CY Cypress Semiconductor Corporation

Cypress Semiconductor Corp. (NASDAQ:CY) today announced second-quarter 2011 results, which included the following highlights and remarks from its president and CEO, T.J. Rodgers.

• Q2 results at high end of guidance
• TrueTouch® exceeded expectations on strong mobile phone and tablet ramps
• Emerging Technologies Division achieved its first $10 million revenue quarter
• Cash flow from operations increased 33% year-on-year
• Produced the highest non-GAAP1 net income since 2000

Fellow shareholders:

Our revenue and earnings for the quarter are given below, compared with the prior-quarter and prior-year results:

        NON-GAAP GAAP Q2 2011   Q1 2011   Q2 2010 Q2 2011   Q1 2011   Q2 2010 Revenue $254,978 $233,110 $223,024 $254,978 $233,110 $223,024   Gross margin 57.2% 58.1% 59.1% 54.5% 55.2% 56.0%   Pretax margin 24.8% 21.3% 23.6% 10.3% 24.3% 11.6%

Net income

$62,993 $48,483 $48,183 $40,823 $55,374 $19,642   Fully diluted EPS $0.32 $0.24 $0.24 $0.21 $0.28 $0.10                       (In thousands, except per-share data)  

Our second-quarter revenue grew 9% sequentially, at the high end of our guidance, and grew 13% sequentially for ongoing operations (net of our Q1 Image Sensor divestiture). Our TrueTouch touchscreen business exceeded our expectations due to strong ramps at leading mobile phone customers and initial production ramps of new tablet products.

CCD, our “PSoC® division,” contributed a record 51% of revenue and grew 21% sequentially. Our overall mobile handset revenues—which are predominantly driven by smartphones—increased 32% sequentially and 197% year-on-year, due not only to revenue from our PSoC-powered TrueTouch touchscreen controllers, but also from our West Bridge® controllers, and our ONS laser navigation solutions. In addition, Cypress’s Emerging Technology Division achieved its first $10 million revenue quarter, led by our Optical Navigation Sensors (ONS) business unit.

Cypress’s non-GAAP1 net income grew 29.9% sequentially, 3.2 times faster than our revenue growth. We remain very focused on driving operating leverage and cash flow.

We have good visibility into Q3 and Q4, especially for our rapidly growing touchscreen controllers and SRAM products. Our book-to-bill for Q2 was 1.09, above our seasonal average, and we ended the first week of the third quarter almost fully booked and with over 50% of the fourth quarter already booked, both well above historical levels. We expect continued revenue and earnings growth in Q3 driven by record touchscreen sales and SRAM growth.

BUSINESS REVIEW

+ Our non-GAAP1 consolidated gross margin for the second quarter was 57.2%, down 0.9 percentage points from the previous quarter due mainly to product and customer mix and higher depreciation due to our S8 capacity expansion. Our GAAP second-quarter consolidated gross margin was 54.5%.

+ Our net inventory dollars at the end of the second quarter were flat relative to Q1, and our days of inventory decreased by 10 days to 87 days, the lowest level in three quarters. Distributor weeks of inventory on hand (which includes in-transit inventory) decreased from 6.5 weeks to 5.7 weeks, the lowest level since 2008.

+ Cash and investments for the second quarter totaled $378 million, an increase of $98 million from the prior quarter, and equivalent to approximately $2.21 per outstanding share. During the quarter, a temporary dip in share price allowed for us to buy back 5.3 million shares of common stock (3.1% of total outstanding shares) for $101.1 million—a price of only $19.02 per share. Since we announced our $600-million stock repurchase program in October 2010, we have repurchased 15.4 million shares through July 3, 2011 and have approximately $300 million left for repurchases.

Our divisional revenue and gross margins are detailed below:

BUSINESS UNIT SUMMARY FINANCIALS (UNAUDITED)

           

THREE MONTHS ENDED

July 3, 2011

  CCD2   DCD2   MPD2  

CoreSemi4

 

EmergingTech.3

  Consolidated REVENUE ($M) 131.0 26.3 87.2 244.5 10.5 255.0 Percentage of total revenues 51.4% 10.3% 34.2% 95.9% 4.1% 100.0%   GROSS MARGIN (%) On a GAAP basis 55.4% 62.4% 53.9% 55.6% 29.2% 54.5% On a non-GAAP1 basis 58.0% 65.1% 56.5% 58.2% 31.8% 57.2%  

