Edgar Filing: Spansion Inc.

code20140930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2014

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-34747

SPANSION INC.

(Exact name of registrant as specified in its charter)

Delaware		20-3898239
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

915 DeGuigne Drive

Sunnyvale, California

94085

(Address of principal executive offices)

(Zip Code)

(408) 962-2500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of October 29, 2014, the registrant had 62,052,782 shares of Class A Common Stock outstanding at $0.001 par value per share.

Table of Contents

INDEX

			Page No.
Part I.	Financial Information		1

	Item 1.	Financial Statements	1

		Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 28, 2014 and September 29, 2013 (Unaudited)	1

		Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September 28, 2014 and September 29, 2013 (Unaudited)	2

		Condensed Consolidated Balance Sheets – September 28, 2014 (Unaudited) and December 29, 2013	3

		Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 28, 2014 and September 29, 2013 (Unaudited)	4

		Notes to Condensed Consolidated Financial Statements	5

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

	Item 4.	Controls and Procedures	41

Part II.	Other Information		42

	Item 1.	Legal Proceedings	42

	Item 1A.	Risk Factors	43

	Item 6.	Exhibits	43

		Signature

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Spansion Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 28,			September 29,			September 28,			September 29,
	2014			2013			2014			2013

Net sales	$	315,930		$	273,378		$	942,346		$	658,020
Cost of sales		215,102			217,209			658,864			498,640
Gross profit		100,828			56,169			283,482			159,380
Research and development		43,241			38,341			126,505			84,666
Sales, general and administrative		60,457			54,544			177,169			117,441
Restructuring charges		-			6,264			-			6,264
Operating loss		(2,870	)		(42,980	)		(20,192	)		(48,991	)
Interest income and other, net		453			3,578			1,794			7,658
Interest expense		(5,988	)		(7,351	)		(18,214	)		(22,333	)
Gain on acquisition of Microcontroller and Analog business		-			8,205			-			8,205
Loss before income taxes		(8,405	)		(38,548	)		(36,612	)		(55,461	)
Provision (benefit) for income taxes		2,441			(1,644	)		8,703			(891	)
Net loss		(10,846	)		(36,904	)		(45,315	)		(54,570	)

Net loss per share
Basic	$	(0.18	)	$	(0.63	)	$	(0.75	)	$	(0.93	)
Diluted	$	(0.18	)	$	(0.63	)	$	(0.75	)	$	(0.93	)

Shares used in per share calculation
Basic		61,543			58,785			60,705			58,506
Diluted		61,543			58,785			60,705			58,506

See accompanying notes.

Spansion Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013
Net loss	$	(10,846	)	$	(36,904	)	$	(45,315	)	$	(54,570	)
Other comprehensive income (loss), net of tax:
Unrealized gain on recovery from impaired investments reclassified into earnings		-			-			-			(1,200	)
Net foreign currency translation gain (loss)		(23	)		117			347			(1,420	)
Net unrealized gain (loss) on cash flow hedges:
Net unrealized hedge gain (loss) arising during the period		2,716			(391	)		(4,174	)		13,669
Net gain reclassified into earnings for revenue hedges (ineffective portion)		-			-			-			(2,415	)
Net loss (gain) reclassified into earnings for revenue hedges (effective portion)		528			(3,113	)		3,511			(7,701	)
Net loss reclassified into earnings for expense hedges		2,815			-			2,815			-
Net unrealized gain (loss) on cash flow hedges		6,059			(3,504	)		2,152			3,553
Other comprehensive income (loss), net of tax		6,036			(3,387	)		2,499			933
Total comprehensive loss	$	(4,810	)	$	(40,291	)	$	(42,816	)	$	(53,637	)

See accompanying notes.

Spansion Inc.

Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)

(Unaudited)

	September 28, 2014			December 29, 2013
Assets
Current assets:
Cash and cash equivalents	$	281,991		$	286,069
Short-term investments		44,778			25,428
Accounts receivable, net		164,933			177,838
Inventories		269,267			254,154
Deferred income taxes		9,282			4,592
Prepaid expenses and other current assets		56,154			52,756
Total current assets		826,405			800,837

Property, plant and equipment, net		189,266			185,505
Intangible assets, net		140,835			167,949
Goodwill		166,334			166,422
Other assets		61,456			60,208
Total assets	$	1,384,296		$	1,380,921

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	153,785		$	126,680
Accrued compensation and benefits		44,441			57,876
Accrued liabilities and other		149,048			86,352
Income taxes payable		486			4,651
Deferred income		37,745			30,247
Current portion of long-term debt		22,285			97,320
Total current liabilities		407,790			403,126

Deferred income taxes		4,917			3,675
Long-term debt, less current portion		387,284			404,612
Other long-term liabilities		50,385			32,048
Total liabilities		850,376			843,461

Commitments and contingencies (Note 16)		-			-
Stockholders’ equity:
Capital stock:
Class A common stock, $0.001 par value, 150,000,000 shares authorized, 61,819,732 shares issued and outstanding as of September 28, 2014 (58,882,949 shares as of December 29, 2013)		62			59
Class B common stock, $0.001 par value, 1 share authorized, 0 shares issued and outstanding as of September 28, 2014 (1 share issued and outstanding as of December 29, 2013)		-			-
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding		-			-
Additional paid-in capital		786,667			747,393
Accumulated deficit		(251,275	)		(205,959	)
Accumulated other comprehensive loss (Note 5)		(1,534	)		(4,033	)
Total stockholders' equity		533,920			537,460
Total liabilities and stockholders' equity	$	1,384,296		$	1,380,921

See accompanying notes.

