Cypress Reports Second Quarter 2018 Results

Revenue from an intellectual property license;
Changes in value of deferred compensation plan assets and liabilities;
Investment-related gains or losses, including equity method investments;
Restructuring and related costs;
Debt issuance costs, including imputed interest related to the equity component of convertible debt;
Asset impairments;
Tax effects of non-GAAP adjustments;
Certain other expenses and benefits; and
Diluted weighted average shares non-GAAP adjustment - for purposes of calculating non-GAAP diluted earnings per share, the GAAP diluted weighted average shares outstanding is adjusted to exclude the benefits related to stock-based compensation expense, and include the impact of the capped call options related to the outstanding convertible notes.

Adjusted EBITDA: Adjusted EBITDA is calculated by adjusting net income (loss) attributable to Cypress to exclude (without duplication): interest expense, income tax provision, depreciation, amortization, equity in net loss of equity method investees, and the non-GAAP adjustments described above (acquisition related charges, stock-based compensation expense, and other adjustments). Commencing in the second quarter of 2018, Cypress reconciles adjusted EBITDA to GAAP net income rather than operating income; prior period reconciliation tables have been revised to conform to the current presentation. Adjusted EBITDA may be useful to management, investors and other users of our financial information because the exclusion of certain gains, losses, and expenses facilitates comparisons of Cypress' operating performance on a period to period basis. Adjusted EBITDA should not be considered as a measure of discretionary cash available to invest in the growth of the business. In addition, adjusted EBITDA should not be considered as a substitute for, or superior to net income attributable to Cypress, operating income, or diluted earnings per share, or other financial measures prepared in accordance with GAAP.

FORWARD-LOOKING STATEMENTS

Statements in this press release that are not historical facts and that refer to Cypress or its subsidiaries’ plans and expectations for the future are forward-looking statements as such term is used in the Private Securities Litigation Reform Act of 1995. We may use words such as “may,” "will," “should,” “plan,” “anticipate,” “believe,” “expect,” “future,” “intend,” “estimate,” “predict,” “potential,” “continue” or similar expressions identify forward-looking statements. This press release includes, among others, forward-looking statements regarding our third quarter financial outlook (as well as the related GAAP to non-GAAP reconciling items). Our forward-looking statements are based on the expectations, beliefs, and intentions of, and the information available to, our executive management on the date of this press release. Forward-looking statements involve risks and uncertainties, and readers are cautioned not to place undue reliance on forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: potential tariffs and other disruptions in the international trade and investment environment; global economic and market conditions; our ability to execute on our Cypress 3.0 strategy and our margin improvement plan; risks related to paying down our indebtedness and meeting the covenants in our debt agreements; our efforts to retain and expand our customer base; business conditions and growth trends in the semiconductor market; competition; volatility in supply and demand for our products, including but not limited to the impact of seasonality on supply and demand; our ability to develop, introduce and sell new products and technologies; potential problems relating to our manufacturing activities; reliance on distributers, resellers, third-party manufacturers, and others; risks related to our “take or pay” agreements with certain vendors; the risk of defects, errors, or security vulnerabilities in our products; the impact of acquisitions; our ability to attract and retain key personnel; the unpredictability and expense of legal proceedings; and other risks and uncertainties described in the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and “Quantitative and Qualitative Disclosures about Market Risk” sections in our most recent Annual Report on Form 10-K and in our subsequent quarterly filings with the Securities and Exchange Commission which are available on our investor relations website at http://investors.cypress.com/financial-information/sec-filings. We assume no responsibility to update our forward-looking statements.

Cypress, the Cypress logo and PSoC are registered trademarks and Semper and EZ-PD are trademarks of Cypress Semiconductor Corporation. All other trademarks are property of their owners.


CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

	July 1, 2018		December 31, 2017

ASSETS
Cash, cash equivalents and short-term investments	$	112,718	$	151,596
Accounts receivable, net	404,524		295,991
Inventories	286,761		272,127
Property, plant and equipment, net	291,026		289,554
Goodwill and other intangible assets, net	2,046,609		2,154,592
Other assets	362,859		373,190
Total assets	$	3,504,497	$	3,537,050
LIABILITIES AND EQUITY
Accounts payable	$	225,619	$	213,101
Income tax liabilities	55,729		52,006
Revenue reserves, deferred margin and other liabilities	480,436		497,838
Revolving credit facility and long-term debt	883,741		956,513
Total liabilities	1,645,525		1,719,458
Total Cypress stockholders' equity	1,857,816		1,816,536
Non-controlling interest	1,156		1,056
Total equity	1,858,972		1,817,592
Total liabilities and equity	$	3,504,497	$	3,537,050


CYPRESS SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
ON A GAAP BASIS
(In thousands, except per-share data)
(Unaudited)

	Three Months Ended									Six Months Ended
	July 1, 2018			April 1, 2018			July 2, 2017			July 1, 2018			July 2, 2017
Revenues	$	624,090		$	582,241		$	593,776		$	1,206,331		$	1,125,650
Cost of revenue ¹	389,952			369,849			401,031			759,801			775,797
Gross profit	234,138			212,392			192,745			446,530			349,853
Research and development ¹	96,693			93,233			88,595			189,926			177,943
Selling, general and administrative ¹	86,599			83,397			95,258			169,996			176,591
Total operating expenses	183,292			176,630			183,853			359,922			354,534
Operating income (loss)	50,846			35,762			8,892			86,608			(4,681		)
Interest and other expense, net	(14,143		)	(18,154		)	(16,407		)	(32,297		)	(35,766		)
Income (loss) before income taxes and non-controlling interest	36,703			17,608			(7,515		)	54,311			(40,447		)
Income tax provision	(5,154		)	(5,057		)	(4,504		)	(10,211		)	(9,431		)
Equity in net loss of equity method investees	(3,755		)	(3,461		)	(4,835		)	(7,216		)	(9,911		)
Net income (loss)	27,794			9,090			(16,854		)	36,884			(59,789		)
Net gain attributable to non-controlling interests	(88		)	(12		)	(66		)	(100		)	(130		)
Net income (loss) attributable to Cypress	$	27,706		$	9,078		$	(16,920	)	$	36,784		$	(59,919	)
Net income (loss) per share attributable to Cypress:
Basic	$	0.08		$	0.03		$	(0.05	)	$	0.10		$	(0.18	)
Diluted	$	0.07		$	0.02		$	(0.05	)	$	0.10		$	(0.18	)
Cash dividend declared per share	$	0.11		$	0.11		$	0.11		$	0.22		$	0.22
Shares used in net income (loss) per share calculation:
Basic	358,577			355,461			329,860			356,123			328,320
Diluted	371,967			370,592			329,860			370,402			328,320

1.			In 2018, certain expenses have been reclassified as part of cost of revenue and operating expenses. Historical results have been conformed with the 2018 presentation.


CYPRESS SEMICONDUCTOR CORPORATION
RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES
(In thousands, except per-share data)
(Unaudited)

Table A: GAAP to non-GAAP reconciling items: Three Months Ended Q2 2018
							Selling, general			Interest and			Income tax
	Cost of			Research and			and			other			(provision)
	revenues			development			administrative			expense, net			benefit
GAAP [i]	$	389,952		$	96,693		$	86,599		$	(17,898	)	$	(5,154	)
[1] Stock-based compensation	3,986			13,800			16,121			—			—
[2] Changes in value of deferred compensation plan	102			467			572			(1,123		)	—
[3] Equity in net loss of equity method investees	—			—			—			3,755			—
[4] Imputed interest on convertible debt, equity component amortization on convertible debt and others	—			—			—			4,415			—
[5] Amortization of acquisition-related intangible assets and other	49,438			—			4,355			—			—
[6] Gain on sale of cost method investment	—			—			(1,521		)	—			—
[7] Restructuring charges	1,589			33			(383		)	—			—
[8] Tax impact of non-GAAP adjustments	—			—			—			(377		)	2,029
Non - GAAP [ii]	$	334,837		$	82,393		$	67,455		$	(11,228	)	$	(3,125	)
Impact of reconciling items [ii - i]	$	(55,115	)	$	(14,300	)	$	(19,144	)	$	6,670		$	2,029


