CYPRESS SEMICONDUCTOR CORPORATION 
The Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the financial statements
and the notes thereto included elsewhere in this Annual Report on Form 10-K. The
MD&A contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended that involve risks and uncertainties, including
those discussed under Item 1A.
EXECUTIVE SUMMARY
General
Cypress Semiconductor Corporation (together with its consolidated subsidiaries,
"Cypress", "the Company", "we" or "us") manufactures and sells advanced embedded
system solutions for Internet of Things (or "IoT"), automotive, industrial, and
consumer applications. Cypress' microcontroller, analog integrated circuits
("ICs"), wireless and wired connectivity solutions and memories help engineers
design differentiated products and help with speed to market. Cypress is
committed to providing customers with quality support and engineering resources.
The Company operates on a 52 or 53-week fiscal year ending on the Sunday nearest
to
Pending Acquisition by Infineon
InJune 2019 , we entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") with Infineon Technologies AG, a stock corporation (Aktiengesellschaft) organized under the laws of theFederal Republic of Germany ("Infineon") andIFX Merger Sub Inc. , aDelaware corporation and a wholly owned subsidiary of Infineon ("Merger Sub"). Subject to approval by the relevant regulatory bodies as well as other customary closing conditions, the Merger Agreement provides for Merger Sub to merge with and into Cypress, with Cypress continuing as the surviving corporation in the Merger and as a wholly owned subsidiary of Infineon.
Refer to Note 2 , Merger Agreement, of the Notes to Consolidated Financial Statements under Part II, Item 8 for more information.
Mergers, Acquisitions and Divestitures
Acquisition of the Noncontrolling Interest in
Joint Venture with SK hynix system ic Inc. ("SKHS")
In April 2019 , we closed the transfer of our NAND flash business to a
newly-formed joint venture between Cypress and SKHS. The joint venture entity is
named SkyHigh Memory Limited ("SkyHigh") and its headquarters are in Hong Kong,
China . SkyHigh is 60-percent-owned by SKHS and 40-percent-owned by us. The NAND
business was reported as part of our MPD segment prior to the close of the
transfer. We recognized $31.1 million , $167.3 million
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and
Acquisition of a software business InAugust 2018 , we acquired an embedded software company focused on the Internet of things market for cash consideration of$3.0 million . The purchased assets were primarily developed technology. Pro forma results of operations of this acquired company are not presented because the effect of the acquisition was not material.
Sale of Cypress Minnesota Incorporated
In
Business Segments
We continuously evaluate our reportable business segments in accordance with the applicable accounting guidance. Consistent with the year endedDecember 30, 2018 , we operated under two reportable business segments, MPD and MCD, for the year endedDecember 29, 2019 . RESULTS OF OPERATIONS Revenues Our total revenues decreased by$278.5 million , or 11.2%, to$2,205.3 million for the year endedDecember 29, 2019 compared to the prior fiscal year. The decrease was attributable in part to the divestiture of our NAND flash business, which was completed onApril 1, 2019 . Revenue from the NAND flash business decreased by$136.2 million to$31.1 million in fiscal 2019 compared to the prior fiscal year. The remainder of the decrease was primarily due to demand softening across our NOR flash, microcontroller and wireless connectivity businesses. Our total revenues increased by$156.1 million , or 6.7%, to$2,483.8 million for the year endedDecember 30, 2018 compared to the prior fiscal year. For the year endedDecember 30, 2018 , the increase was primarily driven by strength in automotive and wireless connectivity, microcontrollers, and memory products. The following table summarizes our consolidated revenues by segments: Year Ended December 29, December 30, December 31, 2019 2018 2017 (In thousands) Microcontroller and Connectivity Division ("MCD")$ 1,476,655 $ 1,474,442 $ 1,409,265 Memory Products Division ("MPD") 728,659 1,009,398 918,506 Total revenues$ 2,205,314 $ 2,483,840 $ 2,327,771 Microcontroller and Connectivity Division: Revenues recorded by MCD increased