|
Previous: SPORTSMANS GUIDE INC, 10-Q, EX-27, 2000-11-15 |
Next: CYPRESS SEMICONDUCTOR CORP /DE/, 10-Q, EX-27.1, 2000-11-15 |
SECURITIES
AND
EXCHANGE COMMISSION FORM 10-Q |X| QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
|
Delaware | 94-2885898 |
---|---|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Part I FINANCIAL INFORMATION | |||
Item 1. Financial Statements | |||
Condensed Consolidated Balance Sheets | 1 | ||
Condensed Consolidated Statements of Operations | 3 | ||
Condensed Consolidated Statements of Cash Flows | 5 | ||
Notes to Condensed Consolidated Financial Statements | 6 | ||
Item 2. Management's Discussion and Analysis of Financial Condition |   ; | 18 | |
Item 3. Quantitative and Qualitative Disclosure About Market Risk | 30 | ||
Part II OTHER INFORMATION | |||
Item 1. Legal Proceedings | 31 | ||
Item 6. Exhibits and Reports on Form 8-K | 31 | ||
Signatures | 32 |
CYPRESS SEMICONDUCTOR CORPORATIONCONDENSED
CONSOLIDATED BALANCE SHEETS
|
October 1, 2000 |
January 2, 2000 | ||||
---|---|---|---|---|---|
ASSETS | |||||
Current assets: | |||||
Cash and cash equivalents | $531,302 | $165,910 | |||
Short-term investments | 299,943 | 121,859 | |||
Total cash, cash equivalents and short-term investments | 831,245 | 287,769 | |||
Accounts receivable, net of allowances of $3,680 at October 1, 2000 | |||||
and $3,471 at January 2, 2000 | 181,393 | 104,097 | |||
Inventories, net | 98,157 | 98,786 | |||
Other current assets | 92,878 | 78,403 | |||
Total current assets | 1,203,673 | 569,055 | |||
Property, plant and equipment, net | 512,296 | 359,990 | |||
Long-term investments | 252,737 | 111,324 | |||
Restricted investments | 61,031 | 61,198 | |||
Other assets | 74,990 | 52,026 | |||
Total assets | $2,104,727 | $1,153,593 | |||
The accompanying notes form an integral part of these condensed consolidated financial statements. 1 CYPRESS SEMICONDUCTOR CORPORATIONCONDENSED
CONSOLIDATED BALANCE SHEETS
|
October 1, 2000 |
January 2, 2000 | ||||
---|---|---|---|---|---|
LIABILITIES AND STOCKHOLDERS EQUITY | |||||
Current liabilities: | |||||
Accounts payable | $ 81,133 | $ 104,269 | |||
Accrued liabilities | 93,259 | 56,731 | |||
Deferred income on sales to distributors | 39,573 | 21,061 | |||
Income taxes payable | 81,164 | 20,311 | |||
Total current liabilities | 295,129 | 202,372 | |||
Convertible subordinated notes | 730,500 | 160,000 | |||
Deferred income tax | 58,844 | 56,100 | |||
Other long-term liabilities | 9,935 | 11,445 | |||
Total liabilities | 1,094,408 | 429,917 | |||
Commitments and Contingencies (Note 16) | |||||
Stockholders' equity: | |||||
Preferred stock, $0.01 par value, 5,000 shares authorized; | |||||
none issued and outstanding | | | |||
Common stock, $0.01 par value, 650,000 and 250,000 shares authorized; | |||||
129,484 and 122,367 issued; 124,314 and 117,197 outstanding | |||||
at October 1, 2000 and January 2, 2000 | 1,295 | 1,224 | |||
Additional paid-in capital | 669,085 | 595,685 | |||
Notes receivable from stockholders | (2,128 | ) | (8,186 | ) | |
Retained earnings | 414,791 | 207,677 | |||
1,083,043 | 796,400 | ||||
Less shares of common stock held in treasury at cost: | |||||
5,170 and 5,170 shares at October 1, 2000 and January 2, 2000 | (72,724 | ) | (72,724 | ) | |
Total stockholders' equity | 1,010,319 | 723,676 | |||
Total liabilities and stockholders' equity | $2,104,727 | $1,153,593 | |||
Three Months Ended | |||||
---|---|---|---|---|---|
October 1, 2000 |
October 3, 1999 | ||||
Revenues | $356,229 | $194,871 | |||
Costs and expenses: | |||||
Cost of revenues | 147,786 | 105,514 | |||
Research and development | 47,893 | 35,124 | |||
Selling, general and administrative | 41,010 | 28,425 | |||
Acquisition and merger costs | 2,951 | 2,005 | |||
Total operating costs and expenses | 239,640 | 171,068 | |||
Operating income | 116,589 | 23,803 | |||
Interest expense | (8,016 | ) | (2,517 | ) | |
Interest income and other | 17,008 | 4,236 | |||
Income before income taxes | 125,581 | 25,522 | |||
Provision for income taxes | 28,358 | 2,259 | |||
Net income | $97,223 | $23,263 | |||
Net income per share: | |||||
Basic | $0.79 | $0.20 | |||
Diluted | $0.68 | $0.19 | |||
Shares used in per share calculations: | |||||
Basic | 123,777 | 113,760 | |||
Diluted | 151,112 | 124,114 |
The accompanying notes form an integral part of these condensed consolidated financial statements. 3 |
CYPRESS SEMICONDUCTOR CORPORATIONCONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Nine Months Ended | |||||
---|---|---|---|---|---|
October 1, 2000 |
October 3, 1999 | ||||
Revenues | $921,081 | $524,989 | |||
Costs and expenses: | |||||
Cost of revenues | 413,767 | 294,483 | |||
Research and development | 134,277 | 105,116 | |||
Selling, general and administrative | 113,413 | 81,123 | |||
Acquisition and merger costs | 14,752 | 11,818 | |||
Restructuring credits | (485 | ) | (3,811 | ) | |
Total operating costs and expenses | 675,724 | 488,729 | |||
Operating income | 245,357 | 36,260 | |||
Interest expense | (18,210 | ) | (7,444 | ) | |
Interest income and other | 43,822 | 11,408 | |||
Income before income taxes | 270,969 | 40,224 | |||
Provision for income taxes | 63,855 | 4,455 | |||
Net income | $207,114 | $35,769 | |||
Net income per share: | |||||
Basic | $1.71 | $0.33 | |||
Diluted | $1.49 | $0.31 | |||
Shares used in per share calculations: | |||||
Basic | 121,350 | 108,595 | |||
Diluted | 146,426 | 115,347 |
Nine Months Ended | |||||
---|---|---|---|---|---|
October 1, 2000 |
October 3, 1999 | ||||
Cash flow from operating activities: | |||||
