Cypress Reports Fourth Quarter and Year End 2018 Results

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.

Free Cash Flow : Free cash flow is calculated as net cash provided by (used in) operating activities, less acquisition of property, plant and equipment, net (i.e., acquisition of property, plant and equipment less proceeds received from disposition of property, plant and equipment). We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by business operations, after deducting our net payments for acquisitions and dispositions of property and equipment, which cash can then be used for strategic opportunities or other business purposes including, among others, investing in the Company's business, repurchasing stock, making strategic acquisitions, repayment of debt, and strengthening the balance sheet. A limitation of free cash flow is that it does not represent the total increase or decrease in the cash balance for the period. Management compensates for this limitation by also relying on the net increase in cash and cash equivalents and restricted cash as presented in the Company’s condensed consolidated statements of cash flows prepared in accordance with GAAP which incorporates all cash movements during the period.

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 first 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 distributors, 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 Excelon, F-RAM and EZ-PD are trademarks of Cypress Semiconductor Corporation. ZipKey is a registered trademark of Cirrent, Inc. All other trademarks are property of their owners.



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

	December 30, 2018		December 31, 2017
ASSETS
Cash, cash equivalents and short-term investments	$	285,720	$	151,596
Accounts receivable, net		324,274		295,991
Inventories		292,093		272,127
Assets held for sale		13,510		—
Property, plant and equipment, net		282,986		289,554
Goodwill and other intangible assets, net		1,864,340		2,154,592
Other assets		630,292		373,190
Total assets	$	3,693,215	$	3,537,050
LIABILITIES AND EQUITY
Accounts payable	$	210,715	$	213,101
Income tax liabilities		53,469		52,006
Revenue reserves, deferred margin and other liabilities		437,757		497,838
Revolving credit facility and long-term debt		874,235		956,513
Total liabilities		1,576,176		1,719,458
Total Cypress stockholders' equity		2,115,734		1,816,536
Non-controlling interest		1,305		1,056
Total equity		2,117,039		1,817,592
Total liabilities and equity	$	3,693,215	$	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									Twelve Months Ended
	December 30,			September 30,			December 31,			December 30,			December 31,
		2018			2018			2017			2018			2017
Revenues	$	604,474		$	673,035		$	597,547		$	2,483,840		$	2,327,771
Cost of revenues¹		379,264			413,320			375,162			1,552,385			1,545,837
Gross profit		225,210			259,715			222,385			931,455			781,934
Research and development¹		82,379			91,691			94,566			363,996			362,931
Selling, general and administrative¹		140,091			92,943			86,125			403,031			340,910
Total operating expenses		222,470			184,634			180,691			767,027			703,841
Operating income (loss)		2,740			75,081			41,694			164,428			78,093
Interest and other expense, net		(20,489	)		(15,059	)		(21,563	)		(67,845	)		(75,947	)
(Loss) income before income taxes and non-controlling interest		(17,749	)		60,022			20,131			96,583			2,146
Income tax benefit (provision)		331,447			(5,618	)		2,773			315,618			(11,157	)
Share in net loss and impairment of equity method investees		(46,497	)		(3,657	)		(56,930	)		(57,370	)		(71,772	)
Net income (loss)		267,201			50,747			(34,026	)		354,831			(80,783	)
Net (gain) loss attributable to non-controlling interests		(87	)		(52	)		12			(239	)		(132	)
Net income (loss) attributable to Cypress	$	267,114		$	50,695		$	(34,014	)	$	354,592		$	(80,915	)
Net income (loss) per share attributable to Cypress:
Basic	$	0.74		$	0.14		$	(0.10	)	$	0.99		$	(0.24	)
Diluted	$	0.72		$	0.14		$	(0.10	)	$	0.95		$	(0.24	)
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		361,616			361,631			343,011			359,324			333,451
Diluted		369,638			374,266			343,011			372,178			333,451