in fiscal 2019 by$2.2 million , or 0.2%, compared to fiscal 2018. The increase was primarily due to a growth in automotive and wired connectivity products, partially offset by a decline in demand for microcontrollers and wireless connectivity products. Revenues recorded by MCD increased in fiscal 2018 by$65.2 million , or 4.6%, compared to fiscal 2017. The increase was primarily driven by growth in our microcontrollers, wired and wireless connectivity and automotive products. MCD revenue during fiscal 2018 benefited from volume increases as a result of new program ramps at certain customers. Memory Products Division: Revenues recorded by MPD decreased in fiscal 2019 by$280.7 million , or 27.8% compared to fiscal 2018. The decrease was primarily due to a decline in demand for NOR flash products, and the divestiture of our NAND flash business, which was completed onApril 1, 2019 . Revenue from the NAND flash business decreased by$136.2 41 --------------------------------------------------------------------------------
million to
Revenues recorded by MPD increased in fiscal 2018 by
Gross Profit & Margin
Year Ended
December 29, 2019 December 30, 2018 December 31, 2017
(In thousands)
Revenues $ 2,205,314 $ 2,483,840 $ 2,327,771
Less: Cost of revenues 1,375,289 1,552,385 1,545,837
Gross profit $ 830,025 $ 931,455 $ 781,934
Gross margin (%) 37.6 % 37.5 % 33.6 %
Our gross margin remained relatively constant at 37.6% in fiscal 2019 as
compared to 37.5% in fiscal 2018. Improvements to gross margin were offset by
items having an unfavorable impact to gross margin. Favorable items included a
shift in the product mix toward higher density memory products, a decrease in
sales of commoditized products, which was due in part to the divestiture of the
NAND business effective the second quarter of fiscal 2019. Additionally, a loss
from sale of assets related to planned sale of the NAND business in the amount
of $1.9 million and $10.9 million was recorded in the cost of goods sold in
fiscal 2019 and 2018 respectively. A primary unfavorable item was the decrease
in revenue in fiscal 2019 compared to fiscal 2018 causing an increase in
amortization expense from intangible assets as a percentage of revenue.
Amortization of intangible assets included in cost of revenue was $187.5 million
or 8.5% of revenues in fiscal 2019 compared to $196.0 million or 7.9% of
revenues in fiscal 2018.
Our gross margin improved from 33.6% in fiscal 2017 to 37.5% in fiscal 2018. The
primary drivers of the improvement in gross margin were higher fab utilization,
which increased from 74.2% for the year ended December 31, 2017 to 81.2% for the
year ended December 30, 2018 ; a reduction in the cost of certain products; a
shift in the product mix towards higher density memory products and away from
commoditized products; and ramping of new products at favorable margins.
Additionally, there was a reduction in write-downs of carrying value of
inventory for the year ended December 30, 2018 as compared to the prior year.
Write-down of inventories for the year ended December 30, 2018 was $22.3 million
as compared to $34.5 million for the year ended December 31, 2017 . Write-down of
inventories unfavorably impacted our gross margin by 0.9% and 1.5% for the year
ended December 30, 2018 and for the year ended December 31, 2017 , respectively.
Sale of inventory that was previously written off or written down aggregated to
$19.5 million and $31.6 million in fiscal 2018 and fiscal 2017, respectively,
which favorably impacted our gross margin by 0.8% and 1.4%, respectively.
Included in the cost of revenues are restructuring costs of $3.3 million and
$0.6 million for fiscal 2018 and fiscal 2017, respectively. The increase in
restructuring costs is primarily due to the 2018 Plan (as defined below), which
we began implementing in the first quarter of 2018.
Included in cost of revenues is the amortization of intangible assets of $196.0
million and $175.0 million for fiscal 2018 and fiscal 2017, respectively. The
increase of the amortization of intangible assets is mainly due to the
capitalization of in-process research and development ("IPR&D") projects.
Included in cost of revenues in fiscal 2018 is the impairment of assets held for
sale of $10.9 million as a result of entering into a definitive agreement to
divest the NAND products business to a joint venture with SKHS in October 2018 .
