Cypress Reports Third Quarter 2018 Results

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

	September 30, 2018		December 31, 2017

ASSETS
Cash, cash equivalents and short-term investments	$	204,771	$	151,596
Accounts receivable, net	404,561		295,991
Inventories	289,436		272,127
Property, plant and equipment, net	292,854		289,554
Goodwill and other intangible assets, net	1,994,200		2,154,592
Other assets	372,102		373,190
Total assets	$	3,557,924	$	3,537,050
LIABILITIES AND EQUITY
Accounts payable	$	228,159	$	213,101
Income tax liabilities	57,283		52,006
Revenue reserves, deferred margin and other liabilities	515,420		497,838
Revolving credit facility and long-term debt	870,574		956,513
Total liabilities	1,671,436		1,719,458
Total Cypress stockholders' equity	1,885,280		1,816,536
Non-controlling interest	1,208		1,056
Total equity	1,886,488		1,817,592
Total liabilities and equity	$	3,557,924	$	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									Nine Months Ended
	September 30 2018			July 1, 2018			October 1, 2017			September 30, 2018			October 1, 2017
Revenues	$	673,035		$	624,090		$	604,574		$	1,879,366		$	1,730,224
Cost of revenue ¹	413,320			389,952			394,878			1,173,121			1,170,675
Gross profit	259,715			234,138			209,696			706,245			559,549
Research and development ¹	91,691			96,693			90,422			281,617			268,365
Selling, general and administrative ¹	92,943			86,599			78,194			262,940			254,785
Total operating expenses	184,634			183,292			168,616			544,557			523,150
Operating income	75,081			50,846			41,080			161,688			36,399
Interest and other expense, net	(15,059		)	(14,143		)	(18,619		)	(47,356		)	(54,385		)
Income (loss) before income taxes and non-controlling interest	60,022			36,703			22,461			114,332			(17,986		)
Income tax provision	(5,618		)	(5,154		)	(4,500		)	(15,829		)	(13,930		)
Equity in net loss of equity method investees	(3,657		)	(3,755		)	(4,931		)	(10,873		)	(14,842		)
Net income (loss)	50,747			27,794			13,030			87,630			(46,758		)
Net gain attributable to non-controlling interests	(52		)	(88		)	(14		)	(152		)	(144		)
Net income (loss) attributable to Cypress	$	50,695		$	27,706		$	13,016		$	87,478		$	(46,902	)
Net income (loss) per share attributable to Cypress:
Basic	$	0.14		$	0.08		$	0.04		$	0.24		$	(0.14	)
Diluted	$	0.14		$	0.07		$	0.04		$	0.23		$	(0.14	)
Cash dividend declared per share	$	0.11		$	0.11		$	0.11		$	0.33		$	0.33
Shares used in net income (loss) per share calculation:
Basic	361,631			358,577			332,873			358,560			329,787
Diluted	374,266			371,967			360,311			373,064			329,787

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 Q3 2018

	Cost of revenues			Research and development			Selling, general and administrative			Interest and other expense, 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] Equity 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] Acquisition costs	—			—			119			—
[7] Restructuring charges	(340		)	516			9,815			—
[8] Litigation settlement and other	—			—			(605		)	(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 B: 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] 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 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 C: GAAP to Non-GAAP reconciling items: Three Months Ended Q3 2017

	Cost of revenues			Research and development			Selling, general and administrative			Interest and other expense, net
GAAP [i]	$	394,878		$	90,422		$	78,194		$	(23,550	)
[1] Stock-based compensation	4,720			8,692			7,600			—
[2] Changes in value of deferred compensation plan	208			1,278			1,415			(1,734		)
[3] Merger, integration, related costs and adjustments related to assets held for sale	1,336			—			(636		)	—
[4] Inventory step-up related to acquisition accounting	704			—			—			—
[5] Equity in net loss and impairment of equity method investees	—			—			—			4,931
[6] Imputed interest on convertible debt, equity component amortization on convertible debt and others	—			—			—			3,521
[7] Write-off of unamortized debt issuance costs related to Term Loan A	—			—			—			2,996
[8] Amortization of debt issuance costs	—			—			—			856
[9] Amortization of acquisition-related intangible assets and other	43,345			—			5,083			51
Non - GAAP [ii]	$	344,565		$	80,452		$	64,732		$	(12,929	)
Impact of reconciling items [ii - i]	$	(50,313	)	$	(9,970	)	$	(13,462	)	$	10,621


