Cypress Reports First Quarter 2019 Results

SAN JOSE, Calif.–(BUSINESS WIRE)–Cypress Semiconductor Corporation (NASDAQ: CY), today announced its
first quarter 2019 results with the following highlights:

  • $539.0 million in revenue, in line with guidance
  • GAAP and non-GAAP gross margins were 37.6% and 47.4%, respectively,
    and represent a 110 bps and 150 bps increase year-over-year
  • GAAP and Non-GAAP diluted EPS were $0.05 and $0.27, respectively,
    above the high-end of guidance
  • Closed the NAND JV to exit the business and increase focus on
    high-growth IoT and automotive end markets

“We delivered a solid first quarter with revenue, gross margin, and
diluted EPS meeting or exceeding our guidance,” said Hassane El-Khoury,
Cypress’ president and chief executive officer. “Despite uncertain
market conditions, Cypress’ world-class connect and compute solutions
continue to gain strong momentum. Overall design activity increased 15%,
led by Automotive and IoT, and in particular we saw strength in
automotive platform wins for our new Traveo-II MCU during the quarter.
With our focus on these high-growth markets, we remain committed to our
Cypress 3.0 strategy while continuing to execute to our long-term
financial model.”

Revenue and earnings for the quarter are shown below with comparable
periods:

(In thousands, except per-share data)

       
GAAP NON-GAAP1
Q1 2019   Q4 2018   Q1 2018 Q1 2019   Q4 2018   Q1 2018
Revenue $ 539,004 $ 604,474 $ 582,241 $ 539,004 $ 604,474 $ 582,241
Gross margin 37.6 % 37.3 % 36.5 % 47.4 % 47.8 % 45.9 %
Operating margin 5.9 % 0.5 % 6.1 % 21.1 % 24.5 % 19.5 %
Net income $ 19,714 $ 267,114 $ 9,078 $ 102,104 $ 130,990 $ 100,296
Diluted EPS $ 0.05 $ 0.72 $ 0.02 $ 0.27 $ 0.35 $ 0.27
 
1.   See the “Reconciliation of GAAP Financial Measures to Non-GAAP
Financial Measures” tables (“Non-GAAP Reconciliation Tables”)
included below.
 
 

REVENUE SUMMARY

(In thousands, except percentages)

(Unaudited)

 
  Three Months Ended
March 31, 2019     December 30, 2018   April 1, 2018   Sequential Change   Year-over-year Change

Business Unit¹

               
MCD $ 310,389 $ 355,793 $ 336,710 (12.8)% (7.8)%
MPD $ 228,615   $ 248,681   $ 245,531   (8.1)% (6.9)%
Total $ 539,004   $ 604,474   $ 582,241   (10.8)% (7.4)%
 
 
Three Months Ended

End Market

March 31, 2019   December 30, 2018   April 1, 2018
IoT 28.5%   31.5%   31.9%
Automotive

36.7%

35.5% 34.3%
Legacy 34.8% 33.0% 33.8%
Total 100% 100% 100%
     
1.   The Microcontroller and Connectivity Division (“MCD”) includes
microcontroller, wireless connectivity and USB products and the
Memory Products Division (“MPD”) includes RAM, Flash and AgigA Tech
products.
 

SECOND QUARTER 2019 FINANCIAL OUTLOOK (1)

For the second quarter of 2019, Cypress estimates financial results as
follows:

         
    GAAP   Non-GAAP
Revenue (2)   $515 million to $545 million
Gross Margin   37.0% – 37.5%   47.0% – 47.5%
Diluted EPS (3)   $(0.03) to $0.01   $0.22 to $0.26
   
1.   Our Q2 2019 outlook reflects our divestiture of the NAND flash
business, which closed on April 1, 2019.
2. For comparison purposes, Q1 2019 revenue would have been $507.9
million excluding the $31.1 million of revenue from the divested
NAND flash business, and Q2 2018 revenue would have been $574.6
million excluding the $49.5 million of revenue from the divested
NAND flash business.
3. Our share of the NAND joint venture’s Q2 2019 income or loss will be
recognized in our Statement of Operations within the line item
“Share in net income (loss) of equity method investments.” Our
expected share of such income is included in our EPS outlook on a
GAAP basis but is excluded from our EPS outlook on a non-GAAP basis.
 

