Cypress Semiconductor Corp. Value Stock - Dividend - Research Selection

Cypress manufactures and sells advanced embedded system solutions for automotive, industrial, home automation and appliances, consumer electronics and medical products. Cypress' microcontrollers, analog ICs, wireless and wired connectivity solutions and memories help engineers design differentiated products and help with speed to market. Cypress is committed to providing customers with quality support and engineering resources.

Cypress was incorporated in California in December 1982. Our stock is listed on the Nasdaq Global Select Market under the ticker symbol “CY”.

Our corporate headquarters are located at 198 Champion Court, San Jose, California 95134, and our main telephone number is (408) 943-2600. We maintain a website at www.cypress.com.

Our fiscal 2017 ended on December 31, 2017, fiscal 2016 ended on January 1, 2017, and fiscal 2015 ended on January 3, 2016.

Acquisitions & Divestitures

In March 2015, we completed a merger ("Merger") with Spansion Inc. ("Spansion") for a total consideration of approximately $2.8 billion. Spansion was a leading designer, manufacturer and developer of embedded systems semiconductors with flash memory, microcontrollers, analog and mixed-signal products.

In August 2015, we completed the sale of the TrueTouch® mobile touchscreen business to Parade Technologies ("Parade") for total cash proceeds of $98.6 million. Post-sale, we continued to provide TrueTouch® solutions to our automotive, industrial and home appliance customers.

In July 2016, we completed the acquisition of certain assets primarily related to the Internet of Things ("IoT") wireless business of Broadcom Corporation ("Broadcom") pursuant to an Asset Purchase Agreement with Broadcom dated April 28, 2016, for a total purchase consideration of $550 million.

In March 2017, we completed the sale of our wafer fabrication facility in Minnesota. We recorded a gain of $1.2 million in fiscal 2017 resulting from the change in the estimated costs to sell the assets.

Business Strategy

Our primary focus is profitable growth in our key markets. We plan to capitalize on our product portfolio to extend our penetration of global markets such as the automotive, industrial, communications, consumer, and computation markets. Our revenue model is based on the following product and market strategies: (a) focus on providing customers with complete solutions, including multiple Cypress products where applicable, and supporting software, (b) growing revenue from our programmable solutions and derivatives including PSoC®, Traveo™ and other microcontrollers in the automotive and industrial markets, (c) increasing our connectivity revenue through the introduction of new products such as Wi-Fi, Bluetooth® and, Bluetooth Low Energy, USB-C and USB Power Delivery solutions and SuperSpeed USB 3.0 peripheral controllers and (d) increasing profitability in our memory products by leveraging our market position and expanding our portfolio with new and complementary products primarily targeted at the automotive and industrial markets. We monitor our operating expenses closely to improve our operating leverage as driven by various company-wide initiatives.

During fiscal 2016, we launched various long-term strategic corporate transformation initiatives, collectively being referred to as Cypress 3.0 initiatives. Cypress 3.0 intends to increase our focus on becoming a solution-driven company, increase ease of doing business, redeploy personnel and resources to target markets segments that are expected to grow faster than the industry and streamline our internal processes.

As we continue to implement our strategies, there are many internal and external factors that could impact our ability to meet any or all of our objectives. Some of these factors are discussed under Item 1A Risk Factors.

Manufacturing

Our "flexible manufacturing" strategy combines capacity from external foundries with output from our internal manufacturing facilities which allows us to meet swings in customer demand while limiting capital expenditure requirements and lessening the burden of high fixed costs, a capability that is important with our rapidly evolving product portfolio.

As of the end of fiscal year 2017, we owned a wafer fabrication facility in Austin, Texas. External wafer foundries, mainly in Asia, manufactured approximately 63% of our wafers. We expect that purchase of wafers as a percentage of our total wafer consumption from our wafer foundry partners will increase in 2018.

We conduct assembly and test operations at our back-end manufacturing facilities in Cavite, Philippines and Bangkok, Thailand, manufacturing volume products and packages, which contribute to better leverage of manufacturing cost. These facilities account for approximately 28% of the total assembly output and 38% of the total test output. Various subcontractors in Asia perform the balance of the assembly and test operations.

We have manufacturing services agreements primarily with the following partners:

• Advanced Semiconductor Engineering, Inc. (“ASE”) - Agreements for assembly and test services;

• Deca Technologies Inc. - Agreement for manufacturing services.

• Fujitsu Semiconductor Limited - Agreements for the supply of product wafer foundry services, sort services and assembly and test services;

• HuaHong Grace Semiconductor Manufacturing Corporation ("Grace") - Agreement for foundry services;

• Semiconductor Manufacturing International Corporation ("SMIC") - Agreements for foundry services;

• SK Hynix Inc. (“SK Hynix”). - Agreements for development and supply of certain products;

• Skywater Technologies Inc. - Agreement for foundry services;

• Taiwan Semiconductor Manufacture Company ("TSMC") - Agreement for foundry services;

• United Microelectronics Corporation ("UMC") - Agreement for foundry services;

• United Test and Assembly Center Ltd - Agreement for assembly and test services; and

• Wuhan Xinxin Semiconductor Manufacturing Corporation ("XMC") - Agreement for foundry services;

Research and Development

Our research and development ("R&D") efforts are focused on the development and design of new semiconductor products, design methodologies, as well as the continued development of advanced software platforms. Our R&D organization works with our manufacturing facilities, suppliers and customers to improve our semiconductor designs and lower our manufacturing costs. During fiscal 2017, 2016 and 2015, R&D expenses totaled $357.0 million, $331.2 million and $274.8 million, respectively.

Our R&D groups conduct ongoing efforts to reduce design cycle time and increase first pass yield through structured re-use of intellectual property blocks from a controlled intellectual property library, development of computer-aided design tools and improved design business processes. Design and related software development work primarily occurs at design centers located in the United States, Ireland, Germany, Israel, India, Japan and China.

Sales and Marketing

We sell our semiconductor products through several channels: distributors; manufacturing representative firms; and sales by our sales force directly to original equipment manufacturers and their suppliers.

Our marketing activities target customers, reference design houses and our potential partners; and include a combination of direct marketing activities, such as trade shows, events and sponsored activities. We augment our sales effort with field application engineers, specialists in our products, technologies and services who work with customers to design our products into their systems. Field application engineers also help us identify emerging markets and new products.

Outstanding accounts receivable from Fujitsu Electronics Inc., one of our distributors accounted for 28% of our consolidated accounts receivable as of December 31, 2017 and 24%, of our consolidated accounts receivable as of January 1, 2017.

Revenue generated through Fujitsu Electronics Inc. and Arrow Electronics, two of our distributors, accounted for 20% and 13%, respectively, of our consolidated revenues for fiscal 2017. Revenue generated through Fujitsu Electronics Inc., one of our distributors, accounted for 23% of our consolidated revenues for fiscal 2016 and 25% of our consolidated revenues for fiscal 2015. Avnet, Inc., one of our distributors, accounted for 10% of our consolidated revenues for fiscal 2015. No other distributors or customers accounts for 10% or more of our revenue.