UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||||
Washington, D.C. 20549 | ||||
FORM 10-K | ||||
(Mark One) | ||||
☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER | |||
or | ||||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ | |||
Commission file number: 000-18032
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 93-0835214 |
(State of Incorporation) | (I.R.S. Employer Identification Number) |
5555 NE Moore Court, Hillsboro, Oregon | 97124-6421 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (
503) 268-8000Securities registered pursuant to Section 12(b) of the Act:
(Title of Class) | (Trading Symbol) | (Name of each exchange on which registered) |
Common Stock, $.01 par value | LSCC | Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer”, “accelerated filer”, “smallerfiler," "accelerated filer," "smaller reporting company”company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer |
Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
| Aggregate market value of voting stock held by non-affiliates of the registrant as of July 1, 2017 | $ | 613,585,307 | |
| Number of shares of common stock outstanding as of March 2, 2018 | 124,210,928 | ||
Aggregate market value of voting stock held by non-affiliates of the registrant as of July 2, 2022 | $ | 4,910,050,770 | ||||
Number of shares of common stock outstanding as of February 13, 2023 | 137,382,419 | |||||
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement relating to the 20182023 Annual Meeting of Stockholders, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page | |||
PART I | |||
Item 1. | |||
Item 1A. | |||
Item 1B. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II | |||
Item 5. | |||
Item 6. | |||
Item 7. | |||
Item 7A. | |||
Item 8. | |||
Item 9. | |||
Item 9A. | |||
Item 9B. | |||
| Item | |||
PART III | |||
Item 10. | |||
Item 11. | |||
Item 12. | |||
Item 13. | |||
Item 14. | |||
PART IV | |||
Item 15. | |||
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These involve estimates, assumptions, risks, and uncertainties. Any statements about our expectations, beliefs, plans, objectives, assumptions, or future events or performance are not historical facts and may be forward-looking. We use words or phrases such as “anticipates,“anticipate,” “believes,“believe,” “could,” “estimates,“estimate,” “expects,“expect,” “intends,“intend,” “plans,“plan,” “predicts,"possible," “predict,” “projects,” “may,” “will,” “should,” “continue,” “ongoing,” “future,” “potential”“potential,” and similar words or phrases to identify forward-looking statements.
Forward-looking statements include, but are not limited to, statements about: our transitionstarget or expected financial performance and our ability to newly adopted accounting standards; the effectachieve those results; future impacts of the implementationongoing COVID-19 pandemic, as well as other pandemics, epidemics, and other public health problems; future impacts of the ongoing military conflict between Ukraine and Russia and the outbreak of new, accounting standardsor expansion of current, military conflicts or terrorism; the impact of any continuing trade or travel restrictions on adjustmentsthe export and our revenueimport of products between the U.S. and China; the impact of any deterioration in future periods;relations between Taiwan and China, and other factors affecting military, political, or economic conditions in Taiwan or elsewhere in Asia; the impact of increased inflation; the effects of climate change and disruptive natural disasters on us, our suppliers, and our consumers, including as a result of actions by governments, businesses, and consumers in response; our business strategy; the impact of tariffs, trade sanctions, license requirements or similar actions on our suppliers and customers; 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 beliefs about who we may compete with and whether we are differentiated from those competitors, as well as their potential capabilities; our expectations regarding our customer base and the impacts of our customers’ actions on our business; our expectations regarding both new and existing product end market and customer mix onofferings; our gross margin in the future;growth and our strategies to achieve gross margin growth and beliefs regarding the markets we serve or may serve; growth opportunities and growth in markets we may serve;other financial results; our making significant future investments in research and development; our expectations regarding cash provided by or used in operating activities; our expectations regarding total restructuring charges under restructuring plans adopted by our Board; our expectation that we will not pay U.S. federal income taxes until we fully realize our tax net operating lossability to take advantage of the process technology development efforts of semiconductor foundries and credit carryforwards; the sufficiency of our financial resourcesapply those technologies when they become most economically beneficial to meet our working capital needs through at least the next 12 months; our strategiesus and beliefs regarding the markets we serve or may serve; growth opportunities and growth in markets we may serve; the advantages our technology provides to our customers, including advanced features in an increasingly intense global technology market; our future product development and marketing plans; our intention to continually introduce new products and enhancements and reduce manufacturing costs; our expectation of emerging technology trends; the anticipation that we will become increasingly dependent on revenue from newer products; our expectation of production volumes and the associated revenue stream for certain mobile handset providers; acceptance of our devices; our continued participation in consortia that develop and promote the High-Definition Multimedia Interface ("HDMI"), Mobile High-Definition Link ("MHL") and WirelessHD specifications, and our participation in other standard setting initiatives; the effect of termination of our agent functions regarding the HDMI consortium, related reduction in adopter fees, revenue recognition, impairment charges and any other changes in the agreements relating to various intellectual property or standards consortia and their sharing of past or present fees or royalties; our expectation that we will continue to transition to increasingly smaller geometry process technologies and the difficulties in transitioning; our need and ability to maintain or develop successful foundry relationships to produce new products; the adequacy of assembly and test capacity commitments;customers; the impact of changing foundries or OSATs or their failure to manufacture sufficient quantities of our global tax structureproducts at acceptable yields, as well as the impact of problems with other subcontractors or distributors; the impact if we are unable to detect product defects; the impact if our insurance proves to be inadequate to resolve claims against us; whether we will experience seasonality or cyclicality and the resulting effects on our business; our expectations regarding taxesabout our patent portfolio, including the expiration of patents, whether, when and tax adjustments;where we will make future filings, and the value of the patents and associated licensing agreements generally and to our conclusion that we should maintain a valuation allowance against certain tax assets;business, as well as risks arising from the licensing and sale of our belief that we may recognize certain tax benefits during the next twelve months;patents; our ability to forecast uncertain tax positions; the effectattract and retain personnel and their importance to our performance; future financial results or accounting treatments; our judgments involved in accounting matters, including revenue recognition, inventories and cost of tax reform on our financial results; our ability to forecast future salesrevenue, and the relative product mix of those revenues; our mitigation of the concentration of credit risk; our expectation thatincome taxes; actions we may consider acquisition opportunities to further extendtake regarding the design and continued effectiveness of our product or technology portfolios and further expandinternal controls over financial reporting; our product offerings;use of cash; our beliefs regarding the adequacy of our liquidity, capital resources and facilities,facilities; the impact of our debt on our future operating and financial performance, as well as the impact if we breach a loan covenant; whether we will consider and act upon acquisition opportunities to extend our product, technology and product offerings and the impact of such opportunities on our business; our expectations regarding taxes, including unrecognized tax benefits, and tax adjustments and allowances; whether we will pursue future stock repurchases and how any future repurchases will be funded; the future price volatility of our stock and the effects of that volatility; our ability to meet our operatingprevent and capital requirementsrespond to information technology system failures, security breaches and obligations;incidents, cyber-attacks or fraud; the impact of laws and regulations addressing privacy, data protection, and cybersecurity and our ability to implement a company-wide enterprise resource planning system.
These forward-looking statements involveare based on estimates and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those statements expressed in the forward-looking statements. The key factors, among others, that could cause our actual results to differ materially from the forward-looking statements includedinclude the effects of pandemics or widespread global health problems and the actions by governments, businesses, and individuals in response to the situation; global economic conditions and uncertainty, including as a result of trade-related restrictions or tariffs; the concentration of our sales in the Mobile and Consumer and Communications and Computingcertain end markets, particularly as it relates to the concentration of our sales in the Asia Pacific region,region; market acceptance and demand for our existing and new products,products; market and technology trends; our ability to achieve yield and quality improvements; our ability to protect, license and sell our intellectual property,property; shortages or increased costs in our supply chain; any disruption of our distribution channels,channels; the impact of competitive products and pricing, unexpected charges, delays or results relating to our restructuring plans, unexpected complicationsespecially by companies with our implementation of a company-wide enterprise resource planning system,great resources than us; unanticipated warranty claims; the effect of theany downturn in the economy on capital markets and credit markets,markets; our failure to prevent or adequately respond to information technology system failures, security breaches and incidents, cyber-attacks, or fraud; physical and transition disruptions and costs associated with climate change; unanticipated taxation requirements or positions of the U.S. Internal Revenue Service or other taxing authority; unanticipated effects of tax reform,reform; unfavorable results of legal proceedings; our ability to attract and retain key personnel; the sufficiency of our insurance coverage; the impact of our outstanding indebtedness on our strategic flexibility, liquidity and results of operations; inflationary pressures; the impact of strategic transactions; or unexpected impacts of recent accounting guidance. In addition, actual results are subject to other risks and uncertainties that relate more broadly to our overall business, including those more fully described herein and that are otherwise described from time to time in our filings with the Securities and Exchange Commission ("SEC"), including, but not limited to, the items discussed in “Risk Factors” inPart I, Item 1A, of Part I of“Risk Factors,” in this Annual Report on Form 10-K.
You should not unduly rely on forward-looking statements because our actual results could differ materially from those expressed in any forward-looking statements made by us. In addition, any forward-looking statement 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.
Overview
Lattice Semiconductor Corporation and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develop semiconductor technologies that we monetize through differentiated programmable logic semiconductor products, system solutions, design services, and licenses.
Our historic focus was on programmable logic devices ("PLDs"). In 2011, we made the strategic decision to competitively differentiate from other established programmable logic companies with ultra-low power and ultra-small sized field programmable gate array ("FPGA") solutions, a type of PLD. As a result, we acquired a leader in this technology, SiliconBlue Technologies, Inc. In 2015, we extendeddevices enable us to provide our capabilities beyond FPGAscustomers with the acquisition of Silicon Image, Inc. ("Silicon Image") and its portfolio of standards-driven video connectivity application specific standard products ("ASSPs"), 60 GHz mmWave devices, and associated intellectual property ("IP"). Together, the control and connect features of our FPGAs and these acquired technologies form a strong, growing base business from which we are able to offer a variety of solutions to multiple establishedcontrol, connect, and emerging markets and customers.
| ● | With the growth of hyperscale datacenters, our “processor agnostic” solutions are ideal for control and connect functions in enterprise and datacenter server applications. |
| ● | With the expected continued Communications infrastructure build-out from 5G deployment and beyond, as well as continued datacenter network expansion, Lattice solutions are being adopted to control and connect a variety of functions in critical systems. |
| ● | With the increase in electrification and the proliferation of sensors in smart factories, smart homes, and automobiles, our low power, small form factor solutions are ideal for everything from battery powered systems and sensor applications to embedded vision. |
| ● | With the increase in artificial intelligence ("AI") and a multitude of applications at the network edge, Lattice devices support applications like face detection, image recognition, and video analytics. |
| ● | With the demand for more hardware security in the Communications, Computing, Industrial, Automotive, and Consumer markets, our devices provide enhanced platform security. |
To accomplishserve these functions, devicesemerging needs, customer solutions require high levels ofpower efficiency, memory bandwidth, processing power, speed, and memory, the need to operate with low power consumption, and the ability to integrate complex functionality into a highly compact footprint. These requirements align towith the capabilities of our FPGA devices. Our flexible, low power, small form factor, silicon, and the design flexibility of ourperformance optimized FPGAs putsput us in a unique position to meet thethese growing edge-computingmarket needs.
Our Markets and Customers
We sell our products globally in three marketsend market groups: Mobile and Consumer, Communications and Computing, and Industrial and Automotive.
In the
Our Communications and Computing customers need to “connect anything to everything,” at ever-increasing data rates.
| ● | As client compute devices become smaller and smarter, there is a need for small form factor devices with power efficiency to interface with a variety of sensors and add intelligence. |
| ● | As server architectures become increasingly complex, customers need simplified control logic, enhanced hardware platform security, system status monitoring, and rigorous power and thermal management. |
| ● | Networks typically require progressively higher bandwidth and increased reliability as more data is demanded by connected devices. |
| ● | As wireless cellular sites become more compact, |
Lattice FPGAs solve these customer problems. Our FPGAs are optimized for low power consumption.
Examples of where our products enablingenable intelligent automation in the Industrial and Automotive Market include Industrial Internet of Things ("IoT"), machine vision, robotics, factory automation, industrial handhelds, surveillance cameras and DVRs, digital signage,advanced driver assistance systems ("ADAS"), and automotive infotainment, servers, and data center networks.
Our Industrial and Automotive customers face numerous challenges:
| ● | As factories automate to improve efficiency and employee safety, sensors, machine vision, and robotics are proliferating, in turn requiring increasing amounts of data to be gathered, connected, and processed. |
| ● | Automobiles and other forms of transportation are also becoming smarter and more connected. Drivers and passengers are demanding better in-cabin experiences including entertainment, diagnostics, and enhanced safety — often involving multiple displays, cameras, and sensors. |
| ● | As factories and automotive manufacturers continue their evolution of computerization, power reduction, faster time to design-in and market, lower costs are becoming increasingly normal. |
Our product portfolio helps solve these challenges with the following products and services:
In the Consumer Market, you can find our solutions making products smarter and regulatory-approved
Our Consumer customers are driven by the complexityneed to deliver richer and more responsive experiences. They typically require:
| ● | More intelligence and computing power. Products need to be "always-on" and "always-aware." |
| ● | Longer battery lives for handheld devices and reduced energy consumption for plugged-in devices. |
| ● | Real-time transmission of higher resolution video content on larger screen sizes. |
| ● | Fast design cycles. Products must be quickly and easily differentiated. |
| ● | Smaller form factors. Products need to lay flatter on the wall or fit more easily into pockets. |
| ● | Various levels of video processing and analytics. |
Lattice FPGAs bring multiple benefits to these customers. An FPGA’s parallel architecture enables faster processing than competing devices, such as microcontrollers, allowing for a user experience with shorter pauses and fewer delays. Our FPGAs are among the most power efficient in the industry, enabling the application processor and other high-power components to remain dormant longer, resulting in longer battery life. Finally, with some of adding high-performance wireless video capabilitiesthe industry’s smallest packages, we enable thinner and more compact end products.
Our proprietary solutions help our customers get their products to displays, withoutmarket faster than typical development cycles of custom ASICs. With re-programmability and flexibility, our FPGAs inherently allow our customers to have quicker product development. The time-to-market advantages of Lattice's solutions are critical given the wires that clutter a factory floor or medical suite.
Our Products, Services, and Competition
We deliver three types of semiconductor devicesare focused on delivering FPGAs and related solutions to help solve our customers' problems: PLDs, Video Connectivity ASSPs, and mmWave devices.problems. We also serve our customers with IP licensing and various other services.
Field Programmable Gate Arrays (“FPGAs”)
FPGAs are regular arrays of logic that can be custom-configured by the user through software. This programmability allows our customers flexibility and reduced time to market while allowing us to offer the chips to many different customers in many different markets. FiveLattice FPGA product family lines anchor our FPGA offerings:
| ● | The Lattice Avant™, Certus™ and LatticeECP™ device families are our “General Purpose FPGAs” and address a broad range of applications across multiple markets. They offer customers the optimal cost per gate, Digital Signal Processing ("DSP") capability, and Serialize-Deserialize ("SERDES") connectivity. ECP devices are optimized for the Communications and Computing market but also find significant use in the Industrial, Automotive, and Consumer markets. The latest introduction in our general purpose family, Lattice Avant-E™ FPGAs, are designed to solve key customer challenges at the Edge by combining class-leading power efficiency, size and performance with an optimized feature set tailored to the needs of mid-range FPGA Edge applications like data processing and AI. |
| ● | The Lattice Mach™ device family are our “Control & Security FPGAs” and are designed for platform management and security applications. They are control-oriented and offer optimized cost per I/O and cost per look-up table. Mach™ FPGAs are widely used across our three end market groups: Communications and Computing, Industrial and Automotive, and Consumer. Lattice MachXO5™-NX family, the fifth device built on the award-winning Lattice Nexus™ platform are our latest addition to the Mach™ FPGA family, enabling the latest generation of secure control through increased logic and memory resources, robust 3.3 V I/O support, and a differentiated security feature set. |
| ● | The Lattice iCE™ device family are our “Ultra Low Power FPGAs.” Their small size and ultra-low power make them the optimal products for each of our core segments where small form factor and customizing is required. The latest member of the family, the iCE40 UltraPlus™ device, is focused on IoT Edge devices with its AI capabilities, low power, and small form factor. |
| ● | The Lattice CrossLink™ device family are our "Video Connectivity FPGAs" and are optimized for high-speed video and sensor applications. CrossLink combines the power and speed benefits of hardened video camera and display bridging cores with the flexibility of FPGA fabric. Lattice CrossLinkPlus™ devices provide users with instant-on capabilities for video display. Lattice CrossLink-NX™ FPGAs, built on the Lattice Nexus platform, provide the lowest power in the smallest packages in its class, higher performance, and high reliability. These products are designed for Computing, Industrial, Automotive, and Consumer markets, but also find use in Communications. |
To enable our customers to get to market faster we support theour FPGAs with intellectual propertyIP cores, reference designs, development kits, and design software.
Depending on the application, we may compete with other FPGA vendors, as well as producers of ASICs, ASSPs, and microcontrollers have historically dominated high-volume market segments through low costmicrocontrollers. We believe that Lattice has developed products and reduced power consumption, our FPGAs have become small enoughsolutions with sufficiently low power consumption that we are now considered by customers in cases where they need the architectural benefits of FPGAs, namely programmability with its accelerated time-to-market and the speed that comes from parallelism. Not only can customers use FPGAs to add new features and support new standards, but if a customer’s design is not working as intended, the customer can quickly change it using the programmability of our FPGAs through software. In contrast, ASICs and ASSPs require time consuming and expensive redesign and fabrication. Against microcontrollers, we differentiate our products with smaller sized packages and higher performance.
Legacy Semiconductor Products
We differentiate from them with ultra-low power and very small sized packages.
IP Licensing and interoperable products to market.
Lattice has a broad set of technological capabilities and many U.S. and international patents. We generate revenue from our technology portfolio via upfront fees and on-going royalty payments with three sets ofthrough the following activities:
| ● | |
Standard IP Licensing - these activities include our participation in two consortia for the licensing of |
IP Core Licensing - some customers need Lattice’s technology for specific functions or features, but for various reasons are not able to use our silicon solutions. In those cases, we may |
Patent Monetization - we | |
| ● | IP Services - we undergo projects and design services for customers who wish to develop specific solutions that harness our proven technology and expertise. |
Research and Development
We place a substantial emphasis on new product development, where return on investment is the key driver, anddriver. We believe that continued investment in research and development is required to maintain and improve our competitive position. Our productresearch and development activities emphasizeare focused on new proprietary products, advanced packaging, enhancement of existing products and process technologies, improvement ofproduct enhancements, software development tools, development of innovative technology standards,soft IP cores, and enhanced services. Researchapplication focused hardware and software solutions. These research and development activities occur primarily at our sites in Hillsboro, Oregon; San Jose, California; Montreal, Canada; Shanghai, China; and Muntinlupa City, Philippines.
We believe that a continued commitment to research and development is essential to maintaining product leadership and providing a strong cadence of innovative new product offerings and, therefore, we expect to continue to make significant future investments in research and development.
Operations
We do not manufacture our own silicon products. Weoperate primarily as a fabless semiconductor provider and, therefore, we maintain strategic relationships with large, established semiconductor foundries to source our finished silicon wafers.wafers and manufacture our silicon products. This strategy allows us to focus our internal resources on product and market development and eliminateseliminate the fixed cost of owning and operating semiconductor manufacturing facilities. We are able to take advantage of the ongoing advanced process technology development efforts of semiconductor foundries and to choose to apply those technologies when they become most economically beneficial to us and to our customers.
We rely on third party vendors to provide cost-effective and efficient supply chain services. Among other activities, these outsourced services relate to direct sales logistics, includingwhich include order fulfillment, inventory management and warehousing, and the shipment of inventory to third party distributors.
Wafer Fabrication
Lattice partners with Taiwan Semiconductor Manufacturing Company ("TSMC") to develop and manufacture on 16nm technology, which is used in our Avant platform of FPGA products, and to manufacture our 350nm, 130nm, 55nm and 40nm products. We perform certain test operationspartner with Samsung Semiconductor ("Samsung") to develop and manufacture the first low-power FPGA on 28nm fully depleted silicon-on-insulator ("FD-SOI") technology, which is used in our Nexus platform of FPGA products. We partner with United Microelectronics Corporation ("UMC") and its subsidiary United Semiconductor Japan Corporation ("USJC") to manufacture our products on its 130nm, 90nm, 65nm, and 40nm CMOS process technologies, as well as reliabilityembedded flash memory in these process nodes. We partner with Seiko Epson ("Epson") to manufacture our 500nm, 350nm, 250nm and quality assurance processes internally. We have achieved and maintained ISO9001:2015 Quality Management Systems Certification and released a line of products qualified to the AEC-Q100 Reliability Standard.
We source silicon wafers from our foundry partners, FujitsuTSMC, Samsung, UMC, USJC, and Epson, in Japan, and TSMC and UMC in Taiwan, pursuant to agreements with each company and their respective affiliates. We negotiate wafer volumes, prices, and other terms with our foundry partners and their respective affiliates on a periodic basis.
Assembly
All of our assembly and test operations are performed by industry-leading outsourced assembly and test suppliers ("OSATs") with our primary supplier being Advanced Semiconductor Engineering, Inc. ("ASE"). We perform certain test operations as well as reliability and quality assurance processes internally during the development process. We have achieved and maintained ISO9001:2015 Quality Management Systems Certification and released a line of products qualified to the AEC-Q100 Reliability Standard in support of Automotive product offerings in addition to ISO26262 certification on both Automotive products and software.
After wafer fabrication and initial testing, we ship wafers to independent subcontractors for assembly. During assembly, wafers are separated into individual die and encapsulated in plastic packages. We have qualified two major assembly partners, ASE and Amkor Technology ("Amkor") and are second sourced where volume and customer requirements are necessary. All ASE and Amkor manufacturing of our products is in Asia. We negotiate assembly prices, volumes, and other terms with our assembly partners and their respective affiliates on a periodic basis.
We currently offer an extensive list of standard products in lead (Pb) free packaging. Our lead-free products meet the European Parliament Directive entitled "Restrictions on the use of Hazardous Substances" ("ROHS"RoHS"). A select and growing subset of our ROHSRoHS compliant products are also offered with a "Halogen Free" material set.
Testing (Sort and Final Test)
We electrically sort test the die on most wafers prior to shipment for assembly. Wafer sort testing is primarily performed mostly by ASE in Taiwan and Malaysia, Amkor in Japan, and we have aour second source, King Yuan Electronics Co. (“KYEC”) in KYEC Taiwan. Some legacy products are tested at Unisem, Indonesia.
Following assembly, but prior to customer shipment, each product undergoes final testing and quality assurance procedures. Final testing is performed by ASE and Amkor, our assembly partners in Asia.
Sales and Revenue
We generate revenue by monetizing our technology designs and patents using two go-to-market strategies.
Sales and Customers
We primarily sell our products to end customers from Lattice Semiconductor Corporation or our wholly-owned subsidiary, Lattice SG Pte. Ltd. WeLtd. Independent distributors are significant customers, and a substantial portion of our sales are made into this channel. Additionally, we sell both directly and through a network of independent manufacturers' representatives. Additionally, we sell indirectly through independent sell-in (primarily Japan) and sell-through distributors. We also employ a direct sales management and field applications engineering organization to support our end customers and indirect sales resources. Our endEnd customers for our products are primarily original equipment manufacturersOriginal Equipment Manufacturers ("OEMs") in the Communications and Computing, Mobile and Consumer, and Industrial and Automotive, and Consumer end markets.
We provide global technical support to our end customers with engineering staff based at our headquarters, product development centers, and selected field sales offices. We maintain numerous domestic and international field sales offices in major metropolitan areas.
In fiscal years 2022, 2021, and 2020, sales to distributors accounted for approximately 66%89%, 87%, and 83%, respectively, of our net revenue in fiscal 2017, approximately 61% of our net revenue in fiscal 2016, and approximately 45% of our net revenue in fiscal 2015, and we expect our distributors to generate a significant portion of our revenue in the future.revenue. We depend on our distributors to sell our products to end customers, complete order fulfillment, and maintain sufficient inventory of our products. Our distributors also provide technical support and other value-added services to our end customers. We have twomultiple global sell-through distributors. We also have regional distribution in Asia, Japan, Israel,Europe, and North America,Israel, and we sell through three major on-line distributors.
Backlog
Our backlog consists of orders from distributors and certain OEMs that generally require delivery within the next year. Historically, our revenue by geography, based on ship-to location, is as follows:
| Year Ended | % Change in | |||||||||||||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | |||||||||||||||||||||
| Asia | $ | 277,638 | 72 | % | $ | 305,093 | 71 | % | $ | 308,534 | 76 | % | (9 | ) | (1 | ) | ||||||||||
| Europe | 44,547 | 12 | 59,835 | 14 | 55,596 | 14 | (26 | ) | 8 | |||||||||||||||||
| Americas | 63,776 | 16 | 62,126 | 15 | 41,836 | 10 | 3 | 48 | ||||||||||||||||||
| Total revenue | $ | 385,961 | 100 | % | $ | 427,054 | 100 | % | $ | 405,966 | 100 | % | (10 | ) | 5 | |||||||||||
| ● | Purchase orders, consistent with common industry practices, generally can be revised or canceled up to 60 days before the scheduled delivery date without significant penalty. |
| ● | A portion of our revenue comes from our "turns business," where the product is ordered and delivered within the same quarter. |
Seasonality
We periodically experience variability in our sales volumes and financial results due to seasonal trends in the end markets we serve, the cyclical nature of the semiconductor industry, and general economic conditions.
IP, Patents, and Licensing
We seek to protect our products, technologies, and technologiesIP primarily through patents, trade secrecy measures,secrets, copyrights, mask work protection, trademark registrations, licensing restrictions, confidentiality agreements, and other approaches designed to protect proprietary information. There can be no assurance that others may not independently develop competitive technology not covered by our intellectual property rights or that measures we take to protect our technology will be effective.
Human Capital Management
We provide a safe and positive work environment that emphasizes respect for individuals, ethical conduct, and learning and development that is facilitated by a direct employee engagement model. The health and safety of our employees is of utmost importance to us. We have aligned to local COVID-19 guidance to return to normal operations while maintaining actions to safeguard the health and well-being of our employees and our business. Recognizing and respecting our global presence, we strive to maintain a diverse and inclusive workforce everywhere we operate. As of December 30, 2017,31, 2022, we had 834 full-time949 employees worldwide.
We believe our employees are the foundation of our success and that our future success will depend,growth depends, in part, on our ability to continue to attract and retain highly skilledkey executive, technical, sales, and management personnel. NoneDue to our growth and cadence of new product introductions we are particularly focused on highly skilled engineers involved in the design, development, and support of new and existing products and processes. In order for us to attract the best talent, we provide a collaborative, diverse, inclusive, and innovative work environment, competitive compensation, and recognition to give our employees the opportunity to grow. We are focused on developing diverse teams and continuing to build an inclusive culture that inspires leadership, encourages innovative thinking, and supports the development and advancement of all.
Our human capital management objectives include identifying, recruiting, incentivizing, and integrating our existing and future employees. We strive to attract and retain talented employees by offering competitive compensation and benefits that support their health, financial, and emotional well-being. Our compensation philosophy is based on rewarding each employee’s individual and team contributions and striving to achieve equal pay for equal work. We use a combination of fixed and variable pay including base salary, bonuses, performance awards, and stock-based compensation. The principal purposes of our equity incentive plans are to attract, retain, and motivate employees through the granting of stock-based compensation awards. We offer employees benefits that vary by country and are represented by a collective bargaining agreement. We have never experienced any work stoppagesdesigned to address local laws and consider our employee relationscultures and to be good.competitive in the marketplace.
Corporate Background
Our corporate headquarters isare located at 111 SW Fifth Avenue, Suite 700, Portland,5555 NE Moore Court, Hillsboro, Oregon 97204,97124, and our website is www.latticesemi.com.www.latticesemi.com. Information contained or referenced on our website is not incorporated by reference into, and does not form a part of, this Annual Report on Form 10-K. Our common stock trades on the NASDAQ Global Select Market under the symbol LSCC.
We make available, free of charge through the Investor Relations section of our website at www.latticesemi.com,ir.latticesemi.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports and statements as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC. You may also obtain free copies of these materials by contacting our Investor Relations Department at 111 SW Fifth Ave, Ste. 700, Portland,5555 NE Moore Court, Hillsboro, Oregon 97204,97124, telephone (503) 268-8000. Our SEC filings are also available at the SEC's website at www.sec.gov.
Our Investor Relations website also provides notifications of news or announcements regarding our financial performance and theyother items that may be readmaterial or of interest to our investors and copied at the SEC's public reference room at 100 F Street NE, Washington, DC 20549. Informationfor complying with our disclosure obligations under Regulation FD, including SEC filings, press releases, earnings releases, and webcasts of our earnings calls. Further, corporate governance information, including our corporate governance policies, director code of ethics, code of conduct, board committee charters, conflict minerals report and conflict minerals policy, is also available on the operationinvestor relations section of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. our website.
The content on any website referred to in this filing is not incorporated by reference into this filing unless expressly noted otherwise.
The following risk factors and all of the other information included in this Annual Report on Form 10-K should be carefully considered in their entirety before making an investment decision relating to our common stock. If any of the risks described below occur, our business, financial condition, operating results, and cash flows could be materially adversely affected.affected, and the trading price of our common stock could decline. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial also may impairmaterially adversely affect our business, financial condition, and operating results. Effects from global health, business, or political events, and the related impacts to economic and operating conditions, may further affect the volatility or degree of known and unknown risks.
Risk Factor Summary
Factors Related to Economic, Legal, Regulatory & Political Business Conditions
| ● | Economic, legal, regulatory, political, and business conditions related to our global business. |
| ● | The impact of tariffs, trade sanctions or similar actions on our business. |
| ● | The impact of pandemics or widespread global health problems on our business. |
Factors Related to Manufacturing our Products
| ● | Geopolitical exposure of our subcontractors that we rely on to supply silicon wafers, packaging, and testing to manufacture our semiconductor products. |
| ● | Our achievement of continued yield and quality improvements to meet our internal cost and customer quality goals, and the potential impact of shortages in, or increased costs of, wafers and other materials. |
| ● | Potential warranty claims and other costs related to our products. |
Factors Related to Intellectual Property and Litigation
| ● | Fluctuations in our revenue and margins caused by the intellectual property licensing component of our business strategy. |
| ● | Material fluctuations in our revenue and gross margins caused by intermittent sales of patents and significant licensing transactions. |
| ● | The impact of actual and potential litigation and unfavorable results of legal proceedings on our business. |
| ● | Variability in our share of royalties for the HDMI standard as a result of our evolving participation in the HDMI standard. |
| ● | Our ability to protect our new and existing intellectual property rights. |
Factors Related to Overall Business & Operations
| ● | Proper functioning of our information technology systems, including in response to data breaches, cyber-attacks, or cyber-fraud. |
| ● | The impact of climate change on our business. |
| ● | Goodwill impairments and other impairments under U.S. GAAP that may impact our business. |
| ● | Changes to financial accounting standards applicable to us and any related changes to our business practices. |
| ● | Exposure to unanticipated tax consequences as a result of changes in effective tax rates, tax laws and our global organizational structure and operations. |
| ● | Weakness in our internal control over financial reporting and business processes. |
| ● | Our ability to compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel. |
| ● | Our failure to adequately foresee and insure against risks related to our business. |
| ● | Limitations to our flexibility caused by our outstanding indebtedness. |
Factors Related to Our Markets and Product Development
| ● | Cyclical market patterns and potential downturns in our industry or our end markets. |
| ● | Our ability to develop and introduce new products that achieve customer and market acceptance. |
| ● | Competition with companies that have significantly greater resources than us and numerous other product solutions. |
| ● | Our reliance on independent contractors and third parties to provide key services in our product development and operations. |
Factors Related to Our Sales and Revenue
| ● | Our dependence on our distributors and a concentrated group of end customers. |
| ● | Fluctuations in and the unpredictability of our business and our sales cycles. |
| ● | Accounting requirements related to sales through our distribution channel. |
General Risk Factors
| ● | Our operations are subject to the effects of rising inflation and recessionary concerns. |
| ● | Disruptions to our worldwide operations and supply chain due to natural or human-induced disasters. |
| ● | The trading price of our common stock has been and may continue to be subject to volatility. |
| ● | Disruption in and impacts of acquisitions, divestitures, strategic investments and strategic partnerships on our business. |
Factors Related to Economic, Legal, Regulatory & Political Business Conditions
Our global business operations expose us to various economic, legal, regulatory, political, and business risks, which could impact our business, operating results and financial results.
