Table of Contents


UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

  

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

 

FOR THE QUARTERLY PERIOD ENDED September 26, 2020July 3, 2021

 

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

 

latticelogocolorpmsa49.jpg
 

LATTICE SEMICONDUCTOR CORPORATION

(Exact name of Registrant as specified in its charter)

  

State of Delaware

93-0835214

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

5555 NE Moore Court, Hillsboro, OR

97124

(Address of principal executive offices)

(Zip Code)

(503) 268-8000

(Registrant's telephone number, including area code)

 

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

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $.01 par value

LSCC

Nasdaq Global Select Market

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Number of shares of common stock outstanding as of October 26, 2020July 30, 2021136,155,870136,384,642

 


 

 

 
 

LATTICE SEMICONDUCTOR CORPORATION

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

   

 

Note Regarding Forward-Looking Statements

- 3 -

 

 

 

PART I.

FINANCIAL INFORMATION

Page

 

 

 

Item 1.

Financial Statements

- 4 -

 

 

 

 

Consolidated Statements of Operations – Three and NineSix Months Ended September 26,July 3, 2021 and June 27, 2020 and September 28, 2019  (unaudited)

- 4 -

 

 

 

 

Consolidated Statements of Comprehensive Income – Three and NineSix Months Ended September 26,July 3, 2021 and June 27, 2020 and September 28, 2019  (unaudited)

- 5 -

 

 

 

 

Consolidated Balance Sheets – September 26, 2020July 3, 2021 and December 28, 2019January 2, 2021  (unaudited)

- 6 -

 

 

 

 

Consolidated Statements of Cash Flows – NineSix Months Ended September 26,July 3, 2021 and June 27, 2020 and September 28, 2019  (unaudited)

- 7 -

 

 

 

 

Consolidated Statements of Stockholders' Equity – Three and NineSix Months Ended September 26,July 3, 2021 and June 27, 2020 and September 28, 2019  (unaudited)

- 8 -

 

 

 

 

Notes to Consolidated Financial Statements  (unaudited)

- 10 -

 

 

 

Item 2.

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

- 19 -18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

- 27 -25

 

 

 

Item 4.

Controls and Procedures

- 27 -25

 

 

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

- 28 -26

 

 

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds26

Item 1A.

Risk Factors

- 28 -26

 

 

 

Item 6.

Exhibits

- 30 -27

 

 

 

 

Signatures

- 31 -28

 

- 2 -


 

 

 

Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve estimates, assumptions, risks, and uncertainties. Any statements about our expectations, beliefs, plans, objectives, assumptions, or future events or performance are not historical facts and may be forward-looking. We use words or phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “plan,” "possible," “predict,” “projects,” “may,” “will,” “should,” “continue,” “ongoing,” “future,” “potential,” and similar words or phrases to identify forward-looking statements.

 

Forward-looking statements include, but are not limited to, statements about: our target or expected financial performance and our ability to achieve those results; future financial results or accounting treatments; the potential impactfuture impacts of the COVID-19 pandemic, including as a result of actions by governments, businesses, and individuals in response to the situation, on consumer, industrial, and financial markets, our business operations, supply chain and partners, financial performance, results of operations, financial position, and the achievement of our strategic objectives; our use of cash; our gross margin growth and our strategies to achieve gross margin growth and other financial results; our opportunities to increase our addressable market; our expectations and strategies regarding market trends and opportunities, including market segment drivers such as 5G infrastructure deployments, cloud and enterprise servers, client computing platforms, industrial Internet of Things, factory automation, automotive electronics, smart homes and prosumers; our judgments involved in accounting matters;matters; actions we may take regarding the design and continued effectiveness of our internal control over financial reporting; our expectations regarding product offerings; our expectations regarding our customer base; our future investments in research and development and our research and development expense efficiency; the expected costs of our restructuring plans; our expectations regarding taxes, including unrecognized tax benefits, and tax adjustments and allowances; our beliefs regarding the adequacy of our liquidity, capital resources and facilities; whether we will pursue future stock repurchases and how any future repurchases will be funded; and our beliefs regarding legal proceedings.

 

These forward-looking statements are based on estimates and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those statements expressed in the forward-looking statements. The key factors, among others, that could cause our actual results to differ materially from the forward-looking statements include the effects of the COVID-19 pandemic and the actions by governments, businesses, and individuals in response to the situation, the effects of which may give rise to or amplify the risks associated with many of these factors listed here; global economic conditions and uncertainty; and other factors more fully described herein or that are otherwise described from time to time in our filings with the Securities and Exchange Commission, including, but not limited to, the items discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019January 2, 2021 and any additional or updated risk factors discussed in any subsequent Quarterly Report on Form 10-Q filed since that date.

 

You should not unduly rely on forward-looking statements because our actual results could differ materially from those expressed by us. In addition, any forward-looking statement applies only as of the date of this filing. We do not plan to, and undertake no obligation to, update any forward-looking statements to reflect new information or new events, circumstances or developments, or otherwise.

 

- 3 -


 

 

PART I. FINANCIAL INFORMATION



 

ITEM 1. FINANCIAL STATEMENTS

 

LATTICE SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)



 

 

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

  

Six Months Ended

 
 

September 26,

 

September 28,

 

September 26,

 

September 28,

  

July 3,

 

June 27,

 

July 3,

 

June 27,

 

(In thousands, except per share data)

 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 

Revenue

 $103,042  $103,469  $300,947  $303,856  $125,905  $100,589  $241,621  $197,905 

Cost of revenue

  40,736   42,030   120,502   124,727   48,721   40,012   93,851   79,766 

Gross margin

  62,306   61,439   180,445   179,129   77,184   60,577   147,770   118,139 

Operating expenses:

          

Research and development

 22,439  20,032  66,590  59,074  27,454  22,458  51,520  44,151 

Selling, general, and administrative

 23,758  21,078  70,797  61,618  25,607  24,488  50,699  47,039 

Amortization of acquired intangible assets

 603  3,389  3,846  10,168  603  603  1,206  3,243 

Restructuring charges

  2,692   252   4,178   4,719   204   546   380   1,486 

Total operating expenses

  49,492   44,751   145,411   135,579   53,868   48,095   103,805   95,919 

Income from operations

 12,814  16,688  35,034  43,550  23,316  12,482  43,965  22,220 

Interest expense

 (792) (2,022) (2,914) (10,547) (702) (1,045) (1,420) (2,122)

Other expense, net

  (70)  (61)  (83)  (2,017)

Other (expense) income, net

  (135)  37   (297)  (13)

Income before income taxes

 11,952  14,605  32,037  30,986  22,479  11,474  42,248  20,085 

Income tax (benefit) expense

  (655)  1,066   634   1,480 

Income tax expense

  641   845   1,597   1,289 

Net income

 $12,607  $13,539  $31,403  $29,506  $21,838  $10,629  $40,651  $18,796 
          

Net income per share:

          

Basic

 $0.09  $0.10  $0.23  $0.22  $0.16  $0.08  $0.30  $0.14 

Diluted

 $0.09  $0.10  $0.22  $0.21  $0.15  $0.08  $0.29  $0.14 
          

Shares used in per share calculations:

          

Basic

  135,598   132,997   134,903   132,065   136,388   134,857   136,394   134,555 

Diluted

  141,524   138,894   140,763   137,679   141,491   139,202   141,637   138,751 

 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

- 4 -


 

 

LATTICE SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)



 

 

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

  

Six Months Ended

 
 

September 26,

 

September 28,

 

September 26,

 

September 28,

  

July 3,

 

June 27,

 

July 3,

 

June 27,

 

(In thousands)

 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 

Net income

 $12,607  $13,539  $31,403  $29,506  $21,838  $10,629  $40,651  $18,796 

Other comprehensive income:

         

Other comprehensive income (loss):

 

Translation adjustment, net of tax

 859  (93) 899  (7)  188   151   (49)  40 
Change in actuarial valuation of defined benefit pension (507) 0 (507) 0 

Unrealized gain related to marketable securities, net of tax

 0  0  0  42 

Reclassification adjustment for gains related to marketable securities included in Other income (expense), net of tax

  0   0   0   (53)

Comprehensive income

 $12,959  $13,446  $31,795  $29,488  $22,026  $10,780  $40,602  $18,836 

 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

- 5 -


 

 

LATTICE SEMICONDUCTOR CORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)



 

 

September 26,

 

December 28,

  

July 3,

  

January 2,

 

(In thousands, except share and par value data)

 

2020

  

2019

  

2021

  

2021

 

ASSETS

              

Current assets:

             

Cash and cash equivalents

 $182,268  $118,081  $187,734  $182,332 

Accounts receivable, net of allowance for credit losses

 72,989  64,917   71,219   64,581 

Inventories

 59,488  54,980 

Inventories, net

  65,584   64,599 

Prepaid expenses and other current assets

  24,205   24,452   21,932   22,331 

Total current assets

 338,950  262,430   346,469   333,843 

Property and equipment, less accumulated depreciation of $108,604 at September 26, 2020 and $125,990 at December 28, 2019

 39,782  39,230 

Property and equipment, less accumulated depreciation of $113,651 at July 3, 2021 and $111,182 at January 2, 2021

  37,475   39,666 

Operating lease right-of-use assets

 21,614  23,591   26,430   22,178 

Intangible assets, net

 3,496  6,977   6,469   6,321 

Goodwill

 267,514  267,514   267,514   267,514 

Deferred income taxes

 483  478   565   577 

Other long-term assets

  10,592   11,796   8,630   9,968 

Total assets

 $682,431  $612,016  $693,552  $680,067 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

              

Current liabilities:

             

Accounts payable and accrued expenses

 $59,742  $60,255 

Accounts payable

 $34,480  $27,530 

Accrued expenses

  21,360   21,411 

Accrued payroll obligations

 15,148  13,404   15,578   18,028 

Current portion of long-term debt

 8,382  21,474   17,154   12,762 

Current portion of operating lease liabilities

  4,562   4,686 

Total current liabilities

 87,834  99,819   88,572   79,731 

Long-term debt, net of current portion

 162,215  125,072   149,352   157,934 

Long-term operating lease liabilities, net of current portion

 19,505  21,438   22,457   18,906 

Other long-term liabilities

  35,984   38,028   35,856   39,069 

Total liabilities

  305,538   284,357   296,237   295,640 

Contingencies (Note 11)

   0 

Contingencies (Note 12)

          

Stockholders' equity:

             

Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding

 0  0   0   0 

Common stock, $.01 par value, 300,000,000 shares authorized; 136,078,000 shares issued and outstanding as of September 26, 2020 and 133,883,000 shares issued and outstanding as of December 28, 2019

 1,361  1,339 

Common stock, $.01 par value, 300,000,000 shares authorized; 136,344,000 shares issued and outstanding as of July 3, 2021 and 136,236,000 shares issued and outstanding as of January 2, 2021

  1,363   1,362 

Additional paid-in capital

 779,630  762,213   742,996   770,711 

Accumulated deficit

 (401,887) (433,290)  (345,247)  (385,898)

Accumulated other comprehensive loss

  (2,211)  (2,603)  (1,797)  (1,748)

Total stockholders' equity

  376,893   327,659   397,315   384,427 

Total liabilities and stockholders' equity

 $682,431  $612,016  $693,552  $680,067 

 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

- 6 -


 

 

LATTICE SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



 

 

Nine Months Ended

  

Six Months Ended

 
 September 26, September 28,  July 3,  June 27, 

(In thousands)

 

2020

  

2019

  

2021

  

2020

 

Cash flows from operating activities:

            

Net income

 $31,403  $29,506  $40,651  $18,796 

Adjustments to reconcile net income to net cash provided by operating activities:

            

Depreciation and amortization

 19,263  24,682  11,759   13,456 

Stock-based compensation expense

 30,228  13,335  22,374   19,740 

Reduction in the carrying amount of right-of-use assets

 4,464  4,372 

Amortization of right-of-use assets

 3,291   2,976 

Amortization of debt issuance costs and discount

 300  1,539  184   208 

Impairment of operating lease right-of-use asset (recorded in Restructuring charges)

 0  977 
Loss on refinancing of long-term debt 0 2,235 

Other non-cash adjustments

 (101) (63) (92)  (60)

Changes in assets and liabilities:

            

Accounts receivable, net

 (8,072) 13,457  (6,638)  (22,491)

Inventories

 (4,508) 7,424 

Inventories, net

 (985)  919 

Prepaid expenses and other assets

 (3,516) (8,741) (1,063)  (1,169)

Accounts payable and accrued expenses

 1,861  (196)