Spansion Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Nine Months Ended
	September 28,			September 29,
	2014			2013
Cash Flows from Operating Activities:
Net loss	$	(45,315	)	$	(54,570	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		80,540			65,053
Gain on liquidation of auction rate securities		-			(1,200	)
Gain on recovery of impaired investments		(1,629	)		(9,592	)
Benefit for deferred income taxes		(3,394	)		(3,728	)
Gain on pension assets		(2,494	)		-
Net gain on sale and disposal of property, plant and equipment		(46	)		(3,084	)
Gain on acquisition of Microcontroller and Analog business		-			(8,205	)
Costs relating to partial repurchase of 7.875% Senior Notes		1,137			2,280
Compensation recognized under employee stock plans		25,078			23,324
Reserve reversal on final settlement of bankruptcy claims		(3,205	)		-
Changes in assets and liabilities		30,955			60,265
Net cash provided by operating activities		81,627			70,543

Cash Flows from Investing Activities:
Proceeds from liquidation of auction rate securities		-			1,530
Proceeds from recovery of impaired investments		1,629			9,592
Proceeds from sale of property, plant and equipment		136			3,206
Purchases of property, plant and equipment		(34,857	)		(42,760	)
Proceeds from sales and maturities of marketable securities		18,463			116,888
Purchases of marketable securities		(37,813	)		(100,535	)
Acquisition of Microcontroller and Analog business, net of cash acquired		-			(148,144	)
Net cash used for investing activities		(52,442	)		(160,223	)

Cash Flows from Financing Activities:
Proceeds from issuance of common stock due to options exercised		14,198			2,303
Refinancing cost on Term Loan and Revolver		-			(282	)
Payments on financing arrangements		(105,651	)		(4,333	)
Proceeds from issuance of 2.00% Senior Exchangeable Notes		-			150,000
Costs relating to issuance of 2.00% Senior Exchangeable Notes		-			(4,506	)
Purchase of capped call for the 2.00% Senior Exchangeable Notes		-			(15,375	)
Partial repurchase of 7.875% Senior Notes including costs		-			(106,779	)
Net proceeds from sale of Sunnyvale property		58,908			-
Cash settlement on hedging activities		-			(268	)
Net cash provided by (used for) financing activities		(32,545	)		20,760
Effect of exchange rate changes on cash and cash equivalents		(718	)		(232	)
Net decrease in cash and cash equivalents		(4,078	)		(69,152	)
Cash and cash equivalents, beginning of period		286,069			262,177
Cash and cash equivalents, end of period	$	281,991		$	193,025


Non-cash investing and financing activities:
Liabilities recorded for purchases of property, plant and equipment	$	21,064		$	10,448
Unpaid issuance costs relating to the 2.00% Senior Exchangeable Notes	$	-		$	460
Restricted cash relating to employee compensation and benefits received from FSL	$	-		$	32,086

See accompanying notes.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, the unaudited interim financial statements reflect all normal and recurring adjustments considered necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. The December 29, 2013 condensed consolidated balance sheet data were derived from audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2013, as filed with the SEC on February 25, 2014 and as amended by the Form 10-K/A filed on July 8, 2014, but does not include all disclosures required by U.S. GAAP for annual periods.

These condensed consolidated financial statements and related notes should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2013 as filed with the SEC on February 25, 2014 and as amended by the Form 10-K/A filed on July 8, 2014. The results of operations for the nine months ended September 28, 2014 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year.

The Company operates on a 52- to 53-week fiscal year ending on the last Sunday in December. The additional week in a 53-week fiscal year is added to the second quarter to realign the Company’s fiscal quarters more closely to calendar quarters. Fiscal 2014 and fiscal 2013 are comprised of 52-week periods.

References in this Quarterly Report to “Spansion,” “we,” “us,” “our,” or the “Company” shall mean Spansion Inc. and our consolidated subsidiaries, unless the context indicates otherwise.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the results of operations of the Company and all of the Company’s wholly-owned subsidiaries. All intercompany accounts have been eliminated.

Use of Estimates

The preparation of the Company’s consolidated financial statements and disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of commitments and contingencies and the reported amounts of revenues and expenses during the reporting periods. Estimates are used to account for the fair value of certain marketable securities, revenue adjustments, the allowance for doubtful accounts, inventory write-downs, valuation of intangible assets, impairment of long-lived assets, legal contingencies, income taxes, stock-based compensation expenses, the fair value of long-term debt, product warranties and pension related liabilities. Actual results may differ from those estimates, and such differences may be material to the Company’s condensed consolidated financial statements.

2. Recent Accounting Pronouncements

In May 2014, the FASB issued an accounting standard update that provides for a new single revenue accounting model that will replace existing revenue recognition guidance. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which a Company expects to be entitled in exchange for those goods or services. The guidance becomes effective in the first quarter of the Company’s fiscal year ending December 31, 2017. The Company will have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard update. The Company is evaluating the impact that the standard update will have on its consolidated financial statements.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

In August 2014, the FASB issued an accounting standard update relating to management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and on the related disclosures. The update requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. The guidance is effective in the interim and annual periods beginning after December 15, 2016, with early application permitted. The adoption of this update is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

3. Acquisition

On August 1, 2013, the Company acquired the microcontroller and analog business (the MCA business) of Fujitsu Semiconductor Limited (FSL) for purchase consideration of $158.5 million, ($150.0 million, net of cash acquired). Pursuant to the terms and conditions of a Stock Purchase Agreement with FSL, the Company acquired certain subsidiaries and assets and assumed certain liabilities of FSL for purposes of acquiring FSL’s business of designing, developing, marketing and selling microcontroller and analog semiconductor products.