Research and Development ("R&D")
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Our R&D efforts are focused on the development and design of new semiconductor
products and design methodologies, as well as the continued development of
advanced software platforms. Our R&D organization works with our manufacturing
facilities, suppliers and customers to improve our semiconductor designs and
lower our manufacturing costs.
Our R&D groups conduct ongoing efforts to reduce design cycle time and increase
first pass yield through structured re-use of intellectual property blocks from
a controlled intellectual property library, development of computer-aided design
tools and improved design business processes. Design and related software
development work primarily occurs at design centers located in the United
States , Ukraine , Ireland , Germany , Israel , India , Japan , China and Malaysia .
Year Ended
December 29, 2019 December 30, 2018 December 31, 2017
(In thousands)
R&D expenses $ 362,716 $ 363,996 $ 362,931
As a percentage of revenues 16.4 % 14.7 % 15.6 %
R&D expenditures decreased by $1.3 million in fiscal 2019 compared to the prior
year. The decrease was mainly attributable to a $14.7 million decrease in labor
costs due to reductions in variable compensation expenses and a $1.4 million
decrease in stock-based compensation. These decreases were partially offset by
$6.7 million increase in outside services, $5.1 million increase in other
compensation, $2.9 million increase in software expenses and $0.1 million
increase in other expenses.
R&D expenditures increased by $1.1 million in fiscal 2018 compared to the fiscal
2017. The increase was mainly attributable to $5.4 million in increased labor
costs mainly due to employee-related compensation expenses, a $3.6 million
increase in depreciation, and $1.8 million in licensing payments to certain
vendors, partially offset by $4.1 million in lower restructuring costs, a $3.8
million decrease in deferred compensation expenses, and a $1.7 million decrease
in stock-based compensation expenses.
Selling, General and Administrative ("SG&A")
Year Ended
December 29, 2019 December 30, 2018 December 31, 2017
(In thousands)
SG&A expenses $ 344,046 $ 403,031 $ 340,910
As a percentage of revenues 15.6 % 16.2 % 14.6 %
SG&A expenses decreased by $59.0 million in fiscal 2019 compared to fiscal 2018.
The decrease was mainly due to a loss from sale of assets related to planned
sale of the NAND business of $65.7 million recognized in fiscal 2018, as well as
a decrease of $17.2 million in professional fee and a decrease of $10.9 million
in restructuring charges. These decreases were partially offset by an increase
of $12.3 million in merger-related expenses, a $12.5 million increase in
stock-based compensation expense, a $8.2 million increase in labor expenses and
an increase of $1.8 million in facility-related expenses.
SG&A expenses increased by $62.1 million in fiscal 2018 compared to fiscal 2017.
The increase was mainly due to a loss from sale of assets related to planned
sale of the NAND business of $65.7 million , a $9.1 million increase in
restructuring costs, a $5.1 million increase in stock-based compensation, a $3.8
million increase in professional fees, a $3.4 million increase in advertising
expenses and a $2.5 million increase in facilities expenses, partially offset by
a $14.3 million decrease in shareholder litigation, a $7.9 million decrease in
labor expenses, and a $5.0 million decrease in deferred compensation expenses.
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Interest Expense
Interest expense for fiscal 2019 was $58.7 million and primarily represents
interest payments due and amortization of debt discount and costs related to our
2% Convertible Senior Notes due 2023, 4.5% Convertible Senior Notes due 2022, 2%
Exchangeable Senior Notes due 2020, and interest expense incurred on our
Revolving Credit Facility, Term Loan B and other debt. In addition, of the $58.7
million , $6.4 million was related to the loss on extinguishment of Term Loan B.
Interest expense for fiscal 2018 was $65.3 million and primarily represents
interest payments due and amortization of debt discount and costs related to our
2% 2023 Exchangeable Notes, 4.5% 2022 Senior Exchangeable Notes, 2% 2020
Spansion Exchangeable Notes, and interest expense incurred on our Revolving
Credit Facility, Term Loan B and other debt. In addition, of the $65.3 million ,
$5.2 million was related to the refinancing and write-off of debt issuance costs
upon the debt amendment for Term Loan B and the extinguishment of the 2% 2020
Spansion Exchangeable Notes.