Net income | $207,114 | $35,769 | |||
Adjustments to reconcile net income to net cash | |||||
provided by operating activities: | |||||
Depreciation and amortization | 100,093 | 81,815 | |||
Gain on sale of FCT product line | (5,000 | ) | | ||
Acquired in-process research and development | 2,025 | 4,019 | |||
Other non-recurring costs | 1,964 | | |||
Restructuring credits | (485 | ) | (3,811 | ) | |
Loss on sales of property, plant and equipment | 1,408 | 711 | |||
Amortization of debt issuance costs | 2,539 | 797 | |||
Changes in operating assets and liabilities: | |||||
Accounts receivable | (77,353 | ) | (23,788 | ) | |
Inventories | (525 | ) | (21,136 | ) | |
Other assets | (14,006 | ) | (10,502 | ) | |
Accounts payable and accrued liabilities | 15,734 | 16,974 | |||
Deferred income | 18,512 | 6,120 | |||
Income taxes payable | 60,853 | 11,044 | |||
Net cash flow generated from operating activities | 312,873 | 98,012 | |||
Cash flow from investing activities: | |||||
Purchase of investments | (424,473 | ) | (138,746 | ) | |
Sale or maturities of investments | 104,975 | 35,605 | |||
Notes Receivable | | (7 | ) | ||
Acquisition of Anchor | | (14,956 | ) | ||
Acquisition of Arcus | | (9,883 | ) | ||
Acquisition of technology rights | | (6,950 | ) | ||
Acquisition of property, plant and equipment | (251,213 | ) | (77,111 | ) | |
Proceeds from sale of FCT product line | 7,500 | | |||
Proceeds from the sale of equipment | 325 | 8,679 | |||
Net cash flow used for investing activities | (562,886 | ) | (203,369 | ) | |
Cash flow from financing activities: | |||||
Issuance of convertible subordinated notes, net of issuance costs | 554,812 | | |||
Issuance of common shares (1) | 56,160 | | |||
Re-issuance of treasury shares | | 111,307 | |||
Repayment of stockholders' notes | 6,073 | (2,653 | ) | ||
Issuance of notes to employees | | (7,892 | ) | ||
Borrowing from (repayment of) notes payable and line of credit | (1,085 | ) | 499 | ||
Other long-term liabilities | (555 | ) | (836 | ) | |
Net cash flow generated by financing activities | 615,405 | 100,425 | |||
Net change in cash during the quarter ended March 31, 1999 for merger | | (2,339 | ) | ||
Net increase in cash and cash equivalents | 365,392 | (7,271 | ) | ||
Cash and cash equivalents, beginning of period | 165,910 | 152,243 | |||
Cash and cash equivalents, end of period | $531,302 | $144,972 | |||
Supplemental Disclosure of Non-Cash Flow Information | |||||
(1) Common stock issued for acquisitions | 10,214 | 6,200 |
Cypress |
SLM |
Eliminations |
Total |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
(In thousands) | ||||||||||
Total revenue | $565,074 | $ | $(222 | ) | $564,852 | |||||
Net income | $117,669 | $(7,778 | ) | $ | $109,891 |
Six months ended July 4, 1999: |
Cypress |
SLM |
Eliminations |
Total |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
(In thousands) | ||||||||||
Total revenue | $330,118 | $ | $ | $330,118 | ||||||
Net income | $17,268 | $(4,762 | ) | $ | $12,506 |
Nine months ended October 3, 1999: |
Cypress |
SLM |
Eliminations |
Total |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
(In thousands) | ||||||||||
Total revenue | $525,134 | $ | $(145 | ) | $524,989 | |||||
Net income | $42,515 | $(6,746 | ) | $ | $35,769 |
(In thousands) | |||||
---|---|---|---|---|---|
Fair value of tangible net assets | $51 | ||||
In-process research and development | 2,025 | ||||
Current technology | 1,752 | ||||
Assembled workforce | 802 | ||||
Excess of purchase price over identifiable net assets acquired | 5,584 | ||||
Total | $10,214 | ||||
Cypress |
Alation |
Total |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
(In thousands) | ||||||||||
Total revenue | $264,241 | $ | $264,241 | |||||||
Net income | $ 53,120 | $(1,080 | ) | $ 52,040 |
Six months ended July 4, 1999: |
Cypress |
Alation |
Total |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
(In thousands) | ||||||||||
Total revenue | $329,920 | $ 198 | $330,118 | |||||||
Net income | $ 18,546 | $(1,278 | ) | $ 17,268 |
Nine months ended October 3, 1999: |
Cypress |
Alation |
Total |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
(In thousands) | ||||||||||
Total revenue | $524,895 | $ 239 | $525,134 | |||||||
Net income | $ 44,865 | $(2,350 | ) | $ 42,515 |
8
The results of operations previously reported by the separate companies prior to the merger and included in the results of operations for the six month period ended July 4, 1999 and the nine months ended October 3, 1999 are presented below. Six months ended July 4, 1999: |
Cypress |
Galvantech |
Total |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
(In thousands) | ||||||||||
Total revenue | $313,114 | $16,806 | $329,920 | |||||||
Net income | $ 17,164 | $ 1,382 | $ 18,546 |
Nine months ended October 3, 1999: |
Cypress |
Galvantech |
Total |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
(In thousands) | ||||||||||
Total revenue | $497,611 | $27,284 | $524,895 | |||||||
Net income | $ 43,581 | $ 1,284 | $ 44,865 |
(In thousands) | |||||
---|---|---|---|---|---|
Fair value of tangible net assets | $ 391 | ||||
In-process research and development | 2,500 | ||||
Current technology | 4,400 | ||||
Assembled workforce | 1,600 | ||||
Deferred compensation | 5,553 | ||||
Excess of purchase price over identifiable net assets acquired | 3,264 | ||||
Total | $17,708 | ||||
(In thousands) | |||||
---|---|---|---|---|---|
Fair value of tangible net liabilities . | $ (919 | ) | |||
In-process research and development | 1,519 | ||||