There were no changes in fiscal 2014 to the allocation of purchase price to the net assets acquired under the MCA business.

Pro Forma consolidated results of operations for fiscal 2013

The following unaudited pro forma consolidated results of operations for the three months and nine months ended September 29, 2013 assumes the acquisition had occurred as of December 26, 2011. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on December 26, 2011 or of results that may occur in future. For the purpose of this pro forma financial information, adjustments were made to include the depreciation of the acquired property and equipment, the amortization of the acquired intangible assets and the income tax effects relating to such adjustments. Adjustments were also made to exclude the gain on acquisition, acquisition related costs, amortization of the fair market value of inventory markup and the income tax effects relating to such adjustments for the three and nine months ended September 29, 2013.

	Three Months Ended			Nine Months Ended
	September 29, 2013			September 29, 2013
	(in thousands, except per share amounts)
Net sales		314,701			947,551
Net loss		(24,106	)		(159,988	)

Net loss
Basic		(0.41	)		(2.73	)
Diluted		(0.41	)		(2.73	)

The MCA business contributed net sales of $92.9 million from acquisition date of August 1, 2013 through September 29, 2013. It is impracticable to determine the earnings for the MCA business as the Company does not allocate non-operating items to its various product groups.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

4. Balance Sheet Components

	September 28, 2014			December 29, 2013
	(in thousands)
Cash and cash equivalents
Cash	$	280,421		$	282,163
Cash equivalents:
Money market funds		1,010			3,906
Certificates of deposit		560			-
Cash and cash equivalents	$	281,991		$	286,069

Short-term investments
Time deposits		21,072			14,045
Certificates of deposit		23,706			11,383
Short-term investments	$	44,778		$	25,428

Account receivable, net
Accounts receivable, gross	$	165,320		$	178,252
Allowance for doubtful accounts		(387	)		(414	)
Account receivable, net	$	164,933		$	177,838

Inventories
Raw materials	$	9,892		$	11,056
Work-in-process		211,462			176,601
Finished goods		47,913			66,497
Inventories	$	269,267		$	254,154

Property, plant and equipment, net
Land	$	45,168		$	45,168
Buildings and leasehold improvements		68,855			61,923
Equipment		422,385			385,679
Construction in progress		19,632			19,734
Accumulated depreciation and amortization		(366,774	)		(326,999	)
Property, plant and equipment, net	$	189,266		$	185,505

Accrued compensation and benefits
Accrued vacation	$	12,050		$	11,077
MCA business employees pension related obligation		6,329			22,406
Others		26,062			24,393
Accrued compensation and benefits	$	44,441		$	57,876

Accrued liabilities and other
Short term license liability	$	6,064		$	13,003
Obligation recorded from sale of Sunnyvale property		59,782			-
Litigation reserve		23,570			20,419
Others		59,632			52,930
Accrued liabilities and other	$	149,048		$	86,352

Other long term liabilities
MCA business employees pension related obligation	$	16,978		$	-
Others		33,407			32,048
Other long term liabilities	$	50,385		$	32,048

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The Company’s cash balances are held in numerous locations throughout the world, with the majority in the United States. As of September 28, 2014, the Company had cash, cash equivalents, and short-term investments of $309.4 million held within the United States and $17.4 million held outside of the United States. As of December 29, 2013, the Company has cash, cash equivalents, and short term investments of $298.3 million held within the United States and $13.2 million held outside the United States.

All securities other than the FDIC insured certificates of deposit were designated as available-for-sale. FDIC insured certificates of deposit are held to maturity. Gross unrealized gains and losses on cash equivalents and short term investments were not material as of September 28, 2014 and December 29, 2013. Gross realized gains and losses on cash equivalents and short-term investments were not material for the three months and nine months ended September 28, 2014 and September 29, 2013.

Sale of Sunnyvale property and new headquarters lease

On January 23, 2014, the Company sold its property in Sunnyvale, California, consisting of 24.5 acres of land with approximately 471,000 square feet of buildings that include its headquarters building and submicron development center, a Pacific Gas & Electric transmission facility and a warehouse building, for net consideration of $58.9 million. The Company concurrently leased back approximately 170,000 square feet of the headquarters building on a month-to-month basis with the Company having the option to continue the lease for up to 24 months; thereafter either party can terminate the lease. The first six months of the lease are rent free. For accounting purposes, the rents relating to the rent-free period have been netted against the sale proceeds and represent prepaid rent. The Company’s rent-free use of this building constitutes continuing involvement by the Company as lessee, and recognition of the sale of the property and the related gain is deferred until the lease period ends.

Due to the Company’s continuing involvement under the lease, the cash proceeds net of third-party costs were recorded under the financing method as a short term financing obligation, in accordance with the authoritative guidance on leases and sale of real estate. Interest is imputed on the financing obligation until such time as the sale can be recognized. The property continues to remain on the Company’s condensed consolidated balance sheet and the buildings are being depreciated over their remaining useful life. After the rent-free period, beginning in the third quarter of fiscal 2014, a portion of the lease payments is recorded as a reduction to the financing obligation and the remainder is recognized as interest expense. As of September 28, 2014, $59.8 million was recorded in accrued liabilities and other as a financing obligation. The Company expects to recognize a gain of approximately $38.1 million on the sale of Sunnyvale property in the fourth quarter of fiscal 2014 when the lease ends. It will be recorded within interest income and other, net in the Consolidated Financial Statements.

