UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||||
Washington, D.C. 20549 | ||||
FORM 10-K | ||||
(Mark One) | ||||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 28, 2019 | |||
or | ||||
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ | |||
Commission file number: 000-18032
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 93-0835214 |
(State of Incorporation) | (I.R.S. Employer Identification Number) |
5555 NE Moore Court, Hillsboro, Oregon | 97124-6421 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (503) 268-8000
________________________________________
Securities registered pursuant to Section 12(b) of the Act:
________________________________________
(Title of Class) | (Trading Symbol) | (Name of each exchange on which registered) |
Common Stock, $.01 par value | LSCC | Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 þ 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 þ 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 þ | 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 Act). Yes ¨ No þ
Aggregate market value of voting stock held by non-affiliates of the registrant as of June 29, 2019 | $ | 1,242,396,539 | |
Number of shares of common stock outstanding as of February 20, 2020 | 134,318,226 | ||
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement relating to the 2020 Annual Meeting of Stockholders, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.
LATTICE SEMICONDUCTOR CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page | |||
PART I | |||
Item 1. | |||
Item 1A. | |||
Item 1B. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II | |||
Item 5. | |||
Item 6. | |||
Item 7. | |||
Item 7A. | |||
Item 8. | |||
Item 9. | |||
Item 9A. | |||
Item 9B. | |||
PART III | |||
Item 10. | |||
Item 11. | |||
Item 12. | |||
Item 13. | |||
Item 14. | |||
PART IV | |||
Item 15. | |||
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Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These involve estimates, assumptions, risks and uncertainties. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. We use words or phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “plan,” "possible," “predict,” “projects,” “may,” “will,” “should,” “continue,” “ongoing,” “future,” “potential” 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; 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; 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; our anticipated reductions in expenses; our expectations regarding our restructuring plans; our sharing of anticipated HDMI royalty revenues; 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; 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 included global economic conditions and uncertainty, including as a result of trade related restrictions or tariffs, the concentration of our sales in certain end markets, particularly as it relates to the concentration of our sales in the Asia Pacific region, market acceptance and demand for our existing and new products, market and technology trends, our ability to license or sell our intellectual property, any disruption of our distribution channels, the impact of competitive products and pricing, the effect of any downturn in the economy on capital markets and credit markets, unanticipated taxation requirements or positions of the U.S. Internal Revenue Service or other taxing authority, unanticipated effects of tax reform, or unexpected impacts of accounting guidance. In addition, actual results are subject to other risks and uncertainties that relate more broadly to our overall business, including those more fully described herein and that are otherwise described from time to time in our filings with the Securities and Exchange Commission, including but not limited to the items discussed in “Risk Factors” in Item 1A of Part I of this Annual Report on Form 10-K.
You should not unduly rely on forward-looking statements because our actual results could differ materially from those expressed by us. In addition, any forward-looking statement applies only as of the date of this filing. We do not plan to, and undertake no obligation to, update any forward-looking statements to reflect new information or new events, circumstances or developments, or otherwise.
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PART I
Item 1. Business
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 growing communications, computing, industrial, automotive, and consumer markets. Our technology, long-standing relationships, and commitment to world-class support enable our customers to create a smart, secure, and connected world.
Our field programmable gate array ("FPGA") devices provide us with a strong, growing base of control, connect, and compute technologies. We believe there are multiple growth areas that will allow us to increase our addressable market. In particular, we believe there are several emerging trends in servers, infrastructure, and smart devices that are opportunities for Lattice:
• | With the growth of hyperscale data centers, our “processor agnostic” solutions are ideal for control and connect functions in enterprise and data center server applications. |
• | With the expected continued communications infrastructure build-out from 5G deployment, Lattice solutions are being adopted to control and connect a variety of functions in critical systems. |
• | With the increase in electrification and the proliferation of sensors in smart factories, smart homes, and automobiles, our low power, small form factor solutions are ideal for everything from battery powered systems and sensor applications to embedded video. |
• | With the increase in artificial intelligence, machine learning, and a multitude of applications at the network edge, Lattice has the capabilities to provide solutions. These applications often act independently and need to make instantaneous decisions. As such, they need their own computing and learning capabilities to perform functions like face detection, image recognition, and video analytics. |
• | With the demand for more hardware security in the communications, computing, industrial, automotive, and consumer markets, our hardware root of trust devices provide platform firmware resilience. This provides a secure boot for systems that are dependent on processors. |
To serve these emerging needs, customer systems require low power, memory bandwidth, processing power, and the ability to integrate complex functionality into a highly compact footprint. These requirements align to the capabilities of our FPGA devices. Our flexible, low power, small form factor, easy to use FPGAs put us in a unique position to meet these growing market needs.
Our Markets and Customers
We sell our products globally in three end market groups: Communications and Computing, Industrial and Automotive, and Consumer. We also provide Intellectual Property ("IP") licensing and services to these end markets, although licensing and services revenue is reported as a separate end market as it has characteristics that differ from other categories.
In the Communications and Computing Market, our solutions play key roles in computing systems such as servers and clients, 5G wireless infrastructure, switches / routers, and other related applications.
Our Communications and Computing customers need to manage control functions in their systems.
• | As compute devices become smaller and power costs become more dominant, there is a need for small form factor devices with power efficiency. |
• | Additionally, these customers need simplified control logic, enhanced hardware platform security, system status monitoring, and rigorous power and thermal management. |
• | Networks typically require progressively higher bandwidth and increased reliability as more data is demanded by consumer and other connected devices. Bandwidth demands are also driven by the rapid transition to cloud-based infrastructure. |
• | As wireless cells become more compact without fans, there is a growing requirement for smaller form factors optimized for low power consumption. |
Lattice FPGAs solve these customer problems. Our FPGAs are optimized for I/O expansion, low cost per look-up table, hardware acceleration, and hardware management. Our FPGAs consume power at very low rates, which reduces operating costs. Their small form factor enables higher functional density in less space. Finally, our FPGAs are I/O rich, which allows for more connections with system application specific integrated circuits ("ASICs") and application specific standard products ("ASSPs").
Examples of our products enabling intelligent automation in the Industrial and Automotive Market include industrial IoT, machine vision, robotics, factory automation, driver assistance, and automotive infotainment.
Our Industrial and Automotive customers face numerous challenges:
• | As smart factories develop, sensors are proliferating and machine vision is becoming higher definition, in turn requiring increasing amounts of data to be gathered, connected, and processed. |
• | Cars, trucks, and trains are also becoming smarter and more connected. Drivers and passengers are demanding better in-cabin experiences including entertainment, diagnostics, and enhanced safety — often involving multiple displays, cameras, and sensors. |
• | As factories and automotive manufacturers continue their evolution of computerization, power reduction, faster time to design in and market, lower costs are becoming increasingly normal. |
Our product portfolio helps solve these challenges. Our small-sized, low-power FPGAs not only provide the I/O expansion, bridging, connectivity, and processing inherent in FPGAs, but they also form the backbone of several integrated solutions, including complete HD camera and DVR solutions on a single FPGA device and Human-Machine Interfaces ("HMI") on a chip.
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In the Consumer Market, you can find our solutions making products smarter and thinner, including: smart home devices, prosumer devices, sound bars, high end projectors, Augmented Reality ("AR") / Virtual Reality ("VR"), and wearables.
Our Consumer customers are driven by the need to deliver richer and more responsive experiences. They typically require:
• | More intelligence and computing power. Products need to be "always-on" and "always-aware." |
• | Longer battery lives for handheld devices and reduced energy consumption for plugged-in devices. |
• | Real-time transmission of higher resolution video content on larger screen sizes. |
• | Fast design cycles. Products must be quickly and easily differentiated. |
• | Smaller form factors. Products need to lay flatter on the wall or fit more easily in people’s pockets. |
• | Various levels of video processing and analytics. |
Lattice FPGAs bring multiple benefits to these customers. An FPGA’s parallel architecture enables faster processing than competing devices, such as microcontrollers, allowing for a user experience with shorter pauses and fewer delays. Our FPGAs are among the lowest power consumption in the industry, enabling the application processor and other high-power components to remain dormant longer, resulting in longer battery life. Finally, with some of the industry’s smallest packages, we enable thinner end products.
Our proprietary solutions help our customers get their products to market faster than typical development cycles. With re-programmability and flexibility, our FPGAs inherently allow our customers to have quicker product development. The time-to-market advantages of Lattice's solutions are critical given the shorter product life cycles and higher competition in our customers’ end markets.
Our Products, Services, and Competition
We are focused on delivering FPGAs and related solutions to help solve our customers' problems. We also serve our customers with IP licensing and various other services.
Field Programmable Gate Arrays (“FPGAs”)
FPGAs are regular arrays of logic that can be custom-configured by the user through software. This programmability allows our customers flexibility and reduced time to market while allowing us to offer the chips to many different customers in many different markets. Five product families anchor our FPGA offerings:
• | The ECP families are our “General Purpose FPGAs” and address a broad range of applications across multiple markets. They offer customers the optimal cost per gate, Digital Signal Processing ("DSP") capability, and Serialize-Deserialize ("SerDes") connectivity. ECP devices are optimized for the Communications and Computing market but also find significant use in the Industrial, Automotive, and Consumer markets. |
• | The MachXO families are known as “Control & Security FPGAs” and are optimized for platform management and security applications. They are control oriented and offer the most optimized cost per I/O, along with the lowest cost per look-up table. MachXO families are widely used across our three primary target markets: Communications and Computing, Industrial and Automotive, and Consumer. Our latest generation enables users with hardware system security. The MachX03D provides systems with the platform firmware resilience they need to protect their processors during boot-up. |
• | iCE40 families are known as “Ultra Low Power FPGAs.” Their small size and ultra-low power make them the optimal products for each of our core segments where small form factor and customizing is required. The latest member of the family, iCE40 UltraPlus, is focused on Internet of Things ("IoT") edge devices with its Artificial Intelligence ("AI") capabilities, low power, and small form factor. |
• | Our CrossLink families are "Video Connectivity FPGAs" and are optimized for high speed video and sensor applications. CrossLink combines the power and speed benefits of hardened video camera and display bridging cores with the flexibility of FPGA fabric. CrossLinkPlus provides users with instant-on capabilities for video display. CrossLink-NX, built on the new Lattice Nexus platform, provides the lowest power in the smallest packages in its class, higher performance, and high reliability. These products are designed for computing, industrial, automotive, and consumer markets, but also find use in communications. |
To enable our customers to get to market faster we support the FPGAs with intellectual property cores, reference designs, development kits, and design software. We are investing in our design software to deliver best-in-class tools that enable predictable design convergence and unparalleled ease of use. Further, we have developed integrated system-level solution stacks, such as Lattice sensAI. We combine all of these elements to solve specific customer problems such as the need to quickly implement low power AI inferencing in Edge applications.
Depending on the application, we may compete with other FPGAs vendors, as well as producers of ASICs, ASSPs, and microcontrollers. We believe that Lattice has developed products and solutions with differentiated advantages.
Legacy Semiconductor Products
We also sell Video Connectivity ASSPs, although we are not developing new products in this area and their support requirements are minimal.
Intellectual Property (IP) Licensing and Services
Lattice has a broad set of technological capabilities and many U.S. and international patents. We generate revenue from our technology portfolio via upfront fees and on-going royalty payments through the following activities:
• | Standard IP Licensing - these activities include our participation in two consortia for the licensing of HDMI and MHL technologies to customers who adopt the technology into their products and voluntarily report their usage and royalties. The royalties are split between consortium members, including us. |
• | IP Core Licensing - some customers need Lattice’s technology for specific functions or features, but for various reasons are not able to use our silicon solutions. In those cases, we may license our IP cores, which they can integrate into their own ASICs. In contrast to the use of consortia, these licensing activities are generally performed internally. |
• | Patent Monetization - we sell certain patents from our portfolio generally for technology that we are no longer actively developing. The revenue from these sales generally consists of upfront payments and potential future royalties. |
• | IP Services - projects and design services for customers who wish to develop specific solutions that harness our proven technology and expertise. |
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Research and Development
We place a substantial emphasis on new product development, where return on investment is the key driver, and believe that continued investment in research and development is required to maintain and improve our competitive position. Our product development activities are focused on new proprietary products, advanced packaging, existing product enhancements, software development tools, soft IP and application focused solutions. Research and development activities occur primarily in Hillsboro, Oregon; San Jose, California; Shanghai, China; and Muntinlupa City, Philippines.
We believe that a continued commitment to research and development is essential to maintaining product leadership and providing an increased cadence of innovative new product offerings and, therefore, we expect to continue to make significant future investments in research and development.