In 2018, certain expenses were 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 Q4 2018
							Selling,			Interest and
	Cost of			Research and			general and			other expense,
	revenues			development			administrative			net
GAAP [i]	$	379,264		$	82,379		$	140,091		$	(66,986	)
[1] Stock based compensation		3,842			6,395			9,166			—
[2] Changes in value of deferred compensation plan		(468	)		(2,377	)		(2,726	)		5,401
[3] Loss on assets held for sale¹		10,869			—			65,722			—
[4] Share in net loss and impairment of equity method investees²		—			—			—			46,496
[5] Imputed interest on convertible debt, equity component amortization on convertible debt and others		—			—			—			3,338
[6] Amortization of debt issuance costs		—			—			—			908
[7] Amortization of intangible assets		49,583			—			4,310			—
[8] Litigation settlement and other		—			(309	)		(159	)		159
[9] Restructuring charges		135			944			437			—
Non - GAAP [ii]	$	315,303		$	77,726		$	63,341		$	(10,684	)
Impact of reconciling items [ii - i]	$	(63,961	)	$	(4,653	)	$	(76,750	)	$	56,302

1.		Relates to our entry into a definitive agreement to divest the NAND business
2.		Includes $41.5 million impairment charge recorded for the investment in Deca Technologies Inc.



Table B: GAAP to Non-GAAP reconciling items: Three Months Ended Q3 2018
							Selling,			Interest and
	Cost of			Research and			general and			other expense,
	revenues			development			administrative			net
GAAP [i]	$	413,320		$	91,691		$	92,943		$	(18,716	)
[1] Stock-based compensation		5,120			8,206			10,869			—
[2] Changes in value of deferred compensation plan		136			667			768			(1,108	)
[3] Share in net loss of equity method investees		—			—			—			3,657
[4] Imputed interest on convertible debt, equity component amortization on convertible debt and others		—			—			—			6,782
[5] Amortization of acquisition-related intangible assets and other		51,565			—			4,310			—
[6] Restructuring charges		(340	)		516			9,815			—
[7] Litigation settlement and other		—			—			(486	)		(1,286	)
Non - GAAP [ii]	$	356,839		$	82,302		$	67,667		$	(10,671	)
Impact of reconciling items [ii - i]	$	(56,481	)	$	(9,389	)	$	(25,276	)	$	8,045



Table C: GAAP to Non-GAAP reconciling items: Three Months Ended Q4 2017
							Selling,			Interest and
	Cost of			Research and			general and			other expense,
	revenues			development			administrative			net
GAAP [i]	$	375,162		$	94,566		$	86,125		$	(78,493	)
[1] Stock based compensation		3,000			8,050			12,014			—
[2] Changes in value of deferred compensation plan		92			389			617			(1,210	)
[3] Merger, integration, related costs and adjustments related to assets held for sale		1,334			—			(135	)		11
[4] Share in net loss and impairment of equity method investees ¹		—			—			—			56,930
[5] Imputed interest on convertible debt, equity component amortization on convertible debt and others		—			—			—			3,378
[6] Loss on extinguishment of Spansion convertible notes		—			—			—			4,250
[7] Amortization of debt issuance costs		—			—			—			1,011
[8] Amortization of intangible assets		44,199			—			5,025			—
[9] Settlement charges and other		—			—			(1,000	)		151
[10] Restructuring charges		317			3,205			2,097			—
Non - GAAP [ii]	$	326,220		$	82,922		$	67,507		$	(13,972	)
Impact of reconciling items [ii - i]	$	(48,942	)	$	(11,644	)	$	(18,618	)	$	64,521

Includes $51.2 million impairment charge recorded for the investment in Enovix Corporation



