10-K 1 cy-10k_20160103.htm 10-K cy-10k_20160103.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

ý

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

For the fiscal year ended January 3, 2016

Or

¨

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: 1-10079  

 

CYPRESS SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

94-2885898

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

198 Champion Court, San Jose, California 95134

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (408) 943-2600

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $.01 par value

 

The NASDAQ Stock Market

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ý  Yes    ¨  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    ý  No

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.    ý  Yes    ¨  No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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 “larger accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ý    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

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

The market value of voting and non-voting common stock held by non-affiliates of the registrant, based upon the closing sale price of the common stock on June 28, 2015 as reported on the NASDAQ Global Select Market, was approximately $3.9 billion. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded from the foregoing calculation in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 26, 2016, 314,558,619 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement for the registrant’s Annual Meeting of Stockholders to be filed pursuant to Regulation 14A for the year ended January 3, 2016 are incorporated by reference in Items 10 - 14 of Part III of this Annual Report on Form 10-K.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

 

 

 

Page

 

PART I

 

Item 1

Business

4

Item 1A

Risk Factors

18

Item 1B

Unresolved Staff Comments

29

Item 2

Properties

29

Item 3

Legal Proceedings

29

Item 4

Mine Safety Disclosures

29

 

 

 

 

PART II

 

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

30

Item 6

Selected Financial Data

35

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

Item 7A

Quantitative and Qualitative Disclosure About Market Risk

57

Item 8

Financial Statements and Supplementary Data

59

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

110

Item 9A

Controls and Procedures

110

Item 9B

Other Information

111

 

 

 

 

PART III

 

Item 10

Directors, Executive Officers and Corporate Governance

112

Item 11

Executive Compensation

112

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

112

Item 13

Certain Relationships and Related Transactions and Director Independence

112

Item 14

Principal Accountant Fees and Services

113

 

 

 

 

PART IV

 

Item 15

Exhibits and Financial Statement Schedule

114

Signatures and Power of Attorney

118

 

2


FORWARD-LOOKING STATEMENTS

The discussion in this Annual Report on Form 10-K contains statements that are not historical in nature, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, including, but not limited to, statements related to our manufacturing strategy; the expected timing and costs related to our integration with Spansion Inc. (“Spansion”) as a result of our recent merger; our ability to execute on planned synergies related to the merger; our expectations regarding dividends and stock repurchases; our expectations regarding future technology transfers and other licensing arrangements; our expectations regarding the timing and cost of our restructuring liabilities; our expectations regarding our active litigation matters and our intent to defend ourselves in those matters; the competitive advantage we believe we have with our patents as well as our proprietary programmable technologies and programmable products; our backlog as an indicator of future performance; the risk associated with our yield investment agreements; our foreign currency exposure and the impact exchange rates could have on our operating margins; the adequacy of our cash and working capital positions; the value and liquidity of our investments; including auction rate securities and our other debt investments; our ability to recognize certain unrecognized tax benefits within the next twelve months as well as the resolution of agreements with various foreign tax authorities; our investment strategy; the impact of interest rate fluctuations on our investments; the volatility of our stock price; the adequacy of our real estate properties; the utility of our non-GAAP reporting; the adequacy of our audits; and the potential impact of our indemnification obligations and the impact of new accounting standards on our financial statements. We use words such as “may,” “will,” “should,” “plan,” “anticipate,” “believe,” “expect,” “future,” “intend,” “estimate,” “predict,” “potential,” “continue,” and similar expressions to identify forward-looking statements. Such forward-looking statements are made as of the date hereof and are based on our current expectations, beliefs and intentions regarding future events or our financial performance and the information available to management as of the date hereof. Except as required by law, we assume no responsibility to update any such forward-looking statements. Our actual results could differ materially from those expected, discussed or projected in the forward-looking statements contained in this Annual Report on Form 10-K for any number of reasons, including, but not limited to, the state and future of the general economy and its impact on the markets and consumers we serve and our investments; our ability to effectively integrate our company with Spansion in a timely manner; our ability to attract and retain key personnel; our ability to timely deliver our proprietary and programmable technologies and products; the current credit conditions; our ability to expand our customer base; our ability to transform our business with a leading portfolio of programmable products; the number and nature of our competitors; the changing environment and/or cycles of the semiconductor industry; foreign currency exchange rates; our ability to efficiently manage our manufacturing facilities and achieve our cost goals emanating from our flexible manufacturing strategy; our ability to achieve our goals related to our restructuring activities; our success in our pending litigation matters; our ability to manage our investments and interest rate and exchange rate exposure; changes in the law; the results of our pending tax examinations; our ability to achieve liquidity in our investments; the failure or success of our Emerging Technology division; and/or the materialization of one or more of the risks set forth above or under Item 1A ( Risk Factors ) in this Annual Report on Form 10-K.

 

3


PART I

ITEM 1.

General

Cypress Semiconductor Corporation (“Cypress”) delivers high-performance, high-quality solutions at the heart of today’s most advanced embedded systems, from automotive, industrial and networking platforms to highly interactive consumer and mobile devices. With a broad, differentiated product portfolio that includes NOR flash memories, SRAM and F-RAM™, Traveo™ microcontrollers, the industry’s only PSoC® programmable system-on-chip solutions, analog and PMIC Power Management ICs, CapSense® capacitive touch-sensing controllers, and Wireless BLE Bluetooth Low-Energy and USB connectivity solutions, Cypress is committed to providing its customers worldwide with consistent innovation, best-in-class support and exceptional system value. Cypress serves numerous major markets, including automotive, industrial, communications, consumer, computation, data communications, mobile handsets and military markets.

Cypress was incorporated in California in December 1982. The initial public offering took place in May 1986, at which time our common stock commenced trading on the NASDAQ National Market. In February 1987, we were reincorporated in Delaware. 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. The contents of our website are not incorporated into, or otherwise to be regarded as part of, this Annual Report on Form 10-K.

Our fiscal 2015 ended on January 3, 2016, fiscal 2014 ended on December 28, 2014, and fiscal 2013 ended on December 29, 2013.

Business Segments

As of the end of fiscal 2015, our organization included the following business segments:

 

Business Segments

 

Description

 

 

 

PSD: Programmable Systems Division

 

PSD focuses on high-performance, programmable solutions. The programmable portfolio includes high-performance Traveo™ automotive microcontrollers, PSoC® programmable system-on-chip products, ARM® Cortex®-M4, -M3, -M0+ microcontrollers and R4 CPUs, analog PMIC Power Management ICs, CapSense® capacitive-sensing controllers, TrueTouch® touchscreen and fingerprint reader products, and PSoC Bluetooth Low Energy solutions for the Internet of Things (“IoT”). Effective March 12, 2015, PSD added Spansion’s microcontroller and analog products.

 

 

 

MPD: Memory Products Division

 

MPD focuses on high-performance parallel and serial NOR flash memories, NAND flash memories, static random access memory (SRAM), and high-reliability F-RAM™ ferroelectric memory devices. Its purpose is to enhance our position in these products and invent new products and derivatives. Effective March 12, 2015, MPD added Spansion’s Flash memory products.

 

 

 

DCD: Data Communications Division

 

DCD focuses on USB controllers, Bluetooth® Low Energy solutions that leverage Cypress’s PRoC™ programmable radio-on-chip technology, WirelessUSB™ solutions, module solutions such as trackpads and Bluetooth Low Energy modules, and controllers for the new USB Type-C standard, which enables data transmission and power delivery over a single cable with a slimmer plug. DCD focuses primarily on industrial, handset and consumer electronics markets and applications.

 

 

 

ETD: Emerging Technologies Division

 

Also known as our “startup” division, ETD includes subsidiaries AgigA, Tech Inc. and Deca Technologies Inc., as well as our foundry business and other development-stage activities.

For additional information on our segments, see Note 20 of Notes to Consolidated Financial Statements under Item 8.

 

4


Recent Developments

Business Strategies

Cypress is committed to growing revenue in profitable and attractive markets, managing its expenses and to maintaining a strong balance sheet. We maintain many of our business operations in low-cost centers, including Malaysia, Thailand, India, the Philippines and China. In addition, we are using foundry partners to supplement our manufacturing needs.

In 2013, Cypress introduced the PSoC 4 programmable system-on-chip architecture and with a sophisticated 32-bit ARM® Cortex™-M0 processor and the high-performance analog and digital circuitry of PSoC 3 and PSoC 5LP, all in a small-footprint, low-power single-chip solution.

In 2014, Cypress introduced the CapSense MBR3 mechanical button replacement family and the industry’s most integrated one-chip Bluetooth Low Energy solutions for the IoT. The low-cost CapSense MBR3 capacitive touch-sensing controllers do not require coding, enabling designers to quickly implement sleek, reliable user interfaces for a broad range of markets. They offer leading noise immunity, proximity sensing and water tolerance. The new PSoC 4 BLE offers unprecedented ease-of-use and integration in a customizable solution for IoT applications, home automation, healthcare equipment, sports and fitness monitors, and other wearable devices. The PRoC™ BLE programmable radio-on-chip provides a cost-effective, turnkey solution for wireless human interface devices, remote controls and toys.

In March 2015, Cypress completed the merger (“Merger”) with 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. Spansion’s broad portfolio of Traveo™ automotive MCUs, NOR flash and HyperFlash™ memories, and automotive power management ICs (PMICs) combined with Cypress’s flexible PSoC® solutions, CapSense® capacitive-sensing solutions, TrueTouch® touchscreen solutions and nonvolatile ferroelectric-RAMs (F-RAMs) to make Cypress the No. 3 supplier of automotive MCUs and memories. Spansion’s portfolio of ARM®-based MCUs complemented Cypress’s ARM-based PSoC solutions, and Spansion’s NOR and NAND flash memories enhanced the Cypress SRAM and nonvolatile memory portfolio, creating a global leader in embedded systems.  

In August 2015, we completed the sale of the TrueTouch® mobile touchscreen business, which is a business unit within our Programmable Systems Division, to Parade Technologies (“Parade”) for total cash proceeds of $98.6 million pursuant to the definitive agreement. Post-sale, Cypress will continue to provide TrueTouch® solutions to its automotive, industrial and home appliance customers.  

Our primary focus is profitable growth in our key markets. With the addition of the legacy Spansion business, we plan to capitalize on our expanded product portfolio and leadership positions in embedded processing and specialized memories to significantly extend our penetration of global markets such as automotive, industrial, communications, consumer, computation, data communications and military markets. Our revenue model is based on the following product and market strategies: (a) increasing market share in our memory products by leveraging our market position and expanding our portfolio with new and complementary products, (b) growing revenue from our high-performance, programmable solutions and derivatives including PSoC programmable system-on-chip products and microcontrollers in the automotive and industrial markets, (c) increasing our DCD revenue through the introduction of new products such as USB Type-C solutions, SuperSpeed USB 3.0 peripheral controllers and Bluetooth® Low Energy solutions that leverage Cypress’s PRoC™ programmable radio-on-chip technology for the IoT and other applications, and (d) revenue growth from ETD, which includes our internal startup companies. For profitability, our focus is to integrate the acquired Spansion business successfully and realize the anticipated product cost and operational cost synergies. Our integration effort includes the re-focusing of portions of legacy Spansion business to higher-margin opportunities, particularly in the Flash memory business segment. We monitor our operating expenses closely to improve our operating leverage as driven by various company-wide initiatives, including our World Class Cost program to continuously reduce cost line items as well as a Human Resources effort to reduce redundancy and improve efficiency across the company.

In order to achieve our goals on revenue growth and profitability, Cypress will continue to pursue the following strategies:

 

·

Successfully integrate our business with Spansion. We are committed to integrating the business of Cypress and Spansion successfully to realize the anticipated cost synergies and improve the bottom line.

 

·

Cross-sell products from Cypress’s expanded product portfolio in the wake of the Spansion Merger. We will continue to take advantage of product and business synergies and grow our top-line revenue.

 

·

Focus on large and growing markets. We will continue to pursue business opportunities in large and growing markets, particularly the automotive and industrial markets.

 

5


 

·

Drive profitability. Cypress has implemented and maintained a tight, corporate wide focus on gross margin and operating expenses. We are committed to maintaining our current strong operating expense management without compromising our new product development and investments in our Emerging Technologies Division.

 

·

Drive programmable technologies, extend our leadership in programmable products and drive PSoC and microcontroller proliferation. We will continue to define, design and develop new programmable products and solutions that offer our customers increased flexibility and efficiency, higher performance, and higher levels of integration with a focus on analog functionality. We will continue to drive PSoC and microcontroller adoption in our key market segments.

 

·

Collaborate with customers to build system-level solutions. We work closely with our customers from initial product design through manufacturing and delivery to optimize their design efforts, help them achieve product differentiation, improve their time-to-market and help them to develop whole product solutions.

 

·

Leverage flexible manufacturing. Our manufacturing strategy combines capacity from leading foundries with output from our internal manufacturing facilities. This enables us to meet rapid swings in customer demand while reducing the burden of high fixed costs.

 

·

Identify and exit legacy or non-strategic, underperforming businesses. We will continue to monitor and, if necessary, to exit certain business units that are inconsistent with our future initiatives and long-term financial plans so that we can focus our resources and efforts on our core programmable and proprietary business model. The sale of our TrueTouch® mobile business to Parade Technologies, Ltd. during the third quarter of 2015 is an example of this business strategy.

 

·

Pursue complementary strategic relationships. We will continue to assess opportunities to develop strategic relationships through acquisitions, investments, licensing and joint development projects. We also will continue to make significant investments in current ventures as well as new ventures.

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.

Product/Service Overview

Programmable Solutions Division (PSD):

The Programmable Solutions Division designs and develops solutions for many of the world’s leading end-product manufacturers. PSD delivers high-performance, programmable solutions at the heart of today's most advanced embedded systems. The product portfolio includes high-performance Traveo™ automotive microcontrollers, the industry’s only PSoC® programmable system-on-chip solutions, ARM® Cortex®-M4, M3, M0+ microcontrollers and R4 CPUs, analog PMIC Power Management ICs, CapSense® capacitive touch-sensing controllers, TrueTouch® fingerprint readers, TrueTouch® touchscreen controllers and wireless BLE Bluetooth® Low-Energy devices. Our automotive business unit is part of PSD and is designed to offer complete solutions for systems such as instrument clusters, infotainment and body electronics. Cypress is committed to delivering best-in-class support, exceptional technical documentation and flexible, low-cost development kits for embedded system developers.