Table B: GAAP to non-GAAP reconciling items: Three Months Ended Q1 2018
										Interest and			Income tax
	Cost of			Research and			Selling, general			other expense,			(provision)
	revenues			development			and administrative			net			benefit
GAAP [i]	$	369,849		$	93,233		$	83,397		$	(21,615	)	$	(5,057	)
[1] Stock-based compensation	3,584			6,713			8,161			—			—
[2] Changes in value of deferred compensation plan	61			272			350			(266		)	—
[3] Equity in net loss and impairment of equity method investees	—			—			—			3,461			—
[4] Imputed interest on convertible debt, equity component amortization on convertible debt and others	—			—			—			3,431			—
[5] Loss on extinguishment of Spansion convertible notes	—			—						3,258			—
[6] Amortization of debt issuance costs	—			—			—			1,073			—
[7] Amortization of acquisition-related intangible assets	49,438			—			5,150			—			—
[8] Restructuring charges	1,887			292			1,917			—			—
[9] Tax impact of non-GAAP adjustments	—			—			—			393			2,043
Non - GAAP [ii]	$	314,879		$	85,956		$	67,819		$	(10,265	)	$	(3,014	)
Impact of reconciling items [ii - i]	$	(54,970	)	$	(7,277	)	$	(15,578	)	$	11,350		$	2,043


Table C: GAAP to Non-GAAP reconciling items: Three Months Ended Q2 2017
				Research			Selling,			Interest and			Income tax
				and			general and			other			(provision)
	Cost of revenues			development			administrative			expense, net			benefit
GAAP [i]	$	401,031		$	88,595		$	95,258		$	(21,242	)	$	(4,504	)
[1] Stock based compensation	4,000			9,776			10,574			—			—
[2] Changes in value of deferred compensation plan	137			563			896			(1,584		)	—
[3] Merger, integration, related costs and adjustments related to assets held for sale	1,336			(96		)	1,193			—			—
[4] Inventory step-up related to acquisition accounting	167			—			—			—			—
[5] Equity in net loss and impairment of equity method investees	—			—			—			4,835			—
[6] Imputed interest on convertible debt, equity component amortization on convertible debt and others	—			—			—			3,507			—
[7] Amortization of debt issuance costs	—			—			—			920			—
[8] Amortization of acquisition-related intangible assets	44,270			—			5,084			—			—
[9] Restructuring charges	—			358			540			—			—
[10] Settlement charges	—			—			3,500			—			—
[11] Tax impact of non-GAAP adjustments	—			—			—			227			1,421
Non - GAAP [ii]	$	351,121		$	77,994		$	73,471		$	(13,337	)	$	(3,083	)
Impact of reconciling items [ii - i]	$	(49,910	)	$	(10,601	)	$	(21,787	)	$	7,905		$	1,421


Table D: GAAP to non-GAAP reconciling items: Six Months Ended Q2 2018
				Research				SG&A and								Income tax
	Cost of			and				Restructuring				Interest and other				(provision)
	revenues			development				costs				expense, net				benefit
GAAP [i]	$	759,801			$	189,926			$	169,996			$	(39,513	)	$	(10,211	)
[1] Stock-based compensation	7,569			20,514				24,283				—				—
[2] Changes in value of deferred compensation plan	163			739				922				(1,389			)	—
[3] Equity in net loss and impairment of equity method investees	—			—				—				7,216				—
[4] Imputed interest on convertible debt, equity component amortization on convertible debt and others	—			—				—				7,846				—

