that upon conversion, the Company would pay the holders of the 2023 Notes cash for an amount up to the aggregate principal amount of the 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 Notes that are intended to be cash settled. The conversion spread will be included in the denominator for the computation of diluted net income per common share, using the treasury stock method.
In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company separated 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 be 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 whole. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is accreted to interest expense over the term of the 2023 Notes using the 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 transaction costs of approximately $4.1 million relating to the 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 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 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 recorded as a reduction of additional paid-in-capital.
At the debt 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 December 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 the consolidated balance sheets within additional paid-in-capital
(2) Included in the consolidated balance sheets within credit facility and long-term debt and is amortized over the remaining life of the 2023 Notes.
Effect of Proposed Merger on the Notes
The proposed Merger will constitute a “fundamental change” (as defined in each of the indentures governing the Spansion Notes, 2022 Notes and 2023 Notes). As a result, holders of the Spansion Notes, 2022 Notes and 2023 Notes will be entitled to either (a) convert or exchange such holder's notes based on the applicable conversion or exchange rate for such notes in effect on the applicable exchange date or conversion date (as increased by additional make-whole shares to the extent such notes are converted after the Effective Time and prior to the Fundamental Change Repurchase Date (as defined in the applicable indenture)) or (b) require the surviving corporation to repurchase that holder's notes (or any portion of principal amount thereof that is equal to $1,000 or an integral multiple of $1,000 in excess thereof) of the applicable series for cash on a date specified by the surviving corporation in accordance with the applicable indenture at a purchase price of 100% of the principal amount thereof plus accrued and unpaid interest to, but excluding, the Fundamental Change Repurchase Date (as defined in the applicable indenture). Alternatively, holders of Cypress's outstanding exchangeable or convertible notes can continue to hold such notes, which, following the Effective Time, will (at such times as conversion or exchange is
permitted by the applicable indenture) be convertible or exchangeable only into an amount of cash equal to $23.85 per share multiplied by the applicable exchange or conversion rate as described above.
Future Debt Payments
The future scheduled principal payments for the Company's outstanding debt as of December 29, 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 |
|
Operating lease expense was $13.7 million and $12.7 million for the years ended December 30, 2018 and December 31 2017, respectively, under Topic 840.
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 18. EQUITY TRANSACTIONS
$450 million Stock Buyback 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 its common stock. The timing and actual amount expended with the 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 2018, the Company used $274.1 million to repurchase 31.8 million shares at an average price of $8.62. NaN open market repurchases were made during fiscal 2019.
Yield Enhancement 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 0 activity related to yield enhanced structured agreements during fiscal 2017 or fiscal 2019. The following table summarizes the activity of the Company’s settled yield enhanced structured agreements during fiscal 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 |
|
.
Dividends
During fiscal 2019, the Company paid total cash dividends of $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 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 26, 2019. This cash dividend was paid on January 16, 2020 and totaled $41.0 million.
During fiscal 2018, the Company paid total cash dividends of $157.4 million, consisting of dividends of $0.11 per share of common stock paid in each of the quarters of the fiscal year.
During fiscal 2017, the Company paid total cash dividends of $144.7 million, consisting of dividends of $0.11 per share of common stock paid in each of the quarters of the fiscal year.
NOTE 19. RELATED-PARTY TRANSACTIONS
In the ordinary course of business, the Company purchases from, or sells to (a) entities for which one of the Company's directors or executive officers serves as a director or (b) entities over which the Company's directors or executive officers or their immediate family members are able, directly or indirectly, to exercise control or significant influence (collectively, "related parties").
For the indicated periods, the following table presents information on the Company's transactions with such entities occurring at a time when the entity was a related party of the Company.
|
| | | | | | | | | | | |
| | 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 |
|
As of December 29, 2019 and December 30, 2018, amounts due from these parties totaled $3.0 million and $0.1 million, respectively, and amounts due to these parties totaled $1.8 million and $1.9 million, respectively.
NOTE 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 | ) |
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 |
|
NOTE 21. EMPLOYEE BENEFIT PLANS
Pension Plans
The Company sponsors defined benefit pension plans covering employees in 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 29, 2019 and December 30, 2018, projected benefit obligations, net of plan assets totaled $17.0 million and $13.4 million, respectively, and the fair value of plan assets was $3.6 million and $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 upon certain performance measures, including the Company’s revenue and pre-bonus pre-tax profit margin as well as the achievement of strategic, operational and financial goals established 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 $42.1 million under the plan in fiscal 2019.
Deferred Compensation Plans
The Company maintains deferred compensation plans, which provide 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 29, 2019 and December 30, 2018, the fair value of the assets was $48.3 million and $44.4 million, respectively, and the fair value of the liabilities was $48.3 million and $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 | ) |
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. Prior to December 31, 2018, the Company matched contributions equal to 50% of the first $2,000 that each 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.
NOTE 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 | ) |
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 | ) |
| |
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 |
|
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 |
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 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. As of December 30, 2018, the Company released $343.3 million of the valuation allowance attributable to certain U.S. deferred tax assets and set up a valuation allowance of $158.5 million for the portion which was not more likely than not to be realized, based upon the Company’s evaluation at the time. The Company will continue to evaluate all evidence in future periods to determine if a further release of the valuation allowance is 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'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 six years. The Company’s tax benefit of these tax holidays for the year ended December 29, 2019 had an insignificant impact on the tax provision and earnings per share.
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 |
|
Gross unrecognized tax benefits increased by $14.2 million during fiscal year 2019, resulting in gross unrecognized tax benefits of $136.0 million as of December 29, 2019.
During fiscal year 2019, the Company recognized $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 Statements of Operations. The Company recognized approximately $2.7 million of expense related to interest and penalties in fiscal year 2019. Accrued interest and penalties are included within other long-term liabilities in the Consolidated Balance Sheets. As of December 29, 2019 and December 30, 2018, the combined amount of cumulative accrued interest and penalties was approximately $15.6 million and $13.0 million, respectively.
As of December 29, 2019 and December 30, 2018, the amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate totaled $71.7 million and $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;
expiration of statutes of limitations on the Company’s tax 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. Given the uncertainty in the development of ongoing tax examinations and tax correspondence with taxing authorities, it is possible that the Company’s balance of gross unrecognized tax benefits could materially change in the next 12 months. As a result, the Company is unable to estimate the full range of 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 29, 2019, December 30, 2018 and December 31, 2017, the amount of accrued interest and penalties totaled $15.6 million, $13.0 million and $11.0 million, respectively. The Company recorded a charge or (benefit) from interest and penalties of $2.7 million, $2.4 million and $2.2 million during fiscal 2019, 2018 and 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 29, 2019:
|
| | |
Tax Jurisdictions | | Tax Years |
United States | | 2000 and onward |
California | | 2008 and onward |
Philippines | | 2014 and onward |
Israel | | 2014 and onward |
India | | 2004 and onward |
Thailand | | 2014 and onward |
Malaysia | | 2007 and onward |
Switzerland | | 2015 and onward |
Japan | | 2012 and onward |
Income tax examinations of the Company' subsidiaries in India, Malaysia, Philippines, Taiwan, Israel, and Germany are in progress. In addition, sales tax examinations in California and Texas are to be expected in fiscal year 2020. The Company does not believe the ultimate outcome of these examinations will result in a material increase to its tax liability.
The Company has not provided the U.S. income taxes and foreign withholding taxes on a cumulative total of $23.6 million of undistributed earnings for non-U.S. subsidiaries as of December 29, 2019, because such earnings are intended to be indefinitely reinvested. Income taxes and foreign withholding taxes associated with these undistributed earnings are not significant.
NOTE 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 upon its historical warranty claim experience. Warranty returns are recorded as an allowance for sales returns. The allowance for sales returns is reviewed quarterly to verify that it reflects the remaining obligations based on the anticipated returns over the balance of the obligation period.
The following table presents the Company's warranty reserve activities:
|
| | | | | | | | | | | |
| | 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 |
|
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 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
The Company is currently involved in various legal proceedings, claims, and disputes arising in the ordinary course of business, including intellectual property claims and other matters.
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, 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 Company, alleging infringement of 8 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. (“FEI”) against the Company in Santa Clara County Superior Court (Case No. 19-cv-359055), alleging 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 LLC (Case No. 19-cv-00719, W.D. Tex.) against the Company, alleging 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 parties determine ownership and rights to the photomasks.
For many legal matters, particularly those in early stages, the Company cannot reasonably estimate the possible loss (or range of loss), if any. The Company records an accrual for legal matters at the time or times it determines that a loss is both probable and reasonably estimable. Amounts accrued as of December 29, 2019 were not material. Regarding matters for which no accrual has been made (including the potential for losses in excess of amounts accrued), the Company currently believes, based on its own investigations, that any losses (or ranges of losses) that are reasonably possible and estimable will not, in the aggregate, have a material adverse effect on its financial position, results of operations, or cash flows. However, the ultimate outcome of legal proceedings involves judgments, estimates, and inherent uncertainties and cannot be predicted with certainty. Should the ultimate outcome of any legal matter be unfavorable, the Company's business, financial condition, results of operations, or cash flows could be materially and adversely affected. The Company may also incur substantial legal fees, which are expensed as incurred, in defending against legal claims.
Indemnification Obligations
The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify other parties to such agreements with respect to certain matters. Typically, these obligations arise in the context of contracts that the Company has entered into, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants or terms and conditions related to such matters as the sale and/or delivery of its products, title to assets sold, certain intellectual property claims, defective products, specified environmental matters and certain income taxes. With respect to the sale of a manufacturing facility or subsidiary business, such indemnification may also cover tax matters and the Company's management of the facility or business prior to the sale. In the foregoing circumstances, payment by the Company is customarily conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims and vigorously defend itself and the other party against related third-party claims. Further, the Company's obligations under these agreements may be limited in terms of time, amount or the scope of its responsibility and in some instances, the Company may have recourse against third parties for certain payments made under these agreements.
It is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments the Company has made under these agreements have not had a material effect on the Company’s business, financial condition or results of operations. As 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, though there can be no assurance in this regard.
NOTE 24. SEGMENT, GEOGRAPHICAL AND CUSTOMER INFORMATION
Segment Information
The Company designs, manufactures and sells advanced embedded system solutions for IoT, automotive, industrial, and consumer 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 CODM is considered to be the Chief Executive Officer.
The Company's segments are its Microcontroller and Connectivity Division (or MCD) and its Memory Products Division (or MPD).
Income Before 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 |
|
The Company does not allocate stock-based compensation, changes in value of deferred compensation plan, amortization of intangible assets, merger-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, interest income and other, and interest expense to its segments. The Company excludes these items consistent with the manner in which it internally evaluates its results of operations.
Geographical Information
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 |
|
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 1 of the Company's distributors, accounted for 15% and 25% of its consolidated accounts receivable as of December 29, 2019 and December 30, 2018, respectively.
Revenue generated through 2 of the Company's distributors, accounted for 16% and 10%, respectively, of the Company's consolidated revenues for fiscal 2019.
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.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Cypress Semiconductor 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”) as of December 29, 2019 and 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 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 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 29, 2019 and December 30, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the 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 on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial 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) 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 consolidated financial 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 consolidated financial 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 21, 2020
We have served as the Company’s auditor since 1982.
UNAUDITED QUARTERLY FINANCIAL DATA
Fiscal 2019
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | 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 | | $ | 559,568 |
| | $ | 574,521 |
| | $ | 532,221 |
| | $ | 539,004 |
|
| Gross Margin | | $ | 212,418 |
| | $ | 216,441 |
| | $ | 198,758 |
| | $ | 202,409 |
|
| Net income (loss) | | $ | 20,760 |
| | $ | 12,673 |
| | $ | (12,733 | ) | | $ | 19,712 |
|
| Adjust for net loss attributable to non-controlling interest | | $ | — |
| | $ | 10 |
| | $ | 4 |
| | $ | 2 |
|
| Net income (loss) attributable to Cypress | | $ | 20,760 |
| | $ | 12,683 |
| | $ | (12,729 | ) | | $ | 19,714 |
|
| Net income (loss) per share - basic | | $ | 0.06 |
| | $ | 0.03 |
| | $ | (0.03 | ) | | $ | 0.05 |
|
| Net income (loss) per share - diluted | | $ | 0.05 |
| | $ | 0.03 |
| | $ | (0.03 | ) | | $ | 0.05 |
|
Fiscal 2018
|
| | | | | | | | | | | | | | | | |
| | | 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 third quarters of fiscal 2019, the Company recorded $51.9 million of amortization expenses related to intangible assets. During the fourth quarter of fiscal 2019, the Company recorded $51.7 million of amortization expenses related to intangible assets. See Note 6, Intangible Assets, of the Notes to Consolidated Financial Statements. |
| |
(2) | During the third quarter of fiscal 2019, the Company recorded $6.4 million of debt extinguishment. See Note 16, Debt, of the Notes to Consolidated Financial Statements. |
| |
(3) | During the second quarter of fiscal 2019, the Company recorded $3.0 million of restructuring charges. The remaining quarters of fiscal 2019, restructuring charges were immaterial. See Note 12, Restructuring, of the Notes to Consolidated Financial Statements. |
| |
(4) | During the second quarter of fiscal 2019, the Company recorded an impairment charge of $29.5 million related to its investment in Deca Technologies Inc., a privately held company. See Note 8, Investment in Equity Method Investments, of the Notes to Consolidated Financial Statements, respectively. |
| |
(5) | During the second, third and fourth quarters of fiscal 2019, the Company recorded $8.4 million, $3.0 million and $1.3 million, respectively, of merger-related expense. See Note 2, Merger Agreement, of the Notes to Consolidated Financial Statements. |
| |
(6) | During the fourth quarter of fiscal 2018, the Company recorded an impairment charge of $41.5 million related to its investment in Deca Technologies Inc., a privately held company, loss on assets held for sale of $76.6 million related to the Company's entry into a definitive agreement to divest the NAND business, and release of the deferred taxes valuation allowance of $343.3 million. |
| |
(7) | During the first, second, third and fourth quarters of fiscal 2018, the Company recorded $4.1 million, $1.2 million, $10.0 million and $1.5 million, respectively, of restructuring charges. |
| |
(8) | During the first, second, third and fourth quarters of fiscal 2018, the Company recorded $53.1 million, $53.7 million, $55.4 million and $54.6 million, respectively, of amortization expenses related to intangible assets. |
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.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
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ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on our 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 effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
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) under 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. 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.
Management assessed the effectiveness of our internal control over financial reporting as of December 29, 2019. Management based this assessment on criteria described in "Internal Control - Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management determined that as of December 29, 2019, we maintained effective internal control over financial reporting.
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.
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ITEM 9B. | OTHER INFORMATION |
None.
PART III
Certain information required by Part III is omitted from this Annual Report. We intend to file a definitive proxy statement pursuant to Regulation 14A 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 as stated below.
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ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item concerning directors is incorporated by reference to the Company's Proxy Statement for its 2020 Annual Meeting of Shareholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 29, 2019 (the “2020 Proxy Statement”).
The information required by this item concerning executive officers is incorporated by reference to Item 1 of this Annual Report.
ETHICSWe have adopted a Code of Business Conduct and Ethics (our "Code“Code of Ethics"Ethics”), which applies to all of our directors, officers and employees. We have made the Code of Ethics 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“About Cypress,"” then on "Investors,"“Investors,” and then “Corporate Governance.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 Report.
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 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 (“Nasdaq”) 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
.95134.AUDIT COMMITTEE
The Company has a separately-designated audit committee established in accordance with Section 3(a)(58)(A) and Section 10A(m) of the Exchange Act. This audit committee (the “Audit Committee”) consists of Ms. Lego (chair) and Messrs. Albrecht, Martino, and Owens. The Board has determined that each member of the Audit Committee is an independent director within the meaning of applicable SEC rules and the Nasdaq listing standards. The Board has also determined that Ms. Lego and Mr. Albrecht qualify as audit committee financial experts within the meaning of SEC rules and satisfy the financial sophistication requirements of the Nasdaq listing standards.
| ITEM 11. | Executive Compensation |
DIRECTOR COMPENSATION
In November 2019, the Compensation Committee surveyed director compensation arrangements at our peer group companies with the assistance of its independent compensation consultant, Compensia, and resolved to keep our non-employee director compensation program unchanged for another year.
The non-employee members of our Board receive cash and equity compensation, as described below.
Non-Employee Director Cash Compensation
Our non-employee directors are paid an annual fee for serving on the Board, plus additional fees based on their committee service. Cash fees for our non-employee directors have remained unchanged since mid-2018. The table below shows the annualized cash compensation payable to our non-employee directors:
Position | Annualized Cash Retainer |
| Non-employee director | $50,000 |
| Board chairman | $65,000 |
| Audit Committee chairman | $25,000 |
| Audit Committee member | $15,000 |
| Compensation Committee chairman | $20,000 |
| Compensation Committee member | $10,000 |
| Nominating and Corporate Governance Committee chairman | $10,000 |
| Nominating and Corporate Governance Committee member | $5,000 |
All retainers are paid in quarterly installments, in arrears, and are generally pro-rated for partial period service in a position. In addition to the retainers described above, non-employee directors are reimbursed for travel and other reasonable out-of-pocket expenses related to attendance at Board and committee meetings, business events on behalf of Cypress, and seminars and programs on subjects related to their responsibilities.
The Board periodically establishes an ad hoc pricing committee (the “Pricing Committee”) to oversee the pricing and management of the Company’s debt structure. Members of the Pricing Committee do not receive any additional compensation for their service on such committee.
Non-Employee Director Equity Compensation
Upon initial appointment or election to the Board, each non-employee director is granted an equity award of restricted stock units (“RSUs”) under Cypress’s 2013 Stock Plan (the “2013 Plan”) with a grant-date value of approximately $200,000, which is scheduled to vest annually over three years. Non-employee directors who are elected at Cypress’s annual stockholders meeting also receive an award of RSUs with a grant-date value of approximately $200,000, which is scheduled to vest the day before the next annual stockholders meeting (which we refer to as the “annual equity grant”). The number of units granted is determined by dividing such values by the closing market price of our common stock on the date of grant. The value of the annual equity grant has remained unchanged since 2015. Any new director appointed by the Board between annual stockholders meetings will receive the annual equity grant, but with a value that is pro-rated for the number of months the director serves until the next annual stockholders meeting (and based on the assumption that the next annual stockholders meeting will be held in May, unless another date has been selected). Under the 2013 Plan, non-employee directors may not be granted, in any fiscal year, equity awards with a grant date fair value (determined in accordance with either GAAP or IASB principles) of more than $500,000 (or $750,000 in connection with a director’s initial appointment or election to the Board).
Stock Ownership Requirements
Our directors and executive officers have historically maintained strong stock ownership to align their interests with stockholder interests, and our stock ownership requirements are consistent with industry best practices. The table below summarizes the stock ownership policy and status among our directors and Named Executive Officers (defined below) as of April 1, 2020 (and based on our April 1, 2020 closing stock price of $23.40 per share).
| Stock Ownership Requirement | Shares Actually Held |
| Chief Executive Officer | 6xbase compensation | 21xbase compensation |
| All Other Named Executive Officers | 4xbase compensation | 12x– 19xbase compensation |
| All Non-Employee Directors | 5xannual cash retainer(1) | 12x– 70xannual cash retainer |
| (1) | The annual cash retainer for non-employee directors is $50,000. |
Unvested RSUs do not count toward the stock ownership requirement; neither do unexercised stock options, even if vested and “in the money.” Executive officers have three years from their designation as named executive officers to meet the stock ownership requirement; if the requirement is not met after three years, then the executive officer must hold all future shares that vest (net of taxes) until the stock ownership requirement is met. Non-employee directors are required to meet the requirement within five years of their initial election or appointment to the Board.
As a result of the above requirements, we expect that our directors and Named Executive Officers will continue to hold a substantial amount of their Cypress compensation in shares of Cypress common stock and maintain alignment with stockholder interests. As of April 1, 2020, all of our Named Executive Officers and directors are in compliance with our stock ownership requirements.
Non-Employee Director Compensation Table—2019
The following table presents compensation information for our non-employee directors for fiscal year 2019.
Director | Fees Earned or
Paid in Cash
($) | Stock
Awards(1)
($) | Option
Awards(2)
($) | All Other
Compensation
($) | Total
($) |
| W. Steve Albrecht | 140,907 | 195,065 | — | — | 335,972 |
| Oh Chul Kwon | 50,000 | 195,065 | — | — | 245,065 |
| Catherine P. Lego | 74,093 | 195,065 | — | — | 269,158 |
| Camillo Martino | 85,000 | 195,065 | — | — | 280,065 |
| J. Daniel McCranie(3) | 25,000 | — | — | — | 25,000 |
| Jeffrey J. Owens | 75,000 | 195,065 | — | — | 270,065 |
| Jeannine P. Sargent | 65,000 | 195,065 | — | — | 260,065 |
| Michael S. Wishart | 70,000 | 195,065 | — | — | 265,065 |
| (1) | The value reported in the “Stock Awards” column represents the aggregate grant date fair value of awards granted in fiscal year 2019, as determined pursuant to Financial Accounting Standards Board Accounting Standards Codification Topic 718Compensation—Stock Compensation(“FASB ASC 718”). On May 3, 2019 at our 2019 annual meeting of stockholders (the “2019 Annual Meeting”), each person listed in this table was re-elected to the Board other than Mr. McCranie, who had decided not to stand for re-election. Accordingly, on that date each person listed above other than Mr. McCranie was automatically granted an award under our 2013 Stock Plan. Each of these awards consisted of 11,383 RSUs with an aggregate grant date fair value of $195,065 per award (or $17.14 per unit). Each of these awards is scheduled to cliff vest in full on the day before the 2020 annual meeting of stockholders (the “2020 Annual Meeting”). The grant date fair value of each of these RSU awards calculated under FASB ASC 718 is lower than the $200,000 target value described in the section “Non-Employee Director Equity Compensation,” above, primarily because RSUs do not have dividend rights. For information on the assumptions used in our grant date fair value computations, refer to Note 11— “Employee Stock Plans and Stock-Based Compensation” in the Notes to Consolidated Financial Statements in the Original Filing of our 2019 Form 10-K. The number of outstanding unvested RSUs held at the end of fiscal year 2019 by each person listed in the table above was as follows: |
| ● | Mr. Albrecht: 11,383 RSUs | ● | Mr. McCranie: none |
| ● | Mr. Kwon: 11,383 RSUs | ● | Mr. Owens: 16,087 RSUs |
| ● | Ms. Lego: 16,245 RSUs | ● | Ms. Sargent: 15,653 RSUs |
| ● | Mr. Martino: 16,332 RSUs | ● | Mr. Wishart: 11,383 RSUs |
Pursuant to our Merger Agreement with Infineon, any RSUs held by directors as of immediately prior to the Closing will be cancelled and converted into the right to receive $23.85 in cash per RSU (which is equivalent to the Merger consideration of $23.85 per share).
| (2) | No stock option awards were granted to our directors in fiscal year 2019. At the end of fiscal 2019, Mr. Wishart held 34,398 Cypress stock options, all of which were originally granted as Spansion, Inc. (“Spansion”) awards prior to our merger with Spansion and were then assumed by Cypress and converted into options over Cypress stock pursuant to the merger agreement between Cypress and Spansion. Such options are fully vested. At the end of fiscal 2019, no other person listed in the table above held any Cypress stock options. Pursuant to the Infineon Merger Agreement, any employee or director stock option that is outstanding and unexercised immediately prior to the Closing will be cancelled and converted into the right to receive a cash payment equal to the product of (i) the number of shares of Cypress common stock subject to that option multiplied by(ii) the amount, if any, by which $23.85 exceeds the per share exercise price of the option. |
| (3) | Mr. McCranie did not stand for re-election at the 2019 Annual Meeting and, accordingly, his Board service ended on the date of the 2019 Annual Meeting, May 3, 2019. Although he served for only part of the second quarter, he received a full quarterly retainer payment of $12,500 for the fiscal quarter ended June 30, 2019. |
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis (“CD&A”) describes Cypress’s executive compensation philosophy, objectives, and programs, as well as the material compensation-related actions taken in fiscal year 2019 or to date in 2020 for the executive officers named below. As required by SEC rules, these are our “Named Executive Officers” (or “NEOs”):
| Name | Title |
| Hassane El-Khoury | President and Chief Executive Officer |
| Thad Trent | Chief Financial Officer and Executive Vice President, Finance and Administration |
| Sam Geha | Executive Vice President, Memory Products Division |
| Sudhir Gopalswamy | Executive Vice President, Microcontroller & Connectivity Division |
| Pamela L. Tondreau | Executive Vice President, Chief Legal & Human Resources Officer |
In this CD&A, the terms “we,” “our,” and “us” refer to Cypress and its management and sometimes, as applicable, the Compensation Committee of Cypress’s Board of Directors (the “Committee” or the “Compensation Committee”).