THREE MONTHS ENDED

April 3, 2011

CCD2   DCD2   MPD2  

CoreSemi4

 

EmergingTech.3

  Consolidated REVENUE ($M) 107.8 27.4 91.8 227.0   6.1 233.1 Percentage of total revenues 46.2% 11.8% 39.4% 97.4% 2.6% 100.0%   GROSS MARGIN (%) On a GAAP basis 55.4% 63.3% 54.2% 55.9% 31.8% 55.2% On a non-GAAP1 basis 58.2% 66.2% 57.1% 58.7% 34.7% 58.1%

1. Refer to “Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures” and “Notes to Non-GAAP Financial Measures” following this press release for a detailed discussion of management’s use of non-GAAP financial measures, as well as reconciliations of all non-GAAP financial measures presented in this press release to the most directly comparable GAAP financial measures.
2. CCD – Consumer and Computation Division; DCD—Data Communications Division; MPD—Memory Products Division.
3. “Emerging Technology” – Businesses outside our core semiconductor businesses outlined in footnote 4. Includes subsidiaries Cypress Envirosystems and AgigA Tech, as well as the ONS (Optical Navigation System) Business Unit, the China Business Unit and our foundry-support business.
4. “Core Semiconductor” – Includes CCD, DCD and MPD and excludes “Emerging Technology.”

SECOND-QUARTER 2011 HIGHLIGHTS

+ Cypress shipped its one-billionth PSoC programmable-system-on-chip device on July 19. The device was shipped to General Electric and will be used for a medical application. Cypress began commercial shipments of its PSoC programmable system-on-chip devices in 2002, achieving one of the fastest product ramps in microcontroller history.

+ Cypress announced that Samsung Electronics Company Ltd. has selected the OvationONS™ II optical navigation system for its Android-based Intercept phones.

+ Cypress announced that it is working with NVIDIA, a leader in computation technology, to develop touchscreen implementations for next-generation Android 3.0-based tablets. The designs are based on Cypress’s single-chip TrueTouch solution for large touchscreens and NVIDIA’s high-performance multicore processors.

+ Cypress announced that Fujitsu Limited has selected the TrueTouch touchscreen solution from Cypress to implement the touchscreens in its new F07C, F09C, and F12C mobile phones, to be marketed by NTT Docomo.

+ Cypress unveiled a breakthrough TrueTouch family solution that enables the use of single-layer touchscreens, providing the benefits of capacitive touchscreens at resistive touchscreen prices. Compared to resistive touchscreens, capacitive touchscreens enable a more feature-rich user experience, lower power, and increased reliability and durability. Using a touchscreen with one, rather than two or three conductor layers, greatly reduces cost, making the overall solution ideal for low-end smartphones and feature phones, as well as cameras and GPS systems.

+ Cypress added industry-best waterproofing capabilities to its TrueTouch family of touchscreen products. TrueTouch devices now perform flawlessly in the presence of rain, mist, saltwater, humidity and sweat—conditions under which competing solutions can lock up or register false touches.

+ Clarion Co., Ltd. selected Cypress’s CapSense® touch-sensing solution to drive the dashboard touch panel of the Suzuki MR Wagon. The touch panel houses the main audio controls.

+ Cypress and Redpine Signals, Inc. have jointly developed 802.11 a/b/g/n wireless solutions enabling system engineers to add low-power, single-stream, 802.11n Wi-Fi capability to their PSoC 3- and PSoC 5-based embedded designs with reduced power and a smaller footprint. PSoC 3- and PSoC 5-compatible Wi-Fi expansion board kits (RS-CY8C001-220X) are available on the Redpine website (www.redpinesignals.com).

+ Cypress introduced the industry’s first USB 3.0 (SuperSpeed USB, 5 Gbps) solution for mobile handheld devices. The new West Bridge Benicia™ (CYWB0263) peripheral controller enables “sideloading” onto cell phones at up to 200 MB per second.

+ AgigA Tech Inc.—a subsidiary of Cypress and the leading developer of high-density, battery-free nonvolatile memory solutions—was selected as a Top 100 North America Tech Startup by Red Herring magazine. The Red Herring Top 100 has become a mark of distinction for promising new companies and entrepreneurs. Previous winners include Facebook, Twitter, Google, Yahoo, Skype, Salesforce.com, YouTube, and eBay.