Table D: GAAP to Non-GAAP reconciling items: Twelve Months Ended Q4 2018
							Selling,			Interest and
	Cost of			Research and			general and			other expense,
	revenues			development			administrative			net
GAAP [i]	$	1,552,385		$	363,996		$	403,031		$	(125,215	)
[1] Stock based compensation, including costs related to modification of equity awards		16,531			35,115			44,319			—
[2] Changes in value of deferred compensation plan		(169	)		(971	)		(1,036	)		2,904
[3] Share in net loss and impairment of equity method investees¹		—			—			—			57,369
[4] Amortization of intangible assets		200,024			—			18,125			—
[5] Imputed interest on convertible debt, equity component amortization on convertible debt and others		—			—			—			17,966
[6] Amortization of debt issuance cost		—			—			—			1,981
[7] Settlement charges and other		—			(309	)		(645	)		(1,111	)
[8] Restructuring charges		3,271			1,785			11,785			—
[9] Loss on extinguishment of Spansion convertible notes		—			—			—			3,258
[10] Loss on assets held for sale²		10,869			—			65,722			—
[11] Gain on sale on cost method investment		—			—			(1,521	)		—
Non - GAAP [ii]	$	1,321,859		$	328,376		$	266,282		$	(42,848	)
Impact of reconciling items [ii - i]	$	(230,526	)	$	(35,620	)	$	(136,749	)	$	82,367

1.		Includes $41.5 million impairment charge recorded for the investment in Deca Technologies Inc.
2.		Relates to our entry into a definitive agreement to divest the NAND business



Table E: GAAP to Non-GAAP reconciling items: Twelve Months Ended Q4 2017
							Selling,			Interest and
	Cost of			Research and			general and			other expense,
	revenues			development			administrative			net
GAAP [i]	$	1,545,837		$	362,931		$	340,910		$	(147,720	)
[1] Stock based compensation, including costs related to modification of equity awards		15,605			36,804			39,172			—
[2] Changes in value of deferred compensation plan		602			2,826			3,936			(6,087	)
[3] Merger, integration, related costs and adjustments related to assets held for sale		5,357			(96	)		(1,057	)		10
[4] Inventory Step-up related to acquisition accounting		3,736			—			—			—
[5] Share in net loss and impairment of equity method investees¹		—			—			—			71,772
[6] Amortization of intangible assets		174,981			—			20,274			—
[7] Imputed interest on convertible debt and others		—			—			—			20,538
[8] Settlement charges and other		—			—			2,500			844
[9] Restructuring charges		548			5,915			2,625			—
[10] Loss on extinguishment of Spansion convertible notes		—			—			—			4,250
Non - GAAP [ii]	$	1,345,008		$	317,482		$	273,460		$	(56,393	)
Impact of reconciling items [ii - i]	$	(200,829	)	$	(45,449	)	$	(67,450	)	$	91,327

Includes $51.2 million impairment charge recorded for the investment in Enovix Corporation.



Table F: Non-GAAP gross profit	Three Months Ended									Twelve Months Ended
	Q4'18			Q3'18			Q4'17			Q4'18			Q4'17

GAAP gross profit	$	225,210		$	259,715		$	222,385		$	931,455		$	781,934
Impact of reconciling items on cost of revenues (Table A, B, C, D and E)		63,961			56,481			48,942			230,526			200,829
Non-GAAP gross profit	$	289,171		$	316,196		$	271,327		$	1,161,981		$	982,763
GAAP gross margin (GAAP gross profit/revenue)		37.3	%		38.6	%		37.2	%		37.5	%		33.6	%
Non-GAAP gross margin (Non-GAAP gross profit/revenue)		47.8	%		47.0	%		45.4	%		46.8	%		42.2	%