Operations
We do not manufacture our own silicon products. We maintain strategic relationships with large, established semiconductor foundries to source our finished silicon wafers. This strategy allows us to focus our internal resources on product and market development, and eliminates the fixed cost of owning and operating semiconductor manufacturing facilities. We are able to take advantage of the ongoing advanced process technology development efforts of semiconductor foundries, and to choose to apply those technologies when they become most economically beneficial to us and to our customers.
Lattice partners with Samsung Semiconductor ("Samsung") to manufacture the first low-power FPGA on 28nm FDS technology, which is used in our latest Nexus FPGA platform of products. We partner with United Microelectronics Corporation ("UMC") and its subsidiary United Semiconductor Japan Corporation ("USJC") to manufacture our products on its 130nm, 90nm, 65nm & 40nm CMOS process technologies, as well as embedded flash memory in these technical nodes. Taiwan Semiconductor Manufacturing Company Ltd. (“TSMC”) manufactures our acquired SiliconBlue and Silicon Image products. Seiko Epson ("Epson") manufactures our 500nm, 350nm, 250nm and 180nm products.
All of our assembly and volume test operations are performed by outside suppliers. We perform certain test operations as well as reliability and quality assurance processes internally. We have achieved and maintained ISO9001:2015 Quality Management Systems Certification and released a line of products qualified to the AEC-Q100 Reliability Standard in support of Automotive product offerings.
We rely on third party vendors to provide cost-effective and efficient supply chain services. Among other activities, these outsourced services relate to direct sales logistics, including order fulfillment, inventory management and warehousing, and shipment of inventory to third party distributors.
Wafer Fabrication
We source silicon wafers from our foundry partners, Samsung, UMC, USJC, Epson, TSMC, pursuant to agreements with each company and their respective affiliates. We negotiate wafer volumes, prices and other terms with our foundry partners and their respective affiliates on a periodic basis.
Assembly
After wafer fabrication and initial testing, we ship wafers to independent subcontractors for assembly. During assembly, wafers are separated into individual die and encapsulated in plastic packages. We have qualified two major assembly partners, Advanced Semiconductor Engineering ("ASE") and Amkor Technology ("Amkor') and are second sourced where volume and customer requirements are necessary. All ASE and Amkor manufacturing of our products is in Asia. We negotiate assembly prices, volumes and other terms with our assembly partners and their respective affiliates on a periodic basis.
We currently offer an extensive list of standard products in lead (Pb) free packaging. Our lead-free products meet the European Parliament Directive entitled "Restrictions on the use of Hazardous Substances" ("RoHS"). A select and growing subset of our ROHS compliant products are also offered with a "Halogen Free" material set.
Testing (Sort and Final Test)
We electrically sort test the die on most wafers prior to shipment for assembly. Wafer sort testing is primarily performed by Amkor in Japan and our second source King Yuan Electronics Co. (“KYEC”) in Taiwan.
Following assembly, but prior to customer shipment, each product undergoes final testing and quality assurance procedures. Final testing is performed by ASE and Amkor, our assembly partners in Asia.
Sales and Revenue
We generate revenue by monetizing our technology and patents through product and technology sales. This involves the direct and channel sales of silicon-based products, as well as the licensing or sale of intellectual property that we have developed or acquired, some of which we use in our products, and certain design services that we may provide.
Sales and Customers
We primarily sell our products to end customers from Lattice Semiconductor Corporation or our wholly-owned subsidiary, Lattice SG Pte. Ltd. We sell both directly and through a network of independent manufacturers' representatives. Additionally, a substantial portion of our sales are made through independent distributors. We also employ a direct sales management and field applications engineering organization to support our end customers and indirect sales resources. Our end customers are primarily OEMs in the Communications and Computing, Industrial and
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Automotive, and Consumer end markets. Our sales team uses our position in OEMs to drive multi-generation design wins and leverages distribution to grow our broad customer base.
We provide global technical support to our end customers with engineering staff based at our headquarters, product development centers and selected field sales offices. We maintain numerous domestic and international field sales offices in major metropolitan areas.
In fiscal years 2019, 2018, and 2017, resale of product by distributors accounted for approximately 82%, 83%, and 77%, respectively, of our net revenue. We depend on our distributors to sell our products to end customers, complete order fulfillment, and maintain sufficient inventory of our products. Our distributors also provide technical support and other value-added services to our end customers. We have two global distributors. We also have regional distribution in Asia, Japan, Israel, and North America, and we sell through three major on-line distributors. In fiscal years 2019, 2018, and 2017, no individual end customer accounted for more than 10% of our total revenue.
Revenue from foreign sales as a percentage of total revenue was 89%, 90%, and 87%, for fiscal 2019, 2018, and 2017, respectively. 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. Both foreign and domestic sales are denominated in U.S. dollars.
Backlog
Our backlog consists of orders from distributors and certain Original Equipment Manufacturers ("OEMs") that require delivery within the next year. Historically, our backlog has not been a predictor of future sales or customer demand for the following reasons:
• | Purchase orders, consistent with common industry practices, can generally be revised or canceled up to 30 days before the scheduled delivery date without significant penalty. |
• | Our backlog for distributors is valued at list price, which in most cases is substantially higher than the prices ultimately recognized as revenue. |
• | A sizable portion of our revenue comes from our "turns business," where the product is ordered and delivered within the same quarter. |
Seasonality
We may periodically experience variability in our sales volumes and financial results due to seasonal trends in the end markets we serve, the cyclical nature of the semiconductor industry, and general economic conditions.
Intellectual Property, Patents, and Licensing
We seek to protect our products, technologies, and intellectual property primarily through patents, trade secrets, copyrights, trademark registrations, licensing restrictions, confidentiality agreements, and other approaches designed to protect proprietary information. We hold numerous United States and international patents and have patent applications pending in the United States and internationally. In addition to protecting innovations designed into our products, our ownership and maintenance of patents is an important factor in the determination of our share of the royalties for the HDMI standard. Our current patents will expire at various times between 2020 and 2038, subject to our payment of periodic maintenance fees. We believe that our patents have value, and we expect to file future patent applications in both the United States and abroad on significant inventions, as we deem appropriate. We have acquired various licenses from third parties to certain technologies that are implemented in IP cores or embedded in our products. These licenses support our continuing ability to make and sell these products to our customers. While our various IP rights are important to our success, we believe our business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses.
Our Team
As of December 28, 2019, we had 747 employees worldwide. We believe that our future success will depend, in part, on our ability to continue to attract and retain highly skilled technical, sales, and management personnel. None of our employees are represented by a collective bargaining agreement. We have never experienced any work stoppages and consider our employee relations to be good.
Corporate Background
Lattice was incorporated in Oregon in 1983 and reincorporated in Delaware in 1985. Our corporate headquarters are located at 5555 NE Moore Court, Hillsboro, Oregon 97124, and our website is www.latticesemi.com. Information contained or referenced on our website is not incorporated by reference into, and does not form a part of, this Annual Report on Form 10-K. Our common stock trades on the NASDAQ Global Select Market under the symbol LSCC.
Available Information
We make available, free of charge through the Investor Relations section of our website at www.latticesemi.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports and statements as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC. You may also obtain free copies of these materials by contacting our Investor Relations Department at 5555 NE Moore Court, Hillsboro, Oregon 97124, telephone (503) 268-8000. Our SEC filings are also available at the SEC's website at www.sec.gov. The content on any website referred to in this filing is not incorporated by reference into this filing unless expressly noted otherwise.
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ITEM 1A. Risk Factors
The following risk factors and other information included in this Annual Report should be carefully considered before making an investment decision relating to our common stock. If any of the risks described below occur, our business, financial condition, operating results and cash flows could be materially adversely affected. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and financial results.
We rely on a concentrated number of subcontractors to supply and fabricate silicon wafers for our semiconductor products. If they are unable to do so on a timely and cost-effective basis in sufficient quantities and using competitive technologies, we may incur significant costs or delays.
We rely on a concentrated number of independent foundries in Asia to supply and fabricate silicon wafers for our semiconductor products, including Samsung Semiconductor, United Microelectronics Corporation, Taiwan Semiconductor Manufacturing, and Seiko Epson. Our success is dependent upon our ability to successfully partner with our foundry partners and their ability to produce wafers with competitive performance attributes and prices, including smaller process geometries. Establishing, maintaining and managing multiple foundry relationships requires the investment of management resources and costs. If we fail to maintain our foundry relationships, if our foundry partners do not provide facilities and support for our development efforts, if our foundry partners are insolvent or experience financial difficulty, or if we elect or are required to change foundries, we may incur significant costs and delays. If our foundry partners are unable to, or do not, manufacture sufficient quantities of our products at acceptable yields, we may be required to allocate the affected products among our customers, prematurely limit or discontinue the sales of certain products, or incur significant costs to transfer products to other foundries, which could adversely affect our customer relationships and operating results.
Our revenues depend on our relationships with our distributors and on a concentrated group of end customers. An adverse change in the relationships with, or performance of, our distributors, or any reduction in the use of our products by our end customers, could harm our sales and significantly decrease our revenue.
We depend on a concentrated group of distributors to sell our products to end customers, complete order fulfillment, maintain sufficient inventory of our products and provide services to our end customers. In fiscal 2019, revenue attributable to distributors accounted for 82% of our total revenue, with two distributors accounting for 55% of total revenue. In fiscal 2018, distributors accounted for 83% of our total revenue with two distributors accounting for 54% of total revenue. We have significant outstanding receivables with our top distributors, and expect our distributors to generate a significant portion of our revenue in the future. Any adverse change to our relationships or agreements with our distributors or a failure by one or more of our distributors to perform its obligations to us could have a material impact on our business, including a reduction in our access to certain end customers or our ability to sell our products.
While a significant portion of our revenue depends on sales to a concentrated number of customers, no individual end customer accounted for more than 10% of our total revenue in either fiscal 2019 or 2018. If our relationships with any material customers were to diminish, if these customers were to develop their own solutions or adopt alternative solutions or competitors' solutions, if any one or more of our concentrated groups of customers were to experience significantly adverse financial conditions, or if as a result of trade disputes or sanctions these customers were restricted from purchasing our products, our results could be adversely affected.
In addition, the inability of customers to obtain credit, the insolvency of one or more customers, or tariffs applicable to our customers’ products, could impact our sales. Any of these effects could impact our ability to effectively manage inventory levels and collect receivables, require additional restructuring actions, and decrease our revenue and profitability.
Our global business operations expose us to various economic, legal, regulatory, political, and business risks, which could impact our business, operating results and financial condition.
We have significant domestic and international operations. Our international operations include foreign sales offices to support our international customers and distributors, which account for the majority of our revenue, and operational and research and development sites in China, the Philippines, and other Asian locations. In addition, we purchase our wafers from foreign foundries; have our commercial products assembled, packaged, and tested by subcontractors located outside of the United States; and rely on an international service provider for inventory management, order fulfillment, and direct sales logistics.
Our domestic and international business activities are subject to economic, political and regulatory risks, including volatility in the financial markets; fluctuations in consumer liquidity; changes in interest rates; price increases for materials and components; trade barriers or changes in trade policies; political instability; acts of war or terrorism; natural disasters; economic sanctions; weak economic conditions, environmental regulations; labor regulations; import and export regulations; tax or freight rates; duties; trade restrictions; interruptions in transportation or infrastructure; anti-corruption laws; domestic and foreign governmental regulations; potential vulnerability of and reduced protection for intellectual property; disruptions or delays in production or shipments; and instability or fluctuations in currency exchange rates, any of which could lead to decreased demand for our products or a change in our results of operation. Uncertainty about future political and economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. Any or all of these factors could adversely affect our financial condition and results of operations in the future.
If we fail to comply with the many laws and regulations to which we are subject, both within the United States and internationally, we may be subject to significant fines, penalties or liabilities for noncompliance, which could harm our business and financial results. For example, effective May 2018, the European Union adopted the General Data Protection Regulation (“GDPR”), which established new requirements regarding the handling of personal data and non-compliance monetary penalties of up to the higher of 20 million Euros or 4% of worldwide revenue. California also recently adopted the California Consumer Privacy Act (“CCPA”), which imposes significant fines and penalties for violations. Any inability or perceived inability to adequately comply with applicable laws or regulations, including GDPR or CCPA, could result in additional cost and liability to our business and could adversely affect our financial condition and results of operations.
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Beginning in late 2019, the media has reported a public health epidemic originating in China, prompting precautionary government-imposed closures of certain travel and business. The operations of customers and the Company in China and elsewhere may be affected by this and similar public health matters. Although our supply chain does not appear to be affected by this epidemic, it may lead to events outside of our control which could have a material adverse impact on our business, operating results and financial condition.
The semiconductor industry routinely experiences cyclical market patterns and our products are used across different end markets. A significant downturn in the industry or in any of these end markets could cause a meaningful reduction in demand for our products and adversely affect our operating results.