Assembled workforce | 1,320 | ||||
Current technology | 13,036 | ||||
Total | $14,956 | ||||
October 1, 2000 |
January 2, 2000 | ||||||
---|---|---|---|---|---|---|---|
(In thousands) | |||||||
Cash and cash equivalents | $ 531,302 | $165,910 | |||||
Short-term investments | 299,943 | 121,859 | |||||
Long-term investments | 252,737 | 111,324 | |||||
Restricted investments | 61,031 | 61,198 | |||||
Total | $1,145,013 | $460,291 | |||||
10 |
Note 12 Inventories |
October 1, 2000 |
January 2, 2000 | ||||||
---|---|---|---|---|---|---|---|
(In thousands) | |||||||
Raw materials | $ 9,634 | $13,360 | |||||
Work-in-process | 52,363 | 49,328 | |||||
Finished goods | 36,160 | 36,098 | |||||
Total | $98,157 | $98,786 | |||||
October 1, 2000 |
October 3, 199 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Income |
Shares |
Per-Share Amount |
Income |
Shares |
Per-Share Amount | ||||||||
(In thousands, except per share amounts) | |||||||||||||
Basic EPS: | |||||||||||||
Net income | $ 97,223 | 123,777 | $0.79 | $23,263 | 113,760 | $0.20 | |||||||
Effects of dilutive securities: | |||||||||||||
6% Convertible Notes | 1,464 | 6,772 | | | |||||||||
4% Convertible Notes | 1,747 | 6,119 | | | |||||||||
3.75% Convertible Notes | 1,589 | 4,597 | | | |||||||||
7.00% Convertible Notes | | | | 50 | |||||||||
Warrants | | 8 | | 6 | |||||||||
Stock options | | 9,839 | | 10,298 | |||||||||
Diluted EPS: | |||||||||||||
Net income | $102,023 | 151,112 | $0.68 | $23,263 | 124,114 | $0.19 | |||||||
Nine months ended October 1, 2000 and October 3, 1999: |
October 2, 2000 |
October 3, 199 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Income |
Shares |
Per-Share Amount |
Income |
Shares |
Per-Share Amount | ||||||||
(In thousands, except per share amounts) | |||||||||||||
Basic EPS: | |||||||||||||
Net income | $207,114 | 121,350 | $1.71 | $35,769 | 108,595 | $0.33 | |||||||
Effects of dilutive securities: | |||||||||||||
6% Convertible Notes | 4,800 | 6,772 | | | |||||||||
4% Convertible Notes | 5,122 | 5,626 | | | |||||||||
3.75% Convertible Notes | 1,717 | 1,650 | | | |||||||||
7.00% Convertible Notes | 5 | 21 | | 48 | |||||||||
Warrants | | 7 | | 6 | |||||||||
Stock options | | 11,000 | | 6,698 | |||||||||
Diluted EPS: | |||||||||||||
Net income | $218,758 | 146,426 | $1.49 | $35,769 | 115,347 | $0.31 | |||||||
| The shutdown of Fab 3, located in Bloomington, Minnesota and consolidation of parts of Fab 3 operations with other operations of Cypress. |
| The discontinuance of the 0.6-micron 256K Static Random Access Memory (SRAM) production in Fab 2 located in Texas. |
| The conversion of an existing research and development fab located in San Jose (Fab 1) to eight-inch capability in order to be compatible with the state of the art eight-inch Minnesota manufacturing facility. |
| The transfer of Cypresss test operations from its subcontractor, Alphatec, in Thailand to Cypresss production facility in the Philippines. |
The restructuring activities described above included the termination of approximately 850 employees, primarily from manufacturing, both at Cypress and at Alphatec. During Q2 1998, in conjunction with the closure of Fab 3, Cypress established a reserve for $1.4 million to cover severance costs associated with the reduction of work force at that location. This was based on the anticipated level of payments that would be made to personnel included in the work force reduction. As a part of a review of inventory, it was noted that Cypress required an additional reserve of $0.5 million to cover inventory that was written off. This related to a change in estimate regarding inventory that had been previously reserved. The following tables set forth charges taken against the restructuring reserve during the nine-months ended October 1, 2000 and Cypresss 1998 restructuring expense and charges taken against the reserve from the date the restructuring commenced through October 1, 2000, respectively. |
Balance January 2, 2000 |
Utilized |
Credits |
Balance October 1, 2000 | ||||||
---|---|---|---|---|---|---|---|---|---|
(In thousands) | |||||||||
Other fixed asset related charges(1) | $ 1,807 | $ (207 | ) | $ | $1,600 |
1998 Restructuring Reserve |
Utilized |
Credits |
Balance October 1, 2000 | ||||||
---|---|---|---|---|---|---|---|---|---|
(In thousands) | |||||||||
Write-down of inventory (1) | $ 3,250 | $(3,250 | ) | $ | $ | ||||
Severance and other employee related charges(1) (2) . | 5,334 | (2,234 | ) | (3,100 | ) | $ | |||
Other fixed asset related charges(1) | 3,030 | (910 | ) | (520 | ) | 1,600 | |||
Provision for phase-down and consolidation of | |||||||||
manufacturing facilities(1) | 976 | (637 | ) | (339 | ) | | |||
Total | $12,590 | $(7,031 | ) | $(3,959 | ) | $1,600 | |||
|
(1) | Classified on the Condensed Consolidated Balance Sheet as part of accrued liabilities. |
(2) | The amount utilized represents cash payments related to severance of approximately 850 employees. |
Balance January 2, 2000 |
Utilized |
Credits |
Ending Balance | ||||||
---|---|---|---|---|---|---|---|---|---|
(In thousands) | |||||||||
Operating lease costs(1) | $ 506 | $ (21 | ) | $(485 | ) | $ |
1997 Restructuring Reserve |
Utilized |
Credits |
Ending Balance | ||||||
---|---|---|---|---|---|---|---|---|---|
(In thousands) | |||||||||
Operating lease costs(1) | $3,615 | $(3,130 | ) | $(485 | ) | $ | |||
Severance and other employee related charges(1) | 207 | (207 | ) | | | ||||
Transaction and other costs(1) | 2,164 | (2,164 | ) | | | ||||
Total | $5,986 | $(5,501 | ) | $(485 | ) | $ | |||