Accounts payable

 6,950   4,409 

Accrued expenses

 176   798 

Accrued payroll obligations

 1,744  2,063  (2,450)  1,869 

Operating lease liabilities, current and long-term portions

 (4,331) (5,571) (3,246)  (2,957)

Income taxes payable

 223  (202)  (207)  370 

Net cash provided by operating activities

  68,958   84,817 

Net cash provided by (used in) operating activities

  70,704   36,864 

Cash flows from investing activities:

            

Capital expenditures

 (9,781) (11,729) (4,413)  (6,829)

Cash paid for software licenses

  (6,850)  (5,745)

Proceeds from sales of and maturities of short-term marketable securities

  0   9,655 

Net cash used in investing activities

  (16,631)  (7,819)

Cash paid for software and intellectual property licenses

  (6,377)  (4,626)

Net cash provided by (used in) investing activities

  (10,790)  (11,455)

Cash flows from financing activities:

            

Restricted stock unit tax withholdings

 (19,934) (7,813) (13,923)  (6,642)

Proceeds from issuance of common stock

 7,145  16,178  3,948   4,537 

Proceeds from issuance of long-term debt

 50,000  206,500 
Original issue discount and debt issuance costs 0 (2,086)

Repayment of debt

  (26,250)  (311,408)

Purchases of treasury stock

 (40,113)  0 

Proceeds from long-term debt

 0   50,000 

Repayment of long-term debt

  (4,375)  (26,250)

Net cash provided by (used in) financing activities

 10,961  (98,629)  (54,463)  21,645 

Effect of exchange rate change on cash

  899   (7)  (49)  40 

Net increase in cash and cash equivalents

 64,187  (21,638) 5,402   47,094 

Beginning cash and cash equivalents

  118,081   119,051   182,332   118,081 

Ending cash and cash equivalents

 $182,268  $97,413  $187,734  $165,175 
        

Supplemental disclosure of cash flow information and non-cash investing and financing activities:

Supplemental disclosure of cash flow information and non-cash investing and financing activities:

 

Supplemental disclosure of cash flow information and non-cash investing and financing activities:

 

Interest paid

 $2,849  $9,932  $1,180  $2,193 

Operating lease payments

 $5,786  $6,540  $3,984  $3,812 

Income taxes paid, net of refunds

 $2,317  $1,922  $1,805  $1,579 

Accrued purchases of plant and equipment

 $549  $1,841  $253  $1,067 

Operating lease right-of-use assets obtained in exchange for lease obligations

 $2,274  $404  $7,459  $1,635 

 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

- 7 -


 

 

LATTICE SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(unaudited)



 

The following summarizes the changes in total equity for the ninesix month period ended September 26, 2020:July 3, 2021:

 

  

Common Stock ($.01 par value)

  

Additional Paid-in

  

Accumulated

  

Accumulated other comprehensive

     

(In thousands, except par value data)

 

Shares

  

Amount

  

capital

  

deficit

  

loss

  

Total

 

Balances, December 28, 2019

  133,883  $1,339  $762,213  $(433,290) $(2,603) $327,659 

Net income for the nine months ended September 26, 2020

     0   0   31,403   0   31,403 

Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes

  2,195   22   (12,811)  0   0   (12,789)

Stock-based compensation related to stock options, ESPP and RSUs

     0   30,228   0   0   30,228 

Translation adjustments, net of tax

     0   0   0   899   899 
Change in actuarial valuation of defined benefit pension     0   0   0   (507)  (507)

Balances, September 26, 2020

  136,078  $1,361  $779,630  $(401,887) $(2,211) $376,893 
  

Common Stock ($.01 par value)

  

Additional Paid-in

  

Treasury

  

Accumulated

  

Accumulated Other Comprehensive

     

(In thousands, except par value data)

 

Shares

  

Amount

  

Capital

  

Stock

  

Deficit

  

Loss

  

Total

 

Balances, January 2, 2021

  136,236  $1,362  $770,711  $0  $(385,898) $(1,748) $384,427 

Components of comprehensive income, net of tax:

                            

Net income for the six months ended July 3, 2021

     0   0   0   40,651   0   40,651 

Other comprehensive loss

     0   0   0   0   (49)  (49)

Total comprehensive income

      0   0   0   0   0   40,602 

Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes

  937   9   (9,984)  0   0   0   (9,975)

Stock-based compensation expense

     0   22,374   0   0   0   22,374 

Purchases of treasury stock

     0   0   (40,113)  0   0   (40,113)

Retirement of treasury stock

  (829)  (8)  (40,105)  40,113   0   0   0 

Balances, July 3, 2021

  136,344  $1,363  $742,996  $0  $(345,247) $(1,797) $397,315 

 

 

 

The following summarizes the changes in total equity for the ninesix month period ended September 28, 2019:June 27, 2020:

 

  

Common Stock($.01 par value)

  

Additional Paid-in

  

Accumulated

  

Accumulated other comprehensive

     

(In thousands, except par value data)

 

Shares

  

Amount

  

capital

  

deficit

  

loss

  

Total

 

Balances, December 29, 2018

  129,728  $1,297  $736,274  $(476,783) $(2,331) $258,457 

Net income for the nine months ended September 28, 2019

     0   0   29,506   0   29,506 

Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes

  3,774   38   8,327   0   0   8,365 

Stock-based compensation related to stock options, ESPP and RSUs

     0   13,335   0   0   13,335 

Translation adjustments, net of tax

     0   0   0   (7)  (7)

Unrealized loss related to marketable securities, net of tax

     0   0   0   42   42 

Recognized gain on redemption of marketable securities, previously unrealized

     0   0   0   (53)  (53)

Balances, September 28, 2019

  133,502  $1,335  $757,936  $(447,277) $(2,349) $309,645 
  

Common Stock ($.01 par value)

  

Additional Paid-in

  

Treasury

  

Accumulated

  

Accumulated Other Comprehensive

     

(In thousands, except par value data)

 

Shares

  

Amount

  

Capital

  

Stock

  

Deficit

  

Loss

  

Total

 

Balances, December 28, 2019

  133,883  $1,339  $762,213  $0  $(433,290) $(2,603) $327,659 

Components of comprehensive income, net of tax:

                            

Net income for the six months ended June 27, 2020

     0   0   0   18,796   0   18,796 

Other comprehensive income

     0   0   0   0   40   40 

Total comprehensive income

      0   0   0   0   0   18,836 

Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes

  1,264   12   (2,117)  0   0   0   (2,105)

Stock-based compensation expense

     0   19,740   0   0   0   19,740 

Balances, June 27, 2020

  135,147  $1,351  $779,836  $0  $(414,494) $(2,563) $364,130 

 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

- 8 -


 

LATTICE SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)

(unaudited)



 

The following summarizes the changes in total equity for the three month period ended September 26, 2020:July 3, 2021:

 

  

Common Stock ($.01 par value)

  

Additional Paid-in

  

Accumulated

  

Accumulated other comprehensive

     

(In thousands, except par value data)

 

Shares

  

Amount

  

capital

  

deficit

  

loss

  

Total

 

Balances, June 27, 2020

  135,147  $1,351  $779,836  $(414,494) $(2,563) $364,130 

Net income for the three months ended September 26, 2020

     0   0   12,607   0   12,607 

Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes

  931   10   (10,694)  0   0   (10,684)

Stock-based compensation related to stock options, ESPP and RSUs

     0   10,488   0   0   10,488 

Translation adjustments, net of tax

     0   0   0   859   859 
Change in actuarial valuation of defined benefit pension     0   0   0   (507)  (507)

Balances, September 26, 2020

  136,078  $1,361  $779,630  $(401,887) $(2,211) $376,893 
  

Common Stock ($.01 par value)

  

Additional Paid-in

  

Treasury

  

Accumulated

  

Accumulated Other Comprehensive

     

(In thousands, except par value data)

 

Shares

  

Amount

  

Capital

  

Stock

  

Deficit

  

Loss

  

Total

 

Balances, April 3, 2021

  136,401  $1,364  $759,291  $0  $(367,085) $(1,985) $391,585 

Components of comprehensive income, net of tax:

                            

Net income for the three months ended July 3, 2021

     0   0   0   21,838   0   21,838 

Other comprehensive income

     0   0   0   0   188   188 

Total comprehensive income

      0   0   0   0   0   22,026 

Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes

  465   4   (3,109)  0   0   0   (3,105)

Stock-based compensation expense

     0   11,920   0   0   0   11,920 

Purchases of treasury stock

     0   0   (25,111)  0   0   (25,111)

Retirement of treasury stock

  (522)  (5)  (25,106)  25,111   0   0   0 

Balances, July 3, 2021

  136,344  $1,363  $742,996  $0  $(345,247) $(1,797) $397,315 

 

 

 

The following summarizes the changes in total equity for the three month period ended September 28, 2019:June 27, 2020:

 

  

Common Stock ($.01 par value)

  

Additional Paid-in

  

Accumulated

  

Accumulated other comprehensive

     

(In thousands, except par value data)

 

Shares

  

Amount

  

capital

  

deficit

  

loss

  

Total

 

Balances, June 29, 2019

  132,536  $1,325  $756,924  $(460,816) $(2,256) $295,177 

Net income for the three months ended September 28, 2019

     0   0   13,539   0   13,539 

Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes

  966   10   (4,668)  0   0   (4,658)

Stock-based compensation related to stock options, ESPP and RSUs

     0   5,680   0   0   5,680 

Translation adjustments, net of tax

     0   0   0   (93)  (93)

Balances, September 28, 2019

  133,502  $1,335  $757,936  $(447,277) $(2,349) $309,645 
  

Common Stock ($.01 par value)

  

Additional Paid-in

  

Treasury

  

Accumulated

  

Accumulated Other Comprehensive

     

(In thousands, except par value data)

 

Shares

  

Amount

  

Capital

  

Stock

  

Deficit

  

Loss

  

Total

 

Balances, March 28, 2020

  134,513  $1,345  $769,451  $0  $(425,123) $(2,714) $342,959 

Components of comprehensive income, net of tax:

                            

Net income for the three months ended June 27, 2020

     0   0   0   10,629   0   10,629 

Other comprehensive income

     0   0   0   0   151   151 

Total comprehensive income

      0   0   0   0   0   10,780 

Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes

  634   6   (627)  0   0   0   (621)

Stock-based compensation expense

     0   11,012   0   0   0   11,012 

Balances, June 27, 2020

  135,147  $1,351  $779,836  $0  $(414,494) $(2,563) $364,130 

 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

- 9 -


 

LATTICE SEMICONDUCTOR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



 

 

Note 1 - Basis of Presentation

 

Lattice Semiconductor Corporation a Delaware corporation, and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develop technologies that we monetize through differentiated programmable logic semiconductor products, system solutions, design services, and licenses. Lattice was founded in 1983 and is headquartered in Hillsboro, Oregon.

 

Basis of Presentation and Use of Estimates

 

The accompanying Consolidated Financial Statements are unaudited and 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"). In our opinion, they include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by the SEC's rules and regulations for interim reporting. These Consolidated Financial Statements should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 28, 2019January 2, 2021 (" ("20192020 10-K").

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments affecting the amounts reported in our consolidated condensed financial statements and the accompanying notes. TheWe base our estimates and judgments on historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when made, and because of the uncertainty inherent in these matters, actual results that we experience may differ materially from our estimates. As of September 26, 2020, the extent to which the COVID-19 pandemic will impact our business going forward depends on numerous dynamic factors which we cannot reliably predict. As a result, some ofthese estimates under different assumptions or conditions. We evaluate our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As the events continue to evolve with respect to the pandemic, our estimates may materially change in future periods.judgments on an ongoing basis.

 

We describe our accounting methods and practices in more detail in our 20192020 10-K. There have been no changes to the significant accounting policies, procedures, or general information described in our 20192020 10-K that have had a material impact on our consolidated financial statements and related notes.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 20202021 will be a 5352-week year and will end on January 2, 2021,1, 2022, and our fiscal 20192020 was a 5253-week year that ended December 28, 2019.January 2, 2021. Our thirdsecond quarter of fiscal 2021 and second quarter of fiscal 2020 and third quarter of fiscal 2019ended on September 26, 2020July 3, 2021 and September 28, 2019June 27, 2020, respectively. All references to quarterly or ninesix months ended financial results are references to the results for the relevant 13-week or 3926-week fiscal period.

 

Concentrations of Risk

 

Potential exposure to concentrations of risk may impact revenue and accounts receivable. Distributors have historically accounted for a significant portion of our total revenue. Revenue attributable to distributors as a percentage of total revenue was 82%88% and 85% for the second quarter of fiscal 2021 and 2020, respectively, and 87% and 81% for the third quarter of fiscal 2020 and 2019, respectively, and 81% and 82% for the ninesix months ended September 26,July 3, 2021 and June 27, 2020, and September 28, 2019, respectively.