 

6


The following table summarizes the markets and certain applications related to our products in this segment:

 

Products

 

Markets

 

Applications

 

Traveo™ MCUs and Flexible Microcontrollers

 

 

Automotive, industrial, consumer, IoT, computation, white goods, communication

 

 

Automotive body electronics, battery management, driver information systems, factory automation, machine-to-machine systems, building management systems, smart meters, printers and many other applications.

 

PSoC® 1, PSoC 3, PSoC 4 and PSoC 5LP

 

 

Consumer, handsets, Industrial, medical, IoT, communications, automotive

 

 

IoT applications, industrial and automotive control applications, digital still and video cameras, home appliances, handheld devices and accessories, notebook computers, LCD monitors, medical devices, mice, keyboards, toys, e-Bikes and many other applications.

 

CapSense®

 

 

Handsets, consumer, industrial, IoT, computation, white goods, communication, automotive

 

 

Notebook computers and PCs, home appliances, handheld devices, wearables, automotive control pads/media centers, digital cameras, toys, consumer products and many other applications.

 

TrueTouch®

 

 

Automotive, industrial

 

 

Automotive infotainment systems, factory automation

 

Analog PMICs, LED drivers and energy harvesting solutions

 

 

Automotive, industrial, consumer, IoT

 

 

Advanced Driver Assistance Systems (ADAS), body control modules, instrument cluster systems, front lighting systems, factory automation, IoT beacons, wireless sensor nodes and many other applications.

Traveo™ MCUs and Flexible Microcontrollers. Our Traveo™ automotive MCU family offers high-performance Human Machine Interfaces for automotive dashboards. The microcontrollers integrate 2-D and 3-D graphic engines. This is a development where we are integrating our flash memory technologies with our microcontrollers and analog IP. This family also features our HyperBus memory interface. The combination of our HyperFlash memory with the HyperBus interface eliminates memory bottlenecks, increases performance, and extends the memory space for MCU and graphic engines without increasing the package pin count. Our Flexible Microcontroller (FM) portfolio, which is based on the ARM® Cortex®-M4, Cortex®-M3, Cortex®-M0+ CPUs, is a scalable platform for industrial and consumer applications.

PSoC Programmable System-on-Chip products. Our PSoC products are highly integrated, high-performance mixed-signal devices with an on-board microcontroller, programmable analog and digital blocks, SRAM and flash memory. They provide a low-cost, single-chip solution for a variety of consumer, industrial, medical, and system management applications. A single PSoC device can potentially integrate as many as 100 peripheral functions, saving customers design time, board space, power consumption and system costs. Because of its programmability, PSoC allows customers to make modifications at any point during the design cycle, providing unmatched flexibility.

Cypress’s PSoC 1 device offers performance, programmability and flexibility with a cost-optimized 8-bit M8 CPU subsystem. PSoC 3 uses an 8-bit, Intel® 8051-based microcontroller with 7.5 times more computing power than PSoC 1. The 32-bit, ARM® -Cortex™ M3-based PSoC 5LP has 25 times more computing power than PSoC 1. The analog-to-digital converters on PSoC 3 and PSoC 5LP are 256 times more accurate and 10 to 30 times faster than PSoC 1, and there are 10 times more programmable logic gates available. PSoC 4 is based on a 32-bit ARM Cortex-M0 processor combined with precision analog circuitry, high-performance digital blocks, fully-routable I/Os and our leading CapSense capacitive touch technology. Platform PSoC is supported by the unique PSoC Creator™ design tool that allows engineers to use intuitive schematic-based capture and dozens of PSoC Components™, free embedded ICs represented by icons that can be dragged and dropped into a design to integrate multiple ICs and system interfaces into one PSoC. PSoC 4 BLE, a Bluetooth Low Energy solution that integrates a Bluetooth Smart radio and balun into the PSoC 4 architecture, offers unprecedented ease-of-use and integration for IoT applications, home automation, healthcare equipment, sports and fitness monitors, and other wearable smart devices. Cypress has shipped more than two billion PSoC devices.

TrueTouch® Touchscreen solutions. TrueTouch® provides capacitive touchscreen solutions for automotive infotainment systems, industrial equipment and home appliances. The TrueTouch® family includes devices that perform traditional touchscreen functions including interpreting multitouch operation, single touches, and gestures such as tap, double-tap, pan, pinch, scroll and rotate. In 2015, Cypress introduced the Automotive TrueTouch® CYAT8168X controller family, which enables screen sizes up to 15-inches with industry-leading performance in harsh automotive environments. The controller uses Cypress’s proprietary AutoArmor™ technology for robust immunity to the strong electromagnetic interference (EMI) emissions found in cars, buses and trucks, and it provides liquid tolerance and tracking of fingers in gloves.

 

7


CapSense® solutions. Our CapSense capacitive touch-sensing solutions replace mechanical switches and buttons with simple, touch-sensitive controls by detecting the presence or absence of a conductive object (such as a finger) and measuring changes in capacitance. This technology lends itself equally well to buttons, sliders, touchpads, touchscreens and proximity sensors, taking industrial design possibilities to a much higher level. The CapSense portfolio supports all different ranges of general purpose inputs/outputs, buttons and slider devices. Cypress’s CapSense devices feature SmartSense™ technology, an automatic tuning solution that dynamically detects and adjusts a system’s capacitive-sensing parameters, eliminating the need for manual tuning. The low-cost CapSense MBR3 mechanical button replacement solution that does not require coding, enabling designers to quickly implement reliable user interfaces for a broad range of markets. MBR3 devices offer leading noise immunity, proximity sensing and water tolerance. CapSense has replaced more than 5 billion buttons, making Cypress the worldwide capacitive sensing market share leader.

Analog Semiconductors. Analog semiconductors measure, condition and regulate “real world” functions such as temperature, speed, sound and electrical current. Our lineup of power management integrated circuits (PMICs) includes DC/DC converters, voltage regulators and supervisors, and power monitoring and reset ICs. In addition, we offer a family of LED lighting driver ICs and energy harvesting solutions. These solutions target automotive and industrial applications, and our energy harvesting solutions are ideal for eliminating the need to replace batteries in IoT applications.

Memory Products Division (MPD):

Our Memory Products Division designs and manufactures the broadest portfolio of high-performance memories for embedded systems. Cypress has established itself as the marketshare leader in NOR Flash and SRAM memories that form the brains of today's most advanced embedded systems. The memory product portfolio includes the world's highest throughput QDR®-IV SRAMs, low-power MoBL® SRAMs, high-performance serial and parallel NOR Flash memories and high-reliability F-RAM™ ferroelectric memory devices that capture and protect the world's most-critical data. Cypress's industry-leading HyperFlash™ memories deliver 333 megabytes per second read throughput-more than five times faster than traditional Quad SPI flash, and one-third the number of pins of parallel NOR flash.

 

8


Our MPD Division also includes timing technology products and specialty memory offerings. The following table summarizes the markets and applications related to our products in this segment:

 

Products

 

Markets

 

Applications

 

 

 

 

 

NOR Flash and HyperFlash™

 

Automotive, industrial, IoT, consumer

 

Automotive advanced driver assistance systems (ADAS), automotive instrument cluster, automotive infotainment systems, networking routers and switches, high-definition televisions and set-top boxes, digital SLR cameras, toys, wearables and many other applications

 

 

 

 

 

NAND Flash

 

Industrial, IoT, consumer

 

Set-top boxes, point-of-sale systems, security systems, wearables, toys, smart home appliances and many other applications.

 

 

 

 

 

HyperRAM™

 

Automotive, industrial, IoT

 

Automotive advanced driver assistance systems (ADAS), automotive instrument cluster, automotive infotainment systems, digital cameras, projectors, factory automation, medical equipment, home automation and appliances, handhelds and many other applications.

 

 

 

 

 

Asynchronous SRAMs

 

Consumer, networking, industrial

 

Consumer electronics, switches and routers, test equipment, automotive and industrial electronics.

 

 

 

 

 

Synchronous SRAMs

 

Telecommunications, networking

 

Enterprise routers and switches, wireless base stations, high bandwidth applications and industrial and defense electronics.

 

 

 

 

 

nvSRAMs

 

Networking, industrial

 

Redundant array of independent disk (RAID) servers, point of sale terminals, set-top boxes, copiers, industrial automation, printers, single-board computers and gaming.

 

 

 

 

 

F-RAMs

 

Automotive, medical

 

Smart electric meters, aerospace, medical systems, automotive, industrial controls, electronic point-of-sale terminals, printers and wireless (RFID) memory.

 

 

 

 

 

Dual-port
Memories

 

Networking, telecommunication

 

Medical and instrumentation, storage, wireless infrastructure, military communications, image processors and base stations.

 

 

 

 

 

First-in, first-out (FIFO)
Memories

 

Video, data communications, telecommunications, networking

 

Video, data communications, telecommunications, and network switching/routing.

 

 

 

 

 

Programmable clocks

 

Communications, computation

 

Set-top boxes, copiers, printers, HDTV, Industrial automation, printers, single-board computers, IP phones, storage devices, servers and routers.

 

 

 

 

 

RoboClock® buffers

 

Communications

 

Base stations, high-end telecom equipment (switches, routers), servers and storage.

NOR Flash memories and HyperFlash™. Cypress offers the broadest portfolio of NOR flash memories for embedded systems. The portfolio features the highest-performance HyperFlash™ and Quad SPI NOR flash memories delivering up to 333MB/s read bandwidth, with the industry leading program and erase, and extended automotive temperature ranges (-40°C to 125°C). Our HyperBus™ interface is being implemented broadly by many of our partners. It is being designed across our industrial, automotive, and communication segments.

NAND Flash memories. Our NAND products add reliable, high-density data storage to our flash product line. Cypress applies its stringent process for qualification, testing, extended temperature support and packaging to its line of SLC NAND products. Our high-performance and high-reliability SLC NAND product portfolio is available in 1Gb - 16 Gb densities. There are two standard product families offering 1bit and 4bit ECC SLC NAND. We also offer SecureNAND™, which is an SLC NAND with enhanced security features.

 

9


HyperRAM. Our HyperRAM™ memory is the first companion device to our HyperFlash™ memory and the second device to operate on our 12-pin HyperBus interface. With a read throughput up to 333 megabytes-per-second, the HyperRAM devices are ideal for SoCs with limited RAM providing a scalable solution for extending fast read and write operations externally, allowing fast delivery of high-resolution graphics in the early part of the boot process for automotive, industrial and IoT applications.

Asynchronous SRAMs. We manufacture a wide selection of fast asynchronous and micropower SRAMs with densities ranging from 16 Kbits to 64 Mbits. These memories are available in many combinations of bus widths, packages and temperature ranges, and include offering for the automotive market. They are ideal for use in point-of-sale terminals, gaming machines, network switches and routers, IP phones, IC testers, DSLAM Cards and various automotive applications.

Synchronous SRAMs. Our high-speed synchronous SRAMs include standard synchronous pipelined, No Bus Latency (NoBL), Quad Data Rate (QDR®), and Double Data Rate (DDR) SRAMs, and are typically used in networking applications. NoBL synchronous SRAMs are optimized for high-speed applications that require maximum bus bandwidth up to 250 MHz, including those in the networking, instrumentation, video and simulation businesses. Double Data Rate SRAMs target network applications and servers that operate at data rates up to 633 MHz. Quad Data Rate products are targeted toward next-generation networking applications, particularly switches and routers that operate at data rates beyond 633 MHz, and offer twice the bus bandwidth of DDR SRAMs. Cypress introduced the industry’s first 65-nm QDR and DDR SRAMs. The 144-Mbit and 72-Mbit devices, developed with foundry partner UMC, feature the industry’s fastest clock speeds and operate at half the power of their 90-nm predecessors. They are ideal for networking, medical imaging and military signal processing. In 2014, Cypress introduced the industry’s first QDR-IV SRAM, which enables 100-400 Gigabit line card rates for next-generation routers and switches.

nvSRAMs. nvSRAMs are products that operate similar to standard asynchronous SRAM and reliably store data into an internal nonvolatile array during unanticipated power outages. The competitive advantage of an nvSRAM is infinite endurance and much faster read/write speed than a serial flash or EEPROM. Additionally, these high-speed nonvolatile SRAM devices can store data for more than 20 years without battery backup. These memories are ideal for redundant array of independent disks (“RAID”) storage arrays, metering applications, multifunction printers and other industrial applications, such as PLCs. Cypress offers parallel nvSRAMs with an integrated real-time clock, providing failsafe battery-free data backup in mission-critical applications.

F-RAMs. Cypress’s F-RAM memories offer extremely low power with the same non-volatility as nvSRAM products. F-RAM memory cells are immune to gamma radiation and EMI, making them well-suited to certain aerospace and medical systems. Other applications include automotive, smart electric meters, industrial controls, electronic point-of-sale terminals, printers and wireless (RFID) memory.

Dual-Port Memories. Dual ports, which can be accessed by two different processors or buses simultaneously, target shared-memory and switching applications, including networking switches and routers, cellular base stations, mass-storage devices and telecommunications equipment. We offer a portfolio of more than 250 synchronous and asynchronous dual-port interconnects ranging in densities from 8 Kbits to 36 Mbits with speeds of up to 250 MHz. Our dual ports are compelling solutions for interprocessor communication in a broad range of applications. For high-volume multiprocessor applications (wireless handsets, PDAs, consumer, etc.) we offer the MoBL™ (More Battery-Life™) dual port, providing a low cost, quick time-to-market interconnect solution with the industry’s lowest power-consumption.

FIFO Memories. FIFOs are used as a buffer between systems operating at different frequencies. Our high-performance FIFO products provide the ideal solution to interconnect problems such as flow control, rate matching, and bus matching. Our FIFO portfolio is comprised of more than 100 synchronous and asynchronous memories in a variety of speeds, bus widths, densities and packages. Using industry-standard pinouts, these products are easily integrated into new and existing designs. Unidirectional, bidirectional, tri-bus and double sync configurations are available with built-in expansion logic and message-passing capabilities for various markets including video, data communications, telecommunications and network switching/routing.

