ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read along with the unaudited consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 10-K.
Overview
Lattice Semiconductor Corporation and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develop semiconductor technologies that we monetize through products, solutions, design services, and licenses.
Lattice is the low power programmable leader. We solve customer problems across the network, from the Edge to the Cloud, in the growing communications, computing, industrial, automotive, and consumer markets. Our technology, long-standing relationships, and commitment to world-class support enables our customers to create a smart, secure, and connected world.
Lattice has focused its strategy on programmable logic and is building differentiated products based on low power, small size, and ease of use. Our R&D team is optimizing to deliver products at a faster cadence, particularly system solutions for high-growth applications such as Edge Artificial Intelligence ("Edge AI"), 5G infrastructure, platform security, and factory automation. Our Sales team is using our position in top
Original Equipment Manufacturers
("OEMs") to drive multi-generation design wins and leveraging distribution to grow our broad customer base.
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.
Other than our updated policies related to accounting for leases (more fully described in "
Note 7 - Leases
" of this report), management believes that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2018 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments affecting the amounts reported in our consolidated condensed financial statements and the accompanying notes. The actual results that we experience may differ materially from our estimates.
Results of Operations
Key elements of our
Consolidated Statements of Operations
, including as a percentage of revenue, are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Revenue
|
$
|
102,296
|
|
|
100.0
|
%
|
|
$
|
102,715
|
|
|
100.0
|
%
|
|
$
|
200,387
|
|
|
100.0
|
%
|
|
$
|
201,338
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
60,038
|
|
|
58.7
|
|
|
50,248
|
|
|
48.9
|
|
|
117,690
|
|
|
58.7
|
|
|
106,769
|
|
|
53.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
19,377
|
|
|
18.9
|
|
|
21,081
|
|
|
20.5
|
|
|
39,042
|
|
|
19.5
|
|
|
44,022
|
|
|
21.9
|
|
Selling, general and, administrative
|
19,759
|
|
|
19.3
|
|
|
21,068
|
|
|
20.5
|
|
|
40,540
|
|
|
20.2
|
|
|
48,111
|
|
|
23.9
|
|
Amortization of acquired intangible assets
|
3,390
|
|
|
3.3
|
|
|
4,523
|
|
|
4.4
|
|
|
6,779
|
|
|
3.4
|
|
|
10,159
|
|
|
5.0
|
|
Restructuring charges
|
3,126
|
|
|
3.1
|
|
|
4,376
|
|
|
4.3
|
|
|
4,467
|
|
|
2.2
|
|
|
5,405
|
|
|
2.7
|
|
Acquisition related charges
|
—
|
|
|
—
|
|
|
864
|
|
|
0.8
|
|
|
—
|
|
|
—
|
|
|
1,531
|
|
|
0.8
|
|
Impairment of intangible assets
|
—
|
|
|
—
|
|
|
11,900
|
|
|
11.6
|
|
|
—
|
|
|
—
|
|
|
11,900
|
|
|
5.9
|
|
Income (loss) from operations
|
$
|
14,386
|
|
|
14.1
|
%
|
|
$
|
(13,564
|
)
|
|
(13.2
|
)%
|
|
$
|
26,862
|
|
|
13.4
|
%
|
|
$
|
(14,359
|
)
|
|
(7.1
|
)%
|
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.
|
Our Licensing and Services end market includes 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 Licensing 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 its higher gross margin.
The end market data below is derived from data provided to us by our distributors and end customers. With a diverse base of customers who may manufacture end products spanning multiple end markets, the assignment of revenue to a specific end market requires the use of estimates and judgment. Therefore, actual results may differ from those reported. We 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 proportionally to the end markets if we cannot identify a specific end market.