Our revenue and gross margin can fluctuate significantly due to downturns in the highly cyclical semiconductor industry. These downturns can be severe and prolonged and can result in price erosion and weak demand for our products. Weak demand for our products resulting from general economic conditions affecting the end markets we serve or the semiconductor industry specifically and reduced spending by our customers can result, and in the past has resulted, in diminished product demand, high inventory levels, erosion of average prices, excess and obsolete inventories and corresponding inventory write-downs. Our expense levels are based, in part, on our expectations of future sales. Many of our expenses, particularly those relating to facilities, capital equipment, and other overhead, are relatively fixed. We might be unable to reduce spending quickly enough to compensate for reductions in sales. Accordingly, shortfalls in sales could adversely affect our operating results. Furthermore, any significant upturn in the semiconductor industry could result in increased competition for access to raw materials and third-party service providers.
Additionally, our products are used across different end markets, and demand for our products is difficult to predict and may vary within or among our Industrial and Automotive, Communications and Computing, and Consumer end markets. Our target markets may not grow or develop as we currently expect, and demand may increase or change in one or more of our end markets, and changes in demand may reduce our revenue, lower our gross margin and effect our operating results. We have experienced concentrations of revenue at certain customers and within certain end markets, and we regularly compete for design opportunities at these customers and within these markets. Any deterioration in these end markets, reductions in the magnitude of revenue streams, our inability to meet design and pricing requirements, or volatility in demand for our products could lead to a reduction in our revenue and adversely affect our operating results. Our success in our end markets depends on many factors, including the strength or financial performance of the customers in our end markets, our ability to timely meet rapidly changing product requirements, market needs, and our ability to maintain design wins across different markets and customers to dampen the effects of market volatility. The dynamics of the markets in which we operate make prediction of and timely reaction to such events difficult.
Due to these and other factors, our past results may not be reliable predictors of our future results. If we are unable to accomplish any of the foregoing, or to offset the volatility of cyclical changes in the semiconductor industry or our end markets through diversification into other markets, could materially and adversely affect our business, financial condition, and operating results.
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 United States Department of Commerce imposed sanctions on one of our customers in China in 2018, which prevented us from doing business with them until the sanctions were lifted. The U.S. Justice Department filed criminal charges against another of our customers in China and imposed sanctions on this customer in May 2019, which has limited our ability to do business with this customer. Revenue from distributors and end customers in China represented approximately 51% of our total revenue in 2019. Future sanctions similar to those imposed in the past 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. 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, or if our customers are affected by tariffs or other government trade restrictions, our business and financial condition could be adversely affected.
Our success and future revenue depends on our ability to develop and introduce new products that achieve customer and market acceptance.
We compete in a dynamic environment characterized by rapid technology and product evolution, generally followed by a relatively longer process of ramping up to volume production on advanced technologies. Our end customers’ continued use of our products is frequently reevaluated, as certain of our customers' product life cycles are relatively short and they continually develop new products. The selection process for our products to be included in our customers' new products is highly competitive. There are no guarantees that our products will be included in the next generation of products introduced by these. Additionally, our markets are also characterized by evolving industry standards and increased demand for higher levels of integration and smaller process geometry. Our competitive position and success depend on our ability to innovate, develop, and introduce new products that compete effectively on the basis of price, density, functionality, power consumption, form factor, and performance, and our addressing the evolving needs of the markets we serve, among other things. With increased introduction of new products, we expect revenue related to mature products to decline over time in a normal product life cycle. As a result, we may be increasingly dependent on revenue derived from our newer products.
9
Our future growth and the success of new product introductions depend upon numerous factors, including:
• | timely completion and introduction of new product designs; |
• | ability to generate new design opportunities and design wins, including those which result in sales of significant volume; |
• | achievement of necessary volume of production to achieve acceptable cost; |
• | availability of specialized field application engineering resources supporting demand creation and customer adoption of new products; |
• | ability to utilize advanced manufacturing process technologies; |
• | achieving acceptable yields and obtaining adequate production capacity from our wafer foundries and assembly and test subcontractors; |
• | ability to obtain advanced packaging; |
• | availability of supporting software design tools; |
• | utilization of predefined IP logic; |
• | customer acceptance of advanced features in our new products; and |
• | market acceptance of our customers' products. |
The failure of any of these factors, among others, could adversely affect our product innovation, development and introduction efforts and our financial condition and results of operations.
Our business depends on the proper functioning of internal processes and information technology systems. A failure of these processes and systems, data breaches, cyber-attacks, or cyber-fraud may cause business disruptions, compromise our intellectual property or other sensitive information, or result in losses.
We rely on various information technology ("IT") networks and systems to manage our operations, including financial reporting, and we regularly make changes to improve them as necessary by periodically implementing new, or upgrading or enhancing existing, operational and IT systems, procedures, and controls. These systems are supported by subcontractors, and they may also be subject to power and telecommunication outages or other general system failures. The legal, regulatory and contractual environment surrounding information security and data privacy is complex and evolving. We continue to commit significant resources to implementing new systems to standardize our processes worldwide and adopt best-in-class capabilities. We are focused on realizing the full analytical functionality of these conversions, which can be extremely complex, in part, because of the wide range of legacy systems and processes that must be integrated.
In the normal course of business, we may implement new or updated IT systems and, as a result, we may experience delays or disruptions in the integration of these systems, or the related procedures or controls. The policies and security measures established with our IT systems may be vulnerable to data breaches, cyber-attacks or fraud. We may also encounter errors in data, an inability to accurately process or record transactions, and security or technical reliability issues. All of these could harm our ability to conduct core operating functions such as processing invoices, shipping and receiving, recording and reporting financial and management information on a timely and accurate basis, and could impact our internal control compliance efforts. If the technical solution or end user training are inadequate, it could limit our ability to manufacture and ship products as planned. We have various systems that remain that may be nearing the end of their useful life or vendor support, which will ultimately need to be replaced.
We maintain sensitive data on our networks and the networks of our business partners and third-party providers, including proprietary and confidential information relating to our intellectual property, personnel, and business, and that of our customers and third-party providers. Companies have been increasingly subject to a wide variety of security incidents, cyber-attacks, hacking, phishing, and other attempts to gain unauthorized access or engage in fraudulent behavior. Cyber-attacks have become more prevalent, sophisticated and much harder to detect and defend against and it is often difficult to anticipate or detect such incidents and to assess the damage caused by them. Our policies and security measures cannot guarantee security, and our information technology infrastructure, including our networks and systems, may be vulnerable to data breaches, cyber-attacks or fraud. In the past, third parties have attempted to penetrate and/or infect our network and systems with malicious software and phishing attacks in an effort to gain access to our network and systems. In addition, we are subject to the risk of third parties falsifying invoices and similar fraud, frequently by obtaining unauthorized access to our vendors’ and business partners’ networks.
In some circumstances, we may partner with third-party providers and provide them with certain sensitive data. If these third parties fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, this sensitive data may be improperly accessed, used or disclosed. These data breaches and any unauthorized access or disclosure of sensitive data could compromise our intellectual property, expose sensitive business information and subject us to third party claims.
The increase in cyber-attacks has resulted in an increased focus on cybersecurity by certain government agencies. Cyber-attacks or any investigation or enforcement action related to cybersecurity could cause us to incur significant remediation costs, result in product development delays, disrupt key business operations, and divert attention of management and key information technology resources. In addition, we may incur loss as a result of cyber-fraud, such as those experienced by other companies by making unauthorized payments irrespective of robust internal controls.
Failure of our IT systems or difficulties or delays in maintaining, managing, and integrating them could adversely affect the Company’s controls and procedures and could impact the Company's ability to perform necessary operations, which could materially adversely affect our business. Furthermore, our reputation, brand, and business could be significantly harmed, and we could be subject to third-party claims or governmental penalties in the event of a security breach.
10
The intellectual property licensing component of our business strategy increases our business risk and fluctuation of our revenue and margins.
Our business strategy includes licensing our intellectual property to companies that incorporate it into their technologies that address multiple markets, including markets where we participate and compete. Our Licensing and services revenue may be impacted by the introduction of new technologies by customers in place of the technologies we license, changes in the law that may weaken our ability to prevent the use of our patented technology by others, the expiration of our patents, and changes of demand or selling prices for products using licensed patents. We cannot assure that our licensing customers will continue to license our technology on commercially favorable terms or at all, or that these customers will introduce and sell products incorporating our technology, accurately report royalties owed to us, pay agreed upon royalties, honor agreed upon market restrictions, or maintain the confidentiality of our proprietary information, or will not infringe upon or misappropriate our intellectual property. Our intellectual property licensing agreements are complex and may depend upon many factors that require significant judgments, including completion of milestones, allocation of values to delivered items and customer acceptance.
Our sale of patents and intermittent significant licensing transactions can cause material fluctuations in our revenue and gross margins.
We have generated revenue from the sale of certain patents from our portfolio, generally for non-core technology that we are no longer actively developing. While we plan to continue to monetize our patent portfolio through sales of non-core patents, we may not be able to realize adequate interest or prices for those patents. Accordingly, we cannot provide assurance that we will continue to generate revenue from these sales. In addition, although we seek to be strategic in our decisions to sell patents, we might incur reputational harm if a purchaser of our patents sues one of our customers for infringement of the purchased patent, and we might later decide to enter a space that requires the use of one or more of the patents we sold. In addition, as we sell groups of patents, we no longer have the opportunity to further sell or to license those patents and receive a continuing royalty stream.
Our Licensing and services revenue fluctuates, sometimes significantly, from period to period because it is heavily dependent on a few key transactions being completed in a given period, the timing of which is difficult to predict and may not match our expectations. Licensing and services revenue may include revenue from the sales of patents, which sales may be difficult to complete and which may have complex terms for the payment which affect revenue recognition. Because of its high margin, the Licensing and services revenue portion of our overall revenue can have a disproportionate impact on gross profit and profitability. In addition, generating revenue from patent sales and intellectual property licenses is a lengthy and complex process that may last beyond the period in which our efforts begin, and the accounting rules governing the recognition of revenue from patent sales and intellectual property licensing transactions are increasingly complex and require significant judgment. As a result, the amount of license revenue recognized in any period may differ significantly from our expectations.
Our margins are dependent on our achieving continued yield improvement.
We rely on obtaining yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products that incorporate advanced features and other price/performance factors that enable us to increase revenues while maintaining acceptable margins. To the extent such cost reductions and new product introductions do not occur in a timely manner, or that our products do not achieve market acceptance or market acceptance at acceptable pricing, our forecasts of future revenue, financial condition, and operating results could be materially adversely affected.
Shortages in, or increased costs of, wafers and materials could adversely impact our gross margins and lead to reduced revenues.
Worldwide manufacturing capacity for silicon wafers is relatively inelastic. If the demand for silicon wafers or assembly material exceeds market supply, our supply of silicon wafers or assembly material could quickly become limited or prohibitively expensive. We typically have short-term wafer supply agreements that do not ensure long-term supply or allocation commitments. A shortage in manufacturing capacity could hinder our ability to meet product demand and therefore reduce our revenue. In addition, silicon wafers constitute a material portion of our product cost. If we are unable to purchase wafers at favorable prices, our financial condition and results of operations will be adversely affected.
The nature of our business and length of our sales cycle makes our revenue, gross margin and net income subject to fluctuation and difficult to accurately predict.
A number of factors, including how products are manufactured to support end markets, yield, wafer pricing, cost of packaging raw materials, product mix, market acceptance of our new products, competitive pricing dynamics, product quality, geographic and/or end market mix, and pricing strategies, can cause our revenue, gross margins and net income to fluctuate significantly either positively or negatively from period to period.
We have limited visibility into the demand for our products, particularly new products, because demand for our products depends upon our products being designed into our end customers' products and those products achieving market acceptance. During our sales cycle, our customers typically test and evaluate our products prior to deciding to include our products into the design of their own products, and then require additional time to begin volume production of their products. This lengthy sales cycle may cause us to incur significant expenses, experience significant production delays and to incur additional inventory costs before we receive a customer order that may be delayed or never get placed. A key strategic customer may demand certain design or production resources to meet their requirements or work on a specific solution, which could cause delays in our normal development schedule and result in significant investment of our resources or missed opportunities with other potential customers. We may incur these expenses without generating revenue from our products to offset the expenses.
While our sales cycles are typically long, our average product life cycles tend to be short as a result of the rapidly changing technology environment in which we operate. Our inventory levels may be higher than historical norms, from time to time, due to inventory build decisions aimed at meeting expected demand from a single large customer, reducing direct material cost or enabling responsiveness to expected demand. In the event the expected demand does not materialize, or if our short sales cycle does not generate sufficient revenue, we may be subject to incremental excess and obsolescence costs.