Programmable Clocks. Programmable timing solutions such as our InstaClock device combine high performance with the flexibility and fast time to market of field-programmable devices at a cost that is competitive against custom clocks at equivalent volumes. Working with our easy-to-use CyberClocks™ software, designers can optimize device parameters such as drive strength, phased-lock loop bandwidth and crystal input capacitive loading. Our programmable clocks are ideal for devices requiring multiple frequencies including Ethernet, PCI, USB, HDTV, and audio applications. Additionally, the FleXO™ family of high-performance clock generators can be instantly programmed in the factory or field to any frequency up to 650 MHz, accelerating time to market and improving manufacturing quality.

 

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RoboClock™ Clock Buffers. Our RoboClock family of clock buffers features programmable output skew, programmable multiply/divide factor, and fault-tolerant, user-selectable, redundant reference clocks. Designers can control output skew and multiply and divide factors to help accommodate last-minute design changes. RoboClock offers a high-performance timing solution for designers of communications, computation and storage networking applications.

Data Communications Division (DCD):

The Data Communications Division delivers flexible connectivity solutions that form the nervous system within the most-advanced embedded systems. Today Cypress is enabling the world to migrate to SuperSpeed USB 3.0 with the flexible EZ-USB® FX3™ peripheral controller and SuperSpeed USB 3.0 hubs. Cypress is leading the industry with the world's first programmable USB Type-C and USB Power Delivery solutions, including the EZ-PD™ Type-C controllers. Cypress's PRoC™ BLE Bluetooth® Low-Energy wireless devices are enabling PC peripherals and smart remote control OEMs to upgrade to BLE. Additionally, Cypress offers certified BLE modules that streamline the design of IoT products and other wireless applications.

The following table summarizes the markets and applications related to our products in this segment:

 

Products

 

Markets

 

Applications

 

 

 

 

 

USB controllers

 

Industrial, handset, PC and peripherals, consumer electronics

 

Printers, cameras, machine vision and other industrial equipment, mice, keyboards, handheld devices, gamepads and joysticks, VoIP phones, headsets, presenter tools, dongles, point of sale devices and bar code scanners.

 

 

 

EZ-PD™ controllers for USB-C with Power Delivery

 

PC and peripherals, consumer electronics, IoT

 

USB-C power adapters, USB-C adapter cables, monitors, docking stations and many other applications

 

 

 

Bluetooth® Low Energy and WirelessUSB™ solutions

 

IoT, PC peripherals

 

Wearables, mice, keyboards, wireless headsets, consumer electronics, gamepads, remote controls, toys, presenter tools and many other applications.

 

 

 

 

 

Trackpad Solutions

 

PCs, consumer

 

Cypress has applied its capacitive sensing expertise to the trackpad market for laptop computers and consumer devices. Trackpads offer cursor control and other functions, and Cypress’s solution has been adopted by multiple PC manufacturers.

 

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USB controllers. Cypress is a market leader in USB with more than one billion devices shipped. USB provides the primary connection between a PC and peripherals, including keyboards, mice, printers, joysticks, scanners and modems. It is also used to connect non-PC systems, such as smartphones, handheld games, digital still cameras and portable media players. The USB standard facilitates a “plug-and-play” architecture that enables instant recognition and interoperability when a USB-compatible peripheral is connected to a system. We offer a full range of USB solutions, including low-speed (1.5 Mbps), full-speed (12 Mbps), high-speed (480 Mbps) and now “SuperSpeed” (up to 5 Gbps) USB products. We also offer a variety of USB hubs, transceivers, serial interface engines and embedded-host products for a broad range of applications.

Bluetooth Low Energy and Wireless USB solutions. Designed for short-range wireless connectivity, WirelessUSB enables personal computer peripherals, gaming controllers, remote controls, toys, and other point-to-point or multipoint-to-point applications to “cut the cord” with a low-cost, 2.4-GHz wireless solution. The WirelessUSB system acts as a USB human interface device, so the connectivity is transparent to the designer at the operating system level. WirelessUSB also operates as a simple, cost-effective wireless link in a host of other applications including industrial, consumer, and medical markets. Our PRoC™ BLE (Programmable Radio-on-a-Chip Bluetooth Low Energy) solution combines a Bluetooth Smart radio, an ARM Cortex-M0 processor and CapSense capacitive touch-sensing in a single chip. The highly-integrated PRoC BLE device provides a cost-effective, turnkey solution for wireless human interface devices, remote controls and toys. We also offer certified EZ-BLE PRoC and EZ-BLE PSoC modules that streamline wireless design even further.

Trackpad. We design and manufacture turnkey Trackpad sensor module solutions. By leveraging the flexibility and power of Cypress touch technologies, we provide solutions ranging from low power, two-finger gesture to feature-rich, true multi-touch solutions. Our design library contains solutions that can be used off-the-shelf; in addition, we offer custom product development for specific form factors and features based on customer requirements. These products are ideal for Windows laptop, Google Chromebook, PC peripheral, and remote control applications. Trackpad modules promote fast time-to-market and cost effective solutions for touch-enable end products.

Emerging Technologies and Other (ETD):

Cypress’s Emerging Technology Division consists of businesses outside our core semiconductor business. It includes majority-owned subsidiaries AgigA Tech, Inc., Deca Technologies Inc., foundry services, other development stage activities and certain corporate expenses.

AgigA Tech, Inc. AgigA Tech, a majority-owned and fully independent subsidiary of Cypress, is an industry pioneer in the development of high-speed, high-density, battery-free non-volatile memory solutions. Its flagship product, AGIGARAM®, merges NAND Flash, DRAM and an ultracapacitor power source into a highly reliable non-volatile memory subsystem, delivering unlimited read/write performance at RAM speeds, while also safely backing up all data when power is interrupted. The patent-pending approach couples innovations in power management, high-speed data movement and systems knowledge, while leveraging high-volume, readily available memory technologies to provide a unique non-volatile solution scalable to very high densities. AGIGARAM earned an Edison Award for innovation. Cypress sampled the industry’s first DDR4 Nonvolatile DIMM, which operates in the standard DIMM sockets of next-generation, Intel-based server platforms.

Deca Technologies Inc. (“Deca”). Deca is a majority-owned and fully independent subsidiary of Cypress. Headquartered in Tempe, AZ., with global capabilities, Deca has pioneered a breakthrough approach to wafer level packaging and interconnect technology inspired by SunPower Corporation’s unique solar wafer fabrication methodology. Deca’s initial product offering includes a series of wafer level chip scale packaging (WLCSP) solutions serving several of the top 25 semiconductor producers. Deca’s approach enables industry-leading cycle times, flexibility and value for WLCSP, which is one of the semiconductor industry’s fastest growing electronic interconnect technologies. Sunpower Corporation is a minority investor in Deca. Deca shipped its 100-millionth component in 2014.

Cypress Foundry Solutions. Cypress Foundry Solutions provides both custom and standard foundry services out of the Cypress wafer fabrication facility in Bloomington, MN. This eight-inch wafer fab manufactures in high volume down to the 90nm node. It offers process technologies that integrate Silicon Oxide Nitride Oxide Silicon (SONOS)-based nonvolatile memory and precision analog/mixed-signal capabilities. The facility has been accredited as a Category 1A Trusted Fab for fabrication, design, and testing of U.S. Department of Defense (DoD) Trusted Microelectronics. Additionally, customers get access to Cypress’s vast design and technology IP portfolio to enable fast time to market.

 

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Mergers and Acquisitions

On March 12, 2015, we completed the merger with Spansion Inc. ("Spansion") pursuant to the Agreement and Plan of Merger and Reorganization, as of December 1, 2014 (the "merger agreement"), for a total consideration of approximately $2.8 billion. In accordance with the terms of the merger agreement, Spansion shareholders received 2.457 Cypress shares for each Spansion share they owned. The merger has been accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standard Topic 805, Business Combinations, with Cypress treated as the accounting acquirer. Spansion was a leading designer, manufacturer and developer of embedded systems semiconductors with flash memory, microcontrollers, analog and mixed-signal products. Spansion’s broad portfolio of ARMTM-based microcontrollers complemented the flexible PSoC solutions from Cypress, and Spansion’s leadership in specialty memories enhanced the Cypress memory portfolio creating a global leader in embedded systems.

For additional information on this acquisition, see Note 2 of Notes to Consolidated Financial Statements under Item 8.

Divestitures

On August 1, 2015, we completed the sale of the TrueTouch® mobile touchscreen business, which is a business unit within our Programmable Systems Division, to Parade Technologies (“Parade”) for total cash proceeds of $98.6 million pursuant to the definitive agreement signed on June 11, 2015. Of the total cash proceeds, $10.0 million are held in an escrow account until January 2017 subject to any indemnity claims on post-closing adjustments, per the terms of the agreement. Post-sale, Cypress will continue to provide TrueTouch® solutions to its automotive, industrial and home appliance customers and to its mobile customers. In connection with the transaction, we sold certain assets associated with the disposed business mostly consisting of inventory with a net book value of $10.5 million and recognized a gain of $66.5 million in the third fiscal quarter of fiscal 2015. This gain has been presented as a separate line item "Gain on divestiture of TrueTouch® mobile business" in the Consolidated Statements of Operations.

Also in connection with the transaction, we entered into a Manufacturing Service Agreement (MSA) in which we agreed to sell finished wafers and devices to Parade during the one-year period following the close of the transaction. The terms of the MSA indicated that we would sell finished products to Parade at agreed-upon prices that were considered below fair market value, indicating that there was an embedded fair value that would be realized by Parade through those terms. Accordingly, we have allocated $19.9 million from the $98.6 million proceeds to the fair value of the MSA based on the forecasted wafer sales to Parade for the subsequent one-year period. Such amount was deferred on our consolidated balance sheet initially and is being amortized to revenue as we sell products to Parade. During the fiscal year ended January 3, 2016 we recognized $5.7 million of revenue from amortization of such deferred revenue.

For additional information on this divestiture, see Note 3 of Notes to Consolidated Financial Statements under Item 8.

Manufacturing

Our core manufacturing strategy-“flexible manufacturing”-combines capacity from external foundries with output from our internal manufacturing facilities. This initiative allows us to meet rapid swings in customer demand while lessening the burden of high fixed costs, a capability that is particularly important with our rapidly evolving product portfolio.

We currently manufacture approximately 50% of our semiconductor products at our wafer manufacturing facilities in Bloomington, Minnesota and Austin, Texas. External wafer foundries, mainly in Asia, manufactured the balance of our products and we expect that our wafer foundry partners will continue to increase their manufacturing as a percentage of total output.

We conduct assembly and test operations at our facilities in the Philippines and Bangkok, Thailand. These facilities account for approximately 42% of the total assembly output and 52% of the total test output. Various subcontractors in Asia perform the balance of the assembly and test operations.

Our facilities in the Philippines and Bangkok, Thailand perform assembly and test operations, manufacturing volume products and packages where our ability to leverage manufacturing costs is high. The Philippines facility has ten fully integrated, automated manufacturing lines enabling complete assembly and test operations (Autolines). These autolines require fewer people to run and have shorter manufacturing cycle times than conventional assembly/test operations, which enable us to respond more rapidly to changes in demand.

 

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We have a strategic foundry partnership with HuaHong Grace Semiconductor Manufacturing Corporation (“Grace”), located in Shanghai, China. Our agreement with them transferred certain proprietary process technologies and provided additional production capacity to augment output from our manufacturing facilities. Since 2007, when we completed the transfer of our 0.35-micron SONOS, 0.13-micron SRAM and LOGIC processes and 0.09-micron SRAM, we have been purchasing products from Grace that are manufactured using these processes. In the fourth quarter of fiscal 2014, the Company, through a wholly-owned subsidiary, purchased 6.9 million ordinary shares of Hua Hong Semiconductor Limited (HHSL) for an aggregate price of $10.0 million in connection with their initial public offering. HHSL is the parent company of Grace Semiconductor Manufacturing Corporation.

We also have a strategic foundry partnership with United Microelectronics Corporation (“UMC”), located in Taiwan. We use UMC’s 65nm process to produce our leading edge SRAM products which we have been shipping since 2008. Since 2008, we have continuously introduced higher density SRAM products up to 144Mb. We have also utilized UMC’s 65nm baseline to create derivative processes and products including our USB3.0 controllers and Asynchronous SRAMs.  Additionally Cypress and UMC are collaborating on qualifying Cypress’s embedded non-volatile memory technology in UMC’s 55nm and 40nm flows under licensing agreement. These technologies will be used for Cypress’s future generation products and be offered as part of general foundry offering by UMC producing royalty revenue for Cypress.

As part of our acquisition of Ramtron, we acquired a commercial manufacturing agreement for F-RAM products with Texas Instruments (“TI”). Under that agreement, the Company provides certain design, testing and other activities associated with product development, and TI provides certain foundry and related services. As amended on November 30, 2012, the agreement provides for automatic renewals unless written notice of termination is given prior to the end of any renewal period. If notice of termination is given, the agreement terminates one year thereafter and the Company may place last orders and take delivery of product during the following year. The agreement contains various obligations of the parties, including our obligations regarding minimum orders and negotiated pricing of products we purchase.

As part of our merger with Spansion, we acquired agreements with Fujitsu Semiconductor Limited (“FSL”), XMC and SK Hynix Inc. (“SK Hynix”).  Agreements with FSL include agreements for the supply of product wafer foundry services, sort services and assembly and test services relating to the microcontroller and analog businesses. These agreements are at competitive market rates and enable us to leverage FSL’s existing manufacturing capabilities and relationships with its partners spanning across various technologies, processes, geometries and wafer sizes in their wafer fabrication facilities and package solutions in their back-end manufacturing facilities, until such time that we can either move these internally to our fabrication and back-end facilities or find alternative solutions. For FSL, the fabrication facilities are all located in Japan, while the back-end facilities are in Japan and other Asian countries. The supply agreements do not call for any minimum purchase commitments. The arrangement with XMC provides production support for advanced NOR technology products at 65, 45 and development of 32 nanometers. The arrangement with SK Hynix provides for the development and supply of SLC NAND products at the 4x and 3x nodes.

Research and Development

Research and development efforts are focused on the development and design of new semiconductor products, as well as the continued development of advanced software platforms primarily for our programmable solutions. Also included are the consolidated costs of research and development associated with our ETD division. Our goal is to increase efficiency in order to maintain our competitive advantage. Our research and development organization works closely with our manufacturing facilities, suppliers and customers to improve our semiconductor designs and lower our manufacturing costs. During fiscal 2015, 2014 and 2013, research and development expenses totaled $281 million, $164.5 million, and $190.9 million, respectively.