+ Cypress introduced a new family of high-density First-In, First-Out (FIFO) memories. With densities up to 72 Mbits, these HD FIFO devices are the densest available from any source and particularly well-suited for streaming and buffering in HD video and imaging applications.

+ Cypress’s Board of Directors announced a cash dividend. The first quarterly cash dividend of $0.09 per share is payable to common stock shareholders of record at the close of business on June 24, 2011. The dividend will be paid on July 21, 2011.

+ Cypress named Dr. Wilbert van den Hoek to its board of directors. Van den Hoek replaces retiring board member Dr. Evert van de Ven. Van den Hoek is a former chief technical officer at Novellus Systems. He is also a technical advisor to seven high-tech companies, including Cypress.

+ Cypress donated a 75,000-square-foot building on five acres of land to the Second Harvest Food Bank of Santa Clara and San Mateo Counties. Valued at approximately $9 million, the building and land, located in San Jose, Calif., is the largest corporate gift ever made to the Food Bank, enabling it to serve 18 million additional meals per year to the local community. In the dedication address, T.J. Rodgers lamented, “California’s economy has been so mismanaged that a building once holding 400 engineers has now been repurposed as a warehouse storing food for the hungry.”

+ Cypress recently named Weiking and Avnet as its distribution partners of the year. Weikeng, based in China and Taiwan, has helped to build record demand for Cypress’s PSoC solutions. Avnet Electronics Marketing has helped to drive record memory product sales and growth.

ABOUT CYPRESS

Cypress delivers high-performance, mixed-signal, programmable solutions that provide customers with rapid time-to-market and exceptional system value. Cypress offerings include the flagship PSoC® programmable system-on-chip families and derivatives such as PowerPSoC® solutions for high-voltage and LED lighting applications, CapSense® touch sensing and TrueTouch solutions for touchscreens. Cypress is the world leader in USB controllers, including the high-performance West Bridge® solution that enhances connectivity and performance in multimedia handsets. Cypress is also a leader in high-performance memories and programmable timing devices. Cypress serves numerous markets including consumer, mobile handsets, computation, data communications, automotive, industrial and military. Cypress trades on the Nasdaq Global Select Market under the ticker symbol CY. Visit Cypress online at www.cypress.com.

FORWARD-LOOKING STATEMENTS

Statements herein that are not historical facts and that refer to Cypress or its subsidiaries’ plans and expectations for the remainder of fiscal year 2011 and the future are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. We may use words such as “believe,” “expect,” “future,” “plan,” “intend” and similar expressions to identify such forward-looking statements that include, but are not limited to, statements related to the semiconductor market, the strength and growth of our proprietary and programmable products, including our TrueTouch and PSoC product families, our expectations regarding our Q311 revenue and earnings, and the demand and growth in the markets we serve, including touchscreens and SRAM.. Such statements reflect our current expectations, which are based on information and data available to our management as of the date of this release. Our actual results may differ materially due a variety of uncertainties and risk factors, including but not limited to the state of and future of the global economy, business conditions and growth trends in the semiconductor market, our ability to enter into new markets with our portfolio of products, whether our products perform as expected, whether the demand for our proprietary and programmable products, including our TrueTouch and PSoC products, is fully realized, whether our product and design wins result in increased sales, customer acceptance of Cypress and its subsidiaries’ products, seasonality in the markets we serve, our ability to achieve lower operating expenses and maintain a solid balance sheet, any impact to sales due to the recent U.S. International Trade Commission ruling in Apple Inc. v. HTC Corp. et al, the actions of our competitors, the behavior of our supply chain, our ability to manage our business to have strong earnings and cash flow leverage, factory utilization, the strength or softness of the markets we serve and whether those markets achieve expected growth, our ability to maintain and improve our gross margins and realize our bookings, our ability to continue to focus on fixed costs, the financial performance of our subsidiaries and Emerging Technology Division, our ability to outgrow the market in revenue once the economy recovers and other risks described in our filings with the Securities and Exchange Commission. We assume no responsibility to update any such forward-looking statements.

Cypress, the Cypress logo, PSoC, CapSense, PowerPSoC, West Bridge, EZ-USB and QDR are registered trademarks of Cypress Semiconductor Corp. Programmable System-on-Chip, TrueTouch, SmartSense, Charger Armor, and PSoC Creator are trademarks of Cypress Semiconductor Corp. All other trademarks or registered trademarks are the property of their respective owners.