On May 22, 2014, the Company entered into a new headquarters lease for renting office space in San Jose, California. The lease term is for a period of 12 years, with two options to extend for periods of five years each after the initial lease term. The initial lease term will commence on January 1, 2015 and expire on December 31, 2026.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

5. Accumulated Other Comprehensive Income (Loss)

The following table summarizes the activity related to accumulated other comprehensive loss, net of tax:

	Foreign Currency Translation Adjustment			Net Gains and Losses on Cash Flow Hedges				Total
	(in thousands)

Beginning Balance, December 29, 2013	$	(4,035	)	$	2			$	(4,033	)
Other comprehensive income before reclassification, net of tax		347			(4,174	)			(3,827	)
Amounts reclassified to earnings on cash flow hedges		-			6,326		⁽¹⁾		6,326
Net other comprehensive income	$	347		$	2,152			$	2,499
Ending Balance, September 28, 2014	$	(3,688	)	$	2,154			$	(1,534	)

(1) Please see note 11 for the further information on the reclassification

6. Equity Incentive Plan and Stock-Based Compensation

Equity Incentive Plan

The Company’s 2010 Equity Incentive Award Plan (2010 Plan) provides for the grant of stock options, stock appreciation rights, restricted stock units, restricted stock, performance awards, stock payments, dividend equivalents and deferred stock to its employees, consultants and non-employee members of its Board of Directors.

In the first quarter of fiscal 2014, the Company granted performance based restricted stock units (PSUs) to certain senior executives with vesting subject to achievement of performance goals established by the Compensation Committee of the Company’s Board of Directors. Performance goals are based on a combination of Company- specific financial targets, and a relative total shareholder return (TSR) target that compares the Company’s TSR over a three-year period to a benchmark peer-group TSR. These stock awards vest at the end of the performance period of three years from the grant date. The number of stock awards that can vest range from 0% to 150% of those initially awarded. In evaluating the fair value of these awards, the Company used a combination of the stock price at the close of market on grant date for the performance condition, and a Monte Carlo simulation on grant date, taking the market-based goal into consideration, for the market condition.

In the first half of fiscal 2013, the Company granted PSUs to certain senior executives. The PSUs have vesting percentages ranging from 0% to 100%, calculated based on the relative TSR of the Company’s common stock as compared to the TSR of its peer companies. These awards are divided into two equal tranches, each with an 18 month performance period. The first performance period is from February 1, 2013 through July 31, 2014 and the second performance period is from August 1, 2014 through January 31, 2016. In the third quarter of fiscal 2014, the first tranche of the PSUs vested at 100% based on the relative TSR of the Company’s common stock as compared to the TSR of its peer companies.

2014 Employee Stock Purchase Plan

On May 16, 2014, the stockholders of the Company approved the Spansion Inc. 2014 Employee Stock Purchase Plan (ESPP), which is qualified under Section 423 of the Internal Revenue Code. The ESPP provides that eligible employees may contribute up to 10% of their base salary towards the purchase of the Company’s common stock. The per share purchase price of the employee will be 85% of the fair market value of the stock at the beginning or the end of the offering period, whichever is lower.

The total number of shares of common stock reserved for issuance under the plan is 2.0 million shares. The plan shares will be increased automatically on an annual basis on January 1 of each year. The increase will be equal to one percent of total number of outstanding shares of the Company’s common stock on the immediately preceding December 31, subject to certain restrictions. The initial offering period under the ESPP commenced on August 15, 2014 and ends on February 13, 2015.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The shares of common stock available for grant under the 2010 Plan are shown in the following table:

	Shares Available For Grant
Balance as of December 29, 2013		2,350,404
Additional shares issuable under 2010 plan (annual increase for 2014)		2,069,902
Stock options forfeited/cancelled through September 28, 2014		299,269
RSUs granted, net of forfeitures/cancellations		(1,211,595	)
Key Executive RSUs forfeited/cancelled through September 28, 2014		357,870
PSUs granted, net of forfeitures/cancellations ⁽¹⁾		(256,000	)
Balance as of September 28, 2014		3,609,850

(1) Includes PSUs granted in fiscal 2014 at target. Additional awards that could be earned under the fiscal 2014 grant total 137,000.

Stock-Based Compensation

The following table presents the total stock-based compensation expense by financial statement caption resulting from the Company’s stock options, RSUs, PSUs, Key Executive RSUs and the ESPP:

	Three Months Ended				Nine Months Ended
	September 28, 2014		September 29, 2013		September 28, 2014		September 29, 2013
	(in thousands)
Cost of sales	$	1,553	$	1,384	$	4,476	$	4,235
Research and development		2,484		1,952		6,298		7,420
Sales, general and administrative		5,439		3,692		14,304		11,669
Stock-based compensation expense after income taxes⁽¹⁾	$	9,476	$	7,028	$	25,078	$	23,324

⁽¹⁾There was no income tax benefit related to stock-based compensation because all of the Company's U.S. deferred tax assets, net of U.S. deferred tax liabilities, continue to be subject to a full valuation allowance.

In the third quarter of fiscal 2014, the Company also began recording expense on the performance awards granted in fiscal 2011 and fiscal 2012 (Key Executive RSU) as it expects that the performance goals for the year will be met. As of September 28, 2014, the total unrecognized compensation cost related to unvested stock options, RSUs, Key Executive RSUs, PSUs and on the ESPP was approximately $31.7 million after reduction for estimated forfeitures which will be recognized by the end of first quarter of fiscal 2017.