Table G: Non-GAAP operating income	Three Months Ended									Twelve Months Ended
	Q4'18			Q3'18			Q4'17			Q4'18			Q4'17
GAAP operating income [i]	$	2,740		$	75,081		$	41,694		$	164,428		$	78,093
Impact of reconciling items on cost of revenues (see Table A, B, C, D, E)		63,961			56,481			48,942			230,526			200,829
Impact of reconciling items on R&D (see Tables A, B, C, D, E)		4,653			9,389			11,644			35,620			45,449
Impact of reconciling items on SG&A (see Tables A, B, C, D, E)		76,750			25,276			18,618			136,749			67,450
Non-GAAP operating income [ii]	$	148,104		$	166,227		$	120,898		$	567,323		$	391,821
Impact of reconciling items on operating income [ii - i]	$	145,364		$	91,146		$	79,204		$	402,895		$	313,728
GAAP operating margin (GAAP operating income / revenue)		0.5	%		11.2	%		7.0	%		6.6	%		3.4	%
Non-GAAP operating margin (Non-GAAP operating income / revenue)		24.5	%		24.7	%		20.2	%		22.8	%		16.8	%



Table H: Non-GAAP pre-tax profit	Three Months Ended									Twelve Months Ended
	Q4'18			Q3'18			Q4'17			Q4'18			Q4'17
GAAP (loss) income before income taxes and non-controlling interest ("Pre-tax income")	$	(17,749	)	$	60,022		$	20,131		$	96,583		$	2,146
Share in net loss and impairment of equity method investees		(46,497	)		(3,657	)		(56,930	)		(57,370	)		(71,772	)
Impact of reconciling items on operating income (see Table G)		145,364			91,146			79,204			402,895			313,728
Impact of reconciling items on interest and other expense, net (see Table A, B, C, D, E)		56,302			8,045			64,521			82,367			91,327
Non-GAAP pre-tax profit	$	137,420		$	155,556		$	106,926		$	524,475		$	335,429
GAAP pre-tax profit margin (GAAP pre-tax income/revenue)		(2.9	)%		8.9	%		3.4	%		3.9	%		0.1	%
Non-GAAP pre-tax profit margin (Non-GAAP pre-tax profit/revenue)		22.7	%		23.1	%		17.9	%		21.1	%		14.4	%



Table I: Non-GAAP income tax expense	Three Months Ended									Twelve Months Ended
	Q4'18			Q3'18			Q4'17			Q4'18			Q4'17
GAAP income tax (benefit) provision [i]	$	(331,447	)	$	5,618		$	(2,773	)	$	(315,618	)	$	11,157
[1] Stock-based compensation		4,075			5,081			8,073			20,152			32,054
[2] Changes in value of deferred compensation plan		(36	)		97			(39	)		153			447
[3] Merger, integration, related costs and adjustments related to assets held for sale		57			—			424			57			1,475
[4] Inventory step-up related to acquisition accounting		—			—			—			—			1,308
[5] Share in net loss and impairment of equity method investees		9,764			768			19,926			12,047			25,120
[6] Imputed interest on convertible debt, equity component amortization on convertible debt and others		892			1,424			1,536			3,964			5,218
[7] Amortization of debt issuance costs		—			—			—			225			1,971
[8] Amortization of acquisition-related intangible assets and other		11,202			11,734			17,228			45,696			68,339
[9] Restructuring charges		318			2,098			1,967			3,537			3,181
[10] Settlement charges		(6	)		—			(350	)		(6	)		875
[11] Loss on extinguishment of Spansion convertible notes		16,084			—			1,488			16,768			1,488
[12] Gain on sale of cost method investment		—			—			—			(319	)		—
[13] Uncertain tax positions		(3,945	)		(2,159	)		(3,769	)		(8,815	)		(6,228	)
[14] Valuation allowance release, utilization of NOLs including excess tax benefits, and others**		299,385			(21,882	)		(41,457	)		237,420			(135,365	)
Non-GAAP income tax expense [ii]*	$	6,343		$	2,779		$	2,254		$	15,261		$	11,040
Impact of reconciling items on income tax provision [i - ii]	$	(337,790	)	$	2,839		$	(5,027	)	$	(330,879	)	$	117

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