CYPRESS SEMICONDUCTOR CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(In thousands)(Unaudited)         July 3,2011 January 2,2011   ASSETS   Cash, cash equivalents and short-term investments (a) $ 358,902 $ 434,261 Accounts receivable, net 170,716 117,726 Inventories, net (b) 104,969 101,763 Property, plant and equipment, net 291,575 260,122 Goodwill and other intangible assets, net 42,561 44,335 Other assets   138,481     114,594   Total assets $ 1,107,204   $ 1,072,801     LIABILITIES AND EQUITY   Accounts payable $ 71,423 $ 59,817 Deferred income 192,000 131,757 Income tax liabilities 51,466 65,461 Other accrued liabilities   130,992     112,873   Total liabilities 445,881 369,908 Total Cypress stockholders' equity 663,231 704,436 Noncontrolling interest   (1,908 )   (1,543 ) Total equity   661,323     702,893   Total liabilities and equity $ 1,107,204   $ 1,072,801  

(a)

Cash, cash equivalents and short-term investments do not include $19 million and $24 million of auction rate securities which are classified as long-term investments in "Other assets" as of July 3, 2011 and January 2, 2011, respectively.

 

(b)

Net inventories include $5 million and $6 million of capitalized inventories related to stock compensation expense, as of July 3, 2011 and January 2, 2011, respectively.

  CYPRESS SEMICONDUCTOR CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSON A GAAP BASIS(In thousands, except per-share data)(Unaudited)     Three Months Ended July 3,2011   April 3,2011   July 4,2010   Revenues $ 254,978 $ 233,110 $ 223,024 Cost of revenues   115,958     104,334     98,078   Gross margin (a) 139,020 128,776 124,946 Operating expenses: Research and development (a) 49,278 47,865 43,106 Selling, general and administrative (a) 58,482 58,652

 

54,147 Amortization of acquisition-related intangibles 731 698 722 Restructuring charges (credits) 3,798 734 (173 ) Gain on Divestiture   -     (34,291 )   -   Total operating expenses, net   112,289     73,658     97,802   Operating income (loss) 26,731 55,118 27,144 Interest and other income, net (a)   (341 )   1,606     (1,165 ) Income before income taxes 26,390 56,724 25,979 Income tax provision   (14,433 )   1,350     6,337   Income, net of taxes 40,823 55,374 19,642 Noncontrolling interest, net of taxes   (181 )   (184 )   (183 ) Net income 40,642 55,190 19,459 Less: net loss attributable to noncontrolling interest   181     184     183   Net income attributable to Cypress $ 40,823   $ 55,374   $ 19,642     Net income per share attributable to Cypress: Basic $ 0.24 $ 0.32 $ 0.12 Diluted $ 0.21 $ 0.28 $ 0.10 Shares used in net income (loss) per share calculation: Basic 168,723 171,346 160,749 Diluted   192,276       199,943       190,342     (a) Includes the following credit (expense) related to Cypress's deferred compensation plan:           Gross margin $ 2 $ (204 ) $ 294 Research and development $ (57 ) $ (509 ) $ 648 Selling, general and administrative $ 3 $ (923 ) $ 1,239 Interest and other income, net $ 5     $ 1,474     $ (2,177 )   RECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES (a)(In thousands)(Unaudited)     Three Months Ended July 3, 2011 CCD (b)   DCD (b)   MPD (b)   Core Semi (c)   EmergingTechnologies (d)   Consolidated GAAP gross margin $ 72,574 $ 16,393 $ 47,002 $ 135,969 $ 3,051 $ 139,020 Stock-based compensation expense 3,450 691 2,297 6,438 276 6,714 Changes in value of deferred compensation plan (e)   (1 )   -     (1 )   (2 )   -     (2 ) Non-GAAP gross margin $ 76,023   $ 17,084   $ 49,298   $ 142,405   $ 3,327   $ 145,732     Three Months Ended April 3, 2011 CCD (b) DCD (b) MPD (b) Core Semi (c) EmergingTechnologies (d) Consolidated GAAP gross margin $ 59,679 $ 17,376 $ 49,792 $ 126,847 $ 1,929 $ 128,776 Stock-based compensation expense 3,010 766 2,565 6,341 169 6,510 Changes in value of deferred compensation plan (e) 94 24 80 198 6 204 Impairment of assets   (29 )   (7 )   (25 )   (61 )   (2 )   (63 ) Non-GAAP gross margin $ 62,754   $ 18,159   $ 52,412   $ 133,325   $ 2,102   $ 135,427     Three Months Ended July 4, 2010 CCD (b) DCD (b) MPD (b) Core Semi (c) EmergingTechnologies (d) Consolidated GAAP gross margin $ 43,289 $ 19,759 $ 60,845 $ 123,893 $ 1,053 $ 124,946 Stock-based compensation expense 2,480 954 3,649 7,083 171 7,254 Changes in value of deferred compensation plan (e)   (100 )   (38 )   (147 )   (285 )   (9 )   (294 ) Non-GAAP gross margin $ 45,669   $ 20,675   $ 64,347   $ 130,691   $ 1,215   $ 131,906  