[5] Loss on extinguishment of Spansion convertible notes and debt issuance cost write off due to refinancing	—			—				—				3,258				—
[6] Amortization of debt issuance costs	—			—				—				1,073				—
[7] Amortization of acquisition-related intangible assets and other	98,876			—				9,505				—				—
[8] Gain on sale of cost method investment	—			—				(1,521			)	—				—
[9] Restructuring charges	3,476			325				1,533				—				—
[10] Tax impact of non-GAAP adjustments	—			—				—				16				4,072
Non - GAAP [ii]	$	649,717			$	168,348			$	135,274			$	(21,493	)	$	(6,139	)
Impact of reconciling items [ii - i]	$	(110,084	)		$	(21,578	)		$	(34,722	)		$	18,020		$	4,072


Table E: GAAP to non-GAAP reconciling items: Six Months Ended Q2 2017
				Research			Selling,			Interest and			Income tax
	Cost of			and			general and			other			(provision)
	revenues			development			administrative			expense, net			benefit
GAAP [i]	$	775,797		$	177,943		$	176,591		$	(45,677	)	$	(9,431	)
[1] Stock-based compensation	7,885			20,062			19,557			—			—
[2] Changes in value of deferred compensation plan	304			1,160			1,904			(3,142		)	—
[3] Merger, integration, related costs and adjustments related to assets held for sale	2,686			(96		)	(286		)	—			—
[4] Inventory step-up related to acquisition accounting	3,031			—			—			—			—
[5] Equity in net loss and impairment of equity method investees	—			—			—			9,911			—
[6] Imputed interest on convertible debt, equity component amortization on convertible debt and others	—			—			—			6,996			—
[7] Amortization of debt issuance costs	—			—			—			1,778			—
[8] Amortization of acquisition-related intangible assets	87,437			—			10,167			—			—
[9] Restructuring charges	231			2,710			528			—			—
[10] Settlement charges	—			—			3,500			—			—
[11] Tax impact of non-GAAP adjustments	—			—			—			642			3,546
Non - GAAP [ii]	$	674,223		$	154,107		$	141,221		$	(29,492	)	$	(5,885	)
Impact of reconciling items [ii - i]	$	(101,574	)	$	(23,836	)	$	(35,370	)	$	16,185		$	3,546


Table F: Non-GAAP gross profit	Three Months Ended									Six Months Ended
	Q2'18			Q1'18			Q2'17			Q2'18			Q2'17
GAAP gross profit	$	234,138		$	212,392		$	192,745		$	446,530		$	349,853
Impact of reconciling items on cost of revenues (Table A, B, C, D and E)	(55,115		)	(54,970		)	(49,910		)	(110,084		)	(101,574		)
Non-GAAP gross profit	$	289,253		$	267,362		$	242,655		$	556,614		$	451,427
GAAP gross margin (GAAP gross profit/revenue)	37.5		%	36.5		%	32.5		%	37.0		%	31.1		%
Non-GAAP gross margin (Non-GAAP gross profit/revenue)	46.3		%	45.9		%	40.9		%	46.1		%	40.1		%


Table G: Non-GAAP operating income	Three Months Ended									Six Months Ended
	Q2'18			Q1'18			Q2'17			Q2'18			Q2'17
GAAP operating income (loss) [i]	$	50,846		$	35,762		$	8,892		$	86,608		$	(4,681	)
Impact of reconciling items on cost of revenues (see Table A, B, C, D, E)	55,115			54,970			49,910			110,084			101,574
Impact of reconciling items on R&D (see Table A, B, C, D, E)	14,300			7,277			10,601			21,578			23,836
Impact of reconciling items on SG&A (see Table A, B, C, D, E)	19,144			15,578			21,787			34,722			35,370
Non-GAAP operating income [ii]	$	139,405		$	113,587		$	91,190		$	252,992		$	156,099
Impact of reconciling items on operating income [ii - i]	$	88,559		$	77,825		$	82,298		$	166,384		$	160,780
GAAP operating margin (GAAP operating income / revenue)	8.1		%	6.1		%	1.5		%	7.2		%	(0.4		)%
Non-GAAP operating margin (Non-GAAP operating income / revenue)	22.3		%	19.5		%	15.4		%	21.0		%	13.9		%