We have both central and division-specific design groups that focus on new product creation and improvement of design methodologies. These 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, Europe, India and China.

Customers, Sales and Marketing

We sell our semiconductor products through several channels: sales through global domestically-based distributors; sales through international distributors and manufacturing representative firms; and sales by our sales force to direct original equipment manufacturers and their suppliers. Our marketing and sales efforts are organized around five regions: North Americas, Europe, Japan, Korea and China.

 

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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 marketing 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 three of our distributors, accounted for 42%, 11% and 9%, respectively, of our consolidated accounts receivable as of January 3, 2016. Outstanding accounts receivable from two of our distributors, accounted for 12%, and 11% respectively, of our consolidated accounts receivable as of December 28, 2014 .

Revenue generated through Fujitsu Electronics Inc., Avnet, Inc., and Arrow electronics, three of our distributors, accounted for 25%, 10% and 7%, respectively, of our consolidated revenue for fiscal 2015. There were no end customers whose total purchases exceeded 10% of our consolidated revenue for fiscal 2015.

Revenue generated through Avnet, Inc., Weikeng Industrial Co. Ltd and Future, Inc., three of our distributors, accounted for 13%, 10% and 10%, respectively, of our consolidated revenue for fiscal 2014. There were no end customers whose total purchases exceeded 10% of our consolidated revenue for fiscal 2014.

Revenue generated through Avnet, Inc. and Macnica Inc., two of our distributors, accounted for 11% and 10% respectively, of our consolidated revenue for fiscal 2013. Samsung Electronics (“Samsung”), an end customer, purchased our products from our distributors and directly from Cypress and accounted for 12% of our consolidated revenue for fiscal 2013.

Backlog

Our sales typically rely upon standard purchase orders for delivery of products with relatively short delivery lead times. Customer relationships are generally not subject to long-term contracts. However, we have entered into long-term supply agreements with certain customers. These long-term supply agreements generally do not contain minimum purchase commitments. Products to be delivered and the related delivery schedules under these long-term contracts are frequently revised to reflect changes in customer needs. Accordingly, our backlog at any particular date is not necessarily representative of actual sales for any succeeding period and we believe that our backlog is not a meaningful indicator of future revenues.

Competition

The semiconductor industry is intensely competitive and continually evolving. This intense competition results in a challenging operating environment for most companies in this industry. This environment is characterized by the potential erosion of product sale prices over the life of each product, rapid technological change, limited product life cycles, greater brand recognition and strong domestic and foreign competition in many markets. Our ability to compete successfully depends on many factors, including:

 

·

our success in developing new products and manufacturing technologies;

 

·

delivery, performance, quality and price of our products;

 

·

diversity of our products and timeliness of new product introductions;

 

·

cost effectiveness of our design, development, manufacturing and marketing efforts;

 

·

quality of our customer service, relationships and reputation;

 

·

overall success with which our customers market their products and solutions that incorporate our products; and

 

·

number and nature of our competitors and general economic conditions.

We face competition from domestic and foreign semiconductor manufacturers, many of which have advanced technological capabilities and have increased their participation in the markets in which we operate. We compete with a large number of companies primarily in the automotive, industrial, communications, consumer, computation, data communications, mobile handsets and military markets. Companies that compete directly with our semiconductor businesses include, but are not limited to, Intel, Analog Devices, Atmel, NXP Semiconductors NV, GSI Technology, Integrated Device Technology, Integrated Silicon Solution, Lattice Semiconductor, Linear Technology, Maxim Integrated Products, Microchip Technology, Renesas, Silicon Laboratories, ST Microelectronics, Synaptics, Texas Instruments and Xilinx.

 

15


Environmental Regulations

We use, generate and discharge hazardous chemicals and waste in our research and development and manufacturing activities. United States federal, state and local regulations, in addition to those of other foreign countries in which we operate, impose various environmental rules and obligations, which are becoming increasingly stringent over time, intended to protect the environment and in particular regulate the management and disposal of hazardous substances. We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances that apply to specified electronic products put on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the “RoHS Directive”) and similar legislation in China and California. We are committed to the continual improvement of our environmental systems and controls. However, we cannot provide assurance that we have been, or will at all times be, in complete compliance with all environmental laws and regulations. Other laws impose liability on owners and operators of real property for any contamination of the property even if they did not cause or know of the contamination. While to date we have not experienced any material adverse impact on our business from environmental regulations, we cannot provide assurance that environmental regulations will not impose expensive obligations on us in the future, or otherwise result in the incurrence of liability such as the following:

 

·

a requirement to increase capital or other costs to comply with such regulations or to restrict discharges;

 

·

liabilities to our employees and/or third parties; and

 

·

business interruptions as a consequence of permit suspensions or revocations or as a consequence of the granting of injunctions requested by governmental agencies or private parties.

Intellectual Property

We have an active program to obtain patent and other intellectual property protection for our proprietary technologies, products and other inventions that are aligned with our strategic initiatives. We rely on a combination of patents, copyrights, trade secrets, trademarks and proprietary information to maintain and enhance our competitive position in the domestic and international markets we serve. As of the end of fiscal 2015 we had approximately 7,000 issued patents and approximately 1,200 additional patent applications on file domestically and internationally. In addition, in fiscal 2016 we are preparing to file up to 90 new patent applications in the United States and up to 70 foreign applications in countries such as China, Taiwan, Korea, Europe and India. The average remaining life of our patent portfolio is approximately 10 years.

In addition to factors such as innovation, technological expertise and experienced personnel, we believe that patents are increasingly important to remain competitive in our industry, defend our position in existing markets and to facilitate the entry of our proprietary products, such as PSoC ®, into new markets. As our technologies are deployed in new applications and we face new competitors, we will likely subject ourselves to new potential infringement claims and discover third party infringement of our intellectual property. Patent litigation, if and when instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. We are committed to vigorously defending and protecting our investment in our intellectual property. Therefore, the strength of our intellectual property program, including the breadth and depth of our portfolio, will be critical to our success in the new markets we intend to pursue.

We perform an analysis of our intellectual property portfolio on an on-going basis to ensure we are deriving the full value of our assets. Accordingly, we continue to evaluate certain unaligned patents as well as other monetization models for our patent portfolio.

Financial Information about Segments and Geographic Areas

Financial information about segments and geographic area is incorporated herein by reference to Note 20 of Notes to Consolidated Financial Statements under Item 8.

International revenues have historically accounted for a significant portion of our total revenues. Our manufacturing and certain finance operations in the Philippines and Malaysia, as well as our sales and support offices and design centers in other parts of the world, face risks frequently associated with foreign operations, including, but not limited to:

 

·

currency exchange fluctuations, including the weakening of the U.S. dollar;

 

·

the devaluation of local currencies;

 

·

political instability;

 

·

labor issues;

 

·

changes in local economic conditions;

 

·

import and export controls;

 

16


 

·

potential shortage of electric power supply; and

 

·

changes in tax laws, tariffs and freight rates.

 

·

potential violations by our international employees or third party agents of international or U.S. laws relevant to foreign operations (such as FCPA) and.

 

·

access to capital or credit at competitive rates

To the extent any such risks materialize, our business, financial condition or results of operations could be seriously harmed.

Employees

As of January 3, 2016 we had 6,279 employees. Geographically, 2,100 employees were located in the United States, 1,041 employees were located in the Philippines, 989 in Thailand, 757 in Japan, 257 employees were located in Malaysia, 472 employees were located in India and 663 employees were located in other countries. Of the total employees, 3,715 employees were associated with manufacturing, 1,149 employees were associated with selling, general and administrative functions and 1,415 employees were associated with research and development.

Approximately 475 employees are represented by a collective bargaining agreement. We have never experienced organized work stoppages.

Executive Officers of the Registrant as of March 1, 2016

Certain information regarding each of our executive officers is set forth below:

 

Name

 

Age

 

Position

T. J. Rodgers

 

67

 

President, Chief Executive Officer and Director

Thad Trent

 

48

 

Executive Vice President, Finance and Administration and Chief Financial Officer

Dana C. Nazarian

 

47

 

Executive Vice President, Memory Products Division

Hassane El-Khoury

 

35

 

Executive Vice President, Programmable Systems Division

 

T.J. Rodgers is a founder of Cypress and has been a Director and its President and Chief Executive Officer since 1982. Mr. Rodgers sits on the board of directors of Cypress’s internal subsidiaries as well as Bloom Energy, a privately held fuel cell company. Mr. Rodgers was also a member of the Board of Trustees of Dartmouth College until June 2012.

Thad Trent has been the Chief Financial Officer and Executive Vice President of Finance & Administration at Cypress Semiconductor Corporation since June 2014. Prior to his current position, Mr. Trent served as Cypress’s Vice President of Finance. Mr. Trent is a 22-year veteran of the technology industry. He held finance management roles at publicly traded companies Wind River Systems and Wyle Electronics, as well as two technology startups. Mr. Trent joined Cypress in 2005 and served as Vice President of Finance since 2010. Most recently, he has led the finance activities for business units, sales and marketing, and distribution groups, and he has supervised financial reporting, accounting, and planning and analysis.  Mr. Trent sits on the board of directors of Cypress’s internal subsidiaries.

Dana C. Nazarian was named Executive Vice President of Memory Products Division in February 2009. Mr. Nazarian started his career with Cypress in 1988. Prior to his current position, Mr. Nazarian held various management positions, which included oversight of significant operations in our former Round Rock, Texas facility and Vice President of our Synchronous SRAM business unit.

Hassane El-Khoury was named Executive Vice president of the Programmable Systems Division in 2012. Prior to his current position, Mr. El-Khoury served as Cypress’s Automotive Business Unit Senior Director since 2010. After working as an engineer at Continental Automotive Systems, he joined Cypress’s automotive business unit and expanded the Company’s presence in the Human-Machine Interface and Body Electronics segments of the automotive marketplace.

Available Information

We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, free of charge on our website at www.cypress.com , as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Additionally, copies of materials filed by us with the SEC may be accessed at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or at www.sec.gov. For information about the SEC’s Public Reference Room, contact 1-800-SEC-0330.

 

17


ITEM 1A.

RISK FACTORS

Unfavorable economic and market conditions, domestically and internationally, may adversely affect our business, financial condition, results of operations and cash flows.

We have significant customer sales both in the U.S. and internationally. We are also reliant upon U.S. and international suppliers, manufacturing partners and distributors. We are therefore susceptible to adverse U.S. and international economic and market conditions. If any of our manufacturing partners, customers, distributors or suppliers experience serious financial difficulties or cease operations, our business will be adversely affected. In addition, the adverse impact of an unfavorable economy on consumers, including high unemployment rates, may adversely impact consumer spending, which will adversely impact demand for consumer products such as certain end products in which our products are embedded. In addition, prices of certain commodities, including oil, metals, grains and other food products, are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations and periodic delays in delivery. High or volatile commodity prices increase the cost of doing business and adversely affect consumers’ discretionary spending. As a result of the difficulty that businesses (including our customers) may have in obtaining credit, the increasing and/or volatile costs of commodities and the decreased consumer spending that may result from weakness in the general global economy, global economic and market turmoil are likely to have an adverse impact on our business, financial condition, results of operations and cash flows.

The trading price of our common stock has been and will likely continue to be volatile due to various factors, some of which are beyond our control, and each of which could adversely affect our stockholders’ value.

The trading price of our common stock has been and will likely continue to be volatile due to various factors, some of which are beyond our control, including, but not limited to:

 

·

Revenue fluctuations due to unexpected shifts in customer orders;

 

·

Announcements about our earnings or the earnings of our competitors that are not in line with analyst expectations;

 

·

Our ability to achieve the planned synergies in the recent merger with Spansion;

 

·

Credit conditions and our ability to refinance our existing debt at commercially reasonable terms, which may limit the Company’s working capital;

 

·

Quarterly variations in our results of operations or those of our competitors;

 

·

Announcements by us or our competitors of acquisitions, new products, significant contracts, design wins, commercial relationships or capital commitments;

 

·

The perceptions of general market conditions in the semiconductor industry and global market conditions;

 

·

Our ability to develop and market new and enhanced products on a timely basis;

 

·

Any major change in our board or senior management;

 

·

Changes in governmental regulations or in the status of our regulatory compliance that impact our business;

 

·

Recommendations by securities analysts or changes in earnings estimates concerning us or our customers or competitors;

 

·

The volume of short sales, hedging and other derivative transactions on shares of our common stock;

 

·

Economic conditions and growth expectations in the markets we serve;

 

·

Changes in our policy regarding dividends or our ability to declare a dividend; and

 

·

Our ability to execute our lean inventory initiative to reduce excess inventory, which could lead to a disruption in the supply of our products and adversely affect our business.

Further, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. Finally, our executive officers, who may hold a substantial number of shares of our common stock, may from time to time pledge all or a portion of their holdings as collateral or include such holdings in margin accounts. If our stock price were to drop suddenly, such margin accounts could be called and the shares in such accounts may be automatically sold by a third party in the open market, even during a blackout period.

 

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We may in the future incur impairments in the value of our goodwill, intangibles and property, plant and equipment.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination.  We test goodwill for impairment annually, and more frequently when events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  Additionally, our other long-lived assets which include intangibles and property, plant and equipment are evaluated for impairments whenever events or changes in circumstances indicate the carrying value may not be recoverable.  Either of these situations may occur for various reasons, including changes in actual or expected income or cash.  We continue to evaluate current conditions to assess whether any impairment exists.   Impairments could occur in the future if any of the following occur: market or interest rate environments deteriorate, significant adverse changes in business climate, unanticipated competition, loss of key customers, changes in technology, expected future cash flows of our reporting units decline, or reporting unit carrying values change materially compared with changes in respective fair values.

We utilize debt financing and such indebtedness could adversely affect our business, financial condition, results of operations, earnings per share and our ability to meet our payment obligations.

