UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
LATTICELOGOCOLORPMSA49.JPG
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its charter)
State of Delaware
 
93-0835214
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5555 NE Moore Court, Hillsboro, OR
 
97124
(Address of principal executive offices)
 
(Zip Code)
(503) 268-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $.01 par value
LSCC
NASDAQ Global Select Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X] No [  ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes [X] No  [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [X]
 
 
Non-accelerated filer [ ]
Smaller reporting company [ ]
 
 
 
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  [  ] No [X]
Number of shares of common stock outstanding as of October 29, 2019                     133,557,952
 
 
 
 
 



LATTICE SEMICONDUCTOR CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

 
 
 
 
PART I.
FINANCIAL INFORMATION
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 
 
 


2


Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve estimates, assumptions, risks, and uncertainties. Any statements about our expectations, beliefs, plans, objectives, assumptions, or future events or performance are not historical facts and may be forward-looking. We use words or phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “plan,” "possible," “predict,” “project,” “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 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 anticipated sharing of 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 include those more fully described herein or that are otherwise described from time to time in our filings with the Securities and Exchange Commission, including, but not limited to, the items discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018 and any additional or updated risk factors discussed in any subsequent Quarterly Report on Form 10-Q filed since that date.

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

3


PART I. FINANCIAL INFORMATION


ITEM 1.    FINANCIAL STATEMENTS

LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)


Three Months Ended
 
Nine Months Ended
 (In thousands, except per share data)
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Revenue:
 
 
 
 
 
 
 
Product
$
97,477

 
$
97,932

 
$
287,185

 
$
291,335

Licensing and services
5,992

 
3,552

 
16,671

 
11,487

Total revenue
103,469

 
101,484

 
303,856

 
302,822

Cost of revenue:
 
 
 
 
 
 
 
Cost of product revenue
42,030

 
43,120

 
124,727

 
137,430

Cost of licensing and services revenue

 

 

 
259

Total cost of revenue
42,030

 
43,120

 
124,727

 
137,689

Gross margin
61,439

 
58,364

 
179,129

 
165,133

Operating expenses:
 
 
 
 
 
 
 
Research and development
20,032

 
19,131

 
59,074

 
63,153

Selling, general, and administrative
21,078

 
21,775

 
61,618

 
69,886

Amortization of acquired intangible assets
3,389

 
3,823

 
10,168

 
13,982

Restructuring charges
252

 
90

 
4,719

 
5,495

Impairment of acquired intangible assets

 
586

 

 
12,486

Acquisition related charges

 

 

 
1,531

Total operating expenses
44,751

 
45,405

 
135,579

 
166,533

Income (loss) from operations
16,688

 
12,959

 
43,550

 
(1,400
)
Interest expense
(2,022
)
 
(5,500
)
 
(10,547
)
 
(15,582
)
Other expense, net
(61
)
 
(452
)
 
(2,017
)
 
(246
)
Income (loss) before income taxes
14,605

 
7,007

 
30,986

 
(17,228
)
Income tax expense
1,066

 
33

 
1,480

 
1,973

Net income (loss)
$
13,539

 
$
6,974

 
$
29,506

 
$
(19,201
)
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.10

 
$
0.05

 
$
0.22

 
$
(0.15
)
Diluted
$
0.10

 
$
0.05

 
$
0.21

 
$
(0.15
)
 
 
 
 
 
 
 
 
Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
132,997

 
127,816

 
132,065

 
125,578

Diluted
138,894

 
129,474

 
137,679

 
125,578



See Accompanying Notes to Unaudited Consolidated Financial Statements.



4


LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)


 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Net income (loss)
$
13,539

 
$
6,974

 
$
29,506

 
$
(19,201
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain related to marketable securities, net of tax

 
14

 
42

 
16

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

 
(17
)
 
(53
)
 
(18
)
Translation adjustment, net of tax
(93
)
 
(584
)
 
(7
)
 
(1,124
)
Comprehensive income (loss)
$
13,446

 
$
6,387

 
$
29,488

 
$
(20,327
)


See Accompanying Notes to Unaudited Consolidated Financial Statements.