A reconciliation of GAAP forward-looking estimates to non-GAAP
forward-looking estimates is included in the Non-GAAP Reconciliation
Tables at the end of this earnings report.

The timing and amount of certain material items, including restructuring
charges, asset impairments, changes in value of deferred compensation
assets and liabilities, impact of stock-based compensation from
modification of equity awards, the tax impact of non-GAAP adjustments,
and share in net income (loss) of equity method investments, which are
needed to estimate forward-looking GAAP financial measures, are either
inherently unpredictable or outside the control of the Company, and may
have a significant impact on the Company’s financial results.

CONFERENCE CALL AND WEBCAST INFORMATION

Cypress will host its quarterly conference call on April 25, 2019 at
1:30 p.m. Pacific Daylight Time to discuss its first quarter 2019
results and outlook for the second quarter of 2019.

All interested parties may dial 517-308-9119 and provide the passcode
“Cypress” to listen to the call. The event will be broadcast over the
Internet and may be accessed through Cypress’ website at www.cypress.com/investors.
The archived presentation will be available for at least two weeks
immediately following the event.

FOLLOW CYPRESS ONLINE

Join the Cypress
Developer Community 3.0
, read our blog,
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Library
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ABOUT CYPRESS

Cypress is a leader in advanced embedded solutions for the world’s most
innovative automotive, industrial, smart home appliances, consumer
electronics and medical products. Cypress’ microcontrollers, analog ICs,
wireless and USB-based connectivity solutions and reliable,
high-performance memories help engineers design differentiated products
and get them to market first. Cypress is committed to providing
customers with the best support and development resources on the planet
enabling them to disrupt markets by creating new product categories. To
learn more, go to www.cypress.com.

NON-GAAP FINANCIAL MEASURES

To supplement its condensed consolidated unaudited financial results
presented in accordance with GAAP, Cypress uses the non-GAAP financial
measures listed below, which are adjusted from the most directly
comparable GAAP financial measures to exclude certain items, as
described in more detail below.

  • Non-GAAP gross profit;
  • Non-GAAP gross margin;
  • Non-GAAP cost of revenues;
  • Non-GAAP interest and other expense, net;
  • Non-GAAP research and development expenses;
  • Non-GAAP selling, general and administrative expenses;
  • Adjusted EBITDA;
  • Non-GAAP income tax provision (benefit);
  • Non-GAAP pre-tax profit;
  • Non-GAAP pre-tax profit margin;
  • Non-GAAP operating income (loss);
  • Non-GAAP operating margin;
  • Non-GAAP net income (loss);
  • Non-GAAP diluted earnings (loss) per share; and
  • Free cash flow.

Management believes that these non-GAAP financial measures reflect an
additional and useful way of viewing aspects of the Company’s operations
which, when viewed in conjunction with Cypress’ GAAP results, provide a
more comprehensive understanding of the various factors and trends
affecting the Company’s business and operations.

The Company presents non-GAAP financial measures because management uses
these measures to analyze and assess the Company’s financial results and
to manage the business.

There are limitations in using non-GAAP financial measures, including
those discussed below. Moreover, the Company’s non-GAAP measures may be
calculated differently than the non-GAAP financial measures used by
other companies. 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.

As presented in the Non-GAAP Reconciliation Tables in this press
release, each of the non-GAAP financial measures (other than free cash
flow) excludes one or more of the following items:

Acquisition-related charges:
Acquisition-related charges are not factored into management’s
evaluation of Cypress’ long-term performance after the completion of
acquisitions. However, a limitation of non-GAAP measures that exclude
acquisition-related charges is that these charges may represent payments
that reduce the cash available to the Company for other purposes.
Acquisition-related expenses primarily include:

  • Amortization of purchased intangibles, including purchased technology,
    patents, customer relationships, trademarks, backlog and non-compete
    agreements;
  • Amortization of step-up in value of inventory recorded as part of
    purchase price accounting; and
  • One-time charges associated with the completion of an acquisition
    including items such as contract termination costs, severance and
    other acquisition-related restructuring costs; costs incurred in
    connection with integration activities; and legal and accounting costs.