Table D: GAAP to non-GAAP reconciling items: Nine Months Ended Q3 2018

	Cost of revenues			Research and development			SG&A and Restructuring costs			Interest and other expense, net
GAAP [i]	$	1,173,121		$	281,617		$	262,940		$	(58,229	)
[1] Stock-based compensation	12,689			28,720			35,152			—
[2] Changes in value of deferred compensation plan	299			1,406			1,690			(2,497		)
[3] Equity in net loss and impairment of equity method investees	—			—			—			10,873
[4] Imputed interest on convertible debt, equity component amortization on convertible debt and others	—			—			—			14,628
[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	150,441			—			13,815			—
[8] Gain on sale of cost method investment	—			—			(1,521		)	—
[9] Acquisition costs	—			—			119			—
[10] Restructuring charges	3,136			841			11,347			—
[11] Litigation settlement and other	—			—			(605		)	(1,270		)
Non - GAAP [ii]	$	1,006,556		$	250,650		$	202,943		$	(32,164	)
Impact of reconciling items [ii - i]	$	(166,565	)	$	(30,967	)	$	(59,997	)	$	26,065


Table E: GAAP to non-GAAP reconciling items: Nine Months Ended Q3 2017

	Cost of revenues			Research and development			Selling, general and administrative			Interest and other expense, net
GAAP [i]	$	1,170,675		$	268,365		$	254,785		$	(69,227	)
[1] Stock-based compensation	12,605			28,754			27,157			—
[2] Changes in value of deferred compensation plan	512			2,438			3,319			(4,876		)
[3] Merger, integration, related costs and adjustments related to assets held for sale	4,022			(96		)	(922		)	—
[4] Inventory step-up related to acquisition accounting	3,735			—			—			—
[5] Equity in net loss and impairment of equity method investees	—			—			—			14,842
[6] Imputed interest on convertible debt, equity component amortization on convertible debt and others	—			—			—			10,517
[7] Write-off of unamortized debt issuance costs related to Term Loan A	—			—			—			2,996
[8] Amortization of debt issuance costs	—			—			—			2,634
[9] Amortization of acquisition-related intangible assets	130,782			—			15,250			—
[10] Restructuring charges	231			2,710			528			—
[11] Settlement charges and other	—			—			3,500			693
Non - GAAP [ii]	$	1,018,788		$	234,559		$	205,953		$	(42,421	)
Impact of reconciling items [ii - i]	$	(151,887	)	$	(33,806	)	$	(48,832	)	$	26,806


Table F: Non-GAAP gross profit	Three Months Ended									Nine Months Ended
	Q3'18			Q2'18			Q3'17			Q3'18			Q3'17
GAAP gross profit	$	259,715		$	234,138		$	209,696		$	706,245		$	559,549
Impact of reconciling items on cost of revenues (Table A, B, C, D and E)	56,481			55,115			50,313			166,565			151,887
Non-GAAP gross profit	$	316,196		$	289,253		$	260,009		$	872,810		$	711,436
GAAP gross margin (GAAP gross profit/revenue)	38.6		%	37.5		%	34.7		%	37.6		%	32.3		%
Non-GAAP gross margin (Non-GAAP gross profit/revenue)	47.0		%	46.3		%	43.0		%	46.4		%	41.1		%


Table G: Non-GAAP operating income	Three Months Ended									Nine Months Ended
	Q3'18			Q2'18			Q3'17			Q3'18			Q3'17
GAAP operating income [i]	$	75,081		$	50,846		$	41,080		$	161,688		$	36,399
Impact of reconciling items on cost of revenues (see Table A, B, C, D, E)	56,481			55,115			50,313			166,565			151,887
Impact of reconciling items on R&D (see Table A, B, C, D, E)	9,389			14,300			9,970			30,967			33,806
Impact of reconciling items on SG&A (see Table A, B, C, D, E)	25,276			19,144			13,462			59,997			48,832
Non-GAAP operating income [ii]	$	166,227		$	139,405		$	114,825		$	419,217		$	270,924
Impact of reconciling items on operating income [ii - i]	$	91,146		$	88,559		$	73,745		$	257,529		$	234,525
GAAP operating margin (GAAP operating income / revenue)	11.2		%	8.1		%	6.8		%	8.6		%	2.1		%
Non-GAAP operating margin (Non-GAAP operating income / revenue)	24.7		%	22.3		%	19.0		%	22.3		%	15.7		%