Table H: Non-GAAP pre-tax profit	Three Months Ended									Six Months Ended
	Q2'18			Q1'18			Q2'17			Q2'18			Q2'17
GAAP income (loss) before income taxes and non-controlling interest ("Pre-tax income")	$	36,703		$	17,608		$	(7,515	)	$	54,311		$	(40,447	)
Equity in net loss and impairment of equity method investees	(3,755		)	(3,461		)	(4,835		)	(7,216		)	(9,911		)
Impact of reconciling items on operating income (see Table G)	88,559			77,825			82,298			166,384			160,780
Impact of reconciling items on interest and other expense, net (see Table A, B, C, D, E)	6,670			11,350			7,905			18,020			16,185
Non-GAAP pre-tax profit	$	128,177		$	103,322		$	77,853		$	231,499		$	126,607
GAAP pre-tax profit margin (GAAP pre-tax income/revenue)	5.9		%	3.0		%	(1.3		)%	4.5		%	(3.6		)%
Non-GAAP pre-tax profit margin (Non-GAAP pre-tax profit/revenue)	20.5		%	17.7		%	13.1		%	19.2		%	11.2		%

Table I: Non-GAAP net income (loss)
	Three Months Ended							Six Months Ended
	Q2'18		Q1'18		Q2'17			Q2'18		Q2'17
GAAP net income (loss) attributable to Cypress	$	27,706	$	9,078	$	(16,920	)	$	36,784	$	(59,919	)
Impact of reconciling items on operating income (see Table G)	88,559		77,825		82,298			166,384		160,780
Impact of reconciling items on interest and other expense, net (see Table A, B, C, D, E)	6,670		11,350		7,905			18,020		16,185
Impact of reconciling items on income tax (provision) benefit (see Table A, B, C, D, E)	2,029		2,043		1,421			4,072		3,546
Non-GAAP net income	$	124,964	$	100,296	$	74,704		$	225,260	$	120,592

Table J: Weighted-average shares, diluted

Three Months Ended

Q2'18

Q1'18

Q2'17

GAAP

Non-GAAP

GAAP

Non-GAAP

GAAP

Non-GAAP

Weighted-average common shares outstanding, basic

358,577

355,461

329,860

Effect of dilutive securities:

Stock options, unvested restricted stock and other

7,837

14,391

7,897

12,515

—

15,822

Convertible notes

5,553

3,070

7,234

4,750

—

18,208

Weighted-average common shares outstanding, diluted

371,967

376,038

370,592

372,726

329,860

363,890

Table K: Weighted-average shares, diluted

Six Months Ended

Q2'18

Q2'17

GAAP

Non-GAAP

GAAP

Non-GAAP

Weighted-average common shares outstanding, basic

356,123

328,320

Effect of dilutive securities:

Stock options, unvested restricted stock and other

7,879

13,071

—

15,466

Convertible notes

6,400

3,916

—

17,791

Weighted-average common shares outstanding, diluted

370,402

373,110

328,320

361,577


Table L: Net income (loss) per share
	Three Months Ended
	Q2'18				Q1'18				Q2'17
	GAAP		Non-GAAP		GAAP		Non-GAAP		GAAP			Non-GAAP
Net income (loss) (see Table I) [i]	$	27,706	$	124,964	$	9,078	$	100,296	$	(16,920	)	$	74,704
Weighted-average common shares outstanding, diluted (see Table J) [ii]	371,967		376,038		370,592		372,726		329,860			363,890
Earnings per share - diluted [i/ii]	$	0.07	$	0.33	$	0.02	$	0.27	$	(0.05	)	$	0.21


