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Cypress Reports Fourth-Quarter and Year-End 2013 Results

Cypress Semiconductor Corp. (NASDAQ: CY) today announced its fourth-quarter 2013 and fiscal year 2013 results, which included the remarks below from its president and CEO, T.J. Rodgers. Highlights for the quarter included:

  • Earnings came in at high end of guidance
  • Book-to-bill increased to 1.08, its highest level in almost two years
  • Non-GAAP operating expenses at a 14-year low
  • Dividend yield was 4.3% with favorable tax treatment

Fellow shareholders:

Our revenue and earnings for the quarter are given below, compared with those of the prior quarter and prior year:

(In thousands, except per-share data)

   
NON-GAAP GAAP
Q4 2013   Q3 2013   Q4 2012 Q4 2013   Q3 2013   Q4 2012
Revenue $ 167,776 $ 188,723 $ 180,283 $ 167,776 $ 188,723 $ 180,283
 
Gross margin 51.0 % 53.8 % 51.5 % 45.6 % 48.6 % 46.7 %
 
Pretax margin 9.4 % 12.5 % 4.4 % -7.0 % -5.1 % -12.9 %
 

Net income (loss)

$ 14,992 $ 22,015 $ 8,300 $ (13,577 ) $ (8,358 ) $ (22,219 )
 
Diluted EPS (loss) $ 0.09 $ 0.14 $ 0.05 $ (0.09 ) $ (0.06 ) $ (0.15 )
 

Our revenue and earnings for the fiscal year are given below, compared with those of the prior year:

(In thousands, except per-share data)

   
NON-GAAP GAAP
FY 2013   FY 2012 FY 2013   FY 2012
Revenue $ 722,693 $ 769,687 $ 722,693 $ 769,687
 
Gross margin 52.2 % 55.4 % 46.9 % 51.0 %
 
Pretax margin 9.1 % 12.2 % -7.7 % -2.8 %
 

Net income (loss)

$ 63,221 $ 91,450 $ (43,364 ) $ (22,370 )
 
Diluted EPS (loss) $ 0.39 $ 0.55 $ (0.31 ) $ (0.15 )
 

Our fourth-quarter revenue of $167.8 million was above the midpoint of our guidance, but down 11% from the $188.7 million in revenue of the prior quarter. All divisions experienced normal seasonal declines. We continued to execute very well on our operating expense management initiatives, enabling us to deliver earnings at the high end of our guidance. We thus are prepared to deliver strong operating leverage as we return to revenue growth in 2014.

We exited 2013 with a book-to-bill ratio of 1.08, a high point since the first quarter of 2012. The book-to-bill ratio of all divisions was above unity with our Programmable Systems Division leading the way at 1.15. Lead times remain low; our distributors decreased their inventories to their lowest levels in three years. As such, we expect less-than-normal seasonal revenue declines in the first quarter of 2014. Our design win pipeline for our new TrueTouch® touchscreen products is finally beginning to recover. We expect our revenue to remain in a seasonal trough in the first quarter and then to increase during the rest of 2014.

Note that we produced $167.8 million in revenue in the fourth quarter of 2013 vs. $180.3 million in the fourth quarter of 2012, down $12.5 million, but that our pretax profit was still up $7.9 million. This was due to record-low operating expenses.

BUSINESS REVIEW

+ Our non-GAAP consolidated gross margin for the fourth quarter was 51.0%, down 2.8 percentage points from the previous quarter, due primarily to reduced amortization of manufacturing expenses by lower revenue. Excluding our Emerging Technologies Division (ETD), our core semiconductor gross margin was 52.3%. ETD revenue is growing rapidly (see Net Sales Summary table) and will contribute significantly to revenue growth in 2014.

+ Net inventory at the end of the fourth quarter was $100.6 million, down from the third quarter.