We have significant domestic and international operations. Our international operations include foreign sales offices to support our international customers and distributors, which account for the majority of our revenue, and operational and research and development sites in China, the Philippines, and other Asian locations. In addition, we purchase our wafers from foreign foundries; have our commercial products assembled, packaged, and tested by subcontractors located outside of the United States; and rely on international service providers for inventory management, order fulfillment, and direct sales logistics.
Worldwide political and economic conditions may create uncertainties that could adversely affect our business. For example, the continuing military conflict between Ukraine and Russia, as well as the financial and trade-related restrictions associated with Russia and Belarus and economic sanctions on certain individuals and entities in Russia and Belarus, may further disrupt global supply chains and could result in shortages of key materials that our suppliers and foundry partners require to satisfy our needs. Additionally, the U.S. government announced new controls regarding semiconductor- and supercomputer-related products and new restrictions affecting U.S. persons’ ability to send certain chips and chip-related technology and software to China without an export license. These controls may also impact the global supply chain and could result in shortages of key materials that our suppliers and foundry partners require to satisfy our needs. Any deterioration in the relations between Taiwan and China, and other factors affecting military, political or economic conditions in Taiwan or elsewhere in Asia, could adversely impact our third-party manufacturing partners and suppliers located in the region, which could disrupt our business operations. Countries in Europe and Asia have proposed, or recently adopted, significant increases in their military budgets and the outbreak of new, or expansion of current, military conflicts could adversely affect our business. Furthermore, adverse macroeconomic conditions, such as rising inflation and labor shortages, may affect demand for our products or increase our product or labor costs, negatively impacting our revenues, gross margins, and overall financial results.
Our domestic and international business activities are subject to economic, political and regulatory risks, including: increased inflation; volatility in financial markets; fluctuations in consumer liquidity; changes in interest rates; price increases for materials and components; trade barriers or changes in trade policies; political instability; acts of war or terrorism; natural disasters; economic sanctions; weak economic conditions; environmental regulations; labor regulations; disruptions to labor markets; import and export regulations; tax or freight rates; duties; trade restrictions; interruptions in transportation or infrastructure; anti-corruption laws; domestic and foreign governmental regulations; potential vulnerability of and reduced protection for intellectual property; disruptions or delays in production or shipments; and instability or fluctuations in currency exchange rates, any of which could lead to decreased demand for our products or a limited numberchange in our results of independent suppliers for the manufacture of alloperation. Although our business has not been materially impacted by supply chain constraints, inflation, or labor market disruptions, events outside of our productscontrol could have a material adverse impact on our business, operating results, and financial condition in the future. Uncertainty about future political and economic conditions makes forecasting demand and providing guidance difficult. Accordingly, our expectations are subject to change without warning and investors are cautioned not to place undue reliance on them.
If we fail to comply with the many laws and regulations to which we are subject, both within the United States and internationally, we may be subject to significant fines, penalties or liabilities for noncompliance, which could harm our business and financial results. For example, effective May 2018, the European Union adopted the General Data Protection Regulation (“GDPR”), which established new requirements regarding the handling of personal data and non-compliance monetary penalties of up to the higher of 20 million Euros or 4% of worldwide revenue. Effective January 2020, California adopted the California Consumer Privacy Act (“CCPA”), which imposes significant fines and penalties for violations. Additionally, the California Privacy Rights Act, which extends and expands the CCPA, became effective January 2023. Other states in the United States have proposed, and in certain cases enacted, legislation similar to the CCPA. Other countries outside of the European Union, including the United Kingdom, China, and Brazil, also have enacted robust legislation addressing privacy, data protection, and cybersecurity and providing for substantial penalties for noncompliance. We anticipate that our efforts to comply with evolving laws and regulations addressing privacy, data protection, and cybersecurity will be a failurerigorous and time-intensive process that may increase our cost of doing business and may require us to change our policies and practices. Additionally, as a public company, we are subject to the requirements of federal securities laws, requirements of the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the rules and regulations of the SEC, and the listing standards of the Nasdaq Stock Market. Noncompliance with these requirements could result in penalties, fines, liabilities, or reputational harm, which could harm our business or financial results.
Any inability or perceived inability to adequately comply with applicable laws or regulations could result in claims, demands, and litigation by private actors or governmental authorities, investigations and other proceedings by governmental authorities, injunctive relief, fines, penalties, and other liabilities, any of which may harm our suppliersreputation and market position and could adversely affect our business, financial condition, and results of operations.
Our business could suffer as a result of tariffs and trade sanctions or similar actions.
The imposition by the United States of tariffs, sanctions or other restrictions on goods imported from outside of the United States or countermeasures imposed in response to provide timely, cost-effective, and quality productssuch government actions could adversely affect our operations or our ability to sell our products globally, which could adversely affect our operating results and financial results.
Our customers or suppliers could also become subject to U.S. regulatory scrutiny or export restrictions. For example, in 2019 the U.S. Justice Department filed criminal charges against one of our customers in China and imposed a licensing requirement on this customer with a policy of denial for some items, which has limited our ability to do business with this customer. In 2020, the U.S. imposed additional regulatory restrictions on the sale of U.S. controlled technology to customers in China, including establishing additional licensing requirements for the sale of U.S.-originated technology for certain applications or to companies that participate in the Chinese national security supply chain and limiting the fabrication of devices for certain Chinese companies where U.S. technology is involved in the fabrication process. Furthermore, in August 2020 the U.S. established additional licensing requirements for one of our China customers and its affiliates that limit any sales of products to that customer or for that customer’s products absent a license. The U.S. government may add additional Chinese companies to its restricted entity list or impose additional licensing requirements that we may be unable to meet in a timely manner or at all. Additionally, in October 2022 the U.S. government announced new controls regarding semiconductor- and supercomputer-related products and new restrictions affecting U.S. persons’ ability to send certain chips and chip-related technology and software to China without an export license, which may impact the global supply chain and could negatively affect our business.
Where license requirements are imposed, there can be no assurance that the U.S. government will grant licenses to permit the continuation of business with these customers. Future sanctions similar to those imposed in the past and to those recently imposed could adversely affect our ability to earn revenue from these and similar customers. In addition, the imposition of sanctions or other restrictions on customers in China may cause those customers to seek domestic alternatives to our products and those of other United States semiconductor companies. Further, the Chinese government has developed an unreliable entity list, which limits the ability of companies on the list to engage in business with Chinese customers. We dependcannot predict what impact these and future actions, sanctions or criminal charges could have on independent foundriesour customers or suppliers, and therefore our business. If any of our other customers or suppliers become subject to sanctions or other regulatory scrutiny, if our customers are affected by tariffs or other government trade restrictions, or if we become subject to retaliatory regulatory measures, our business and financial condition could be adversely affected.
Pandemics or other widespread public health problems could adversely affect our business, results of operations, and financial condition in a material way.
Pandemics, epidemics or other widespread public health problems, such as the ongoing COVID-19 pandemic, could negatively impact our business. Outbreaks have, and could again, result in significant government measures to control the spread of disease, including, among others, restrictions on travel, manufacturing, and the movement of employees. If, for example, pandemics were to occur 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, including revenue, gross margins, operating margins, cash flows and other operating results, and our overall business. Disruptions to manufacturing and shipping could also constrain our supplies, leading to operational delays, disruptions and inflationary pressures. 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.
For example, the spread and impact of the COVID-19 pandemic throughout Asia and other jurisdictions in which we operate continues to fluctuate and its impacts remain uncertain. The majority of our products are manufactured, assembled, and tested by third parties in Asia. In addition, we also have other operations in China, the Philippines, and the United States. We rely on third party vendors for certain logistics and shipping operations throughout the world, including in Malaysia, Singapore, South Korea, Japan, and Taiwan. Recently, China relaxed government restrictions related to controlling the spread of COVID-19, which may result in disruptions to our manufacturing, supply chain and operations.
The ultimate impact of a pandemic on our operations and financial performance depends on many factors that are not within our control, including, but not limited, to: governmental, business, and individuals’ responses; general economic uncertainty in key global markets; volatility in financial markets, labor markets, and supply chains; global economic conditions and levels of economic growth; and the pace of recovery when the pandemic subsides. Pandemics may negatively impact the overall economy and, as a result of the foregoing, could negatively impact our operating results and may do so in a material way. In particular, pandemics or other widespread public health problems may increase or change the severity of our other risks reported in this Annual Report on Form 10-K.
Factors Related to Manufacturing our Products
We rely on subcontractors to supply and fabricate silicon wafers and to perform assembly and test operations for our semiconductor products. If they are unable to do so on a timely and cost-effective basis in sufficient quantities and using competitive technologies, we may incur significant costs or delays.
We rely on foundries in Japan, Korea and Taiwan to supply and fabricate silicon wafers for our products. These foundries include Fujitsu in Japan andsemiconductor products, including Taiwan Semiconductor Manufacturing, Samsung Semiconductor, United Microelectronics Corporation, in Taiwan, which supply the majority of our programmable logic wafers, and Taiwan Semiconductor Manufacturing, which supplies most of our HDMI and MHL integrated circuits. We negotiate wafer volumes, prices, and other terms with our foundry partners and their respective affiliates on a periodic basis typically resulting in short-term agreements which do not ensure long-term supply or allocation commitments.Seiko Epson. We rely on our OSATs in Malaysia, Taiwan and Japan to support the packaging and test of our products, including Advanced Semiconductor Engineering and Amkor Technology. Our success is dependent upon our ability to successfully partner with our foundry partnersand OSAT suppliers and their ability to produce wafers and finished semiconductor products with competitive prices and performance attributes. attributes, including smaller process geometries, which ability may be impacted by labor market disruptions and rising inflation. Establishing, maintaining and managing multiple foundry and OSAT relationships requires the investment of management resources and costs.
If we fail to maintain our foundry and OSAT relationships, if these partners do not provide facilities and support for our development efforts, if they are insolvent or experience financial difficulty, if their operations are interrupted by the ongoing COVID-19 pandemic, or if we elect or are required to change foundries that supplyor OSATs, we may incur significant costs and delays. If our wafers experience manufacturing problems, including unacceptable yields, delays in the realization of the requisite process technologies,foundry or difficulties due to limitations of new and existing process technologies, our operating results could be adversely affected.
Our margins are dependent on our achieving continued yield and quality improvements, cost reductions, and the financial health and viability of the foundries and cause them to limit or discontinue their business operations, resulting in shortages of supply and an inability to meet their commitments to us, which could adversely affect our financial conditioncost of wafers and operating results.
We rely on obtaining yield, quality, productivity, and logistic improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products that incorporate advanced features and other price/performance factors that enable us to increase revenues while maintaining acceptable margins. To the extent that such cost reductions and new product introductions do not occur in a timely manner, because of inflation, increases in personnel costs, employee turnover, or other factors, or that our products do not achieve market acceptance or market acceptance at acceptable pricing, our forecasts of future revenue,margins, operating results, and financial condition and operating results could be materially adversely affected.
Furthermore, worldwide manufacturing capacity for our strategic flexibility and liquidity and may have other adverse effects on our results of operations.
We may be subject to warranty claims and other costs related to our assetsproducts.
In general, we warrant our products for varying lengths of time against non-conformance to our specifications and subsidiaries securing the facility, whichcertain other defects. Because our products, including hardware, software, and intellectual property cores, are highly complex and increasingly incorporate advanced technology, our quality assurance programs may not detect all defects, whether these are specific manufacturing defects affecting individual products or these are systemic defects that could materially decrease the valueaffect numerous shipments. Our inability to detect a defect could result in a diversion of our common stock.
Factors Related to Intellectual Property and Litigation
The intellectual property licensing component of our business strategy increases our business risk and fluctuation of our revenue.
Our business strategy includes licensing our intellectual property to companies that incorporate it into their respective technologies that address multiple markets, in which we do not directly participate or compete. We also license our intellectual property intoincluding markets where we do participate and compete. Our licensingLicensing and services revenue may be impacted by the introduction of new technologies by customers in place of the technologies based on our intellectual property,we license, changes in the law that may weaken our ability to prevent the use of our patented technology by others, the expiration of our patents, and changes of demand or selling prices for products using licensed patents. We cannot assure that our licensing customers will continue to license our technology on commercially favorable terms or at all, or that these customers will introduce and sell products incorporating our technology, accurately report royalties owed to us, pay agreed upon royalties, honor agreed upon market restrictions, or maintain the confidentiality of our proprietary information, or will not infringe upon or misappropriate our intellectual property. Our intellectual property licensing agreements are complex and may depend upon many factors that require significant judgments, including completion of milestones, allocation of values to delivered items and customer acceptances. Manyacceptance.
Our sale of patents and intermittent significant judgments. Additionally, this is a relatively new end market for us, with which we do not yet have extensive experience.
We have also generated revenue from the sale of certain patents from our portfolio in the past, generally for non-core technology that we are no longer actively developing. While we plan to continue to monetize our patent portfolio through sales of non-core patents, we may not be able to realize adequate interest or prices for those patents. Accordingly, we cannot provide assurance that we will continue to generate revenue from these sales. In addition, although we seek to be strategic in our decisions to sell patents, we might incur reputational harm if a purchaser of our patents sues one of our customers for infringement of the purchased patent, and we might later decide to enter a space that requires the use of one or more of the patents we sold. In addition, as we sell groups of patents, we no longer have the opportunity to further sell or to license those patents and receive a continuing royalty stream.
Our licensingLicensing and services revenue fluctuates, sometimes significantly, from period to period because it is heavily dependent on a few key transactions being completed in a given period, the timing of which is difficult to predict and may not match our expectations. Licensing and services revenue may include revenue from the sales of patents, which may be difficult to complete and which may have complex terms for the payment which affects revenue recognition. Because of its high margin, the licensingLicensing and services revenue portion of our overall revenue can have a disproportionate impact on gross profit and profitability. GeneratingIn addition, generating revenue from patent sales and intellectual property licenses is a lengthy and complex process that may last beyond the period in which our efforts begin, and the accounting rules governing the recognition of revenue from patent sales and intellectual property licensing transactions are increasingly complex and subject to interpretation.require significant judgment. As a result, the amount of license revenue recognized in any period may differ significantly from our expectations.
Litigation and a significant industry downturn could adversely affect our operating results.
From time to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries, and increased expenses.
Our participation in the HDMI standard is evolving, and MHL has included our acting as agent for these consortia for which we have been receivingshare of adopter fees. We no longer act as agentfees and royalties for the HDMI standard and there is no guarantee that we will continuesubject to act as agent for the MHL standard. Accordingly, we now receive a reduced share of HDMI adopter fees and we could in the future lose MHL adopter fees.
We share HDMI royalties with the other HDMI foundersFounders based on an allocation formula, which is reviewed generally every three years. The most recent royalty sharing formula coveredIn the period from January 1, 2014 through December 31, 2016, andfourth quarter of fiscal 2019, the HDMI Founders adopted a new agreement is yet to be signed. Ourcovering the five-year period beginning January 1, 2018. The HDMI Founders are currently negotiating a new agreement covering the next sharing period beginning January 1, 2023. The amount of our portion of the royalty allocation has declined for the last several years. In 2015, we received between 24% and 25% of the royalty allocation, while for 2016, we received 20% of the royalty allocation. The royalty allocation for 2017 and future years is not yet known but may decline. If the level continues to decline, our financial performance could be adversely affected. In addition, delays in the signing of new royalty sharing agreements impacted our timing of revenue recognition and ability to recognize revenue related todependent on the royalties in fiscal 2017. With our adoption of ASU 2014-09,
If we are unable to adequately protect our new and existing intellectual property rights globally, our financial results and our ability to compete effectively may suffer.
Our success depends in part on our proprietary technology and we rely upon patent, copyright, trade secret, mask work, and trademark laws to protect our intellectual property.property globally. We intend to continue to protect our proprietary technology, however, we may be unsuccessful in asserting our intellectual property rights or such rights may be invalidated, violated, circumvented, or challenged. From time to time, third parties, including our competitors, have asserted against us patent, copyright, and other intellectual property rights to technologies that are important to us. Third parties may attempt to misappropriate our intellectual property through electronic or other means or assert infringement claims against us in the future. Such assertions by third parties may result in costly litigation, indemnity claims, or other legal actions, and we may not prevail in such matters or be able to license any valid and infringed patents from third parties on commercially reasonable terms. This could result in the loss of our ability to import and sell our products or require us to pay costly royalties to third parties in connection with sales of our products. Any infringement claim, indemnification claim, or impairment or loss of use of our intellectual property could materially adversely affect our financial condition and results of operations.
Factors Related to Overall Business & Operations
Our business depends on the proper functioning of information technology systems. A material changefailure of these systems, data breaches, cyber-attacks, or cyber-fraud may cause business disruptions, compromise our intellectual property or other sensitive information, or result in losses.
We rely on various information technology ("IT") networks and systems to manage our operations, including financial reporting, and we regularly make changes to improve them as necessary by periodically implementing new, or upgrading or enhancing existing, operational and IT systems, procedures, and controls. These systems are supported by subcontractors, and they may also be subject to power and telecommunication outages or other general system failures. The legal, regulatory and contractual environments surrounding information security, data privacy, and data protection are complex and evolving. We continue to commit significant resources to implementing new systems to standardize our processes worldwide and to develop our capabilities in these areas. We are focused on realizing the full analytical functionality of these conversions, which can be extremely complex, in part, because of the wide range of legacy systems and processes that must be integrated.
In the normal course of business, we may implement new or updated IT systems and, as a result, we may experience delays or disruptions in the integration of these systems, or the related procedures or controls. The policies and security measures established with our IT systems may be vulnerable to security breaches and incidents, cyber-attacks, or fraud. We may also encounter errors in corruption or loss of data, an inability to accurately process or record transactions, and security or technical reliability issues. All of these could harm our ability to conduct core operating functions such as processing invoices, shipping and receiving, recording and reporting financial and management information on a timely and accurate basis, and could impact our internal control compliance efforts. If the technical solution or end user training are inadequate, it could limit our ability to manufacture and ship products as planned. Moreover, the proper functioning of the internal processes that the IT systems and networks support relies on qualified employees. Competition for qualified employees has generally increased across the economy in the United States, which, if we experience employee turnover, could lead to disruptions in our processes, inadequate end user training or difficulty updating our IT systems and networks.
We maintain sensitive data on our networks and on the networks of our business partners and third-party providers, including proprietary and confidential information relating to our intellectual property, personnel, and business, and that of our customers and third-party providers. Companies have been increasingly subject to a wide variety of security incidents, cyber-attacks, hacking, phishing, malware, ransomware, and other attempts to gain unauthorized access to systems or data, or to engage in fraudulent behavior. Cyber-attacks have become more prevalent, sophisticated and much harder to detect and defend against and it is often difficult to anticipate or detect such incidents on a timely basis and to assess the damage caused by them. In addition, our agreements governing encryption keyswith third-party providers, including but not limited to the liability limitations and insurance provisions contained in such agreements, may be inadequate to cover the liability, if any, associated with any security breaches. Increasing geopolitical tensions or conflicts have also created, and may continue to create, a heightened risk of cyberattacks. Our policies and security measures cannot guarantee security, and our information technology infrastructure, including our networks and systems, may be vulnerable to security breaches and incidents, cyber-attacks, or fraud. In the past, third parties have attempted to penetrate and/or infect our network and systems with malicious software and phishing attacks in an effort to gain access to our network and systems. In addition, we use could place additional restrictions on us,are subject to the risk of third parties falsifying invoices and similar fraud, frequently by obtaining unauthorized access to our vendors’ and business partners’ networks.
In some circumstances, we may partner with third-party providers and provide them with certain data, including sensitive data, or the ability to access or otherwise process such data. These third parties also face substantial security risks from a variety of sources. There can be no assurance that any security measures that we or our distributorsthird-party service providers have implemented will be effective against current or contract manufacturers,future security threats, and we cannot guarantee that our systems and networks or those of our third-party service providers have not been breached or otherwise compromised, or that they and any software in our or their supply chains do not contain bugs, vulnerabilities, or compromised code that could result in a breach of or disruption to our systems and networks or the systems and networks of third parties that support us and our services. If any of our third-party providers fails to adopt or adhere to adequate data security practices, or suffers a security breach or incident, any data, including sensitive data, that we provide them or that they otherwise may access or process for us may be improperly accessed, used, disclosed, modified, lost, destroyed, or rendered unavailable. Any security breaches or incidents that we or our third-party providers may suffer could compromise our intellectual property, expose sensitive business information and otherwise result in unauthorized access to or disclosure, modification, misuse, loss or destruction of sensitive information. We may need to expend significant financial and development resources to analyze, correct, eliminate, or work around errors or defects or to eliminate or otherwise address security vulnerabilities, and we and our third-party service providers may face difficulties or delays in identifying or otherwise responding to any potential security breach or incident.
Further, the increase in cyber-attacks has resulted in an increased focus on cybersecurity by certain government agencies. Any cyber-attack or other security breach or incident that we or our third-party providers may suffer, or the perception that any such attack, breach, or incident has occurred, could result in a loss of customer confidence in our security measures, damage to our brand, reputation, and market position, result in unauthorized access to or disclosure, modification, misuse, loss, corruption, unavailability, or destruction of our data or other sensitive data that we or our third-party providers process or maintain, disrupt normal business operations, require us to spend material resources to investigate or correct any breach or incident and to prevent future security breaches and incidents, expose us to legal claims and liabilities, including litigation, regulatory investigations and enforcement actions, and indemnity obligations, and adversely affect our revenues and operating results. Further, any such actual or perceived breach or incident, and any claims, demands, litigation, or investigations or enforcement actions related to cybersecurity could cause us to incur significant remediation costs, result in product development delays, disrupt key business operations, and divert attention of management and key information technology resources. In addition, we may incur loss as a result of cyber-fraud, such as those experienced by other companies by making unauthorized payments irrespective of robust internal controls.
Failure or disruptions of our IT systems or difficulties or delays in maintaining, managing, and integrating them could adversely affect our controls and procedures and could impact our ability to perform necessary operations, which could restrict product shipmentmaterially adversely affect our business.
We cannot be certain that our insurance coverage will be adequate for data security liabilities incurred and, will cover any indemnification claims against us relating to any incident, that insurance will continue to be available to us on economically reasonable terms, or significantlyat all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.
Climate change may have a long-term impact on our business.
Climate-related risks are inherent wherever our business is conducted. Global climate change is causing, and is projected to continue to cause, an increase in the costfrequency and intensity of certain natural disasters and adverse weather, such as drought, wildfires, storms, sea-level rise, flooding, heat waves, and cold waves, occurring more frequently or with greater intensity. Such extreme events are driving changes in market dynamics, stakeholder expectations, and local, national and international climate change policies and regulations, any of which could result in disruptions to trackus, our suppliers, vendors, customers and logistics hubs, and may impact employees’ abilities to commute or to work from home effectively. These disruptions could make it more difficult and costly for us to deliver our products throughoutand services, obtain components or other supplies through our supply chain, maintain, or resume operations or perform other critical corporate functions, and could reduce customer demand for our products and services.
The increasing concern over climate change could also result in transition risks such as shifting customer preferences and increased regulatory requirements. Changing customer preferences may result in increased expectations regarding our solutions, products, and services, including the distribution chain.
Additionally, concerns over climate change have resulted in, and are expected to continue to result in, the handlingadoption of legal and trackingregulatory requirements designed to address climate change, as well as legal and regulatory requirements requiring certain climate-related disclosures. Where new laws or regulations are more stringent than current legal or regulatory requirements, we may experience increased compliance burdens and costs to meet such obligations. Climate change also may reduce the availability or increase the cost of encryption keys,insurance for these negative impacts of natural disasters by contributing to an increase in the incidence and severity of such natural disasters. Ultimately, the impacts of climate change, whether involving physical risks (such as disruptions resulting from climate-related events or rising sea levels) or transition risks (such as regulatory changes, changes in market dynamics or increased operating costs, including the cost of insurance) are expected to be widespread and unpredictable and may materially adversely affect our business and financial results.
We regularly test for goodwill and other impairments as required under U.S. GAAP, and we may incur future impairments.
We are required under U.S. GAAP to test goodwill for possible impairment on an annual basis and to test goodwill and long-lived assets, including amortizable intangible assets, for impairment at any other time that circumstances arise indicating the carrying value may not be recoverable.For purposes of testing goodwill for impairment, the Company currently operates as one reporting unit: the core Lattice business, which includes intellectual property and semiconductor devices. There were no impairment charges to goodwill or amortizable intangible assets in fiscal years 2022, 2021, or 2020. There is no certainty that future impairment tests will indicate that goodwill or amortizable intangible assets will be deemed recoverable. As we continue to review our business operations and test for impairment or in connection with possible sales of assets, we may have impairment charges in the future, which may be material.
Changes to cease shipping or manufacturing certain products.
We prepare our consolidated financial statements to conform to generally accepted accounting principles in consortiathe United States. These accounting principles are subject to establish industry standardsinterpretation by the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create accounting rules and regulations. Changes in certain of our target markets; promoting and enhancing specifications; and developing and marketing products based on those specificationsthese rules have occurred in the past and future enhancements. We intendchanges to continue participating in consortia that develop and promote the HDMI, MHL, and WirelessHD specifications. In connection with our participation in these consortia, we make certain commitments regarding our intellectual property, in each case with the effect of making certain of our intellectual property available to others, including our competitors, desiring to implement the specification in question. For example, we must license specific elements of our intellectual property to others for use in implementing the HDMI specification, including enhancements, as long as we remain part of the consortium. Also, we must agree not to assert certain necessary patent claims against other members of the MHL consortium, even if those members may have infringed upon those patents in implementing the MHL specification.
Changes in effective tax rates, tax laws and our global organizational structure and operations could expose us to time, competing standards have been established which negatively affect the success of existing standards or jeopardize the creation of new standards. Our failureunanticipated tax consequences.
We are subject to continue to drive innovationtaxation in the MHL specifications couldUnited States and other countries. Certain tax positions may remain open to examination for several years. Challenges by tax authorities to our previous tax positions and intercompany transfer pricing arrangements, and continuing assessments of our tax exposures may have an adverse effect on our provision for income taxes and cash tax liability. We have a global tax structure that aligns our corporate structure with our global business going forward.
We also may be impacted by changes in the tax laws of the United States and foreign jurisdictions. President Biden signed into law the Inflation Reduction Act of 2022 (“IRA”) on August 16, 2022 and the CHIPS and Science Act of 2022 on August 9, 2022. These laws implement new tax provisions, including a 1% excise tax on certain stock repurchases made by publicly traded corporations after December 31, 2022, and provide for various incentives and tax credits. The Organisation for Economic Co-operation and Development, which represents a coalition of member countries, recommended changes to numerous long-standing tax principles, including a 15% global minimum tax. If implemented by taxing authorities, such changes, as well as changes in taxing jurisdictions’ administrative interpretations, decisions, policies, and positions, could have faileda material adverse effect on our business, results of operations, or financial condition. In addition, future effective tax rates could be affected by changes in the valuation of deferred tax assets and liabilities.
Weakness in our internal control over financial reporting and business processes could adversely affect our business and financial results.
We are required to maintain internal controls over financial reporting. We review these controls regularly and deficiencies may be identified from time to time. In the future, we may identify material weaknesses in our internal controls over financial reporting. Any failure to maintain an effective system of internal controls over financial reporting could limit our ability to report our financial results accurately and timely, which could adversely affect our business, financial results, and stock price.
We must also maintain high quality business processes. We rely on our business processes to, among other things, coordinate with our suppliers, manage our supply chain efficiently, manufacture high quality products and comply with various laws and regulations. Any failure to maintain high quality business processes, or to effectively adjust our business processes to changing circumstances and needs, could limit our ability to meet our business’ needs, which could adversely affect our business, financial results, and stock price.
We compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel could adversely affect our ability to compete effectively.
We depend on the efforts and abilities of certain key members of management and other technical personnel. Our future success depends, in part, upon our ability to retain such personnel and attract and retain other highly qualified personnel, particularly product engineers who can respond to market demands and required product innovation. Competition for such personnel is intense and has been increasing generally throughout the economy, and we may not be successful in hiring or retaining new or existing qualified personnel. If we lose existing qualified personnel or are unable to hire new qualified personnel, as needed, we could have difficulty competing in our highly competitive and innovative environment.
Our insurance may not adequately insure againstcover certain risks and, as a result, our financial condition and results may be adversely affected.
We carry insurance customary for companies in our industry, including, but not limited to, liability, property, and casualty; workers' compensation; cyber liability; and business interruption insurance. We also insure our employees for basic medical expenses. In addition, we have insurance contracts that provide director and officer liability coverage for our directors and officers. Other than the specific areas mentioned above, we are self-insured with respect to most other risks and exposures, and the insurance we carry in many cases is subject to a significant policy deductible or other limitation before coverage applies. Based on management's assessment and judgment, we have determined that it is more cost effective to self-insure against certain risks than to incur the insurance premium costs. The risks and exposures for which we self-insure include, but are not limited to, certain natural disasters, certain product defects, certain matters for which we indemnify third parties, political risk, certain theft, patent infringement, and employment practice matters. Should there be a catastrophic loss due to an uninsured event (such as an earthquake) or a loss due to adverse occurrences in any area in which we are self-insured, our financial condition or operating results could be adversely affected.
Our outstanding indebtedness could reduce our strategic flexibility and liquidity and may have other adverse effects on our results of operations.
As of December 31, 2022, we had approximately $130 million outstanding in revolving loans under an amended and restated credit agreement, dated September 1, 2022 (the “2022 Credit Agreement”). Our obligations under the 2022 Credit Agreement are guaranteed by certain of our U.S. subsidiaries meeting materiality thresholds set forth in the 2022 Credit Agreement, and the revolving loans under the 2022 Credit Agreement may be repaid and reborrowed at our discretion, with any remaining outstanding principal amount due and payable on the maturity date of the revolving loan facility on September 1, 2027. Our ability to meet our debt service obligations depends upon our operating and financial performance, which is subject to general economic and competitive conditions and to financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to service our debt, we may need to sell material assets, restructure or refinance our debt, or seek additional equity capital. Prevailing economic conditions and global credit markets could adversely impact our ability to sell material assets, restructure or refinance our debt on terms acceptable to us, or at all, or we may not be able to restructure or refinance our debt without incurring significant additional fees and expenses.
The 2022 Credit Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company and our subsidiaries to, among other things, incur debt, grant liens, undergo certain fundamental changes, make investments, make certain restricted payments, dispose of assets, enter into transactions with affiliates, and enter into burdensome agreements, in each case, subject to limitations and exceptions set forth in the 2022 Credit Agreement. We competeare also required to maintain compliance with othersa total net leverage ratio and an interest coverage ratio, in each case, determined in accordance with the terms of the 2022 Credit Agreement.
The amount and terms of our indebtedness, as well as our credit rating, could have important consequences, including the following:
| ● | we may be more vulnerable to economic downturns, less able to withstand competitive pressures, and less flexible in responding to changing business and economic conditions; |
| ● | our cash flow from operations may be allocated to the payment of outstanding indebtedness, and not to research and development, operations or business growth; |
| ● | we might not generate sufficient cash flow from operations or other sources to enable us to meet our payment obligations under the facility and to fund other liquidity needs; |
| ● | our ability to make distributions to our stockholders in a sale or liquidation may be limited until any balance on the facility is repaid in full; and |
| ● | our ability to incur additional debt, including for working capital, acquisitions, or other needs, is more limited. |
If we breach a loan covenant, the lenders could accelerate the repayment of the facility. We might not have sufficient assets to attractrepay our indebtedness upon acceleration. If we are unable to repay or refinance the indebtedness upon acceleration or at maturity, the lenders could initiate a bankruptcy proceeding against us or collection proceedings with respect to our assets and retain key personnel,subsidiaries securing the facility, which could materially decrease the value of our common stock.