Distributors also account for a substantial portion of our net accounts receivable. Our two2 largest distributors accountedaccounted for 53%47% and 31%36% of net accounts receivable at September 26, 2020July 3, 2021 and 40%47% and 38%45% of net accounts receivable at December 28, 2019January 2, 2021.No other distributor or end customer accounted for more than 10% of net accounts receivable at these dates.

Recently Issued Accounting Standards

In December 2019, the FASB issued ASU 2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which adds new guidance for accounting for tax law changes, year-to-date losses in interim periods, and determining how to apply the income tax guidance to franchise taxes that are partially based on income, as well as other changes to simplify accounting for income taxes. The ASU is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Entities may early adopt the ASU in any interim period for which financial statements have not yet been issued (or made available for issuance). We are currently assessing the impact of ASU 2019-12 on our consolidated financial statements and related disclosures.

- 10 -

 

 

Note 2 - Net Income per Share

 

Our calculation of the diluted share count includes the number of shares from our equity awards with market conditions or performance conditions that would be issuable under the terms of such awards at the end of the reporting period. For equity awards with a market condition, the number of shares included in the diluted share count as of September 26, 2020the end of each period presented is determined by measuring the achievement of the market condition as of the end of the respective reporting period.periods. For equity awards with an EBITDA performance condition, the number of shares that qualified for vestingas of the end of each period presented are included in the diluted share count when the condition for their issuance was satisfied by the end of the respective reporting periods. For equity awards granted in fiscal 2021 with a year-over-year revenue growth performance condition, no shares are included in the diluted share count as of September 26, 2020July 3, 2021, as vesting of future tranches of these awards is contingent upon achievement of the performance condition over two consecutive trailing four-quartercertain periods of time, which hashave not yet been achieved. transpired.See "Note 9 - Stock-Based Compensation" to our consolidated financial statements for further discussion of our equity awards with market conditions or performance conditions.

 

- 10 -

A summary of basic and diluted Net income per share is presented in the following table:

 

 

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

  

Six Months Ended

 
 

September 26,

 

September 28,

 

September 26,

 

September 28,

  

July 3,

 

June 27,

 

July 3,

 

June 27,

 

(in thousands, except per share data)

 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 

Net income

 $12,607  $13,539  $31,403  $29,506  $21,838  $10,629  $40,651  $18,796 
          

Shares used in basic Net income per share

 135,598  132,997  134,903  132,065  136,388 134,857 136,394 134,555 

Dilutive effect of stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition

  5,926   5,897   5,860   5,614   5,103   4,345   5,243   4,196 

Shares used in diluted Net income per share

  141,524   138,894   140,763   137,679   141,491   139,202   141,637   138,751 
          

Basic Net income per share

 $0.09  $0.10  $0.23  $0.22  $0.16  $0.08  $0.30  $0.14 

Diluted Net income per share

 $0.09  $0.10  $0.22  $0.21  $0.15  $0.08  $0.29  $0.14 

 

The computation of diluted Net income per share excludes the effects of stock options, restricted stock units ("RSUs"), Employee Stock Purchase Plan ("ESPP") shares, and equity awards with a market condition or performance condition that are antidilutive, aggregating approximately the following number of shares:

 

 

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

  

Six Months Ended

 
 

September 26,

 

September 28,

 

September 26,

 

September 28,

  

July 3,

 

June 27,

 

July 3,

 

June 27,

 

(in thousands)

 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 

Stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition excluded as they are antidilutive

  370   909   514   328  124  579  96  658 

 

 

Note 3 - Revenue from Contracts with Customers

 

Disaggregation of revenue

 

The following tables provide information about revenue from contracts with customers disaggregated by major class of revenue, revenue by channel, and by geographical market, based on ship-to location of the end customer, where available, and ship-to location of distributor otherwise:the customer:

 

 

Three Months Ended

  

Six Months Ended

 

Major Class of Revenue

 

Three Months Ended

  

Nine Months Ended

  

July 3,

 

June 27,

 

July 3,

 

June 27,

 
 

September 26,

 

September 28,

 

September 26,

 

September 28,

 

(In thousands)

 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 
Product $96,650 94% $97,477 94% $285,871 95% $287,185 95% $122,536 97% $95,996 96% $234,128 97% $189,221 96%
Licensing and services  6,392   6%  5,992   6%  15,076   5%  16,671   5%  3,369   3%  4,593   4%  7,493   3%  8,684   4%

Total revenue

 $103,042   100% $103,469   100% $300,947   100% $303,856   100% $125,905   100% $100,589   100% $241,621   100% $197,905   100%
                 

Revenue by Channel

                        

(In thousands)

                        

Product revenue - Distributors

 $111,168 88% $85,152 85% $209,947 87% $160,607 81%

Product revenue - Direct

 11,368 9% 10,844 11% 24,181 10% 28,614 15%

Licensing and services revenue

  3,369   3%  4,593   4%  7,493   3%  8,684   4%

Total revenue

 $125,905   100% $100,589   100% $241,621   100% $197,905   100%
                 

Revenue by Geographical Market

                        

(In thousands)

                        

United States

 $11,672 9% $9,860 10% $20,782 9% $23,179 12%

Other Americas

  6,154   5%  4,647   4%  12,887   5%  7,915   4%

Americas

  17,826   14%  14,507   14%  33,669   14%  31,094   16%

China

 64,821 52% 52,465 52% 131,940 54% 95,964 48%

Taiwan

 6,577 5% 7,593 8% 9,391 4% 17,452 9%

Japan

 8,836 7% 6,435 6% 16,613 7% 14,434 7%

Other Asia

  16,221   13%  8,067   8%  26,901   11%  15,403   8%

Asia

  96,455   77%  74,560   74%  184,845   76%  143,253   72%

Europe

  11,624   9%  11,522   12%  23,107   10%  23,558   12%

Total revenue

 $125,905   100% $100,589   100% $241,621   100% $197,905   100%

 

- 11 -

Revenue by Channel

 

Three Months Ended

  

Nine Months Ended

 
  

September 26,

  

September 28,

  

September 26,

  

September 28,

 

(In thousands)

 

2020

  

2019

  

2020

  

2019

 
Product revenue - Distributors $84,409   82% $84,135   81% $245,016   81% $248,234   82%
Product revenue - Direct  12,241   12%  13,342   13%  40,855   14%  38,951   13%
Licensing and services revenue  6,392   6%  5,992   6%  15,076   5%  16,671   5%

Total revenue

 $103,042   100% $103,469   100% $300,947   100% $303,856   100%

Revenue by Geographical Market

 

Three Months Ended

  

Nine Months Ended

 
  

September 26,

  

September 28,

  

September 26,

  

September 28,

 

(In thousands)

 

2020

  

2019

  

2020

  

2019

 
United States $10,455   10% $9,296   9% $33,634   11% $32,352   11%
Other Americas  4,857   5%  2,838   3%  12,772   4%  9,518   3%
Americas  15,312   15%  12,134   12%  46,406   15%  41,870   14%
China  58,122   56%  57,301   55%  154,086   51%  157,648   52%
Taiwan  7,505   7%  6,796   7%  24,957   8%  14,147   5%
Japan  4,346   4%  10,262   10%  18,780   6%  31,534   10%
Other Asia  9,766   10%  5,285   5%  25,169   9%  22,171   7%
Asia  79,739   77%  79,644   77%  222,992   74%  225,500   74%
Europe  7,991   8%  11,691   11%  31,549   11%  36,486   12%

Total revenue

 $103,042   100% $103,469   100% $300,947   100% $303,856   100%

Contract balances

 

Our contract assets relate to our rights to consideration for licenses and royalties due to us as a member of the HDMI Founders consortium, with collection collection��dependent on events other than the passage of time, such as collection of licenses and royalties from customers by the HDMI licensing agent. The balance results primarily from the amount of estimated revenue related to HDMI that we have recognized to date, but which has not yet been collected by the agent. Contract assets are included in Prepaid expenses and other current assets on our Consolidated Balance Sheets. The following table summarizes activity during the first ninesix months of fiscal 20202021:

 

(In thousands)

      

Contract assets as of December 28, 2019

 $5,569 

Contract assets as of January 2, 2021

 $5,611 

Revenues recorded during the period

 11,660  7,191 

Transferred to Accounts receivable or collected

  (12,091)  (7,568)

Contract assets as of September 26, 2020

 $5,138 

Contract assets as of July 3, 2021

 $5,234 

 

Contract liabilities are included in Accounts payable and accruedAccrued expenses on our Consolidated Balance Sheets. The following table summarizes activity during the first ninesix months of fiscal 20202021:

 

(In thousands)

    

Contract liabilities as of December 28, 2019

 $2,313 

Accruals for estimated future stock rotation and scrap returns

  4,474 

Less: Release of accruals for recognized stock rotation and scrap returns

  (2,571)
Prepayment for performance obligations expected to be satisfied within three months  336 
Less: Revenue recognized on satisfaction of performance obligations  (179)

Contract liabilities as of September 26, 2020

 $4,373 

The impact to revenue from the release of accruals for recognized stock rotation and scrap returns was offset by the processing of return merchandise authorizations totaling approximately $3.0 million, yielding a net revenue reduction of approximately $0.4 million for the first nine months of 2020.

- 12 -

(In thousands)

    

Contract liabilities as of January 2, 2021

 $3,068 

Accruals for estimated future stock rotation and scrap returns

  3,550 

Less: Release of accruals for recognized stock rotation and scrap returns

  (1,831)

Contract liabilities as of July 3, 2021

 $4,787 

 

 

Note 4 - Balance Sheet Components

 

Accounts Receivable

 

Accounts receivable do not bear interest and are shown net of an allowance for expected lifetime credit losses, which reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine this allowance through an assessment of known troubled accounts, analysis of our accounts receivable aging, historical experience, expectations for future economic conditions, management judgment, and other available evidence.

 

  September 26,  December 28, 

(In thousands)

 

2020

  

2019

 

Accounts receivable

 $73,043  $65,023 

Less: Allowance for credit losses

  (54)  (106)

Accounts receivable, net of allowance for credit losses

 $72,989  $64,917 

  July 3,  January 2, 

(In thousands)

 

2021

  

2021

 

Accounts receivable

 $71,273  $64,635 

Less: Allowance for credit losses

  (54)  (54)

Accounts receivable, net of allowance for credit losses

 $71,219  $64,581 

 

Inventories

 

 September 26, December 28,  July 3,  January 2, 

(In thousands)

 

2020

  

2019

  

2021

  

2021

 

Work in progress

 $38,691  $39,855  $40,859  $34,724 

Finished goods

  20,797   15,125   24,725   29,875 

Total inventories

 $59,488  $54,980 

Total inventories, net

 $65,584  $64,599 

 

Accrued Expenses

Included in Accrued expenses in the Consolidated Balance Sheets are the following balances:

  

July 3,

  

January 2,

 

(In thousands)

 

2021

  

2021

 

Liability for non-cancelable contracts

 $6,780  $8,492 

Current portion of operating lease liabilities

  4,811   4,149 

Contract liability under ASC 606

  4,787   3,068 

Other accrued expenses

  4,982   5,702 

Total accrued expenses

 $21,360  $21,411 

- 12 -

Property and Equipment – Geographic Information

 

Our Property and equipment, net by country at the end of each period was as follows:

 

  September 26,  December 28, 

(In thousands)

 

2020

  

2019

 

United States

 $29,830  $32,313 
         

China

  1,390   1,683 

Philippines

  2,589   2,683 

Taiwan

  5,224   1,885 

Japan

  555   283 

Other

  194   383 

Total foreign property and equipment, net

  9,952   6,917 

Total property and equipment, net

 $39,782  $39,230 

Accounts Payable and Accrued Expenses

Included in Accounts payable and accrued expenses in the Consolidated Balance Sheets are the following balances:

  September 26,  December 28, 

(In thousands)

 

2020

  

2019

 

Trade accounts payable

 $40,113  $44,350 

Liability for non-cancelable contracts

  7,769   6,964 

Other accrued expenses

  11,860   8,941 

Total accounts payable and accrued expenses

 $59,742  $60,255 

- 13 -

  July 3,  January 2, 

(In thousands)

 

2021

  

2021

 

United States

 $27,685  $29,440 
         

Taiwan

  4,793   5,171 

Philippines

  2,668   2,912 

China

  1,764   1,537 

Japan

  458   476 

Other

  107   130 

Total foreign property and equipment, net

  9,790   10,226 

Total property and equipment, net

 $37,475  $39,666 

 

Cloud Based Computing Implementation Costs

 

Under the guidance in ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), we are capitalizing the implementation costs for cloud computing arrangements, mainly for our integrated distributor accounting management systems. These cloud-based computing implementation costs are recorded in Prepaid expenses and other current assets and Other long-term assets on our Consolidated Balance Sheets. The following table summarizes activity during the first ninesix months of fiscal 20202021:

 

(In thousands)

      

Cloud based computing implementation costs as of December 28, 2019

 $2,543 

Cloud based computing implementation costs as of January 2, 2021

 $2,831 

Costs capitalized

 646  235 

Amortization

  (388)  (367)

Cloud based computing implementation costs as of September 26, 2020

 $2,801 

Cloud based computing implementation costs as of July 3, 2021

 $2,699 

 

 

Note 5 - Long-Term Debt

 

On May 17, 2019, we entered into a credit agreement (the “Current Credit Agreement”), which provides for a five-year secured term loan facility in an aggregate principal amount of $175.0 million and a five-year secured revolving loan facility in an aggregate principal amount of up to $75.0 million. Details of the term loan and the revolving loan (collectively, "long-term debt"), including the basis for interest, payment terms, and covenant compliancecovenants are described in the Current Credit Agreement and in the Notes to Consolidated Financial Statements in our 201910-K.Agreement.