 
NET SALES SUMMARY
(In thousands, except percentages)
(Unaudited)
 
  THREE MONTHS ENDED

Dec. 29,

 

Sept. 29,

  Dec. 30,   Sequential   Year-over-
Business Unit 2013 2013 2012 Change Year Change
PSD1 $ 67,746 $ 78,135 $ 81,405 -13 %

-17

%

MPD1 $ 79,890 $ 88,743 $ 77,421 -10 % 3 %
DCD1 $ 16,482 $ 18,884 $ 20,170 -13 % -18 %
ETD1, 2 $ 3,658   $ 2,961   $ 1,287   24 % 184 %
Total $ 167,776   $ 188,723   $ 180,283   -11 % -7 %
 
Geographic
China and ROW 64 % 64 % 68 % 0 % -6 %
Americas 14 % 14 % 16 % 0 % -13 %
Europe 12 % 12 % 9 % 0 % 33 %
Japan   10 %   10 %   7 % 0 % 43 %
Total   100 %   100 %   100 % 0 % 0 %
 
Channel
Distribution 69 % 74 % 75 % -7 % -8 %
Direct   31 %   26 %   25 % 19 % 24 %
Total   100 %   100 %   100 % 0 % 0 %
 
 
TWELVE MONTHS ENDED

Dec. 29,

 

Dec. 30,

  Year-over-
Business Unit 2013 2012 Year Change
PSD1 $ 292,707 $ 345,430 -15 %
MPD1 $ 338,986 $ 330,504 3 %
DCD1 $ 79,410 $ 86,591 -8 %
ETD1, 2 $ 11,590   $ 7,162   62 %
Total $ 722,693   $ 769,687   -6 %
 
Geographic
China and ROW 66 % 65 % 2 %
Americas 14 % 17 % -18 %
Europe 11 % 10 % 10 %
Japan   9 %   8 % 13 %
Total   100 %   100 % 0 %
 
Channel
Distribution 73 % 74 % -1 %
Direct   27 %   26 % 4 %
Total   100 %   100 % 0 %
 
1.   PSD, Programmable Systems Division; DCD, Data Communications Division; MPD, Memory Products Division: ETD, Emerging Technology Division.
2. “Emerging Technology” includes businesses outside our core semiconductor businesses outlined in Footnote 1. Includes subsidiaries AgigA Tech Inc., Deca Technologies Inc., and our foundry business unit .

FOURTH-QUARTER 2013 HIGHLIGHTS

+ Cypress was issued its one-hundredth patent for its TrueTouch® capacitive touchscreen controllers. The patent relates to the TrueTouch Gen5 family’s unmatched immunity to electrical noise from chargers and displays, which can render touchscreens unusable. The company continues to expand its touch patent portfolio, with more than 200 patents pending.

+ Cypress announced that its partnership with Fujifilm of Japan has created new TrueTouch controllers that support Fujifilm’s metal mesh sensors. Cypress believes these sensors to be the most advanced and cost-effective on the market. Metal mesh sensors deliver significantly better scanning performance than traditional indium tin oxide (ITO) sensors.

+ Cypress shipped its one-billionth CapSense® capacitive touch-sensing controller. Cypress's CapSense solutions have replaced more than five billion mechanical buttons, producing four times the revenue of its nearest competitor.

+ The research and analytics firm Chipworks noted the use of a Cypress CapSense controller in a recent teardown of the Samsung Galaxy Note 3 smartphone. The teardown also determined that the controller enables the ability to register touches from users wearing gloves.

+ Cypress held a global design competition promoting the use of its new PSoC® 4 programmable system-on-chip to develop intelligent, forward-looking embedded systems for homes, offices and cars. The design challenge was based on the easy-to-use PSoC 4 Pioneer Kit, which just won distributor element14’s development kit of the year award, beating entries from Texas Instruments and Freescale.

+ Digital multimedia supplier AVerMedia Technologies selected Cypress’s EZ-USB® FX3™ (USB 3.0) controller for its new high-definition (HD) video capture card. AVerMedia’s ExtremeCap U3 card records and streams game play at full HD resolution. The card uses the 5-Gbps FX3 solution to capture HD video without compression, improving image quality.

+ Cypress announced production availability of the CYFB0072 high-density video frame buffer, which addresses the increasing demand for high-bandwidth video buffering. The device contains 72 Mbits of high-performance SRAM in an interface that simplifies implementation and debugging.

+ Seiko Epson selected Cypress’s CY5077C programmable clock generator die for its new SG-8003CG programmable crystal oscillator. The die delivers precise, programmable frequency output to the ultra-small oscillator. The flexible combination provides fast time-to-market and low power consumption for a wide variety of electronics equipment. Cypress has shipped a cumulative 880 million crystal oscillator chips.