Stock-based compensation expense:
Stock-based compensation expense relates primarily to employee stock
options, restricted stock units, performance stock units and the
employee stock purchase plan. Stock-based compensation expense is a
non-cash expense that is affected by changes in market factors including
the price of Cypress’ common shares, which are not within the control of
management. In addition, the valuation of stock-based compensation is
subjective, and the expense recognized by Cypress may be significantly
different than the expense recognized by other companies for similar
equity awards, which makes it difficult to assess Cypress’ results
compared to its competitors. Accordingly, management excludes this item
from its internal operating forecasts and models. However, a limitation
of non-GAAP measures that exclude stock-based compensation expense is
that they do not reflect the full costs of compensating employees.

Other adjustments: Other items are excluded
from non-GAAP financial measures because management does not consider
them to be related to the core operating activities and ongoing
operating performance of Cypress. Excluding these items, which can vary
significantly from quarter to quarter, allows management to better
compare Cypress’ period-over-period performance. However, limitations of
non-GAAP measures that exclude these items include that these
adjustments are often subjective and such non-GAAP measures may not be
comparable to similarly titled non-GAAP financial measures used by other
companies. Other adjustments primarily include:

  • Changes in value of deferred compensation plan assets and liabilities,
  • Investment-related gains or losses, including equity method
    investments,
  • Restructuring and related costs,
  • Loss on extinguishment of debt,
  • Amortization of debt issuance costs, discounts and imputed interest
    related to the equity component of convertible debt,
  • Asset impairments,
  • Tax effects of non-GAAP adjustments,
  • Income tax adjustment related to the use of the net operating loss,
    non-cash impact of not asserting indefinite reinvestment on earnings
    of our foreign subsidiaries, deferred tax expense not affecting taxes
    payable (i.e. release of valuation allowance), and non-cash expense
    (benefit) related to uncertain tax positions,
  • 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 include the impact
    of non-GAAP adjustments on the number of diluted shares underlying
    stock-based compensation awards and the impact of the capped call
    transactions related to the 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.

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
second 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 filing with the Securities
and Exchange Commission which is 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)

 
  March 31, 2019   December 30, 2018
 
ASSETS
Cash, cash equivalents and short-term investments $ 285,119 $ 285,720
Accounts receivable, net 266,374 324,274
Inventories 316,921 292,093
Assets held for sale 10,818 13,510
Property, plant and equipment, net 274,123 282,986
Goodwill and other intangible assets, net 1,812,452 1,864,340
Other assets 661,817   630,292
Total assets $ 3,627,624   $ 3,693,215
LIABILITIES AND EQUITY
Accounts payable $ 181,220 $ 210,715
Income tax liabilities 53,041 53,469
Revenue reserves, deferred margin and other liabilities 422,311 437,757
Revolving credit facility and long-term debt 851,279   874,235
Total liabilities 1,507,851   1,576,176
Total Cypress stockholders’ equity 2,118,469 2,115,734
Non-controlling interest 1,304   1,305
Total equity 2,119,773   2,117,039
Total liabilities and equity $ 3,627,624   $ 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
March 31, 2019   December 30, 2018   April 1, 2018
Revenues $ 539,004 $ 604,474 $ 582,241
Cost of revenue 336,595   379,264   369,849  
Gross profit 202,409   225,210   212,392  
Research and development 88,606 82,379 93,233
Selling, general and administrative 81,987   140,091   83,397  
Total operating expenses 170,593   222,470   176,630  
Operating income 31,816 2,740 35,762
Interest and other expense, net (9,244 ) (20,489 ) (18,154 )
Income before income taxes, share in net loss of equity method
investee and non-controlling interest
22,572 (17,749 ) 17,608
Income tax provision 730 331,447 (5,057 )
Share in net loss of equity method investee (3,590 ) (46,497 ) (3,461 )
Net income 19,712 267,201 9,090
Net gain attributable to non-controlling interests 2   (87 ) (12 )
Net income attributable to Cypress $ 19,714   $ 267,114   $ 9,078  
Net income per share attributable to Cypress:
Basic $ 0.05 $ 0.74 $ 0.03
Diluted $ 0.05 $ 0.72 $ 0.02
Cash dividend declared per share $ 0.11 $ 0.11 $ 0.11
Shares used in net income per share calculation:
Basic 363,700 361,616 355,461
Diluted 373,131 369,638 370,592
 