11
These factors make it difficult for us to accurately forecast future sales and project quarterly revenues. The difficulty in forecasting future sales weakens our ability to project our inventory requirements, which could result, and in the past has resulted, in inventory write-downs or failure to meet customer product demands in a timely manner. While we may give guidance, the difficulty in forecasting revenues as well as the relative customer and product mix of those revenues limits our ability to provide accurate forward-looking revenue and gross margin guidance.
We compete against companies that have significantly greater resources than us and numerous other product solutions.
The semiconductor industry is highly competitive and many of our direct and indirect competitors have substantially greater financial, technological, manufacturing, marketing, and sales resources. Consolidation in our industry may increasingly mean that our competitors have greater consolidated resources, or other synergies, that could put us at a competitive disadvantage. We currently compete directly with companies that have licensed our technology or have developed similar products, as well as numerous semiconductor companies that offer products based on alternative solutions, such as applications processor, application specific standard product, microcontroller, analog, and digital signal processing technologies. Competition from these semiconductor companies may intensify as we offer more products in any of our end markets. These competitors include established, multinational semiconductor companies, as well as emerging companies.
Acquisitions, divestitures, strategic investments and strategic partnerships could disrupt our business and adversely affect our financial condition and operating results.
We may pursue growth opportunities by acquiring complementary businesses, solutions or technologies through strategic transactions, investments or partnerships. The identification of suitable acquisition, strategic investment or strategic partnership candidates can be costly and time consuming and can distract our management team from our current operations. If such strategic transactions require us to seek additional debt or equity financing, we may not be able to obtain such financing on terms favorable to us or at all, and such transaction may adversely affect our liquidity and capital structure. We may also choose to divest certain non-core assets, which divestitures could lead to charges against earnings and may expose us to additional liabilities and risks. Any strategic transaction might not strengthen our competitive position, may increase some of our risks, and may be viewed negatively by our customers, partners or investors. Even if we successfully complete a strategic transaction, we may not be able to effectively integrate the acquired business, technology, systems, control environment, solutions, personnel or operations into our business or global tax structure. We may experience unexpected changes in how we are required to account for strategic transactions pursuant to U.S. GAAP and may not achieve the anticipated benefits of any strategic transaction. We may incur unexpected costs, claims or liabilities that we incur during the strategic transaction or that we assume from the acquired company, or we may discover adverse conditions post acquisition for which we have limited or no recourse.
We regularly test for goodwill and other impairments as required under U.S. GAAP, and we may incur future impairments.
We are required under U.S. GAAP to test goodwill for possible impairment on an annual basis and to test goodwill and long-lived assets, including amortizable intangible assets, for impairment at any other time that circumstances arise indicating the carrying value may not be recoverable. For purposes of testing goodwill for impairment, the Company currently operates as one reporting unit: the core Lattice ("Core") business, which includes intellectual property and semiconductor devices. We had no impairment charges in fiscal 2019. Impairment charges related to amortizable intangible assets from the Silicon Image acquisition totaled approximately $12.5 million and $32.4 million in fiscal years 2018 and 2017, respectively. There is no assurance that future impairment tests will indicate that goodwill or amortizable intangible assets will be deemed recoverable. As we continue to review our business operations and test for impairment or in connection with possible sales of assets, we may have impairment charges in the future, which may be material.
We depend on independent contractors and third parties to provide key services in our product development and operations, and any disruption of their services, or an increase in cost of these services, could negatively impact our financial condition and results of operations.
We depend on subcontractors to provide cost effective and efficient services in our product development and supply chain functions, including test and assembly services, software and hardware development, support of intellectual property cores, inventory management, order fulfillment and direct sales logistics.
Our operations and operating results may be adversely affected if we experience problems with our subcontractors that impact the delivery of product to our customers. These problems may include: delays in software or hardware development timelines, prolonged inability to obtain wafers or packaging materials with competitive performance and cost attributes; inability to achieve adequate yields or timely delivery; inability to meet customer timelines or demands, disruption or defects in assembly, test, or shipping services; or delays in stabilizing manufacturing processes or ramping up volume for new products. If our third-party supply chain providers were to reduce or discontinue services for us or their operations are disrupted as a result of a fire, earthquake, act of terrorism, political unrest, governmental uncertainty, war, disease, or other natural disaster or catastrophic event, weak economic conditions, or any other reason, our financial condition and results of operations could be adversely affected.
Litigation and unfavorable results of legal proceedings could adversely affect our financial condition and operating results.
From time to time we are subject to various legal proceedings and claims that arise out of the ordinary conduct of our business. Certain claims may not yet be resolved, including but not limited to any that are discussed under Item 3. Legal Proceedings and "Note 13 - Contingencies" contained in the Notes to Consolidated Financial Statements, and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of merit or outcome, claims or litigation may be both time-consuming and disruptive to our operations and cause significant expense and diversion of management attention and we may enter into material settlements to avoid these risks. Should we fail to prevail in certain matters or enter into a material settlement, we may be faced with significant monetary damages or injunctive relief against us that could materially and adversely affect our financial condition and operating results and certain portions of our business.
12
Changes to financial accounting standards may affect our results of operations and could cause us to change our business practices.
We prepare our consolidated financial statements to conform to generally accepted accounting principles in the United States, or U.S. GAAP. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create accounting rules and regulations. Changes in these rules, such as the adoption of ASC 606 - Revenue from Contracts with Customers in fiscal 2018 or ASC 842 - Leases in fiscal 2019, or in the guidance relating to interpretation and adoption of the rules could have a significant effect on our financial results and could affect portions of our business differently.
Accounting requirements related to sales through our distribution channel could result in our reporting revenue in excess of demand.
Revenue recognition standards require recognition of revenue based on estimates and may require us to book revenue from distributors that is in excess of actual end customer demand. Since we have limited ability to forecast inventory levels of our end customers, we depend on the timeliness and accuracy of resale reports from our distributors. Late or inaccurate resale reports could mask significant build-up of inventories in our distribution channel, have a detrimental effect on our ability to properly recognize revenue, and impact our ability to forecast future sales. An inventory build-up in our distribution channel could result in a slowdown in orders, requests for returns from customers, or requests to move out planned shipments. If our distributors do not ultimately sell the inventory and our estimates change, we could be required to materially correct our recognized revenue in a future period, depending on actual results. Any failure to manage these challenges could disrupt or reduce sales of our products and unfavorably impact our financial results.
Our participation in the HDMI standard is evolving. We no longer act as agent for the HDMI standard, and our share of adopter fees and royalties for the HDMI standard is subject to variability.
We acted as agent of the HDMI consortium until December 31, 2016 and were responsible for promoting and administering the specification. We received all of the adopter fees paid by adopters of the HDMI specification in connection with our role as agent. In September 2016, the Founders of the HDMI consortium, of which we are a member, amended the Founders Agreement resulting in changes to our role as agent for the HDMI consortium and to the model for sharing adopter fee revenues. Under the terms of the agreement, our role as the agent was terminated effective January 1, 2017 and a new independent entity was appointed to act as the new HDMI licensing agent with responsibility for licensing and the distribution of royalties among Founders. As a result of the amended model for sharing adopter fee revenue, we are entitled to a share of the adopter fees paid by parties adopting the HDMI standard.
We share HDMI royalties with the other HDMI Founders based on an allocation formula, which is reviewed generally every three years. In the fourth quarter of fiscal 2019, the HDMI Founders adopted a new agreement covering the five-year period beginning January 1, 2018. The amount of our portion of the royalty allocation is dependent on the royalties generated by adopter sales of royalty-bearing HDMI technology.
Changes in effective tax rates, tax laws and our global organizational structure and operations could expose us to unanticipated tax consequences.
We are subject to taxation in the United States and other countries. We have a global tax structure that aligns our corporate structure with our global business operations, and we currently operate legal entities in multiple countries. In some countries, we maintain multiple entities for tax or other purposes. We may choose to consolidate or integrate certain of these entities, and these integration activities, changes in tax laws, rates, regulations, future jurisdictional profitability of the Company, and related regulatory interpretations in the countries in which we operate may impact the taxes we pay or tax provision we record, which could adversely affect our results of operations. In addition, future effective tax rates could be affected by changes in the composition of our earnings in countries with differing tax rates, and by changes in the valuation of deferred tax assets and liabilities. We make no assurance as to what taxes we pay or the ability to estimate our future effective tax rate because of, among other things, uncertainty regarding the tax policies of the jurisdictions where we operate, or the potential impact of releasing our valuation allowance.
We may be subject to warranty claims and other costs related to our products.
In general, we warrant our products for varying lengths of time against non-conformance to our specifications and certain other defects. Because our products, including hardware, software, and intellectual property cores, are highly complex and increasingly incorporate advanced technology, our quality assurance programs may not detect all defects, whether these are specific manufacturing defects affecting individual products or these are systematic defects that could affect numerous shipments. Inability to detect a defect could result in a diversion of our engineering resources from product development efforts, increased engineering expenses to remediate the defect, and increased costs due to customer accommodation or inventory impairment charges. On occasion, we have also repaired or replaced certain components, made software fixes, or refunded the purchase price or license fee paid by our customers due to product or software defects. Our insurance may be unavailable or inadequate to protect against these issues. If there are significant product defects, the costs to remediate such defects, net of reimbursed amounts from our vendors, if any, or to resolve warranty claims may adversely affect our financial condition and results of operations and may harm our reputation.
If we are unable to adequately protect our new and existing intellectual property rights, our financial results and our ability to compete effectively may suffer.
Our success depends in part on our proprietary technology and we rely upon patent, copyright, trade secret, mask work, and trademark laws to protect our intellectual property. We intend to continue to protect our proprietary technology, however, we may be unsuccessful in asserting our intellectual property rights or such rights may be invalidated, violated, circumvented, or challenged. From time to time, third parties, including our competitors, have asserted against us patent, copyright, and other intellectual property rights to technologies that are important to us. Third parties may attempt to misappropriate our intellectual property through electronic or other means or assert infringement claims against us in the future. Such assertions by third parties may result in costly litigation, indemnity claims, or other legal actions, and we may not prevail in such matters or be able to license any valid and infringed patents from third parties on commercially reasonable terms. This could result in the loss of our ability to import and sell our products or require us to pay costly royalties to third parties in connection with sales of our products. Any infringement claim, indemnification claim, or impairment or loss of use of our intellectual property could materially adversely affect our financial condition and results of operations.
13
Weakness in our internal control over financial reporting could adversely affect our business and financial results.
We are required to maintain internal controls over financial reporting. We review these controls regularly and deficiencies may be identified from time to time. During the quarter ended December 28, 2019, we evaluated and remediated certain deficiencies in our information technology controls over system access and no material weakness existed at the end of the period. We previously disclosed a material weakness in 2017 related to our risk assessment involving significant unusual transactions that was remediated in 2018. In the future, we may identify material weaknesses in our internal controls over financial reporting. Any failure to maintain an effective system of internal controls over financial reporting could limit our ability to report our financial results accurately and timely, which could adversely affect our business, financial results, and stock price.
We compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel could adversely affect our ability to compete effectively.
We depend on the efforts and abilities of certain key members of management and other technical personnel. Our future success depends, in part, upon our ability to retain such personnel and attract and retain other highly qualified personnel, particularly product engineers who can respond to market demands and required product innovation. Competition for such personnel is intense and we may not be successful in hiring or retaining new or existing qualified personnel. If we lose existing qualified personnel or are unable to hire new qualified personnel, as needed, we could have difficulty competing in our highly-competitive and innovative environment.
Our outstanding indebtedness could reduce our strategic flexibility and liquidity and may have other adverse effects on our results of operations.
As of December 28, 2019, we had approximately $148.1 million outstanding under a Credit Agreement, dated May 17, 2019 (the “Current Credit Agreement”). Our obligations under the Current Credit Agreement are guaranteed by our U.S. subsidiaries, and include a requirement to pay quarterly installments of approximately $4.4 million with the remaining balance due upon maturity in May 2024. Our ability to meet our debt service obligations depends upon our operating and financial performance, which is subject to general economic and competitive conditions and to financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to service our debt, we may need to sell material assets, restructure or refinance our debt, or seek additional equity capital. Prevailing economic conditions and global credit markets could adversely impact our ability to sell material assets, restructure or refinance our debt on terms acceptable to us, or at all, or we may not be able to restructure or refinance our debt without incurring significant additional fees and expenses.
The Current Credit Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company to, among other things, incur debt, grant liens, undergo certain fundamental changes, make investments, make certain restricted payments, dispose of assets, enter into transactions with affiliates, and enter into burdensome agreements, in each case, subject to limitations and exceptions set forth in the Current Credit Agreement. We are also required to maintain compliance with a total leverage ratio and an interest coverage ratio, in each case, determined in accordance with the terms of the Current Credit Agreement.