No options were granted during the three and nine months ended September 28, 2014. The fair value of each stock option granted during the three and nine months ended September 29, 2013 was estimated at the date of grant using a Black-Scholes option pricing model, with the following assumptions for grants:

	Three Months Ended			Nine Months Ended
	September 29, 2013			September 29, 2013

Expected volatility		41.84	%		47.06	%
Risk-free interest rate		1.14	%		0.94	%
Expected term (in years)		4.35			4.35
Dividend yield		0.00	%		0.00	%

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The weighted average fair value of the Company’s stock options granted is as follows:

	Three Months Ended		Nine Months Ended
	September 29, 2013		September 29, 2013

Weighted average fair value of stock options granted	$	3.68	$	4.69

The fair value of each PSU award granted in fiscal 2014 and fiscal 2013 was determined using a Monte Carlo pricing model, and was estimated using the following assumptions:

	Nine Months Ended
	September 28, 2014			September 29, 2013

Stock price on grant date	$	16.58		$	11.50
Expected volatility		42.79	%		50.90	%
Risk-free interest rate		0.73	%		0.21	%
Dividend yield		0.00	%		0.00	%

Stock Option and Restricted Stock Unit Activity

The following table summarizes stock option activities and related information under the 2010 Plan for the periods presented:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares			Price		Life (in Years)		Value
								(in thousands)
Outstanding stock options as of December 29, 2013		6,542,929		$	13.03		4.42	$	14,061
Granted		-		$	-
Cancelled/Forfeited		(299,269	)	$	15.39
Exercised		(1,236,390	)	$	18.06			$	8,130
Outstanding stock options as of September 28, 2014		5,007,270		$	13.29		3.73	$	46,191
Total vested and exercisable as of September 28, 2014		4,386,657		$	13.63		3.55	$	38,934

No income tax benefit was realized from stock option exercises for the three and nine months ended September 28, 2014.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The following table summarizes RSU award activities and related information for the nine months ended September 28, 2014:

	RSU
				Weighted Average
	Number of			Grant-date
	Shares			Fair Value
Outstanding as of December 29, 2013		2,384,712		$	14.01
Granted		1,320,531		$	16.13
Cancelled/Forfeited		(108,936	)	$	13.09
Vested		(1,337,996	)	$	12.83
Outstanding as of September 28, 2014		2,258,311		$	15.99

The following table summarizes Key Executive RSUs and PSU award activities and related information for the nine months ended September 28, 2014.

	Key Executive RSU					PSU
				Weighted Average					Weighted Average
	Number of			Grant-date		Number of			Grant-date
	Shares			Fair Value		Shares			Fair Value
Outstanding as of December 29, 2013		974,286		$	12.40		362,000		$	7.38
Granted		-		$	-		274,000	⁽¹⁾	$	17.94
Cancelled/Forfeited		(357,870	)	$	11.03		(18,000	)	$	7.40
Vested		(318,781	)	$	11.37		(172,000	)	$	7.40
Outstanding as of September 28, 2014		297,635		$	15.15		446,000		$	13.86

(1) Includes performance awards granted in fiscal 2014 at target. Additional awards that could be earned under the fiscal 2014 grant total 137,000.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

7. Net Income (Loss) Per Share

The following table presents the computation of basic and diluted net loss per share:

	Three Months Ended						Nine Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013
	(in thousands except for per-share amounts)
Numerator:
Net loss	$	(10,846	)	$	(36,904	)	$	(45,315	)	$	(54,570	)
Denominator:
Denominator for basic / diluted net loss per share, weighted average shares		61,543			58,785			60,705			58,506

Net loss per share:
Basic / Diluted net loss per share	$	(0.18	)	$	(0.63	)	$	(0.75	)	$	(0.93	)
Potentially dilutive shares excluded from the diluted net loss per share computation because their effect would have been anti-dilutive
RSUs, PSUs, options and the employee stock purchase plan		7,846			4,441			7,174			4,555
Conversion of Senior Exchangeable Notes		10,814			3,996			10,814			1,352
Total antidilutive shares		18,660			8,437			17,988			5,907

8. Intangible Assets and Goodwill

Intangible Assets

The following table presents the balance of intangible assets as of the dates indicated below:

			September 28, 2014							December 29, 2013
	Estimated range of lives (in years)		Gross Amount⁽²⁾		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
			(in thousands)
Developed technology		5 to 10	$	140,976	$	(69,333	)	$	71,643	$	140,476	$	(53,661	)	$	86,815
Customer relationships		5 to 10		110,039		(45,945	)		64,094		110,119		(35,976	)		74,143
Trade names		0.5 to 7		8,079		(5,287	)		2,792		9,478		(5,545	)		3,933
Trademarks		7 to 8		2,700		(394	)		2,306		2,700		(142	)		2,558
IP R&D ⁽¹⁾				-		-			-		500		-			500
Total Intangible Assets			$	261,794	$	(120,959	)	$	140,835	$	263,273	$	(95,324	)	$	167,949

(1) All of the IP R&D reached technological feasibility during the nine months ended September 28, 2014 and was reclassified into developed technology.

(2) The changes in gross balance of intangible assets resulted from the removal of fully amortized assets no longer in use and from foreign currency translation adjustments.

The actual amortization expense for the intangible assets is as shown below:

	Three Months Ended				Nine Months Ended
	September 28, 2014		September 29, 2013		September 28, 2014		September 29, 2013
	(in thousands)

Amortization expense	$	8,940	$	9,514	$	27,034	$	23,140

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The estimated future amortization expense for intangible assets as summarized below:

	Estimated Future Amortization
	(in thousands)
Fiscal 2014 (remaining 3 months)	$	7,929
Fiscal 2015		35,759
Fiscal 2016		35,926
Fiscal 2017		25,061
Fiscal 2018		19,607
Fiscal 2019 and beyond		16,553
Total	$	140,835

Goodwill

The following table represents the balance of goodwill as of the dates indicated below:

	September 28, 2014		December 29, 2013
	(in thousands)

Goodwill	$	166,334	$	166,422

The changes in the carrying amount of goodwill since December 29, 2013 resulted from foreign currency translation adjustments.

