UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||||
Washington, D.C. 20549 | ||||
FORM 10-K | ||||
(Mark One) | ||||
☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED | |||
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: 000-18032
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 93-0835214 |
(State of Incorporation) | (I.R.S. Employer Identification Number) |
5555 NE Moore Court, Hillsboro, Oregon | 97124-6421 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (
503) 268-8000Securities registered pursuant to Section 12(b) of the Act:
(Title of Class) | (Trading | (Name of each exchange on which registered) |
Common Stock, $.01 par value | LSCC | Nasdaq Global Select 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. Yes
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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an "emergingemerging growth company." See the definitions of “large"large accelerated filer”, “accelerated filer”, “smallerfiler," "accelerated filer," "smaller reporting company”company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer |
Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
| Aggregate market value of voting stock held by non-affiliates of the registrant as of June 29, 2019 | $ | 1,242,396,539 | |
| Number of shares of common stock outstanding as of February 20, 2020 | 134,318,226 | ||
Aggregate market value of voting stock held by non-affiliates of the registrant as of July 3, 2021 | $ | 6,695,294,586 | |
Number of shares of common stock outstanding as of February 17, 2022 | 137,689,935 | ||
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement relating to the 20202021 Annual Meeting of Stockholders, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I | |||
Item 1. | |||
Item 1A. | |||
Item 1B. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II | |||
Item 5. | |||
Item 6. | |||
Item 7. | |||
Item 7A. | |||
Item 8. | |||
Item 9. | |||
Item 9A. | |||
Item 9B. | |||
| Item | |||
PART III | |||
Item 10. | |||
Item 11. | |||
Item 12. | |||
Item 13. | |||
Item 14. | |||
PART IV | |||
Item 15. | |||
This Annual Report on Form 10-K contains 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. These involve estimates, assumptions, risks, and uncertainties. Any statements about our expectations, beliefs, plans, objectives, assumptions, or future events or performance are not historical facts and may be forward-looking. We use words or phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “plan,” "possible," “predict,” “projects,” “may,” “will,” “should,” “continue,” “ongoing,” “future,” “potential”“potential,” and similar words or phrases to identify forward-looking statements.
Forward-looking statements include, but are not limited to, statements about: our target or expected financial performance and our ability to achieve those results; future impacts of the COVID-19 pandemic, including as a result of actions by governments, businesses, and individuals in response to the situation, on consumer, industrial, labor, and financial markets, our business operations, supply chain and partners, financial performance, results or accounting treatments;of operations, financial position, and the achievement of our use of cash;strategic objectives; our gross margin growth and our strategies to achieve gross margin growth and other financial results;business strategy; our opportunities to increase our addressable market; our expectations and strategies regarding market trends and opportunities, including market segment drivers such as 5G infrastructure deployments, cloud and enterprise servers, client computing platforms, industrial Internet of Things, factory automation, automotive electronics, smart homes and prosumers; our judgments involved in accounting matters;beliefs about who we may compete with and how we are differentiated from those competitors; our expectations regarding our customer base; our expectations regarding product offerings; our expectations regardinggross margin growth and our customer base;strategies to achieve gross margin growth and other financial results; our future investments in research and development, and our research and development expense efficiency; our anticipated reductions in expenses;ability to take advantage of the process technology development efforts of semiconductor foundries and apply those technologies when they become most economically beneficial to us and to our customers; whether we will experience seasonality or cyclicality; our expectations about our patent portfolio, including the expiration of patents, whether, when and where we will make future filings, and the value of the patents generally and to our business; our ability to attract and retain personnel and their importance to our performance; future financial results or accounting treatments; our judgments involved in accounting matters, including revenue recognition, inventories and cost of revenue, and income taxes; actions we may take regarding the design and continued effectiveness of our internal controls over financial reporting; our use of cash; our beliefs regarding the adequacy of our liquidity, capital resources and facilities; whether we will consider and act upon acquisition opportunities to extend our product, technology and product offerings; expected synergies from the acquisition of Mirametrix, Inc.; the expected costs of our restructuring plans; our sharing of anticipated HDMI royalty revenues; our expectations regarding taxes, including unrecognized tax benefits, and tax adjustments and allowances; whether we will pursue future stock repurchases and how any future repurchases will be funded; our beliefs regardingability to prevent and respond to information technology system failures, security breaches and incidents, cyber-attacks or fraud; the adequacyimpact of laws and regulations addressing privacy, data protection, and cybersecurity and our liquidity, capital resources and facilities;ability to comply with the same; and our beliefs regarding legal proceedings.
These forward-looking statements are based on estimates and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those statements expressed in the forward-looking statements. The key factors, among others, that could cause our actual results to differ materially from the forward-looking statements includedinclude the effects of the COVID-19 pandemic and the actions by governments, businesses, and individuals in response to the situation, the effects of which may give rise to or amplify the risks associated with many of these factors listed here; global economic conditions and uncertainty, including as a result of trade relatedtrade-related restrictions or tariffs,tariffs; the concentration of our sales in certain end markets, particularly as it relates to the concentration of our sales in the Asia Pacific region,region; market acceptance and demand for our existing and new products,products; market and technology trends,trends; our ability to license or sell our intellectual property,property; any disruption of our distribution channels,channels; the impact of competitive products and pricing,pricing; the effect of any downturn in the economy on capital markets and credit markets, markets; our failure to prevent or adequately respond to information technology system failures, security breaches and incidents, cyber-attacks, or fraud; unanticipated taxation requirements or positions of the U.S. Internal Revenue Service or other taxing authority,authority; unanticipated effects of tax reform,reform; or unexpected impacts of accounting guidance. In addition, actual results are subject to other risks and uncertainties that relate more broadly to our overall business, including those more fully described herein and that are otherwise described from time to time in our filings with the Securities and Exchange Commission ("SEC"), including, but not limited to, the items discussed in “Risk Factors” inPart I, Item 1A, of Part I of“Risk Factors,” in this Annual Report on Form 10-K.
You should not unduly rely on forward-looking statements because our actual results could differ materially from those expressed by us. In addition, any forward-looking statement applies only as of the date of this filing. We do not plan to, and undertake no obligation to, update any forward-looking statements to reflect new information or new events, circumstances or developments, or otherwise.
Overview
Lattice Semiconductor Corporation and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develop technologies that we monetize through differentiated programmable logic semiconductor products, system solutions, design services, and licenses.
Lattice is the low power programmable leader. We solve customer problems across the network, from the Edge to the Cloud, in the growingOur field programmable gate array ("FPGA") devices enable us to provide usour customers with a strong, growing base of control, connect, and compute technologies. We believe there are multiple growth areas that will allow us to increase our addressable market. In particular, we believe there are several emerging trends in servers, infrastructure, and smart devices that are opportunities for Lattice:
| ● | With the growth of hyperscale datacenters, our “processor agnostic” solutions are ideal for control and connect functions in enterprise and datacenter server applications. |
| ● | With the expected continued Communications infrastructure build-out from 5G deployment and beyond, Lattice solutions are being adopted to control and connect a variety of functions in critical systems. |
| ● | With the increase in electrification and the proliferation of sensors in smart factories, smart homes, and automobiles, our low power, small form factor solutions are ideal for everything from battery powered systems and sensor applications to embedded vision. |
| ● | With the increase in artificial intelligence ("AI"), machine learning, and a multitude of applications at the network edge, Lattice devices support applications that often act independently and need to make instantaneous decisions. Our solutions provide the computing and machine learning capabilities to perform functions like face detection, image recognition, and video analytics. |
| ● | With the demand for more hardware security in the Communications, Computing, Industrial, Automotive, and Consumer markets, our hardware root of trust devices provide platform firmware resilience. This provides a secure boot for systems that are dependent on processors. |
To serve these emerging needs, customer systemssolutions require low power efficiency, memory bandwidth, processing power, and the ability to integrate complex functionality into a highly compact footprint. These requirements align to the capabilities of our FPGA devices. Our flexible, low power, small form factor, easy to use FPGAs put us in a unique position to meet these growing market needs.
Our Markets and Customers
We sell our products globally in three end market groups: Communications and Computing, Industrial and Automotive, and Consumer. We also provide Intellectual Property ("IP") licensing and services to these end markets, although licensing and services revenue is reported as a separate end market as it has characteristics that differ from other categories.
In the
Communications and Computing Market, our solutions play key roles in computing systems such as servers andOur Communications and Computing customers need to manage control functions in their systems.
| ● | As client compute devices become smaller and smarter, there is a need for small form factor devices with power efficiency to interface with a variety of sensors and add intelligence. |
| ● | As server architectures become increasingly complex, customers need simplified control logic, enhanced hardware platform security, system status monitoring, and rigorous power and thermal management. |
| ● | Networks typically require progressively higher bandwidth and increased reliability as more data is demanded by consumer and other connected devices. Bandwidth demands are also driven by the rapid transition to cloud-based infrastructure. |
| ● | As wireless cellular sites become more compact without fans, there is a growing requirement for smaller form factors optimized for low power consumption. |
Lattice FPGAs solve these customer problems. Our FPGAs are optimized for input/output ("I/OO") expansion, low cost per look-up table, hardware acceleration, and hardware management. Our FPGAs consume power at very low rates, which reduces operating costs.costs and supports the continued miniaturization of consumer devices. Their small form factor enables higher functional density in less space. Finally, our FPGAs are I/O rich, which allows for more connections with system application specific integrated circuits ("ASICs") and application specific standard products ("ASSPs").
Examples of where our products enablingenable intelligent automation in the Industrial and Automotive Market include industrial IoT,Industrial Internet of Things ("IoT"), machine vision, robotics, factory automation, advanced driver assistance systems ("ADAS"), and automotive infotainment.
Our Industrial and Automotive customers face numerous challenges:
| ● | As factories automate to improve efficiency and employee safety, sensors, machine vision, and robotics are proliferating, in turn requiring increasing amounts of data to be gathered, connected, and processed. |
| ● | Cars, trucks, and trains are also becoming smarter and more connected. Drivers and passengers are demanding better in-cabin experiences including entertainment, diagnostics, and enhanced safety — often involving multiple displays, cameras, and sensors. |
| ● | As factories and automotive manufacturers continue their evolution of computerization, power reduction, faster time to design-in and market, lower costs are becoming increasingly normal. |
Our product portfolio helps solve these challenges. Our small-sized, low-power FPGAs not only provide the I/O expansion, bridging, connectivity, and processing inherent in FPGAs, but they also form the backbone of several integrated solutions, including motor control, complete HDHigh Definition ("HD") camera and DVR solutions on a single FPGA device, and Human-Machine Interfaces ("HMI") on a chip.
In the
Consumer Market, you can find our solutions making products smarter and thinner,Our Consumer customers are driven by the need to deliver richer and more responsive experiences. They typically require:
| ● | More intelligence and computing power. Products need to be "always-on" and "always-aware." |
| ● | Longer battery lives for handheld devices and reduced energy consumption for plugged-in devices. |
| ● | Real-time transmission of higher resolution video content on larger screen sizes. |
| ● | Fast design cycles. Products must be quickly and easily differentiated. |
| ● | Smaller form factors. Products need to lay flatter on the wall or fit more easily into pockets. |
| ● | Various levels of video processing and analytics. |
Lattice FPGAs bring multiple benefits to these customers. An FPGA’s parallel architecture enables faster processing than competing devices, such as microcontrollers, allowing for a user experience with shorter pauses and fewer delays. Our FPGAs are among the lowestmost power consumptionefficient in the industry, enabling the application processor and other high-power components to remain dormant longer, resulting in longer battery life. Finally, with some of the industry’s smallest packages, we enable thinner end products.
Our proprietary solutions help our customers get their products to market faster than typical development cycles. With re-programmability and flexibility, our FPGAs inherently allow our customers to have quicker product development. The time-to-market advantages of Lattice's solutions are critical given the shorter product life cycles and higher competition in our customers’ end markets.
Our Products, Services, and Competition
We are focused on delivering FPGAs and related solutions to help solve our customers' problems. We also serve our customers with IP licensing and various other services.
Field Programmable Gate Arrays (“FPGAs”)
FPGAs are regular arrays of logic that can be custom-configured by the user through software. This programmability allows our customers flexibility and reduced time to market while allowing us to offer the chips to many different customers in many different markets. FiveFour product families anchor our FPGA offerings:
| ● | The Certus™ and ECP™ device families are our “General Purpose FPGAs” and address a broad range of applications across multiple markets. They offer customers the optimal cost per gate, Digital Signal Processing ("DSP") capability, and Serialize-Deserialize ("SERDES") connectivity. ECP devices are optimized for the Communications and Computing market but also find significant use in the Industrial, Automotive, and Consumer markets. The latest introduction in our general purpose family, CertusPro™, is the CertusPro-NX™ FPGA, which offers the highest logic density of any Lattice Nexus™ platform device and delivers advanced system bandwidth and memory capabilities to Edge applications. |
| ● | The Mach™ device family are our “Control & Security FPGAs” and are designed for platform management and security applications. They are control-oriented and offer optimized cost per I/O and cost per look-up table. Mach FPGAs are widely used across our three end market groups: Communications and Computing, Industrial and Automotive, and Consumer. Our latest generation MachXO3D™ and Mach-NX™ FPGAs come with pre-verified cryptographic functions to enable Hardware Root-of-Trust functionality, which is needed for systems to have platform firmware resiliency, i.e. the ability to protect, detect, and recover from unauthorized firmware attacks. |
| ● | The iCE™ device family are our “Ultra Low Power FPGAs.” Their small size and ultra-low power make them the optimal products for each of our core segments where small form factor and customizing is required. The latest member of the family, the iCE40 UltraPlus™ device, is focused on IoT Edge devices with its AI capabilities, low power, and small form factor. |
| ● | The Lattice CrossLink™ device family are our "Video Connectivity FPGAs" and are optimized for high speed video and sensor applications. CrossLink combines the power and speed benefits of hardened video camera and display bridging cores with the flexibility of FPGA fabric. Lattice CrossLinkPlus™ devices provide users with instant-on capabilities for video display. Lattice CrossLink-NX™ FPGAs, built on the new Lattice Nexus platform, provides the lowest power in the smallest packages in its class, higher performance, and high reliability. These products are designed for Computing, Industrial, Automotive, and Consumer markets, but also find use in Communications. |
To enable our customers to get to market faster we support theour FPGAs with intellectual propertyIP cores, reference designs, development kits, and design software. We are investing in our design software, such as Lattice Radiant™, to deliver best-in-class tools that enable predictable design convergence, and Lattice Propel™ for unparalleled ease of use. Further, wein creating embedded processor-based designs. We have developed integrated system-level solution stacks, such as Lattice sensAI.sensAI™ for Edge AI applications, as well as Lattice mVision™ for low power embedded vision, Lattice Sentry™ for implementing hardware security, and Lattice Automate™ for industrial automation and robotics. We combine all of these elements to solve specific customer problems such as the need to quickly implement low power AI inferencing in Edge applications.
Depending on the application, we may compete with other FPGAsFPGA vendors, as well as producers of ASICs, ASSPs, and microcontrollers. We believe that Lattice has developed products and solutions with differentiated advantages.
Legacy Semiconductor Products
We also sell Video Connectivity ASSPs, although we are not developing new products in this area and their support requirements are minimal.
IP Licensing and Services
Lattice has a broad set of technological capabilities and many U.S. and international patents. We generate revenue from our technology portfolio via upfront fees and on-going royalty payments through the following activities:
| ● | Standard IP Licensing - these activities include our participation in two consortia for the licensing of High-Definition Multimedia Interface™ ("HDMI") and Mobile High-Definition Link™ ("MHL") standard technologies to customers who adopt the technology into their products and voluntarily report their usage and royalties. The royalties are split among consortium members, including us. |
| ● | IP Core Licensing - some customers need Lattice’s technology for specific functions or features, but for various reasons are not able to use our silicon solutions. In those cases, we may license our IP cores, which they can integrate into their own ASICs. In contrast to the use of consortia, these licensing activities are generally performed internally. |
| ● | Patent Monetization - we sell certain patents from our portfolio generally for technology that we are no longer actively developing. The revenue from these sales generally consists of upfront payments and potential future royalties. |
| ● | IP Services - projects and design services for customers who wish to develop specific solutions that harness our proven technology and expertise. |
Research and Development
We place a substantial emphasis on new product development, where return on investment is the key driver, anddriver. We believe that continued investment in research and development is required to maintain and improve our competitive position. Our productresearch and development activities are focused on new proprietary products, advanced packaging, existing product enhancements, software development tools, soft IP cores, and application focused hardware and software solutions. ResearchThese research and development activities occur primarily at our sites in Hillsboro, Oregon; San Jose, California; Montreal, Canada; Shanghai, China; and Muntinlupa City, Philippines.
We believe that a continued commitment to research and development is essential to maintaining product leadership and providing an increaseda strong cadence of innovative new product offerings and, therefore, we expect to continue to make significant future investments in research and development.
Operations
We operate as a fabless semiconductor provider and, therefore, we do not manufacture our own silicon products. We maintain strategic relationships with large, established semiconductor foundries to source our finished silicon wafers. This strategy allows us to focus our internal resources on product and market development and eliminateseliminate the fixed cost of owning and operating semiconductor manufacturing facilities. We are able to take advantage of the ongoing advanced process technology development efforts of semiconductor foundries and to choose to apply those technologies when they become most economically beneficial to us and to our customers.
We rely on third party vendors to provide cost-effective and efficient supply chain services. Among other activities, these outsourced services relate to direct sales logistics, which include order fulfillment, inventory management and warehousing, and the shipment of inventory to third party distributors.
Wafer Fabrication
Lattice partners with Samsung Semiconductor ("Samsung") to develop and manufacture the first low-power FPGA on 28nm FDSfully depleted silicon-on-insulator ("FD-SOI") technology, which is used in our latest Nexus FPGA platform of FPGA products. We partner with United Microelectronics Corporation ("UMC") and its subsidiary United Semiconductor Japan Corporation ("USJC") to manufacture our products on its 130nm, 90nm,, 65nm, &and 40nm CMOS process technologies, as well as embedded flash memory in these technicalprocess nodes. Taiwan Semiconductor Manufacturing Company Ltd. (“TSMC”) manufactures our acquired SiliconBlue350nm, 130nm, 55nm and Silicon Image40nm products. Seiko Epson ("Epson") manufactures our 500nm, 350nm, 250nm and 180nm products.
We source silicon wafers from our foundry partners, Samsung, UMC, USJC, TSMC, and Epson, TSMC, pursuant to agreements with each company and their respective affiliates. We negotiate wafer volumes, prices, and other terms with our foundry partners and their respective affiliates on a periodic basis.
Assembly
All of our assembly and test operations are performed by industry-leading outsourced assembly and test suppliers ("OSATs") with our primary supplier being Advanced Semiconductor Engineering, Inc. ("ASE"). We perform certain test operations as well as reliability and quality assurance processes internally during the development process. We have achieved and maintained ISO9001:2015 Quality Management Systems Certification and released a line of products qualified to the AEC-Q100 Reliability Standard in support of Automotive product offerings in addition to ISO26262 certification on both Automotive products and software.
After wafer fabrication and initial testing, we ship wafers to independent subcontractors for assembly. During assembly, wafers are separated into individual die and encapsulated in plastic packages. We have qualified two major assembly partners, Advanced Semiconductor Engineering ("ASE")ASE and Amkor Technology ("Amkor'Amkor") and are second sourced where volume and customer requirements are necessary. All ASE and Amkor manufacturing of our products is in Asia. We negotiate assembly prices, volumes, and other terms with our assembly partners and their respective affiliates on a periodic basis.
We currently offer an extensive list of standard products in lead (Pb) free packaging. Our lead-free products meet the European Parliament Directive entitled "Restrictions on the use of Hazardous Substances" ("RoHS"). A select and growing subset of our ROHSRoHS compliant products are also offered with a "Halogen Free" material set.
Testing (Sort and Final Test)
We electrically sort test the die on most wafers prior to shipment for assembly. Wafer sort testing is primarily performed by ASE in Taiwan and Malaysia, Amkor in Japan, and our second source, King Yuan Electronics Co. (“KYEC”) in Taiwan.
Following assembly, but prior to customer shipment, each product undergoes final testing and quality assurance procedures. Final testing is performed by ASE and Amkor, our assembly partners in Asia.
Sales and Revenue
We generate revenue by monetizing our technology designs and patents through product and technology sales. This involves thedistribution channel and direct and channel sales of silicon-based hardware and silicon-enabling products, as well as the licensing or sale of intellectual propertyIP that we have developed or acquired, some of which we use in our products, and certain design services that we may provide.
Sales and Customers
We primarily sell our products to end customers from Lattice Semiconductor Corporation or our wholly-owned subsidiary, Lattice SG Pte. Ltd. WeLtd. Independent distributors are significant customers, and a substantial portion of our sales are made into this channel. Additionally, we sell both directly and through a network of independent manufacturers' representatives. Additionally, a substantial portion of our sales are made through independent distributors. We also employ a direct sales management and field applications engineering organization to support our end customers and indirect sales resources. Our endEnd customers for our products are primarily OEMsOriginal Equipment Manufacturers ("OEMs") in the Communications and Computing, Industrial and
We provide global technical support to our end customers with engineering staff based at our headquarters, product development centers, and selected field sales offices. We maintain numerous domestic and international field sales offices in major metropolitan areas.
In fiscal years 2021, 2020, and 2019, 2018, and 2017, resale of product bysales to distributors accounted for approximately 82%87%, 83%, and 77%82%, respectively, of our net revenue. We depend on our distributors to sell our products to end customers, complete order fulfillment, and maintain sufficient inventory of our products. Our distributors also provide technical support and other value-added services to our end customers. We have two global distributors. We also have regional distribution in Asia, Japan, Israel, and North America,Israel, and we sell through three major on-line distributors. In fiscal years 2019, 2018, and 2017, no individual end customer accounted for more than 10% of our total revenue.
Backlog
Our backlog consists of orders from distributors and certain Original Equipment Manufacturers ("OEMs")
| ● | Purchase orders, consistent with common industry practices, generally can be revised or canceled up to 60 days before the scheduled delivery date without significant penalty. |
| ● | A sizable portion of our revenue comes from our "turns business," where the product is ordered and delivered within the same quarter. |
Seasonality
We may periodically experience variability in our sales volumes and financial results due to seasonal trends in the end markets we serve, the cyclical nature of the semiconductor industry, and general economic conditions.
IP, Patents, and Licensing
We seek to protect our products, technologies, and intellectual propertyIP primarily through patents, trade secrets, copyrights, trademark registrations, licensing restrictions, confidentiality agreements, and other approaches designed to protect proprietary information. We hold numerous United States and international patents and have patent applications pending in the United States and internationally. In addition to protecting innovations designed into our products, our ownership and maintenance of patents is an important factor in the determination of our share of the royalties forfrom the implementation of the HDMI standard. Our current patents will expire at various times between 20202022 and 2038,2040, subject to our payment of periodic maintenance fees. We believe that our patents have value, and we expect to file future patent applications in both the United States and abroad on significant inventions, as we deem appropriate. We have acquired various licenses from third parties to certain technologies that are implemented in IP cores or embedded in our products. These licenses support our continuing ability to make and sell these products to our customers. While our various IP rights are important to our success, we believe our business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses.
Human Capital Management
We provide a safe and positive work environment for our employees that emphasizes respect for individuals and ethical conduct, learning and development, facilitated by a direct employee engagement model. The health and safety of our employees is of utmost important to us. During the COVID-19 pandemic, we have taken actions to safeguard the health and well-being of our employees and our business. We implemented social distancing policies at our locations around the world as appropriate, including working from home and eliminating substantially all travel. Recognizing and respecting our global presence, we strive to maintain a diverse and inclusive workforce everywhere we operate. As of December 28, 2019,January 1, 2022, we had 747856 employees worldwide.
We believe our employees are the foundation of our success and that our future success will depend,growth depends, in part, on our ability to continue to attract and retain highly skilledkey technical, sales, and management personnel. Nonepersonnel, particularly highly-skilled engineers involved in the design, development, and support of new and existing products and processes. In order for us to attract the best talent, we provide a collaborative, diverse, inclusive, and innovative work environment, competitive compensation, and recognition to give our employees the opportunity to grow. We are focused on developing diverse teams and continuing to build an inclusive culture that inspires leadership, encourages innovative thinking, and supports the development and advancement of all.
Our human capital management objectives include identifying, recruiting, incentivizing, and integrating our existing and future employees. We strive to attract and retain talented employees by offering competitive compensation and benefits that support their health, financial, and emotional well-being. Our compensation philosophy is based on rewarding each employee’s individual contributions and striving to achieve equal pay for equal work. We use a combination of fixed and variable pay including base salary, bonuses, performance awards, and stock-based compensation. The principal purposes of our equity incentive plans are to attract, retain, and motivate employees through the granting of stock-based compensation awards. We offer employees benefits that vary by country and are represented by a collective bargaining agreement. We have never experienced any work stoppagesdesigned to address local laws and consider our employee relationscultures and to be good.
Corporate Background
Our corporate headquarters are located at 5555 NE Moore Court, Hillsboro, Oregon 97124, and our website is www.latticesemi.com.www.latticesemi.com. Information contained or referenced on our website is not incorporated by reference into, and does not form a part of, this Annual Report on Form 10-K. Our common stock trades on the NASDAQ Global Select Market under the symbol LSCC.
We make available, free of charge through the Investor Relations section of our website at www.latticesemi.com,ir.latticesemi.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports and statements as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC. You may also obtain free copies of these materials by contacting our Investor Relations Department at 5555 NE Moore Court, Hillsboro, Oregon 97124, telephone (503) 268-8000. Our SEC filings are also available at the SEC's website at www.sec.gov. www.sec.gov.
Our Investor Relations website also provides notifications of news or announcements regarding our financial performance and other items that may be material or of interest to our investors, including SEC filings, press releases, earnings releases, and webcasts of our earnings calls. Further, corporate governance information, including our corporate governance policies, director code of ethics, code of conduct, board committee charters, conflict minerals report and conflict minerals policy, is also available on the investor relations section of our website.
The content on any website referred to in this filing is not incorporated by reference into this filing unless expressly noted otherwise.
The following risk factors and all of the other information included in this Annual Report on Form 10-K should be carefully considered in their entirety before making an investment decision relating to our common stock. If any of the risks described below occur, our business, financial condition, operating results, and cash flows could be materially adversely affected.affected, and the trading price of our common stock could decline. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial also may impairmaterially adversely affect our business, operationsfinancial condition, and financialoperating results. Continuing effects from the COVID-19 pandemic and containment measures, and related impacts to economic and operating conditions, may further affect the volatility or degree of known and unknown risks.
Risk Factor Summary
Factors Related to Economic, Legal, Regulatory & Political Business Conditions
| ● | The impact of the COVID-19 pandemic on our business. |
| ● | Economic, legal, regulatory, political, and business conditions related to our global business. |
| ● | The impact of tariffs, trade sanctions or similar actions on our business. |
Factors Related to Manufacturing our Products
| ● | The concentration of subcontractors that we rely on to supply and fabricate silicon wafers for our semiconductor products. |
| ● | Our achievement of continued yield improvement. |
| ● | The impacts of shortages in, or increased costs of, wafers and other materials. |
| ● | Potential warranty claims and other costs related to our products. |
Factors Related to Intellectual Property and Litigation
| ● | Fluctuations in our revenue and margins caused by the intellectual property licensing component of our business strategy. |
| ● | Material fluctuations in our revenue and gross margins caused by our sale of patents and intermittent significant licensing transactions. |
| ● | The impact of actual and potential litigation and unfavorable results of legal proceedings on our business. |
| ● | Variability in our share of adopter fees and royalties for the HDMI standard as a result of our evolving participation in the HDMI standard. |
| ● | Our ability to protect our new and existing intellectual property rights. |
Factors Related to Overall General Business & Operations
| ● | Proper functioning of our internal processes and information technology systems, including in response to data breaches, cyber-attacks, or cyber-fraud. |
| ● | Goodwill impairments and other impairments under U.S. GAAP that may impact our business. |
| ● | Changes to financial accounting standards applicable to us and any related changes to our business practices. |
| ● | Exposure to unanticipated tax consequences as a result of changes in effective tax rates, tax laws and our global organizational structure and operations. |
| ● | Weakness in our internal control over financial reporting. |
| ● | Our ability to compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel. |
| ● | Our failure to adequately foresee and insure against risks related to our business. |
| ● | Limitations to our flexibility caused by our outstanding indebtedness. |
Factors Related to Our Markets and Product Development
| ● | Cyclical market patterns and potential downturns in our industry or our end markets. |
| ● | Our ability to develop and introduce new products that achieve customer and market acceptance. |
| ● | Competition with companies that have significantly greater resources than us and numerous other product solutions. |
| ● | Our reliance on independent contractors and third parties to provide key services in our product development and operations. |
Factors Related to Our Sales and Revenue
| ● | Our dependence on our distributors and a concentrated group of end customers. |
| ● | Fluctuations in and the unpredictability of our business and our sales cycles. |
| ● | Accounting requirements related to sales through our distribution channel. |
Factors Related to Strategic Transactions
| ● | Disruption in and impacts of acquisitions, divestitures, strategic investments and strategic partnerships on our business. |
Factors Related to supply and fabricate silicon wafers for our semiconductor products. If they are unable to do so on a timely and cost-effective basis in sufficient quantities and using competitive technologies, we may incur significant costs or delays.Economic, Legal, Regulatory & Political Business Conditions
The ongoing COVID-19 pandemic could adversely affect our customer relationshipsbusiness, results of operations, and operating results.financial condition in a material way.
The COVID-19 pandemic continues to mutate and affect the populations of the United States as well as many countries around the world. The outbreak has resulted in significant governmental measures to control the spread of the COVID-19 variants, including, among others, restrictions on our relationships with our distributorstravel, manufacturing and on a concentrated groupthe movement of end customers. An adverse changeemployees in many regions of the relationships with,world, and the imposition of remote or performancework-from-home mandates in many of our distributors, or any reductionthe countries in which we operate, including the useUnited States and the Philippines. The majority of our products are manufactured, assembled, and tested by third parties in Asia. We also have other operations in China, the Philippines, and the United States. In addition, we rely on third party vendors for certain logistics and shipping operations throughout the world, including in Malaysia, Singapore, South Korea, Japan, and Taiwan. As remote and work-from-home conditions in our endoffices continue, we face new challenges, including the integration of new employees, current employees moving to new geographies and time zones, and uncertainty with respect to future work arrangements. Due to these and other challenges and uncertainties related to the makeup and structure of our workforce and workplace, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity.