Factors Related to Our Markets and Product Development
The semiconductor industry routinely experiences cyclical market patterns and our products are used across different end markets. A significant downturn in the industry or in any loss of these end markets could cause a meaningful reduction in demand for our products and adversely affect our operating results.
Our revenue and gross margin can fluctuate significantly due to downturns in the highly cyclical semiconductor industry. These downturns can be severe and prolonged and can result in price erosion and weak demand for our products. Weak demand for our products resulting from general economic conditions affecting the end markets we serve, or inabilitythe semiconductor industry specifically, and reduced spending by our customers can result, and in the past has resulted, in diminished product demand, high inventory levels, erosion of average selling prices, excess and obsolete inventories and corresponding inventory write-downs. Our expense levels are based, in part, on our expectations of future sales. Many of our expenses, particularly those relating to attract, such personnelfacilities, capital equipment, and other overhead, are relatively fixed. We might be unable to reduce spending quickly enough to compensate for reductions in sales. Accordingly, shortfalls in sales could adversely affect our operating results. Furthermore, any significant upturn in the semiconductor industry could result in increased competition for access to raw materials and third-party service providers.
Additionally, our products are used across different end markets, and demand for our products is difficult to predict and may vary within or among our Industrial and Automotive, Communications and Computing, and Consumer end markets. Our target markets may not grow or develop as we currently expect, and demand may increase or change in one or more of our end markets, and changes in demand may reduce our revenue, lower our gross margin and effect our operating results. We have experienced concentrations of revenue at certain customers and within certain end markets, and we regularly compete for design opportunities at these customers and within these markets. Any deterioration in these end markets, reductions in the magnitude of revenue streams, our inability to meet design and pricing requirements, or volatility in demand for our products could lead to a reduction in our revenue and adversely affect our operating results. Our success in our end markets depends on many factors, including the strength or financial performance of the customers in our end markets, our ability to timely meet rapidly changing product requirements, market needs, and our ability to maintain design wins across different markets and customers to dampen the effects of market volatility. The dynamics of the markets in which we operate make prediction of and timely reaction to such events difficult.
Due to these and other factors, our past results may not be reliable predictors of our future results. If we are unable to accomplish any of the foregoing, or to offset the volatility of cyclical changes in the semiconductor industry or our end markets through diversification into other markets, these factors could materially and adversely affect our business, financial condition, and operating results.
Our success and future revenue depend on our ability to develop and introduce new products that achieve customer and market acceptance.
We compete effectively.in a dynamic environment characterized by rapid technology and product evolution, generally followed by a relatively longer process of ramping up to volume production on advanced technologies. Our end customers’ continued use of our products is frequently reevaluated, as certain of our customers' product life cycles are relatively short and they continually develop new products. The selection process for our products to be included in our customers' new products is highly competitive. There are no guarantees that our products will be included in the next generation of products introduced by these customers. Additionally, our markets are also characterized by evolving industry standards and increased demand for higher levels of integration and smaller process geometry. Our competitive position and success depend on our ability to innovate, develop, and introduce new products that compete effectively on the basis of price, density, functionality, power consumption, form factor, and performance, and our addressing the evolving needs of the markets we serve, among other things. With increased introduction of new products, we expect revenue related to mature products to decline over time in a normal product life cycle. As a result, we may be increasingly dependent on revenue derived from our newer products.
Our future growth and the success of new product introductions depend upon numerous factors, including:
| ● | timely completion and introduction of new product designs; |
| ● | ability to generate new design opportunities and design wins, including those which result in sales of significant volume; |
| ● | achievement of necessary volume of production to achieve acceptable cost; |
| ● | availability of specialized field application engineering resources supporting demand creation and customer adoption of new products; |
| ● | ability to utilize advanced manufacturing process technologies; |
| ● | achieving acceptable yields and obtaining adequate production capacity from our wafer foundries and assembly and test subcontractors; |
| ● | ability to obtain advanced packaging; |
| ● | availability of supporting software design tools; |
| ● | utilization of predefined IP logic; |
| ● | customer acceptance of advanced features in our new products; and |
| ● | market acceptance of our customers' products. |
The failure of any of these factors, among others, could adversely affect our product innovation, development and introduction efforts and our financial condition and results of operations.
We compete against companies that have significantly greater resources than us and numerous other product solutions.
The semiconductor industry is highly competitive and many of our direct and indirect competitors have substantially greater financial, technological, manufacturing, marketing, and sales resources than us. Consolidation in our industry may increasingly mean that our competitors have greater consolidated resources, or other synergies, including the ability to attract qualified employee or incorporate higher costs into product and service prices, that could put us at a competitive disadvantage. We currently compete directly with companies that have licensed our technology or have developed similar products, as well as numerous semiconductor companies that offer products based on alternative solutions, such as applications processor, application specific standard product, microcontroller, analog, and digital signal processing technologies. Competition from these semiconductor companies may intensify as we offer more products in any of our end markets. These competitors include established, multinational semiconductor companies, as well as emerging companies.
We depend on independent contractors and third parties to provide key services in our product development and operations, and any disruption of their services, or an increase in cost of these services, could negatively impact our financial condition and results of operations.
We depend on subcontractors to provide cost effective and efficient services in our product development and supply chain functions, including test and assembly services, software and hardware development, support of intellectual property cores, inventory management, order fulfillment and direct sales logistics.
Our operations and operating results may be adversely affected if we experience problems with our subcontractors that impact the effortsdelivery of product to our customers. These problems may include: schedule delays or defects in software or hardware development deliverables; prolonged inability to obtain wafers or packaging materials with competitive performance and abilitiescost attributes; inability to achieve adequate yields or timely delivery; inability to meet customer timelines or demands; disruption or defects in assembly, test, or shipping services; or delays in stabilizing manufacturing processes or ramping up volume for new products. If our third-party supply chain providers were to reduce or discontinue services for us or their operations are disrupted as a result of a fire, earthquake, act of terrorism, political unrest, governmental uncertainty, war, disease, or other natural disaster or catastrophic event, weak economic conditions, inflation, recession, labor market disruptions, or any other reason, our financial condition and results of operations could be adversely affected.
Factors Related to Our Sales and Revenue
Our revenues depend on our relationships with our distributors and on a concentrated group of end customers. An adverse change in the relationships with, or performance of, our distributors, or any reduction in the use of our products by our end customers, could harm our sales and significantly decrease our revenue.
We depend on a concentrated group of distributors to sell our products to end customers, complete order fulfillment, maintain sufficient inventory of our products and provide services to our end customers. In fiscal 2022, revenue attributable to sales to distributors accounted for 89% of our total revenue, with two distributors accounting for 59% of total revenue. We have significant outstanding receivables with our top distributors, and expect our distributors to generate a significant portion of our revenue in the future. Any adverse change to our relationships or agreements with our distributors, a failure by one or more of our distributors to perform its obligations to us, or consolidation in the distribution industry could have a material impact on our business, including a reduction in our access to certain key members of management and other technical personnel. Our future success depends, in part, uponend customers, or our ability to retainsell our products.
If our relationships with any material customers were to diminish, if these customers were to develop their own solutions or adopt alternative solutions or competitors' solutions, if any one or more of our concentrated groups of customers were to experience significantly adverse financial conditions, including as a result of inflation, economic slowdown or recession, or labor market disruptions, or if as a result of trade disputes or sanctions these customers were restricted from purchasing our products, our results could be adversely affected.
In addition, the inability of customers to obtain credit, the insolvency of one or more customers, or tariffs applicable to our customers’ products, could impact our sales. Any of these effects could impact our ability to effectively manage inventory levels and collect receivables, require additional restructuring actions, and decrease our revenue and profitability.
The nature of our business and length of our sales cycle makes our revenue, gross margin, net income, and inventory subject to fluctuation and difficult to accurately predict.
A number of factors, including how products are manufactured to support end markets, yield, wafer pricing, cost of packaging raw materials, product mix, market acceptance of our new products, competitive pricing dynamics, product quality, geographic and/or end market mix, and pricing strategies, can cause our revenue, gross margins, net income, and inventory to fluctuate significantly either positively or negatively from period to period.
We have limited visibility into the demand for our products, particularly new products, because demand for our products depends upon our products being designed into our end customers' products and those products achieving market acceptance. During our sales cycle, our customers typically test and evaluate our products prior to deciding to include our products into the design of their own products, and then require additional time to begin volume production of their products. This lengthy sales cycle may cause us to incur significant expenses, which could be exacerbated by rising inflation, experience significant production delays and to incur additional inventory costs before we receive a customer order that may be delayed or never get placed. A key strategic customer may demand certain design or production resources to meet their requirements or work on a specific solution, which could cause delays in our normal development schedule and result in significant investment of our resources or missed opportunities with other potential customers. We may incur these expenses without generating revenue from our products to offset the expenses.
While our sales cycles are typically long, our average product life cycles can be short as a result of the rapidly changing technology environment in which we operate. From time to time, our inventory levels may be higher than historical norms due to inventory build decisions aimed at meeting expected demand, ramping for new products, reducing direct material cost, or enabling responsiveness to expected demand. In the event the expected demand does not materialize, or if our short sales cycle does not generate sufficient revenue, we may be subject to incremental excess and obsolescence costs.
These factors make it difficult for us to accurately forecast future sales and project quarterly revenues. The difficulty in forecasting future sales weakens our ability to project our inventory requirements, which could result, and in the past has resulted, in inventory write-downs or failure to meet customer product demands in a timely manner. While we may issue guidance, difficulty in forecasting financial performance, relative customer and product mix, and the unpredictability of unknown variables and their impact on our financial performance may impair the accuracy of our forward-looking financial measures.
Accounting requirements related to sales through our distribution channel could result in our reporting revenue in excess of demand.
Revenue recognition standards require recognition of revenue based on estimates and may require us to record revenue from distributors that is in excess of actual end customer demand. Since we have limited ability to forecast inventory levels of our end customers, we depend on the timeliness and accuracy of resale reports from our distributors. Late or inaccurate resale reports could mask significant build-up of inventories in our distribution channel, have a detrimental effect on our ability to properly recognize revenue, and impact our ability to forecast future sales. An inventory build-up in our distribution channel could result in a slowdown in orders, requests for returns from customers, or requests to move out planned shipments. If our distributors do not ultimately sell the inventory and our estimates change, we could be required to materially correct our recognized revenue in a future period, depending on actual results. Any failure to manage these challenges could disrupt or reduce sales of our products and unfavorably impact our financial results.
General Risk Factors
Our operations are subject to the effects of inflationary pressures and recessionary concerns.
Global economic conditions have recently experienced historically high levels of inflation, and there is increasing concern about the potential for recession. Recent inflation is primarily believed to be the result of the economic impacts from the ongoing COVID-19 pandemic, including the global supply chain disruptions, strong economic recovery and associated widespread demand for goods, and government stimulus packages, among other factors. For instance, global supply chain disruptions have resulted in shortages in materials and services. Such shortages have resulted in inflationary cost increases for labor, materials, and services across the economy, and could continue to cause costs to increase as well as scarcity of certain products. If the inflation rate continues to increase, it will affect our expenses. To the extent inflation results in rising interest rates and has other adverse effects on the market, including the possibility of recession, it may adversely affect our consolidated financial condition and results of operations.
Business disruptions could seriously harm our future revenue, cash flows, and financial condition and increase our costs and expenses.
Our worldwide operations and supply chain could be disrupted by natural or human-induced disasters including, but not limited to, earthquakes, tsunamis, or floods; hurricanes, cyclones, or typhoons; fires, or other extreme weather conditions; power or water shortages; telecommunications failures; materials scarcity and price volatility; manufacturing equipment failures; IT system failures; cybersecurity attacks; data breaches; medical epidemics or pandemics (such as COVID-19); terrorist acts, civil unrest, military actions, conflicts, or wars; or other natural or man-made disasters or catastrophic events.
The occurrence of any of these business disruptions could adversely affect our competitive position and result in significant losses, decrease demand for our products, seriously harm our revenue, profitability and financial condition, increase our costs and expenses, make it difficult or impossible to provide services or deliver products to our customers or to receive components from our suppliers, create delays and inefficiencies in our supply chain, result in the need to impose employee travel restrictions, and require substantial expenditures and recovery time in order to fully resume operations. The impacts and frequency of any of the above could furthermore be exacerbated by climate change, particularly in countries where we, or our suppliers or customers, operate that have limited infrastructure and disaster recovery resources.
Our operations and those of our significant suppliers and distributors could be adversely affected if manufacturing, logistics, or other operations in key locations, including logistics hubs in Asia, are disrupted for any reason, such personnelas those described above or other economic, business, labor, environmental, public health, regulatory or political reasons. In addition, even if our operations are unaffected or recover quickly, if our customers cannot timely resume their own operations due to a catastrophic event, they may reduce or cancel their orders, or these events could otherwise result in a decrease in demand for our products. Although it is impossible to completely predict the occurrences or consequences of any such events, forecasting disruptive events and attractbuilding additional resiliency into our operations accordingly will become an increasing business imperative.
The trading price of our common stock has been and may continue to be subject to volatility in response to a variety of factors.
Our common stock has experienced substantial price volatility in the past and may continue to do so in the future. Additionally, the technology industry and the stock market as a whole has experienced extreme volatility that often has been unrelated to the performance of particular companies. The trading price of our common stock may fluctuate widely due to various factors, including, but not limited to, actual or anticipated fluctuations in our financial condition and operating results; changes in financial estimates by us or financial or other market estimates and ratings by securities and other analysts; our ability to develop new products, enter new market segments, gain market share, manage cyber-security and litigation risk, diversify our customer base, and successfully secure manufacturing capacity; news regarding our products or products of our competitors; any mergers, acquisitions or divestitures of assets undertaken by us; inflationary conditions, interest rate changes, and recessionary concerns; regulatory changes to international trade policies, economic sanctions, or export controls, such as new licensing requirements for exporting certain chip-related technology to China; terrorist acts or acts of war, including the ongoing conflict between Ukraine and Russia; epidemics and pandemics, such as developments and restrictions with respect to the COVID-19 pandemic; trading activity in our common stock, including stock repurchases, actions by institutional or other large stockholders, or our inclusion in market indices; or general economic, industry, and market conditions worldwide.
The volatility of our stock may cause the value of a stockholder’s investment to change rapidly. Investors in our common stock may not realize any return on their investment in us and may lose some or all of their investment. Additionally, if our stock price declines, it may be more difficult for us to raise capital and may have other adverse effects on our business. Stock price fluctuations could impact the value of our equity compensation, which could affect our ability to recruit and retain other highly qualified personnel, particularly product engineers whoemployees. Volatility in the trading price of our common stock could also result in the filing of securities class action litigation matters, which could result in substantial costs and the diversion of management time and resources. For these reasons, investors should not rely on recent or historical trends to predict future trading prices of our common stock, financial condition, results of operations, or cash flows.
Acquisitions, divestitures, strategic investments and strategic partnerships could disrupt our business and adversely affect our financial condition and operating results.
We may pursue growth opportunities by acquiring complementary businesses, solutions or technologies through strategic transactions, investments or partnerships. The identification of suitable acquisition, strategic investment or strategic partnership candidates can respondbe costly and time consuming and can distract our management team from our current operations. If such strategic transactions require us to market demands and required product innovation. Competition for such personnel is intense andseek additional debt or equity financing, we may not be successfulable to obtain such financing on terms favorable to us or at all, and such transaction may adversely affect our liquidity and capital structure. We may also choose to divest certain non-core assets, which divestitures could lead to charges against earnings and may expose us to additional liabilities and risks. Any strategic transaction might not strengthen our competitive position, may increase some of our risks, and may be viewed negatively by our customers, partners or investors. Even if we successfully complete a strategic transaction, we may not be able to effectively integrate the acquired business, technology, systems, control environment, solutions, personnel or operations into our business or global tax structure. We may experience unexpected changes in hiringhow we are required to account for strategic transactions pursuant to U.S. GAAP and may not achieve the anticipated benefits of any strategic transaction. We may incur unexpected costs, claims or retaining newliabilities that we incur during the strategic transaction or existing qualified personnel. From time to timethat we assume from the acquired company, or we may discover adverse conditions post acquisition for which we have effected restructurings which have eliminated a numberlimited or no recourse.
None.
We also leasedlease a 47,800 square foot of space in Hillsboro, Oregon as our corporate headquarters and a research and development facility through November 2022. We also currently lease aOctober 2028.
In San Jose, California, we have 98,874 square footfeet under lease through September 2026, of which we use 49,579 square feet as a research and development facilityfacility. We vacated 49,295 square feet during the fourth quarter of 2018. During 2019, we vacated a 23,680 square foot office space in San Jose, CaliforniaPortland, Oregon, which we have subleased through September 2026.the end of the lease in March 2025.
In Muntinlupa City, Philippines, we lease a total of 48,56550,503 square feet through May 2025 and 1,938 square feet through June 2025 for research and development and operations facilities. In this location, we also lease another 2,856 square feet through April 2018.
The information contained under the heading "Legal Matters" in Note 15 - Contingencies to time, we are exposed to certain assertedour Consolidated Financial Statements in Part II, Item 8 of this report is incorporated by reference into this Part I, Item 3. Also, see “Litigation and unasserted potential claims. Periodically, we review the statusunfavorable results of each significant matterlegal proceedings could adversely affect our financial condition and assess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and a rangeoperating results” in “Risk Factors” in Item 1A 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. BecausePart I of such uncertainties, accruals are based onlythis Annual Report 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.
Not applicable.
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol "LSCC". The following table sets forth the low and high intraday sale prices for our common stock for the last two fiscal years, as reported by NASDAQ.
| Low | High | ||||||
| 2017: | |||||||
| First Quarter | $ | 6.76 | $ | 7.55 | |||
| Second Quarter | 6.51 | 7.10 | |||||
| Third Quarter | 5.05 | 7.03 | |||||
| Fourth Quarter | 5.14 | 6.60 | |||||
| 2016: | |||||||
| First Quarter | $ | 4.02 | $ | 6.67 | |||
| Second Quarter | 4.89 | 6.47 | |||||
| Third Quarter | 5.21 | 6.69 | |||||
| Fourth Quarter | 5.91 | 7.99 | |||||
Holders
As of March 2, 2018,February 13, 2023, we had approximately 240177 stockholders of record.
Dividends
The payment of dividends on our common stock is within the discretion of our Board of Directors. We intend to retain earnings to finance our business. We have never paid cash dividends.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
On August 8, 2022, we announced that our Board of Directors had approved a stock repurchase program pursuant to which up to $150 million of outstanding common stock could be repurchased from time to time (the "2023 Repurchase Program"). The duration of the 2023 Repurchase Program is through the end of December 2023. Under the 2023 Repurchase Program during the fourth quarter of fiscal 2022, we repurchased 288,652 shares for $20.0 million, or an average price paid per share of $69.27. All repurchases were open market transactions funded from available working capital. All shares repurchased pursuant to the 2023 Repurchase Programs were retired by the end of the fourth quarter of fiscal 2022. We have repurchased a total of 1,951,934 shares for $110.1 million, or an average price paid per share of $56.42, during fiscal year 2022.
The following table contains information regarding our repurchases of our common stock that is registered pursuant to Section 12 of the Securities Exchange Act of 1934 during the fourth quarter of fiscal 2022:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs ($M) (b) | ||||||||||||
October 2, 2022 through October 29, 2022 | — | $ | — | — | $ | 149.7 | ||||||||||
October 30, 2022 through November 26, 2022 | — | $ | — | — | $ | 149.7 | ||||||||||
November 27, 2022 through December 31, 2022 | 288,652 | $ | 69.27 | 288,652 | $ | 129.7 | ||||||||||
Total | 288,652 | $ | 69.27 | 288,652 | $ | 129.7 | ||||||||||
| (a) | All repurchases during the quarter were open-market transactions funded from available working capital made under the authorization from our Board of Directors to purchase up to $150.0 million of our common stock announced August 8, 2022 | |
| (b) | As of December 31, 2022 this amount consisted of the remaining portion of the $150.0 million program authorized through the end of December 2023 that was announced August 8, 2022. |
The following graph shows the five-year comparison of cumulative stockholder return on our common stock, the Standard and Poor's (“S&P”) 500 Index and the Philadelphia Semiconductor Index (“PHLX”) from December 20122017 through December 2017.2022. Cumulative stockholder return assumes $100 invested at the beginning of the period in our common stock, the S&P and PHLX. Historical stock price performance is not necessarily indicative of future stock price performance.
Lattice Cumulative Stockholder Return
| Year Ended * | |||||||||||||||||||
| STATEMENT OF OPERATIONS: | December 30, 2017 | December 31, 2016 | January 2, 2016 ** | January 3, 2015 | December 28, 2013 | ||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||
| Revenue: | |||||||||||||||||||
| Product | $ | 356,502 | $ | 390,704 | $ | 369,200 | $ | 366,127 | $ | 332,525 | |||||||||
| Licensing and services | 29,459 | 36,350 | 36,766 | — | — | ||||||||||||||
| Total Revenue | 385,961 | 427,054 | 405,966 | 366,127 | 332,525 | ||||||||||||||
| Costs and expenses: | |||||||||||||||||||
| Cost of product revenue | 164,657 | 179,983 | 184,914 | 159,940 | 154,281 | ||||||||||||||
| Cost of licensing and services revenue | 4,725 | 637 | 1,143 | — | — | ||||||||||||||
| Research and development | 103,357 | 117,518 | 136,868 | 88,079 | 80,966 | ||||||||||||||
| Selling, general, and administrative | 90,718 | 98,602 | 97,349 | 73,527 | 67,144 | ||||||||||||||
| Amortization of acquired intangible assets | 31,340 | 33,575 | 29,580 | 2,948 | 2,960 | ||||||||||||||
| Restructuring charges | 7,196 | 9,267 | 19,239 | 17 | 388 | ||||||||||||||
| Acquisition related charges | 3,781 | 6,305 | 22,450 | — | — | ||||||||||||||
| Impairment of goodwill and acquired intangible assets | 32,431 | 7,866 | 21,655 | — | — | ||||||||||||||
| Gain on sale of building | (4,624 | ) | — | — | — | — | |||||||||||||
| Total costs and expenses | 433,581 | 453,753 | 513,198 | 324,511 | 305,739 | ||||||||||||||
| (Loss) Income from operations | (47,620 | ) | (26,699 | ) | (107,232 | ) | 41,616 | 26,786 | |||||||||||
| Interest expense | (18,807 | ) | (20,327 | ) | (18,389 | ) | (172 | ) | (152 | ) | |||||||||
| Other (expense) income, net *** | (3,286 | ) | 2,844 | (1,072 | ) | 1,497 | (148 | ) | |||||||||||
| (Loss) income before income taxes | (69,713 | ) | (44,182 | ) | (126,693 | ) | 42,941 | 26,486 | |||||||||||
| Income tax expense (benefit) | 849 | 9,917 | 32,540 | (5,639 | ) | 4,165 | |||||||||||||
| Net (loss) income | $ | (70,562 | ) | $ | (54,099 | ) | $ | (159,233 | ) | $ | 48,580 | $ | 22,321 | ||||||
| Net (loss) income per share: | |||||||||||||||||||
| Basic | $ | (0.58 | ) | $ | (0.45 | ) | $ | (1.36 | ) | $ | 0.41 | $ | 0.19 | ||||||
| Diluted | $ | (0.58 | ) | $ | (0.45 | ) | $ | (1.36 | ) | $ | 0.40 | $ | 0.19 | ||||||
| Shares used in per share calculations: | |||||||||||||||||||
| Basic | 122,677 | 119,994 | 117,387 | 117,708 | 115,701 | ||||||||||||||
| Diluted | 122,677 | 119,994 | 117,387 | 120,245 | 117,081 | ||||||||||||||
| BALANCE SHEET: | December 30, 2017 | December 31, 2016 | January 2, 2016 | January 3, 2015 | December 28, 2013 | ||||||||||||||
| (In thousands) | |||||||||||||||||||
| Cash, cash equivalents, and short-term marketable securities | $ | 111,797 | $ | 116,860 | $ | 102,574 | $ | 254,844 | $ | 215,815 | |||||||||
| Total assets | $ | 635,961 | $ | 766,883 | $ | 785,920 | $ | 510,530 | $ | 447,876 | |||||||||
| Long term liabilities | $ | 334,621 | $ | 338,903 | $ | 369,223 | $ | 8,809 | $ | 3,588 | |||||||||
| Total liabilities | $ | 418,268 | $ | 496,453 | $ | 480,400 | $ | 69,555 | $ | 62,196 | |||||||||
| Total stockholders' equity | $ | 217,693 | $ | 270,430 | $ | 305,520 | $ | 440,975 | $ | 385,680 | |||||||||
| * The year ended January 3, 2015 was a 53-week year as compared to the other years presented, which were based on our standard 52-week year. | |||||||||||||||||||
| ** Our results for the year ended January 2, 2016 include the results associated with the acquisition of Silicon Image for the approximately 10-month period from | |||||||||||||||||||
March 11, 2015 through January 2, 2016. Results presented for periods prior to fiscal 2015 are those historically reported for Lattice only. | |||||||||||||||||||
| *** Equity in net loss of an unconsolidated affiliate previously presented separately is now included in Other (expense) income, net for all periods presented. | |||||||||||||||||||
| (see "Reclassifications" in Note 1 - Nature of Operations and Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8). | |||||||||||||||||||
Overview
Lattice Semiconductor Corporation and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develops semiconductordevelop technologies that we monetize through differentiated programmable logic semiconductor products, silicon-enabling 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 smart connectivity solutions, providing intellectual property ("IP")the growing communications, computing, industrial, automotive, and low-power, small form-factor devices that enable globalconsumer markets. Our technology, long-standing relationships, and commitment to world-class support lets our customers to quickly and easily develop innovative,unleash their innovation to create a smart, secure, and connected products.world.
Lattice has focused its strategy on delivering programmable logic products and related solutions based on low power, small size, and 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 theirwith IP licensing and various other services. Our product development activities include new proprietary products, advanced packaging, existing product enhancements, software development tools, soft IP, and system solutions for high-growth applications such as Edge AI, 5G infrastructure, platform security, and factory automation.
This discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes included in Part II, Item 8. "Financial Statements and Supplementary Data" of this report. Discussions of results for prior periods (fiscal 2021 compared to fiscal 2020) are incorporated by reference from our Annual Report on Form 10-K for the year ended January 1, 2022.
Impact of COVID-19 and Global Economic Environment on our Business
The COVID-19 pandemic, increased financial market faster than their competitors. Our broad end-market exposure extends from mobile devicesvolatility, inflationary pressure, rising interest rates, recessionary concerns, and consumer electronicsgeopolitical tension continue to industrialimpact business globally and automotive equipment, communicationsmay impact our operations by causing disruption to our labor markets and computing infrastructure, and licensing.
Critical Accounting Policies and Use of Estimates
Critical accounting policies are those that are both most important to the portrayal of a company's financial condition and results of operations, and that require management's most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments affecting the amounts reported in our consolidated financial statements and the accompanying notes. We base our estimates and judgments on historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when made, and because of the uncertainty inherent in these matters, actual results may differ materially from these estimates under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis.
We believe the following accounting policies and the related estimates are critical in the portrayal of our financial condition and results of operations, and require management's most difficult, subjective, or complex judgments. See "NoteNote 1 - Nature of Operations and Significant Accounting Policies" underPolicies to our Consolidated Financial Statements in Part II, Item 8 of this report for further information on the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Revenue Recognitionfrom Contracts with Customers
We recognize revenue upon satisfaction of performance obligations when control of promised goods or services has been transferred to our customers. We measure revenue based on the amount of consideration we expect to be entitled to in exchange for products or services. For revenue recognized on both sales to distributors and related to HDMI and other royalties, the amount of consideration we expect to be entitled to receive is based on estimates that require assumptions and judgments relating to trends in recent and historical activity. See Note 1 - Basis of Presentation and Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 of this report for further information on our recognition of revenue. Sales to most distributors are made under terms allowing certain price adjustments upon sale to their end customers and limited rights of return of our products held in their inventory. The revenue recognized based on estimated price adjustments and stock rotation reserves may be materially different from the actual consideration received if the actual distributor price adjustments and stock rotation returns differ significantly from the historical trends used in the estimates.
Inventories and Cost of Revenue
Inventories are stated at the lower of actual cost (determined using the first-in, first-out method) or net realizable value. We review and set standard costs quarterly to approximate current actual manufacturing costs. Our manufacturing overhead standards for product costs are calculated assuming full absorption of actual spending over actual costs. The valuation of inventory requires us to estimate excess or obsolete inventory. Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on specific facts and circumstances. In determining provisions for excess or obsolete products, we consider assumptions such as changes in business and economic conditions, projected customer demand for our products, and changes in technology or customer requirements. The creation of such provisions results in a write-down of inventory to net realizable value and a charge to Cost of revenue. If in any period we anticipate a change in assumptions such as future market or economic conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in Cost of revenue, resulting in a negative impact to our gross margin in that period. If in any period we are able to sell inventories that had been written down to a level below the ultimate realized selling price in a previous period, related revenue would be recorded with a lower or no offsetting charge to Cost of revenue resulting in a net benefit to our gross margin in that period.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting, under which we allocate the purchase price paid for a company to identifiable assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Goodwill is measured as the excess of purchase price over the fair value of identifiable assets acquired and liabilities assumed. Determining the fair value of assets acquired and liabilities assumed requires management to make assumptions, estimates, and judgments that are based on all available information, including comparable market data and information obtained from our management and the management of the acquired companies. These judgments affect the amount of consideration paid that is allocable to identified tangible and intangible assets acquired and liabilities assumed in the business combination. The estimation of the fair values of the intangible assets requires significant judgment and the use of valuation techniques including primarily the income approach. Consideration is given to all relevant factors that might affect the fair value such as estimates of future revenues and costs, present value factors, and the estimated useful lives of intangible assets.
Accounting for Income Taxes
We are required to estimate our provision for income taxes and amounts ultimately payable or recoverable in numerous tax jurisdictions around the world. These estimates involve significant judgment and interpretations of regulations and are inherently complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of the applicable year. Deferred Incometax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse.
Valuation allowances are provided to reduce deferred tax assets to an amount that in management’s judgment is more-likely-than-not to be recoverable against future taxable income. The determination of a valuation allowance and when it should be released requires complex judgment. In assessing the ability to realize deferred tax assets, we regularly evaluate both positive and negative evidence that may exist and consider whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
As part of our regular financial review process, we also assess the likelihood that our tax reporting positions will ultimately be sustained on examination by the taxing authorities, based on the technical merits of the position. To the extent it is determined it is more likely than not (a likelihood of more than 50 percent) that some portion or all of a tax reporting position will ultimately not be recognized and sustained, a provision for unrecognized tax benefit is provided by either reducing the applicable deferred tax asset or accruing an income tax liability. Our judgment regarding the sustainability of our tax reporting positions may change in the future due to changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to the related deferred tax assets or accrued income tax liabilities and an accompanying reduction or increase in income tax expense which may result in a corresponding increase or decrease in net income in the period when such determinations are made. We recognize the tax impact of including certain foreign earnings in U.S. taxable income as a period cost.
Results of Operations
Key elements of our Consolidated Statements of Operations, including as a percentage of revenue, are presented in the following table:
Year Ended * | ||||||||||||||||||||||||
December 31, | January 1, | January 2, | ||||||||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | |||||||||||||||||||||
Revenue | $ | 660,356 | 100.0 | % | $ | 515,327 | 100.0 | % | $ | 408,120 | 100.0 | % | ||||||||||||
Gross margin | 452,050 | 68.5 | 321,675 | 62.4 | 245,306 | 60.1 | ||||||||||||||||||
Research and development | 135,767 | 20.6 | 110,518 | 21.4 | 89,223 | 21.9 | ||||||||||||||||||
Selling, general and, administrative | 122,076 | 18.5 | 105,617 | 20.5 | 95,331 | 23.4 | ||||||||||||||||||
Amortization of acquired intangible assets | 3,778 | 0.6 | 2,613 | 0.5 | 4,449 | 1.1 | ||||||||||||||||||
Restructuring charges | 2,551 | 0.4 | 940 | 0.2 | 3,937 | 1.0 | ||||||||||||||||||
Acquisition related charges | 511 | 0.1 | 1,171 | 0.2 | — | — | ||||||||||||||||||
Income from operations | $ | 187,367 | 28.4 | % | $ | 100,816 | 19.6 | % | $ | 52,366 | 12.8 | % | ||||||||||||
* The year ended January 2, 2021 was a 53-week year as compared to the other years presented, which were based on our standard 52-week year.
