Edgar Filing: CYPRESS SEMICONDUCTOR CORP /DE/

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¨ (Do not check if a smaller reporting company)

Smaller reporting company

CY-2013.09.29-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2013



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10079

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CYPRESS SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)

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Delaware		94-2885898
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

198 Champion Court, San Jose, California 95134

(Address of principal executive offices and zip code)

(408) 943-2600

(Registrant’s telephone number, including area code)

————————————

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The total number of outstanding shares of the registrant’s common stock as of October 24, 2013 was 151,101,454.

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INDEX




		Page
PART I—FINANCIAL INFORMATION
Forward-Looking Statements		2

Item 1.	Financial Statements (unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36
Item 4.	Controls and Procedures	36

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	38
Item 6.	Exhibits	39
	Signatures	40

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PART I—FINANCIAL INFORMATION

Forward-Looking Statements

The discussion in this Quarterly Report on Form 10-Q contains statements that are not historical in nature, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, including, but not limited to, statements related to our belief that our goodwill adjustments will not be material to our full fiscal year financials, our estimated future amortization expenses, our expectation regarding dividends and stock repurchases, our expectations regarding future technology transfers and other licensing arrangements, what we expect to achieve form our restructuring activities, our expectations regarding the timing of our restructuring liabilities, our plan to sell the assets in our Texas facility, how we expected our pre-payments to Grace to be used and when we expect to receive certain payments from Grace, our plan to purchase additional preferred stock in an advanced battery storage company, the estimates used in our stock-based compensation table, our expected funding schedule for the limited partnership interest we recently acquired, our beliefs and expectations regarding our active litigation matters and our intent to defend ourselves in those matters; our foreign currency exposure and the impact exchange rates could have on our operating margins, the adequacy of our cash and working capital positions, the value and liquidity of our investments, including auction rate securities and our other debt investments, our ability to recognize certain unrecognized tax benefits within the next twelve months as well as the resolution of agreements with various foreign tax authorities, our investment strategy, our belief that liquidity provided by existing cash, cash equivalents and investments and our borrowing arrangements will provide sufficient capital to meet our requirements for at least the next twelve months, our expectations regarding our outstanding warranty liability, the impact of interest rate fluctuations on our investments, the volatility of our stock price and the impact of new accounting standards on our financial statements. We use words such as “plan,” “anticipate,” “believe,” “expect,” “future,” “intend” and similar expressions to identify forward-looking statements. Such forward-looking statements are made as of the date hereof and are based on our current expectations, beliefs and intentions regarding future events or our financial performance and the information available to management as of the date hereof. Except as required by law, we assume no responsibility to update any such forward-looking statements. Our actual results could differ materially from those expected, discussed or projected in the forward-looking statements contained in this Quarterly Report on Form 10-Q for any number of reasons, including, but not limited to, the state and future of the general economy and its impact on the markets and consumers we serve and our investments; current and future credit conditions; our ability to expand our customer base and gain acceptance of our products, our ability to effectively forecast the demand for our products and estimate our financial performance, our ability to achieve on our expected financials results of operation, our ability to transform our business with a leading portfolio of programmable products; the number and nature of our competitors; the changing environment and/or cycles of the semiconductor industry; foreign currency exchange rates; our ability to efficiently manage our manufacturing facilities and achieve our cost goals; our ability to achieve our goals related to our restructuring activities; our success in our pending litigation matters, our ability to manage our cash and investments as well as our interest rate and exchange rate exposure; our ability to achieve the intended goal for all of our investments, capital commitments and limited partnerships; our ability to achieve liquidity in our investments, the failure or success of our Emerging Technology division and/or the materialization of one or more of the risks set forth above or in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q and in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended December 30, 2012.

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ITEM 1. FINANCIAL STATEMENTS

CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	September 29, 2013			December 30, 2012
	(In thousands, except per-share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	76,550		$	63,203
Short-term investments	24,839			54,007
Accounts receivable, net	108,200			82,920
Inventories	101,031			127,596
Other current assets	39,367			41,082
Total current assets	349,987			368,808
Property, plant and equipment, net	259,897			274,427
Goodwill	65,696			64,194
Intangible assets, net	42,852			49,216
Other long-term assets	77,559			74,984
Total assets	$	795,991		$	831,629
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	52,809		$	58,704
Accrued compensation and employee benefits	45,103			38,190
Deferred margin on sales to distributors	137,958			131,192
Dividends payable	16,578			15,847
Income taxes payable	3,243			6,526
Other current liabilities	80,909			98,289
Total current liabilities	336,600			348,748
Other tax liabilities	25,770			40,928
Long-term revolving credit facility	227,000			232,000
Other long-term liabilities	29,079			33,092
Total liabilities	618,449			654,768
Commitments and contingencies (Note 8)	—			—
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; 293,946 and 286,903 shares issued; 150,834 and 144,224 shares outstanding at September 29, 2013 and December 30, 2012, respectively	2,939			2,868
Additional paid-in-capital	2,650,629			2,612,579
Accumulated other comprehensive loss	(474		)	(444		)
Accumulated deficit	(381,320		)	(348,533		)
Stockholders’ equity before treasury stock	2,271,774			2,266,470
Less: shares of common stock held in treasury, at cost; 143,112 and 142,679 shares at September 29, 2013 and December 30, 2012, respectively	(2,090,095		)	(2,085,570		)
Total Cypress stockholders’ equity	181,679			180,900
Noncontrolling interest	(4,137		)	(4,039		)
Total equity	177,542			176,861
Total liabilities and equity	$	795,991		$	831,629

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
	(In thousands, except per-share amounts)
Revenues	$	188,723		$	203,015		$	554,917		$	589,404
Costs and expenses:
Cost of revenues	97,070			92,959			292,793			280,798
Research and development	50,429			46,908			148,563			142,822
Selling, general and administrative	45,533			47,328			139,049			159,776
Amortization of acquisition-related intangible assets	1,987			707			5,983			2,169
Restructuring costs	3,693			66			15,826			1,283
Total costs and expenses	198,712			187,968			602,214			586,848
Operating income (loss)	(9,989		)	15,047			(47,297		)	2,556
Interest and other income (expense), net	427			(1,330		)	3,030			(996		)
Income (loss) before income taxes and noncontrolling interest	(9,562		)	13,717			(44,267		)	1,560
Income tax benefit (provision)	774			241			9,971			(2,741		)
Net income (loss)	(8,788		)	13,958			(34,296		)	(1,181		)
Adjust for net loss attributable to noncontrolling interest	430			374			1,509			1,030
Net income (loss) attributable to Cypress	$	(8,358	)	$	14,332		$	(32,787	)	$	(151	)
Net income (loss) per share attributable to Cypress:
Basic	$	(0.06	)	$	0.10		$	(0.22	)	$	—
Diluted	$	(0.06	)	$	0.09		$	(0.22	)	$	—
Cash dividend declared per share	$	0.11		$	0.11		$	0.33		$	0.33
Shares used in net income (loss) per share calculation:
Basic	149,679			147,673			147,551			151,153
Diluted	149,679			160,300			147,551			151,153

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
	(In thousands)
Net income (loss)	$	(8,788	)	$	13,958		$	(34,296	)	$	(1,181	)
Available for sale investments:
Change in net unrealized gains, net of tax benefit for the three and nine months ended September 29, 2013 and September 30, 2012, respectively	(48		)	(1,009		)	1,033			8,965
Net gains reclassified into earnings, net of tax effects for the three and nine months ended September 29, 2013 and September 30, 2012, respectively	—			—			(1,063		)	(7,446		)
Other comprehensive income (loss)	(48		)	(1,009		)	(30		)	1,519
Comprehensive income (loss)	(8,836		)	12,949			(34,326		)	338
Adjust for net loss attributable to noncontrolling interest	430			374			1,509			1,030
Comprehensive income (loss) attributable to Cypress	$	(8,406	)	$	13,323		$	(32,817	)	$	1,368

