Commission file number 000-18032
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its charter)
State of Delaware | 93-0835214 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
5555 NE Moore Court, Hillsboro, OR | 97124 | |
(Address of principal executive offices) | (Zip Code) |
(503) 268-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $.01 par value | LSCC | Nasdaq Global Select Market |
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 [X]☒ No [ ]
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 [X]☒ No [ ]
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 emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]☐ No [X]☒
| Number of shares of common stock outstanding as of April 27, 2020 | 134,623,022 |
LATTICE SEMICONDUCTOR CORPORATION
QUARTERLY REPORT ON FORM 10-Q
PART I. | FINANCIAL INFORMATION | Page |
Item 1. | ||
Consolidated Statements of Comprehensive Income | ||
Consolidated Statements of Stockholders' Equity – Three Months Ended March 28, 2020 and March 30, 2019 | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. | OTHER INFORMATION | |
Item 1. | ||
Item 1A. | ||
Item 6. | ||
This Quarterly Report on Form 10-Q 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. Thesethat 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 “anticipates,“anticipate,” “believes,“believe,” “could,” “estimates,“estimate,” “expects,“expect,” “intends,“intend,” “plans,“plan,” “predicts,"possible," “predict,” “projects,” “may,” “will,” “should,” “continue,” “ongoing,” “future,” “potential,” and similar words or phrases to identify forward-looking statements.
Forward-looking statements include, but are not limited to, statements about: our transitionstarget or expected financial performance and our ability to newly adoptedachieve those results; future financial results or accounting standards;treatments; the effectimpact of new accounting standardsthe COVID-19 pandemic on our consolidatedbusiness operations, financial statementsperformance, results of operations, financial position, and financial results; the effectsachievement of sales mix onour strategic objectives; our use of cash; our gross margin in the future;growth and our strategies to achieve gross margin growth and other financial results; 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 revenue recognition; our strategies and beliefs regarding the markets in which we compete or may compete; our strategies and beliefs regarding investments in financial instruments;accounting matters; our expectations regarding the dilutive effects of equity awards;product offerings; our expectations regarding emerging trends and market opportunities, our expectations regarding market infrastructure and growth areas,customer base; our future investments in research and development and our product leadership;research and development expense efficiency; our expectations regarding cash provided by or usedanticipated reductions in operating activities; our expectations regarding royalties under collaborative agreements;expenses; our expectations regarding our ability to service our debt obligations; our expectations regarding restructuring charges recorded under, and the timing and results of, restructuring plans; the sufficiencyour sharing of our financial resources to meet our operating and working capital needs through at least the next 12 months; our continued participation in or sources of revenue from standard setting initiatives or consortia that develop and promote the High-Definition Multimedia Interface ("HDMI") specification including our expectations regarding sharing ofanticipated HDMI royalty revenues; our plans to continue to monetize our patent portfolio through sales of non-core patents; our expectations regarding taxes, including unrecognized tax benefits, and tax adjustments particularly with respect to the Tax Cuts and Jobs Act; our expectations regarding the possibility and outcome of tax and other audits; our valuation allowance and uncertain tax positions;allowances; our beliefs regarding the adequacy of our liquidity, capital resources and facilities; and our intention to sublease vacated leased space in San Jose, California and Portland, Oregon; our expectations regarding our implementation of a company-wide enterprise resource planning system; our beliefs regarding legal proceedings,proceedings.
These forward-looking statements are based on estimates and our expectations regarding the impact of sanctions imposed by the United States Department of Commerce.
You should not unduly rely on forward-looking statements because our actual results could differ materially from those expressed in any forward-looking statements madeexpressed by us. In addition, any forward-looking statementstatement applies only as of the date on which it is made.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 circumstances that occur after the date on which such statements are madedevelopments, or to reflect the occurrenceotherwise.
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended | ||||||||
March 28, | March 30, | |||||||
(In thousands, except per share data) | 2020 | 2019 | ||||||
Revenue | $ | 97,316 | $ | 98,091 | ||||
Cost of revenue | 39,754 | 40,439 | ||||||
Gross margin | 57,562 | 57,652 | ||||||
Operating expenses: | ||||||||
Research and development | 21,693 | 19,665 | ||||||
Selling, general, and administrative | 22,551 | 20,781 | ||||||
Amortization of acquired intangible assets | 2,640 | 3,389 | ||||||
Restructuring charges | 940 | 1,341 | ||||||
Total operating expenses | 47,824 | 45,176 | ||||||
Income from operations | 9,738 | 12,476 | ||||||
Interest expense | (1,077 | ) | (4,987 | ) | ||||
Other (expense) income, net | (50 | ) | 153 | |||||
Income before income taxes | 8,611 | 7,642 | ||||||
Income tax expense | 444 | 234 | ||||||
Net income | $ | 8,167 | $ | 7,408 | ||||
Net income per share: | ||||||||
Basic | $ | 0.06 | $ | 0.06 | ||||
Diluted | $ | 0.06 | $ | 0.05 | ||||
Shares used in per share calculations: | ||||||||
Basic | 134,253 | 130,992 | ||||||
Diluted | 138,044 | 134,810 | ||||||
| Three Months Ended | |||||||
| (In thousands, except per share data) | March 30, 2019 | March 31, 2018 | |||||
| Revenue: | |||||||
| Product | $ | 91,612 | $ | 95,109 | |||
| Licensing and services | 6,479 | 3,514 | |||||
| Total revenue | 98,091 | 98,623 | |||||
| Costs and expenses: | |||||||
| Cost of product revenue | 40,439 | 42,102 | |||||
| Research and development | 19,665 | 22,941 | |||||
| Selling, general, and administrative | 20,781 | 27,043 | |||||
| Amortization of acquired intangible assets | 3,389 | 5,636 | |||||
| Restructuring charges | 1,341 | 1,029 | |||||
| Acquisition related charges | — | 667 | |||||
| Total costs and expenses | 85,615 | 99,418 | |||||
| Income (loss) from operations | 12,476 | (795 | ) | ||||
| Interest expense | (4,987 | ) | (5,114 | ) | |||
| Other income, net | 153 | 554 | |||||
| Income (loss) before income taxes | 7,642 | (5,355 | ) | ||||
| Income tax expense | 234 | 597 | |||||
| Net income (loss) | $ | 7,408 | $ | (5,952 | ) | ||
| Net income (loss) per share: | |||||||
| Basic | $ | 0.06 | $ | (0.05 | ) | ||
| Diluted | $ | 0.05 | $ | (0.05 | ) | ||
| Shares used in per share calculations: | |||||||
| Basic | 130,992 | 124,076 | |||||
| Diluted | 134,810 | 124,076 | |||||
See Accompanying Notes to Unaudited Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
Three Months Ended | ||||||||
March 28, | March 30, | |||||||
(In thousands) | 2020 | 2019 | ||||||
Net income | $ | 8,167 | $ | 7,408 | ||||
Other comprehensive (loss) income: | ||||||||
Translation adjustment, net of tax | (111 | ) | 47 | |||||
Unrealized gain related to marketable securities, net of tax | — | 42 | ||||||
Reclassification adjustment for gains related to marketable securities included in Other (expense) income, net of tax | — | (53 | ) | |||||
Comprehensive income | $ | 8,056 | $ | 7,444 | ||||
| Three Months Ended | |||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | |||||
| Net income (loss) | $ | 7,408 | $ | (5,952 | ) | ||
| Other comprehensive income (loss): | |||||||
| Unrealized gain (loss) related to marketable securities, net of tax | 42 | (7 | ) | ||||
| Reclassification adjustment for gains related to marketable securities included in Other income, net of tax | (53 | ) | (1 | ) | |||
| Translation adjustment, net of tax | 47 | 589 | |||||
| Comprehensive income (loss) | $ | 7,444 | $ | (5,371 | ) | ||
See Accompanying Notes to Unaudited Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 28, | December 28, | |||||||
(In thousands, except share and par value data) | 2020 | 2019 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 176,572 | $ | 118,081 | ||||
Accounts receivable, net of allowance for credit losses | 68,643 | 64,917 | ||||||
Inventories | 48,932 | 54,980 | ||||||
Prepaid expenses and other current assets | 24,531 | 24,452 | ||||||
Total current assets | 318,678 | 262,430 | ||||||
Property and equipment, less accumulated depreciation of $128,890 at March 28, 2020 and $125,990 at December 28, 2019 | 39,933 | 39,230 | ||||||
Operating lease right-of-use assets | 22,212 | 23,591 | ||||||
Intangible assets, net | 4,323 | 6,977 | ||||||
Goodwill | 267,514 | 267,514 | ||||||
Deferred income taxes | 476 | 478 | ||||||
Other long-term assets | 11,069 | 11,796 | ||||||
Total assets | $ | 664,205 | $ | 612,016 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 59,964 | $ | 60,255 | ||||
Accrued payroll obligations | 7,715 | 13,404 | ||||||
Current portion of long-term debt | 21,484 | 21,474 | ||||||
Current portion of operating lease liabilities | 4,564 | 4,686 | ||||||
Total current liabilities | 93,727 | 99,819 | ||||||
Long-term debt, net of current portion | 170,791 | 125,072 | ||||||
Long-term operating lease liabilities, net of current portion | 20,172 | 21,438 | ||||||
Other long-term liabilities | 36,556 | 38,028 | ||||||
Total liabilities | 321,246 | 284,357 | ||||||
Contingencies (Note 11) | — | — | ||||||
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; 134,513,000 shares issued and outstanding as of March 28, 2020 and 133,883,000 shares issued and outstanding as of December 28, 2019 | 1,345 | 1,339 | ||||||
Additional paid-in capital | 769,451 | 762,213 | ||||||
Accumulated deficit | (425,123 | ) | (433,290 | ) | ||||
Accumulated other comprehensive loss | (2,714 | ) | (2,603 | ) | ||||
Total stockholders' equity | 342,959 | 327,659 | ||||||
Total liabilities and stockholders' equity | $ | 664,205 | $ | 612,016 | ||||
| (In thousands, except share and par value data) | March 30, 2019 | December 29, 2018 | |||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 130,391 | $ | 119,051 | |||
| Short-term marketable securities | — | 9,624 | |||||
| Accounts receivable, net of allowance for doubtful accounts | 55,606 | 60,890 | |||||
| Inventories | 66,773 | 67,096 | |||||
| Prepaid expenses and other current assets | 28,993 | 27,762 | |||||
| Total current assets | 281,763 | 284,423 | |||||
Property and equipment, less accumulated depreciation of $139,985 at March 30, 2019 and $141,367 at December 29, 2018 | 36,758 | 34,883 | |||||
| Operating lease right-of-use assets | 27,868 | — | |||||
| Intangible assets, net | 17,187 | 21,325 | |||||
| Goodwill | 267,514 | 267,514 | |||||
| Deferred income taxes | 215 | 215 | |||||
| Other long-term assets | 13,421 | 15,327 | |||||
| Total assets | $ | 644,726 | $ | 623,687 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable and accrued expenses (includes restructuring) | $ | 50,789 | $ | 51,763 | |||
| Accrued payroll obligations | 6,577 | 9,365 | |||||
| Current portion of long-term debt | 7,796 | 8,290 | |||||
| Current portion of operating lease liabilities | 5,027 | — | |||||
| Total current liabilities | 70,189 | 69,418 | |||||
| Long-term debt, net of current portion | 225,662 | 251,357 | |||||
| Long-term operating lease liabilities, net of current portion | 25,376 | — | |||||
| Other long-term liabilities | 42,344 | 44,455 | |||||
| Total liabilities | 363,571 | 365,230 | |||||
| Contingencies (Note 16) | — | — | |||||