OVERVIEW
2019 Business Highlights
Fiscal year 2019 was a year of execution on our Cypress 3.0 initiatives, including the following accomplishments:
| ● | We generated GAAP revenue of $2.21 billion; |
| ● | Revenue from our Microcontroller and Connectivity Division (MCD) increased 0.2% year-over-year in a challenging environment; |
| ● | We earned record automotive revenue of $829.4 million, representing 38% of our total fiscal year 2019 revenue and demonstrating sustained growth in this strategic end-market; |
| ● | We generated record GAAP net cash provided by operating activities of $478.9 million and record free cash flow of $438.2 million;1 |
| ● | Customer design win activity was up 15% year-over-year; |
| ● | We invested in multiple new product cycles such as Wi-Fi 6, PSoC® 6, Traveo® II, Semper®, Excelon™, and USB-C; |
| ● | We closed a joint-venture transaction with SK hynix systems ic Inc. to exit the more commoditized NAND flash market; and |
| ● | We signed a definitive agreement providing for Infineon to acquire Cypress for $23.85 per share in cash, corresponding to an enterprise value of approximately $10 billion. |
Furthermore, our net burn rate for fiscal year 2019 was 1.71%. We calculated this “net burn rate” by dividing our net equity awards granted in 2019 (i.e., shares subject to new equity awards (at target) in 2019, plus any performance-based shares vesting above target in 2019, less shares subject to award forfeitures occurring in 2019) by our weighted average diluted shares outstanding for 2019. This calculation may differ from similarly named metrics used by others.
2019 CEO Compensation Highlights
In early 2019, the Compensation Committee, with assistance from its independent compensation consultant, reviewed the compensation of our chief executive officer (“CEO”) against market levels (as sourced from 2018 public filings of companies in the compensation peer group described below (which we refer to as “market peers”)) and based on the factors described in this CD&A made several adjustments, which can be summarized as follows:
| ● | The Committee increased Mr. El-Khoury’s base salary by 7% (from $700,000 to $750,000), which moved him from the 20th percentile to the 40th percentile among market peers; |
| ● | The Committee increased Mr. El-Khoury’s target bonus opportunity from 140% to 150% of base salary, which moved him from the 35th percentile to the 50th percentile among market peers; |
| ● | Overall, Mr. El-Khoury’s target total cash compensation (including base salary and target bonus) increased from $1.7 million to $1.9 million, shifting him from the 25th percentile to the 40th percentile among market peers; |
| 1. | Free cash flow is a non-GAAP financial measure calculated as GAAP net cash provided by (used in) operating activities, less acquisition of property, plant and equipment, net (i.e., acquisition of property, plant and equipment less proceeds received from disposition of property, plant and equipment). Other non-GAAP financial measures appear in this CD&A. Each of our other non-GAAP financial measures is adjusted from the most directly comparable GAAP financial measure to exclude certain items as described in the appendix to this Amendment (the “Appendix”). Our non-GAAP financial measures may be calculated differently than similarly-named non-GAAP financial measures presented by other companies. Our presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for information prepared and presented in accordance with generally accepted accounting principles (“GAAP”). Our presentation of non-GAAP financial measures supplements and should be viewed in conjunction with our GAAP financial measures. There are limitations to the use non-GAAP financial measures. Explanations of our non-GAAP financial measures, descriptions of such limitations, and reconciliations of the non-GAAP financial measures above to the GAAP financial measures the Company considers most comparable are included in the Appendix. |
| ● | The approved grant-date value2 of Mr. El-Khoury’s long-term incentive awards (at target) for 2019 increased slightly from $5.2 million to $5.4 million, moving him from the 50th percentile to the 60th percentile among market peers. (These amounts are prior to application of the one-time Special 2019 Increase described below); |
| ● | Mr. El-Khoury’s resulting total direct compensation (salary, target bonus, and equity grant-date value2) increased from $6.9 million to $7.3 million, or from the 45th percentile to the 60th percentile among market peers (again prior to application of the one-time Special 2019 Increase described below). |
The performance-based equity award granted in 2019 was a three-year award with three annual vesting opportunities (an “annual allocation”). By contrast the 2018 performance-based equity grant had been a three-year award with only two vesting opportunities (at the end of years one and three, a “bi-modal allocation”). For 2019, in order to smooth the transition from the bi-modal allocation to the annual allocation, the Committee approved a special one-time adjustment for the CEO and the other Named Executive Officers, increasing each executive’s 2019 equity award grant-date value2 by 21.2% compared to the levels that otherwise would have been approved (the “Special 2019 Increase”), as described in more detail in this CD&A.
After application of the one-time Special 2019 Increase, the grant-date value2 of Mr. El-Khoury’s long-term incentive awards (at target) granted in 2019 was $6.5 million and his total direct compensation for 2019 was $8.4 million, placing him at approximately the 90th percentile and 85th percentile, respectively, among market peers. The Special 2019 Increase wasnotrepeated in 2020; the grant-date value of the long-term incentive awards approved in February 2020 was equal to what the grant-date value of the February 2019 awards would have been excluding the Special 2019 Increase.
Although the CEO’s total direct compensation approved in 2019 was above the market median, the Compensation Committee maintained a heavier weighting toward performance-based awards—approving an equity mix for the CEO of 35% service-based (RSU) and 65% performance-based stock unit (“PSU”) awards (measured at target)—in order to tie a significant portion of his compensation to long-term stockholder value creation.
Effect of Pending Merger on 2019 Compensation Payouts
On June 3, 2019, we signed the Merger Agreement to be acquired by Infineon for consideration of $23.85 per common share in cash. Upon the Closing of the Merger, Cypress will become a wholly-owned subsidiary of Infineon. As of the filing of this Amendment, the Merger is still pending and the Closing is scheduled for April 16, 2020, subject to the satisfaction of customary closing conditions.
The Merger announcement was well received by our stockholders. The Merger premium of 55% over the unaffected price of our stock (i.e., the market price before rumors of the transaction began circulating) represented the fourth largest semiconductor company acquisition premium since 2014, as illustrated in the chart below. And Cypress’s stockholders approved the Merger by an overwhelming majority. At our August 27, 2019 special meeting of stockholders, 99.85% of the votes cast (representing over 71% of outstanding shares) were in favor of the Merger, compared to only 0.14% opposed.
| 2. | For purposes of these compensation highlights, the “grant-date value” of Cypress equity awards means the target value approved by the Compensation Committee. The specific number of units granted was determined by dividing such approved value by the closing price per share of our stock on the grant date. This grant-date value approved by the Compensation Committee will differ from the grant date fair value of the award as calculated for accounting purposes under FASB ASC 718. |
Fourth Highest Semiconductor Acquisition Premium since 2014
Transaction Premia in Public Semiconductor Company Deals with Over $1 Billion Enterprise Value since 2014
| * | Cypress premium is based on the Merger consideration of $23.85 per share compared to Cypress’s unaffected closing stock price of $15.40 on May 28, 2019. |
Source: Company Filings, Capital IQ, Morgan Stanley Database, Dealpoint
The pending Merger had important effects on our outstanding equity-based awards and how we chose to pay out incentive-plan awards previously granted to our executive officers that related to fiscal 2019 performance periods, as described below.
The Merger Agreement negotiated between Infineon and Cypress treats all employees’ equity awards under the same set of rules; no distinctions are made beween executives and employees. In general, these rules provide as follows:
| ● | Service-Based RSUs –Immediately prior to the Merger Closing, any outstanding service based RSUs that were granted prior to the June 3, 2019 Merger Agreement will be accelerated as to 50% of each outstanding vesting tranche (with the accelerated portion paid out at $23.85 per unit). The remaining 50% of such RSUs (along with all outstanding RSUs granted after June 3, 2019) will convert at Closing into cash-based awards that entitle the holder to $23.85 per unit, subject to continued employment through the predecessor RSU’s originally scheduled vesting date. |
| ● | Performance-Based PSUs – Performance-based PSUs will not accelerate at Closing but instead will convert into cash-based awards as described above at the PSU’s maximum achievement level.3 So, for example, a PSU covering 100 shares at target, which by its terms could vest up to 200% based on performance, will convert into 200 cash-based units entitling the holder to $23.85 per unit, subject to continued employment through the predecessor PSU’s originally scheduled vesting date but no longer subject to any performance-based vesting conditions. |
| 3. | In the case of the 2019 LTI award (as explained in detail in this CD&A), conversion is not necessarily at the maximum level but depends on Cypress’s TSR from the start of fiscal 2019 to the Closing, based on the acquisition price per share, relative to the TSR of other companies in the S&P Semiconductors Select Industry Index, according to a formula in the award agreement. Based on prevailing market prices as of April 1, 2020, such formula is expected to result in conversion of the 2019 LTI award at the maximum level. |
The Merger Agreement further provides so-called “double-trigger” termination protection for the cash-based awards in that any unvested cash-based awards will accelerate in full if, after the Closing, the holder’s employment is (a) terminated by the Company for any reason other than for “cause” or (b) terminated by the holder for “good reason” (as such terms are defined in the Merger Agreement).
As a result of the above rules, our executives’ PSUs were expected to convert into cash-based awards at the maximum level in the Merger and, for executives whose employment would not continue with Infineon, to accelerate in full upon their post-closing terminations.
Such accelerations, however, create tax risk for the continuing company in that, under Section 280G of the Internal Revenue Code of 1986, as amended (the “Tax Code”), the corporation is denied an income tax deduction for any “excess parachute payments” to executives in connection with a merger. The full definitions are complex and technical, but in general if an executive receives any compensatory payment that is contingent upon a change-in-control and that, when aggregated with other such contingent payments, exceeds three times the executive’s average annual income from the Company over the prior five calendar years or over such lesser period that the executive was employed by the Company (such average, the “Base Amount”), then the executive’s “excess parachute payment” is the portion of such aggregate that exceeds one times the Base Amount.
Excess parachute payments have negative implications both for the Company, which is denied any federal income tax deduction for the payments as mentioned above, and for the executives, who are subject to a 20% federal excise tax under Tax Code Section 4999 in addition to income tax on the excess payments.
The Merger Agreement therefore provided an opportunity for tax planning. The schedules to the agreement provided that if the Merger was expected to close in 2020, the Company could accelerate into December 2019 the vesting or payment of compensation that was scheduled to vest or be paid prior to April 1, 2020 (including by paying in 2019 annual bonuses in respect of 2019 that would ordinarily be paid in 2020). By so doing, the Company would raise the Base Amount and reduce the contingent payments, thereby reducing the likelihood that any remaining portion of the contingent payments would be considered an excess parachute payment. The Merger Agreement also provided that any such accelerated amounts must be subject to clawback or repayment in the event the recipient voluntarily resigns or is terminated for cause prior to the originally scheduled vesting or payment date.
Accordingly, our Board sought expert advice from a specialized Section 280G firm. After receiving a detailed Section 280G analysis from such firm, on December 12, 2019 our Board (a) accelerated into December 2019 the vesting of all equity awards that were otherwise scheduled to vest or be paid to the Named Executive Officers in January or February of 2020 and (b) accelerated into December payment of annual bonuses for 2019 to the Named Executive Officers. The Board approved the PSU acceleration at the maximum achievement levels and the bonus payment at target achievement levels. The PSUs were otherwise expected to vest above target but at less than maximum, and the annual bonus was otherwise expected to be paid below target.
The Board approved these accelerations at levels in excess of what otherwise would have vested or been paid in 2020 for the following reasons:
| ● | The Board considered the Merger premium to be an outstanding performance result; in the Board’s view the executives had fully earned the payments approved on December 12, 2019 by virtue of the merger process they ran and the result obtained. |
| ● | The Board recognized that achieving certain performance goals was not possible while adhering to the covenants in the June 3, 2019 Merger Agreement. Such covenants limited our executives’ ability to restructure operations in the second half of the year in response to the challenging macro environment. |
| ● | At the time the accelerations were approved, it was unclear how quickly the Merger might close. The Board recognized that if the Merger closed before the originally scheduled vesting dates, then the PSUs would upon Closing convert into cash-based awards at maximum levels and therefore, in such scenario, the Board’s acceleration at maximum would not increase the expected PSU payout; to the contrary, accelerating PSUs at any less than maximum could have been perceived as a “take away” of expected compensation from the executives. |
| ● | The Board recognized that reducing the potential excise tax burden that the executives may bear in connection with payments associated with the Closing of the Merger would benefit the Company by providing the Named Executive Officers with an additional financial incentive to remain with Cypress through the Closing of the Merger. |
| ● | The Board recognized that acceleration of such payments was a benefit under the Merger Agreement that had been negotiated with Infineon and that would not cause any reduction in the Merger consideration to be received by the Company’s stockholders. |
Because determination of the accelerated bonus amount was a discretionary decision of the Board, rather than being pursuant to the original incentive plan design, the accelerated bonus amount is reported in the Summary Compensation Table under “Bonus” rather than under “Non-Equity Incentive Plan Compensation.” In connection with the bonus and equity accelerations, each Named Executive Officer entered into a recoupment (or “clawback”) letter agreement with the Company. For more information on the accelerated payments, including the terms of the clawback, see “Executive Compensation Tables—Narrative Disclosure to Summary Compensation Table and Grants of Plan Based Awards Table—Modifications to Equity Awards and Non-Equity Incentive Plan Awards.”
The Merger Agreement also allowed for equity grants to executives in the first quarter of fiscal 2020 consistent with past practice, provided such awards were not performance based. Accordingly, the equity awards we granted to the Named Executive Officers in early 2020 consisted entirely of service-based RSUs, with each executive’s grant-date value approximately 21% below his or her 2019 award value. For more information on these grants, see “—Material Compensation Actions for 2020,” below.
In the event the Merger does not close, the Compensation Committee will consider how best to implement robust performance-based incentives for the Named Executive Officers in 2020.
Responding to our Stockholders
When determining executive compensation, the Compensation Committee considers the results of the annual advisory “say-on-pay” vote cast by stockholders. At our 2019 Annual Meeting of stockholders, 97% of the votes cast (representing nearly 73% of our outstanding shares) were in favor of our executive compensation program. The Compensation Committee believes this result reflects stockholders’ strong support for our approach to executive compensation.
The Compensation Committee also considered it important to solicit stockholder input to ensure our compensation philosophy and practices remain in sync with stockholder preferences. Accordingly, we maintained a formal stockholder outreach program to solicit feedback on executive compensation and governance. (The program was suspended upon signing the Merger Agreement.) In response to stockholder input and monitoring of best practices:
| ● | in 2019 we continued our use of total stockholder return (“TSR”) as a performance metric in our long-term incentive equity awards; and |
| ● | in 2019 our short-term incentive cash bonus plan design moved from quarterly payments to a single annual payment for our NEOs. |
Cypress’s Compensation Philosophy
Our Compensation Committee’s overarching philosophy is to maintain an executive compensation program that emphasizes pay for performance, drives business growth, and links stockholder value and executive performance. As explained below, the core goals of our executive compensation philosophy are to:
| ● | Attract, motivate, and retain top talent for positions that are critical to Cypress’s success; |
| ● | Compensate executives at responsible levels; and |
| ● | Emphasize performance-based compensation arrangements under which executives are rewarded for achieving specific short-term and long-term strategic, corporate goals, and enhancing stockholder value. |
Attract, Motivate, and Retain Top Talent. We aim to attract, motivate, and retain top talent for the critical positions that will guide our long-term success. We have structured our executive compensation program to motivate our executives to deliver on strategic objectives and to be competitive with compensation paid by companies in the same market for executive talent. Providing competitive compensation is especially important in the Silicon Valley area where we are headquartered. To ensure we remain competitive, our Compensation Committee conducts an annual compensation review to evaluate whether our current levels of cash and equity compensation for each executive are competitive with compensation provided at our peer companies. The Committee then makes adjustments based on merit and other factors.
Compensate Executives at Responsible Levels.Our philosophy is to compensate our executives at competitive but responsible levels, with higher compensation for above-plan performance and lower compensation for below-plan performance. We seek to accomplish this through:
| ● | base salary and cash incentive opportunity levels that are generally targeted at or below the median for comparable positions among our peer group companies (though actual cash compensation of our NEOs relative to similar positions at peer companies may vary based on each NEO’s skills, experience and other factors); |
| ● | long-term equity grants generally weighted more toward performance-based awards, with single- and multi-year measurement periods, and weighted less toward service-based awards; and |
| ● | standard health and welfare benefits. |
See “Determining Compensation Levels” below for a discussion of the general factors we take into account when determining specific compensation levels.
Pay-for-Performance.We use pay-for-performance compensation programs to align executive compensation with our achievements on both a short-term and long-term basis. In normal years, our Named Executive Officers’ target total direct compensation is heavily weighted toward at risk, performance-based cash and equity compensation, including incentive cash bonuses and performance-based stock units (PSUs). The performance targets established under these programs are challenging and set in advance both at the corporate level, through corporate goals, and at an individual level—for cash bonuses—through individual goals. This aligns executive compensation with stockholder interests by tying a significant portion of total direct compensation to achieving performance goals designed to promote Cypress’s financial and operational success over both the short- and long-term. Compensation is designed to be rewarding when the corporate goals are achieved above target and to result in limited or no payout when the goals are not achieved.
However, the Compensation Committee provides oversight (and reserves discretion) to ensure payouts are consistent with the Committee’s assessment of the Company’s performance. The Committee (sitting as part of the full Board) exercised such discretion in the extraordinary circumstances of 2019, when merger bids were received and a merger agreement was negotiated after annual goals had already been established. As described in detail above, the Board appreciated the attractive merger premium negotiated by management, and recognized the necessity of managing the Company for the Merger in the second half of the year in a tough market environment. Accordingly, for 2019, the Board determined to modify performance-based equity awards and to authorize cash bonus payouts that were based in part on the Committee’s assessment of management’s performance in the changed circumstances of the pending Merger rather than according to the pre-established performance goals.
Cypress’s Compensation Processes and Practices
The Role of the Compensation Committee. The Compensation Committee administers all of the Company’s equity-based compensation plans and, under its Board-approved charter, is responsible for the formulation, implementation, review, and modification of the compensation of our directors and “Senior Executives” (i.e., our Named Executive Officers and other executives who report directly to the CEO). In this capacity, the Compensation Committee reviews and approves all compensation paid to our executive officers, including salary, bonus, equity compensation, and other employee benefits. In late 2018, the Committee’s charter was revised to provide that compensation of the CEO will be recommended by the Committee and approved by the full Board (without participation by the CEO). The Compensation Committee consists entirely of independent directors. As mentioned above, the Compensation Committee seeks to ensure that executive cash compensation is market competitive. Target total cash compensation is supplemented by equity awards that are weighted toward performance-based shares. Each executive’s total direct compensation will vary depending on Cypress’s financial performance, the executive’s individual performance and importance to Cypress, and internal fairness considerations among all senior management. Due to our emphasis on performance-based compensation, as Cypress’s performance improves, so does the compensation of our executive officers. However, the Compensation Committee may also use its judgment to apply discretion to adjust payouts of certain compensation programs.
The Role of the Independent Compensation Consultant.The Compensation Committee works directly with an independent compensation consultant to develop compensation strategies and levels for Cypress’s non-employee directors and executive officers and also to assess any risk to the corporation posed by the Company’s executive compensation plan design. In mid-2018, the Chairman of the Compensation Committee initiated an evaluation of our overall executive compensation program and, as part of that effort, in June 2018 the Compensation Committee retained Compensia as its new compensation consultant. The Compensation Committee typically asks representatives of the compensation consultant to attend its regular meetings, including executive sessions. The compensation consultant is instrumental in assisting the Committee with its annual review of each executive officer’s compensation (salary, target bonus opportunity, and equity award levels) as compared to compensation levels for comparable positions at our peer group companies, as well as facilitating the annual selection of those peer companies. The compensation consultant has also assisted the Committee with a compensation review that considers multi-year wealth accumulation and uses both internal and peer data.
Our compensation consultant, Compensia, is independent from Cypress’s management, has not provided any services to Cypress other than to the Compensation Committee, and receives compensation from Cypress only for services provided to the Compensation Committee. The Compensation Committee evaluated Compensia’s independence as required by applicable SEC rules and NASDAQ listing standards and determined that work performed by Compensia does not give rise to any conflicts of interest.
The Role of Management.The CEO makes recommendations to the Committee about the compensation of the other Named Executive Officers based on their achievement of quarterly, annual and multi-year objectives. While the Compensation Committee is solely responsible for approving executive officer compensation, our VP of compensation, our deputy general counsel, our chief legal officer, our CFO, and our CEO all support the work of the Compensation Committee and its compensation consultant. The Compensation Committee meets at least quarterly in executive session without management present.
Peer Group Companies.The Compensation Committee conducts an analysis each year to select a group of peer companies to use for purposes of assessing the competitive market for executive talent. The Committee seeks to select companies that are publicly traded, are headquartered in the United States, compete in the semiconductor industry, are broadly similar to Cypress in their product and service offerings, revenue, size, and market capitalization, and against which Cypress competes for executive talent. Cypress’s compensation consultant provides the Committee with analysis and recommendations regarding peer group selection. In July 2018 and in consultation with the compensation consultant, the Committee made changes to Cypress’s peer group for 2019 to better align the group with Cypress’s revenue and market capitalization, and to account for mergers and acquisitions within our industry. Specifically, the Committee removed Microsemi Corporation (which had been acquired by Microchip Technology) and added Diodes Incorporated, Mellanox Technologies, Ltd. and Xilinx, Inc. The resulting peer group, which was used for purposes of the comparative review that informed the Committee’s compensation decisions made in the first quarter of 2019, is listed below:
| 2019 Peer Group Companies |
ITEM 11.Advanced Micro Devices, Inc. | EXECUTIVE COMPENSATIONMicrochip Technology Inc. |
| Cirrus Logic, Inc. | ON Semiconductor Corp. |
| Cree, Inc. | Qorvo, Inc. |
| Diodes Incorporated | Silicon Laboratories, Inc. |
| Integrated Device Technology, Inc. | Skyworks Solutions, Inc. |
| Marvell Technology Group Ltd. | Synaptics Incorporated |
| Maxim Integrated Products Inc. | Xilinx, Inc. |
| Mellanox Technologies, Ltd. | |
As of mid-2018 when this peer group was selected, Cypress ranked at the 49th percentile among these peers in revenue (over the prior twelve months), at the 44th percentile in market capitalization, and at the 50th percentile in number of employees.