The following are examples of end market applications for the periods presented:
|
|
|
|
|
Communications and Computing
|
Industrial and Automotive
|
Consumer
|
Licensing and Services
|
Wireless
|
Security and Surveillance
|
Cameras
|
IP Royalties
|
Wireline
|
Machine Vision
|
Displays
|
Adopter Fees
|
Data Backhaul
|
Industrial Automation
|
Wearables
|
IP Licenses
|
Server Computing
|
Robotics
|
Televisions
|
Patent Sales
|
Client Computing
|
Automotive
|
Home Theater
|
|
Data Center Computing
|
Drones
|
|
|
Data Storage
|
|
|
|
The composition of our revenue by end market is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Communications and Computing
|
$
|
39,876
|
|
|
39
|
%
|
|
$
|
29,514
|
|
|
29
|
%
|
|
$
|
75,429
|
|
|
38
|
%
|
|
$
|
57,653
|
|
|
29
|
%
|
Industrial and Automotive
|
38,861
|
|
|
38
|
|
|
44,480
|
|
|
43
|
|
|
75,174
|
|
|
38
|
|
|
84,744
|
|
|
42
|
|
Consumer
|
19,359
|
|
|
19
|
|
|
24,300
|
|
|
24
|
|
|
39,105
|
|
|
19
|
|
|
51,006
|
|
|
25
|
|
Licensing and Services
|
4,200
|
|
|
4
|
|
|
4,421
|
|
|
4
|
|
|
10,679
|
|
|
5
|
|
|
7,935
|
|
|
4
|
|
Total revenue
|
$
|
102,296
|
|
|
100
|
%
|
|
$
|
102,715
|
|
|
100
|
%
|
|
$
|
200,387
|
|
|
100
|
%
|
|
$
|
201,338
|
|
|
100
|
%
|
Revenue from the Communications and Computing end market increased by
35%
for the
second
quarter of fiscal
2019
compared to the
second
quarter of fiscal
2018
and increased by
31%
for the first six months of fiscal 2019 compared to the first six months of fiscal 2018 primarily due to demand increases for server and client computing products, as well as for products used in 5G wireless infrastructure.
Revenue from the Industrial and Automotive end market decreased by
13%
for the
second
quarter of fiscal
2019
compared to the
second
quarter of fiscal
2018
and decreased by
11%
for the first six months of fiscal 2019 compared to the first six months of fiscal 2018 due to broad market decreases in the Industrial end market.
Revenue from the Consumer end market decreased by
20%
for the
second
quarter of fiscal
2019
compared to the
second
quarter of fiscal
2018
and decreased by
23%
for the first six months of fiscal 2019 compared to the first six months of fiscal 2018 primarily due to decreased demand for mobile phone related products.
Revenue from the Licensing and Services end market is subject to variability between periods in the amount of royalties that we are entitled to receive. Licensing and services revenue decreased by
5%
for the
second
quarter of fiscal
2019
compared to the
second
quarter of fiscal
2018
and increased by
35%
for the first six months of fiscal 2019 compared to the first six months of fiscal 2018 due primarily to variability in HDMI royalty revenue.
We share HDMI royalties with the other HDMI Founders based on an allocation formula, which is reviewed periodically, generally every three years. However, a new agreement covering the period beginning January 1, 2018 is yet to be signed. While a new royalty sharing agreement is being negotiated with the other Founders of the HDMI consortium for fiscal years 2019 and 2018, we are estimating our share of royalty revenues under an anticipated 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Asia
|
$
|
76,845
|
|
|
75
|
%
|
|
$
|
77,899
|
|
|
76
|
%
|
|
$
|
145,856
|
|
|
73
|
%
|
|
$
|
149,820
|
|
|
74
|
%
|
Europe
|
12,585
|
|
|
12
|
|
|
12,162
|
|
|
12
|
|
|
24,795
|
|
|
12
|
|
|
24,304
|
|
|
12
|
|
Americas
|
12,866
|
|
|
13
|
|
|
12,654
|
|
|
12
|
|
|
29,736
|
|
|
15
|
|
|
27,214
|
|
|
14
|
|
Total revenue
|
$
|
102,296
|
|
|
100
|
%
|
|
$
|
102,715
|
|
|
100
|
%
|
|
$
|
200,387
|
|
|
100
|
%
|
|
$
|
201,338
|
|
|
100
|
%
|
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.