(a)

Please refer to the accompanying "Notes to Non-GAAP Financial Measures" for a detailed discussion of management's use of non-GAAP financial measures.

(b)

CCD - Consumer and Computation Division; DCD - Data Communications Division; MPD - Memory Product Division.

(c)

“Core Semi” – Includes CCD, DCD and MPD divisions and excludes “Emerging Technologies.”

(d)

“Emerging Technologies” – Activities outside our core semiconductor businesses outlined in footnote (c). Includes wholly owned subsidiaries Cypress Envirosystems, AgigA Tech and other.

(e)

Consistent with current presentation, all prior periods have been recast to reflect changes in deferred compensation plan as a Non-GAAP adjustment.

  CYPRESS SEMICONDUCTOR CORPORATIONRECONCILIATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES (a)(In thousands, except per-share data)(Unaudited)     Three Months Ended July 3,2011   April 3,2011   July 4,2010   GAAP research and development expenses $ 49,278 $ 47,865 $ 43,106 Stock-based compensation expense (6,941) (5,473) (6,060) Acquisition-related expense - - (1) Changes in value of deferred compensation plan (b) (57) (509) 648 Non-GAAP research and development expenses $ 42,280 $ 41,883 $ 37,693   GAAP selling, general and administrative expenses $ 58,482 $ 58,652 $ 54,147 Stock-based compensation expense (16,085) (8,854) (12,965) Acquisition-related expense - - (8) Changes in value of deferred compensation plan (b) 3 (923) 1,239 Loss on sale of asset (1,901) - - Building donation - (4,125) - Impairment of assets 178 - (366) Non-GAAP selling, general and administrative expenses $ 40,677 $ 44,750 $ 42,047   GAAP operating income $ 26,731 $ 55,118 $ 27,144 Stock-based compensation expense 29,740 20,837 26,279 Gain on divestitures - (34,291) - Acquisition-related expense 731 698 730 Changes in value of deferred compensation plan (b) 52 1,636 (2,182) Restructuring charges 3,798 734 (173) Loss on sale of asset 1,901 - - Building donation - 4,125 - Impairment of assets and other (178) (62) 366 Non-GAAP operating income $ 62,775 $ 48,795 $ 52,164   GAAP net income attributable to Cypress $ 40,823 $ 55,374 $ 19,642 Stock-based compensation expense 29,740 20,837 26,279 Gain on divestiture - (34,291) - Acquisition-related expense 731 698 730 Changes in value of deferred compensation plan (b) 52 162 (5) Restructuring charges 3,798 734 (173) Investment-related gains/losses (24) 71 336 Loss on sale of asset 1,901 - - Building donation - 4,125 - Impairment of assets and other (178) (62) 366 Tax effects (13,850) 835 1,008 Non-GAAP net income attributable to Cypress $ 62,993 $ 48,483 $ 48,183   GAAP net income per share attributable to Cypress - diluted $ 0.21 $ 0.28 $ 0.10 Stock-based compensation expense 0.15 0.10 0.13 Gain on divestiture - (0.17) - Acquisition-related expense - 0.01 - Restructuring charges 0.02 - - Building donation - 0.02 - Loss on sale of asset 0.01 - - Tax effects (0.07) - 0.01 Non-GAAP net income per share attributable to Cypress - diluted $ 0.32 $ 0.24 $ 0.24

(a)

Please refer to the accompanying "Notes to Non-GAAP Financial Measures" for a detailed discussion of management's use of non-GAAP financial measures.

(b)

Consistent with current presentation, all prior periods have been recast to reflect changes in deferred compensation plan as a Non-GAAP adjustment.