9. Financing arrangements

The following table summarizes the Company’s debt:

	September 28, 2014		December 29, 2013
	(in thousands)
Debt obligations:
Term Loan	$	294,334	$	296,135
2.00% Senior Exchangeable Notes		115,235		111,733
7.875% Senior Notes		-		94,064
Total debt	$	409,569	$	501,932
Less: current portion		22,285		97,320
Long-term debt	$	387,284	$	404,612

The Company is in compliance of all the covenants under the 2.00% Senior Exchangeable Notes and Term Loan as of September 28, 2014.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

2.00% Senior Exchangeable Notes due 2020

The net carrying amount of the liability component of 2.00% Senior Exchangeable Notes due 2020 (the Notes) consists of the following:

	September 28, 2014			September 29, 2013
	(in thousands)
Principal amount	$	150,000		$	150,000
Unamortized debt discount		(34,765	)		(39,391	)
Net carrying value	$	115,235		$	110,609

The following table presents the interest expense recognized on the Notes:

	Three Months Ended		Nine Months Ended		Three and Nine Months Ended
	September 28, 2014		September 28, 2014		September 29, 2013
	(in thousands)
Contractual interest expense at 2% per annum	$	746	$	2,230	$	290
Amortization of debt issuance costs		130		391		50
Accretion of debt discount		1,185		3,502		432
Total	$	2,061	$	6,123	$	772

Capped Calls

In connection with the issuance of the Notes, the Company entered into capped call transactions with certain bank counterparties to reduce the potential dilution to the Company’s common stock upon exchange of the Notes. The capped call transactions have a strike price of approximately $13.87 and a cap price of approximately $18.14, and are exercisable when and if the Notes are converted. If upon conversion of the Notes, the price of the common stock is above the strike price of the capped calls, the counterparties will deliver shares of the Company’s common stock and/or cash with an aggregate value approximately equal to the difference between the price of our common stock at the conversion date (with a maximum price for purposes of this determination equal to the cap price) and the strike price, multiplied by the number of shares of our common stock related to the capped call transactions being exercised. The capped call transactions expire on September 1, 2020.

7.875% Senior Notes due 2017

On January 21, 2014, the Company redeemed the remaining $94.1 million aggregate principal amount outstanding of the7.875% Senior Notes due 2017 (the Senior Notes) at a redemption price that was 103.938% of their face value. The Company paid an aggregate amount of $99.1 million, including redemption price, accrued and unpaid interest, and repurchase premium, and recorded a loss on redemption of $4.8 million within Interest income and other, net in the Condensed Consolidated Statement of Operations. The Company redeemed these Senior Notes with the proceeds from the issuance of the Notes.

2012 Revolving Credit Facility

As of September 28, 2014, the Company was in compliance with all of the 2012 Revolving Credit Facility’s covenants. However, drawdown under the 2012 Revolving Credit Facility requires that the Company meet or obtain a waiver to certain conditions including the senior secured leverage ratio not to exceed 2.75:1.00 and compliance with coverage and leverage ratios, as of the last day of the most recently ended fiscal quarter. Based on its operating results for the three months ended September 28, 2014, the Company does not meet the maximum leverage ratio limit. The Company has not obtained a waiver for those conditions; accordingly, it is not able to draw down on the 2012 Revolving Credit Facility. The Company did not need to draw on the revolving line of credit during the three months ended September 28, 2014 and believes that its sources of cash and liquidity are sufficient to meet the business requirements for the next 12 months.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

10. Fair Value Measurement

The fair value measurements of the Company’s financial assets and liabilities, categorized into types of instruments, are set forth in the table below based upon the fair value hierarchy:

	September 28, 2014							December 29, 2013
	Level 1		Level 2		Total			Level 1		Level 2		Total
	(in thousands)

Money market funds	$	1,010	$	-	$	1,010	⁽¹⁾	$	3,906	$	-	$	3,906	⁽²⁾
Foreign Exchange Forward Contracts		-		3,928		3,928			-		3,493		3,493
Total financial assets	$	1,010	$	3,928	$	4,938		$	3,906	$	3,493		7,399
Foreign Exchange Forward Contracts			$	2,010	$	2,010		$	-	$	313	$	313
Total financial liabilities	$	-	$	2,010	$	2,010		$	-	$	313	$	313

⁽¹⁾ Total cash and cash equivalents and short-term investments of $326.8 million as of September 28, 2014 includes cash of $280.4 million held in operating accounts, $1.0 million in money market funds, $24.3 million held in certificates of deposit and $21.1 million held in time deposit accounts.

⁽²⁾ Total cash and cash equivalents and short-term investments of $311.5 million as of December 29, 2013 includes cash of $282.2 million held in operating accounts, $3.9 million in money market funds, $11.4 million held in certificates of deposit and $14.0 million in time deposit accounts.