Revenue from Distributors
Distributors have historically accounted for a significant portion of our total revenue. Revenue attributable to our primary distributors is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Revenue
|
|
% of Total Revenue
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Arrow Electronics Inc.
|
29
|
%
|
|
35
|
%
|
|
26
|
%
|
|
33
|
%
|
Weikeng Group
|
30
|
|
|
25
|
|
|
29
|
|
|
26
|
|
All others
|
26
|
|
|
26
|
|
|
27
|
|
|
28
|
|
All distributors
|
85
|
%
|
|
86
|
%
|
|
82
|
%
|
|
87
|
%
|
Revenue attributable to distributors was essentially flat for the
second
quarter of fiscal 2019 compared to the second quarter of fiscal
2018
, while revenue attributable to distributors decreased in the first six months of fiscal 2019 compared to the first six months of fiscal 2018 as the increased revenue recognized in fiscal 2018 on inventory held by distributors from the adoption of ASC 606,
Revenue from Contracts with Customers,
did not recur in fiscal
2019
.
Gross Margin
The composition of our Gross margin, including as a percentage of revenue, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Gross margin
|
$
|
60,038
|
|
|
$
|
50,248
|
|
|
$
|
117,690
|
|
|
$
|
106,769
|
|
Percentage of net revenue
|
58.7
|
%
|
|
48.9
|
%
|
|
58.7
|
%
|
|
53.0
|
%
|
Product gross margin %
|
56.9
|
%
|
|
46.9
|
%
|
|
56.4
|
%
|
|
51.2
|
%
|
Licensing and services gross margin %
|
100.0
|
%
|
|
94.1
|
%
|
|
100.0
|
%
|
|
96.7
|
%
|
For the
second
quarter and first six months of fiscal
2019
compared to the
second
quarter and first six months of fiscal
2018
, Gross margin as a percentage of net revenue increased by 980 and 570 basis points, respectively.
A majority of this increase for both the quarterly and six-month periods resulted from non-recurrence in the current year of the $8.3 million in specific inventory reserves taken in the second quarter of fiscal 2018 on products eliminated as a result of the discontinuation of our millimeter wave business. Gross margin also increased due to lower reserves in the current year periods resulting from lower inventory levels. Product gross margin improved as a result of cost reductions initiated in fiscal 2018 and realized in the first six months of fiscal 2019, and from pricing optimization programs, partially offset by less favorable product mix.
Additionally, Gross margin was favorably impacted by the relative mix between product revenue and licensing and services revenue. Licensing and services accounted for over 5% of total revenue in the first half of 2019 compared to less than 4% in the first half of 2018. Because of its higher margin, the licensing and services portion of our overall revenue can have a disproportionate impact on Gross margin and profitability.
We anticipate that Gross margin will improve as we drive multiple expansion strategies including pricing optimization, product cost improvements, and mix shift.
Operating Expenses
Research and Development Expense
The composition of our
Research and development
expense, including as a percentage of revenue, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
Research and development
|
$
|
19,377
|
|
|
$
|
21,081
|
|
|
(8)
|
|
$
|
39,042
|
|
|
$
|
44,022
|
|
|
(11)
|
Percentage of revenue
|
18.9
|
%
|
|
20.5
|
%
|
|
|
|
19.5
|
%
|
|
21.9
|
%
|
|
|
Research and development
expense includes costs for compensation and benefits, stock compensation, engineering wafers, depreciation, licenses, and outside engineering services. These expenditures are for the design of new products, IP cores, processes, packaging, and software to support new products.
We incur costs for the fabrication of masks used by our foundry partners to manufacture our products. Beginning the first quarter of fiscal 2019, we started to capitalize mask costs that we expect will be utilized in production manufacturing as our product development process has become more predictable and thus supports capitalization of the mask. The capitalized mask costs begin depreciating to Cost of product revenue once the products go into production. Depreciation is straight-lined over a three-year period, which is the expected useful life of the mask.
The decrease in
Research and development
expense for the
second
quarter and first six months of fiscal
2019
compared to the
second
quarter and first six months of 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, including lower stock compensation expense, and from reductions in both depreciation and rent expense.
Research and development
expense also decreased for the comparative six-month periods as a result of our capitalization of mask costs in the current year.