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CYPRESS SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended
	September 29, 2013			September 30, 2012
	(In thousands)
Cash flows from operating activities:
Net loss	$	(34,296	)	$	(1,181	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock-based compensation expense	52,143			67,068
Depreciation and amortization	36,932			37,877
Deferred income taxes and other tax liabilities	(15,191		)	448
Restructuring costs	15,826			1,282
Loss on sale or retirement of property and equipment, net	584			821
Other	(784		)	1,325
Changes in operating assets and liabilities:
Accounts receivable, net	(25,280		)	(21,678		)
Inventories	28,124			1,873
Other current and long-term assets	1,423			(10,186		)
Accounts payable and other liabilities	(19,722		)	21,063
Deferred margin on sales to distributors	6,766			18,983
Net cash provided by operating activities	46,525			117,695
Cash flows from investing activities:
Proceeds from sales or maturities of available-for-sale investments	53,461			112,137
Purchases of available-for-sale investments	(23,315		)	(97,527		)
Net employee contributions to (distribution of) deferred compensation plan	(1,247		)	310
Acquisition of property, plant and equipment	(27,877		)	(25,204		)
Cash paid for equity investments	(4,361		)	(7,203		)
Proceeds from sale of equity investments	2,158			—
Other	1,751			13
Net cash provided by (used in) investing activities	570			(17,474		)
Cash flows from financing activities:
Repurchase of common shares	—			(179,257		)
Line of credit proceeds	80,000			248,000
Repayment of line of credit	(85,000		)	(50,000		)
Withholding of common shares for tax obligations on vested restricted shares	(4,526		)	(20,239		)
Payment of dividends	(48,241		)	(47,170		)
Proceeds from issuance of common shares under employee stock plan	33,395			20,361
Payments of equipment leases and loans, net	(7,533		)	(5,009		)
Yield Enhancement structured agreements settled in cash	—			433
Repayment of other financing agreements	(3,254		)	(4,728		)
Cash received for investment in subsidiary	1,411			—
Net cash provided used in financing activities	(33,748		)	(37,609		)
Net increase in cash and cash equivalents	13,347			62,612
Cash and cash equivalents, beginning of period	63,203			99,717
Cash and cash equivalents, end of period	$	76,550		$	162,329

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Years

Cypress Semiconductor Corporation (“Cypress” or 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 2013 and fiscal 2012 had 52 weeks. The third quarter of fiscal 2013 ended on September 29, 2013 and the third quarter of fiscal 2012 ended on September 30, 2012.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal, recurring items, which are necessary to state fairly the financial information included therein. The financial data should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2012.

The preparation of 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 financial statements and accompanying notes. Actual results could differ from those estimates.

Certain prior period balances have been reclassified to conform to the current year presentation.

The condensed consolidated results of operations for the three and nine months ended September 29, 2013 are not necessarily indicative of the results to be expected for the full fiscal year.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to the guidance on Comprehensive Income, to improve the reporting of reclassifications out of accumulated other income. This guidance requires entities to provide information about the amounts reclassified out of accumulated other income by component. The authoritative guidance also requires an entity to present, either on the face of the statement where net income (loss) is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income only if the amount reclassified is required under U.S. GAAP to be reclassified to net income (loss) in its entirety in the same reporting period. For amounts not required to be reclassified under U.S. GAAP, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted this guidance in the first quarter of fiscal 2013 and our adoption did not have a significant impact on our condensed consolidated financial statements. See Note 10 for more information.

In July 2013, the FASB issued an ASU on Income Taxes, to improve the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is expected to reduce diversity in practice and is expected to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This guidance is effective for our interim and annual periods beginning after December 15, 2013. We do not believe that the implementation of this authoritative guidance will have any material impact on our financial position or results of operations.

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 2. GOODWILL AND INTANGIBLE ASSETS

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. The carrying amount of goodwill at September 29, 2013 was $65.7 million, of which $33.9 million was in the Memory Products Division (“MPD”) and $31.8 million in the Programmable System Division (“PSD”). The carrying amount of goodwill at December 30, 2012 was $64.2 million, of which $32.4 million was in MPD and $31.8 million was in PSD. In the second quarter of fiscal of 2013, we increased the amount of goodwill attributable to the MPD reportable segment by $1.5 million as we had not recorded certain shares that were not tendered at the tender offering period in the fourth quarter of fiscal 2012. As management and the Audit Committee believe this adjustment is not material to any prior years’ financial statements, and the impact of correcting this error in the current quarter is not material to the current quarter’s consolidated financial statements and is not expected to be material to the full year fiscal 2013 consolidated financial statements, we recorded the adjustment in the second quarter of fiscal 2013.

The following table presents details of our intangible assets:



	As of September 29, 2013							As of December 30, 2012
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
	(In thousands)
Acquisition-related intangible assets	$	151,773	$	(109,824	)	$	41,949	$	151,773	$	(103,840	)	$	47,933
Non-acquisition related intangible assets	10,423		(9,520		)	903		10,048		(8,765		)	1,283
Total intangible assets	$	162,196	$	(119,344	)	$	42,852	$	161,821	$	(112,605	)	$	49,216

As of September 29, 2013, the estimated future amortization expense of these intangible assets was as follows:




	(In thousands)
2013 (remaining three months)	$	2,448
2014	7,675
2015	5,772
2016	5,772
2017	5,772
2018 and future	15,413
Total future amortization expense	$	42,852

NOTE 3. RESTRUCTURING

For the three and nine months ended September 29, 2013, we recorded restructuring charges of $3.7 million and $15.8 million, respectively. For the three and nine months ended September 30, 2012, we recorded restructuring charges of $0.1 million and $1.3 million, respectively. The determination of when we accrue for severance and benefits costs, and which accounting standard applies, depends on whether the termination benefits are provided under a one-time benefit arrangement or under an on-going benefit arrangement.

Fiscal 2013 Restructuring Plan

During fiscal 2013, we implemented a restructuring plan to reduce operating expenses as part of our 2013 corporate priorities. The plan includes the termination of employees and the disposal of certain equipment located in our Bloomington, Minnesota facility. To date, we have recorded total restructuring charges of $15.2 million related to the Fiscal 2013 Restructuring Plan. Of the total restructuring charge, $6.7 million was related to property, plant and equipment, $8.0 million was related to personnel costs and $0.5 million was mainly related to the amounts payable upon the termination of agreements with certain distributor representatives.

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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



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

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

Fiscal 2011/12 Restructuring Plan

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



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

The restructuring liability as of September 29, 2013 under the Fiscal 2011 Restructuring Plan related primarily to personnel costs and is expected to be paid out within the next twelve months.

Assets Held-For-Sale

Our Texas facility ceased operations in the fourth quarter of fiscal 2008. As our management has committed to a plan to sell the assets associated with the facility, we have classified the assets as held-for-sale. In fiscal 2012, due to the unfavorable economic and market conditions, management reassessed the fair value of the assets and recorded a write-down of $2.3 million to the estimated fair value of $4.6 million.

During the first quarter of 2013, we incurred a $6.0 million charge to write down certain equipment to the current fair value of $2.3 million. Management considered a third-party valuation in determining the fair value of this held-for-sale asset.

The net book value of these assets are classified as held-for-sale and included in “Other current assets” in the Condensed Consolidated Balance Sheet (see Note 4).

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 4. BALANCE SHEET COMPONENTS

Accounts Receivable, Net



	As of
	September 29, 2013			December 30, 2012
	(In thousands)
Accounts receivable, gross	$	112,265		$	87,050
Allowance for doubtful accounts receivable and sales returns	(4,065		)	(4,130		)
Total accounts receivable, net	$	108,200		$	82,920

Inventories



	As of
	September 29, 2013		December 30, 2012
	(In thousands)
Raw materials	$	3,196	$	4,307
Work-in-process	69,007		62,603
Finished goods	28,828		60,686
Total inventories	$	101,031	$	127,596

Other Current Assets



	As of
	September 29, 2013		December 30, 2012
	(In thousands)
Prepaid expenses	$	24,976	$	21,623
Assets held-for-sale	6,880		4,630
Prepayment to Grace	1,762		7,321
Other current assets	5,749		7,508
Total other current assets	$	39,367	$	41,082

Prepayment to Grace

In fiscal 2011, we made certain prepayments to Grace Semiconductor Manufacturing Corporations (“Grace”), a strategic foundry partner, to secure a certain supply of wafers. The prepayments were expected to be applied to purchases of wafers from Grace. As of September 29, 2013 and December 30, 2012, the unapplied prepayment balances were approximately $1.8 million and $7.3 million, respectively, and were recorded as part of “Other current assets” in the Condensed Consolidated Balance Sheet. In the first quarter of fiscal 2013 of the unused prepayment, Grace paid us $3.6 million, in cash. In the third quarter of fiscal 2013, Grace made an additional cash payment of $1.8 million. We expect to receive the remaining $1.8 million by the end of fiscal 2013.