|
(1) | Classified on the Condensed Consolidated Balance Sheet as part of accrued liabilities. |
| Enforce its patents or other intellectual property rights. |
| Protect its trade secrets and know-how. |
| Determine the validity or scope of the proprietary rights of others. |
| Defend against claims of infringement or invalidity. |
Three Months Ended |
Nine Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|
October 1, 2000 |
October 3, 1999 |
October 1, 2000 |
October 3, 1999 | ||||||
(In thousands) | |||||||||
Memory | $173,375 | $ 78,051 | $437,367 | $215,765 | |||||
Non-memory | 182,854 | 116,820 | 483,714 | 309,224 | |||||
Total consolidated revenues | $356,229 | $194,871 | $921,081 | $524,989 | |||||
Business Segment Profit (Loss) |
Three Months Ended |
Nine Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|
October 1, 2000 |
October 3, 1999 |
October 1, 2000 |
October 3, 1999 | ||||||
(In thousands) | |||||||||
Memory | $ 56,857 | $ 55 | $112,226 | $ (19,561 | ) | ||||
Non-memory | 62,683 | 25,753 | 147,398 | 63,828 | |||||
Acquisition and merger costs | (2,951 | ) | (2,005 | ) | (14,752 | ) | (11,818 | ) | |
Restructuring credits | | | 485 | 3,811 | |||||
Interest income and other | 17,008 | 4,236 | 43,822 | 11,408 | |||||
Interest expense | (8,016 | ) | (2,517 | ) | (18,210 | ) | (7,444 | ) | |
Income before provision for income taxes . | $125,581 | $ 25,522 | $270,969 | $ 40,224 | |||||
Three Months Ended October 1, 2000 |
Nine Months Ended October 1, 2000 | ||||
---|---|---|---|---|---|
(In thousands) | |||||
Network | $144,031 | $376,904 | |||
Wireless | 136,968 | 335,366 | |||
Computation & Other | 75,230 | 208,811 | |||
Total consolidated revenues | $356,229 | $921,081 | |||
Three Months Ended |
Nine Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|
October 1, 2000 |
October 3, 1999 |
October 1, 2000 |
October 3, 1999 | ||||||
(In thousands) | |||||||||
Memory | $173,375 | $ 78,051 | $437,367 | $215,765 | |||||
Non-memory | 182,854 | 116,820 | 483,714 | 309,224 | |||||
Total consolidated revenues | $356,229 | $194,871 | $921,081 | $524,989 | |||||
| Product mix; |
| Factory capacity and utilization; |
| Manufacturing yields; |
| Availability of certain raw materials; |
| Terms negotiated with third-party contractors; and |
| Foreign currency fluctuations. |
| The shutdown of Fab 3 located in Bloomington, Minnesota and consolidation of parts of Fab 3 operations with other operations of Cypress. |
| The discontinuance of the 0.6-micron 256K SRAM production in Fab 2 located in Texas. |
| The conversion of an existing research and development fab located in San Jose (Fab 1) to eight-inch capability in order to be compatible with the state of the art eight-inch Minnesota manufacturing facility. |
| The transfer of Cypresss test operations from its subcontractor, Alphatec, in Thailand to Cypresss production facility in the Philippines. |
Three Months Ended |
Nine Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|
October 1, 2000 |
October 3, 1999 |
October 1, 2000 |
October 3, 1999 | ||||||
(In thousands) | |||||||||
Basic net income per share | $0.79 | $0.20 | $1.71 | $0.33 | |||||
Goodwill & Acquisition costs net of taxes per share . | $0.02 | $0.02 | $0.13 | $0.11 | |||||
Non-recurring gain on sale of FCT per share | $ | $ | $(0.04 | ) | $ | ||||
Restructuring credits net of taxes per share | $ | $ | $ | $(0.03 | ) | ||||
Basic earnings before goodwill per share | $0.81 | $0.22 | $1.80 | $0.41 | |||||
Reconciliation of diluted net income per share to diluted earnings before goodwill: |
Three Months Ended |
Nine Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|
October 1, 2000 |
October 3, 1999 |
October 1, 2000 |
October 3, 1999 | ||||||
(In thousands) | |||||||||
Diluted net income per share | $0.68 | $0.19 | $1.49 | $0.31 | |||||
Goodwill & Acquisition costs net of taxes per share . | $0.02 | $0.02 | $0.11 | $0.11 | |||||
Non-recurring gain on sale of FCT per share | $ | $ | $(0.03 | ) | $ | ||||
Restructuring credits net of taxes per share | $ | $ | $ | $(0.03 | ) | ||||
Diluted earnings before goodwill per share | $0.70 | $0.21 | $1.57 | $0.39 | |||||
| the intense competitive pricing pressure to which our products are subject, which can lead to rapid and unexpected declines in average selling prices; |
| the complexity of our manufacturing processes and the sensitivity of our production costs to declines in manufacturing yields, which make yield problems both possible and costly when they occur; and |
| the need for constant, rapid new product introductions which present an ongoing design and manufacturing challenge, which can be significantly impacted by even relatively minor errors, and which may result products never achieving expected market demand. |