5


LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS

 
September 28,
2019
 
December 29,
2018
(In thousands, except share and par value data)
(unaudited)
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
97,413

 
$
119,051

Short-term marketable securities

 
9,624

Accounts receivable, net of allowance for doubtful accounts
47,433

 
60,890

Inventories
59,672

 
67,096

Prepaid expenses and other current assets
34,691

 
27,762

Total current assets
239,209

 
284,423

Property and equipment, less accumulated depreciation of
$138,343 at September 28, 2019 and $141,367 at December 29, 2018
40,163

 
34,883

Operating lease right-of-use assets
24,563

 

Intangible assets, net
10,381

 
21,325

Goodwill
267,514

 
267,514

Deferred income taxes
226

 
215

Other long-term assets
11,349

 
15,327

Total assets
$
593,405

 
$
623,687

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses (includes restructuring)
$
48,181

 
$
51,763

Accrued payroll obligations
11,428

 
9,365

Current portion of long-term debt
17,196

 
8,290

Current portion of operating lease liabilities
4,623

 

Total current liabilities
81,428

 
69,418

Long-term debt, net of current portion
139,230

 
251,357

Long-term operating lease liabilities, net of current portion
22,484

 

Other long-term liabilities
40,618

 
44,455

Total liabilities
283,760

 
365,230

Contingencies (Note 11)

 

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

 

Common stock, $.01 par value, 300,000,000 shares authorized;
133,502,000 shares issued and outstanding as of September 28, 2019 and
129,728,000 shares issued and outstanding as of December 29, 2018
1,335

 
1,297

Additional paid-in capital
757,936

 
736,274

Accumulated deficit
(447,277
)
 
(476,783
)
Accumulated other comprehensive loss
(2,349
)
 
(2,331
)
Total stockholders' equity
309,645

 
258,457

Total liabilities and stockholders' equity
$
593,405

 
$
623,687



See Accompanying Notes to Unaudited Consolidated Financial Statements.

6


LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Nine Months Ended
(In thousands)
September 28, 2019
 
September 29, 2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
29,506

 
$
(19,201
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
24,682

 
30,740

Impairment of acquired intangible assets

 
12,486

Stock-based compensation expense
13,335

 
9,908

Amortization of operating lease right-of-use assets
4,372

 

Loss on re-financing of long-term debt
2,235

 

Amortization of debt issuance costs and discount
1,539

 
1,847

Impairment of operating lease right-of-use asset (recorded in Restructuring charges)
977

 

Other non-cash adjustments
(63
)
 
8

Changes in assets and liabilities:
 
 
 
Accounts receivable, net
13,457

 
(18,736
)
Inventories
7,424

 
13,892

Prepaid expenses and other assets
(8,741
)
 
(11,729
)
Accounts payable and accrued expenses (includes restructuring)
(196
)
 
1,661

Accrued payroll obligations
2,063

 
(557
)
Operating lease liabilities, current and long-term portions
(5,571
)
 

Income taxes payable
(202
)
 
309

Deferred licensing and services revenue

 
(68
)
Net cash provided by operating activities
84,817

 
20,560

Cash flows from investing activities:
 
 
 
Proceeds from sales of and maturities of short-term marketable securities
9,655

 
5,000

Purchases of marketable securities

 
(9,603
)
Capital expenditures
(11,729
)
 
(6,178
)
Cash paid for software licenses
(5,745
)
 
(6,144
)
Net cash used in investing activities
(7,819
)
 
(16,925
)
Cash flows from financing activities:
 
 
 
Restricted stock unit tax withholdings
(7,813
)
 
(1,600
)
Proceeds from issuance of common stock
16,178

 
28,051

Proceeds from issuance of long-term debt
206,500

 

Original issue discount and debt issuance costs
(2,086
)
 

Repayment of debt
(311,408
)
 
(27,884
)
Net cash used in financing activities
(98,629
)
 
(1,433
)
Effect of exchange rate change on cash
(7
)
 
(1,124
)
Net (decrease) increase in cash and cash equivalents
(21,638
)
 
1,078

Beginning cash and cash equivalents
119,051

 
106,815

Ending cash and cash equivalents
$
97,413

 
$
107,893

 
 
 
 
Supplemental disclosure of cash flow information and non-cash investing and financing activities:
Interest paid
$
9,932

 
$
13,976

Operating lease payments
$
6,540

 
$

Income taxes paid, net of refunds
$
1,922

 
$
2,716

Accrued purchases of plant and equipment
$
1,841

 
$
332

Operating lease right-of-use assets obtained in exchange for lease obligations
$
404

 
$

Change in unrealized gain related to marketable securities, net of tax, included in Accumulated other comprehensive loss
$
42

 
$
16

See Accompanying Notes to Unaudited Consolidated Financial Statements.