 

During the first nine months of fiscal 2020, we have made principal payments totaling $26.3 million, including $13.1 million in accelerated principal payments made during the second quarter of fiscal 20202021, that fulfilled thewe paid a required quarterly installments through the first quarterinstallment of fiscal 2021. We drew $50.0$4.4 million on our revolving loan facility during the first quarter of fiscal 2020.long-term debt.  The fair value of our long-term debt approximates the carrying value, which is reflected in our Consolidated Balance Sheets as follows:

 

 September 26, December 28,  July 3,  January 2, 

(In thousands)

 

2020

  

2019

  

2021

  

2021

 

Principal amount

 $171,875  $148,125  $167,500  $171,875 

Unamortized original issuance discount and debt costs

 (1,278) (1,579) (994)  (1,179)

Less: Current portion of long-term debt

  (8,382)  (21,474)  (17,154)  (12,762)

Long-term debt, net of current portion and unamortized debt issue costs

 $162,215  $125,072  $149,352  $157,934 

 

As of September 26, 2020July 3, 2021, the effective interest rate on the term loan was 1.62%1.57%, and the effective interest rate on the revolving loan was 1.42%1.35%. We pay a commitment fee of 0.20% on the unused portion of the revolving loan. Interest expense related to our long-term debt was included in Interest expense on our Consolidated Statements of Operations as follows:

 

 

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

  

Six Months Ended

 
 

September 26,

 

September 28,

 

September 26,

 

September 28,

  

July 3,

 

June 27,

 

July 3,

 

June 27,

 

(In thousands)

 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 

Contractual interest

 $663  $1,686  $2,667  $8,991  $588  $918  $1,185  $2,004 

Amortization of original issuance discount and debt costs

  92   324   300   1,539   92   105   184   208 

Total interest expense related to long-term debt

 $755  $2,010  $2,967  $10,530  $680  $1,023  $1,369  $2,212 

 

- 13 -

Expected future principal payments are based on the schedule of required quarterly installments. With the accelerated principal payments we made during the second quarter of fiscal 2020, our next required quarterly installment is due in the second quarter of fiscal 2021.As of September 26, 2020July 3, 2021, expected future principal payments on our long-term debt were as follows:

 

Fiscal year

 

(in thousands)

 
     

2020 (remaining 3 months)

 $0 

2021

  13,125 

2022

  17,500 

2023

  13,125 

2024

  128,125 
  $171,875 

- 14 -

Fiscal year

 

(in thousands)

 

2021 (Remaining 2 quarters)

 $8,750 

2022

  17,500 

2023

  17,500 

2024

  123,750 
  $167,500 

 

 

Note 6 - Restructuring

 

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 the Q1 2020 Plan, which is described in the 202010-K, we incurred restructuringrecorded less than $0.1 million and approximately $0.3 million of expense of approximately $0.6 million during the thirdsecond quarter of fiscal 2021 and 2020, associated with additional headcount related costs. Arespectively; and we recorded less than $0.1 million and approximately $1.4 million of expense in the firstsix months of fiscal 2021 and 2020, respectively. Approximately $2.0 million of total of $2.0 millionexpense has been incurred through September 26, 2020, July 3, 2021and we believe this amount substantially approximates the total costs under the Q1 2020 Plan. Substantially all actions planned under the Q12020 Plan have been implemented.

 

Under the Q2 2019 Sales Plan, which is described in the 20192020 10-K, we incurred chargesrecorded 0 expense and approximately $0.2 million of expense during the second quarter of fiscal 2021 and 2020, respectively; and we recorded 0 expense and a net credit adjustment of less than $0.1 million during both the thirdfirst quartersix months of fiscal 20202021 and the nine2020, months ended September 26, 2020. We recorded a net credit adjustment of approximately $0.1 million during the third quarter of fiscal 2019 and expenses of approximately $2.3 million during the nine months ended September 28, 2019. respectively. Approximately $2.0$2.1 million of nettotal expense has been incurred through September 26, 2020 July 3, 2021under the Q2 2019 Sales Plan. Substantially allAll actions planned under the Q2 2019 Sales Plan have been implemented.

 

Under the June 2017 Plan, which is described in the 20192020 10-K, we incurred approximately $1.9 million of incremental restructuring costs in the third quarter of fiscal 2020expense related to our partially vacated facility in San Jose, California due to changes in the estimated timing of subleasing the vacated space. Including these charges, we incurred expenses of approximately $2.0$0.2 million and approximately $0.1 million during the thirdsecond quarter of fiscal 20202021 and 2020, respectively; and approximately $2.1$0.4 million and approximately $0.1 million during the ninefirstsix months ended September 26, 2020. We incurred expenses of approximately $0.4 million and $2.4 million, respectively, during the third quarter of fiscal 20192021 and during the nine2020, months ended September 28, 2019. respectively. We have incurred approximately $21.2$21.3 million of total expense through September 26, 2020July 3, 2021 under the June 2017 Plan, and all planned actions have been implemented. We expect the total cost of the June 2017 Plan to be approximately $22.0$21.5 million to $23.5 million as ROU asset amortization expenses related to our partially vacated facility in San Jose, California will be incurred over the remaining lease term.

 

These expenses were recorded to Restructuring charges on our Consolidated Statements of Operations. The restructuring accrual balance is presented in Accounts payable and accruedAccrued expenses and in Other long-term liabilities on our Consolidated Balance Sheets. The following table displays the activity related to our restructuring plans:

 

(In thousands)

 

Severance & Related (1)

  

Lease Termination & Fixed Assets

  

Software Contracts & Engineering Tools (2)

  

Other (3)

  

Total

  

Severance & Related (1)

  

Lease Termination & Fixed Assets

  

Other (2)

  

Total

 

Accrued Restructuring at January 2, 2021

 $246  $8,233  $664  $9,143 

Restructuring charges

 17  363  0  380 

Costs paid or otherwise settled

  (10)  (896)  (664)  (1,570)

Accrued Restructuring at July 3, 2021

 $253  $7,700  $0  $7,953 
         

Accrued Restructuring at December 28, 2019

 $160  $6,585  $0  $865  $7,610  $160  $6,585  $865  $7,610 

Restructuring charges

 1,733  2,132  0  313  4,178  1,277  114  95  1,486 

Costs paid or otherwise settled

  (1,254)  (1,275)  0   (526)  (3,055)  (508)  (833)  (201)  (1,542)

Accrued Restructuring at September 26, 2020

 $639  $7,442  $0  $652  $8,733 
 

Accrued Restructuring at December 29, 2018

 $1,814  $8,630  $218  $18  $10,680 

Restructuring charges

 625  2,482  0  1,612  4,719 

Costs paid or otherwise settled

  (2,279)  (3,714)  (218)  (96)  (6,307)

Accrued Restructuring at September 28, 2019

 $160  $7,398  $0  $1,534  $9,092 

Accrued Restructuring at June 27, 2020

 $929  $5,866  $759  $7,554 

 

(1

Includes employee relocation and outplacement costs

(2

Includes cancellation of contracts, asset impairments, and accelerated depreciation on certain enterprise resource planning and customer relationship management systems

(3

Beginning in the second quarter of fiscal 2019, "Other" included termination fees on the cancellation of certain contracts under the Q2 2019 Sales Plan

 

 

Note 7 - Leases

 

We have operating leases for corporate offices, sales offices, research and development facilities, storage facilities, and a data center, the terms of which are described in our 20192020 10-K. In the first quarter of fiscal 2021, we extended the leases for our Hillsboro, Oregon and Shanghai, China facilities, which resulted in approximately $7.2 million of the increase in right-of-use assets and operating lease liabilities. All of our facilities are leased under operating leases, which expire at various times through 2027,2028, with a weighted-average remaining lease term of 5.14.6 years and a weighted-average discount rate of 7.0%5.3% as of September 26, 2020July 3, 2021.

We recorded fixed operating lease expenses of $2.0 million and $1.9 million for the thirdsecond quarter of both fiscal2021 and 2020, respectively, and fiscal 2019,$3.9 and $5.7 million and $5.8$3.8 million for the first ninesix months of fiscal 20202021 and 2019,2020, respectively. 

 

- 1514 -

The following table presents the lease balance classifications within the Consolidated Balance Sheets and summarizes their activity during the first ninesix months of fiscal 20202021:

 

Operating lease right-of-use assets

 

(in thousands)

 

Balance as of December 28, 2019

 $23,591 

Right-of-use assets obtained for new lease contracts during the period

  2,274 

Reduction in the carrying amount of right-of-use assets during the period

  (4,464)

Adjustments for present value and foreign currency effects

  213 

Balance as of September 26, 2020

 $21,614 

Operating lease right-of-use assets

 

(in thousands)

 

Balance as of January 2, 2021

 $22,178 

Right-of-use assets obtained for new and modified lease contracts during the period

  7,459 

Amortization of right-of-use assets during the period

  (3,291)

Adjustments for present value and foreign currency effects

  84 

Balance as of July 3, 2021

 $26,430 

 

Operating lease liabilities

 

(in thousands)

  

(in thousands)

 

Balance as of December 28, 2019

 $26,124 

Balance as of January 2, 2021

 $23,055 

Lease liabilities incurred for new lease contracts during the period

 2,274  7,459 

Accretion of lease liabilities

 1,247  657 

Operating cash used by payments on lease liabilities

 (5,786) (3,984)

Adjustments for present value, foreign currency, and restructuring liability effects

  208 

Balance as of September 26, 2020

 24,067 

Less: Current portion of operating lease liabilities

  (4,562)

Adjustments for present value and foreign currency effects

  81 

Balance as of July 3, 2021

 27,268 

Less: Current portion of operating lease liabilities (included in Accrued expenses)

  (4,811)

Long-term operating lease liabilities, net of current portion

 $19,505  $22,457 

 

Maturities of operating lease liabilities as of September 26, 2020July 3, 2021 are as follows:

 

Fiscal year

 

(in thousands)

  

(in thousands)

 
   

2020 (remaining 3 months)

 $1,086 

2021

 6,313 

2021 (remaining 2 quarters)

 $2,564 

2022

 5,121  7,133 

2023

 5,030  7,189 

2024

 4,848  5,881 

2025

 3,664 

Thereafter

  6,774   4,614 

Total lease payments

 29,172  31,045 

Less: amount representing interest

 (4,966)  (3,777)

Less: amount representing restructuring liability adjustments

  (139)

Total lease liabilities

 $24,067  $27,268 

 

Prior to 2020, the reporting of future minimum lease commitments included the lease obligations associated with previously restructured facilities. Lease obligations for facilities restructured prior to the adoption of Topic 842 totaled approximately $7.4$7.7 million at September 26, 2020July 3, 2021 and continued to be recorded in Other long-term liabilities on our Consolidated Balance Sheets.

 

 

Note 8 - Intangible Assets

 

On our Consolidated Balance Sheets at September 26, 2020July 3, 2021 and December 28, 2019January 2, 2021, , Intangible assets, net are shown net of accumulated amortization of $131.3$133.6 million and $127.4$132.0 million, respectively. During the thirdfirst quarter of fiscal 2020,2021, we entered into license agreements for third-party technology totaling approximately $0.4$1.8 million and have recorded them as intangible assets. These licenses are being amortized to Research and development expense over their estimated useful lives.