Stockholder-Friendly Practices.We believe that stockholder interests are further served by other executive compensation-related policies and practices that we follow, which include:
| ✓ | Our Compensation Committee annually reviews compensation levels and periodically reviews compensation design against the market. |
| ✓ | We donot have minimum payment levels for our short-term incentive (cash bonus) plan or for our performance- based equity awards. |
| ✓ | We donot provide any material perquisites to our executive officers. |
| ✓ | We donot pay taxes on our executives’ behalf through “gross-up” payments or otherwise (other than for a business-related relocation or pursuant to the terms of a broad-based employee program). |
| ✓ | Our change-of-control agreements with our executive officers have a “double-trigger” provision (benefits require both a change of control of the Company and termination of employment) rather than a “single-trigger” provision (under which benefits would be triggered automatically upon a change of control). Although our executives do not have any contractual right to single-trigger benefits, our Merger Agreement with Infineon provides for all Cypress employees to receive 50% accelerated vesting of most service-based RSU awards upon the Merger Closing. |
| ✓ | We donot reprice “underwater” stock options (stock options where the exercise price is below the then-current market price of our stock) without stockholder approval. |
| ✓ | Our executive officers are subject to a stock ownership policy (after an initial-appointment grace period), which requires them to retain a portion of newly vested equity awards until they have satisfied the policy. |
| ✓ | We have a clawback policy that allows the Board to recover cash- and equity-based incentive compensation from executives (including each of the Named Executive Officers) in certain circumstances such as if Cypress has to restate its financial results or the executive engages in dishonest conduct. |
| ✓ | We prohibit pledging of, and hedging against losses in, Cypress securities by our executives. |
| ✓ | Our Compensation Committee retains a compensation consultant for independent advice and objective market data. |
| ✓ | Our Compensation Committee oversees our performance-based compensation programs and reserves discretion to ensure payouts are consistent with the Committee’s assessment of the Company’s performance. |
| ✓ | We carefully monitor and take into account the dilutive impact of our equity awards. |
| ✓ | We seek annual stockholder feedback on our executive compensation program. |
Elements of Compensation
The information requiredkey components of Cypress’s executive compensation program are described below.
| Compensation | Objectives | Key Features |
| Base Salary | Provides a fixed level of compensation to reward demonstrated experience, skills and competencies relative to the market value of the job. | Generally targeted at or below the 50th percentile for comparable positions among Cypress’s peer group (but actual base salary of our NEOs relative to similar positions at peer companies may vary based on each NEO’s skills, experience and other factors). Adjustments are considered annually based on individual performance, level of pay relative to the market, and internal pay fairness. |
| Short-Term Incentive (Cash Bonus) Plan | Rewards achievement of strategic corporate objectives and individual milestones based on a balanced scorecard. | Bonus opportunities are generally targeted at or below the 50th percentile for comparable positions among Cypress’s peer group. 100% at-risk based on company and individual performance. Funding is generally based on Cypress meeting revenue and pre-tax profit margin targets, so the plan pays out only in profitable periods. |
| Long-Term Incentive (Equity Award) Program | Aligns with stockholder interests by giving executives an equity stake in Cypress’s success. | Typically, equity awards make up the greatest portion of an executive’s target total direct compensation opportunity. |
| ● Service-Based Restricted Stock Units (RSUs) | Promote retention and provide a reliable opportunity for wealth creation over time. | Vesting occurs over time as long as the executive remains employed with the Company. |
| ● Performance-Based Stock Units (PSUs) | Align executive and stockholder interests by linking vesting to long-term corporate performance. | Vesting requiresboth goal achievementand continued employment through scheduled vesting date. |
| Other Compensation | Ensure the health, welfare, and security of our workforce. | We provide health and welfare plans, and retirement savings plans. Severance benefits for key executives. We do not provide pensions or other material perquisites to our Named Executive Officers. |
Determining Compensation Levels
In setting specific salary, target cash bonus, and equity award levels for each Named Executive Officer and our other senior officers, the Compensation Committee considers and assesses, among other factors it may consider relevant:
| ● | The compensation levels for comparable positions at our peer companies (or with respect to executives whose roles are not semiconductor specific (such as the chief financial officer and the chief legal and human resources officer) a broader range of high-tech industry companies in the Company’s revenue range); |
| ● | Various subjective factors relating to the individual recipient—the executive’s scope of responsibility, prior experience, past performance, advancement potential, impact on results, and compensation level relative to other Cypress executives; and |
| ● | As to long-term incentive equity awards, individual performance, level of pay relative to the market, and internal pay fairness. |
The Compensation Committee gives no single factor any specific weight. Each executive’s compensation level, as well as the appropriate mix of equity award types and other compensation elements, ultimately reflects the Compensation Committee’s business judgment in consideration of these factors and stockholder interests.
2019 EXECUTIVE COMPENSATION
2019 Base Salaries
In February 2019, as part of its annual review of executive compensation, the Compensation Committee reviewed the base salaries of all of our Named Executive Officers and approved the increases shown below to remain competitive with peer group salaries and based on the Committee’s assessment of the factors identified under “Determining Compensation Levels” above. The Committee’s recommendation regarding the CEO’s salary was approved by the Board.
Name | Initial Base Salary Rate (Jan–May) | Increase(1) | Adjusted
Base Salary Rate (June–Dec) | Actual Base Salary Earned in 2019(2) |
| Hassane El-Khoury | $700,000 | 7.1% | $750,000 | $726,923 |
| Thad Trent | $435,000 | 3.5% | $450,000 | $443,077 |
| Sam Geha | $350,000 | 7.1% | $375,000 | $363,462 |
| Sudhir Gopalswamy | $354,000 | 15.8% | $410,000 | $384,154 |
| Pamela L. Tondreau | $385,000 | 2.6% | $395,000 | $390,385 |
| (1) | Base salary increases were effective in June 2019. |
| (2) | These amounts appear in the “Salary” column of the Summary Compensation Table. |
2019 Short-Term Incentive Plan (Cash Bonus) Compensation
In January 2019, in keeping with Cypress’s performance-based compensation philosophy, the Compensation Committee approved the Named Executive Officers’ continued participation for 2019 in our short-term incentive cash bonus program, which we call the Cypress Incentive Plan (or “CIP”).
For 2019, the CIP featured a single annual performance measurement period for our Named Executive Officers. This represents a change from 2018, when the CIP featured five performance measurement periods, namely each of our four fiscal quarters and our full fiscal year with targets set at the beginning of the year for all periods. In 2018, a cash bonus could be separately earned for each of the five periods (with the fourth quarter and full year bonuses paid concurrently).
For 2019, the Committee decided to move to a single annual performance period to ensure that quarter-to-quarter seasonality would not skew the aggregate payouts and to mitigate any ultra-short term incentives for earningsmanagement or related issues that can arise in a quarterly plan. The change to a single, annual performance period was made on the advice of the compensation consultant and in response to stockholder feedback.
Most of the Company’s workforce participates in the CIP—executives and employees alike—and, apart from the Named Executive Officers, most employees continued to work under a quarterly bonus structure in 2019. Indeed, the CEO and other Named Executive Officers continued to be assigned quarterly goals (subject to Committee oversight) which cascaded down through their respective organizations. However, under the new 2019 CIP design for the Named Executive Officers, the Company funding percentage and individual goal achievement percentages that determine year-end bonuses are designed to be measured based solely on Company performance and individual performance, respectively, against annual goals.
Under the CIP, as applicable to each Named Executive Officer, the cash bonus payout for the year is determined by multiplying the executive’s target bonus for the year by a Company funding factor (the “Funding Percentage”) and by an individual goal achievement factor as shown below:
Cypress Incentive Plan (Cash Bonus) Formula
There is no minimum bonus payment guaranteed under the CIP, and the Compensation Committee has discretion under the plan to increase or decrease (including to $0) the amount of any bonus otherwise payable to a participant based on performance. We believe that Compensation Committee discretion is appropriate to help mitigate the risks associated with the short-term nature of this itembonus plan. Each executive’s maximum bonus under the CIP is incorporatedcapped at 250% of his or her target bonus amount.
Target Bonus Amount. The Compensation Committee assigns each Senior Executive a target incentive expressed as a percentage of his or her annualized base salary rate. In January 2019, the Compensation Committee reviewed the target incentive levels of the Named Executive Officers and approved the increases shown below. The Committee’s recommendation regarding the CEO’s target incentive was approved by referencethe Board. Under the CIP, the target bonus amount, in dollars, is determined by applying the target incentive percentage to the 2020 Proxy Statementbase salary rate in effect at year-end. The Compensation Committee determined in its judgment that these target incentive levels were appropriate based on its assessment of the factors identified under “Determining Compensation Levels” above, and in particular to move each executives’ total cash compensation opportunity closer to the 50th percentile among our market peers.
Name | 2018
Target Incentive | 2019
Target Incentive |
| Hassane El-Khoury | 140% | 150% |
| Thad Trent | 70% | 85% |
| Sam Geha | 70% | 75% |
| Sudhir Gopalswamy | 70% | 75% |
| Pamela L. Tondreau | 70% | 75% |
Funding Percentage.In January 2019, the Compensation Committee decided that the Funding Percentage under the plan would be determined after year-end 2019 within a range of 0% to 200% based on the Company’s attainment of financial goals for 2019 as well as the Committee’s discretionary assessment of the Company’s operational performance. The financial performance measures selected by the Compensation Committee for 2019 were as follows:
| ● | revenue as determined under GAAP (or “revenue”) adjusted to exclude revenue from the NAND flash-memory business we divested in April 2019 (“revenue ex-NAND”); and |
| ● | non-GAAP pre-tax profit (“Profit Before Tax” or “PBT”) margin calculated before bonus payments (“pre-bonus PBT”). |
Revenue and PBT are both key metrics used by our management to measure the performance of the business and are reported by the Company in its quarterly earnings release. The Compensation Committee believed it was appropriate to use revenue as a financial metric to maintain management’s focus on increasing market share. The Compensation Committee chose to use profit as a financial metric to align the plan with stockholder interests and help ensure that revenue growth was not pursued to the detriment of earnings. Non-GAAP pre-tax profit margin is also a metric the Company reports in its earnings materials and is calculated as PBT divided by revenue and otherwise according to the non-GAAP adjustments described in the Appendix (which is the same manner in which this measure is calculated for external reporting purposes in the Company’s quarterly earnings press releases). For purposes of calculating both the revenue measure and the PBT margin measure, the Committee provided for revenue to be determined excluding revenue from NAND flash-memory products because as announced on October 25, 2018 we had agreed to contribute our NAND flash business to a non-consolidated joint venture (which transaction ultimately closed on April 1, 2019) and therefore NAND flash was not part of our annual operating plan for 2019. The Committee provided for profit to be determined on a non-GAAP basis because our non-GAAP adjustments generally relate to matters not included in our annual operating plan and over which management may be considered to have less control. The Committee provided for profit to be determined on a pre-tax basis because the Company’s tax liability is determined by a variety of factors, such as prior year net operating loss carryforwards, the results of audit examinations, and changing tax laws, which are not directly related the operational excellence the Committee was seeking to incentivize. The Committee provided for profit to be determined before payment of the bonus, in order to avoid circularity in the formula inasmuch as the cash bonus plan can be viewed as distributing a share of profit to the workforce. Rather than setting dollar-based targets for PBT, the Committee set relative targets (i.e., relative to revenue) in the form of pre-bonus PBTmargin. The Committee believed such relative PBT targets (in conjunction with dollar-based revenue targets) would be more likely to remain relevant, challenging, and motivating for our workforce regardless of the macro-economic revenue environment.
Using those metrics, in January 2019 the Compensation Committee approved a funding formula (in the form of a two dimensional matrix), while retaining the right to make upward or downward adjustments to the formulaic result to ensure funding is consistent with the Committee’s discretionary assessment of the Company’s operating performance. The annual funding matrix set a revenue ex-NAND target of $2.4 billion for 2019, representing 3.5% growth over the Company’s 2018 revenue ex-NAND result, and a pre-bonus PBT margin target of 22.3%, down slightly from the Company’s pre-bonus PBT margin of 23.6% for 2018, which included the profit contribution of the NAND business. These target levels corresponded to the Company’s Board-approved annual operating plan for 2019.
In prior years, the funding formula had additionally provided for zero bonus if revenues came in below a specified threshold level (e.g., 7% or more below target); however, such threshold was eliminated for 2019 because the Committee did not want to eliminate employee CIP bonuses entirely (and the formula approved for the Named Executive Officers was intended to apply to rank and file employees in the CIP as well, after adjusting from annual to quarterly levels). Rather than imposing a revenue threshold, the Committee required that sufficient PBT margin be achieved, at any given revenue level, before funding would be available. This approach was designed to reward executives (and employees) for keeping the Company profitable while ensuring that bonus payments would not erode non-GAAP operating margins below acceptable levels or divert cash needed for debt principal payments, dividends, taxes, and capital expenditures.
Individual Goal Achievement Percentage.The final element of the 2019 CIP was the achievement of individual goals (also called performance “milestones”), measured on an annual basis. The individual milestones were approved in advance. The milestones varied by individual and were a mix of short- and long-term goals that focused on factors critical to the success of Cypress, including financial goals (revenue, gross margin, operating margin, free cash flow, etc.) and operational goals (relating to our internet of things (or “IoT”) initiatives, our customer experience initiative, our innovation initiative, employee engagement, and product quality improvements, among many other individual goals. The milestones were scored on a scale of 0% to 100%, with each milestone weighted by a specific point value based on its importance to Cypress and/or its level of difficulty. Specific scoring parameters to be used to determine whether the milestone had been achieved were also identified in advance in writing.
2019 Cash Bonus Payouts.On December 12, 2019, for the reasons explained in the section “Effect of Pending Merger on 2019 Compensation Payouts,” above, our Board of Directors approved accelerated payment of 2019 CIP bonuses at each individual’s target level. The payments were made on December 20, 2019 as shown below. Because the acceleration was discretionary rather than pursuant to the terms of the incentive plan, the final bonus amounts are reported in the Summary Compensation Table under “Bonus” rather than under “Non-Equity Incentive Plan Compensation.”
Name | Base Salary
Rate | Target
Incentive | Target
Bonus | Final
Bonus(1) |
| Hassane El-Khoury | $750,000 | 150% | $1,125,000 | $1,125,000 |
| Thad Trent | $450,000 | 85% | $382,500 | $382,500 |
| Sam Geha | $375,000 | 75% | $281,250 | $281,250 |
| Sudhir Gopalswamy | $410,000 | 75% | $307,500 | $307,500 |
| Pamela L. Tondreau | $395,000 | 75% | $296,250 | $296,250 |
| (1) | Each Named Executive Officer’s final bonus payment appears in the “Bonus” column of the Summary Compensation Table. |
Long-Term Incentive (Equity Award) Compensation
2019 Long-Term Incentive Program
In February 2019, the Compensation Committee approved equity award grants to the Named Executive Officers as part of our Long-Term Incentive (or “LTI”) program for 2019. The Committee’s recommendations regarding the CEO’s grants were approved by the Board. The awards were granted under the Company’s 2013 Stock Plan. At the same time, the Committee set the performance goals (or “milestones”) under which our executives would be eligible to earn their shares. Each executive received two awards: a performance-based PSU award and a service-based RSU award. The Committee weighted the grants toward performance-based awards in keeping with our pay-for-performance philosophy.
| ● | For the CEO, approximately 65% of the total units granted (at target) were allocated to the performance-based award and approximately 35% of the total units granted were allocated to the service-based award. |
| ● | For our other Named Executive Officers, the ratio was approximately 55% performance-based to 45% service-based. |
The service-based RSUs were scheduled to vest, according to their terms, in three annual installments on each of the first three anniversaries of the date of grant, subject to continued employment with the Company through each scheduled vesting date.
The performance-based PSUs were eligible to vest, according to their terms, only if and to the extent that performance goals (which are also called performance “milestones”) established by the Compensation Committee are satisfied. For each milestone, the Committee established a payout scale to translate performance levels into vesting results. Exact achievement of the performance goal generally translates into earning 100% of the target number of shares, with lesser earnings provided for lesser performance and greater earnings provided for greater performance.
For 2019, the performance-based equity structure differed slightly from the past. The 2019 award featured two near-term milestones with longer-term upside opportunities based on the Company’s total stockholder return (TSR) relative to the S&P Semiconductors Select Industry Index (the “S&P Semiconductors Index”). The two near-term performance milestones—non-GAAP operating margin (weighted 60%) and customer experience (weighted 40%)—both related to the fiscal 2019 performance period. Shares subject to the award could be earned up to 150% of target based on achievement on those two milestones in 2019. However, unlike prior years, shares earned for 2019 performance would be divided into three portions that would be scheduled to vest over three years, on the last trading day of February in 2020, 2021, and 2022, respectively. Each of those three vesting tranches would be subject to an additional upside multiplier—ranging from 1.0xto 1.5x—based on Cypress’s relative TSR over the prior one, two, or three years, as applicable. Therefore, the maximum possible vesting would be 225% of target (i.e., the 2019 earned percentage of up to 150% × a TSR multiplier of up to 1.5x).
As described above, the new structure of the 2019 LTI program featured performance vesting opportunities each year for the next three years. This represented a change from the 2018 LTI program which featured bi-modal performance vesting opportunities concentrated after years one and three. In the Compensation Committee’s view, the bi-modal allocation did not provide sufficient retention and had created planning and communication complexitiesthat outweighed its benefits. In order to smooth the transition back to annual performance vesting, each executive’s LTI awards for 2019 were increased by 21.2% compared to the levels that otherwise would have been approved and the CEO’s PSU/RSU mix was changed from 70/30 (the prior year’s grant ratio) to 65/35 (this 2019 grant ratio). When the Committee approved the Special 2019 Increase, the Committee determined that equity award grants in 2020 should be reduced by the same percentage. In that respect the increase was intended to shift equity award value from 2020 grants to 2019 grants, but not to materially affect the aggregate grant value each executive would receive over the two year period 2019-2020.4
The Special 2019 Increase units were allocated among award years one, two, and three and between PSUs and RSUs in a manner that helped smooth out each executive’s year-to-year combined vesting opportunities under the two structures. Notably, the 2018 structure had not provided any performance-vesting opportunity with respect to 2019 performance; therefore the 2019 awards were weighted toward 2019 (i.e., disproportionately scheduled to vest shortly after 2019 (year one) as compared to shortly after 2020 (year two) or 2021 (year three)).
| ● | For our CEO: the service-based RSUs granted in 2019 were scheduled to vest 50% after year one, and 25% after each of years two and three; while the performance-based PSUs (at target) were scheduled to vest approximately 36% after year one and 32% after each of years two and three. |
| ● | For our other Named Executive Officers: the service-based RSUs granted in 2019 were scheduled to vest approximately 42% after year one, and 29% after each of years two and three; while the performance-based PSUs (at target) were scheduled to vest approximately 40% after year one and 30% after each of years two and three. |
Each PSU is subject to both performance-basedand service-based vesting requirements to provide additional retention of our executives. This means that, for an executive’s PSUs to vest, the executive must (x) satisfy performance-based requirements and (y) remain continuously employed with the Company through the vesting date specified in the award agreement, which is generally the last trading day of February after completion of the applicable year.
The table below presents the number of shares of our common stock underlying each type of award (at target), showing the year-by-year vesting opportunity allocations.
Vesting Schedule (at Target) of Long-Term Incentive (LTI) Program Equity Awards Granted in 2019
Name | Annual Allocation of Newly Granted
Performance-Based Units (PSUs) | Annual Allocation of Newly Granted
Service-Based Units (RSUs) | Total LTI Award Units |
| | 2019* | 2020* | 2021* | 2019* | 2020* | 2021* | Granted |
| Hassane El-Khoury | 98,393 | 86,102 | 86,103 | 73,134 | 36,567 | 36,567 | 416,866 |
| Thad Trent | 34,046 | 24,961 | 24,962 | 29,795 | 20,315 | 20,315 | 154,394 |
| Sam Geha | 27,235 | 19,970 | 19,970 | 23,836 | 16,252 | 16,252 | 123,515 |
| Sudhir Gopalswamy | 32,343 | 23,714 | 23,714 | 28,305 | 19,299 | 19,300 | 146,675 |
| Pamela L. Tondreau | 28,087 | 20,593 | 20,594 | 24,581 | 16,760 | 16,760 | 127,375 |
| * | Units allocated to each year were scheduled to vest shortly after the end of such year. For example, PSUs allocated to 2019 were scheduled to vest on February 28, 2020 and RSUs allocated to 2019 were scheduled to vest on February 15, 2020. |
| 4. | Ultimately, when 2020 grants were made, the value of each executive’s LTI award approved in February 2020 was equal to what the value of his or her February 2019 grant would have been excluding the Special 2019 Increase. See “—Material Compensation Actions for 2020,” below. |
The performance milestones, performance periods, targets, and payout scales for each performance-based award were as follows:
Performance Milestone
(and Weighting) | Performance
Period | Target | Payout Scale or Result(1) |
Non-GAAP Operating Margin(2)
(60% weight) | 2019 | 21% | ● achievement ≤ 15%: 0% credited ● achievement = 21%: 100% credited ● achievement ≥ 25%: 150% credited |
Customer Experience Plan Achievement
(40% weight) | 2019 | 90% | ● achievement ≤ 50%: 0% credited ● achievement = 90%: 100% credited ● achievement ≥ 100%: 150% credited |
Cypress’s TSR relative to the companies
in the S&P Semiconductors Index
(TSR multiplier) | One, Two, or
Three Years(3) | 50th
percentile | ● 50th percentile or below: 1.0x ● 75th percentile or above: 1.5x |
| (1) | For achievement between the stated levels, crediting or vesting is determined by linear interpolation. |
| (2) | This milestone is calculated on a non-GAAP basis using the same non-GAAP adjustments we make for external reporting purposes as described in the Appendix. |
| (3) | The TSR multiplier provides upside potential to the two 2019 goals (non-GAAP operating margin and customer experience plan achievement, together the “2019 Performance Milestones”). As the award is designed, the Company’s achievement on these two performance goals would be assessed after the end of 2019 and a weighted average crediting score would be determined (from 0% to 150% as shown above). That crediting percentage would apply to all three of the award’s tranches, scheduled to vest shortly after 2019, 2020, and 2021 respectively. The vesting of each tranche would be further subject to the TSR multiplier, as measured over the prior one, two, or three years as applicable. In other words: |
| ● | the TSR performance period for the multiplier to be applied to the first vesting tranche runs from the start of fiscal 2019 to the end of fiscal 2019; |
| ● | the TSR performance period for the multiplier to be applied to the second vesting tranche runs from the start of fiscal 2019 to the end of fiscal 2020; and |
| ● | the TSR performance period for the multiplier to be applied third vesting tranche runs from the start of fiscal 2019 to the end of fiscal 2021. |
The maximum vesting of each tranche is 225% of target (calculated as the 2019 Performance Milestones’ weighted average percentage of up to 150% × a TSR multiplier of up to 1.5x).