As a result of these or other factors we could fail to achieve our expectations as to future revenues, gross profit and income from operations. Any downward fluctuation or failure to meet expectations will likely adversely affect the value of your investment in Cypress. In addition, because we recognize revenues from sales to our domestic distributors only when these distributors make a sale to customers, we are highly dependent on the accuracy of their resale estimates. The occurrence of inaccurate estimates also contributes to the difficulty in predicting our quarterly revenue and results of operations. We face periods of industry-wide semiconductor over-supply which harm our results. The semiconductor industry has historically been characterized by wide fluctuations in the demand for, and supply of, semiconductors. These fluctuations have helped produce many occasions when supply and demand for semiconductors have not been balance. In the past, these industry-wide fluctuations in demand, which have resulted in under-utilization of our manufacturing capacity, have harmed our operating results. In some cases, industry downturns with these characteristics have lasted more than a year. If these cycles continue, they will seriously harm our business, financial condition and results of operations. Our financial results could be seriously harmed if the markets in which we sell our products do not grow. Our continued success depends in large part on the continued growth of various electronics industries that use our semiconductors, including the following industries: |
| data communications and telecommunications equipment; |
| computers and computer related peripherals; |
| automotive electronics; |
| industrial controls; |
| customer electronics equipment; and |
| military equipment. |
A significant portion of our products is incorporated into data communications and telecommunication end products. Any decline in the demand for networking applications, mass storage, telecommunications, cellular base stations, cellular handsets and other personal communication devices which incorporate our products could seriously harm our business, financial condition and operating results. In addition, certain of our products, including Universal Serial Bus microcontrollers, high-frequency clocks and static RAMs, are incorporated into computer and computer-related products, which have historically experienced significant fluctuations in demand. We may also be seriously harmed by slower growth in the other markets in which we sell our products. 24 We are affected by a general pattern of product price decline and fluctuations, which can harm our business. Even in the absence of an industry downturn, the average selling prices of our products have historically decreased during the productslives, and we expect this trend to continue. In order to offset these average selling price decreases, we attempt to decrease manufacturing costs of our products, and to introduce new, higher priced products that incorporate advanced features. If our efforts are not successful or do not occur in a timely manner, or if our newly introduced products do not gain market acceptance, our business, financial condition and results of operations could be seriously harmed. In addition to following the general pattern of decreasing average selling prices, the selling prices for certain products, particularly commodity static RAM products, fluctuate significantly with real and perceived changes in the balance of supply and demand for these products. Growth in worldwide supply of static RAMs in recent periods resulted in a decrease in average selling prices for such products. If we are unable to decrease per unit manufacturing costs faster than a rate equal to or faster than the rate at which average selling prices continue to decline, our business, financial condition and results of operations will be seriously harmed. Furthermore, we expect our competitors to invest in new manufacturing capacity and achieve significant manufacturing yield improvements in the future. These developments could dramatically increase worldwide supply of static RAM products and result in associated downward pressure on prices. We may be unable to adequately protect our intellectual property rights, and may face significant expenses as a result of ongoing or future litigation. Protection of intellectual property rights is essential to keep others from copying the innovations that are central to our existing and future products. Consequently, we may become involved in litigation to enforce our patents or other intellectual property rights, to protect our trade secrets and know-how, to determine the validity or scope of the proprietary rights of others, or to defend against claims of invalidity. This kind of litigation can be expensive, regardless of whether we win or lose. Also, we are now and may again become involved in litigation relating to alleged infringement by us of others patents or other intellectual property rights. This kind of litigation is frequently expensive to both the winning party and the losing party and takes up significant amounts of managements time and attention. In addition, if we lose such a lawsuit, a court could require us to pay substantial damages and/or royalties, or prohibit us from using essential technologies. For these and other reasons, this kind of litigation could seriously harm our business, financial condition and results of operations. Also, although we may seek to obtain a license under a third partys intellectual property rights in order to bring an end to certain claims or actions asserted against us, we may not be able to obtain such a license on reasonable terms or at all. We have entered into technology license agreements with third parties that give those parties the right to use patents and other technology developed by us, and that give us the right to use patents and other technology developed by them. We anticipate that we will continue to enter into these kinds of licensing arrangements in the future. It is possible, however, that licenses we want will not be available to us on commercially reasonable terms. If we lose existing licenses to key technology, or are unable to enter into new licensing agreements, which we deem important, our