We routinely incur indebtedness to finance our operations and from time to time we have significant amounts of outstanding indebtedness and substantial debt service requirements. Our amended and restated senior secured credit facility with a group of lenders led by Morgan Stanley Senior Funding, Inc., provides for a $540 million revolving credit facility and a $100 million term loan. The credit facility contains customary affirmative, negative and financial covenants, including a maximum total leverage ratio and a minimum fixed charge coverage ratio. Our ability to meet our payment and other obligations and covenants under our indebtedness depends on our ability to generate significant cash flow. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. There is no assurance that our business will generate cash flow from operations, or that future borrowings will be available to us under our existing or any amended credit facilities or otherwise, in an amount sufficient to enable us to meet payment obligations under indebtedness we may under take from time to time. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. There is no assurance that we will be able to implement any of these alternatives on commercially reasonable terms, if at all.  If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under any indebtedness we owe. As of January 3, 2016, our outstanding debt included $449.0 million related to our Senior Secured Revolving Credit Facility, $150 million of 2% Senior Exchange notes assumed from Spansion, $97.2 million Term Loan A, net of costs, $7.2 million of capital leases and $3.0 million of equipment loans.  See Note 14 for more information on our Senior Secured Revolving Credit Facility, 2.0% Senior Exchange notes assumed from Spansion and our Term Loan A and Note 19 on our capital leases.

If we fail to compete successfully in our highly competitive industry and markets, our business, financial condition and results of operations will be seriously harmed.

The semiconductor industry is intensely competitive. This intense competition results in a difficult operating environment that is marked by erosion of average selling prices over the life of each product and rapid technological change resulting in limited product life cycles. In order to offset selling price decreases, we attempt to decrease the manufacturing costs of our products and to introduce new, higher priced products that incorporate advanced features. If these efforts are not successful or do not occur in a timely manner, or if our newly introduced products do not gain market acceptance, our business, financial condition and results of operations could be seriously harmed.

Our ability to compete successfully in the rapidly evolving semiconductor industry depends on many factors, including:

 

·

our success in developing and marketing new products, software platforms and manufacturing technologies and bringing them to market on a timely basis;

 

·

the quality and price of our products;

 

·

the pace at which customers incorporate our products into their systems, as is sometimes evidenced by design wins;

 

·

the diversity of our product lines;

 

·

the cost effectiveness of our design, development, manufacturing, support and marketing efforts, especially as compared to our competitors;

 

·

our success in developing and introducing firmware in a timely manner;

 

·

our customer service and customer satisfaction;

 

·

our ability to successfully execute our flexible manufacturing strategy;

 

·

the number, strength and nature of our competitors, the markets they target and the rate and success of their technological advances;

 

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·

the success of certain of our development activity which is a part of our Emerging Technologies business segment;

 

·

our ability to get competitive terms with our vendors, manufacturing partners and suppliers;

 

·

general economic conditions; and

 

·

our access to and the availability of working capital.

Although we believe we currently compete effectively in the above areas to the extent they are within our control, given the pace of change in our industry, our current abilities are not guarantees of future success. If we are unable to compete successfully in this environment, our business, financial condition and results of operations will be seriously harmed.

We may fail to realize all of the anticipated benefits of our acquisition of Spansion

On March 12, 2015, we completed our acquisition of Spansion. The success of the transaction will depend, in part, on our ability to achieve the anticipated cost synergies and other strategic benefits from combining the businesses of Cypress and Spansion. We expect to benefit from operational synergies resulting from the consolidation of capabilities and elimination of redundancies as well as greater efficiencies from increased scale, market integration and more automation. However, to realize these anticipated benefits, we must successfully combine the businesses of Cypress and Spansion. If we are not able to achieve these objectives, the anticipated cost synergies and other strategic benefits of the transaction may not be realized fully or at all or may take longer to realize than expected. We may fail to realize some or all of the anticipated benefits of the transaction in the amounts and times projected for a number of reasons, including that the integration may take longer than anticipated or be more costly than anticipated.

The failure to integrate successfully the businesses and operations of Cypress and Spansion in the expected time frame may adversely affect our future results.

Prior to the completion of the transaction, Cypress and Spansion historically operated as independent companies. Our management may face significant challenges in consolidating the functions of Cypress and Spansion and their subsidiaries, integrating their technologies, organizations, ERP systems, procedures, policies and operations, as well as addressing differences in the business cultures of the two companies and retaining key personnel. In connection with the acquisition, we are integrating certain operations of Cypress and Spansion, including, among other things, back-office operations, information technology and regulatory compliance. The integration of the two companies will be complex and time consuming, and require substantial resources and effort. The integration process and other disruptions resulting from the transaction may disrupt each company’s ongoing businesses or cause inconsistencies in standards, controls, procedures and policies that adversely affect our relationships with our members and other market participants, employees, regulators and others with whom we have business or other dealings. If we fail to manage the integration of these businesses effectively, our growth strategy and future profitability could be negatively affected, and we may fail to achieve the intended benefits of the transaction.

We have incurred costs in connection with our acquisition of Spansion and will continue to incur costs in connection with the transaction.

We have incurred significant costs associated with transaction fees, professional services and other costs related to the transaction and we will continue to incur additional costs, including restructuring costs, in connection with the integration of the business. Specifically, through January 3, 2016, we have incurred $84.6 million for costs in addition to restructuring and other items associated with the merger and integration. Although we expect that the realization of efficiencies related to the integration of the businesses will offset merger-related and restructuring costs over time, this net benefit may not be achieved in the near term, or at all.

We face significant volatility in supply and demand conditions for our products, and this volatility, as well as any failure by us to accurately forecast future supply and demand conditions, could materially and negatively impact our business.

The semiconductor industry has historically been characterized by wide fluctuations in the demand for, and supply of, semiconductors. Demand for our products depends in large part on the continued growth of various electronics industries that use our products, including, but not limited to:

 

·

automotive applications including advanced driver assistance systems (ADAS), instrument clusters, infotainment systems, body electronics, HVAC controls, event data recorders, powertrains and electric vehicle/hybrid-electric vehicle systems;

 

·

industrial systems including factory automation equipment, smart electric meters, aerospace, industrial controls, point-of-sale terminals and test equipment

 

·

consumer electronics including wearable electronics, smartphones, gaming consoles, gamepads, remote controls, toys, presenter tools, TVs, set-top boxes and fitness equipment;

 

·

wireless telecommunications equipment;

 

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·

computers and computer-related peripherals;

 

·

medical equipment; and

 

·

networking equipment.

Any downturn, shift in product launch schedule or reduction in the growth of these industries could seriously harm our business, financial condition and results of operations. In particular, our TrueTouch family of products is highly concentrated in consumer handset markets which are susceptible to changes in the general economy, consumer acceptance, design wins, competition and price.

We order materials and build our products based primarily on our internal forecasts, customer and distributor forecasts and secondarily on existing orders, which may be cancelled under many circumstances. Because our markets can be volatile, are based on consumer demand and subject to rapid technological and price changes, our forecasts may be inaccurate, causing us to make too many or too few of certain products.

Also, our customers frequently place orders requesting product delivery almost immediately after the order is made, which makes forecasting customer demand even more difficult, particularly when supply is abundant. If we experience inadequate demand or a significant shift in the mix of product orders that makes our existing capacity and capability inadequate, our fixed costs per semiconductor produced will increase, which will harm our financial condition and results of operations. Alternatively, if we should experience a sudden increase in demand, we will need to quickly ramp our inventory and/or manufacturing capacity to adequately respond to our customers. If we or our manufacturing partners are unable to ramp our inventory or manufacturing capacity in a timely manner or at all, we risk losing our customers’ business, which could have a negative impact on our financial performance and reputation.

If we fail to develop, introduce and sell new products or fail to develop and implement new technologies, our ability to compete in our end markets will suffer and our financial results could be adversely impacted.

Like many semiconductor companies, which operate in a highly competitive, quickly changing environment marked by rapid obsolescence of existing products, our future success depends on our ability to develop and introduce new products that customers choose to buy. Our new products, for example PSoC® products, BLE, USB-Type C, Traveo and our ETD companies are an important strategic focus for us and therefore, they tend to consume a significant amount of our resources. The new products the market requires tend to be increasingly complex, incorporating more functions and operating at faster speeds than old products. Increasing complexity generally requires smaller features on a chip. This makes manufacturing new generations of products substantially more difficult than prior generations.

Despite the significant amount of resources we commit to new products, there can be no guarantee that such products will perform as expected or at all, be introduced on time to meet customer schedules or gain market acceptance. If we fail to introduce new product designs or technologies in a timely manner or are unable to manufacture products according to the requirements of these designs, or if our customers do not successfully introduce new systems or products incorporating our products, or market demand for our new products does not materialize as anticipated, our business, financial condition and results of operations could be materially harmed.

The complex nature of our manufacturing activities, our broad product portfolio, and our increasing reliance on third-party manufacturers makes us highly susceptible to manufacturing problems and these problems can have a substantial negative impact on us if they occur.

Making semiconductors is a highly complex and precise process, requiring production in a tightly controlled, clean environment. Even very small impurities in our manufacturing materials, defects in the masks used to print circuits on a wafer or other problems in the wafer fabrication process can cause a substantial percentage of wafers to be rejected or numerous chips on each wafer to be non-functional. We and, similarly, our third party foundry partners, may experience problems in achieving an acceptable success rate in the manufacture of wafers and the likelihood of facing such difficulties is higher in connection with the transition to new manufacturing methods. The interruption of wafer fabrication or the failure to achieve acceptable manufacturing yields at any of our facilities, or the facilities of our third-party foundry partners, would seriously harm our business, financial condition and results of operations. We may also experience manufacturing problems in our assembly and test operations and in the introduction of new packaging materials.

 

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We are increasingly dependent upon third parties to manufacture, distribute, generate a significant portion of our product sales, fulfill our customer orders and transport our product. Problems in the performance or availability of these companies could seriously harm our financial performance.

Although many of our products are fabricated in our manufacturing facilities located in Minnesota, Austin, Malaysia and the Philippines, we rely to a significant extent on independent contractors to manufacture and assemble our products. In addition, if market demand for our products exceeds our internal manufacturing capacity and available capacity from our foundry partners, we may seek additional foundry manufacturing arrangements.

A shortage in foundry manufacturing capacity, which is more likely to occur at times of increasing demand, could hinder our ability to meet demand for our products and therefore adversely affect our operating results. In addition, greater demand for wafers produced by any such foundries without an offsetting increase in foundry capacity raises the likelihood of potential wafer price increases. Our operations would be disrupted if any of our foundry partners terminates its relationship with us or has financial issues and we are unable to arrange a satisfactory alternative to fulfill customer orders on a timely basis and in a cost-effective manner. There are also only a few foundry vendors that have the capabilities to manufacture our most advanced products. If we engage alternative sources of supply, we may encounter start-up difficulties, yield issues or incur additional costs. Shipments could be delayed significantly while these sources are qualified for volume production.

While a high percentage of our products are assembled, packaged and tested at our manufacturing facilities located in the Philippines and Malaysia, we rely on independent subcontractors to assemble, package and test the balance of our products. We cannot be certain that these subcontractors will continue to assemble, package and test products for us on acceptable economic and quality terms or at all and it might be difficult for us to find alternatives if they do not do so.

Our foundry partners and assembly and test subcontractors have operations in locations that may suffer the impact of certain natural disasters, which could impact their ability to provide us with our products. We monitor these events closely, but if one of our third party manufacturing partners were to suffer significant damage to its operations as a result of a natural disaster, our ability to timely meet consumer demand would suffer which would materially harm our results of operations.

Our channel partners include distributors and resellers. We continue to expand and change our relationships with our distributors. Worldwide sales through our distributors accounted for approximately 71% of our net sales in fiscal year 2015. We rely on many distributors to assist us in creating customer demand, providing technical support and other value-added services to our customers, filling customer orders and stocking our products. We face ongoing business risks due to our reliance on our channel partners to create and maintain customer relationships where we have a limited or no direct relationship. Should our relationships with our channel partners or their effectiveness decline, we face the risk of declining demand which could affect our revenue and results of operations. Our contracts with our distributors may be terminated by either party upon notice. In addition, our distributors are located all over the world and are of various sizes and financial conditions. Any disruptions to our distributors’ operations such as lower sales, lower earnings, debt downgrades, the inability to access capital markets and higher interest rates could have an adverse impact on our business.

We also rely on independent carriers and freight haulers to move our products between manufacturing plants and our customers’ facilities. Transport or delivery problems due to their error or because of unforeseen interruptions in their business due to factors such as strikes, political instability, terrorism, natural disasters or accidents could seriously harm our business, financial condition and results of operations and ultimately impact our relationship with our customers.

We may be unable to protect our intellectual property rights adequately.

The protection of our intellectual property rights, as well as those of our subsidiaries, is essential to keeping others from copying the innovations that are critical to our existing and future products. It may be possible for an unauthorized third party to reverse-engineer or decompile our software products. The process of seeking patent protection can be long and expensive and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be respected by third parties. Furthermore, our flexible fab initiative requires us to enter into technology transfer agreements with external partners, providing third party access to our intellectual property and resulting in additional risk. In some cases, these technology transfer and/or license agreements are with foreign companies and subject our intellectual property to regulation in foreign countries which may afford less protection and/or result in increased costs to enforce such agreements or intellectual property rights. We anticipate that we will continue to enter into these kinds of licensing arrangements in the future. Consequently, we may become involved in litigation, in the United States or abroad, to enforce our patents or other intellectual property rights, to protect our trade secrets and know-how, to determine the validity or scope of the proprietary rights of others or to defend against claims of invalidity. We are also from time to time involved in litigation relating to alleged infringement by us of others’ patents or other intellectual property rights.

 

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Moreover, a key element of our strategy is to enter new markets with our products. If we are successful in entering these new markets, we will likely be subject to additional risks of potential infringement claims against us as our technologies are deployed in new applications and face new competitors. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights, particularly in certain international markets, making misappropriation of our intellectual property more likely. Patent litigation, if necessary or if and when instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

We also rely on trade secret protection for our technology, in part through confidentiality and other written agreements with our employees, consultants and third parties. Through these and other written agreements, we attempt to control access to and distribution of our intellectual property documentation and other proprietary technology information. Despite our efforts to protect our proprietary rights, former employees, consultants or third parties may, in an unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality as our technology. Policing unauthorized use of our intellectual property rights is difficult, and nearly impossible on a worldwide basis. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriation of our technology or intellectual property rights, particularly in foreign countries where we do business or where our technology is sold or used, where the laws may not protect proprietary rights as fully as do the laws of the United States or where the enforcement of such laws is not common or effective.

We may be involved in intellectual property litigation and face significant expenses as a result of ongoing or future litigation.