| 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; 131,905,000 shares issued and outstanding as of March 30, 2019 and 129,728,000 shares issued and outstanding as of December 29, 2018 | 1,319 | 1,297 | |||||
| Additional paid-in capital | 751,506 | 736,274 | |||||
| Accumulated deficit | (469,375 | ) | (476,783 | ) | |||
| Accumulated other comprehensive loss | (2,295 | ) | (2,331 | ) | |||
| Total stockholders' equity | 281,155 | 258,457 | |||||
| Total liabilities and stockholders' equity | $ | 644,726 | $ | 623,687 | |||
See Accompanying Notes to Unaudited Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended | ||||||||
| March 28, | March 30, | |||||||
(In thousands) | 2020 | 2019 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 8,167 | $ | 7,408 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 7,793 | 8,403 | ||||||
Stock-based compensation expense | 8,728 | 3,686 | ||||||
Reduction in the carrying amount of right-of-use assets | 1,494 | 1,487 | ||||||
Amortization of debt issuance costs and discount | 103 | 686 | ||||||
Impairment of operating lease right-of-use asset (recorded in Restructuring charges) | — | 757 | ||||||
Other non-cash adjustments | (88 | ) | (129 | ) | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | (3,726 | ) | 5,284 | |||||
Inventories | 6,048 | 323 | ||||||
Prepaid expenses and other assets | (129 | ) | (1,965 | ) | ||||
Accounts payable and accrued expenses | 130 | 330 | ||||||
Accrued payroll obligations | (5,689 | ) | (2,788 | ) | ||||
Operating lease liabilities, current and long-term portions | (1,437 | ) | (2,089 | ) | ||||
Income taxes payable | (291 | ) | 365 | |||||
Net cash provided by operating activities | 21,103 | 21,758 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from sales of and maturities of short-term marketable securities | — | 9,655 | ||||||
Capital expenditures | (3,867 | ) | (3,074 | ) | ||||
Cash paid for software licenses | (2,775 | ) | (1,739 | ) | ||||
Net cash (used in) provided by investing activities | (6,642 | ) | 4,842 | |||||
Cash flows from financing activities: | ||||||||
Restricted stock unit tax withholdings | (3,854 | ) | (418 | ) | ||||
Proceeds from issuance of common stock | 2,370 | 11,986 | ||||||
Proceeds from issuance of long-term debt | 50,000 | — | ||||||
Repayment of debt | (4,375 | ) | (26,875 | ) | ||||
Net cash provided by (used in) financing activities | 44,141 | (15,307 | ) | |||||
Effect of exchange rate change on cash | (111 | ) | 47 | |||||
Net increase in cash and cash equivalents | 58,491 | 11,340 | ||||||
Beginning cash and cash equivalents | 118,081 | 119,051 | ||||||
Ending cash and cash equivalents | $ | 176,572 | $ | 130,391 | ||||
Supplemental disclosure of cash flow information and non-cash investing and financing activities: | ||||||||
Interest paid | $ | 1,113 | $ | 4,383 | ||||
Operating lease payments | $ | 1,934 | $ | 2,597 | ||||
Income taxes paid, net of refunds | $ | 852 | $ | 280 | ||||
Accrued purchases of plant and equipment | $ | 753 | $ | 1,417 | ||||
Operating lease right-of-use assets obtained in exchange for lease obligations | $ | 49 | $ | 219 | ||||
| Three Months Ended | |||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | |||||
| Cash flows from operating activities: | |||||||
| Net income (loss) | $ | 7,408 | $ | (5,952 | ) | ||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||
| Depreciation and amortization | 8,403 | 12,356 | |||||
| Amortization of operating lease right-of-use assets | 1,487 | — | |||||
| Amortization of debt issuance costs and discount | 686 | 507 | |||||
| Gain on sale or maturity of marketable securities | (53 | ) | (1 | ) | |||
| (Gain) loss on forward contracts | (84 | ) | 99 | ||||
| Stock-based compensation expense | 3,686 | 4,800 | |||||
| Impairment of operating lease right-of-use asset (recorded in Restructuring charges) | 757 | — | |||||
| Loss (gain) on disposal of fixed assets | 8 | (58 | ) | ||||
| Changes in assets and liabilities: | |||||||
| Accounts receivable, net | 5,284 | (8,867 | ) | ||||
| Inventories | 323 | 2,356 | |||||
| Prepaid expenses and other assets | (1,965 | ) | (3,253 | ) | |||
| Accounts payable and accrued expenses (includes restructuring) | 330 | 1,567 | |||||
| Accrued payroll obligations | (2,788 | ) | (1,441 | ) | |||
| Operating lease liabilities, current and long-term portions | (2,089 | ) | — | ||||
| Income taxes payable | 365 | 413 | |||||
| Deferred licensing and services revenue | — | (68 | ) | ||||
| Net cash provided by operating activities | 21,758 | 2,458 | |||||
| Cash flows from investing activities: | |||||||
| Proceeds from sales of and maturities of short-term marketable securities | 9,655 | 2,500 | |||||
| Purchases of marketable securities | — | (9,603 | ) | ||||
| Capital expenditures | (3,074 | ) | (1,804 | ) | |||
| Cash paid for software licenses | (1,739 | ) | (1,837 | ) | |||
| Net cash provided by (used in) investing activities | 4,842 | (10,744 | ) | ||||
| Cash flows from financing activities: | |||||||
| Restricted stock unit tax withholdings | (418 | ) | (459 | ) | |||
| Proceeds from issuance of common stock | 11,986 | 1,608 | |||||
| Repayment of debt | (26,875 | ) | (875 | ) | |||
| Net cash (used in) provided by financing activities | (15,307 | ) | 274 | ||||
| Effect of exchange rate change on cash | 47 | 589 | |||||
| Net increase (decrease) in cash and cash equivalents | 11,340 | (7,423 | ) | ||||
| Beginning cash and cash equivalents | 119,051 | 106,815 | |||||
| Ending cash and cash equivalents | $ | 130,391 | $ | 99,392 | |||
| Supplemental disclosure of cash flow information and non-cash investing and financing activities: | |||||||
| Interest paid | $ | 4,383 | $ | 4,420 | |||
| Operating lease payments | $ | 2,597 | $ | — | |||
| Income taxes paid, net of refunds | $ | 280 | $ | 40 | |||
| Accrued purchases of plant and equipment | $ | 1,417 | $ | 232 | |||
| Operating lease right-of-use assets obtained in exchange for lease obligations | $ | 219 | $ | — | |||
| Change in unrealized (gain) loss related to marketable securities, net of tax, included in Accumulated other comprehensive loss | $ | (42 | ) | $ | 7 | ||
See Accompanying Notes to Unaudited Consolidated Financial Statements.
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
The following summarizes the changes in total equity for the three month period ended March 28, 2020:
Common Stock ($.01 par value) | Additional Paid-in | Accumulated | Accumulated other comprehensive | |||||||||||||||||||||
(In thousands, except par value data) | Shares | Amount | capital | deficit | loss | Total | ||||||||||||||||||
Balances, December 28, 2019 | 133,883 | $ | 1,339 | $ | 762,213 | $ | (433,290 | ) | $ | (2,603 | ) | $ | 327,659 | |||||||||||
Net income for the three months ended March 28, 2020 | — | — | — | 8,167 | — | 8,167 | ||||||||||||||||||
Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes | 630 | 6 | (1,490 | ) | — | — | (1,484 | ) | ||||||||||||||||
Stock-based compensation related to stock options, ESPP and RSUs | — | — | 8,728 | — | — | 8,728 | ||||||||||||||||||
Translation adjustments, net of tax | — | — | — | — | (111 | ) | (111 | ) | ||||||||||||||||
Balances, March 28, 2020 | 134,513 | $ | 1,345 | $ | 769,451 | $ | (425,123 | ) | $ | (2,714 | ) | $ | 342,959 | |||||||||||
The following summarizes the changes in total equity for the three month period ended March 30, 2019:
Common Stock ($.01 par value) | Additional Paid-in | Accumulated | Accumulated other comprehensive | |||||||||||||||||||||
(In thousands, except par value data) | Shares | Amount | capital | deficit | loss | Total | ||||||||||||||||||
Balances, December 29, 2018 | 129,728 | $ | 1,297 | $ | 736,274 | $ | (476,783 | ) | $ | (2,331 | ) | $ | 258,457 | |||||||||||
Net income for the three months ended March 30, 2019 | — | — | — | 7,408 | — | 7,408 | ||||||||||||||||||
Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes | 2,177 | 22 | 11,546 | — | — | 11,568 | ||||||||||||||||||
Stock-based compensation related to stock options, ESPP and RSUs | — | — | 3,686 | — | — | 3,686 | ||||||||||||||||||
Translation adjustments, net of tax | — | — | — | — | 47 | 47 | ||||||||||||||||||
Unrealized loss related to marketable securities, net of tax | — | — | — | — | 42 | 42 | ||||||||||||||||||
Recognized gain on redemption of marketable securities, previously unrealized | — | — | — | — | (53 | ) | (53 | ) | ||||||||||||||||
Balances, March 30, 2019 | 131,905 | $ | 1,319 | $ | 751,506 | $ | (469,375 | ) | $ | (2,295 | ) | $ | 281,155 | |||||||||||
See Accompanying Notes to Unaudited Consolidated Financial Statements.
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Lattice Semiconductor Corporation, a Delaware corporation, and Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying Consolidated Financial Statements are unaudited and have been prepared by Lattice Semiconductor Corporation (“Lattice,” the “Company,” “we,” “us,” or “our”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”) and inSEC. In our opinion, they include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP")GAAP have been condensed or omitted as permitted by the SEC's rules and regulations.regulations for interim reporting. These Consolidated Financial Statements should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K10-K for the fiscal year ended December 29, 2018.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affectjudgments affecting the amounts reported amounts and classification of assets, such as marketable securities, accounts receivable, contract assets and contract liabilities, inventory, depreciable lives of fixed assets, lease right-of-use assets and lease liabilities, goodwill (including the assessment of reporting units), intangible assets, current and deferred income taxes, accrued liabilities (including restructuring charges and bonus arrangements), disclosure of contingent assets and liabilities at the date of thein our consolidated condensed financial statements impairment assessments, the fair value of equity awards, and the reported amounts of product revenue, licensingaccompanying notes. The actual results that we experience may differ materially from our estimates.
We describe our accounting methods and services revenue, and expenses duringpractices in more detail in our 201910-K. There have been no changes to the fiscal periods presented. Actual results could differ from those estimates.
Fiscal Reporting Periods
We value these instruments at their fair value and monitor our portfolio for impairmentreport based on a periodic basis. In52 or 53-week fiscal year ending on the eventSaturday closest to December 31. Our fiscal 2020 will be a 53-week year and will end on January 2, 2021, and our fiscal 2019 was a 52-week year that the carrying valueended December 28, 2019. Our first quarter of an investment exceeds its fair valuefiscal 2020 and the decline in value is determined to be other than temporary, we would record an impairment charge first quarter of fiscal 2019 ended on March 28, 2020 and establish a new carrying value. We assess other than temporary impairment of marketable securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “
| March 30, 2019 | December 29, 2018 | |||||||
Total cost of contracts for Japanese yen (in thousands) | $ | 2,883 | $ | 1,955 | ||||
| Number of contracts | 3 | 2 | ||||||
| Settlement month | June 2019 | June 2019 | ||||||
Concentrations of Risk
Distributors have historically accounted for a significant portion of our total revenue. Revenue attributable to distributors as a percentage of total revenue was
Distributors also account for a substantial portion of our net accounts receivable. At March 30, 2019 and December 29, 2018, ArrowOur two largest distributors accounted for 34%38% and 41%, respectively, and Weikeng accounted for 32% and 23%, respectively, of net accounts receivable. A third distributor accounted for 12%36% of net accounts receivable at March 30, 2019, but accounted for less than 10%28, 2020 and 40% and 38% of net accounts receivable at December 29, 2018. 28, 2019. No other distributor group or end customer accounted for more than 10% of net accounts receivable at these dates.