business, financial condition and results of operations could be seriously harmed. It is critical to our success that we are able to prevent competitors from copying our innovations, we therefore intend to continue to seek patent, trade secret and mask work protection for our semiconductor manufacturing technologies. The process of seeking patent protection can be long and expensive, and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, that they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. Furthermore, others may develop technologies that are similar or superior to our technology or design around the patents we own. We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties. However, these parties may breach these agreements, and we may not have adequate remedies for any breach. Also, others may come to know about or determine our trade secrets through a variety of methods. In addition, the laws of certain territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as the laws of the United States. 25 Our financial results could be adversely impacted if we fail to develop, introduce and sell new products or fail to develop and implement new manufacturing technologies. Like many semiconductor companies, which frequently operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products, our future success depends on our ability to develop and introduce new products which customers choose to buy. We introduce significant numbers of new products each year, which are an important source of revenue for us. If we fail to compete and introduce new product designs in a timely manner or are unable to manufacture products according to the requirements of these designs (discussed more below), or if our customers do not successfully introduce new systems or products incorporating ours, or market demand for our new products does not exist as anticipated, our business, financial condition and results of operations could be seriously harmed. For Cypress and many other semiconductor companies, introduction of new products is a major manufacturing challenge. The new products the market requires tend to be increasingly complex, incorporating more functions and operating at greater speed than prior products. Increasing complexity generally requires smaller features on a chip. This makes manufacturing new generations of products substantially more difficult than prior products. Ultimately, whether we can successfully introduce these and other new products depends on our ability to develop and implement new ways of manufacturing semiconductors. If we are unable to design, develop, manufacture, market and sell new products successfully, our business, financial condition and results of operations would be seriously harmed. Interruptions in the availability of raw materials can seriously harm our financial performance. Our semiconductor manufacturing operations require raw materials that must meet exacting standards. We generally have more than one source available for these materials, but there are only a limited number of suppliers capable of delivering certain raw materials that meet our standards. If we need to use other companies as suppliers, they must go through a qualification process. In addition, the raw materials we need for our business could become scarcer as worldwide demand for semiconductors increases. Interruption of our sources of raw materials could seriously harm our business, financial condition and results of operations. Problems in the performance of other companies we hire to perform certain manufacturing tasks can seriously harm our financial performance. A high percentage of our products are assembled, packaged and tested at our manufacturing facility located in the Philippines. We rely on independent subcontractors to assemble, package and test the balance of our products. This reliance involves certain risks, because we have less control over manufacturing quality and delivery schedules, whether these companies have adequate capacity to meet our needs and whether or not they discontinue or phase-out assembly processes we require. We cannot be certain that these subcontractors will continue to assemble, package and test products for us, and it might be difficult for us to find alternatives if they do not do so. The complex nature of our manufacturing activities makes us highly susceptible to manufacturing problems and these problems can have substantial negative impact when they occur. Making semiconductors is a highly complex and precise process, requiring production in a tightly controlled, clean environment. Even very small impurities in our manufacturing materials, difficulties in the wafer fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause a substantial percentage of wafers to be rejected or numerous chips on each wafer to be nonfunctional. We may experience problems in achieving an acceptable success rate in the manufacture of wafers, and the likelihood of facing such difficulties is higher in connection with the transition to new manufacturing methods. The interruption of wafer fabrication or the failure to achieve acceptable manufacturing yields at any of our facilities would seriously harm our business, financial condition and results of operations. We may also experience manufacturing problems in our assembly and test operations and in the introduction of new packaging materials. We may not be able to use all of our existing or future manufacturing capacity, which can negatively impact our business. We have spent, and expect to