Other companies or entities also have commenced, and may again commence, actions seeking to establish the invalidity of our patents. While we intend to defend these actions vigorously, there is no guarantee of success, and such effort takes significant financial and time resources from the Company. In the event that one or more of our patents are challenged, a court or the United States Patent and Trademark Office may invalidate the patent(s) or determine that the patent(s) is not enforceable, which could harm our competitive position. If our patents are invalidated, or if the scope of the claims in any of these patents is limited by a court or USPTO decision, we could be prevented from pursuing certain litigation matters or licensing the invalidated or limited portion of such patents. Such adverse decisions could negatively impact our future, expected revenue.

Intellectual property litigation is frequently expensive to both the winning party and the losing party and could take up significant amounts of management’s time and attention. In addition, if we lose such a lawsuit, a court could find that our intellectual property rights are invalid, enabling our competitors to use our technology, or require us to pay substantial damages and/or royalties or prohibit us from using essential technologies. For these and other reasons, this type of litigation could seriously harm our business, financial condition and results of operations. Also, although in certain instances we may seek to obtain a license under a third party’s intellectual property rights in order to bring an end to certain claims or actions asserted against us, we may not be able to obtain such a license on reasonable terms or at all. We believe we have meritorious defenses and claims in our current litigation and we intend to defend and pursue such claims vigorously. Unfortunately, such litigation and other claims are subject to inherent uncertainties.

We face additional problems and uncertainties associated with international operations that could seriously harm us.

International revenues historically accounted for a significant portion of our total revenues. Our manufacturing, assembly, test operations and certain finance operations located in outside of the United States, as well as our international sales offices and design centers, face risks frequently associated with foreign operations including but not limited to:

 

·

currency exchange fluctuations;

 

·

the devaluation of local currencies;

 

·

political instability;

 

·

labor issues;

 

·

the impact of natural disasters on local infrastructures and economies;

 

·

changes in local economic conditions;

 

·

import and export controls;

 

·

potential shortage of electric power supply;

 

·

potential violations by our international employees or third party agents of international or U.S. laws relevant to foreign operations (such as FCPA) and

 

·

changes in tax laws, tariffs and freight rates.

To the extent any such risks materialize, our business, financial condition or results of operations could be seriously harmed.

 

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We compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel would harm us.

To a greater degree than most non-technology companies, we depend on the efforts and abilities of certain key members of management and technical personnel to execute on the strategic initiatives of our business. Our future success depends, in part, upon our ability to retain such personnel and to attract and retain other highly qualified personnel, particularly product and process engineers. We compete for these individuals with certain of our competitors, other companies, academic institutions, government entities and other organizations. Competition for such personnel is intense and we may not be successful in hiring or retaining new or existing qualified personnel. Equity awards are critical to our ability to hire and retain such key personnel. In addition, we may also need to significantly increase our cash based compensation to retain such personnel.

Our financial results could be adversely impacted if our Emerging Technologies businesses fail to develop and successfully bring to market new and proprietary products.

We have made a financial and personnel commitment to our Emerging Technologies businesses. Despite the significant amount of resources we commit to our Emerging Technologies businesses, there can be no guarantee that such Emerging Technologies businesses will perform as expected or at all, launch new products and solutions as expected or gain market acceptance. If our Emerging Technologies businesses’ fail to introduce new product and solutions or successfully develop new technologies, or if our customers do not successfully introduce new systems or products incorporating the products or solutions offered by our Emerging Technologies businesses or market demand for the products or solutions offered by our Emerging Technologies businesses do not materialize as anticipated, our business, financial condition and results of operations could be materially harmed.

Any guidance that we may provide about our business or expected future results may differ significantly from actual results.

From time to time we have shared our views in press releases or SEC filings, on public conference calls and in other contexts about current business conditions and our expectations as to our future results of operations. Correctly identifying the key factors affecting business conditions and predicting future events is inherently an uncertain process, especially in uncertain economic times. Given the complexity and volatility of our business, our analyses and forecasts have in the past and will likely in the future, prove to be materially incorrect. We offer no assurance that such predictions or analyses will ultimately be accurate, and investors should treat any such predictions or analyses with appropriate caution. Any analysis or forecast that we make which ultimately proves to be inaccurate may adversely affect our stock price.

We are subject to many different environmental, health and safety laws, regulations and directives, and compliance with them may be costly.

We are subject to many different international, federal, state and local governmental laws and regulations related to, among other things, the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process, conflict mineral and data privacy legislation, as well as the health and safety regulations related to our employees. Compliance with these regulations can be costly. We cannot assure you that we have been, or will be at all times in complete compliance with such laws and regulations. If we violate or fail to comply with these laws and regulations, we could be fined or otherwise sanctioned by the regulators. Under certain environmental laws, we could be held responsible, without regard to fault, for all of the costs relating to any contamination at our or our predecessors’ past or present facilities and at third party waste disposal sites. We could also be held liable for any and all consequences arising out of human exposure to such substances or other environmental damage.

Over the last several years, there has been increased public awareness of the potentially negative environmental impact of semiconductor manufacturing operations. This attention and other factors may lead to changes in environmental regulations that could force us to purchase additional equipment or comply with other potentially costly requirements. If we fail to control the use of, or to adequately restrict the discharge of, hazardous substances under present or future regulations, we could face substantial liability or suspension of our manufacturing operations, which could seriously harm our business, financial condition and results of operations.

We face increasing complexity in our product design as we adjust to new and future requirements relating to the material composition of our products, including the restrictions on lead and other hazardous substances that apply to specified electronic products put on the market in the European Union, China and California. Other countries, including at the federal and state levels in the United States, are also considering similar laws and regulations. Certain electronic products that we maintain in inventory may be rendered obsolete if they are not in compliance with such laws and regulations, which could negatively impact our ability to generate revenue from those products. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, or in the worst case decreased revenue, and could even require that we redesign or change how we manufacture our products. Such redesigns result in additional costs and possible delayed or lost revenue.

 

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Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our worldwide operations could be adversely affected if disrupted for any reason, including natural disasters such as earthquakes, tsunamis, floods, hurricanes, typhoons, telecommunication or information technology system failures, regulatory or political issues, power or water shortages, fires, extreme weather conditions, medical epidemics or pandemics or other man- made disasters or catastrophic events. While we maintain business interruption insurance for our primary foreign manufacturing operations, we are self-insured for any loss or damage to our primary manufacturing facility. As such, the occurrence of any of these business disruptions for us or our third party manufacturers, partners or customers could result in significant losses, seriously harm our revenue and financial condition, adversely affect our competitive position, increase our costs and expenses, and require substantial expenditures and recovery time in order to fully resume operations. Our corporate headquarters, and a portion of our research and development activities, are located in California, and other critical business operations and some of our suppliers are located in California and Asia, near major earthquake faults known for seismic activity. The manufacture of product components, the final assembly of our products and other critical operations are concentrated in certain geographic locations, including the Philippines, Malaysia, China and India. We also rely on major logistics hubs primarily in Asia to manufacture and distribute our products. The ultimate impact on us, our significant suppliers and our general infrastructure of being located near major earthquake faults and being consolidated in certain geographical areas is unknown. However in the event of a major earthquake or other natural disaster or catastrophic event, our revenue, profitability and financial condition could suffer.

System security risks, data protection or privacy breaches, cyber-attacks and systems integration issues could disrupt our internal operations and/or harm the reputation of the Company, and any such disruption or harm could cause a reduction in our expected revenue, increase our expenses, negatively impact our results of operation or otherwise adversely affect our stock price.

Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential and proprietary information, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions and delays that may impede our sales, manufacturing, distribution or other critical functions.

We manage and store various proprietary information and sensitive or confidential data relating to our business on the cloud. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant.

Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions have adversely affected us in the past, and in the future could adversely affect our financial results, stock price and reputation.

We maintain self-insurance for certain indemnities we have made to our officers and directors, and if a significant payment were to arise out of such liabilities, it could harm our financial condition and results of operation.

Our certificate of incorporation, by-laws and indemnification agreements require us to indemnify our officers and directors for certain liabilities that may arise in the course of their service to us. We self-insure with respect to these indemnifiable claims. If we were required to pay a significant amount on account of these liabilities for which we self-insure, our business, financial condition and results of operations could be seriously harmed.

 

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New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.

On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the SEC adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements require companies to do diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We have undertaken the necessary diligence to determine whether such minerals are used in the manufacture of our products. However, the implementation of these new requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, regardless of our findings, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free. The next report is due on May 31, 2016 for the 2015 calendar year.

Changes in U.S. and International tax legislation regarding our foreign earnings could materially impact our business.

A majority of our revenue is generated from customers located outside the U.S. and a substantial portion of our assets, including employees, are located outside the U.S. United States income tax has not been provided on a portion of earnings of our non-U.S. subsidiaries to the extent that such earnings are considered to be indefinitely reinvested. In the past, the administration has considered initiatives which could substantially reduce our ability to defer U.S. taxes including: limitations on deferral of U.S. taxation of foreign earnings eliminate utilization or substantially reduce our ability to claim foreign tax credits, and eliminate various tax deductions until foreign earnings are repatriated to the U.S. If any of these proposals are constituted into law, they could have a negative impact on our financial position and results of operations.

We are subject to examination by the U.S. Internal Revenue Service (the “IRS”), and from time to time we are subject to income tax audits or similar proceedings in other jurisdictions in which we do business, and as a result we may incur additional costs and expenses or owe additional taxes, interest and penalties which will negatively impact our operating results.

We are subject to income taxes in the U.S. and certain foreign jurisdictions, and our determination of our tax liability is subject to review by applicable domestic and foreign tax authorities. The results of these US and certain foreign jurisdiction examinations may result in a decrease of our current estimate of unrecognized tax benefits or increase of actual tax liabilities which could negatively impact our financial position, results of operations and cash flows.

Tax bills are introduced from time to time to reform U.S. taxation of international business activities. The Organization for Economic Co-operation and Development, or OECD, also recently released guidance covering various topics, including country-by-country reporting, definitional changes to permanent establishment and Base Erosion and Profit Shifting, or BEPS, an initiative that aims to standardize and modernize global tax policy. Depending on the final guidance and legislation ultimately enacted, if any, there may be significant consequences for us due to the large scale of our international business activities.

In addition, policies regarding corporate income taxes in numerous jurisdictions are under heightened scrutiny. As a result, decisions by tax authorities regarding treatments and positions of corporate income taxes could be subject to legislative investigation and inquiry, which could result in changes in tax policies or prior tax rulings. There can be no assurance as to the outcome of these investigations and inquiries. As such, the taxes we previously paid may be subject to change and our taxes may increase in the future, which could have an adverse effect on our results of operations, financial condition and our corporate reputation.

 

26


If the tax incentive or tax holiday arrangements we have negotiated in Malaysia, Philippines and Thailand change or cease to be in effect or applicable, in part or in whole, for any reason, or if our assumptions and interpretations regarding tax laws and incentive or holiday arrangements prove to be incorrect, the amount of corporate income taxes we have to pay could significantly increase.

We have structured our operations to maximize the benefit from various tax incentives and tax holidays extended to us in various jurisdictions to encourage investment or employment. Each such tax incentive is separate and distinct from the others, and may be granted, withheld, extended, modified, truncated, complied with or terminated independently without any effect on the other incentives. The tax incentives are presently scheduled to expire at various dates generally beginning in 2018, subject in certain cases to potential extensions, which we may or may not be able to obtain. Absent these tax incentives, the corporate income tax rate in these jurisdictions that would otherwise apply to us would be between 20% to 30%. The tax incentives that we have negotiated are also subject to our compliance with various operating and other conditions. If we cannot, or elect not to, comply with the operating conditions included in any particular tax incentive, we will lose the related tax benefits and we could be required to refund previously realized material tax benefits. Depending on the incentive at issue, we could also be required to modify our operational structure and tax strategy, which may not be as beneficial to us as the benefits provided under the present tax concession arrangements. Our interpretations and conclusions regarding the tax incentives are not binding on any taxing authority, and if our assumptions about tax and other laws are incorrect or if these tax incentives are substantially modified or rescinded we could suffer material adverse tax and other financial consequences, which would increase our expenses, reduce our profitability and adversely affect our cash flows.

The accumulation of changes in our shares by “5-percent stockholders” could trigger an ownership change for U.S. income tax purposes, in which case our ability to utilize our net operating losses would be limited and therefore impact our future tax benefits.

Cypress is a publicly traded company whose stockholders can change on a daily basis. These changes are beyond our control. The U.S. Internal Revenue Code (Section 382) restricts a company’s ability to benefit from net operating losses if a “Section 382 Ownership Change” occurs. An ownership change for purposes of U.S. tax law Section 382 may result from ownership changes that increase the aggregate ownership of “5-percent stockholders,” by more than 50 percentage points over a testing period, generally three years (“Section 382 Ownership Change”). We experienced a Section 382 Ownership Change upon the acquisition of Spansion. The resulting limitations accompanying the ownership change are reflected in our deferred tax assets with no permanent limitation in our ability to utilize our tax attributes.

Acquisition and investments could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations.

Acquisitions are an important element of our overall corporate strategy and use of capital. These transactions could be material to our financial condition and results of operations. We expect to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquired company, business, or technology has created, and will continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks include, but are not limited to:

 

·

Diversion of management time and focus from operating our business to integration challenges;

 

·

Cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire;

 

·

Successfully transitioning the current customer, supplier, foundry and other partnering relationships of the acquired company;

 

·

Implementation or remediation of controls, procedures, and policies at the acquired company;

 

·

Integration of the acquired company’s accounting, human resource, and other administrative systems, and coordination of product, engineering, and sales and marketing functions;

 

·

In the case of acquired companies with global operations, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries;

 

·

Failure to successfully further develop the acquired business or technology;

 

·

Liability for activities of the acquired company before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities; and

 

·

Pending litigation or other known or unknown claims in connection with the acquired company, including claims by stockholders for breach of fiduciary duties, terminated employees, customers, former stockholders, or other third parties.

Our failure to address these and other risks or other problems encountered in connection with our past or current acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business generally. Current and future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition or results. As a result, the anticipated benefit of many of our acquisitions may not be realized.

 

27


We invest in companies for strategic reasons and may not realize a return on our investments.