Each performance milestone is further described below.
| ● | Non-GAAP Operating Margin.Non-GAAP operating margin is a metric we report in our quarterly earnings release, defined as non-GAAP operating income divided by revenue. This is a key metric used by management to measure the performance of our business. The Compensation Committee chose an income metric as a milestone because remaining profitable and growing income is a critical imperative for our Company. The Committee chose operating income (rather than net income, for example) because operating income more closely relates to the operational variables that executives can control (as compared to net income which additionally reflects tax effects and the performance of our third-party equity investees, for example). The Compensation Committee weighted this metric at 60% in order to emphasize the importance of financial results. The Compensation Committee set the target performance level at 21%, which is approximately equal to the level called for by the Company’s annual financial plan approved by the Board. Rather than setting a dollar- based goal for operating income, the Committee set a relative goal (i.e., operating income relative to revenue) in the form of operating margin. The Committee believed a relative goal would be more likely to remain relevant, challenging, and motivating for our executives regardless of the macro-economic environment. |
| ● | Customer Experience Plan Achievement. One of the Company’s key operational initiatives in 2019 was to focus on improving customer experience as a means of increasing revenue over the long-term. The initiative included 38 specific “voice of the customer” projects (or “tracks”), ranging from developing new ways to solicit customer feedback such as web pages and in-product surveys, designing new dashboards to measure and report progress, and implementing new feedback loops to ensure customer insights are used to inform and improve product design and service delivery. The Compensation Committee recognized the value in making Cypress an easy company with which to do business, both for attracting new customers and selling new products to established customers, and so chose to incentivize management with this milestone. Specifically, the Compensation Committee set a target of completing 34 of the 38 tracks (90%), with the 0% to 150% payout range corresponding to achievement of 19 tracks (i.e., 50% of the 38 tracks) on the low end and all 38 tracks (i.e. 100% of the tracks) on the high end. |
| ● | Relative Total Stockholder Return (TSR) Milestone (an upside multiplier):Total stockholder return (or TSR) means the stock price appreciation generated by an investment in a company’s common stock held for a specified period and is generally calculated as the percentage change in the market price of the stock at the end of the period (plus reinvested dividends) compared to its beginning price. This milestone provides an upside multiplier to the shares otherwise earned based on the above two performance milestones. As per the award’s design, the Company’s achievement of those two performance goals would be assessed after the end of 2019 and a weighted average crediting score for the performance metrics would be determined (from 0% to 150% as shown in the table above). That crediting percentage would apply to all three of the award’s tranches, which were scheduled to vest shortly after 2019 (the “first tranche”), 2020 (the “second tranche”), and 2021 (the “third tranche”), respectively. The vesting of each tranche would be further subject to the TSR multiplier. For this purpose, TSR is measured over the period beginning on the first day of fiscal 2019 (December 31, 2018) and ending on (a) the final day of fiscal 2019, with respect to the first tranche, (b) the final day of fiscal 2020, with respect to the second tranche, and (c) the final day of fiscal 2021 with respect to the third tranche. TSR is calculated assuming reinvestment of dividends at the closing price on the ex-dividend date. Beginning price and ending price are defined as the trailing 20 trading-day average closing price. Cypress’s one-, two-, or three- year TSR (as applicable) is ranked against the TSRs of each of the other companies in the S&P Semiconductors Select Industry Index (the “S&P Semiconductors Index”) over the same period and this milestone’s vesting percentage is based on our percentile rank within that group according to the payout scale shown above. The minimum multiplier is 1.0x, which applies to 50th percentile TSR performance or below, and the maximum multiplier is 1.5x, which applies to 75th percentile TSR performance or above. For achievement between those two levels, the multiplier is determined by linear interpolation. The Compensation Committee chose relative TSR as a milestone to align compensation with stockholder interests and in response to stockholder input. The Compensation Committee designed the award so that the TSR milestone provides upside to the performance milestones (but cannot reduce the shares otherwise earned for performance). In the Committee’s view this design strikes an appropriate balance between rewarding executives for the performance metrics they can more directly control, while providing an extra market-based incentive to more closely align with stockholder interests. |
The Compensation Committee intended the performance goals to be challenging but achievable.
The Compensation Committee provided for operating margin to be determined on a non-GAAP basis, consistent with the non-GAAP adjustments we make for external reporting purposes as described in the Appendix. Determining this milestone on a non-GAAP basis is appropriate, in the Committee’s view, because the Company’s non-GAAP adjustments generally relate to matters not included in the Company’s annual financial plan and over which management may be considered to have less control. The Committee further provided for this milestone to be adjusted for certain mergers, acquisitions, or divestitures occurring after the grant date that were not contemplated by the Board-approved annual operating plan. The purpose of all of these adjustments is to mitigate extraordinary events that may occur during the performance period and align payouts with measures that reflect management’s actual performance over the period.
On December 12, 2019, for the reasons explained in the section “Effect of Pending Merger on 2019 Compensation Payouts,” above, our Board of Directors approved accelerated payment of the first tranche of the 2019 LTI award (which was otherwise scheduled to vest on February 28, 2020). The acceleration occurred on December 16, 2019 at the tranche’s maximum vesting level, rather than based on achievement of the performance goals specified in the award agreement.
Shares Allocated to 2019 Performance under our 2017 Multi-Year Performance Accelerated Restricted Stock (PARS) Program
In March 2017, each of the Named Executive Officers received an award of performance-based stock units under our long-term incentive program for 2017, which we called the “PARS” program. The 2017 PARS program is described in detail in the CD&A section of the proxy statement we filed with the SEC within 120 dayson March 29, 2018 under the caption “2017 Multi-Year Performance Accelerated Restricted Stock (PARS) Program.” Those 2017 grants had two milestones with 2019 performance periods and, accordingly, in 2019 our Named Executive Officers had an opportunity to earn that portion of their 2017 PARS awards. Vesting of these 2019 performance units was scheduled for February 28, 2020.
The table below shows the number of shares (at target) underlying each PARS milestone with a 2019 performance period:
| Name | 2019 Cypress Revenue
Growth Relative to
Semi Market Growth
(over 2016 base year)
(shares) | 2019 Profit-Before-Tax
(PBT) Growth
(over 2017 base year)
(shares) | Total
(shares) |
| Hassane El-Khoury | 31,710 | 31,710 | 63,420 |
| Thad Trent | 11,499 | 11,499 | 22,998 |
| Sam Geha | 10,454 | 10,454 | 20,908 |
| Sudhir Gopalswamy | 10,454 | 10,454 | 20,908 |
| Pamela L. Tondreau | 9,408 | 9,408 | 18,816 |
The performance milestones, performance periods, targets, and payout scales (as established by the Compensation Committee in March 2017) for each of those PARS components were as follows:
Performance
Milestone(1) | Performance
Period | Target | Payout Scale(2) |
Cypress Revenue Growth relative to Semi Market Growth
(each over 2016 base year) | 2019 | 1.2x | ● achievement ≤ 0.8x: 0% vest ● achievement = 1.2x: 100% vest ● achievement ≥ 1.6x: 200% vest |
Profit-Before-Tax (PBT) Growth
(2019 PBT over 2017 PBT) | 2019 | 3% growth | ● achievement ≤ 0% growth: 0% vest ● achievement = 3% growth: 100% vest ● achievement ≥ 8% growth: 200% vest |
| (1) | All milestones are calculated on a non-GAAP basis consistent with the non-GAAP adjustments we make for external reporting purposes as described in the Appendix. |
| (2) | For achievement between the stated levels, vesting is determined by linear interpolation. |
These 2019 performance milestones are described below.
| ● | 2019 Cypress Revenue Growth Relative to Semiconductor Market Growth (over 2016 Base Year):The Compensation Committee chose revenue growth as a milestone because an essential step of the Cypress 3.0 strategy is increasing market share in our key automotive, industrial, and Internet of Things target markets. The Committee selected the year of Mr. El-Khoury’s appointment as CEO (2016) as the base year in order to measure our performance under his leadership. The Committee set the multi-year goal on a relative basis (compared to semiconductor market growth over the same period) because the Committee believed a relative goal would be more likely to remain relevant, challenging, and motivating for our executives regardless of the macro-economic environment in future years. The Committee defined semiconductor market size as the mean of the estimates published by Gartner and WSTS. For both the Company and the market, the Committee provided for revenue growth to be calculated excluding DRAM because we do not compete in that segment. The Committee also provided in the award agreement for results to be adjusted for divestitures, and in May 2019 the Committee confirmed such an adjustment should be made (for both the Company and the market data) to exclude NAND, as a result of the April 1, 2019 contribution of our NAND business to a non-consolidated joint venture controlled by our third-party venture partner. |
| ● | Profit-Before-Tax Growth (2019 over 2017): Profit Before Tax, or PBT, is a key metric used by our management to measure the performance of the business and is reported by the Company in its quarterly earnings releases (where it is called non-GAAP pre-tax profit). The Compensation Committee chose to use profit as a financial metric to align with stockholder interests and help ensure that revenue growth was not pursued to the detriment of earnings. The Committee provided for profit to be determined on a non-GAAP basis because our non-GAAP adjustments generally relate to matters not included in our annual operating plan and over which management may be considered to have less control. The Committee provided for profit to be determined on a pre-tax basis because the company’s tax liability is determined by a variety of factors, such as prior year net operating loss carryforwards, the results of audit examinations, and changing tax laws, which are not directly related the operational excellence the Committee was seeking to incentivize. The Committee provided for the PBT goal to be measured as growth over 2017 because 2017 was the year we announced our Cypress 3.0 strategy (at our 2017 Analyst Day), so this goal can be seen as incentivizing the success of our Cypress 3.0 initiatives. |
On December 12, 2019, for the reasons explained in the section “Effect of Pending Merger on 2019 Compensation Payouts,” above, our Board of Directors approved accelerated payment of the 2019 tranches of the 2017 PARS award (which were otherwise scheduled to vest on February 28, 2020). The acceleration occurred on December 16, 2020 at the maximum vesting levels applicable to the 2019 tranches, rather than based on achievement of the performance goals specified in the award agreement.
Other Compensation/Benefits/Perquisites
Non-Qualified Deferred Compensation Plans.Cypress maintains unfunded, non-qualified deferred compensation plans. Each year, these plans allow eligible participants, including our Named Executive Officers, voluntarily to defer receipt of a percentage of up to 75% of their base salary and up to 90% of their cash bonus payments, as the case may be, earned in such year until the date or dates elected by the participants, thereby allowing participating executives to defer taxation on such amounts. There are two non-qualified deferred compensation plans available. Plan I offers a choice of 68 mutual funds in which to invest deferred compensation and, for participants who enrolled prior to December 31, 2015, pays a death benefit equal to two times the participant’s contributions to the plan through such date. Plan II offers a vast array of broker-assisted investment options. In other respects, the two plans are generally identical. All eligible employees have the option to choose one plan in which to participate. We do not make any company-paid contributions to the deferred compensation plans and we do not guarantee returns on the investments. Withdrawals and other distributions are subject to the requirements of Section 409A of the Tax Code. Participant deferrals and investment gains and losses are liabilities of the Company and the underlying assets are subject to the claims of our general creditors. None of our Named Executive Officers contributed to either plan in 2019, but prior contribution balances remain invested. Please refer to “Executive Compensation Tables—Non-Qualified Deferred Compensation Table” for a summary of investment performance in fiscal year 2019.
Other Programs Open to All Employees. The Named Executive Officers are also eligible to participate in the health and welfare programs and other benefit programs that the Company makes available to its employees generally, including the following programs that resulted in Summary Compensation Table entries for 2019:
| ● | Group Term Life Insurance.The Company provides group term life insurance coverage to all employees, including the Named Executive Officers, with a death benefit equal to three times annual base salary. The value of the premiums paid by the Company for the benefit of each executive appear as “Other Compensation” in the Summary Compensation Table. |
| ● | 401(k) Plan.The Company’s 401(k) plan provides for Company-paid matching contributions of up to $2,000 per year (matching 50% of the employee’s contributions up to $4,000). All of our Named Executive Officers received the maximum matching payment in 2019, which appear as “Other Compensation” in the Summary Compensation Table. |
| ● | Health Savings Accounts.Each of the Company’s high-deductible health plans is offered in tandem with a tax-advantaged health savings account (or “HSA”) and provides for Company-paid contributions to participants’ HSAs in an amount equal to half of the participant’s deductible. Messrs. El-Khoury, Trent, and Geha and Ms. Tondreau received Company-paid HSA contributions under this program in 2019, which appear as “Other Compensation” in the Summary Compensation Table. |
| ● | Patent Bonus Program.The Company’s patent bonus program rewards employees who are named as inventors in patents newly issued to the Company. Employee inventors share a $3,000 bonus per patent. Mr. El-Khoury received $333 under this program in 2019 for being one of nine inventors named in a patent newly issued to the Company, which appears as “Bonus” in the Summary Compensation Table. |
| ● | Employee Recognition Program.The Company’s Proactive Problem Solutions (or PROPS) program allows employees to nominate peers for outstanding performance and provides for automatic rewards upon certain milestones. Reward vouchers can be redeemed for merchandise and the program provides a tax gross-up to recipients. In 2019, Ms. Tondreau received an automatic 5-year service reward voucher for $250 (and a corresponding tax gross-up of $213) under this program, which amounts are included in the “All Other Compensation” column of the Summary Compensation Table. |
We do not provide other material perquisites to our executive officers.
Severance and Change of Control Severance Arrangements
The Compensation Committee believes that providing our Senior Executives with specified benefits in the event of a termination of employment by Cypress without “cause” (or by the executive for “good reason” in certain circumstances) is consistent with competitive practices. It also helps us retain executives and maintain leadership stability. Furthermore, the Compensation Committee believes that adopting uniform terms, as reflected in the severance arrangements described below, helps to ensure that our executives are treated fairly and consistently, and helps the Company avoid the need to separately negotiate severance in connection with each individual termination of employment.
Accordingly, in 2018 we entered into agreements with our Senior Executives (including each of the Named Executive Officers) to provide severance if their employment terminates in certain circumstances. Mr. El-Khoury’s severance arrangements are set forth in his employment agreement and our other Senior Executives’ arrangements are set forth in separate Change of Control Severance Agreements. We refer to these agreements as our “Severance Arrangements”; they are described in detail in the section of this Amendment captioned “Executive Compensation Tables—Potential Payments Upon Termination or Change of Control.”
As described in that section, among other matters the Severance Arrangements provide an approach for acceleration of outstanding performance-based awards that will apply in the event of a double-trigger termination5 unless the terms of the pertinent performance-based award provide an alternate severance acceleration formula (in which case such alternate formula shall control). In the case of the LTI PSUs granted in 2019, the Committee included an alternate acceleration formula (the “Alternate Acceleration Formula”) in the award letter. As explained above (see “—2019 Long Term Incentive Program”), the 2019 LTI PSUs’ performance goals feature a set of performance milestones applicable to fiscal 2019 only (namely, non-GAAP operating margin and customer experience) with a weighted payout (ranging from 0% to 150%) based on such 2019 milestones that will apply to all three of the award’s annual vesting tranches, and with further multipliers (ranging from 1.0xto 1.5x) that will apply to each of the three annual vesting tranches based on Cypress’s relative TSR percentile over the prior one, two, or three years as applicable. The Committee’s Alternate Acceleration Formula for this award provides that in the event of a double-trigger termination5 (a) the 2019 performance milestones will be deemed to have been met at target (i.e., at 100%) in the case of a change of control5 before the end of fiscal 2019, or at the actual performance level in the case of a change of control5 at or after the end of fiscal 2019, and (b) any TSR performance period in progress will end on the date of the change of control5 and the Company’s relative TSR over such period will be calculated with the Company’s ending price deemed to be the merger consideration per share received by our fiscal year ended December 29, 2019.stockholders, rather than our trailing 20 trading day average closing market price6 and otherwise according to the payout scale in the award agreement. Any as yet outstanding tranche would then accelerate upon the double-trigger termination5 based on target shares multiplied by such 2019 payout percentage and such TSR multiplier. The Committee included the Alternate Acceleration Formula because it wanted any change-of-control acceleration to depend, in part, on the actual merger consideration received by stockholders, in order to incentivize management to negotiate the best possible sale price.
The Severance Arrangements with our Senior Executives have not been amended since 2018. However, the Merger Agreement negotiated with Infineon provides certain additional benefits, including the following:
| |
ITEM 12.5. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSOr, for Mr. El-Khoury, any termination by the Company without “cause” or by Mr. El-Khoury for “good reason,” as such terms are defined under his Severance Arrangement. |
| 6. | In the case of a qualifying termination of Mr. El-Khoury not in connection with a change in control, the Company’s relative TSR over such period will be calculated for the Company in the same manner as for the other index companies (i.e., with ending price defined as the trailing 20 trading day average closing market price). |
The information required by this item is incorporated30
| ● | Single-Trigger Acceleration of 50% of Service-Based RSUs– The Merger Agreement provides that, immediately prior to the Closing, any outstanding service based RSUs that were granted prior to the June 3, 2019 Merger announcement will be accelerated as to 50% of each outstanding vesting tranche (with the accelerated portion paid out based on the Merger consideration of $23.85 per unit). This is in contrast to our prior Severance Arrangements, which do not provide any benefits—commonly called “single-trigger” benefits—that would become payable upon a change of control alone (i.e., without any related termination of the executive’s employment). The Merger Agreement provides that the remaining 50% of such RSUs (along with all outstanding RSUs granted after June 3, 2019) will convert at Closing into cash-based awards that entitle the holder to $23.85 per unit, subject to continued employment through the predecessor RSU’s originally scheduled vesting date. |
| ● | 2019 LTI PSU Conversion Level –In the case of the 2019 LTI PSU, the Merger Agreement provides that upon the Closing the 2019 LTI PSUs will convert into cash-based awards, with the number of cash-based units being equal to the number of shares that would accelerate vesting in the event of a double-trigger termination under the Alternate Acceleration Formula described above, except that the 2019 performance goals will be deemed to have been met at the maximum level of 150% (rather than the actual performance level of approximately 121% as would have been the case under our prior Severance Arrangements). Based on prevailing market prices as of April 1, 2020, the formula in the Merger Agreement is expected to result in conversion of the 2019 LTI award at its overall maximum level (of 225% of target) at the Closing. Each cash-based award will entitle the holder to $23.85 per unit, subject to continued employment through the predecessor PSU’s originally scheduled vesting date. |
| ● | Other PSUs’ Conversion Level– The Merger Agreement provides for all other outstanding PSUs at Closing to convert into a number of cash-based units at the predecessor PSUs’ maximum achievement level. |
| ● | Double-Trigger Acceleration of Cash-Based Units –The Merger Agreement further provides so-called “double-trigger” protection that will cause all of the holder’s cash-based awards (received at Closing upon conversion of his or her stock-based RSUs and PSUs, as described above) to accelerate payment if, after the Closing, the holder’s employment is (a) terminated by the Company for any reason other than for “cause” or (b) terminated by the holder for “good reason” (as such terms are defined in the Merger Agreement). In the case of executives with pre-existing Severance Arrangements, the Merger Agreement defines “cause” and “good reason” by reference to the definitions used in the Severance Arrangements. The effect of these provisions is that a Senior Executive who experiences a double-trigger termination after the Closing will receive cash value for his or her PSUs based on their maximum achievement level. This is in contrast to our prior Severance Arrangements, which generally provided for acceleration of PSUs at target level.7 |
The events leading up to the 2020 Proxy Statement to benegotiation of the Merger Agreement are described in detail under the caption “The Merger—Background of the Merger” in the Company’s definitive proxy statement soliciting stockholders’ approval of the Merger, which was filed with the SEC on July 16, 2019. The treatment of equity awards in connection with the pending Merger and the benefits that may become payable to each Named Executive Officer if his or her employment terminates in specified circumstances after the Closing are described in detail in that same filing under the caption “The Merger—Interests of Cypress’s Executive Officers and Directors in the Merger.”
In the event the Merger Agreement is terminated before any Closing, the additional severance benefits listed above will cease to apply.
RISK CONSIDERATIONS
Risk Assessment
The Compensation Committee regularly considers the risks associated with Cypress’s compensation policies and practices for employees, including those related to executive compensation programs. As part of the risk assessment, the Compensation Committee reviews Cypress’s compensation programs to avoid certain design features that have the potential to encourage excessive risk-taking.
| 7. | The only exceptions to this generalization are (a) with respect to the 2019 LTI PSU award, as described above, and (b) with respect to PSUs granted prior to December 3, 2018 to Mr. El-Khoury, of which only the 2018 LTI PSU remains outstanding as of the filing of this Amendment. For such latter category (b), the terms of Mr. El-Khoury’s applicable agreement provide that “all vesting … shall be accelerated in full” in the event of a termination without cause or a resignation for good reason. For purposes of preparing our compensation-related disclosures, we interpret such phrase to provide for acceleration of such PSUs at the maximum level. |
Material risk in our compensation program design is mitigated in several ways, including:
| ● | we have an appropriate mix of pay elements, with compensation well-balanced between fixed and variable elements, and short-term and long-term incentives; |
| ● | base salaries are intended to constitute a sufficient component of total compensation to discourage undue risk taking in order to meet incentive goals; |
| ● | incentive plans are designed with goals that are intended to result in long-term value to our stockholders; |
| ● | financial and earnings goals and opportunities in our incentive programs are at levels intended to be attainable without the need to take inappropriate risks; |
| ● | bonus and incentive opportunities are capped so that the upside potential is not so large as to encourage undue risk taking; |
| ● | many of our equity incentives vest or are earned over a multi-year period, which requires the executive to bear the economic risk of the award over the vesting or performance period; |
| ● | our incentive plans define a range of performance over which payouts may be earned, including at levels below target achievement, rather than an “all-or-nothing” approach; |
| ● | we generally use different performance measures in different incentive programs, which provides balance and reduces the potential for taking undue risks to meet a single goal; |
| ● | the stock components of our long-term incentive program, combined with our stock ownership guidelines, align the interests of our executives with long-term preservation and appreciation of stockholder value; |
| ● | we prohibit pledging of, and hedging against losses in, Cypress securities by our executives; |
| ● | incentive payments and awards are subject to clawback in the event of a material restatement of our financial results; |
| ● | our Compensation Committee retains a compensation consultant for independent advice and objective market data; and |
| ● | the Compensation Committee considers information from peer companies in evaluating compensation levels (annual review) and incentive plan designs (periodic review), thereby avoiding unusually high pay opportunities and unusual pay structures relative to the Company’s peers. |
The Compensation Committee, with assistance from its independent compensation consultant, has reviewed compensation related risks and does not believe Cypress’s compensation programs encourage excessive or inappropriate risk taking or create risks that are reasonably likely to have a material adverse effect on Cypress. The Compensation Committee, with the assistance of its compensation consultant, intends to continue to take risk considerations into account when designing executive compensation programs.
Stock Ownership Requirements
Our Named Executive Officers are subject to stock ownership requirements. Our CEO is required to hold Cypress stock with a value of six times his base salary and each other Named Executive Officer is required to hold Cypress stock with a value of four times his or her base salary. All of our Named Executive Officers are in compliance with these requirements as of April 1, 2020. For more information, see “Director Compensation—Stock Ownership Requirements,” above.
Policy Against Hedging and Pledging
The Company recognizes that hedging against losses in shares of our common stock may undermine the alignment between stockholders and executives that the Company’s stock ownership policy and equity awards are intended to build. Accordingly, the Company has incorporated prohibitions on various hedging activities within 120its corporate governance guidelines and insider trading policy (the “Insider Trading policy”), which applies to our directors and officers, our employees, and our representatives and independent contractors, as well as the immediate families of such persons (collectively, “Insiders”). All Insiders are prohibited from engaging in short sales of Company securities and trading in derivatives (such as put and call options, straddles, prepaid variable forward contracts, equity swaps, collars, and exchange funds) that relate to Company securities. Our Insiders are further prohibited from pledging Company securities as collateral for a loan, purchasing Company securities on margin, and holding Company securities in a margin account.
As of April 1, 2020, our Named Executive Officers do not hold any Cypress securities that are pledged (whether pursuant to a margin account, as security for a loan, or otherwise).
Grant Practices
The Compensation Committee generally holds four in-person meetings per year, with additional telephonic meetings as required. Each year, equity awards to the Senior Executives (i.e., our Named Executive Officers and other executives who report directly to the CEO) are approved (or, in the case of grants to the CEO, recommended to the Board) by the Compensation Committee, generally at an in-person meeting held in February. Such grants are generally approved by reference to specified dollar amounts, which are converted into share-based amounts using the per-share closing market price of our common stock on the grant date. The grant date is generally specified as the first trading day after the date of the Committee’s meeting (which allows time for Board approval of the Committee’s recommendation, in the case of grants to the CEO). This schedule is designed so that awards are not granted to Senior Executives during our Insider Trading Policy’s quarterly blackout period (which typically commences 16 days afterbefore the end of each fiscal quarter and ends 24 hours after our quarterly earnings release).
The Compensation Committee has delegated to our chief legal and human resources officer the authority to approve equity awards to employees below the Senior Executive level, but only within Committee-approved guidelines (which establish dollar-based ranges for various job-types and seniority levels, as well as an overall annual grant limit). The chief legal and human resources officer’s general practice is to approve awards to new hires on the eighth day of the month following their month of hire (or on the next business day, if such eighth day is not a business day). In the second half of 2019, we added a second grant date per month, in order to more efficiently utilize capacity under the monthly grant limits imposed by the Merger Agreement and as agreed with Infineon.
Clawback Policy
Cypress’s clawback policy requires the return of performance-based compensation payments to Cypress (i) by any executive engaged in (a) fraud, theft, misappropriation, embezzlement or dishonesty, or (b) intentional misconduct related to Cypress’s financial reporting, or (ii) in the event of a material negative revision of any financial or operating measure on which performance-based compensation was paid out to such executive.