continue to spend, significant amounts of money to upgrade and increase our wafer fabrication, assembly and test manufacturing capability and capacity. If we do not need some of this capacity and capability for any of a variety of reasons, including inadequate demand or a significant shift in mix of product orders making our existing capacity and capability inadequate or in excess of actual needs, our fixed costs per semiconductor produced will increase, which will harm us. In addition, if the need for more advanced products requires accelerated conversion to technologies capable of manufacturing semiconductors having smaller features, or requires the use of larger wafers, we are likely to face higher operating expenses and the need to write-off capital equipment made obsolete by the technology conversion, which could seriously harm our business and results of operations. 26 Our operations and financial results could be severely harmed by certain natural disasters. Our headquarters, some manufacturing facilities and some of our major vendorsfacilities are located near major earthquake faults. If a major earthquake or other natural disaster occurs, we could suffer damages that could seriously harm our business, financial condition and results of operations. Our business, results of operations and financial condition will be seriously harmed if we fail to successfully compete in our highly competitive industry and markets. The semiconductor industry is intensely competitive. This intense competition results in a difficult operating environment for us and most other semiconductor companies that is marked by erosion of average selling prices over the lives of each product, rapid technological change, limited product life cycles and strong domestic and foreign competition in many markets. A primary cause of this highly competitive environment is the strength of our competitors. The industry consists of major domestic and international semiconductor companies, many of which have substantially greater financial, technical, marketing, distribution and other resources than we do. Cypress faces competition from other domestic and foreign high-performance integrated circuit manufacturers, many of which have advanced technological capabilities and have increased their participation in markets that are important to us. If we are unable to compete successfully in this environment, our business, operating results and financial condition will be seriously harmed. Our ability to compete successfully in the rapidly evolving high performance portion of the semiconductor technology industry depends on many factors, including: |
| Our success in developing new products and manufacturing technologies; |
| The quality and price of our products; |
| The diversity of our product lines; |
| The cost effectiveness of our design, development, manufacturing and marketing efforts; |
| The pace at which customers incorporate our products into their systems; and |
| The number and nature of our competitors and general economic conditions. |
Although we believe we currently compete effectively in the above areas to the extent they are within our control, given the pace of change in the industry, our current abilities are not a guarantee of future success. We must build semiconductors based on our forecasts of demand, and if our forecasts are inaccurate, we may have large amounts of unsold products or we may not be able to fill all orders. We order materials and build semiconductors based primarily on our internal forecasts, and secondarily on existing orders, which may be cancelled under many circumstances. Consequently, we depend on our forecasts to determine inventory levels for our products and the amount of manufacturing capacity that we need. Because our markets are volatile and subject to rapid technological and price changes, our forecasts may be wrong, and we may make too many or too few of certain products or have too much or too little manufacturing capacity. Also, our customers frequently place orders requesting product delivery almost immediately after the order is made, which makes forecasting customer demand all the more difficult. The above factors also make it difficult to forecast quarterly operating results. If we are unable to predict accurately the appropriate amount of product required to satisfy customer demand, our business, financial condition and results of operations could be seriously harmed. We must spend heavily on equipment to stay competitive, and will be adversely impacted if we are unable to secure financing for such investments. In order to remain competitive, semiconductor manufacturers generally must spend heavily on equipment to maintain or increase manufacturing capacity and capability. We have budgeted for approximately $380.0 million in expenditures on equipment in 2000 and anticipate significant continuing capital expenditures in subsequent years. In the past, we have reinvested a substantial portion of our cash flow from operations in capacity expansion and improvement programs. However, our cash flows from operations depend primarily on average selling prices, which generally decline over time, and on the per-unit cost of our products. 