+ L-3 Cincinnati Electronics, a division of L-3 Communications, selected Cypress to manufacture its Readout Integrated Circuits (ROICs). L-3 will use the proprietary process technology of Cypress’s wafer fabrication facility in Bloomington, Minnesota to design and manufacture these ROICs for its cooled infrared detectors.

+ D-Wave Systems successfully transferred its proprietary process technology for building quantum computing microprocessors to Cypress’s wafer foundry in Bloomington.

+ Cypress announced that its Board of Directors approved a quarterly cash dividend of $0.11 per share, payable to holders of record of the company’s common stock as of the close of business on December 26, 2013. This dividend was paid on January 16, 2014.

Learn More About Cypress

ABOUT CYPRESS

Cypress delivers high-performance, mixed-signal, programmable solutions that provide customers with rapid time-to-market and exceptional system value. Cypress offerings include the flagship PSoC 1, PSoC 3, PSoC 4 and PSoC 5LP programmable system-on-chip families. Cypress is the world leader in capacitive user interface solutions including CapSense touch sensing, TrueTouch touchscreens, and trackpad solutions for notebook PCs and peripherals. Cypress is a world leader in USB controllers, which enhance connectivity and performance in a wide range of consumer and industrial products. Cypress is also the world leader in SRAM and nonvolatile RAM memories. Cypress serves numerous major markets, including consumer, mobile handsets, computation, data communications, automotive, industrial and military. Cypress trades on the NASDAQ Global Select Market under the ticker symbol CY. Visit Cypress online at www.cypress.com.

FORWARD-LOOKING STATEMENTS

Statements herein that are not historical facts and that refer to Cypress or its subsidiaries’ plans and expectations for Q1 2014 and the remainder of fiscal year 2014 and beyond are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. We may use words such as “believe,” “expect,” “future,” “plan,” “intend” and similar expressions to identify such forward-looking statements that include, but are not limited to, statements related to the semiconductor market; the strength and growth of our proprietary and programmable products; our expectation that we will experience a less than normal seasonal revenue decline in Q1 2014 and then increase during the rest of 2014; our expectation related to our earnings leverage, margins, profit, cash flow and cost-saving measures; our expectation that our ETD division will contribute to our 2014 revenue; our expectations regarding the demand for our products and how our products are expected to perform, including the expected recovery of our TrueTouch touchscreen design win pipeline, as well as our future design win expectations for other products and market share gains. Such statements reflect our current expectations, which are based on information and data available to our management as of the date of this release. Our actual results may differ materially due to a variety of uncertainties and risk factors, including, but not limited to, the state of and future of the global economy, business conditions and growth trends in the semiconductor market, whether our products perform as expected, whether the demand for our proprietary and programmable products is fully realized, whether our product and design wins and kit sales result in increased sales, our ability to manage our business to have strong earnings, reduce operating expenses, factory utilization, the strength or softness of the markets we serve, our ability to maintain and improve our gross margins and realize our bookings, the seasonality of the markets we serve, the financial performance of our subsidiaries and Emerging Technology Division, and other risks described in our filings with the Securities and Exchange Commission. We assume no responsibility to update any such forward-looking statements.

Cypress, the Cypress logo, PSoC, TrueTouch, EZ-USB and CapSense are registered trademarks and FX3 is a trademark of Cypress Semiconductor Corp. All other trademarks or registered trademarks are the property of their respective owners.

 
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
       
December 29, December 30,
2013 2012
 
ASSETS
 
Cash, cash equivalents and short-term investments $ 104,462 $ 117,210
Accounts receivable, net 81,084 82,920
Inventories (a) 100,612 127,596
Property, plant and equipment, net 258,585 274,427
Goodwill and other intangible assets, net 106,523 113,410
Other assets   113,707     116,066  
Total assets $ 764,973   $ 831,629  
 
LIABILITIES AND EQUITY
 
Accounts payable $ 47,893 $ 58,704
Deferred margin on sales to distributors 122,578 131,192
Income tax liabilities 29,001 47,454
Other liabilities 159,866 185,418
Long-term revolving credit facility   227,000     232,000  
Total liabilities   586,338     654,768  
Total Cypress stockholders' equity 183,109 180,900
Noncontrolling interest   (4,474 )   (4,039 )
Total equity   178,635     176,861  
Total liabilities and equity $ 764,973   $ 831,629  
 

(a)

 

Inventories include $5.3 million and $2.8 million of capitalized inventories related to stock-based compensation expense, as of December 29, 2013 and December 30, 2012, respectively.