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Other Long-term Assets



	As of
	September 29, 2013		December 30, 2012
	(In thousands)
Employee deferred compensation plan	$	40,467	$	37,142
Investments:
Debt securities	4,434		5,504
Equity securities	10,361		7,054
Other assets	22,297		25,284
Total other long-term assets	$	77,559	$	74,984

Other Current Liabilities



	As of
	September 29, 2013		December 30, 2012
	(In thousands)
Employee deferred compensation plan	$	40,202	$	36,244
Restructuring accrual (see Note 3)	7,331		5,113
Capital lease-current portion (see Note 8)	2,257		4,849
Equipment loan-current portion (see Note 9)	2,725		2,725
Advances received from sale of ARS (see Note 5)	3,140		3,140
Customer advances	—		10,191
Other current liabilities	25,254		36,027
Total other current liabilities	$	80,909	$	98,289

Other Long-term Liabilities



	As of
	September 29, 2013		December 30, 2012
	(In thousands)
Equipment loan–long-term portion (see Note 9)	$	6,711	$	8,756
Capital lease–long-term portion (see Note 8)	10,885		12,779
Other long-term liabilities	11,483		11,557
Total other long-term liabilities	$	29,079	$	33,092

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 5. FAIR VALUE MEASUREMENTS

Assets/Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis and our non-financial assets measured at fair value on a non-recurring basis:



	As of September 29, 2013								As of December 30, 2012
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial Assets
Cash equivalents:
Money market funds	$	253	$	—	$	—	$	253	$	24,187	$	—	$	—	$	24,187
Commercial paper	—		9,000		—		9,000		—		—		—		—
Total cash equivalents	253		9,000		—		9,253		24,187		—		—		24,187
Short-term investments:
U.S. treasuries	—		—		—		—		10,032		—		—		10,032
Corporate notes and bonds	—		19,569		—		19,569		—		28,435		—		28,435
Federal agency	—		—		—		—		—		3,005		—		3,005
Commercial paper	—		2,799		—		2,799		—		11,694		—		11,694
Certificates of deposit	—		2,471		—		2,471		—		840		—		840
Non-financial assets held-for-sale	—		6,880		—		6,880		—		4,630		—		4,630
Total short-term investments	—		31,719		—		31,719		10,032		48,604		—		58,636
Long-term investments:
Auction rate securities	—		—		4,434		4,434		—		—		5,504		5,504
Marketable equity securities	—		—		—		—		1,054		—		—		1,054
Total long-term investments	—		—		4,434		4,434		1,054		—		5,504		6,558
Employee deferred compensation plan assets:
Cash equivalents	5,137		—		—		5,137		3,588		—		—		3,588
Mutual funds	22,048		—		—		22,048		21,207		—		—		21,207
Equity securities	6,149		—		—		6,149		5,322		—		—		5,322
Fixed income	3,147		—		—		3,147		3,732		—		—		3,732
Money market funds	—		3,986		—		3,986		3,293		—		—		3,293
Total employee deferred compensation plan assets	36,481		3,986		—		40,467		37,142		—		—		37,142
Total financial assets	$	36,734	$	44,705	$	4,434	$	85,873	$	72,415	$	48,604	$	5,504	$	126,523
Financial Liabilities
Employee deferred compensation plan liability	$	—	$	40,202	$	—	$	40,202	$	—	$	36,244	$	—	$	36,244

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Valuation Techniques:

There have been no changes to our valuation techniques used to measure our assets and liabilities. For a description of our valuation techniques, refer to our Form 10-K for the year ended December 30, 2012.

Sale of Auction Rate Securities

In December 2011, we entered into a settlement and securities purchase agreement (the “Securities Agreement”) with a certain financial institution which expires on November 30, 2013. As of September 29, 2013, the remaining fair value of the ARS under the Securities Agreement was approximately $3.7 million.

The fair value of our total investments in ARS was approximately $4.4 million and $5.5 million as of September 29, 2013 and December 30, 2012, respectively.

As of September 29, 2013, and December 30, 2012, we performed an analysis to assess the fair value of the ARS using a valuation model based on discounted cash flows. The assumptions used were the following:



	Q3-2013	Q4-2012
Years to liquidity	7	7
Discount rates *	1.18%-4.78%	0.90%-3.42%
Continued receipt of contractual interest which provides a premium spread for failed auctions	Yes	Yes

* Discount rates incorporate a spread for both credit and liquidity risk.

Based on these assumptions, we estimated that the ARS were valued at approximately 90.5% and 93.3% of their stated par value as of September 29, 2013 and December 30, 2012, respectively. These amounts were recorded as an unrealized loss in accumulated other comprehensive loss as of September 29, 2013 and December 30, 2012, respectively.

Level 3 Investments Measured Fair Value on a Recurring Basis

The following table presents a summary of changes in our Level 3 investments measured at fair value on a recurring basis:



	Auction Rate Securities
	(In thousands)
Balance as of December 30, 2012	$	5,504
Unrealized loss recorded in accumulated other comprehensive loss	(70		)
Realized loss recorded in interest and other income (expense), net	(16		)
Amounts sold	(984		)
Balance as of September 29, 2013	$	4,434

Level 3 Assets Measured at Fair Value on a Nonrecurring Basis

As of September 29, 2013, the carrying value of our line of credit was $227.0 million. The fair value of our line of credit approximate its fair value since it bears interest rates that are similar to existing market rates that would be offered to the Company and represents a Level 2 measurement.

Investments in Equity Securities

Our investments in equity securities included long-term investments in non-marketable equity securities (investments in privately-held companies) of approximately $10.4 million and no investments in marketable equity securities (investments in publicly traded companies) as of September 29, 2013 ($6.0 million investments in non-marketable equity securities and $1.1 million investments in marketable equity securities as of December 30, 2012). Our privately-held equity investments are accounted for under the cost method and are periodically reviewed for other-than-temporary declines in fair value.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In February 2012, we entered into a Stock Purchase Agreement (the “Agreement”) with a company that designs, develops and manufactures products in the area of advanced battery storage for mobile consumer devices. As of September 29, 2013, we purchased $9.5 million of preferred stock. As of September 29, 2013, our total investment of $9.5 million was recorded as part of our investments in non-marketable securities. During the fourth quarter of fiscal 2013, we invested an additional $4.0 million and we currently own approximately 16% of the company. Subject to the attainment of certain milestones, we plan to purchase additional preferred stock up to approximately $31 million in fiscal 2014. If our future commitments are fully funded, we could become their majority shareholder and consolidate the financial results of this company.

In the second fiscal quarter of 2013, we sold our investment in a certain marketable equity security for $2.2 million, which resulted in a realized gain of $1.1 million.

There were no significant transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the nine months ended September 29, 2013.

NOTE 6. INVESTMENTS AND EMPLOYEE DEFERRED COMPENSATION PLAN

Available-For-Sale Securities

The following tables summarize our available-for-sale and other investments:



	As of September 29, 2013									As of December 30, 2012
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Reported as cash equivalents:
Money market funds	$	253	$	—	$	—		$	253	$	24,187	$	—	$	—		$	24,187
Commercial paper	9,000		—		—			9,000		—		—		—			—
Total cash equivalents	9,253		—		—			9,253		24,187		—		—			24,187
Reported as short-term investments:
Corporate note and bonds	19,560		10		(1		)	19,569		28,430		13		(8		)	28,435
Federal agency	—		—		—			—		3,005		—		—			3,005
U.S. Treasuries	—		—		—			—		10,023		9		—			10,032
Commercial paper	2,799		—		—			2,799		11,692		2		—			11,694
Certificates of deposit	2,471		—		—			2,471		840		—		—			840
Assets held-for-sale	12,866		—		(5,986		)	6,880		6,913		—		(2,283		)	4,630
Total short-term investments	37,696		10		(5,987		)	31,719		60,903		24		(2,291		)	58,636
Reported as long-term investments:
Auction rate securities (1)	4,900		—		(466		)	4,434		5,900		—		(396		)	5,504
Marketable equity securities	—		—		—			—		1,030		70		(46		)	1,054
Total long-term investments	4,900		—		(466		)	4,434		6,930		70		(442		)	6,558
Total available-for-sale securities and other investments	$	51,849	$	10	$	(6,453	)	$	45,406	$	92,020	$	94	$	(2,733	)	$	89,381


(1)	The $0.5 million and $0.4 million of gross unrealized losses were related to ARS that had been in a continuous loss position for 12 months or more, as of September 29, 2013 and December 30, 2012, respectively

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

As of September 29, 2013, the contractual maturities of our available-for-sale investments and certificates of deposit were as follows (the table below does not include our investments in marketable equity securities and our assets held-for-sale):



	Cost		Fair Value
	(in thousands)
Maturing within one year	$	31,837	$	31,844
Maturing in one to three years	2,245		2,248
Maturing in more than three years	4,900		4,434
Total	$	38,982	$	38,526

Realized gains from sales of available-for-sale investments during the nine months ended September 29, 2013 was approximately $1.1 million (See Note 5). Realized gains from the sales of available-for-sale investments during the nine months ended September 30, 2012 were not material.

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 or 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.

Under the deferred compensation plan, the assets are recorded at fair value in each reporting period with the offset being recorded in “Interest and other income, 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 September 29, 2013 and December 30, 2012, the fair value of the assets was $40.5 million and $37.1 million, respectively, and the fair value of the liabilities was $40.2 million and $36.2 million, respectively.