  CYPRESS SEMICONDUCTOR CORPORATIONCONSOLIDATED DILUTED EPS CALCULATION(In thousands, except per-share data)(Unaudited)     Three Months Ended July 3,2011   April 3,2011   July 4,2010 GAAP   Non-GAAP GAAP   Non-GAAP GAAP   Non-GAAP   Net income attributable to Cypress $ 40,823 $ 62,993 $ 55,374 $ 48,483 $ 19,642 $ 48,183   Weighted-average common shares outstanding (basic) 168,723 168,723 171,346 171,346 160,749 160,749 Effect of dilutive securities: Stock options, unvested restricted stock and other   23,553   27,571   28,597   33,650   29,593   37,015 Weighted-average common shares outstanding for diluted computation   192,276   196,294   199,943   204,996   190,342   197,764   Net income per share attributable to Cypress - basic $ 0.24 $ 0.37 $ 0.32 $ 0.28 $ 0.12 $ 0.30 Net income per share attributable to Cypress - diluted $ 0.21 $ 0.32 $ 0.28 $ 0.24 $ 0.10 $ 0.24     July 3,2011 April 3,2011 July 4,2010   Average stock price for the period ended $20.71 $20.68 $11.70   Common stock outstanding at period end (in thousands) 171,241 171,232 159,873

Includes unvested restricted stock awards of approximately 1.0 million shares at April 3, 2011 and 1.9 million shares at January 2, 2011 and April 4, 2010.

    CYPRESS SEMICONDUCTOR CORPORATIONSUPPLEMENTAL FINANCIAL DATA(In thousands)(Unaudited)         Three Months Ended Six Months Ended July 3,2011   April 3,2011   July 4,2010 July 3,2011   July 4,2010

Selected Cash Flow Data (Preliminary):

Net cash provided by operating activities $ 76,870 $ 35,343 $ 46,031 $ 112,213 $ 84,154 Net cash provided by (used in) investing activities $ 46,624 $ 30,711 $ (13,937 ) $ 77,335 $ (57,694 ) Net cash provided by (used in) financing activities $ 37,061 $ (209,639 ) $ (60,339 ) $ (172,578 ) $ (81,222 )  

Other Supplemental Data (Preliminary):

Capital expenditures $ 34,282 $ 19,309 $ 8,533 $ 53,591 $ 26,405 Depreciation $ 13,493   $ 12,373     $ 11,947   $ 25,866     $ 23,408    

Notes to Non-GAAP Financial Measures

To supplement its consolidated financial results presented in accordance with GAAP, Cypress uses non-GAAP financial measures which are adjusted from the most directly comparable GAAP financial measures to exclude certain items, as described in details below. Management believes that these non-GAAP financial measures reflect an additional and useful way of viewing aspects of Cypress’s operations that, when viewed in conjunction with Cypress’s GAAP results, provide a more comprehensive understanding of the various factors and trends affecting Cypress’s business and operations. Non-GAAP financial measures used by Cypress include:

• Gross margin;
• Research and development expenses;
• Selling, general and administrative expenses;
• Operating income (loss);
• Net income (loss); and
• Diluted net income (loss) per share.

Cypress uses each of these non-GAAP financial measures for internal managerial purposes, when providing its financial results and business outlook to the public, and to facilitate period-to-period comparisons. Management believes that these non-GAAP measures provide meaningful supplemental information regarding Cypress’s operational and financial performance of current and historical results. Management uses these non-GAAP measures for strategic and business decision making, internal budgeting, forecasting and resource allocation processes. In addition, these non-GAAP financial measures facilitate management’s internal comparisons to Cypress’s historical operating results and comparisons to competitors’ operating results.

Cypress believes that providing these non-GAAP financial measures, in addition to the GAAP financial results, are useful to investors because they allow investors to see Cypress’s results “through the eyes” of management as these non-GAAP financial measures reflect Cypress’s internal measurement processes. Management believes that these non-GAAP financial measures enable investors to better assess changes in each key element of Cypress’s operating results across different reporting periods on a consistent basis. Thus, management believes that each of these non-GAAP financial measures provides investors with another method for assessing Cypress’s operating results in a manner that is focused on the performance of its ongoing operations.

There are limitations in using non-GAAP financial measures because they are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. In addition, non-GAAP financial measures may be limited in value because they exclude certain items that may have a material impact upon Cypress’s reported financial results. Management compensates for these limitations by providing investors with reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures. 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. Investors should review the reconciliations of the non-GAAP financial measures to their most directly comparable GAAP financial measures as provided in the accompanying press release.