Recently Issued Accounting Standards
In August 2018, December 2019, the FASB issued ASU 2018-15,
Our calculation of the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which clarifieddiluted share count includes the FASB’s original intent to grant disclosure relief for interim periods duringnumber of shares from our equity awards with market conditions or performance conditions that would be issuable under the year in whichterms of such awards at the end of the reporting period. For equity awards with a company adopts Topic 842. ASU 2019-01 accomplishes this by explicitly providing an exception tomarket condition, the paragraph 250-10-50-3 interim disclosure requirementsnumber of shares included in the Topic 842 transition disclosure requirements. Paragraph 250-10-50-3 requires entities to providediluted share count as of March 28, 2020 is determined by measuring the achievement of the market condition as of the end of the reporting period. For equity awards with a performance condition, the number of shares that qualified for vesting as of March 28, 2020 are included in the fiscal year in which a new accounting principlediluted share count, as the condition for their issuance was satisfied by the end of the reporting period. See "Note 9 - Stock-Based Compensation" to our consolidated financial statements for further discussion of our equity awards with market conditions or performance conditions.
A summary of basic and diluted Net income (loss) per share is adopted the identical disclosures for interim periods after the date of adoption. Thus, ASU 2019-01 exempts entities from such reporting in interim periodspresented in the fiscal year in whichfollowing table:
Three Months Ended | ||||||||
March 28, | March 30, | |||||||
(in thousands, except per share data) | 2020 | 2019 | ||||||
Net income | $ | 8,167 | $ | 7,408 | ||||
Shares used in basic Net income per share | 134,253 | 130,992 | ||||||
Dilutive effect of stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition | 3,791 | 3,818 | ||||||
Shares used in diluted Net income per share | 138,044 | 134,810 | ||||||
Basic Net income per share | $ | 0.06 | $ | 0.06 | ||||
Diluted Net income per share | $ | 0.06 | $ | 0.05 | ||||
The computation of diluted Net income per share excludes the entities adopt Topic 842. The amendments set forth in ASC 2019-01 take effect in fiscal years beginning after December 15, 2019,effects of stock options, restricted stock units ("RSUs"), Employee Stock Purchase Plan ("ESPP") shares, and interim periods within those fiscal years. Early adoption is permitted. We will follow this exception for interim periods inequity awards with a market condition or performance condition that are antidilutive, aggregating approximately the current fiscal year, concurrent with our adoptionfollowing number of Topic 842.shares:
Three Months Ended | ||||||||
March 28, | March 30, | |||||||
(in thousands) | 2020 | 2019 | ||||||
Stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition excluded as they are antidilutive | 1,056 | 812 | ||||||
Disaggregation of revenue
The following tables provide information about revenue from Contracts with Customers
Major Class of Revenue | Three Months Ended | |||||||||||||||
March 28, | March 30, | |||||||||||||||
(In thousands) | 2020 | 2019 | ||||||||||||||
Product | $ | 93,225 | 96 | % | $ | 91,612 | 93 | % | ||||||||
Licensing and services | 4,091 | 4 | % | 6,479 | 7 | % | ||||||||||
Total revenue | $ | 97,316 | 100 | % | $ | 98,091 | 100 | % | ||||||||
Revenue by Channel | Three Months Ended | |||||||||||||||
March 28, | March 30, | |||||||||||||||
(In thousands) | 2020 | 2019 | ||||||||||||||
Product revenue - Distributors | $ | 75,455 | 78 | % | $ | 77,472 | 79 | % | ||||||||
Product revenue - Direct | 17,770 | 18 | % | 14,140 | 14 | % | ||||||||||
Licensing and services revenue | 4,091 | 4 | % | 6,479 | 7 | % | ||||||||||
Total revenue | $ | 97,316 | 100 | % | $ | 98,091 | 100 | % | ||||||||
Revenue by Geographical Market | Three Months Ended | |||||||||||||||
March 28, | March 30, | |||||||||||||||
(In thousands) | 2020 | 2019 | ||||||||||||||
| United States | $ | 13,319 | 14 | % | $ | 12,895 | 13 | % | ||||||||
| Other Americas | 3,268 | 3 | % | 3,975 | 4 | % | ||||||||||
Americas | 16,587 | 17 | % | 16,870 | 17 | % | ||||||||||
| China | 43,499 | 45 | % | 48,305 | 49 | % | ||||||||||
| Taiwan | 9,859 | 10 | % | 2,678 | 3 | % | ||||||||||
| Japan | 7,999 | 8 | % | 11,857 | 12 | % | ||||||||||
| Other Asia | 7,336 | 8 | % | 6,171 | 7 | % | ||||||||||
Asia | 68,693 | 71 | % | 69,011 | 71 | % | ||||||||||
Europe | 12,036 | 12 | % | 12,210 | 12 | % | ||||||||||
Total revenue | $ | 97,316 | 100 | % | $ | 98,091 | 100 | % | ||||||||
Contract balances
Our contract bearing enforceable rights and obligations only with the distributor. As part of our consideration of the contract, we evaluate certain factors including the customer’s ability to pay (or credit risk).
(In thousands) | ||||
Contract assets as of December 28, 2019 | $ | 5,569 | ||
Revenues recorded during the period | 3,103 | |||
Transferred to Accounts receivable or collected | (3,238 | ) | ||
Contract assets as of March 28, 2020 | $ | 5,434 |
Contract liabilities are included in Accounts payable and accrued expenses on our Consolidated Balance Sheets. The following table summarizes activity during the first three months of fiscal 2020:
(In thousands) | ||||
Contract liabilities as of December 28, 2019 | $ | 2,313 | ||
Accruals for estimated future stock rotation and scrap returns | 990 | |||
Less: Release of accruals for recognized stock rotation and scrap returns | (376 | ) | ||
Contract liabilities as of March 28, 2020 | $ | 2,927 |
The impact to revenue from the release of accruals for recognized stock rotation and scrap returns was offset by the processing of return merchandise authorizations totaling approximately $0.5 million, yielding a net revenue reduction of approximately $0.1 million for the first three months of 2020.
Note 4 - Balance Sheet Components
Accounts Receivable
Accounts receivable do not bear interest and are shown net of an allowance for expected lifetime credit losses, which reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine this allowance through an assessment of known troubled accounts, analysis of our accounts receivable aging, historical experience, expectations for future economic conditions, management judgment, and other available evidence.
| March 28, | December 28, | |||||||
(In thousands) | 2020 | 2019 | ||||||
Accounts receivable | $ | 68,749 | $ | 65,023 | ||||
Less: Allowance for credit losses | (106 | ) | (106 | ) | ||||
Accounts receivable, net of allowance for credit losses | $ | 68,643 | $ | 64,917 | ||||
Inventories
| March 28, | December 28, | |||||||
(In thousands) | 2020 | 2019 | ||||||
Work in progress | $ | 39,744 | $ | 39,855 | ||||
Finished goods | 9,188 | 15,125 | ||||||
Total inventories | $ | 48,932 | $ | 54,980 | ||||
Property and Equipment – Geographic Information
Our Property and equipment, net by country at the end of each period was as follows:
| March 28, | December 28, | |||||||
(In thousands) | 2020 | 2019 | ||||||
United States | $ | 31,593 | $ | 32,313 | ||||
China | 1,528 | 1,683 | ||||||
Philippines | 2,705 | 2,683 | ||||||
Taiwan | 3,556 | 1,885 | ||||||
Japan | 234 | 283 | ||||||
Other | 317 | 383 | ||||||
Total foreign property and equipment, net | 8,340 | 6,917 | ||||||
Total property and equipment, net | $ | 39,933 | $ | 39,230 | ||||
Accounts Payable and Accrued Expenses
Included in Accounts payable and accrued expenses in the Consolidated Balance Sheets are the following balances:
| March 28, | December 28, | |||||||
(In thousands) | 2020 | 2019 | ||||||
Trade accounts payable | $ | 44,440 | $ | 44,350 | ||||
Liability for non-cancelable contracts | 6,359 | 6,964 | ||||||
Other accrued expenses | 9,165 | 8,941 | ||||||
Total accounts payable and accrued expenses | $ | 59,964 | $ | 60,255 | ||||
Cloud Based Computing Implementation Costs
Under the guidance in ASU 2018-15,Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), we are capitalizing the implementation costs for cloud computing arrangements, mainly for our new royalty sharing agreement. The contract assetsand integrated distributor accounting management systems. These cloud-based computing implementation costs are recorded in Prepaid expenses and other current assets inand Other long-term assets on our Consolidated Balance Sheets, and they are transferred to Accounts receivable when the rights become unconditional.
(In thousands) | ||||
Cloud based computing implementation costs as of December 28, 2019 | $ | 2,543 | ||
Costs capitalized during the period | 523 | |||
Capitalized costs amortized during the period | (73 | ) | ||
Cloud based computing implementation costs as of March 28, 2020 | $ | 2,993 |
| (In thousands) | |||
| Balance as of December 29, 2018 | $ | 9,143 | |
| Revenues recorded during the period | 2,947 | ||
| Transferred to accounts receivable or collected | (1,118 | ) | |
| Balance as of March 30, 2019 | $ | 10,972 | |
On May 17, 2019, we entered into a credit agreement (the “Current Credit Agreement”), which provides for a five-year secured term loan facility in an aggregate principal amount of revenue
| Major Class of Revenue | Three Months Ended | ||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | |||||
| Product revenue - Distributors | 77,472 | 85,957 | |||||
| Product revenue - Direct | 14,140 | 9,152 | |||||
| Licensing and services revenue | 6,479 | 3,514 | |||||
| Total revenue | 98,091 | 98,623 | |||||
| Revenue by Geographical Market | Three Months Ended | ||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | |||||
| Asia | 69,011 | 71,921 | |||||
| Europe | 12,210 | 12,142 | |||||
| Americas | 16,870 | 14,560 | |||||
| Total revenue | 98,091 | 98,623 | |||||
| Three Months Ended | |||||||
| (in thousands, except per share data) | March 30, 2019 | March 31, 2018 | |||||
| Net income (loss) | $ | 7,408 | $ | (5,952 | ) | ||
| Shares used in basic Net income (loss) per share | 130,992 | 124,076 | |||||
| Dilutive effect of stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition | 3,818 | — | |||||
| Shares used in diluted Net income (loss) per share | 134,810 | 124,076 | |||||
| Basic Net income (loss) per share | $ | 0.06 | $ | (0.05 | ) | ||
| Diluted Net income (loss) per share | $ | 0.05 | $ | (0.05 | ) | ||
| Three Months Ended | |||||
| (in thousands) | March 30, 2019 | March 31, 2018 | |||
| Stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition excluded as they are antidilutive | 812 | 9,424 | |||
| (In thousands) | March 30, 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 | |||
| Fair value measurements as of | Fair value measurements as of | ||||||||||||||||||||||||||||||
| March 30, 2019 | December 29, 2018 | ||||||||||||||||||||||||||||||
| (In thousands) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||
| Short-term marketable securities | $ | — | $ | — | $ | — | $ | — | $ | 9,624 | $ | 9,624 | $ | — | $ | — | |||||||||||||||
| Foreign currency forward exchange contracts, net | 84 | — | 84 | — | 53 | — | 53 | — | |||||||||||||||||||||||
| Total fair value of financial instruments | $ | 84 | $ | — | $ | 84 | $ | — | $ | 9,677 | $ | 9,624 | $ | 53 | $ | — | |||||||||||||||
During the first three months of fiscal 2019 or 2018.
| (In thousands) | March 30, 2019 | December 29, 2018 | |||||
| Work in progress | $ | 49,096 | $ | 47,224 | |||
| Finished goods | 17,677 | 19,872 | |||||
| Total inventories | $ | 66,773 | $ | 67,096 | |||
| March 28, | December 28, | |||||||
(In thousands) | 2020 | 2019 | ||||||
Principal amount | $ | 193,750 | $ | 148,125 | ||||
Unamortized original issue discount and debt costs | (1,475 | ) | (1,579 | ) | ||||
Less: Current portion of long-term debt | (21,484 | ) | (21,474 | ) | ||||
Long-term debt, net of current portion and unamortized debt issue costs | $ | 170,791 | $ | 125,072 | ||||
As of March 28, 2020, the effective interest rate on the term loan was 3.07%, and as lease liabilities, with the current portion presented in Currenteffective interest rate on the revolving loan was 2.17%. We pay a commitment fee of 0.20% on the unused portion of operating lease liabilities and with the revolving loan. Interest expense related to our long-term portion presenteddebt was included in Long-term operating lease liabilities, netInterest expense on our Consolidated Statements of current portion.