 

We recorded amortization expense related to intangible assets on the Consolidated Statements of Operations as presented in the following table:

 

 

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

  

Six Months Ended

 
 

September 26,

 

September 28,

 

September 26,

 

September 28,

  

July 3,

 

June 27,

 

July 3,

 

June 27,

 

(In thousands)

 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 

Research and development

 $17  $14  $45  $41  $223  $14  $421  $28 

Amortization of acquired intangible assets

  603   3,389   3,846   10,168   603   603   1,206   3,243 
 $620  $3,403  $3,891  $10,209  $826  $617  $1,627  $3,271 

 

- 1615 -

 

Note 9 - Stock-Based CompensationCompensation

 

Total stock-based compensation expense included in our Consolidated Statements of Operations is presented in the following table:

 

 

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

  

Six Months Ended

 
 

September 26,

 

September 28,

 

September 26,

 

September 28,

  

July 3,

 

June 27,

 

July 3,

 

June 27,

 

(In thousands)

 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 

Cost of revenue

 $834  $453  $2,322  $982  $825  $897  $1,491  $1,488 

Research and development

 2,633  1,658  7,461  4,029  3,969  2,234  6,736  4,828 

Selling, general, and administrative

  7,021   3,569   20,445   8,324   7,126   7,881   14,147   13,424 

Total stock-based compensation

 $10,488  $5,680  $30,228  $13,335  $11,920  $11,012  $22,374  $19,740 

 

Market-Based and Performance-Based Stock Compensation

 

In the 2018first six months of fiscal 2021, certain awards with a performance condition or market condition granted in prior fiscal years have vested. As of July 3, 2021, the Company had met the "adjusted" EBITDA performance criteria on a trailing four quarter basis for two consecutive trailing four-quarter periods, and the second tranche of 33.3% of the base number of the awards with an EBITDA performance condition qualified for vesting. During the first quarter of fiscal 2021, the market condition for awards granted to certain executives in the first quarter of fiscal 2019 exceeded the 75th percentile of the TSR condition, and the second tranche of these awards vested at 200%.

In the first quarter of fiscal 2021, we granted awards of RSUs with either a market condition to certain executives. Under the terms of these grants, the RSUs with a market condition vest and become payable over a three-year period based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index, which condition is measured for the grants on the 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. We also granted awards of RSUs with a performance condition to certain executives, as described in ourexecutives. Under the terms of these grants, the RSUs with a performance condition will vest and become payable based on the Company generating specified levels of year-over-year revenue growth, which will be measured annually for 2019one-fourth of the grants after each fiscal year-end through the end of fiscal 102024,-K. with vesting occurring 13 months after the end of each measurement period. Vesting of these awards scales for achievement of year-over-year revenue growth compared to certain targets, with maximum vesting up to 200%.

During the first quarter of fiscal 2020, the Board of Directors approved a modification to the market condition measurement periods associated with the unvested portions of certain of the Company’s awards with a market condition that were granted prior to fiscal 2020. The modification extended the duration of the measurement period by adjusting the beginning date of each measurement period to the original grant date, resulting in approximately $1.8 million additional stock compensation expense during the first quarter of fiscal 2020.

 

In the first quarter of fiscal 2020, we granted awards of RSUs with a market condition to certain executives. Under the terms of these grants, the RSUs with a market condition vest and become payable over a three-year period based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index, which condition is tested for one-half of the grants on the second and third anniversary of the grant date. If the 75th percentile of the market condition is achieved, the awards may vest at 250% or 200%, depending upon the executive, with 100% of the units vesting at the 55th percentile, zero vesting if relative TSR is below the 25th percentile, and vesting scaling for achievement between the 25th and 75th percentile.

During the third quarter of fiscal 2020, the market condition for awards granted in previous years exceeded the 75th percentile of the condition, and one-third of these awards vested at 250% or 200%, as applicable for the respective executive. During the second quarter of fiscal 2020, the first tranche of 33.3% of the base number of the awards with an EBITDA performance condition vested, as the Company had generated the specified "adjusted" EBITDA levels on a trailing four quarter basis for two consecutive trailing four-quarter periods as of the end of the previous quarter. During the first quarter of fiscal 2020, the market condition for awards granted to certain executives in the first quarter of fiscal 2019 exceeded the 75th percentile of the condition, and the first tranche of these awards vested at 200%. For our awards with a market condition or a performance condition, we incurred stock compensation expense including the effect of the modificationapproximately $6.7 million in the firstsecond quarter of both fiscal 2020,2021 of approximately $5.6 million and $0.9 million in the third quarter of fiscal 2020, and 2019, respectively, and of approximately $16.5$11.3 million and $2.9$10.9 million in the first ninesix months of fiscal 20202021 and 2019,2020, respectively, which is recorded as a component of total stock-based compensation expense.


The following table summarizes the activity for our awards with a market condition or performance condition:

(Shares in thousands)

 

Total

 

Balance, December 28, 2019January 2, 2021

  1,1631,021 

Granted

  349607 

Effect of vesting multiplier

  44055 

Vested

  (816)
Cancelled(14110)

Balance, September 26, 2020July 3, 2021

  1,1221,573 

 

- 1716 -

Note 10 - Common Stock Repurchase Program

On February 19, 2021, our Board of Directors approved a stock repurchase program pursuant to which up to $60.0 million of outstanding common stock could be repurchased from time to time ("the "2021 Repurchase Program"). The duration of the 2021 Repurchase Program is twelve months. Under the 2021 Repurchase Program during the secondquarter of fiscal 2021, approximately 0.5 million shares were repurchased for $25.1 million, or an average price paid per share of $48.07. As of July 3, 2021, the remaining portion of the amount authorized for the twelve-month program is approximately $19.9 million. All repurchases were open market transactions funded from available working capital. All shares repurchased pursuant to the 2021 Repurchase Program were retired by the end of the secondquarter of fiscal 2021.

 

 

Note 1011 - Income Taxes

 

We are subject to federal and state income tax as well as income tax in the foreign jurisdictions in which we operate. For the thirdsecond quarter of fiscal 20202021, we recorded an income tax benefit of approximately $0.7 million, and for fiscal 20192020, we recorded income tax expense of approximately $1.1 million. For$0.6 million and $0.8 million, respectively, and for the first ninesix months of fiscal 20202021 and fiscal 2019,2020, we recorded income tax expense of approximately $0.6$1.6 million and $1.5$1.3 million, respectively. Income taxes for the three and ninesix month periods ended September 26, 2020July 3, 2021 and September 28, 2019June 27, 2020 represent tax at the federal, state, and foreign statutory tax rates in addition to withholding taxes, changes in uncertain tax positions, changes in the U.S. valuation allowance, as well as other non-deductible items in foreign jurisdictions. The difference between the U.S. federal statutory tax rate of 21% and our effective tax rates for the three and ninesix months ended September 26, 2020July 3, 2021 and for the three and ninesix months ended September 28, 2019June 27, 2020 resulted primarily from the U.S. valuation allowance, foreign withholding taxes, foreign rate differentials, and the discrete impacts of uncertain tax positions due to lapsing of the statute of limitations.

 

We updated our evaluation of the valuation allowance position in the United States through September 26, 2020July 3, 2021 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 exercised significant judgment and considered estimates about our ability to generate revenue and taxable profits sufficient to offset expenditures in future periods within the U.S. We will continue to evaluate both positive and negative evidence in future periods to determine if we will realize the deferred tax assets. We do not have a valuation allowance in any foreign jurisdictions as we have concluded it is more likely than not that we will realize the net deferred tax assets in future periods.

 

Our liability recorded for uncertain tax positions (including penalties and interest) was $23.0$21.9 million and $24.6$22.3 million at September 26, 2020July 3, 2021 and December 28, 2019January 2, 2021, respectively, and is included as a component of Other long-term liabilities on our Consolidated Balance Sheets.

 

We are not currently paying U.S. federal income taxes and do not expect to pay such taxes until we fully utilize our tax net operating loss ("NOL") and credit carryforwards. We expect to pay a nominal amount of state income tax. We are paying foreign income and withholding taxes, which are reflected in Income tax expense in our Consolidated Statements of Operations and are primarily related to the cost of operating offshore activities and subsidiaries. We accrue interest and penalties related to uncertain tax positions in Income tax expense.

 

Note 1112 - Contingencies

 

Legal Matters

 

On or about December 19, 2018, Steven A.W. De Jaray, Perienne De Jaray and Darrell R. Oswald (collectively, the “Plaintiffs”) commenced an action against the Company and several unnamed defendants in the Multnomah County Circuit Court of the State of Oregon, in connection with the sale of certain products by the Company to the Plaintiffs in or around 2008. The Plaintiffs allege that we violated The Lanham Act, engaged in negligence and fraud by failing to disclose to the Plaintiffs the export-controlled status of the subject parts. The Plaintiffs seek damages of $138 million, treble damages, and other remedies. In January 2019, we removed the action to the United States District Court for the District of Oregon. At this stage of the proceedings, we do not have an estimate of the likelihood or the amount of any potential exposure to the Company; however, we believe that these claims are without merit and intend to vigorously defend the action.

 

From time to time, we are exposed to certain additional asserted and unasserted potential claims. We review the status of each significant matter and assess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and a range of possible losses can be estimated, we then accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may revise estimates.

 

- 1817 -

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read along with the unaudited consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 20192020 10-K.

 

Overview

 

Lattice Semiconductor Corporation and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develop technologies that we monetize through differentiated programmable logic semiconductor products, system solutions, design services, and licenses. Lattice is the low power programmable leader. We solve customer problems across the network, from the Edge to the Cloud, in the growing communications, computing, industrial, automotive, and consumer markets. Our technology, long-standing relationships, and commitment to world-class support enablelets our customers quickly and easily unleash their innovation to create a smart, secure, and connected 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 also serve our customers with IP licensing and various other services. Our product development activities include new proprietary products, advanced packaging, existing product enhancements, software development tools, soft IP, and system solutions for high-growth applications such as Edge Artificial Intelligence, 5G infrastructure, platform security, and factory automation.

 

Critical Accounting Policies and Use of Estimates

 

Critical accounting policies are those that are both most important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 20192020 10-K.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments affecting the amounts reported in our consolidated condensed financial statements and the accompanying notes. TheWe base our estimates and judgments on historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when made, and because of the uncertainty inherent in these matters, actual results that we experience may differ materially from our estimates. As of September 26, 2020, the extent to which the COVID-19 pandemic will impact our business going forward depends on numerous dynamic factors which we cannot reliably predict. As a result, some ofthese estimates under different assumptions or conditions. We evaluate our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As the events continue to evolve with respect to the pandemic, our estimates may materially change in future periods.judgments on an ongoing basis.

 

Impact of COVID-19 on our Business

 

The COVID-19 pandemic has caused, and is expected tomay continue to cause, thea global slowdown of economic activity (including thea decrease in demand for certain goods and services), and significant volatility in and disruption to financial markets. Because the severity,markets. The severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, and the pandemic’s impact on our operations and financial performance, as well as its impact on our ability to successfully execute our business strategy and initiatives, remains uncertain. We continue to take actions to safeguard the health and well-being of our employees and our business. We implemented social distancing policies at our locations around the world including working from home and eliminating virtually all travel. Furthermore, we continue to manage our cash position and liquidity needs in light of the rapidly changing environment, and we have additional resources available under our Current Credit Agreement, if needed. As a result of the accelerated debt payments we made during the second quarter of fiscal 2020 to reduce our future interest rate expense, we do not have any required debt payments until June 30, 2021.

 

As COVID-19 has spread globally and been declared a pandemic, theThe full extent of this outbreak,the COVID-19 pandemic, the related governmental, business and travel restrictions in order to contain this virus are continuing to evolve globally.globally even with the rollout of vaccination programs. We anticipate that these actions and the global health crisis caused by the COVID-19 pandemic will negatively impact business activity across the globe. We expectDemand for our demand toproducts may be impacted in Q4Q3 and potentially beyond Q4Q3 given the global reach and economic impact of the virus. For example, governmental actions or policies or other initiatives to contain the virus could lead to reductions in our end customers’ demand under which we would expect to lose revenue. We have previously seen and could again see delays or disruptions in our supply chain due to governmental restrictions. If our suppliers experience similar impacts, we may have difficulty sourcing materials necessary to fulfill customer production requirements and transporting completed products to our end customers.