MATERIAL COMPENSATION ACTIONS FOR 2020
2020 Peer Group Companies
In August 2019, the Compensation Committee revised our peer group for 2020 to account for mergers and acquisitions within our industry and otherwise as recommended by the independent compensation consultant. Specifically, the Committee removed Integrated Device Technology (which had been acquired by Renesas Electronics in March 2019) and Synaptics Incorporated (which was significantly below the Company’s market capitalization range). The Committee resolved to keep Mellanox Technologies in the peer group, despite its pending acquisition by Nvidia, as it had already filed its annual compensation disclosures, which were therefore available to provide another point of insight into market practice. The resulting peer group, which was used for purposes of the comparative review that informed the Committee’s compensation decisions made to date in 2020, is as listed below:
| 2020 Peer Group Companies |
| Advanced Micro Devices, Inc. | Microchip Technology Inc. |
| Cirrus Logic, Inc. | ON Semiconductor Corp. |
| Cree, Inc. | Qorvo, Inc. |
| Diodes Incorporated | Silicon Laboratories, Inc. |
| Marvell Technology Group Ltd. | Skyworks Solutions, Inc. |
| Maxim Integrated Products Inc. | Xilinx, Inc. |
| Mellanox Technologies, Ltd. | |
As of mid-2019 when this peer group was selected, Cypress ranked at the 42nd percentile among the peers in revenue (over the prior four quarters), at the 40th percentile in market capitalization, at the 37th percentile in number of employees, at the 53rd percentile in revenue growth (3-year CAGR), at the 47th percentile in operating income, and at the 67th percentile in net income.
2020 Base Salaries and Short-Term Incentive (Cash Bonus) Plan
In February 2020, the Compensation Committee reviewed the annual base salaries and target bonus incentives for our Named Executive Officers and decided to leave them unchanged for 2020. At the same time, the Compensation Committee approved the Named Executive Officers’ continued participation in our short-term incentive (cash bonus) plan, the Cypress Incentive Plan (or CIP), for another year. These Committee actions with regard to the CEO were confirmed by the Board.
The fiscal 2020 CIP will be structured similarly to 2019. Bonus payments under the CIP for the Named Executive Officers will continue to be calculated and paid on an annual basis. The Company Funding Percentage for 2020 will continue to be determined by a combination of revenue and non-GAAP pre-tax profit margin targets, subject to the Compensation Committee’s discretionary evaluation of the Company’s operational performance for the year. Individual performance factors will continue to be determined based on the achievement of individual milestones, which vary by individual and are focused on factors critical to our success, including financial targets, and initiatives relating to the internet of things, new product development, and customer experience, among many other topics.
The Committee’s salary and bonus participation decisions were based on a review of each Named Executive Officer’s compensation compared to the compensation of his or her applicable counterparts at our peer group companies and each executive’s performance, as well as the other factors listed in “Determining Compensation Levels” above. The Merger Agreement also prohibits us (absent Infineon’s consent) from altering any compensation plan or making salary or bonus adjustments for anyone whose annual base salary exceeds $300,000.
2020 Long-Term Incentive (Equity Award) Program
In February 2020, the Compensation Committee approved grants of RSUs (confirmed by the Board, in the case of the grant to our CEO) as part of our Long-Term Incentive Program for 2020. The Merger Agreement permitted us to make such grants provided that all grants were subject only to service-based vesting (so performance-based units (PSUs) could not be granted).
When the prior year’s LTI awards were approved (in February 2019), the Committee had applied a Special 2019 Increase to the amounts that otherwise would have been approved for 2019 and the Committee had further determined that equity award grants in 2020 should be discounted by the same percentage. In that respect the Special 2019 Increase was originally intended to shift equity award value from 2020 grants to 2019 grants. (See “— 2019 Long-Term Incentive Program,” above, for a further explanation of the Special 2019 Increase.) When the 2020 grants were approved, however, the Committee determinednot to apply any such discount for 2020. The Committee believed the Merger Agreement’s prohibition of PSU grants had already reduced the Senior Executives’ upside opportunity and that a further reduction of RSU value would not be appropriate. In addition, the Merger Agreement required each Senior Executive’s grant value to be consistent with his or her 2019 grant.
Accordingly, the 2020 LTI awards approved by the Committee (and confirmed by the Board for the CEO) consisted only of service-based RSU awards, scheduled to vest in three equal annual installments. The 2020 LTI awards do not qualify for the 50% acceleration of vesting upon Closing under the terms of the Merger Agreement but will vest upon a double-trigger termination following the Closing. The grant value approved by the Committee for each Senior Executive (and confirmed by the Board for the CEO) was equal to the approved value of his or her 2019 LTI award, as adjusted to exclude the Special 2019 Increase (but without application of any further discount). As directed by the Committee, the grant date for these awards was Sunday, March 1, 2020 and approved values were translated into numbers of units using the Friday, February 28, 2020 closing market price for our common stock. The 2020 LTI grants to our Named Executive Officers are shown below:
Name | 2020 LTI Equity Award (3-Year, Service-Based) |
| Approved Value | Number of RSUs |
| Hassane El-Khoury | $5.4 million | 233,867 |
| Thad Trent | $2.0 million | 86,617 |
| Sudhir Gopalswamy | $1.9 million | 82,286 |
| Pamela L. Tondreau | $1.65 million | 71,459 |
| Sam Geha | $1.6 million | 69,294 |
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year ended December 29, 2019.2019, the following directors were members of our Compensation Committee: Camillo Martino, Jeffrey J. Owens, Jeannine P. Sargent, and Michael S. Wishart. None of the Compensation Committee members is or has at any time been an officer or employee of Cypress.
None of Cypress’s executive officers serves, or in the past fiscal year served, as a member of the board of directors or compensation committee of any entity that has one or more of its named executive officers serving on Cypress’s Board or Compensation Committee.
COMPENSATION COMMITTEE REPORT
We have reviewed and discussed with management the disclosures contained in the Compensation Discussion and Analysis section of this report. Based on this review and discussion, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Camillo Martino, Chairman
Jeffrey J. Owens
Jeannine P. Sargent
Michael S. Wishart
EXECUTIVE COMPENSATION TABLES
The tables on the following pages present compensation information for:
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ITEM 13.● | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this item is incorporated by reference to the 2020 Proxy Statement to be filed with the SEC within 120 days after the end of our fiscal year ended December 29, 2019.
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ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this item is incorporated by reference to the 2020 Proxy Statement to be filed with the SEC within 120 days after the end of our fiscal year ended December 29, 2019.
PART IV
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ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULE |
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(a) | The following documents are filed as a part of this Annual Report on Form 10-K:Hassane El-Khoury, our president and chief executive officer; |
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1.● | Financial Statements:Thad Trent, our executive vice president, finance and administration, and chief financial officer; |
| ● | Sam Geha, our executive vice president, memory products division; |
| ● | Sudhir Gopalswamy, our executive vice president, microcontroller & connectivity division; and |
| ● | Pamela L. Tondreau, our executive vice president, chief legal and human resources officer, and corporate secretary. |
These five individuals are our “Named Executive Officers” (or NEOs). During fiscal 2019, we did not have any other executive officers (as such term is defined by the SEC in Rule 3b-7 under the Exchange Act).
Summary Compensation Table — 2017-2019
The following table presents summary compensation information for fiscal years 2019, 2018, and 2017:
Name and Principal Position | Year | Salary(1)
($) | Bonus(2)
($) | Stock
Awards(3)
($) | Option
Awards
($) | Non-Equity
Incentive Plan
Compensation(4)
($) | All Other
Compensation(5)
($) | Total
Compensation
($) |
Hassane El-Khoury(6) President, Chief Executive Officer, and Director | 2019 | 726,923 | 1,125,333 | 8,714,980 | — | — | 4,622 | 10,571,858 |
| 2018 | 676,923 | 500 | 5,385,541 | — | 950,875 | 4,043 | 7,017,882 |
| 2017 | 650,000 | 500 | 4,852,323 | — | 923,599 | 3,024 | 6,429,446 |
Thad Trent(7) Executive Vice President, Finance & Administration, Chief Financial Officer | 2019 | 443,077 | 382,500 | 3,134,876 | — | — | 4,764 | 3,965,217 |
| 2018 | 418,846 | — | 1,957,463 | — | 325,962 | 3,911 | 2,706,182 |
| 2017 | 398,077 | — | 1,759,615 | — | 342,239 | 2,760 | 2,502,691 |
Sam Geha(8) Executive Vice President, Memory Products Division | 2019 | 363,462 | 281,250 | 2,522,892 | — | — | 4,554 | 3,172,158 |
| 2018 | 345,385 | — | 1,738,043 | — | 262,327 | 3,700 | 2,349,455 |
| 2017 | 338,631 | — | 1,599,650 | — | 269,690 | 2,385 | 2,210,356 |
Sudhir Gopalswamy(9) Executive Vice President, Microcontroller & Connectivity Division | 2019 | 384,154 | 307,500 | 2,972,502 | — | — | 3,151 | 3,667,307 |
| 2018 | 347,538 | — | 2,031,338 | — | 186,843 | 3,125 | 2,568,844 |
| 2017 | 337,961 | — | 1,599,650 | — | 235,862 | 1,460 | 2,174,933 |
Pamela L. Tondreau(10) Executive Vice President, Chief Legal and Human Resources Officer | 2019 | 390,385 | 296,250 | 2,585,310 | — | — | 5,073 | 3,277,018 |
| 2018 | 373,461 | — | 1,689,152 | — | 267,133 | 3,770 | 2,333,516 |
| 2017 | 359,154 | — | 1,439,685 | — | 323,882 | — | 2,112,721 |
| | Page(1) | Includes amounts (if any) electively deferred by Named Executive Officers participating in the Cypress Semiconductor Corporation Non-Qualified Deferred Compensation Plan. For more information, see the Non-Qualified Deferred Compensation Table below and “CD&A—Other Compensation/Benefits/Perquisites” above. |
Consolidated Balance Sheets | (2) | Mr. El-Khoury received a $333 bonus in August 2019 under the Company’s patent bonus program (which is open to all full-time employees) for being among the inventors named in a patent issued to the Company in 2019. |
For 2019, amounts in the “Bonus” column also include the bonus paid for 2019 under the Cypress Incentive Plan (or “CIP”). Payment of 2019 CIP bonuses to the NEOs were accelerated by the Board at the target level in December 2019. Because the acceleration was discretionary rather than pursuant to the terms of the incentive plan, the accelerated amounts are reported under “Bonus” rather than under “Non-Equity Incentive Plan Compensation.”
| (3) | In 2019 our Named Executive Officers each received one service-based RSU award and one performance-based PSU award. |
Please note that the “Stock Award” values in the table above do not present the value of the stock thatvestedto our Named Executive Officers in the years shown. Instead, as required by SEC rules, the Stock Awards column presents the grant date fair value of the equity awards that weregrantedto each executive in the years shown (as computed for accounting purposes in accordance with FASB ASC 718 and SEC rules). Accordingly, for 2019 this column includes the aggregate grant date fair value of the 2019 RSU and PSU grants. This column also includes the incremental fair value, computed in accordance with FASB ASC 718 and SEC rules, of the December 2019 modifications (see “—Modifications to Equity Awards and Non-Equity Incentive Plan Awards,” below).
For more information on the 2019 awards’ vesting schedules and performance conditions, please see “CD&A—2019 Long-Term Incentive Program.” For more information about the component values included in the Stock Awards column, see the “Grants of Plan-Based Awards Table,” below. For the value of stock awards that actually vested in 2019, see the “Option Exercises and Stock Vested Table” below.
As mentioned above, values in the “Stock Awards” column present grant date fair value (as computed for accounting purposes in accordance with FASB ASC 718 and SEC rules). As required by SEC and accounting rules, we calculated each PSU’s grant date fair value based on the performance outcome we judged to be probable when the award was granted. The PSUs granted in 2019 can vest up to 225 percent of target, according to their terms, with the ultimate vesting level depending on our achievement of performance goals established by the Compensation Committee. For performance goals involving financial or operational measures, at the time of grant we generally considered target performance to be probable, so the grant date fair values included in the table above are based on our expectation that the portions of the awards subject to financial or operational milestones would be achieved at target. For performance goals (such as relative TSR) that involve future market prices of common stock, we determined the fair value using a Monte Carlo simulation model. The following table presents the grant date fair values of the PSUs granted in 2019 under two sets of assumptions: (a) assuming that the performance goals would be achieved at the probable level and (b) assuming that the highest level of performance vesting would be achieved.
Name | Grant Date Fair Value
of PSUs Granted in 2019 |
Based on
Probable Outcome
($) | Based on
Maximum Performance
($) |
| Hassane El-Khoury | 5,093,880 | 7,640,802 |
| Thad Trent | 1,582,750 | 2,374,116 |
| Sam Geha | 1,266,195 | 1,899,284 |
| Sudhir Gopalswamy | 1,503,621 | 2,255,421 |
| Pamela L. Tondreau | 1,305,760 | 1,958,621 |
For purposes of presenting FASB ASC 718 grant date fair value in our director and officer compensation tables, as required by SEC rules we have excluded any impact of estimated forfeitures related to service-based vesting conditions. For information on other assumptions used in our grant date fair value computations, refer to Note 11—“Employee Stock Plans and Stock-Based Compensation” in the Notes to Consolidated Financial Statements in the Original Filing of our 2019 Form 10-K.
| (4) | For 2017 and 2018, the “Non-Equity Incentive Plan Compensation” column presents bonus amounts earned under the Cypress Incentive Plan (or CIP) for performance during the specified year (even if paid out early in the following year). For 2019, CIP bonuses are reported under “Bonus” as described in Note (2) above. |
| (5) | “All Other Compensation” amounts for 2019 include: |
| ● | for Mr. El-Khoury: Company-paid matching contributions of $2,000 under our 401(k) plan (open to all U.S. employees), premiums for group term life insurance (provided to all U.S. employees) valued at $1,872, and Company-paid contributions of $750 to his health savings account (HSA) under our health benefit program open to all U.S. employees; |
| ● | for Mr. Trent: 401(k) matching contributions of $2,000, Company-paid HSA contributions of $1,500, and group term life insurance premiums valued at $1,264; |
| ● | for Mr. Geha: 401(k) matching contributions of $2,000, Company-paid HSA contributions of $1,500, and group term life insurance premiums valued at $1,054; |
| ● | for Mr. Gopalswamy: 401(k) matching contributions of $2,000 and group term life insurance premiums valued at $1,151; and |
| ● | for Ms. Tondreau: 401(k) matching contributions of $2,000, Company-paid HSA contributions of $1,500, group term life insurance premiums valued at $1,110, a voucher redeemable for $250 of merchandise automatically awarded in December 2019 under the Company’s employee recognition program (open to all employees) upon Ms. Tondreau’s completion of five years of service at Cypress, and a “gross-up” payment of $213 to eliminate the adverse tax consequences of receiving such voucher and gross-up. |
Cypress is not the beneficiary of the life insurance policies. Our Named Executive Officers participate in the same group term life insurance program as other Cypress employees. The policies pay out at three times the employee’s annual base salary if the employee dies during the coverage period.
| (6) | Mr. El-Khoury’s annual salary rate was increased from $650,000 to $700,000 effective June 4, 2018, and to $750,000 effective June 3, 2019. |
| (7) | Mr. Trent’s annual salary rate was increased from $400,000 to $435,000 effective June 4, 2018, and to $450,000 effective June 3, 2019. |
| (8) | Mr. Geha was promoted to Executive Vice President, Memory Products Division in February 2018. Previously, he served as our Senior Vice President of the Memory Products Division. Mr. Geha’s annual salary rate was increased from $340,000 to $350,000 effective June 4, 2018, and to $375,000 effective June 3, 2019. |
| (9) | Mr. Gopalswamy was promoted to Executive Vice President, Microcontroller & Connectivity Division in February 2018. Previously, he served as our Senior Vice President of the Microcontroller & Connectivity Division. Mr. Gopalswamy’s annual salary rate was increased from $340,000 to $354,000 effective June 4, 2018, and to $410,000 effective June 3, 2019. |
| (10) | Ms. Tondreau was promoted to Executive Vice President, and Chief Legal and Human Resources Officer in February 2018. Previously, she served as our Senior Vice President, and Chief Legal and Human Resources Officer. Ms. Tondreau’s annual salary rate was increased from $360,000 to $385,000 effective June 4, 2018, and to $395,000 effective June 3, 2019. |
Grants of Plan-Based Awards Table—2019
The following table presents all plan-based awards granted to our Named Executive Officers during fiscal year 2019.
Name and
Award Type | Grant Date | Date of
Compensation Committee Approval | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards(1) | Estimated Future Payouts Under Equity Incentive Plan Awards(3) | All Other Stock Awards: Number of Shares of Stock or Units (#)(5) | Grant Date Fair Value of Stock and Option Awards ($)(6) |
Threshold
($)(2) | Target
($) | Maximum
($) | Threshold
(#)(4) | Target
(#) | Maximum
(#) |
| Hassane El-Khoury |
| Cash Bonus Opportunity(7) | | 1/29/2019 | | 1,125,000 | 2,812,500 | | | | | |
| RSU Award(8) | 2/15/2019 | 2/14/2019 | | | | | | | 146,268 | 2,187,058 |
| PSU Award(9) | 2/15/2019 | 2/14/2019 | | | | | 270,598 | 608,844 | | 5,093,880 |
| Modification of PSU Award(10) | 3/16/2017 | 12/12/2019 | | | | | | | | 379,669 |
| Modification of PSU Award(11) | 2/15/2019 | 12/12/2019 | | | | | | | | 1,054,374 |
Name and
Award Type | Grant Date | Date of
Compensation Committee Approval | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards(1) | Estimated Future Payouts Under Equity Incentive Plan Awards(3) | All Other
Stock
Awards: Number of
Shares of
Stock or
Units (#)(5) | Grant Date Fair Value of Stock and Option
Awards ($)(6) |
Threshold
($)(2) | Target
($) | Maximum
($) | Threshold
(#)(4) | Target
(#) | Maximum (#) |
| Thad Trent |
| Cash Bonus Opportunity(7) | | 1/29/2019 | | 382,500 | 956,250 | | | | | |
| RSU Award(12) | 2/15/2019 | 2/14/2019 | | | | | | | 70,425 | 1,049,621 |
| PSU Award(13) | 2/15/2019 | 2/14/2019 | | | | | 83,969 | 188,929 | | 1,582,750 |
| Modification of PSU Award(10) | 3/16/2017 | 12/12/2019 | | | | | | | | 137,679 |
| Modification of PSU Award(11) | 2/15/2019 | 12/12/2019 | | | | | | | | 364,825 |
| Sam Geha |
| Cash Bonus Opportunity(7) | | 1/29/2019 | | 281,250 | 703,125 | | | | | |
| RSU Award(12) | 2/15/2019 | 2/14/2019 | | | | | | | 56,340 | 839,697 |
| PSU Award(13) | 2/15/2019 | 2/14/2019 | | | | | 67,175 | 151,142 | | 1,266,195 |
| Modification of PSU Award(10) | 3/16/2017 | 12/12/2019 | | | | | | | | 125,167 |
| Modification of PSU Award(11) | 2/15/2019 | 12/12/2019 | | | | | | | | 291,833 |
| Sudhir Gopalswamy |
| Cash Bonus Opportunity(7) | | 1/29/2019 | | 307,500 | 768,750 | | | | | |
| RSU Award(12) | 2/15/2019 | 2/14/2019 | | | | | | | 66,904 | 997,144 |
| PSU Award(13) | 2/15/2019 | 2/14/2019 | | | | | 79,771 | 179,483 | | 1,503,621 |
| Modification of PSU Award(10) | 3/16/2017 | 12/12/2019 | | | | | | | | 125,167 |
| Modification of PSU Award(11) | 2/15/2019 | 12/12/2019 | | | | | | | | 346,570 |
| Pamela Tondreau |
| Cash Bonus Opportunity(7) | | 1/29/2019 | | 296,250 | 740,625 | | | | | |
| RSU Award(12) | 2/15/2019 | 2/14/2019 | | | | | | | 58,101 | 865,943 |
| PSU Award(13) | 2/15/2019 | 2/14/2019 | | | | | 69,274 | 155,865 | | 1,305,760 |
| Modification of PSU Award(10) | 3/16/2017 | 12/12/2019 | | | | | | | | 112,643 |
| Modification of PSU Award(11) | 2/15/2019 | 12/12/2019 | | | | | | | | 300,963 |
| (1) | Amounts in the “Non-Equity Incentive Plan” columns represent cash bonus opportunities under our short-term incentive (cash bonus) plan, the Cypress Incentive Plan (or CIP). As the CIP is designed, the CIP’s performance period is the fiscal year, corporate and individual goals are set early in the year, and any cash bonus earned is paid out upon Compensation Committee approval shortly after the end of the year. Under the CIP, our Compensation Committee assigns an incentive target to each NEO expressed as a percentage of base salary. For 2019, the incentive target for Mr. El-Khoury was 150%, the incentive target for Mr. Trent was 85%, and the incentive target for each of Mr. Geha, Mr. Gopalswamy, and Ms. Tondreau was 75%. Each executive’s target bonus is shown in the “Target” column above, calculated as his or her annual incentive target multiplied by his or her annualized base salary rate at the end of the year. Under the CIP design, the actual bonus for the year is determined by multiplying the Named Executive Officer’s target bonus by (a) a Company funding percentage that may range from 0% to 200% and (b) an individual goal achievement percentage that may range from 0% to 100% (or up to 125% in the case of special “stretch” goals). The Company funding percentage for the year is determined by the Compensation Committee after year-end based on (x) the Company’s performance relative to financial goals for such period established by the Committee early in the year and (y) the Committee’s discretionary assessment of the Company’s operational performance for the year. For 2019, the funding goal metrics were revenue and non-GAAP pre-tax profit margin. Each NEO’s individual goal achievement percentage was designed to be determined by the Compensation Committee after year-end based on the Committee’s assessment of his or her performance for the year, particularly with respect to his or her Critical Success Factor goals (or “CSFs”) for the year. CSFs were assigned to each participant shortly after the start of the year by the Compensation Committee, in the case of Mr. El-Khoury’s goals, or by the CEO subject to Committee oversight, in the case of the other NEOs’ goals. CIP bonuses cannot exceed 250 percent of target. The “maximum” column presents each NEO’s maximum possible CIP bonus for 2019 (250% of the target amount). |
On December 12, 2019, the Board of Directors accelerated payment of the 2019 CIP bonus at the target level for each NEO, and such bonuses were paid on December 20, 2019. The acceleration was approved primarily to preserve compensation-related corporate income tax deductions for Cypress that might otherwise be disallowed through the operation of Section 280G of the Tax Code, in connection with the Merger. Because the acceleration was discretionary rather than pursuant to the terms of the incentive plan design, the accelerated amounts are reported in the “Bonus” column of the Summary Compensation Table. There were no other payouts to the NEOs in connection with the 2019 CIP.