           
CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
ON A GAAP BASIS
(In thousands, except per-share data)
(Unaudited)
               
Three Months Ended Twelve Months Ended
December 29, September 29, December 30, December 29, December 30,
2013 2013 2012 2013 2012

 

Revenues $ 167,776 $ 188,723 $ 180,282

 

$ 722,693 $ 769,687
Cost of revenues   91,328     97,070     96,088     384,121     376,887  
Gross margin 76,448 91,653 84,194 338,572 392,800
Operating expenses:
Research and development 42,343 50,429 47,075 190,906 189,897
Selling, general and administrative 43,623 45,533 52,183 182,671 211,959
Amortization of acquisition-related intangibles 1,850 1,987 1,826 7,833 3,996
Restructuring charges (469 ) 3,693 2,976 15,357 4,258
Loss on divestiture - - 1,605 - 1,605
         
Total operating expenses, net   87,347     101,642     105,665     396,767     411,715  
Operating income (loss) (10,899 ) (9,989 ) (21,471 ) (58,195 ) (18,915 )
Interest and other income (expense), net   (805 )   427     (1,749 )   2,225     (2,745 )
Income (loss) before income taxes -

 

(9,562 ) (23,220 ) (55,970 ) (21,660 )
Income tax provision (benefit)   2,210     (774 )   417     (7,761 )   2,324  
Income (loss), net of taxes (13,914 ) (8,788 ) (22,803 ) (48,209 ) (23,984 )
Adjust for net loss attributable to noncontrolling interest   337     430     584     1,845     1,614  
Net income (loss) attributable to Cypress $ (13,577 ) $ (8,358 ) $ (22,219 ) $ (46,364 ) $ (22,370 )
 
Net income (loss) per share attributable to Cypress:
Basic $ (0.09 ) $ (0.06 ) $ (0.15 ) $ (0.31 ) $ (0.15 )
Diluted $ (0.09 ) $ (0.06 ) $ (0.15 ) $ (0.31 ) $ (0.15 )
Cash dividend declared per share $ 0.11 $ 0.11 $ 0.11 $ 0.44 $ 0.44
Shares used in net income (loss) per share calculation:
Basic 151,580 149,679 143,605 148,558 149,266
Diluted   151,580       149,679       143,605     148,558       149,266  
 
       
CYPRESS SEMICONDUCTOR CORPORATION
RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES (a)
(In thousands, except per-share data)
(Unaudited)
                 
Three Months Ended Twelve Months Ended
December 29, September 29, December 30, December 29, December 30,
2013 2013 2012 2013 2012
 
GAAP gross margin $ 76,448 $ 91,653 $ 84,194 $ 338,572 $ 392,800
Stock-based compensation expense 3,088 2,804 2,195 12,789 18,519
Acquisition-related expense 5,562 6,849 3,545 24,805 3,545
Changes in value of deferred compensation plan 136 265 (66 ) 854 372
Impairment of assets and other 269 (64 ) 2,137 241 3,581
Patent license fee - - - - 7,100
(Gain) loss on divestiture   -     -     776     -     776  
Non-GAAP gross margin $ 85,503   $ 101,507   $ 92,781   $ 377,261   $ 426,693  
 
GAAP research and development expenses $ 42,343 $ 50,429 $ 47,074 $ 190,906 $ 189,897
Stock-based compensation expense (7,356 ) (6,806 ) (2,345 ) (26,042 ) (19,800 )
Acquisition-related expense - (19 ) (2,703 ) (252 ) (2,703 )
Non-cash compensation - - (433 ) - (433 )
Changes in value of deferred compensation plan (282 ) (548 ) 155 (1,744 ) (568 )
(Gain) loss on divestiture - - (306 ) - (307 )
Impairment of assets and other   1,368     (1,078 )   -     (1,104 )   -  
Non-GAAP research and development expenses $ 36,074   $ 41,978   $ 41,442   $ 161,764   $ 166,086  
 