 

- 1918 -


 

We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects of any such alterations or modifications may have on our business, including the effects on our customers, employees, and prospects, or on our financial results for the remainder of fiscal 2020 or future periods.results. The The full extent of thepotential impact of the COVID-19 pandemic on our business, results of operations and financial position is currently uncertain and will depend on many factors that are not within our control, including, but not limited to: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides.subsides. See the section entitled “Risk Factors” in Item 1A of Part III of this reportour Annual Report on Form 10-K for the fiscal year ended January 2, 2021 for further information about related risks and uncertainties.

 

Results of Operations

 

Key elements of our Consolidated Statements of Operations, including as a percentage of revenue, are presented in the following table:

 

 

Three Months Ended

  

Nine Months Ended

 
 

September 26,

 

September 28,

 

September 26,

 

September 28,

  

Three Months Ended

  

Six Months Ended *

 

(In thousands)

 

2020

  

2019

  

2020

  

2019

  

July 3, 2021

  

June 27, 2020

  

July 3, 2021

  

June 27, 2020

 

Revenue

 $103,042  100.0% $103,469  100.0% $300,947   100.0% $303,856  100.0% $125,905  100.0% $100,589  100.0% $241,621  100.0% $197,905  100.0%
                                    
Gross margin 62,306 60.5 61,439 59.4 180,445   60.0 179,129 59.0  77,184 61.3 60,577 60.2 147,770 61.2 118,139 59.7 
                                    
Research and development 22,439 21.8 20,032 19.4 66,590   22.1 59,074 19.4  27,454 21.8 22,458 22.3 51,520 21.3 44,151 22.3 
Selling, general and, administrative 23,758 23.1 21,078 20.4 70,797   23.5 61,618 20.3  25,607 20.3 24,488 24.3 50,699 21.0 47,039 23.8 
Amortization of acquired intangible assets 603 0.6 3,389 3.3 3,846   1.3 10,168 3.3  603 0.5 603 0.6 1,206 0.5 3,243 1.6 
Restructuring charges  2,692  2.6  252  0.2  4,178   1.4  4,719  1.6   204   0.2   546   0.5   380   0.2   1,486   0.8 
Income from operations $12,814   12.4% $16,688   16.1% $35,034   11.6% $43,550   14.3% $23,316   18.5% $12,482   12.4% $43,965   18.2% $22,220   11.2%

 

Revenue by End Market

 

We sell our products globally to a broad base of customers in three primary end market groups: Communications and Computing, Industrial and Automotive, and Consumer. We also provide Intellectual Propertyintellectual property ("IP") licensing and services to these end markets.

 

We anticipate future revenue growth due toWithin these end markets, there are multiple market segment drivers, including:

Communications and computing: 5G infrastructure deployments, client computing platforms, and cloud and enterprise servers, and client computing platforms,

Industrial and automotive: industrial Internet of Things ("IoT"), factory automation, robotics, and automotive electronics,

Consumer: smart home, and prosumer.

 

We also generate revenue from the licensing of our Intellectual Property ("IP"),IP, the collection of certain royalties, patent sales, the revenue related to our participation in consortia and standard-setting activities, and services. While these activities may be associated with multiple markets, Licensing and services revenue is reported as a separate end market as it has characteristics that differ from other categories, most notably a higher gross margin.

 

The end market data below is derived from data provided to us byby our distributors and end customers. WithWith 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 forfor which end customers andand 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 periods presented:

 

Communications and Computing

Industrial and Automotive

Consumer

Licensing and Services

Wireless

Security and Surveillance

Cameras

IP Royalties

Wireline

Machine Vision

Displays

Adopter Fees

Data Backhaul

Industrial Automation

Wearables

IP Licenses

Server Computing

Robotics

Televisions

Patent Sales

Client Computing

Automotive

Home Theater

 

Data Storage

Drones

 

 

 

- 2019 -


 

The composition of our revenue by end market is presented in the following table:

 

 

Three Months Ended

  

Nine Months Ended

 
 

September 26,

 

September 28,

 

September 26,

 

September 28,

  

Three Months Ended

  

Six Months Ended

 

(In thousands)

 

2020

  

2019

  

2020

  

2019

  

July 3, 2021

  

June 27, 2020

  

July 3, 2021

  

June 27, 2020

 
Communications and Computing $44,257 43.0% $41,891 40.4% $128,592 42.7% $117,320 38.5% $52,577 41.8% $45,883 45.6% $101,905 42.2% $84,335 42.6%
Industrial and Automotive 42,249 41.0 37,102 35.9 122,767 40.8 112,276 37.0  57,439 45.6 39,078 38.8 107,184 44.4 80,518 40.7 
Consumer 10,144 9.8 18,484 17.9 34,512 11.5 57,589 19.0  12,520 9.9 11,035 11.0 25,039 10.4 24,368 12.3 
Licensing and Services  6,392   6.2   5,992   5.8   15,076   5.0   16,671   5.5   3,369   2.7   4,593   4.6   7,493   3.1   8,684   4.4 

Total revenue

 $103,042   100.0% $103,469   100.0% $300,947   100.0% $303,856   100.0% $125,905   100.0% $100,589   100.0% $241,621   100.0% $197,905   100.0%

 

Revenue from the Communications and Computing end market increased by 6%15% for the thirdsecond quarter of fiscal 2021 compared to the second quarter of fiscal 2020 and increased by 21% for the first six months of fiscal 2021 compared to the third quarter of fiscal 2019 and increased by 10% for the first ninesix months of fiscal 2020 comparedprimarily due to the first nine months of fiscal 2019 due tothe continued adoption of our products usedincreased demand for applications in servers, and client computing platforms, as well as ongoingand 5G infrastructure deployments..

 

Revenue from the Industrial and Automotive end market increased by 14%47% for the thirdsecond quarter of fiscal 2021 compared to the second quarter of fiscal 2020 and increased by 33% for the first six months of fiscal 2021 compared to the third quarter of fiscal 2019 and increased by 9% for the first ninesix months of fiscal 2020 compared to the first nine months of fiscal 2019primarily due primarily to increased demand for our products used in a broad range ofacross multiple applications, includingsuch as industrial automation and safety, robotics, embedded vision, and automotive electronics.robotics.

 

Revenue from the Consumer end market decreasedincreased by 45%13% for the thirdsecond quarter of fiscal 2021 compared to the second quarter of fiscal 2020 and increased by 3% for the first six months of fiscal 2021 compared to the third quarter of fiscal 2019 and decreased by 40% for the first ninesix months of fiscal 2020 comparedprimarily due to the first nine months of fiscal 2019. This segment has been impacted by lowerincreased demand for our products in Consumer end market demand due to the COVID-19 pandemic, as well as the expected shift in the mix of revenue towards our other market segments.applications.

 

Revenue from the Licensing and services end market increaseddecreased by 7%27% for the thirdsecond quarter of fiscal 2021 compared to the second quarter of fiscal 2020 and decreased by 14% for the first six months of fiscal 2021 compared to the third quarter of fiscal 2019 primarily due to increased licensing revenue, and decreased by 10% for the first ninesix months of fiscal 2020 compared to the first nine months of fiscal 2019 primarily due to decreased HDMI revenue.a decrease in royalties.

 

Revenue by Geography

 

We assign revenue to geographies based on ship-to location of the end customer, where available, and based upon the location of the distributor to which the product was shipped otherwise.customer.

 

The composition of our revenue by geography is presented in the following table:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 26,

  

September 28,

  

September 26,

  

September 28,

 

(In thousands)

 

2020

  

2019

  

2020

  

2019

 
Asia $79,739   77.4% $79,644   77.0% $222,992   74.1% $225,500   74.2%
Americas  15,312   14.9   11,691   11.3   46,406   15.4   36,486   12.0 
Europe  7,991   7.7   12,134   11.7   31,549   10.5   41,870   13.8 

Total revenue

 $103,042   100.0% $103,469   100.0% $300,947   100.0% $303,856   100.0%

- 21 -

  

Three Months Ended

  

Six Months Ended

 

(In thousands)

 

July 3, 2021

  

June 27, 2020

  

July 3, 2021

  

June 27, 2020

 

Asia

 $96,455   76.6% $74,560   74.1% $184,845   76.5% $143,253   72.4%

Americas

  17,826   14.2   14,507   14.4   33,669   13.9   31,094   15.7 

Europe

  11,624   9.2   11,522   11.5   23,107   9.6   23,558   11.9 

Total revenue

 $125,905   100.0% $100,589   100.0% $241,621   100.0% $197,905   100.0%

 

Revenue from DistributorsCustomers

 

We sell our products to independent distributors and directly to customers. Distributors have historically accounted for a significant portion of our total revenue. Revenue attributable torevenue, and the two distributor groups noted below accounted for more than 10% of our primary distributorstotal revenue in the periods covered by this report.

The composition of our revenue by customer is presented in the following table:

 

 

% of Total Revenue

 

% of Total Revenue

 
 

Three Months Ended

  

Nine Months Ended

  

% of Total Revenue

 

% of Total Revenue

 
 

September 26,

 

September 28,

 

September 26,

 

September 28,

  

Three Months Ended

  

Six Months Ended

 
 

2020

  

2019

  

2020

  

2019

  

July 3, 2021

  

June 27, 2020

  

July 3, 2021

  

June 27, 2020

 

Weikeng Group

 37.9% 30.6% 32.9% 29.7% 34.1% 37.1% 36.4% 30.2%

Arrow Electronics Inc.

 24.7  24.3  24.9  25.1  24.3  25.0  25.1  25.1 

All others

  19.3   26.4   23.6   26.9 

Other distributors

 

29.9

   22.6   25.4   25.9 

All distributors

  81.9%  81.3%  81.4%  81.7%  88.3   84.7   86.9   81.2 

Direct customers

 9.0  10.7  10.0  14.4 

Licensing and services revenue

  2.7   4.6   3.1   4.4 

Total revenue

  100.0%  100.0%  100.0%  100.0%

 

- 20 -

 

Gross Margin

 

The composition of our Gross margin, including as a percentage of revenue, is presented in the following table:

 

 

Three Months Ended

  

Nine Months Ended

 
 

September 26,

 

September 28,

 

September 26,

 

September 28,

  

Three Months Ended

  

Six Months Ended

 

(In thousands)

 

2020

  

2019

  

2020

  

2019

  

July 3, 2021

  

June 27, 2020

  

July 3, 2021

  

June 27, 2020

 

Gross margin

 $62,306  $61,439  $180,445  $179,129  $77,184  $60,577  $147,770  $118,139 

Percentage of net revenue

 60.5% 59.4% 60.0% 59.0%

Gross margin percentage

 61.3% 60.2% 61.2% 59.7%

Product gross margin %

 57.9% 56.9% 57.8% 56.6% 60.2% 58.3% 59.9% 57.8%

Licensing and services gross margin %

 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

 

Gross margin, as a percentage of revenue, increased 110 basis points in the thirdsecond quarter of fiscal 2021 compared to the second quarter of fiscal 2020 compared to the third quarter of fiscal 2019 and increased by 100150 basis points forin the first ninesix months of fiscal 20202021 compared to the first ninesix months of fiscal 2019.2020. Improved margins were driven by benefits from pricing optimization programs, product cost reductions, and product mix.

 

Because of its higher margin, the licensing and services portion of our overall revenue can have a disproportionate impact on Gross margin depending on the relative mix between product revenue and licensing and services revenue.margin.

 

 

Operating Expenses

 

Research and Development Expense

 

The composition of our Research and development expense, including as a percentage of revenue, is presented in the following table:

 

 

Three Months Ended

     

Nine Months Ended

    
 

September 26,

 

September 28,

    

September 26,

 

September 28,

    

Three Months Ended

     

Six Months Ended

    

(In thousands)

 

2020

  

2019

  

% change

  

2020

  

2019

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

 

Research and development

 $22,439  $20,032  12.0% $66,590  $59,074  12.7% $27,454  $22,458  22.2% $51,520  $44,151  16.7%

Percentage of revenue

 21.8% 19.4%    22.1% 19.4%    21.8% 22.3%    21.3% 22.3%   

 

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 the thirdsecond quarter and first ninesix months of fiscal 20202021 compared to the thirdsecond quarter and first ninesix months of fiscal 20192020 was due primarily to increased headcountheadcount-related costs as we continue to supportinvest in the expansion of our programmable logic product portfolio and the acceleration of our new product introduction cadence. We believe that a continued commitment to Research and development is essential to maintaining product leadership and providing innovative new product offerings and, therefore, we expect to continue to increase our investment in Research and development, particularly with expanded investment in the development of software solutions.