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
. We anticipate that these expenses will be relatively flat as a percentage of revenue, but will increase in absolute dollars as revenue rises. Additionally, we expect to continue improving our
Research and development
expense efficiency through continued portfolio optimization and 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
Selling, general, and administrative
|
$
|
19,759
|
|
|
$
|
21,068
|
|
|
(6)
|
|
$
|
40,540
|
|
|
$
|
48,111
|
|
|
(16)
|
Percentage of revenue
|
19.3
|
%
|
|
20.5
|
%
|
|
|
|
20.2
|
%
|
|
23.9
|
%
|
|
|
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 the
second
quarter of fiscal
2019
compared to the
second
quarter of fiscal
2018
is driven by the non-recurrence of one-time charges for sales events, as well as additional savings in the current year period resulting from previous restructuring actions. The decrease in
Selling, general, and administrative
expense for the first six months of fiscal
2019
compared to the first six months of fiscal
2018
is due mainly to the non-recurrence of certain one-time costs from our CEO retirement and transition in the prior year, including accelerated stock compensation, severance expense, and CEO search fees. Additional savings in the current year period resulted from previous restructuring actions, and from lower commissions and legal expenses.
Over time
,
we seek to reduce our
Selling, general, and administrative
expenses as a percentage of revenue through site consolidation, IT and infrastructure efficiency gains, greater leverage from low cost geographies, and operational leverage as revenue grows.
Amortization of Acquired Intangible Assets
The composition of our
Amortization of acquired intangible assets
, including as a percentage of revenue, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
Amortization of acquired intangible assets
|
$
|
3,390
|
|
|
$
|
4,523
|
|
|
(25)
|
|
$
|
6,779
|
|
|
$
|
10,159
|
|
|
(33)
|
Percentage of revenue
|
3.3
|
%
|
|
4.4
|
%
|
|
|
|
3.4
|
%
|
|
5.0
|
%
|
|
|
The decrease in
Amortization of acquired intangible assets
for the
second
quarter and first six months of fiscal
2019
compared to the
second
quarter and first six months of fiscal
2018
is 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. We expect our quarterly
Amortization of acquired intangible assets
to remain at approximately the current amount through the first quarter of fiscal 2020, when the amortization period for most intangibles will end, reducing the quarterly expense by approximately 80%.
Restructuring Charges
The composition of our
Restructuring charges
, including as a percentage of revenue, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
Restructuring charges
|
$
|
3,126
|
|
|
$
|
4,376
|
|
|
(29)
|
|
$
|
4,467
|
|
|
$
|
5,405
|
|
|
(17)
|
Percentage of revenue
|
3.1
|
%
|
|
4.3
|
%
|
|
|
|
2.2
|
%
|
|
2.7
|
%
|
|
|
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 6 - Restructuring
" of this report.
The decrease in restructuring expense in the
second
quarter and first six months of fiscal
2019
compared to the
second
quarter and first six months of 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 the cease use of leased facilities and from termination fees on the cancellation of certain contracts.
Acquisition Related Charges
The composition of our
Acquisition related charges
, including as a percentage of revenue, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
Acquisition related charges
|
$
|
—
|
|
|
$
|
864
|
|
|
(100)
|
|
$
|
—
|
|
|
$
|
1,531
|
|
|
(100)
|
Percentage of revenue
|
—
|
%
|
|
0.8
|
%
|
|
|
|
—
|
%
|
|
0.8
|
%
|
|
|
Acquisition related charges
include legal and professional fees directly related to acquisitions.
For the
second
quarter and first six months of fiscal 2018,
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 charges directly related to this transaction. We do not expect any future costs related to this matter.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
Impairment of acquired intangible assets
|
$
|
—
|
|
|
$
|
11,900
|
|
|
(100)
|
|
$
|
—
|
|
|
$
|
11,900
|
|
|
(100)
|
Percentage of revenue
|
—
|
%
|
|
11.6
|
%
|
|
|
|
—
|
%
|
|
5.9
|
%
|
|
|
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. We do not believe that any future impairments of acquired intangible assets will be material.
Interest expense
Interest expense
, including as a percentage of revenue, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
Interest expense
|
$
|
(3,538
|
)
|
|
$
|
(4,968
|
)
|
|
(29)
|
|
$
|
(8,525
|
)
|
|
$
|
(10,082
|
)
|
|
(15)
|
Percentage of revenue
|
(3.5
|
)%
|
|
(4.8
|
)%
|
|
|
|
(4.3
|
)%
|
|
(5.0
|
)%
|
|
|
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 the
second
quarter and first six months of fiscal
2019
compared to the
second
quarter and first six months of fiscal
2018
was largely driven by 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, coupled with the significant reduction in the effective interest rate on our long-term debt under the terms of the new Credit Agreement.