All non-cash expense and income recorded under the deferred compensation plan are included in the following line items in the Condensed Consolidated Statements of Operations:



	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
	(In thousands)
Changes in fair value of assets recorded in:
Interest and other income, net	$	2,091		$	1,503		$	4,810		$	3,155
Changes in fair value of liabilities recorded in:
Cost of revenues	(265		)	(217		)	(718		)	(439		)
Research and development expenses	(548		)	(389		)	(1,462		)	(723		)
Selling, general and administrative expenses	(1,181		)	(945		)	(3,187		)	(2,016		)
Total income (expense)	$	97		$	(48	)	$	(557	)	$	(23	)

NOTE 7. STOCK-BASED COMPENSATION

Our equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes the stock-based compensation expense, by line item recorded in the Condensed Consolidated Statements of Operations:



	Three Months Ended				Nine months ended
	September 29, 2013		September 30, 2012		September 29, 2013		September 30, 2012
	(In thousands)
Cost of revenues	$	2,804	$	4,526	$	9,701	$	16,324
Research and development	6,806		5,062		18,686		17,455
Selling, general and administrative	9,701		6,513		23,756		33,289
Total stock-based compensation	$	19,311	$	16,101	$	52,143	$	67,068

As stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The accounting guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Cash proceeds from the issuance of shares under the employee stock plans were approximately $17.8 million and $33.4 million for the three and nine months ended September 29, 2013, respectively, and $10.4 million and $20.4 million for the three and nine months ended September 30, 2012, respectively. We did not recognize a tax benefit from stock option exercises for the three and nine months ended September 29, 2013 or September 30, 2012.

As of September 29, 2013 and December 30, 2012, stock-based compensation capitalized in inventories totaled $4.4 million and $2.8 million, respectively.

The following table summarizes the stock-based compensation expense by type of awards:



	Three Months Ended				Nine Months Ended
	September 29, 2013		September 30, 2012		September 29, 2013		September 30, 2012
	(In thousands)
Stock options	$	2,234	$	1,588	$	6,645	$	5,511
Restricted stock units and restricted stock awards	15,600		12,266		37,415		54,163
Employee Stock Purchase Plan (“ESPP”)	1,477		2,247		8,083		7,394
Total stock-based compensation expense	$	19,311	$	16,101	$	52,143	$	67,068

The following table summarizes the unrecognized stock-based compensation expense, net of estimated forfeitures, by type of awards:



	Nine Months Ended
	September 29, 2013		Weighted- Average Amortization Period
	(In thousands)		(In years)
Stock options	$	13,780	2.21
Restricted stock units and restricted stock awards	48,018		1.00
ESPP	3,193		0.46
Total unrecognized stock-based compensation balance	$	64,991	1.23

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Valuation Assumptions

We estimated the fair value of the stock options and ESPP using the Black-Scholes valuation model with the following assumptions:



	Three Months Ended		Nine Months Ended
	September 29, 2013	September 30, 2012	September 29, 2013	September 30, 2012
Expected life	0.5-7.27 years	1.2-8.0 years	0.5-7.27 years	1.2-8.0 years
Volatility	36.51%-42.7%	44.8%-48.3%	36.51%-46.3%	42.9%-49.6%
Risk-free interest rate	0.08%-1.85%	0.2%-1.3%	0.08%-1.85%	0.2%-1.5%
Dividend yield	3.82%	3.8%	3.82%-4.18%	2.8%-3.8%

The fair value of the restricted stock units and the restricted stock awards was based on our stock price on the date of grant.

Equity Incentive Program

As of September 29, 2013, approximately 7.3 million stock options or 3.9 million restricted stock units and restricted stock awards were available for grant under the Amended and Restated 2013 Stock Plan and the 2012 Incentive Award Plan.

Stock Options:

The following table summarizes our stock option activities:



	Shares		Weighted- Average Exercise Price Per Share
	(In thousands, except per-share amounts)
Options outstanding as of December 30, 2012	22,760		$	7.25
Granted	284		$	10.26
Exercised	(994	)	$	4.64
Forfeited or expired	(720	)	$	11.11
Options outstanding as of March 31, 2013	21,330		$	7.31
Granted	3,272		$	11.53
Exercised	(765	)	$	5.23
Forfeited or expired	(427	)	$	12.24
Options outstanding as of June 30, 2013	23,410		$	7.88
Granted	480		$	12.24
Exercised	(1,925	)	$	5.51
Forfeited or expired	(458	)	$	11.28
Options outstanding as of September 29, 2013	21,507		$	8.10
Options exercisable as of September 29, 2013	13,779		$	6.08

The weighted-average grant-date fair value of the options granted during the three and nine months ended September 29, 2013 was $2.88 and $2.67, respectively. The weighted-average grant-date fair value of the options granted during the three and nine months ended September 30, 2012 was $3.32 and $3.43, respectively.

The aggregate intrinsic value of the options outstanding and options exercisable as of September 29, 2013 was approximately $53.4 million and $51.5 million, respectively. The aggregate intrinsic value 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 September 29, 2013 and does not include substantial tax payments.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The aggregate pre-tax 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 $13.1 million and $23.3 million during three and nine months ended September 29, 2013, respectively, and $4.1 million and $27.2 million during three and nine months ended September 30, 2012, respectively

The total number of exercisable in-the-money options was approximately 11.5 million shares as of September 29, 2013.

As of September 29, 2013, stock options vested and expected to vest totaled approximately 20.3 million shares, with a weighted-average remaining contractual life of 4.2 years and a weighted-average exercise price of $7.91 per share. The aggregate intrinsic value was approximately $53.1 million.

Restricted Stock Units and Restricted Stock Awards:

The following table summarizes our restricted stock unit and restricted stock award activities:



	Shares		Weighted- Average Grant Date Fair Value Per Share
	(In thousands, except per-share amounts)
Balance as of December 30, 2012	7,887		$	14.52
Granted	5,456		$	11.08
Released	(1,366	)	$	10.45
Forfeited	(3,019	)	$	15.12
Balance as of March 31, 2013	8,958		$	12.31
Granted	1,001		$	11.41
Released	(384	)	$	10.71
Forfeited	(242	)	$	14.78
Balance as of June 30, 2013	9,333		$	12.25
Granted	287		$	10.94
Released	(181	)	$	10.75
Forfeited	(246	)	$	12.88
Balance as of September 29, 2013	9,193		$	11.89

The 9.2 million outstanding restricted stock units and awards as of September 29, 2013 included approximately 4.5 million of performance-based restricted stock units (“PARS”). For more information regarding the performance milestones, refer to our Form 10-Q for the quarter ended March 31, 2013.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

We lease certain facilities and equipment under non-cancelable operating lease agreements that expire at various dates through fiscal 2018. Some leases include renewal options, which would permit extensions of the expiration dates at rates approximating fair market rental values at the time of the extension.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

As of September 29, 2013, future minimum lease payments under non-cancelable operating leases were as follows:



Fiscal Year	(In thousands)
2013 (remaining three months)	$	2,172
2014	5,890
2015	5,108
2016	3,282
2017	2,739
2018 and thereafter	1,053
Total	$	20,244

Capital Lease

In 2011, we entered into a capital lease agreement which allows us to borrow up to $35.0 million to finance the acquisition of certain manufacturing equipment. Assets purchased under the capital lease are included in “Property, plant and equipment, net” as manufacturing equipment and the amortization is included in depreciation. As of September 29, 2013, the gross value and net book value of manufacturing equipment purchased under a capital lease was approximately $20.5 million and $16.5 million, respectively. As of September 29, 2013, the total minimum lease payments under our capital leases amounted to approximately $13.1 million.

Future minimum payments, by year and in the aggregate, under the capitalized lease consist of the following:




Fiscal Year	(In thousands)
2013 (remaining three months)	$	790
2014	2,936
2015	2,936
2016	6,581
2017	599
Total minimum lease payments	13,842
Less: amount representing interest	700
Total	$	13,142

Product Warranties

We generally warrant our 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. We estimate our warranty costs based on historical warranty claim experience. Warranty returns are recorded as an allowance for sales returns. The allowance for sales returns is reviewed quarterly to verify that it properly reflects the remaining obligations based on the anticipated returns over the balance of the obligation period.

The following table presents our warranty reserve activities:



	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
	(In thousands)
Beginning balance	$	3,360		$	3,091		$	3,360		$	3,085
Settlements made	(98		)	(135		)	(276		)	(641		)
Provisions	98			135			276			647
Ending balance	$	3,360		$	3,091		$	3,360		$	3,091

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Equity Investment Commitments

As disclosed in Note 5, we have committed to purchase additional preferred stock from a company that works in the area of advanced battery storage. As of September 29, 2013, we purchased $9.5 million of preferred stock which was recorded as part of our investments in non-marketable securities. During the fourth quarter of fiscal 2013, we invested an additional $4.0 million. Subject to the attainment of certain milestones, we plan to purchase additional preferred stock of approximately $31 million in fiscal 2014.