7


LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)


The following summarizes the changes in total equity for the nine month period ended September 28, 2019:
 
 
 
 
 
 
 
 
 
 
 
Common Stock
($.01 par value)
 
Additional Paid-in
 capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Total
(In thousands, except par value data)
Shares
 
Amount
 
 
 
 
Balances, December 29, 2018
129,728

 
$
1,297

 
$
736,274

 
$
(476,783
)
 
$
(2,331
)
 
$
258,457

Net income for the nine months ended September 28, 2019

 

 

 
29,506

 

 
29,506

Unrealized gain related to marketable securities, net of tax

 

 

 

 
42

 
42

Recognized gain on redemption of marketable securities, previously unrealized

 

 

 

 
(53
)
 
(53
)
Translation adjustments, net of tax

 

 

 

 
(7
)
 
(7
)
Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes
3,774

 
38

 
8,327

 

 

 
8,365

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

 

 
13,335

 

 

 
13,335

Balances, September 28, 2019
133,502

 
$
1,335

 
$
757,936

 
$
(447,277
)
 
$
(2,349
)
 
$
309,645



The following summarizes the changes in total equity for the nine month period ended September 29, 2018:
 
 
 
 
 
 
 
 
 
 
 
Common Stock
($.01 par value)
 
Additional Paid-in
 capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Total
(In thousands, except par value data)
Shares
 
Amount
 
 
 
 
Balances, December 30, 2017
123,895

 
$
1,239

 
$
695,768

 
$
(477,862
)
 
$
(1,452
)
 
$
217,693

Net income for the nine months ended September 29, 2018

 

 

 
(19,201
)
 

 
(19,201
)
Unrealized loss related to marketable securities, net of tax

 

 

 

 
16

 
16

Recognized gain on redemption of marketable securities, previously unrealized

 

 

 

 
(18
)
 
(18
)
Translation adjustments, net of tax

 

 

 

 
(1,124
)
 
(1,124
)
Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes
5,380

 
54

 
26,397

 

 

 
26,451

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

 

 
9,908

 

 

 
9,908

Accounting method transition adjustment (1)

 

 

 
27,401

 

 
27,401

Balances, September 29, 2018
129,275

 
$
1,293

 
$
732,073

 
$
(469,662
)
 
$
(2,578
)
 
$
261,126

(1)
As of the beginning of fiscal 2018, we adopted ASC 606, "Revenue from Contracts With Customers," using the modified retrospective transition method. As a result of this adoption, we recorded a cumulative-effect adjustment to Accumulated Deficit, as shown in the table above.


See Accompanying Notes to Unaudited Consolidated Financial Statements.

8


LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
(unaudited)


The following summarizes the changes in total equity for the three month period ended September 28, 2019:
 
 
 
 
 
 
 
 
 
 
 
Common Stock
($.01 par value)
 
Additional Paid-in
 capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Total
(In thousands, except par value data)
Shares
 
Amount
 
 
 
 
Balances, June 29, 2019
132,536

 
$
1,325

 
$
756,924

 
$
(460,816
)
 
$
(2,256
)
 
$
295,177

Net income for the three months ended September 28, 2019

 

 

 
13,539

 

 
13,539

Translation adjustments, net of tax

 

 

 

 
(93
)
 
(93
)
Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes
966

 
10

 
(4,668
)
 

 

 
(4,658
)
Stock-based compensation related to stock options, ESPP and RSUs

 

 
5,680

 

 

 
5,680

Balances, September 28, 2019
133,502

 
$
1,335

 
$
757,936

 
$
(447,277
)
 
$
(2,349
)
 