| (2) | There was no threshold bonus under the CIP for 2019. The Company funding percentage for the year was subject to two performance measures, revenue and non-GAAP pre-tax profit margin, with goal levels for each measure arranged on a two dimensional matrix. The funding percentage would be zero if the Company did not achieve The non-GAAP pre-tax profit margin measure’s minimum performance level, subject to Compensation Committee discretion to override the performance-determined result. If the Company performed above minimum levels but less than the next higher goal level, the funding percentage would be determined by linear interpolation between 0% and the funding percentage for such next higher level. |
| (3) | Amounts in the “Equity Incentive Plan” columns represent performance-based PSU awards granted under the Company’s 2013 Stock Plan as part of our Long-Term Incentive (LTI) Program. Each PSU is subject to both performance-based and service-based vesting requirements. This means that, in addition to satisfying the performance-based requirements, the grantee must also remain continuously employed with the Company through the vesting date specified in the award agreement for the grantee’s PSUs to vest. As described in the CD&A, the goals for the PSUs granted in 2019 relate to the Company’s 2019 non-GAAP operating income, 2019 achievement of customer experience plan goals, and the Company’s total stockholder return (TSR) over one-, two-, and three-year periods relative to that of the other companies in the S&P Semiconductors Index for the same periods. |
| (4) | There was no vesting threshold for the PSUs granted in 2019. The vesting for each PSU is subject to various performance measures as listed in Note (3) above. The portion of each PSU allocated to each measure will not vest if the Company does not achieve that measure’s minimum performance level. If the Company performs above that measure’s minimum level but less than 100 percent of its target level, the portion of the PSU allocated to that measure would vest between zero percent and 100 percent. |
| (5) | Amounts in the “All Other Stock Awards” column represent service-based RSU awards granted as part of our LTI Program. |
| (6) | This column presents the aggregate grant date fair value of the awards computed in accordance with FASB ASC 718 and SEC rules. These amounts do not reflect whether the recipient has actually realized a financial benefit from the awards (such as by vesting in stock). The reported grant date fair value of our RSU awards (as calculated under FASB ASC 718) islessthan the market value of the underlying shares on the grant date primarily because the awards are not entitled to dividends prior to vesting (the “dividend discount”), and we have a regular history of paying dividends on our shares. The reported grant date fair value of our PSU awards (as calculated under FASB ASC 718) isgreaterthan the market value of the underlying shares (at target) on the grant date based on the valuation analysis performed using a Monte Carlo simulation, partially offset by the dividend discount. In the case of the modifications, as required by SEC rules this column presents the incremental fair value of the modified awards computed as of December 29, 2019the modification date, as compared to the fair value of the awards immediately prior to the modification, in accordance with FASB ASC 718. For information on the assumptions used in our fair value computations, refer to Note 11—“Employee Stock Plans and December 30, 2018 | 54 |
Consolidated Statements of Operations forStock-Based Compensation” in the years ended December 29, 2019, December 30, 2018, and December 31, 2017 | 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 in the Original Filing of our 2019 Form 10-K. |
| |
2.(7) | Financial Statement Schedule (ValuationThis row represents a cash bonus opportunity under the Company’s short-term incentive program, the Cypress Incentive Plan, as further described in footnotes (1) and Qualifying Accounts) for the years ended December 29, (2) above. For more information, see “CD&A—2019 December 30, 2018 and December 31, 2017:Short-Term Incentive Plan (Cash Bonus) Compensation.” |
| (8) | This row represents a service-based RSU award granted to the CEO under the Company’s LTI Program. This grant was recommended by the Compensation Committee on February 14, 2019 and approved by the Board of Directors on February 15, 2019. This award was scheduled to vest in three annual installments, with 50% of the units vesting on February 15, 2020, 25% of the units vesting on February 15, 2021, and 25% of the units vesting on February 15, 2022. For more information, see “CD&A—2019 Long-Term Incentive Program.” |
| (9) | This row represents a performance-based PSU award granted to the CEO under the Company’s LTI Program. This grant was recommended by the Compensation Committee on February 14, 2019 and approved by the Board of Directors on February 15, 2019. This award was scheduled to vest in three annual installments; with 36% of the units eligible to vest on February 28, 2020, 32% of the units eligible to vest on February 26, 2021, and 32% of the units eligible to vest on February 28, 2022 (percentages calculated based on target vesting levels). For more information, see “CD&A—2019 Long-Term Incentive Program.” |
| (10) | On December 12, 2019, the Board of Directors modified the terms of the PSUs granted on March 16, 2017 under our Performance Accelerated Restricted Stock (or PARS) Program by accelerating the final annual vesting tranche, which had been scheduled to vest on February 28, 2020. The acceleration was approved primarily to preserve compensation-related corporate income tax deductions for Cypress that might otherwise be disallowed through the operation of Section 280G of the Tax Code in connection with the Merger. As directed by the Board, the acceleration occurred on December 16, 2019 at the maximum vesting level. To the extent that some of the PSUs were otherwise expected to vest at less than maximum, the acceleration caused some shares to vest that otherwise would not have vested. This row reports the incremental fair value of the modified awards computed as of the modification date, as compared to the fair value of the awards immediately prior to the modification, in accordance with FASB ASC 718 and SEC rules. For more information on the modification, see “—Modifications to Equity Awards and Non-Equity Incentive Plan Awards,” below, and “CD&A—Effect of Pending Merger on 2019 Compensation Payouts,” above. |
| (11) | On December 12, 2019, the Board of Directors modified the terms of the PSUs granted on February 15, 2019 under our LTI Program by accelerating the first annual vesting tranche, which had been scheduled to vest on February 28, 2020. The acceleration was approved primarily to preserve compensation-related corporate income tax deductions for Cypress that might otherwise be disallowed through the operation of Section 280G of the Tax Code in connection with the Merger. As directed by the Board, the acceleration occurred on December 16, 2019 at the maximum vesting level. To the extent that some of the PSUs were otherwise expected to vest at less than maximum, the acceleration caused some shares to vest that otherwise would not have vested. This row reports the incremental fair value of the modified awards computed as of the modification date, as compared to the fair value of the awards immediately prior to the modification, in accordance with FASB ASC 718 and SEC rules. For more information on the modification, see “—Modifications to Equity Awards and Non-Equity Incentive Plan Awards,” below, and “CD&A—Effect of Pending Merger on 2019 Compensation Payouts,” above. |
| (12) | This row represents a service-based RSU award under the Company’s LTI Program. Each of the 2019 RSU awards to Named Executive Officers other than the CEO were scheduled to vest in three annual installments, with 42% of the units vesting on February 15, 2020, 29% of the units vesting on February 15, 2021, and 29% of the units vesting on February 15, 2022. For more information, see “CD&A—2019 Long-Term Incentive Program.” |
| (13) | This row represents a performance-based PSU award under the Company’s LTI Program. Each of the 2019 PSU awards to Named Executive Officers other than the CEO was scheduled to vest in three annual installments; with approximately 40% of the units eligible to vest on February 28, 2020, 30% of the units eligible to vest on February 26, 2021, and 30% of the units eligible to vest on February 28, 2022 (percentages calculated based on target vesting levels). For more information, see “CD&A—2019 Long-Term Incentive Program.” |
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
Employment Agreements
Hassane El-Khoury.On December 3, 2018, the Company entered into an amended and restated employment agreement with Mr. El-Khoury to serve as our president and chief executive officer. The employment agreement has no specified term, and Mr. El-Khoury’s employment with the Company is on an at-will basis. The employment agreement provides that Mr. El-Khoury will receive an annual base salary of no less than $700,000. He will also be eligible to participate in the Company’s cash bonus plan, the Cypress Incentive Plan, with a target incentive of 140% effective June 2018. Base salary will be subject to increase, but not decrease, at the sole discretion of the Board and payment of any bonus will be in the sole discretion of the Board. Mr. El-Khoury is also eligible to participate in the benefit programs generally available to executive officers of the Company. The provisions of Mr. El-Khoury’s amended and restated employment agreement relating to severance benefits are described below in the section “Potential Payments Upon Termination or Change of Control” as well as above in “CD&A—Severance and Change of Control Severance Arrangements.”
Thad Trent. On September 20, 2005, the Company entered into an employment offer letter with Mr. Trent. The letter has no specified term. The letter provides that Mr. Trent will receive an annual base salary of $180,000 and will be eligible to participate in the Company’s cash bonus plan with a target incentive of 30%. Mr. Trent will also be eligible to participate in the Company’s employee fringe benefit programs, stock purchase, new product bonus, and 401(k) plans.
Sam Geha, Ph.D.On October 27, 1995, the Company entered into an employment offer letter with Mr. Geha. The letter has no specified term. The letter provides that Mr. Geha will be eligible to participate in the Company’s employee fringe benefit programs, stock purchase, profit sharing, and 401(k) plans.
Sudhir Gopalswamy.On February 26, 2008, the Company entered into an employment offer letter with Mr. Gopalswamy. The letter has no specified term, and Mr. Gopalswamy’s employment with the Company is on an at-will basis. The letter provides that Mr. Gopalswamy will receive an annual base salary of $200,000 and will be eligible to participate in the Company’s cash bonus plan with a target incentive of 30%. Mr. Gopalswamy will also be eligible to participate in the Company’s employee fringe benefit programs, stock purchase, new product bonus, and 401(k) plans.
Pamela L. Tondreau. On January 15, 2015, the Company entered into an employment offer letter with Ms. Tondreau to serve as our general counsel. The letter has no specified term, and Ms. Tondreau’s employment with the Company is on an at-will basis. The letter provides that Ms. Tondreau will receive an annual base salary of $260,000 and will be eligible to participate in the Company’s cash bonus plan with a target incentive of 50%. Ms. Tondreau will also be eligible to participate in the Company’s employee fringe benefit programs, stock purchase, and 401(k) plans.
Equity Awards and Non-Equity Incentive Plan Awards
Each of the “non-equity incentive plan awards” reported in the Grants of Plan-Based Awards Table above was granted under, and is subject to the terms of, the Cypress Incentive Plan. Please see the discussion in the CD&A under the heading “2019 Executive Compensation—2019 Short-Term Incentive (Cash Bonus) Compensation” for a description of the material terms of awards granted under the Cypress Incentive Plan for 2019.
Each of the “equity incentive plan awards” and “other stock awards” reported in the Grants of Plan-Based Awards Table above was granted as part of our Long-Term Incentive Program and is subject to the terms of our 2013 Stock Plan. Please see the discussion in the CD&A under the heading “Long-Term Incentive (Equity Award) Compensation—2019 Long-Term Incentive Program” for a description of the material terms of the equity awards granted to our named executive officers in 2019.
Modifications to Equity Awards and Non-Equity Incentive Plan Awards
On December 12, 2019, the Board of Directors modified the terms of some equity awards by accelerating into December 2019 the vesting of all equity awards that were otherwise scheduled to vest to the Named Executive Officers in January or February of 2020. This was done primarily to preserve compensation-related corporate income tax deductions for Cypress that might otherwise be disallowed through the operation of Section 280G of the Tax Code in connection with the Merger. Specifically:
| ● | The Board modified the terms of the performance-based PSUs granted on March 16, 2017 under our Performance Accelerated Restricted Stock (or PARS) Program by accelerating the final annual vesting tranche, which had been scheduled to vest on February 28, 2020, with the acceleration occurring at the maximum achievement level provided in the award agreement. |
| ● | The Board modified the terms of the performance-based PSUs granted on February 15, 2019 under our LTI Program by accelerating the first annual vesting tranche, which had also been scheduled to vest on February 28, 2020, with the acceleration occurring at the maximum achievement level provided in the award agreement. |
| | Page● | The Board modified the terms of the service-based RSUs held by Named Executive Officers by accelerating the vesting of any units that were otherwise scheduled to vest in January or February of 2020. |
The accelerated equity award vesting was approved by the Board on December 12, 2019 and, as directed by the Board, occurred on December 16, 2019. To the extent that some of theperformance-basedunits (PSUs) were otherwise expected to vest at less than the maximum achievement level, the acceleration caused some shares to vest that otherwise would not have vested. The modification entries in the Grants of Plan Based Awards Table (which are also included under “Stock Awards” in the Summary Compensation Table) report the incremental fair value of the modified awards computed as of the modification date (December 12, 2019), as compared to the fair value of the awards immediately prior to the modification, in accordance with FASB ASC 718 and SEC rules. Theservice-basedunit (RSU) accelerations did not cause any shares to vest that otherwise would not have vested, did not result in any incremental fair value charge under FASB ASC 718, and therefore do not appear in the Grants of Plan Based Awards Table (nor in the Summary Compensation Table) above.
Concurrently with these equity award accelerations, on December 12, 2019 the Board approved accelerated payment of 2019 Cypress Incentive Plan bonuses to the Named Executive Officers at their bonus target levels. The bonuses were otherwise expected to be earned below target (absent any exercise of upward discretion by the Compensation Committee). The accelerated bonuses were paid on December 20, 2019.
In addition to preserving compensation-related corporate income tax deductions for Cypress that might otherwise be disallowed through the operation of Section 280G, these equity and bonus accelerations are expected to mitigate or eliminate the amount of excise tax that may be payable by the Named Executive Officers pursuant to Sections 280G and 4999 of the Tax Code in connection with so called “excess parachute payments” they may receive at or after the closing of the Merger. For more information on the Board’s rationale for these modifications, see “CD&A—Effect of Pending Merger on 2019 Compensation Payouts.”
The accelerated amounts were as follows:
| ● | With respect to Mr. El-Khoury, the Board approved the accelerated vesting of (a) 52,859 RSUs that were scheduled to vest on February 3, 2020, (b) 73,134 RSUs that were scheduled to vest on February 15, 2020, (c) 32,198 RSUs that were scheduled to vest on February 16, 2020, and (d) an aggregate of 348,224 PSUs that were scheduled to vest on February 28, 2020, calculated by assuming that the applicable performance goals were achieved at maximum performance. The value of Mr. El-Khoury’s accelerated RSUs and PSUs was $11,839,983, based upon the number of shares vested multiplied by the closing price of Cypress’s common stock on December 16, 2019 of $23.38 per share (the “December 16 Closing Price”). In addition, the Board approved the accelerated payment of his CIP bonus in the amount of $1,125,000, calculated by assuming that the applicable performance goals were achieved at 100% of target. |
| ● | With respect to Mr. Trent, the Board approved the accelerated vesting of (a) 19,169 RSUs that were scheduled to vest on February 3, 2020, (b) 29,795 RSUs that were scheduled to vest on February 15, 2020, (c) 16,737 RSUs that were scheduled to vest on February 16, 2020, and (d) 122,599 PSUs that were scheduled to vest on February 28, 2020, calculated by assuming that the applicable performance goals were achieved at maximum performance. The value of Mr. Trent’s accelerated RSUs and PSUs was $4,402,454, based upon the number of shares vested multiplied by the December 16 Closing Price. In addition, the Board approved the accelerated payment of his CIP bonus in the amount of $382,500, calculated by assuming that the applicable performance goals were achieved at 100% of target. |
| ● | With respect to Mr. Geha, the Board approved the accelerated vesting of (a) 17,425 RSUs that were scheduled to vest on February 3, 2020, (b) 23,836 RSUs that were scheduled to vest on February 15, 2020, (c) 14,861 RSUs that were scheduled to vest on February 16, 2020, and (d) an aggregate of 103,094 PSUs that were scheduled to vest on February 28, 2020, calculated by assuming that the applicable performance goals were achieved at maximum performance. The value of Mr. Geha’s accelerated RSUs and PSUs was $3,722,470, based upon the number of shares vested multiplied by the December 16 Closing Price. In addition, the Board approved the accelerated payment of his CIP bonus in the amount of $281,250, calculated by assuming that the applicable performance goals were achieved at 100% of target. |
| ● | With respect to Mr. Gopalswamy, the Board approved the accelerated vesting of (a) 17,425 RSUs that were scheduled to vest on February 3, 2020, (b) 28,305 RSUs that were scheduled to vest on February 15, 2020, (c) 17,368 RSUs that were scheduled to vest on February 16, 2020 and (d) an aggregate of 114,587 PSUs that were scheduled to vest on February 28, 2020, calculated by assuming that the applicable performance goals were achieved at maximum performance. The value of Mr. Gopalswamy’s accelerated RSUs and PSUs was $4,154,275, based upon the number of shares vested multiplied by the December 16 Closing Price. In addition, the Board approved the accelerated payment of his CIP bonus in the amount of $307,500, calculated by assuming that the applicable performance goals were achieved at 100% of target. |
| ● | With respect to Ms. Tondreau, the Board approved the accelerated vesting of (a) 18,000 RSUs that were scheduled to vest on January 22, 2020, (b) 15,685 RSUs that were scheduled to vest on February 3, 2020, (c) 24,581 RSUs that were scheduled to vest on February 15, 2020, (d) 14,443 RSUs that were scheduled to vest on February 16, 2020 and (e) an aggregate of 100,827 PSUs that were scheduled to vest on February 28, 2020, calculated by assuming that the applicable performance goals were achieved at maximum performance. The value of Ms. Tondreau’s accelerated RSUs and PSUs was $4,057,272, based upon the number of shares vested multiplied by the December 16 Closing Price. In addition, the Board approved the accelerated payment of her CIP bonus in the amount of $296,250, calculated by assuming that the applicable performance goals were achieved at 100% of target. |
In connection with the bonus payment and accelerated equity vesting, each Named Executive Officer entered into a recoupment (or “clawback”) letter agreement with the Company. Each letter agreement provides that, with respect to his or her accelerated RSUs and PSUs, if the executive is terminated for cause or voluntarily resigns prior to the originally scheduled vesting date for such RSUs or PSUs, the executive will automatically forfeit the net (after tax) shares he or she received in settlement of such RSUs or PSUs for no consideration. If the executive has sold such shares, he or she must pay Cypress an amount equal to the gross proceeds he or she received in such sale. However, in the event the Closing of the Merger occurs prior to the applicable originally scheduled vesting date for the accelerated RSUs, the clawback will cease to apply to 50% of the net (after tax) shares each executive received in settlement of such RSUs. In addition, in the event the Closing occurs prior to any originally scheduled vesting date and the executive is terminated prior to the originally scheduled vesting date, the clawback will cease to apply on the date of such termination if the executive would be entitled to accelerated vesting of equity awards under the Merger Agreement in connection with such termination. If the Merger Agreement is terminated without the Merger closing and Cypress determines that the number of PSUs that would have vested on February 28, 2020 based on the actual level at which the applicable performance goals are achieved is less than the number that vested assuming maximum performance (such difference, the “Delta Amount”), then the excess shares equal to the Delta Amount will be subject to a lapsing forfeiture right based on the following terms: (a) on the last day of the calendar month in which the Merger Agreement is terminated and on the last day of each subsequent calendar month through February 2021, a pro-rata portion of the Delta Amount will no longer be subject to the lapsing forfeiture right and (b) the lapsing forfeiture right will expire in full and terminate on February 28, 2021. If the preceding sentence applies and, before February 28, 2021, the executive’s employment is terminated by Cypress for cause or by the executive without good reason, he or she will forfeit the excess shares equal to the portion of the Delta Amount then subject to the lapsing forfeiture provision (or, if the executive has sold such excess shares, he or she must pay Cypress an amount equal to the gross proceeds he or she received in such sale).
Outstanding Equity Awards at Fiscal Year End Table—2019
The following table presents all equity awards held by our Named Executive Officers at the end of fiscal year 2019:
Name | Option Awards | Stock Awards |
Schedule II—Valuation and Qualifying AccountsNumber of
Securities
Underlying
Unexercised
Options (#) Exercisable | 123 |
Number of
Securities
Underlying
Unexercised
Options (#) Unexercisable | Equity
Incentive
Plan Awards:
Number of
Securities
Underlying Unexercised/
Unearned
Options (#) | Option Exercise Price ($) | Option
Expiration
Date | Service-Based
Awards: | Equity Incentive Plan
Awards: |
3.Number of
Shares or
Units of Stock
that Have Not Vested(1)(2) (#) | Exhibits:
Market Value
of Shares or
Units of Stock
that Have Not Vested(3)
($) |
The documents listed below are filed (or furnished, as noted) as exhibits to this Annual Report on Form 10-K:
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| 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 | | Agency Resignation and Appointment Agreement and Amendment No. 9 to Amended and Restated Credit and Guaranty Agreement, dated as of July 31, 2019, by and among Cypress Semiconductor Corporation, the Guarantors party thereto, the lenders party thereto, MUFG Bank, Ltd., as successor administrative agent, as an issuing bank and as swing line lender, MUFG Union Bank, N.A., as successor collateral agent, Morgan Stanley Senior Funding, Inc. as outgoing administrative agent and collateral agent, and the other financial institutions party thereto. | | 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 |
| | | | | | | | | | | |
Number of
Unearned
Shares, Units
or Other
Rights that
Have Not
Vested(1)(4) (#) | Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights that
Have Not
Vested(3) ($) |
| | | | | | | | | | |
101.SCH | | iXBRL Taxonomy Extension Schema Document.Hassane El-Khoury | | | | | | 73,134(5) | 1,713,530 | | |
| | | | | | | 208,050(6) | 4,874,612 |
| | | | | 32,198(7) | 754,399 | | |
| | | | | | | 112,692(8) | 2,640,374 |
Name | Option Awards | Stock Awards |
Number of
Securities
Underlying
Unexercised
Options (#) Exercisable | Number of
Securities
Underlying
Unexercised
Options (#) Unexercisable | Equity
Incentive
Plan Awards:
Number of
Securities
Underlying Unexercised/
Unearned
Options (#) | Option Exercise Price ($) | Option
Expiration
Date | Service-Based
Awards: | Equity Incentive Plan
Awards: |
Number of
Shares or
Units of Stock
that Have Not Vested(1)(2) (#) | Market Value
of Shares or
Units of Stock
that Have Not Vested(3)
($) | Number of
Unearned
Shares, Units
or Other
Rights that
Have Not
Vested(1)(4) (#) | Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights that
Have Not
Vested(3) ($) |
| Thad Trent | | | | | | 40,630(5) | 951,961 | | |
| | | | | | | 60,314(6) | 1,413,157 |
| | | | | 16,737(7) | 392,148 | | |
| | | | | | | 30,684(9) | 718,926 |
| Sam Geha | | | | | | 32,504(5) | 761,569 | | |
| | | | | | | 48,252(6) | 1,130,544 |
| | | | | 14,861(7) | 348,193 | | |
| | | | | | | 27,244(9) | 638,327 |
| | | | | 1,084(10) | 25,398 | | |
| Sudhir Gopalswamy | | | | | | 38,599(5) | 904,375 | | |
| | | | | | | 57,300(6) | 1,342,539 |
| | | | | 17,369(7) | 406,956 | | |
| | | | | | | 31,842(9) | 746,058 |
| | | | | 6,400(11) | 149,952 | | |
| Pamela L. Tondreau | | | | | | 33,520(5) | 785,374 | | |
| | | | | | | 49,759(6) | 1,165,853 |
| | | | | 14,443(7) | 338,399 | | |
| | | | | | | 26,478(9) | 620,380 |
| (1) | Awards are generally subject to forfeiture in connection with any termination of the award holder’s employment with Cypress, subject however to any vesting acceleration to which the award holder may be entitled in the circumstances of the termination as described below in the section “Potential Payments Upon Termination or Change of Control.” |
| (2) | Entries in this column represent unvested service-based RSUs, (i.e., stock awards that are scheduled to vest after year-end 2019 based on the executive’s continued service with Cypress through the scheduled vesting dates). |
| (3) | Market value is based on the $23.43 closing price per share of Cypress common stock on December 27, 2019 (the final trading day of fiscal year 2019) multiplied by the number of unvested units. |
| (4) | Entries in this column represent unvested performance-based PSUs (i.e., stock awards that are scheduled to vest after year-end 2020 and 2021 based primarily on the achievement of performance goals (which may include market conditions), in addition to the executive’s continued service with Cypress through the scheduled vesting dates). The number of unvested units presented in the table has been calculated based on actual achievement levels with respect to performance periods that were completed as of year-end 2019, and based on target achievement levels with respect to performance periods that extend beyond 2019. |
| (5) | These RSUs will vest in two equal installments on February 15, 2021 and February 15, 2022. |
| (6) | This is a performance-based award. The amount shown in the table is based on actual performance levels for performance periods that were completed as of the end of fiscal 2019 and target performance levels for performance periods that extend beyond the end of 2019. These PSUs will vest in two equal (at target) installments on February 26, 2021 and February 28, 2022. Each installment is eligible to vest up to 150% of the amount shown in the table based on our TSR relative to that of the companies in the S&P Semiconductors Index over the prior two or three fiscal years, respectively. |
| (7) | These RSUs will vest on February 16, 2021. |
| (8) | These PSUs will be eligible to vest on February 26, 2021 at up to 200% of the target amount shown in the table based on relative attainment of performance goals relating to our 2020 non-GAAP pre-tax profit margin, our three-year TSR 2018-2020 relative to that of the companies in the S&P Semiconductors Index, and the revenue growth that we achieve in 2020 over the 2016 base year relative to semiconductor market growth (excluding DRAM) for the same period. |
| (9) | These PSUs will be eligible to vest on February 26, 2021 at up to 200% of the target amount shown in the table based on relative attainment of performance goals relating to our 2020 non-GAAP pre-tax profit margin and our three-year TSR 2018-2020 relative to that of the companies in the S&P Semiconductors Index. |
| (10) | These RSUs will vest on June 22, 2020. |
| (11) | These RSUs will vest in two equal installments on May 30, 2020 and May 30, 2021. |
Option Exercises and Stock Vested Table—2019
The following table shows how many stock options our Named Executive Officers exercised, and how many shares of stock vested for them, during 2019. This table also presents the aggregate value our Named Executive Officers realized from such option exercises and vesting events.
| | Option Awards | Stock Awards |
Name | Number of Shares
Acquired on Exercise
(#)(1) | Value Realized
on Exercise
($)(2) | Number of Shares
Acquired on Vesting
(#)(1) | Value Realized
on Vesting
($)(3) |
| Hassane El-Khoury | 4,300 | 29,369 | 929,242 | 18,470,989 |
| Thad Trent | 53,003 | 588,273 | 327,147 | 6,534,765 |
| Sam Geha | — | — | 286,870 | 5,705,963 |
| Sudhir Gopalswamy | 6,598 | 51,676 | 323,357 | 6,446,005 |
| Pamela L. Tondreau | — | — | 308,631 | 6,085,667 |
| (1) | Number of shares acquired is the total number of shares exercised or vested, as applicable (before any deduction for payment of taxes or exercise price). |
| (2) | In the case of options, “value realized” equals the difference between the exercise price and the market price of our common stock at exercise, multiplied by the number of exercised options. |
| (3) | In the case of stock awards, “value realized” equals the closing price of our common stock on the vesting date (or the prior trading day, in the case of weekend or holiday vesting events), as reported by Nasdaq, multiplied by the total number of vested shares (including shares withheld by us to cover tax withholding). |
Non-Qualified Deferred Compensation Table—2019(1)
The following table presents the contributions and withdrawals that our Named Executive Officers made to or from our non-qualified deferred compensation plans in fiscal 2019, along with the aggregate earnings (or losses) in their plan accounts for the year, and their plan balances at the end of fiscal 2019.