Pandemics and epidemics such as the current COVID-19 outbreak or other widespread public health problems could harmnegatively impact our salesbusiness. If, for example, the COVID-19 pandemic continues to progress in ways that significantly disrupt the manufacture, shipment, and significantly decrease our revenue.
| ● | Our subcontractor suppliers who manufacture silicon wafers, packaging and testing to deliver our semiconductor products may be unable to meet delivery expectations to meet customer demand; |
| ● | Our distributors and customers may experience adverse performance and any reduction in the use of our products by our end customers could harm our sales and significantly decrease our revenue; |
| ● | The semiconductor industry could experience a cyclical downturn, which could cause a meaningful reduction in demand for our products and adversely affect our operating results; |
| ● | Countries may adopt tariffs and trade sanctions or similar actions; |
| ● | We may be delayed in our development and introduction of new products that achieve customer and market acceptance; |
| ● | Our operations may be disrupted if employees are unavailable due to illness, risk of illness, travel restrictions, work from home requirements, or other factors that may limit our access to key personnel or critical skills, or reduce productivity; |
| ● | Shortages in or increased costs for silicon wafers, packaging materials, testing and shipping could adversely impact our gross margin and lead to reduced revenue; |
| ● | We may experience difficulty in maintaining the uninterrupted operation of our information technology systems, or be exposed to increased risk of a cyber-security incident or fraud, due to an increased reliance on remote work; |
| ● | We may incur impairments of goodwill and other assets as required under U.S. GAAP; and |
| ● | Our outstanding indebtedness could reduce our strategic flexibility and liquidity and may have other adverse effects on our results of operations. |
The impact of COVID-19 may exacerbate the risk factors listed in this Annual Report on Form 10-K, or cause them to change in importance. Developments related to the pandemic and to vaccine rollout have been rapidly changing, and additional impacts and risks may arise that we are not aware of or able to appropriately respond to currently. The ultimate impact of the COVID-19 pandemic on our abilityoperations and financial performance depends on many factors that are not within our control, including, but not limited, to: governmental, business, and individuals’ actions that have been and continue to effectively manage inventorybe taken in response to the pandemic; general economic uncertainty in key global markets; volatility in financial markets, labor markets, and supply chains; global economic conditions and levels of economic growth; and collect receivables, require additional restructuring actions,the pace of recovery when the COVID-19 pandemic subsides. As of the filing of this Annual Report, the extent to which the COVID-19 pandemic will affect our business continues to be highly uncertain and decreasedependent on future developments that are inherently unpredictable, which makes forecasting demand and providing guidance especially difficult. Accordingly, our revenueexpectations are subject to change without warning and profitability.investors are cautioned not to place undue reliance on them.
Our global business operations expose us to various economic, legal, regulatory, political, and business risks, which could impact our business, operating results and financial condition.
We have significant domestic and international operations. Our international operations include foreign sales offices to support our international customers and distributors, which account for the majority of our revenue, and operational and research and development sites in China, the Philippines, and other Asian locations. In addition, we purchase our wafers from foreign foundries; have our commercial products assembled, packaged, and tested by subcontractors located outside of the United States; and rely on an international service providerproviders for inventory management, order fulfillment, and direct sales logistics.
Our domestic and international business activities are subject to economic, political and regulatory risks, including volatility in the financial markets; fluctuations in consumer liquidity; changes in interest rates; price increases for materials and components; trade barriers or changes in trade policies; political instability; acts of war or terrorism; natural disasters; economic sanctions; weak economic conditions,conditions; environmental regulations; labor regulations; labor markets; import and export regulations; tax or freight rates; duties; trade restrictions; interruptions in transportation or infrastructure; anti-corruption laws; domestic and foreign governmental regulations; potential vulnerability of and reduced protection for intellectual property; disruptions or delays in production or shipments; and instability or fluctuations in currency exchange rates, any of which could lead to decreased demand for our products or a change in our results of operation. Uncertainty about future political and economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. Any or all of these factors could adversely affect our financial condition and results of operations in the future.
The COVID-19 pandemic prompted precautionary government regulations limiting certain travel and business as well as precautionary business measures, such as those we adopted, like remote work-from-home operations for many employees. The COVID-19 pandemic and related responses have exacerbated many of the risks listed above, including but not limited to, causing fluctuations in consumer liquidity and volatility in financial markets, increases in inflation, interruptions in transportation and infrastructure, and disruptions to labor markets. Although our business has not been materially impacted by supply chain constraints, inflation, or labor market disruptions due to the COVID-19 pandemic, the pandemic may still lead to events outside of our control which could have a material adverse impact on our business, operating results, and financial condition. Additionally, in the future, the operations of customers and of the Company may be affected by this and similar public health matters.
If we fail to comply with the many laws and regulations to which we are subject, both within the United States and internationally, we may be subject to significant fines, penalties or liabilities for noncompliance, which could harm our business and financial results. For example, effective May 2018, the European Union adopted the General Data Protection Regulation (“GDPR”), which established new requirements regarding the handling of personal data and non-compliance monetary penalties of up to the higher of 20 million Euros or 4% of worldwide revenue. California also recently adopted the California Consumer Privacy Act (“CCPA”), which imposes significant fines and penalties for violations. In November 2020, California voters approved the California Privacy Rights Act, which extends and expands the CCPA. Other states in the United States have proposed, and in certain cases enacted, legislation similar to the CCPA. Other countries outside of the European Union, including the United Kingdom, China, and Brazil, also have enacted robust legislation addressing privacy, data protection, and cybersecurity and providing for substantial penalties for noncompliance. We anticipate that our efforts to comply with evolving laws and regulations addressing privacy, data protection, and cybersecurity will be a rigorous and time-intensive process that may increase our cost of doing business and may require us to change our policies and practices.
Any inability or perceived inability to adequately comply with applicable laws or regulations including GDPR or CCPA, could result in claims, demands, and litigation by private actors or governmental authorities, investigations and other proceedings by governmental authorities, injunctive relief, fines, penalties, and other liabilities, any of which may harm our reputation and market position and could adversely affect our business, financial condition, and results of operations.
Our business could suffer as a result of tariffs and trade sanctions or similar actions.
The imposition by the United States of tariffs, sanctions or other restrictions on goods imported from outside of the United States or countermeasures imposed in response to such government actions could adversely affect our operations or our ability to sell our products globally, which could adversely affect our operating results and financial condition. The materials subject to these tariffs may impact the cost of raw materials used by our suppliers or in our customers’ products. The imposition of further tariffs by the United States on a broader range of imports, or further retaliatory trade measures taken in response to additional costtariffs, could increase costs in our supply chain or reduce demand of our customers’ products, either of which could adversely affect our results of operations.
Our customers or suppliers could also become subject to U.S. regulatory scrutiny or export restrictions. For example, in 2019 the U.S. Justice Department filed criminal charges against one of our customers in China and liabilityimposed a licensing requirement on this customer with a policy of denial for some items, which has limited our ability to do business with this customer. In 2020, the U.S. imposed additional regulatory restrictions on the sale of U.S. controlled technology to customers in China, including establishing additional licensing requirements for the sale of U.S.-originated technology for certain applications or to companies that participate in the Chinese national security supply chain and limiting the fabrication of devices for certain Chinese companies where U.S. technology is involved in the fabrication process. Furthermore, in August 2020 the U.S. established additional licensing requirements for one of our China customers and its affiliates that limit any sales of products to that customer or for that customer’s products absent a license. The U.S. government may add additional Chinese companies to its restricted entity list or impose additional licensing requirements that we may be unable to meet in a timely manner or at all.
Where license requirements are imposed, there can be no assurance that the U.S. government will grant licenses to permit the continuation of business with these customers. Future sanctions similar to those imposed in the past and to those recently imposed could adversely affect our ability to earn revenue from these and similar customers. In addition, the imposition of sanctions on customers in China may cause those customers to seek domestic alternatives to our products and those of other United States semiconductor companies. Further, the Chinese government has developed an unreliable entity list, which limits the ability of companies on the list to engage in business with Chinese customers. We cannot predict what impact these and future actions, sanctions or criminal charges could have on our customers or suppliers, and therefore our business. If any of our other customers or suppliers become subject to sanctions or other regulatory scrutiny, if our customers are affected by tariffs or other government trade restrictions, or if we become subject to retaliatory regulatory measures, our business and financial condition could be adversely affected.
Factors Related to Manufacturing our Products
We rely on a concentrated number of subcontractors to supply and fabricate silicon wafers and to perform assembly and test operations for our semiconductor products. If they are unable to do so on a timely and cost-effective basis in sufficient quantities and using competitive technologies, we may incur significant costs or delays.
We rely on a concentrated number of independent foundries in Asia to supply and fabricate silicon wafers for our semiconductor products, including Samsung Semiconductor, United Microelectronics Corporation, Taiwan Semiconductor Manufacturing, and Seiko Epson. Our success is dependent upon our ability to successfully partner with our foundry and OSAT partners and their ability to produce wafers and finished semiconductor products with competitive prices and performance attributes, including smaller process geometries, which ability may be impacted by labor market disruptions and rising inflation. Establishing, maintaining and managing multiple foundry and OSAT relationships requires the investment of management resources and costs.
If we fail to maintain our foundry and OSAT relationships, if these partners do not provide facilities and support for our development efforts, if they are insolvent or experience financial difficulty, if their operations are interrupted by the COVID-19 pandemic, or if we elect or are required to change foundries or OSATs, we may incur significant costs and delays. If our foundry or OSAT partners are unable to, or do not, manufacture sufficient quantities of our products at acceptable yields, we may be required to allocate the affected products among our customers, prematurely limit or discontinue the sales of certain products, or incur significant costs to transfer products to other foundries or OSATs, which could adversely affect our customer relationships and operating results.
Our margins are dependent on our achieving continued yield improvement.
We rely on obtaining yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products that incorporate advanced features and other price/performance factors that enable us to increase revenues while maintaining acceptable margins. To the extent that such cost reductions and new product introductions do not occur in a timely manner, because of inflation, increases in personnel costs, employee turnover, or other factors, or that our products do not achieve market acceptance or market acceptance at acceptable pricing, our forecasts of future revenue, financial condition, and operating results could be materially adversely affected.
Shortages in, or increased costs of, wafers and materials could adversely impact our gross margins and lead to reduced revenues.
Worldwide manufacturing capacity for silicon wafers is relatively inelastic. If the demand for silicon wafers or assembly material exceeds market supply, or if suppliers increase prices to cover the cost of rising inflation, our supply of silicon wafers or assembly material could quickly become limited or prohibitively expensive. We typically have short-term wafer supply agreements that do not ensure long-term supply or allocation commitments. A shortage in manufacturing capacity could hinder our ability to meet product demand and therefore reduce our revenue. In addition, silicon wafers constitute a material portion of our product cost. If we are unable to purchase wafers at favorable prices, due to supply constraints, inflation, or other factors, our financial condition and results of operations will be adversely affected.
We may be subject to warranty claims and other costs related to our products.
In general, we warrant our products for varying lengths of time against non-conformance to our specifications and certain other defects. Because our products, including hardware, software, and intellectual property cores, are highly complex and increasingly incorporate advanced technology, our quality assurance programs may not detect all defects, whether these are specific manufacturing defects affecting individual products or these are systematic defects that could affect numerous shipments. Inability to detect a defect could result in a diversion of our engineering resources from product development efforts, increased engineering expenses to remediate the defect, and increased costs due to customer accommodation or inventory impairment charges. On occasion, we have also repaired or replaced certain components, made software fixes, or refunded the purchase price or license fee paid by our customers due to product or software defects. Our insurance may be unavailable or inadequate to protect against these issues. If there are significant product defects, the costs to remediate such defects, net of reimbursed amounts from our vendors, if any, or to resolve warranty claims may adversely affect our financial condition and results of operations.
Factors Related to Intellectual Property and Litigation
The intellectual property licensing component of our business strategy increases our business risk and fluctuation of our revenue and margins.
Our business strategy includes licensing our intellectual property to companies that incorporate it into their technologies that address multiple markets, including markets where we participate and compete. Our Licensing and services revenue may be impacted by the introduction of new technologies by customers in lateplace of the technologies we license, changes in the law that may weaken our ability to prevent the use of our patented technology by others, the expiration of our patents, and changes of demand or selling prices for products using licensed patents. We cannot assure that our licensing customers will continue to license our technology on commercially favorable terms or at all, or that these customers will introduce and sell products incorporating our technology, accurately report royalties owed to us, pay agreed upon royalties, honor agreed upon market restrictions, or maintain the confidentiality of our proprietary information, or will not infringe upon or misappropriate our intellectual property. Our intellectual property licensing agreements are complex and may depend upon many factors that require significant judgments, including completion of milestones, allocation of values to delivered items and customer acceptance.
Our sale of patents and intermittent significant licensing transactions can cause material fluctuations in our revenue and gross margins.
We have generated revenue from the sale of certain patents from our portfolio in the past, generally for non-core technology that we are no longer actively developing. While we plan to continue to monetize our patent portfolio through sales of non-core patents, we may not be able to realize adequate interest or prices for those patents. Accordingly, we cannot provide assurance that we will continue to generate revenue from these sales. In addition, although we seek to be strategic in our decisions to sell patents, we might incur reputational harm if a purchaser of our patents sues one of our customers for infringement of the purchased patent, and we might later decide to enter a space that requires the use of one or more of the patents we sold. In addition, as we sell groups of patents, we no longer have the opportunity to further sell or to license those patents and receive a continuing royalty stream.
Our Licensing and services revenue fluctuates, sometimes significantly, from period to period because it is heavily dependent on a few key transactions being completed in a given period, the timing of which is difficult to predict and may not match our expectations. Licensing and services revenue may include revenue from the sales of patents, which may be difficult to complete and which may have complex terms for the payment which affects revenue recognition. Because of its high margin, the Licensing and services revenue portion of our overall revenue can have a disproportionate impact on gross profit and profitability. In addition, generating revenue from patent sales and intellectual property licenses is a lengthy and complex process that may last beyond the period in which our efforts begin, and the accounting rules governing the recognition of revenue from patent sales and intellectual property licensing transactions are increasingly complex and require significant judgment. As a result, the amount of license revenue recognized in any period may differ significantly from our expectations.
Litigation and unfavorable results of legal proceedings could adversely affect our financial condition and operating results.
From time to time we are subject to various legal proceedings and claims that arise out of the ordinary conduct of our business. Certain claims may not yet be resolved, including but not limited to any that are discussed under "Note 15 - Contingencies" contained in the Notes to Consolidated Financial Statements, and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of merit or outcome, claims or litigation may be both time-consuming and disruptive to our operations and cause significant expense and diversion of management attention and we may enter into material settlements to avoid these risks. Should we fail to prevail in certain matters or enter into a material settlement, we may be faced with significant monetary damages or injunctive relief against us that could materially and adversely affect our financial condition and operating results and certain portions of our business.
Our participation in the HDMI standard is evolving. We no longer act as agent for the HDMI standard, and our share of adopter fees and royalties for the HDMI standard is subject to variability.
We acted as agent of the HDMI consortium until December 31, 2016 and were responsible for promoting and administering the specification. We received all of the adopter fees paid by adopters of the HDMI specification in connection with our role as agent. In September 2016, the Founders of the HDMI consortium, of which we are a member, amended the Founders Agreement resulting in changes to our role as agent for the HDMI consortium and to the model for sharing adopter fee revenues. Under the terms of the agreement, our role as the agent was terminated effective January 1, 2017 and a new independent entity was appointed to act as the new HDMI licensing agent with responsibility for licensing and the distribution of royalties among Founders. As a result of the amended model for sharing adopter fee revenue, we are entitled to a share of the adopter fees paid by parties adopting the HDMI standard.
We share HDMI royalties with the other HDMI Founders based on an allocation formula, which is reviewed generally every three years. In the fourth quarter of fiscal 2019, the mediaHDMI Founders adopted a new agreement covering the five-year period beginning January 1, 2018. The amount of our portion of the royalty allocation is dependent on the royalties generated by adopter sales of royalty-bearing HDMI technology, which are subject to variability in economic trends particularly in the market for consumer electronics.
If we are unable to adequately protect our new and existing intellectual property rights, our financial results and our ability to compete effectively may suffer.
Our success depends in part on our proprietary technology and we rely upon patent, copyright, trade secret, mask work, and trademark laws to protect our intellectual property. We intend to continue to protect our proprietary technology, however, we may be unsuccessful in asserting our intellectual property rights or such rights may be invalidated, violated, circumvented, or challenged. From time to time, third parties, including our competitors, have asserted against us patent, copyright, and other intellectual property rights to technologies that are important to us. Third parties may attempt to misappropriate our intellectual property through electronic or other means or assert infringement claims against us in the future. Such assertions by third parties may result in costly litigation, indemnity claims, or other legal actions, and we may not prevail in such matters or be able to license any valid and infringed patents from third parties on commercially reasonable terms. This could result in the loss of our ability to import and sell our products or require us to pay costly royalties to third parties in connection with sales of our products. Any infringement claim, indemnification claim, or impairment or loss of use of our intellectual property could materially adversely affect our financial condition and results of operations.
Factors Related to Overall General Business & Operations
Our business depends on the proper functioning of internal processes and information technology systems. A failure of these processes and systems, data breaches, cyber-attacks, or cyber-fraud may cause business disruptions, compromise our intellectual property or other sensitive information, or result in losses.
We rely on various information technology ("IT") networks and systems to manage our operations, including financial reporting, and we regularly make changes to improve them as necessary by periodically implementing new, or upgrading or enhancing existing, operational and IT systems, procedures, and controls. These systems are supported by subcontractors, and they may also be subject to power and telecommunication outages or other general system failures. The legal, regulatory and contractual environments surrounding information security, data privacy, and data protection are complex and evolving. We continue to commit significant resources to implementing new systems to standardize our processes worldwide and to develop our capabilities in these areas. We are focused on realizing the full analytical functionality of these conversions, which can be extremely complex, in part, because of the wide range of legacy systems and processes that must be integrated.
In the normal course of business, we may implement new or updated IT systems and, as a result, we may experience delays or disruptions in the integration of these systems, or the related procedures or controls. The policies and security measures established with our IT systems may be vulnerable to security breaches and incidents, cyber-attacks, or fraud. We may also encounter errors in corruption or loss of data, an inability to accurately process or record transactions, and security or technical reliability issues. All of these could harm our ability to conduct core operating functions such as processing invoices, shipping and receiving, recording and reporting financial and management information on a timely and accurate basis, and could impact our internal control compliance efforts. If the technical solution or end user training are inadequate, it could limit our ability to manufacture and ship products as planned. We have various systems that remain that may be nearing the end of their useful life or vendor support, which will ultimately need to be replaced. Moreover, the proper functioning of the internal processes that the IT systems and networks support relies on qualified employees. Competition for qualified employees has reported a public health epidemic originatinggenerally increased across the economy in China, prompting precautionary government-imposed closuresthe United States, which, if we experience employee turnover, could lead to disruptions in our processes, inadequate end user training or difficulty updating our IT systems and networks.
We maintain sensitive data on our networks and business. The operationsthe networks of our business partners and third-party providers, including proprietary and confidential information relating to our intellectual property, personnel, and business, and that of our customers and third-party providers. Companies have been increasingly subject to a wide variety of security incidents, cyber-attacks, hacking, phishing, malware, ransomware, and other attempts to gain unauthorized access to systems or data, or to engage in fraudulent behavior. Cyber-attacks have become more prevalent, sophisticated and much harder to detect and defend against and it is often difficult to anticipate or detect such incidents on a timely basis and to assess the Company in Chinadamage caused by them. Our policies and elsewheresecurity measures cannot guarantee security, and our information technology infrastructure, including our networks and systems, may be affected by thisvulnerable to security breaches and incidents, cyber-attacks, or fraud. In the past, third parties have attempted to penetrate and/or infect our network and systems with malicious software and phishing attacks in an effort to gain access to our network and systems. In addition, we are subject to the risk of third parties falsifying invoices and similar public health matters. Althoughfraud, frequently by obtaining unauthorized access to our vendors’ and business partners’ networks.
In some circumstances, we may partner with third-party providers and provide them with certain data, including sensitive data, or the ability to access or otherwise process such data. These third parties also face substantial security risks from a variety of sources. There can be no assurance that any security measures that we or our third-party service providers have implemented will be effective against current or future security threats, and we cannot guarantee that our systems and networks or those of our third-party service providers have not been breached or otherwise compromised, or that they and any software in our or their supply chain doeschains do not appearcontain bugs, vulnerabilities, or compromised code that could result in a breach of or disruption to our systems and networks or the systems and networks of third parties that support us and our services. If any of our third-party providers fails to adopt or adhere to adequate data security practices, or suffers a security breach or incident, any data, including sensitive data, that we provide them or that they otherwise may access or process for us may be improperly accessed, used, disclosed, modified, lost, destroyed, or rendered unavailable. Any security breaches or incidents that we or our third-party providers may suffer could compromise our intellectual property, expose sensitive business information and otherwise result in unauthorized access to or disclosure, modification, misuse, loss or destruction of sensitive information. We may need to expend significant financial and development resources to analyze, correct, eliminate, or work around errors or defects or to eliminate or otherwise address security vulnerabilities, and we and our third-party service providers may face difficulties or delays in identifying or otherwise responding to any potential security breach or incident.
Further, the increase in cyber-attacks has resulted in an increased focus on cybersecurity by certain government agencies. Any cyber-attack or other security breach or incident that we or our third-party providers may suffer, or the perception that any such attack, breach, or incident has occurred, could result in a loss of customer confidence in our security measures, damage to our brand, reputation, and market position, result in unauthorized access to or disclosure, modification, misuse, loss, corruption, unavailability, or destruction of our data or other sensitive data that we or our third-party providers process or maintain, disrupt normal business operations, require us to spend material resources to investigate or correct any breach or incident and to prevent future security breaches and incidents, expose us to legal claims and liabilities, including litigation, regulatory investigations and enforcement actions, and indemnity obligations, and adversely affect our revenues and operating results. Further, any such actual or perceived breach or incident, and any claims, demands, litigation, or investigations or enforcement actions related to cybersecurity could cause us to incur significant remediation costs, result in product development delays, disrupt key business operations, and divert attention of management and key information technology resources. In addition, we may incur loss as a result of cyber-fraud, such as those experienced by other companies by making unauthorized payments irrespective of robust internal controls.
Failure or disruptions of our IT systems or difficulties or delays in maintaining, managing, and integrating them could adversely affect our controls and procedures and could impact our ability to perform necessary operations, which could materially adversely affect our business.
We cannot be certain that our insurance coverage will be adequate for data security liabilities incurred and, will cover any indemnification claims against us relating to any incident, that insurance will continue to be affected by this epidemic, it may leadavailable to events outsideus on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our control whichinsurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse impacteffect on our business, including our financial condition, operating results, and reputation.
We regularly test for goodwill and other impairments as required under U.S. GAAP, and we may incur future impairments.
We are required under U.S. GAAP to test goodwill for possible impairment on an annual basis and to test goodwill and long-lived assets, including amortizable intangible assets, for impairment at any other time that circumstances arise indicating the carrying value may not be recoverable.For purposes of testing goodwill for impairment, the Company currently operates as one reporting unit: the core Lattice ("Core") business, which includes intellectual property and semiconductor devices. We had no impairment charges in fiscal years 2021, 2020, or 2019. Impairment charges related to amortizable intangible assets from the Silicon Image acquisition totaled approximately $12.5 million in fiscal 2018. There is no certainty that future impairment tests will indicate that goodwill or amortizable intangible assets will be deemed recoverable. As we continue to review our business operations and test for impairment or in connection with possible sales of assets, we may have impairment charges in the future, which may be material.
Changes to financial accounting standards may affect our results of operations and could cause us to change our business practices.
We prepare our consolidated financial statements to conform to generally accepted accounting principles in the United States. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create accounting rules and regulations. Changes in these rules, such as the adoption of ASC 842 - Leases in fiscal 2019, has had a material effect on our financial results and affected portions of our business differently. Future changes to these rules, or in the guidance relating to interpretation and adoption of the rules, could have a significant effect on our financial results and could affect portions of our business differently.
Changes in effective tax rates, tax laws and our global organizational structure and operations could expose us to unanticipated tax consequences.
We are subject to taxation in the United States and other countries. Certain tax positions may remain open to examination for several years. Challenges by tax authorities to our previous tax positions and intercompany transfer pricing arrangements, and continuing assessments of our tax exposures may have an adverse effect on our provision for income taxes and cash tax liability. We have a global tax structure that aligns our corporate structure with our global business operations, and we currently operate legal entities in multiple countries. We may choose to consolidate or integrate certain of these entities, and these integration activities, as well as changes in composition of our earnings in jurisdictions with different tax rates, may impact the taxes we pay or tax provision we record, which could adversely affect our results of operations. Furthermore, various levels of government are focused on tax reform and other legislative actions to increase tax revenue. The current U.S. administration has various proposals that, if enacted, would increase U.S. federal income taxes on corporations. Further changes in the tax laws of foreign jurisdictions could arise as a result of the base erosion and profit shifting project undertaken by the Organisation for Economic Co-operation and Development, which represents a coalition of member countries and recommended changes to numerous long-standing tax principles. If implemented by taxing authorities, such changes, as well as changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions, could have a material adverse effect on our business, results of operations, or financial condition. In addition, future effective tax rates could be affected by changes in the valuation of deferred tax assets and liabilities.
Weakness in our internal control over financial reporting could adversely affect our business and financial results.
We are required to maintain internal controls over financial reporting. We review these controls regularly and deficiencies may be identified from time to time. For example, during the quarter ended December 28, 2019, we evaluated and remediated certain deficiencies in our information technology controls over system access and no material weakness existed at the end of the period. In the future, we may identify material weaknesses in our internal controls over financial reporting. Any failure to maintain an effective system of internal controls over financial reporting could limit our ability to report our financial results accurately and timely, which could adversely affect our business, financial results, and stock price.
We compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel could adversely affect our ability to compete effectively.
We depend on the efforts and abilities of certain key members of management and other technical personnel. Our future success depends, in part, upon our ability to retain such personnel and attract and retain other highly qualified personnel, particularly product engineers who can respond to market demands and required product innovation. Competition for such personnel is intense and has been increasing generally throughout the economy, and we may not be successful in hiring or retaining new or existing qualified personnel. If we lose existing qualified personnel or are unable to hire new qualified personnel, as needed, we could have difficulty competing in our highly competitive and innovative environment.
We may have failed to adequately insure against certain risks and, as a result, our financial condition and results may be adversely affected.
We carry insurance customary for companies in our industry, including, but not limited to, liability, property, and casualty; workers' compensation; and business interruption insurance. We also insure our employees for basic medical expenses. In addition, we have insurance contracts that provide director and officer liability coverage for our directors and officers. Other than the specific areas mentioned above, we are self-insured with respect to most other risks and exposures, and the insurance we carry in many cases is subject to a significant policy deductible or other limitation before coverage applies. Based on management's assessment and judgment, we have determined that it is more cost effective to self-insure against certain risks than to incur the insurance premium costs. The risks and exposures for which we self-insure include, but are not limited to, certain natural disasters, certain product defects, certain matters for which we indemnify third parties, political risk, certain theft, patent infringement, and employment practice matters. Should there be a catastrophic loss due to an uninsured event (such as an earthquake) or a loss due to adverse occurrences in any area in which we are self-insured, our financial condition or operating results could be adversely affected.
Our outstanding indebtedness could reduce our strategic flexibility and liquidity and may have other adverse effects on our results of operations.
As of January 1, 2022, we had approximately $158.8 million outstanding under a credit agreement, dated May 17, 2019 (the “Current Credit Agreement”). Our obligations under the Current Credit Agreement are guaranteed by our U.S. subsidiaries, and include a requirement to pay quarterly installments of approximately $4.4 million with the remaining balance due upon maturity in May 2024. Our ability to meet our debt service obligations depends upon our operating and financial performance, which is subject to general economic and competitive conditions and to financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to service our debt, we may need to sell material assets, restructure or refinance our debt, or seek additional equity capital. Prevailing economic conditions and global credit markets could adversely impact our ability to sell material assets, restructure or refinance our debt on terms acceptable to us, or at all, or we may not be able to restructure or refinance our debt without incurring significant additional fees and expenses.
The Current Credit Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company to, among other things, incur debt, grant liens, undergo certain fundamental changes, make investments, make certain restricted payments, dispose of assets, enter into transactions with affiliates, and enter into burdensome agreements, in each case, subject to limitations and exceptions set forth in the Current Credit Agreement. We are also required to maintain compliance with a total leverage ratio and an interest coverage ratio, in each case, determined in accordance with the terms of the Current Credit Agreement.
The amount and terms of our indebtedness, as well as our credit rating, could have important consequences, including the following:
| ● | we may be more vulnerable to economic downturns, less able to withstand competitive pressures, and less flexible in responding to changing business and economic conditions; |
| ● | our cash flow from operations may be allocated to the payment of outstanding indebtedness, and not to research and development, operations or business growth; |
| ● | we might not generate sufficient cash flow from operations or other sources to enable us to meet our payment obligations under the facility and to fund other liquidity needs; |
| ● | our ability to make distributions to our stockholders in a sale or liquidation may be limited until any balance on the facility is repaid in full; and |
| ● | our ability to incur additional debt, including for working capital, acquisitions, or other needs, is more limited. |
If we breach a loan covenant, the lenders could accelerate the repayment of the facility. We might not have sufficient assets to repay our indebtedness upon acceleration. If we are unable to repay or refinance the indebtedness upon acceleration or at maturity, the lenders could initiate a bankruptcy proceeding against us or collection proceedings with respect to our assets and subsidiaries securing the facility, which could materially decrease the value of our common stock.
Factors Related to Our Markets and Product Development
The semiconductor industry routinely experiences cyclical market patterns and our products are used across different end markets. A significant downturn in the industry or in any of these end markets could cause a meaningful reduction in demand for our products and adversely affect our operating results.