27 If we are unable to reduce the costs for our products at a rate at least as fast as the rate of decline in average selling prices for such products, we may not be able to generate enough cash flow from operations to maintain or increase manufacturing capability and capacity as necessary. In such a situation we would need to seek financing from external sources to satisfy our needs for manufacturing equipment and, if cash flow from operations declines too much, for operational cash needs as well. Such financing, however, may not be available on terms which are satisfactory to us or at all, in which case our business, financial condition and results of operations will be seriously harmed. We compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel would harm us. To a greater degree than most non-technology companies, we depend on the efforts and abilities of certain key management and technical personnel. Our future success depends in part, upon our ability to retain such personnel, and to attract and retain other highly qualified personnel, particularly product and process engineers. We compete for these individuals with other companies, academic institutions, government institutions and other organizations. Competition for such personnel is intense, and we may not be successful in hiring or retaining new or existing qualified personnel. If we lose existing qualified personnel or are unable to hire new qualified personnel as needed, our business, financial condition and results of operations could be seriously harmed. We face additional problems and uncertainties associated with international operations that could seriously harm us. International sales represented approximately 52% of our revenues during the nine months ended October 1, 2000 and 44% of our revenues during the same period in fiscal 1999. Our offshore assembly and test operations, as well as our international sales, face risks frequently associated with foreign operations, including: |
| currency exchange fluctuations, |
| political instability, |
| changes in local economic conditions, |
| the devaluation of local currencies, |
| import and export controls, and |
| changes in tax laws, tariffs and freight rates. |
To the extent any such risks materialize, our business, financial condition and results of operations could be seriously harmed. We are subject to many different environmental regulations, and compliance with them may be costly. We are subject to many different governmental regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process. Compliance with these regulations can be costly. In addition, over the last several years, the public has paid a great deal of attention to the potentially negative environmental impact of semiconductor manufacturing operations. This attention and other factors may lead to changes in environmental regulations that could force us to purchase additional equipment or comply with other potentially costly requirements. If we fail to control the use of, or to adequately restrict the discharge of, hazardous substances under present or future regulations, we could face substantial liability or suspension of our manufacturing operations, which could have a seriously harm our business, financial condition and results of operations. We depend on third parties to transport our products and could be harmed if these parties experience problems. We rely on independent carriers and freight forwarders to move our products between manufacturing plants and to our customers. We have limited control over these parties; however, any transport or delivery problems because of their errors, or because of unforeseen interruptions in their activities due to factors such as strikes, political instability, natural disasters and accidents, could seriously harm our business, financial conditions and results of operations and ultimately impact our relationship with our customers. 28 We may fail to integrate our business and technologies with those of companies we have recently acquired and that we may acquire in the future. We completed four acquisitions in calendar year 1999, four acquisitions in the first nine months of 2000, and may pursue additional acquisitions in the future. If we fail to successfully or properly integrate these businesses, our quarterly and annual results may be seriously harmed. Integrating additional businesses, products and services could be expensive, time-consuming and a strain on our resources. Specific issues that we face with regard to prior and future acquisitions include: |
| the difficulty of integrating acquired technology or products; |
| the difficulty of assimilating the personnel of the acquired companies; |
| the difficulty of coordinating and integrating geographically dispersed operations; |
| our ability to retain customers of the acquired company; |
| the potential disruption of our on-going business and distraction of management; |
| the maintenance of brand recognition of acquired businesses; |
| the failure to successfully develop acquired in-process technology, resulting in the impairment of amounts currently capitalized as intangible assets; |
| unanticipated expenses related to technology integration; |
| the maintenance of uniform standards, corporate cultures, controls, procedures and policies; |
| the impairment of relationships with employees and customers as a result of any integration of new management personnel; and |
| the potential unknown liabilities associated with acquired businesses. |
a. | Exhibits |
Exhibit 27.1 Financial Data Schedule. |
b. | Reports on Form 8-K |
CYPRESS SEMICONDUCTOR CORORATION By: /s/ T.J. RODGERS T.J. Rodgers President and Chief Executive Officer |
||
By: /s/ EMMANUEL HERNANDEZ Emmanuel Hernandez Vice President, Finance and Administration and Chief Financial Officer |
Dated: November 15, 2000 32 |
|