Name | Executive
Contributions
in the Last
Fiscal Year(2)
($) | Registrant
Contributions
in the Last
Fiscal Year(3)
($) | Aggregate
Earnings (Losses)
in the Last Fiscal Year(4)
($) | Aggregate
Withdrawals/
Distributions(2)
($) | Aggregate
Balance at Last
Fiscal Year End(5)
($) |
| Hassane El-Khoury | — | — | — | — | — |
| Thad Trent | — | — | 147,830 | — | 804,120 |
| Sam Geha | — | — | 41,566 | — | 556,466 |
| Sudhir Gopalswamy | — | — | — | — | — |
| Pamela L. Tondreau | — | — | — | — | — |
| (1) | Cypress’s two deferred compensation plans provide certain eligible employees, including the Named Executive Officers, with the opportunity to defer the receipt of compensation in order to accumulate funds for retirement on a tax-deferred basis. Each participant in Cypress’s deferred compensation plans may elect to defer a percentage of his or her compensation (annual base salary, cash bonuses and any cash sales commissions) and invest such deferral in the plans’ available investment options. Cypress does not make contributions to the employees’ deferred compensation plans and does not guarantee returns on the investments. Participant deferrals and net investment gains remain as Cypress liabilities and the underlying assets are subject to the claims of Cypress’s general creditors. Withdrawals and other distributions are subject to the requirements of Section 409A of the Tax Code. See “CD&A—Other Compensation/Benefits/Perquisites” above for additional information about deferral limits and terms of each plan. |
| (2) | During fiscal 2019, our Named Executive Officers did not make any contributions to nor any withdrawals from our deferred compensation plans. |
| (3) | The deferred compensation plans do not provide for, and we do not make, any registrant contributions to the plans. |
| (4) | None of the aggregate earnings (losses) in the non-qualified deferred compensation plans are reported in the Summary Compensation Table. |
| (5) | The aggregate balance amounts under the deferred compensation plans include deferrals made in prior fiscal years. For individuals who were named executive officers for the fiscal years in which the deferrals were made, the amount of the deferred compensation was included in such individuals’ compensation as reported in the Summary Compensation Tables that were included in the proxy statements for such fiscal years. |
Potential Payments Upon Termination or Change of Control
The following sections describe the benefits that may become payable to our Named Executive Officers in connection with a termination of their employment with the Company and/or a change of control of the Company under arrangements in effect at the end of fiscal 2019.
Infineon Merger Agreement
The Merger Agreement provides for potential payments upon termination or change of control that are different from, or in addition to, the payments our Named Executive Officers would be entitled to receive in the absence of the Merger Agreement upon a hypothetical termination or change of control.
The treatment of equity awards in connection with the Merger and the benefits that may become payable to each Named Executive Officer if his or her employment terminates in specified circumstances after the Closing are described in detail under the caption “The Merger—Interests of Cypress’s Executive Officers and Directors in the Merger” in the Company’s definitive proxy statement soliciting stockholders’ approval of the Merger, which was filed with the SEC on July 16, 2019.
The remainder of this section describes the potential payments our Named Executive Officers would be entitled to receive upon a hypothetical termination or in connection with a hypothetical change of control (i.e., due to an acquiror other than Infineon) under arrangements in effect at the end of fiscal 2019.
Severance Provisions of our Amended and Restated CEO Employment Agreement
Effective December 3, 2018, the Company entered into an Amended and Restated Employment Agreement with Mr. El-Khoury (the “Current Agreement”) which amends his Employment Agreement dated as of November 30, 2016 (the “Original Agreement”) and includes severance provisions as summarized below.
Pursuant to the Current Agreement, if Mr. El-Khoury’s employment is terminated involuntarily by the Company other than for “cause,” death, or disability, or by Mr. El-Khoury pursuant to a “voluntary termination for good reason” (as such terms are defined in the Current Agreement), then Mr. El-Khoury will be entitled to receive the following compensation and benefits:
| ● | a lump-sum severance payment (less applicable withholdings) equal to twenty-four (24) months of Mr. El-Khoury’s base salary plus twenty-four (24) months of his annual target bonus; |
| ● | payments by the Company on Mr. El-Khoury’s behalf of (or, at the Company’s option, reimbursement of Mr. El-Khoury for) the premium costs incurred by Mr. El-Khoury and his dependents for continued health, dental, vision, and employee assistance program coverage under the applicable plans maintained by the Company for a coverage period of twenty-four (24) months following the effective date of the employment termination; |
| ● | accelerated vesting and extended exercisability of Mr. El-Khoury’s then-outstanding equity-based awards as follows: |
| ○ | awards grantedpriorto the Current Agreement’s Effective Date of December 3, 2018 shall become vested to the extent provided in the Original Agreement, which provides that “[a]ll vesting for … equity and equity equivalent awards granted under any equity plan of the Company or affiliate of the Company then held by Executive shall be accelerated in full”; |
| ○ | awards grantedafterthe Effective Date shall accelerate vesting as to 100% of their unvested shares; in the case of performance-based awards such acceleration shall occur assuming attainment of the underlying performance targets at the 100% target level (or at the greater of actual performance levels or 100% of target levels if the termination occurs following the completion of the relevant performance period but before the relevant vesting date), unless the terms of such performance-vesting awards provide for different severance acceleration terms (in which case such different terms shall control); and |
| ○ | all of Mr. El-Khoury’s vested options (including any options accelerated as above) shall be exercisable for up to twelve (12) months following the employment termination date (or, if earlier, until the option’s original expiration date or the cancellation of the option pursuant to the terms of the plan under which it was granted). |
The above benefits are subject to Mr. El-Khoury signing and not revoking a general release of claims in a form satisfactory to the Company such that the release becomes irrevocable no later than 60 days following the termination of employment.
The Current Agreement provides that any severance payment or other benefit payable to Mr. El-Khoury that constitutes a “parachute payment” within the meaning of Section 280G of the Tax Code, shall be either: (i) delivered in full, or (ii) delivered as to such lesser extent that would result in no portion of such payment being subject to excise tax under Section 4999 of the Tax Code. The estimates included below in the section “Estimated Severance and Change-of-Control Benefits” are presented assuming that no such reduction in benefits would be required. Mr. El-Khoury’s employment agreement does not provide for any tax gross-up or other reimbursement payment in respect of so-called “golden parachute” excise tax payments.
Amended and Restated Change of Control Severance Agreements with our Executive Vice Presidents
Effective December 3, 2018, the Company entered into Amended and Restated Change of Control Severance Agreements with its executive vice presidents (each a “Covered Officer”), including Mr. Trent, Mr. Geha, Mr. Gopalswamy, and Ms. Tondreau.
Pursuant to these agreements, if the Company or any successor terminates the employment of a Covered Officer other than for “cause,” death or disability, or if a Covered Officer voluntarily terminates his or her employment for “good reason” (as such terms are defined in the agreement), in either case during the period (the “Change of Control Period”) beginning three (3) months prior to, and ending twenty-four (24) months after, the occurrence of a “change of control” (as defined in the agreement), then the Covered Officer will be entitled to receive the following compensation and benefits:
| ● | a lump-sum severance payment (less applicable withholdings) equal to eighteen (18) months of the Covered Officer’s annual base salary plus eighteen (18) months of the Covered Officer’s annual target bonus; |
| ● | an additional lump-sum payment (less applicable withholdings) equal to the product of (x) eighteen (18) multiplied by (y) the monthly premium that would be required for the first month of the Covered Officer’s COBRA premium, calculated on the assumption that the premium includes coverage for the Covered Officer and the Covered Officer’s spouse and/or dependents; and |
| ● | accelerated vesting of 100% of the unvested portion of the Covered Officer’s then-outstanding equity-based compensation; in the case of performance-based awards such acceleration shall occur assuming attainment of the underlying performance targets at the 100% target level (or at the greater of actual performance levels or 100% of target levels if the termination occurs following the completion of the relevant performance period but before the relevant vesting date), unless the terms of such performance-vesting awards provide for different severance acceleration terms (in which case such different terms shall control). |
Outside the Change of Control Period, upon an involuntary termination other than for cause, death, or disability, the Covered Officer shall be entitled to receive the following severance benefits and payments:
| ● | a lump-sum severance payment (less applicable withholdings) equal to nine (9) months of the Covered Officer’s annual base salary, and |
| ● | an additional lump-sum payment (less applicable withholdings) equal to the product of (x) nine (9) multiplied by (y) the monthly premium that would be required for the first month of the Covered Officer’s COBRA premium, calculated on the same assumptions as above. |
The agreement also contains non-disparagement and non-solicitation covenants, which apply if the Covered Officer receives severance benefits and run for nine (9) nine months following a date of termination outside the Change of Control Period or eighteen (18) months following a date of termination within the Change of Control Period.
The above benefits are also subject to the Covered Officer signing and not revoking a standard release of claims in a form reasonably acceptable to the Company within the time period specified in the release and in no event later than 60 days following the Covered Officer’s termination of employment (the “Release Deadline Date”).
Severance payments under the agreements are to be paid the first business day after the Release Deadline Date (but no later than March 15 of the next calendar year after the employment termination), subject to a delay of up to six months as necessary in order to comply with Section 409A of the Tax Code.
The agreements provide that any severance payment or other benefit payable to a Covered Officer that constitutes a “parachute payment” within the meaning of Section 280G of the Tax Code, shall be either: (i) delivered in full, or (ii) delivered as to such lesser extent that would result in no portion of such payment being subject to excise tax under Section 4999 of the Tax Code. The estimates included below in the section “Estimated Severance and Change-of-Control Benefits” are presented assuming that no such reduction in benefits would be required. The agreements do not provide for any tax gross-up or other reimbursement payment in respect of so-called “golden parachute” excise tax payments.
The initial term of the agreements is two years from December 3, 2018. At the expiration of the initial term and on each one year anniversary thereafter each agreement will automatically renew for an additional one year term unless either party provides written notice of non-renewal to the other party at least four months prior to the renewal date. If a change of control occurs while the agreement is in effect, the agreement’s term will extend automatically through the date that is 24 months after the change of control.
The Closing of the Merger with Infineon will constitute a change of control for purposes of these agreements.
2019 LTI PSU Award
The severance arrangements described above provide an approach for acceleration of outstanding performance- based awards that will apply in the event of a double-trigger termination8 unless the terms of the applicable performance-based award provide an alternate severance acceleration formula (in which case such alternate formula shall control). In the case of the LTI PSUs granted in 2019, the Committee included an alternate acceleration formula (the “Alternate Acceleration Formula”) in the award letter. As explained above (see “CD&A—2019 Long Term Incentive Program”), the 2019 LTI PSUs’ performance goals feature a set of performance milestones applicable to fiscal 2019 only (namely, non-GAAP operating margin and customer experience) with a weighted payout (ranging from 0% to 150%) based on such 2019 milestones that will apply to all three of the award’s annual vesting tranches, and with further multipliers (ranging from 1.0xto 1.5x) that will apply to each of the three annual vesting tranches based on Cypress’ relative TSR percentile over the prior one, two, or three years, as applicable. The Committee’s Alternate Acceleration Formula for this award provides that in the event of a double-trigger termination8(a) the 2019 performance milestones will be deemed to have been met at target (i.e., at 100%) in the case of a change of control8 before the end of fiscal 2019, or at the actual performance level in the case of a change of control8at or after the end of fiscal 2019, and (b) any TSR performance period in progress will end on the date of the change of control8 and the Company’s relative TSR over such period will be calculated with the Company’s ending price deemed to be the merger consideration per share received by our stockholders, rather than our trailing 20 trading day average closing market price9and otherwise according to the payout scale in the award agreement. Any as yet outstanding tranche would then accelerate upon the double-trigger termination8based on target shares multiplied by such 2019 payout percentage and such TSR multiplier.
Estimated Severance and Change-of-Control Severance Benefits
No Single-Trigger Benefits upon a Change of Control.Except as provided in the Infineon Merger Agreement, none of the Company’s Named Executive Officers are entitled to benefits (commonly called “single-trigger” benefits) that would become payable upon a change of control alone (i.e., without any employment termination). The single-trigger benefits under the Infineon Merger Agreement apply only in connection with the proposed Merger with Infineon, see “Infineon Merger Agreement,” above.
Severance Benefits (Not in Connection with a Change of Control).The following table presents the Company’s estimate of the benefits to which each of our Named Executive Officers would have been entitled if his or her employment had been terminated on December 27, 2019 (the final business day of fiscal 2019) by the Company without cause (or, in the case of Mr. El-Khoury, by the executive for good reason), andnotin connection with any change of control of the Company.
Name | Salary Payments ($) | Bonus Payments ($) | COBRA Benefits ($) | Equity Acceleration(1) (2) ($) | Total ($) |
| Hassane El-Khoury | 1,500,000 | 2,250,000 | 16,538 | 15,060,617(3) | 18,827,155 |
| Thad Trent | 337,500 | — | 17,223 | — | 354,723 |
| Sam Geha | 281,250 | — | 17,479 | — | 298,729 |
| Sudhir Gopalswamy | 307,500 | — | 26,984 | — | 334,484 |
| Pamela L. Tondreau | 296,250 | — | 16,721 | — | 312,971 |
| (1) | The value of equity award acceleration is based on the $23.43 closing market price per share of the Company’s common stock on December 27, 2019, as reported on Nasdaq. |
| (2) | For purposes of calculating the value of the accelerated 2019 LTI PSU award, we assumed that the fiscal 2019 performance period would be deemed to be complete at the time of the hypothetical December 27, 2019 termination of employment. |
| 8. | Or, for Mr. El-Khoury, any termination by the Company without “cause” or by Mr. El-Khoury for “good reason,” as such terms are defined under his Severance Arrangement. |
| 9. | In the case of a qualifying termination of Mr. El-Khoury not in connection with a change in control, the Company’s relative TSR over such period will be calculated for the Company in the same manner as for the other index companies (i.e., with ending price defined as the trailing 20 trading day average closing market price). |
| (3) | With respect to equity awards granted prior to December 3, 2018, the terms of Mr. El-Khoury’s applicable agreement provide that “all vesting … shall be accelerated in full” in the event of a termination without cause or a resignation for good reason. For purposes of the table above, we have interpreted such phrase to provide for acceleration of any such outstanding performance-based stock units at the maximum level. |
Double-Trigger Change-of-Control Severance Benefits.The following table presents the Company’s estimate of the severance benefits to which each of our Named Executive Officers would have been entitled if his or her employment had been terminated on December 27, 2019 (the final business day of fiscal 2019) by the Company without cause or by the executive for good reason, and assuming for purposes of this illustration that such date was within 3 months before or 24 months after a hypothetical change of control of the Company (i.e., due to an acquiror other than Infineon).
Name | Salary Payments ($) | Bonus Payments ($) | COBRA Benefits ($) | Equity Acceleration(1) (2) ($) | Total ($) |
| Hassane El-Khoury(3) | 1,500,000 | 2,250,000 | 16,538 | 15,060,617(4) | 18,827,155 |
| Thad Trent | 675,000 | 573,750 | 34,447 | 4,182,794 | 5,465,991 |
| Sam Geha | 562,500 | 421,875 | 34,959 | 3,469,350 | 4,488,684 |
| Sudhir Gopalswamy | 615,000 | 461,250 | 53,968 | 4,221,149 | 5,351,367 |
| Pamela L. Tondreau | 592,500 | 444,375 | 33,443 | 3,492,968 | 4,563,286 |
| (1) | The value of equity award acceleration is based on the $23.43 closing market price per share of the Company’s common stock on December 27, 2019, as reported on Nasdaq. |
| (2) | For purposes of calculating the value of the accelerated 2019 LTI PSU award, we have assumed that the hypothetical change of control and employment termination occurred simultaneously on December 27, 2019 and that the fiscal 2019 performance period would be deemed to be complete at that time, with the hypothetical change-of-control transaction consideration per share received by stockholders being equal to the Company’s December 27, 2019 closing market price. |
| (3) | Mr. El-Khoury’s severance benefits become payable upon any termination of employment without cause or resignation for good reason (regardless of whether in connection with a change of control of the Company). |
| (4) | With respect to equity awards granted prior to December 3, 2018, the terms of Mr. El-Khoury’s applicable agreement provide that “all vesting … shall be accelerated in full” in the event of a termination without cause or a resignation for good reason. For purposes of the table above, we have interpreted such phrase to provide for acceleration of any such outstanding performance-based stock units at the maximum level. |
CEO PAY RATIO
Pursuant to a mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, companies are generally required to disclose the ratio of their median employee’s annual total compensation to the annual total compensation of the chief executive officer (CEO). The Company’s CEO is Hassane El-Khoury.
For purposes of making this required disclosure in 2018, we undertook to identify Cypress’s median employee as of the final day of fiscal year 2017 (December 31, 2017). At that time, Cypress employed 6,589 persons of which 6,050 were regular full-time or part-time employees of Cypress or its wholly-owned subsidiaries, 404 were employees of less-than-wholly-owned subsidiaries, and 135 were temporary or seasonal workers. At that time, approximately 30.1% of our employees were in North America, 5.8% were in Europe, and 64.1% were in Asia. From this population, we identified the median employee based on each employee’s total cash compensation in 2017. We did not make any assumptions or adjustments (including cost-of-living adjustments) or use any estimates for purposes of determining total cash compensation (except that local currencies were converted to U.S. Dollars using the exchange rates that we use for internal accounting purposes). For simplicity, in determining our median employee, the value of the Company’s 401(k) plan, global pension plans (where offered) and medical benefits provided was excluded because all employees, including the CEO, are generally offered comparable benefits.
As of the final day of fiscal year 2019 (December 29, 2019), Cypress employed 6,452 persons of which 5,871 are regular full-time or part-time employees of Cypress or its wholly-owned subsidiaries, 392 are employees of less-than-wholly-owned subsidiaries, and 189 are temporary or seasonal workers. Approximately 28.7% of our employees are in North America, 6.4% are in Europe, and 64.9% are in Asia.
SEC rules permit us to use the median employee that was identified in connection with prior year disclosure for purposes of this year’s disclosure as well, provided that no more than three years have elapsed since the median determination date and provided there have been no changes to our employee population or employee compensation arrangements in the interim that we reasonably believe would significantly affect our pay ratio disclosure. During 2018 and 2019 we did not make any material broad-based changes to our employee compensation arrangements (salary structures, bonus arrangements, or equity grant patterns). As of the end of 2019, we conducted an analysis to consider the likely impact that restructuring activities, attrition, and hiring patterns had on our employee population over the course of the two-year period ended December 29, 2019. Based on that analysis, we believe there were no changes in 2018 or 2019 that would significantly impact the pay ratio disclosure. However, in connection with our 2018 pay ratio disclosure, we concluded it would no longer be appropriate to use the employee identified in 2017 as the median employee for subsequent years because of a change in the original median employee’s circumstances that makes such employee no longer a representative employee. Accordingly, as permitted by SEC rules, for purposes of our 2018 pay ratio disclosure we identified another median employee for 2018 whose 2017 compensation was substantially similar to that of the original median employee based on the compensation analysis used to select the original median employee. The new median employee identified for purposes of our 2018 disclosure continues to be representative and is being utilized for purposes of these 2019 disclosures as well.
After identifying the median employee for 2019 as described above, we calculated the annual total compensation for such employee using the same methodology we use to determine the total compensation of our Named Executive Officers as set forth in the Summary Compensation Table included in this Proxy Statement. Compensation was measured over our fiscal year 2019, beginning on December 31, 2018 and ending on December 29, 2019.
| ● | Mr. El-Khoury’s annual total compensation for fiscal 2019 was $10,571,858, as reported in the Summary Compensation Table included in this Proxy Statement. |
| ● | Our median employee’s annual total compensation for fiscal 2019 was $54,343. |
| ● | For fiscal 2019, Mr. El-Khoury’s annual total compensation was approximately 195 times that of our median employee. |
This ratio is a reasonable estimate calculated in a manner consistent with SEC rules based on our payroll and employment records and the methodology described above. The SEC rules for identifying the median compensated employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their compensation practices. Therefore, the pay ratio reported by other companies might not be comparable to the pay ratio reported above, as other companies may have different employment and compensation practices and may use different methodologies, exclusions, estimates, and assumptions in calculating their own pay ratios.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes certain information with respect to shares of our common stock that may be issued under our equity compensation plans as of December 29, 2019:
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (#) | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights ($) | Number of Securities Remaining Available for Future Issuance (#) |
| Equity Compensation Plans Approved by Security Holders(1) | 6,630,273(3) | 11.34(6) | 34,105,593(7) |
| Equity Compensation Plans Not Approved by Security Holders(2) | 2,697,269(4) | 9.43(6) | 472,073(8) |
| Total | 9,327,542(5) | 11.11(6) | 34,577,666(9) |
| (1) | Plans approved by security holders consist of our 2013 Plan and our Employee Stock Purchase Plan (the “ESPP”). |
| (2) | Plans not approved by security holders consist of the 2010 Equity Incentive Award Plan (the “2010 Plan”), which we assumed in our merger with Spansion Inc., and the 2012 Incentive Award Plan (the “2012 Plan”), which we assumed in our acquisition of Ramtron. We no longer have any awards outstanding under the 1999 Stock Option Plan, which has expired for new grants and will not appear in subsequent reports. |
| (3) | Includes 1,035,954 shares underlying stock options and 5,594,319 shares underlying service-based RSUs and performance-based PSUs. |
| (4) | Includes 140,687 shares underlying stock options and 2,556,582 shares underlying RSUs and PSUs. |
| (5) | PSUs subject to performance periods that are completed (but which remain subject to service-based vesting conditions) as of the end of fiscal 2019, are reflected in this table based on our actual performance results for fiscal 2019. PSUs subject to multiple performance periods, some of which are completed and some of which are still open as of the end of fiscal 2019, are reflected in this table based on our actual performance for the completed periods and target performance for the open periods. If PSUs subject to open performance-based vesting conditions at the end of fiscal 2019 were included at the maximum vesting level still achievable as of the end of 2019, the total number of securities to be issued upon exercise of outstanding options, warrants, and rights would be 10,042,451 shares. |
| (6) | Calculated exclusive of outstanding RSUs and PSUs, which have no exercise price. |
| (7) | Includes 27,280,650 shares available for award grant purposes under the 2013 Plan and 6,824,944 shares available for future issuance under the ESPP. As required by the Merger Agreement, we are not currently offering the ESPP; however, the Board retains authority to re-launch the ESPP if the Merger Agreement is terminated. Shares issued under the 2013 Plan in respect of “full-value awards” (i.e., RSUs, PSUs, and other awards with a per share purchase price lower than 100% of the stock’s fair market value on the date of grant) count against the 2013 Plan’s remaining available balance as 1.88 shares for every one share actually issued. The remaining available balance in the table above reflects such deductions with respect to all of the 2013 Plan’s outstanding full value awards. Under the 2013 Plan, shares underlying full value awards that are cancelled or otherwise fail to vest will return to the available-for-grant pool at a ratio of 1.88 to 1. |
| (8) | Includes 208,142 shares available for award grant purposes under the 2012 Plan and 263,931 shares available for award grant purposes under the 2010 Plan. Shares issued under the 2012 Plan in respect of full-value awards count against the 2012 Plan’s remaining available balance as 1.53 shares for every one share actually issued. The remaining available balance in the table above reflects such deductions with respect to all of the 2012 Plan’s outstanding full value awards. Under the 2012 Plan, shares underlying full value awards that are cancelled or otherwise fail to vest will return to the available-for-grant pool at a ratio of 1.53 to 1. |
| (9) | For purposes of calculating the number of securities remaining available for future issuance, we have deducted outstanding performance-based awards from the available for grant reserve based on actual performance levels for performance periods that were completed as of the end of fiscal 2019 and target performance levels for performance periods that extend beyond the end of 2019. If such awards were to be deducted based on the maximum vesting levels that were still achievable as of the end of fiscal 2019, the total number of shares available for future issuance would be 33,290,577 shares. |
See Note 11 of the Notes to Consolidated Financial Statements in the Original Filing of our 2019 Form 10-K for further discussion of Cypress’s stock plans.