Our revenue and gross margin can fluctuate significantly due to downturns in the highly cyclical semiconductor industry. These downturns can be severe and prolonged and can result in price erosion and weak demand for our products. Weak demand for our products resulting from general economic conditions affecting the end markets we serve, or the semiconductor industry specifically, and reduced spending by our customers can result, and in the past has resulted, in diminished product demand, high inventory levels, erosion of average selling prices, excess and obsolete inventories and corresponding inventory write-downs. Our expense levels are based, in part, on our expectations of future sales. Many of our expenses, particularly those relating to facilities, capital equipment, and other overhead, are relatively fixed. We might be unable to reduce spending quickly enough to compensate for reductions in sales. Accordingly, shortfalls in sales could adversely affect our operating results. Furthermore, any significant upturn in the semiconductor industry could result in increased competition for access to raw materials and third-party service providers.
Additionally, our products are used across different end markets, and demand for our products is difficult to predict and may vary within or among our Industrial and Automotive, Communications and Computing, and Consumer end markets. Our target markets may not grow or develop as we currently expect, and demand may increase or change in one or more of our end markets, and changes in demand may reduce our revenue, lower our gross margin and effect our operating results. We have experienced concentrations of revenue at certain customers and within certain end markets, and we regularly compete for design opportunities at these customers and within these markets. Any deterioration in these end markets, reductions in the magnitude of revenue streams, our inability to meet design and pricing requirements, or volatility in demand for our products could lead to a reduction in our revenue and adversely affect our operating results. Our success in our end markets depends on many factors, including the strength or financial performance of the customers in our end markets, our ability to timely meet rapidly changing product requirements, market needs, and our ability to maintain design wins across different markets and customers to dampen the effects of market volatility. The dynamics of the markets in which we operate make prediction of and timely reaction to such events difficult.
Due to these and other factors, our past results may not be reliable predictors of our future results. If we are unable to accomplish any of the foregoing, or to offset the volatility of cyclical changes in the semiconductor industry or our end markets through diversification into other markets, these factors could materially and adversely affect our business, financial condition, and operating results.
Our success and future revenue dependsdepend on our ability to develop and introduce new products that achieve customer and market acceptance.
We compete in a dynamic environment characterized by rapid technology and product evolution, generally followed by a relatively longer process of ramping up to volume production on advanced technologies. Our end customers’ continued use of our products is frequently reevaluated, as certain of our customers' product life cycles are relatively short and they continually develop new products. The selection process for our products to be included in our customers' new products is highly competitive. There are no guarantees that our products will be included in the next generation of products introduced by these.these customers. Additionally, our markets are also characterized by evolving industry standards and increased demand for higher levels of integration and smaller process geometry. Our competitive position and success depend on our ability to innovate, develop, and introduce new products that compete effectively on the basis of price, density, functionality, power consumption, form factor, and performance, and our addressing the evolving needs of the markets we serve, among other things. With increased introduction of new products, we expect revenue related to mature products to decline over time in a normal product life cycle. As a result, we may be increasingly dependent on revenue derived from our newer products.
Our future growth and the success of new product introductions depend upon numerous factors, including:
| ● | timely completion and introduction of new product designs; |
| ● | ability to generate new design opportunities and design wins, including those which result in sales of significant volume; |
| ● | achievement of necessary volume of production to achieve acceptable cost; |
| ● | availability of specialized field application engineering resources supporting demand creation and customer adoption of new products; |
| ● | ability to utilize advanced manufacturing process technologies; |
| ● | achieving acceptable yields and obtaining adequate production capacity from our wafer foundries and assembly and test subcontractors; |
| ● | ability to obtain advanced packaging; |
| ● | availability of supporting software design tools; |
| ● | utilization of predefined IP logic; |
| ● | customer acceptance of advanced features in our new products; and |
| ● | market acceptance of our customers' products. |
The failure of any of these factors, among others, could adversely affect our product innovation, development and introduction efforts and our financial condition and results of operations.
We compete against companies that have significantly greater resources than us and numerous other product solutions.
The semiconductor industry is highly competitive and many of our direct and indirect competitors have substantially greater financial, technological, manufacturing, marketing, and sales resources than us. Consolidation in our industry may increasingly mean that our competitors have greater consolidated resources, or other synergies, including the ability to attract qualified employee or incorporate higher costs into product and service prices, that could put us at a competitive disadvantage. We currently compete directly with companies that have licensed our technology or have developed similar products, as well as numerous semiconductor companies that offer products based on the proper functioningalternative solutions, such as applications processor, application specific standard product, microcontroller, analog, and digital signal processing technologies. Competition from these semiconductor companies may intensify as we offer more products in any of internal processesour end markets. These competitors include established, multinational semiconductor companies, as well as emerging companies.
We depend on independent contractors and information technology systems. A failurethird parties to provide key services in our product development and operations, and any disruption of their services, or an increase in cost of these processesservices, could negatively impact our financial condition and systems, data breaches, cyber-attacks, or cyber-fraud may cause business disruptions, compromiseresults of operations.
We depend on subcontractors to provide cost effective and efficient services in our product development and supply chain functions, including test and assembly services, software and hardware development, support of intellectual property or other sensitive information, or result in losses.
Our operations including financial reporting, and operating results may be adversely affected if we regularly make changes to improve them as necessary by periodically implementing new, or upgrading or enhancing existing, operational and IT systems, procedures, and controls. These systems are supported by subcontractors, and they may also be subject to power and telecommunication outages or other general system failures. The legal, regulatory and contractual environment surrounding information security and data privacy is complex and evolving. We continue to commit significant resources to implementing new systems to standardize our processes worldwide and adopt best-in-class capabilities. We are focused on realizing the full analytical functionality of these conversions, which can be extremely complex, in part, because of the wide range of legacy systems and processes that must be integrated.
Factors Related to Our Sales and Revenue
Our revenues depend on our relationships with our distributors and on a concentrated group of end customers. An adverse change in the relationships with, or performance of, our distributors, or any reduction in the use of our products by our end customers, could harm our sales and significantly decrease our revenue.
We depend on a concentrated group of distributors to sell our products to end customers, complete order fulfillment, maintain sufficient inventory of our products and provide services to our end customers. In fiscal 2021, revenue attributable to sales to distributors accounted for 87% of our total revenue, with two distributors accounting for 64% of total revenue. We have significant outstanding receivables with our top distributors, and expect our distributors to generate a significant portion of our revenue in the future. Any adverse change to our relationships or agreements with our distributors or a failure by one or more of our distributors to perform its obligations to us could have a material impact on our business, including a reduction in our access to certain end customers or our ability to sell our products.
If our relationships with any material customers were to diminish, if these customers were to develop their own solutions or adopt alternative solutions or competitors' solutions, if any one or more of our concentrated groups of customers were to experience significantly adverse financial conditions, including as a result of inflation or labor market disruptions, or if as a result of trade disputes or sanctions these customers were restricted from purchasing our products, our results could be adversely affected.
In addition, the inability of customers to obtain credit, the insolvency of one or more customers, or tariffs applicable to our customers’ products, could impact our sales. Any of these effects could impact our ability to effectively manage inventory levels and collect receivables, require additional restructuring actions, and decrease our revenue and profitability.
The nature of our business and length of our sales cycle makes our revenue, gross margin and net income subject to fluctuation and difficult to accurately predict.
A number of factors, including how products are manufactured to support end markets, yield, wafer pricing, cost of packaging raw materials, product mix, market acceptance of our new products, competitive pricing dynamics, product quality, geographic and/or end market mix, and pricing strategies, can cause our revenue, gross margins and net income to fluctuate significantly either positively or negatively from period to period.
We have limited visibility into the demand for our products, particularly new products, because demand for our products depends upon our products being designed into our end customers' products and those products achieving market acceptance. During our sales cycle, our customers typically test and evaluate our products prior to deciding to include our products into the design of their own products, and then require additional time to begin volume production of their products. This lengthy sales cycle may cause us to incur significant expenses, which could be exacerbated by rising inflation, experience significant production delays and to incur additional inventory costs before we receive a customer order that may be delayed or never get placed. A key strategic customer may demand certain design or production resources to meet their requirements or work on a specific solution, which could cause delays in our normal development schedule and result in significant investment of our resources or missed opportunities with other potential customers. We may incur these expenses without generating revenue from our products to offset the expenses.
While our sales cycles are typically long, our average product life cycles tend to be short as a result of the rapidly changing technology environment in which we operate. Our inventory levels may be higher than historical norms, from time to time, due to inventory build decisions aimed at meeting expected demand from a single large customer, reducing direct material cost or enabling responsiveness to expected demand. In the event the expected demand does not materialize, or if our short sales cycle does not generate sufficient revenue, we may be subject to incremental excess and obsolescence costs.
These factors make it difficult for us to accurately forecast future sales and project quarterly revenues. The difficulty in forecasting future sales weakens our ability to project our inventory requirements, which could result, and in the past has resulted, in inventory write-downs or failure to meet customer product demands in a timely manner. While we may give guidance, the difficulty in forecasting revenues as well as the relative customer and product mix of those revenues limits our ability to provide accurate forward-looking revenue and gross margin guidance.
Accounting requirements related to sales through our direct and indirect competitors have substantially greater financial, technological, manufacturing, marketing, and sales resources. Consolidationdistribution channel could result in our industry may increasingly mean that our competitors have greater consolidated resources, or other synergies, that could put us at a competitive disadvantage. We currently compete directly with companies that have licensed our technology or have developed similar products, as well as numerous semiconductor companies that offer productsreporting revenue in excess of demand.
Revenue recognition standards require recognition of revenue based on alternative solutions, such as applications processor, application specific standard product, microcontroller, analog,estimates and digital signal processing technologies. Competitionmay require us to record revenue from these semiconductor companies may intensify asdistributors that is in excess of actual end customer demand. Since we offer more products in anyhave limited ability to forecast inventory levels of our end markets. These competitors include established, multinational semiconductor companies, as well as emerging companies.
Factors Related to Strategic Transactions
Acquisitions, divestitures, strategic investments and strategic partnerships could disrupt our business and adversely affect our financial condition and operating results.
We may pursue growth opportunities by acquiring complementary businesses, solutions or technologies through strategic transactions, investments or partnerships. The identification of suitable acquisition, strategic investment or strategic partnership candidates can be costly and time consuming and can distract our management team from our current operations. If such strategic transactions require us to seek additional debt or equity financing, we may not be able to obtain such financing on terms favorable to us or at all, and such transaction may adversely affect our liquidity and capital structure. We may also choose to divest certain non-core assets, which divestitures could lead to charges against earnings and may expose us to additional liabilities and risks. Any strategic transaction might not strengthen our competitive position, may increase some of our risks, and may be viewed negatively by our customers, partners or investors. Even if we successfully complete a strategic transaction, we may not be able to effectively integrate the acquired business, technology, systems, control environment, solutions, personnel or operations into our business or global tax structure. We may experience unexpected changes in how we are required to account for strategic transactions pursuant to U.S. GAAP and may not achieve the anticipated benefits of any strategic transaction. We may incur unexpected costs, claims or liabilities that we incur during the strategic transaction or that we assume from the acquired company, or we may discover adverse conditions post acquisition for which we have limited or no recourse.
None.
We lease a 47,800 square foot of space in Hillsboro, Oregon as our corporate headquarters and a research and development facility through November 2022.October 2028. In San Jose, California, we have 98,874 square feet under lease through September 2026, of which we use 49,579 square feet as a research and development facility, while we vacated 49,295 square feet during the fourth quarter of 2018 and intend to sublease the vacated space. During 2019, we vacated a 23,680 square foot office space in Portland, Oregon, which we have subleased through the end of the lease in March 2025.
In Muntinlupa City, Philippines, we lease a total of 48,56550,503 square feet through May 2025 and 1,938 square feet through June 2025 for research and development and operations facilities. In this location, we also leased another 2,856 square feet through April 2018 as storage space that has been consolidated into other facilities.
The information contained under the “Plaintiffs”) commenced an action against the Company and several unnamed defendantsheading "Legal Matters" in the Multnomah County Circuit Court of the State of Oregon,Note 15 - Contingencies to our Consolidated Financial Statements in connection with the sale of certain productsPart II, Item 8 is incorporated by the Company to the Plaintiffs in or around 2008. The Plaintiffs allege that we violated The Lanham Act, engaged in negligence and fraud by failing to disclose to the Plaintiffs the export-controlled status of the subject parts. The Plaintiffs seek damages of $138 million, treble damages, and other remedies. In January 2019, we removed the action to the United States District Court for the District of Oregon. Atreference into this stage of the proceedings, we do not have an estimate of the likelihood or the amount of any potential exposure to the Company; however, we believe that these claims are without merit and intend to vigorously defend the action. SeePart I, Item 3. Also, see “Litigation and unfavorable results of legal proceedings could adversely affect our financial condition and operating results” in “Risk Factors” in Item 1A of Part I of this Annual Report on Form 10-K.
Not applicable.
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol "LSCC".
Holders
As of February 20, 2020,17, 2022, we had approximately 216182 stockholders of record.
Dividends
The payment of dividends on our common stock is within the discretion of our Board of Directors. We intend to retain earnings to finance our business. We have never paid cash dividends.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
On February 19, 2021, our Board of Directors approved a stock repurchase program pursuant to which up to $60.0 million of outstanding common stock could be repurchased from time to time (the "2021 Repurchase Program"). The duration of the 2021 Repurchase Program is twelve months. Under the 2021 Repurchase Program during the fourth quarter of fiscal 2021, we repurchased approximately 60,800 shares for approximately $4.9 million, or an average price paid per share of $80.55. All shares repurchased pursuant to the 2021 Repurchase Program were retired by the end of the 2021 fiscal year.
On November 8, 2021, we announced that our Board of Directors had approved a stock repurchase program pursuant to which up to an additional $100.0 million of outstanding common stock could be repurchased from time to time (the "2022 Repurchase Program"). The duration of the 2022 Repurchase Program is through the end of December 2022. Under the 2022 Repurchase Program during the fourth quarter of fiscal 2021, we repurchased approximately 125,400 shares for $10.1 million, or an average price paid per share of $80.55. All shares repurchased pursuant to the 2022 Repurchase Program were retired by the end of the 2021 fiscal year.
The following table contains information regarding our repurchases of our common stock that is registered pursuant to Section 12 of the Securities Exchange Act of 1934 during the fourth quarter of fiscal 2021:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs ($M) (b) | ||||||||||||
October 3, 2021 through October 30, 2021 | — | $ | — | — | $ | 4.9 | ||||||||||
October 31, 2021 through November 27, 2021 | 186,200 | $ | 80.55 | 186,200 | $ | 89.9 | ||||||||||
November 28, 2021 through January 1, 2022 | — | $ | — | — | $ | 89.9 | ||||||||||
Total | 186,200 | $ | 80.55 | 186,200 | $ | 89.9 | ||||||||||
| (a) | All repurchases during the quarter were open-market transactions funded from available working capital made under the authorization from our board of directors to purchase up to $60.0 million of LSCC common stock announced February 19, 2021 and under the authorization from our board of directors to purchase up to $100.0 million of LSCC common stock announced November 8, 2021. | |
| (b) | As of January 1, 2022 this amount consisted of the remaining portion of the $100.0 million program authorized through the end of December 2022 that was announced November 8, 2021. We do not plan to make further repurchases pursuant to the 2021 Repurchase Program, which was due to expire in February 2022, because as of November 27, 2021 we had repurchased the maximum dollar value of shares authorized under the 2021 Repurchase Program. |
The following graph shows the five-year comparison of cumulative stockholder return on our common stock, the Standard and Poor's (“S&P”) 500 Index and the Philadelphia Semiconductor Index (“PHLX”) from December 20142016 through December 2019.2021. Cumulative stockholder return assumes $100 invested at the beginning of the period in our common stock, the S&P and PHLX. Historical stock price performance is not necessarily indicative of future stock price performance.
Lattice Cumulative Stockholder Return
| Year Ended (1) | ||||||||||||||||||||
| STATEMENT OF OPERATIONS: | December 28, 2019 | December 29, 2018 | December 30, 2017 | December 31, 2016 | January 2, 2016 (2) | |||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
| Revenue | $ | 404,093 | $ | 398,799 | $ | 385,961 | $ | 427,054 | $ | 405,966 | ||||||||||
| Cost of revenue | 165,671 | 179,360 | 169,382 | 180,620 | 186,057 | |||||||||||||||
| Gross margin | 238,422 | 219,439 | 216,579 | 246,434 | 219,909 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research and development | 78,617 | 82,449 | 103,357 | 117,518 | 136,868 | |||||||||||||||
| Selling, general, and administrative | 82,542 | 91,054 | 90,718 | 98,602 | 97,349 | |||||||||||||||
| Amortization of acquired intangible assets | 13,558 | 17,690 | 31,340 | 33,575 | 29,580 | |||||||||||||||
| Restructuring charges | 4,664 | 17,349 | 7,196 | 9,267 | 19,239 | |||||||||||||||
| Impairment of acquired intangible assets and goodwill | — | 12,486 | 32,431 | 7,866 | 21,655 | |||||||||||||||
| Acquisition related charges | — | 1,531 | 3,781 | 6,305 | 22,450 | |||||||||||||||
| Gain on sale of building | — | — | (4,624 | ) | — | — | ||||||||||||||
| Total operating expenses | 179,381 | 222,559 | 264,199 | 273,133 | 327,141 | |||||||||||||||
| Income (loss) from operations | 59,041 | (3,120 | ) | (47,620 | ) | (26,699 | ) | (107,232 | ) | |||||||||||
| Interest expense | (11,731 | ) | (20,600 | ) | (18,807 | ) | (20,327 | ) | (18,389 | ) | ||||||||||
| Other (expense) income, net | (2,245 | ) | (249 | ) | (3,286 | ) | 2,844 | (1,072 | ) | |||||||||||
| Income (loss) before income taxes | 45,065 | (23,969 | ) | (69,713 | ) | (44,182 | ) | (126,693 | ) | |||||||||||
| Income tax expense | 1,572 | 2,353 | 849 | 9,917 | 32,540 | |||||||||||||||
| Net income (loss) | $ | 43,493 | $ | (26,322 | ) | $ | (70,562 | ) | $ | (54,099 | ) | $ | (159,233 | ) | ||||||
| Net income (loss) per share: | ||||||||||||||||||||
| Basic | $ | 0.33 | $ | (0.21 | ) | $ | (0.58 | ) | $ | (0.45 | ) | $ | (1.36 | ) | ||||||
| Diluted | $ | 0.32 | $ | (0.21 | ) | $ | (0.58 | ) | $ | (0.45 | ) | $ | (1.36 | ) | ||||||
| Shares used in per share calculations: | ||||||||||||||||||||
| Basic | 132,471 | 126,564 | 122,677 | 119,994 | 117,387 | |||||||||||||||
| Diluted | 137,274 | 126,564 | 122,677 | 119,994 | 117,387 | |||||||||||||||
| BALANCE SHEET: | December 28, 2019 | December 29, 2018 | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Cash, cash equivalents, and short-term marketable securities | $ | 118,081 | $ | 128,675 | $ | 111,797 | $ | 116,860 | $ | 102,574 | ||||||||||
| Total assets | $ | 612,016 | $ | 623,687 | $ | 635,961 | $ | 766,883 | $ | 785,920 | ||||||||||
| Long term liabilities | $ | 184,538 | $ | 295,812 | $ | 334,621 | $ | 338,903 | $ | 369,223 | ||||||||||
| Total liabilities | $ | 284,357 | $ | 365,230 | $ | 418,268 | $ | 496,453 | $ | 480,400 | ||||||||||
| Total stockholders' equity | $ | 327,659 | $ | 258,457 | $ | 217,693 | $ | 270,430 | $ | 305,520 | ||||||||||
| (1) | Results for periods prior to 2018 are presented in accordance with ASC 605, which was in effect during those fiscal years. | |||||||||||||||||||
| (2) | Our results for the year ended January 2, 2016 include the results associated with the acquisition of Silicon Image for the approximately 10-month period from March 11, 2015 through January 2, 2016. | |||||||||||||||||||
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Lattice Semiconductor Corporation and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develop technologies that we monetize through differentiated programmable logic semiconductor products, silicon-enabling products, system solutions, design services, and licenses.
Lattice has focused its strategy on delivering programmable logic products and related solutions based on low power, small size, and ease of use. We also serve our customers with IP licensing and various other services. Our product development activities include new proprietary products, advanced packaging, existing product enhancements, software development tools, soft IP, and system solutions for high-growth applications such as Edge AI, 5G infrastructure, platform security, and factory automation.
This discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes included in Item 8. "Financial Statements and Supplementary Data" of this report. Discussions of results for prior periods (fiscal 20182020 compared to fiscal 2017)2019) are incorporated by reference from our
Impact of the COVID-19 pandemic on our Business
The COVID-19 pandemic has caused, and may continue to cause, a global slowdown of economic activity (including the decrease in demand for certain goods and services), and volatility in and disruption to financial markets, labor markets, and supply chains. The severity, magnitude and duration of the COVID-19 pandemic and its economic consequences have been and continue to be uncertain, evolving and difficult to predict, and the pandemic’s impact on our operations and financial performance, as well as its impact on our ability to successfully execute our business strategy and initiatives, remains uncertain. We continue to take actions to safeguard the health and well-being of our employees and our business. We implemented social distancing policies at our locations around the world, including working from home and eliminating substantially all travel. Furthermore, we continue to manage our cash position and liquidity needs in light of the rapidly changing environment, and we have additional resources available under our Current Credit Agreement, if needed.
The full extent of the effects of the COVID-19 pandemic and the related governmental, business and travel restrictions in order to contain the virus are continuing to evolve globally, including in response to variants of the virus. We anticipate that these actions and the global health crisis caused by the COVID-19 pandemic will continue to negatively impact business activity across the globe. Demand for our products may be impacted given the global reach and economic impact of the virus. For example, governmental actions or policies or other initiatives to contain the virus could lead to reductions in our end customers’ demand for our products, which could have a negative impact on our revenue. We have previously seen and could again see delays or disruptions in our supply chain due to governmental restrictions or voluntary precautionary measures adopted by our suppliers. If our suppliers experience similar impacts, we may have difficulty sourcing materials necessary to fulfill customer production requirements and transporting completed products to our end customers. It is difficult for us to predict the scope, magnitude, and length of supply chain disruptions. Supply chain delays and disruptions may also affect the ability of our customers to obtain materials or products from other suppliers which may constrain or delay their demand for our products.
We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects of any such alterations or modifications may have on our business, including the effects on our customers, employees, and prospects, or on our financial condition or results of operations. The potential impact of the COVID-19 pandemic on our business, results of operations and financial position is currently uncertain and will depend on many factors that are not within our control, including, but not limited to: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides. See the section entitled “Risk Factors” in Item 1A of Part I of this report for further information about related risks and uncertainties.
Critical Accounting Policies and Use of Estimates
Critical accounting policies are those that are both most important to the portrayal of a company's financial condition and results of operations, and that require management's most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments affecting the amounts reported in our consolidated condensed financial statements and the accompanying notes. We base our estimates and judgments on historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when made, and because of the uncertainty inherent in these matters, actual results may differ materially from these estimates under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis.
We believe the following accounting policies and the related estimates are critical in the portrayal of our financial condition and results of operations, and require management's most difficult, subjective, or complex judgments. See "
Note 1 - Nature of Operations and Significant Accounting Policies" under Part II, Item 8 of this report for further information on the significant accounting policies and methods used in the preparation of the consolidated financial statements.Revenue from Contracts with Customers
We recognize revenue upon satisfaction of performance obligations when control of promised goods or services has been transferred to our customers. We measure revenue based on the amount of consideration we expect to be entitled to in exchange for products or services. For revenue recognized on both sales to distributors and related to HDMI and other royalties, the amount of consideration we expect to be entitled to receive is based on estimates that require assumptions and judgments relating to trends in recent and historical activity. See "
Note 1 - Basis of Presentation and Significant Accounting Policies" under Part II, Item 8 of this report for further information on our recognition of revenue. Sales to most distributors are made under terms allowing certain price adjustments upon sale to their end customers and limited rights of return of our products held in their inventory. The revenue recognized based on estimated price adjustments and stock rotation reserves may be materially different from the actual consideration received if the actual distributor price adjustments and stock rotation returns differ significantly from the historical trends used in the estimates.Inventories and Cost of Revenue
Inventories are recordedstated at the lower of averageactual cost determined(determined using the first-in, first-out method) or net realizable value. We review and set standard costs quarterly to approximate current actual manufacturing costs. Our manufacturing overhead standards for product costs are calculated assuming full absorption of actual spending over actual costs. The valuation of inventory requires us to estimate excess or obsolete inventory. Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on a first-in-first-out basis or market. We establishspecific facts and circumstances. In determining provisions for inventory if it isexcess or obsolete orproducts, we hold quantities which areconsider assumptions such as changes in excess ofbusiness and economic conditions, projected customer demand.demand for our products, and changes in technology or customer requirements. The creation of such provisions results in a write-down of inventory to net realizable value and a charge to Cost of revenue.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting, under which we allocate the purchase price paid for a company to identifiable assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Goodwill is measured as the excess of purchase price over the fair value of identifiable assets acquired and liabilities assumed. Determining the fair value of assets acquired and liabilities assumed requires management to make assumptions, estimates, and judgments that are based on all available information, including comparable market data and information obtained from our management and the management of the acquired companies. These judgments affect the amount of consideration paid that is allocable to identified tangible and intangible assets acquired and liabilities assumed in the business combination. The estimation of the fair values of the intangible assets requires significant judgment and the use of valuation techniques including primarily the income approach. Consideration is given to all relevant factors that might affect the fair value such as estimates of future revenues and costs, present value factors, and the estimated useful lives of intangible assets.
Accounting for Income Taxes
We are required to estimate our provision for income taxes and amounts ultimately payable or recoverable in numerous tax is comprisedjurisdictions around the world. These estimates involve significant judgment and interpretations of our currentregulations and are inherently complex. Resolution of income tax liability and changestreatments in deferred tax assets and liabilities.individual jurisdictions may not be known for many years after completion of the applicable year. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse.
Valuation allowances are provided to reduce deferred tax assets to an amount that in management’s judgment is more-likely-than-not to be recoverable against future taxable income. The determination of a valuation allowance and when it should be released requires complex judgment. In assessing the ability to realize deferred tax assets, we regularly evaluate both positive and negative evidence that may exist and consider whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
As part of our regular financial review process, we also assess the likelihood that our tax reporting positions will ultimately be sustained.sustained on examination by the taxing authorities, based on the technical merits of the position. To the extent it is determined it is more likely than not (a likelihood of more than 50 percent) that some portion or all of a tax reporting position will ultimately not be recognized and sustained, a provision for unrecognized tax benefit is provided by either reducing the applicable deferred tax asset or accruing an income tax liability. Our judgment regarding the sustainability of our tax reporting positions may change in the future due to changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to the related deferred tax assets or accrued income tax liabilities and an accompanying reduction or increase in income tax expense which may result in a corresponding increase or decrease in net income in the period when such determinations are made.
Results of Operations
Key elements of our Consolidated Statements of Operations, including as a percentage of revenue, are presented in the following table:
| Year Ended * | ||||||||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||||||||||
| Revenue | $ | 404,093 | 100.0 | % | $ | 398,799 | 100.0 | % | $ | 385,961 | 100.0 | % | ||||||||
| Gross margin | 238,422 | 59.0 | 219,439 | 55.0 | 216,579 | 56.1 | ||||||||||||||
| Research and development | 78,617 | 19.5 | 82,449 | 20.7 | 103,357 | 26.8 | ||||||||||||||
| Selling, general, and administrative | 82,542 | 20.4 | 91,054 | 22.8 | 90,718 | 23.5 | ||||||||||||||
| Amortization of acquired intangible assets | 13,558 | 3.4 | 17,690 | 4.4 | 31,340 | 8.1 | ||||||||||||||
| Restructuring charges | 4,664 | 1.2 | 17,349 | 4.4 | 7,196 | 1.9 | ||||||||||||||
| Impairment of acquired intangible assets | — | — | 12,486 | 3.1 | 32,431 | 8.4 | ||||||||||||||
| Acquisition related charges | — | — | 1,531 | 0.4 | 3,781 | 1.0 | ||||||||||||||
| Gain on sale of building | — | — | — | — | (4,624 | ) | (1.2 | ) | ||||||||||||
| Income (loss) from operations | $ | 59,041 | 14.6 | % | $ | (3,120 | ) | (0.8 | )% | $ | (47,620 | ) | (12.3 | )% | ||||||
Year Ended * | ||||||||||||||||||||||||
| January 1, | January 2, | December 28, | ||||||||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | |||||||||||||||||||||
Revenue | $ | 515,327 | 100.0 | % | $ | 408,120 | 100.0 | % | $ | 404,093 | 100.0 | % | ||||||||||||
Gross margin | 321,675 | 62.4 | 245,306 | 60.1 | 238,422 | 59.0 | ||||||||||||||||||
Research and development | 110,518 | 21.4 | 89,223 | 21.9 | 78,617 | 19.5 | ||||||||||||||||||
Selling, general and, administrative | 105,617 | 20.5 | 95,331 | 23.4 | 82,542 | 20.4 | ||||||||||||||||||
Amortization of acquired intangible assets | 2,613 | 0.5 | 4,449 | 1.1 | 13,558 | 3.4 | ||||||||||||||||||
Restructuring charges | 940 | 0.2 | 3,937 | 1.0 | 4,664 | 1.2 | ||||||||||||||||||
Acquisition related charges | 1,171 | 0.2 | — | — | — | — | ||||||||||||||||||
Income from operations | $ | 100,816 | 19.6 | % | $ | 52,366 | 12.8 | % | $ | 59,041 | 14.6 | % | ||||||||||||
* Results for 2017 areThe year ended January 2, 2021 was a 53-week year as compared to the other years presented, in accordance with ASC 605, which was in effect during that fiscalwere based on our standard 52-week year.
Revenue
| Year Ended * | % Change in | ||||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
| Revenue | $ | 404,093 | $ | 398,799 | $ | 385,961 | 1.3 | % | 3.3 | % | |||||||
Year Ended | ||||||||||||||||||||
January 1, | January 2, | December 28, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | 2021 | 2020 | |||||||||||||||
Revenue | $ | 515,327 | $ | 408,120 | $ | 404,093 | 26.3 | % | 1.0 | % | ||||||||||
Revenue increased $5.3$107.2 million, or 1%26.3%, in fiscal 20192021 compared to fiscal 2018,2020, primarily driven by increased demand for products used in client computing solutions, and in 5G wireless infrastructure, along with increases in IP revenue, offset by broad market weakness.