The amount and terms of our indebtedness, as well as our credit rating, could have important consequences, including the following:
• | we may be more vulnerable to economic downturns, less able to withstand competitive pressures, and less flexible in responding to changing business and economic conditions; |
• | our cash flow from operations may be allocated to the payment of outstanding indebtedness, and not to research and development, operations or business growth; |
• | we might not generate sufficient cash flow from operations or other sources to enable us to meet our payment obligations under the facility and to fund other liquidity needs; |
• | our ability to make distributions to our stockholders in a sale or liquidation may be limited until any balance on the facility is repaid in full; and |
• | our ability to incur additional debt, including for working capital, acquisitions, or other needs, is more limited. |
If we breach a loan covenant, the lenders could accelerate the repayment of the facility. We might not have sufficient assets to repay our indebtedness upon acceleration. If we are unable to repay or refinance the indebtedness upon acceleration or at maturity, the lenders could initiate a bankruptcy proceeding against us or collection proceedings with respect to our assets and subsidiaries securing the facility, which could materially decrease the value of our common stock.
A material change in the agreements governing encryption keys we use could place additional restrictions on us, or our distributors or contract manufacturers, which could restrict product shipment or significantly increase the cost to track products throughout the distribution chain.
Certain components in our products contain encryption keys used in connection with High Definition Content Protection ("HDCP"). The regulation and distribution of these encryption keys are controlled through license agreements with Digital Content Protection ("DCP"), a wholly owned subsidiary of Intel Corporation. These license agreements have been modified by DCP from time to time, and such changes could impact us, our distributors, and our customers. An important element of HDMI is the ability to implement link protection for high definition ("HD"), and more recently, 4K UltraHD, content. We implement various aspects of the HDCP link protection within certain parts we sell. We also, for the benefit of our customers, include the necessary HDCP encryption keys in parts we ship to customers. These encryption keys are provided to us from DCP. We have a specific process for tracking and handling these encryption keys. If DCP changes any of the tracking or handling requirements associated with HDCP encryption keys, we may be required to change our manufacturing and distribution processes, which could adversely affect our manufacturing and distribution costs associated with these products. If we cannot satisfy new requirements for the handling and tracking of encryption keys, we may have to cease shipping or manufacturing certain products.
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We may have failed to adequately insure against certain risks, and, as a result, our financial condition and results may be adversely affected.
We carry insurance customary for companies in our industry, including, but not limited to, liability, property, and casualty; workers' compensation; and business interruption insurance. We also insure our employees for basic medical expenses. In addition, we have insurance contracts that provide director and officer liability coverage for our directors and officers. Other than the specific areas mentioned above, we are self-insured with respect to most other risks and exposures, and the insurance we carry in many cases is subject to a significant policy deductible or other limitation before coverage applies. Based on management's assessment and judgment, we have determined that it is more cost effective to self-insure against certain risks than to incur the insurance premium costs. The risks and exposures for which we self-insure include, but are not limited to, certain natural disasters, certain product defects, certain matters for which we indemnify third parties, political risk, certain theft, patent infringement, and employment practice matters. Should there be a catastrophic loss due to an uninsured event (such as an earthquake) or a loss due to adverse occurrences in any area in which we are self-insured, our financial condition or operating results could be adversely affected.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease a 47,800 square foot of space in Hillsboro, Oregon as our corporate headquarters and a research and development facility through November 2022. In San Jose, California, we have 98,874 square feet under lease through September 2026, of which we use 49,579 square feet as a research and development facility, while we vacated 49,295 square feet during the fourth quarter of 2018 and intend to sublease the vacated space. During 2019, we vacated a 23,680 square foot office space in Portland, Oregon, which we have subleased through the end of the lease in March 2025.
In Muntinlupa City, Philippines, we lease a total of 48,565 square feet through May 2025 and 1,938 square feet through June 2025 for research and development and operations facilities. In this location, we also leased another 2,856 square feet through April 2018 as storage space that has been consolidated into other facilities.
In Shanghai, China, we lease 68,027 square feet through May 2021 for research and development operations. We also owned an 18,869 square foot research and development facility in Shanghai, China, which we sold in August 2017.
We also lease office facilities in multiple other metropolitan locations for our domestic and international sales staff. We believe that our existing facilities are suitable and adequate for our current and foreseeable future needs.
Item 3. Legal Proceedings
On or about December 19, 2018, Steven A.W. De Jaray, Perienne De Jaray and Darrell R. Oswald (collectively, the “Plaintiffs”) commenced an action against the Company and several unnamed defendants in the Multnomah County Circuit Court of the State of Oregon, in connection with the sale of certain products by the Company to the Plaintiffs in or around 2008. The Plaintiffs allege that we violated The Lanham Act, engaged in negligence and fraud by failing to disclose to the Plaintiffs the export-controlled status of the subject parts. The Plaintiffs seek damages of $138 million, treble damages, and other remedies. In January 2019, we removed the action to the United States District Court for the District of Oregon. At this stage of the proceedings, we do not have an estimate of the likelihood or the amount of any potential exposure to the Company; however, we believe that these claims are without merit and intend to vigorously defend the action. See “Litigation and unfavorable results of legal proceedings could adversely affect our financial condition and operating results” in “Risk Factors” in Item 1A of Part I of this Annual Report on Form 10-K.
From time to time, we are exposed to certain asserted and unasserted potential claims. Periodically, we review the status of each significant matter and assess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and a range of possible losses can be estimated, we then accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may revise estimates.
Item 4. Mine Safety Disclosures
Not applicable.
15
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol "LSCC".
Holders
As of February 20, 2020, we had approximately 216 stockholders of record.
Dividends
The payment of dividends on our common stock is within the discretion of our Board of Directors. We intend to retain earnings to finance our business. We have never paid cash dividends.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Comparison of Total Cumulative Stockholder Return
The following graph shows the five-year comparison of cumulative stockholder return on our common stock, the Standard and Poor's (“S&P”) 500 Index and the Philadelphia Semiconductor Index (“PHLX”) from December 2014 through December 2019. Cumulative stockholder return assumes $100 invested at the beginning of the period in our common stock, the S&P and PHLX. Historical stock price performance is not necessarily indicative of future stock price performance.
16
Lattice Cumulative Stockholder Return
17
Item 6. Selected Financial Data
Year Ended (1) | ||||||||||||||||||||
STATEMENT OF OPERATIONS: | December 28, 2019 | December 29, 2018 | December 30, 2017 | December 31, 2016 | January 2, 2016 (2) | |||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
Revenue | $ | 404,093 | $ | 398,799 | $ | 385,961 | $ | 427,054 | $ | 405,966 | ||||||||||
Cost of revenue | 165,671 | 179,360 | 169,382 | 180,620 | 186,057 | |||||||||||||||
Gross margin | 238,422 | 219,439 | 216,579 | 246,434 | 219,909 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Research and development | 78,617 | 82,449 | 103,357 | 117,518 | 136,868 | |||||||||||||||
Selling, general, and administrative | 82,542 | 91,054 | 90,718 | 98,602 | 97,349 | |||||||||||||||
Amortization of acquired intangible assets | 13,558 | 17,690 | 31,340 | 33,575 | 29,580 | |||||||||||||||
Restructuring charges | 4,664 | 17,349 | 7,196 | 9,267 | 19,239 | |||||||||||||||
Impairment of acquired intangible assets and goodwill | — | 12,486 | 32,431 | 7,866 | 21,655 | |||||||||||||||
Acquisition related charges | — | 1,531 | 3,781 | 6,305 | 22,450 | |||||||||||||||
Gain on sale of building | — | — | (4,624 | ) | — | — | ||||||||||||||
Total operating expenses | 179,381 | 222,559 | 264,199 | 273,133 | 327,141 | |||||||||||||||
Income (loss) from operations | 59,041 | (3,120 | ) | (47,620 | ) | (26,699 | ) | (107,232 | ) | |||||||||||
Interest expense | (11,731 | ) | (20,600 | ) | (18,807 | ) | (20,327 | ) | (18,389 | ) | ||||||||||
Other (expense) income, net | (2,245 | ) | (249 | ) | (3,286 | ) | 2,844 | (1,072 | ) | |||||||||||
Income (loss) before income taxes | 45,065 | (23,969 | ) | (69,713 | ) | (44,182 | ) | (126,693 | ) | |||||||||||
Income tax expense | 1,572 | 2,353 | 849 | 9,917 | 32,540 | |||||||||||||||
Net income (loss) | $ | 43,493 | $ | (26,322 | ) | $ | (70,562 | ) | $ | (54,099 | ) | $ | (159,233 | ) | ||||||
Net income (loss) per share: | ||||||||||||||||||||
Basic | $ | 0.33 | $ | (0.21 | ) | $ | (0.58 | ) | $ | (0.45 | ) | $ | (1.36 | ) | ||||||
Diluted | $ | 0.32 | $ | (0.21 | ) | $ | (0.58 | ) | $ | (0.45 | ) | $ | (1.36 | ) | ||||||
Shares used in per share calculations: | ||||||||||||||||||||
Basic | 132,471 | 126,564 | 122,677 | 119,994 | 117,387 | |||||||||||||||
Diluted | 137,274 | 126,564 | 122,677 | 119,994 | 117,387 | |||||||||||||||
BALANCE SHEET: | December 28, 2019 | December 29, 2018 | December 30, 2017 | December 31, 2016 | January 2, 2016 | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Cash, cash equivalents, and short-term marketable securities | $ | 118,081 | $ | 128,675 | $ | 111,797 | $ | 116,860 | $ | 102,574 | ||||||||||
Total assets | $ | 612,016 | $ | 623,687 | $ | 635,961 | $ | 766,883 | $ | 785,920 | ||||||||||
Long term liabilities | $ | 184,538 | $ | 295,812 | $ | 334,621 | $ | 338,903 | $ | 369,223 | ||||||||||
Total liabilities | $ | 284,357 | $ | 365,230 | $ | 418,268 | $ | 496,453 | $ | 480,400 | ||||||||||
Total stockholders' equity | $ | 327,659 | $ | 258,457 | $ | 217,693 | $ | 270,430 | $ | 305,520 | ||||||||||
(1) | Results for periods prior to 2018 are presented in accordance with ASC 605, which was in effect during those fiscal years. | |||||||||||||||||||
(2) | Our results for the year ended January 2, 2016 include the results associated with the acquisition of Silicon Image for the approximately 10-month period from March 11, 2015 through January 2, 2016. | |||||||||||||||||||
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Lattice Semiconductor Corporation and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develop technologies that we monetize through differentiated programmable logic semiconductor products, system solutions, design services, and licenses.
This discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes included in Item 8. "Financial Statements and Supplementary Data" of this report. Discussions of results for prior periods (fiscal 2018 compared to fiscal 2017) are incorporated by reference from our Annual Report on Form 10-K for the year ended December 29, 2018.
Critical Accounting Policies and Use of Estimates
Critical accounting policies are those that are both most important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments affecting the amounts reported in our consolidated condensed financial statements and the accompanying notes. We base our estimates and judgments on historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when made, and because of the uncertainty inherent in these matters, actual results may differ from these estimates under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis.
We believe the following accounting policies and the related estimates are critical in the portrayal of our financial condition and results of operations, and require management's most difficult, subjective, or complex judgments. See "Note 1 - Nature of Operations and Significant Accounting Policies" under Part II, Item 8 of this report for further information on the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Revenue from Contracts with Customers
We adopted ASC 606, Revenue from Contracts with Customers, effective on December 31, 2017, the first day of our 2018 fiscal year, using the modified retrospective method. We recognize revenue upon satisfaction of performance obligations when control of promised goods or services has been transferred to our customers. We measure revenue based on the amount of consideration we expect to be entitled to in exchange for products or services. For revenue recognized on both sales to distributors and related to HDMI royalties, the amount of consideration we expect to be entitled to receive is based on estimates that require assumptions and judgments relating to trends in recent and historical activity. See "Note 1 - Basis of Presentation and Significant Accounting Policies" under Part II, Item 8 of this report for further information on our recognition of revenue. Sales to most distributors are made under terms allowing certain price adjustments upon sale to their end customers and limited rights of return of our products held in their inventory. The revenue recognized based on estimated price adjustments and stock rotation reserves may be materially different from the actual consideration received if the actual distributor price adjustments and stock rotation returns differ significantly from the historical trends used in the estimates.
Inventories and Cost of Revenue
Inventories are recorded at the lower of average cost determined on a first-in-first-out basis or market. We establish provisions for inventory if it is obsolete or we hold quantities which are in excess of projected customer demand. The creation of such provisions results in a write-down of inventory to net realizable value and a charge to Cost of revenue.