We make investments in companies to further our strategic objectives and support our key business initiatives. Such investments include equity instruments of private companies, and many of these instruments are non-marketable at the time of our initial investment. These companies range from early-stage companies that are often still defining their strategic direction to more mature companies with established revenue streams and business models. The success of these companies is dependent on product development, market acceptance, operational efficiency, and other key business factors as well as their ability to secure additional funding, obtain favorable investment terms for future financings, or participate in liquidity events such as public offerings, mergers, and private sales. If any of these companies fail, we could lose all or part of our investment in that company. If we determine that other-than-temporary decline in the fair value exists for an equity investment in a company in which we have invested, we write down the investment to its fair value and recognize the related write-down as an investment loss.

When the strategic objectives of an investment have been achieved, or if the investment or business diverges from our strategic objectives, we may decide to dispose of the investment. We may incur losses on the disposal of our investments. Additionally, for cases in which we are required under equity method accounting to recognize a proportionate share of another company's income or loss, such income or loss may impact our earnings. Gains or losses from equity securities could vary from expectations depending on gains or losses realized on the sale or exchange of securities, gains or losses from equity method investments, and impairment charges for equity and other investments.

We may have fluctuations in the amount and frequency of our stock repurchases.

On October 20, 2015, our Board of Directors approved a new share repurchase plan pursuant to which we are authorized to repurchase our common stock in an aggregate amount not to exceed $450 million. Although our Board of Directors has approved a share repurchase program, the share repurchase program does not obligate us to repurchase any specific dollar amount or number of shares.  The stock repurchase could affect the price of our stock and increase volatility and may be suspended or terminated at any time without prior notice and in compliance with legal and regulatory requirements, which may result in a decrease in the trading price of our common stock.  

There can be no assurance we will continue to declare dividends and that our cash distributions on common stock will continue to be considered a return of capital.

In the second quarter of fiscal 2011, our Board of Directors adopted a policy pursuant to which the Company would pay quarterly cash distributions on our common stock. We intend to continue to pay such distributions subject to capital availability and periodic determinations by our Board of Directors that cash distributions are in the best interest of our shareholders and are in compliance with all laws and agreements of Cypress applicable to the declaration and payment of cash distributions. Based upon our lack of current earnings and profits, in the United States, prior to 2016, these distributions have been treated for income tax purposes as a return of capital.

Future distributions may be affected by, among other factors:

 

·

our views on potential future capital requirements for investments in acquisitions and the funding of our research and development;

 

·

stock repurchase programs;

 

·

changes in federal and state income tax laws or corporate laws;

 

·

changes to our business model; and

 

·

debt payments.

Our distribution payments may change from time to time, and we cannot provide assurance that we will continue to declare distributions in any particular amounts or at all. In addition, we cannot provide assurance that the cash distributions will continue to be treated for income tax purposes as a return of capital. A reduction in our distribution payments or a change in the tax treatment of future distributions could have a negative effect on our stock price.

 

28


If we are unable to obtain stockholder approval of additional shares for our share-based compensation award programs in the future, we could be at a competitive disadvantage in the marketplace for qualified personnel.

Our compensation program, which includes cash and share-based compensation award components, has been instrumental in attracting, hiring, motivating, and retaining qualified personnel. Competition for qualified personnel in our industry is extremely intense, particularly for engineering and other technical personnel. Our success depends on our continued ability to attract, hire, motivate, and retain qualified personnel and our share-based compensation award programs provide us with a competitive compensatory tool for this purpose. The continued use of our share-based compensation program is necessary for us to compete for engineering and other technical personnel and professional talent. In the future, if we are unable to obtain stockholder approval of additional shares for our share-based compensation award programs, we could be at a competitive disadvantage in the marketplace for qualified personnel.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our executive offices are located in San Jose, California. The following tables summarize our primary properties as of the end of fiscal 2015:

 

Location

 

Square Footage

 

Primary Use

Owned:

 

 

 

 

United States :

 

 

 

 

Bloomington, Minnesota

 

337,000

 

Manufacturing, research and development

San Jose, California

 

171,000

 

Administrative offices, research and development

Austin, Texas

 

1,514,000

 

Manufacturing, research and development and administrative offices

Colorado Springs, Colorado

 

70,400

 

Administrative offices, research and development

Lynnwood, Washington

 

67,000

 

Administrative offices, research and development

Asia :

 

 

 

 

Cavite, Philippines

 

253,000

 

Manufacturing, research and development

Bangkok

 

253,000

 

Manufacturing, research and development

Penang, Malaysia

 

175,000

 

Manufacturing, research and development and administrative offices

 

We have an additional 760,000 square feet of leased space for research and development, administrative, sales offices and design centers located in the United States, Asia and Europe. We believe that our current properties are suitable and adequate for our foreseeable needs. We may need to exit facilities as we continue to evaluate our business model and cost structure.  

ITEM 3.

LEGAL PROCEEDINGS

Information with respect to this item may be found in Note 19 of Notes to Consolidated Financial Statements under Item 8, which is incorporated herein by reference.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

 

 

 

29


PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information, Holders of Common Equity, Dividends and Performance Graph

On November 12, 2009, our common stock was listed on the NASDAQ Global Select Market under the trading symbol “CY.” Prior to November 12, 2009, our common stock was listed on the New York Stock Exchange. The following table sets forth the high and low per share prices for our common stock:

 

 

 

Low

 

 

High

 

Fiscal 2015:

 

 

 

 

 

 

 

 

Fourth quarter

 

$

8.11

 

 

$

10.96

 

Third quarter

 

$

8.55

 

 

$

12.46

 

Second quarter

 

$

11.65

 

 

$

14.46

 

First quarter

 

$

13.39

 

 

$

16.25

 

Fiscal 2014:

 

 

 

 

 

 

 

 

Fourth quarter

 

$

14.42

 

 

$

14.68

 

Third quarter

 

$

9.96

 

 

$

10.23

 

Second quarter

 

$

10.42

 

 

$

10.66

 

First quarter

 

$

10.00

 

 

$

10.27

 

Fiscal 2013:

 

 

 

 

 

 

 

 

Fourth quarter

 

$

8.97

 

 

$

10.34

 

Third quarter

 

$

9.05

 

 

$

13.10

 

Second quarter

 

$

9.60

 

 

$

11.55

 

First quarter

 

$

9.84

 

 

$

11.37

 

 

As of February 26, 2016, there were approximately 1,550 registered holders of record of our common stock.

Dividends

During fiscal 2015, we paid dividends of $128.0 million, at a rate of $0.11 per share of common stock paid in each quarter of the fiscal year.

During fiscal 2014, we paid dividends of $69.2 million, at a rate of $0.11 per share of common stock paid in each quarter of the fiscal year.

During fiscal 2013, we paid dividends of $64.8 million, at a rate of $0.11 per share of common stock paid in each quarter of the fiscal year.

 

30


The following line graph compares the yearly percentage change in the cumulative total stockholder return on our common stock against the cumulative total return of the Standard and Poor (“S&P”) 500 Index and the S&P Semiconductors Index for the last five fiscal years:

*$100 invested on 1/2/11 in stock or 12/31/10 in index, including reinvestment of dividends.
Indexes calculated on month-end basis. Indexes calculated on month-end basis.

 

 

January 1,

2012

December 30,

2012

December 29,

2013

December 28,

2014

January 3,

2016

    Cypress**

91.88

59.52

60.86

89.78

62.70

    S&P 500 Index

102.11

118.45

156.82

178.29

180.75

    S&P Semiconductors Index

102.24

98.75

134.24

181.05

182.64

    Peer Group

86.90

82.79

108.54

133.55

147.18

 

 **

All closing prices underlying this table have been adjusted for cash dividends, stock splits and stock dividends.

 

 

31


Securities Authorized for Issuance under Equity Compensation Plans

Equity Compensation Plan Information:

The following table summarizes certain information with respect to our common stock that may be issued under the existing equity compensation plans as of January 3, 2016:

 

Plan Category

Number of Securities to be Issued

Upon Exercise of Outstanding Options, Warrants and Rights

(a)

 

 

 

Weighted-Average

Exercise Price of

Outstanding Options, Warrants and Rights

(b)

 

 

 

Number of Securities Remaining

Available for Future Issuance

Under Equity Compensation Plans

(Excluding Securities Reflected in

Column (a))

(c)

 

 

 

(In millions, except per-share amounts)

 

 

Equity compensation plans approved by shareholders

 

16.8

 

(1)

 

$

10.4

 

(3)

 

 

26.7

 

(6)

Equity compensation plans not approved by shareholders

 

11.1

 

(2)

 

$

5.6

 

(4)

 

 

10.1

 

(7)

Total

 

27.9

 

 

 

$

7.99

 

(5)

 

 

36.8

 

 

 

(1)

Includes 8.3 million shares of full value awards (restricted stock units, restricted stock awards and performance stock units)

(2)

Includes 2.7 million shares of full value awards (restricted stock units, restricted stock awards and performance stock units)

(3)

Excludes the impact of 8.3 million shares of full value awards (restricted stock units, restricted stock awards and performance stock units) which have no exercise price.

(4)

Excludes the impact of 2.7 million shares of full value awards (restricted stock units, restricted stock awards and performance stock units) which have no exercise price.

(5)

Excludes the impact of 11.1 million shares of full value awards (restricted stock units, restricted stock awards and performance stock units) which have no exercise price.

(6)

Includes 25 million shares available for future issuance under Cypress’s 2013 Stock Plan and 1.7 million shares available for future issuance under Cypress’s Employee Stock Purchase Plan.

(7)

Includes two thousand shares available for future issuance under the assumed Ramtron Plan and 10.1 million shares available for future issuance under the assumed Spansion Plan.

See Note 8 of Notes to Consolidated Financial Statements under Item 8 for further discussion of Cypress’s stock plans.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Stock Buyback Programs:

Approval of a New $450 Million Stock Buyback Program

On October 20, 2015, our Board of Directors (the “Board”) approved a new share repurchase plan pursuant to which we are authorized to repurchase our common stock in an aggregate amount not to exceed $450 million. In connection with the approval of the new share repurchase plan, the share repurchase plan previously approved in September 2011 was terminated.  The new share repurchase plan may be funded all or in part by term loans under the Amended Credit Facility. The share repurchase program does not obligate us to repurchase any specific number of shares and may be suspended or terminated at any time without prior notice and in compliance with legal and regulatory requirements.  

 

32


The table below sets forth information with respect to repurchases of our common stock made during fiscal 2013, 2014 and 2015 under these programs:

 

 

 

Total Number

of Shares

Purchased

 

 

Average Price

Paid per Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced

Programs

 

 

Total Dollar

Value of Shares

That May Yet Be

Purchase Under the

Plans or Programs

 

 

 

(In thousands, except per-share amounts)

 

Authorized fund under 2011 Repurchase program:

 

 

 

 

$

 

 

 

 

 

$

400,000

 

Repurchases in fiscal 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012—March 31, 2013

 

 

411

 

 

$

10.49

 

 

 

411

 

 

$

84,059

 

April 1, 2013—June 30, 2013

 

 

10

 

 

$

10.71

 

 

 

10

 

 

$

83,952

 

July 1, 2013—September 29, 2013

 

 

9

 

 

$

11.41

 

 

 

9

 

 

$

83,856

 

September 30, 2013—December 29, 2013

 

 

23

 

 

$

9.46

 

 

 

23

 

 

$

83,675

 

Total repurchases in fiscal 2013

 

 

453

 

 

 

 

 

 

 

453

 

 

$

83,675

 

Repurchases in fiscal 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 30, 2013—March 30, 2014

 

 

18

 

 

$

10.23

 

 

 

18

 

 

$

83,490

 

March 31, 2014—June 29, 2014

 

 

7

 

 

$

9.72

 

 

 

7

 

 

$

83,425

 

June 30, 2014—September 28, 2014

 

 

3

 

 

$

10.53

 

 

 

3

 

 

$

83,398

 

September 29, 2014—December 28, 2014

 

 

5

 

 

$

10.27

 

 

 

5

 

 

$

83,341

 

Total repurchases in fiscal 2014

 

 

33

 

 

 

 

 

 

 

33

 

 

$

83,341

 

Repurchases in fiscal 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 29, 2014—March 29, 2015

 

 

6

 

 

$

14.66

 

 

 

6

 

 

$

83,252

 

March 30, 2015—June 28, 2015

 

 

818

 

 

$

12.75

 

 

 

818

 

 

$

72,672

 

June 29, 2015—September 27, 2015

 

 

2

 

 

$

10.62

 

 

 

2

 

 

$

72,648

 

Total repurchases in fiscal 2015

 

 

826

 

 

 

 

 

 

 

826

 

 

$

72,648

 

Total repurchases under this program

 

 

1,312

 

 

 

 

 

 

 

1,312

 

 

 

 

 

Authorized fund under 2015 Repurchase program:

 

 

 

 

 

 

 

 

 

 

 

 

 

$

450,000

 

September 28, 2015—January 3, 2016

 

 

5,658

 

 

$

9.99

 

 

 

5,658

 

 

$

393,475

 

Total repurchases in fiscal 2015

 

 

5,658

 

 

 

 

 

 

 

5,658

 

 

$

393,475

 

Total repurchases under this program

 

 

5,658

 

 

 

 

 

 

 

5,658

 

 

 

 

 

 

Yield Enhancement Program (“YEP”):

In fiscal 2009, the Audit Committee approved a yield enhancement strategy intended to improve the yield on our available cash. As part of this program, the Audit Committee authorized us to enter into short-term yield enhanced structured agreements, typically with maturities of 90 days or less, correlated to our stock price. Under the agreements we have entered into to date, we pay a fixed sum of cash upon execution of an agreement in exchange for the financial institution’s obligations to pay either a pre-determined amount of cash or shares of our common stock depending on the closing market price of our common stock on the expiration date of the agreement. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our cash investment returned plus a yield substantially above the yield currently available for short-term cash investments. If the closing market price is at or below the pre-determined price, we will receive the number of shares specified at the agreement’s inception. As the outcome of these arrangements is based entirely on our stock price and does not require us to deliver either shares or cash, other than the original investment, the entire transaction is recorded in equity. The shares received upon the maturing of a yield enhancement structure are included in our “shares of common stock held in treasury” in the Consolidated Balance Sheets under Item 8.