Revenue by End Market
We sell our products globally to a broad base of customers in three primary groups of end markets:markets groups: Communications and Computing, Industrial and Automotive, and Consumer. We also provide Intellectual Property licensing and services to these end markets.
Within these end markets, there are multiple market segment drivers, including:
• | Communications and Computing: 5G infrastructure deployments, client computing platforms, and cloud and enterprise servers, | |
• | Industrial and Automotive: industrial IoT, factory automation, robotics, and automotive electronics, | |
• | Consumer: smart home, and prosumer. |
We also generate revenue from the licensing of our Intellectual Property ("IP"),IP, the collection of certain royalties, patent sales, the revenue related to our participation in consortia and standard-setting activities, and services. While these activities may be associated with multiple markets, Licensing and services revenue is reported as a separate end market as it has characteristics that differ from other categories, most notably a higher gross margin.
The end market data below is derived from data provided to us by our distributors and end customers. With a diverse base of customers who may manufacture end products spanning multiple end markets, the assignment of revenue to a specific end market requires the use of judgment. We also recognize certain revenue for which end customers and end markets are not yet known. We assign this revenue first to a specific end market using historical and anticipated usage of the specific products, if possible, and allocate the remainder to the end markets by product family based uponon either historical usage for each product family if we cannot identify a specific end market.
The following are examples of end market applications for the fiscal years presented:
Communications and Computing | Industrial and Automotive | Consumer | Licensing and Services |
Wireless | Security and Surveillance | Cameras | IP Royalties |
Wireline | Machine Vision | Displays | Adopter Fees |
Data Backhaul | Industrial Automation | Wearables | IP Licenses |
Server Computing | Robotics | Televisions | Patent Sales |
Client Computing | Automotive | Home Theater | |
Data Storage | Drones |
The composition of our revenue by end market is presented in the following table:
| Year Ended * | % Change in | |||||||||||||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | |||||||||||||||||||||
| Communications and Computing | $ | 155,821 | 38.6 | % | $ | 123,195 | 30.9 | % | $ | 113,019 | 29.3 | % | 26.4 | % | 9.0 | % | ||||||||||
| Industrial and Automotive | 151,607 | 37.5 | 157,979 | 39.6 | 134,639 | 34.9 | (4.0 | ) | 17.3 | |||||||||||||||||
| Consumer | 75,120 | 18.6 | 99,294 | 24.9 | 108,844 | 28.2 | (24.3 | ) | (8.8 | ) | ||||||||||||||||
| Licensing and Services | 21,545 | 5.3 | 18,331 | 4.6 | 29,459 | 7.6 | 17.5 | (37.8 | ) | |||||||||||||||||
| Total revenue | $ | 404,093 | 100.0 | % | $ | 398,799 | 100.0 | % | $ | 385,961 | 100.0 | % | 1.3 | % | 3.3 | % | ||||||||||
Year Ended | ||||||||||||||||||||||||||||||||
| January 1, | January 2, | December 28, | % Change in | |||||||||||||||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | 2021 | 2020 | |||||||||||||||||||||||||||
Communications and Computing | $ | 217,960 | 42.3 | % | $ | 174,656 | 42.8 | % | $ | 155,821 | 38.6 | % | 24.8 | % | 12.1 | % | ||||||||||||||||
Industrial and Automotive | 226,240 | 43.9 | 168,323 | 41.2 | 151,607 | 37.5 | 34.4 | 11.0 | ||||||||||||||||||||||||
Consumer | 50,652 | 9.8 | 45,523 | 11.2 | 75,120 | 18.6 | 11.3 | (39.4 | ) | |||||||||||||||||||||||
Licensing and Services | 20,475 | 4.0 | 19,618 | 4.8 | 21,545 | 5.3 | 4.4 | (8.9 | ) | |||||||||||||||||||||||
Total revenue | $ | 515,327 | 100.0 | % | $ | 408,120 | 100.0 | % | $ | 404,093 | 100.0 | % | 26.3 | % | 1.0 | % | ||||||||||||||||
Revenue from the Communications and Computing end market increased 26%by 25% in fiscal 20192021 compared to fiscal 20182020 primarily due to increased demand increases for server andapplications in data center servers, client computing products, as well as for products used inplatforms, and 5G wireless infrastructure.
Revenue from the Industrial and Automotive end market revenue decreased 4% increased by 34% in fiscal 2021 compared to fiscal 2020, primarily due to increased demand for our products across multiple applications such as industrial automation and robotics, as well as in Automotive led by adoption in ADAS and infotainment applications.
Revenue from the Consumer end market increased by 11% in fiscal 2021 compared to fiscal 2020 primarily due to broad market weakness, primarilyincreased demand for our products in Asia and Europe.
Revenue from the Licensing and Services end market increased by 18%4% in fiscal 20192021 compared to fiscal 2018 predominantly2020 primarily due to increases in HDMI royalty revenueincreased licensing and certain patent and asset sales recognized in 2019.
Revenue by Geography
We assign revenue to geographies based on ship-to location of the end customer, where available, and based upon the location of the distributor to which the product was shipped otherwise.
The composition of our revenue by geography is presented in the following table:
Year Ended | ||||||||||||||||||||||||||||||||
| January 1, | January 2, | December 28, | % Change in | |||||||||||||||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | 2021 | 2020 | |||||||||||||||||||||||||||
Asia | $ | 384,568 | 74.6 | % | $ | 305,183 | 74.8 | % | $ | 298,765 | 73.9 | % | 26.0 | % | 2.1 | % | ||||||||||||||||
Americas | 80,870 | 15.7 | 62,137 | 15.2 | 57,936 | 14.4 | 30.1 | 7.3 | ||||||||||||||||||||||||
Europe | 49,889 | 9.7 | 40,800 | 10.0 | 47,392 | 11.7 | 22.3 | (13.9 | ) | |||||||||||||||||||||||
Total revenue | $ | 515,327 | 100.0 | % | $ | 408,120 | 100.0 | % | $ | 404,093 | 100.0 | % | 26.3 | % | 1.0 | % | ||||||||||||||||
| Year Ended * | % Change in | |||||||||||||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | |||||||||||||||||||||
| Asia | $ | 298,765 | 73.9 | % | $ | 298,119 | 74.8 | % | $ | 277,638 | 71.9 | % | 0.2 | % | 7.4 | % | ||||||||||
| Europe | 47,392 | 11.7 | 45,546 | 11.4 | 44,547 | 11.5 | 4.1 | 2.2 | ||||||||||||||||||
| Americas | 57,936 | 14.4 | 55,134 | 13.8 | 63,776 | 16.6 | 5.1 | (13.6 | ) | |||||||||||||||||
| Total revenue | $ | 404,093 | 100.0 | % | $ | 398,799 | 100.0 | % | $ | 385,961 | 100.0 | % | 1.3 | % | 3.3 | % | ||||||||||
Revenue from End Customers
We sell our products to a broad base of endindependent distributors and directly to customers.
The composition of our revenue by customer is presented in the following table:
| Year Ended * | ||||||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||
| Weikeng Group | 29.8 | % | 25.4 | % | 26.7 | % | ||
| Arrow Electronics Inc. | 25.4 | 28.7 | 23.9 | |||||
| All others | 26.9 | 28.8 | 26.4 | |||||
| All distributors ** | 82.1 | % | 82.9 | % | 77.1 | % | ||
% of Total Revenue | ||||||||||||
Year Ended | ||||||||||||
| January 1, | January 2, | December 28, | ||||||||||
| 2022 | 2021 | 2019 | ||||||||||
Weikeng Group | 37.2 | % | 34.8 | % | 29.8 | % | ||||||
Arrow Electronics Inc. | 27.1 | 25.1 | 25.4 | |||||||||
Other distributors | 23.0 | 23.2 | 26.9 | |||||||||
All distributors | 87.3 | 83.1 | 82.1 | % | ||||||||
Direct customers | 8.7 | 12.1 | 12.6 | |||||||||
Licensing and services revenue | 4.0 | 4.8 | 5.3 | |||||||||
Total revenue | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Gross margin
The composition of our gross margin, including as a percentage of revenue, is presented in the following table:
| Year Ended * | |||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||
| Gross margin | $ | 238,422 | $ | 219,439 | $ | 216,579 | |||||
| Percentage of revenue | 59.0 | % | 55.0 | % | 56.1 | % | |||||
| Product gross margin % | 56.7 | % | 52.9 | % | 53.8 | % | |||||
| Licensing and services gross margin % | 100.0 | % | 98.6 | % | 84.0 | % | |||||
Year Ended | ||||||||||||
| January 1, | January 2, | December 28, | ||||||||||
(In thousands) | 2022 | 2021 | 2019 | |||||||||
Gross margin | $ | 321,675 | $ | 245,306 | $ | 238,422 | ||||||
Gross margin percentage | 62.4 | % | 60.1 | % | 59.0 | % | ||||||
Product gross margin % | 60.9 | % | 58.1 | % | 56.7 | % | ||||||
Licensing and services gross margin % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Gross margin as a percentage of revenue, increased 400230 basis points from fiscal 20182020 to fiscal 2019 due to product cost reductions,2021. Improved margins were driven by benefits from our pricing optimization as well as overall mix. The increase inand gross margin was also attributable to the non-recurrence in 2019 of the $8.0 million in specific inventory charges taken in the second quarter of fiscal 2018 as a result of the discontinuation of our millimeter wave business.
Because of its higher margin, the licensing and services portion of our overall revenue can have a disproportionate impact on Gross Margin.
Operating Expenses
Research and development expense
The composition of our Research and development expense, including as a percentage of revenue, is presented in the following table:
| Year Ended | % Change in | ||||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
| Research and development | $ | 78,617 | $ | 82,449 | $ | 103,357 | (4.6 | )% | (20.2 | )% | |||||||
| Percentage of revenue | 19.5 | % | 20.7 | % | 26.8 | % | |||||||||||
Year Ended | ||||||||||||||||||||
January 1, | January 2, | December 28, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | 2021 | 2020 | |||||||||||||||
Research and development | $ | 110,518 | $ | 89,223 | $ | 78,617 | 23.9 | % | 13.5 | % | ||||||||||
Percentage of revenue | 21.4 | % | 21.9 | % | 19.5 | % | ||||||||||||||
Research and development expense includes costs for compensation and benefits, stock compensation, engineering wafers, depreciation, licenses, and outside engineering services. These expenditures are for the design of new products, IP cores, processes, packaging, and software solutions.
The decreaseincrease in Research and development expense for fiscal 20192021 compared to fiscal 20182020 was due mainlyprimarily to increased headcount-related costs as we continue to invest in the cost reductions realized from the discontinuationexpansion of our millimeter wave businessproduct portfolio and other restructuring actions including the consolidationacceleration of leased facilities. These savings were predominantly from headcount related expenses and from reductions in both depreciation and rent expense, partially offset by increased stock compensation expense.
We believe that a continued commitment to Research and development is essential to maintaining product leadership and providing innovative new product offerings and, therefore, we expect to continue to make significant future investmentsincrease our investment in Research and development, particularly with expanded investment in the development of software solutions.
Selling, General, and solutions
The composition of our Selling, general, and administrative expense, including as a percentage of revenue, is presented in the following table:
| Year Ended | % Change in | ||||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
| Selling, general, and administrative | $ | 82,542 | $ | 91,054 | $ | 90,718 | (9.3 | )% | 0.4 | % | |||||||
| Percentage of revenue | 20.4 | % | 22.8 | % | 23.5 | % | |||||||||||
Year Ended | ||||||||||||||||||||
January 1, | January 2, | December 28, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | 2021 | 2020 | |||||||||||||||
Selling, general, and administrative | $ | 105,617 | $ | 95,331 | $ | 82,542 | 10.8 | % | 15.5 | % | ||||||||||
Percentage of revenue | 20.5 | % | 23.4 | % | 20.4 | % | ||||||||||||||
Selling, general, and administrative expense includes costs for compensation and benefits related to selling, general, and administrative employees, commissions, depreciation, professional and outside services, trade show, and travel expenses.
The decreaseincrease in Selling, general, and administrative expense for fiscal 20192021 compared to fiscal 20182020 was due mainlyprimarily to the cost reductions realized from restructuring actions including the consolidation of leased facilities. These savings were predominantly from headcount related expenses and from reductions in both depreciation and rent expense, partially offset by increased stock compensation, expense. Additional savings in the current year period resulted from the non-recurrence of certain one-time costssalaries, and variable compensation related to our CEO transition in the prior year, including accelerated stock compensation, severance expense, and CEO search fees
Amortization of acquired intangible assets
The composition of our Amortization of acquired intangible assets, including as a percentage of revenue, is presented in the following table:
| Year Ended | % Change in | ||||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
| Amortization of acquired intangible assets | $ | 13,558 | $ | 17,690 | $ | 31,340 | (23.4 | )% | (43.6 | )% | |||||||
| Percentage of revenue | 3.4 | % | 4.4 | % | 8.1 | % | |||||||||||
Year Ended | ||||||||||||||||||||
January 1, | January 2, | December 28, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | 2021 | 2020 | |||||||||||||||
Amortization of acquired intangible assets | $ | 2,613 | $ | 4,449 | $ | 13,558 | (41.3 | )% | (67.2 | )% | ||||||||||
Percentage of revenue | 0.5 | % | 1.1 | % | 3.4 | % | ||||||||||||||
The decrease in Amortization of acquired intangible assets for fiscal 20192021 compared to fiscal 20182020 was due to the end of the amortization period for certain intangibles and to the reduction of certain intangibles as a result of impairment charges in previous periods. The amortization period for mostmajority of our legacy acquired intangible assets will end induring the first quarter of fiscal 2020.
Restructuring charges
The composition of our Restructuring charges, including as a percentage of revenue, is presented in the following table:
| Year Ended | % Change in | |||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | |||||||||||
| Restructuring charges | $ | 4,664 | $ | 17,349 | $ | 7,196 | (73.1 | )% | 100+% | |||||||
| Percentage of revenue | 1.2 | % | 4.4 | % | 1.9 | % | ||||||||||
Year Ended | ||||||||||||||||||||
January 1, | January 2, | December 28, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | 2021 | 2020 | |||||||||||||||
Restructuring charges | $ | 940 | $ | 3,937 | $ | 4,664 | (76.1 | )% | (15.6 | )% | ||||||||||
Percentage of revenue | 0.2 | % | 1.0 | % | 1.2 | % | ||||||||||||||
Restructuring charges are comprised of expenses resulting from reductions in our worldwide workforce, consolidation of our facilities, removal of fixed assets from service, and cancellation of software contracts and engineering tools. Details of our restructuring plans and expenses incurred under them are more fully discussed in "
Restructuring charges decreased in fiscal 20192021 compared to fiscal 2018 was driven primarily by the higher headcount-related2020, as we had no significant restructuring charges in the prior year periods, as compared to lower chargesactivity in the current period from ceasing use of certain leased facilities and from termination fees on the cancellation of certain contracts.
| Year Ended | % Change in | ||||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
| Impairment of acquired intangible assets | $ | — | $ | 12,486 | $ | 32,431 | (100.0 | )% | (61.5 | )% | |||||||
| Percentage of revenue | — | % | 3.1 | % | 8.4 | % | |||||||||||
Acquisition related charges
The composition of our Acquisition related charges, including as a percentage of revenue, is presented in the following table:
Year Ended | ||||||||||||||||||||
January 1, | January 2, | December 28, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | 2021 | 2020 | |||||||||||||||
Acquisition related charges | $ | 1,171 | $ | — | $ | — | 100+% | — | % | |||||||||||
Percentage of revenue | 0.2 | % | — | % | — | % | ||||||||||||||
| Year Ended | % Change in | ||||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
| Acquisition related charges | $ | — | $ | 1,531 | $ | 3,781 | (100.0 | )% | (59.5 | )% | |||||||
| Percentage of revenue | — | % | 0.4 | % | 1.0 | % | |||||||||||
Acquisition related charges include legal and professional fees directly related to acquisitions. We incurred no Acquisition related charges in fiscal 2019. For fiscal years 2018, and 2017,2021, Acquisition related charges were entirely attributable to our acquisition of Mirametrix in November 2021 and were comprised primarily of professional services including legal and accounting fees, and outside services in connection with our proposed acquisition by Canyon Bridge Acquisition Company, Inc. Although the acquisition was terminated, we continued to incur certain residual legal fees directly related to this transaction.
Interest Expense
The composition of our Interest expense, including as a percentage of revenue, is presented in the following table:
| Year Ended | % Change in | ||||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
| Interest expense | $ | (11,731 | ) | $ | (20,600 | ) | $ | (18,807 | ) | (43.1 | )% | 9.5 | % | ||||
| Percentage of revenue | (2.9 | )% | (5.2 | )% | (4.9 | )% | |||||||||||
Year Ended | ||||||||||||||||||||
January 1, | January 2, | December 28, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | 2021 | 2020 | |||||||||||||||
Interest expense | $ | (2,738 | ) | $ | (3,702 | ) | $ | (11,731 | ) | (26.0 | )% | (68.4 | )% | |||||||
Percentage of revenue | (0.5 | )% | (0.9 | )% | (2.9 | )% | ||||||||||||||
Interest expense is primarily related to our long-term debt, which is further discussed under the Credit Arrangements"Credit Arrangements" heading in the Liquidity and Capital Resources section, below. This interest expense is comprised of contractual interest and amortization of original issue discount and debt issuance costs based on the effective interest method.
The decrease in Interest expense for fiscal 20192021 compared to fiscal 2018 2020 was largely driven by the significant reduction in the effective interest rate on our long-termlong term debt under the terms of the new Credit Agreement, coupled with the reduction in the principal balance of our long-term debt as a result of the additional principal payments made in the current and previous periods.
Other expense,(Expense) Income, net
The composition of our Other expense,(expense) income, net, including as a percentage of revenue, is presented in the following table:
| Year Ended | % Change in | |||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | |||||||||||
| Other expense, net | $ | (2,245 | ) | $ | (249 | ) | $ | (3,286 | ) | 100+% | (92 | )% | ||||
| Percentage of revenue | (0.6 | )% | (0.1 | )% | (0.9 | )% | ||||||||||
Year Ended | ||||||||||||||||||||
January 1, | January 2, | December 28, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | 2021 | 2020 | |||||||||||||||
Other (expense) income, net | $ | (452 | ) | $ | (208 | ) | $ | (2,245 | ) | 117.3 | % | (90.7 | )% | |||||||
Percentage of revenue | (0.1 | )% | (0.1 | )% | (0.6 | )% | ||||||||||||||
For fiscal 20192021 compared to fiscal 2018,2020, the increase in Other expense,(expense) income, net increased primarily due to the $2.2 million loss on re-financing charge taken in the second quarter of fiscal 2019 to write off the remaining unamortized balance of debt costs and original issue discount related to our refinanced long-term debt, partially offsetwas largely driven by reduced miscellaneous expenses during the period.
Income taxes
The composition of our Income tax expense is presented in the following table:
| Year Ended | % Change in | ||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||
| Income tax expense | $ | 1,572 | $ | 2,353 | $ | 849 | (33.2)% | 177.1% | |||||||
Year Ended | ||||||||||||||||||||
January 1, | January 2, | December 28, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | 2021 | 2020 | |||||||||||||||
Income tax expense | $ | 1,704 | $ | 1,064 | $ | 1,572 | 60.2 | % | (32.3 | )% | ||||||||||
Our Income tax expense is composed primarily of foreign income and withholding taxes, partially offset by benefits resulting from the release of uncertain tax positions ("UTP") due to statute of limitation expirations that occurred in the respective periods. The decreaseincrease in expense in fiscal 20192021 as compared to fiscal 20182020 is primarily results from the release ofdue to changes in uncertain tax positions due to statute of limitations expiration.
We are not currently paying U.S. federal income taxes and do not expect to pay such taxes until we fully utilizeupdated our tax net operating loss and credit carryforwards. We expect to pay a nominal amount of state income tax. We are paying foreign income taxes, which are primarily related to withholding taxes on income from foreign royalties, foreign sales, and the cost of operating offshore research and development, marketing, and sales subsidiaries. It is reasonably possible that during the next twelve months, we will establish a sustained level of profitability in the U.S. As a result, we may reverse a significant portionevaluation of the valuation allowance recordedposition in the United States through January 1, 2022 and concluded that we should continue to maintain a full valuation allowance against our U.S.the net federal and state deferred tax assets. We continue to evaluate future projected financial performance to determine whether such performance is sufficient evidence to support a reduction in or reversal of the valuation allowance. We will continue to evaluate both positive and negative evidence in future periods to determine if we will realize the deferred tax assets. The reversal would resultamount of the deferred tax asset considered realizable could be adjusted if sufficient positive evidence exists. Details of our deferred tax assets and valuation allowance are discussed in an income tax benefit for the quarterly and annual fiscal period in which we release the valuation allowance. We accrue interest and penalties related"Note 13 - Income Taxes" to uncertain tax positions in income tax expense on our Consolidated Financial Statements in Part II, Item 8 of Operations. The inherent uncertainties related to the geographical distribution and relative level of profitability among various high and low tax jurisdictions make it difficult to estimate the impact of the global tax structure on our future effective tax rate.
Liquidity and Capital Resources
The following sections discuss material changes in our financial condition from the end of fiscal 2018,2020, including the effects of changes in our Consolidated Balance Sheets, and the effects of our credit arrangements and contractual obligations on our liquidity and capital resources. There is significant uncertainty around the extent and duration of the disruption to our business from the COVID-19 pandemic, and our liquidity and working capital needs may be impacted in future periods as a result of the effects of the COVID-19 pandemic.
We have historically financed our operating and capital resource requirements through cash flows from operations, and from the issuance of long-term debt to fund acquisitions. Cash provided by or used in operating activities will fluctuate from period to period due to fluctuations in operating results, the timing and collection of accounts receivable, and required inventory levels, among other things.
We believe that our financial resources, including current cash and cash equivalents, cash flow from operating activities, and our credit facilities, will be sufficient to meet our liquidity and working capital needs through at least the next 12 months. As of December 28, 2019,January 1, 2022, we did not have significant long-term commitments for capital expenditures. For further information on our cash commitments for operating lease liabilities and required future principal payments on our long-term debt, see Note 10 - Leases and Note 8 - Long-Term Debt, respectively, under Part II, Item 8 of this report.
In the future, we may continue to consider acquisition opportunities to further extend our product or technology portfolios and further expand our product offerings. In connection with funding capital expenditures, acquisitions, securing additional wafer supply, increasing our working capital, or other operations, we may seek to obtain equity or additional debt financing, or advance purchase payments or similar arrangements with wafer manufacturers.financing. We may also seek to obtain equity or additional debt financing if we experience downturns or cyclical fluctuations in our business that are more severe or longer than we anticipated when determining our current working capital needs. On May 17, 2019,
Liquidity
Cash and cash equivalents
(In thousands) | January 1, 2022 | January 2, 2021 | $ Change | % Change | ||||||||||||
Cash and cash equivalents | $ | 131,570 | $ | 182,332 | $ | (50,762 | ) | (27.8 | )% | |||||||
As of January 1, 2022, we entered into our Current Credit Agreement that is more fully discussed under the "Credit Arrangements" heading, below.
| (In thousands) | December 28, 2019 | December 29, 2018 | $ Change | %Change | ||||||||||
| Cash and cash equivalents | $ | 118,081 | $ | 119,051 | $ | (970 | ) | (0.8 | )% | |||||
| Short-term marketable securities | — | 9,624 | (9,624 | ) | (100.0 | )% | ||||||||
| Total Cash and cash equivalents and Short-term marketable securities | $ | 118,081 | $ | 128,675 | $ | (10,594 | ) | (8.2 | )% | |||||
We manage our global cash requirements considering, among other things, (i) available funds among our subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. The repatriation of non-US earnings may require us to withhold and pay foreign income tax on dividends. This should not result in our recording significant additional tax expense as we have accrued expense based on current withholding rates. As of December 28, 2019,January 1, 2022, we could access all cash held by our foreign subsidiaries without incurring significant additional expense.
The net decrease in Cash and cash equivalents and short-term marketable securities of $10.6$50.8 million between December 29, 2018January 2, 2021 and December 28, 2019January 1, 2022 was primarily driven by cash flows from the following activities:
Operating activities —
Cash provided by operating activities results from net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was $167.7 million in fiscalInvesting activities —
Investing cash flows consist primarily of transactions related toFinancing activities —
Financing cash flows consist primarily of| (In thousands) | December 28, 2019 | December 29, 2018 | $Change | %Change | ||||||||||
| Accounts receivable, net | $ | 64,917 | $ | 60,890 | $ | 4,027 | 6.6 | % | ||||||
| Days sales outstanding - Overall | 59 | 58 | 1 | |||||||||||
(In thousands) | January 1, 2022 | January 2, 2021 | Change | % Change | ||||||||||||
Accounts receivable, net | $ | 79,859 | $ | 64,581 | $ | 15,278 | 23.7 | % | ||||||||
Days sales outstanding - Overall | 51 | 55 | (4 | ) | ||||||||||||
Accounts receivable, net as of December 28, 2019January 1, 2022 increased by approximately $4.0$15.3 million, or 7%approximately 24%, compared to December 29, 2018.January 2, 2021. This resulted primarily from the timing ofincreased shipments in December 2019the fourth quarter of fiscal 2021 compared to December 2018.
Inventories
| (In thousands) | December 28, 2019 | December 29, 2018 | $Change | %Change | ||||||||||
| Inventories | $ | 54,980 | $ | 67,096 | $ | (12,116 | ) | (18.1 | )% | |||||
| Days of inventory on hand | 123 | 147 | (24 | ) | ||||||||||
(In thousands) | January 1, 2022 | January 2, 2021 | Change | % Change | ||||||||||||
Inventories | $ | 67,594 | $ | 64,599 | $ | 2,995 | 4.6 | % | ||||||||
Days of inventory on hand | 122 | 139 | (17 | ) | ||||||||||||
Inventories as of December 28, 2019 decreased $12.1January 1, 2022 increased $3.0 million, or approximately 18%5%, compared to December 29, 2018January 2, 2021 primarily due to meet the increased demands of our improved management of inventory levels, as well as the ramp down of mature and aging products.
The Days of inventory on hand ratio compares the inventory balance at the end of a quarter to the cost of sales in that quarter. OurWe calculate Days of inventory on hand decreased to 123 dayson the basis of a 365-day year as Inventories at December 28, 2019 from 147 days at December 29, 2018. This decrease resulted from improved inventory management.
Credit Arrangements
On May 17, 2019, we entered into our newCurrent Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and other lenders. The details of this new arrangement are more fully described in "
Fiscal year (In thousands) | Operating leases (1) | Long-term Debt (2) | ||||||
| 2020 | $ | 6,445 | $ | 26,335 | ||||
| 2021 | 5,485 | 21,337 | ||||||
| 2022 | 4,468 | 20,799 | ||||||
| 2023 | 4,596 | 20,261 | ||||||
| 2024 | 4,716 | 74,658 | ||||||
| Thereafter | 6,705 | — | ||||||
| $ | 32,415 | $ | 163,390 | |||||
Share Repurchase Program
See "Issuer Purchases of fiscal 2018 and intend to subleaseEquity Securities" under Part II, Item 5 of this Annual Report on Form 10-K for more information about the vacated space.
New Accounting Pronouncements
The information contained under the heading "New Accounting Pronouncements" in
Note 1 - Nature of Operations and Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 is incorporated by reference into this Part II, Item 7.Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We assess these risks on a regular basis and have established policies that are designed to protect against the adverse effects of these and other potential exposures.
Foreign Currency Exchange Rate Risk
While our revenues and the majority of our expenses are denominated in U.S. dollars, we collect an annual Japanese consumption tax refund in yen, and as a result of having various international subsidiary and branch operations, our financial position and results of operations are subject to foreign currency exchange rate risk.
| December 28, 2019 | December 29, 2018 | |||||||
| Total cost of contracts for Japanese yen (thousands) | $ | 1,894 | $ | 1,955 | ||||
| Number of contracts | 2 | 2 | ||||||
| Settlement month | June 2020 | June 2019 | ||||||
Interest Rate Risk
We are exposed to interest rate risk related to our indebtedness. At December 28, 2019,January 1, 2022, we had $148.1$158.8 million outstanding under our Current Credit Agreement. A hypothetical increase in the one-month LIBOR by 1% (100 basis points) would increase our future interest expense by approximately $0.4 million per quarter.