Interest expense for fiscal 2017 was $80.2 million and primarily represents
interest payments due and amortization of debt discount and costs related to our
2% 2023 Exchangeable Notes, 4.5% 2022 Senior Exchangeable Notes, and 2% 2020
Spansion Exchangeable Notes, and interest expense incurred on our Revolving
Credit Facility, Term Loan B and other debt. In addition, of the $80.2 million ,
$7.2 million was related to the debt extinguishment of the 2% 2020 Spansion
Exchangeable Notes and Term Loan A.
Refer to Note 16 , Debt, of the Notes to Consolidated Financial Statements
under Part II, Item 8 for more information about our credit facility and
other debt.
Other Income (Expense), Net
The following table summarizes the components of other income (expense), net:
Year Ended
December 29, 2019 December 30, 2018 December 31, 2017
(In thousands)
Interest income $ 5,367 $ - $ 568
Changes in fair value of investments under
the deferred compensation plan 7,991 (2,904 ) 6,087
Foreign currency exchange and other (losses)
gains, net (1,135 ) (340 ) (1,838 )
Other 1,945 726 (549 )
Other income (expense), net $ 14,168 $ (2,518 ) $ 4,268
Employee Deferred Compensation Plan
We have a deferred compensation plan, which provides certain key employees,
including our executive management, with the ability to defer the receipt of
compensation in order to accumulate funds for retirement on a tax-deferred
basis. We do not make contributions to the deferred compensation plan and we do
not guarantee returns on the investments. Participant deferrals and investment
gains and losses remain as our liabilities and the underlying assets are subject
to claims of general creditors. In fiscal 2019, 2018 and 2017, we recognized
changes in fair value of the assets under the deferred compensation plan in
"Other income (expense), net" of $8.0 million , $(2.9) million , and $6.1 million ,
respectively. The increase or decrease in the fair value of the investments
relates to the increased or decreased performance of the portfolio on a year
over year basis. Refer to Note 21 , Employee Benefit Plans, of the Notes to
Consolidated Financial Statements under Part II, Item 8 for more information
about our deferred compensation plan.
Share in Gain/Loss, Net and Impairment of Equity Method Investees
Deca Technologies Inc. ("Deca")
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Cypress held 52.4% and 52.5% of Deca's outstanding voting shares as of December
29, 2019 and December 30, 2018 , respectively. Our investment in Deca is
accounted for as an equity method investment.
During the fourth quarter of fiscal 2018, we determined that our investment in
Deca was other-than-temporarily impaired due to Deca's failure to achieve
significant product development and testing milestones. As a result, we
recognized a charge of $41.5 million in order to write down the carrying amount
of the investment to the estimated fair value as of the end of fiscal 2018.
During the second quarter of fiscal 2019, certain key customers notified Deca
management of their intention to significantly reduce their previously estimated
orders from Deca for 2019. Additionally, preliminary conversations between Deca
and certain potential investors during the second quarter of fiscal 2019 had
indicated that the enterprise value of Deca was lower than Cypress's previous
estimates. As a result, we recognized a charge of $29.5 million in order to
write down the carrying amount of the investment to the estimated fair value as
of the end of the second quarter of fiscal 2019.
During fiscal 2019 and 2018, we recorded
OnOctober 1, 2019 , Deca reached a definitive agreement with nepes Corporation ("nepes") to sell Deca'sPhilippines manufacturing facility to nepes, subject to receipt of regulatory approvals and other customary closing conditions. As part of the agreement, nepes has licensed certain Deca technologies, and nepes will purchase a limited number of Deca's shares from certain existing shareholders which may include Cypress. The agreement provides for milestone-based payments from nepes to Deca both forthe Philippines manufacturing facility purchase and the technology license, which milestones are currently expected to be achieved in 2020. The transfer of Deca's manufacturing facility to nepes closed onJanuary 1, 2020 . Following the closing, Deca's remaining assets primarily consist of intellectual property and its new business model will focus on monetizing its intellectual property portfolio as well as providing engineering services. Given the factors described above, there continues to be a substantial risk that the carrying value of our investment in Deca may be further impaired in the future. Conditions that may have a material adverse effect on Deca's business, results of operations and financial condition or on its enterprise value include: • any delays of failure to complete product or intellectual property development milestones-similar to those previously experienced; • any inability of Deca to raise sufficient funding, if needed, for continuing its operations; and
• any inability of Deca to monetize its intellectual property assets.
