Cypress Reports Second Quarter 2019 Results

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.

ADDITIONAL INFORMATION AND WHERE TO FIND IT

This press release may be deemed to be solicitation material in respect of the proposed Merger. This press release does not constitute an offer to sell or the solicitation of an offer to buy our securities or the solicitation of any vote or approval. The proposed Merger will be submitted to Cypress’ stockholders for their consideration. In connection with the proposed transaction, Cypress has filed a definitive proxy statement with the SEC on July 16, 2019 and other relevant materials with the SEC in connection with the solicitation of proxies in connection with the proposed transaction. The definitive proxy statement has been mailed to Cypress’ stockholders. BEFORE MAKING ANY VOTING OR INVESTMENT DECISION WITH RESPECT TO THE PROPOSED TRANSACTION, INVESTORS AND STOCKHOLDERS OF CYPRESS SEMICONDUCTOR CORPORATION ARE URGED TO READ THE DEFINITIVE PROXY STATEMENT REGARDING THE PROPOSED TRANSACTION (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) AND OTHER RELEVANT MATERIALS CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. The proxy statement, any amendments or supplements thereto and other relevant materials, and any other documents filed by Cypress with the SEC, may be obtained once such documents are filed with the SEC free of charge at the SEC’s website at www.sec.gov.

In addition, Cypress’ stockholders may obtain free copies of the documents we file with the SEC through the Investors portion of Cypress’ website at investors.cypress.com under the link “Financials & Filings” and then under the link “SEC Filings” or by contacting Cypress’ Investor Relations Department by (a) mail at Cypress Semiconductor Corporation, Attention: Investor Relations, 198 Champion Ct., San Jose, CA 95134, (b) telephone at (408) 943-2600, or (c) e-mail at Email Contact.

PARTICIPANTS IN SOLICITATION

Cypress and certain of its executive officers, directors, other members of management and employees may, under the rules of the SEC, be deemed to be “participants” in the solicitation of proxies from Cypress’ stockholders in connection with the proposed transaction. Information regarding the persons who may be considered “participants” in the solicitation of proxies is set forth in Cypress’ definitive proxy statement filed with the SEC on July 16, 2019 and other relevant documents to be filed with the SEC in connection with the proposed transaction, each of which can be obtained free of charge from the sources indicated above when they become available. Information regarding certain of these persons and their beneficial ownership of Cypress’ common stock is also set forth in Cypress’ definitive proxy statement on Schedule 14A for its 2019 annual meeting of stockholders filed on March 15, 2019 with the SEC, which can be obtained free of charge from the sources indicated above.

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


	June 30, 2019		December 30, 2018

ASSETS
Cash, cash equivalents and short-term investments	$	372,180	$	285,720
Accounts receivable, net	267,763		324,274
Inventories	335,251		292,093
Assets held for sale	—		13,510
Property, plant and equipment, net	268,723		282,986
Goodwill and other intangible assets, net	1,760,564		1,864,340
Other assets	643,995		630,292
Total assets	$	3,648,476	$	3,693,215
LIABILITIES AND EQUITY
Accounts payable	$	182,826	$	210,715
Income tax liabilities	50,385		53,469
Revenue reserves, deferred margin and other liabilities	451,955		437,757
Revolving credit facility and long-term debt	854,304		874,235
Total liabilities	1,539,470		1,576,176
Total Cypress stockholders' equity	2,107,706		2,115,734
Non-controlling interest	1,300		1,305
Total equity	2,109,006		2,117,039
Total liabilities and equity	$	3,648,476	$	3,693,215