$
309,645



The following summarizes the changes in total equity for the three month period ended September 29, 2018:
 
 
 
 
 
 
 
 
 
 
 
Common Stock
($.01 par value)
 
Additional Paid-in
 capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Total
(In thousands, except par value data)
Shares
 
Amount
 
 
 
 
Balances, June 30, 2018
125,613

 
$
1,256

 
$
707,991

 
$
(476,636
)
 
$
(1,991
)
 
$
230,620

Net income for the three months ended September 29, 2018

 

 

 
6,974

 

 
6,974

Unrealized loss related to marketable securities, net of tax

 

 

 

 
14

 
14

Recognized gain on redemption of marketable securities, previously unrealized

 

 

 

 
(17
)
 
(17
)
Translation adjustments, net of tax

 

 

 

 
(584
)
 
(584
)
Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of shares withheld for employee taxes
3,662

 
37

 
21,374

 

 

 
21,411

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

 

 
2,708

 

 

 
2,708

Balances, September 29, 2018
129,275

 
$
1,293

 
$
732,073

 
$
(469,662
)
 
$
(2,578
)
 
$
261,126




See Accompanying Notes to Unaudited Consolidated Financial Statements.


9


LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Note 1 - Basis of Presentation, and Updates to Accounting Policies

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

Basis of Presentation and Use of Estimates

The accompanying Consolidated Financial Statements are unaudited and have been prepared in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP") and pursuant to the rules and regulations of the SEC. In our opinion, they include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by the SEC's rules and regulations for interim reporting. These Consolidated Financial Statements should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 29, 2018 ("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.

We describe our accounting methods and practices in more detail in our 2018 10-K. Except for the impact of the adoption of the new lease accounting standard, discussed below, there have been no other changes to the significant accounting policies, procedures, or general information described in our 2018 10-K that have had a material impact on our consolidated financial statements and related notes.

Updates to Accounting Policies

On December 30, 2018, the first day of our 2019 fiscal year, we adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). See "Note 7 - Leases" for further information on our leases and our application of Topic 842.

Fiscal Reporting Period

We report based on a 52 or 53 week fiscal year ending on the Saturday closest to December 31. Our third quarter of fiscal 2019 and third quarter of fiscal 2018 ended on September 28, 2019 and September 29, 2018, respectively. All references to quarterly or nine months ended financial results are references to the results for the relevant 13-week or 39-week fiscal period.

Concentrations of Risk

Distributors have historically accounted for a significant portion of our total revenue. Revenue attributable to distributors as a percentage of total revenue was 81% and 82% for the third quarter of fiscal 2019 and 2018, respectively, and 82% and 85% for the nine months ended September 28, 2019 and September 29, 2018, respectively. In the periods covered by this report, no end customer accounted for more than 10% of total revenue.

Distributors also account for a substantial portion of our net accounts receivable. At September 28, 2019 and December 29, 2018, our largest distributor accounted for 43% and 41%, respectively, and our second largest accounted for 28% and 23%, respectively, of net accounts receivable. A third distributor accounted for 11% of net accounts receivable at September 28, 2019, but accounted for less than 10% of net accounts receivable at December 29, 2018. No other distributor or end customer accounted for more than 10% of net accounts receivable at these dates.

Recently Issued Accounting Standards

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), which clarifies the accounting for implementation costs in cloud computing arrangements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We are currently assessing the impact of ASU 2018-15 on our consolidated financial statements and related disclosures.


10


Note 2 - Net Income (Loss) per Share

Our calculation of the diluted share count includes the number of shares from our equity awards with market conditions or performance conditions that would be issuable under the terms of such awards at the end of the reporting period. For equity awards with a market condition, the maximum number of shares issuable are included in the diluted share count as of September 28, 2019, as the market condition would have been achieved at the highest level of vesting if measured as of the end of the reporting period. For equity awards with a performance condition, no shares are included in the diluted share count as of September 28, 2019, as vesting of these awards is contingent upon evaluation of the performance condition over two consecutive trailing four-quarter periods starting as of the date the awards were issued, which have not yet elapsed. See "Note 9 - Stock-Based Compensation" to our consolidated financial statements for further discussion of our equity awards with market conditions or performance conditions.