Other (expense) income, net
The composition of our
Other (expense) income, net
, including as a percentage of revenue, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
Other (expense) income, net
|
$
|
(2,109
|
)
|
|
$
|
(348
|
)
|
|
506
|
|
$
|
(1,956
|
)
|
|
$
|
206
|
|
|
(1,050)
|
Percentage of revenue
|
(2.1
|
)%
|
|
(0.3
|
)%
|
|
|
|
(1.0
|
)%
|
|
0.1
|
%
|
|
|
For the
second
quarter and first six months of fiscal
2019
compared to the
second
quarter and first six months of fiscal
2018
the increased expense in
Other (expense) income, net
is driven primarily by the $2.2 million loss on re-financing charge taken to write off the remaining unamortized balance of debt costs and original issue discount related to the long-term debt re-financed during the period.
Income Taxes
The composition of our
Income tax expense
is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
(In thousands)
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
|
June 29,
2019
|
|
June 30,
2018
|
|
% change
|
Income tax expense
|
$
|
180
|
|
|
$
|
1,343
|
|
|
(87)
|
|
$
|
414
|
|
|
$
|
1,940
|
|
|
(79)
|
Our Income tax expense for the
second
quarters and first six months of fiscal
2019
and fiscal 2018 is composed primarily of foreign income and withholding taxes, partially offset by benefits resulting from the release of uncertain tax positions due to statute of limitation expirations that occurred in the respective periods. The decrease in expense in the second quarter and first six months of fiscal 2019 as compared to the second quarter and first six months of fiscal 2018 is primarily due to decreased foreign withholding taxes related to HDMI royalty distributions received in the current year periods.
We are not currently paying U.S. federal income taxes and do not expect to pay such taxes until we fully utilize our tax net operating loss and credit carryforwards. We expect to pay a nominal amount of state income tax. We are paying foreign income taxes, which are primarily related to withholding taxes on income from foreign royalties, foreign sales, and the cost of operating offshore research and development, marketing, and sales subsidiaries. It is reasonably possible that during the next twelve months, we will establish a sustained level of profitability in the U.S. As a result, we may reverse a significant portion of the valuation allowance recorded against our U.S. deferred tax assets. The reversal would result in an income tax benefit for the quarterly and annual fiscal period in which we release the valuation allowance. We accrue interest and penalties related to uncertain tax positions in income tax expense on our Consolidated Statements of Operations. The inherent uncertainties related to the geographical distribution and relative level of profitability among various high and low tax jurisdictions make it difficult to estimate the impact of the global tax structure on our future effective tax rate. Bermuda enacted the Economic Substance Act of 2018, effective January 2019, with a six-month transition period. We are currently analyzing this legislation in concert with the 2017 US tax reform in order to align our global tax structure more efficiently in the future.
The Tax Cuts and Jobs Act, enacted December 22, 2017, contains provisions that affect Lattice. The limitation on net interest expense may limit current deductibility of some of the interest on our debt, although this deduction may be carried forward for utilization in future years. Global Intangible Low-Taxed Income ("GILTI") results in additional U.S. taxable income due to non-U.S. sourced income. To the extent we are required to recognize additional taxable income under these provisions, we have approximately $365 million in net operating loss carry forwards as of December 29, 2018 available for offset. Adoption of the territorial system concept will facilitate our ability to repatriate future foreign earnings without incurring additional U.S. tax. Base Erosion Anti-Abuse Tax ("BEAT") effectively requires U.S. companies with related non-U.S. persons to pay a minimum amount of U.S. tax and does not currently apply to us as we are below the $500 million revenue threshold.
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
June 29, 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, completing acquisitions, securing additional wafer supply, or increasing our working capital, 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 a new Credit Agreement that is more fully discussed under the "Credit Arrangements" heading, below.