 

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 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 investees 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 (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 B: GAAP to non-GAAP reconciling
items: Three Months Ended Q4 2018

  Cost of revenues   Research and development   Selling, general and administrative   Interest and other expense, 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 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 and other 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 C: GAAP to Non-GAAP reconciling
items: Three Months Ended Q1 2018

  Cost of revenues   Research and development   Selling, general and administrative   Interest and other expense, net
GAAP [i] $ 369,849 $ 93,233 $ 83,397 $ (21,615 )
[1] Stock-based compensation 3,584 6,713 8,161
[2] Changes in value of deferred compensation plan 61 272 350 (266 )
[3] Share 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 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 49,438 5,150
[8] Restructuring charges and other 1,887   292   1,917   393  
Non – GAAP [ii] $ 314,879   $ 85,956   $ 67,819   $ (10,265 )
Impact of reconciling items [ii – i] $ (54,970 ) $ (7,277 ) $ (15,578 ) $ 11,350
 
 

Table D: Non-GAAP gross profit

Three Months Ended
Q1’19   Q4’18   Q1’18
GAAP gross profit $ 202,409   $ 225,210   $ 212,392
Impact of reconciling items on cost of revenues (see Table A, B, C) 53,340   63,961   54,970  
Non-GAAP gross profit $ 255,749   $ 289,171   $ 267,362  
GAAP gross margin (GAAP gross profit/revenue) 37.6 % 37.3 % 36.5 %
Non-GAAP gross margin (Non-GAAP gross profit/revenue) 47.4 % 47.8 % 45.9 %
 
 

Table E: Non-GAAP operating income

Three Months Ended
Q1’19   Q4’18   Q1’18
GAAP operating income [i] $ 31,816 $ 2,740 $ 35,762
Impact of reconciling items on cost of revenues (see Table A, B, C) 53,340 63,961 54,970
Impact of reconciling items on R&D (see Table A, B, C) 8,941 4,653 7,277
Impact of reconciling items on SG&A (see Table A, B, C) 19,661   76,750   15,578  
Non-GAAP operating income [ii] $ 113,758   $ 148,104   $ 113,587  
Impact of reconciling items on operating income [ii – i] $ 81,942 $ 145,364 $ 77,825
GAAP operating margin (GAAP operating income / revenue) 5.9 % 0.5 % 6.1 %
Non-GAAP operating margin (Non-GAAP operating income / revenue) 21.1 % 24.5 % 19.5 %
 
 

Table F: Non-GAAP pre-tax profit

Three Months Ended
Q1’19   Q4’18   Q1’18
GAAP income (loss) before income taxes and non-controlling
interest (“Pre-tax income”)
$ 22,572 $ (17,749 ) $ 17,608
Share in net loss and impairment of equity method investees (3,590 ) (46,497 ) (3,461 )
Impact of reconciling items on operating income (see Table E) 81,942 145,364 77,825
Impact of reconciling items on interest and other expense, net (see
Table A, B, C)
3,856   56,302   11,350  
Non-GAAP pre-tax profit $ 104,780 $ 137,420 $ 103,322
GAAP pre-tax profit margin (GAAP pre-tax income/revenue) 4.2 % (2.9 )% 3.0 %
Non-GAAP pre-tax profit margin (Non-GAAP pre-tax profit/revenue) 19.4 % 22.7 % 17.7 %
 

Contacts

Thad Trent
EVP Finance & Administration and CFO
(408)
943-2925

Ann Minooka
Vice President, Corporate Communications
(408)
456-1962

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