Litigation and Asserted Claims

In August 2013, our five-patent infringement case against GSI’s static random access memory (“SRAM”) technology in the United Stated District Court of Minnesota was unstayed, allowing us to dismiss the case in Minnesota and consolidate certain of the asserted patents in that case with our pending five-patent infringement case in the Northern District of California. We are seeking damages as well as injunctive relief in the now seven patent case assigned to Judge Tigar in the Northern District of California. Our initial infringement contentions on all seven patents have been filed in the case and discovery is underway. We believe strongly in the merits of our patent infringement claims, and intend to take the steps necessary to protect our intellectual property.

With respect to the civil antitrust case filed by GSI in the United States District Court for the Northern California, we remain engaged in the discovery stage of this case. GSI’s case, which only names Cypress as a defendant, accuses the QDR Consortium, which was comprised of several other semiconductor companies, of certain anti-competitive behavior. Aside from injunctive relief, GSI has made no specific monetary demand in the antitrust matter. Accordingly, the possible range of monetary loss that might be demanded in the future in the matter, if any, is unknown at this time. We believe strongly that we have meritorious defenses to the allegations set forth in the GSI civil antitrust complaint and we will vigorously defend ourselves in that matter.

With respect to the litigation stemming from our acquisition of Ramtron, both the Dent and the Weber shareholder litigation case remain inactive. We have motions to dismiss pending in each of those cases. We believe strongly that these cases are without merit, and in the event either plaintiff chooses to take further action, we will defend ourselves vigorously. Because the case is at a very early stage and no specific monetary demand has been made, it is not possible for us to estimate the potential loss or range of potential losses for either case.

On December 11, 2012, LongPath Capital, LLC (“LongPath”) filed an appraisal petition with the Court of Chancery in the State of Delaware in connection with our acquisition of Ramtron. Specifically, the petition seeks an appraisal of the fair value of the common stock shares held by LongPath, and an order that Ramtron pay such fair value, plus interest and attorney’s fees. We believe LongPath’s petition is without merit and we intend to defend this matter vigorously. We are currently engaged in the discovery process in this case. Given that the case is still in its early stages and LongPath has not demanded a specific valuation; it is not possible for us to estimate the potential exposure for this matter.

After extended licensing discussions were effectively abandoned by LG Electronics, Inc. (“LG”) and Blackberry Limited/Blackberry Corporation (“Blackberry”), on August 29, 2013, we filed a patent infringement complaint against LG in the federal district court in the Northern District of California, accusing certain of their products of infringing our six of our USB and Touch patents. We filed a second complaint in the Northern District of California with respect to the same six USB and Touch patents against Blackberry on September 10^th. We are awaiting the answers of both defendants. We are seeking damages as well as injunctive relief in both cases. We believe strongly in the merits of our patent infringement claims, and intend to take the steps necessary to protect our intellectual property as well as the business interests of our non-infringing customers.

On September 24, 2013, we filed a three-patent infringement case against Silego Technology, Inc. (“Silego”) in federal district court in the Northern District of California. Silego has yet to file an answer in the case. We are seeking damages as well as injunctive relief in this case. We believe strongly in the merits of our patent infringement claims, and intend to take the steps necessary to protect our intellectual property against misappropriation.

We are currently a party to various other legal proceedings, claims, disputes and litigation arising in the ordinary course of business. Based on our own investigations, we believe the ultimate outcome of our current legal proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operation or cash flows. However, because of the nature and inherent uncertainties of the litigation, should the outcome of these actions be unfavorable, our business, financial condition, results of operations or cash flows could be materially and adversely affected.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 9. DEBT AND EQUITY TRANSACTIONS

Mortgage Note and Loan Facility

As part of our acquisition of Ramtron, we acquired a loan facility and a mortgage note related to our building in Colorado Springs, Colorado. On June 3, 2013, we terminated the loan facility and repaid the remaining $3.3 million balance of the mortgage note.

Senior Secured Revolving Credit Facility

Outstanding amounts under our five-year senior secured revolving credit facility (“Credit Facility”) may be repaid prior to maturity without penalty and are mandatory for certain asset sales and casualty events. The Credit Facility contains certain covenants for similarly rated companies, including: 1) maximum senior secured leverage ratio of 2.00 to 1.00, 2) maximum total leverage ratio of 3.50 to 1.00 through June 30, 2013 and 3.00 to 1.00 thereafter, 3) minimum fixed charge coverage ratio of 1.20 to 1.00, and 4) minimum liquidity of at least $150 million. Borrowings are collateralized by substantially all assets of the Company. In the second quarter of fiscal 2013, the Company repaid $5.0 million of the outstanding borrowing. At September 29, 2013, our remaining outstanding borrowings of $227.0 million were recorded as part of long-term liabilities and are presented as “Long-term revolving credit facility” in the Condensed Consolidated Balance Sheet. As of September 29, 2013 and December 30, 2012, we were in compliance with all of the financial covenants under the Credit Facility.

On October 17, 2013, the Company executed an Amendment to the Credit Facility Agreement. See Note 15 for more information.

Equipment Loans

In December 2011, we obtained equipment loans from a financial institution for an aggregate amount of approximately $14.1 million which are collateralized by certain manufacturing equipment. Of the $9.4 million outstanding balance as of September 29, 2013, approximately $2.7 million was recorded as part of “Other current liabilities” and $6.7 million was recorded as part of “Other long-term liabilities” in the Condensed Consolidated Balance Sheet. The fair value was estimated using a discounted cash flow analysis using factors, such as present value factors and risk-free interest rates based on the U.S. Treasury yield curve.

The schedule of principal payments under our equipment loans is as follows:




Fiscal Year	(In thousands)
2013 (remaining three months)	$	692
2014	2,825
2015	2,915
2016	3,003
Total	$	9,435

Stock Buyback Program:

$400 million Program Authorized in Fiscal 2011

For the three months ended September 29, 2013, repurchases made under this program were immaterial. Since we announced our $400 million stock buyback program in September 2011 through the end of the third quarter of fiscal 2013, we used approximately $316.3 million from this program to repurchase approximately 23.5 million shares at an average share price of $13.44. As of September 29, 2013, the total remaining dollar amount of shares that may be repurchased under the program was approximately $83.7 million.

Dividends

On August 2, 2013, our Board of Directors approved a cash dividend of $0.11 per share payable to holders of record of our common stock at the close of business day on September 26, 2013. This cash dividend was paid on October 17, 2013 and totaled approximately $16.6 million which was accrued for in the third quarter of fiscal 2013 and shown as “Dividends payable” in the Condensed Consolidated Balance Sheet as of September 29, 2013.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 10. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss were as follows:



	Net unrealized gains (loss) on investments			Cumulative translation adjustment and other		Accumulated other comprehensive loss (income)
Balance as of December 30, 2012 (1)	$	(450	)	$	6	$	(444	)
Other comprehensive income attributable to Cypress	(30		)	—		(30		)
Balance as of September 29, 2013	$	(480	)	$	6	$	(474	)


(1)	For defined benefit pension items, please see Note 16, Employee Benefit Plan, in our Consolidated Financial Statements, in our Annual Report on Form 10-K for the year ended December 30, 2012.

NOTE 11. FOREIGN CURRENCY DERIVATIVES

The aggregate notional and fair value of outstanding forward contracts to hedge the risks associated with foreign currency denominated assets and liabilities as of September 29, 2013 and December 30, 2012 was not material to our consolidated financial statements.

NOTE 12. INCOME TAXES

Our income tax benefit was $0.8 million for the three months ended September 29, 2013 and tax benefit was $0.2 million for the three months ended September 30, 2012. Our income tax benefit was $10.0 million and tax expense was $2.7 million for the nine months ended September 29, 2013 and September 30, 2012, respectively. The tax benefit for the third quarter and first three quarters of fiscal 2013 was primarily attributable to a release of previously accrued taxes and interest due to the expired statutes of limitations in foreign jurisdictions, offset by non-U.S. taxes on income earned in foreign jurisdictions. The tax benefit for the third quarter of fiscal 2012 was primarily attributable to non-U.S. taxes on income earned in foreign jurisdictions, offset by a release of previously accrued taxes and interest due to the expired statutes of limitations in foreign jurisdictions, and the tax expense for the first three quarters of fiscal 2012 was primarily attributable to non-U.S. taxes on income earned in foreign jurisdictions.

Unrecognized Tax Benefits

As of September 29, 2013 and December 30, 2012, the amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate totaled $16.7 million and $28.2 million, respectively.

Management believes events that could occur in the next 12 months and cause a material change in unrecognized tax benefits include, but are not limited to, the following:


•	completion of examinations by the U.S. or foreign taxing authorities; and


•	expiration of statute of limitations on our tax returns.

The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses our tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which we do business. We believe it is possible that we may recognize approximately $1.8 million to $2.0 million of our existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.

Classification of Interest and Penalties

Our policy is to classify interest and penalties, if any, as components of the income tax provision in the Condensed Consolidated Statements of Operations. As of September 29, 2013 and December 30, 2012, the amount of accrued interest and penalties totaled $5.3 million and $11.6 million, respectively.