Revenue
Year Ended | ||||||||||||||||||||
December 31, | January 1, | January 2, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
Revenue | $ | 660,356 | $ | 515,327 | $ | 408,120 | 28.1 | % | 26.3 | % | ||||||||||
Revenue increased $145.0 million, or 28.1%, in fiscal 2022 compared to fiscal 2021, primarily from our products used in data center servers, client computing solutions, 5G wireless infrastructure, industrial automation, and robotics applications.
Revenue by End Market
We sell our products though several channels:globally to a broad base of customers in three primary end markets groups: Communications and Computing, Industrial and Automotive, and Consumer. We also provide IP licensing and services to these end markets.
Within these end markets, there are multiple segment drivers, including:
• | Communications and Computing: datacenter servers and networking equipment, client computing platforms, and 5G communications infrastructure deployments, | |
• | Industrial and Automotive: factory automation, robotics, automotive electronics, and industrial IoT, | |
• | Consumer: smart home, prosumer, and other applications. |
We also generate revenue from the licensing of our 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 customers. With a diverse base of customers who may manufacture end products spanning multiple end markets, the assignment of revenue to a specific end market requires the use of judgment. We also recognize certain revenue for which end customers and end markets are not yet known. We assign this revenue first to a specific end market using historical and anticipated usage of the specific products, if possible, and allocate the remainder to the end markets based on either historical usage for each product family or industry application data for certain product types.
The following are examples of end market applications for the fiscal years presented:
Communications and Computing | Industrial and Automotive | Consumer | Licensing and Services |
Wireless | Security and Surveillance | Cameras | IP Royalties |
Wireline | Machine Vision | Displays | Adopter Fees |
Data Backhaul | Industrial Automation | Wearables | IP Licenses |
Server Computing | Robotics | Televisions | Patent Sales |
Client Computing | Automotive | Home Theater | |
Data Storage | Drones |
The composition of our revenue by end market is presented in the following table:
Year Ended | ||||||||||||||||||||||||||||||||
December 31, | January 1, | January 2, | % Change in | |||||||||||||||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||
Communications and Computing | $ | 274,754 | 41.6 | % | $ | 217,960 | 42.3 | % | $ | 174,656 | 42.8 | % | 26.1 | % | 24.8 | % | ||||||||||||||||
Industrial and Automotive | 319,399 | 48.4 | 226,240 | 43.9 | 168,323 | 41.2 | 41.2 | 34.4 | ||||||||||||||||||||||||
Consumer | 49,064 | 7.4 | 50,652 | 9.8 | 45,523 | 11.2 | (3.1 | ) | 11.3 | |||||||||||||||||||||||
Licensing and Services | 17,139 | 2.6 | 20,475 | 4.0 | 19,618 | 4.8 | (16.3 | ) | 4.4 | |||||||||||||||||||||||
Total revenue | $ | 660,356 | 100.0 | % | $ | 515,327 | 100.0 | % | $ | 408,120 | 100.0 | % | 28.1 | % | 26.3 | % | ||||||||||||||||
Revenue from the Communications and Computing end market increased by 26% in fiscal 2022 compared to fiscal 2021 primarily due to content expansion in datacenter servers, new greenfield client computing opportunities, 5G infrastructure, and datacenter networking.
Revenue from the Industrial and Automotive end market increased by 41% in fiscal 2022 compared to fiscal 2021, primarily due to strong customer adoption in a broad range of applications, including industrial automation and robotics. Growth in Automotive was driven by the adoption of new designs in ADAS and infotainment applications.
Revenue from the Consumer end market decreased by 3% in fiscal 2022 compared to fiscal 2021 primarily due to macroeconomic weakness in Consumer in the current year.
Revenue from the Licensing and Services end market decreased by 16% in fiscal 2022 compared to fiscal 2021 primarily due to decreased licensing and IP royalties.
Revenue by Geography
We assign revenue to geographies based on ship-to location of the customer.
The composition of our revenue by geography is presented in the following table:
Year Ended | ||||||||||||||||||||||||||||||||
December 31, | January 1, | January 2, | % Change in | |||||||||||||||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||
Asia | $ | 464,904 | 70.5 | % | $ | 384,568 | 74.6 | % | $ | 305,183 | 74.8 | % | 20.9 | % | 26.0 | % | ||||||||||||||||
Americas | 100,260 | 15.2 | 80,870 | 15.7 | 62,137 | 15.2 | 24.0 | 30.1 | ||||||||||||||||||||||||
Europe | 95,192 | 14.3 | 49,889 | 9.7 | 40,800 | 10.0 | 90.8 | 22.3 | ||||||||||||||||||||||||
Total revenue | $ | 660,356 | 100.0 | % | $ | 515,327 | 100.0 | % | $ | 408,120 | 100.0 | % | 28.1 | % | 26.3 | % | ||||||||||||||||
Revenue from Customers
We sell our products to independent distributors and directly to customers. Distributors have historically accounted for a significant portion of our total revenue, and the two distributor groups noted below individually accounted for more than 10% of our total revenue in the periods covered by this report.
The composition of our revenue by customer is presented in the following table:
% of Total Revenue | ||||||||||||
Year Ended | ||||||||||||
December 31, | January 1, | January 2, | ||||||||||
2022 | 2022 | 2021 | ||||||||||
Weikeng Group | 30.3 | % | 37.2 | % | 34.8 | % | ||||||
Arrow Electronics Inc. | 28.5 | 27.1 | 25.1 | |||||||||
Other distributors | 30.7 | 23.0 | 23.2 | |||||||||
All distributors | 89.5 | 87.3 | 83.1 | % | ||||||||
Direct customers | 7.9 | 8.7 | 12.1 | |||||||||
Licensing and services revenue | 2.6 | 4.0 | 4.8 | |||||||||
Total revenue | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Gross margin
The composition of our gross margin, including as a percentage of revenue, is presented in the following table:
Year Ended | ||||||||||||
December 31, | January 1, | January 2, | ||||||||||
(In thousands) | 2022 | 2022 | 2021 | |||||||||
Gross margin | $ | 452,050 | $ | 321,675 | $ | 245,306 | ||||||
Gross margin percentage | 68.5 | % | 62.4 | % | 60.1 | % | ||||||
Product gross margin % | 67.6 | % | 60.9 | % | 58.1 | % | ||||||
Licensing and services gross margin % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Gross margin percentage increased 610 basis points from fiscal 2021 to fiscal 2022. Improved margins were driven by benefits from our gross margin expansion strategy.
Because of its higher margin, the licensing and services portion of our overall revenue can have a disproportionate impact on Gross margin.
Operating Expenses
Research and Development Expense
The composition of our Research and development expense, including as a percentage of revenue, is presented in the following table:
Year Ended | ||||||||||||||||||||
December 31, | January 1, | January 2, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
Research and development | $ | 135,767 | $ | 110,518 | $ | 89,223 | 22.8 | % | 23.9 | % | ||||||||||
Percentage of revenue | 20.6 | % | 21.4 | % | 21.9 | % | ||||||||||||||
Research and development expense includes costs for compensation and benefits, stock compensation, engineering wafers, depreciation, licenses, and outside engineering services. These expenditures are for the design of new products, IP cores, processes, packaging, and software solutions.
The increase in Research and development expense for fiscal 2022 compared to fiscal 2021 was due primarily to increased headcount-related costs as we continue to invest in our long-term product roadmap.
We believe that investing in research and development is important to delivering innovative products to our customers and, therefore, we expect to continue to increase our investment in research and development.
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:
Year Ended | ||||||||||||||||||||
December 31, | January 1, | January 2, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
Selling, general, and administrative | $ | 122,076 | $ | 105,617 | $ | 95,331 | 15.6 | % | 10.8 | % | ||||||||||
Percentage of revenue | 18.5 | % | 20.5 | % | 23.4 | % | ||||||||||||||
Selling, general, and administrative expense includes costs for compensation and benefits related to selling, general, and administrative employees, commissions, depreciation, professional and outside services, trade show, and travel expenses.
The increase in Selling, general, and administrative expense for fiscal 2022 compared to fiscal 2021 was due primarily to increased headcount-related costs to support the growth of our business, and to increased legal expenses primarily related to the defense of claims outside the ordinary course of business.
Amortization of Acquired Intangible Assets
The composition of our Amortization of acquired intangible assets, including as a percentage of revenue, is presented in the following table:
Year Ended | ||||||||||||||||||||
December 31, | January 1, | January 2, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
Amortization of acquired intangible assets | $ | 3,778 | $ | 2,613 | $ | 4,449 | 44.6 | % | (41.3 | )% | ||||||||||
Percentage of revenue | 0.6 | % | 0.5 | % | 1.1 | % | ||||||||||||||
The increase in Amortization of acquired intangible assets for fiscal 2022 compared to fiscal 2021 was due to the amortization expense for new intangible assets added in the fourth quarter of fiscal 2021 through the acquisition of Mirametrix, Inc., partially offset by end customers, throughof the amortization period during the first quarter of fiscal 2022 for acquired intangible assets from previous acquisitions.
Restructuring Charges
The composition of our Restructuring charges, including as a networkpercentage of independent manufacturers' representatives,revenue, is presented in the following table:
Year Ended | ||||||||||||||||||||
December 31, | January 1, | January 2, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
Restructuring charges | $ | 2,551 | $ | 940 | $ | 3,937 | 171.4 | % | (76.1 | )% | ||||||||||
Percentage of revenue | 0.4 | % | 0.2 | % | 1.0 | % | ||||||||||||||
Restructuring charges are comprised of expenses resulting from reductions in our worldwide workforce, consolidation of our facilities, removal of fixed assets from service, and indirectly throughcancellation of software contracts and engineering tools. Details of our restructuring plans and expenses incurred under them are discussed in Note 9 - Restructuring to our Consolidated Financial Statements in Part II, Item 8 of this report.
Restructuring charges increased in fiscal 2022 compared to fiscal 2021 due to additional lease right-of-use asset impairment charges for our partially vacated facility in San Jose, California and contract termination fees in the current year under the internal restructuring plan that our management approved and executed in April 2019, as compared to minimal activity in the prior year.
Acquisition Related Charges
The composition of our Acquisition related charges, including as a networkpercentage of independent sell-inrevenue, is presented in the following table:
Year Ended | ||||||||||||||||||||
December 31, | January 1, | January 2, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
Acquisition related charges | $ | 511 | $ | 1,171 | $ | — | (56.4 | )% | 100+% | |||||||||||
Percentage of revenue | 0.1 | % | 0.2 | % | — | % | ||||||||||||||
Acquisition related charges include legal and sell-through distributors. Distributors provide periodic data regarding the product, price, quantity,professional fees directly related to acquisitions. For fiscal 2022 and end customer when products are resold,2021, Acquisition related charges were entirely attributable to our acquisition of Mirametrix in November 2021 and were comprised primarily of professional services including legal and accounting fees, as well as closing costs.
Interest Expense
The composition of our Interest expense, including as a percentage of revenue, is presented in the quantitiesfollowing table:
Year Ended | ||||||||||||||||||||
December 31, | January 1, | January 2, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
Interest expense | $ | (4,146 | ) | $ | (2,738 | ) | $ | (3,702 | ) | 51.4 | % | (26.0 | )% | |||||||
Percentage of revenue | (0.6 | )% | (0.5 | )% | (0.9 | )% | ||||||||||||||
Interest expense is primarily related to our long-term debt. 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 increase in Interest expense for fiscal 2022 compared to fiscal 2021 was driven by the increase in the applicable base rate for our long-term debt, the adjusted Term Secured Overnight Financing Rate ("SOFR") from September 1, 2022, and the London Interbank Offered Rate ("LIBOR") prior to that date.
Other (Expense) Income, net
The composition of our Other (expense) income, net, including as a percentage of revenue, is presented in the following table:
Year Ended | ||||||||||||||||||||
December 31, | January 1, | January 2, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
Other (expense) income, net | $ | (1,109 | ) | $ | (452 | ) | $ | (208 | ) | 145.4 | % | 117.3 | % | |||||||
Percentage of revenue | (0.2 | )% | (0.1 | )% | (0.1 | )% | ||||||||||||||
For fiscal 2022 compared to fiscal 2021, the increase in Other (expense) income, net was primarily due to the $0.7 million loss on refinancing of our long-term debt during the current year.
Income Taxes
The composition of our Income tax expense is presented in the following table:
Year Ended | ||||||||||||||||||||
December 31, | January 1, | January 2, | % Change in | |||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||
Income tax expense (benefit) | $ | 3,230 | $ | 1,704 | $ | 1,064 | 89.6 | % | 60.2 | % | ||||||||||
Our Income tax expense (benefit) 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 increase in expense in fiscal 2022 as compared to fiscal 2021 is primarily due to increased worldwide income and changes in uncertain tax positions.
We updated our evaluation of the valuation allowance position in the United States through December 31, 2022 and concluded that we should continue to maintain a full valuation allowance against the net federal and state deferred tax assets. In making this evaluation, we considered the uncertain stability of the current economic and operating environment and estimates about our ability to generate taxable income in future periods within the United States. We continue to evaluate future projected financial performance to determine whether such performance is sufficient evidence to support a reduction in or reversal of the valuation allowance. We will continue to evaluate both positive and negative evidence in future periods to determine if we will realize the deferred tax assets. The amount of the deferred tax asset considered realizable could be adjusted if sufficient positive evidence exists. Details of our deferred tax assets and valuation allowance are discussed in Note 13 - Income Taxes to our Consolidated Financial Statements in Part II, Item 8 of this report.
Liquidity and Capital Resources
The following sections discuss material changes in our financial condition from the end of fiscal 2021, including the effects of changes in our Consolidated Balance Sheets, and the effects of our credit arrangements and contractual obligations on our liquidity and capital resources. There continues to be uncertainty around the extent and duration of the disruption to our business, including from the effects of the ongoing COVID-19 pandemic, market volatility, and inflationary pressures, which may impact our liquidity and working capital needs in future periods.
We have historically financed our operating and capital resource requirements through cash flows from operations, and from the issuance of long-term debt to fund acquisitions. Cash provided by or used in operating activities will fluctuate from period to period due to fluctuations in operating results, the timing and collection of accounts receivable, and required inventory levels, among other things. We believe that our financial resources, including current cash and cash equivalents, cash flow from operating activities, and our credit facilities, will be sufficient to meet our liquidity and working capital needs through at least the next 12 months. On September 1, 2022, we entered into our 2022 Credit Agreement, as described in Note 8 - Long-Term Debt to our Consolidated Financial Statements in Part II, Item 8 of this report. As of December 31, 2022, we did not have significant long-term commitments for capital expenditures. For further information on our cash commitments for operating lease liabilities, see Note 10 - Leases to our Consolidated Financial Statements in Part II, Item 8 of this report.
In the future, we may continue to consider acquisition opportunities to further extend our product or technology portfolios and further expand our product offerings. In connection with funding capital expenditures, acquisitions, securing additional wafer supply, increasing our working capital, or other operations, we may seek to obtain equity or additional debt financing. We may also seek to obtain equity or additional debt financing if we experience downturns or cyclical fluctuations in our business that are more severe or longer than we anticipated when determining our current working capital needs.
Liquidity
Cash and cash equivalents
(In thousands) | December 31, 2022 | January 1, 2022 | $ Change | % Change | ||||||||||||
Cash and cash equivalents | $ | 145,722 | $ | 131,570 | $ | 14,152 | 10.8 | % | ||||||||
As of December 31, 2022, we had Cash and cash equivalents of $145.7 million, of which approximately $30.9 million in Cash and cash equivalents was held by our foreign subsidiaries. We manage our global cash requirements considering, among other things, (i) available funds among our subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. The repatriation of non-US earnings may require us to withhold and pay foreign income tax on dividends. This should not result in our recording significant additional tax expense as we have accrued expense based on current withholding rates. As of December 31, 2022, we could access all cash held by our foreign subsidiaries without incurring significant additional expense.
The net increase in Cash and cash equivalents of $14.2 million between January 1, 2022 and December 31, 2022 was primarily driven by cash flows from the following activities:
Operating activities — Cash provided by operating activities results from net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was $238.8 million in fiscal 2022 compared to $167.7 million in fiscal 2021. This increase of $71.1 million was primarily driven by an increase of $98.9 million provided by improved operating performance, partially offset by $27.8 million of changes in working capital, primarily from cash used by inventories.
Investing activities — Investing cash flows consist primarily of transactions related to capital expenditures and payments for software and intellectual property licenses, and a business acquisition in fiscal 2021. Net cash used by investing activities in fiscal 2022 was $34.9 million compared to $89.8 million in fiscal 2021. This $54.9 million decrease was primarily a result of the acquisition of Mirametrix in the prior year, which used cash, net of cash acquired, of $68.1 million. Total cash used for capital expenditures and payments for software and intellectual property licenses increased $13.2 million to $34.9 million in fiscal 2022 from $21.7 million in fiscal 2021.
Financing activities — Financing cash flows consist primarily of repurchases of common stock, tax payments related to the net share settlement of restricted stock units, proceeds from the exercise of options to acquire common stock, and activity on our long-term debt. Net cash used by financing activities in fiscal 2022 was $188.1 million compared to $128.6 million in fiscal 2021. This $59.5 million increase was due to the following mix of activities. During fiscal 2022, we repurchased approximately 2.0 million shares of common stock for $110.1 million compared to repurchases in fiscal 2021 of approximately 1.3 million shares of common stock for $70.1 million. Payments for tax withholdings on vesting of RSUs partially offset by employee exercises of stock options used net cash flows of $47.8 million in fiscal 2022, an increase of approximately $2.4 million from the net $45.4 million used in fiscal 2021. In September 2022, we entered into our 2022 Credit Agreement and drew down an initial $150.0 million revolving loan at closing, which we used to pay off the $150.0 million outstanding balance on our previous term and revolving loans. In connection with the 2022 Credit Agreement, we paid $1.4 million in debt issuance costs. During fiscal 2022, we made a discretionary payment of $20.0 million on our current revolving loans, and we paid required quarterly installments on our previous long-term debt totaling $8.8 million. During fiscal 2021, we paid required quarterly installments on our long-term debt totaling $13.1 million.
Accounts receivable, net
(In thousands) | December 31, 2022 | January 1, 2022 | $ Change | % Change | ||||||||||||
Accounts receivable, net | $ | 94,018 | $ | 79,859 | $ | 14,159 | 17.7 | % | ||||||||
Days sales outstanding - Overall | 49 | 51 | (2 | ) | ||||||||||||
Accounts receivable, net as of December 31, 2022 increased by approximately $14.2 million, or approximately 18%, compared to January 1, 2022. This resulted primarily from higher revenue shipments in the fourth quarter of fiscal 2022 compared to the fourth quarter of fiscal 2021. We calculate Days sales outstanding on the basis of a 365-day year as Accounts receivable, net at the end of the quarter divided by sales during the quarter annualized and then multiplied by 365.
Inventories
(In thousands) | December 31, 2022 | January 1, 2022 | $ Change | % Change | ||||||||||||
Inventories | $ | 110,375 | $ | 67,594 | $ | 42,781 | 63.3 | % | ||||||||
Days of inventory on hand | 187 | 122 | 65 | |||||||||||||
Inventories as of December 31, 2022 increased $42.8 million, or approximately 63%, compared to January 1, 2022 primarily to meet the increased demands of our customers and for new product ramps.
The Days of inventory on hand ratio compares the inventory balance at the end of a quarter to the cost of sales in that quarter. We calculate Days of inventory on hand on the basis of a 365-day year as Inventories at the end of the quarter divided by Cost of sales during the quarter annualized and then multiplied by 365.
Credit Arrangements
On September 1, 2022, we entered into our 2022 Credit Agreement. The details of this arrangement are described in Note 8 - Long-Term Debt to our Consolidated Financial Statements in Part II, Item 8 of this report. As of December 31, 2022, we had no used or unused credit arrangements beyond the secured revolving loan facility described in the 2022 Credit Agreement.
Share Repurchase Program
See "Issuer Purchases of Equity Securities" under Part II, Item 5 of this Annual Report on Form 10-K for more information about the share repurchase program.
New Accounting Pronouncements
The information contained under the heading "New Accounting Pronouncements" in Note 1 - Nature of Operations and Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 of this report is incorporated by reference into this Part II, Item 7.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We assess these risks on a regular basis and have established policies that are designed to protect against the adverse effects of these and other potential exposures.
Foreign Currency Exchange Rate Risk
While our revenues and the majority of our expenses are denominated in U.S. dollars, our financial position and results of operations are subject to foreign currency exchange rate risk as a result of having various international subsidiary and branch operations. Historically, exposure to foreign currency exchange rate risk has not had a material impact on our results from operations. At times in the past, we have entered into foreign currency forward exchange contracts in relation to certain activities, which mitigated the foreign currency exchange rate exposure from an economic perspective, but these were not designated as "effective" hedges under U.S. GAAP.
Interest Rate Risk
We are exposed to interest rate risk related to our indebtedness. At December 31, 2022, we had $130.0 million outstanding under our 2022 Credit Agreement. A hypothetical increase in the one-month SOFR by 1% (100 basis points) would increase our future interest expense by approximately $0.3 million per quarter.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements: | Page | |
Reports of Independent Registered Public Accounting Firm (Ernst & Young LLP) | (PCAOB ID: 42) |
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended | ||||||||||||
December 31, | January 1, | January 2, | ||||||||||
(In thousands, except per share data) | 2022 | 2022 | 2021 | |||||||||
Revenue | $ | 660,356 | $ | 515,327 | $ | 408,120 | ||||||
Cost of revenue | 208,306 | 193,652 | 162,814 | |||||||||
Gross margin | 452,050 | 321,675 | 245,306 | |||||||||
Operating expenses: | ||||||||||||
Research and development | 135,767 | 110,518 | 89,223 | |||||||||
Selling, general, and administrative | 122,076 | 105,617 | 95,331 | |||||||||
Amortization of acquired intangible assets | 3,778 | 2,613 | 4,449 | |||||||||
Restructuring charges | 2,551 | 940 | 3,937 | |||||||||
Acquisition related charges | 511 | 1,171 | — | |||||||||
Total operating expenses | 264,683 | 220,859 | 192,940 | |||||||||
Income from operations | 187,367 | 100,816 | 52,366 | |||||||||
Interest expense | (4,146 | ) | (2,738 | ) | (3,702 | ) | ||||||
Other (expense) income, net | (1,109 | ) | (452 | ) | (208 | ) | ||||||
Income before income taxes | 182,112 | 97,626 | 48,456 | |||||||||
Income tax expense (benefit) | 3,230 | 1,704 | 1,064 | |||||||||
Net income | $ | 178,882 | $ | 95,922 | $ | 47,392 | ||||||
Net income per share: | ||||||||||||
Basic | $ | 1.30 | $ | 0.70 | $ | 0.35 | ||||||
Diluted | $ | 1.27 | $ | 0.67 | $ | 0.34 | ||||||
Shares used in per share calculations: | ||||||||||||
Basic | 137,321 | 136,619 | 135,220 | |||||||||
Diluted | 140,667 | 142,143 | 141,276 | |||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended | ||||||||||||
December 31, | January 1, | January 2, | ||||||||||
(In thousands) | 2022 | 2022 | 2021 | |||||||||
Net income | $ | 178,882 | $ | 95,922 | $ | 47,392 | ||||||
Other comprehensive income (loss): | ||||||||||||
Translation adjustment | (1,554 | ) | (75 | ) | 1,533 | |||||||
Change in actuarial valuation of defined benefit pension, net of tax | 591 | 372 | (678 | ) | ||||||||
Comprehensive income | $ | 177,919 | $ | 96,219 | $ | 48,247 | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, | January 1, | |||||||
(In thousands, except share and par value data) | 2022 | 2022 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 145,722 | $ | 131,570 | ||||
Accounts receivable, net of allowance for credit losses | 94,018 | 79,859 | ||||||
Inventories, net | 110,375 | 67,594 | ||||||
Prepaid expenses and other current assets | 29,052 | 22,328 | ||||||
Total current assets | 379,167 | 301,351 | ||||||
Property and equipment, net | 47,614 | 38,094 | ||||||
Operating lease right-of-use assets | 17,590 | 23,818 | ||||||
Intangible assets, net | 25,070 | 29,782 | ||||||
Goodwill | 315,358 | 315,358 | ||||||
Other long-term assets | 13,914 | 18,091 | ||||||
Total assets | $ | 798,713 | $ | 726,494 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 42,036 | $ | 34,597 | ||||
Accrued liabilities | 48,467 | 26,444 | ||||||
Accrued payroll obligations | 36,870 | 27,967 | ||||||
Current portion of long-term debt | — | 17,173 | ||||||
Total current liabilities | 127,373 | 106,181 | ||||||
Long-term debt, net of current portion | 128,752 | 140,760 | ||||||
Long-term operating lease liabilities, net of current portion | 13,618 | 19,248 | ||||||
Other long-term liabilities | 41,807 | 48,672 | ||||||
Total liabilities | 311,550 | 314,861 | ||||||
Contingencies (Note 15) | ||||||||
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; 137,099,000 shares issued and outstanding as of December 31, 2022 and 137,239,000 shares issued and outstanding as of January 1, 2022 | 1,371 | 1,372 | ||||||
Additional paid-in capital | 599,300 | 701,688 | ||||||
Accumulated deficit | (111,094 | ) | (289,976 | ) | ||||
Accumulated other comprehensive loss | (2,414 | ) | (1,451 | ) | ||||
Total stockholders' equity | 487,163 | 411,633 | ||||||
Total liabilities and stockholders' equity | $ | 798,713 | $ | 726,494 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended | ||||||||||||
December 31, | January 1, | January 2, | ||||||||||
(In thousands) | 2022 | 2022 | 2021 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 178,882 | $ | 95,922 | $ | 47,392 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
Depreciation and amortization | 29,323 | 24,429 | 25,140 | |||||||||
Stock-based compensation expense | 55,530 | 46,475 | 40,372 | |||||||||
Amortization of right-of-use assets | 6,512 | 6,587 | 5,960 | |||||||||
Impairment of operating lease right-of-use asset | 1,149 | — | — | |||||||||
Other non-cash adjustments | 642 | (239 | ) | 144 | ||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable, net | (14,159 | ) | (12,013 | ) | 336 | |||||||
Inventories, net | (42,781 | ) | (2,995 | ) | (9,619 | ) | ||||||
Prepaid expenses and other assets | (6,276 | ) | 1,918 | (6,441 | ) | |||||||
Accounts payable | 7,439 | 7,046 | (16,820 | ) | ||||||||
Accrued liabilities | 20,101 | (2,855 | ) | 6,314 | ||||||||
Accrued payroll obligations | 8,903 | 9,692 | 4,624 | |||||||||
Operating lease liabilities, current and long-term portions | (6,459 | ) | (6,245 | ) | (5,715 | ) | ||||||
Net cash provided by (used in) operating activities | 238,806 | 167,722 | 91,687 | |||||||||
Cash flows from investing activities: | ||||||||||||
Cash paid for business acquisition, net of cash acquired | — | (68,099 | ) | — | ||||||||
Capital expenditures | (23,338 | ) | (9,835 | ) | (12,121 | ) | ||||||
Cash paid for software and intellectual property licenses | (11,594 | ) | (11,862 | ) | (8,747 | ) | ||||||
Net cash provided by (used in) investing activities | (34,932 | ) | (89,796 | ) | (20,868 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Restricted stock unit tax withholdings | (54,946 | ) | (54,191 | ) | (26,965 | ) | ||||||
Proceeds from issuance of common stock | 7,159 | 8,827 | 10,103 | |||||||||
Repurchase of common stock | (110,132 | ) | (70,124 | ) | (14,989 | ) | ||||||
Proceeds from long-term debt, net of issuance costs | 148,597 | — | 50,000 | |||||||||
Repayment of long-term debt | (178,750 | ) | (13,125 | ) | (26,250 | ) | ||||||
Net cash provided by (used in) financing activities | (188,072 | ) | (128,613 | ) | (8,101 | ) | ||||||
Effect of exchange rate change on cash | (1,650 | ) | (75 | ) | 1,533 | |||||||
Net increase (decrease) in cash and cash equivalents | 14,152 | (50,762 | ) | 64,251 | ||||||||
Beginning cash and cash equivalents | 131,570 | 182,332 | 118,081 | |||||||||
Ending cash and cash equivalents | $ | 145,722 | $ | 131,570 | $ | 182,332 | ||||||
Supplemental disclosure of cash flow information and non-cash investing and financing activities: | ||||||||||||
Interest paid | $ | 3,973 | $ | 2,313 | $ | 3,700 | ||||||
Operating lease payments | $ | 7,419 | $ | 7,639 | $ | 7,713 | ||||||
Income taxes paid, net of refunds | $ | 4,621 | $ | 3,304 | $ | 1,868 | ||||||
Accrued purchases of plant and equipment | $ | 1,357 | $ | 1,360 | $ | 975 | ||||||
Operating lease right-of-use assets obtained in exchange for lease obligations | $ | 2,134 | $ | 8,134 | $ | 2,645 | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated | ||||||||||||||||||||||||
Common Stock | Additional | Other | ||||||||||||||||||||||
($.01 par value) | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
(In thousands, except par value data) | Shares | Amount | Capital | Deficit | Income (Loss) | Total | ||||||||||||||||||
Balances, December 28, 2019 | 133,883 | $ | 1,339 | $ | 762,213 | $ | (433,290 | ) | $ | (2,603 | ) | $ | 327,659 | |||||||||||
Components of comprehensive income, net of tax: | ||||||||||||||||||||||||
Net income | — | — | — | 47,392 | — | 47,392 | ||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | 855 | 855 | ||||||||||||||||||
Total comprehensive income | 48,247 | |||||||||||||||||||||||
Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes | 2,738 | 27 | (16,889 | ) | — | — | (16,862 | ) | ||||||||||||||||
Stock-based compensation expense | — | — | 40,372 | — | — | 40,372 | ||||||||||||||||||
Repurchase of common stock | (385 | ) | (4 | ) | (14,985 | ) | — | — | (14,989 | ) | ||||||||||||||
Balances, January 2, 2021 | 136,236 | $ | 1,362 | $ | 770,711 | $ | (385,898 | ) | $ | (1,748 | ) | $ | 384,427 | |||||||||||
Components of comprehensive income, net of tax: | ||||||||||||||||||||||||
Net income | — | — | — | 95,922 | — | 95,922 | ||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | 297 | 297 | ||||||||||||||||||
Total comprehensive income | 96,219 | |||||||||||||||||||||||
Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes | 2,270 | 23 | (45,387 | ) | — | — | (45,364 | ) | ||||||||||||||||
Stock-based compensation expense | — | — | 46,475 | — | — | 46,475 | ||||||||||||||||||
Repurchase of common stock | (1,267 | ) | (13 | ) | (70,111 | ) | — | — | (70,124 | ) | ||||||||||||||
Balances, January 1, 2022 | 137,239 | $ | 1,372 | $ | 701,688 | $ | (289,976 | ) | $ | (1,451 | ) | $ | 411,633 | |||||||||||
Components of comprehensive income, net of tax: | ||||||||||||||||||||||||
Net income | — | — | — | 178,882 | — | 178,882 | ||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | (963 | ) | (963 | ) | ||||||||||||||||
Total comprehensive income | 177,919 | |||||||||||||||||||||||
Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes | 1,812 | 18 | (47,806 | ) | — | — | (47,788 | ) | ||||||||||||||||
Stock-based compensation expense | — | — | 55,530 | — | — | 55,530 | ||||||||||||||||||
Repurchase of common stock | (1,952 | ) | (19 | ) | (110,112 | ) | — | — | (110,131 | ) | ||||||||||||||
Balances, December 31, 2022 | 137,099 | $ | 1,371 | $ | 599,300 | $ | (111,094 | ) | $ | (2,414 | ) | $ | 487,163 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation and Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). They include the accounts of Lattice and its subsidiaries after the elimination of all intercompany balances and transactions.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments affecting the amounts reported in our consolidated financial statements and the accompanying notes. We base our estimates and judgments on historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when made, and because of the uncertainty inherent in these matters, the actual results that we experience may differ materially from these estimates under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis.