We may be required to record further impairments resulting in partial or full write down of the carrying value of our investment in Deca if any of the conditions described above were to materialize. SkyHigh OnApril 1, 2019 , we closed the transfer of our NAND business to a newly-formed joint venture between Cypress and SK hynix system ic Inc. ("SKHS"). The joint venture entity is namedSkyHigh Memory Limited ("SkyHigh") and its headquarters are inHong Kong, China . SkyHigh is 60-percent-owned by SKHS and 40-percent-owned by Cypress. We paid$2.4 million in cash as our capital contribution in SkyHigh upon close of the transaction. Our investment in SkyHigh is accounted for as an equity method investment. During fiscal 2019, we recorded$4.1 million for our share of income recorded by SkyHigh.Enovix Corporation ("Enovix") We held 23.2% and 24.8% of Enovix's outstanding equity at the end of fiscal 2019 and 2018, respectively. During the fourth quarter of fiscal 2017, Enovix missed achieving certain key planned product development milestones. Consequently, we concluded that our investment in Enovix was other-than-temporarily impaired and recorded a charge of$51.2 million to write down the carrying amount of the investment to zero. 45 -------------------------------------------------------------------------------- During fiscal 2017, we recorded$8.7 million for our share of losses recorded by Enovix. No further share in losses of Enovix have been recorded since the full impairment of the carrying value of our investment in Enovix in the fourth quarter of fiscal 2017 as described above. Income Taxes We recorded income tax provision of$2.4 million and income tax benefit of$315.6 million in fiscal 2019 and 2018, respectively, and an income tax provision of$11.2 million in fiscal 2017. The income tax provision for 2019 was primarily due to income taxes associated with our non-U.S. operation, partially offset by tax credits and excess tax benefits from stock-based compensation. The income tax benefit for 2018 was primarily due to a release of our valuation allowance previously maintained against certain deferred tax assets of$343.3 million , as discussed further below. The income tax expense for fiscal 2017 was primarily attributable to income taxes associated with our non-U.S. operations, partially offset by release of previously accrued taxes related to the lapsing of statutes of limitation. A valuation allowance is established or maintained when, based on currently available information and other factors, it is more likely than not that all or a portion of the deferred tax assets will not be realized. We regularly assess our valuation allowance against deferred tax assets on a jurisdiction by jurisdiction basis. We consider all available positive and negative evidence, including future reversals of temporary differences, projected future taxable income, tax planning strategies and recent financial results. During the fourth quarter of 2018, we released$343.3 million of the valuation allowance attributable to certainU.S. deferred tax assets. As ofDecember 29, 2019 , for certain federal and state attributes, a valuation allowance of$176.0 million has been recorded for the portion that is not more likely than not to be realized. We will continue to evaluate all evidence in future periods to determine if a further release of the valuation allowance is warranted. Our effective tax rate varies from theU.S. statutory rate primarily due to earnings of foreign subsidiaries taxed at different rates. The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We regularly assess our tax positions in light of legislative, bilateral tax treaties, and regulatory and judicial developments in the many countries in which we and our affiliates do business. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes information regarding our cash and cash equivalents and working capital: As of December 29, 2019 December 30, 2018 December 31, 2017 (In
thousands)
Cash and cash equivalents $ 415,462 $ 285,720 $ 151,596
Working capital, net $ 487,515 $ 396,208 $ 147,854
Key Components of Cash Flows
Year Ended
December 29, 2019 December 30, 2018 December 31, 2017
(in thousands)Net cash provided by operating activities $ 478,915 $ 471,700 $ 403,487 Net cash used in investing activities $ (27,311 ) $ (49,690 )