Accounting for Income Taxes
Our provision for income tax is comprised of our current tax liability and changes in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that in management’s judgment is more-likely-than-not to be recoverable against future taxable income. The determination of a valuation allowance and when it should be released requires complex judgment. In assessing the ability to realize deferred tax assets, we evaluate both positive and negative evidence that may exist and consider whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
As part of our financial review process, we also assess the likelihood that our tax reporting positions will ultimately be sustained. To the extent it is determined it is more likely than not (a likelihood of more than 50 percent) that some portion or all of a tax reporting position will ultimately not be recognized and sustained, a provision for unrecognized tax benefit is provided by either reducing the applicable deferred tax asset or accruing an income tax liability. Our judgment regarding the sustainability of our tax reporting positions may change in the future due to changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to the related deferred tax assets or accrued income tax liabilities and an accompanying reduction or increase in income tax expense which may result in a corresponding increase or decrease in net income in the period when such determinations are made.
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Results of Operations
Key elements of our Consolidated Statements of Operations, including as a percentage of revenue, are presented in the following table:
Year Ended * | ||||||||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||||||||||
Revenue | $ | 404,093 | 100.0 | % | $ | 398,799 | 100.0 | % | $ | 385,961 | 100.0 | % | ||||||||
Gross margin | 238,422 | 59.0 | 219,439 | 55.0 | 216,579 | 56.1 | ||||||||||||||
Research and development | 78,617 | 19.5 | 82,449 | 20.7 | 103,357 | 26.8 | ||||||||||||||
Selling, general, and administrative | 82,542 | 20.4 | 91,054 | 22.8 | 90,718 | 23.5 | ||||||||||||||
Amortization of acquired intangible assets | 13,558 | 3.4 | 17,690 | 4.4 | 31,340 | 8.1 | ||||||||||||||
Restructuring charges | 4,664 | 1.2 | 17,349 | 4.4 | 7,196 | 1.9 | ||||||||||||||
Impairment of acquired intangible assets | — | — | 12,486 | 3.1 | 32,431 | 8.4 | ||||||||||||||
Acquisition related charges | — | — | 1,531 | 0.4 | 3,781 | 1.0 | ||||||||||||||
Gain on sale of building | — | — | — | — | (4,624 | ) | (1.2 | ) | ||||||||||||
Income (loss) from operations | $ | 59,041 | 14.6 | % | $ | (3,120 | ) | (0.8 | )% | $ | (47,620 | ) | (12.3 | )% | ||||||
* Results for 2017 are presented in accordance with ASC 605, which was in effect during that fiscal year.
Revenue
Year Ended * | % Change in | ||||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
Revenue | $ | 404,093 | $ | 398,799 | $ | 385,961 | 1.3 | % | 3.3 | % | |||||||
* Results for 2017 are presented in accordance with ASC 605, which was in effect during that fiscal year.
Revenue increased $5.3 million, or 1%, in fiscal 2019 compared to fiscal 2018, primarily driven by increased demand for products used in computing solutions and in 5G wireless infrastructure, along with increases in IP revenue, offset by broad market weakness.
Revenue by End Market
We sell our products globally in three primary groups of end markets: Communications and Computing, Industrial and Automotive, and Consumer. We also provide Intellectual Property licensing and services to these end markets.
We anticipate future revenue growth due to multiple market segment drivers, including:
• | Communications and computing: 5G infrastructure deployments, cloud and enterprise servers, and client computing platforms, |
• | Industrial and automotive: industrial Internet of Things ("IoT"), factory automation, and automotive electronics, |
• | Consumer: smart home and prosumer. |
We also generate revenue from the licensing of our Intellectual Property ("IP"), the collection of certain royalties, patent sales, the revenue related to our participation in consortia and standard-setting activities, and services. While these activities may be associated with multiple markets, Licensing and services revenue is reported as a separate end market as it has characteristics that differ from other categories, most notably a higher gross margin.
The end market data below is derived from data provided to us by our distributors and end customers. With a diverse base of customers who may manufacture end products spanning multiple end markets, the assignment of revenue to a specific end market requires the use of judgment. We also recognize certain revenue for which end customers and end markets are not yet known. We assign this revenue first to a specific end market using historical and anticipated usage of the specific products, if possible, and allocate to the end markets by product family based upon historical usage for each family if we cannot identify a specific end market.
20
The following are examples of end market applications for the fiscal years presented:
Communications and Computing | Industrial and Automotive | Consumer | Licensing and Services |
Wireless | Security and Surveillance | Cameras | IP Royalties |
Wireline | Machine Vision | Displays | Adopter Fees |
Data Backhaul | Industrial Automation | Wearables | IP Licenses |
Server Computing | Robotics | Televisions | Patent Sales |
Client Computing | Automotive | Home Theater | |
Data Storage | Drones | ||
The composition of our revenue by end market is presented in the following table:
Year Ended * | % Change in | |||||||||||||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | |||||||||||||||||||||
Communications and Computing | $ | 155,821 | 38.6 | % | $ | 123,195 | 30.9 | % | $ | 113,019 | 29.3 | % | 26.4 | % | 9.0 | % | ||||||||||
Industrial and Automotive | 151,607 | 37.5 | 157,979 | 39.6 | 134,639 | 34.9 | (4.0 | ) | 17.3 | |||||||||||||||||
Consumer | 75,120 | 18.6 | 99,294 | 24.9 | 108,844 | 28.2 | (24.3 | ) | (8.8 | ) | ||||||||||||||||
Licensing and Services | 21,545 | 5.3 | 18,331 | 4.6 | 29,459 | 7.6 | 17.5 | (37.8 | ) | |||||||||||||||||
Total revenue | $ | 404,093 | 100.0 | % | $ | 398,799 | 100.0 | % | $ | 385,961 | 100.0 | % | 1.3 | % | 3.3 | % | ||||||||||
* Results for 2017 are presented in accordance with ASC 605, which was in effect during that fiscal year.
Our revenue in the Communications and Computing end market increased 26% in fiscal 2019 compared to fiscal 2018 primarily due to demand increases for server and client computing products, as well as for products used in 5G wireless infrastructure.
For fiscal 2019 compared to fiscal 2018, Industrial and Automotive end market revenue decreased 4% primarily due to broad market weakness, primarily in Asia and Europe.
Consumer end market revenue decreased 24% in fiscal 2019 compared to fiscal 2018 primarily due to a greater focus on the Industrial and Automotive and the Communications and Computing end markets, and due to Asia market softness and broad market weakness.
Revenue from the Licensing and Services end market is subject to variability between periods. Revenue from the Licensing and Services end market increased by 18% in fiscal 2019 compared to fiscal 2018 predominantly due to increases in HDMI royalty revenue and certain patent and asset sales recognized in 2019.
We share HDMI royalties with the other HDMI Founders based on an allocation formula, which is reviewed periodically, generally every three years. In the fourth quarter of fiscal 2019, the Founders adopted a new agreement covering the five-year period beginning January 1, 2018. Revenues recorded during fiscal 2019 and 2018 based on our estimated share of the royalties were consistent with the amounts recognized under the new agreement.
Revenue by Geography
We assign revenue to geographies based on ship-to location of the end customer, where available, and based upon the location of the distributor to which the product was shipped otherwise.
The composition of our revenue by geography is presented in the following table:
Year Ended * | % Change in | |||||||||||||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | |||||||||||||||||||||
Asia | $ | 298,765 | 73.9 | % | $ | 298,119 | 74.8 | % | $ | 277,638 | 71.9 | % | 0.2 | % | 7.4 | % | ||||||||||
Europe | 47,392 | 11.7 | 45,546 | 11.4 | 44,547 | 11.5 | 4.1 | 2.2 | ||||||||||||||||||
Americas | 57,936 | 14.4 | 55,134 | 13.8 | 63,776 | 16.6 | 5.1 | (13.6 | ) | |||||||||||||||||
Total revenue | $ | 404,093 | 100.0 | % | $ | 398,799 | 100.0 | % | $ | 385,961 | 100.0 | % | 1.3 | % | 3.3 | % | ||||||||||
* Results for 2017 are presented in accordance with ASC 605, which was in effect during that fiscal year.
Revenue from End Customers
In the periods covered by this report, no end customer accounted for more than 10% of total revenue, and we expect to continue to sell our products to a broad base of end customers.
21
Revenue from Distributors
Distributors have historically accounted for a significant portion of our total revenue. Revenue attributable to our primary distributors is presented in the following table:
Year Ended * | ||||||||
December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||
Weikeng Group | 29.8 | % | 25.4 | % | 26.7 | % | ||
Arrow Electronics Inc. | 25.4 | 28.7 | 23.9 | |||||
All others | 26.9 | 28.8 | 26.4 | |||||
All distributors ** | 82.1 | % | 82.9 | % | 77.1 | % | ||
* | Results for 2017 are presented in accordance with ASC 605, which was in effect during that fiscal year. |
** | During the first quarter of 2018, we updated our channel categories to group all forms of distribution into a single channel. Prior periods have been reclassified to match current period presentation. |
Gross margin
The composition of our gross margin, including as a percentage of revenue, is presented in the following table:
Year Ended * | |||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||
Gross margin | $ | 238,422 | $ | 219,439 | $ | 216,579 | |||||
Percentage of revenue | 59.0 | % | 55.0 | % | 56.1 | % | |||||
Product gross margin % | 56.7 | % | 52.9 | % | 53.8 | % | |||||
Licensing and services gross margin % | 100.0 | % | 98.6 | % | 84.0 | % | |||||
* Results for 2017 are presented in accordance with ASC 605, which was in effect during that fiscal year.
Gross margin, as a percentage of revenue, increased 400 basis points from fiscal 2018 to fiscal 2019 due to product cost reductions, benefits from pricing optimization, as well as overall mix. The increase in gross margin was also attributable to the non-recurrence in 2019 of the $8.0 million in specific inventory charges taken in the second quarter of fiscal 2018 as a result of the discontinuation of our millimeter wave business.
Additionally, Gross margin was favorably impacted by the relative mix between product revenue and licensing and services revenue. Licensing and services accounted for 5.3% of total revenue in fiscal 2019 compared to 4.6% of total revenue in fiscal 2018. Because of its higher margin, the licensing and services portion of our overall revenue can have a disproportionate impact on Gross Margin.
Operating Expenses
Research and development expense
The composition of our Research and development expense, including as a percentage of revenue, is presented in the following table:
Year Ended | % Change in | ||||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
Research and development | $ | 78,617 | $ | 82,449 | $ | 103,357 | (4.6 | )% | (20.2 | )% | |||||||
Percentage of revenue | 19.5 | % | 20.7 | % | 26.8 | % | |||||||||||
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 decrease in Research and development expense for fiscal 2019 compared to fiscal 2018 was due mainly to the cost reductions realized from the discontinuation of our millimeter wave business and other restructuring actions including the consolidation of leased facilities. These savings were predominantly from headcount related expenses and from reductions in both depreciation and rent expense, partially offset by increased stock compensation expense.
22
We believe that a continued commitment to Research and development is essential to maintaining product leadership and providing innovative new product offerings and, therefore, we expect to continue to make significant future investments in Research and development, particularly with expanded investment in software and solutions.
Selling, general, and administrative expense
The composition of our Selling, general, and administrative expense, including as a percentage of revenue, is presented in the following table:
Year Ended | % Change in | ||||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
Selling, general, and administrative | $ | 82,542 | $ | 91,054 | $ | 90,718 | (9.3 | )% | 0.4 | % | |||||||
Percentage of revenue | 20.4 | % | 22.8 | % | 23.5 | % | |||||||||||
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 decrease in Selling, general, and administrative expense for fiscal 2019 compared to fiscal 2018 was due mainly to the cost reductions realized from restructuring actions including the consolidation of leased facilities. These savings were predominantly from headcount related expenses and from reductions in both depreciation and rent expense, partially offset by increased stock compensation expense. Additional savings in the current year period resulted from the non-recurrence of certain one-time costs related to our CEO transition in the prior year, including accelerated stock compensation, severance expense, and CEO search fees
Amortization of acquired intangible assets
The composition of our Amortization of acquired intangible assets, including as a percentage of revenue, is presented in the following table:
Year Ended | % Change in | ||||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
Amortization of acquired intangible assets | $ | 13,558 | $ | 17,690 | $ | 31,340 | (23.4 | )% | (43.6 | )% | |||||||
Percentage of revenue | 3.4 | % | 4.4 | % | 8.1 | % | |||||||||||
The decrease in Amortization of acquired intangible assets for fiscal 2019 compared to fiscal 2018 was due to the end of the amortization period for certain intangibles and to the reduction of certain intangibles as a result of impairment charges in previous periods. The amortization period for most of our acquired intangible assets will end in the first quarter of fiscal 2020.