Certain prior year balances have been reclassified to conform to the current year’s presentation.
Fiscal Reporting Periods
We report based on a 52 or 53-week fiscal year ending on the Saturday closest to December 31. Our fiscal 2022 was a 52-week year that ended on December 31, 2022. Our fiscal 2021 was a 52-week year that ended on January 1, 2022, and our fiscal 2020 was a 53-week year that ended on January 2, 2021. All references to quarterly or annual financial results are references to the results for the relevant fiscal period.
Concentrations of Risk
Potential exposure to concentrations of risk may impact revenue, accounts receivable, and supply of wafers for our new products.
Distributors have historically accounted for a significant portion of our total revenue. Our two largest distributor groups, the Weikeng Group ("Weikeng") and Arrow Electronics, Inc. ("Arrow"), each account for more than 10% of our total revenue and our net accounts receivable. Revenue attributable to distributors as a percentage of total revenue is presented in the following table:
Year Ended | ||||||||||||
| December 31, | January 1, | January 2, | ||||||||||
| 2022 | 2022 | 2021 | ||||||||||
Weikeng Group | 30 | % | 37 | % | 35 | % | ||||||
Arrow Electronics Inc. | 28 | 27 | 25 | |||||||||
Other distributors | 31 | 23 | 23 | |||||||||
Revenue attributable to distributors | 89 | % | 87 | % | 83 | % | ||||||
At December 31, 2022 and January 1, 2022, Weikeng accounted for approximately 47% and 59%, respectively, and Arrow accounted for approximately 27% and 28%, respectively, of net accounts receivable.
Concentration of credit risk with respect to accounts receivable is mitigated by our credit and collection process including active management of collections, credit limits, routine credit evaluations for essentially all customers, and secure transactions with letters of credit or advance payments where appropriate. We regularly review our allowance for doubtful accounts and the aging of our accounts receivable.
We rely on a limited number of foundries for our wafer purchases. We seek to mitigate the concentration of supply risk by establishing, maintaining and managing multiple foundry relationships; however, certain of our products they stillare sourced from a single foundry and changing from one foundry to another can have a significant cost, or create delays in stock.production or shipments, among other factors.
Cash and Cash Equivalents
We consider all investments that are readily convertible into cash and that have original maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of highly liquid investments in time deposits or money market accounts and are carried at cost, which approximates fair value. Deposits with financial institutions at times exceed Federal Deposit Insurance Corporation insurance limits.
Foreign Exchange and Translation of Foreign Currencies
While our revenues and the majority of our expenses are denominated in U.S. dollars, we also have international subsidiaries and branch operations that conduct some transactions in currencies that differ from the functional currency of that entity. Gains or losses from foreign exchange rate fluctuations on balances denominated in currencies that differ from the functional currencies are reflected in Other expense, net.
We translate accounts denominated in foreign currencies in accordance with ASC 830, “Foreign Currency Matters,” using the current rate method under which asset and liability accounts are translated at the current rate, while stockholders' equity accounts are translated at the appropriate historical rates, and revenue and expense accounts are translated at average monthly exchange rates. Translation adjustments related to the consolidation of foreign subsidiary financial statements are reflected in Accumulated other comprehensive loss in Stockholders' equity (See our Consolidated Statements of Stockholders' Equity).
Revenue Recognition
Under the terms of ASC 606,"Revenue from Contracts with Customers", we recognize revenue when we satisfy performance obligations as evidenced by the transfer of control of our products or services to customers. For sales to original equipment manufacturers ("OEMs")distributors, we have concluded that our contracts are with the distributor, rather than with the distributor’s end customer, as we hold a contract bearing enforceable rights and sell-in distributorsobligations only with the distributor. Our revenue is generally recognized upon shipment. Reserves for sell-in stock rotations, where applicable, are estimated basedderived primarily on historical experience and provided for at the time of shipment. Revenue from sales of silicon-based products, with additional revenue from sales of silicon-enabling products. We consider customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, we consider our sell-through distributorspromise to transfer each distinct product to be the identified performance obligations. Revenue for product sales is recognized at the time of reported resale. Under both types of revenue recognition, persuasive evidence of an arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, and there are no remaining customer acceptance requirements and no remaining significant performance obligations.
Our licensingLicensing and services revenue is comprised of revenue from our intellectual property ("IP")IP core licensing activity, patent monetization activities, design services, and royalty and adopter fee revenue from our standards activities. These activities are complementary to our product sales and help us to monetize our IP and accelerate market adoption curves associated with our technology and standards.
We measure revenue based on the amount of consideration we expect to be entitled to in exchange for products or services. Variable consideration is estimated and reflected as an adjustment to the transaction price. We determine variable consideration, which consists primarily of various sales price concessions, by estimating the most likely amount of consideration we expect to receive from the customer based on an analysis of historical rebate claims over a period of time considered adequate to account for current pricing and business trends. Sales rebates earned by customers are offset against their products pursuant to terms and conditions that varyreceivable balances. Rebates earned by licensee. Revenue earned under these agreements is classified ascustomers when they do not have outstanding receivable balances are recorded within Accrued liabilities. Licensing and services revenue. Our IP licensing agreements generally include multiple elements,revenue, which may include one or more off-the-shelf or customizedincludes HDMI and MHL standards revenue, as well as certain IP licenses, bundled with support services covering a fixed periodincludes variable consideration in the form of time,usage-based royalties.
We generally one year. If the different elements of a multiple-element arrangement qualify as separate units of accounting, we allocate the total arrangement consideration to each element based on relative selling price.
Inventories and Cost of Product Revenue
Inventories are recordedstated at the lower of averageactual cost determined(determined using the first-in, first-out method) or net realizable value. We review and set standard costs quarterly to approximate current actual manufacturing costs. Our manufacturing overhead standards for product costs are calculated assuming full absorption of actual spending over actual costs. The valuation of inventory requires us to estimate excess or obsolete inventory. Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on a first-in-first-out basis or market. We establishspecific facts and circumstances. In determining provisions for inventory if it isexcess or obsolete orproducts, we hold quantities which areconsider assumptions such as changes in excess ofbusiness and economic conditions, projected customer demand.demand for our products, and changes in technology or customer requirements. The creation of such provisions results in a write-down of inventory to net realizable value and a charge to Cost of product revenue.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the amount can be reasonablystraight-line method over the estimated useful lives of the related assets, generally three to five years for equipment and software, and one to three years for tooling. Leasehold improvements are amortized over the shorter of the non-cancelable lease term or the estimated useful life of the assets. We capitalize costs for the fabrication of masks used by our foundry partners to manufacture our products. The capitalized mask costs begin depreciating to Cost of revenue once the products go into production, and depreciation is straight-lined over a three-year period, which is the expected useful life of the mask. Upon disposal of property and equipment, the accounts are relieved of the costs and related accumulated depreciation and amortization, and resulting gains or losses are reflected in accordance with ASC 712, “
Business Combinations
Business combinations are accounted for using the acquisition method of accounting, under which we allocate the purchase price paid for a company to the total future lease obligations fromidentifiable assets acquired and liabilities assumed based on their estimated fair values at the date of vacatingacquisition. Goodwill is measured as the premises throughexcess of purchase price over the expirationfair value of identifiable assets acquired and liabilities assumed. Determining the fair value of identifiable tangible and intangible assets acquired and liabilities assumed requires management to make assumptions, estimates, and judgments that are based on all available information, including comparable market data and information obtained from our management and the management of the lease, netacquired companies. The estimation of anythe fair values of the intangible assets requires significant judgment and the use of valuation techniques including primarily the income approach. Consideration is given to all relevant factors that might affect the fair value such as estimates of future sublease income, is recorded as a partrevenues and costs, present value factors, and the estimated useful lives of restructuring charges.
Impairment of Long-Lived Assets
Long-lived assets, includingwhich consist primarily of property and equipment, amortizable intangible assets, and right-of-use assets, are carried on our financial statements based on their cost less accumulated depreciation or amortization. We monitor the carrying value of our long-lived assets for potential impairment and test the recoverability of such assets annually during the fourth quarter and whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. These events or changes in circumstances, including management decisions pertaining to such assets, are referred to as impairment indicators. If an impairment indicator occurs, we perform a test of recoverability by comparing the carrying value of the asset group to its undiscounted expected future cash flows. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset group to its carrying value. Fair value is generally determined by considering (i) internally developed discounted projected cash flow analysis of the asset group; (ii) actual third-partythird-party valuations; and/or (iii) information available regarding the current market for similar asset groups. If the fair value of the asset group is determined to be less than the carrying amount of the asset group, an impairment in the amount of the difference is recorded in the period that the impairment indicator occurs and is included in our Consolidated Statements of Operations. Estimating future cash flows requires significant judgment and projections may vary from the cash flows eventually realized, which could impact our ability to accurately assess whether an asset has been impaired.
Valuation of Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. We review goodwillGoodwill is not amortized, but is instead tested for impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. When evaluating whether goodwill is impaired, we make a qualitative assessment to determine if it is more likely than not that the reporting unit's fair value is less than the carrying amount. If the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication ofthen goodwill impairment exists for the reporting unit and we must measure the impairment loss.unit. The impairment loss, if any, is recognized for any excess ofthe amount by which the carrying amount of the reporting unit's goodwill over the implied fair value of the goodwill. The implied fair value of goodwill is determined by allocatingexceeds the fair value of the reporting unit in a manner similar to purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis.value. If the fair value of the reporting unit exceeds its carrying value, no further impairment analysis is neededneeded. For purposes of testing goodwill for impairment, we currently operate as a single reporting unit.
Leases
We account for leases under the terms of ASC 842, "Leases," which requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. Upon adoption, we elected the "package of practical expedients" that would allow us to carryforward our historical lease classifications, not reassess historical contracts to determine if they contain leases, and not reassess the initial direct costs for any existing leases. We also elected the practical expedient to not separate lease and non-lease components, which we applied to all asset classes. Concurrent with our adoption of Topic 842, we early adopted ASU 2019-01,Leases (Topic 842): Codification Improvements, which granted disclosure relief for interim periods during the year in which a company adopted Topic 842.
Right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized on the commencement date of the lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we determine the present value of lease payments using an incremental borrowing rate based on information from our commercial bank for an equivalent borrowing and term in the respective region as of the lease commencement date. At inception, we determine if an arrangement is a lease, if it includes options to extend or terminate the lease, and if it is reasonably certain that we will exercise the options. Lease cost, representing lease payments over the term of the lease and any capitalizable direct costs less any incentives received, is recognized on a straight-line basis over the lease term as lease expense. We have operating leases for corporate offices, sales offices, research and development facilities, storage facilities, and a data center.
The exercise of lease renewal options is at our sole discretion. When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term and lease payment obligation, respectively. For our leases that contain variable lease payments, residual value guarantees, or restrictive covenants, we have concluded that these inputs are not significant to the determination of the ROU asset and lease liability.
Research and Development
Research and development expenses include costs for compensation and benefits, engineering wafers, depreciation, licenses, and outside engineering services. These expenditures are for the design of new products, intellectual property cores, processes, packaging, and software solutions. Research and development costs are generally expensed as incurred, with certain licensed technology agreements capitalized as intangible assets and amortized to Research and development expense over their estimated useful lives.
Restructuring Charges
Expenses associated with exit or disposal activities are recognized when incurred under ASC 420, “Exit or Disposal Cost Obligations,” for everything except severance expenses and vacated leased facilities. Because we have a history of paying severance benefits, the cost of severance benefits associated with a restructuring plan is recorded when such costs are probable and the amount can be reasonably estimated in accordance with ASC 712, “Compensation - Nonretirement Postemployment Benefits.” When leased facilities are vacated, the amount of any ROU asset impairment is calculated in accordance with ASC 360, "Property, Plant, and Equipment" and recorded as a part of restructuring charges. Expenses from other exit or disposal activities, including the cancellation of software contracts and engineering tools or the abandonment of long-lived assets, is recorded as a part of Restructuring charges.
Accounting for Income Taxes
We are required to estimate our provision for income taxes and amounts ultimately payable or recoverable in numerous tax is comprisedjurisdictions around the world. These estimates involve significant judgment and interpretations of our currentregulations and are inherently complex. Resolution of income tax liability and changestreatments in deferred tax assets and liabilities.individual jurisdictions may not be known for many years after completion of the applicable year. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that in management’s judgment is more-likely-than-notmore-likely-than-not to be recoverable against future taxable income. U.S.The determination of a valuation allowance and when it should be released requires complex judgment.
In assessing the ability to realize deferred tax reform required a deemed repatriationassets, we evaluate both positive and negative evidence that may exist and consider whether it is more-likely-than-not that some portion or all of foreign earnings as of December 30, 2017 and no future U.S. taxesthe deferred tax assets will be due on these earnings becauserealized. The ultimate realization of enactmentdeferred tax assets is dependent upon the generation of a 100% dividends received deduction. Foreign earnings may be subjectfuture taxable income during the periods in which those temporary differences become deductible. Any adjustment to withholding taxes if they are distributed and repatriated to Latticethe net deferred tax asset valuation allowance is recorded in the United States.
Our income tax calculations are based on application of the respective U.S. federal, state or foreign tax law. law. Our tax filings, however, are subject to audit by the relevant tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-notmore-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases as well as any interest or penalties are recorded as income tax expense or benefit in the Consolidated Statements of Operations.
Stock-Based Compensation
We estimate the fair value of share-based awards consistent with the provisions of ASC 718, “Compensation - Stock Compensation.” We value RSUs using the closing market price on the date of grant, and we value stock options using the Black-Scholes option pricing model. We have also granted RSUs with a market condition or a performance condition to realize deferredcertain executives. The terms of these grants, including achievement criteria and vesting schedules, are detailed under the heading "Market-Based and Performance-Based Awards — Grants" in "Note 11 - Stock-Based Compensation Plans." Our current practice is to issue new shares to satisfy option exercises. For RSUs, we issue new shares when awards vest and withhold a portion of these shares on behalf of employees to satisfy the minimum statutory tax assets, withholding requirements.
Segment Information
As of December 31, 2022, we evaluate both positivehad one operating segment: the core Lattice business, which includes silicon-based and negative evidence that may existsilicon-enabling products, evaluation boards, development hardware, and consider whether itrelated intellectual property licensing, services, and sales. Our chief operating decision maker is more-likely-than-not that some portion or allthe Chief Executive Officer, who reviews operating results and financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance.
Note 2 - Net Income Per Share
Our calculation of the deferred tax assets willdiluted share count includes the number of shares from our equity awards with market conditions or performance conditions that would be realized. The ultimate realizationissuable under the terms of deferred tax assetssuch awards at the end of the reporting period. For equity awards with a market condition, the number of shares included in the diluted share count as of the end of each period presented is dependent upondetermined by measuring the generationachievement of future taxable income during the periodsmarket condition as of the end of the respective reporting periods. For equity awards with a performance condition, the number of shares that qualified for vesting as of the end of each period presented are included in which those temporary differences become deductible.
A summary of Operations are presented in the following table:
| Year Ended | ||||||||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 * | |||||||||||||||||
| Revenue | $ | 385,961 | 100.0 | % | $ | 427,054 | 100.0 | % | $ | 405,966 | 100.0 | % | ||||||||
| Gross margin | 216,579 | 56.1 | 246,434 | 57.7 | 219,909 | 54.2 | ||||||||||||||
| Research and development | 103,357 | 26.8 | 117,518 | 27.5 | 136,868 | 33.7 | ||||||||||||||
| Selling, general, and administrative | 90,718 | 23.5 | 98,602 | 23.1 | 97,349 | 24.0 | ||||||||||||||
| Amortization of acquired intangible assets | 31,340 | 8.1 | 33,575 | 7.9 | 29,580 | 7.3 | ||||||||||||||
| Restructuring charges | 7,196 | 1.9 | 9,267 | 2.2 | 19,239 | 4.7 | ||||||||||||||
| Acquisition related charges | 3,781 | 1.0 | 6,305 | 1.5 | 22,450 | 5.5 | ||||||||||||||
| Impairment of goodwill and acquired intangible assets | 32,431 | 8.4 | 7,866 | 1.8 | 21,655 | 5.3 | ||||||||||||||
| Gain on sale of building | (4,624 | ) | (1.2 | ) | — | — | — | — | ||||||||||||
| Loss from operations | $ | (47,620 | ) | (12.3 | )% | $ | (26,699 | ) | (6.3 | )% | $ | (107,232 | ) | (26.4 | )% | |||||
| Year Ended | % Change in | |||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | |||||||||||
| Revenue | $ | 385,961 | $ | 427,054 | $ | 405,966 | (10 | ) | 5 | |||||||
| Year Ended * | % Change in | |||||||||||||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | |||||||||||||||||||||
| Communications and Computing | $ | 113,019 | 29 | % | $ | 123,021 | 29 | % | $ | 143,424 | 35 | % | (8 | ) | (14 | ) | ||||||||||
| Mobile and Consumer | 108,844 | 28 | 127,405 | 30 | 126,130 | 31 | (15 | ) | 1 | |||||||||||||||||
| Industrial and Automotive | 134,639 | 35 | 140,278 | 33 | 99,646 | 25 | (4 | ) | 41 | |||||||||||||||||
| Licensing and Services | 29,459 | 8 | 36,350 | 8 | 36,766 | 9 | (19 | ) | (1 | ) | ||||||||||||||||
| Total revenue | $ | 385,961 | 100 | % | $ | 427,054 | 100 | % | $ | 405,966 | 100 | % | (10 | ) | 5 | |||||||||||
Year Ended | ||||||||||||
December 31, | January 1, | January 2, | ||||||||||
(In thousands, except per share data) | 2022 | 2022 | 2021 | |||||||||
Net income | $ | 178,882 | $ | 95,922 | $ | 47,392 | ||||||
Shares used in basic Net income per share | 137,321 | 136,619 | 135,220 | |||||||||
Dilutive effect of stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition | 3,346 | 5,524 | 6,056 | |||||||||
Shares used in diluted Net income per share | 140,667 | 142,143 | 141,276 | |||||||||
Basic Net income per share | $ | 1.30 | $ | 0.70 | $ | 0.35 | ||||||
Diluted Net income per share | $ | 1.27 | $ | 0.67 | $ | 0.34 | ||||||
The computation of diluted Net income per share excludes the first quartereffects of fiscal 2016, we realigned our endstock options, RSUs, ESPP shares, and equity awards with a market categoriescondition or performance condition that are antidilutive, aggregating to group Computing with Communications rather than with
Year Ended | ||||||||||||
December 31, | January 1, | January 2, | ||||||||||
(In thousands) | 2022 | 2022 | 2021 | |||||||||
Stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition excluded as they are antidilutive | 472 | 638 | 646 | |||||||||
Note 3 - Revenue from Contracts with Customers (Topic 606)
Disaggregation of Revenue
The following tables provide information about revenue from contracts with customers disaggregated by channel and determinable revenue recognition criteria not being met. Once an HDMI royalty sharing agreement is reached, we will not be able to recognize HDMI royalty revenues related to prior periods under the new standard that we would have been able to recognize under current GAAP. We estimate that the effect on 2018 licensing revenues under the new standard will be an increase of $5 million to $10 million if a royalty sharing agreement is not reached in 2018, and a decrease of $5 million to $10 million if a royalty sharing agreement is reached in 2018.
| Year Ended | % Change in | |||||||||||||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | |||||||||||||||||||||
| Asia | $ | 277,638 | 72 | % | $ | 305,093 | 71 | % | $ | 308,534 | 76 | % | (9 | ) | (1 | ) | ||||||||||
| Europe | 44,547 | 12 | 59,835 | 14 | 55,596 | 14 | (26 | ) | 8 | |||||||||||||||||
| Americas | 63,776 | 16 | 62,126 | 15 | 41,836 | 10 | 3 | 48 | ||||||||||||||||||
| Total revenue | $ | 385,961 | 100 | % | $ | 427,054 | 100 | % | $ | 405,966 | 100 | % | (10 | ) | 5 | |||||||||||
Year Ended | ||||||||||||||||||||||||
Revenue by Channel | December 31, | January 1, | January 2, | |||||||||||||||||||||
(In thousands) | 2022 | 2022 | 2021 | |||||||||||||||||||||
Product revenue - Distributors | $ | 591,229 | 89 | % | $ | 449,650 | 87 | % | $ | 339,100 | 83 | % | ||||||||||||
Product revenue - Direct | 51,988 | 8 | % | 45,202 | 9 | % | 49,402 | 12 | % | |||||||||||||||
Licensing and services | 17,139 | 3 | % | 20,475 | 4 | % | 19,618 | 5 | % | |||||||||||||||
Total revenue | $ | 660,356 | 100 | % | $ | 515,327 | 100 | % | $ | 408,120 | 100 | % | ||||||||||||
Revenue by Geographical Market | ||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
United States | $ | 94,972 | 14 | % | $ | 60,176 | 12 | % | $ | 43,945 | 11 | % | ||||||||||||
Other Americas | 5,288 | 1 | % | 20,694 | 4 | % | 18,192 | 4 | % | |||||||||||||||
Americas | 100,260 | 15 | % | 80,870 | 16 | % | 62,137 | 15 | % | |||||||||||||||
China | 296,917 | 45 | % | 281,237 | 55 | % | 213,714 | 52 | % | |||||||||||||||
Japan | 90,902 | 14 | % | 47,915 | 9 | % | 25,435 | 6 | % | |||||||||||||||
Other Asia | 77,085 | 12 | % | 55,416 | 10 | % | 66,034 | 17 | % | |||||||||||||||
Asia | 464,904 | 71 | % | 384,568 | 74 | % | 305,183 | 75 | % | |||||||||||||||
Europe | 95,192 | 14 | % | 49,889 | 10 | % | 40,800 | 10 | % | |||||||||||||||
Total revenue | $ | 660,356 | 100 | % | $ | 515,327 | 100 | % | $ | 408,120 | 100 | % | ||||||||||||
Contract Balances
Our contract assets relate to our rights to consideration for licenses and decreased 1% in fiscal 2016. In fiscal 2017, revenue decreased in Asia primarilyroyalties due to a significant decrease in Communications and Computing end market revenue from a major telecommunications customer whose business was affected by government regulations, and by conversion of materials from 200mm to 300mm wafers. Additionally, the Mobile and Consumer end market saw a significant decrease in volume for a major North American mobile handset provider. The production volume for this mobile handset peaked in the fourth quarter of fiscal 2016, and the associated revenue stream has declined in subsequent quarters as the end product completes its lifecycle. This was coupled with decreased revenue from DTV and Home Theater related devices. In fiscal 2016, revenue decreased in Asia primarily due to declines in HDTV and ASSP revenue, although these were substantially offset by increases in revenue from field programmable gate array logic products in the Mobile and Consumer end market. We believe the Asia Pacific region will remain the primary source of our revenue due to relatively more favorable business conditions in Asia and a continuing trend towards the migration of manufacturing by North American and European customers to the Asia Pacific region.
| Year Ended | ||||||||
| December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||||
| Arrow Electronics Inc. | 24 | % | 24 | % | 20 | % | ||
| Weikeng Group | 27 | 22 | 12 | |||||
| All others | 15 | 15 | 13 | |||||
| All sell-through distributors | 66 | % | 61 | % | 45 | % | ||
| Year Ended | |||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||||||
| Gross margin | $ | 216,579 | $ | 246,434 | $ | 219,909 | |||||
| Percentage of revenue | 56.1 | % | 57.7 | % | 54.2 | % | |||||
| Product gross margin % | 53.8 | % | 53.9 | % | 49.9 | % | |||||
| Licensing and services gross margin % | 84.0 | % | 98.2 | % | 96.9 | % | |||||
| Year Ended | % Change in | ||||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | ||||||||||||
| Research and development | $ | 103,357 | $ | 117,518 | $ | 136,868 | (12.1 | )% | (14.1 | )% | |||||||
| Percentage of revenue | 26.8 | % | 27.5 | % | 33.7 | % | |||||||||||
| Mask costs included in Research and development | $ | 931 | $ | 3,328 | $ | 5,770 | (72.0 | )% | (42.3 | )% | |||||||
| Year Ended | % Change in | ||||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | ||||||||||||
| Selling, general, and administrative | $ | 90,718 | $ | 98,602 | $ | 97,349 | (8.0 | )% | 1.3 | % | |||||||
| Percentage of revenue | 23.5 | % | 23.1 | % | 24.0 | % | |||||||||||
| Year Ended | % Change in | ||||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | ||||||||||||
| Amortization of acquired intangible assets | $ | 31,340 | $ | 33,575 | $ | 29,580 | (6.7 | )% | 13.5 | % | |||||||
| Percentage of revenue | 8.1 | % | 7.9 | % | 7.3 | % | |||||||||||
| Year Ended | % Change in | ||||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | ||||||||||||
| Restructuring charges | $ | 7,196 | $ | 9,267 | $ | 19,239 | (22.3 | )% | (51.8 | )% | |||||||
| Percentage of revenue | 1.9 | % | 2.2 | % | 4.7 | % | |||||||||||
| Year Ended | % Change in | ||||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | ||||||||||||
| Acquisition related charges | $ | 3,781 | $ | 6,305 | $ | 22,450 | (40.0 | )% | (71.9 | )% | |||||||
| Percentage of revenue | 1.0 | % | 1.5 | % | 5.5 | % | |||||||||||
| Year Ended | % Change in | |||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | |||||||||||
| Impairment of goodwill and acquired intangible assets | $ | 32,431 | $ | 7,866 | $ | 21,655 | +100% | (63.7 | )% | |||||||
| Percentage of revenue | 8.4 | % | 1.8 | % | 5.3 | % | ||||||||||
| Year Ended | % Change in | ||||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | ||||||||||||
| Interest expense | $ | (18,807 | ) | $ | (20,327 | ) | $ | (18,389 | ) | (7.5 | )% | 10.5 | % | ||||
| Percentage of revenue | (4.9 | )% | (4.8 | )% | (4.5 | )% | |||||||||||
| Year Ended | % Change in | ||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | ||||||||||
| Other (expense) income, net | $ | (3,286 | ) | $ | 2,844 | $ | (1,072 | ) | (100+)% | 100+% | |||||
| Percentage of revenue | (0.9 | )% | 0.7 | % | (0.3 | )% | |||||||||
| Year Ended | % Change in | |||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | 2017 | 2016 | |||||||||||
| Income tax expense | $ | 849 | $ | 9,917 | $ | 32,540 | (91.4 | )% | (69.5)% | |||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | $ Change | ||||||||
| Cash and cash equivalents | $ | 106,815 | $ | 106,552 | $ | 263 | |||||
| Short-term marketable securities | 4,982 | 10,308 | (5,326 | ) | |||||||
| Total Cash and cash equivalents and Short-term marketable securities | $ | 111,797 | $ | 116,860 | $ | (5,063 | ) | ||||
| (In thousands) | December 30, 2017 | December 31, 2016 | $Change | %Change | ||||||||||
| Accounts receivable, net | $ | 55,104 | $ | 99,637 | $ | (44,533 | ) | (44.7 | )% | |||||
| Days sales outstanding - Overall | 53 | 77 | (24 | ) | ||||||||||
| Days sales outstanding - Product | 53 | 75 | (22 | ) | ||||||||||
| Days sales outstanding - Licensing and services | 29 | 106 | (77 | ) | ||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | $Change | %Change | ||||||||||
| Inventories | $ | 79,903 | $ | 79,168 | $ | 735 | 0.9 | % | ||||||
| Months of inventory on hand | 5.4 | 4.3 | 1.1 | |||||||||||
The following table summarizes our contractual cash obligations at December 30, 2017:
| (In thousands) | |||||||
| Fiscal year | Operating leases (1) | Long-term Debt (2) | |||||
| 2018 | $ | 6,310 | $ | 20,027 | |||
| 2019 | 4,784 | 41,366 | |||||
| 2020 | 4,860 | 71,849 | |||||
| 2021 | 4,654 | 219,966 | |||||
| 2022 | 4,694 | — | |||||
| Thereafter | 14,259 | — | |||||
| $ | 39,561 | $ | 353,208 | ||||
(In thousands) | ||||
Contract assets as of January 2, 2021 | $ | 5,611 | ||
Revenues recorded during the period | 15,587 | |||
Transferred to Accounts receivable or collected | (15,526 | ) | ||
Contract assets as of January 1, 2022 | $ | 5,672 | ||
Revenues recorded during the period | 15,848 | |||
Transferred to Accounts receivable or collected | (14,173 | ) | ||
Contract assets as of December 31, 2022 | $ | 7,347 |
Contract liabilities are included solely for informational and comparative purposes and are not meant as a substitute for GAAP and should be considered together with the consolidated financial information located in this report. Pursuant to the requirements of Regulation S-K and to make clear to our investors the adjustments we make to U.S. GAAP measures, we have provided the following reconciliations of the non-GAAP measures to the most directly comparable U.S. GAAP financial measures.