As presented in the “Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures” tables in the accompanying press release, each of the non-GAAP financial measures excludes one or more of the following items:

• Stock-based compensation expense.Stock-based compensation expense relates primarily to the equity awards such as stock options and restricted stock. Stock-based compensation is a non-cash expense that varies in amount from period to period and is dependent on market forces that are often beyond Cypress’s control. As a result, management excludes this item from Cypress’s internal operating forecasts and models. Management believes that non-GAAP measures adjusted for stock-based compensation provide investors with a basis to measure Cypress’s core performance against the performance of other companies without the variability created by stock-based compensation as a result of the variety of equity awards used by companies and the varying methodologies and subjective assumptions used in determining such non-cash expense.
• Changes in value of Cypress’s key employee deferred compensation plan.Cypress sponsors a voluntary deferred compensation plan which provides certain key employees with the option to defer the receipt of compensation in order to accumulate funds for retirement. The amounts are held in a trust and Cypress does not make contributions to the deferred compensation plan or guarantee returns on the investment. Changes in the value of the investments under the plan are excluded from the non-GAAP measures. Management believes that such non-cash item is not related to the ongoing core business and operating performance of Cypress, as the investment contributions are made by the employees themselves.
• Restructuring charges.Restructuring charges primarily relate to activities engaged by management to make changes related to its infrastructure in an effort to reduce costs. Restructuring charges are excluded from non-GAAP financial measures because they are not considered core operating activities and such costs have not historically occurred in each year. Although Cypress has engaged in various restructuring activities in the past, each has been a discrete event based on a unique set of business objectives. As such, management believes that it is appropriate to exclude restructuring charges from Cypress’s non-GAAP financial measures, as it enhances the ability of investors to compare Cypress’s period-over-period operating results from continuing operations.
• Gains on divestitures.Cypress recognizes gains resulting from the exiting of certain non-strategic businesses that no longer align with Cypress’s long-term operating plan. Cypress excludes these items from its non-GAAP financial measures primarily because it is not reflective of the ongoing operating performance of Cypress’s business and can distort the period-over-period comparison.
• Building donation.Cypress committed to donate an unused building to a charitable entity. Cypress excludes these items because the expense is not reflective of its ongoing operating results. Excluding this data allows investors to better compare Cypress’s period-over-period performance without such expense.
• Acquisition-related expense.Acquisition-related expense primarily includes: (1) amortization of intangibles, which include acquired intangibles such as purchased technology, patents and trademarks, and (2) earn-out compensation expense, which include compensation resulting from the achievement of milestones established in accordance with the terms of the acquisitions. In most cases, these acquisition-related charges are not factored into management’s evaluation of potential acquisitions or Cypress’s performance after completion of acquisitions, because they are not related to Cypress’s core operating performance. Adjustments of these items provide investors with a basis to compare Cypress against the performance of other companies without the variability caused by purchase accounting.
• Investment-related gains/losses.Investment-related gains/losses primarily include: (1) impairment loss related to Cypress’s investment when it determines the decline in fair value is other-than-temporary in nature, and (2) gains/losses related to the sales of its debt and equity investments. These items are excluded from non-GAAP financial measures because they are not related to the core operating activities and operating performance of Cypress, and in most cases, such transactions have not historically occurred in every quarter. As such, management believes that it is appropriate to exclude investment-related gains/losses from Cypress’s non-GAAP financial measures, as it enhances the ability of investors to compare Cypress’s period-over-period operating results.
• Impairment of assets.Cypress wrote down the book value of certain assets to its estimated fair value as management determined these assets will be donated, sold or will have no future benefit. Cypress excludes these items because the expense is not reflective of its ongoing operating results. Excluding this data allows investors to better compare Cypress’s period-over-period performance without such expense.
• Gains and losses on sales of long-term assets.Cypress recognizes gains resulting from the sale of certain long-term assets that no longer align with Cypress’s long-term operating plan. Cypress excludes these items from its non-GAAP financial measures primarily because it is not reflective of the ongoing operating performance of Cypress’s business and can distort the period-over-period comparison.
• Tax effects.Cypress adjusts for the income tax effect that resulted from the non-GAAP adjustments as described above. Additionally, Cypress also excludes the impact of items that are related to historical activities in nature and not reflective of the ongoing operating results of Cypress.