 

- 22 -

Selling, General, and Administrative Expense

 

The composition of our Selling, general, and administrative expense, including as a percentage of revenue, is presented in the following table:

 

 

Three Months Ended

     

Nine Months Ended

    
 

September 26,

 

September 28,

    

September 26,

 

September 28,

    

Three Months Ended

     

Six Months Ended

    

(In thousands)

 

2020

  

2019

  

% change

  

2020

  

2019

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

 

Selling, general, and administrative

 $23,758  $21,078  12.7% $70,797  $61,618  14.9% $25,607  $24,488  4.6% $50,699  $47,039  7.8%

Percentage of revenue

 23.1% 20.4%    23.5% 20.3%    20.3% 24.3%    21.0% 23.8%   

 

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 the thirdsecond quarter and first nine months of fiscal 20202021 compared to the thirdsecond quarter and first nine months of fiscal 20192020 was due primarily to increased expenses for stock compensationbonus, commissions, and salaries,outside services, partially offset by reducedlower stock compensation. The increase in Selling, general, and administrative expense for the first six months of fiscal 2021 compared to the first six months of fiscal 2020 was due primarily to increased expenses for bonus, commissions, resulting from our restructuring under the Q2 2019 Sales Plan.wages, outside services, and stock compensation.

- 21 -

 

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:

 

 

Three Months Ended

     

Nine Months Ended

    
 

September 26,

 

September 28,

    

September 26,

 

September 28,

    

Three Months Ended

     

Six Months Ended

    

(In thousands)

 

2020

  

2019

  

% change

  

2020

  

2019

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

 

Amortization of acquired intangible assets

 $603  $3,389  (82.2)% $3,846  $10,168  (62.2)% $603  $603  0.0% $1,206  $3,243  (62.8)%

Percentage of revenue

 0.6% 3.3%    1.3% 3.3%    0.5% 0.6%    0.5% 1.6%   

 

The decrease in Amortization of acquired intangible assets for the third quarter and first ninesix months of fiscal 20202021 compared to the third quarter and first ninesix months of fiscal 20192020 is due to the end of the amortization period for the majority of our acquired intangible assets during the first quarter of fiscal 2020.

 

Restructuring Charges

 

The composition of our Restructuring charges, including as a percentage of revenue, is presented in the following table:

 

 

Three Months Ended

     

Nine Months Ended

    
 

September 26,

 

September 28,

    

September 26,

 

September 28,

    

Three Months Ended

     

Six Months Ended

    

(In thousands)

 

2020

  

2019

  

% change

  

2020

  

2019

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

 

Restructuring charges

 $2,692  $252  968.3% $4,178  $4,719  (11.5)% $204  $546  (62.6)% $380  $1,486  (74.4)%

Percentage of revenue

 2.6% 0.2%    1.4% 1.6%    0.2% 0.5%    0.2% 0.8%   

 

Restructuring charges are comprised of expenses resulting from reductions in our worldwide workforce, consolidation of our facilities, removal of fixed assets from service, and cancellation of software contracts and engineering tools. Details of our restructuring plans and expenses incurred under them are discussed in "Note 6 - Restructuring" to our Consolidated Financial Statements in Part I, Item 1 of this report.

Quarterly Report on Form 10-Q. The increasedecrease in restructuring expenseRestructuring charges in the thirdsecond quarter and first six months of fiscal 20202021 compared to the thirdsecond quarter of fiscal 2019 was due primarily to the incremental costs related to our partially vacated facility in San Jose, California under the June 2017 Plan and the additional headcount related costs under the Q1 2020 Plan. The decrease in restructuring expense in the first ninesix months of fiscal 2020 compared to the first nine months of fiscal 2019 was driven primarily by lowerthe non-recurrence of prior year charges in the current year period for facility closures under the June 2017 Plan, and by lower charges in the current year period for severance under the Q1 2020 Plan compared to charges in the prior year period resulting from contract cancellation under the Q2 2019 Sales Plan.

 

- 23 -

Interest Expense

 

The composition of our Interest expense, including as a percentage of revenue, is presented in the following table:

 

 

Three Months Ended

     

Nine Months Ended

    
 

September 26,

 

September 28,

    

September 26,

 

September 28,

    

Three Months Ended

     

Six Months Ended

    

(In thousands)

 

2020

  

2019

  

% change

  

2020

  

2019

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

 

Interest expense

 $(792) $(2,022) (60.8)% $(2,914) $(10,547) (72.4)% $(702) $(1,045) (32.8)% $(1,420) $(2,122) (33.1)%

Percentage of revenue

 (0.8)% (2.0)%    (1.0)% (3.5)%    (0.6)% (1.0)%    (0.6)% (1.1)%   

 

Interest expense is primarily related to our long-term debt, which is further discussed under the Credit Arrangements"Credit Arrangements" heading in the Liquidity and Capital Resources section, below. This interest expense is comprised of contractual interest and amortization of original issue discount and debt issuance costs based on the effective interest method.

The decrease in Interest expense for the thirdsecond quarter and first ninesix months of fiscal 2021 compared to the second quarter and first six months of fiscal 2020 compared to the third quarter and first nine months of fiscal 2019 was largely driven by the significant reduction in the effective interest rate onprincipal balance of our long-term debt coupled with the additionaldue to principal payments made in previous periods.

 

Other Expense,(Expense) Income, net

 

The composition of our Other expense,(expense) income, net, including as a percentage of revenue, is presented in the following table:

 

 

Three Months Ended

     

Nine Months Ended

    
 

September 26,

 

September 28,

    

September 26,

 

September 28,

    

Three Months Ended

     

Six Months Ended

    

(In thousands)

 

2020

  

2019

  

% change

  

2020

  

2019

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

 

Other expense, net

 $(70) $(61) 14.8% $(83) $(2,017) (95.9)%

Other (expense) income, net

 $(135) $37  (100+)%  $(297) $(13) 100+% 

Percentage of revenue

 (0.1)% (0.1)%    (0.0)% (0.7)%    (0.1)%      (0.1)%     

 

ForThe increase in Other (expense) income, net for the second quarter and first ninesix months of fiscal 2021 compared to the second quarter and first six months of fiscal 2020 compared to the first nine monthswas largely driven by higher foreign currency exchange losses.

- 22 -

 

Income Taxes

 

The composition of our Income tax expense is presented in the following table:

 

 

Three Months Ended

     

Nine Months Ended

    
 

September 26,

 

September 28,

    

September 26,

 

September 28,

    

Three Months Ended

     

Six Months Ended

    

(In thousands)

 

2020

  

2019

  

% change

  

2020

  

2019

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

  

July 3, 2021

  

June 27, 2020

  

% change

 

Income tax (benefit) expense

 $(655) $1,066  (161.4)% $634  $1,480  (57.2)%

Income tax expense

 $641  $845  (24.1)% $1,597  $1,289  23.9%

 

Our Income tax expense is composed primarily of foreign income and withholding taxes, partially offset by benefits resulting from the release of uncertain tax positions ("UTP") due to statute of limitation expirations that occurred in the respective periods. The decrease in expense in the thirdsecond quarter of fiscal 20202021 as compared to the thirdsecond quarter of fiscal 20192020 is primarily due to release ofdecreases in foreign withholding taxes and changes in uncertain tax positions due to statute of limitations expirations.positions. The increase in expense in the first nine monthssix month of fiscal 20202021 as compared to the first ninesix months of fiscal 20192020 is primarily due to increaseincreases in foreign withholding taxesworldwide income and UTP expense partially offset by release ofchanges in uncertain tax positions due to statute of limitations expirations..

 

We are not currently paying U.S. federal income taxes and do not expect to pay such taxes until we fully utilize our tax net operating loss and credit carryforwards. We expect to pay a nominal amount of state income tax. We are paying foreign income taxes, which are primarily related to withholding taxes on income from foreign royalties, foreign sales, and the cost of operating offshore research and development, marketing, and sales subsidiaries. We updated our evaluation of the valuation allowance position in the United States through September 26, 2020 and concluded that we should continue to maintain a full valuation allowance against the net federal and state deferred tax assets. We will continue to evaluate both positive and negative evidence in future periods to determine if we will realize the deferred tax assets. We accrue interest and penalties related to uncertain tax positions in income tax expense on our Consolidated Statements of Operations. The inherent uncertainties related to the geographical distribution and relative level of profitability among various high and low tax jurisdictions make it difficult to estimate the impact of the global tax structure on our future effective tax rate.

- 24 -

Liquidity and Capital Resources

 

The following sections discuss material changes in our financial condition from the end of fiscal 2019,2020, including the effects of changes in our Consolidated Balance Sheets, and the effects of our credit arrangements and contractual obligations on our liquidity and capital resources.

 

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.

 

There is significant uncertainty around the extent and duration of the disruption to our business from the COVID-19 pandemic, and our liquidity and working capital needs may be impacted in the future periods.

 

We believe that our financial resources, including current cash and cash equivalents, cash flow from operating activities, and our credit facilities, will be sufficient to meet our liquidity and working capital needs through at least the next 12 months. As of September 26, 2020,July 3, 2021, we did not have significant long-term commitments for capital expenditures. In the future, we may continue to consider acquisition opportunities to further extend our product or technology portfolios and further expand our product offerings. In connection with funding capital expenditures, acquisitions, securing additional wafer supply, increasing our working capital, or other operations, we may seek to obtain equity or additional debt financing, or advance purchase payments or similar arrangements with wafer manufacturers. We may also seek to obtain equity or additional debt financing if we experience downturns or cyclical fluctuations in our business that are more severe or longer than we anticipated when determining our current working capital needs. On May 17, 2019, we entered into our Current Credit Agreement that is discussed under the "Credit Arrangements" heading below.

 

Cash and cash equivalents

 

(In thousands)

 

September 26, 2020

  

December 28, 2019

  

$ Change

  

% Change

  

July 3, 2021

  

January 2, 2021

  

$ Change

  

% Change

 

Cash and cash equivalents

 $182,268  $118,081  $64,187  54.4% $187,734  $182,332  $5,402   3.0%

 

As of September 26, 2020,July 3, 2021, we had Cash and cash equivalents of $182.3$187.7 million, of which approximately $103.6$61.3 million 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 September 26, 2020,July 3, 2021, we could access all cash held by our foreign subsidiaries without incurring significant additional expense.

 

- 23 -

The net increase in Cash and cash equivalents of $64.2$5.4 million between December 28, 2019January 2, 2021 and September 26, 2020July 3, 2021 was primarily driven by cash flows from the following activities:

 

Operating activities — Cash provided by operating activities results from net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities for the first ninesix months of fiscal 20202021 was $69.0$70.7 million compared to $84.8$36.9 million for the first ninesix months of fiscal 2019.2020. This decreaseincrease of $15.8$33.8 million was driven by changes in working capital, primarily the increase in accounts receivable and inventory partially offset by the reduction in prepaid expenses and other current assets, netting to $24.8 million, which was partially offsetdriven by an increase of $9.0$23.1 million provided by improved operating performance.performance, coupled with $10.7 million of net changes in working capital, primarily from cash provided by accounts receivable activity, partially offset by cash used by changes in accrued payroll obligations. We are using cash provided by operating activities to invest infund our operations.

 

Investing activities — Investing cash flows consist primarily of transactions related to capital expenditures and payments for software licenses, and in the prior year, short-term marketable securities.intellectual property licenses. Net cash used by investing activities in the first ninesix months of fiscal 20202021 was $16.6 $10.8 million compared to $7.8$11.5 million in the first ninesix months of fiscal 2019.2020. This $8.8$0.7 million changereduction was primarily due to the non-recurrence of the $9.7 million provided by our liquidation of all short-term investments in the first quarter of fiscal 2019. Total cash used for capital expenditures and payments for software licenses decreased $0.9 million to $16.6 million in the first nine months of fiscal 2020 from $17.5 million in the first nine months of fiscal 2019 primarily due to lower expenditures for test equipment and software enhancements.

 

Financing activities — Financing cash flows consist primarily of activity on our long-term debt, proceeds from the exercise of options to acquire common stock, and tax payments related to the net share settlement of restricted stock units. units, and purchases of treasury stock. During the first ninesix months of fiscal 2021, we paid the required quarterly installment of $4.4 million for the second quarter of fiscal 2021. During the first six months of fiscal 2020, we drew $50.0 million on our revolving loan facility to further strengthen our liquidity position, and we paid quarterly installments totaling $26.3 million on our long-term debt, which fulfilled the required quarterly installments through the first quarter of fiscal 2021. During the first nine months of fiscal 2019, we made a total of $107.0 million in principal payments in addition to the cash flows related to refinancing our long-term debt.2021. Payments for tax withholdings on vesting of RSUs partially offset by employee exercises of stock options used net cash flows of $12.8$10.0 million in the first ninesix months of fiscal 2020, which is a change2021, an increase of approximately $21.2$7.9 million from the $8.4 net $2.1 million providedused in the first ninesix months of fiscal 2019.