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 13. NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per share:



	Three Months Ended					Nine Months Ended
	September 29, 2013			September 30, 2012		September 29, 2013			September 30, 2012
	(In thousands, except per-share amounts)
Net income (loss) attributable to Cypress	$	(8,358	)	$	14,332	$	(32,787	)	$	(151	)
Weighted-average common shares	149,679			147,673		147,551			151,153
Weighted-average diluted shares	149,679			160,300		147,551			151,153
Net income (loss) per share—basic	$	(0.06	)	$	0.10	$	(0.22	)	$	—
Net income (loss) per share—diluted	$	—		$	—	$	(0.22	)	$	—

For the three and nine months ended September 29, 2013, approximately 8.8 million and 7.6 million weighted average potentially dilutive securities, respectively, were excluded in the computation of diluted net income (loss) per share because their effect would have been anti-dilutive.

For the three and nine months ended September 30, 2012, approximately 8.3 million and 6.2 million weighted average potentially dilutive securities, respectively, were excluded in the computation of diluted net income (loss) per share because their effect would have been anti-dilutive.

NOTE 14. SEGMENT, GEOGRAPHICAL AND CUSTOMER INFORMATION

Segment Information

We design, develop, manufacture and market a broad range of programmable system solutions for various markets including consumer, computation, data communications, automotive and industrial. We evaluate our reportable business segments in accordance with the accounting guidance. We operate in the following four reportable business segments:



Business Segments		Description

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

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

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

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

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Revenue:



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

Income (Loss) before Income Taxes:



	Three Months Ended						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
	(In thousands)
Programmable Systems Division	$	246		$	4,309		$	(16,763	)	$	7,362
Memory Products Division	30,345			38,319			86,346			102,934
Data Communications Division	(2,192		)	(3,279		)	(5,170		)	(6,716		)
Emerging Technologies Division	(4,720		)	(5,396		)	(14,202		)	(17,773		)
Unallocated items:
Stock-based compensation	(19,311		)	(16,101		)	(52,143		)	(67,068		)
Patent license fee	—			—			—			(7,100		)
Amortization of acquisition-related intangibles	(2,817		)	(707		)	(9,142		)	(2,169		)
Restructuring charges	(3,693		)	(66		)	(15,826		)	(1,283		)
Changes in value of deferred compensation plan	97			(48		)	(556		)	(23		)
Impairment of assets and other	(7,517		)	(3,314		)	(16,811		)	(6,604		)
Income (loss) before income taxes	$	(9,562	)	$	13,717		$	(44,267	)	$	1,560

Depreciation:



	Three Months Ended				Nine Months Ended
	September 29, 2013		September 30, 2012		September 29, 2013		September 30, 2012
	(In thousands)
Programmable Systems Division	$	3,706	$	4,769	$	10,946	$	13,837
Memory Products Division	4,108		4,579		12,363		13,229
Data Communications Division	926		1,160		3,149		3,660
Emerging Technologies Division	1,005		1,272		3,679		3,404
Total depreciation	$	9,745	$	11,780	$	30,137	$	34,130

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Geographical Information

The following table presents our revenues by geographical locations:



	Three Months Ended				Nine Months Ended
	September 29, 2013		September 30, 2012		September 29, 2013		September 30, 2012
	(In thousands)
United States	$	18,432	$	23,128	$	57,587	$	78,162
Europe	21,932		19,796		60,641		62,102
Asia:
China	82,782		93,900		234,091		253,707
South Korea	22,328		22,389		79,784		70,522
Japan	19,344		18,903		49,307		53,982
Rest of the World	23,905		24,899		73,507		70,929
Total revenue	$	188,723	$	203,015	$	554,917	$	589,404

Property, plant and equipment, net, by geographic locations were as follows:



	As of
	September 29, 2013		December 30, 2012
	(In thousands)
United States	$	154,549	$	180,139
Philippines	85,166		73,091
Other	20,182		21,197
Total property, plant and equipment, net	$	259,897	$	274,427

We track our assets by physical location. Although management reviews asset information on a corporate level and allocates depreciation expense by segment, our chief operating decision maker does not review asset information on a segment basis.

Customer Information

Outstanding accounts receivable from three of our distributors, accounted for 13%, 12% and 11% of our consolidated accounts receivable as of September 29, 2013. Outstanding accounts receivable from three of our distributors, accounted for 12%, 12% and 10% of our consolidated accounts receivable as of December 30, 2012.

Revenue generated through two of our distributors accounted for 12% and 11% of our consolidated revenue for the three months ended September 29, 2013. Revenue generated through two of our distributors accounted for 11% and 10% of our consolidated revenue for the nine months ended September 29, 2013. One end customer purchases primarily from our distributors and accounted for 10% and 12% of our consolidated revenue for the three and nine months ended September 29, 2013, respectively.

Revenue generated through three of our distributors accounted for 13%, 13% and 10% of our consolidated revenue for the three months ended September 30, 2012. Revenue generated through three of our distributors accounted for 13%, 12% and 10% of our consolidated revenue for the nine months ended September 30, 2012. One end customer purchases primarily from our distributors and accounted for 9% and 11% of our consolidated revenue for the three and nine months ended September 30, 2012, respectively.

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CYPRESS SEMICONDUCTOR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 15. SUBSEQUENT EVENTS

Amendment to Senior Secured Revolving Credit Facility

On October 17, 2013, we amended our senior secured revolving credit facility ("Credit Facility") to reduce the revolving commitments to $300 million from $430 million. In connection with the reduction, certain financial covenants were amended. The amended financial covenants include the following conditions: 1) maximum senior secured leverage ratio of 2.50 to 1.00 through January 1, 2017 and 2.25 to 1.00 thereafter, 2) maximum total leverage ratio of 4.25 to 1.00 through January 3, 2015, 3.5 to 1.00 through January 1, 2017 and 3.00 to 1.00 thereafter, 3) minimum fixed charge coverage ratio of 1.00 to 1.00, and 4) minimum liquidity of at least $100 million. Refer to Note 9 for additional information.

Capital Commitment

In October 2013, the Company executed a subscription agreement to purchase a limited partnership interest with an aggregate capital commitment of $20 million as a founding strategic partner in a change-management private equity firm focused on lower middle-market investments. The Company expects to fund $5 million of this commitment during the fourth quarter of fiscal 2013 and expects to fund the remaining commitment over the next two years.

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

The Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, which are discussed in the “Forward-Looking Statements” section under Part I of this Quarterly Report on Form 10-Q.

EXECUTIVE SUMMARY

General

Cypress Semiconductor Corporation (“Cypress”) delivers high-performance, mixed-signal, programmable solutions that provide customers with rapid time-to-market and exceptional system value. Our offerings include the flagship Programmable System-on-Chip (“PSoC^®”) families and derivatives such as CapSense^® touch sensing and TrueTouch^® solutions for touchscreens. We are the world leader in universal serial bus (“USB”) controllers. We are also a leader in high-performance memories and programmable timing devices. We serve numerous markets including consumer, mobile handsets, computation, data communications, automotive, industrial and military.

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



Business Segments		Description

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

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

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

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

Manufacturing Strategy

Our core manufacturing strategy—“flexible manufacturing”—combines capacity from foundries with output from our internal manufacturing facilities. This initiative is intended to allow us to meet rapid swings in customer demand while lessening the burden of high fixed costs, a capability that is particularly important in high-volume consumer markets that we serve with our leading programmable product portfolio.

Results of Operations

Revenues

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



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

Programmable Systems Division:

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

Memory Products Division:

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

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Data Communications Division:

Revenues from the Data Communications Division decreased by $2.4 million in the third quarter of fiscal 2013 and $3.5 million in the first three quarters of fiscal 2013, or approximately 11.1% and 5.3%, respectively, compared to the same prior-year periods primarily due to the decreases in sales of our USB-related products partially offset by increases in sales of our trackpad modules due to new design wins moving into production.

Emerging Technologies Division:

Revenues from the Emerging Technologies Division increased by $0.6 million in the third quarter of fiscal 2013 and $2.1 million in the first three quarters of fiscal 2013, or approximately 27.7% and 35.0% respectively, compared to the same prior-year periods primarily due to the overall increase in demand as certain of our Emerging Technologies companies had design wins that moved into production. This increase was partially offset by the loss in revenue from Cypress Envirosystems as we had divested this subsidiary in fiscal 2012.

Cost of Revenues/Gross Margins



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

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

Research and Development (“R&D”) Expenses



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

R&D expenditures increased by $3.5 million in the third quarter of fiscal 2013 compared to the same prior-year period. The increase was primarily attributable to an increase in variable bonus-related expense and stock-based compensation expense of $4.1 million. As a percentage of revenues, R&D expenses were higher in the third quarter of fiscal 2013 driven by the decrease in total revenues in the same prior-year period.