Restructuring charges
The composition of our Restructuring charges, including as a percentage of revenue, is presented in the following table:
Year Ended | % Change in | |||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | |||||||||||
Restructuring charges | $ | 4,664 | $ | 17,349 | $ | 7,196 | (73.1 | )% | 100+% | |||||||
Percentage of revenue | 1.2 | % | 4.4 | % | 1.9 | % | ||||||||||
Restructuring charges are comprised of expenses resulting from reductions in our worldwide workforce, consolidation of our facilities, removal of fixed assets from service, and cancellation of software contracts and engineering tools. Details of our restructuring plans and expenses incurred under them are more fully discussed in "Note 7 - Restructuring" to our Consolidated Financial Statements in Part II, Item 8 of this report.
The $12.7 million decrease in Restructuring charges in fiscal 2019 compared to fiscal 2018 was driven primarily by the higher headcount-related restructuring charges in the prior year periods, as compared to lower charges in the current period from ceasing use of certain leased facilities and from termination fees on the cancellation of certain contracts.
Impairment of acquired intangible assets
The composition of our Impairment of acquired intangible assets, including as a percentage of revenue, is presented in the following table:
Year Ended | % Change in | ||||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
Impairment of acquired intangible assets | $ | — | $ | 12,486 | $ | 32,431 | (100.0 | )% | (61.5 | )% | |||||||
Percentage of revenue | — | % | 3.1 | % | 8.4 | % | |||||||||||
23
During the third quarter of fiscal 2018, we concluded that a certain product line had limited future revenue potential due to a decline in customer demand for that product. We determined that this conclusion constituted an impairment indicator to the related specific developed technology intangible asset acquired in our acquisition of Silicon Image. Our assessment of the fair value of this intangible asset concluded that it had been fully impaired as of September 29, 2018, and we recorded an impairment charge of $0.6 million in the Consolidated Statements of Operations.
In the second quarter of 2018, we made the strategic decision to discontinue our millimeter wave business, which included certain wireless technology intangible assets. We determined that this action constituted an impairment indicator related to certain of the developed technology intangible assets acquired in our acquisition of Silicon Image. Our assessment of the fair value of these intangible assets concluded that they had been fully impaired as of June 30, 2018, and we recorded an impairment charge of $11.9 million in the Consolidated Statements of Operations.
Acquisition related charges
The composition of our Acquisition related charges, including as a percentage of revenue, is presented in the following table:
Year Ended | % Change in | ||||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
Acquisition related charges | $ | — | $ | 1,531 | $ | 3,781 | (100.0 | )% | (59.5 | )% | |||||||
Percentage of revenue | — | % | 0.4 | % | 1.0 | % | |||||||||||
Acquisition related charges include legal and professional fees directly related to acquisitions. We incurred no Acquisition related charges in fiscal 2019. For fiscal years 2018, and 2017, Acquisition related charges were entirely attributable to legal fees and outside services in connection with our proposed acquisition by Canyon Bridge Acquisition Company, Inc. Although the acquisition was terminated, we continued to incur certain residual legal fees directly related to this transaction.
Interest Expense
The composition of our Interest expense, including as a percentage of revenue, is presented in the following table:
Year Ended | % Change in | ||||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||||
Interest expense | $ | (11,731 | ) | $ | (20,600 | ) | $ | (18,807 | ) | (43.1 | )% | 9.5 | % | ||||
Percentage of revenue | (2.9 | )% | (5.2 | )% | (4.9 | )% | |||||||||||
Interest expense is primarily related to our long-term debt, which is further discussed under the Credit Arrangements heading in the Liquidity and Capital Resources section, below. This interest expense is comprised of contractual interest and amortization of original issue discount and debt issuance costs based on the effective interest method.
The decrease in Interest expense for fiscal 2019 compared to fiscal 2018 was largely driven by the significant reduction in the effective interest rate on our long-term debt under the terms of the new Credit Agreement, coupled with the reduction in the principal balance of our long-term debt as a result of the additional principal payments made in the current and previous periods.
Other expense, net
The composition of our Other expense, net, including as a percentage of revenue, is presented in the following table:
Year Ended | % Change in | |||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | |||||||||||
Other expense, net | $ | (2,245 | ) | $ | (249 | ) | $ | (3,286 | ) | 100+% | (92 | )% | ||||
Percentage of revenue | (0.6 | )% | (0.1 | )% | (0.9 | )% | ||||||||||
For fiscal 2019 compared to fiscal 2018, Other expense, net increased primarily due to the $2.2 million loss on re-financing charge taken in the second quarter of fiscal 2019 to write off the remaining unamortized balance of debt costs and original issue discount related to our refinanced long-term debt, partially offset by reduced miscellaneous expenses during the period.
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Income taxes
The composition of our Income tax expense is presented in the following table:
Year Ended | % Change in | ||||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | 2019 | 2018 | ||||||||||
Income tax expense | $ | 1,572 | $ | 2,353 | $ | 849 | (33.2)% | 177.1% | |||||||
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 due to statute of limitation expirations that occurred in the respective periods. The decrease in expense in fiscal 2019 as compared to fiscal 2018 primarily results from the release of uncertain tax positions due to statute of limitations expiration.
We are not currently paying U.S. federal income taxes and do not expect to pay such taxes until we fully utilize our tax net operating loss and credit carryforwards. We expect to pay a nominal amount of state income tax. We are paying foreign income taxes, which are primarily related to withholding taxes on income from foreign royalties, foreign sales, and the cost of operating offshore research and development, marketing, and sales subsidiaries. It is reasonably possible that during the next twelve months, we will establish a sustained level of profitability in the U.S. As a result, we may reverse a significant portion of the valuation allowance recorded against our U.S. deferred tax assets. The reversal would result in an income tax benefit for the quarterly and annual fiscal period in which we release the valuation allowance. We accrue interest and penalties related to uncertain tax positions in income tax expense on our Consolidated Statements of Operations. The inherent uncertainties related to the geographical distribution and relative level of profitability among various high and low tax jurisdictions make it difficult to estimate the impact of the global tax structure on our future effective tax rate.
Liquidity and Capital Resources
The following sections discuss material changes in our financial condition from the end of fiscal 2018, 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.
We believe that our financial resources will be sufficient to meet our working capital needs through at least the next 12 months. As of December 28, 2019, 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 more fully discussed under the "Credit Arrangements" heading, below.
Liquidity
Cash and cash equivalents and Short-term marketable securities
(In thousands) | December 28, 2019 | December 29, 2018 | $ Change | %Change | ||||||||||
Cash and cash equivalents | $ | 118,081 | $ | 119,051 | $ | (970 | ) | (0.8 | )% | |||||
Short-term marketable securities | — | 9,624 | (9,624 | ) | (100.0 | )% | ||||||||
Total Cash and cash equivalents and Short-term marketable securities | $ | 118,081 | $ | 128,675 | $ | (10,594 | ) | (8.2 | )% | |||||
As of December 28, 2019, we had total Cash, cash equivalents, and short-term marketable securities of $118.1 million, of which approximately $57.4 million in Cash and cash equivalents was held by our foreign subsidiaries. During the first quarter of fiscal 2019, we liquidated our Short-term marketable securities. We manage our global cash requirements considering, among other things, (i) available funds among our subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. The repatriation of non-US earnings may require us to withhold and pay foreign income tax on dividends. This should not result in our recording significant additional tax expense as we have accrued expense based on current withholding rates. As of December 28, 2019, we could access all cash held by our foreign subsidiaries without incurring significant additional expense.
The net decrease in Cash, cash equivalents, and short-term marketable securities of $10.6 million between December 29, 2018 and December 28, 2019 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 in fiscal 2019 was $124.1 million, an increase of $72.6 million from the $51.5 million of cash provided by operating activities in fiscal 2018. This increase was driven by both improved operating performance, which contributed $64.5 million to the increase, and by changes in working capital, which contributed $8.1 million to the increase, primarily due to the receipt of royalties distributed by the HDMI agent with the adoption of the new sharing agreement, partially offset by changes in Operating lease liabilities. We are using this increased cash provided by operating activities to invest in our operations.
25
Investing activities — Investing cash flows consist primarily of transactions related to short-term marketable securities, capital expenditures, and payments for software licenses. The $15.5 million of cash used by investing activities in fiscal 2019 was $5.6 million less than the $21.1 million used by investing activities in fiscal 2018 primarily due to a $14.3 million change in the net cash flows for short-term marketable securities offset by $8.7 million more cash used for capital expenditures and software licenses. In fiscal 2018, we made $4.6 million in net purchases of short-term marketable securities, whereas we liquidated all short-term investments in 2019 for $9.7 million. The total $25.2 million of cash used in fiscal 2019 for capital expenditures and payments for software licenses was $8.7 million greater than the $16.5 million used in fiscal 2018 due primarily to increased investments in test equipment and software enhancements.
Financing activities — Financing cash flows consist primarily of payments on and refinancing of 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. In May 2019, we entered into our Current Credit Agreement and received $206.5 million, which we used to pay off the $204.4 million outstanding balance on our previous loan. In connection with the Current Credit Agreement, we paid $2.1 million in debt issuance costs. During fiscal 2019, we made a total of $117.0 million in voluntary and required principal payments on our long-term debt. Employee exercises of stock options partially offset by tax withholdings on vesting of RSUs provided net cash flows of $7.1 million in fiscal 2019, which is a decrease of approximately $19.8 million from the $26.9 million provided in fiscal 2018.
Accounts receivable, net
(In thousands) | December 28, 2019 | December 29, 2018 | $Change | %Change | ||||||||||
Accounts receivable, net | $ | 64,917 | $ | 60,890 | $ | 4,027 | 6.6 | % | ||||||
Days sales outstanding - Overall | 59 | 58 | 1 | |||||||||||
Accounts receivable, net as of December 28, 2019 increased by approximately $4.0 million, or 7%, compared to December 29, 2018. This resulted primarily from the timing of shipments in December 2019 compared to December 2018.
Inventories
(In thousands) | December 28, 2019 | December 29, 2018 | $Change | %Change | ||||||||||
Inventories | $ | 54,980 | $ | 67,096 | $ | (12,116 | ) | (18.1 | )% | |||||
Days of inventory on hand | 123 | 147 | (24 | ) | ||||||||||
Inventories as of December 28, 2019 decreased $12.1 million, or approximately 18%, compared to December 29, 2018 primarily due to our improved management of inventory levels, as well as the ramp down of mature and aging products.
The Days of inventory on hand ratio compares the inventory balance at the end of a quarter to the cost of sales in that quarter. Our Days of inventory on hand decreased to 123 days at December 28, 2019 from 147 days at December 29, 2018. This decrease resulted from improved inventory management.
Credit Arrangements
On May 17, 2019, we entered into our new Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and other lenders. The details of this new arrangement are more fully described in "Note 6 - Long-Term Debt" in the accompanying Notes to Consolidated Financial Statements.
As of December 28, 2019, 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.
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at December 28, 2019:
Fiscal year (In thousands) | Operating leases (1) | Long-term Debt (2) | ||||||
2020 | $ | 6,445 | $ | 26,335 | ||||
2021 | 5,485 | 21,337 | ||||||
2022 | 4,468 | 20,799 | ||||||
2023 | 4,596 | 20,261 | ||||||
2024 | 4,716 | 74,658 | ||||||
Thereafter | 6,705 | — | ||||||
$ | 32,415 | $ | 163,390 | |||||
(1) Certain of our facilities and equipment are leased under operating leases, which expire at various times through 2027.
(2) Cash payments due for long-term debt include estimated interest payments, which are based on outstanding principal amounts, currently effective interest rates as of December 28, 2019, timing of scheduled payments and the debt term. Our 53-week fiscal 2020 will result in five quarterly installments being paid during that fiscal year. See Liquidity section of Item 7 for further discussion pertaining to our Credit Arrangements.
The table above does not include amounts related to uncertain tax positions because we cannot reliably estimate the timing of the settlement of such liabilities.
26
Our significant operating leases are for our facilities in Hillsboro and Portland, Oregon; San Jose, California; Muntinlupa City, Philippines; and Shanghai, China.
In the first quarter of 2019, we relocated our corporate headquarters to our facility in Hillsboro, Oregon, which is leased until November 2022. Annual rental costs are estimated at $0.6 million with 3% annual increases.
The lease for our former office space in Portland, Oregon expires in March 2025. Annual rental costs are estimated at $0.7 million with average annual increases of approximately 5%. Under a previously approved restructuring plan, we fully vacated the space in Portland, Oregon in early 2019 and subleased the vacated space.
Our lease in San Jose, California expires September 2026 with total annual rental costs estimated to be $2.4 million and annual increases of approximately 3%. Under a previously approved restructuring plan, we vacated approximately 50% or our facility in San Jose, California in the fourth quarter of fiscal 2018 and intend to sublease the vacated space.
Two of our leases in Muntinlupa City, Philippines expire in May 2025 and June 2025, with total annual rental costs estimated to be $0.7 million and annual increases of approximately 5%. Our lease in Shanghai expires in May 2021, with total annual rental costs estimated to be $1.8 million.