We have entered into various yield enhanced structured agreements based upon a comparison of the yields available in the financial markets for similar maturities against the expected yield to be realized per the structured agreement and the related risks associated with this type of arrangement. We believe the risk associated with these types of agreements is no different than alternative investments available to us with equivalent counterparty credit ratings. All counterparties to a yield enhancement program have a credit rating of at least Aa2 or A as rated by major independent rating agencies. For all such agreements that matured to date, the yields of the structured agreements were far superior to the yields available in the financial markets primarily due to the volatility of our stock price and the pre-payment aspect of the agreements. The counterparty is willing to pay a premium over the yields available in the financial markets due to the structure of the agreement.

 

33


The following table summarizes the activity of our settled yield enhanced structured agreements during fiscal 2015 and 2014:

 

Periods

 

Aggregate

Price

Paid

 

 

Total Cash

Proceeds

Received Upon

Maturity

 

 

Yield Realized

 

 

Total Number of

Shares Received Upon

Maturity

 

 

Average Price Paid

per Share

 

Fiscal 2015:

 

(in thousands)

 

 

 

 

 

 

 

 

 

Settled through cash proceeds

 

$

28,966

 

 

$

29,353

 

 

$

387

 

 

 

 

 

$

 

Settled through issuance of common stock

 

 

9,601

 

 

 

 

 

 

 

 

 

1,000,000

 

 

$

9.60

 

Total for fiscal 2015

 

$

38,567

 

 

$

29,353

 

 

$

387

 

 

 

1,000,000

 

 

 

9.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Settled through cash proceeds

 

$

19,415

 

 

$

19,733

 

 

$

318

 

 

 

 

 

$

 

Settled through issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total for fiscal 2014

 

$

19,415

 

 

$

19,733

 

 

$

318

 

 

 

 

 

$

 

 

There was no activity of our yield enhanced structured agreements during fiscal 2013.

 

 

 

34


ITEM 6.

SELECTED FINANCIAL DATA

The following selected consolidated financial data is not necessarily indicative of results of future operations, and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7, and the Consolidated Financial Statements and Notes to Consolidated Financial Statements under Item 8:

 

 

 

Year Ended

 

 

 

January 3,

2016 (2)

 

 

December 28,

2014 (2)

 

 

December 29,

2013

 

 

December 30,

2012

 

 

January 1,

2012

 

 

 

 

 

 

 

(In thousands, except per-share amounts)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,607,853

 

 

$

725,497

 

 

$

722,693

 

 

$

769,687

 

 

$

995,204

 

Cost of revenues

 

$

1,207,850

 

 

$

361,820

 

 

$

384,121

 

 

$

376,887

 

 

$

448,602

 

Operating income (loss)

 

$

(336,905

)

 

$

22,873

 

 

$

(58,195

)

 

$

(18,915

)

 

$

153,719

 

Income (loss) attributable to Cypress (3)

 

$

(378,867

)

 

$

17,936

 

 

$

(48,242

)

 

$

(23,444

)

 

$

167,839

 

Noncontrolling interest, net of income taxes

 

$

(2,271

)

 

$

(1,418

)

 

$

(1,845

)

 

$

(1,614

)

 

$

(882

)

Net income (loss) (3)

 

$

(381,138

)

 

$

16,518

 

 

$

(50,087

)

 

$

(25,058

)

 

$

166,957

 

Adjust for net loss (income) attributable to noncontrolling

   interest

 

$

2,271

 

 

$

1,418

 

 

$

1,845

 

 

$

1,614

 

 

$

882

 

Net income (loss) attributable to Cypress

 

$

(378,867

)

 

$

17,936

 

 

$

(48,242

)

 

$

(23,444

)

 

$

167,839

 

Net income (loss) per share—basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Cypress

 

$

(1.25

)

 

$

0.11

 

 

$

(0.32

)

 

$

(0.16

)

 

$

1.02

 

Net income (loss) per share—basic

 

$

(1.25

)

 

$

0.11

 

 

$

(0.32

)

 

$

(0.16

)

 

$

1.02

 

Net income (loss) per share—diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to Cypress

 

$

(1.25

)

 

$

0.11

 

 

$

(0.32

)

 

$

(0.16

)

 

$

0.90

 

Net income (loss) per share—diluted

 

$

(1.25

)

 

$

0.11

 

 

$

(0.32

)

 

$

(0.16

)

 

$

0.90

 

Dividends per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Declared

 

$

0.44

 

 

$

0.44

 

 

$

0.44

 

 

$

0.44

 

 

$

0.27

 

Paid

 

$

0.44

 

 

$

0.44

 

 

$

0.44

 

 

$

0.42

 

 

$

0.18

 

Shares used in per-share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

302,036

 

 

 

159,031

 

 

 

148,558

 

 

 

149,266

 

 

 

164,495

 

Diluted

 

 

302,036

 

 

 

169,122

 

 

 

148,558

 

 

 

149,266

 

 

 

186,895

 

 

 

 

As of

 

 

 

January 3,

2016

 

 

December 28,

2014

 

 

December 29,

2013

 

 

December 30,

2012

 

 

January 1,

2012

 

 

 

 

 

 

 

(In thousands)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

227,561

 

 

$

118,812

 

 

$

104,462

 

 

$

117,210

 

 

$

166,330

 

Working capital (3)

 

$

322,376

 

 

$

37,479

 

 

$

13,871

 

 

$

20,060

 

 

$

79,190

 

Total assets (3)

 

$

4,004,261

 

 

$

743,281

 

 

$

762,884

 

 

$

830,554

 

 

$

810,090

 

Debt (1)

 

$

688,265

 

 

$

243,250

 

 

$

248,230

 

 

$

264,942

 

 

$

45,767

 

Stockholders’ equity (3)

 

$

2,712,685

 

 

$

201,865

 

 

$

175,683

 

 

$

175,786

 

 

$

397,842

 

 

(1)

The debt in fiscal year 2015 primarily included $449.0 million related to our Senior Secured Revolving Credit Facility, $150 million of 2% Senior Exchange notes assumed from Spansion, $97.2 million Term Loan A, net of costs, $7.2 million of capital leases and $3.0 million of equipment loans.  The debt in fiscal year 2014 primarily included $227.0 million related to our revolving credit facility, $10.3 million of capital leases, and $5.9 million of equipment loans. The debt in fiscal year 2013 primarily included $227.0 million related to our revolving credit facility, $12.5 million of capital leases, and $8.7 million of equipment loans. The debt in fiscal year 2012 included $232.0 million related to our revolving credit facility, $15.0 million of capital leases, $11.5 million of equipment loans, $3.3 million of a mortgage note related to Ramtron, and $3.1 million of advances received for the sale of certain of our auction rate securities. See Note 14 for more information on revolving credit facility, equipment loans and mortgage note and Note 19 for more information on capital leases.

(2)

During the fourth quarter of fiscal 2014, the Company changed from recognizing revenue for sales to certain distributors at the time of shipment, as compared to when resold by the distributor to the end customer, as it determined it could reliably estimate returns and pricing concessions on certain product families and with certain distributors. This change increased fiscal 2014 revenues by $12.3 million, net income by $6.2 million and net income per share, basic and diluted, by $0.04. The change increased 2015 revenue by $40.9 million and decreased net loss by $25 million and net income per share, basic and diluted, by $0.07. See additional disclosures on this change in revenue recognition in Footnote 1 to the consolidated financial statements.

 

 

 

35


ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    

The Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended that involve risks and uncertainties, which are discussed under Item 1A.

EXECUTIVE SUMMARY

General

Cypress Semiconductor Corporation (“Cypress”) delivers high-performance, high-quality solutions at the heart of today’s most advanced embedded systems, from automotive, industrial and networking platforms to highly interactive consumer and mobile devices. With a broad, differentiated product portfolio that includes NOR flash memories, F-RAM™ and SRAM, Traveo™ microcontrollers, the industry’s only PSoC® programmable system-on-chip solutions, analog and PMIC Power Management ICs, CapSense® capacitive touch-sensing controllers, and Wireless BLE Bluetooth Low-Energy and USB connectivity solutions, Cypress is committed to providing its customers worldwide with consistent innovation, best-in-class support and exceptional system value.

Merger with Spansion

On March 12, 2015, we completed the merger (“Merger”) with Spansion Inc. (“Spansion”) pursuant to the Agreement and Plan of Merger and Reorganization, as of December 1, 2014 (the “Merger Agreement”), for a total consideration of approximately $2.8 billion. In accordance with the terms of the Merger Agreement, Spansion shareholders received 2.457 Cypress shares for each Spansion share they owned. The Merger has been accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standard Topic 805, Business Combinations, with Cypress treated as the accounting acquirer. The post-Merger company is expected to realize more than $160 million in cost synergies on an annualized basis within two years, and create a leading global provider of microcontrollers and specialized memories needed in today's embedded systems.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations includes the financial results of legacy Spansion beginning March 12, 2015. The comparability of our operating results for the year ended January 3, 2016 to the same period in fiscal 2014 is significantly impacted by our Merger. In our discussion and analysis of comparative periods, we have quantified the contribution of additional revenue or expense resulting from this transaction wherever such amounts were material and identifiable. While identified amounts may provide indications of general trends, the analysis cannot completely address the effects attributable to integration efforts.

Divestiture of TrueTouch® Business

On August 1, 2015, we completed the sale of the TrueTouch® mobile touchscreen business, which is a business unit within our Programmable Systems Division, to Parade Technologies (“Parade”) for total cash proceeds of $98.6 million pursuant to the definitive agreement signed on June 11, 2015. Of the total cash proceeds, $10.0 million are held in an escrow account until January 2017 subject to any indemnity claims on post-closing adjustments, per the terms of the agreement.   Post-sale, Cypress will continue to provide TrueTouch® solutions to its automotive, industrial and home appliance customers and to its mobile customers. In connection with the transaction, we sold certain assets associated with the disposed business mostly consisting of inventory with a net book value of $10.5 million and recognized a gain of $66.5 million in the third fiscal quarter of fiscal 2015. This gain has been presented as a separate line item “Gain on divestiture of TrueTouch® mobile business” in the Consolidated Statements of Operations.

Also in connection with the transaction, we entered into a Manufacturing Service Agreement (MSA) in which we agreed to sell finished wafers and devices to Parade during the one-year period following the close of the transaction.  The terms of the MSA indicated that we would sell finished products to Parade at agreed-upon prices that were considered below fair market value, indicating that there was an embedded fair value that would be realized by Parade through those terms.  Accordingly, we have allocated $19.9 million from the $98.6 million proceeds to the fair value of the MSA based on the forecasted wafer sales to Parade for the subsequent one-year period.  Such amount was deferred on our consolidated balance sheet initially and is being amortized to revenue as we sell products to Parade.  During the year ended January 3, 2016, we recognized $5.7 million of revenue from amortization of such deferred revenue.

 

36


As of the end of fiscal 2015, our organization included the following business segments:

 

Business Segments

 

Description

 

 

 

PSD: Programmable Systems Division

 

PSD focuses on high-performance, programmable solutions. The programmable portfolio includes high-performance Traveo™ automotive microcontrollers, PSoC® programmable system-on-chip products, ARM® Cortex®-M4, -M3, -M0+ microcontrollers and R4 CPUs, analog PMIC Power Management ICs, CapSense® capacitive-sensing controllers, TrueTouch® touchscreen and fingerprint reader products, and PSoC Bluetooth Low Energy solutions for the IoT. PSD added Spansion’s microcontroller and analog products starting March 12, 2015.

 

 

 

MPD: Memory Products Division

 

MPD focuses on high-performance parallel and serial NOR flash memories, NAND flash memories, static random access memory (SRAM), and high-reliability F-RAM™ ferroelectric memory devices. Its purpose is to enhance our position in these products and invent new products and derivatives. MPD added Spansion’s Flash memory products starting March 12, 2015.

 

 

 

DCD: Data Communications Division

 

DCD focuses on USB controllers, Bluetooth® Low Energy solutions that leverage Cypress’s PRoC™ programmable radio-on-chip technology, WirelessUSB™ solutions, module solutions such as trackpads and Bluetooth Low Energy modules, and controllers for the new USB Type-C standard, which enables data transmission and power delivery over a single cable with a slimmer plug. DCD focuses primarily on industrial, handset and consumer electronics markets and applications.

 

 

 

ETD: Emerging Technologies Division

 

Also known as our “startup” division, ETD includes subsidiaries AgigA Tech Inc. and Deca Technologies Inc., as well as our foundry business and other development-stage activities.

 

Our primary focus is profitable growth in our key markets. With the addition of the legacy Spansion business, we plan to capitalize on our expanded product portfolio and leadership positions in embedded processing and specialized memories to significantly extend our penetration of global markets such as automotive, industrial, communications, consumer, computation, data communications, mobile handsets and military. Our revenue model is based on the following product and market strategies: (a) increasing market share in our memory products by leveraging our market position and expanding our portfolio with new and complementary products, (b) growing revenue from our high-performance, programmable solutions and derivatives including PSoC programmable system-on-chip products and microcontrollers in the automotive and industrial markets, (c) increasing our DCD revenue through the introduction of new products such as USB Type-C solutions, SuperSpeed USB 3.0 peripheral controllers and Bluetooth® Low Energy solutions that leverage Cypress’s PRoC™ programmable radio-on-chip technology for the IoT and other applications, and (d) revenue growth from ETD, which includes our internal startup companies. For profitability, our focus is to integrate the acquired Spansion business successfully and realize the anticipated product cost and operational cost synergies. Our integration effort includes the re-focusing of portions of legacy Spansion business to higher-margin opportunities, particularly in the Flash memory business. We monitor our operating expenses closely to improve our operating leverage as driven by various company-wide initiatives, including our World Class Cost program to continuously reduce cost line items as well as a Human Resources effort to reduce redundancy and improve efficiency across the company.

In order to achieve our goals on revenue growth and profitability, Cypress will continue to pursue the following strategies:

 

·

Successfully integrate our business with Spansion. We are committed to integrating the business of Cypress and Spansion successfully to realize the anticipated cost synergies and improve the bottom line.

 

·

Cross-sell products from Cypress’s expanded product portfolio in the wake of the Spansion Merger. We will continue to take advantage of product and business synergies and grow our top-line revenue.

 

·

Focus on large and growing markets. We will continue to pursue business opportunities in large and growing markets, particularly the automotive and industrial markets.

 

·

Drive profitability. Cypress has implemented and maintained a tight, corporate wide focus on gross margin and operating expenses. We are committed to maintaining our current strong operating expense management without compromising our new product development and investments in our Emerging Technologies Division.

 

·

Drive programmable technologies, extend