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

Selling, General and Administrative (“SG&A”) Expenses



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

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SG&A expenses decreased by $1.8 million in the third quarter of fiscal 2013 compared to the same prior-year period. The decrease was primarily attributable to a $3.1 million decrease in acquisition-related expenses and a $3.4 million decrease in headcount related expenses which was driven by a company-wide effort to reduce costs. These decreases were partially offset by an increase in stock-based compensation expense of $3.2 million due to an increase in certain performance-based awards and an increase in variable bonus-related expenses of $1.1 million. As a percentage of revenues, SG&A expenses were higher in the third quarter of fiscal 2013 driven by the decrease in total revenues in the same quarter.

SG&A expenses decreased by $20.7 million in the first three quarters of fiscal 2013 compared to the same prior-year period. The decrease was primarily attributable to a $9.5 million decrease in stock-based compensation expense related to performance-based stock awards, a $5.7 million decrease in headcount related expenses which was driven by a company-wide effort to reduce costs, a $3.5 million decrease in acquisition-related expenses and a decrease of $1.5 million in marketing and advertising expenses. These decreases were partially offset by an increase in variable bonus-related expenses of $3.1 million. As a percentage of revenues, SG&A expenses were lower in the third quarter and nine months of fiscal 2013 driven by a company-wide effort to reduce overall operating expenses.

Amortization of acquisition-related intangible assets

For the three and nine months ended September 29, 2013, we recorded amortization expense of acquisition-related intangibles assets of $2.0 million and $6.0 million, respectively. For the three and nine months ended September 30, 2012, we recorded amortization expense of acquisition-related intangibles assets of $0.7 million and $2.2 million, respectively. The increase in the amortization expense in 2013 is related to the increase in intangible assets as part of our acquisition of Ramtron in the fourth fiscal quarter of 2012.

Restructuring

Fiscal 2013 Restructuring Plan

During the first quarter of fiscal 2013, we implemented a restructuring plan to reduce operating expenses as part of our 2013 corporate priorities. The plan includes the termination of employees and the disposal of certain equipment located in our Bloomington, Minnesota facility. To date, we have recorded total restructuring charges of $15.2 million related to the Fiscal 2013 Restructuring Plan. Of the total restructuring charge, $6.7 million was related to property, plant and equipment, $8.0 million was related to personnel costs and $0.5 million was mainly related to the amounts payable upon the termination of agreements with certain distributor representatives.

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




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

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

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Fiscal 2011/12 Restructuring Plan




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

The restructuring liability as of September 29, 2013 under the Fiscal 2011 Restructuring Plan related primarily to personnel costs and is expected to be paid out within the next twelve months.

Assets Held-For-Sale

Income Taxes

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LIQUIDITY AND CAPITAL RESOURCES

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



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

Key Components of Cash Flows



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

Nine Months Ended September 29, 2013:

During the nine months ended September 29, 2013, cash and cash equivalents increased by approximately $13.3 million primarily due to the cash we generated from our operating and investing activities of approximately $46.5 million and $0.6 million, respectively. This increase was partially offset by the $33.7 million cash we used in our financing activities, principally related to our dividend payments of $48.2 million.

Operating Activities

The $46.5 million cash generated from our operating activities during the nine months ended September 29, 2013 was primarily due to $89.5 million in net favorable non-cash adjustments to our net loss, an increase in deferred margin on sales to distributors, and decreases in inventories and other assets, partially offset by increases in accounts receivable and a decrease in accounts payable and other liabilities.

The key changes in our working capital as of September 29, 2013 compared to December 30, 2012 were as follows:


•	Total cash, cash equivalents and short-term investments decreased by $15.8 million primarily due to our cash dividend.


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


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


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

Investing Activities

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

Financing Activities

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During the nine months ended September 29, 2013, we used approximately $33.7 million of cash from our financing activities primarily related to $48.2 million for our dividend payment, $7.5 million of cash used to repay equipment leases and loan, $80.0 million of cash used to partially repay our revolver, $4.5 million payments related to statutory income tax withholdings on vested restricted stock awards in lieu of issuing shares of stock (considered as part of our stock buyback program), and $3.3 million to pay off the remaining mortgage note related to the Ramtron acquisition. These decreases were partially offset by net proceeds from the issuance of common shares under our employee stock plans of $33.4 million.

Nine Months Ended September 30, 2012:

Operating Activities

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

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


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


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


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


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


•	Other current liabilities increased by $11.8 million primarily due to the accrual of a patent license fee related to a Patent License Agreement.

Investing Activities

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

Financing Activities

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

Liquidity and Contractual Obligations

Liquidity

Stock Buyback Programs:

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

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Contractual Obligations

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



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


(1)	Purchase obligations primarily include non-cancelable purchase orders for materials, services, manufacturing equipment, building improvements and supplies in the ordinary course of business. Purchase obligations are defined as enforceable agreements that are legally binding on us and that specify all significant terms, including quantity, price and timing.


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

As of September 29 2013, our unrecognized tax benefits were $16.7 million, which were classified as long-term liabilities. We believe it is possible that we may recognize approximately $1.8 million to $2.0 million of our existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.

Equity Investment Commitments

Capital Resources and Financial Condition

Our long-term strategy is to maintain a minimum amount of cash and cash equivalents for operational purposes and to invest the remaining amount of our cash in interest-bearing and highly liquid cash equivalents, debt securities and the repayment of our short-term debt, the purchase of our stock through our stock buyback program and payments of regularly scheduled cash dividends. As of September 29, 2013, in addition to $76.6 million in cash and cash equivalents, we had $24.8 million invested in short-term investments for a total cash, cash equivalents and short-term investment position of $101.4 million that is available for use in our current operations.

As of September 29, 2013, approximately 24% of our cash, cash equivalents and available-for-sale investments are held in offshore funds. While these amounts are primarily invested in U.S. dollars, a portion is held in foreign currencies. All offshore balances are exposed to local political, banking, currency control and other risks. In addition, these amounts, if repatriated may be subject to tax and other transfer restrictions.

We believe that liquidity provided by existing cash, cash equivalents and available-for-sale investments and our borrowing arrangements will provide sufficient capital to meet our requirements for at least the next twelve months. However, should prevailing economic conditions and/or financial, business and other factors beyond our control adversely affect the estimates of our future cash requirements; we could be required to fund our cash requirements by alternative financing. There can be no assurance that additional financing, if needed, would be available on terms acceptable to us or at all. In addition we may 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 and provide us with additional flexibility to take advantage of other business opportunities that arise.

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Non-GAAP Financial Measures

Regulation G, conditions for use of Non-Generally Accepted Accounting Principles (“Non-GAAP”) financial measures, and other SEC regulations define and prescribe the conditions for use of certain Non-GAAP financial information. To supplement our condensed consolidated financial results presented in accordance with GAAP, we use Non-GAAP financial measures which are adjusted from the most directly comparable GAAP financial measures to exclude certain items, as described below. Management believes that these Non-GAAP financial measures reflect an additional and useful way of viewing aspects of our operations that, when viewed in conjunction with our GAAP results, provide a more comprehensive understanding of the various factors and trends affecting our business and operations. Non-GAAP financial measures used by us include gross margin, research and development expenses, selling, general and administrative expenses, operating income or loss, net income or loss and basic and diluted net income or loss per share.

Our Non-GAAP measures primarily exclude stock-based compensation, acquisition-related charges, impairments to goodwill, gain or losses on divestiture, investment-related gains and losses, discontinued operations, restructuring costs and other special charges and credits. Management believes these Non-GAAP financial measures provide meaningful supplemental information regarding our strategic and business decision making, internal budgeting, forecasting and resource allocation processes. In addition, these Non-GAAP financial measures facilitate management’s internal comparisons to our historical operating results and comparisons to competitors’ operating results.

We use each of these Non-GAAP financial measures for internal managerial purposes, when providing our financial results and business outlook to the public, to facilitate period-to-period comparisons and are used to formulate our formula driven cash bonus plan and any milestone based stock awards. Management believes that these Non-GAAP measures provide meaningful supplemental information regarding our operational and financial performance of current and historical results. Management uses these Non-GAAP measures for strategic and business decision making, internal budgeting, forecasting and resource allocation processes. In addition, these Non-GAAP financial measures facilitate management’s internal comparisons to our historical operating results and comparisons to competitors’ operating results.