- 25 -

fiscal 2021, we also purchased $40.1 million of treasury stock, as further discussed below under "Share Repurchase Program."

 

Accounts receivable, net

 

(In thousands)

 

September 26, 2020

  

December 28, 2019

  

$ Change

  

% Change

  

July 3, 2021

  

January 2, 2021

  

Change

  

% Change

 

Accounts receivable, net

 $72,989  $64,917  $8,072  12.4% $71,219  $64,581  $6,638   10.3%

Days sales outstanding - Overall

 65  59  6     52   55   (3)    

 

Accounts receivable, net as of September 26, 2020July 3, 2021 increased by approximately $8.1$6.6 million, or 12%10%, compared to December 28, 2019.January 2, 2021. This increase resulted primarily from higher revenue shipments in the timingsecond quarter of shipments to certain customers in September 2020fiscal 2021 compared to December 2019.theyear-end period. 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)

 

September 26, 2020

  

December 28, 2019

  

$ Change

  

% Change

  

July 3, 2021

  

January 2, 2021

  

Change

  

% Change

 

Inventories

 $59,488  $54,980  $4,508  8.2% $65,584  $64,599  $985   1.5%

Days of inventory on hand

 133  123  10     123   139   (16)    

 

Inventories as of September 26, 2020July 3, 2021 increased $4.5$1.0 million, or approximately 8%2%, compared to December 28, 2019January 2, 2021 primarily to meet the increased demands of our customers.

 

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. Our Days of inventory on hand increaseddecreased to 133 days at September 26, 2020 from 123 days at December 28, 2019.July 3, 2021 from 139 days at January 2, 2021. This increasedecrease resulted from inventory increasesincreased product shipments to meet the increased demands of our customers.customer demand.

 

Credit Arrangements

 

On May 17, 2019, we entered into our Current Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and other lenders. The details of this arrangement are described in "Note 6 - Long-Term Debt" in the Notes to Consolidated Financial Statements of our 20192020 10-K.

 

As of September 26, 2020,July 3, 2021, we had no significant long-term purchase commitments for capital expenditures or existing used or unused credit arrangements beyond the secured revolving loan facility described above.

 

- 24 -

Share Repurchase Program

 

On March 24, 2020, we announced that our Board of Directors had approved a stockSee Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds,” of this Quarterly Report on Form 10-Q for more information about the share repurchase program pursuant to which up to $40.0 million of outstanding common stock may be repurchased from time to time. The duration of the repurchase program is twelve months. No shares have been repurchased under this program during the quarter ended September 26, 2020. We expect that all future repurchases will be open market transactions funded from available working capital.program.

 

Contractual Cash Obligations

 

There have been no material changes to our contractual cash obligations outside of the ordinary course of business in the first ninesix months of fiscal 2020,2021, as summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 28, 2019.January 2, 2021.

 

Off-Balance Sheet Arrangements

 

As of September 26, 2020,July 3, 2021, we did not have any off-balance sheet arrangements of the type described by Item 303(a)(4) of SEC Regulation S-K.

- 26 -

 

ITEM 3. 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. There have been no material changes to either the foreign currency exchange rate risk or interest rate risk previously disclosed in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019.

January 2, 2021.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

In connection with the filing of this Quarterly Report on Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls were effective as of the end of the period covered by this report.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during the thirdsecond quarter of fiscal 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We do not believe there has been any material impact to our internal controls over financial reporting notwithstanding that most of our employees are working remotely due to the COVID-19 pandemic. We continue to monitor and assess the COVID-19 situation on our internal controls to address any potential impact of the COVID-19 pandemic on theirthe design and operating effectiveness.effectiveness of our internal controls.

 

Inherent Limitations on Effectiveness of Controls

 

We do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

- 2725 -


 

PART II. OTHER INFORMATION



 

ITEM 1. LEGAL PROCEEDINGS

 

The information set forth above under ""Note 1112 - Contingencies - Legal Matters" contained in the Notes to Consolidated Financial Statements is incorporated herein by reference.

 

ITEM 1A. Risk Factors

 

The risksrisk factors associated with our business were previously described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019January 2, 2021 ("20192020 10-K") could materially and adversely affect our business, financial condition, and results of operations, and the trading price of our common stock could decline. The additional risk factors described below supplements. There have been no material changes in the risk factors describedincluded in our 20192020 10-K, based on information currently known to us and recent developments since the filing date of that report. The matters discussed belowthis report should be read in conjunction with the risk factors set forth in our 2020 10-K. If any of these risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected, and the 2019 10-K.

The risks described in this report and intrading price of our 2019 10-Kcommon stock could decline. These risk factors are not the only risks facing our company. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results, particularly in light of the rapidly changing nature of the COVID-19 pandemic, containment measures, and the related impacts to economic and operating conditions. These factors, together with all of the other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, should be carefully considered before making an investment decision relating to our common stock.

 

The COVID-19 pandemic could adversely affect our business, resultsITEM 2. Unregistered Sales of operations,Equity Securities and financial condition in a material way.Use of Proceeds

 

COVID-19 has spread internationally and been declaredIssuer Purchases of Equity Securities

On February 19, 2021, our Board of Directors approved a pandemic, affecting stock repurchase program pursuant to which up to $60.0 million of outstanding common stock could be repurchased from time to time ("the populations"2021 Repurchase Program"). The duration of the United States as well as many countries around2021 Repurchase Program is twelve months. Under 2021 Repurchase Program during the world. The outbreak has resulted in significant governmental measures being implementedsecond quarter of fiscal 2021, we made open market purchases funded from available working capital totaling approximately $25.1 million. All shares repurchased pursuant to control the spread of COVID-19, including, among others, restrictions on travel, manufacturing and2021 Repurchase Program were retired by the movement of employees in many regionsend of the world, and the impositionsecond quarter of remote or work-from-home mandates in manyfiscal 2021.

The following table contains information regarding our repurchases of our offices, including incommon stock that is registered pursuant to Section 12 of the United States,Securities Exchange Act of 1934 during the Philippines and, for a time, China. The majoritysecond quarter of our products are manufactured, assembled, and tested by third parties in Asia. In addition, we rely on third party vendors for certain logistics and shipping operations throughout the world, including in Malaysia, Singapore, South Korea, Japan, and Taiwan. We also have other operations in China, the Philippines, and the United States. If the remote or work-from-home conditions in any of our offices continue for an extended period of time, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity.fiscal 2021.

 

Pandemics and epidemics such as the current COVID-19 outbreak or other widespread public health problems could negatively impact our business. If, for example, COVID-19 continues to progress in ways that significantly disrupt the manufacture, shipment, and buying patterns of our products or the products of our customers, this may materially negatively impact our operating results for the current period and subsequent periods, including revenue, gross margins, operating margins, cash flows and other operating results, and our overall business. Our customers may also experience closures of their manufacturing facilities or inability to obtain other components, either of which could negatively impact demand for our solutions. COVID-19 has negatively impacted the overall economy and, as a result of the foregoing, will likely negatively impact our operating results for the current fiscal year and may do so in a material way. In particular, COVID-19 may increase or change the severity of our other risks reported in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, including that:

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 (b)

 

May 2, 2021 through May 29, 2021

  425,160  $47.30   732,184  $24.9 

May 30, 2021 through July 3, 2021

  97,223   51.43   97,223   19.9 

Total

  522,383  $48.07   829,407  $19.9 

 

(a)

Our subcontractor suppliers who manufacture silicon wafers, packaging and testing

All open-market purchases during the quarter were made under the authorization from our board of directors to deliver our semiconductor products may be unablepurchase up to meet delivery expectations to meet customer demand;

Our distributors and customers may experience adverse performance and any reduction in the use$60.0 million of our products by our end customers could harm our sales and significantly decrease our revenue;

The semiconductor industry could experience a cyclical downturn, which could cause a meaningful reduction in demand for our products and adversely affect our operating results;

Countries may adopt tariffs and trade sanctions or similar actions;

We may be delayed in our development and introduction of new products that achieve customer and market acceptance;

Our operations may be disrupted if employees are unavailable due to illness, risk of illness, travel restrictions, work from home requirements, or other factors that may limit our access to key personnel or critical skills, or reduce productivity;LSCC common stock announced February 19, 2021.

(b)

Shortages in or increased costs

As of July 3, 2021, this amount consisted of the remaining portion of the $60.0 million authorized for silicon wafers, packaging materials, testing and shipping could adversely impact our gross margin and lead to reduced revenue;

the twelve-month program announced February 19, 2021.

 

- 28 -

We may experience difficulty in maintaining the uninterrupted operation of our information technology systems, or be exposed to increased risk of a cyber-security incident or fraud, due to an increased reliance on remote work;

We may incur impairments of goodwill and otherwise as required under U.S. GAAP;

Our outstanding indebtedness could reduce our strategic flexibility and liquidity and may have other adverse effects on our results of operations.

The impact of COVID-19 may exacerbate the risk factors listed above and in our Annual Report on Form 10-K, or cause them to change in importance. Developments related to the pandemic have been rapidly changing, and additional impacts and risks may arise that we are not aware of or able to appropriately respond to currently. The ultimate impact of the COVID-19 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’ actions that have been and continue to be taken in response to the pandemic; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides. As of the filing of this Quarterly Report, the extent to which the COVID-19 pandemic will affect our business is highly uncertain and dependent on future developments that are inherently unpredictable, which makes forecasting demand and providing guidance especially difficult. Accordingly, our expectations are subject to change without warning and investors are cautioned not to place undue reliance on them.

Our business could suffer as a result of tariffs and trade sanctions or similar actions.

The imposition by the United States of tariffs, sanctions or other restrictions on goods imported from outside of the United States or countermeasures imposed in response to such government actions could adversely affect our operations or our ability to sell our products globally, which could adversely affect our operating results and financial condition. The materials subject to these tariffs may impact the cost of raw materials used by our suppliers or in our customers’ products. The imposition of further tariffs by the United States on a broader range of imports, or further retaliatory trade measures taken in response to additional tariffs, could increase costs in our supply chain or reduce demand of our customers’ products, either of which could adversely affect our results of operations.

Our customers or suppliers could also become subject to U.S. regulatory scrutiny or export restrictions. For example, the U.S. Justice Department filed criminal charges against one of our customers in China and imposed a licensing requirement on this customer in May 2019, which has limited our ability to do business with this customer. In 2020, the U.S. imposed additional regulatory restrictions on the sale of U.S. controlled technology to customers in China, including establishing additional licensing requirements for the sale of U.S.-originated technology for certain applications or to companies that participate in the Chinese national security supply chain and limiting the fabrication of devices for certain Chinese companies where U.S. technology is involved in the fabrication process. Furthermore, in August 2020 the U.S. established additional licensing requirements for one of our China customers and its affiliates that limit any sales of products to that customer or for that customer’s products absent a license. The U.S. government may add additional Chinese companies to its restricted entity list or impose additional licensing requirements that we may be unable to meet in a timely manner or at all. Where license requirements are imposed, there can be no assurance that the U.S. government will grant licenses to permit the continuation of business with these customers. Future sanctions similar to those imposed in the past and to those recently imposed could adversely affect our ability to earn revenue from these and similar customers. In addition, the imposition of sanctions on customers in China may cause those customers to seek domestic alternatives to our products and those of other United States semiconductor companies. Further, the Chinese government has indicated its intention to develop an unreliable entity list, which may limit the ability of companies on the list to engage in business with Chinese customers. We cannot predict what impact these and future actions, sanctions or criminal charges could have on our customers or suppliers, and therefore our business. If any of our other customers or suppliers become subject to sanctions or other regulatory scrutiny, if our customers are affected by tariffs or other government trade restrictions, or if we become subject to retaliatory regulatory measures, our business and financial condition could be adversely affected.

 

- 2926 -


 

ITEM 6. EXHIBITS

 

Exhibit Number

 

Description

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to the Securities Exchange Act of 1934 Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to the Securities Exchange Act of 1934 Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

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 Label 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

 

- 3027 -


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

LATTICE SEMICONDUCTOR CORPORATION

 

(Registrant)

 

 

 

/s/ Sherri Luther

 

Sherri Luther

 

Chief Financial Officer

 

(Duly Authorized Officer and Principal Financial and Accounting Officer)

 

Date: October 29, 2020August 4, 2021

 

- 3128 -