Three Months Ended | ||||||||
March 28, | March 30, | |||||||
(In thousands) | 2020 | 2019 | ||||||
Contractual interest | $ | 1,086 | $ | 4,316 | ||||
Amortization of debt issuance costs and discount | 103 | 687 | ||||||
Total interest expense related to long-term debt | $ | 1,189 | $ | 5,003 | ||||
Expected future principal payments arising from the lease. Operating lease ROU assets and liabilities are recognized on the commencement date of the lease based on the present valueschedule of leaserequired quarterly installments, adjusted for known voluntary payments. Our 53-week fiscal 2020 will result in five quarterly installments being paid during this fiscal year. As of March 28, 2020, expected future principal payments on our long-term debt were as follows:
Fiscal year | (in thousands) | |||
2020 (remaining 9 months) | $ | 17,500 | ||
2021 | 17,500 | |||
2022 | 17,500 | |||
2023 | 13,125 | |||
2024 | 128,125 | |||
| $ | 193,750 | |||
In March 2020, our management approved and executed an internal restructuring plan (the “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. Approximately $1.1 million of restructuring expense has been incurred through March 28, 2020 under the Q12020 Plan, and we believe this amount approximates the total costs under the plan.
Under the Q22019 Sales Plan, which is more fully described in the 201910-K, we recorded a credit adjustment of approximately $0.2 million during the first quarter of fiscal 2020 due to the final reconciliation of expenses incurred, and we incurred approximately $2.0 million of restructuring expense during fiscal 2019. Approximately $1.8 million of net expense has been incurred through March 28, 2020 under the Q22019 Sales Plan. All actions planned under the Q22019 Sales Plan have been implemented.
Under the June 2017 Plan, which is more fully described in the 201910-K, we incurred less than $0.1 million and approximately $1.3 million of expense during the first quarter of fiscal 2020 and fiscal 2019, respectively. We have incurred approximately $19.1 million of total expense through March 28, 2020 under the June 2017 Plan, and all planned actions have been implemented. We expect the total cost of the June 2017 Plan to be approximately $20.0 million to $21.5 million as expenses related to our partially vacated facility in San Jose, California will be incurred over the remaining lease term. As most
These expenses were recorded to Restructuring charges on our Consolidated Statements of Operations. The restructuring accrual balance is presented in Accounts payable and accrued expenses and in Other long-term liabilities on our leases do not provide an implicit rate, we useConsolidated Balance Sheets. The following table displays the activity related to our incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments.restructuring plans:
(In thousands) | Severance & Related (1) | Lease Termination & Fixed Assets | Software Contracts & Engineering Tools (2) | Other (3) | Total | |||||||||||||||
Accrued Restructuring at December 28, 2019 | $ | 160 | $ | 6,585 | $ | — | $ | 865 | $ | 7,610 | ||||||||||
Restructuring charges | 949 | 47 | — | (56 | ) | 940 | ||||||||||||||
Costs paid or otherwise settled | (135 | ) | (405 | ) | — | (201 | ) | (741 | ) | |||||||||||
Accrued Restructuring at March 28, 2020 | $ | 974 | $ | 6,227 | $ | — | $ | 608 | $ | 7,809 | ||||||||||
Accrued Restructuring at December 29, 2018 | $ | 1,814 | $ | 8,630 | $ | 218 | $ | 18 | $ | 10,680 | ||||||||||
Restructuring charges | (60 | ) | 1,409 | — | (8 | ) | 1,341 | |||||||||||||
Costs paid or otherwise settled | (1,540 | ) | (1,875 | ) | (83 | ) | (10 | ) | (3,508 | ) | ||||||||||
Accrued Restructuring at March 30, 2019 | $ | 214 | $ | 8,164 | $ | 135 | $ | — | $ | 8,513 | ||||||||||
(1) | Includes employee relocation and outplacement costs | |||||||||||||||||||
(2) | Includes cancellation of contracts, asset impairments, and accelerated depreciation on certain enterprise resource planning and customer relationship management systems | |||||||||||||||||||
(3) | Beginning in the second quarter of fiscal 2019, "Other" included 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. Our leases have remaining leasecenter, the terms of 1 year to 8 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year. The exercise of lease renewal options is atare more fully described in 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. We have no finance leases as of March 30, 2019.
| Three Months Ended | ||||
| (In thousands) | March 30, 2019 | |||
| Fixed operating lease expense | $ | 1,995 | ||
| Variable operating lease expense | — | |||
| Total operating lease expense | $ | 1,995 | ||
The following table presents the lease balance classifications within the Consolidated Balance Sheets and summarizes their activity during the firstthree months of fiscal 2019:
Operating lease right-of-use assets | (in thousands) | |||
Balance as of December 28, 2019 | $ | 23,591 | ||
Right-of-use assets obtained in exchange for new lease obligations during the period | 49 | |||
Reduction in the carrying amount of right-of-use assets during the period | (1,494 | ) | ||
Adjustments for present value and foreign currency effects | 66 | |||
Balance as of March 28, 2020 | $ | 22,212 | ||
Operating lease liabilities | (in thousands) | |||
Balance as of December 28, 2019 | $ | 26,124 | ||
Lease liabilities incurred for new lease obligations during the period | 49 | |||
Accretion of lease liabilities | 431 | |||
Operating cash used by payments on lease liabilities | (1,934 | ) | ||
Adjustments for present value, foreign currency, and restructuring liability effects | 66 | |||
Balance as of March 28, 2020 | 24,736 | |||
Less: Current portion of operating lease liabilities | (4,564 | ) | ||
Long-term operating lease liabilities, net of current portion | $ | 20,172 | ||
Maturities of operating lease liabilities as of March 30, 201928, 2020 are as follows:
| Fiscal year | (in thousands) | |||
| 2019 (remaining 9 months) | $ | 4,974 | ||
| 2020 | 7,053 | |||
| 2021 | 5,288 | |||
| 2022 | 4,436 | |||
| 2023 | 4,563 | |||
| Thereafter | 11,369 | |||
| Total lease payments | 37,683 | |||
| Less: amount representing interest | (7,280 | ) | ||
| Total lease liabilities | $ | 30,403 | ||
| Fiscal year | (in thousands) | |||
| 2019 | $ | 7,090 | ||
| 2020 | 6,893 | |||
| 2021 | 5,452 | |||
| 2022 | 4,658 | |||
| 2023 | 4,229 | |||
| Thereafter | 9,930 | |||
| $ | 38,252 | |||
Fiscal year | (in thousands) | |||
2020 (remaining 9 months) | $ | 4,531 | ||
2021 | 5,480 | |||
2022 | 4,464 | |||
2023 | 4,592 | |||
2024 | 4,711 | |||
Thereafter | 6,703 | |||
Total lease payments | 30,481 | |||
Less: amount representing interest | (5,610 | ) | ||
Less: amount representing restructuring liability adjustments | (135 | ) | ||
Total lease liabilities | $ | 24,736 | ||
Prior to 2019,2020, the reporting of future minimum lease commitments included the lease obligations associated with previously restructured facilities. AfterLease obligations for facilities restructured prior to the adoption of Topic 842 for the first quarter of 2019, the lease obligations for previously restructured facilities were $8.1 totaled approximately $6.2 million at March 28, 2020 and continued to be recorded in Other long-term liabilities on our Consolidated Balance Sheets. The difference between the future minimum lease payments reported at December 29, 2018 and the total maturity of operating lease liabilities as of March 30, 2019 is primarily due to new leases executed in the first quarter of fiscal 2019 and to the reasonable certainty of extending the lease of an existing facility. Rental expense under operating leases was $8.3 million for fiscal 2018 and $8.9 million for fiscal 2017.
On our Consolidated Balance Sheets at March 30,28, 2020 and December 28, 2019 and December 29, 2018,, Intangible assets, net are shown net of accumulated amortization of $117.2$130.1 million and $114.5$127.4 million, respectively.
We recorded amortization expense related to intangible assets on the Consolidated Statements of Operations as presented in the following table:
Three Months Ended | ||||||||
March 28, | March 30, | |||||||
(In thousands) | 2020 | 2019 | ||||||
Research and development | $ | 14 | $ | 14 | ||||
Amortization of acquired intangible assets | 2,640 | 3,389 | ||||||
| $ | 2,654 | $ | 3,403 | |||||
| Three Months Ended | |||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | |||||
| Research and development | $ | 14 | $ | 127 | |||
| Amortization of acquired intangible assets | 3,389 | 5,636 | |||||
| $ | 3,403 | $ | 5,763 | ||||
Note 9 - Cost Method Investment and Collaborative Arrangement
Total stock-based compensation expense included in a privately-held company that designs human-computer interaction technology for total consideration of $5.0 million. This gross investment constituted a 22.7% ownership interest. In the third quarter of fiscal 2016, we made an additional investment of $1.0 million via a convertible debt instrument, bringing our gross investment in the investee to $6.0 million.
Three Months Ended | ||||||||
March 28, | March 30, | |||||||
(In thousands) | 2020 | 2019 | ||||||
Cost of revenue | $ | 591 | $ | 202 | ||||
Research and development | 2,594 | 1,125 | ||||||
Selling, general, and administrative | 5,543 | 2,359 | ||||||
Total stock-based compensation | $ | 8,728 | $ | 3,686 | ||||
Market-Based and Performance-Based Stock Compensation
In 2018 and 2019, we granted awards of RSUs with either a market condition or a performance condition to certain executives, as more fully described in our 201910-K. During the first quarter of fiscal 2020, the Board of Directors approved a modification to the market condition measurement periods associated with the unvested portions of certain of the Company’s awards with a commensurate decreasemarket condition that were granted prior to fiscal 2020. The modification extended the duration of the measurement period by adjusting the beginning date of each measurement period to the original grant date, resulting in approximately $1.8 million additional stock compensation expense during the first quarter of fiscal 2020.
In the first quarter of fiscal 2020, we granted awards of RSUs with a market condition to certain executives. Under the terms of these grants, the RSUs with a market condition vest and become payable over a three-year period based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index, which condition is tested for one-half of the grants on the second and third anniversary of the grant date. If the 75th percentile of the market condition is achieved, the awards may vest at 250% or 200%, depending upon the executive, 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.
During the first quarter of fiscal 2020, the market condition for awards granted to certain executives in the carrying valueprevious year exceeded the 75th percentile of the investment. Undercondition, and the first tranche of these approaches,awards vested at 200%. As of March 28, 2020, the Company had generated the specified "adjusted" EBITDA levels on a trailing four quarter basis for two consecutive trailing four-quarter periods, and the first tranche of 33.3% of the base number of the awards with an EBITDA performance condition qualified for vesting. For our awards with a market condition or a performance condition, we have concluded that no impairment adjustment was necessaryincurred stock compensation expense, including the effect of the modification in the firstcurrent quarter, of either fiscal 2019 or fiscal 2018. Through March 30, 2019, we have reduced the value of our investment by approximately $4.0 million. The net balance of our investment included in Other long-term assets$4.2 million and $0.9 million in the Consolidated Balance Sheetsfirst quarter of fiscal 2020 and fiscal 2019, respectively, which is approximately $2.0 million.