(14,429 )
Net cash used in financing activities
Fiscal 2019: Operating Activities Net cash provided by operating activities during fiscal 2019 of$478.9 million consisted of (in millions): 46 -------------------------------------------------------------------------------- Net income $
40.4
Non-cash items
Stock-based compensation expenses
106.0
Depreciation and amortization
284.7
Loss on sale of NAND business to joint venture
1.5
Gain on sale or retirement of property and equipment, net
(0.5 )
Share in gain/loss, net and impairment of equity method investees
35.9
Accretion of interest expense on Senior Exchangeable Notes and amortization of
debt and financing costs on other debt 17.9
Loss on extinguishment of debt 6.4
Restructuring and other costs 3.9
Changes in operating asset and liability accounts (17.3 )
$ 478.9
The decrease in net cash due to changes in operating assets and liabilities
during fiscal 2019 of $17.3 million was primarily due to a decrease in accounts
payable and accrued and other liabilities of $101.0 million mainly due to timing
of payments to vendors. This was partially offset by an increase of $67.5
million in price adjustments and other revenue reserves for sales to
distributors (the "DPA Reserve") mainly due to a transition of business between
distributors in Japan during the third quarter of fiscal 2019. Other changes
that impacted the operating assets and liabilities included the following:
•
adoption of ASU No. 2016-02, "Leases (ASC Topic 842)," partially offset by
$44.6 million of operating lease liability; • a decrease in accounts receivable of$23.4 million due to timing of invoicing and collections; and
• an increase in inventories of
builds to support certain supplier transitions.
Investing Activities
In fiscal 2019, we used approximately
• property and equipment expenditures of
of manufacturing facility equipment;
• cash paid for purchase of noncontrolling interest in AgigA of $3.7
million ; and
• cash paid for equity method investments of
These cash outflows were partially offset by proceeds of
Financing Activities
In fiscal 2019, we used approximately
• payments of
• dividend payments of
• payments of
• payments of$19.4 million on net shares settlement of restricted stock units; and
• payments of
These payments were partially offset by proceeds of$447.0 million from draws on our Revolving Credit Facility and proceeds of$38.6 million from employee equity awards. Fiscal 2018: Operating Activities 47
-------------------------------------------------------------------------------- Net cash provided by operating activities during fiscal 2018 of$471.7 million consisted of (in millions): Net income $ 354.8 Non-cash items Stock-based compensation expenses
96.0
Depreciation and amortization
283.0
Impairment of assets held for sale
76.6
Loss on sale or retirement of property and equipment, net
7.5
Share in gain/loss, net and impairment of equity method investees
57.4
Accretion of interest expense on Senior Exchangeable Notes and amortization of
debt and financing costs on other debt
19.5
Release of valuation allowance
(343.3 )
Loss on extinguishment of debt
5.2
Restructuring and other costs
16.1
Changes in operating asset and liability accounts (101.1 )
$ 471.7
The decrease in net cash due to changes in operating assets and liabilities
during fiscal 2018 of
• an increase in accounts receivable of$23.8 million mainly due to an increase in revenue;
• an increase in inventories of
• an increase in other current and long-term assets of
• a decrease in accounts payable and accrued and other liabilities of
million mainly due to timing of payments and payments related to
restructuring activities;
• a decrease in price adjustments and other distributor related reserves of
• an increase in assets held for sale related inventories of
due to the sale of NAND business.
Investing Activities
In fiscal 2018, we used approximately
•
relating to purchases of certain laboratory and manufacturing facility
equipment.
These cash outflows were partially offset by $5.8 million of cash received on
the sales of property and equipment, and $18.5 million of cash received related
to our investments in privately held equity interests.