A summary of basic and diluted Net income (loss) per share is presented in the following table:
 
Three Months Ended
 
Nine Months Ended
(in thousands, except per share data)
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Net income (loss)
$
13,539

 
$
6,974

 
$
29,506

 
$
(19,201
)
 
 
 
 
 
 
 
 
Shares used in basic Net income (loss) per share
132,997

 
127,816

 
132,065

 
125,578

Dilutive effect of stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition
5,897

 
1,658

 
5,614

 

Shares used in diluted Net income (loss) per share
138,894

 
129,474

 
137,679

 
125,578

 
 
 
 
 
 
 
 
Basic Net income (loss) per share
$
0.10

 
$
0.05

 
$
0.22

 
$
(0.15
)
Diluted Net income (loss) per share
$
0.10

 
$
0.05

 
$
0.21

 
$
(0.15
)

The computation of diluted Net income (loss) per share excludes the effects of stock options, restricted stock units ("RSUs"), Employee Stock Purchase Plan ("ESPP") shares, and equity awards with a market condition or performance condition that are antidilutive, aggregating approximately the following number of shares:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition excluded as they are antidilutive
909

 
2,299

 
328

 
8,284


Stock options, RSUs, and ESPP shares that are antidilutive at September 28, 2019 could become dilutive in the future.


Note 3 - Revenue from Contracts with Customers

Disaggregation of revenue

The following tables provide information about revenue from contracts with customers disaggregated by major class of revenue and by geographical market, based on ship-to location of the end customer, where available, and ship-to location of distributor otherwise:
 
Major Class of Revenue
 
Three Months Ended
 
Nine Months Ended
 
 (In thousands)
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
 
Product revenue - Distributors
 
$
84,135

 
$
82,969

 
$
248,234

 
$
257,716

 
Product revenue - Direct
 
13,342

 
14,963

 
38,951

 
33,619

 
Licensing and services revenue
 
5,992

 
3,552

 
16,671

 
11,487

 
Total revenue
 
$
103,469

 
$
101,484

 
$
303,856

 
$
302,822

 
 
 
 
 
 
 
 
 
 
 
Revenue by Geographical Market
 
Three Months Ended
 
Nine Months Ended
 
 (In thousands)
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
 
Asia
 
$
79,644

 
$
76,927

 
$
225,500

 
$
226,747

 
Europe
 
11,691

 
11,873

 
36,486

 
36,177

 
Americas
 
12,134

 
12,684

 
41,870

 
39,898

 
Total revenue
 
$
103,469

 
$
101,484

 
$
303,856

 
$
302,822




11


Contract balances

Our contract assets result from the amount of estimated revenue related to HDMI that we have recognized to date, and which we expect to receive when a new royalty sharing agreement is adopted. Contract assets are included in Prepaid expenses and other current assets on our Consolidated Balance Sheets. The following table summarizes activity during the first nine months of fiscal 2019:
 (In thousands)
 
Contract assets as of December 29, 2018
$
9,143

Revenues recorded during the period
8,871

Transferred to Accounts receivable or collected
(2,570
)
Contract assets as of September 28, 2019
$
15,444


Contract liabilities are included in Accounts payable and accrued expenses on our Consolidated Balance Sheets. The following table summarizes activity during the first nine months of fiscal 2019:
 (In thousands)
 
Contract liabilities as of December 29, 2018
$
1,614

Accruals for estimated future stock rotation and scrap returns
4,397

Less: Release of accruals for recognized stock rotation and scrap returns
(2,461
)
Prepayment for products to be manufactured and delivered to the customer within six months
751

Contract liabilities as of September 28, 2019
$
4,301


The impact to revenue from the release of accruals for recognized stock rotation and scrap returns was offset by the processing of return merchandise authorizations totaling $2.8 million, yielding a net revenue reduction of $0.3 million for the first nine months of 2019. We will recognize the revenue related to the prepayment contract liability when control of the product is transferred to the end customer and the performance obligation has been satisfied.