| (In thousands, except per share amounts) | Year Ended | ||||||||||
| (unaudited) | December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||||||
| Revenue Reconciliation | |||||||||||
| GAAP Revenue | $ | 385,961 | $ | 427,054 | $ | 405,966 | |||||
| Acquisition related deferred revenue effect (1) | — | — | 5,187 | ||||||||
| Non-GAAP Revenue | $ | 385,961 | $ | 427,054 | $ | 411,153 | |||||
| Gross Margin Reconciliation | |||||||||||
| GAAP Gross margin | $ | 216,579 | $ | 246,434 | $ | 219,909 | |||||
| Acquisition related net deferred revenue effect (1) (2) | — | — | 3,691 | ||||||||
| Acquisition related inventory fair value effect (3) | — | 523 | 6,078 | ||||||||
| Stock-based compensation expense - gross margin | 788 | 888 | 1,416 | ||||||||
| Non-GAAP Gross margin | $ | 217,367 | $ | 247,845 | $ | 231,094 | |||||
| Gross Margin % Reconciliation | |||||||||||
| GAAP Gross margin % | 56.1 | % | 57.7 | % | 54.2 | % | |||||
| Cumulative effect of non-GAAP Gross Margin adjustments | 0.2 | % | 0.3 | % | 2.0 | % | |||||
| Non-GAAP Gross margin % | 56.3 | % | 58.0 | % | 56.2 | % | |||||
| Operating Expenses Reconciliation | |||||||||||
| GAAP Operating expenses | $ | 264,199 | $ | 273,133 | $ | 327,141 | |||||
| Amortization of acquired intangible assets | (31,340 | ) | (33,575 | ) | (29,580 | ) | |||||
| Restructuring charges | (7,196 | ) | (9,267 | ) | (19,239 | ) | |||||
| Acquisition related charges (4) | (3,781 | ) | (6,305 | ) | (22,450 | ) | |||||
| Impairment of goodwill and acquired intangible assets | (32,431 | ) | (7,866 | ) | (21,655 | ) | |||||
| Stock-based compensation expense - operations | (11,755 | ) | (15,325 | ) | (15,934 | ) | |||||
| Gain on sale of building | 4,624 | — | — | ||||||||
| Non-GAAP Operating expenses | $ | 182,320 | $ | 200,795 | $ | 218,283 | |||||
| (Loss) Income from Operations Reconciliation | |||||||||||
| GAAP Loss from operations | $ | (47,620 | ) | $ | (26,699 | ) | $ | (107,232 | ) | ||
| Acquisition related net deferred revenue effect (1) (2) | — | — | 3,691 | ||||||||
| Acquisition related inventory fair value effect (3) | — | 523 | 6,078 | ||||||||
| Stock-based compensation expense - gross margin | 788 | 888 | 1,416 | ||||||||
| Amortization of acquired intangible assets | 31,340 | 33,575 | 29,580 | ||||||||
| Restructuring charges | 7,196 | 9,267 | 19,239 | ||||||||
| Acquisition related charges (4) | 3,781 | 6,305 | 22,450 | ||||||||
| Impairment of goodwill and acquired intangible assets | 32,431 | 7,866 | 21,655 | ||||||||
| Stock-based compensation expense - operations | 11,755 | 15,325 | 15,934 | ||||||||
| Gain on sale of building | (4,624 | ) | — | — | |||||||
| Non-GAAP Income from operations | $ | 35,047 | $ | 47,050 | $ | 12,811 | |||||
| (1) Fair value adjustment to deferred revenue from purchase accounting | |||||||||||
| (2) Fair value adjustment to deferred cost of sales from purchase accounting | |||||||||||
| (3) Fair value adjustment for inventory step-up from purchase accounting | |||||||||||
| (4) Includes legal fees and outside services that were related to our proposed acquisition by Canyon Bridge Acquisition Company, Inc. | |||||||||||
| and stock-based compensation and severance costs related to change in control. | |||||||||||
| Reconciliation of U.S. GAAP to Non-GAAP Financial Measures | |||||||||||
| (In thousands, except per share amounts) | Year Ended | ||||||||||
| (unaudited) | December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||||||
| (Loss) Income from Operations % Reconciliation | |||||||||||
| GAAP Loss from operations % | (12.3 | )% | (6.3 | )% | (26.4 | )% | |||||
| Cumulative effect of non-GAAP Gross Margin and Operating adjustments | 21.4 | % | 17.3 | % | 29.5 | % | |||||
| Non-GAAP Income from operations % | 9.1 | % | 11.0 | % | 3.1 | % | |||||
| Other (Expense) Income, Net Reconciliation | |||||||||||
| GAAP Other (expense) income, net | $ | (3,286 | ) | $ | 2,844 | $ | (1,072 | ) | |||
| Loss (gain) on sale of assets and business units | 1,496 | (2,646 | ) | — | |||||||
| Non-GAAP Other income (expense), net | $ | (1,790 | ) | $ | 198 | $ | (1,072 | ) | |||
| Income Tax Expense Reconciliation | |||||||||||
| GAAP Income tax expense | $ | 849 | $ | 9,917 | $ | 32,540 | |||||
| Estimated tax effect of non-GAAP adjustments (5) | — | — | (21,030 | ) | |||||||
| Non-GAAP Income tax expense | $ | 849 | $ | 9,917 | $ | 11,510 | |||||
| Net (Loss) Income Reconciliation | |||||||||||
| GAAP Net loss | $ | (70,562 | ) | $ | (54,099 | ) | $ | (159,233 | ) | ||
| Acquisition related net deferred revenue effect (1) (2) | — | — | 3,691 | ||||||||
| Acquisition related inventory fair value effect (3) | — | 523 | 6,078 | ||||||||
| Stock-based compensation expense - gross margin | 788 | 888 | 1,416 | ||||||||
| Amortization of acquired intangible assets | 31,340 | 33,575 | 29,580 | ||||||||
| Restructuring charges | 7,196 | 9,267 | 19,239 | ||||||||
| Acquisition related charges (4) | 3,781 | 6,305 | 22,450 | ||||||||
| Impairment of goodwill and acquired intangible assets | 32,431 | 7,866 | 21,655 | ||||||||
| Stock-based compensation expense - operating expense | 11,755 | 15,325 | 15,934 | ||||||||
| Gain on sale of building | (4,624 | ) | — | — | |||||||
| Loss (gain) on sale of assets and business units | 1,496 | (2,646 | ) | — | |||||||
| Estimated tax effect of non-GAAP adjustments (5) | — | — | 21,030 | ||||||||
| Non-GAAP Net income (loss) | $ | 13,601 | $ | 17,004 | $ | (18,160 | ) | ||||
| (1) Fair value adjustment to deferred revenue from purchase accounting | |||||||||||
| (2) Fair value adjustment to deferred cost of sales from purchase accounting | |||||||||||
| (3) Fair value adjustment for inventory step-up from purchase accounting | |||||||||||
| (4) Includes legal fees and outside services that were related to our proposed acquisition by Canyon Bridge Acquisition Company, Inc. | |||||||||||
| and stock-based compensation and severance costs related to change in control. | |||||||||||
| (5) 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 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 | |||||||||||
| (In thousands, except per share amounts) | Year Ended | ||||||||||
| (unaudited) | December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||||||
| Net (Loss) Income Per Share Reconciliation | |||||||||||
| GAAP Net loss per share - basic and diluted | $ | (0.58 | ) | $ | (0.45 | ) | $ | (1.36 | ) | ||
| Cumulative effect of Non-GAAP adjustments | 0.69 | 0.59 | 1.21 | ||||||||
| Non-GAAP Net income (loss) per share - basic and diluted | $ | 0.11 | $ | 0.14 | $ | (0.15 | ) | ||||
| Shares used in per share calculations: | |||||||||||
| Basic | 122,677 | 119,994 | 117,387 | ||||||||
| Diluted - GAAP (6) | 122,677 | 119,994 | 117,387 | ||||||||
| Diluted - non-GAAP (6) | 124,499 | 121,957 | 117,387 | ||||||||
| (6) Diluted shares are calculated using the GAAP treasury stock method. In a loss position, diluted shares equal basic shares. | |||||||||||
| December 30, 2017 | December 31, 2016 | |||||||
| Total cost of contracts for Japanese yen (thousands) | $ | 2,204 | $ | 2,323 | ||||
| Number of contracts | 2 | 2 | ||||||
| Settlement month | June 2018 | June 2017 | ||||||
| (In thousands, except share and par value data) | December 30, 2017 | December 31, 2016 | |||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 106,815 | $ | 106,552 | |||
| Short-term marketable securities | 4,982 | 10,308 | |||||
| Accounts receivable, net of allowance for doubtful accounts | 55,104 | 99,637 | |||||
| Inventories | 79,903 | 79,168 | |||||
| Prepaid expenses and other current assets | 16,567 | 19,035 | |||||
| Total current assets | 263,371 | 314,700 | |||||
| Property and equipment, net | 40,423 | 49,481 | |||||
| Intangible assets, net | 51,308 | 118,863 | |||||
| Goodwill | 267,514 | 269,758 | |||||
| Deferred income taxes | 198 | 372 | |||||
| Other long-term assets | 13,147 | 13,709 | |||||
| Total assets | $ | 635,961 | $ | 766,883 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable and accrued expenses (includes restructuring) | $ | 54,405 | $ | 80,933 | |||
| Accrued payroll obligations | 10,416 | 9,865 | |||||
| Current portion of long-term debt | 1,508 | 33,767 | |||||
| Deferred income and allowances on sales to sell-through distributors | 17,250 | 32,257 | |||||
| Deferred licensing and services revenue | 68 | 728 | |||||
| Total current liabilities | 83,647 | 157,550 | |||||
| Long-term debt | 299,667 | 300,855 | |||||
| Other long-term liabilities | 34,954 | 38,048 | |||||
| Total liabilities | 418,268 | 496,453 | |||||
| Commitments and contingencies (Notes 13 and 20) | — | — | |||||
| 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; 123,895,000 shares issued and outstanding as of December 30, 2017 and 121,645,000 shares issued and outstanding as of December 31, 2016 | 1,239 | 1,216 | |||||
| Additional paid-in capital | 695,768 | 680,315 | |||||
| Accumulated deficit | (477,862 | ) | (406,945 | ) | |||
| Accumulated other comprehensive loss | (1,452 | ) | (4,156 | ) | |||
| Total stockholders' equity | 217,693 | 270,430 | |||||
| Total liabilities and stockholders' equity | $ | 635,961 | $ | 766,883 | |||
| Year Ended | ||||||||||||
| (In thousands, except per share data) | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||
| Revenue: | ||||||||||||
| Product | $ | 356,502 | $ | 390,704 | $ | 369,200 | ||||||
| Licensing and services | 29,459 | 36,350 | 36,766 | |||||||||
| Total revenue | 385,961 | 427,054 | 405,966 | |||||||||
| Costs and expenses: | ||||||||||||
| Cost of product revenue | 164,657 | 179,983 | 184,914 | |||||||||
| Cost of licensing and services revenue | 4,725 | 637 | 1,143 | |||||||||
| Research and development | 103,357 | 117,518 | 136,868 | |||||||||
| Selling, general, and administrative | 90,718 | 98,602 | 97,349 | |||||||||
| Amortization of acquired intangible assets | 31,340 | 33,575 | 29,580 | |||||||||
| Restructuring charges | 7,196 | 9,267 | 19,239 | |||||||||
| Acquisition related charges | 3,781 | 6,305 | 22,450 | |||||||||
| Impairment of goodwill and acquired intangible assets | 32,431 | 7,866 | 21,655 | |||||||||
| Gain on sale of building | (4,624 | ) | — | — | ||||||||
| Total costs and expenses | 433,581 | 453,753 | 513,198 | |||||||||
| Loss from operations | (47,620 | ) | (26,699 | ) | (107,232 | ) | ||||||
| Interest expense | (18,807 | ) | (20,327 | ) | (18,389 | ) | ||||||
| Other (expense) income, net | (3,286 | ) | 2,844 | (1,072 | ) | |||||||
| Loss before income taxes | (69,713 | ) | (44,182 | ) | (126,693 | ) | ||||||
| Income tax expense | 849 | 9,917 | 32,540 | |||||||||
| Net loss | $ | (70,562 | ) | $ | (54,099 | ) | $ | (159,233 | ) | |||
| Net loss per share, basic and diluted | $ | (0.58 | ) | $ | (0.45 | ) | $ | (1.36 | ) | |||
| Shares used in per share calculations, basic and diluted | 122,677 | 119,994 | 117,387 | |||||||||
| Year Ended | ||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||
| Net loss | $ | (70,562 | ) | $ | (54,099 | ) | $ | (159,233 | ) | |||
| Other comprehensive loss: | ||||||||||||
| Unrealized loss related to marketable securities, net of tax | (73 | ) | (172 | ) | (69 | ) | ||||||
| Reclassification adjustment for losses related to marketable securities included in other (expense) income | 252 | 79 | 442 | |||||||||
| Translation adjustment loss, net of tax | 2,620 | (1,303 | ) | (1,243 | ) | |||||||
| Change in actuarial valuation of defined benefit pension | (95 | ) | 150 | (156 | ) | |||||||
| Comprehensive loss | $ | (67,858 | ) | $ | (55,345 | ) | $ | (160,259 | ) | |||
| Common Stock ($.01 par value) | Paid-in capital | Treasury stock | Accumulated deficit | Accumulated other comprehensive loss | ||||||||||||||||||||||
| (In thousands, except par value data) | Shares | Amount | Total | |||||||||||||||||||||||
| Balances, January 3, 2015 | 117,288 | $ | 1,173 | $ | 635,299 | $ | — | $ | (193,613 | ) | $ | (1,884 | ) | $ | 440,975 | |||||||||||
| Net loss for 2015 | — | — | — | — | (159,233 | ) | — | (159,233 | ) | |||||||||||||||||
| Unrealized loss related to marketable securities, net of tax | — | — | — | — | — | (69 | ) | (69 | ) | |||||||||||||||||
| Recognized loss on redemption of marketable securities, previously unrealized | — | — | — | — | — | 442 | 442 | |||||||||||||||||||
| Translation adjustments, net of tax | — | — | — | — | — | (1,243 | ) | (1,243 | ) | |||||||||||||||||
| Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of tax | 2,415 | 25 | 2,161 | — | — | — | 2,186 | |||||||||||||||||||
| Stock repurchase | — | — | — | (6,970 | ) | — | — | (6,970 | ) | |||||||||||||||||
| Retirement of treasury stock | (1,052 | ) | (11 | ) | (6,959 | ) | 6,970 | — | — | — | ||||||||||||||||
| Stock-based compensation expense related to options, ESPP and RSUs | — | — | 18,396 | — | — | — | 18,396 | |||||||||||||||||||
| Fair value of partially vested stock options and RSUs assumed in acquisition | — | — | 5,139 | — | — | — | 5,139 | |||||||||||||||||||
| Defined benefit pension, net of actuarial losses | — | — | — | — | — | (156 | ) | (156 | ) | |||||||||||||||||
| Redemption of noncontrolling interest, net of previous accretion to redemption value. | — | — | 6,053 | — | — | — | 6,053 | |||||||||||||||||||
| Balances, January 2, 2016 | 118,651 | $ | 1,187 | $ | 660,089 | $ | — | $ | (352,846 | ) | $ | (2,910 | ) | $ | 305,520 | |||||||||||
| Net loss for 2016 | — | — | — | — | (54,099 | ) | — | (54,099 | ) | |||||||||||||||||
| Unrealized loss related to marketable securities, net of tax | — | — | — | — | — | (172 | ) | (172 | ) | |||||||||||||||||
| Recognized loss on redemption of marketable securities, previously unrealized | — | — | — | — | — | 79 | 79 | |||||||||||||||||||
| Translation adjustments, net of tax | — | — | — | — | — | (1,303 | ) | (1,303 | ) | |||||||||||||||||
| Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of tax | 2,994 | 29 | 4,013 | — | — | — | 4,042 | |||||||||||||||||||
| Stock-based compensation expense related to options, ESPP and RSUs | — | — | 16,213 | — | — | — | 16,213 | |||||||||||||||||||
| Defined benefit pension, net of actuarial losses | — | — | — | — | — | 150 | 150 | |||||||||||||||||||
| Balances, December 31, 2016 | 121,645 | $ | 1,216 | $ | 680,315 | $ | — | $ | (406,945 | ) | $ | (4,156 | ) | $ | 270,430 | |||||||||||
| Net loss for 2017 | — | — | — | — | (70,562 | ) | — | (70,562 | ) | |||||||||||||||||
| Unrealized loss related to marketable securities, net of tax | — | — | — | — | — | (73 | ) | (73 | ) | |||||||||||||||||
| Recognized loss on redemption of marketable securities, previously unrealized | — | — | — | — | — | 252 | 252 | |||||||||||||||||||
| Translation adjustments, net of tax | — | — | — | — | — | 2,620 | 2,620 | |||||||||||||||||||
| Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of tax | 2,250 | 23 | 2,795 | — | — | — | 2,818 | |||||||||||||||||||
| Stock-based compensation expense related to stock options, ESPP and RSUs (1) | — | — | 12,658 | — | — | — | 12,658 | |||||||||||||||||||
| Defined benefit pension, net of actuarial losses | — | — | — | — | — | (95 | ) | (95 | ) | |||||||||||||||||
| Accounting method transition adjustment (2) | — | — | — | — | (355 | ) | — | (355 | ) | |||||||||||||||||
| Balances, December 30, 2017 | 123,895 | $ | 1,239 | $ | 695,768 | $ | — | $ | (477,862 | ) | $ | (1,452 | ) | $ | 217,693 | |||||||||||
| Year Ended | |||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (70,562 | ) | $ | (54,099 | ) | $ | (159,233 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 57,861 | 61,806 | 60,808 | ||||||||
| Impairment of goodwill and acquired intangible assets | 32,431 | 7,866 | 21,655 | ||||||||
| Amortization of debt issuance costs and discount | 1,982 | 1,350 | 2,835 | ||||||||
| Change in deferred income tax provision | (154 | ) | 90 | 21,367 | |||||||
| Loss on sale or maturity of marketable securities | 252 | 79 | 333 | ||||||||
| Gain on forward contracts | (77 | ) | (184 | ) | — | ||||||
| Stock-based compensation expense | 12,543 | 16,213 | 18,396 | ||||||||
| (Gain) loss on disposal of fixed assets | (75 | ) | 597 | — | |||||||
| Gain on sale of building | (4,624 | ) | — | — | |||||||
| Loss (Gain) on sale of assets and business units | 1,496 | (2,646 | ) | — | |||||||
| Impairment of cost-method investment | 1,761 | 1,459 | 492 | ||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | 44,613 | (11,419 | ) | 4,578 | |||||||
| Inventories | (902 | ) | (3,272 | ) | 9,868 | ||||||
| Prepaid expenses and other assets | 889 | (2,270 | ) | (6,710 | ) | ||||||
| Accounts payable and accrued expenses (includes restructuring) | (23,588 | ) | 8,338 | 6,301 | |||||||
| Accrued payroll obligations | 726 | 402 | (10,202 | ) | |||||||
| Income taxes payable | (556 | ) | 3,216 | 1,749 | |||||||
| Deferred income and allowances on sales to sell-through distributors | (15,007 | ) | 14,391 | 2,920 | |||||||
| Deferred licensing and services revenue | (495 | ) | (183 | ) | 1,958 | ||||||
| Net cash provided by (used in) operating activities | 38,514 | 41,734 | (22,885 | ) | |||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from sales of and maturities of short-term marketable securities | 12,689 | 14,897 | 142,956 | ||||||||
| Purchase of marketable securities | (7,420 | ) | (7,490 | ) | (15,982 | ) | |||||
| Cash paid for business acquisition, net of cash acquired | — | — | (431,068 | ) | |||||||
| Proceeds from sale of building | 7,895 | — | — | ||||||||
| Cash paid for costs of sale of building | (1,004 | ) | — | — | |||||||
| Capital expenditures | (12,855 | ) | (16,717 | ) | (18,209 | ) | |||||
| Proceeds from sale of assets and business units, net of cash sold | 967 | 1,972 | — | ||||||||
| Repayment received on short-term loan to cost-method investee | 2,000 | — | — | ||||||||
| Short-term loan to cost-method investee | (2,000 | ) | — | — | |||||||
| Cash paid for a cost-method investment | — | (1,000 | ) | (5,000 | ) | ||||||
| Cash paid for software licenses | (8,532 | ) | (9,035 | ) | (9,515 | ) | |||||
| Net cash used in investing activities | $ | (8,260 | ) | $ | (17,373 | ) | $ | (336,818 | ) | ||
| The accompanying notes are an integral part of these Consolidated Financial Statements | |||||||||||
| LATTICE SEMICONDUCTOR CORPORATION | |||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) | |||||||||||
| Year Ended | |||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||||||
| Cash flows from financing activities: | |||||||||||
| Restricted stock unit withholdings | $ | (3,267 | ) | $ | (3,565 | ) | $ | (3,493 | ) | ||
| Proceeds from issuance of common stock | 6,085 | 7,607 | 5,679 | ||||||||
| Net proceeds from issuance of long-term debt | — | — | 346,500 | ||||||||
| Cash paid for debt issuance costs | — | — | (8,283 | ) | |||||||
| Repayment of debt | (35,429 | ) | (5,154 | ) | (2,625 | ) | |||||
| Purchase of treasury stock | — | — | (6,970 | ) | |||||||
| Cash paid to redeem noncontrolling interest | — | — | (867 | ) | |||||||
| Net cash (used in) provided by financing activities | $ | (32,611 | ) | $ | (1,112 | ) | $ | 329,941 | |||
| Effect of exchange rate change on cash | $ | 2,620 | $ | (1,303 | ) | $ | (1,243 | ) | |||
| Net increase (decrease) in cash and cash equivalents | 263 | 21,946 | (31,005 | ) | |||||||
| Beginning cash and cash equivalents | 106,552 | 84,606 | 115,611 | ||||||||
| Ending cash and cash equivalents | $ | 106,815 | $ | 106,552 | $ | 84,606 | |||||
| Supplemental cash flow information: | |||||||||||
| Change in unrealized loss related to marketable securities, net of tax, included in Accumulated other comprehensive loss | $ | 73 | $ | 172 | $ | 69 | |||||
| Income taxes paid, net of refunds | $ | 2,387 | $ | 9,359 | $ | 8,339 | |||||
| Interest paid | $ | 20,649 | $ | 18,159 | $ | 11,071 | |||||
| Accrued purchases of property and equipment | $ | 588 | $ | 1,028 | $ | 1,277 | |||||
| Note receivable resulting from sale of assets and business units | $ | 3,050 | $ | — | $ | — | |||||
| Transfer of residual temporary equity to additional paid-in capital on redemption of noncontrolling interest | $ | — | $ | — | $ | 6,773 | |||||
(In thousands) | ||||
Contract liabilities as of January 2, 2021 | $ | 3,068 | ||
Accruals for estimated future stock rotation and scrap returns | 4,613 | |||
Less: Release of accruals for recognized stock rotation and scrap returns | (2,913 | ) | ||
Contract liabilities as of January 1, 2022 | $ | 4,768 | ||
Prepaid customer deposit | 12,811 | |||
Accruals for estimated future stock rotation and scrap returns | 6,142 | |||
Less: Release of accruals for recognized stock rotation and scrap returns | (6,055 | ) | ||
Contract liabilities as of December 31, 2022 | $ | 17,666 |
| December 30, 2017 | December 31, 2016 | |||||||
Total cost of contracts for Japanese yen (in thousands) | $ | 2,204 | $ | 2,323 | ||||
| Number of contracts | 2 | 2 | ||||||
| Settlement month | June 2018 | June 2017 | ||||||
| Year Ended | |||||||||
| December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||
| Revenue attributable to top five end customers | 26 | % | 27 | % | 32 | % | |||
| Revenue attributable to largest end customer | 7.3 | % | 9.9 | % | 9.3 | % | |||
| Year Ended | |||||||||
| December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||
| Revenue attributable to sell-through distributors | 66 | % | 61 | % | 45 | % | |||
Note 4 - Balance Sheet Components
Accounts Receivable
Accounts receivable do not bear interest and are shown net of allowances for doubtful accounts of $9.4 million and $9.3 million at December 30, 2017 and December 31, 2016, respectively. Thean allowance for doubtful accountsexpected lifetime credit losses, which reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine thethis allowance based onthrough an assessment of known troubled accounts, analysis of the aging of our accounts receivable aging, historical experience, expectations for future economic conditions, management judgment, and other currently available evidence.
December 31, | January 1, | |||||||
(In thousands) | 2022 | 2022 | ||||||
Accounts receivable | $ | 94,018 | $ | 79,859 | ||||
Less: Allowance for credit losses | — | — | ||||||
Accounts receivable, net of allowance for credit losses | $ | 94,018 | $ | 79,859 | ||||
We write off accounts receivable against the allowance when we determine a balance is uncollectible and had no longer actively pursue collection of the receivable. The amounts of accounts receivable written off were insignificant for all periods presented. Bad debt expense was negligible for fiscal 2017. During fiscal 2016, we recorded a full allowance on our accounts receivable, net of deferred revenue, from a bankrupt distributor group resulting in an increase in allowance for doubtful accounts of $9.0 million and material bad debt expense of $7.5 million in that year.
Inventories
December 31, | January 1, | |||||||
(In thousands) | 2022 | 2022 | ||||||
Work in progress | $ | 58,269 | $ | 43,546 | ||||
Finished goods | 52,106 | 24,048 | ||||||
Total inventories, net | $ | 110,375 | $ | 67,594 | ||||
Accrued Liabilities
Included in any one instrument. Our investment policy defines approved credit ratings for investment securities. Investments on-hand in marketable securities consisted primarily of money market instruments, “AA” or better corporate notes and bonds and commercial paper, and U.S. government agency obligations. See Note 3 for a discussion of the liquidity attributes of our marketable securities.
| (In thousands) | December 30, 2017 | December 31, 2016 | ||||||
| Inventory valued at published list price and held by sell-through distributors with right of return | $ | 74,788 | $ | 86,218 | ||||
| Allowance for distributor advances | (44,990 | ) | (37,090 | ) | ||||
| Deferred cost of sales related to inventory held by sell-through distributors | (12,548 | ) | (16,871 | ) | ||||
| Total Deferred income and allowances on sales to sell-through distributors | $ | 17,250 | $ | 32,257 | ||||
December 31, | January 1, | |||||||
(In thousands) | 2022 | 2022 | ||||||
Contract liability under ASC 606 | $ | 17,666 | $ | 4,768 | ||||
Liability for non-cancelable contracts | 10,498 | 9,930 | ||||||
Current portion of operating lease liabilities | 6,454 | 5,696 | ||||||
Liability for production materials | 6,002 | — | ||||||
Other accrued liabilities | 7,847 | 6,050 | ||||||
Total accrued liabilities | $ | 48,467 | $ | 26,444 | ||||
Cloud Based Computing Implementation Costs
Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Our adoption of this accounting standard update in the first quarter of fiscal 2017 did not have a material impact on our consolidated financial statements.
| Year Ended | ||||||||||||
| (in thousands, except per share data) | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||
| Net loss | $ | (70,562 | ) | $ | (54,099 | ) | $ | (159,233 | ) | |||
| Shares used in basic and diluted net loss per share | 122,677 | 119,994 | 117,387 | |||||||||
| Basic and diluted net loss per share | $ | (0.58 | ) | $ | (0.45 | ) | $ | (1.36 | ) | |||
| Year Ended | |||||||||
| (in thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||||
| Stock options, RSUs, and ESPP shares excluded as they are antidilutive | 6,622 | 8,978 | 9,243 | ||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | |||||
| Short-term marketable securities: | |||||||
| Corporate and government bonds and notes | $ | 4,982 | $ | 10,230 | |||
| Certificates of deposit | — | 78 | |||||
| Total marketable securities | $ | 4,982 | $ | 10,308 | |||
| Fair value measurements as of | Fair value measurements as of | ||||||||||||||||||||||||||||||
| December 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||||
| (In thousands) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||
| Short-term marketable securities | $ | 4,982 | $ | 4,982 | $ | — | $ | — | $ | 10,308 | $ | 10,230 | $ | 78 | $ | — | |||||||||||||||
| Foreign currency forward exchange contracts, net | 77 | — | 77 | — | 184 | — | 184 | — | |||||||||||||||||||||||
| Total fair value of financial instruments | $ | 5,059 | $ | 4,982 | $ | 77 | $ | — | $ | 10,492 | $ | 10,230 | $ | 262 | $ | — | |||||||||||||||
(In thousands) | ||||
Cloud based computing implementation costs as of January 2, 2021 | $ | 2,831 | ||
Costs capitalized | 324 | |||
Amortization | (775 | ) | ||
Cloud based computing implementation costs as of January 1, 2022 | $ | 2,380 | ||
Costs capitalized | 63 | |||
Amortization | (841 | ) | ||
Cloud based computing implementation costs as of December 31, 2022 | $ | 1,602 |
Note 5 - Inventories
| (In thousands) | December 30, 2017 | December 31, 2016 | |||||
| Work in progress | $ | 49,642 | $ | 50,688 | |||
| Finished goods | 30,261 | 28,480 | |||||
| Total inventories | $ | 79,903 | $ | 79,168 | |||
| (In thousands) | December 30, 2017 | December 31, 2016 | |||||
| Buildings | $ | — | $ | 3,554 | |||
| Computer and test equipment | 155,492 | 162,388 | |||||
| Office furniture and equipment | 2,914 | 3,460 | |||||
| Leasehold and building improvements | 13,277 | 14,865 | |||||
| 171,683 | 184,267 | ||||||
| Accumulated depreciation and amortization | (131,260 | ) | (134,786 | ) | |||
| $ | 40,423 | $ | 49,481 | ||||
| December 31, | January 1, | |||||||
(In thousands) | 2022 | 2022 | ||||||
Production equipment and software | $ | 149,787 | $ | 133,039 | ||||
Leasehold improvements | 12,416 | 12,960 | ||||||
Office furniture and equipment | 1,760 | 2,000 | ||||||
| 163,963 | 147,999 | |||||||
Accumulated depreciation and amortization | (116,349 | ) | (109,905 | ) | ||||
| $ | 47,614 | $ | 38,094 | |||||
For fiscal years 20172022, 2021, and 2016, respectively. For fiscal year 2015,2020 depreciation and amortization expense for property and equipment was $18.1$13.8 million, including $1.5 million of restructuring expense.
Property and Equipment – Geographic Information
Our Property and equipment, net by country at the end of direct selling costs, resulting in a net gain on sale of $4.6 million, which is presentedeach period was as Gain on sale of building in our Consolidated Statements of Operations.follows:
| December 31, | January 1, | |||||||
(In thousands) | 2022 | 2022 | ||||||
United States | $ | 29,118 | $ | 26,509 | ||||
Taiwan | 10,732 | 6,555 | ||||||
Philippines | 3,596 | 2,498 | ||||||
China | 2,229 | 1,643 | ||||||
Other | 1,939 | 889 | ||||||
Total foreign property and equipment, net | 18,496 | 11,585 | ||||||
Total property and equipment, net | $ | 47,614 | $ | 38,094 | ||||
On September 30, 2017, in conjunction with our June 2017 restructuring plan (see Note 15), we sold 100% of the equity of our Hyderabad, India subsidiary and certain assets related to our Simplay Labs testing and certification business to Invecas, Inc. The fair value of purchase price consideration was $5.3 million, which was comprised of $2.3 million of cash and a $3.0 million note receivable. We recorded a $1.8 million loss on the sale, including a $2.2 million disposal of a relative fair value share of our goodwill, which is included in Other (expense) income, net in the Consolidated Statements of Operations.
Purchase consideration was allocated to the tangible and intangible assets and liabilities assumed on the basis of the respective estimated fair values on the acquisition date. The estimation of the fair values of the assets acquired and liabilities assumed in the acquisition of Mirametrix, by major class, were recognized as follows:
(In thousands) | Estimated Fair Value | |||
Assets acquired: | ||||
Cash and cash equivalents | $ | 437 | ||
Accounts receivable | 3,265 | |||
Other current assets | 262 | |||
Property and equipment | 156 | |||
Intangible assets | 24,800 | |||
Goodwill | 47,844 | |||
Total assets acquired | 76,764 | |||
Liabilities assumed | ||||
Accounts payable | 21 | |||
Accrued liabilities | 5 | |||
Accrued payroll obligations | 247 | |||
Long-term liabilities | 7,955 | |||
Total liabilities assumed | 8,228 | |||
Fair value of net assets acquired | $ | 68,536 | ||
The following table presents details of the identified intangible assets requiredacquired through the useacquisition of valuation techniques includingMirametrix, as of November 12, 2021:
Useful Life | Fair Value | |||||||
(In years) | (In thousands) | |||||||
Existing technology | 7 | $ | 13,500 | |||||
Customer relationships | 7 | 9,800 | ||||||
Trade name / trademarks | 10 | 1,500 | ||||||
Total identified intangible assets subject to amortization | $ | 24,800 | ||||||
We do not believe there is any significant residual value associated with these intangible assets. We are amortizing the income approach andintangible assets using the cost approach, and entailed consideration of all the relevant factors that might affect the fair value such as present value factors, and estimates of future revenues and costs.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. The goodwill recognized in the acquisition of Mirametrix was derived from expected benefits from cost synergies and the knowledgeable and experienced workforce who joined the Company after the acquisition. Goodwill resulting from the acquisition is not amortized, but is instead tested for impairment annually or more frequently if certain indicators of impairment are present. We do not expect goodwill impairment to be tax deductible for Canada income tax purposes.