Fair Value of Other Financial Instruments Not Carried At Fair Value

The Company’s Term Loan and Notes are traded in the market and the fair values are Level 1, as they are based on quoted market prices. Prior to redemption in fiscal 2013, the Senior Notes were traded in the market and the fair value was Level 1. The carrying amounts and estimated fair values of the Company’s debt obligations are as follows:

	September 28, 2014				December 29, 2013
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
	(in thousands)
Debt traded in the market:
Term Loan	$	294,334	$	290,287	$	296,135	$	295,170
2.0% Senior Exchangeable Notes		115,235		199,356		111,733		129,104
7.875% Senior Notes		-		-		94,064		97,591
Total Debt Obligations	$	409,569	$	489,643	$	501,932	$	521,865

The fair value of the Company’s cash equivalents, accounts receivable, accounts payable and other current liabilities approximates their carrying value.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

11. Derivative Financial Instruments

The Company entered into multiple foreign exchange forward contracts to hedge certain operational exposures resulting from movements in Japanese yen exchange rates. The Company’s hedging policy is designed to mitigate the impact of foreign currency exchange rate movements on its operating results. Some foreign currency forward contracts were considered to be economic hedges that were not designated as hedging instruments while others were designated as cash flow hedges. Whether designated or undesignated, these forward contracts protect the Company against the variability of forecasted foreign currency cash flows resulting from revenues, expenses and net asset or liability positions designated in currencies other than the U.S. dollar and they are not speculative in nature.

Cash Flow Hedges

In the third quarter of fiscal 2014, the Company entered into cash flow hedges to protect non-functional currency inventory purchases and certain other operational expenses, in addition to its on-going program of cash flow hedges to protect its non-functional currency revenues against variability in cash flows due to foreign currency fluctuations. The Company’s foreign currency forward contracts that were designated as cash flow hedges have maturities between three and eight months. The maximum original duration of any contract allowable under the Company’s hedging policy is fifteen months. All hedging relationships are formally documented, and the hedges are designed to offset changes to future cash flows on hedged transactions at the inception of the hedge. The Company recognizes derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measures them at fair value on a quarterly basis. The Company records changes in the intrinsic value of its cash flow hedges in accumulated other comprehensive income in the accompanying Consolidated Balance Sheets, until the forecasted transaction occurs. Interest charges or “forward points” on the forward contracts are excluded from the assessment of hedge effectiveness and are recorded in interest and other income (expense), net in the accompanying Condensed Consolidated Statements of Operations. When the forecasted transaction occurs, the Company reclassifies the related gain or loss on the cash flow hedge to revenue or costs, depending on the risk hedged. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company will reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income (expense), net in its Condensed Consolidated Statements of Operations at that time.

The Company evaluates hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and records any ineffective portion of the hedge in interest and other income (expense), net in its Condensed Consolidated Statements of Operations.

At September 28, 2014, the Company had outstanding forward contracts to sell approximately ¥ 7.5 billion for $72.5 million and to buy approximately ¥ 12.5 billion for $116.0 million

Over the next twelve months, the Company expects to reclassify $2.2 million from accumulated other comprehensive loss to earnings as the related forecasted transactions occur.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Non-designated hedges

Total notional amounts of outstanding contracts were as summarized below:

Buy / Sell	September 28, 2014	December 29, 2013
	(in millions)

Japanese Yen / US dollar	¥ 735.7/$6.8	¥ 2,945/$28.2
US dollar / Japanese Yen	$11.7/¥ 1,276	$42.0/¥ 4,047
US dollar / EUR	$33.9/€ 26.5	$23.4/€ 17.1

The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three and nine months ended September 28, 2014 and September 29, 2013 was as follows:

	Three Months Ended					Nine Months Ended
	September 28, 2014		September 29, 2013			September 28, 2014			September 29, 2013
	(in thousands)
Derivatives Designated as Hedging Instruments
Foreign Exchange Forward Contracts

Net unrealized gain (loss) recognized in OCI ⁽¹⁾	$	2,716	$	(391	)	$	(4,174	)	$	13,669

Net loss (gain) reclassified from accumulated OCI into net sales (effective portion)	$	528	$	(3,113	)	$	3,511		$	(7,701	)

Net loss reclassified from accumulated OCI into cost of goods sold	$	2,449	$	-		$	2,449		$	-

Net loss reclassified from accumulated OCI into sales, general and administrative expenses	$	129	$	-		$	129		$	-

Net loss reclassified from accumulated OCI into research and development expenses	$	237	$	-		$	237		$	-

Net gain reclassified from accumulated OCI into income (ineffective portion) ⁽²⁾	$	-	$	-		$	-		$	(2,415	)

Derivatives Not Designated as Hedging Instruments
Net gain (loss) recognized in income
Swap interest expense ⁽³⁾	$	-	$	-		$	-		$	(8	)
Foreign Exchange Forward Contracts ⁽²⁾	$	3,685	$	(1,053	)	$	5,679		$	(813	)
Foreign Exchange Options Contracts ⁽²⁾	$	-	$	(197	)	$	-		$	-

(1)	Net change in the fair value of the effective portion classified in other comprehensive income (OCI)
(2)	Classified in interest income and other, net
(3)	Classified in interest expense

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The gross fair values of derivative instruments on the Condensed Consolidated Balance Sheets as of September 28, 2014 and December 29, 2013 were as follows:

	September 28, 2014				December 29, 2013
Balance sheet location	Derivatives designated as hedging instruments		Derivatives not designated as hedging instruments		Derivatives designated as hedging instruments		Derivatives not designated as hedging instruments
	(in thousands)
Prepaid expenses and other current assets
Foreign Exchange Forward Contracts	$	3,610	$	318	$	-	$	3,493

Accrued liabilities and other
Foreign Exchange Forward Contracts	$	1,983	$	27	$	-	$	313

Changes to the derivative asset or derivative liability position for cash flow hedges result from weakening/strengthening of the Japanese Yen to the US Dollar as of end of quarter.