The following table summarizes the Consolidated Balance Sheets areactivity for our awards with a market condition or performance condition during the following balances:
(Shares in thousands) | Total | |||
Balance, December 28, 2019 | 1,163 | |||
| Granted | 349 | |||
Effect of vesting multiplier | 91 | |||
Vested | (182 | ) | ||
Balance, March 28, 2020 | 1,421 | |||
| (In thousands) | March 30, 2019 | December 29, 2018 | |||||
| Trade accounts payable | $ | 33,414 | $ | 31,880 | |||
| Liability for non-cancelable contracts | 5,681 | 6,078 | |||||
| Contract liability under ASC 606 | 3,917 | 1,614 | |||||
| Restructuring | 2,525 | 4,220 | |||||
| Other accrued expenses | 5,252 | 7,971 | |||||
| Total accounts payable and accrued expenses | $ | 50,789 | $ | 51,763 | |||
| The following summarizes the changes in total equity for the three month period ended March 30, 2019: | ||||||||||||||||||||||
Common Stock ($.01 par value) | Additional Paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Total | ||||||||||||||||||
| (In thousands, except par value data) | Shares | Amount | ||||||||||||||||||||
| Balances, December 29, 2018 | 129,728 | $ | 1,297 | $ | 736,274 | $ | (476,783 | ) | $ | (2,331 | ) | $ | 258,457 | |||||||||
| Net income for the three months ended March 30, 2019 | — | — | — | 7,408 | — | 7,408 | ||||||||||||||||
| 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 | — | — | — | — | 47 | 47 | ||||||||||||||||
| Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of tax | 2,177 | 22 | 11,546 | — | — | 11,568 | ||||||||||||||||
| Stock-based compensation related to stock options, ESPP and RSUs | — | — | 3,686 | — | — | 3,686 | ||||||||||||||||
| Balances, March 30, 2019 | 131,905 | $ | 1,319 | $ | 751,506 | $ | (469,375 | ) | $ | (2,295 | ) | $ | 281,155 | |||||||||
| The following summarizes the changes in total equity for the three month period ended March 31, 2018: | ||||||||||||||||||||||
Common Stock ($.01 par value) | Additional Paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Total | ||||||||||||||||||
| (In thousands, except par value data) | Shares | Amount | ||||||||||||||||||||
| Balances, December 30, 2017 | 123,895 | $ | 1,239 | $ | 695,768 | $ | (477,862 | ) | $ | (1,452 | ) | $ | 217,693 | |||||||||
| Net income for the three months ended March 31, 2018 | — | — | — | (5,952 | ) | — | (5,952 | ) | ||||||||||||||
| Unrealized loss related to marketable securities, net of tax | — | — | — | — | (7 | ) | (7 | ) | ||||||||||||||
| Recognized gain on redemption of marketable securities, previously unrealized | — | — | — | — | (1 | ) | (1 | ) | ||||||||||||||
| Translation adjustments, net of tax | — | — | — | — | 589 | 589 | ||||||||||||||||
| Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of tax | 416 | 4 | 1,145 | — | — | 1,149 | ||||||||||||||||
| Stock-based compensation related to stock options, ESPP and RSUs | — | — | 4,800 | — | — | 4,800 | ||||||||||||||||
| Accounting method transition adjustment (1) | — | — | — | 27,401 | — | 27,401 | ||||||||||||||||
| Balances, March 31, 2018 | 124,311 | $ | 1,243 | $ | 701,713 | $ | (456,413 | ) | $ | (871 | ) | $ | 245,672 | |||||||||
We are subject to federal and state income tax as well as income tax in the various foreign jurisdictions in which we operate. For the three months ended March 30, first quarter of fiscal 2020 and fiscal 2019, we recorded an income tax expense of approximately $0.4 million and $0.2 million, and for the three months ended March 31, 2018, we recorded an income tax expense of approximately $0.6 million.respectively. Income taxes for the three month periodsperiod ended March 28, 2020 and March 30, 2019 and March 31, 2018 represent tax at the federal, state, and foreign statutory tax rates adjusted for withholding taxes, changes in uncertain tax positions, changes in the U.S. valuation allowance, as well as other non-deductible items in the United States and foreign jurisdictions. The difference between the U.S. federal statutory tax rate of 21% and our effective tax rate for the three months ended March 28, 2020 resulted primarily from a decrease in the valuation allowance that offset expected tax expense in the United States, foreign withholding tax expense, discrete impact from uncertain tax positions, and foreign rate differential primarily due to zero tax rate in Bermuda. For the three months ended March 30, 2019 results, the difference resulted from an increase in the valuation allowance that offset expected tax benefit in the United States, foreign incomerate differential and withholding taxes, offset withzero tax rate in Bermuda which resulted in 0 tax benefit for the pretax loss in Bermuda, and a benefit from the release of uncertain tax positions due to lapsing of the statute of limitations.
Through March 30, 2019,28, 2020, we continued to evaluate the valuation allowance position in the United States and concluded that we should maintain a full valuation allowance against the net federal and state deferred tax assets. In making this evaluation, we exercised significant judgment and considered estimates about our ability to generate revenue and grosstaxable profits sufficient to offset expenditures in future periods within the United States.U.S. 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 portion of the valuation allowance recorded against our U.S. deferred tax assets. The reversal would result in an income tax benefit for the quarterly and annual fiscal period in which we release the valuation allowance. We will continue to evaluate both positive and negative evidence in future periods to determine if we should recognize morewill realize the deferred tax assets. We do not have a valuation allowance in any foreign jurisdictions as we have concluded it is more likely than not that we will realize the net deferred tax assets in future periods.
At March 30, 2019,28, 2020, it is reasonably possible that $1.2$2.3 million of unrecognized tax benefits and $0.1$0.5 million of associated interest and penalties could be recognized during the next twelve months. The $1.3$2.8 million potential change would represent a decrease in unrecognized tax benefits, comprised of items related to tax filings for years that will no longer be subject to examination under expiring statutes of limitations.
Our liability for uncertain tax positions (including penalties and interest) was $25.9$24.3 million and $26.3$24.6 million at March 30,28, 2020 and December 28, 2019 and December 29, 2018,, 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 $24.9of $24.8 million isnetted against deferred tax assets.
We are not currently paying U.S. federal income taxes and do not expect to pay such taxes until we fully utilize our tax NOLnet operating loss ("NOL") and credit carryforwards. We expect to pay a nominal amount of state income tax. We are paying foreign income and withholding taxes, which are reflected in Income tax expense in our Consolidated Statements of Operations and are primarily related to the cost of operating offshore activities and subsidiaries. We accrue interest and penalties related to uncertain tax positions in Income tax expense.
| (In thousands) | Severance & Related (1) | Lease Termination & Fixed Assets | Software Contracts & Engineering Tools (2) | Other | Total | ||||||||||||||
| Balance at December 30, 2017 | $ | 1,192 | $ | 870 | $ | 360 | $ | 25 | $ | 2,447 | |||||||||
| Restructuring charges | 241 | 13 | 738 | 37 | 1,029 | ||||||||||||||
| Costs paid or otherwise settled | (908 | ) | (85 | ) | (700 | ) | (31 | ) | (1,724 | ) | |||||||||
| Balance at March 31, 2018 | $ | 525 | $ | 798 | $ | 398 | $ | 31 | $ | 1,752 | |||||||||
| Balance at December 29, 2018 | $ | 1,814 | $ | 8,630 | $ | 218 | $ | 18 | $ | 10,680 | |||||||||
| Restructuring charges | (60 | ) | 1,409 | — | (8 | ) | 1,341 | ||||||||||||
| Costs paid or otherwise settled | (1,540 | ) | (1,875 | ) | (83 | ) | (10 | ) | (3,508 | ) | |||||||||
| Balance at March 30, 2019 | $ | 214 | $ | 8,164 | $ | 135 | $ | — | $ | 8,513 | |||||||||
| (In thousands) | March 30, 2019 | December 29, 2018 | |||||
| Principal amount | $ | 236,158 | $ | 263,033 | |||
| Unamortized original issue discount and debt costs | (2,700 | ) | (3,386 | ) | |||
| Less: Current portion of long-term debt | (7,796 | ) | (8,290 | ) | |||
| Long-term debt, net of current portion | $ | 225,662 | $ | 251,357 | |||
| Three Months Ended | |||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | |||||
| Contractual interest | $ | 4,316 | $ | 4,528 | |||
| Amortization of debt issuance costs and discount | 687 | 507 | |||||
| Total interest expense related to the Term Loan | $ | 5,003 | $ | 5,035 | |||
| Fiscal year | (in thousands) | |||
| 2019 | 9,388 | |||
| 2020 | 59,291 | |||
| 2021 | 167,479 | |||
| $ | 236,158 | |||
| Three Months Ended | |||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | |||||
| Cost of products sold | $ | 202 | $ | 237 | |||
| Research and development | 1,125 | 1,207 | |||||
| Selling, general, and administrative | 2,359 | 3,356 | |||||
| Total stock-based compensation | $ | 3,686 | $ | 4,800 | |||
| (Shares in thousands) | Unvested | Vested | Total | ||||||
| Balance, December 29, 2018 | 909 | — | 909 | ||||||
| Granted | 265 | — | 265 | ||||||
| Canceled | (98 | ) | — | (98 | ) | ||||
| Balance, March 30, 2019 | 1,076 | — | 1,076 | ||||||
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 the Companywe 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, the Companywe removed the action to the United States District Court for the District of Oregon. At this stage of the proceedings, the Company does we do not have an estimate of the likelihood or the amount of any potential exposure to the Company; however, the Company believeswe believe that these claims are without merit and intendsintend to vigorously defend the action.
From time to time, we are exposed to certain asserted and unasserted potential claims. Periodically, we 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.
| (In thousands) | March 30, 2019 | December 29, 2018 | |||||||||
| United States | $ | 29,965 | 82 | % | $ | 27,353 | 78 | % | |||
| China | 2,088 | 6 | 2,360 | 7 | |||||||
| Philippines | 3,142 | 8 | 3,319 | 9 | |||||||
| Taiwan | 802 | 2 | 949 | 3 | |||||||
| Japan | 280 | 1 | 324 | 1 | |||||||
| Other | 481 | 1 | 578 | 2 | |||||||
| Total foreign property and equipment, net | 6,793 | 18 | 7,530 | 22 | |||||||
| Total property and equipment, net | $ | 36,758 | 100 | % | $ | 34,883 | 100 | % | |||
The following discussion should be read along with the unaudited consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 10-K.
Overview
Lattice Semiconductor Corporation and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) is a Delaware corporation that develops semiconductordevelop technologies that we monetize through differentiated programmable logic semiconductor products, system solutions, design services, and licenses. Lattice is the low power programmable leader. We engagesolve customer problems across the network, from the Edge to the Cloud, in the growing communications, computing, industrial, automotive, and consumer markets. Our technology, long-standing relationships, and commitment to world-class support enable our customers to create a smart, connectivity, control,secure, and compute solutions, providing intellectual property ("IP") and low-power, small form-factorconnected world.
Lattice has focused its strategy on delivering programmable logic devices that enable global customers to quicklyproducts and easily develop innovative, smart,related solutions based on low power, small size, and connected products.ease of use. We help their products become more aware, interact more intelligently, and make better and faster connections. In an increasingly intense global technology market, we helpalso serve our customers get their products to market faster than their competitors. Our broad end-market exposure extends from mobile devices and consumer electronics to industrial and automotive equipment, communications and computing infrastructure, andwith IP licensing and various other services. Lattice was founded in 1983Our product development activities include new proprietary products, advanced packaging, existing product enhancements, software development tools, soft IP, and is headquartered in Hillsboro, Oregon.