Table H: Non-GAAP pre-tax profit	Three Months Ended									Nine Months Ended
	Q3'18			Q2'18			Q3'17			Q3'18			Q3'17
GAAP income (loss) before income taxes and non-controlling interest ("Pre-tax income")	$	60,022		$	36,703		$	22,461		$	114,332		$	(17,986	)
Equity in net loss and impairment of equity method investees	(3,657		)	(3,755		)	(4,931		)	(10,873		)	(14,842		)
Impact of reconciling items on operating income (see Table G)	91,146			88,559			73,745			257,529			234,525
Impact of reconciling items on interest and other expense, net (see Table A, B, C, D, E)	8,045			6,670			10,621			26,065			26,806
Non-GAAP pre-tax profit	$	155,556		$	128,177		$	101,896		$	387,053		$	228,503
GAAP pre-tax profit margin (GAAP pre-tax income/revenue)	8.9		%	5.9		%	3.7		%	6.1		%	(1.0		)%
Non-GAAP pre-tax profit margin (Non-GAAP pre-tax profit/revenue)	23.1		%	20.5		%	16.9		%	20.6		%	13.2		%


Table I: Non-GAAP income tax expense	Three Months Ended									Nine Months Ended
	Q3'18			Q2'18			Q3'17			Q3'18			Q3'17
GAAP income tax provision [i]	5,618			5,154			4,500			15,829			13,930
[1] Stock-based compensation	5,081			7,120			7,354			16,078			23,981
[2] Changes in value of deferred compensation plan	97			4			408			189			488
[3] Merger, integration, related costs and adjustments related to assets held for sale	—			—			245			—			1,051
[4] Inventory step-up related to acquisition accounting	—			—			246			—			1,314
[5] Equity in net loss and impairment of equity method investees	768			789			1,726			2,283			5,195
[6] Imputed interest on convertible debt, equity component amortization on convertible debt and others	1,424			927			1,232			3,072			3,681
[7] Amortization of debt issuance costs	—			—			300			225			922
[8] Amortization of acquisition-related intangible assets and other	11,734			11,297			16,950			34,494			51,111
[9] Restructuring charges	2,098			260			—			3,218			1,214
[10] Settlement charges	—			—			—			—			1,225
[11] Loss on extinguishment of Spansion convertible notes	—			—			1,049			684			1,049
[12] Gain on sale of cost method investment	—			(319		)	—			(319		)	—
[13] Uncertain tax positions	(2,159		)	(1,348		)	(663		)	(4,870		)	(2,458		)
[14] Utilization of NOL including excess tax benefits, and others**	(21,882		)	(20,759		)	(30,445		)	(61,966		)	(93,917		)
Non-GAAP income tax expense [ii]*	$	2,779		$	3,125		$	2,902		$	8,917		$	8,786
Impact of reconciling items on income tax provision [i - ii]	2,839			2,029			1,598			6,912			5,144

*		Tax impact of Non-GAAP adjustments is calculated by using the federal statutory rate of 21%, 21%, and 35% for the periods ended July 1, 2018, September 30, 2018, and October 1, 2017 respectively.
**		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						Nine Months Ended
	Q3'18		Q2'18		Q3'17		Q3'18		Q3'17
GAAP net income (loss) attributable to Cypress	$	50,695	$	27,706	$	13,016	$	87,478	$	(46,902	)
Impact of reconciling items on operating income (see Table G)	91,146		88,559		73,745		257,529		234,525
Impact of reconciling items on interest and other expense, net (see Table A, B, C, D, E)	8,045		6,670		10,621		26,065		26,806
Impact of reconciling items on income tax provision (see Table I)	2,839		2,029		1,598		6,912		5,144
Non-GAAP net income	$	152,725	$	124,964	$	98,980	$	377,984	$	219,573

Table K: Weighted-average shares, diluted

Three Months Ended

Q3'18

Q2'18

Q3'17

GAAP

Non-GAAP

GAAP

Non-GAAP

GAAP

Non-GAAP

Weighted-average common shares outstanding, basic

361,631

358,577

332,873

Effect of dilutive securities:

Stock options, unvested restricted stock and other

7,096

12,468

7,837

14,391

7,884

12,948

Convertible notes

5,539

3,234

5,553

3,070

19,554

18,790

Weighted-average common shares outstanding, diluted

374,266

377,333

371,967

376,038

360,311

364,611


Table L: Weighted-average shares, diluted

	Nine Months Ended
	Q3'18		Q3'17
	GAAP	Non-GAAP	GAAP	Non-GAAP
Weighted-average common shares outstanding, basic	358,560	358,560	329,787	329,787
Effect of dilutive securities:
Stock options, unvested restricted stock and other	8,378	13,557	—	13,060
Convertible notes	6,126	3,852	—	18,370
Weighted-average common shares outstanding, diluted	373,064	375,969	329,787	361,217