Offsetting Derivative Assets and Liabilities

The Company presents its derivatives at gross fair values on the Condensed Consolidated Balance Sheets. However, the Company’s master netting and other similar arrangements allow net settlements under certain conditions. The following table sets forth the offsetting of derivative assets as of September 28, 2014 and December 29, 2013.

							Gross amounts not offset on the Condensed Consolidated Balance Sheets but have legal rights to offset
	Gross amounts of recognized Assets		Gross amounts offset in the Condensed Consolidated Balance Sheets		Net amounts of Assets presented in the Condensed Consolidated Balance Sheets		Financial Instruments ⁽¹⁾			Cash collateral pledged		Net amount
	(in thousands)
As of September 28, 2014:
Foreign exchange contracts	$	3,928	$	-	$	3,928	$	(2,709	)	$	-	$	1,219
As of December 29, 2013:
Foreign exchange contracts	$	3,493	$	-	$	3,493	$	(1,572	)	$	-	$	1,921

⁽¹⁾ Financial Instruments as of September 28, 2014 and December 29, 2013 relates to derivative liabilities and the term loan facility which can be net settled against derivative assets in accordance with the Company’s master netting agreements.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

The following table sets forth the offsetting of derivative liabilities as of September 28, 2014 and December 29, 2013:

							Gross amounts not offset on the Condensed Consolidated Balance Sheets but have legal rights to offset
	Gross amounts of recognized Liabilities		Gross amounts offset in the Condensed Consolidated Balance Sheets		Net amounts of Liabilities presented in the Condensed Consolidated Balance Sheets		Financial Instruments				Cash collateral pledged		Net amount
	(in thousands)
As of September 28, 2014:
Foreign exchange contracts	$	2,010	$	-	$	2,010	$	(1,601	)	⁽¹⁾	$	-	$	409
As of December 29, 2013:
Foreign exchange contracts	$	313	$	-	$	313	$	(226	)	⁽²⁾	$	-	$	87

(1)

Financial Instruments as of September 28, 2014 relates to cash and cash equivalents, short-term investments and derivative assets which can be net settled against derivative liabilities in accordance with the Company’s master netting agreements.

(2)

Financial Instruments as of December 29, 2013 relates to derivative assets which can be net settled against derivative liabilities in accordance with the Company’s master netting agreements.

12. Employee related pension obligation

A majority of the employees transferred as part of the MCA business acquisition were participants in the Fujitsu Corporate Pension Fund and Retirement Allowance Plan (together, the Fujitsu Defined Benefit Plan) until March 31, 2014. The Company accounted for its participation in the Fujitsu Defined Benefit Plan on behalf of these employees (Plan participants) as a multiemployer plan participant and recorded pension expense of $1.5 million for the quarter ended March 30, 2014.

On January 15, 2014, the Company received approval from the transferred employees’ union to exit from the Fujitsu Defined Benefit Plan and establish the Spansion defined contribution and cash balance plans.

On April 1, 2014, the Company withdrew from the Fujitsu Defined Benefit Plan and set up the Spansion Corporate Defined Contribution Pension Plan and the Spansion Innovates Group Cash Balance Plan, an unfunded defined benefit plan of our MCA Japan business subsidiaries (Spansion Pension Plans). In accordance with the Stock Purchase Agreement with FSL, the plan assets transferred from the Fujitsu Defined Benefit Plan to the Spansion Pension Plans were valued as of March 31, 2014, one day before the transfer. The Company was not subject to any liabilities upon withdrawal from the Fujitsu Defined Benefit Plan.

The Company recognized a gain of $2.5 million in the second quarter of fiscal 2014 due to better than expected performance of the total fund assets in the pension plan. This gain was recorded within Interest income and other, net in the Company’s Condensed Consolidated Statement of Operations for the nine months ended September 28, 2014.

The restricted cash that was received as a part of the MCA business acquisition for the underfunded portion of the Fujitsu managed pension plan was $21.5 million as of September 28, 2014. According to the employees’ election and the expected distribution schedule, the Company recorded $6.1 million in accrued compensation and benefits and $16.3 million in other long-term liabilities on the Condensed Consolidated Balance Sheet as of September 28, 2014. Restricted cash relating to these distributions has been recorded in short term and long term assets as appropriate.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

Spansion Innovates Group Cash balance plan (Defined Benefit Plan)

The Spansion Innovates Group Cash balance plan (Cash Balance Plan) provides for the Company to set up a hypothetical cash balance account (CB account) for each plan participant and accumulates at a percentage of the annual pensionable salary and interest thereon. Only employees transferred as part of the MCA business acquisition are eligible to participate in the cash balance plan.

The pension charges under the Cash Balance Plan are based on certain actuarial assumptions, such as turnover rates, discount rates and other factors. The discount rate assumption is determined by comparing the expected benefit payments to the Japanese corporate bonds yield curve as of April 1, 2014. Actual results that differ from these assumptions will be accumulated and amortized over the future life of the plan participants if they exceed 10% of the projected benefit obligation (PBO).

The Company recorded a service cost of $0.3 million for the three months ended September 28, 2014 and accrued a liability of $0.6 million as of September 28, 2014. The Company expects to expense $1.0 million related to the Cash Balance Plan for fiscal year 2014.

Spansion Corporate Defined Contribution Plan

The Company recorded an expense of $0.6 million and $1.2 million under this plan for the three and nine months ended September 28, 2014, respectively, and accrued a liability of $0.2 million as of September 28, 2014.

13. Income Taxes

The following table presents the Company’s income tax expense (benefit):

Three Months Ended

Nine Months Ended

September 28, 2014

September 29, 2013

September 28, 2014

September 29, 2013

(in thousands)