GAAP selling, general and administrative expenses $ 43,623 $ 45,533 $ 52,182 $ 182,671 $ 211,959
Stock-based compensation expense (10,432 ) (9,701 ) (2,724 ) (34,187 ) (36,013 )
Acquisition-related expense (148 ) (366 ) (6,545 ) (1,168 ) (9,095 )
Non-cash compensation - - (500 ) - (500 )
Changes in value of deferred compensation plan (607 ) (1,181 ) 306 (3,795 ) (1,710 )
Impairment of assets and other (244 ) 131 (220 ) (450 ) (173 )
(Gain) loss on divestiture   -     -     (664 )   -     (664 )
Non-GAAP selling, general and administrative expenses $ 32,192   $ 34,416   $ 41,835   $ 143,071   $ 163,804  
 
GAAP operating income (loss) $ (10,899 ) $ (9,989 ) $ (21,470 ) (58,195 ) $ (18,915 )
Stock-based compensation expense 20,877 19,311 7,264 73,020 # 74,332
Acquisition-related expense 7,558 9,221 14,618 34,056 19,337
Non-cash compensation - - 933 - 933
Changes in value of deferred compensation plan 1,026 1,994 (528 ) 6,393 2,650
Impairment of assets and other (854 ) 883 2,361 1,795 3,758
Restructuring charges (470 ) 3,693 2,975 15,357 4,258
Patent license fee - - - - 7,100
(Gain) loss on divestiture and expenses   -     -     3,351     -     3,351  
Non-GAAP operating income $ 17,238   $ 25,113   $ 9,504   $ 72,426   $ 96,804  
 
GAAP net income (loss) attributable to Cypress $ (13,577 ) $ (8,358 ) $ (22,219 ) $ (46,364 ) $ (22,370 )
Stock-based compensation expense 20,877 19,311 7,264 73,020 74,332
Acquisition-related expense 7,558 9,221 14,618 34,056 19,337
Non-cash compensation - - 933 - 933
Changes in value of deferred compensation plan (535 ) (97 ) (530 ) 22 (507 )
Impairment of assets and other (854 ) 883 292 1,794 3,758
Restructuring charges (470 ) 3,693 2,975 15,357 4,258
Tax and tax-related items 1,065 (2,638 ) (555 ) (12,398 ) (1,502 )
Investment-related gains/losses 930 - 2,171 (2,266 ) 2,760
Patent license fee - - - - 7,100
(Gain) loss on divestiture and expenses   -     -     3,351     -     3,351  
Non-GAAP net income attributable to Cypress $ 14,994   $ 22,015   $ 8,300   $ 63,221   $ 91,450  
 
GAAP net income (loss) per share attributable to Cypress - diluted $ (0.09 ) $ (0.06 ) $ (0.15 ) $ (0.31 ) $ (0.15 )
Stock-based compensation expense 0.13 0.12 0.04 0.45 0.45
Acquisition-related expense 0.05 0.02 0.08 0.21 0.12
Impairment of assets and other (0.01 ) 0.05 - 0.01 0.02
Non-cash compensation - - 0.01 - -
Restructuring charges - 0.02 0.02 0.10 0.03
Tax and tax-related items 0.01 (0.02 ) - (0.08 ) (0.01 )
Investment-related gains/losses 0.01 - 0.02 (0.01 ) 0.02
Non-GAAP share count adjustment (0.01 ) 0.01 0.01 0.02 0.01
Patent license fee - - - - 0.04
(Gain) loss on divestiture and expenses   -     -     0.02     -     0.02  
Non-GAAP net income per share attributable to Cypress - diluted $ 0.09     $ 0.14     $ 0.05   $ 0.39     $ 0.55  
 

(a)

 

Refer to the accompanying "Notes to Non-GAAP Financial Measures" for a detailed discussion of management's use of non-GAAP financial measures.

 
CYPRESS SEMICONDUCTOR CORPORATION
SUPPLEMENTAL FINANCIAL DATA
(In thousands)
(Unaudited)
                     
Three Months Ended Twelve Months Ended
December 29,   September 29,   December 30, December 29   December 30,
2013 2013 2012 2013 2012

Selected Cash Flow Data (Preliminary):

Net cash provided by operating activities $ 20,171 $ 7,905 $ 17,302 $ 66,696 $ 134,997
Net cash provided by (used in) investing activities $ 569 $ (2,080 ) $ (95,562 ) $ 1,139 $ (113,036 )
Net cash provided by (used in) financing activities $ (11,276 ) $ 108 $ (20,866 ) $ (45,024 ) $ (58,475 )
 