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
	June 30, 2019			March 31, 2019			July 1, 2018			June 30, 2019			July 1, 2018
Revenues	$	532,221		$	539,004		$	624,090		$	1,071,225		$	1,206,331
Cost of revenue	333,463			336,595			389,952			670,058			759,801
Gross profit	198,758			202,409			234,138			401,167			446,530
Research and development	93,639			88,606			96,693			182,245			189,926
Selling, general and administrative	91,633			81,987			86,599			173,620			169,996
Total operating expenses	185,272			170,593			183,292			355,865			359,922
Operating income	13,486			31,816			50,846			45,302			86,608
Interest and other expense, net	(12,003		)	(9,244		)	(14,143		)	(21,246		)	(32,297		)
Income before income taxes, share in net loss of equity method investee and non-controlling interest	1,483			22,572			36,703			24,056			54,311
Income tax provision	18,189			730			(5,154		)	18,919			(10,211		)
Share in net loss and impairment of equity method investees	(32,405		)	(3,590		)	(3,755		)	(35,995		)	(7,216		)
Net (loss) income	(12,733		)	19,712			27,794			6,980			36,884
Net gain attributable to non-controlling interests	4			2			(88		)	5			(100		)
Net (loss) income attributable to Cypress	$	(12,729	)	$	19,714		$	27,706		$	6,985		$	36,784
Net (loss) income per share attributable to Cypress:
Basic	$	(0.03	)	$	0.05		$	0.08		$	0.02		$	0.10
Diluted	$	(0.03	)	$	0.05		$	0.07		$	0.02		$	0.10
Cash dividend declared per share	$	0.11		$	0.11		$	0.11		$	0.22		$	0.22
Shares used in net (loss) income per share calculation:
Basic	365,600			363,700			358,577			364,842			356,123
Diluted	365,600			373,131			371,967			377,195			370,402

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 2019
	*Cost of revenues*			Research and development			Selling, general and administrative			Interest and other expense, net
GAAP [i]	$	333,463		$	93,639		$	91,633		$	(44,408	)
[1] Stock-based compensation	2,817			12,304			15,359			—
[2] Changes in value of deferred compensation plan	130			632			627			(1,145		)
[3] Share in net loss and impairment of equity method investees ¹	—			—			—			32,405
[4] Imputed interest on convertible debt, equity component amortization on convertible debt and others	—			—			—			3,276
[5] Amortization of debt issuance costs	—			—			—			929
[6] Amortization of acquisition-related intangible assets and other	47,293			—			4,304			—
[7] Restructuring charges	1,018			1,362			641			—
[8] Merger-related expenses	—			—			8,409			—
[9] Other income and expenses	—			—			32			(103		)
Non - GAAP [ii]	$	282,205		$	79,341		$	62,261		$	(9,046	)
Impact of reconciling items [ii - i]	$	(51,258	)	$	(14,298	)	$	(29,372	)	$	35,362

1.	Includes a $29.5 million impairment charge recorded for the investment in Deca Technologies, Inc.

Table B: GAAP to non-GAAP reconciling items: Three Months Ended Q1 2019
	*Cost of revenues*			Research and development			Selling, general and administrative			Interest and other expense, net
GAAP [i]	$	336,595		$	88,606		$	81,987		$	(12,834	)
[1] Stock-based compensation	2,684			6,680			11,031			—
[2] Changes in value of deferred compensation plan	471			2,204			2,259			(4,334		)
[3] Loss on assets held for sale	2,017			—			1,515			—
[4] Share in net loss of equity method investee	—			—			—			3,590
[5] Imputed interest on convertible debt, equity component amortization on convertible debt and others	—			—			—			3,368
[6] Amortization of debt issuance costs	—			—			—			929
[7] Amortization of acquisition-related intangible assets and other	48,217			—			4,310			—
[8] Restructuring charges and other	(49		)	—			98			—
[9] Other income and expenses	—			57			448			303
Non - GAAP [ii]	$	283,255		$	79,665		$	62,326		$	(8,978	)
Impact of reconciling items [ii - i]	$	(53,340	)	$	(8,941	)	$	(19,661	)	$	3,856

Table C: GAAP to Non-GAAP reconciling items: Three Months Ended Q2 2018
	*Cost of revenues*			Research and development			Selling, general and administrative			Interest and other expense, net
GAAP [i]	$	389,952		$	96,693		$	86,599		$	(17,898	)
[1] Stock-based compensation	3,986			13,800			16,121			—
[2] Changes in value of deferred compensation plan	102			467			572			(1,123		)
[3] Share 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 and other	1,589			33			(383		)	(377		)
Non - GAAP [ii]	$	334,837		$	82,393		$	67,455		$	(11,228	)
Impact of reconciling items [ii - i]	$	(55,115	)	$	(14,300	)	$	(19,144	)	$	6,670