Index to Consolidated Financial Statements: | Page | |
(PCAOB ID: 42) | ||
| Report of Independent Registered Public Accounting Firm (KPMG LLP) | (PCAOB ID: 185) | 61 |
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended | ||||||||||||
January 1, | January 2, | December 28, | ||||||||||
(In thousands, except per share data) | 2022 | 2021 | 2019 | |||||||||
Revenue | $ | 515,327 | $ | 408,120 | $ | 404,093 | ||||||
Cost of revenue | 193,652 | 162,814 | 165,671 | |||||||||
Gross margin | 321,675 | 245,306 | 238,422 | |||||||||
Operating expenses: | ||||||||||||
Research and development | 110,518 | 89,223 | 78,617 | |||||||||
Selling, general, and administrative | 105,617 | 95,331 | 82,542 | |||||||||
Amortization of acquired intangible assets | 2,613 | 4,449 | 13,558 | |||||||||
Restructuring charges | 940 | 3,937 | 4,664 | |||||||||
Acquisition related charges | 1,171 | 0 | 0 | |||||||||
Total operating expenses | 220,859 | 192,940 | 179,381 | |||||||||
Income from operations | 100,816 | 52,366 | 59,041 | |||||||||
Interest expense | (2,738 | ) | (3,702 | ) | (11,731 | ) | ||||||
Other (expense) income, net | (452 | ) | (208 | ) | (2,245 | ) | ||||||
Income before income taxes | 97,626 | 48,456 | 45,065 | |||||||||
Income tax expense | 1,704 | 1,064 | 1,572 | |||||||||
Net income | $ | 95,922 | $ | 47,392 | $ | 43,493 | ||||||
Net income per share: | ||||||||||||
Basic | $ | 0.70 | $ | 0.35 | $ | 0.33 | ||||||
Diluted | $ | 0.67 | $ | 0.34 | $ | 0.32 | ||||||
Shares used in per share calculations: | ||||||||||||
Basic | 136,619 | 135,220 | 132,471 | |||||||||
Diluted | 142,143 | 141,276 | 137,274 | |||||||||
| Year Ended | ||||||||||||
| (In thousands, except per share data) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||
| Revenue | $ | 404,093 | $ | 398,799 | $ | 385,961 | ||||||
| Cost of revenue | 165,671 | 179,360 | 169,382 | |||||||||
| Gross margin | 238,422 | 219,439 | 216,579 | |||||||||
| Operating expenses: | ||||||||||||
| Research and development | 78,617 | 82,449 | 103,357 | |||||||||
| Selling, general, and administrative | 82,542 | 91,054 | 90,718 | |||||||||
| Amortization of acquired intangible assets | 13,558 | 17,690 | 31,340 | |||||||||
| Restructuring charges | 4,664 | 17,349 | 7,196 | |||||||||
| Impairment of acquired intangible assets | — | 12,486 | 32,431 | |||||||||
| Acquisition related charges | — | 1,531 | 3,781 | |||||||||
| Gain on sale of building | — | — | (4,624 | ) | ||||||||
| Total operating expenses | 179,381 | 222,559 | 264,199 | |||||||||
| Income (loss) from operations | 59,041 | (3,120 | ) | (47,620 | ) | |||||||
| Interest expense | (11,731 | ) | (20,600 | ) | (18,807 | ) | ||||||
| Other expense, net | (2,245 | ) | (249 | ) | (3,286 | ) | ||||||
| Income (loss) before income taxes | 45,065 | (23,969 | ) | (69,713 | ) | |||||||
| Income tax expense | 1,572 | 2,353 | 849 | |||||||||
| Net income (loss) | $ | 43,493 | $ | (26,322 | ) | $ | (70,562 | ) | ||||
| Net income (loss) per share: | ||||||||||||
| Basic | $ | 0.33 | $ | (0.21 | ) | $ | (0.58 | ) | ||||
| Diluted | $ | 0.32 | $ | (0.21 | ) | $ | (0.58 | ) | ||||
| Shares used in per share calculations: | ||||||||||||
| Basic | 132,471 | 126,564 | 122,677 | |||||||||
| Diluted | 137,274 | 126,564 | 122,677 | |||||||||
The accompanying notes are an integral part of these Consolidated Financial StatementsStatements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended | ||||||||||||
January 1, | January 2, | December 28, | ||||||||||
(In thousands) | 2022 | 2021 | 2019 | |||||||||
Net income | $ | 95,922 | $ | 47,392 | $ | 43,493 | ||||||
Other comprehensive income (loss): | ||||||||||||
Translation adjustment | (75 | ) | 1,533 | 341 | ||||||||
Change in actuarial valuation of defined benefit pension, net of tax | 372 | (678 | ) | (602 | ) | |||||||
Unrealized gain related to marketable securities, net of tax | 0 | 0 | 42 | |||||||||
Reclassification adjustment for gains related to marketable securities included in Other expense, net of tax | 0 | 0 | (53 | ) | ||||||||
Comprehensive income | $ | 96,219 | $ | 48,247 | $ | 43,221 | ||||||
| Year Ended | ||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||
| Net income (loss) | $ | 43,493 | $ | (26,322 | ) | $ | (70,562 | ) | ||||
| Other comprehensive income (loss): | ||||||||||||
| Unrealized gain (loss) related to marketable securities, net of tax | 42 | 41 | (73 | ) | ||||||||
| Reclassification adjustment for (gains) losses related to marketable securities included in Other expense, net of tax | (53 | ) | (18 | ) | 252 | |||||||
| Translation adjustment, net of tax | 341 | (1,271 | ) | 2,620 | ||||||||
| Change in actuarial valuation of defined benefit pension | (602 | ) | 369 | (95 | ) | |||||||
| Comprehensive income (loss) | $ | 43,221 | $ | (27,201 | ) | $ | (67,858 | ) | ||||
The accompanying notes are an integral part of these Consolidated Financial StatementsStatements.
CONSOLIDATED BALANCE SHEETS
January 1, | January 2, | |||||||
(In thousands, except share and par value data) | 2022 | 2021 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 131,570 | $ | 182,332 | ||||
Accounts receivable, net of allowance for credit losses | 79,859 | 64,581 | ||||||
Inventories, net | 67,594 | 64,599 | ||||||
Prepaid expenses and other current assets | 22,328 | 22,331 | ||||||
Total current assets | 301,351 | 333,843 | ||||||
Property and equipment, net | 38,094 | 39,666 | ||||||
Operating lease right-of-use assets | 23,818 | 22,178 | ||||||
Intangible assets, net | 29,782 | 6,321 | ||||||
Goodwill | 315,358 | 267,514 | ||||||
Other long-term assets | 18,091 | 10,545 | ||||||
Total assets | $ | 726,494 | $ | 680,067 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 34,597 | $ | 27,530 | ||||
Accrued expenses | 26,444 | 21,411 | ||||||
Accrued payroll obligations | 27,967 | 18,028 | ||||||
Current portion of long-term debt | 17,173 | 12,762 | ||||||
Total current liabilities | 106,181 | 79,731 | ||||||
Long-term debt, net of current portion | 140,760 | 157,934 | ||||||
Long-term operating lease liabilities, net of current portion | 19,248 | 18,906 | ||||||
Other long-term liabilities | 48,672 | 39,069 | ||||||
Total liabilities | 314,861 | 295,640 | ||||||
Contingencies (Note 15) | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding | 0 | 0 | ||||||
Common stock, $.01 par value, 300,000,000 shares authorized; 137,239,000 shares issued and outstanding as of January 1, 2022 and 136,236,000 shares issued and outstanding as of January 2, 2021 | 1,372 | 1,362 | ||||||
Additional paid-in capital | 701,688 | 770,711 | ||||||
Accumulated deficit | (289,976 | ) | (385,898 | ) | ||||
Accumulated other comprehensive loss | (1,451 | ) | (1,748 | ) | ||||
Total stockholders' equity | 411,633 | 384,427 | ||||||
Total liabilities and stockholders' equity | $ | 726,494 | $ | 680,067 | ||||
| (In thousands, except share and par value data) | December 28, 2019 | December 29, 2018 | |||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 118,081 | $ | 119,051 | |||
| Short-term marketable securities | — | 9,624 | |||||
| Accounts receivable, net of allowance for doubtful accounts | 64,917 | 60,890 | |||||
| Inventories | 54,980 | 67,096 | |||||
| Prepaid expenses and other current assets | 24,452 | 27,762 | |||||
| Total current assets | 262,430 | 284,423 | |||||
| Property and equipment, net | 39,230 | 34,883 | |||||
| Operating lease right-of-use assets | 23,591 | — | |||||
| Intangible assets, net | 6,977 | 21,325 | |||||
| Goodwill | 267,514 | 267,514 | |||||
| Deferred income taxes | 478 | 215 | |||||
| Other long-term assets | 11,796 | 15,327 | |||||
| Total assets | $ | 612,016 | $ | 623,687 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable and accrued expenses (includes restructuring) | $ | 60,255 | $ | 51,763 | |||
| Accrued payroll obligations | 13,404 | 9,365 | |||||
| Current portion of long-term debt | 21,474 | 8,290 | |||||
| Current portion of operating lease liabilities | 4,686 | — | |||||
| Total current liabilities | 99,819 | 69,418 | |||||
| Long-term debt, net of current portion | 125,072 | 251,357 | |||||
| Long-term operating lease liabilities, net of current portion | 21,438 | — | |||||
| Other long-term liabilities | 38,028 | 44,455 | |||||
| Total liabilities | 284,357 | 365,230 | |||||
| Commitments and contingencies (Notes 8 and 13) | — | — | |||||
| Stockholders' equity: | |||||||
| Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding | — | — | |||||
Common stock, $.01 par value, 300,000,000 shares authorized; 133,883,000 shares issued and outstanding as of December 28, 2019 and 129,728,000 shares issued and outstanding as of December 29, 2018 | 1,339 | 1,297 | |||||
| Additional paid-in capital | 762,213 | 736,274 | |||||
| Accumulated deficit | (433,290 | ) | (476,783 | ) | |||
| Accumulated other comprehensive loss | (2,603 | ) | (2,331 | ) | |||
| Total stockholders' equity | 327,659 | 258,457 | |||||
| Total liabilities and stockholders' equity | $ | 612,016 | $ | 623,687 | |||
The accompanying notes are an integral part of these Consolidated Financial StatementsStatements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended | ||||||||||||
January 1, | January 2, | December 28, | ||||||||||
(In thousands) | 2022 | 2021 | 2019 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 95,922 | $ | 47,392 | $ | 43,493 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
Depreciation and amortization | 24,429 | 25,140 | 33,056 | |||||||||
Stock-based compensation expense | 46,475 | 40,372 | 18,899 | |||||||||
Amortization of right-of-use assets | 6,587 | 5,960 | 5,797 | |||||||||
Amortization of debt issuance costs and discount | 362 | 400 | 1,659 | |||||||||
Loss on refinancing of long-term debt | 0 | 0 | 2,235 | |||||||||
Impairment of operating lease right-of-use asset | 0 | 0 | 977 | |||||||||
Other non-cash adjustments | (601 | ) | (256 | ) | (374 | ) | ||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable, net | (12,013 | ) | 336 | (4,027 | ) | |||||||
Inventories, net | (2,995 | ) | (9,619 | ) | 12,116 | |||||||
Prepaid expenses and other assets | 1,918 | (6,441 | ) | 3,740 | ||||||||
Accounts payable | 7,046 | (16,820 | ) | 12,470 | ||||||||
Accrued expenses | (2,855 | ) | 6,314 | (3,047 | ) | |||||||
Accrued payroll obligations | 9,692 | 4,624 | 4,039 | |||||||||
Operating lease liabilities, current and long-term portions | (6,245 | ) | (5,715 | ) | (6,896 | ) | ||||||
Net cash provided by (used in) operating activities | 167,722 | 91,687 | 124,137 | |||||||||
Cash flows from investing activities: | ||||||||||||
Cash paid for business acquisition, net of cash acquired | (68,099 | ) | 0 | 0 | ||||||||
Capital expenditures | (9,835 | ) | (12,121 | ) | (15,590 | ) | ||||||
Cash paid for software and intellectual property licenses | (11,862 | ) | (8,747 | ) | (9,601 | ) | ||||||
Proceeds from sales of and maturities of short-term marketable securities | 0 | 0 | 9,655 | |||||||||
Net cash provided by (used in) investing activities | (89,796 | ) | (20,868 | ) | (15,536 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Restricted stock unit tax withholdings | (54,191 | ) | (26,965 | ) | (10,084 | ) | ||||||
Proceeds from issuance of common stock | 8,827 | 10,103 | 17,166 | |||||||||
Repurchase of common stock | (70,124 | ) | (14,989 | ) | 0 | |||||||
Proceeds from long-term debt | 0 | 50,000 | 206,500 | |||||||||
Original issue discount and debt issuance costs | 0 | 0 | (2,086 | ) | ||||||||
Repayment of long-term debt | (13,125 | ) | (26,250 | ) | (321,408 | ) | ||||||
Net cash provided by (used in) financing activities | (128,613 | ) | (8,101 | ) | (109,912 | ) | ||||||
Effect of exchange rate change on cash | (75 | ) | 1,533 | 341 | ||||||||
Net increase (decrease) in cash and cash equivalents | (50,762 | ) | 64,251 | (970 | ) | |||||||
Beginning cash and cash equivalents | 182,332 | 118,081 | 119,051 | |||||||||
Ending cash and cash equivalents | $ | 131,570 | $ | 182,332 | $ | 118,081 | ||||||
Supplemental disclosure of cash flow information and non-cash investing and financing activities: | ||||||||||||
Interest paid | $ | 2,313 | $ | 3,700 | $ | 10,995 | ||||||
Operating lease payments | $ | 7,639 | $ | 7,713 | $ | 8,425 | ||||||
Income taxes paid, net of refunds | $ | 3,304 | $ | 1,868 | $ | 3,393 | ||||||
Accrued purchases of plant and equipment | $ | 1,360 | $ | 975 | $ | 826 | ||||||
Operating lease right-of-use assets obtained in exchange for lease obligations | $ | 8,134 | $ | 2,645 | $ | 747 | ||||||
| Year Ended | |||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 43,493 | $ | (26,322 | ) | $ | (70,562 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 33,056 | 39,261 | 57,861 | ||||||||
| Impairment of acquired intangible assets | — | 12,486 | 32,431 | ||||||||
| Stock-based compensation expense | 18,899 | 13,646 | 12,543 | ||||||||
| Reduction in the carrying amount of right-of-use assets | 5,797 | — | — | ||||||||
| Loss on re-financing of long-term debt | 2,235 | — | — | ||||||||
| Amortization of debt issuance costs and discount | 1,659 | 2,230 | 1,982 | ||||||||
| Impairment of operating lease right-of-use asset (recorded in Restructuring charges) | 977 | — | — | ||||||||
| Gain on sale of building | — | — | (4,624 | ) | |||||||
| Loss on sale of assets and business units | — | — | 1,496 | ||||||||
| Other non-cash adjustments | (374 | ) | (79 | ) | 1,707 | ||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | (4,027 | ) | (3,978 | ) | 44,613 | ||||||
| Inventories | 12,116 | 13,177 | (902 | ) | |||||||
| Prepaid expenses and other assets | 3,740 | (11,667 | ) | 889 | |||||||
| Accounts payable and accrued expenses (includes restructuring) | 9,261 | 13,325 | (23,588 | ) | |||||||
| Accrued payroll obligations | 4,039 | (1,051 | ) | 726 | |||||||
| Operating lease liabilities, current and long-term portions | (6,896 | ) | — | — | |||||||
| Income taxes payable | 162 | 498 | (556 | ) | |||||||
| Deferred income and allowances on sales to distributors | — | — | (15,007 | ) | |||||||
| Deferred licensing and services revenue | — | (68 | ) | (495 | ) | ||||||
| Net cash provided by operating activities | 124,137 | 51,458 | 38,514 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from sales of and maturities of short-term marketable securities | 9,655 | 5,000 | 12,689 | ||||||||
| Purchases of marketable securities | — | (9,603 | ) | (7,420 | ) | ||||||
| Proceeds from sale of building | — | — | 7,895 | ||||||||
| Cash paid for costs of sale of building | — | — | (1,004 | ) | |||||||
| Capital expenditures | (15,590 | ) | (8,384 | ) | (12,855 | ) | |||||
| Proceeds from sale of assets and business units, net of cash sold | — | — | 967 | ||||||||
| Repayment received on short-term loan to cost-method investee | — | — | 2,000 | ||||||||
| Short-term loan to cost-method investee | — | — | (2,000 | ) | |||||||
| Cash paid for software licenses | (9,601 | ) | (8,123 | ) | (8,532 | ) | |||||
| Net cash used in investing activities | $ | (15,536 | ) | $ | (21,110 | ) | $ | (8,260 | ) | ||
| The accompanying notes are an integral part of these Consolidated Financial Statements | |||||||||||
| LATTICE SEMICONDUCTOR CORPORATION | |||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) | |||||||||||
| Year Ended | |||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||
| Cash flows from financing activities: | |||||||||||
| Restricted stock unit tax withholdings | $ | (10,084 | ) | $ | (2,370 | ) | $ | (3,267 | ) | ||
| Proceeds from issuance of common stock | 17,166 | 29,288 | 6,085 | ||||||||
| Proceeds from issuance of long-term debt | 206,500 | — | — | ||||||||
| Original issue discount and debt issuance costs | (2,086 | ) | — | — | |||||||
| Repayment of debt | (321,408 | ) | (43,759 | ) | (35,429 | ) | |||||
| Net cash used in financing activities | (109,912 | ) | (16,841 | ) | (32,611 | ) | |||||
| Effect of exchange rate change on cash | 341 | (1,271 | ) | 2,620 | |||||||
| Net (decrease) increase in cash and cash equivalents | (970 | ) | 12,236 | 263 | |||||||
| Beginning cash and cash equivalents | 119,051 | 106,815 | 106,552 | ||||||||
| Ending cash and cash equivalents | $ | 118,081 | $ | 119,051 | $ | 106,815 | |||||
| Supplemental disclosure of cash flow information and non-cash investing and financing activities: | |||||||||||
| Interest paid | $ | 10,995 | $ | 18,607 | $ | 20,649 | |||||
| Operating lease payments | $ | 8,425 | $ | — | $ | — | |||||
| Income taxes paid, net of refunds | $ | 3,393 | $ | 3,054 | $ | 2,387 | |||||
| Accrued purchases of property and equipment | $ | 826 | $ | 110 | $ | 588 | |||||
| Operating lease right-of-use assets obtained in exchange for lease obligations | $ | 747 | $ | — | $ | — | |||||
| Note receivable resulting from sale of assets and business units | $ | — | $ | — | $ | 3,050 | |||||
The accompanying notes are an integral part of these Consolidated Financial StatementsStatements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated | ||||||||||||||||||||||||
Common Stock | Additional | Other | ||||||||||||||||||||||
($.01 par value) | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
(In thousands, except par value data) | Shares | Amount | Capital | Deficit | Income (Loss) | Total | ||||||||||||||||||
Balances, December 29, 2018 | 129,728 | $ | 1,297 | $ | 736,274 | $ | (476,783 | ) | $ | (2,331 | ) | $ | 258,457 | |||||||||||
Components of comprehensive income, net of tax: | ||||||||||||||||||||||||
Net income | — | 0 | 0 | 43,493 | 0 | 43,493 | ||||||||||||||||||
Other comprehensive income (loss) | — | 0 | 0 | 0 | (272 | ) | (272 | ) | ||||||||||||||||
Total comprehensive income | 0 | 0 | 0 | 0 | 43,221 | |||||||||||||||||||
Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes | 4,155 | 42 | 7,040 | 0 | 0 | 7,082 | ||||||||||||||||||
Stock-based compensation expense | — | 0 | 18,899 | 0 | 0 | 18,899 | ||||||||||||||||||
Balances, December 28, 2019 | 133,883 | $ | 1,339 | $ | 762,213 | $ | (433,290 | ) | $ | (2,603 | ) | $ | 327,659 | |||||||||||
Components of comprehensive income, net of tax: | ||||||||||||||||||||||||
Net income | — | 0 | 0 | 47,392 | 0 | 47,392 | ||||||||||||||||||
Other comprehensive income (loss) | — | 0 | 0 | 0 | 855 | 855 | ||||||||||||||||||
Total comprehensive income | 0 | 0 | 0 | 0 | 48,247 | |||||||||||||||||||
Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes | 2,738 | 27 | (16,889 | ) | 0 | 0 | (16,862 | ) | ||||||||||||||||
Stock-based compensation expense | — | 0 | 40,372 | 0 | 0 | 40,372 | ||||||||||||||||||
Repurchase of common stock | (385 | ) | (4 | ) | (14,985 | ) | 0 | 0 | (14,989 | ) | ||||||||||||||
Balances, January 2, 2021 | 136,236 | $ | 1,362 | $ | 770,711 | $ | (385,898 | ) | $ | (1,748 | ) | $ | 384,427 | |||||||||||
Components of comprehensive income, net of tax: | ||||||||||||||||||||||||
Net income | — | 0 | 0 | 95,922 | 0 | 95,922 | ||||||||||||||||||
Other comprehensive income (loss) | — | 0 | 0 | 0 | 297 | 297 | ||||||||||||||||||
Total comprehensive income | 0 | 0 | 0 | 0 | 96,219 | |||||||||||||||||||
Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes | 2,270 | 23 | (45,387 | ) | 0 | 0 | (45,364 | ) | ||||||||||||||||
Stock-based compensation expense | — | 0 | 46,475 | 0 | 0 | 46,475 | ||||||||||||||||||
Repurchase of common stock | (1,267 | ) | (13 | ) | (70,111 | ) | 0 | 0 | (70,124 | ) | ||||||||||||||
Balances, January 1, 2022 | 137,239 | $ | 1,372 | $ | 701,688 | $ | (289,976 | ) | $ | (1,451 | ) | $ | 411,633 | |||||||||||
| Common Stock ($.01 par value) | Additional Paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | |||||||||||||||||||
| (In thousands, except par value data) | Shares | Amount | Total | |||||||||||||||||||
| Balances, December 31, 2016 | 121,645 | $ | 1,216 | $ | 680,315 | $ | (406,945 | ) | $ | (4,156 | ) | $ | 270,430 | |||||||||
| Net loss for 2017 | — | — | — | (70,562 | ) | — | (70,562 | ) | ||||||||||||||
| Unrealized loss related to marketable securities, net of tax | — | — | — | — | (73 | ) | (73 | ) | ||||||||||||||
| Recognized gain on redemption of marketable securities, previously unrealized | — | — | — | — | 252 | 252 | ||||||||||||||||
| Translation adjustments, net of tax | — | — | — | — | 2,620 | 2,620 | ||||||||||||||||
| Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes | 2,250 | 23 | 2,795 | — | — | 2,818 | ||||||||||||||||
| Stock-based compensation expense related to stock options, ESPP and RSUs (1) | — | — | 12,658 | — | — | 12,658 | ||||||||||||||||
| Defined benefit pension, net of actuarial valuation adjustments | — | — | — | — | (95 | ) | (95 | ) | ||||||||||||||
| Accounting method transition adjustment (2) | — | — | — | (355 | ) | — | (355 | ) | ||||||||||||||
| Balances, December 30, 2017 | 123,895 | $ | 1,239 | $ | 695,768 | $ | (477,862 | ) | $ | (1,452 | ) | $ | 217,693 | |||||||||
| Net loss for 2018 | — | — | — | (26,322 | ) | — | (26,322 | ) | ||||||||||||||
| Unrealized gain related to marketable securities, net of tax | — | — | — | — | 41 | 41 | ||||||||||||||||
| Recognized loss on redemption of marketable securities, previously unrealized | — | — | — | — | (18 | ) | (18 | ) | ||||||||||||||
| Translation adjustments, net of tax | — | — | — | — | (1,271 | ) | (1,271 | ) | ||||||||||||||
| Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes | 5,833 | 58 | 26,860 | — | — | 26,918 | ||||||||||||||||
| Stock-based compensation expense related to stock options, ESPP and RSUs | — | — | 13,646 | — | — | 13,646 | ||||||||||||||||
| Defined benefit pension, net of actuarial valuation adjustments | — | — | — | — | 369 | 369 | ||||||||||||||||
| Accounting method transition adjustment (3) | — | — | — | 27,401 | — | 27,401 | ||||||||||||||||
| Balances, December 29, 2018 | 129,728 | $ | 1,297 | $ | 736,274 | $ | (476,783 | ) | $ | (2,331 | ) | $ | 258,457 | |||||||||
| Net income for 2019 | — | — | — | 43,493 | — | 43,493 | ||||||||||||||||
| Unrealized gain related to marketable securities, net of tax | — | — | — | — | 42 | 42 | ||||||||||||||||
| Recognized gain on redemption of marketable securities, previously unrealized | — | — | — | — | (53 | ) | (53 | ) | ||||||||||||||
| Translation adjustments, net of tax | — | — | — | — | 341 | 341 | ||||||||||||||||
| Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes | 4,155 | 42 | 7,040 | — | — | 7,082 | ||||||||||||||||
| Stock-based compensation expense related to stock options, ESPP and RSUs | — | — | 18,899 | — | — | 18,899 | ||||||||||||||||
| Defined benefit pension, net of actuarial valuation adjustments | — | — | — | — | (602 | ) | (602 | ) | ||||||||||||||
| Balances, December 28, 2019 | 133,883 | $ | 1,339 | $ | 762,213 | $ | (433,290 | ) | $ | (2,603 | ) | $ | 327,659 | |||||||||
The accompanying notes are an integral part of these Consolidated Financial StatementsStatements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation and Use of Estimates
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). They include the accounts of Lattice and its subsidiaries after the elimination of all intercompany balances and transactions.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments affecting the amounts reported in our consolidated condensed financial statements and the accompanying notes. TheWe base our estimates and judgments on historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when made, and because of the uncertainty inherent in these matters, the actual results that we experience may differ materially from these estimates under different assumptions or conditions. We evaluate our estimates.
Certain prior year balances have been reclassified to conform to the current year’s presentation.
Fiscal Reporting Periods
We report based on a 52 or 53-week53-week fiscal year ending on the Saturday closest to December 31. Our fiscal 2019, 2018, and 2017 were 52-week years2021 was a 52-week year that ended on January 1, 2022. Our fiscal 2020 was a 53-week year that ended on January 2,2021, and our fiscal 2019 was a 52-week year that ended on December 28, 2019 December 29, 2018, and December 30, 2017 respectively. Our fiscal 2020 will be a 53-week year and will end on January 2, 2021.. All references to quarterly or annual financial results are references to the results for the relevant fiscal period.
Concentrations of Risk
Potential exposure to concentrations of risk may impact revenue, accounts receivable, andand supply of wafers for our new products.
Distributors have historically accounted for a significant portion of our total revenue. Our two largest distributor groups, the Weikeng Group ("Weikeng") and Arrow Electronics, Inc. ("Arrow"), each account for substantial portionsmore than 10% of our total revenue and our net accounts receivable. Revenue attributable to distributors as a percentage of total revenue is presented in the following table:
| Year Ended | ||||||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||
| Weikeng Group | 30 | % | 25 | % | 27 | % | ||
| Arrow Electronics Inc. | 25 | 29 | 24 | |||||
| All others | 27 | 29 | 26 | |||||
| Revenue attributable to distributors* | 82 | % | 83 | % | 77 | % | ||
Year Ended | ||||||||||||
| January 1, | January 2, | December 28, | ||||||||||
| 2022 | 2021 | 2019 | ||||||||||
Weikeng Group | 37 | % | 35 | % | 30 | % | ||||||
Arrow Electronics Inc. | 27 | 25 | 25 | |||||||||
Other distributors | 23 | 23 | 27 | |||||||||
Revenue attributable to distributors | 87 | % | 83 | % | 82 | % | ||||||
At December 28, 2019 January 1, 2022 and December 29, 2018,January 2, 2021, Weikeng accounted for 59% and 47%, respectively, and Arrow accounted for 40%28% and 41%, respectively, and Weikeng accounted for 38% and 23%45%, respectively, of net accounts receivable. No other distributor group or end customer accounted for more than 10% of net accounts receivable at these dates.
Concentration of credit risk with respect to accounts receivable is mitigated by our credit and collection process including active management of collections, credit limits, routine credit evaluations for essentially all customers, and secure transactions with letters of credit or advance payments where appropriate. We regularly review our allowance for doubtful accounts and the aging of our accounts receivable.
We rely on a limited number of foundries for our wafer purchases. We seek to mitigate the concentration of supply risk by establishing, maintaining and managing multiple foundry relationships; however, certain of our products are sourced from a single foundry and changing from one foundry to another can have a significant cost, or create delays in production or shipments, among other factors.
We consider all investments that are readily convertible into cash and that have original maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of highly liquid investments in time deposits or money market accounts and are carried at cost, which approximates fair value. Deposits with financial institutions at times exceed Federal Deposit Insurance Corporation insurance limits.
Foreign Exchange and Translation of Foreign Currencies
While our revenues and the majority of our expenses are denominated in U.S. dollars, we also have international subsidiaries and branch operations that conduct some transactions in foreign currencies.currencies that differ from the functional currency of that entity. Gains or losses from foreign exchange rate fluctuations on balances denominated in foreigncurrencies that differ from the functional currencies are reflected in Other expense, net.
We translate accounts denominated in foreign currencies in accordance with ASC 830, “
Revenue Recognition
Under the guidance in effect prior to the adoptionterms of ASC 606, we deferred the recognition of revenue and the cost of revenue"Revenue from certain sales until the distributors of our products reported that they had sold the products to their customers, at which point the selling price of these products became fixed and determinable, and certain licensing revenues were not recognizable under previous GAAP due to the fixed and determinable revenue recognition criteria not being met.
Our Licensing and services revenue is comprised of revenue from our intellectual property ("IP")IP core licensing activity, patent monetization activities, design services, and royalty and adopter fee revenue from our standards activities. These activities are complementary to our product sales and help us to monetize our IP associated with our technology and standards. We consider licensing arrangements with our customers and agreements with the standards consortia of which we are a member to be the contract. For each contract, we consider the promise to deliver a license that grants the customer the right to use the IP, as well as any professional services provided under the contract, as distinct performance obligations. We recognize license revenue at the point in time that control of the license transfers to the customer, which is generally upon delivery, or as usage occurs.
We measure revenue based on the amount of consideration we expect to be entitled to in exchange for products or services. Variable consideration is estimated and reflected as an adjustment to the transaction price. We determine variable consideration, which consists primarily of various sales price concessions, by estimating the most likely amount of consideration we expect to receive from the customer based on an analysis of historical ship and debitrebate claims at the distributor and product level, over a period of time considered adequate to account for current pricing and business trends. Sales rebates earned by customers are offset against their receivable balances. Rebates earned by customers when they do not have outstanding receivable balances are recorded within other accrued liabilities. The impacts of distributor sales price reductions resulting from price protection agreements are also estimated based on historical analysis of such activityAccrued expenses. Licensing and are reflected as a reduction in net revenue. Ourservices revenue, which includes HDMI and MHL standards revenue, as well as certain IP licenses, includeincludes variable consideration in the form of usage-based royalties.