SECURITY OWNERSHIP OF FIVE PERCENT STOCKHOLDERS AND MANAGEMENT
The following tables present the number of shares of our common stock that were beneficially owned as of April 1, 2020 (except where another date is noted) by:
| ● | known beneficial owners of more than five percent of our common stock; |
| ● | each Named Executive Officer; and |
| ● | all current directors and current executive officers of the Company as a group. |
As of April 1, 2020, a total of 375,031,419 shares of the Company’s common stock were issued and outstanding (excluding treasury shares).
5% Stockholders | Total Shares Beneficially Owned(1) | Percent of Common Shares Outstanding(2) |
The Vanguard Group(3)
100 Vanguard Blvd. Malvern, PA 19355 | 35,914,748 | 9.60% |
BlackRock, Inc.(4) 55 East 52nd Street
New York, NY 10055 | 34,632,782 | 9.25% |
Directors and Executive Officers | Shares Owned Outright(5) | Right to
Acquire within 60 days(6) | Total Shares Beneficially Owned(1) | Percent of Common Shares Outstanding(2) |
| Non-Employee Directors | | | | |
| W. Steve Albrecht | 149,019 | | 149,019 | * |
| Oh Chul Kwon | 69,403 | | 69,403 | * |
| Catherine P. Lego | 74,934 | | 74,934 | * |
| Camillo Martino | 62,098 | | 62,098 | * |
| Jeffrey J. Owens | 31,172 | | 31,172 | * |
| Jeannine P. Sargent | 26,233 | | 26,233 | * |
| Michael S. Wishart | 90,276 | 34,398 | 124,674 | * |
| | | | | |
| Named Executive Officers | | | | |
| Hassane El-Khoury | 671,989 | | 671,989 | * |
| Sam Geha | 199,426 | | 199,426 | * |
| Sudhir Gopalswamy(7) | 249,298 | 3,200 | 252,498 | * |
| Pamela L. Tondreau | 314,164 | | 314,164 | * |
| Thad Trent(8) | 350,555 | | 350,555 | * |
| | | | | |
| All current directors and executive officers of the Company as a group (12 persons) | 2,288,567 | 37,598 | 2,326,165 | 0.62% |
| * | Less than 0.5%. See footnotes below. |
| (1) | The total shares beneficially owned by each person or group as of April 1, 2020 (except where another date is noted) includes shares of common stock that such person or group held outright on that date (e.g., shares held in a brokerage account) plus shares such person or group had the right to acquire on or within 60 days after that date, including, but not limited to, upon the exercise of options and vesting of restricted stock units. To our knowledge, except as otherwise indicated in the footnotes to this table and subject to applicable community property laws, each stockholder named in the table has the sole power to vote or direct the voting of (voting power), and the sole power to sell or otherwise direct the disposition of (dispositive power), the shares set forth opposite such stockholder’s name. |
| (2) | For each person and group included in the table, percentage ownership is calculated by dividing the total shares beneficially owned by such person or group as described above by the sum of the 375,031,419 shares of common stock outstanding (excluding treasury shares) on April 1, 2020 plus the number of shares of common stock that such person or group had the right to acquire from the Company on or within 60 days of that date, including, but not limited to, upon the exercise of options and upon vesting and settlement of restricted stock units. |
| (3) | Beneficial ownership information for The Vanguard Group is as of December 31, 2019 and is based on information contained in the amendment to Schedule 13G it filed with the SEC on February 12, 2020. Such amendment states that The Vanguard Group has sole voting power over 188,780 shares, shared voting power over 64,378 shares, sole dispositive power over 35,709,096 shares, and shared dispositive power over 205,652 shares. |
| (4) | Beneficial ownership information for BlackRock, Inc. is as of December 31, 2019 and is based on information contained in the amendment to Schedule 13G it filed with the SEC on February 5, 2020. Such amendment states that BlackRock, Inc. has sole voting power over 33,153,430 shares, shared voting power over zero shares, sole dispositive power over 34,632,782 shares, and shared dispositive power over zero shares. |
| (5) | “Shares owned outright” refers to long shares held in brokerage accounts. |
| (6) | “Right to acquire within 60 days” refers to (a) shares subject to employee or director stock options that are exercisable on or within 60 days after April 1, 2020 and/or (b) shares subject to employee or director restricted stock unit awards that are scheduled to vest within 60 days after April 1, 2020 (without regard to potential accelerated vesting in connection with the Closing of the Merger with Infineon). |
| (7) | Mr. Gopalswamy and his spouse have shared voting power and shared dispositive power over 147,979 shares as of April 1, 2020, which are held by a living trust for which they both serve as trustees. |
| (8) | Mr. Trent and his spouse have shared voting power and shared dispositive power over 350,555 shares as of April 1, 2020, which are held by a living trust for which they both serve as trustees. |
ITEM 13. Certain Relationships and Related Transactions and Director Independence
POLICIES AND PROCEDURES WITH RESPECT TO RELATED-PERSON TRANSACTIONS
Our written Code of Business Conduct and Ethics prohibits our executive officers, directors and employees, or any of such persons’ immediate family members or affiliates, from entering into any transaction or relationship that might present a conflict of interest to the Company or such individual. Any potential conflict of interest must be reported to the Company’s chief financial officer or the Legal Department for review and, if necessary, escalated to the Audit Committee for further review. Our Audit Committee considers the relevant facts and circumstances available and deemed relevant to the Audit Committee, including, but not limited to the risks, costs and benefits to us, the terms of the transaction, the availability of other sources for comparable services or products, and, if applicable, the impact on a director’s independence.
TRANSACTIONS WITH RELATED-PERSONS
Since the start of fiscal 2019 we have not entered into any related person transactions. For purposes of this section, “related person” and “transaction” are used as defined in Item 404(a) of SEC Regulation S-K.
DIRECTOR INDEPENDENCE
Our Corporate Governance Guidelines provide that a majority of our directors must be persons who, in the business judgment of the Board, qualify as independent directors under the applicable Nasdaq listing standards. The Board has adopted the definition of “independence” as described under Nasdaq Listing Rule 5605 and, with respect to committee members, the standards applicable to the committees on which they serve including the audit committee standards under Section 301 of the Sarbanes-Oxley Act of 2002 and Rule 10A-3 under the Exchange Act, and the compensation committee standards under Section 162(m) of the Tax Code, Rule 16b-3 under the Exchange Act, and the Nasdaq listing standards.
To determine director independence as required by our Corporate Governance Guidelines and the applicable rules, the Board reviews whether a director or a director nominee has a material relationship with Cypress (either directly or indirectly as a partner, stockholder or officer of an organization that has a relationship with Cypress). To aid in such review, each director or director nominee completes a questionnaire, with questions tailored to the Nasdaq listing standards and such other requirements for independence. Our accounting personnel also advise the Board of transactions between Cypress and entities with which the directors are affiliated, as disclosed in such questionnaires.
In April 2020, each director’s direct and indirect relationships with Cypress that have been identified were reviewed, and only those directors (1) who in the opinion of the Board have no relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and (2) who otherwise meet the requirements of the Nasdaq listing standards are considered independent. The Board has determined that each of Messrs. Albrecht, Kwon, Martino, Owens and Wishart and each of Mses. Lego and Sargent is independent under our Corporate Governance Guidelines and the Nasdaq listing standards for service on the Board. The Board also determined that each of these directors is independent under the Nasdaq listing standards and such other rules for service on the various committees of the Board on which they serve or previously served.
The Board also determined that Mr. McCranie, who chose not to stand for re-election at the 2019 Annual Meeting (and whose Board service therefore ended on May 3, 2019), was, during his period of Board service from April 29, 2018 to May 3, 2019, independent under the applicable SEC rules and the Nasdaq listing standards for membership on the Board and on all committees of the Board on which he served. Mr. El-Khoury, our president and chief executive officer, is not independent by virtue of his employment and position at Cypress.
The Board considered the transactions described below (none of which involved professional, advisory, or consulting services provided to us by a director) in making its affirmative determination that each of our current non-employee directors is independent pursuant to the Nasdaq listing standards and the additional standards mentioned above for members of audit committees and members of compensation committees. In each case, the Board affirmatively determined that, because of the nature of the director’s relationship with the entity and/or the amount involved, the relationship did not, or would not, interfere with the director’s exercise of independent judgment in carrying out his or her responsibilities as a director.
| ● | In the ordinary course of business during fiscal 2019, we purchased approximately $6.3 million in products and services from Lam Research Corporation (“Lam Research”) and we owed approximately $1.1 million to Lam Research in connection with those transactions at the end of the fiscal year. In addition, during fiscal 2019, we sold approximately $114,000 in products and services to Lam Research in the ordinary course of business. Ms. Lego has served on the board of directors of Lam Research since 2006. Ms. Lego was not directly involved in the negotiation of our agreements with Lam Research and did not have any role in determining the pricing or terms of these transactions. The annual amounts involved in these transactions did not exceed one percent of the recipient entity’s consolidated gross revenues for 2019. |
| ● | In the ordinary course of business during fiscal 2019, we sold products and services to other companies for which Mr. Martino, Ms. Sargent, or Ms. Lego served as non-employee directors. Our fiscal 2019 sales revenue from these transactions was less than $0.5 million in the aggregate (which is less than 0.1 percent of our consolidated gross revenues for 2019) and such directors were not directly involved in the negotiation of the agreements and did not have any role in determining the pricing or terms of these transactions. |
| ● | In October 2018, we entered into a joint venture agreement (the “Joint Venture Agreement”) with SK hynix system ic Inc. (“SKHS”), a South Korean company for which Mr. Kwon serves as a senior advisor. When the transaction closed on April 1, 2019, we contributed our NAND flash business and $2.4 million in cash toward the equity of the joint venture (“JV”). The transaction was intended to reduce our exposure to a commoditized product line that has traditionally been volatile with low gross margins. The JV is controlled by SKHS, which is a wholly-owned subsidiary of SK Hynix Inc. (“SKH”), formerly known as Hyundai Electronics. The principal purpose of the joint venture is the development, manufacture, sale and distribution of NAND flash products and other related products and services using large-scale NAND wafers supplied by SKH. Pursuant to the Joint Venture Agreement, upon launch, the JV entered into a supply agreement with SKH, a back-end manufacturing agreement with Cypress, and a transition services agreement with Cypress, and purchased existing inventory from Cypress. In fiscal 2019, Cypress earned revenue of approximately $10.5 million from the JV under such agreements and in connection with such sale of inventory (which is approximately 0.5% of our consolidated gross revenues for 2019), and the JV owed us approximately $2.6 million at year end. It has been proposed that the JV borrow an aggregate amount in the range of $2.0 to $5.0 million from Cypress on a short-term basis during 2020 and pay an equivalent amount to Cypress in the form of dividends required by the JV agreement; however as of April 1, 2020 no such loan has been finalized. Mr. Kwon was employed by SKH for almost 30 years in a variety of roles, most recently as chief executive officer from 2010 to 2013. Mr. Kwon retired from his chief executive officer position in 2013 but continued to serve as a senior advisor to SKH until December 2017. In January 2018, Mr. Kwon became a senior advisor to SKHS. Mr. Kwon recused himself from our Board’s discussion and approval of the Joint Venture Agreement and has not been involved in discussions regarding the proposed loan. |
| ITEM 14. | Principal Accounting Fees and Services |
FEES FOR SERVICES RENDERED BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP (“PwC”) has served as our independent registered public accounting firm since 1982.
The Audit Committee is responsible for the compensation of our independent registered public accounting firm and oversees our audit and non-audit fee negotiations with the firm. Fees billed to us by PwC for each of the last two fiscal years were as follows:
| Services | 2018 | 2019 |
| Audit Fees | $4,036,494 | $3,647,019 |
| Audit-Related Fees | $387,825 | - |
| Tax Fees | $816,700 | $809,641 |
| All Other Fees | $2,700 | $2,700 |
| Total | $5,243,719 | $4,459,360 |
Audit Fees.Includes fees associated with the annual audit of our financial statements and internal control over financial reporting in compliance with regulatory requirements under the Sarbanes-Oxley Act of 2002, review of our quarterly reports on Form 10-Q, annual report on Form 10-K and current reports on Form 8-K, consents issued in connection with our Form S-8 filings, assistance with and review of other documents we file with the SEC, and statutory audits required internationally.
Audit-Related Fees.Audit-related services principally include systems pre-implementation review and due diligence services not associated with the regular audit.
Tax Fees.Includes fees for tax compliance (tax return preparation assistance and expatriate tax services), general tax planning, tax-related services for acquisitions and international tax consulting.
All Other Fees.Includes fees for accessing PwC’s online accounting research database.
At least 50% of the hours expended on PwC’s audit of our 2019 financial statements were attributable to full-time, permanent employees of PwC.
AUDIT COMMITTEE PRE-APPROVAL POLICY
The Audit Committee has adopted a policy that requires advance approval of all audit services, audit-related services, tax and other services performed by the Company’s independent registered public accounting firm. With the exception of certain de minimis amounts, unless the specific service has been previously pre-approved with respect to that fiscal year, the Audit Committee must approve the permitted service before the independent registered public accounting firm is engaged to perform such services for Cypress.
All services provided to Cypress by PwC for fiscal years 2018 and 2019 were pre-approved by the Audit Committee.
PART IV
The exhibits listed below are filed with this Amendment and the exhibits listed in Item 15 of the Original Filing of our 2019 Form 10-K are hereby incorporated by reference in this Amendment.
EXHIBIT INDEX
* Commission File Number for incorporated documents is 001-10079.
APPENDIX: NON-GAAP FINANCIAL MEASURES
This Amendment references the following non-GAAP financial measures:
| |
*● | Unless otherwise noted, Commission File Number for incorporated documents is 001-10079.Non-GAAP revenues; |
| |
+● | Management contractNon-GAAP pre-tax profit (which is called “Profit Before Tax” or compensatory plan or arrangement.“PBT” in our incentive plans); |
| |
(a)● | FiledNon-GAAP pre-tax profit margin (which is called “PBT Margin” in our incentive plans and is defined as non- GAAP pre-tax profit divided by Spansion, Inc., Commission File Number 001-34747.GAAP revenue); |
| |
(b)● | Form S-8 filed 2012-12-12 Commission File Number is 333-185439.Non-GAAP operating income; |
| |
(c)● | Form S-8 filed 2008-10-27 Commission File NumberNon-GAAP operating margin (which is 333-154748.defined as non-GAAP operating income divided by GAAP revenue); |
| |
(d)● | Form S-8 filed 2018-06-20 Commission File Number is 333-225759.Free cash flow. |
Cypress uses such non-GAAP financial measures to supplement its financial results presented in accordance with GAAP. Cypress’s non-GAAP financial measures are adjusted from the most directly comparable GAAP financial measures to exclude certain items, as described in more detail below. The most directly comparable GAAP financial measure for non-GAAP revenues is GAAP revenue. The most directly comparable GAAP financial measure to non- GAAP pre-tax profit is GAAP income before income taxes and non-controlling interest. The most directly comparable GAAP financial measure for free cash flow is GAAP net cash provided by operating activities. Cypress’s non-GAAP measures may be calculated differently than the non-GAAP financial measures presented by other companies.
Management believes that the non-GAAP financial measures we present reflect an additional and useful way of viewing aspects of the Company’s operations that, when viewed in conjunction with Cypress’s GAAP results, provides a more comprehensive understanding of the various factors and trends affecting the Company’s business and operations. The Company generally presents non-GAAP financial measures because management uses these measures to analyze and assess the Company’s financial results and to manage the business.
There are limitations to using non-GAAP financial measures, including the limitations discussed below. Management generally compensates for limitations in the use of non-GAAP financial measures by relying on comparable GAAP financial measures and providing investors with a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure. Our presentation of non-GAAP financial measures is not meant to be considered in isolation or as a substitute for information prepared and presented in accordance with GAAP. Our non-GAAP financial measures supplement and should be considered in conjunction with GAAP financial measures.
Non-GAAP Exclusions and Limitations
Our non-GAAP financial measures (other than free cash flow) exclude one or more of the following items:
Acquisition-related charges:Acquisition-related charges are not factored into management’s evaluation of Cypress’s long-term performance after the completion of acquisitions. However, a limitation of non-GAAP measures that exclude acquisition-related charges is that these charges may represent payments that reduce the cash available to the Company for other purposes. Acquisition-related expenses primarily include:
| ● | Amortization of purchased intangibles, including purchased technology, patents, customer relationships, trademarks, backlog and non-compete agreements; |
(e) | Exhibits 32.1● | Amortization of step-up in value of inventory recorded as part of purchase price accounting; and 32.2 are furnished |
| ● | One-time charges associated with the completion of an acquisition including items such as contract termination costs, severance and shall not be deemed to be “filed” for purposesother acquisition-related restructuring costs; costs incurred in connection with integration activities; and legal and accounting costs. |
Stock-based compensation expense:Stock-based compensation expense relates primarily to employee stock options, restricted stock units, performance stock units and the employee stock purchase plan. Stock-based compensation expense is a non-cash expense that is affected by changes in market factors including the price of Cypress’s common shares, which are not within the control of management. In addition, the valuation of stock-based compensation is subjective, and the expense recognized by Cypress may be significantly different than the expense recognized by other companies for similar equity awards, which makes it difficult to assess Cypress’s results compared to its competitors. Accordingly, management excludes this item from its internal operating forecasts and models. However, a limitation of non-GAAP measures that exclude stock-based compensation expense is that they do not reflect the full costs of compensating employees.
Other adjustments:Other items are excluded in the preparation of non-GAAP financial measures because management does not consider them to be related to the core operating activities and ongoing operating performance of Cypress. Excluding these items, which can vary significantly from quarter to quarter, allows management to better compare Cypress’s period-over-period performance. However, limitations of non-GAAP measures that exclude these items include that these adjustments are often subjective and such non-GAAP measures may not be comparable to similarly titled non-GAAP financial measures used by other companies. Other adjustments primarily include:
| ● | Costs incurred in connection with the Merger; |
| ● | Impairments of Section 18equity-method investments; |
| ● | Changes in value of the Securities Exchange Actdeferred compensation plan assets and liabilities, |
| ● | Investment-related gains or losses, including equity method investments, |
| ● | Restructuring and related costs, |
| ● | Loss on extinguishment of 1934, as amended (the Exchange Act), or otherwise subjectdebt, |
| ● | Amortization of debt issuance costs, discounts and imputed interest related to the liabilityequity component 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.convertible debt, |
ITEM 16. FORM 10-K SUMMARY
None.
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 |
|
(1) | Includes the 2018 change in valuation allowance previously recorded primarily●
| Tax effects of non-GAAP adjustments, |
| ● | Income tax adjustments related to certain federal and statethe use of net operating losses, non-cash impacts of not asserting indefinite reinvestment on earnings of our foreign subsidiaries, deferred tax assetsexpenses not affecting taxes payable (i.e., release of $343.3 million that management has determined more likely than notvaluation allowance), and non-cash expenses (benefits) related to be realized.uncertain tax positions, and |
| ● | Certain other expenses and benefits. |
In addition, “non-GAAP revenues” (which Cypress presented for six quarters following our March 2015 merger with Spansion) adjusted GAAP revenues to include revenue from an intellectual property license between Spansion and Samsung that was not included in GAAP revenues as a result of the effect of our purchase accounting for the Spansion merger.
Free Cash Flow
Free cash flow is calculated as net cash provided by (used in) operating activities, less acquisition of property, plant and equipment, net (i.e., acquisition of property, plant and equipment less proceeds received from disposition of property, plant and equipment). We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by business operations, after deducting our net payments for acquisitions and dispositions of property and equipment, which cash can then be used for strategic opportunities or other business purposes including, among others, investing in the Company’s business, repurchasing stock, making strategic acquisitions, repayment of debt, and strengthening the balance sheet. A limitation of free cash flow is that it does not represent the total increase or decrease in the cash balance for the period. Management compensates for this limitation by also relying on the net increase in cash and cash equivalents and restricted cash as presented in the Company’s condensed consolidated statements of cash flows prepared in accordance with GAAP, which incorporate all cash movements during the period.
Reconciliations of GAAP Measures to Non-GAAP Measures
Set forth below is a reconciliation of (a) the non-GAAP financial measure appearing in the “2019 Business Highlights” section of the CD&A to (b) the GAAP financial measure the Company considers most comparable:
| Free Cash Flow | | FY’19 | | | FY’18 | |
| | | (in thousands) | |
| GAAP net cash provided by operating activities | | $ | 478,915 | | | $ | 471,700 | |
| Acquisition of property, plant, and equipment, net | | | (40,686 | ) | | | (63,130 | ) |
| Free cash flow | | $ | 438,229 | | | $ | 408,570 | |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this reportAmendment to be signed on its behalf by the undersigned, thereto duly authorized.
|
| | |
| | CYPRESS SEMICONDUCTOR CORPORATION |
| | | |
Date: February 21,April 15, 2020 | By: | /S /s/ Thad Trent |
| | | Thad Trent
Executive Vice President, Finance and Administration and Chief Financial Officer
|
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 21, 2020 |
Hassane El-Khoury | | | |
| | | | |
/S/ THAD TRENT
| | Executive Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) | | February 21, 2020 |
Thad Trent
| | | |
| | | | |
/S/ W. STEVE ALBRECHT
| | Chairman of the Board of Directors | | February 21, 2020 |
W. Steve Albrecht
| | | | |
| | | | |
/S/ OH CHUL KWON
| | Director | | February 21, 2020 |
Oh Chul Kwon
| | | | |
| | | | |
/s/ CATHERINE P. LEGO | | Director | | February 21, 2020 |
Catherine P. Lego | | | | |
| | | | |
/s/ CAMILLO MARTINO | | Director | | February 21, 2020 |
Camillo Martino | | | | |
| | | | |
/s/ JEFFREY J. OWENS | | Director | | February 21, 2020 |
Jeffrey J. Owens | | | | |
| | | | |
/s/ JEANNINE P. SARGENT | | Director | | February 21, 2020 |
Jeannine P. Sargent | | | | |
| | | | |
/S/ MICHAEL S. WISHART
| | Director | | February 21, 2020 |
Michael S. Wishart | | | | |