Other Supplemental Data (Preliminary):

Capital expenditures $ 8,750 $ 10,808 $ 7,809 $ 36,627 $ 33,013
Depreciation $ 9,436 $ 9,745 $ 11,419 $ 39,572 $ 44,904
Payment of dividend $ 16,578 $ 16,258 $ 16,057 $ 64,819 $ 63,227
Dividend paid per share $ 0.11 $ 0.11 $ 0.11 $ 0.44 $ 0.44
Dividend yield per share (a)   4.3 %     4.9 %     4.2 %   4.3 %     4.2 %
 

(a)

 

Dividend yield per share is calculated based on the annualized dividend paid per share divided by the common stock share price at the end of the period.

                     
CYPRESS SEMICONDUCTOR CORPORATION
CONSOLIDATED DILUTED EPS CALCULATION
(In thousands, except per-share data)
(Unaudited)
                                   

Three Months Ended

 

Twelve Months Ended

December 29, September 29, December 30, December 29, December 30,
2013 2013 2012 2013 2012
GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP GAAP Non-GAAP
 
Net income (loss) attributable to Cypress $ (13,577 ) $ 14,992 $ (8,358 ) $ 22,015 $ (22,219 ) $ 8,300 $ (46,364 ) $ 63,221 $ (22,370 ) $ 91,450
 
Weighted-average common shares outstanding (basic) 151,580 151,580 149,679 149,679 143,605 143,605 148,558 148,558 149,266 149,266
Effect of dilutive securities:
Stock options, unvested restricted stock and other   -     14,224   -     12,525   -     13,723   -     12,954   -     16,063
Weighted-average common shares outstanding for diluted computation   151,580     165,804   149,679     162,204   143,605     157,328   148,558     161,512   149,266     165,329
 
Net income (loss) per share attributable to Cypress - basic $ (0.09 ) $ 0.10 $ (0.06 ) $ 0.15 $ (0.15 ) $ 0.06 $ (0.31 ) $ 0.43 $ (0.15 ) $ 0.61
Net income (loss) per share attributable to Cypress - diluted $ (0.09 ) $ 0.09 $ (0.06 ) $ 0.14 $ (0.15 ) $ 0.05 $ (0.31 ) $ 0.39 $ (0.15 ) $ 0.55
                                       
 
                                       
December 29, September 30, December 30, December 29, December 30,
2013 2012 2012 2013 2012
 
Average stock price for the period ended $9.45 $11.70 $10.19 $10.59 $13.26
Common stock outstanding at period end (in thousands) 153,214 150,833 144,224 153,214 144,224
 

Notes to Non-GAAP Financial Measures

To supplement its consolidated financial results presented in accordance with GAAP, Cypress uses non-GAAP financial measures which are adjusted from the most directly comparable GAAP financial measures to exclude certain items, as described in details below. Management believes that these non-GAAP financial measures reflect an additional and useful way of viewing aspects of Cypress’s operations that, when viewed in conjunction with Cypress’s GAAP results, provide a more comprehensive understanding of the various factors and trends affecting Cypress’s business and operations. Non-GAAP financial measures used by Cypress include:

    Gross margin;
    Research and development expenses;
    Selling, general and administrative expenses;
    Operating income (loss);
    Net income (loss); and
    Diluted net income (loss) per share.

Cypress uses each of these non-GAAP financial measures for internal managerial purposes, when providing its financial results and business outlook to the public, and to facilitate period-to-period comparisons. Management believes that these non-GAAP measures provide meaningful supplemental information regarding Cypress’s 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 Cypress’s historical operating results and comparisons to competitors’ operating results.

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

There are limitations in using non-GAAP financial measures because they are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. In addition, non-GAAP financial measures may be limited in value because they exclude certain items that may have a material impact upon Cypress’s reported financial results. Management compensates for these limitations by providing investors with reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP financial measures. The non-GAAP financial measures supplement, and should be viewed in conjunction with, GAAP financial measures. Investors should review the reconciliations of the non-GAAP financial measures to their most directly comparable GAAP financial measures as provided in the accompanying press release.

As presented in the “Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures” tables in the accompanying press release, each of the non-GAAP financial measures excludes one or more of the following items:

    Stock-based compensation expense.