We generally provide an assurance warranty that our products will substantially conform to the published specifications for twelve months from the date of shipment. In some cases, the warranty period may be longer than twelve months. We do not separately price or sell the assurance warranty. Our liability is limited to either a credit equal to the purchase price or replacement of the defective part. Under the practical expedient provided by ASC 340, we generally expense sales commissions when incurred because the amortization period would be less than one year. We record these costs within Selling, general, and administrative expenses. Substantially all of our performance obligations are satisfied within twelve months. Accordingly, under the optional exemption provided by ASC 606, we do not disclose revenues allocated to future performance obligations
Inventories are recordedstated at the lower of averageactual cost determined(determined using the first-in, first-out method) or net realizable value. We review and set standard costs quarterly to approximate current actual manufacturing costs. Our manufacturing overhead standards for product costs are calculated assuming full absorption of actual spending over actual costs. The valuation of inventory requires us to estimate excess or obsolete inventory. Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on a first-in-first-out basis or market. We establishspecific facts and circumstances. In determining provisions for inventory if it isexcess or obsolete orproducts, we hold quantities which areconsider assumptions such as changes in excess ofbusiness and economic conditions, projected customer demand.demand for our products, and changes in technology or customer requirements. The creation of such provisions results in a write-down of inventory to net realizable value and a charge to Cost of revenue. Lower of cost or net realizable value is based on assumptions such as recent historical sales activity and selling prices, as well as estimates of future sales activity and selling prices. Shipping and handling costs are included in Cost of revenue in our Consolidated Statements of Operations.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, generally three to five years for equipment and software, and one to three years for tooling, and thirty years for buildings and building space.tooling. Leasehold improvements are amortized over the shorter of the non-cancelable lease term or the estimated useful life of the assets. We capitalize costs for the fabrication of masks used by our foundry partners to manufacture our products. The capitalized mask costs begin depreciating to Cost of revenue once the products go into production, and depreciation is straight-lined over a three-yearthree-year period, which is the expected useful life of the mask. Upon disposal of property and equipment, the accounts are relieved of the costs and related accumulated depreciation and amortization, and resulting gains or losses are reflected in the Consolidated Statements of Operations for recognized gains and losses, or in the Consolidated Balance Sheets for deferred gains and losses. Repair and maintenance costs are expensed as incurred.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting, under which we allocate the purchase price paid for a company to identifiable assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Goodwill is measured as the excess of purchase price over the fair value of identifiable assets acquired and liabilities assumed. Determining the fair value of identifiable tangible and intangible assets acquired and liabilities assumed requires management to make assumptions, estimates, and judgments that are based on all available information, including comparable market data and information obtained from our management and the management of the acquired companies. The estimation of the fair values of the intangible assets requires significant judgment and the use of valuation techniques including primarily the income approach. Consideration is given to all relevant factors that might affect the fair value such as estimates of future revenues and costs, present value factors, and the estimated useful lives of intangible assets. We expense acquisition-related costs in the period incurred.
Impairment of Long-Lived Assets
Long-lived assets, which consist primarily of property and equipment, and amortizable intangible assets, and right-of-use assets, are carried on our financial statements based on their cost less accumulated depreciation or amortization. We monitor the carrying value of our long-lived assets for potential impairment and test the recoverability of such assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. These events or changes in circumstances, including management decisions pertaining to such assets, are referred to as impairment indicators. If an impairment indicator occurs, we perform a test of recoverability by comparing the carrying value of the asset group to its undiscounted expected future cash flows. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset group to its carrying value. Fair value is generally determined by considering (i) internally developed discounted projected cash flow analysis of the asset group; (ii) actual third-partythird-party valuations; and/or (iii) information available regarding the current market for similar asset groups. If the fair value of the asset group is determined to be less than the carrying amount of the asset group, an impairment in the amount of the difference is recorded in the period that the impairment indicator occurs and is included in our Consolidated Statements of Operations. Estimating future cash flows requires significant judgment and projections may vary from the cash flows eventually realized, which could impact our ability to accurately assess whether an asset has been impaired. There has been no occurrence
Valuation of Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is not amortized, but is instead tested for impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. When evaluating whether goodwill is impaired, we make a qualitative assessment to determine if it is more likely than not that the reporting unit's fair value is less than the carrying amount. If the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, then goodwill impairment exists for the reporting unit. The impairment loss, if any, is recognized for the amount by which the carrying value exceeds the fair value. If the fair value of the reporting unit exceeds its carrying value, no further impairment analysis is needed. For purposes of testing goodwill for impairment, we currently operate as a single reporting unit:unit.
Leases
We account for leases under the core Lattice ("Core") business, which includes intellectual property and semiconductor devices. We do not expect goodwill impairment to be tax deductible for income tax purposes.
Right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized on the commencement date of the lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we determine the present value of lease payments using an incremental borrowing rate based on information from our commercial bank for an equivalent borrowing and term in the respective region as of the lease commencement date. At inception, we determine if an arrangement is a lease, if it includes options to extend or terminate the lease, and if it is reasonably certain that we will exercise the options. Lease cost, representing lease payments over the term of the lease and any capitalizable direct costs less any incentives received, is recognized on a straight-line basis over the lease term as lease expense. We have operating leases for corporate offices, sales offices, research and development facilities, storage facilities, and a data center.
The exercise of lease renewal options is at our sole discretion. When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term and lease payment obligation, respectively. For our leases that contain variable lease payments, residual value guarantees, or restrictive covenants, we have concluded that these inputs are not significant to the determination of the ROU asset and lease liability.
Research and Development
Research and development expenses include costs for compensation and benefits, engineering wafers, depreciation, licenses, and outside engineering services. These expenditures are for the design of new products, intellectual property cores, processes, packaging, and software solutions. Research and development costs are generally expensed as incurred.
Restructuring Charges
Expenses associated with exit or disposal activities are recognized when incurred under ASC 420, “
Exit or Disposal Cost Obligations,” for everything except severance expenses and vacated leased facilities. Because we have a history of paying severance benefits, the cost of severance benefits associated with a restructuring plan is recorded when such costs are probable and the amount can be reasonably estimated in accordance with ASC 712, “Compensation - Nonretirement Postemployment Benefits.” When leased facilities are vacated, the amount of any ROU asset impairment is calculated in accordance with ASC 360, "Property, Plant, and Equipment" and recorded as a part of restructuring charges. Expenses from other exit or disposal activities, including the cancellation of software contracts and engineering tools or the abandonment of long-lived assets, is recorded as a part ofWe are required to estimate our provision for income taxes and amounts ultimately payable or recoverable in numerous tax is comprisedjurisdictions around the world. These estimates involve significant judgment and interpretations of our currentregulations and are inherently complex. Resolution of income tax liability and changestreatments in deferred tax assets and liabilities.individual jurisdictions may not be known for many years after completion of the applicable year. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that in management’s judgment is more-likely-than-notmore-likely-than-not to be recoverable against future taxable income. The determination of a valuation allowance and when it should be released requires complex judgment.
In assessing the ability to realize deferred tax assets, we evaluate both positive and negative evidence that may exist and consider whether it is more-likely-than-notmore-likely-than-not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Any adjustment to the net deferred tax asset valuation allowance is recorded in the Consolidated Statements of Operations for the period that the adjustment is determined to be required.
Our income tax calculations are based on application of the respective U.S. federal, state or foreign tax law
. Our tax filings, however, are subject to audit by the relevant tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates areStock-Based Compensation
We use the Black-Scholes option pricing model to estimate the fair value of substantially all share-based awards consistent with the provisions of ASC 718, “
Segment Information
As of December 28, 2019, January 1, 2022, we had one operating segment: the core Lattice business, which includes semiconductor devices,silicon-based and silicon-enabling products, evaluation boards, development hardware, and related intellectual property licensing, services, and sales. Our chief operating decision maker is the Chief Executive Officer, who reviews operating results and financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance.
Note 2 - Net Income (Loss) Per Share
Our calculation of the diluted share count includes the number of shares from our equity awards with market conditions or performance conditions that would be issuable under the terms of such awards at the end of the reporting period. For equity awards with a market condition, the maximum number of shares issuable are included in the diluted share count as of December 28, 2019, asthe end of each period presented is determined by measuring the achievement of the market condition would have been achieved at the highest level of vesting if measured as of the end of the respective reporting period.periods. For equity awards with a performance condition, nothe number of shares that qualified for vesting as of the end of each period presented are included in the diluted share count as of December 28, 2019, as vesting of these awards is contingent upon achievementwhen the condition for their issuance was satisfied by the end of the performance condition over two consecutive trailing four-quarter periods, which has not yet been achieved.respective reporting periods. See "
A summary of basic and diluted Net income (loss) per share is presented in the following table:
| Year Ended | ||||||||||||
| (in thousands, except per share data) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||
| Net income (loss) | $ | 43,493 | $ | (26,322 | ) | $ | (70,562 | ) | ||||
| Shares used in basic Net income (loss) per share | 132,471 | 126,564 | 122,677 | |||||||||
| Dilutive effect of stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition | 4,803 | — | — | |||||||||
| Shares used in diluted Net (loss) income per share | 137,274 | 126,564 | 122,677 | |||||||||
| Basic Net income (loss) per share | $ | 0.33 | $ | (0.21 | ) | $ | (0.58 | ) | ||||
| Diluted Net income (loss) per share | $ | 0.32 | $ | (0.21 | ) | $ | (0.58 | ) | ||||
Year Ended | ||||||||||||
January 1, | January 2, | December 28, | ||||||||||
(in thousands, except per share data) | 2022 | 2021 | 2019 | |||||||||
Net income | $ | 95,922 | $ | 47,392 | $ | 43,493 | ||||||
Shares used in basic Net income per share | 136,619 | 135,220 | 132,471 | |||||||||
Dilutive effect of stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition | 5,524 | 6,056 | 4,803 | |||||||||
Shares used in diluted Net income per share | 142,143 | 141,276 | 137,274 | |||||||||
Basic Net income per share | $ | 0.70 | $ | 0.35 | $ | 0.33 | ||||||
Diluted Net income per share | $ | 0.67 | $ | 0.34 | $ | 0.32 | ||||||
The computation of diluted Net income (loss) per share excludes the effects of stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition that are antidilutive, aggregating to approximately the following number of shares:
Year Ended | ||||||||||||
January 1, | January 2, | December 28, | ||||||||||
(in thousands) | 2022 | 2021 | 2019 | |||||||||
Stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition excluded as they are antidilutive | 638 | 646 | 890 | |||||||||
| Year Ended | |||||||||
| (in thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||
| Stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition excluded as they are antidilutive | 890 | 7,567 | 6,622 | ||||||
Note 3 - Revenue from Contracts with Customers
Disaggregation of Revenue
The following tables provide disaggregation ofinformation about revenue from contracts with customers by major class of revenue, revenuedisaggregated by channel and by geographical market, based on ship-to location of the end customer, where available, and ship-to location of distributor otherwise:
| Major Class of Revenue | Year Ended * | |||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||||||
| Product | $ | 382,548 | 95% | $ | 380,468 | 95% | $ | 356,502 | 92% | |||||||
| Licensing and services | 21,545 | 5% | 18,331 | 5% | 29,459 | 8% | ||||||||||
| Total revenue | $ | 404,093 | 100% | $ | 398,799 | 100% | $ | 385,961 | 100% | |||||||
| Revenue by Channel | Year Ended * | |||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||||||
| Product revenue - Distributors | $ | 331,941 | 82% | $ | 330,719 | 83% | $ | 297,736 | 77% | |||||||
| Product revenue - Direct | 50,607 | 13% | 49,749 | 12% | 58,766 | 15% | ||||||||||
| Licensing and services revenue | 21,545 | 5% | 18,331 | 5% | 29,459 | 8% | ||||||||||
| Total revenue | $ | 404,093 | 100% | $ | 398,799 | 100% | $ | 385,961 | 100% | |||||||
| Revenue by Geographical Market | Year Ended * | |||||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||||||
| Asia | $ | 298,765 | 74% | $ | 298,119 | 75% | $ | 277,638 | 72% | |||||||
| Europe | 47,392 | 12% | 45,546 | 11% | 44,547 | 12% | ||||||||||
| Americas | 57,936 | 14% | 55,134 | 14% | 63,776 | 16% | ||||||||||
| Total revenue | $ | 404,093 | 100% | $ | 398,799 | 100% | $ | 385,961 | 100% | |||||||
| * | Amounts in periods prior to fiscal 2018 have not been adjusted under the modified retrospective method of adopting ASC 606 and, therefore, are presented under GAAP in effect during that period. | |||||||||||||||
Year Ended | ||||||||||||||||||||||||
Revenue by Channel | January 1, | January 2, | December 28, | |||||||||||||||||||||
(In thousands) | 2022 | 2021 | 2019 | |||||||||||||||||||||
Product revenue - Distributors | $ | 449,650 | 87 | % | $ | 339,100 | 83 | % | $ | 331,941 | 82 | % | ||||||||||||
Product revenue - Direct | 45,202 | 9 | % | 49,402 | 12 | % | 50,607 | 13 | % | |||||||||||||||
Licensing and services | 20,475 | 4 | % | 19,618 | 5 | % | 21,545 | 5 | % | |||||||||||||||
Total revenue | $ | 515,327 | 100 | % | $ | 408,120 | 100 | % | $ | 404,093 | 100 | % | ||||||||||||
Revenue by Geographical Market | ||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
United States | $ | 60,176 | 12 | % | $ | 43,945 | 11 | % | $ | 44,330 | 11 | % | ||||||||||||
Other Americas | 20,694 | 4 | % | 18,192 | 4 | % | 13,606 | 3 | % | |||||||||||||||
Americas | 80,870 | 16 | % | 62,137 | 15 | % | 57,936 | 14 | % | |||||||||||||||
China | 281,237 | 55 | % | 213,714 | 52 | % | 206,107 | 51 | % | |||||||||||||||
Japan | 47,915 | 9 | % | 25,435 | 6 | % | 42,658 | 11 | % | |||||||||||||||
Other Asia | 55,416 | 10 | % | 66,034 | 17 | % | 50,000 | 12 | % | |||||||||||||||
Asia | 384,568 | 74 | % | 305,183 | 75 | % | 298,765 | 74 | % | |||||||||||||||
Europe | 49,889 | 10 | % | 40,800 | 10 | % | 47,392 | 12 | % | |||||||||||||||
Total revenue | $ | 515,327 | 100 | % | $ | 408,120 | 100 | % | $ | 404,093 | 100 | % | ||||||||||||
Contract balances
Our contract assets relate to our rights to consideration for licenses and royalties due to us as a member of the HDMI consortium, with collection dependent on events other than the passage of time, such as collection of licenses and royalties from customers by the HDMI licensing agent. The balance results primarily from the amount of estimated revenue related to HDMI that we have recognized to date, but which has not yet been collected by the agent. Contract assets are recorded in Prepaid expenses and other current assets in our Consolidated Balance Sheets.
The following table summarizes activity during the periods presented:
| (In thousands) | |||
| Balance as of December 31, 2017 | $ | 7,515 | |
| Revenues recorded during the period | 11,618 | ||
| Transferred to accounts receivable or collected | (9,990 | ) | |
| Contract assets as of December 29, 2018 | 9,143 | ||
| Revenues recorded during the period | 17,356 | ||
| Transferred to Accounts receivable or collected | (20,930 | ) | |
| Contract assets as of December 28, 2019 | $ | 5,569 | |
(In thousands) | ||||
Contract assets as of December 28, 2019 | $ | 5,569 | ||
Revenues recorded during the period | 15,860 | |||
Transferred to Accounts receivable or collected | (15,818 | ) | ||
Contract assets as of January 2, 2021 | $ | 5,611 | ||
Revenues recorded during the period | 15,587 | |||
Transferred to Accounts receivable or collected | (15,526 | ) | ||
Contract assets as of January 1, 2022 | $ | 5,672 |
Contract liabilities are included in Accounts payable and accruedAccrued expenses on our Consolidated Balance Sheets. The following table summarizes activity during the periods presented:
(In thousands) | ||||
Contract liabilities as of December 28, 2019 | $ | 2,313 | ||
Accruals for estimated future stock rotation and scrap returns | 5,976 | |||
Less: Release of accruals for recognized stock rotation and scrap returns | (5,221 | ) | ||
Contract liabilities as of January 2, 2021 | $ | 3,068 | ||
Accruals for estimated future stock rotation and scrap returns | 4,613 | |||
Less: Release of accruals for recognized stock rotation and scrap returns | (2,913 | ) | ||
Contract liabilities as of January 1, 2022 | $ | 4,768 |
| (In thousands) | |||
| Contract liabilities as of December 31, 2017 | $ | — | |
| Accruals for estimated future stock rotation and scrap returns | 4,281 | ||
| Less: Release of accruals for recognized stock rotation and scrap returns | (2,667 | ) | |
| Contract liabilities as of December 29, 2018 | 1,614 | ||
| Accruals for estimated future stock rotation and scrap returns | 5,763 | ||
| Less: Release of accruals for recognized stock rotation and scrap returns | (5,064 | ) | |
| Contract liabilities as of December 28, 2019 | $ | 2,313 | |
| Condensed Consolidated Statement of Operations | ||||||||||||
| Year ended December 29, 2018 | ||||||||||||
| (In thousands, except per share data) | As reported under new standard | Adjustments | Pro forma as if previous standard was in effect | |||||||||
| Product revenue | $ | 380,468 | $ | (14,098 | ) | $ | 366,370 | |||||
| Licensing and services revenue | 18,331 | (1,478 | ) | 16,853 | ||||||||
| Cost of product revenue | 179,101 | (6,399 | ) | 172,702 | ||||||||
| Net loss | $ | (26,322 | ) | $ | (9,177 | ) | $ | (35,499 | ) | |||
| Net loss per share, basic and diluted | $ | (0.21 | ) | $ | (0.07 | ) | $ | (0.28 | ) | |||
| Condensed Consolidated Balance Sheets | ||||||||||||
| As of December 29, 2018 | ||||||||||||
| (In thousands) | As reported under new standard | Adjustments | Pro forma as if previous standard was in effect | |||||||||
| Accounts receivable, net of allowance for doubtful accounts | $ | 60,890 | $ | 6,600 | $ | 67,490 | ||||||
| Inventories | 67,096 | 78 | 67,174 | |||||||||
| Prepaid expenses and other current assets | 27,762 | (9,775 | ) | 17,987 | ||||||||
| Total assets | $ | 623,687 | $ | (3,097 | ) | $ | 620,590 | |||||
| Accounts payable and accrued expenses (includes restructuring) | $ | 51,763 | $ | (1,156 | ) | $ | 50,607 | |||||
| Deferred income and allowances on sales to distributors | — | 34,637 | 34,637 | |||||||||
| Accumulated deficit | (476,783 | ) | (36,578 | ) | (513,361 | ) | ||||||
| Total liabilities and stockholders' equity | $ | 623,687 | $ | (3,097 | ) | $ | 620,590 | |||||
| Condensed Consolidated Statement of Cash Flows | ||||||||||||
| Year ended December 29, 2018 | ||||||||||||
| (In thousands) | As reported under new standard | Adjustments | Pro forma as if previous standard was in effect | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss | $ | (26,322 | ) | $ | (9,177 | ) | $ | (35,499 | ) | |||
| Accounts receivable, net | (3,978 | ) | (8,408 | ) | (12,386 | ) | ||||||
| Inventories | 13,177 | (448 | ) | 12,729 | ||||||||
| Prepaid expenses and other assets | (11,667 | ) | 2,260 | (9,407 | ) | |||||||
| Accounts payable and accrued expenses (includes restructuring) | 13,325 | (1,614 | ) | 11,711 | ||||||||
| Deferred income and allowances on sales to distributors | $ | — | $ | 17,387 | $ | 17,387 | ||||||
Note 4 - Balance Sheet Components
| (In thousands) | December 28, 2019 | December 29, 2018 | |||||
| Short-term marketable securities: | |||||||
| Maturing within one year | $ | — | $ | 7,454 | |||
| Maturing between one and two years | — | 2,170 | |||||
| Total marketable securities | $ | — | $ | 9,624 | |||
Accounts Receivable
Accounts receivable do not bear interest and are shown net of allowances for doubtful accounts. Thean allowance for doubtful accountsexpected lifetime credit losses, which reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine thethis allowance based onthrough an assessment of known troubled accounts, analysis of the aging of our accounts receivable aging, historical experience, expectations for future economic conditions, management judgment, and other currently available evidence.
| (In thousands) | December 28, 2019 | December 29, 2018 | |||||
| Accounts receivable | $ | 65,023 | $ | 61,087 | |||
| Less: Allowance for doubtful accounts | (106 | ) | (197 | ) | |||
| Accounts receivable, net of allowance for doubtful accounts | $ | 64,917 | $ | 60,890 | |||
Fiscal Years Ended (In thousands) | Balance at beginning of period | Charged (Credit) to costs and expenses | Charged (credit) to other accounts | Settlements & write-offs net of recoveries | Balance at end of period | |||||||||||||||
| Allowance for doubtful accounts | ||||||||||||||||||||
| December 28, 2019 | $ | 197 | $ | (30 | ) | $ | (12 | ) | $ | (49 | ) | $ | 106 | |||||||
| December 29, 2018 | $ | 9,371 | $ | 1 | $ | 73 | $ | (9,248 | ) | $ | 197 | |||||||||
| December 30, 2017 | $ | 9,299 | $ | 3 | $ | 38 | $ | 31 | $ | 9,371 | ||||||||||
January 1, | January 2, | |||||||
(In thousands) | 2022 | 2021 | ||||||
Accounts receivable | $ | 79,859 | $ | 64,635 | ||||
Less: Allowance for credit losses | 0 | (54 | ) | |||||
Accounts receivable, net of allowance for credit losses | $ | 79,859 | $ | 64,581 | ||||
We had no impact on Accounts Receivable material bad debt expense in fiscal 2018, as we had recorded a full allowance against our accounts receivable, net2021,2020, or 2019.
Inventories
January 1, | January 2, | |||||||
(In thousands) | 2022 | 2021 | ||||||
Work in progress | $ | 43,546 | $ | 34,724 | ||||
Finished goods | 24,048 | 29,875 | ||||||
Total inventories, net | $ | 67,594 | $ | 64,599 | ||||
| (In thousands) | December 28, 2019 | December 29, 2018 | |||||
| Work in progress | $ | 39,855 | $ | 47,224 | |||
| Finished goods | 15,125 | 19,872 | |||||
| Total inventories | $ | 54,980 | $ | 67,096 | |||
Accrued Expenses
Included in Accounts payable and accruedAccrued expenses in the Consolidated Balance Sheets are the following balances:
| (In thousands) | December 28, 2019 | December 29, 2018 | |||||
| Trade accounts payable | $ | 44,350 | $ | 31,880 | |||
| Liability for non-cancelable contracts | 6,964 | 6,078 | |||||
| Restructuring | 3,060 | 4,220 | |||||
| Other accrued expenses | 5,881 | 9,585 | |||||
| Total accounts payable and accrued expenses | $ | 60,255 | $ | 51,763 | |||
January 1, | January 2, | |||||||
(In thousands) | 2022 | 2021 | ||||||
Liability for non-cancelable contracts | $ | 9,930 | $ | 8,492 | ||||
Current portion of operating lease liabilities | 5,696 | 4,149 | ||||||
Contract liability under ASC 606 | 4,768 | 3,068 | ||||||
Other accrued expenses | 6,050 | 5,702 | ||||||
Total accrued expenses | $ | 26,444 | $ | 21,411 | ||||
Cloud Based Computing Implementation Costs
Under the fourth quarter of fiscal 2019, we early adoptedguidance in ASU 2018-15,
(In thousands) | ||||
Cloud based computing implementation costs as of December 28, 2019 | $ | 2,543 | ||
Costs capitalized | 983 | |||
Amortization | (695 | ) | ||
Cloud based computing implementation costs as of January 2, 2021 | $ | 2,831 | ||
Costs capitalized | 324 | |||
Amortization | (775 | ) | ||
Cloud based computing implementation costs as of January 1, 2022 | $ | 2,380 |
Note 5 - Property and Equipment
| (In thousands) | December 28, 2019 | December 29, 2018 | |||||
| Production equipment and software | $ | 150,591 | $ | 160,979 | |||
| Leasehold improvements | 12,517 | 12,648 | |||||
| Office furniture and equipment | 2,112 | 2,623 | |||||
| 165,220 | 176,250 | ||||||
| Accumulated depreciation and amortization | (125,990 | ) | (141,367 | ) | |||
| $ | 39,230 | $ | 34,883 | ||||
| January 1, | January 2, | |||||||
(In thousands) | 2022 | 2021 | ||||||
Production equipment and software | $ | 133,039 | $ | 135,774 | ||||
Leasehold improvements | 12,960 | 12,913 | ||||||
Office furniture and equipment | 2,000 | 2,161 | ||||||
| 147,999 | 150,848 | |||||||
Accumulated depreciation and amortization | (109,905 | ) | (111,182 | ) | ||||
| $ | 38,094 | $ | 39,666 | |||||
For fiscal years 2021 and 2020, depreciation and amortization expense for property and equipment was $12.0 million and $11.8 million, respectively. For fiscal year 2019, depreciation and amortization expense for property and equipment was $11.6 million, including $0.4 million of restructuring expense. For fiscal year 2018, depreciation and amortization expense for property and equipment was $13.4 million, including $0.6 million of restructuring expense. For fiscal year 2017, depreciation and amortization expense for property and equipment was $16.3 million.
Property and Equipment – Geographic Information
Our Property and equipment, net by country at the end of each period was as follows:
| January 1, | January 2, | |||||||
(In thousands) | 2022 | 2021 | ||||||
United States | $ | 26,509 | $ | 29,440 | ||||
Taiwan | 6,555 | 5,171 | ||||||
Philippines | 2,498 | 2,912 | ||||||
China | 1,643 | 1,537 | ||||||
Other | 889 | 606 | ||||||
Total foreign property and equipment, net | 11,585 | 10,226 | ||||||
Total property and equipment, net | $ | 38,094 | $ | 39,666 | ||||
| (In thousands) | December 28, 2019 | December 29, 2018 | |||||
| United States | $ | 32,313 | $ | 27,353 | |||
| China | 1,683 | 2,360 | |||||
| Philippines | 2,683 | 3,319 | |||||
| Taiwan | 1,885 | 949 | |||||
| Japan | 283 | 324 | |||||
| Other | 383 | 578 | |||||
| Total foreign property and equipment, net | 6,917 | 7,530 | |||||
| Total property and equipment, net | $ | 39,230 | $ | 34,883 | |||
Note 6 - Business Combination and Goodwill
On November 12, 2021, we acquired 100% of the outstanding shares of Mirametrix, Inc. ("Mirametrix"), an innovator in advanced AI software and computer vision ("CV") applications. This acquisition combines Mirametrix technology and expertise with Lattice’s innovative hardware and software solution stacks to create an end-to-end AI and computer vision solution that spans from the hardware to the application layer. Total consideration to acquire Mirametrix was $68.5 million, paid 100% in cash to Mirametrix shareholders. There is 0 contingent consideration included in the determination of the purchase consideration.
Purchase consideration was allocated to the tangible and intangible assets and liabilities assumed on the basis of the respective estimated fair values on the acquisition date. The purchase price allocation has been substantially completed, but may be subject to revision as we perform and complete more detailed analysis of certain tax matters. The fair values of the assets acquired and liabilities assumed in the acquisition of Mirametrix, by major class, were recognized as follows:
(In thousands) | Estimated Fair Value | |||
Assets acquired: | ||||
Cash and cash equivalents | $ | 437 | ||
Accounts receivable | 3,265 | |||
Other current assets | 262 | |||
Property and equipment | 156 | |||
Intangible assets | 24,800 | |||
Goodwill | 47,844 | |||
Total assets acquired | 76,764 | |||
Liabilities assumed | ||||
Accounts payable | 21 | |||
Accrued expenses | 5 | |||
Accrued payroll obligations | 247 | |||
Long-term liabilities | 7,955 | |||
Total liabilities assumed | 8,228 | |||
Fair value of net assets acquired | $ | 68,536 | ||
The following table presents details of the identified intangible assets acquired through the acquisition of Mirametrix:
Useful Life | Fair Value | |||||||
(In years) | (In thousands) | |||||||
Existing technology | 7 | $ | 13,500 | |||||
Customer relationships | 7 | 9,800 | ||||||
Trade name / trademarks | 10 | 1,500 | ||||||
Total identified intangible assets subject to amortization | $ | 24,800 | ||||||
We do not believe there is any significant residual value associated with these intangible assets. We are amortizing the intangible assets using the straight-line method over their estimated useful lives.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. The goodwill recognized in the acquisition of Mirametrix was derived from expected benefits from cost synergies and the knowledgeable and experienced workforce who joined the Company after the acquisition. Goodwill resulting from the acquisition is not deductible for Canada income tax purposes.
The goodwill balance of approximately $315.4 million at January 1, 2022 is comprised of approximately $267.5 million from prior acquisitions combined with the approximately $47.8 million from the acquisition of Mirametrix. NaN impairment charges relating to goodwill were recorded for fiscal 2021, 2020, or 2019.
In connection with our acquisitions of Mirametrix, Inc. in November 2021, Silicon Image, Inc. in March 2015, and SiliconBlue Technologies, Inc. in December 2011, we recorded identifiable intangible assets related to developed technology, customer relationships, licensed technology, patents, and in-process research and development based on guidance for determining fair value under the provisions of ASC 820, "Fair Value Measurements." We are amortizing the intangible assets using the straight-line method over their estimated useful lives. Additionally, we have entered into license agreements for third-party technology and recorded them as intangible assets. These licenses are being amortized to Research and development expense over their estimated useful lives. NaN impairment charges relating to acquired intangible assets were recorded for fiscal 2021, 2020, or 2019.
The following tables summarize the details of our Intangible assets, net as of January 1, 2022 and January 2, 2021:
January 1, 2022 | ||||||||||||||||
(In thousands) | Weighted Average Amortization Period (in years) | Gross | Accumulated Amortization | Intangible assets, net | ||||||||||||
Existing technology | 5.1 | $ | 124,487 | $ | (111,090 | ) | $ | 13,397 | ||||||||
Customer relationships | 6.1 | 32,734 | (22,947 | ) | 9,787 | |||||||||||
Trade name / trademarks | 10.0 | 1,500 | (19 | ) | 1,481 | |||||||||||
Licensed technology | 6.3 | 6,551 | (1,434 | ) | 5,117 | |||||||||||
Total identified intangible assets | $ | 165,272 | $ | (135,490 | ) | $ | 29,782 | |||||||||
January 2, 2021 | ||||||||||||||||
(In thousands) | Weighted Average Amortization Period (in years) | Gross | Accumulated Amortization | Intangible assets, net | ||||||||||||
Developed technology | 5.0 | $ | 110,987 | $ | (109,162 | ) | $ | 1,825 | ||||||||
Customer relationships | 5.8 | 22,934 | (22,281 | ) | 653 | |||||||||||
Licensed technology | 6.6 | 4,376 | (533 | ) | 3,843 | |||||||||||
Total identified intangible assets | $ | 138,297 | $ | (131,976 | ) | $ | 6,321 | |||||||||
We recorded amortization expense related to intangible assets on the Consolidated Statements of Operations as presented in the following table:
Year Ended | ||||||||||||
January 1, | January 2, | December 28, | ||||||||||
(In thousands) | 2022 | 2021 | 2019 | |||||||||
Research and development | $ | 901 | $ | 124 | $ | 55 | ||||||
Amortization of acquired intangible assets | 2,613 | 4,449 | 13,558 | |||||||||
| $ | 3,514 | $ | 4,573 | $ | 13,613 | |||||||
The annual expected amortization expense of acquired intangible assets is as follows:
Fiscal year | (in thousands) | |||
2022 | $ | 4,771 | ||
2023 | 4,492 | |||
2024 | 4,280 | |||
2025 | 4,233 | |||
2026 | 4,233 | |||
Thereafter | 7,773 | |||
Total | $ | 29,782 | ||
On May 17, 2019, we entered into a new credit agreement (the “Current Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent, and other lenders. The Current Credit Agreement, which provides for a five-yearfive-year secured term loan facility in an aggregate principal amount of $175.0 million and a five-yearfive-year secured revolving loan facility in an aggregate principal amount of up to $75.0 million, along with other components and options, such as a letter of credit, swing line, or expansion of the revolver, currently not in use, which are more fully described in the Current Credit Agreement.