Table D: GAAP to non-GAAP reconciling items: Six Months Ended Q2 2019
	*Cost of revenues*			Research and development			Selling, general and administrative			Interest and other expense, net
GAAP [i]	$	670,058		$	182,245		$	173,620		$	(57,241	)
[1] Stock-based compensation	5,501			18,984			26,390			—
[2] Changes in value of deferred compensation plan	601			2,836			2,886			(5,479		)
[3] Loss on assets held for sale	2,017			—			1,515			—
[4] Share in net loss and impairment of equity method investees ¹	—			—			—			35,995
[5] Imputed interest on convertible debt, equity component amortization on convertible debt and others	—			—			—			6,644
[6] Amortization of debt issuance costs	—			—			—			1,858
[7] Amortization of acquisition-related intangible assets and other	95,510			—			8,614			—
[8] Restructuring charges and other	969			1,362			739			—
[9] Merger-related expenses	—			—			8,409			—
[10] Other income and expenses	—			57			480			200
Non - GAAP [ii]	$	565,460		$	159,006		$	124,587		$	(18,023	)
Impact of reconciling items [ii - i]	$	(104,598	)	$	(23,239	)	$	(49,033	)	$	39,218

1.	Includes a $29.5 million impairment charge recorded for the investment in Deca Technologies, Inc.

Table E: GAAP to non-GAAP reconciling items: Six Months Ended Q2 2018
	*Cost of revenues*			Research and development			Selling, general and administrative			Interest and other expense, net
GAAP [i]	$	759,801		$	189,926		$	169,996		$	(39,513	)
[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 others	98,876			—			9,505			—
[8] Gain on sale of cost method investment	—			—			(1,521		)	—
[9] Restructuring charges and other	3,476			325			1,533			16
Non - GAAP [ii]	$	649,717		$	168,348		$	135,274		$	(21,493	)
Impact of reconciling items [ii - i]	$	(110,084	)	$	(21,578	)	$	(34,722	)	$	18,020

Table F: Non-GAAP gross profit	Three Months Ended									Six Months Ended
	Q2'19			Q1'19			Q2'18			Q2'19			Q2'18
GAAP gross profit	$	198,758		$	202,409		$	234,138		$	401,167		$	446,530
Impact of reconciling items on cost of revenues (see Table A, B, C, D and E)	51,258			53,340			55,115			104,598			110,084
Non-GAAP gross profit	$	250,016		$	255,749		$	289,253		$	505,765		$	556,614
GAAP gross margin (GAAP gross profit/revenue)	37.3		%	37.6		%	37.5		%	37.4		%	37.0		%
Non-GAAP gross margin (Non-GAAP gross profit/revenue)	47.0		%	47.4		%	46.3		%	47.2		%	46.1		%

Table G: Non-GAAP operating income	Three Months Ended									Six Months Ended
	Q2'19			Q1'19			Q2'18			Q2'19			Q2'18
GAAP operating income [i]	$	13,486		$	31,816		$	50,846		$	45,302		$	86,608
Impact of reconciling items on cost of revenues (see Table A, B, C, D and E)	51,258			53,340			55,115			104,598			110,084
Impact of reconciling items on R&D (see Table A, B, C, D and E)	14,298			8,941			14,300			23,239			21,578
Impact of reconciling items on SG&A (see Table A, B, C, D and E)	29,372			19,661			19,144			49,033			34,722
Non-GAAP operating income [ii]	$	108,414		$	113,758		$	139,405		$	222,172		$	252,992
Impact of reconciling items on operating income [ii - i]	$	94,928		$	81,942		$	88,559		$	176,870		$	166,384
GAAP operating margin (GAAP operating income / revenue)	2.5		%	5.9		%	8.1		%	4.2		%	7.2		%
Non-GAAP operating margin (Non-GAAP operating income / revenue)	20.4		%	21.1		%	22.3		%	20.7		%	21.0		%

Table H: Non-GAAP pre-tax profit	Three Months Ended									Six Months Ended
	Q2'19			Q1'19			Q2'18			Q2'19			Q2'18
GAAP income before income taxes and non-controlling interest ("Pre-tax income")	$	1,483		$	22,572		$	36,703		$	24,056		$	54,311
Share in net loss and impairment of equity method investees ¹	(32,405		)	(3,590		)	(3,755		)	(35,995		)	(7,216		)
Impact of reconciling items on operating income (see Table G)	94,928			81,942			88,559			176,870			166,384
Impact of reconciling items on interest and other expense, net (see Table A, B, C, D and E)	35,362			3,856			6,670			39,218			18,020
Non-GAAP pre-tax profit	$	99,368		$	104,780		$	128,177		$	204,149		$	231,499
GAAP pre-tax profit margin (GAAP pre-tax income/revenue)	0.3		%	4.2		%	5.9		%	2.2		%	4.5		%
Non-GAAP pre-tax profit margin (Non-GAAP pre-tax profit/revenue)	18.7		%	19.4		%	20.5		%	19.1		%	19.2		%

1.	The three and six months ended Q2'19 include a $29.5 million impairment charge recorded for the investment in Deca Technologies, Inc.