Stock-based compensation expense relates primarily to the equity awards such as stock options and restricted stock. Stock-based compensation is a non-cash expense that varies in amount from period to period and is dependent on market forces that are often beyond Cypress’s control. As a result, management excludes this item from Cypress’s internal operating forecasts and models. Management believes that non-GAAP measures adjusted for stock-based compensation provide investors with a basis to measure Cypress’s core performance against the performance of other companies without the variability created by stock-based compensation as a result of the variety of equity awards used by companies and the varying methodologies and subjective assumptions used in determining such non-cash expense.

    Changes in value of Cypress’s key employee deferred compensation plan.

Cypress sponsors a voluntary deferred compensation plan which provides certain key employees with the option to defer the receipt of compensation in order to accumulate funds for retirement. The amounts are held in a trust and Cypress does not make contributions to the deferred compensation plan or guarantee returns on the investment. Changes in the value of the investments under the plan are excluded from the non-GAAP measures. Management believes that such non-cash item is not related to the ongoing core business and operating performance of Cypress, as the investment contributions are made by the employees themselves.

    Restructuring charges.

Restructuring charges primarily relate to activities engaged by management to make changes related to its infrastructure in an effort to reduce costs. Restructuring charges are excluded from non-GAAP financial measures because they are not considered core operating activities and such costs have not historically occurred in each year. Although Cypress has engaged in various restructuring activities in the past, each has been a discrete event based on a unique set of business objectives. As such, management believes that it is appropriate to exclude restructuring charges from Cypress’s non-GAAP financial measures as it enhances the ability of investors to compare Cypress’s period-over-period operating results from continuing operations.

    Acquisition-related expense.

Acquisition-related expense primarily includes: (1) amortization of intangibles, which include acquired intangibles such as purchased technology, patents and trademarks, (2) costs such as advisory, legal, accounting and other professional or consulting fees related to acquisitions, (3) severance expense incurred in connection with acquisition-related headcount reduction efforts, and (4) earn-out compensation expense, which include compensation resulting from the achievement of milestones established in accordance with the terms of the acquisitions. In most cases, these acquisition-related charges are not factored into management’s evaluation of potential acquisitions or Cypress’s performance after completion of acquisitions, because they are not related to Cypress’s core operating performance. Adjustments of these items provide investors with a basis to compare Cypress against the performance of other companies without the variability caused by purchase accounting.

    Impairment of assets.

Cypress wrote down the book value of certain assets to their estimated fair value as management determined these assets will be donated, sold or will have no future benefit. Cypress excludes these items because the expense is not reflective of its ongoing operating results. Excluding this data allows investors to better compare Cypress’s period-over-period performance without such expense.

    Taxes, tax effects and foreign currency gain/loss.

Cypress adjusts for the income tax effect that resulted from the non-GAAP adjustments as described above. Additionally, Cypress also excludes the impact of items that are related to historical activities in nature and not reflective of the ongoing operating results of Cypress, which can include completion of examinations by our U.S. or foreign taxing authorities, lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities. This also includes foreign currency gain or loss effects on the activities mentioned above.

    Investment-related gains/losses.

Investment-related gains/losses primarily include: (1) impairment loss related to Cypress’s investment when it determines the decline in fair value is other-than-temporary in nature, and (2) gains/losses related to the sales of its debt and equity investments. These items are excluded from non-GAAP financial measures because they are not related to the core operating activities and operating performance of Cypress, and in most cases, such transactions have not historically occurred in every quarter. As such, management believes that it is appropriate to exclude investment-related gains/losses from Cypress’s non-GAAP financial measures, as it enhances the ability of investors to compare Cypress’s period-over-period operating results.

    Patent license fee.

This fee relates to an agreement we entered into providing Cypress a license to a substantial patent portfolio, avoidance of future litigation expenses as well as future customer disruption. We determined that a portion of the agreement relates to cumulative costs for prior years. Management excluded the one-time charge which relates to prior years from the non-GAAP measures because it does not relate to Cypress’ core business or impact its ongoing operating performance.

    Non-cash compensation.

Cypress provides awards to employees who reach certain years of service with the Company. This amount represents the accrual for benefits for awards that will be paid in the future. This non-cash expense is not reflective of Cypress’s ongoing operating results and is excluded from its non-GAAP financial measures.

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