Table M: Earnings per share

	Three Months Ended
	Q3'18				Q2'18				Q3'17
	GAAP		Non-GAAP		GAAP		Non-GAAP		GAAP		Non-GAAP
Net income (see Table J) [i]	$	50,695	$	152,725	$	27,706	$	124,964	$	13,016	$	98,980
Weighted-average common shares outstanding, diluted (see Table K) [ii]	374,266		377,333		371,967		376,038		360,311		364,611
Earnings per share - diluted [i/ii]	$	0.14	$	0.40	$	0.07	$	0.33	$	0.04	$	0.27


Table N: Earnings (loss) per share

	Nine Months Ended
	Q3'18				Q3'17
	GAAP		Non-GAAP		GAAP			Non-GAAP
Net income (loss) (see Table J) [i]	$	87,478	$	377,984	$	(46,902	)	$	219,573
Weighted-average common shares outstanding, diluted (see Table L) [ii]	373,064		375,969		329,787			361,217
Earnings (loss) per share - diluted [i/ii]	$	0.23	$	1.01	$	(0.14	)	$	0.61


Table O: Adjusted EBITDA

	Three Months Ended									Nine Months Ended
	Q3'18			Q2'18			Q3'17			Q3'18			Q3'17
GAAP net income (loss) attributable to Cypress	$	50,695		$	27,706		$	13,016		$	87,478		$	(46,902	)
Interest and other expense, net	(15,059		)	(14,143		)	(18,619		)	(47,356		)	(54,385		)
Income tax provision	(5,618		)	(5,154		)	(4,500		)	(15,829		)	(13,930		)
Equity in net loss of and impairment of equity method investees	(3,657		)	(3,755		)	(4,931		)	(10,873		)	(14,842		)
Net gain (loss) attributable to non-controlling interests	(52		)	(88		)	(14		)	(152		)	(144		)
GAAP operating income	$	75,081		$	50,846		$	41,080		$	161,688		$	36,399
Impact of reconciling items on operating income (see Table G)	91,146			88,559			73,745			257,529			234,525
Non-GAAP operating income	$	166,227		$	139,405		$	114,825		$	419,217		$	270,924
Depreciation	16,393			16,239			16,674			49,772			48,876
Adjusted EBITDA	$	182,620		$	155,644		$	131,499		$	468,989		$	319,800


Table P: Free cash flow	Three Months Ended									Nine Months Ended
	Q3'18			Q2'18			Q3'17			Q3'18			Q3'17
GAAP net cash provided by operating activities	$	187,073		$	110,734		$	143,778		$	329,485		$	201,946
Acquisition of property, plant and equipment, net	(15,448		)	(25,590		)	(15,975		)	(58,061		)	(44,154		)
Free cash flow	$	171,625		$	85,144		$	127,803		$	271,424		$	157,792


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

	Three Months Ended									Nine Months Ended
	September 30, 2018			July 1, 2018			October 1, 2017			September 30, 2018			October 1, 2017
Selected Cash Flow Data (Preliminary):
Net cash provided by operating activities	$	187,073		$	110,734		$	143,778		$	329,485		$	201,946
Net cash (used in) provided by investing activities	$	(22,316	)	$	(7,213	)	$	(15,051	)	$	(43,700	)	$	(8,393	)
Net cash used in financing activities	$	(72,730	)	$	(97,556	)	$	(105,935	)	$	(232,634	)	$	(182,162	)
Other Supplemental Data (Preliminary):
Capital expenditures, net	$	15,448		$	25,590		$	15,975		$	58,061		$	44,154
Depreciation	$	16,393		$	16,239		$	16,674		$	49,772		$	48,876
Payment of dividend	$	39,447		$	39,404		$	36,325		$	117,592		$	108,079
Dividend paid per share	$	0.11		$	0.11		$	0.11		$	0.33		$	0.33
Total debt (principal amount)	$	936,518		$	955,553		$	1,205,790		$	936,518		$	1,205,790
Leverage ratio	1.54			1.71			2.91			1.54			2.91
Cash Income Tax	2,779			3,125			2,902			8,917			8,786


CYPRESS SEMICONDUCTOR CORPORATION RECONCILIATION OF GAAP FORWARDING-LOOKING ESTIMATES TO NON-GAAP FORWARD- LOOKING ESTIMATES

	Forward-looking GAAP estimate (A)¹	Adjustments (B)									Forward-looking Non-GAAP estimate (C)=(A)+(B)
		Amortization of intangibles			Stock-based compensation expense			Other items
Gross margin	38.0% - 39.0%	8.4		%	0.4		%	0.2		%	47.0% - 48.0%
Diluted earnings per share	$0.07 to $0.11	$	0.15		$	0.06		$	0.03		$0.31 to $0.35

1.		GAAP outlook does not include any impact from the planned disposition of our NAND business to the joint venture with SK hynix system ic Inc., which is not expected to be completed until the first quarter of 2019.

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