Financing Activities
In fiscal 2018, we used approximately
•
• net repayments of
Facility;
•
•
•
The above payments were partially offset by proceeds of
Liquidity and Contractual Obligations
Summary of our debt balances is included below:
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December 29, 2019
Less: Unamortized
Principal amount discount and issuance Net carrying value
outstanding costs outstanding
(in thousands)
Revolving Credit Facility $ 300,000 $ - $ 300,000
2% Exchangeable Senior Notes due
2020 11,984 223 11,761
4.5% Convertible Senior Notes
due 2022 287,495 20,685 266,810
2% Convertible Senior Notes due
2023 150,000 11,301 138,699
Finance lease obligations 9,153 - 9,153
Total debt $ 758,632 $ 32,209 $ 726,423
Of the net carrying value outstanding, $11.8 million related to 2% Exchangeable
Senior Notes due 2020 and $1.9 million related to finance lease obligations were
classified as current liabilities as of December 29, 2019 .
December 30, 2018
Less: Unamortized
Principal amount discount and issuance Net carrying value
outstanding costs outstanding
(in thousands)
Term Loan B $ 476,310 $ 8,391 $ 467,919
2% Exchangeable Senior Notes due
2020 11,990 552 11,438
4.5% Convertible Senior Notes
due 2022 287,500 30,774 256,726
2% Convertible Senior Notes due
2023 150,000 14,943 135,057
Finance lease obligations 10,038 - 10,038
Total debt $ 935,838 $ 54,660 $ 881,178
Of the net carrying value outstanding, $6.9 million related to Term Loan B and
finance lease obligation was classified as current liabilities as of December
30, 2018 .
On March 12, 2015 , we entered into an Amended and Restated Credit and Guaranty
Agreement with Morgan Stanley Bank, N.A. , as issuing bank, and other lenders (as
amended, the "Credit Agreement"). The Credit Agreement establishes a credit
facility (the "Credit Facility" or the "Senior Secured Credit Facility") that
includes a revolving loan facility (the "Revolving Credit Facility") and
provides for the possibility of term loans.
The Revolving Credit Facility, as amended, provides for $700 million of
borrowing capacity, of which $400.0 million was undrawn as of December 29, 2019 .
As of December 29, 2019 , we were in compliance with all of the financial
covenants under all of our debt facilities.
Refer to Note 16 , Debt, of the Notes to Consolidated Financial Statements
under Part II, Item 8 for more information on our debt obligations.
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Contractual Obligations
The following table summarizes our contractual obligations as of December 29,
2019 :
Total 2020 2021 and 2022 2023 and 2024 After 2024
(In thousands)
Purchase obligations (1)
55,599 16,244 15,949 9,945 13,461
Finance lease commitments 10,081 2,196 4,380 2,583 922
2% Exchangeable Senior Notes due
2020 (2) 11,984 11,984 - - -
4.5% Convertible Senior Notes
due 2022 (2) 287,495 9 287,486 - -
2% Convertible Senior Notes due
2023(2) 150,000 - - 150,000 -
Revolving credit facility 300,000 - 300,000 - -
Interest and commitment fee due
on debt (3) 54,766 26,459 26,661 1,632 14
Asset retirement obligations 5,959 1,876 3,710 340 33
Total contractual obligations
(4) $ 1,069,633 $ 153,904 $ 703,895 $ 197,404 $ 14,430
(1) Purchase obligations primarily include commitments under "take or pay"
arrangements, non-cancelable purchase orders for materials, services,
manufacturing equipment, building improvements and supplies in the ordinary
course of business. Purchase obligations are defined as enforceable
agreements that are legally binding on us and that specify all significant
terms, including quantity, price and timing.
(2) The notes are presented based on scheduled payment due dates and had become
exchangeable or convertible (as applicable) at the holders' options during
the third and fourth quarters of fiscal 2019.
(3) Interest and commitment fees due on variable debt is based on the effective
interest rates as of December 29, 2019 .
(4) Total contractual obligations do not include transaction fees of
approximately $63 million which are contingently payable upon thecompletion of the proposed Merger with Infineon. If the proposed Merger
does not close under circumstances in which we receive a reverse break-up
fee, transaction fees of approximately
payable by us. Additionally, the contractual obligations do not include
which are payable upon the closing of the Merger, and the remaining 50% of
which are potentially payable six months after the closing of the Merger.