Table M: Net income (loss) per share
	Six Months Ended
	Q2'18				Q2'17
	GAAP		Non-GAAP		GAAP			Non-GAAP
Net income (loss) (see Table I) [i]	$	36,784	$	225,260	$	(59,919	)	$	120,592
Weighted-average common shares outstanding (see Table K) [ii]	370,402		373,110		328,320			361,577
Earnings per share - diluted [i/ii]	$	0.10	$	0.60	$	(0.18	)	$	0.33


Table N: Adjusted EBITDA
	Three Months Ended									Six Months Ended
	Q2'18			Q1'18			Q2'17			Q2'18			Q2'17
GAAP net income (loss) attributable to Cypress	$	27,706		$	9,078		$	(16,920	)	$	36,784		$	(59,919	)
Interest and other expense, net	(14,143		)	(18,154		)	(16,407		)	(32,297		)	(35,766		)
Income tax provision	(5,154		)	(5,057		)	(4,504		)	(10,211		)	(9,431		)
Equity in net loss of and impairment of equity method investees	(3,755		)	(3,461		)	(4,835		)	(7,216		)	(9,911		)
Net gain (loss) attributable to non-controlling interests	(88		)	(12		)	(66		)	(100		)	(130		)
GAAP operating income	$	50,846		$	35,762		$	8,892		$	86,608		$	(4,681	)
Impact of reconciling items on operating income (see Table G)	88,559			77,825			82,298			166,384			160,780
Non-GAAP operating income	$	139,405		$	113,587		$	91,190		$	252,992		$	156,099
Depreciation	16,239			17,140			16,045			33,379			32,202
Adjusted EBITDA	$	155,644		$	130,727		$	107,235		$	286,371		$	188,301


CYPRESS SEMICONDUCTOR CORPORATION
SUPPLEMENTAL FINANCIAL DATA
(In thousands)
(Unaudited)

	Three Months Ended									Six Months Ended
	July 1, 2018			April 1, 2018			July 2, 2017			July 1, 2018			July 2, 2017
Selected Cash Flow Data (Preliminary):
Net cash provided by operating activities	$	110,734		$	31,678		$	32,447		$	142,412		$	58,168
Net cash (used in) provided by investing activities	$	(7,213	)	$	(14,173	)	$	(14,992	)	$	(21,386	)	$	6,658
Net cash used in financing activities	$	(97,556	)	$	(62,348	)	$	(30,184	)	$	(159,904	)	$	(76,227	)
Other Supplemental Data (Preliminary):
Capital expenditures	$	25,593		$	17,267		$	15,577		$	42,860		$	29,349
Depreciation	$	16,239		$	17,140		$	16,045		$	33,379		$	32,202
Payment of dividend	$	39,404		$	38,741		$	36,217		$	78,145		$	71,754
Dividend paid per share	$	0.11		$	0.11		$	0.11		$	0.22		$	0.22
Total debt (principal amount)	$	955,553		$	1,017,588		$	1,280,390		$	955,553		$	1,280,390
Leverage ratio	1.71			2.00			3.42			1.71			3.42

CYPRESS SEMICONDUCTOR CORPORATION

RECONCILIATION OF GAAP FORWARDING-LOOKING ESTIMATES TO NON-GAAP FORWARD-

LOOKING ESTIMATES

Forward-looking

Non-GAAP

GAAP estimate

estimate

(A)

Adjustments (B)

(C)=(A)+(B)

Stock-based

Amortization of

compensation

Other

intangibles

expense

items

Gross margin

38.0% - 39.0%

7.4

0.7

0.4

46.5% - 47.5%

Diluted earnings per share

$0.11 to $0.15

0.14

0.07

0.04

$0.36 to $0.40

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