We used the $175.0 million term loan proceeds and an initial $31.5 million revolving loan draw at closing to (i) repay the $204.4 million obligation outstanding under our previous credit agreement (the “Previous Credit Agreement”) with Jefferies Finance LLC, as administrative agent,, and (ii) pay fees and expenses totaling $2.1 million incurred in connection with the Current Credit Agreement. The revolving loan may be used for working capital and general corporate purposes. With the repayment of our obligations under the Previous Credit Agreement, we wrote off the remaining unamortized balance of the related original issue discount and debt costs, which we recorded as a $2.2 million loss on refinancing in Other expense, net on our Consolidated Statements of Operations in the second quarter of fiscal 2019.
At our option, the term loan and the revolving loan (collectively, "long-term debt") accrue interest at a per annum rate based on either (i) the base rate plus a margin ranging from 0.25% to 1.00%, determined based on our total leverage ratio or (ii) the London Interbank Offered Rate ("LIBOR") for interest periods of 1,2,3 or 6 months plus a margin ranging from 1.25% to 2.00%, determined based on our total leverage ratio. The base rate is defined as the highest of (i) the federal funds rate, plus 0.50%, (ii) Wells Fargo Bank, National Association’s prime rate or (iii) the LIBOR rate for a 1-month1-month interest period plus 1.00%. As of December 28, 2019, January 1, 2022, the effective interest rate on the term loan was 3.16%1.57%, and the effective interest rate on the revolving loan did not have an outstanding balance.was 1.35%. We pay a commitment fee of 0.20% on the unused portion of the revolving loan.
The term loan is payable through a combination of (i) required quarterly installments of approximately $4.4 million, and (ii) any payments due upon certain issuances of additional indebtedness and certain asset dispositions, with any remaining outstanding principal amount due and payable on the maturity date of the term loan. The revolving loan is payable at our discretion, with any remaining outstanding principal amount due and payable on the maturity date of the revolving loan.
The Current Credit Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company to, among other things, incur debt, grant liens, undergo certain fundamental changes, make investments, make certain restricted payments, dispose of assets, enter into transactions with affiliates, and enter into burdensome agreements, in each case, subject to limitations and exceptions set forth in the Current Credit Agreement. We are also required to maintain compliance with a total leverage ratio and an interest coverage ratio, in each case, determined in accordance with the terms of the Current Credit Agreement.
We account for the original issue discount and the debt issuance costs as a reduction to the carrying value of our long-term debt on our Consolidated Balance Sheets. We amortize the discount and costs to Interest expense in our Consolidated Statements of Operations over the contractual term using the effective interest method. We determine the Current portion of long-term debt as the sum of the required quarterly installments to be made over the next twelve months, reduced by the original issue discount and the debt issuance costs to be amortized over the next twelve months.
During fiscal 2021, we made principal payments totaling $13.1 million. The fair value of our long-term debt approximates the carrying value, which is reflected in our Consolidated Balance Sheets as follows:
| (In thousands) | December 28, 2019 | December 29, 2018 | |||||
| Principal amount | $ | 148,125 | $ | 263,033 | |||
| Unamortized original issue discount and debt costs | (1,579 | ) | (3,386 | ) | |||
| Less: Current portion of long-term debt | (21,474 | ) | (8,290 | ) | |||
| Long-term debt, net of current portion and unamortized debt issue costs | $ | 125,072 | $ | 251,357 | |||
January 1, | January 2, | |||||||
(In thousands) | 2022 | 2021 | ||||||
Principal amount | $ | 158,750 | $ | 171,875 | ||||
Unamortized original issuance discount and debt costs | (817 | ) | (1,179 | ) | ||||
Less: Current portion of long-term debt | (17,173 | ) | (12,762 | ) | ||||
Long-term debt, net of current portion and unamortized debt issue costs | $ | 140,760 | $ | 157,934 | ||||
Interest expense related to our long-term debt wasis included in Interest expense on our Consolidated Statements of Operations as follows:
Year Ended | ||||||||||||
January 1, | January 2, | December 28, | ||||||||||
(In thousands) | 2022 | 2021 | 2019 | |||||||||
Contractual interest | $ | 2,304 | $ | 3,319 | $ | 10,278 | ||||||
Amortization of original issuance discount and debt costs | 362 | 400 | 1,659 | |||||||||
Total interest expense related to long-term debt | $ | 2,666 | $ | 3,719 | $ | 11,937 | ||||||
| Year Ended | |||||||||||
| (in thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||
| Contractual interest | $ | 10,278 | $ | 18,600 | $ | 16,503 | |||||
| Amortization of debt issuance costs and discount | 1,659 | 2,230 | 1,982 | ||||||||
| Total Interest expense related to the long-term debt | $ | 11,937 | $ | 20,830 | $ | 18,485 | |||||
Expected future principal payments are based on the schedule of required quarterly installments, adjusted for known voluntary payments. Our 53-week fiscal 2020 will result in five quarterly installments being paid during that fiscal year.installments. As of December 28, 2019, January 1, 2022, expected future principal payments on our long-term debt were as follows:
Fiscal year | (in thousands) | |||
2022 | 17,500 | |||
2023 | 17,500 | |||
2024 | 123,750 | |||
| $ | 158,750 | |||
| Fiscal year | (in thousands) | |||
| 2020 | $ | 21,875 | ||
| 2021 | 17,500 | |||
| 2022 | 17,500 | |||
| 2023 | 17,500 | |||
| 2024 | 73,750 | |||
| $ | 148,125 | |||
In April 2019, March 2020, our management approved and executed an internal restructuring plan (the “Q2“Q12020 Plan”), which included a workforce reduction in order to reduce our operating cost structure by leveraging our low-cost regions as well as enhancing efficiency. Under this plan, we incurred restructuring expense of approximately $0.2 million and $2.0 million, respectively, during fiscal 2021 and 2020. Approximately $2.2 million of total expense has been incurred through January 1, 2022 under the Q12020 Plan. Substantially all actions planned under the Q12020 Plan have been implemented.
In April 2019,our management approved and executed an internal restructuring plan (the “Q22019 Sales Plan”), which focused on a restructuring of the global sales organization through cancellation of certain contracts and a workforce reduction. Under this plan, we have incurred $2.0 million of restructuring expense during fiscal 2019. All actions planned under the Q2 2019 Sales Plan have been implemented.
In June 2018, 2017, our Board of Directors approved an internal restructuring plan (the "June 2018 Plan"), which included the discontinuation of our millimeter wave business and the use of certain assets related to our Wireless products, and a workforce reduction. Under this plan, we recorded a total credit adjustment of approximately $0.1 million during fiscal 2019 due to the final reconciliation of expenses incurred, and we incurred approximately $4.2 million of restructuring expense during fiscal 2018. Approximately $4.1 million of total expense has been incurred through December 28, 2019 under the June 2018 Plan. All actions planned under the June 2018 Plan have been implemented.
These expenses and credits were recorded to Restructuring charges on our Consolidated Statements of Operations. The restructuring accrual balance is presented in Accounts payable and accruedAccrued expenses and Other long-term liabilities on our Consolidated Balance Sheets.
The following table displays the activity related to the restructuring plans described above:
| (In thousands) | Severance & Related (1) | Lease Termination & Fixed Assets | Software Contracts & Engineering Tools (2) | Other (3) | Total | ||||||||||||||
| Balance at December 31, 2016 | $ | 801 | $ | 1,036 | $ | 25 | $ | 12 | $ | 1,874 | |||||||||
| Restructuring charges | 2,484 | 811 | 3,066 | 835 | 7,196 | ||||||||||||||
| Costs paid or otherwise settled | (2,093 | ) | (977 | ) | (2,731 | ) | (822 | ) | (6,623 | ) | |||||||||
| Balance at December 30, 2017 | $ | 1,192 | $ | 870 | $ | 360 | $ | 25 | $ | 2,447 | |||||||||
| Restructuring charges | 5,696 | 7,379 | 913 | 3,361 | 17,349 | ||||||||||||||
| Costs paid or otherwise settled | (5,074 | ) | 381 | (1,055 | ) | (3,368 | ) | (9,116 | ) | ||||||||||
| Balance at December 29, 2018 | $ | 1,814 | $ | 8,630 | $ | 218 | $ | 18 | $ | 10,680 | |||||||||
| Restructuring charges | 625 | 2,716 | — | 1,323 | 4,664 | ||||||||||||||
| Costs paid or otherwise settled | (2,279 | ) | (4,761 | ) | (218 | ) | (476 | ) | (7,734 | ) | |||||||||
| Balance at December 28, 2019 | $ | 160 | $ | 6,585 | $ | — | $ | 865 | $ | 7,610 | |||||||||
(In thousands) | Severance & Related (1) | Lease Termination & Fixed Assets | Software Contracts & Engineering Tools (2) | Other (3) | Total | |||||||||||||||
Accrued Restructuring at December 29, 2018 | $ | 1,814 | $ | 8,630 | $ | 218 | $ | 18 | $ | 10,680 | ||||||||||
Restructuring charges | 625 | 2,716 | 0 | 1,323 | 4,664 | |||||||||||||||
Costs paid or otherwise settled | (2,279 | ) | (4,761 | ) | (218 | ) | (476 | ) | (7,734 | ) | ||||||||||
Accrued Restructuring at December 28, 2019 | $ | 160 | $ | 6,585 | $ | 0 | $ | 865 | $ | 7,610 | ||||||||||
Restructuring charges | 1,669 | 1,896 | 0 | 372 | 3,937 | |||||||||||||||
Costs paid or otherwise settled | (1,583 | ) | (248 | ) | 0 | (573 | ) | (2,404 | ) | |||||||||||
Accrued Restructuring at January 2, 2021 | $ | 246 | $ | 8,233 | $ | 0 | $ | 664 | $ | 9,143 | ||||||||||
Restructuring charges | 250 | 690 | 0 | 0 | 940 | |||||||||||||||
Costs paid or otherwise settled | (245 | ) | (1,793 | ) | 0 | (664 | ) | (2,702 | ) | |||||||||||
Accrued Restructuring at January 1, 2022 | $ | 251 | $ | 7,130 | $ | 0 | $ | 0 | $ | 7,381 | ||||||||||
(1) | Includes employee relocation costs and outplacement costs, and accelerated stock compensation | |
(2) | Includes cancellation of contracts, asset impairments, and accelerated depreciation on certain enterprise resource planning and customer relationship management systems | |
(3) | Includes termination fees on the cancellation of certain contracts under the Q22019 Sales Plan |
We have operating leases for corporate offices, sales offices, research and development facilities, storage facilities, and a data center, all of our facilitieswhich are leased under operating leases whichthat expire at various times through 2027. We recorded fixed2028. In the first quarter of fiscal 2021, we extended the leases for our Hillsboro, Oregon and Shanghai, China facilities, which resulted in approximately $7.2 million of the increase in right-of-use assets and operating lease cost of $7.7 million for fiscal 2019. Rental expense under the previous guidance for operating leases was $8.3 million and $8.9 million for fiscal years 2018 and 2017, respectively.
The following table presents the lease balance classifications within the Consolidated Balance Sheets and summarizes their activity during fiscal 2019:
| Operating lease right-of-use assets | (in thousands) | |||
| Balance as of December 29, 2018 | $ | — | ||
| Right-of-use assets recorded from adoption of ASC 842 | 29,893 | |||
| Right-of-use assets obtained in exchange for new lease obligations during the period | 747 | |||
| Reduction in the carrying amount of right-of-use assets during the period | (5,797 | ) | ||
| Impairment of right-of-use asset on Portland, Oregon office (recorded in Restructuring charges) | (977 | ) | ||
| Adjustments for present value and foreign currency effects | (275 | ) | ||
| Balance as of December 28, 2019 | $ | 23,591 | ||
| Operating lease liabilities | (in thousands) | |||
| Balance as of December 29, 2018 | $ | — | ||
| Lease liabilities recorded from adoption of ASC 842 | 32,273 | |||
| Lease liabilities incurred for new lease obligations during the period | 747 | |||
| Accretion of lease liabilities | 1,918 | |||
| Operating cash used by payments on lease liabilities | (8,425 | ) | ||
| Adjustments for present value, foreign currency, and restructuring liability effects | (389 | ) | ||
| Balance as of December 28, 2019 | 26,124 | |||
| Less: Current portion of operating lease liabilities | (4,686 | ) | ||
| Long-term operating lease liabilities, net of current portion | $ | 21,438 | ||
| Fiscal year | (in thousands) | |||
| 2020 | $ | 6,445 | ||
| 2021 | 5,485 | |||
| 2022 | 4,468 | |||
| 2023 | 4,596 | |||
| 2024 | 4,716 | |||
| Thereafter | 6,705 | |||
| Total lease payments | 32,415 | |||
| Less: amount representing interest | (6,156 | ) | ||
| Less: amount representing restructuring liability adjustments | (135 | ) | ||
| Total lease liabilities | $ | 26,124 | ||
| Fiscal year | (In thousands) | |||
| 2019 | $ | 7,090 | ||
| 2020 | 6,893 | |||
| 2021 | 5,452 | |||
| 2022 | 4,658 | |||
| 2023 | 4,229 | |||
| Thereafter | 9,930 | |||
| $ | 38,252 | |||
Operating lease right-of-use assets | (in thousands) | |||
Balance as of January 2, 2021 | $ | 22,178 | ||
Right-of-use assets obtained for new and modified lease contracts during the period | 8,134 | |||
Amortization of right-of-use assets during the period | (6,587 | ) | ||
Adjustments for present value and foreign currency effects | 93 | |||
Balance as of January 1, 2022 | $ | 23,818 | ||
Operating lease liabilities | (in thousands) | |||
Balance as of January 2, 2021 | $ | 23,055 | ||
Lease liabilities incurred for new lease contracts during the period | 8,134 | |||
Accretion of lease liabilities | 1,305 | |||
Operating cash used by payments on lease liabilities | (7,639 | ) | ||
Adjustments for present value and foreign currency effects | 89 | |||
Balance as of January 1, 2022 | 24,944 | |||
Less: Current portion of operating lease liabilities (included in Accrued expenses) | (5,696 | ) | ||
Long-term operating lease liabilities, net of current portion | $ | 19,248 | ||
Lease obligations for facilities restructured prior to the adoption of Topic 842 totaled approximately $6.6$7.1 million at December 28, 2019 January 1, 2022 and continued to be recorded in Other long-term liabilities on our Consolidated Balance Sheets.
Maturities of Silicon Image, Inc. in March 2015 and SiliconBlue Technologies, Inc. in December 2011, we recorded identifiable intangible assets related to developed technology, customer relationships, licensed technology, patents, and in-process research and development based on guidance for determining fair value under the provisions of ASC 820, "
| December 28, 2019 | ||||||||||||||
| (In thousands) | Weighted Average Amortization Period (in years) | Gross | Accumulated Amortization | Intangible assets, net | ||||||||||
| Developed technology | 5.0 | $ | 110,987 | $ | (105,594 | ) | $ | 5,393 | ||||||
| Customer relationships | 5.8 | 22,934 | (21,400 | ) | 1,534 | |||||||||
| Licensed technology | 5.0 | 459 | (409 | ) | 50 | |||||||||
| Total identified intangible assets | $ | 134,380 | $ | (127,403 | ) | $ | 6,977 | |||||||
| December 29, 2018 | ||||||||||||||
| (In thousands) | Weighted Average Amortization Period (in years) | Gross | Accumulated Amortization | Intangible assets, net | ||||||||||
| Developed technology | 5.0 | $ | 110,987 | $ | (94,389 | ) | $ | 16,598 | ||||||
| Customer relationships | 5.8 | 22,934 | (19,048 | ) | 3,886 | |||||||||
| Licensed technology | 5.0 | 1,194 | (353 | ) | 841 | |||||||||
| Total identified intangible assets | $ | 135,115 | $ | (113,790 | ) | $ | 21,325 | |||||||
Fiscal year | (in thousands) | |||
2022 | 6,917 | |||
2023 | 7,446 | |||
2024 | 5,408 | |||
2025 | 3,651 | |||
2026 | 2,532 | |||
Thereafter | 2,082 | |||
Total lease payments | 28,036 | |||
Less: amount representing interest | (3,092 | ) | ||
Total lease liabilities | $ | 24,944 | ||
| Year Ended | |||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||
| Research and development | $ | 55 | $ | 277 | $ | 569 | |||||
| Amortization of acquired intangible assets | 13,558 | 17,690 | 31,340 | ||||||||
| $ | 13,613 | $ | 17,967 | $ | 31,909 | ||||||
| (In thousands) | Amount | ||
| 2020 | $ | 4,500 | |
| 2021 | 2,239 | ||
| 2022 | 238 | ||
| Total | $ | 6,977 | |
Employee and Director Stock Options, Restricted Stock, and ESPP
We have two active equity incentive plans, the "2013"2013 Incentive Plan and the "2011"2011 Non-Employee Director Equity Incentive Plan", under which shares remain available for grants to employees and non-employee directors, respectively. In addition, we have made grants of inducement awards to certain of our newly hired executives and employees that are granted outside of, but governed by, the 2013 Incentive Plan. "Incentive stock options" under Section 422 of the U.S. Internal Revenue Code and restricted stock unit ("RSU") grants are part of our equity compensation practices for employees who receive equity grants. Options and RSUs generally vest quarterly over a four-yearfour-year period beginning on the grant date. The contractual terms of options granted do not exceed ten years.
In May 2012, the Company's stockholders approved the 2012 Employee Stock Purchase Plan ("("2012 ESPP"), which authorizes the issuance of 3.0 million shares of common stock to eligible employees to purchase shares of common stock through payroll deductions, which cannot exceed 10% of an employee's compensation. The purchase price of the shares is the lower of 85% of the fair market value of the stock at the beginning of each six-monthsix-month offering period or 85% of the fair market value at the end of such period. We have treated the 2012 ESPP as a compensatory plan. We recorded $0.5 million and $0.6 million related compensation expense in fiscal 2019 and 2018, respectively. During fiscal 2017 only, the ESPP was suspended and we recorded no related compensation expense.
At January 1, 2022, a total of 7.5 million shares of our common stock were available for future grants under the 2013 Incentive Plan, and the 2011 Non-Employee Director Equity Incentive Plan. Following our 2018 Shareholder meeting, a share ratio of 2.2:1 was applied to the 2013 Incentive Plan. This ratio takes two and two tenths-tenths shares out of the 2013 Plan for every one full value share granted. During fiscal 2019,2021, a total of 2.92.3 million shares were adjusted out of the 2013 Plan. Shares subject to stock option grants that expire or are canceled, without delivery of such shares, generally become available for re-issuance under equity incentive plans. At December 28, 2019, a total of 1.4 million shares of our common stock were available for future purchases under the 2012 ESPP.
Stock-Based Compensation
Total stock-based compensation expense included in our Consolidated Statements of Operations is presented in the following table:
| Year Ended | ||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||
| Cost of revenue | $ | 1,422 | $ | 940 | $ | 795 | ||||||
| Research and development | 5,640 | 4,357 | 5,245 | |||||||||
| Selling, general, and administrative | 11,837 | 8,349 | 6,503 | |||||||||
| Total stock-based compensation | $ | 18,899 | $ | 13,646 | $ | 12,543 | ||||||
Year Ended | ||||||||||||
January 1, | January 2, | December 28, | ||||||||||
(In thousands) | 2022 | 2021 | 2019 | |||||||||
Cost of revenue | $ | 3,049 | $ | 3,179 | $ | 1,422 | ||||||
Research and development | 14,563 | 10,124 | 5,640 | |||||||||
Selling, general, and administrative | 28,863 | 27,069 | 11,837 | |||||||||
Total stock-based compensation | $ | 46,475 | $ | 40,372 | $ | 18,899 | ||||||
ESPP and administrative expense for fiscal 2018 includes approximately $1.4 million of additional one-time expense for acceleration of stock compensation under the CEO separation agreement executed with our former CEO during the first quarter of fiscal 2018.
The fair values of each option award on the date of grant and of the shares expected to be issued under the employee stock purchase plan and of each option award on the date of grant were estimated using the Black-Scholes valuation model and the assumptions noted in the following table.No new stock options were granted during fiscal 2021,2020, or 2019. The expected volatility of both ESPP shares and stock options is based on the daily historical volatility of our stock price, measured over the ESPP purchase period or the expected term of the option. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term closest to the expected term of the option. The expected term is based on historical vested option exercises and includes an estimate of the expected term for options that are fully vested and outstanding. The expected volatility of both stock options and ESPP shares is based on the daily historical volatility of our stock price, measured over the expected term of the option or the ESPP purchase period. The risk-free interest rate is based on the impliedDividend yield on a U.S. Treasury zero-coupon issue with a remaining term closest to the expected term of the option. The dividend yield reflects thathas no valuation impact, as we have not paid any cash dividends since inception and do not intend to pay any cash dividends in the foreseeable future.
The following table summarizes the assumptions used in the valuation of stockESPP compensation for the periods presented:
Year Ended | |||||||||
| January 1, | January 2, | December 28, | |||||||
| 2022 | 2021 | 2019 | |||||||
Employee Stock Purchase Plan | |||||||||
Weighted average expected volatility | 39.9% | 48.2% | 31.6% | ||||||
Weighted average risk-free interest rate | 0.07% | 0.89% | 2.51% | ||||||
Expected term (in months) | 6 | 6 | 6 | ||||||
The weighted average fair values for the ESPP, calculated using the Black-Scholes option pricing model with the noted assumptions for the ESPP, were $13.04, $6.62, and ESPP compensation:
| Year Ended | |||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | |||
| Employee and Director Stock Options * | |||||
| Expected volatility | n/a | 39.87% to 41.11% | 40.96% to 48.01% | ||
| Risk-free interest rate | n/a | 2.29% to 2.78% | 1.99% to 2.09% | ||
| Expected term (years) | n/a | 4.08 to 4.25 | 4.08 to 4.25 | ||
| Employee Stock Purchase Plan ** | |||||
| Weighted average expected volatility | 31.6% | 36.4% | n/a | ||
| Weighted average risk-free interest rate | 2.51% | 1.61% | n/a | ||
| Expected term | 6 months | 6 months | n/a | ||
| * No stock options granted during fiscal 2019 | |||||
| ** ESPP suspended during fiscal 2017 only | |||||
At December 28, 2019, January 1, 2022, there was $3.2 million of total0 unrecognized compensation cost related to unvested employee and director stock options, which is expected to be recognized over a weighted average period of 1.5 years. Our current practice is to issue new shares to satisfy option exercises.options. Compensation expense for all stock-based compensation awards is recognized using the straight-line method. In fiscal 2021, 2020, and 2019, we recorded stock compensation expense of approximately $1.2 million, $1.0 million, and $0.5 million, respectively, related to the ESPP, and approximately $1.0 million, $2.0 million, and $2.4 million, respectively, related to stock options.
The following table summarizes our stock option activity and related information for the year ended December 28, 2019:
| (Shares and aggregate intrinsic value in thousands) | Shares | Weighted average exercise price | Weighted average remaining contractual term (years) | Aggregate Intrinsic Value | ||||||||
| Balance, December 29, 2018 | 6,616 | $ | 5.94 | |||||||||
| Granted | — | — | ||||||||||
| Effect of vesting multiplier | 36 | |||||||||||
| Exercised | (2,715 | ) | 5.73 | |||||||||
| Forfeited or expired | (605 | ) | 5.72 | |||||||||
| Balance, December 28, 2019 | 3,332 | $ | 6.16 | |||||||||
| Vested and expected to vest at December 28, 2019 | 3,332 | $ | 6.16 | 4.50 | $ | 43,553 | ||||||
| Exercisable, December 28, 2019 | 1,721 | $ | 6.00 | 3.95 | $ | 22,758 | ||||||
(Shares and aggregate intrinsic value in thousands) | Shares | Weighted average exercise price | Weighted average remaining contractual term (years) | Aggregate Intrinsic Value | ||||||||||||
Balance, January 2, 2021 | 2,200 | $ | 6.40 | |||||||||||||
Granted | 0 | 0 | ||||||||||||||
Exercised | (822 | ) | 6.02 | |||||||||||||
Forfeited or expired | (11 | ) | 5.73 | |||||||||||||
Balance, January 1, 2022 | 1,367 | $ | 6.62 | |||||||||||||
Vested and expected to vest at January 1, 2022 | 1,367 | $ | 6.62 | 2.92 | $ | 96,315 | ||||||||||
Exercisable, January 1, 2022 | 1,367 | $ | 6.62 | 2.92 | $ | 96,315 | ||||||||||
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that day. This amount changes based on the fair market value of the Company's stock. Total intrinsic value of options exercised for fiscal 2019, 2018,2021, 2020, and 20172019 was $44.7 million, $21.5 million, and $17.8 million, $6.5 million, and $2.2 million, respectively. The total fair value of options and RSUs vested and expensed in fiscal 2019, 2018, and 2017 was $18.4 million, $13.0 million, and $12.5 million, respectively.
Time-Based Restricted Stock Unit Awards
The following table summarizes the activity for our RSU activitytime-based RSUs for the year ended December 28, 2019:
| (Shares in thousands) | Shares | Weighted average grant date fair value | ||||
| Balance, December 29, 2018 | 4,412 | $ | 7.53 | |||
| Granted | 2,445 | 16.23 | ||||
| Effect of vesting multiplier | 216 | — | ||||
| Vested | (1,734 | ) | 8.10 | |||
| Forfeited or expired | (564 | ) | 7.27 | |||
| Balance, December 28, 2019 | 4,775 | $ | 12.23 | |||
(Shares in thousands) | Shares | Weighted average grant date fair value | ||||||
Balance, January 2, 2021 | 2,998 | $ | 16.76 | |||||
Granted | 1,176 | 56.29 | ||||||
Vested | (1,392 | ) | 14.66 | |||||
Forfeited or expired | (98 | ) | 19.71 | |||||
Balance, January 1, 2022 | 2,684 | $ | 35.06 | |||||
At December 28, 2019 January 1, 2022, there was $51.9$62.4 million of total unrecognized compensation costexpense related to unvested time-based RSUs. Our current practice is to issue new shares when RSUs vest. Compensation expense for RSUs is recognized using the straight-line method over the related vesting period.
Market-Based and Performance-Based Stock Compensation
In fiscal years 20172019 through 2019,2021, we granted stock options andawards of RSUs with either a market condition (TSR) or a performance condition (Adjusted EBITDA) to certain executives.
Market-Based and Performance-Based Awards — Grants
In the first quarters of fiscal 2021 and 2020, we granted awards of RSUs with a market condition granted in fiscal year 2017 have a two year vesting period and vest between 0% and 200% of the target amount, based on the Company's relative TSR when compared to the TSR of a component of companies of the PHLX Semiconductor Sector Index over a two year period. certain executives. Under the terms of these grants, the RSUs with a market condition vest over a three-year period based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index, which condition is measured for the 2021 grants on the third anniversary of the grant date, and measured for one-half of the 2020 grants on the second and third anniversary of the grant date. The awards may vest at 250% or 200%, depending upon the executive, if the 75th percentile of the market condition is achieved, with 100% of the units vesting at the 55th percentile, zero vesting if relative TSR is below the 25th percentile, and vesting scaling for achievement between the 25th and 75th percentile.
In the first quarter of fiscal 2021, we also granted awards of RSUs with a performance condition to certain executives, to specifically drive additional executive attention and focus on the Company’s revenue growth priorities. Under the terms of these grants, the RSUs with a performance condition will vest based on the Company generating specified levels of year-over-year revenue growth, which will be measured annually for one-fourth of the grants executives will receiveafter each fiscal year-end through the target amount ifend of fiscal 2024. Vesting of these awards scales for achievement of year-over-year revenue growth compared to certain targets, with maximum vesting up to 200%. Vesting of these awards occurs 13 months after the Company’s TSR relative to thatend of each measurement period and the Index achieves or exceeds the 50
In fiscal years 2018 and 2019, we granted inducement awards outside of, but subject to the terms and conditions of the 2013 Incentive Plan to certain executives. These awards consistedexecutives consisting of RSUs with either a market condition or a performance condition that vest and become payable upon achievement of TSR or Adjusted EBITDA targets, respectively. The TSR-basedcondition. These awards vest and become payable over a three-yearthree-year period based on the Company’s TSR relative to the PHLX Semiconductor Sector Index, with either 250% or 200% of the units vesting at the 75th percentile, depending upon the executive, 100% of the units vesting at the 50th percentile and either 200% or 250% of the units vesting at the 75th percentile, depending upon the executive, zero vesting if relative TSR is below the 25th percentile, and vesting scaling linearly for achievement between the 25th and 75th percentile. The Adjusted EBITDA-basedPrior to fiscal 2019, we granted inducement awards willoutside of, but subject to the terms and conditions of the 2013 Incentive Plan to our Chief Executive Officer consisting of RSUs with a performance condition. These awards vest and become payable based upon the Company’s generating specified “adjusted”achievement of Adjusted EBITDA levelstargets on a trailing four quarter basis in any two consecutive trailing four-quarterfour-quarter periods.