The following table shows our Non-GAAP financial measures:



	Three Months Ended
	September 29, 2013		September 30, 2012
	(In thousands, except per share amounts)
Non-GAAP gross margin	$	101,507	$	115,928
Non-GAAP research and development expenses	$	41,978	$	41,457
Non-GAAP selling, general and administrative expenses	$	34,416	$	39,323
Non-GAAP operating income	$	25,113	$	35,148
Non-GAAP net income attributable to Cypress	$	22,015	$	32,322
Non-GAAP net income per share attributable to Cypress—diluted	$	0.20	$	0.11

We believe that providing these Non-GAAP financial measures, in addition to the GAAP financial results, are useful to investors because they allow investors to see our results “through the eyes” of management as these Non-GAAP financial measures reflect our internal measurement processes. Management believes that these Non-GAAP financial measures enable investors to better assess changes in each key element of our operating results across different reporting periods on a consistent basis and provides investors with another method for assessing our operating results in a manner that is focused on the performance of our ongoing operations.

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CYPRESS SEMICONDUCTOR CORPORATION

RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES

(In thousands, except per-share data)

(Unaudited)



	Three Months Ended
	September 29, 2013			September 30, 2012
	(In thousands, except per share amounts)
GAAP gross margin	$	91,653		$	110,056
Stock-based compensation expense	2,804			4,526
Changes in value of deferred compensation plan	6,849			217
Acquisition-related expenses	265			—
Impairment of assets and other	(64		)	1,129
Non-GAAP gross margin	$	101,507		$	115,928
GAAP research and development expenses	$	50,429		$	46,908
Stock-based compensation expense	(6,806		)	(5,062		)
Acquisition-related expenses	(19		)	—
Changes in value of deferred compensation plan	(548		)	(389		)
Impairment of assets and other	(1,078		)	—
Non-GAAP research and development expenses	$	41,978		$	41,457
GAAP selling, general and administrative expenses	$	45,533		$	47,328
Stock-based compensation expense	(9,701		)	(6,513		)
Changes in value of deferred compensation plan	(1,181		)	(945		)
Acquisition-related expenses	(366		)	(547		)
Impairment of assets and other	131			—
Non-GAAP selling, general and administrative expenses	$	34,416		$	39,323
GAAP operating income (loss)	$	(9,989	)	$	15,047
Stock-based compensation expense	19,311			16,101
Changes in value of deferred compensation plan	1,994			1,551
Acquisition-related expenses	9,221			1,254
Impairment of assets and other	883			1,129
Restructuring charges	3,693			66
Non-GAAP operating income	$	25,113		$	35,148
GAAP net income (loss) attributable to Cypress	$	(8,358	)	$	14,332
Stock-based compensation	19,311			16,101
Changes in value of deferred compensation plan	(97		)	48
Acquisition-related expenses	9,221			1,254
Impairment of assets and other	883			1,129
Restructuring charges	3,693			66
Tax and tax-related items	(2,638		)	(2,246		)
Investment-related gains/losses	—			1,638
Non-GAAP net income attributable to Cypress	$	22,015		$	32,322
GAAP net income (loss) per share attributable to Cypress-diluted	—			$	—
Stock-based compensation expense and other	0.12			0.10
Acquisition-related expenses	0.02			0.01
Impairment of assets and other	0.05			0.01
Restructuring charges	0.02			—
Tax and tax-related items	(0.02		)	(0.02		)
Investment-related gains/losses	—			0.01
Non-GAAP share count adjustment	0.01			—
Non-GAAP net income attributable to Cypress-diluted	$	0.20		$	0.11

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risks

Our investment portfolio consists of a variety of financial instruments that exposes us to interest rate risk, including, but not limited to, money market funds, commercial paper and corporate securities. These investments are generally classified as available-for-sale and, consequently, are recorded on our balance sheets at fair market value with their related unrealized gain or loss reflected as a component of accumulated other comprehensive income in stockholders’ equity. Due to the relatively short-term nature of our investment portfolio, we do not believe that an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio. Since we believe we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio.

Foreign Currency Exchange Risk

We operate and sell products in various global markets and purchase capital equipment using foreign currencies but predominantly the U.S. dollar. As a result, we are exposed to risks associated with changes in foreign currency exchange rates. Changes in exchange rates between foreign currencies and the U.S. dollar may adversely affect our operating margins. For example, when foreign currencies appreciate against the U.S. dollar, inventory and expenses denominated in foreign currencies become more expensive. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive for international customers, thus potentially leading to a reduction in demand, and therefore in our sales and profitability. Furthermore, many of our competitors are foreign companies that could benefit from such a currency fluctuation, making it more difficult for us to compete with those companies. We cannot predict the impact of future exchange rate fluctuations on our business and results of operations.

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.

ITEM 4. 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 was 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 their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three month period ended September 29, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this item is included in Note 8 of Notes to Condensed Consolidated Financial Statements under Item 1, Part 1 of this Quarterly Report on Form 10-Q and is incorporated herein by reference.

ITEM 1A. RISK FACTORS

Aside from the risk factors below, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 30, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

On September 20, 2011, our Board of Directors (the “Board”) authorized a $400 million stock buyback program. The program allows us to purchase our common stock or enter into equity derivative transactions related to our common stock. The timing and actual amount expended with the new authorized funds will depend on a variety of factors including the market price of our common stock, regulatory, legal, and contractual requirements, other uses of cash, and other market factors. The program does not obligate us to repurchase any particular amount of common stock and may be modified or suspended at any time at the discretion of our Board.

The table below sets forth information with respect to repurchases of our common stock made during the first three quarters of fiscal 2013 under this program:



	Total Number of Shares Purchased	Average Price Paid per Share		Total Shares Purchased as Part of Publicly Announced Programs	Total Dollar Value of Shares That May Yet Be Purchased Under the Plan or Program
	(In thousands, except per-share amounts)
Remaining balance available for purchases at the beginning of the period					$	88,381
Repurchases during Q1-2013:
December 31 , 2012—March 31, 2013	412	$	10.81	412	$	83,930
Total repurchases during Q1-2013	412	$	10.81	412	$	83,930
Repurchases during Q2-2013:
April 1, 2013—June 30, 2013	10	$	10.71	10	$	83,824
Total repurchases during Q2-2013	10	$	10.71	10	$	83,824
Repurchases during Q3-2013:
July 1, 2013—September 29, 2013	9	$	11.41	9	$	83,726
Total repurchases during Q3-2013	9			9	$	83,726
Grand total repurchase during Q1 - Q3 2013	431			431

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5. OTHER INFORMATION

Quarterly Executive Incentive Payments

On October 31, 2013, Cypress’s Compensation Committee of the Board of Directors (the “Compensation Committee”) approved the incentive payments to our executive officers for the third quarter of fiscal 2013 performance incentive plans. These payments were earned in accordance with the terms of our Key Employee Bonus Plan (the “KEBP”) and the Performance Bonus Plan (the “PBP”).

The payments were determined based upon the financial performance of Cypress and each executive’s performance. The performance measures under the KEBP include our non-GAAP profit-before-taxes percentage as well as individual strategic, operational and financial goals established for each executive. The following table sets forth the cash payments to our Named Executive Officers (as determined in our Proxy Statement filed with the Securities and Exchange Commission on March 29, 2013) under the KEBP and the PBP in the third quarter of fiscal 2013:



Named Executive Officers	KEBP		PBP
T.J. Rodgers, President and Chief Executive Officer	—		$	45,407
Brad W. Buss, Executive Vice President, Finance & Administration and Chief Financial Officer	$	12,706	—
Paul Keswick, Executive Vice President, New Product Development	$	6,235	—
Christopher Seams, Chief Executive Officer, Deca Technologies, Inc.	$	12,852	—
Dana Nazarian, Executive Vice President, Memory Products Division	$	4,065	—

Additionally, the Compensation Committee authorized quarterly and annual incentive payments under the KEBP, totaling $60,351, to eight other senior executive officers who are not Named Executive Officers.

Mr. Paul Keswick, our Executive Vice President of New Product Development, was paid an incentive payment amounting to $39,959 in accordance with the terms of our Design Bonus Plan (the “DBP”). The payment amount was determined based upon the performance of Mr. Keswick during the second quarter of fiscal 2013. Mr. Keswick is the only named executive officer participant to the DBP as it is a bonus plan available to our design and certain product development engineers.

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ITEM 6. EXHIBITS



		Incorporated by Reference
Exhibit Number	Description	Form	Filing Date	File No.	Filed Herewith

10.1	Amendment No. 1 to Credit and Guaranty Agreement	8-K	10/22/2013	001-10079

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

101.INS*	XBRL Instance Document.

101.SCH*	XBRL Taxonomy Extension Schema Document.

101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	CYPRESS SEMICONDUCTOR CORPORATION

Date: November 1, 2013	By:	/s/ BRAD W. BUSS
		Brad W. Buss
		Executive Vice President, Finance and Administration and Chief Financial Officer

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EXHIBIT INDEX



		Incorporated by Reference
Exhibit Number	Description	Form	Filing Date	File No.	Filed Herewith

10.1	Amendment No. 1 to Credit and Guaranty Agreement	8-K	10/22/2013	001-10079

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

101.INS*	XBRL Instance Document.

101.SCH*	XBRL Taxonomy Extension Schema Document.

101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.