The goodwill balance of approximately $315.4 million at December 31, 2022 is comprised of approximately $267.5 million from prior acquisitions combined with the approximately $47.8 million from the acquisition of Mirametrix. No impairment charges relating to goodwill were recorded for either fiscal 20172022, 2021, or fiscal 2016 as no indicators of impairment were present. A $12.7 million charge to fully impair the Qterics goodwill was recorded for fiscal 2015 (Note 9).2020.
| (In thousands) | December 30, 2017 | December 31, 2016 | ||||||
| Beginning balance | $ | 269,758 | $ | 267,549 | ||||
| Additions | — | 2,209 | ||||||
| Disposals | (2,244 | ) | — | |||||
| Ending balance | $ | 267,514 | $ | 269,758 | ||||
In connection with our acquisitions of Mirametrix, Inc. in November 2021, Silicon Image, Inc. in March 2015,
and SiliconBlue Technologies, Inc. in December 2011, we recorded identifiable intangible assets related to developed technology, customer relationships, licensed technology, patents, and in-process research and development based on guidance for determining fair value under the provisions of ASC 820, "Fair Value Measurements."The following tables summarize the details of our Intangible assets, net as of December 30, 2017 and December 31, 2016:
December 31, 2022 | |||||||||||||||
(In thousands) | Weighted Average Amortization Period (in years) | Gross | Accumulated Amortization | Intangible assets, net | |||||||||||
Existing technology | 5.1 | $ | 124,487 | $ | (113,157 | ) | $ | 11,330 | |||||||
Customer relationships | 6.1 | 32,734 | (24,509 | ) | 8,225 | ||||||||||
Trade name / trademarks | 10.0 | 1,500 | (169 | ) | 1,331 | ||||||||||
Licensed technology | 6.3 | 6,671 | (2,487 | ) | 4,184 | ||||||||||
Total identified intangible assets | $ | 165,392 | $ | (140,322 | ) | $ | 25,070 | ||||||||
January 1, 2022 | |||||||||||||||
(In thousands) | Weighted Average Amortization Period (in years) | Gross | Accumulated Amortization | Intangible assets, net | |||||||||||
Existing technology | 5.1 | $ | 124,487 | $ | (111,090 | ) | $ | 13,397 | |||||||
Customer relationships | 6.1 | 32,734 | (22,947 | ) | 9,787 | ||||||||||
Trade name / trademarks | 10.0 | 1,500 | (19 | ) | 1,481 | ||||||||||
Licensed technology | 6.3 | 6,551 | (1,434 | ) | 5,117 | ||||||||||
Total identified intangible assets | $ | 165,272 | $ | (135,490 | ) | $ | 29,782 | ||||||||
| December 30, 2017 | ||||||||||||||||||
| (In thousands) | Weighted Average Amortization Period (in years) | Gross | Impairment | Accumulated Amortization | Intangible assets, net | |||||||||||||
| Developed technology | 4.7 | $ | 158,700 | $ | (32,431 | ) | $ | (81,847 | ) | $ | 44,422 | |||||||
| Customer relationships | 5.7 | 22,934 | — | (16,696 | ) | 6,238 | ||||||||||||
| Licensed technology | 3.5 | 2,392 | — | (1,744 | ) | 648 | ||||||||||||
| Total identified intangible assets | $ | 184,026 | $ | (32,431 | ) | $ | (100,287 | ) | $ | 51,308 | ||||||||
| December 31, 2016 | ||||||||||||||||||
| (In thousands) | Weighted Average Amortization Period (in years) | Gross | Impairment | Accumulated Amortization | Intangible assets, net | |||||||||||||
| Developed technology | 4.7 | $ | 141,359 | $ | — | $ | (55,493 | ) | $ | 85,866 | ||||||||
| Customer relationships | 6.1 | 30,800 | (7,866 | ) | (13,694 | ) | 9,240 | |||||||||||
| Licensed technology | 3.3 | 2,127 | — | (1,201 | ) | 926 | ||||||||||||
| Patents | 5 | 769 | — | (279 | ) | 490 | ||||||||||||
| Total identified finite-lived intangible assets | 175,055 | (7,866 | ) | (70,667 | ) | 96,522 | ||||||||||||
| In-process research and development | indefinite | 22,341 | — | — | 22,341 | |||||||||||||
| Total identified intangible assets | $ | 197,396 | $ | (7,866 | ) | $ | (70,667 | ) | $ | 118,863 | ||||||||
We recorded amortization expense related to intangible assets on the Consolidated Statements of Operations as presented in the following table:
| Year Ended | |||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||||||
| Research and development | $ | 569 | $ | 745 | $ | 731 | |||||
| Amortization of acquired intangible assets | 31,340 | 33,575 | 29,580 | ||||||||
| $ | 31,909 | $ | 34,320 | $ | 30,311 | ||||||
Year Ended | ||||||||||||
December 31, | January 1, | January 2, | ||||||||||
(In thousands) | 2022 | 2022 | 2021 | |||||||||
Research and development | $ | 1,054 | $ | 901 | $ | 124 | ||||||
Amortization of acquired intangible assets | 3,778 | 2,613 | 4,449 | |||||||||
| $ | 4,832 | $ | 3,514 | $ | 4,573 | |||||||
The annual expected amortization expense of acquired intangible assets with finite lives is as follows:
Fiscal year | (In thousands) | |||
2023 | $ | 4,522 | ||
2024 | 4,310 | |||
2025 | 4,263 | |||
2026 | 4,261 | |||
2027 | 4,197 | |||
Thereafter | 3,517 | |||
Total | $ | 25,070 | ||
| (In thousands) | Amount | ||
| 2018 | $ | 19,419 | |
| 2019 | 16,619 | ||
| 2020 | 7,504 | ||
| 2021 | 5,148 | ||
| 2022 | 2,352 | ||
| Thereafter | 266 | ||
| Total | $ | 51,308 | |
On September 1, 2022, we entered into an Amended and Restated Credit Agreement (the “2022 Credit Agreement”), which provides for a five-year secured revolving loan facility with an aggregate principal amount of Goodwillup to $350 million, along with other components and Acquired Intangible Assets
We drew down an initial $150 million revolving loan at closing, which we used along with $1.9 million of cash to (i) repay the $150.5 million term loan, revolving loan, and accrued interest obligations outstanding under our previous credit agreement (the “2019 Credit Agreement”), and (ii) pay fees and expenses totaling $1.4 million incurred in connection with our acquisitions of Silicon Image in March 2015 and SiliconBlue in December 2011 we recorded goodwill and identifiable intangible assets relatedthe 2022 Credit Agreement. We intend to developed technology, customer relationships, licensed technology, patents, and in-process research. We monitor the carrying value of our goodwill and acquired intangible assets for potential impairment and test the recoverability of such assets annually during the fourth quarter and whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. When we are required to determine the fair value of intangible assets other than goodwill, we use the income approach. We start withrevolving loan facility for working capital and general corporate purposes.
At our option, the revolving loans accrue interest at a forecastper annum rate based on ranges determined by our consolidated total leverage ratio of all expected net cash flows associated witheither (i) the asset and then apply a discountbase rate to arrive at fair value.
With the amendment of our 2019 Credit Agreement pursuant to the long-lived assets2022 Credit Agreement, we capitalized $0.9 million of the Qterics operating segment. For purposesnew debt costs, and expensed $0.7 million of testing for impairmentdebt costs and existing original issue discount ("OID") as a loss on refinancing in fiscal 2015, the Company operated as two reporting units: the continuing core Lattice ("Core") business, which includes intellectual property and semiconductor devices, and Qterics, which was a discrete software-as-a-service business unit in the Lattice legal entity structure until it was sold in April 2016. Although these two operating segments constituted two reportable segments in fiscal 2015, we combined Qterics withOther (expense) income, net on our Core business and reported them together as one reportable segment due to the immaterial nature of the Qterics segment. Following this assessment, we concluded that goodwill and intangible assets had been impaired in the Qterics segment as of December 31, 2016. As a result we recorded an impairment charge amounting to $21.7 million, or approximately 92% of the previous value of goodwill and intangible assets, in the Consolidated Statements of Operations for fiscal 2022. We determine the year ended December 31, 2016, comprising $12.7 million pertaining to goodwill, $3.9 million pertaining to developed technology, and $5.1 million pertaining to customer relationships. The valuation was based onCurrent portion of long-term debt, if any, as the market approach and was our best estimate of fair value assum of the end of fiscal 2015. No impairment charges were recorded forrequired debt payments to be made over the Core segment in fiscal 2015.
The revolving loans under the 2022 Credit Agreement may be repaid and reborrowed at our gross investment in the investee to $6.0 million.
The fair value of our long-term debt approximates the carrying value, which is reflected in our Consolidated Balance Sheets while outstanding. The investee repaid the total advances in October 2017.as follows:
December 31, | January 1, | |||||||
(In thousands) | 2022 | 2022 | ||||||
Principal amount | $ | 130,000 | $ | 158,750 | ||||
Unamortized original issuance discount and debt costs | (1,248 | ) | (817 | ) | ||||
Less: Current portion of long-term debt | — | (17,173 | ) | |||||
Long-term debt, net of current portion and unamortized debt issue costs | $ | 128,752 | $ | 140,760 | ||||
Interest expense related to our long-term debt that effectively subordinates our ownership position between their debt and common shareholders. After evaluating these events and our investment position, we concluded that we have a variable interest in the privately-held company. However, since we are not the primary beneficiary of the investee, are not holding in-substance common stock, and do not have a significant amount of influence to direct the activities that most significantly impact the investee’s economic performance, accordingly we account for our investment in this company under the cost method.
| Year Ended | ||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||
| Impairment of cost-basis investment | $ | (1,761 | ) | $ | (1,459 | ) | $ | (492 | ) | |||
| (In thousands) | Total | |||
| Balance at January 2, 2016 | $ | 4,508 | ||
| Investment made during fiscal year | 1,000 | |||
| Impairment of cost-basis investment | (1,459 | ) | ||
| Balance at December 31, 2016 | 4,049 | |||
| Impairment of cost-basis investment | (1,761 | ) | ||
| Balance at December 30, 2017 | $ | 2,288 | ||
| Amount of each | ||||||
| Fiscal Year | Frequency | payment (In thousands) | ||||
| 2017 | In the fourth calendar quarter | $ | 625 | |||
| 2018 | At the end of each calendar quarter | $ | 875 | |||
| 2019 | At the end of each calendar quarter | $ | 1,250 | |||
| (In thousands) | December 30, 2017 | December 31, 2016 | |||||
| Trade accounts payable | $ | 35,350 | $ | 37,800 | |||
| Liability for non-cancelable contracts | 4,531 | 5,744 | |||||
| Payable to members of the MHL and HDMI consortia* | 87 | 9,698 | |||||
| Other accrued expenses | 14,437 | 27,691 | |||||
| Total accounts payable and accrued expenses | $ | 54,405 | $ | 80,933 | |||
| Fiscal year | Amount | |||
| (In thousands) | ||||
| 2018 | $ | 6,310 | ||
| 2019 | 4,784 | |||
| 2020 | 4,860 | |||
| 2021 | 4,654 | |||
| 2022 | 4,694 | |||
| Thereafter | 14,259 | |||
| $ | 39,561 | |||
| Year Ended | ||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||
| Domestic | $ | (17,341 | ) | $ | (33,962 | ) | $ | (93,229 | ) | |||
| Foreign | (52,372 | ) | (10,220 | ) | (33,464 | ) | ||||||
| Loss before taxes | $ | (69,713 | ) | $ | (44,182 | ) | $ | (126,693 | ) | |||
| Year Ended | ||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||
| Current: | ||||||||||||
| Federal | $ | 508 | $ | 1,896 | $ | 968 | ||||||
| State | 30 | 13 | 80 | |||||||||
| Foreign | 304 | 7,918 | 10,634 | |||||||||
| 842 | 9,827 | 11,682 | ||||||||||
| Deferred: | ||||||||||||
| Federal | — | — | 18,713 | |||||||||
| State | — | — | 2,318 | |||||||||
| Foreign | 7 | 90 | (173 | ) | ||||||||
| 7 | 90 | 20,858 | ||||||||||
| Income tax expense | $ | 849 | $ | 9,917 | $ | 32,540 | ||||||
| Year Ended | ||||||
| December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||
| % | % | % | ||||
| Statutory federal rate | (35) | (35) | (35) | |||
| Adjustments for tax effects of: | ||||||
| State taxes, net | (7) | 7 | (6) | |||
| Research and development credits | (1) | (2) | (2) | |||
| Stock compensation | 3 | 3 | 1 | |||
| Foreign rate differential | 28 | 15 | 12 | |||
| Foreign dividends | 1 | — | 5 | |||
| Foreign withholding taxes | — | 9 | 3 | |||
| Other permanent | — | 3 | 4 | |||
| Goodwill impairment | — | — | 4 | |||
| Valuation allowance | (73) | 17 | 46 | |||
| Change in uncertain tax benefit accrual | 1 | 5 | (8) | |||
| Stock compensation adoption | (8) | — | — | |||
| Tax rate change | 93 | — | 3 | |||
| Other | (1) | 1 | (1) | |||
| Effective income tax rate | 1 | 23 | 26 | |||
| (In thousands) | December 30, 2017 | December 31, 2016 | ||||||
| Deferred tax assets: | ||||||||
| Accrued expenses and reserves | $ | 3,096 | $ | 5,143 | ||||
| Inventory | 2 | 290 | ||||||
| Deferred Revenue | 228 | 426 | ||||||
| Stock-based and deferred compensation | 4,018 | 7,269 | ||||||
| Intangible assets | 19,576 | 20,063 | ||||||
| Fixed assets | 216 | 678 | ||||||
| Net operating loss carry forwards | 86,410 | 137,521 | ||||||
| Tax credit carry forwards | 90,530 | 89,174 | ||||||
| Capital loss carry forwards | 3,926 | 962 | ||||||
| Other | 2,323 | 2,973 | ||||||
| 210,325 | 264,499 | |||||||
| Less: valuation allowance | (209,691 | ) | (260,687 | ) | ||||
| Net deferred tax assets | 634 | 3,812 | ||||||
| Deferred tax liabilities: | ||||||||
| Fixed Assets | 559 | — | ||||||
| Other | 16 | 3,746 | ||||||
| Total deferred tax liabilities | 575 | 3,746 | ||||||
| Net deferred tax assets | $ | 59 | $ | 66 | ||||
| (In thousands) | Amount | |||
| Balance at January 3, 2015 | $ | 18,673 | ||
| Additions based on tax positions related to the current year | 4,381 | |||
| Additions based on tax positions of prior years | — | |||
| Additions due to acquisition | 41,083 | |||
| Reduction for tax positions of prior years | (14,958 | ) | ||
| Settlements | — | |||
| Reduction as a result of lapse of applicable statute of limitations | (972 | ) | ||
| Balance at January 2, 2016 | 48,207 | |||
| Additions based on tax positions related to the current year | 2,573 | |||
| Additions based on tax positions of prior years | 530 | |||
| Additions due to acquisition | — | |||
| Reduction for tax positions of prior years | (1,824 | ) | ||
| Settlements | — | |||
| Reduction as a result of lapse of applicable statute of limitations | (1,863 | ) | ||
| Balance at December 31, 2016 | 47,623 | |||
| Additions based on tax positions related to the current year | 471 | |||
| Additions based on tax positions of prior years | 11 | |||
| Additions due to acquisition | — | |||
| Reductions for tax positions of prior years | (1,226 | ) | ||
| Settlements | — | |||
| Reduction as a result of lapse of applicable statute of limitations | (2,047 | ) | ||
| Balance at December 30, 2017 | $ | 44,832 | ||
Year Ended | ||||||||||||
December 31, | January 1, | January 2, | ||||||||||
(In thousands) | 2022 | 2022 | 2021 | |||||||||
Contractual interest | $ | 4,500 | $ | 2,304 | $ | 3,319 | ||||||
Amortization of original issuance discount and debt costs | 310 | 362 | 400 | |||||||||
Total interest expense related to long-term debt | $ | 4,810 | $ | 2,666 | $ | 3,719 | ||||||
In September 2022, our management approved and implemented additional contract cancellations and headcount reductions under the 2017 Tax Act. Due to the lack of authoritative guidance issued, complexity,Q22019 Sales Plan, an internal restructuring plan that our management approved and enactment timingexecuted in April 2019. The Q22019 Sales Plan focused on a restructuring of the global sales organization through cancellation of certain contracts and a workforce reduction. With these actions, we incurred approximately $1.0 million of incremental restructuring costs in fiscal 2022. Under this plan, no restructuring expense was incurred during fiscal 2021, and we incurred restructuring expense of approximately $0.1 million during fiscal 2020. Under this plan, approximately $3.1 million of total expense has been incurred through December 31, 2022. All actions planned under the Q22019 Sales Plan have been implemented.
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. Under this plan, we recorded a credit of approximately $0.1 million during fiscal 2022, and we incurred restructuring expense of approximately $0.2 million and $2.0 million, respectively, during fiscal 2021 and 2020. Approximately $2.1 million of total expense has been incurred through December 31, 2022 under the Q12020 Plan. All actions planned under the Q12020 Plan have been implemented.
In June 2017, Tax Act, we have made a reasonable estimate of the income tax effect of the deemed repatriation of deferred foreign earnings. We may refine this as additional guidance, clarification, and analysis is available. Any changes to our estimate will be reflected in continuing operations in the period the amounts are determined and within the “measurement period” allowed under SAB 118.
These expenses and certain assets related to our Simplay Labs testing and certification business, a worldwide workforce reduction, and an initiative to reduce our infrastructure costs. These actions are part of an overall plan to achieve financial targets and to enhance our financial and competitive position by better aligning our revenue and operating expenses. Approximately $8.0 million of total expense has been incurred through December 30, 2017 under the June 2017 Plan, and we expect the total cost to be approximately $8.0 million to $19.0 million.
The following table displays the activity related to the restructuring plans described above:
(In thousands) | Severance & Related (1) | Lease Termination & Fixed Assets | Other (2) | Total | ||||||||||||
Accrued Restructuring at December 28, 2019 | $ | 160 | $ | 6,585 | $ | 865 | $ | 7,610 | ||||||||
Restructuring charges | 1,669 | 1,896 | 372 | 3,937 | ||||||||||||
Costs paid or otherwise settled | (1,583 | ) | (248 | ) | (573 | ) | (2,404 | ) | ||||||||
Accrued Restructuring at January 2, 2021 | $ | 246 | $ | 8,233 | $ | 664 | $ | 9,143 | ||||||||
Restructuring charges | 250 | 690 | — | 940 | ||||||||||||
Costs paid or otherwise settled | (245 | ) | (1,793 | ) | (664 | ) | (2,702 | ) | ||||||||
Accrued Restructuring at January 1, 2022 | $ | 251 | $ | 7,130 | $ | — | $ | 7,381 | ||||||||
Restructuring charges | 303 | 1,608 | 640 | 2,551 | ||||||||||||
Costs paid or otherwise settled | (154 | ) | (2,846 | ) | — | (3,000 | ) | |||||||||
Accrued Restructuring at December 31, 2022 | $ | 400 | $ | 5,892 | $ | 640 | $ | 6,932 | ||||||||
(1) | Includes employee relocation costs and outplacement costs | |
(2) | Includes termination fees on the cancellation of certain contracts |
| (In thousands) | Severance & related * | Lease termination | Software Contracts & Engineering Tools** | Other | Total | ||||||||||||||
| Balance at January 3, 2015 | $ | — | $ | 43 | $ | — | $ | 139 | $ | 182 | |||||||||
| Restructuring charges | 12,861 | 2,667 | 3,040 | 671 | 19,239 | ||||||||||||||
| Costs paid or otherwise settled | (9,165 | ) | (1,705 | ) | (2,663 | ) | (810 | ) | (14,343 | ) | |||||||||
| Balance at January 2, 2016 | $ | 3,696 | $ | 1,005 | $ | 377 | $ | — | $ | 5,078 | |||||||||
| Restructuring charges | 2,883 | 2,993 | 1,903 | 1,488 | 9,267 | ||||||||||||||
| Costs paid or otherwise settled | (5,778 | ) | (2,962 | ) | (2,255 | ) | (1,476 | ) | (12,471 | ) | |||||||||
| Balance at December 31, 2016 | $ | 801 | $ | 1,036 | $ | 25 | $ | 12 | $ | 1,874 | |||||||||
| Restructuring charges | 2,484 | 811 | 3,066 | 835 | 7,196 | ||||||||||||||
| Costs paid or otherwise settled | (2,093 | ) | (977 | ) | (2,731 | ) | (822 | ) | (6,623 | ) | |||||||||
| Balance at December 30, 2017 | $ | 1,192 | $ | 870 | $ | 360 | $ | 25 | $ | 2,447 | |||||||||
We have operating leases for corporate offices, sales offices, research and accelerated stock compensation
The Term Loan bears variable interest equalfollowing table presents the lease balance classifications within the Consolidated Balance Sheets and summarizes their activity during fiscal 2022:
Operating lease right-of-use assets | (In thousands) | |||
Balance as of January 1, 2022 | $ | 23,818 | ||
Right-of-use assets obtained for new lease contracts during the period | 2,134 | |||
Amortization of right-of-use assets during the period | (6,512 | ) | ||
Impairment of right-of use asset during the period (recorded in Restructuring charges) | (1,149 | ) | ||
Adjustments for present value and foreign currency effects | (701 | ) | ||
Balance as of December 31, 2022 | $ | 17,590 | ||
Operating lease liabilities | (In thousands) | |||
Balance as of January 1, 2022 | $ | 24,944 | ||
Lease liabilities incurred for new lease contracts during the period | 2,134 | |||
Accretion of lease liabilities | 1,087 | |||
Operating cash used by payments on lease liabilities | (7,419 | ) | ||
Adjustments for present value and foreign currency effects | (674 | ) | ||
Balance as of December 31, 2022 | 20,072 | |||
Less: Current portion of operating lease liabilities (included in Accrued liabilities) | (6,454 | ) | ||
Long-term operating lease liabilities, net of current portion | $ | 13,618 | ||
Lease obligations for facilities restructured prior to the one-month LIBOR, subjectadoption of Topic 842 totaled approximately $5.9 million at December 31, 2022 and continued to a 1.00% floor, plus a spread of 4.25%. The current effective interest rate on the Term Loan is 6.29%.
Maturities of Operations over the contractual term, using the effective interest method.
| (in thousands) | December 30, 2017 | December 31, 2016 | |||||
| Principal amount | $ | 306,791 | $ | 342,221 | |||
| Unamortized original issue discount and debt issuance costs | (5,616 | ) | (7,599 | ) | |||
| Less: Current portion of long-term debt | (1,508 | ) | (33,767 | ) | |||
| Long-term debt | $ | 299,667 | $ | 300,855 | |||
| Year Ended | |||||||||||
| (in thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||||||
| Contractual interest | $ | 16,503 | $ | 18,518 | $ | 15,225 | |||||
| Amortization of debt issuance costs and discount | 1,982 | 1,350 | 2,835 | ||||||||
| Total Interest expense related to the Term Loan | $ | 18,485 | $ | 19,868 | $ | 18,060 | |||||
| Fiscal year | (in thousands) | |||
| 2018 | $ | 3,500 | ||
| 2019 | 26,235 | |||
| 2020 | 59,187 | |||
| 2021 | 217,869 | |||
| $ | 306,791 | |||
Fiscal year | (In thousands) | |||
2023 | 7,536 | |||
2024 | 6,042 | |||
2025 | 4,140 | |||
2026 | 2,522 | |||
2027 | 1,110 | |||
Thereafter | 934 | |||
Total lease payments | 22,284 | |||
Less: amount representing interest | (2,212 | ) | ||
Total lease liabilities | $ | 20,072 | ||
Employee and Director Stock Options, Restricted Stock, and ESPP
We have fourtwo active equity incentive plans, (the "1996 Stock Incentive Plan," the "2001 Stock Plan," the "20132013 Incentive Plan" and the "2011"2011 Non-Employee Director Equity Incentive Plan"). Awards granted, under the 1996 Stock Incentive Plan and the 2001 Stock Plan remain outstanding, but nowhich shares are available for future awards under these plans. Shares remain available for grants to employees and non-employee directors, only underrespectively. In addition, we have made grants of inducement awards to certain executives and employees that are granted outside of, but governed by, the 2013 Incentive Plan and the 2011 Non-Employee Director Equity Incentive Plan, respectively.Plan. "Incentive stock options" under Section 422 of the U.S. Internal Revenue Code and restricted stock unit ("RSU") grants are part of our equity compensation practices for employees who receive equity grants. Options and RSUs generally vest quarterly over a four-yearfour-year period beginning on the grant date. The contractual terms of options granted do not exceed ten years.
In May 2012, the Company's stockholders approved the 2012 Employee Stock Purchase Plan ("("2012 ESPP"), which authorizes the issuance of 3.0 million shares of common stock to eligible employees to purchase shares of common stock through payroll deductions, which cannot exceed 10% of an employee's compensation. The purchase price of the shares is the lower of 85% of the fair market value of the stock at the beginning of each six-monthsix-month offering period or 85% of the fair market value at the end of such period. During fiscal 2017 only, the ESPP was suspended. We have treated the 2012 ESPP as a compensatory plan. We recorded no related compensation expense in fiscal 2017, and related compensation expense of $0.6 million and $0.4 million for fiscal years 2016 and 2015, respectively.
At December 31, 2022, a total of 5.0 million shares of our common stock were available for future grants under the 2013 Incentive Plan and the 2011 Non-Employee Director Equity Incentive Plan. Following our 2018 Shareholder meeting, a share ratio of 2.2:1 was applied to the 2013 Incentive Plan. This ratio takes two and two-tenths shares out of the 2013 Plan for every one full value share granted. During fiscal 2022, a total of 2.5 million shares were adjusted out of the 2013 Plan. Shares subject to stock option grants that expire or are canceled, without delivery of such shares, generally become available for re-issuance under equity incentive plans. At December 30, 2017, a total of 1.9 million shares of our common stock were available for future purchases under the 2012 ESPP. On March 10, 2015, in conjunction with the acquisition of Silicon Image, we assumed certain outstanding stock option and RSU grants of the Silicon Image Equity Incentive Plans. We assumed all stock option grants that were unvested or vested and out-of-the-money and all outstanding unvested RSU grants. The exchange ratio for the conversion was 1.09816 for all grants. The conversion ratio was determined by the weighted average closing price of Lattice common stock for the ten days prior to the acquisition date divided by the offer price of $7.30. The converted outstanding option grants totaled 2,087,605 shares and converted RSU grants totaled 2,025,255 shares as of March 10, 2015. As of December 30, 2017, 275,991 options and 30,679 RSU shares arising from this conversion remained outstanding.
Stock-Based Compensation
Total stock-based compensation expense included in our Consolidated Statements of Operations is presented in the following table:
| Year Ended | ||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||
| Cost of products sold | $ | 795 | $ | 888 | $ | 1,416 | ||||||
| Research and development | 5,245 | 7,928 | 9,141 | |||||||||
| Selling, general, and administrative | 6,503 | 7,397 | 6,793 | |||||||||
| Acquisition related charges | — | — | 4,293 | |||||||||
| Total stock-based compensation | $ | 12,543 | $ | 16,213 | $ | 21,643 | ||||||
Year Ended | ||||||||||||
December 31, | January 1, | January 2, | ||||||||||
(In thousands) | 2022 | 2022 | 2021 | |||||||||
Cost of revenue | $ | 3,674 | $ | 3,049 | $ | 3,179 | ||||||
Research and development | 19,645 | 14,563 | 10,124 | |||||||||
Selling, general, and administrative | 32,211 | 28,863 | 27,069 | |||||||||
Total stock-based compensation | $ | 55,530 | $ | 46,475 | $ | 40,372 | ||||||
ESPP and director options and ESPP rights that are expected to vest.
The fair values of each option award on the date of grant and of the shares expected to be issued under the employee stock purchase plan areand of each option award on the date of grant were estimated using the Black-Scholes valuation model and the assumptions noted in the following table.No new stock options were granted during fiscal 2022,2021, or 2020. The expected volatility of both ESPP shares and stock options is based on the daily historical volatility of our stock price, measured over the ESPP purchase period or the expected term of the option. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term closest to the expected term of the option. The expected term is based on historical vested option exercises and includes an estimate of the expected term for options that are fully vested and outstanding. The expected volatility of both stock options and ESPP shares is based on the daily historical volatility of our stock price, measured over the expected term of the option or the ESPP purchase period. The risk-free interest rate is based on the impliedDividend yield on a U.S. Treasury zero-coupon issue with a remaining term closest to the expected term of the option. The dividend yield reflects thathas no valuation impact, as we have not paid any cash dividends since inception and do not intend to pay any cash dividends in the foreseeable future.
The following table summarizes the assumptions used in the valuation of stockESPP compensation for the periods presented:
Year Ended | ||||||
December 31, | January 1, | January 2, | ||||
2022 | 2022 | 2021 | ||||
Employee Stock Purchase Plan | ||||||
Weighted average expected volatility | 60.3% | 39.9% | 48.2% | |||
Weighted average risk-free interest rate | 3.74% | 0.07% | 0.89% | |||
Expected term (in months) | 6 | 6 | 6 | |||
The weighted average fair values for the ESPP, calculated using the Black-Scholes option pricing model with the noted assumptions for the ESPP, were $15.25, $13.04, and ESPP compensation:
| Year Ended | |||||
| December 30, 2017 | December 31, 2016 | January 2, 2016 | |||
| Employee and Director Stock Options | |||||
| Expected volatility | 40.96% to 48.01% | 44.2% to 50.8% | 43.6% to 47.3% | ||
| Risk-free interest rate | 1.99% to 2.09% | .94% to 2.06% | 1.4% to 1.7% | ||
| Expected term (years) | 4.08 to 4.25 | 4.06 to 4.78 | 4.08 to 4.75 | ||
| Dividend yield | —% | —% | —% | ||
| Employee Stock Purchase Plan * | |||||
| Weighted average expected volatility | —% | 57.9% | 33.6% | ||
| Weighted average risk-free interest rate | —% | 0.43% | 0.12% | ||
| Expected term | N/A | 6 months | 6 months | ||
| Dividend yield | —% | —% | —% | ||
| * ESPP suspended during fiscal 2017 only | |||||
At December 30, 2017, 31, 2022, there was $12.4 million of totalno unrecognized compensation cost related to unvested employee and director stock options, which is expected to be recognized over a weighted average period of 2.8 years. Our current practice is to issue new shares to satisfy option exercises.options. Compensation expense for all stock-based compensation awards is recognized using the straight-line method. We recorded stock compensation expense related to the ESPP of approximately $1.5 million, $1.2 million, and $1.0 million in fiscal 2022, 2021, and 2020, respectively. Related to stock options, we recorded no expense in fiscal 2022, and approximately $1.0 million and $2.0 million, in fiscal 2021 and 2020, respectively.
The following table summarizes our stock option activity and related information for the year ended December 30, 2017:
| (Shares and aggregate intrinsic value in thousands) | Shares | Weighted average exercise price | Weighted average remaining contractual term (years) | Aggregate Intrinsic Value | ||||||||
| Balance, December 31, 2016 | 12,566 | $ | 5.70 | |||||||||
| Granted | 3,732 | 5.73 | ||||||||||
| Exercised | (1,803 | ) | 5.07 | |||||||||
| Forfeited or expired | (1,556 | ) | 6.00 | |||||||||
| Balance, December 30, 2017 | 12,939 | $ | 5.77 | |||||||||
| Vested and expected to vest at December 30, 2017 | 12,939 | $ | 5.77 | 4.47 | $ | 3,333 | ||||||
| Exercisable, December 30, 2017 | 6,601 | $ | 5.81 | 2.87 | $ | 2,485 | ||||||
(Shares and aggregate intrinsic value in thousands) | Shares | Weighted average exercise price | Weighted average remaining contractual term (years) | Aggregate Intrinsic Value | ||||||||||||
Balance, January 1, 2022 | 1,367 | $ | 6.62 | |||||||||||||
Granted | — | — | ||||||||||||||
Exercised | (448 | ) | 6.48 | |||||||||||||
Forfeited or expired | (1 | ) | 5.01 | |||||||||||||
Balance, December 31, 2022 | 918 | $ | 6.70 | |||||||||||||
Vested and expected to vest at December 31, 2022 | 918 | $ | 6.70 | 1.93 | $ | 53,433 | ||||||||||
Exercisable, December 31, 2022 | 918 | $ | 6.70 | 1.93 | $ | 53,433 | ||||||||||
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that day. This amount changes based on the fair market value of the Company's stock. Total intrinsic value of options exercised for fiscal 2017, 20162022, 2021, and 2015, and2020 was $2.2$24.3 million, $3.3$44.7 million, and $2.5$21.5 million, respectively. The total fair value of options and RSUs vested and expensed in fiscal 2017, 2016 and 2015 and was $12.5 million, $15.6 million and $18.0 million, respectively.