Cash, cash equivalents, and short-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 29, 2019
|
|
December 29, 2018
|
|
$ Change
|
Cash and cash equivalents
|
$
|
122,636
|
|
|
$
|
119,051
|
|
|
$
|
3,585
|
|
Short-term marketable securities
|
—
|
|
|
9,624
|
|
|
(9,624
|
)
|
Total Cash and cash equivalents and Short-term marketable securities
|
$
|
122,636
|
|
|
$
|
128,675
|
|
|
$
|
(6,039
|
)
|
As of
June 29, 2019
, we had total Cash, cash equivalents, and short-term marketable securities of
$122.6 million
, of which approximately
$86.7 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
June 29, 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
$6.0 million
between
December 29, 2018
and
June 29, 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 for the first six months of fiscal 2019 was $66.5 million, an increase of $56.9 million from the $9.6 million of cash provided by operating activities for the first six months of fiscal 2018. This increase was driven by both improved operating performance, which contributed $31.1 million of the increase, and by changes in working capital, which contributed $25.8 million of the increase, primarily due to increased cash receipts associated with the timing of payments from customers. We are using this increased cash provided by operating activities to invest in our operations and to reduce our long-term debt.
Investing activities —
Cash used by investing activities results from transactions related to short-term marketable securities, capital expenditures and payments for software licenses. The $2.4 million of cash used by investing activities in the first six months of fiscal 2019 was $12.8 million less than the $15.2 million used by investing activities in the first six months of fiscal 2018 primarily due to $16.8 million less cash used by short-term marketable securities offset by $4.0 million more cash used for capital expenditures and software licenses. In the first six months of fiscal 2018, we made $7.1 million in net purchases of short-term marketable securities, whereas we liquidated these investments in 2019 for $9.7 million. The total
$12.1 million
of cash used in the first six months of fiscal 2019 for capital expenditures and payments for software licenses was $4.0 million greater than the $8.1 million used in the first six months of 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 the first six months of fiscal 2019, we made principal payments totaling $58.6 million on our previous loan. In May 2019, we entered into a new Credit Agreement and received $206.5 million, which we used to pay off the $204.4 million outstanding balance on our previous Credit Agreement. In connection with the new Credit Agreement, we paid $2.1 million in debt issuance costs. Following the closing of our new Credit Agreement, we made a total of $15.0 million in principal payments on our long-term debt, for a total of $73.6 million in principal payments on our long-term debt in the first six months of fiscal 2019. With the increase in our stock price since the beginning of fiscal 2019, activity in our employee stock compensation plans has increased. Net cash flows of $13.0 million were provided in the first six months of fiscal 2019 in relation to employee activity in our stock compensation plans, which is an increase of approximately $8.0 million from the $5.0 million provided in the first six months of fiscal 2018.
Accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 29, 2019
|
|
December 29, 2018
|
|
Change
|
Accounts receivable, net
|
$
|
37,893
|
|
|
$
|
60,890
|
|
|
$
|
(22,997
|
)
|
Days sales outstanding - Overall
|
34
|
|
|
58
|
|
|
(24
|
)
|
Accounts receivable, net
as of
June 29, 2019
decreased by approximately
$23.0 million
, or 38%, compared to
December 29, 2018
. This decrease resulted primarily from improved timing of collections from major distributors, which also decreased the overall Days sales outstanding to
34
days at
June 29, 2019
from
58
days at
December 29, 2018
.
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 29, 2019
|
|
December 29, 2018
|
|
Change
|
Inventories
|
$
|
64,964
|
|
|
$
|
67,096
|
|
|
$
|
(2,132
|
)
|
Days of inventory on hand
|
140
|
|
|
147
|
|
|
(7
|
)
|
Inventories
as of
June 29, 2019
decreased
$2.1 million
, or approximately 3%, compared to
December 29, 2018
primarily due to a decline related to 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
140
days at
June 29, 2019
from
147
days at
December 29, 2018
. This decrease resulted from an increase in the cost of sales between the periods and a reduction of inventory levels.
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 5 - Long-Term Debt
" in the accompanying Notes to Consolidated Financial Statements.
As of
June 29, 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
There have been no material changes to our contractual cash obligations outside of the ordinary course of business in the first
six
months of fiscal
2019
, as summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended
December 29, 2018
.
Off-Balance Sheet Arrangements
As of
June 29, 2019
, we did not have any off-balance sheet arrangements of the type described by Item 303(a)(4) of SEC Regulation S-K.