Table I: Non-GAAP income tax expense	Three Months Ended									Six Months Ended
	Q2'19			Q1'19			Q2'18			Q2'19			Q2'18
GAAP income tax provision [i]	(18,189		)	(730		)	5,154			(18,919		)	10,211
[1] Tax impact of non-GAAP adjustments* relating to:
[a] Stock-based compensation	6,401			4,283			7,121			10,684			10,997
[b] Changes in value of deferred compensation plan	51			126			3			177			91
[c] Share in net loss and impairment of equity method investees	6,805			754			788			7,559			1,515
[d] Imputed interest on convertible debt, equity component amortization on convertible debt and others	688			707			927			1,395			1,648
[e] Amortization of debt issuance costs	195			195			—			390			225
[f] Amortization of acquisition-related intangible assets and other	10,835			11,031			11,297			21,866			22,760
[g] Restructuring charges and other	620			21			260			641			1,120
[h] Other (income) and expenses	—			159			—			159			—
[i] Loss on extinguishment of convertible notes	—			—			—			—			684
[j] Loss on assets held for sale	—			742			—			742			—
[k] Gain on sale of cost method investment	—			—			(319		)	—			(319		)
[l] Merger-related expenses	1,766			—			—			1,766			—
[2] Uncertain tax positions	2,621			297			(1,348		)	2,918			(2,710		)
[3] Valuation allowance release, utilization of NOL including excess tax benefits, and other items**	(9,662		)	(14,907		)	(20,758		)	(24,569		)	(40,083		)
Non-GAAP income tax expense [ii]*	$	2,131		$	2,678		$	3,125		$	4,809		$	6,139
Impact of reconciling items on income tax provision [i - ii]	(20,320		)	(3,408		)	2,029			(23,728		)	4,072

*Tax impact of Non-GAAP adjustments is calculated by using the federal statutory rate of 21%.

** Other items include but are not limited to deferred tax expense not affecting income tax payable.

Table J: Non-GAAP net income
	Three Months Ended								Six Months Ended
	Q2'19			Q1'19			Q2'18		Q2'19			Q2'18
GAAP net (loss) income attributable to Cypress	$	(12,729	)	$	19,714		$	27,706	$	6,985		$	36,784
Impact of reconciling items on operating income (see Table G)	94,928			81,942			88,559		176,870			166,384
Impact of reconciling items on interest and other expense, net (see Table A, B, C, D and E)	35,362			3,856			6,670		39,218			18,020
Impact of reconciling items on income tax provision (see Table I)	(20,320		)	(3,408		)	2,029		(23,728		)	4,072
Non-GAAP net income	$	97,241		$	102,104		$	124,964	$	199,345		$	225,260

Table K: Weighted-average shares, diluted

Three Months Ended

Q2'19

Q1'19

Q2'18

GAAP

Non-GAAP

GAAP

Non-GAAP

GAAP

Non-GAAP

Weighted-average common shares outstanding, basic

365,600

363,700

358,577

Effect of dilutive securities:

Stock options, unvested restricted stock units and other

—

13,937

6,343

10,496

7,837

14,391

Convertible notes

—

5,187

3,088

1,634

5,553

3,070

Weighted-average common shares outstanding, diluted

365,600

384,724

373,131

375,830

371,967

376,038

Table L: Weighted-average shares, diluted

Six Months Ended

Q2'19

Q2'18

GAAP

Non-GAAP

GAAP

Non-GAAP

Weighted-average common shares outstanding, basic

364,842

356,123

Effect of dilutive securities:

Stock options, unvested restricted stock and other

6,913

12,347

7,879

13,071

Convertible notes

5,440

3,117

6,400

3,916

Weighted-average common shares outstanding, diluted

377,195

380,306

370,402

373,110

Table M: Earnings per share
	Three Months Ended
	Q2'19					Q1'19				Q2'18
	GAAP			Non-GAAP		GAAP		Non-GAAP		GAAP		Non-GAAP
Net (loss) income (see Table J) [i]	$	(12,729	)	$	97,241	$	19,714	$	102,104	$	27,706	$	124,964
Weighted-average common shares outstanding, diluted (see Table K) [ii]	365,600			384,724		373,131		375,830		371,967		376,038
(Loss) earnings per share - diluted [i/ii]	$	(0.03	)	$	0.25	$	0.05	$	0.27	$	0.07	$	0.33

Table N: Earnings per share

Six Months Ended

Q2'19

Q2'18

GAAP

Non-GAAP

GAAP

Non-GAAP

Net income (see Table J) [i]

6,985

199,345

36,784

225,260

Weighted-average common shares outstanding, diluted (see Table L) [ii]

377,195

380,306

370,402

373,110

Earnings per share - diluted [i/ii]

0.02

0.52

0.10

0.60

Table O: Adjusted EBITDA
	Three Months Ended									Six Months Ended
	Q2'19			Q1'19			Q2'18			Q2'19			Q2'18
GAAP net (loss) income attributable to Cypress	$	(12,729	)	$	19,714		$	27,706		$	6,985		$	36,784
Interest and other expense, net	(12,003		)	(9,244		)	(14,143		)	(21,246		)	(32,297		)
Income tax provision	18,189			730			(5,154		)	18,919			(10,211		)
Share in net loss and impairment of equity method investee ¹	(32,405		)	(3,590		)	(3,755		)	(35,995		)	(7,216		)
Net gain (loss) attributable to non-controlling interests	4			2			(88		)	5			(100		)
GAAP operating income	$	13,486		$	31,816		$	50,846		$	45,302		$	86,608
Impact of reconciling items on operating income (see Table G)	94,928			81,942			88,559			176,870			166,384
Non-GAAP operating income	$	108,414		$	113,758		$	139,405		$	222,172		$	252,992
Depreciation	19,394			19,512			16,239			38,906			33,379
Adjusted EBITDA	$	127,808		$	133,270		$	155,644		$	261,078		$	286,371

1.	The three and six months ended Q2'19 include a $29.5 million impairment charge recorded for the investment in Deca Technologies, Inc.

Table P: Free cash flow	Three Months Ended									Six Months Ended
	Q2'19			Q1'19			Q2'18			Q2'19			Q2'18
GAAP net cash provided by operating activities	$	118,923		$	61,248		$	110,734		$	180,171		$	142,412
Acquisition of property, plant and equipment, net	(7,490		)	(10,534		)	(25,589		)	(18,024		)	(42,612		)
Free cash flow	$	111,433		$	50,714		$	85,145		$	162,147		$	99,800

CYPRESS SEMICONDUCTOR CORPORATION
SUPPLEMENTAL FINANCIAL DATA
(In thousands, except per-share and ratio data)
(Unaudited)


	Three Months Ended									Six Months Ended
	June 30, 2019			March 31, 2019			July 1, 2018			June 30, 2019			July 1, 2018
Selected Cash Flow Data (Preliminary):
Net cash provided by operating activities	$	118,923		$	61,248		$	110,734		$	180,171		$	142,412
Net cash used in investing activities	$	(6,821	)	$	(4,376	)	$	(7,213	)	$	(11,197	)	$	(21,386	)
Net cash used in financing activities	$	(25,041	)	$	(57,473	)	$	(97,556	)	$	(82,514	)	$	(159,904	)
Other Supplemental Data (Preliminary):
Capital expenditures, net	$	7,490		$	10,534		$	25,589		$	18,024		$	42,612
Depreciation	$	19,394		$	19,512		$	16,239		$	38,906		$	33,379
Payment of dividend	$	40,134		$	39,748		$	39,404		$	79,882		$	78,145
Dividend paid per share	$	0.11		$	0.11		$	0.11		$	0.22		$	0.22
Total debt (principal amount)	$	908,339		$	909,549		$	955,553		$	908,339		$	955,553
Leverage ratio¹	0.88			0.98			1.51			0.88			1.51
Cash Income Tax	$	2,131		$	2,678		$	3,125		$	4,809		$	6,139

1.	Total debt (principal amount) less cash / Last 12 months Adjusted EBITDA

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