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, 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. generally accepted accounting principles ("U.S. GAAP")GAAP requires management to make estimates and assumptionsjudgments affecting the amounts reported in our consolidated condensed financial statements and the accompanying notes. The actual results that affectwe experience may differ materially from our estimates.
Impact of COVID-19 on our Business
The COVID-19 pandemic has caused, and is expected to continue to cause, the reported amounts and classificationglobal slowdown of assets, such as marketable securities, accounts receivable, contract assets and contract liabilities, inventory, depreciable lives of fixed assets, lease right-of-use assets and lease liabilities, goodwilleconomic activity (including the assessment of reporting units)decrease in demand for goods and services), intangible assets, current and deferred income taxes, accrued liabilities (including restructuring chargessignificant volatility in and bonus arrangements), disclosure of contingent assetsdisruption to financial markets. Because the severity, magnitude and liabilities at the dateduration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our operations and financial statements, impairment assessments,performance, as well as its impact on our ability to successfully execute our business strategy and initiatives, remains uncertain. We took action quickly during the fair valuequarter to safeguard the health and well-being of equity awards,our employees and our business. We implemented social distancing policies at our locations around the world including working from home and eliminating virtually all travel. Furthermore, we assessed our liquidity in light of the rapidly changing environment and preemptively drew down $50 million on our revolving credit facility to further solidify our cash position, and we have additional resources available under our Credit Agreement, if needed. As COVID-19 has spread to other jurisdictions and been declared a global pandemic, the full extent of this outbreak, the related governmental, business and travel restrictions in order to contain this virus are continuing to evolve globally.
We anticipate that these actions and the reported amountsglobal health crisis caused by COVID-19 will negatively impact business activity across the globe. We expect our demand to be impacted in Q2 and potentially beyond Q2 given the global reach and economic impact of product revenue, licensingthe virus. For example, governmental actions or policies or other initiatives to contain the virus, could lead to reductions in our end customers’ demand under which we would expect to lose revenue. We have also recently seen some disruptions in our supply chain due to governmental restrictions. If our suppliers experience similar impacts, we may have difficulty sourcing materials necessary to fulfill customer production requirements and services revenue,transporting completed products to our end customers.
We will continue to actively monitor the situation and expenses duringmay 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 results for the remainder of fiscal periods presented. Actual results could differ from those estimates.2020 or future periods.
Results of Operations
Key elements of our Consolidated Statements of Operations, including as a percentage of revenue, are presented in the following table:
| Three Months Ended | |||||||||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | |||||||||||
| Revenue | $ | 98,091 | 100.0 | % | $ | 98,623 | 100.0 | % | |||||
| Gross margin | 57,652 | 58.8 | 56,521 | 57.3 | |||||||||
| Research and development | 19,665 | 20.0 | 22,941 | 23.3 | |||||||||
| Selling, general and, administrative | 20,781 | 21.2 | 27,043 | 27.4 | |||||||||
| Amortization of acquired intangible assets | 3,389 | 3.5 | 5,636 | 5.7 | |||||||||
| Restructuring charges | 1,341 | 1.4 | 1,029 | 1.0 | |||||||||
| Acquisition related charges | — | — | 667 | 0.7 | |||||||||
| Income (loss) from operations | $ | 12,476 | 12.7 | % | $ | (795 | ) | (0.8 | )% | ||||
Three Months Ended | ||||||||||||||||
(In thousands) | March 28, | March 30, | ||||||||||||||
2020 | 2019 | |||||||||||||||
Revenue | $ | 97,316 | 100.0 | % | $ | 98,091 | 100.0 | % | ||||||||
Gross margin | 57,562 | 59.1 | 57,652 | 58.8 | ||||||||||||
Research and development | 21,693 | 22.3 | 19,665 | 20.0 | ||||||||||||
Selling, general and, administrative | 22,551 | 23.2 | 20,781 | 21.2 | ||||||||||||
Amortization of acquired intangible assets | 2,640 | 2.7 | 3,389 | 3.5 | ||||||||||||
| Restructuring charges | 940 | 1.0 | 1,341 | 1.4 | ||||||||||||
Income from operations | $ | 9,738 | 10.0 | % | $ | 12,476 | 12.7 | % | ||||||||
Revenue by End Market
We sell our products globally in three primary groups of end markets: Communications and Computing, Industrial and Automotive, and Consumer. We also provide Intellectual Property licensing and services to these end markets.
We anticipate future revenue growth due to multiple market segment drivers, including:
• | Communications and computing: 5G infrastructure deployments, cloud and enterprise servers, and client computing platforms, |
• | Industrial and automotive: industrial Internet of Things ("IoT"), factory automation, and automotive electronics, |
• | Consumer: smart home and prosumer. |
We also generate revenue from the licensing of our Intellectual Property ("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 estimates and judgment. Therefore, actual results may differ from those reported.
The following are examples of end market applications for the periods 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:
Three Months Ended | ||||||||||||||||
March 28, | March 30, | |||||||||||||||
(In thousands) | 2020 | 2019 | ||||||||||||||
Industrial and Automotive | $ | 41,440 | 42.6 | % | $ | 36,313 | 37.0 | % | ||||||||
Communications and Computing | 38,452 | 39.5 | 35,553 | 36.2 | ||||||||||||
Consumer | 13,333 | 13.7 | 19,746 | 20.2 | ||||||||||||
Licensing and Services | 4,091 | 4.2 | 6,479 | 6.6 | ||||||||||||
Total revenue | $ | 97,316 | 100.0 | % | $ | 98,091 | 100.0 | % | ||||||||
| Three Months Ended | |||||||||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | |||||||||||
| Communications and Computing | $ | 35,553 | 36 | % | $ | 28,139 | 28 | % | |||||
| Mobile and Consumer | 19,746 | 20 | 26,706 | 27 | |||||||||
| Industrial and Automotive | 36,313 | 37 | 40,264 | 41 | |||||||||
| Licensing and Services | 6,479 | 7 | 3,514 | 4 | |||||||||
| Total revenue | $ | 98,091 | 100 | % | $ | 98,623 | 100 | % | |||||
Revenue from the Industrial and Automotive end market increased by 14% for the first quarter of fiscal 2020 compared to the first quarter of fiscal 2019 due primarily to increased demand for our products used in a broad range of industrial applications including factory automation and robotics.
Revenue from the Communications and Computing end market increased by 26%8% for the first quarter of fiscal 20192020 compared to the first quarter of fiscal 20182019 due to demand increases for serverstrength in the Computing end market due to the continued adoption of our products used in servers and client computing products, as well as for products used in 5G wireless infrastructure.
Revenue from the Mobile and Consumer end market decreased by 26%32% for the first quarter of fiscal 20192020 compared to the first quarter of fiscal 20182019 due to decreased demand for mobile phone related products.
Revenue from the Licensing and Services end market increasedis subject to variability between periods. Revenue from the Licensing and services end market decreased by 84%37% for the first quarter of fiscal 20192020 compared to the first quarter of fiscal 20182019 primarily due primarily to increasedvariability in HDMI royalty revenue.
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:
| Three Months Ended | |||||||||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | |||||||||||
| Asia | $ | 69,011 | 70 | % | $ | 71,921 | 73 | % | |||||
| Europe | 12,210 | 12 | 12,142 | 12 | |||||||||
| Americas | 16,870 | 18 | 14,560 | 15 | |||||||||
| Total revenue | $ | 98,091 | 100 | % | $ | 98,623 | 100 | % | |||||
Three Months Ended | ||||||||||||||||
March 28, | March 30, | |||||||||||||||
(In thousands) | 2020 | 2019 | ||||||||||||||
Asia | $ | 68,693 | 70.6 | % | $ | 69,011 | 70.4 | % | ||||||||
Europe | 12,036 | 12.4 | 12,210 | 12.4 | ||||||||||||
Americas | 16,587 | 17.0 | 16,870 | 17.2 | ||||||||||||
Total revenue | $ | 97,316 | 100.0 | % | $ | 98,091 | 100.0 | % | ||||||||
Revenue from End Customers
In the periods covered by this report, no end customer accounted for more than 10% of total revenue, during the periods presented in this report. Our top fiveand we expect to continue to sell our products to a broad base of end customers constituted approximately 24% of our revenue for the first quarter of fiscal 2019, compared to approximately 16% for the first quarter of fiscal 2018.
Revenue from Distributors
Distributors have historically accounted for a significant portion of our total revenue. Revenue attributable to our primary distributors is presented in the following table:
% of Total Revenue | ||||||||
Three Months Ended | ||||||||
March 28, | March 30, | |||||||
2020 | 2019 | |||||||
Arrow Electronics Inc. | 25.1 | % | 21.9 | % | ||||
Weikeng Group | 23.1 | 28.8 | ||||||
All others | 29.3 | 28.3 | ||||||
All distributors | 77.5 | % | 79.0 | % | ||||
| % of Total Revenue | |||||
| Three Months Ended | |||||
| March 30, 2019 | March 31, 2018 | ||||
| Arrow Electronics Inc. | 22 | % | 30 | % | |
| Weikeng Group | 29 | 26 | |||
| All others | 28 | 31 | |||
| All distributors | 79 | % | 87 | % | |
Gross Margin
The composition of our grossGross margin, including as a percentage of revenue, is presented in the following table:
| Three Months Ended | |||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | |||||
| Gross margin | $ | 57,652 | $ | 56,521 | |||
| Percentage of net revenue | 58.8 | % | 57.3 | % | |||
| Product gross margin % | 55.9 | % | 55.7 | % | |||
| Licensing and services gross margin % | 100.0 | % | 100.0 | % | |||
Three Months Ended | ||||||||
March 28, | March 30, | |||||||
(In thousands) | 2020 | 2019 | ||||||
Gross margin | $ | 57,562 | $ | 57,652 | ||||
Percentage of net revenue | 59.1 | % | 58.8 | % | ||||
Product gross margin % | 57.4 | % | 55.9 | % | ||||
Licensing and services gross margin % | 100.0 | % | 100.0 | % | ||||
Gross margin, as a percentage of revenue, increased 30 basis points in the first quarter of fiscal 20192020 compared to the first quarter of fiscal 2018, gross margin as a percentage of net revenue increased2019. Improved margins were driven by 1.5 percentage points. The overall gross margin was influencedproduct cost reductions and benefits derived from pricing optimization actions, offset somewhat by the relative mix between product revenue and licensing and services revenue, and this increase resulted primarily from a greater proportion of high margin licensing and services revenue in the first quarter of fiscal 2019. Licensing and services accounted for approximately 7% of total revenue in the first quarter of fiscal 2019 compared to approximately 4% in the first quarter of fiscal 2018.
Because of its higher margin, the licensing and services portion of our overall revenue can have a disproportionate impact on grossGross margin depending on the relative mix between product revenue and profitability. For programmablelicensing and standard products, we expect that product, end market, and customer mix will subject our gross margin to fluctuation, while we expect downward pressure on average selling price to adversely affect our gross margin in the future. If we are unable to realize additional or sufficient product cost reductions in the future to balance changes in product and customer mix, we may experience degradation in our product 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:
| Three Months Ended | |||||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | % change | ||||||
| Research and development | $ | 19,665 | $ | 22,941 | (14) | ||||
| Percentage of revenue | 20.0 | % | 23.3 | % | |||||
Three Months Ended | ||||||||||||
March 28, | March 30, | |||||||||||
(In thousands) | 2020 | 2019 | % change | |||||||||
Research and development | $ | 21,693 | $ | 19,665 | 10.3 | % | ||||||
Percentage of revenue | 22.3 | % | 20.0 | % | ||||||||
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 to support new products.