Market-Based and Performance-Based Awards — Vesting
For our awards with a market condition or a performance condition, we incurred stock compensation expense, including the effect of the modification in the first quarter of fiscal 2020, of approximately $22.1 million, $20.8 million, and $5.7 million in fiscal years 2021, 2020, and 2019, respectively. At January 1, 2022, there was $25.3 million of unrecognized compensation expense related to unvested RSUs with a market condition or a performance condition. Awards with a TSR market condition were valued using a Monte Carlo simulation model.
The following table summarizes the assumptions used at the grant date in the valuation of stock options and RSUs with a market or performance condition:
Year Ended | |||||||||
| January 1, | January 2, | December 28, | |||||||
| 2022 | 2021 | 2019 | |||||||
Executive RSUs with a market condition or performance condition | |||||||||
Weighted average expected volatility | 50.37% to 52.11% | 42.38% | 40.15% to 41.10% | ||||||
Weighted average risk-free interest rate | 0.22% to 0.77% | 1.40% | 1.66% to 2.55% | ||||||
Expected term (years) | 3.00 to 5.00 | 3.00 | 3.00 | ||||||
The following table summarizes the activity for our stock options and RSUsawards with a market condition or performance condition:
(Shares in thousands) | Shares | Weighted average grant date fair value | ||||||
Balance, January 2, 2021 | 1,021 | $ | 20.42 | |||||
Granted | 630 | 57.29 | ||||||
Effect of vesting multiplier | 479 | 0 | ||||||
Vested | (884 | ) | 13.87 | |||||
Balance, January 1, 2022 | 1,246 | $ | 41.23 | |||||
| (Shares in thousands) | Unvested | Vested | Total | ||||||
| Balance, December 29, 2018 | 909 | — | 909 | ||||||
| Granted | 584 | — | 584 | ||||||
| Effect of vesting multiplier | 260 | — | 260 | ||||||
| Vested | (484 | ) | 71 | (413 | ) | ||||
| Exercised | — | (71 | ) | (71 | ) | ||||
| Canceled | (106 | ) | — | (106 | ) | ||||
| Balance, December 28, 2019 | 1,163 | — | 1,163 | ||||||
Note 12 - Common Stock Repurchase Program
On February 19, 2021, our Board of Directors approved a stock compensation expense relatedrepurchase program pursuant to thesewhich up to $60.0 million of outstanding common stock option and RSU awards withcould be repurchased from time to time (the "2021 Repurchase Program"). The duration of the 2021 Repurchase Program is twelve months. Under the 2021 Repurchase Program during the fourth quarter of fiscal 2021, we repurchased approximately 60,800 shares for approximately $4.9 million, or an average price paid per share of $80.55. As of January 1, 2022, the amount authorized for the twelve-month 2021 Repurchase Program had been fully utilized. All repurchases were open market transactions funded from available working capital. All shares repurchased pursuant to the 2021 Repurchase Program were retired by the end of the 2021 fiscal year.
On November 8, 2021, we announced that our Board of Directors had approved a stock repurchase program pursuant to which up to an additional $100.0 million of outstanding common stock could be repurchased from time to time (the "2022 Repurchase Program"). The duration of the 2022 Repurchase Program is through the end of December 2022. Under the 2022 Repurchase Program during the fourth quarter of fiscal 2021, we repurchased approximately 125,400 shares for $10.1 million, or an average price paid per share of $80.55. As of January 1, 2022, the remaining portion of the amount authorized for the 2022 Repurchase Program is approximately $89.9 million. All repurchases were open market or performance conditiontransactions funded from available working capital. All shares repurchased pursuant to the 2022 Repurchase Program were retired by the end of approximately $5.7 million, $0.9 million, and $0.5 million inthe 2021 fiscal years 2019, 2018, and 2017, respectively, which is recorded as a component of total stock-based compensation expense.year.
We are subject to federal and state income tax as well as income tax in the various foreign jurisdictions in which we operate.
The domestic and foreign components of Income (loss) before income taxes were as follows:
| Year Ended | ||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||
| Domestic | $ | 33,417 | $ | (8,274 | ) | $ | (17,341 | ) | ||||
| Foreign | 11,648 | (15,695 | ) | (52,372 | ) | |||||||
| Income (loss) before taxes | $ | 45,065 | $ | (23,969 | ) | $ | (69,713 | ) | ||||
Year Ended | ||||||||||||
| January 1, | January 2, | December 28, | ||||||||||
(In thousands) | 2022 | 2021 | 2019 | |||||||||
Domestic | $ | 24,003 | $ | 11,772 | $ | 33,417 | ||||||
Foreign | 73,623 | 36,684 | 11,648 | |||||||||
Income before taxes | $ | 97,626 | $ | 48,456 | $ | 45,065 | ||||||
The components of the Income tax expense are as follows:
Year Ended | ||||||||||||
| January 1, | January 2, | December 28, | ||||||||||
(In thousands) | 2022 | 2021 | 2019 | |||||||||
Current: | ||||||||||||
Federal | $ | 445 | $ | 54 | $ | 499 | ||||||
State | 45 | 68 | 45 | |||||||||
Foreign | 1,538 | 1,025 | 1,345 | |||||||||
| 2,028 | 1,147 | 1,889 | ||||||||||
Deferred: | ||||||||||||
Federal | 0 | 0 | 0 | |||||||||
State | 0 | 0 | 0 | |||||||||
Foreign | (324 | ) | (83 | ) | (317 | ) | ||||||
| (324 | ) | (83 | ) | (317 | ) | |||||||
Income tax expense | $ | 1,704 | $ | 1,064 | $ | 1,572 | ||||||
| Year Ended | ||||||||||||
| (In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||
| Current: | ||||||||||||
| Federal | $ | 499 | $ | 536 | $ | 508 | ||||||
| State | 45 | 38 | 30 | |||||||||
| Foreign | 1,345 | 1,869 | 304 | |||||||||
| 1,889 | 2,443 | 842 | ||||||||||
| Deferred: | ||||||||||||
| Federal | — | — | — | |||||||||
| State | — | — | — | |||||||||
| Foreign | (317 | ) | (90 | ) | 7 | |||||||
| (317 | ) | (90 | ) | 7 | ||||||||
| Income tax expense | $ | 1,572 | $ | 2,353 | $ | 849 | ||||||
Income tax expense differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:
| Year Ended | ||||||
| December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||
| % | % | % | ||||
| Statutory federal rate | 21 | (21) | (35) | |||
| Adjustments for tax effects of: | ||||||
| State taxes, net | 3 | (6) | (7) | |||
| Research and development credits | 3 | (5) | (1) | |||
| Stock compensation | (11) | 8 | 3 | |||
| Foreign rate differential | (2) | 20 | 28 | |||
| Foreign dividends | — | — | 1 | |||
| Foreign withholding taxes | 3 | 5 | — | |||
| Other permanent | 6 | 2 | — | |||
| Other deferred tax asset adjustment | — | 13 | — | |||
| Valuation allowance | (19) | (11) | (73) | |||
| Change in uncertain tax benefit accrual | — | 2 | 1 | |||
| Stock compensation (ASU 2016-09) adoption | — | — | (8) | |||
| Tax rate change | — | — | 93 | |||
| Other | — | 3 | (1) | |||
| Effective income tax rate | 4 | 10 | 1 | |||
Year Ended | |||||||||
| January 1, | January 2, | December 28, | |||||||
| 2022 | 2021 | 2019 | |||||||
% | % | % | |||||||
Statutory federal rate | 21 | 21 | 21 | ||||||
Adjustments for tax effects of: | |||||||||
State taxes, net | (4) | (4) | 3 | ||||||
Federal tax credits | (3) | (3) | 3 | ||||||
Excess tax benefit for stock compensation | (8) | (10) | (6) | ||||||
Foreign rate differential | (14) | (12) | (2) | ||||||
U.S. tax on foreign operations | 3 | 15 | 0 — | ||||||
Foreign withholding taxes | 1 | 3 | 3 | ||||||
Capital loss expiration | 3 | 0 — | 1 | ||||||
Other deferred tax asset adjustment | — | 3 | — | ||||||
Valuation allowance | 8 | (13) | (19) | ||||||
Change in uncertain tax benefit accrual | (5) | 2 | — | ||||||
Effective income tax rate | 2 | 2 | 4 | ||||||
We updated our evaluation of deferred tax assets if realization of these assets is more-likely-than-not. We evaluate both positive and negative evidence to determine if some or all of our deferred tax assets should be recognized on a quarterly basis.
The components of our net deferred tax assets and liabilities are as follows:
(In thousands) | January 1, 2022 | January 2, 2021 | ||||||
Deferred tax assets: | ||||||||
Intangible assets | $ | 8,236 | $ | 10,082 | ||||
Net operating loss carry forwards | 88,254 | 87,443 | ||||||
Tax credit carry forwards | 93,095 | 83,534 | ||||||
Accrued expenses and reserves | 6,590 | 5,464 | ||||||
Stock-based and deferred compensation | 4,477 | 3,851 | ||||||
Other | 6,615 | 9,493 | ||||||
Total deferred tax assets | 207,267 | 199,867 | ||||||
Less: valuation allowance | (200,438 | ) | (192,478 | ) | ||||
Net deferred tax assets | 6,829 | 7,389 | ||||||
Deferred tax liabilities: | ||||||||
Fixed assets | 2,379 | 2,809 | ||||||
Unremitted earnings | 2,128 | 1,746 | ||||||
Other | 9,969 | 4,003 | ||||||
Total deferred tax liabilities | 14,476 | 8,558 | ||||||
Net deferred taxes | $ | (7,647 | ) | $ | (1,169 | ) | ||
Reported as: | ||||||||
Deferred tax assets (included in Other long-term assets) | $ | 953 | $ | 577 | ||||
Deferred tax liabilities (included in Other long-term liabilities) | (8,600 | ) | (1,746 | ) | ||||
Net deferred taxes | $ | (7,647 | ) | $ | (1,169 | ) | ||
| (In thousands) | December 28, 2019 | December 29, 2018 | ||||||
| Deferred tax assets: | ||||||||
| Accrued expenses and reserves | $ | 4,137 | $ | 3,714 | ||||
| Inventory | — | 2 | ||||||
| Deferred Revenue | — | — | ||||||
| Stock-based and deferred compensation | 2,812 | 2,660 | ||||||
| Interest expense disallowance | — | 1,283 | ||||||
| Intangible assets | 12,294 | 14,649 | ||||||
| Fixed assets | 256 | 281 | ||||||
| Net operating loss carry forwards | 86,899 | 88,333 | ||||||
| Tax credit carry forwards | 90,339 | 92,208 | ||||||
| Capital loss carry forwards | 4,235 | 5,007 | ||||||
| Other | 1,059 | 1,130 | ||||||
| Total deferred tax assets | 202,031 | 209,267 | ||||||
| Less: valuation allowance | (198,499 | ) | (207,108 | ) | ||||
| Net deferred tax assets | 3,532 | 2,159 | ||||||
| Deferred tax liabilities: | ||||||||
| Fixed assets | 2,620 | 1,536 | ||||||
| Deferred revenue | 434 | 525 | ||||||
| Other | — | (57 | ) | |||||
| Total deferred tax liabilities | 3,054 | 2,004 | ||||||
| Net deferred tax assets | $ | 478 | $ | 155 | ||||
The following table displays the activity related to changes in our valuation allowance for deferred tax assets:
Fiscal Years Ended (In thousands) | Balance at beginning of period | Charged (Credit) to costs and expenses | Charged (credit) to other accounts | Balance at end of period | ||||||||||||
| Valuation allowance for deferred tax assets | ||||||||||||||||
| December 28, 2019 | $ | 207,108 | $ | (8,609 | ) | $ | — | $ | 198,499 | |||||||
| December 29, 2018 | $ | 209,691 | $ | (2,583 | ) | $ | — | $ | 207,108 | |||||||
| December 30, 2017 | $ | 260,687 | $ | (50,960 | ) | $ | (36 | ) | $ | 209,691 | ||||||
Fiscal Years Ended | Balance at beginning | Charged (Credit) to costs and | Charged (credit) to other | Balance at end of | ||||||||||||
(in thousands) | of period | expenses | accounts | period | ||||||||||||
January 1, 2022 | $ | 192,478 | $ | 7,960 | $ | 0 | $ | 200,438 | ||||||||
January 2, 2021 | $ | 198,499 | $ | (6,021 | ) | $ | 0 | $ | 192,478 | |||||||
December 28, 2019 | $ | 207,108 | $ | (8,609 | ) | $ | 0 | $ | 198,499 | |||||||
At December 28, 2019, January 1, 2022, we had U.S. federal net operating loss ("NOL") carryforwards (pretax) of approximately $360.5$361.5 million, thatof which $345.4 million expire at various dates between 20202022 and 2037.2037, and the remaining do not expire. We had state NOL carryforwards (pretax) of approximately $141.3$152.8 million that substantially all expire at various dates from 2022 through 2037. We also had federal credit carryforwards of $55.3 million that expire at various dates from 20202022 through 2039. We also had federal2041, and $68.9 million state credit carryforwards, of $50.1 million and $62.6 million, respectively. Of the $62.6 million state credit carryforwards, $61.9 millionwhich substantially all do not expire. The federal and remaining state credits expire at various dates from 2020 through 2039.
Future utilization of federal and state net operating losses and tax credit carry forwards may be limited if cumulative changes to ownership exceed 50% within any three-year period. Ifthree-year period, which has not occurred through fiscal 2021. However, if there is a significant change in ownership, future tax attribute utilization may be restrictedlimited and NOL carryforwards and/or R&D credits will be reduced to reflect the limitation.
Foreign earnings may be subject to withholding taxes in local jurisdictions if they are distributed and repatriated in the United States.distributed. At December 28, 2019, January 1, 2022, U.S. income taxes and foreign withholding taxes were not provided for on a cumulative total of approximately $2.9$3.2 million of the undistributed earnings of our Chinese subsidiary.foreign subsidiaries. We intend to reinvest these earnings indefinitely.
At December 28, 2019, January 1, 2022 and January 2, 2021, our unrecognized tax benefits associated with uncertain tax positions were $41.9$56.2 million and $55.7 million, respectively, of which $39.9$54.0 million and $53.6 million, respectively, if recognized, would affect the effective tax rate, subject to valuation allowance. As of December 28, 2019, January 1, 2022 and January 2, 2021, interest and penalties associated with unrecognized tax benefits were $9.0$9.6 million and $9.1 million, respectively, which are not reflected in the table below.
The following table summarizes the changes to unrecognized tax benefits for the fiscal years presented:
| (In thousands) | Amount | |||
| Balance at December 31, 2016 | $ | 47,623 | ||
| Additions based on tax positions related to the current year | 471 | |||
| Additions based on tax positions of prior years | 11 | |||
| Reduction for tax positions of prior years | (1,226 | ) | ||
| Reduction as a result of lapse of applicable statute of limitations | (2,047 | ) | ||
| Balance at December 30, 2017 | 44,832 | |||
| Additions based on tax positions related to the current year | 389 | |||
| Additions based on tax positions of prior years | 19 | |||
| Reductions for tax positions of prior years | (5 | ) | ||
| Reduction as a result of lapse of applicable statute of limitations | (1,235 | ) | ||
| Balance at December 29, 2018 | 44,000 | |||
| Additions based on tax positions related to the current year | 238 | |||
| Additions based on tax positions of prior years | 334 | |||
| Reductions for tax positions of prior years | (213 | ) | ||
| Reduction as a result of lapse of applicable statute of limitations | (2,432 | ) | ||
| Balance at December 28, 2019 | $ | 41,927 | ||
(in thousands) | ||||
Balance at December 29, 2018 | $ | 58,285 | ||
Additions based on tax positions related to the current year | 238 | |||
Additions based on tax positions of prior years | 1,084 | |||
Reduction for tax positions of prior years | (213 | ) | ||
Reduction as a result of lapse of applicable statute of limitations | (2,432 | ) | ||
Balance at December 28, 2019 | 56,962 | |||
Additions based on tax positions related to the current year | 548 | |||
Additions based on tax positions of prior years | 628 | |||
Reductions for tax positions of prior years | 0 | |||
Reduction as a result of lapse of applicable statute of limitations | (2,401 | ) | ||
Balance at January 2, 2021 | 55,737 | |||
Additions based on tax positions related to the current year | 1,156 | |||
Additions based on tax positions of prior years | 1,130 | |||
Additions due to acquisition | 977 | |||
Settlements | (51 | ) | ||
Reduction as a result of lapse of applicable statute of limitations | (2,718 | ) | ||
Balance at January 1, 2022 | $ | 56,231 | ||
Our liability for uncertain tax positions (including penalties and interest) was $24.6$21.6 million and $26.3$22.3 million at December 28, 2019January 1, 2022 and December 29, 2018,January 2, 2021, respectively, and is recorded as a component of Other long-term liabilities on our Consolidated Balance Sheets. The remainder of our uncertain tax position exposure of $24.8$44.2 million and $42.5 million at January 1, 2022 and January 2, 2021, respectively, is netted against deferred tax assets.
At December 28, 2019, January 1, 2022, it is reasonably possible that $2.4$0.8 million of unrecognized tax benefits and $0.5$0.1 million of associated interest and penalties could be recognized during the next twelve months. The $2.9 million potential change would represent a decrease in unrecognized tax benefits, comprised
The years that remain subject to examination are 2016are 2017 for federal income taxes, 2015 forand state income taxes, and 20122015 for foreign income taxes, including years ending thereafter. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carryforward amount.
Note 1214 - Employee Benefit Plans
Qualified Investment Plan
In 1990, we adopted a 401(k)401(k) tax-deferred savings plan, which provides all employees in the United States who meet certain eligibility requirements with an opportunity to accumulate funds for retirement. Participants may contribute up to the amount allowable as a deduction for federal income tax purposes. The plan does not allow investments in the Company's common stock. The plan allows for the Company to make discretionary matching contributions in cash. We recorded matching contributions of approximately $0.8$2.6 million, $0.6$2.4 million, and $0.8 million in fiscal years 2019, 2018,2021, 2020, and 2017,2019, respectively.
Cash Incentive Plans
For 2019, 2018,2021, 2020, and 2017,2019, the Board of Directors of the Company, upon the recommendation of the Compensation Committee, approved the Cash Incentive Plan (the “Cash Plans”) for the respective fiscal year. The chief executive officer, other executive officers, and other members of senior management, including vice presidents and director-level employees, together with all other employees of the Company not on the Company's sales incentive plan are eligible to participate in the Cash Plans. Under the Cash Plans, individual cash incentive payments for the eligible employees will be based both on Company financial performance, as measured by achievement of operating income (before incentive plan accruals) and revenue goals within specified ranges established by the Compensation Committee, and Company performance, as measured by the achievement of personal management objectives. The Compensation Committee determines the performance of the chief executive officer, the chief financial officer and other participants based on the achievement of the management objectives established by the Compensation Committee during the first quarter of the respective fiscal year. We recorded approximately $5.8$18.0 million, $5.9$7.9 million, and $7.2$5.8 million of expense under the Cash Plans in fiscal 2019, 2018,2021, 2020, and 2017,2019, respectively.
Legal Matters
On or about December 19, 2018, Steven A.W. De Jaray, Perienne De Jaray and Darrell R. Oswald (collectively, the “Plaintiffs”) commenced an action against the Company and several unnamed defendants in the Multnomah County Circuit Court of the State of Oregon, in connection with the sale of certain products by the Company to the Plaintiffs in or around 2008. The Plaintiffs allege that we violated The Lanham Act, engaged in negligence and fraud by failing to disclose to the Plaintiffs the export-controlled status of the subject parts. The Plaintiffs seek damages of $138 million, treble damages, and other remedies. In January 2019, we removed the action to the United States District Court for the District of Oregon. At this stage of the proceedings, we do not have an estimate of the likelihood or the amount of any potential exposure to the Company; however, we believe that these claims are without merit and intend to vigorously defend the action. See “Litigation and unfavorable results of legal proceedings could adversely affect our financial condition and operating results” in “Risk Factors” in Item 1A of Part I of this Annual Report on Form 10-K.
From time to time, we are exposed to certain additional asserted and unasserted potential claims. Periodically, weWe review the status of each significant matter and assess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and a range of possible losses can be estimated, we then accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may revise estimates.
| 2019 | 2018 | |||||||||||||||||||||||||||||||
| (In thousands, except per share data) | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||||||
| Revenue | $ | 100,237 | $ | 103,469 | $ | 102,296 | $ | 98,091 | $ | 95,977 | $ | 101,484 | $ | 102,715 | $ | 98,623 | ||||||||||||||||
| Gross margin | 59,293 | 61,439 | 60,038 | 57,652 | 54,306 | 58,364 | 50,248 | 56,521 | ||||||||||||||||||||||||
| Restructuring charges | (55 | ) | 252 | 3,126 | 1,341 | 11,854 | 90 | 4,376 | 1,029 | |||||||||||||||||||||||
| Net income (loss) | $ | 13,987 | $ | 13,539 | $ | 8,559 | $ | 7,408 | $ | (7,121 | ) | $ | 6,974 | $ | (20,223 | ) | $ | (5,952 | ) | |||||||||||||
| Net income (loss) per share - basic | $ | 0.10 | $ | 0.10 | $ | 0.06 | $ | 0.06 | $ | (0.05 | ) | $ | 0.05 | $ | (0.16 | ) | $ | (0.05 | ) | |||||||||||||
| Net income (loss) per share - diluted | $ | 0.10 | $ | 0.10 | $ | 0.06 | $ | 0.05 | $ | (0.05 | ) | $ | 0.05 | $ | (0.16 | ) | $ | (0.05 | ) | |||||||||||||
To the Stockholders and the Board of Directors
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Lattice Semiconductor Corporation and subsidiaries (the Company) as of December 28, 2019January 1, 2022 and December 29, 2018,January 2, 2021, the related consolidated statements of operations, comprehensive income, (loss), stockholders’ equity and cash flows for each of the two years in the three‑year period ended December 28, 2019,January 1, 2022, and the related notes (collectively referred to as the consolidated“consolidated financial statements)statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 28, 2019at January 1, 2022 and December 29, 2018,January 2, 2021, and the results of its operations and its cash flows for each of the two years in the three‑year periodperiods ended December 28, 2019,January 1, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 28, 2019,January 1, 2022, based on criteria established in
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit mattermatters communicated below is a matterare matters arising from the current period audit of the consolidated financial statements that waswere communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgment.judgments. The communication of a critical audit mattermatters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattermatters below, providing a separate opinionopinions on the critical audit mattermatters or on the accounts or disclosures to which it relates.
| Inventory Valuation | ||
| Description of | The Company's net inventory totaled $67.6 million as of January 1, 2022. As explained in “Note 1 - Basis of Presentation and Significant Accounting Policies” within the consolidated financial statements, the Company | |
Auditing management’s estimates of excess and obsolete inventory was challenging because the estimate is judgmental and considers a number of factors that are affected by market and economic conditions that are outside of the Company’s control. In particular, excess and obsolete inventory calculations are sensitive to | ||
| How We Addressed the Matter in Our Audit | We evaluated and | |
| Our audit procedures included, among others, evaluating the significant assumptions stated above and the underlying data used in management's excess and obsolete inventory assessment. We evaluated inventory levels compared to projected customer demand, historical sales, and specific product considerations. We also assessed the historical accuracy of management's estimates and performed sensitivity analyses to evaluate the changes in inventory valuation that would result from changes in significant assumptions. |
| Business Combinations | ||
| Description of the Matter | The Company acquired 100% of the outstanding shares of Mirametrix, Inc. for total consideration of $68.5 million. As explained in “Note 6 – Business Combination and Goodwill” within the consolidated financial statements, the transaction was accounted for as a business combination. | |
| Auditing management’s accounting for the Mirametrix acquisition was complex and required judgment due to the |
| discount rates. These assumptions are forward-looking and could be affected by future economic and market conditions. | |
| We evaluated and tested the design and operating effectiveness of the Company's internal controls over the Company's accounting for acquisitions. For example, we tested controls over management's review of the valuation of acquired intangible assets, including the review of the valuation models and significant assumptions used in the valuation models. | ||
| To test the estimated fair value of these intangible assets, our audit procedures included, among others, evaluating the Company's valuation methodology, evaluating the significant assumptions used by the Company and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For example, we compared the significant assumptions used to current industry, market, and economic trends, to the assumptions used to value similar assets in other acquisitions, and to the historical |
/s/ KPMGErnst & Young LLP
We have served as the Company's auditor since 2007.
San Jose, California
February 24, 2020
To the Stockholders and the Board of Directors
Opinion on Internal Control Over Financial Reporting
We have audited Lattice Semiconductor Corporation and subsidiaries’ (the Company)Corporation’s internal control over financial reporting as of December 28, 2019,January 1, 2022, based on criteria established in
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheetssheet of the Company as of December 28, 2019January 1, 2022 and December 29, 2018,January 2, 2021, the related consolidated statements of operations, comprehensive income, (loss), stockholders’ equity and cash flows for each of the two years in the three-year period ended December 28, 2019,January 1, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated February 24, 202023, 2022 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
February 23, 2022
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Lattice Semiconductor Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows of Lattice Semiconductor Corporation and subsidiaries (the Company) for the year ended December 28, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations of the Company and its cash flows for the year ended December 28, 2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2007 to 2020.
Portland, Oregon
February
None.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
In connection with the filing of this Annual Report on Form 10-K, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 28, 2019.January 1, 2022. These disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that we accumulate and communicate correct information to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls are effective as of December 28, 2019.
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding reliability of financial reporting and the preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
(i) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
(ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
(iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
We do not expect that our disclosure controls and procedures or our internal control over financial reporting may notwill prevent or detect misstatements.all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met, and may not prevent or detect misstatements. Also, projectionsFurther, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any evaluationsystem of effectiveness tocontrols also is based in part upon certain assumptions about the likelihood of future periods are subject to the riskevents, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's internal control over financial reporting as of December 28, 2019.January 1, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Ernst & Young LLP, our independent registered public accounting firm, has audited the Company's internal control over financial reporting and has issued its opinion on the effectiveness of the Company's internal control over financial reporting, which appears on
pageThere were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during the fourth quarter of fiscal 20192021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Certain information required by Part III is incorporated by reference from our definitive proxy statement (the “Proxy Statement”) for the 20202021 Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, which we will file not later than 120 days after the end of the fiscal year covered by this report. With the exception of the information expressly incorporated by reference from the Proxy Statement, the Proxy Statement is not to be deemed filed as a part of this report.
Information regarding our directors that is required by this item is incorporated by reference from the information contained under the captions “Proposal 1: Election of Directors” and “Corporate Governance and Other Matters--Board Meetings and Committees” in the Proxy Statement. Information regarding our executive officers that is required by this item is incorporated by reference from the information contained under the caption "Executive Compensation--The Executive Officers of the Company” in the Proxy Statement.
Information regarding Section 16(a) reporting compliance that is required by this item is incorporated by reference from the information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
We have adopted a Code of Conduct that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions. The Code of Conduct is posted on our website at www.latticesemi.com. There were no changes towww.latticesemi.com. In fiscal 2021, we revised our Code of Conduct during fiscal 2019. by integrating certain standalone policies and providing clarifications on a variety of covered topics. Amendments to the Code of Conduct or any grant of a waiver from a provision of the Code of Conduct requiring disclosure under applicable SEC rules, if any, will be disclosed on our website at www.latticesemi.com.
Information about our Corporate Governance Policies, our “Director Code of Ethics” and written committee charters for our Audit Committee, Compensation Committee, and Nominating and Governance Committee are available free of charge on the Company's website at www.latticesemi.com and are available in print to any shareholder upon request.
Information regarding our Audit Committee that is required by this Item is incorporated by reference from the information concerning our Audit Committee contained under the caption “Corporate Governance and Other Matters--Board Meetings and Committees” in the Proxy Statement.
The information contained under the captions “Executive Compensation,” "Director Compensation," “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the Proxy Statement is incorporated herein by reference.
The information contained under the captions “Security Ownership of Certain Beneficial Owners and Management” and "Equity Compensation Plan Information" in the Proxy Statement is incorporated herein by reference.
The information contained under the captions entitled “Certain Relationships and Related Transactions” and “Corporate Governance and Other Matters--Director Independence” in the Proxy Statement is incorporated herein by reference.
The information contained under the caption entitled “Proposal 5: Ratification of Appointment of Independent Registered Public Accounting Firm--Audit and Related Fees” in the Proxy Statement is incorporated herein by reference.
(a) List of Documents Filed as Part of this Report
(1) All financial statements
The following financial statements are filed as part of this report under Item 8.
Consolidated Financial Statements: | Page |
All other schedules have been omitted because the required information is included in the Consolidated Financial Statements or the notes thereto, or is not applicable or required.
(2) Exhibits
| * | Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) thereof. |
16.1 | |||
| 21.1 | |||
| 23.1 | |||
| Consent of Independent Registered Public Accounting Firm (KPMG LLP) | |||
| 24.1 | Power of Attorney (reference is made to the signature page hereto). | ||
| * | Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) thereof. |
| Exhibit Number | Description | ||
31.1 | |||
31.2 | |||
32.1 | |||
32.2 | |||
101.INS | Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
Cover Page Interactive Data File - formatted in Inline XBRL | |||
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LATTICE SEMICONDUCTOR CORPORATION | |
(Registrant) | |
By: | /s/ Sherri Luther |
Sherri Luther Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) | |
Date: | February |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James Anderson and Sherri Luther, or either of them, his or her attorneys-in-fact, each with the power of substitution, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated and on the dates indicated:
Signature | Title | |
Date | ||
Principal Executive | ||
| Officer | ||
/s/ James Anderson | February | |
James Anderson | President, Chief Executive Officer, and Director | |
Principal Financial and | ||
Accounting Officer | ||
/s/ Sherri Luther | February 23, 2022 | |
Sherri Luther | Chief Financial Officer | |
Directors | ||
/s/ Robin Abrams | February 23, 2022 | |
Robin Abrams | Director | |
/s/ Mark Jensen | February 23, 2022 | |
Mark Jensen | Director | |
/a/ Anjali Joshi | February 23, 2022 | |
Anjali Joshi | Director | |
/s/ | February | |
James Lederer | Director | |
/s/ Krishna Rangasayee | February 23, 2022 | |
Krishna Rangasayee | Director | |
/s/ Jeff Richardson | February 23, 2022 | |
Jeff Richardson | Director |