Time-Based Restricted Stock Unit Awards
The following table summarizes the activity for our RSU activitytime-based RSUs for the year ended December 30, 2017:
| (Shares in thousands) | Shares | Weighted average grant date fair value | ||||
| Balance, December 31, 2016 | 3,247 | $ | 5.90 | |||
| Granted | 1,530 | 5.83 | ||||
| Exercised | (1,478 | ) | 5.95 | |||
| Forfeited or expired | (533 | ) | 5.84 | |||
| Balance, December 30, 2017 | 2,766 | $ | 5.85 | |||
(Shares in thousands) | Shares | Weighted average grant date fair value | ||||||
Balance, January 1, 2022 | 2,188 | $ | 31.85 | |||||
Granted | 843 | 62.23 | ||||||
Vested | (1,132 | ) | 24.34 | |||||
Forfeited or expired | (78 | ) | 41.21 | |||||
Balance, December 31, 2022 | 1,821 | $ | 50.18 | |||||
At December 30, 2017 31, 2022, there was $14.4$81.6 million of total unrecognized compensation costexpense related to unvested time-based RSUs. Our current practice is to issue new shares when RSUs vest. Compensation expense for RSUs is recognized using the straight-line method over the related vesting period.
Market-Based and Performance-Based Awards
In 2020 through 2017,2022, we granted stock optionsawards of RSUs with either a market condition or a performance condition to certain executives.
Market-Based and Performance-Based Awards — Grants
In the first quarters of fiscal 2022,2021 and 2020,we granted awards of RSUs with a market condition to certain executives. The options haveUnder the terms of these grants, the RSUs with a two year vesting andmarket condition vest between 0% and 200% of the target amount,over a three-year period based on the Company's Company’s total shareholder return ("TSR") relative Total Shareholder Return (TSR) whento the Russell 2000 index, which condition is measured for the 2022 and 2021grants on the third anniversary of the grant date, and measured for one-half of the 2020 grants on the second and third anniversary of the grant date. The awards may vest at 250% or 200%, depending upon the executive, if the 75th percentile of the market condition is achieved, with 100% of the units vesting at the 55th percentile, zero vesting if relative TSR is below the 25th percentile, and vesting scaling for achievement between the 25th and 75th percentile.
In the first quarter of fiscal 2021, we also granted awards of RSUs with a performance condition to certain executives, to specifically drive additional executive attention and focus on the Company’s revenue growth priorities. Under the terms of these grants, the RSUs with a performance condition will vest based on the Company generating specified levels of year-over-year revenue growth, which will be measured annually for one-fourth of the grants after each fiscal year-end through the end of fiscal 2024. Vesting of these awards scales for achievement of year-over-year revenue growth compared to certain targets, with maximum vesting up to 200%. Vesting of each tranche of these awards occurs 13 months after the performance conditions is met, and the entire award cannot be fully earned until five years from grant. For the first and second tranches of these awards, the Company had met the year-over-year revenue growth performance criteria at the 200% level of achievement as of January 1, 2022 and December 31, 2022, respectively.
Market-Based and Performance-Based Awards — Vesting
For our awards with a market condition or a performance condition, we incurred stock compensation expense, including the effect of the modification in the first quarter of fiscal 2020, of approximately $24.0 million, $22.1 million, and $20.8 million in fiscal years 2022, 2021, and 2020, respectively, which is recorded as a component of companiestotal stock-based compensation. At December 31, 2022, there was $21.6 million of unrecognized compensation expense related to unvested RSUs with a market condition or a performance condition. Awards with a TSR market condition were valued using a Monte Carlo simulation model.
The following table summarizes the PHLX Semiconductor Sector Index over a two year period. TSR is a measure of stock price appreciation plus dividends paid, if any,assumptions used at the grant date in the valuation of RSUs with a market or performance period. The fair values of the options and RSUs were determined and fixed on the date of grant using a lattice-based option-pricing valuation model incorporating a Monte-Carlo simulation and a consideration of the likelihood that we would achieve the market condition.
Year Ended | ||||||
December 31, | January 1, | January 2, | ||||
2022 | 2022 | 2021 | ||||
Executive RSUs with a market condition or performance condition | ||||||
Weighted average expected volatility | 51.44% | 50.37% to 52.11% | 42.38% | |||
Weighted average risk-free interest rate | 1.67% | 0.22% to 0.77% | 1.40% | |||
Expected term (years) | 3.00 | 3.00 to 5.00 | 3.00 | |||
The following table summarizes the activity for our stock options with a market condition:
| (Shares in thousands) | Unvested | Vested | Total | ||||||
| Balance, December 31, 2016 | 597 | — | 597 | ||||||
| Granted | 475 | — | 475 | ||||||
| Vested | (92 | ) | 92 | — | |||||
| Exercised | — | (9 | ) | (9 | ) | ||||
| Canceled | (273 | ) | — | (273 | ) | ||||
| Balance, December 30, 2017 | 707 | 83 | 790 | ||||||
(Shares in thousands) | Shares | Weighted average grant date fair value | ||||||
Balance, January 1, 2022 | 1,246 | $ | 41.23 | |||||
Granted | 183 | 96.63 | ||||||
Effect of vesting multiplier | 642 | |||||||
Vested | (1,086 | ) | 20.38 | |||||
Balance, December 31, 2022 | 985 | $ | 60.15 | |||||
Note 12 - Common Stock Repurchase Program
On August 8, 2022, we announced that our Board of Directors had approved a stock repurchase program pursuant to which up to $150 million of outstanding common stock could be repurchased from time to time (the "2023 Repurchase Program"). The duration of the 2023 Repurchase Program is through the end of December 2023. Under the 2023 Repurchase Program during the fourth quarter of fiscal 2022, we repurchased 288,652 shares for $20.0 million, or an average price paid per share of $69.27. All repurchases were open market transactions funded from available working capital. All shares repurchased pursuant to the 2023 Repurchase Program were retired by the end of the fourth quarter of fiscal 2022. As of December 31, 2022, the remaining portion of the amount authorized for the 2023 Repurchase Program is approximately $129.7 million. We repurchased a certain executivetotal of 1,951,934 shares for $110.1 million, or an average price paid per share of $56.42, during fiscal year 2022.
We are subject to federal and state income tax as well as income tax in fiscal 2015. These RSUs had the same market conditionvarious foreign jurisdictions in which we operate.
The domestic and foreign components of Income before income taxes were as follows:
Year Ended | ||||||||||||
| December 31, | January 1, | January 2, | ||||||||||
(In thousands) | 2022 | 2022 | 2021 | |||||||||
Domestic | $ | 30,362 | $ | 24,003 | $ | 11,772 | ||||||
Foreign | 151,750 | 73,623 | 36,684 | |||||||||
Income before taxes | $ | 182,112 | $ | 97,626 | $ | 48,456 | ||||||
The components of Income tax expense are as follows:
Year Ended | ||||||||||||
| December 31, | January 1, | January 2, | ||||||||||
(In thousands) | 2022 | 2022 | 2021 | |||||||||
Current: | ||||||||||||
Federal | $ | 748 | $ | 445 | $ | 54 | ||||||
State | 265 | 45 | 68 | |||||||||
Foreign | 3,637 | 1,538 | 1,025 | |||||||||
| 4,650 | 2,028 | 1,147 | ||||||||||
Deferred: | ||||||||||||
Federal | — | — | — | |||||||||
State | — | — | — | |||||||||
Foreign | (1,420 | ) | (324 | ) | (83 | ) | ||||||
| (1,420 | ) | (324 | ) | (83 | ) | |||||||
Income tax expense | $ | 3,230 | $ | 1,704 | $ | 1,064 | ||||||
Income tax expense differs from the stock options above amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:
Year Ended | |||||||||
| December 31, | January 1, | January 2, | |||||||
| 2022 | 2022 | 2021 | |||||||
% | % | % | |||||||
Statutory federal rate | 21 | 21 | 21 | ||||||
Adjustments for tax effects of: | |||||||||
State taxes, net | (2) | (4) | (4) | ||||||
Federal tax credits | (1) | (3) | (3) | ||||||
Excess tax benefit from stock compensation | — | (8) | (10) | ||||||
Foreign rate differential | (16) | (14) | (12) | ||||||
U.S. tax on foreign operations | 33 | 3 | 15 | ||||||
Foreign withholding taxes | 1 | 1 | 3 | ||||||
Capital loss expiration | 1 | 3 | — | ||||||
Other deferred tax asset adjustment | — | — | 3 | ||||||
Valuation allowance | (33) | 8 | (13) | ||||||
Change in uncertain tax benefit accrual | (2) | (5) | 2 | ||||||
Effective income tax rate | 2 | 2 | 2 | ||||||
We updated our evaluation of the valuation allowance position in the United States through December 31, 2022 and were canceledconcluded that we should continue to maintain a full valuation allowance against the net federal and state deferred tax assets. In making this evaluation, we considered the uncertain stability of the current economic and operating environment and estimates about our ability to generate taxable income in fiscal 2016 duefuture periods within the United States. We will continue to termination.
The components of our net deferred tax assets and liabilities are as follows:
(In thousands) | December 31, 2022 | January 1, 2022 | ||||||
Deferred tax assets: | ||||||||
Intangible assets | $ | 6,264 | $ | 8,236 | ||||
Net operating loss carry forwards | 15,362 | 88,254 | ||||||
Tax credit carry forwards | 103,092 | 93,095 | ||||||
Accrued liabilities and reserves | 12,932 | 6,590 | ||||||
Stock-based and deferred compensation | 3,769 | 4,477 | ||||||
Other | 5,031 | 6,615 | ||||||
Total deferred tax assets | 146,450 | 207,267 | ||||||
Less: valuation allowance | (140,533 | ) | (200,438 | ) | ||||
Net deferred tax assets | 5,917 | 6,829 | ||||||
Deferred tax liabilities: | ||||||||
Fixed assets | 2,058 | 2,379 | ||||||
Unremitted earnings | 2,498 | 2,128 | ||||||
Other | 8,134 | 9,969 | ||||||
Total deferred tax liabilities | 12,690 | 14,476 | ||||||
Net deferred taxes | $ | (6,773 | ) | $ | (7,647 | ) | ||
Reported as: | ||||||||
Deferred tax assets (included in Other long-term assets) | $ | 1,022 | $ | 953 | ||||
Deferred tax liabilities (included in Other long-term liabilities) | (7,795 | ) | (8,600 | ) | ||||
Net deferred taxes | $ | (6,773 | ) | $ | (7,647 | ) | ||
The following table displays the activity related to these stock option and RSU market condition awardschanges in our valuation allowance for deferred tax assets:
Fiscal Years Ended | Balance at beginning | Charged (Credit) to costs and | Charged (credit) to other | Balance at end of | ||||||||||||
(In thousands) | of period | expenses | accounts | period | ||||||||||||
December 31, 2022 | $ | 200,438 | $ | (59,905 | ) | $ | — | $ | 140,533 | |||||||
January 1, 2022 | $ | 192,478 | $ | 7,960 | $ | — | $ | 200,438 | ||||||||
January 2, 2021 | $ | 198,499 | $ | (6,021 | ) | $ | — | $ | 192,478 | |||||||
At December 31, 2022, we had U.S. federal net operating loss ("NOL") carryforwards (pretax) of approximately $0.5$16.3 million $0.8which do not expire. We had state NOL carryforwards (pretax) of approximately $142.0 million that substantially all expire at various dates from 2023 through 2041. We also had federal credit carryforwards of $59.1 million that expire at various dates from 2023 through 2042, and $75.0 million state credit carryforwards, of which substantially all do not expire.
Future utilization of federal and state net operating losses and tax credit carry forwards may be limited if cumulative changes to ownership exceed 50% within any three-year period. However, if there is a significant change in ownership, future tax attribute utilization may be limited and NOL carryforwards and/or R&D credits will be reduced to reflect the limitation.
Foreign earnings may be subject to withholding taxes in local jurisdictions if they are distributed. At December 31, 2022, U.S. income taxes and foreign withholding taxes were not provided for on a cumulative total of approximately $3.0 million of the undistributed earnings of our foreign subsidiaries. We intend to reinvest these earnings indefinitely.
At December 31, 2022 and January 1, 2022, our unrecognized tax benefits associated with uncertain tax positions were $58.9 million and $0.6$56.2 million, respectively, of which $56.3 million and $54.0 million, respectively, if recognized, would affect the effective tax rate, subject to valuation allowance. As of December 31, 2022 and January 1, 2022, interest and penalties associated with unrecognized tax benefits were $10.6 million and $9.6 million, respectively, which are not reflected in the table below. We accrue interest and penalties related to uncertain tax positions in Income tax expense.
The following table summarizes the changes to unrecognized tax benefits for the fiscal years 2017, 2016,presented:
(In thousands) | ||||
Balance at December 28, 2019 | $ | 56,962 | ||
Additions based on tax positions related to the current year | 548 | |||
Additions based on tax positions of prior years | 628 | |||
Reduction for tax positions of prior years | — | |||
Reduction as a result of lapse of applicable statute of limitations | (2,401 | ) | ||
Balance at January 2, 2021 | 55,737 | |||
Additions based on tax positions related to the current year | 1,156 | |||
Additions based on tax positions of prior years | 1,130 | |||
Additions due to acquisition | 977 | |||
Settlements | (51 | ) | ||
Reduction as a result of lapse of applicable statute of limitations | (2,718 | ) | ||
Balance at January 1, 2022 | 56,231 | |||
Additions based on tax positions related to the current year | 1,594 | |||
Additions based on tax positions of prior years | 2,798 | |||
Settlements | (148 | ) | ||
Reduction as a result of lapse of applicable statute of limitations | (1,586 | ) | ||
Balance at December 31, 2022 | $ | 58,889 | ||
Our liability for uncertain tax positions (including penalties and 2015, respectively, whichinterest) was $21.6 million at both December 31, 2022 and January 1, 2022 and is recorded as a component of total optionsOther long-term liabilities on our Consolidated Balance Sheets. The remainder of our uncertain tax position exposure of $47.9 million and RSU expense.$44.2 million at December 31, 2022 and January 1, 2022, respectively, is netted against deferred tax assets.
At December 31, 2022, it is reasonably possible that $1.0 million of unrecognized tax benefits and $0.2 million of associated interest and penalties could be recognized during the next twelve months.
The following table summarizesyears that remain subject to examination are 2017 for federal and state income taxes, and 2016 for foreign income taxes, including years ending thereafter. However, to the assumptions used inextent allowed by law, the valuationtax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of stock options and RSUs with a market condition:the net operating losses or credit carryforward amount. Our Singapore 2020 income tax return is currently under examination.
| Year Ended | |||||
| December 30, 2017 | December 31, 2016 | January 2, 2016 | |||
| Executive stock options with a market condition | |||||
| Expected volatility | 41% | 46% | 44% to 46% | ||
| Risk-free interest rate | 1.9% | 1.1% | 1.4% | ||
| Expected term (years) | 4.5 | 4.5 | 4.5 | ||
| Dividend yield | —% | —% | —% | ||
| Executive RSUs with a market condition | |||||
| Expected volatility | n/a | n/a | 36.9% | ||
| Risk-free interest rate | n/a | n/a | 0.6% | ||
| Expected term (years) | n/a | n/a | 2.0 | ||
| Dividend yield | n/a | n/a | —% | ||
Note 1914 - Employee Benefit Plans
Qualified Investment Plan
In 1990, we adopted a 401(k)401(k) tax-deferred savings plan, which provides participantsall employees in the United States who meet certain eligibility requirements with an opportunity to accumulate funds for retirement. Participants may contribute up to the amount allowable as a deduction for federal income tax purposes. The plan does not allow investments in the Company's common stock. The plan allows for the Company to make discretionary matching contributions in cash. We recorded matching contributions of approximately $0.8$2.8 million, $2.6 million, and $2.4 million in fiscal 2017,years 2022, 2021, and of approximately $0.9 million in each of fiscal 2016 and fiscal 2015.
Cash Incentive Plan
For 2022, 2021, and 2020, the Board of Directors of the Company, upon the recommendation of the Compensation Committee, the Board of Directors of the Company approved the 2017 Cash Incentive Plan (the “2017 Cash Plan”“Cash Plans”). for the respective fiscal year. The chief executive officer, other executive officers, and other members of senior management, including vice presidents and director-level employees, together with all other employees of the Company not on the Company's sales incentive plan are eligible to participate in the 2017 Cash Plan.Plans. Under the 2017 Cash Plan,Plans, individual cash incentive payments for the eligible employees will be based both on Company financial performance, as measured by achievement of operating income (before incentive plan accruals) and revenue goals within specified ranges established by the Compensation Committee, and Company performance, as measured by the achievement of personal management objectives. The Compensation Committee determines the performance of the chief executive officer, the chief financial officer and other participants based on the achievement of the management objectives established by the Compensation Committee during the first fiscal quarter of 2017. There was $7.2the respective fiscal year. We recorded approximately $25.2 million, $18.0 million, and $7.9 million of expense recorded under this planthe Cash Plans in fiscal 2017.2022, 2021, and 2020, respectively.
Legal Matters
On or about December 21, 2015, upon19, 2018, Steven A.W. De Jaray, Perienne De Jaray and Darrell R. Oswald (collectively, the recommendation“Plaintiffs”) commenced an action against the Company and several unnamed defendants in the Multnomah County Circuit Court of the Compensation Committee,State of Oregon, in connection with the Boardsale of Directorscertain products by the Company to the Plaintiffs in or around 2008. The Plaintiffs allege that we violated The Lanham Act, engaged in negligence and fraud by failing to disclose to the Plaintiffs the export-controlled status of the Company approved the 2016 Cash Incentive Plan (the “2016 Cash Plan”).subject parts. The chief executive officer, other executive officers,Plaintiffs seek damages of $155 million to $268 million, treble damages, and other membersremedies. In January 2019, we removed the action to the United States District Court for the District of senior management, including vice presidents and director-level employees, together with all other employeesOregon. At this stage of the Company proceedings, we do not on the Company's sales incentive plan are eligible to participate in the 2016 Cash Plan. Under the 2016 Cash Plan, individual cash incentive payments for the eligible employees will be based both on Company financial performance, as measured by achievement of operating income (before incentive plan accruals) and revenue goals within specified ranges established by the Compensation Committee, and Company performance, as measured by the achievement of personal management objectives. The Compensation Committee determines the performance have an estimate of the chief executive officer,likelihood or the chief financial officeramount of any potential exposure to the Company; however, we believe that these claims are without merit and other participants based onintend to vigorously defend the achievement of the management objectives established by the Compensation Committee during the first fiscal quarter of 2016. There was $4.7 million of expense recorded under this plan in fiscal 2016.
From time to time, we are exposed to certain additional asserted and unasserted potential claims. Periodically, weWe review the status of each significant matter and assess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and a range of possible losses can be estimated, we then accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may revise estimates.
| (In thousands) | Balance at beginning of period | Balance received through acquisition | Charged (Credit) to costs and expenses | Charged (credit) to other accounts | Settlements & write-offs net of recoveries | Balance at end of period | |||||||||||||||||
| Fiscal year ended December 30, 2017 | |||||||||||||||||||||||
| Allowance for deferred taxes | 260,687 | — | (50,960 | ) | (36 | ) | — | 209,691 | |||||||||||||||
| Allowance for doubtful accounts | 9,299 | — | 3 | 38 | 31 | 9,371 | |||||||||||||||||
| Allowance for warranty expense | 352 | — | 100 | — | (197 | ) | 255 | ||||||||||||||||
| $ | 270,338 | $ | — | $ | (50,857 | ) | $ | 2 | $ | (166 | ) | $ | 219,317 | ||||||||||
| Fiscal year ended December 31, 2016 | |||||||||||||||||||||||
| Allowance for deferred taxes | $ | 252,578 | $ | — | $ | 7,450 | $ | 659 | $ | — | $ | 260,687 | |||||||||||
| Allowance for doubtful accounts | 621 | — | 7,362 | 2,284 | (968 | ) | 9,299 | ||||||||||||||||
| Allowance for warranty expense | 370 | — | 216 | — | (234 | ) | 352 | ||||||||||||||||
| $ | 253,569 | $ | — | $ | 15,028 | $ | 2,943 | $ | (1,202 | ) | $ | 270,338 | |||||||||||
| Fiscal year ended January 2, 2016 | |||||||||||||||||||||||
| Allowance for deferred taxes | $ | 141,215 | $ | 52,481 | $ | 58,658 | $ | 224 | $ | — | $ | 252,578 | |||||||||||
| Allowance for doubtful accounts | 875 | — | (438 | ) | 189 | (5 | ) | 621 | |||||||||||||||
| Allowance for warranty expense | 81 | 136 | 153 | — | — | 370 | |||||||||||||||||
| $ | 142,171 | $ | 52,617 | $ | 58,373 | $ | 413 | $ | (5 | ) | $ | 253,569 | |||||||||||
| Year Ended | ||||||||||||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||||||||
| United States: | $ | 48,315 | 13% | $ | 51,752 | 12% | $ | 33,677 | 8% | |||||||||
| China* | 193,590 | 50 | 186,865 | 44 | 165,582 | 41 | ||||||||||||
| Europe | 44,547 | 12 | 59,835 | 14 | 55,596 | 14 | ||||||||||||
| Japan | 42,286 | 11 | 49,080 | 12 | 44,067 | 11 | ||||||||||||
| Taiwan | 14,846 | 4 | 31,322 | 7 | 31,181 | 8 | ||||||||||||
| Other Asia* | 26,916 | 7 | 37,826 | 9 | 67,704 | 17 | ||||||||||||
| Other Americas | 15,461 | 4 | 10,374 | 3 | 8,159 | 2 | ||||||||||||
| Total foreign revenue | 337,646 | 87 | 375,302 | 88 | 372,289 | 92 | ||||||||||||
| Total revenue | $ | 385,961 | 100% | $ | 427,054 | 100% | $ | 405,966 | 100% | |||||||||
| (In thousands) | December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||||||
| United States | $ | 30,338 | $ | 30,532 | $ | 25,615 | |||||
| China | 4,632 | 10,617 | 14,998 | ||||||||
| Philippines | 3,883 | 4,928 | 3,948 | ||||||||
| Taiwan | 958 | 2,310 | 3,677 | ||||||||
| India | — | 215 | 1,470 | ||||||||
| Japan | 313 | 637 | 1,211 | ||||||||
| Other | 299 | 242 | 933 | ||||||||
| Total foreign property and equipment, net | 10,085 | 18,949 | 26,237 | ||||||||
| Total property and equipment, net | $ | 40,423 | $ | 49,481 | $ | 51,852 | |||||
| % of Total Revenue in Year Ended | ||||||||
| December 30, 2017 | December 31, 2016 | January 2, 2016 | ||||||
| Arrow Electronics Inc. | 24 | % | 24 | % | 20 | % | ||
| Weikeng Group | 27 | 22 | 12 | |||||
| All others | 15 | 15 | 13 | |||||
| All sell-through distributors | 66 | % | 61 | % | 45 | % | ||
| 2017 | 2016 | |||||||||||||||||||||||||||||||
| (In thousands, except per share data) | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||||||
| Revenue | $ | 95,266 | $ | 91,971 | $ | 94,137 | $ | 104,587 | $ | 118,108 | $ | 113,225 | $ | 99,209 | $ | 96,512 | ||||||||||||||||
| Gross margin | 51,216 | 53,322 | 51,209 | 60,832 | 63,480 | 67,424 | 58,426 | 57,104 | ||||||||||||||||||||||||
| Restructuring charges | 2,483 | 3,071 | 1,576 | 66 | 951 | 317 | 2,568 | 5,431 | ||||||||||||||||||||||||
| Net loss | $ | (7,213 | ) | $ | (43,052 | ) | $ | (13,022 | ) | $ | (7,275 | ) | $ | (8,164 | ) | $ | (12,414 | ) | $ | (13,810 | ) | $ | (19,711 | ) | ||||||||
| Net loss per share - basic and diluted | $ | (0.06 | ) | $ | (0.35 | ) | $ | (0.11 | ) | $ | (0.06 | ) | $ | (0.07 | ) | $ | (0.10 | ) | $ | (0.12 | ) | $ | (0.17 | ) | ||||||||
To the Stockholders and the Board of Directors and Stockholders
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Lattice Semiconductor Corporation and subsidiaries (the Company) as of December 30, 201731, 2022 and December 31, 2016,January 1, 2022, the related consolidated statements of operations, comprehensive loss,income, stockholders’ equity and cash flows for each of the three years in the three‑year period ended December 30, 2017,31, 2022, and the related notes (collectively referred to as the consolidated“consolidated financial statements)statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2017 andat December 31, 2016,2022 and January 1, 2022, and the results of its operations and its cash flows for each of the three years in the three‑year periodperiods ended December 30, 2017,31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 30, 2017,31, 2022, based on criteria established in
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
| Inventory Valuation | ||
| Description of the Matter | The Company's net inventory totaled $110.4 million as of December 31, 2022. As explained in “Note 1 - Basis of Presentation and Significant Accounting Policies” within the consolidated financial statements, the Company records inventory at the lower of cost or net realizable value, and writes down inventories to net realizable value if it is obsolete or if quantities are in excess of projected customer demand. | |
Auditing management’s estimates of excess and obsolete inventory was challenging because the estimate is judgmental and considers a number of factors that are affected by market and economic conditions that are outside of the Company’s control. In particular, excess and obsolete inventory calculations are sensitive to significant assumptions that relate to projected customer demand for the Company’s products. | ||
| How We Addressed the Matter in Our Audit | We evaluated and tested the design and operating effectiveness of the Company's internal controls over the calculation of excess and obsolete inventory, including the determination of projected customer demand and related application against on-hand inventory. | |
| Our audit procedures included, among others, evaluating the significant assumptions stated above and the underlying data used in management's excess and obsolete inventory assessment. We evaluated inventory levels compared to projected customer demand, historical sales, and specific product considerations. We also assessed the historical accuracy of management's estimates and performed sensitivity analyses to evaluate the changes in inventory valuation that would result from changes in significant assumptions. |
/s/ KPMGErnst & Young LLP
We have served as the Company's auditor since 2007.2020.
San Jose, California
February 17, 2023
To the Stockholders and the Board of Directors and Stockholders
Opinion on Internal Control Over Financial Reporting
We have audited Lattice Semiconductor Corporation and subsidiaries’
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheetssheet of the Company as of December 30, 201731, 2022 and December 31, 2016,January 1, 2022, the related consolidated statements of operations, comprehensive loss,income, stockholders’ equity and cash flows for each of the three years in the three-year period ended December 30, 2017,31, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated March 13, 2018February 17, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMGErnst & Young LLP
San Jose, California
February 17, 2023
None.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
In connection with the filing of this Annual Report on Form 10-K, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 30, 2017. We seek to design our31, 2022. These disclosure controls and procedures are designed to provide reasonable assuranceensure that information required to be disclosed in the reports we file or submit under the Exchange Act contain the required informationis recorded, processed, summarized and that we submit these reportsreported within the time periods specified in SEC rules and forms. We also seek to design theseOur 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.
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding reliability of financial reporting and the preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
(i) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
(ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
(iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
We do not expect that our disclosure controls and procedures or a combination of deficiencies, inour internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met, and may not prevent or detect misstatements.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the company'sCompany's internal control over financial reporting as of December 30, 2017.31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this assessment, management identified the control deficiencies described below.
Ernst & Young LLP, our independent registered public accounting firm, has audited the Company's internal control over financial reporting and because of the material weakness described above, has issued an adverseits opinion on the effectiveness of the Company's internal control over financial reporting, which appears on
There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fourth quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Certain information required by Part III is incorporated by reference from our definitive proxy statement (the “Proxy Statement”) for the 20182023 Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, which we will file not later than 120 days after the end of the fiscal year covered by this report. With the exception of the information expressly incorporated by reference from the Proxy Statement, the Proxy Statement is not to be deemed filed as a part of this report.
Information regarding our directors that is required by this item is incorporated by reference from the information contained under the captions “Proposal 1: Election of Directors” and “Corporate Governance and Other Matters--Board Meetings and Committees” in the Proxy Statement. Information regarding our executive officers that is required by this item is incorporated by reference from the information contained under the caption "Proposal 2: Executive"Executive Compensation--The Executive Officers of the Company” in the Proxy Statement.
Information regarding Section 16(a) reporting compliance that is required by this item is incorporated by reference from the information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
We have adopted a Code of Conduct that applies to all of our directors, employees, including our principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions.functions, consultants, contractors, and agents. The Code of Conduct is posted on our website at www.latticesemi.com. There were no changeswww.latticesemi.com. In fiscal 2022, we rescinded our Director Code of Ethics and expanded our Code of Conduct to cover directors, consultants, and agents. In addition, we revised our codeCode of Conduct to provide general guidance on how to handle ethical business decisions, and to expand and/or clarify provisions in the Code of Conduct related to antitrust, conflicts of interest, improper conduct during fiscal 2017.and activities, and public disclosures. We also revised our Corporate Governance Policies to incorporate any items previously addressed in the Director Code of Conduct that the revised Code of Conduct did not address. Amendments to the Code of Conduct or any grant of a waiver from a provision of the codeCode of ethicsConduct requiring disclosure under applicable SEC rules, if any, will be disclosed on our website at www.latticesemi.com.
Information about our “Director Code of Ethics”Corporate Governance Policies and written committee charters for our Audit Committee, Compensation Committee, and Nominating and Governance Committee are available free of charge on the Company's website at www.latticesemi.com and are available in print to any shareholder upon request.
Information regarding our Audit Committee that is required by this Item is incorporated by reference from the information concerning our Audit Committee contained under the caption “Corporate Governance and Other Matters--Board Meetings and Committees” in the Proxy Statement.
The information contained under the captions “Executive Compensation,” "Director Compensation," “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the Proxy Statement is incorporated herein by reference.
The information contained under the captions “Security Ownership of Certain Beneficial Owners and Management” and "Equity Compensation Plan Information" in the Proxy Statement is incorporated herein by reference.
The information contained under the captions entitled “Certain Relationships and Related Transactions” and “Corporate Governance and Other Matters--Director Independence” in the Proxy Statement is incorporated herein by reference.
The information contained under the caption entitled “Audit“Proposal 5: Ratification of Appointment of Independent Registered Public Accounting Firm--Audit and Related Fees” in the Proxy Statement is incorporated herein by reference.
(a) List of Documents Filed as Part of this Report
(1) All financial statements.
The following financial statements are filed as part of this report under Item 8.
Consolidated Financial Statements: | Page |
All other schedules have been omitted because the required information is included in the Consolidated Financial Statements or the notes thereto, or is not applicable or required.
(2) Exhibits.
Exhibit Number | Description | |
3.1 | ||
3.2 | ||
4.1 | ||
10.1* | ||
10.2* | ||
| 10.3* |
| * | Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) thereof. |
| * | ||
| Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) thereof. | |
| Exhibit Number | Description | ||
31.1 | |||
31.2 | |||
32.1 | |||
32.2 | |||
101.INS | Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
| 104 | Cover Page Interactive Data File - formatted in Inline XBRL and included in Exhibit 101 | ||
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LATTICE SEMICONDUCTOR CORPORATION | |
(Registrant) | |
By: | /s/ |
Sherri Luther Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) | |
Date: | February 17, 2023 |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Darin G. BillerbeckJames Anderson and Max Downing,Sherri Luther, or either of them, his or her attorneys-in-fact, each with the power of substitution, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated and on the dates indicated:
Signature | Title | |
Date | ||
Principal Executive | ||
| Officer | ||
/s/ James Anderson | February 17, 2023 | |
James Anderson | President, Chief Executive Officer, and Director | |
Principal Financial and | ||
Accounting Officer | ||
/s/ Sherri Luther | February 17, 2023 | |
Sherri Luther | Chief Financial Officer | |
Directors | ||
/s/ Robin Abrams | February 17, 2023 | |
Robin Abrams | Director | |
| /s/ | ||
/s/ | February 17, 2023 | |
Mark Jensen | Director | |
/s/ | February 17, 2023 | |
Anjali Joshi | Director | |
/s/ | ||
James Lederer | Director | |
/s/ | February 17, 2023 | |
Jeff Richardson | Director | |
/s/ Raejeanne Skillern | February 17, 2023 | |
Raejeanne Skillern | Director |