Capital Resources and Financial Condition Our long-term strategy is to minimize the amount of cash required for operational purposes and to utilize the remaining amount of our cash for investments in interest-bearing and highly liquid cash equivalents and debt securities, repayment of debt, the purchase of our stock through our stock buyback program and payments of regularly scheduled cash dividends. In addition, we may use excess cash to invest in strategic investments and partnerships and pursue acquisitions. Our investment policy defines three main objectives when making investments: security of principal, liquidity, and maximization of after-tax yield. We invest excess cash in various financial securities subject to certain requirements including security type, duration, concentration limits, and credit rating profile. As ofDecember 29, 2019 , a total cash and cash equivalents position of$415.5 million is available for use in current operations. As ofDecember 29, 2019 , approximately 12.2% of our cash and cash equivalents were held by our non-U.S. subsidiaries. While these amounts are primarily invested inU.S. dollars, a portion is held in foreign currencies. All offshore balances are exposed to local political, banking, currency control and other risks. In addition, these amounts, if repatriated may be subject to tax and other transfer restrictions. OnJuly 31, 2019 , we amended the Revolving Credit Facility to increase the available amount from$540 million to$700 million and extend its maturity fromMarch 12, 2020 toJanuary 31, 2021 . We may, at our sole discretion, extend the maturity for another six months toJuly 31, 2021 . The financial covenants were amended to increase the maximum total leverage ratio from 3.75 to 4.0. Subject to the terms and conditions set forth in the amended Revolving Credit Facility, the completion of the Merger will trigger the change of control provision of the Revolving Credit Facility causing the debt to become payable immediately. We borrowed$447 million under the amended Revolving Credit Facility and repaid the entire outstanding Term Loan B principal balance of approximately$448 50 -------------------------------------------------------------------------------- million inJuly 2019 , resulting in an extinguishment of Term Loan B, which was scheduled to mature onJuly 5, 2021 . As a result, we recorded a debt extinguishment loss of$6.4 million in connection with the write-off of unamortized debt discount and issuance costs, which was recorded in "Interest expense" in the Consolidated Statements of Operations. Subsequently, we repaid$147.0 million of the outstanding amended Revolving Credit Facility during fiscal 2019. We believe that liquidity provided by existing cash, cash equivalents, our cash from operations and our borrowing arrangements will provide sufficient capital to meet our requirements for at least the next twelve months. However, if economic conditions deteriorate, debt covenants unexpectedly impact our ability to borrow and other factors beyond our control adversely affect our estimates of our future cash requirements, we could be required to fund our cash requirements using alternative financing. There can be no assurance that additional financing, if needed, would be available on terms acceptable to us if at all. We may also choose at any time to raise additional capital or debt to strengthen our financial position, facilitate growth, enter into strategic initiatives including the acquisition of other companies, repurchase shares of our stock, increase our dividends and/or provide us with additional liquidity to take advantage of other business opportunities that arise. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements included in this Annual Report on Form 10-K and the data used to prepare them. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States . Note 1 , Description of Business and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements under Part II, Item 8 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. We are required to make estimates, judgments and assumptions in the course of preparing our financial statements. We base our estimates, judgments and assumptions on historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. While we believe that our estimates, judgments and assumptions are reasonable, actual results may differ from these estimates under different assumptions or conditions. Our critical accounting estimates and policies are as follows:
Revenue Recognition: estimates related to (i) distributor price adjustments and stock rotation, which are primarily determined based on our analysis of historical trends experienced for similar revenue transactions; and (ii) determining whether reliable information related to an arrangement with a customer that includes variable contingent consideration is available.
Valuation of Inventories: estimates related to write-down of our inventories that have become obsolete or are in excess of anticipated demand or net realizable value. Primary factors used in making this estimate include historical sales levels, demand forecast, backlog and age of the inventory items.
Share-Based Compensation: estimates related to measuring the level of achievement of performance milestones, based on forecasted operating results.
Accounting for Income Taxes: estimating reserves needed against uncertain tax positions. Such reserves are recorded primarily based on judgmental assessment of tax regulations and case law. Recent Accounting Pronouncements See "Recent Accounting Pronouncements" in Note 1 , Description of Business and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements under Part II, Item 8 of this Annual Report on Form 10-K.
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