New Accounting Pronouncements
The information contained under the heading "New Accounting Pronouncements" in Note 1 - Nature of Operations and Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 is incorporated by reference into this Part II, Item 7.
Off-Balance Sheet Arrangements
As of December 28, 2019, we did not have any off-balance sheet arrangements of the type described by Item 303(a)(4) of SEC Regulation S-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We assess these risks on a regular basis and have established policies that are designed to protect against the adverse effects of these and other potential exposures.
Foreign Currency Exchange Rate Risk
While our revenues and the majority of our expenses are denominated in U.S. dollars, we collect an annual Japanese consumption tax refund in yen, and as a result of having various international subsidiary and branch operations, our financial position and results of operations are subject to foreign currency exchange rate risk.
We mitigate the resulting foreign currency exchange rate exposure by entering into foreign currency forward exchange contracts, details of which are presented in the following table:
December 28, 2019 | December 29, 2018 | |||||||
Total cost of contracts for Japanese yen (thousands) | $ | 1,894 | $ | 1,955 | ||||
Number of contracts | 2 | 2 | ||||||
Settlement month | June 2020 | June 2019 | ||||||
Although these hedges mitigate our foreign currency exchange rate exposure from an economic perspective, they were not designated as "effective" hedges under U.S. GAAP and as such are adjusted to fair value through Other expense, net. We do not engage in speculative trading in any financial or capital market.
The net fair value of these contracts was favorable by approximately $0.1 million at both December 28, 2019 and December 29, 2018. A hypothetical 10% unfavorable exchange rate change in the yen against the U.S. dollar would have resulted in an unfavorable change in net fair value of approximately $0.2 million at both December 28, 2019 and December 29, 2018. Changes in fair value resulting from foreign exchange rate fluctuations would be substantially offset by the change in value of the underlying hedged transactions.
Interest Rate Risk
We are exposed to interest rate risk related to our indebtedness. At December 28, 2019, we had $148.1 million outstanding under our Credit Agreement. A hypothetical increase in the one-month LIBOR by 1% (100 basis points) would increase our future interest expense by approximately $0.4 million per quarter.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements: | Page |
28
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended | ||||||||||||
(In thousands, except per share data) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||
Revenue | $ | 404,093 | $ | 398,799 | $ | 385,961 | ||||||
Cost of revenue | 165,671 | 179,360 | 169,382 | |||||||||
Gross margin | 238,422 | 219,439 | 216,579 | |||||||||
Operating expenses: | ||||||||||||
Research and development | 78,617 | 82,449 | 103,357 | |||||||||
Selling, general, and administrative | 82,542 | 91,054 | 90,718 | |||||||||
Amortization of acquired intangible assets | 13,558 | 17,690 | 31,340 | |||||||||
Restructuring charges | 4,664 | 17,349 | 7,196 | |||||||||
Impairment of acquired intangible assets | — | 12,486 | 32,431 | |||||||||
Acquisition related charges | — | 1,531 | 3,781 | |||||||||
Gain on sale of building | — | — | (4,624 | ) | ||||||||
Total operating expenses | 179,381 | 222,559 | 264,199 | |||||||||
Income (loss) from operations | 59,041 | (3,120 | ) | (47,620 | ) | |||||||
Interest expense | (11,731 | ) | (20,600 | ) | (18,807 | ) | ||||||
Other expense, net | (2,245 | ) | (249 | ) | (3,286 | ) | ||||||
Income (loss) before income taxes | 45,065 | (23,969 | ) | (69,713 | ) | |||||||
Income tax expense | 1,572 | 2,353 | 849 | |||||||||
Net income (loss) | $ | 43,493 | $ | (26,322 | ) | $ | (70,562 | ) | ||||
Net income (loss) per share: | ||||||||||||
Basic | $ | 0.33 | $ | (0.21 | ) | $ | (0.58 | ) | ||||
Diluted | $ | 0.32 | $ | (0.21 | ) | $ | (0.58 | ) | ||||
Shares used in per share calculations: | ||||||||||||
Basic | 132,471 | 126,564 | 122,677 | |||||||||
Diluted | 137,274 | 126,564 | 122,677 | |||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements
29
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended | ||||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | |||||||||
Net income (loss) | $ | 43,493 | $ | (26,322 | ) | $ | (70,562 | ) | ||||
Other comprehensive income (loss): | ||||||||||||
Unrealized gain (loss) related to marketable securities, net of tax | 42 | 41 | (73 | ) | ||||||||
Reclassification adjustment for (gains) losses related to marketable securities included in Other expense, net of tax | (53 | ) | (18 | ) | 252 | |||||||
Translation adjustment, net of tax | 341 | (1,271 | ) | 2,620 | ||||||||
Change in actuarial valuation of defined benefit pension | (602 | ) | 369 | (95 | ) | |||||||
Comprehensive income (loss) | $ | 43,221 | $ | (27,201 | ) | $ | (67,858 | ) | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements
30
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value data) | December 28, 2019 | December 29, 2018 | |||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 118,081 | $ | 119,051 | |||
Short-term marketable securities | — | 9,624 | |||||
Accounts receivable, net of allowance for doubtful accounts | 64,917 | 60,890 | |||||
Inventories | 54,980 | 67,096 | |||||
Prepaid expenses and other current assets | 24,452 | 27,762 | |||||
Total current assets | 262,430 | 284,423 | |||||
Property and equipment, net | 39,230 | 34,883 | |||||
Operating lease right-of-use assets | 23,591 | — | |||||
Intangible assets, net | 6,977 | 21,325 | |||||
Goodwill | 267,514 | 267,514 | |||||
Deferred income taxes | 478 | 215 | |||||
Other long-term assets | 11,796 | 15,327 | |||||
Total assets | $ | 612,016 | $ | 623,687 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses (includes restructuring) | $ | 60,255 | $ | 51,763 | |||
Accrued payroll obligations | 13,404 | 9,365 | |||||
Current portion of long-term debt | 21,474 | 8,290 | |||||
Current portion of operating lease liabilities | 4,686 | — | |||||
Total current liabilities | 99,819 | 69,418 | |||||
Long-term debt, net of current portion | 125,072 | 251,357 | |||||
Long-term operating lease liabilities, net of current portion | 21,438 | — | |||||
Other long-term liabilities | 38,028 | 44,455 | |||||
Total liabilities | 284,357 | 365,230 | |||||
Commitments and contingencies (Notes 8 and 13) | — | — | |||||
Stockholders' equity: | |||||||
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding | — | — | |||||
Common stock, $.01 par value, 300,000,000 shares authorized; 133,883,000 shares issued and outstanding as of December 28, 2019 and 129,728,000 shares issued and outstanding as of December 29, 2018 | 1,339 | 1,297 | |||||
Additional paid-in capital | 762,213 | 736,274 | |||||
Accumulated deficit | (433,290 | ) | (476,783 | ) | |||
Accumulated other comprehensive loss | (2,603 | ) | (2,331 | ) | |||
Total stockholders' equity | 327,659 | 258,457 | |||||
Total liabilities and stockholders' equity | $ | 612,016 | $ | 623,687 | |||
The accompanying notes are an integral part of these Consolidated Financial Statements
31
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended | |||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | 43,493 | $ | (26,322 | ) | $ | (70,562 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 33,056 | 39,261 | 57,861 | ||||||||
Impairment of acquired intangible assets | — | 12,486 | 32,431 | ||||||||
Stock-based compensation expense | 18,899 | 13,646 | 12,543 | ||||||||
Reduction in the carrying amount of right-of-use assets | 5,797 | — | — | ||||||||
Loss on re-financing of long-term debt | 2,235 | — | — | ||||||||
Amortization of debt issuance costs and discount | 1,659 | 2,230 | 1,982 | ||||||||
Impairment of operating lease right-of-use asset (recorded in Restructuring charges) | 977 | — | — | ||||||||
Gain on sale of building | — | — | (4,624 | ) | |||||||
Loss on sale of assets and business units | — | — | 1,496 | ||||||||
Other non-cash adjustments | (374 | ) | (79 | ) | 1,707 | ||||||
Changes in assets and liabilities: | |||||||||||
Accounts receivable, net | (4,027 | ) | (3,978 | ) | 44,613 | ||||||
Inventories | 12,116 | 13,177 | (902 | ) | |||||||
Prepaid expenses and other assets | 3,740 | (11,667 | ) | 889 | |||||||
Accounts payable and accrued expenses (includes restructuring) | 9,261 | 13,325 | (23,588 | ) | |||||||
Accrued payroll obligations | 4,039 | (1,051 | ) | 726 | |||||||
Operating lease liabilities, current and long-term portions | (6,896 | ) | — | — | |||||||
Income taxes payable | 162 | 498 | (556 | ) | |||||||
Deferred income and allowances on sales to distributors | — | — | (15,007 | ) | |||||||
Deferred licensing and services revenue | — | (68 | ) | (495 | ) | ||||||
Net cash provided by operating activities | 124,137 | 51,458 | 38,514 | ||||||||
Cash flows from investing activities: | |||||||||||
Proceeds from sales of and maturities of short-term marketable securities | 9,655 | 5,000 | 12,689 | ||||||||
Purchases of marketable securities | — | (9,603 | ) | (7,420 | ) | ||||||
Proceeds from sale of building | — | — | 7,895 | ||||||||
Cash paid for costs of sale of building | — | — | (1,004 | ) | |||||||
Capital expenditures | (15,590 | ) | (8,384 | ) | (12,855 | ) | |||||
Proceeds from sale of assets and business units, net of cash sold | — | — | 967 | ||||||||
Repayment received on short-term loan to cost-method investee | — | — | 2,000 | ||||||||
Short-term loan to cost-method investee | — | — | (2,000 | ) | |||||||
Cash paid for software licenses | (9,601 | ) | (8,123 | ) | (8,532 | ) | |||||
Net cash used in investing activities | $ | (15,536 | ) | $ | (21,110 | ) | $ | (8,260 | ) | ||
The accompanying notes are an integral part of these Consolidated Financial Statements | |||||||||||
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LATTICE SEMICONDUCTOR CORPORATION | |||||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) | |||||||||||
Year Ended | |||||||||||
(In thousands) | December 28, 2019 | December 29, 2018 | December 30, 2017 | ||||||||
Cash flows from financing activities: | |||||||||||
Restricted stock unit tax withholdings | $ | (10,084 | ) | $ | (2,370 | ) | $ | (3,267 | ) | ||
Proceeds from issuance of common stock | 17,166 | 29,288 | 6,085 | ||||||||
Proceeds from issuance of long-term debt | 206,500 | — | — | ||||||||
Original issue discount and debt issuance costs | (2,086 | ) | — | — | |||||||
Repayment of debt | (321,408 | ) | (43,759 | ) | (35,429 | ) | |||||
Net cash used in financing activities | (109,912 | ) | (16,841 | ) | (32,611 | ) | |||||
Effect of exchange rate change on cash | 341 | (1,271 | ) | 2,620 | |||||||
Net (decrease) increase in cash and cash equivalents | (970 | ) | 12,236 | 263 | |||||||
Beginning cash and cash equivalents | 119,051 | 106,815 | 106,552 | ||||||||
Ending cash and cash equivalents | $ | 118,081 | $ | 119,051 | $ | 106,815 | |||||
Supplemental disclosure of cash flow information and non-cash investing and financing activities: | |||||||||||
Interest paid | $ | 10,995 | $ | 18,607 | $ | 20,649 | |||||
Operating lease payments | $ | 8,425 | $ | — | $ | — | |||||
Income taxes paid, net of refunds | $ | 3,393 | $ | 3,054 | $ | 2,387 | |||||
Accrued purchases of property and equipment | $ | 826 | $ | 110 | $ | 588 | |||||
Operating lease right-of-use assets obtained in exchange for lease obligations | $ | 747 | $ | — | $ | — | |||||
Note receivable resulting from sale of assets and business units | $ | — | $ | — | $ | 3,050 | |||||
The accompanying notes are an integral part of these Consolidated Financial Statements
33
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock ($.01 par value) | Additional Paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | |||||||||||||||||||
(In thousands, except par value data) | Shares | Amount | Total | |||||||||||||||||||
Balances, December 31, 2016 | 121,645 | $ | 1,216 | $ | 680,315 | $ | (406,945 | ) | $ | (4,156 | ) | $ | 270,430 | |||||||||
Net loss for 2017 | — | — | — | (70,562 | ) | — | (70,562 | ) | ||||||||||||||
Unrealized loss related to marketable securities, net of tax | — | — | — | — | (73 | ) | (73 | ) | ||||||||||||||
Recognized gain on redemption of marketable securities, previously unrealized | — | — | ||||||||||||||||||||