Selling, General, and Administrative Expense
The composition of our Selling, general, and administrative expense, including as a percentage of revenue, is presented in the following table:
| Three Months Ended | |||||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | % change | ||||||
| Selling, general, and administrative | $ | 20,781 | $ | 27,043 | (23) | ||||
| Percentage of revenue | 21.2 | % | 27.4 | % | |||||
Three Months Ended | ||||||||||||
March 28, | March 30, | |||||||||||
(In thousands) | 2020 | 2019 | % change | |||||||||
Selling, general, and administrative | $ | 22,551 | $ | 20,781 | 8.5 | % | ||||||
Percentage of revenue | 23.2 | % | 21.2 | % | ||||||||
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 composition of our Amortization of acquired intangible assets, including as a percentage of revenue, is presented in the following table:
| Three Months Ended | |||||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | % change | ||||||
| Amortization of acquired intangible assets | $ | 3,389 | $ | 5,636 | (40) | ||||
| Percentage of revenue | 3.5 | % | 5.7 | % | |||||
Three Months Ended | ||||||||||||
March 28, | March 30, | |||||||||||
(In thousands) | 2020 | 2019 | % change | |||||||||
Amortization of acquired intangible assets | $ | 2,640 | $ | 3,389 | (22.1 | )% | ||||||
Percentage of revenue | 2.7 | % | 3.5 | % | ||||||||
The decrease in Amortization of acquired intangible assets for the first quarter of fiscal 20192020 compared to the first quarter of fiscal 20182019 is due to the end of the amortization period for certain intangibles and to the reductionmajority of certain intangibles as a resultour acquired intangible assets during the first quarter of impairment charges in previous periods.
Restructuring Charges
The composition of our Restructuring charges, including as a percentage of revenue, is presented in the following table:
| Three Months Ended | |||||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | % change | ||||||
| Restructuring charges | $ | 1,341 | $ | 1,029 | 30 | ||||
| Percentage of revenue | 1.4 | % | 1.0 | % | |||||
Three Months Ended | ||||||||||||
March 28, | March 30, | |||||||||||
(In thousands) | 2020 | 2019 | % change | |||||||||
Restructuring charges | $ | 940 | $ | 1,341 | (29.9 | )% | ||||||
Percentage of revenue | 1.0 | % | 1.4 | % | ||||||||
Restructuring charges includeare 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.
The $0.3 million increasedecrease in restructuring expense in the first quarter of fiscal 20192020 compared to the first quarter of fiscal 20182019 was the driven by abandoned lease restructuringlower charges in the current year versus headcount-related, lease and software license restructuringperiod, primarily for severance, compared to higher charges in the prior year.
Interest Expense
The composition of our Acquisition related charges, including as a percentage of revenue, is presented in the following table:
| Three Months Ended | |||||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | % change | ||||||
| Acquisition related charges | $ | — | $ | 667 | (100) | ||||
| Percentage of revenue | — | % | 0.7 | % | |||||
| Three Months Ended | |||||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | % change | ||||||
| Interest expense | $ | (4,987 | ) | $ | (5,114 | ) | (2) | ||
| Percentage of revenue | (5.1 | )% | (5.2 | )% | |||||
Three Months Ended | ||||||||||||
March 28, | March 30, | |||||||||||
(In thousands) | 2020 | 2019 | % change | |||||||||
Interest expense | $ | (1,077 | ) | $ | (4,987 | ) | (78.4 | )% | ||||
Percentage of revenue | (1.1 | )% | (5.1 | )% | ||||||||
Interest expense is primarily related to our long-term debt, acquired to partially fund the Silicon Image, Inc. acquisition, which is further discussed under the 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 the first quarter of fiscal 20192020 compared to the first quarter of fiscal 20182019 was largely driven by the significant reduction in the principal balance ofeffective interest rate on our long-term debt as a resultunder the terms of the new Credit Agreement, coupled with the additional principal payments made in the current and previous periods, partially offset byperiods. With the draw from our revolving loan facility during the first quarter of fiscal 2020, Interest expense will increase infor the effective interest rate on our long-term debt.period that those funds remain outstanding.
Other income,(Expense) Income, net
The composition of our Other (expense) income, net, including as a percentage of revenue, is presented in the following table:
| Three Months Ended | |||||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | % change | ||||||
| Other income, net | $ | 153 | $ | 554 | (72) | ||||
| Percentage of revenue | 0.2 | % | 0.6 | % | |||||
Three Months Ended | ||||||||||||
March 28, | March 30, | |||||||||||
(In thousands) | 2020 | 2019 | % change | |||||||||
Other (expense) income, net | $ | (50 | ) | $ | 153 | (132.7 | )% | |||||
Percentage of revenue | (0.1 | )% | 0.2 | % | ||||||||
For the first quarter of fiscal 20192020 compared to the first quarter of fiscal 2018 the decrease in2019, Other (expense) income, net is drivenchanged primarily bydue to reductions in miscellaneous income and the non-recurrence of realized gains on investments with the liquidation of all of our foreign currency forward exchange contractsshort-term marketable securities in the current year versus losses in the prior year.
Income Taxes
The composition of our Income tax expense is presented in the following table:
| Three Months Ended | |||||||||
| (In thousands) | March 30, 2019 | March 31, 2018 | % change | ||||||
| Income tax expense | $ | 234 | $ | 597 | (61) | ||||
Three Months Ended | ||||||||||||
March 28, | March 30, | |||||||||||
(In thousands) | 2020 | 2019 | % change | |||||||||
Income tax expense | $ | 444 | $ | 234 | 89.7 | % | ||||||
Our Income tax expense for the first quarters of fiscal 2019 and fiscal 2018 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 the first quarter of fiscal 20192020 as compared to the first quarter of fiscal 2018 is2019 results primarily due to decreasedfrom an increase in foreign withholding taxes relatedand UTP expense partially offset by release of uncertain tax positions due to HDMI royalty distributions received in the current year periods.
We are not currently paying U.S. federal income taxes and do not expect to pay such taxes until we fully utilize 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 portion of the valuation allowance recorded against our U.S. deferred tax assets. The reversal would result 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 to uncertain tax positions in income tax expense on our Consolidated Statements 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 2018,2019, 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, as well as our non-GAAP measures.
We have historically financed our operating and capital resource requirements through cash flows from operations.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 will be sufficient to meet our working capital needs through at least the next 12 months. As of March 30, 2019,28, 2020, we did not have significant long-term commitments for capital expenditures. In the future, and to the extent our Credit Agreement permits, 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, completing acquisitions, securing additional wafer supply, or 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. We may also needseek 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, which financing may now beneeds. On May 17, 2019, we entered into our Current Credit Agreement that is more difficult to obtain in lightfully discussed under the "Credit Arrangements" heading, below.
Cash and cash equivalents and short-term marketable securities
| (In thousands) | March 30, 2019 | December 29, 2018 | $ Change | ||||||||
| Cash and cash equivalents | $ | 130,391 | $ | 119,051 | $ | 11,340 | |||||
| Short-term marketable securities | — | 9,624 | (9,624 | ) | |||||||
| Total Cash and cash equivalents and Short-term marketable securities | $ | 130,391 | $ | 128,675 | $ | 1,716 | |||||
(In thousands) | March 28, 2020 | December 28, 2019 | $ Change | % Change | ||||||||||||
Cash and cash equivalents | $ | 176,572 | $ | 118,081 | $ | 58,491 | 49.5 | % | ||||||||
As of March 30, 2019,28, 2020, we had total Cash and cash equivalents and short-term marketable securities of $130.4$176.6 million, of which approximately $93.0$83.5 million in Cash and cash equivalents was held by our foreign subsidiaries. During the first quarter of fiscal 2019, we liquidated our Short-term marketable securities. We manage our global cash requirements considering, among other things, (i) available funds among theour 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 the dividends. This should not result in our recording significant additional tax expense as we have accrued expense based on current withholding rates. As of March 30, 2019,28, 2020, we could access all cash held by our foreign subsidiaries without incurring significant additional expense.
The net increase in Cash and cash equivalents and short-term marketable securities of $1.7$58.5 million between December 29, 201828, 2019 and March 30, 201928, 2020 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 for the first three months of fiscal 2020 was $21.1 million, a decrease of $0.7 million from the $21.8 million inof cash provided by operations, and $11.6operating activities for the first three months of fiscal 2019. This decrease was driven by $4.6 million of changes in working capital, primarily due to the increase in accounts receivable partially offset by the reduction of inventory. This was substantially offset by an increase of $3.9 million provided by improved operating performance. We are using cash provided by operating activities to invest in our operations.
Investing activities — Investing cash flows consist primarily of transactions related to capital expenditures and payments for software licenses, and, in the issuanceprior year, short-term marketable securities. The $6.6 million of common stock uponcash used by investing activities in the first three months of fiscal 2020 was an $11.4 million change from the $4.8 million provided by investing activities in the first three months of fiscal 2019 primarily due to the non-recurrence of the $9.7 million provided by our liquidation of all short-term investments in the first quarter of fiscal 2019. The total $6.6 million of cash used in the first three months of fiscal 2020 for capital expenditures and payments for software licenses was $1.8 million greater than the $4.8 million used in the first three months of fiscal 2019 due primarily to increased investments in test equipment and software enhancements.
Financing activities — Financing cash flows consist primarily of activity on our long-term debt, proceeds from the exercise of options to acquire common stock, options,and tax payments related to the net share settlement of withholding taxesrestricted stock units. During the first three months of fiscal 2020, we drew $50.0 million on theour revolving loan facility and paid a required quarterly installment of $4.4 million on our long-term debt. Payments for tax withholdings on vesting of RSUs partially offset by $26.9employee exercises of stock options used net cash flows of $1.5 million in cash usedthe first three months of fiscal 2020, which is a change of approximately $13.1 million from the $11.6 million provided in the repaymentfirst three months of debt and $4.8 million of cash used in capital expenditures and payment for software licenses.
Accounts receivable, net
| (In thousands) | March 30, 2019 | December 29, 2018 | Change | ||||||||
| Accounts receivable, net | $ | 55,606 | $ | 60,890 | $ | (5,284 | ) | ||||
| Days sales outstanding - Overall | 52 | 58 | (6 | ) | |||||||
(In thousands) | March 28, 2020 | December 28, 2019 | $ Change | % Change | ||||||||||||
Accounts receivable, net | $ | 68,643 | $ | 64,917 | $ | 3,726 | 5.7 | % | ||||||||
Days sales outstanding - Overall | 64 | 59 | 5 | |||||||||||||
Accounts receivable, net as of March 30, 2019 decreased28, 2020 increased by approximately $5.3$3.7 million, or 9%6%, compared to December 29, 2018. A majority of28, 2019. This increase resulted primarily from the decrease resulted from improved timing of collections from major distributors, which also decreased the overall Days sales outstandingshipments to 52 days atcertain customers in March 30, 2019 from 58 days at2020 compared to December 29, 2018.
Inventories
| (In thousands) | March 30, 2019 | December 29, 2018 | Change | ||||||||
| Inventories | $ | 66,773 | $ | 67,096 | $ | (323 | ) | ||||
| Months of inventory on hand | 5.0 | 4.8 | 0.2 | ||||||||
(In thousands) | March 28, 2020 | December 28, 2019 | $ Change | % Change | ||||||||||||
Inventories | $ | 48,932 | $ | 54,980 | $ | (6,048 | ) | (11.0 | )% | |||||||
Days of inventory on hand | 112 | 123 | (11 | ) | ||||||||||||
Inventories as of March 30, 201928, 2020 decreased $0.3$6.0 million, or less than 1%approximately 11%, compared to December 29, 201828, 2019 primarily due to a decline related toour improved management of inventory levels, as well as the ramp down of mature and aging products. This inventory decline was offset by builds to support sales for confirmed product demand
The MonthsDays of inventory on hand ratio compares the inventory balance at the end of a quarter to the cost of sales in that quarter. Our MonthsDays of inventory on hand increaseddecreased to 5.0 months112 days at March 30, 201928, 2020 from 4.8 months123 days at December 29, 2018.28, 2019. This increasedecrease resulted from a decrease in the costimproved inventory management.
On March 10, 2015,May 17, 2019, we entered into a secured credit agreement (the "Credit Agreement") with Jefferies Finance, LLC and certain other lenders for purposes of funding, in part, our acquisition of Silicon Image, Inc. The Credit Agreement provided for a $350 million term loan (the "Term Loan") maturing on March 10, 2021 (the "Term Loan Maturity Date"). We received $346.5 million, netwith Wells Fargo Bank, National Association, as administrative agent, and other lenders. The details of an original issue discount of $3.5 million and we paid debt issuance costs of $8.3 million. The Term Loan bears variable interest equal to the one-month LIBOR, subject to a 1.00% floor, plus a spread of 4.25%. The current effective interest rate on the Term Loan is 7.42%.
As of March 30, 2019, the Credit Agreement would require a 75% excess cash flow payment.
Share Repurchase Program
On March 24, 2020, we announced that our Board of Directors had approved a stock repurchase program pursuant to which up to $40.0 million of outstanding common stock may be repurchased from time to time. The duration of the repurchase program is twelve months. No shares have been repurchased under this program during the quarter ended March 28, 2020. We expect that all future repurchases will be open market transactions funded from available working capital. In the current environment, we expect to be more conservative on potential buyback activity as we focus on preserving capital and continue to invest in our business.
Contractual Cash Obligations
There have been no material changes to our contractual cash obligations outside of the ordinary course of business in the first three months of fiscal 2019,2020, as summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 29, 2018.
Off-Balance Sheet Arrangements
As of March 30, 2019,28, 2020, we did not have any off-balance sheet arrangements of the type described by Item 303(a)(4) of SEC Regulation S-K.
| (In thousands, except per share data) | Three Months Ended | ||||||
| (unaudited) | March 30, 2019 | March 31, 2018 | |||||
| Gross Margin Reconciliation | |||||||
| GAAP Gross margin | $ | 57,652 | $ | 56,521 | |||
| Inventory adjustment related to restructured operations | (338 | ) | — | ||||
| Stock-based compensation expense - gross margin | 202 | 237 | |||||
| Non-GAAP Gross margin | $ | 57,516 | $ | 56,758 | |||
| Gross Margin % Reconciliation | |||||||
| GAAP Gross margin % | 58.8 | % | 57.3 | % | |||
| Cumulative effect of non-GAAP Gross Margin adjustments | (0.2 | )% | 0.3 | % | |||
| Non-GAAP Gross margin % | 58.6 | % | 57.6 | % | |||
| Operating Expenses Reconciliation | |||||||
| GAAP Operating expenses | $ | 45,176 | $ | 57,316 | |||
| Amortization of acquired intangible assets | (3,389 | ) | (5,636 | ) | |||
| Restructuring charges | (1,341 | ) | (1,029 | ) | |||
| Acquisition related charges (1) | — | (667 | ) | ||||
| Impairment of acquired intangible assets | 1,023 | — | |||||
| Stock-based compensation expense - operations | (3,484 | ) | (4,563 | ) | |||
| Non-GAAP Operating expenses | $ | 37,985 | $ | 45,421 | |||
| (1) Legal fees and outside services that were related to our proposed acquisition by Canyon Bridge Acquisition Company, Inc. | |||||||
| Reconciliation of U.S. GAAP to Non-GAAP Financial Measures (continued) | |||||||
| (In thousands, except per share data) | Three Months Ended | ||||||
| (unaudited) | March 30, 2019 | March 31, 2018 | |||||
| Income (Loss) from Operations Reconciliation | |||||||
| GAAP Income (loss) from operations | $ | 12,476 | $ | (795 | ) | ||
| Inventory adjustment related to restructured operations | (338 | ) | — | ||||
| Stock-based compensation expense - gross margin | 202 | 237 | |||||
| Amortization of acquired intangible assets | 3,389 | 5,636 | |||||
| Restructuring charges | 1,341 | 1,029 | |||||
| Acquisition related charges (1) | — | 667 | |||||
| Impairment of acquired intangible assets | (1,023 | ) | — | ||||
| Stock-based compensation expense - operations | 3,484 | 4,563 | |||||
| Non-GAAP Income from operations | $ | 19,531 | $ | 11,337 | |||
| Income (Loss) from Operations % Reconciliation | |||||||
| GAAP Income (loss) from operations % | 12.7 | % | (0.8 | )% | |||
| Cumulative effect of non-GAAP Gross Margin and Operating adjustments | 7.2 | % | 12.3 | % | |||
| Non-GAAP Income from operations % | 19.9 | % | 11.5 | % | |||
| Income Tax Expense Reconciliation | |||||||
| GAAP Income tax expense | $ | 234 | $ | 597 | |||
| Estimated tax effect of non-GAAP Adjustments (2) | (98 | ) | 62 | ||||
| Non-GAAP Income tax expense | $ | 136 | $ | 659 | |||
| Net Income (Loss) Reconciliation | |||||||
| GAAP Net income (loss) | $ | 7,408 | $ | (5,952 | ) | ||
| Inventory adjustment related to restructured operations | (338 | ) | — | ||||
| Stock-based compensation expense - gross margin | 202 | 237 | |||||
| Amortization of acquired intangible assets | 3,389 | 5,636 | |||||
| Restructuring charges | 1,341 | 1,029 | |||||
| Acquisition related charges (1) | — | 667 | |||||
| Impairment of acquired intangible assets | (1,023 | ) | — | ||||
| Stock-based compensation expense - operations | 3,484 | 4,563 | |||||
| Estimated tax effect of non-GAAP Adjustments (2) | 98 | (62 | ) | ||||
| Non-GAAP Net income | $ | 14,561 | $ | 6,118 | |||
| (1) Legal fees and outside services that were related to our proposed acquisition by Canyon Bridge Acquisition Company, Inc. | |||||||
| (2) We calculate non-GAAP tax expense by applying our tax provision model to year-to-date and projected income after adjusting for | |||||||
| non-GAAP items. The difference between calculated values for U.S. GAAP and non-GAAP tax expense has been included as the | |||||||
| "Estimated tax effect of non-GAAP adjustments.” | |||||||
| Reconciliation of U.S. GAAP to Non-GAAP Financial Measures (continued) | |||||||
| (In thousands, except per share data) | Three Months Ended | ||||||
| (unaudited) | March 30, 2019 | March 31, 2018 | |||||
| Net Income (Loss) Per Share Reconciliation | |||||||
| GAAP Net income (loss) per share - basic | $ | 0.06 | $ | (0.05 | ) | ||
| Cumulative effect of Non-GAAP adjustments | 0.05 | 0.10 | |||||
| Non-GAAP Net income per share - basic | $ | 0.11 | $ | 0.05 | |||
| GAAP Net income (loss) per share - diluted | $ | 0.05 | $ | (0.05 | ) | ||
| Cumulative effect of Non-GAAP adjustments | 0.06 | 0.10 | |||||
| Non-GAAP Net income per share - diluted | $ | 0.11 | $ | 0.05 | |||
| Shares used in per share calculations: | |||||||
| Basic | 130,992 | 124,076 | |||||
| Diluted - GAAP | 134,810 | 124,076 | |||||
| Diluted - non-GAAP (3) | 134,810 | 125,144 | |||||
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
There have been no material changes to 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.
| March 30, 2019 | December 29, 2018 | |||||||
Total cost of contracts for Japanese yen (in thousands) | $ | 2,883 | $ | 1,955 | ||||
| Number of contracts | 3 | 2 | ||||||
| Settlement month | June 2019 | June 2019 | ||||||
Interest Rate Risk
We are exposed to interest rate risk related to our indebtedness. At March 30, 2019,28, 2020, we had a $236.2 million principal outstanding balance on the original $350 million term loan $193.8 million outstanding under our Credit Agreement, with a variable contractual interest rate based on the one-month LIBOR as of March 30, 2019, subject to a 1.00% floor, plus a spread of 4.25%.Agreement. A hypothetical increase in the one-month LIBOR by 1% (100 basis points) would increase our future interest expense by approximately $0.6$0.5 million per quarter.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
In connection with the filing of this Form 10-Q, 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 the end of the period covered by this report. 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 were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting (as defined in Rules 13a - 15(f) and 15(d) - 15(f)13a-15(f) under the Exchange Act) that occurred during the first quarter of fiscal 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
We do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent 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. Further, 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 system of controls also is based in part upon certain assumptions about the likelihood of future events, 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 the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
The information set forth above under "Note 16"Note 11 - Contingencies - Legal Matters"Matters" contained in the Notes to Consolidated Financial Statements is incorporated herein by reference.
The risk factors associated with our business were previouslyrisks described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018 filed with the SEC on February 26, 2019. If any of these risks occur,28, 2019 ("2019 10-K") could materially and adversely affect our business, financial condition, operatingand results of operations, and cash flowsthe trading price of our common stock could be materially adversely affected. Thesedecline. The additional risk factor described below supplements the risk factors described in our 2019 10-K based on information currently known to us and recent developments since the filing date of that report. The matters discussed below should be read in conjunction with the risk factors set forth in the 2019 10-K.
The risks described in this report and in our 2019 10-K are not the only risks facing our company. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results. The Risk Factors sectionresults, particularly in light of our 2018 Annual Report on Form 10-K remains current in all material respects.the rapidly changing nature of the COVID-19 pandemic, containment measures, and the related impacts to economic and operating conditions. These factors, together with all of the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, should be carefully considered before making an investment decision relating to our common stock.
The COVID-19 pandemic could adversely affect our business in a material way.
COVID-19 has spread internationally and been declared a pandemic, affecting the populations of the United States as well as many countries around the world. The outbreak has resulted in significant governmental measures being implemented to control the spread of COVID-19, including, among others, restrictions on travel, manufacturing and the movement of employees in many regions of the world, and the imposition of remote or work-from-home mandates in many of our offices, including in the United States, the Philippines and, for a time, China. The majority of our products are manufactured, assembled, and tested by third parties in Asia. 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. We also have other operations in China, the Philippines, and the United States. If the remote or work-from-home conditions in any of our offices continues for an extended period of time, 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 negatively impact our business. If, for example, COVID-19 continues to progress in ways that significantly disrupt the manufacture, shipment and buying patterns of our products or the products of our customers, this may materially negatively impact our operating results for the current period and subsequent periods, including revenue, gross margins, operating margins, cash flows and other operating results and our overall business. Our customers may also experience closures of their manufacturing facilities or inability to obtain other components, either of which could negatively impact demand for our solutions. COVID-19 has negatively impacted the overall economy and, as a result of the foregoing, will likely negatively impact our operating results for the current fiscal year and may do so in a material way. In particular, COVID-19 may increase or change the severity of our other risks reported in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, including that:
● | 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, or other factors that may limit our access to key personnel or critical skills; |
● | 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 otherwise as required under U.S. GAAP; |
● | 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 above and in our Annual Report on Form 10-K, or cause them to change in importance. Developments related to the pandemic have been rapidly changing, and additional impacts and risks may arise that we are not aware of or able to appropriately respond to currently. As of the filing of this Quarterly Report, the extent to which the coronavirus will affect our business is highly uncertain and dependent on future developments that are inherently unpredictable, which makes forecasting demand and providing guidance especially difficult. Accordingly, our expectations are subject to change without warning and investors are cautioned not to place undue reliance on them.
Exhibit Number | Description | |
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | 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 | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
| Cover Page Interactive Data File - formatted in Inline XBRL | ||
Pursuant to the requirements 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) | |
/s/ Sherri Luther | |
Sherri Luther | |
Chief Financial Officer | |
(Duly Authorized Officer and Principal Financial and Accounting Officer) |
Date: May 3, 2019