Note 4 - Balance Sheet Components

Short-Term Marketable Securities

Our Short-term marketable securities consisted of U.S. government agency obligations with maturities up to two years, which we carried at their fair value as Level 1 instruments in accordance with ASC 820, "Fair Value Measurements." We liquidated these investments in the first quarter of fiscal 2019. The following table summarizes the maturities of our formerly-held Short-term marketable securities at fair value.
(In thousands)
September 28,
2019
 
December 29,
2018
Short-term marketable securities:
 
 
 
Maturing within one year
$

 
$
7,454

Maturing between one and two years

 
2,170

Total marketable securities
$

 
$
9,624



Accounts Receivable
(In thousands)
September 28,
2019
 
December 29,
2018
Accounts receivable
$
47,544

 
$
61,087

Less: Allowance for doubtful accounts
(111
)
 
(197
)
Accounts receivable, net of allowance for doubtful accounts
$
47,433

 
$
60,890



Inventories
(In thousands)
September 28,
2019
 
December 29,
2018
Work in progress
$
43,867

 
$
47,224

Finished goods
15,805

 
19,872

Total inventories
$
59,672

 
$
67,096




12


Property and Equipment – Geographic Information

Our Property and equipment, net by country at the end of each period was as follows:
(In thousands)
September 28,
2019
 
December 29,
2018
United States
$
33,303

 
$
27,353

 
 
 
 
China
1,698

 
2,360

Philippines
3,298

 
3,319

Taiwan
1,268

 
949

Japan
202

 
324

Other
394

 
578

Total foreign property and equipment, net
6,860

 
7,530

Total property and equipment, net
$
40,163

 
$
34,883



Accounts Payable and Accrued Expenses

Included in Accounts payable and accrued expenses in the Consolidated Balance Sheets are the following balances:
(In thousands)
September 28,
2019
 
December 29,
2018
Trade accounts payable
$
29,644

 
$
31,880

Liability for non-cancelable contracts
6,686

 
6,078

Contract liabilities under ASC 606
4,301

 
1,614

Restructuring
4,129

 
4,220

Other accrued expenses
3,421

 
7,971

Total accounts payable and accrued expenses
$
48,181

 
$
51,763



Note 5 - Long-Term Debt

On May 17, 2019, we entered into a new credit agreement (the “Current Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent, and other lenders. The Current Credit Agreement provides for a five-year secured term loan facility in an aggregate principal amount of $175.0 million and a five-year secured revolving loan facility in an aggregate principal amount of up to $75.0 million, along with other components and options, such as a letter of credit, swing line, or expansion of the revolver, currently not in use, which are more fully described in the Current Credit Agreement.

We used the $175.0 million term loan proceeds and an initial $31.5 million revolving loan draw at closing to (i) repay the $204.4 million obligation outstanding under our previous credit agreement (the “Previous Credit Agreement”) with Jefferies Finance LLC, as administrative agent, and (ii) pay fees and expenses totaling $2.1 million incurred in connection with the Current Credit Agreement. The revolving loan may be used for working capital and general corporate purposes. With the repayment of our obligations under the Previous Credit Agreement, we wrote off the remaining unamortized balance of the related original issue discount and debt costs, which we recorded as a $2.2 million loss on refinancing in Other expense, net on our Consolidated Statements of Operations in the second quarter of fiscal 2019.

At our option, the term loan and the revolving loan (collectively, "long-term debt") accrue interest at a per annum rate based on either (i) the base rate plus a margin ranging from 0.25% to 1.00%, determined based on our total leverage ratio or (ii) the London Interbank Offered Rate ("LIBOR") for interest periods of 1, 2, 3 or 6 months plus a margin ranging from 1.25% to 2.00%, determined based on our total leverage ratio. The base rate is defined as the highest of (i) the federal funds rate, plus 0.50%, (ii) Wells Fargo Bank, National Association’s prime rate or (iii) the LIBOR rate for a 1-month interest period plus 1.00%. As of September 28, 2019, the effective interest rate on the term loan was 4.38%, and the revolving loan did not have an outstanding balance. We pay a commitment fee of 0.20% on the unused portion of the revolving loan.

The term loan is payable through a combination of (i) required quarterly installments of approximately $4.4 million, and (ii) any payments due upon certain issuances of additional indebtedness and certain asset dispositions, with any remaining outstanding principal amount due and payable on the maturity date of the term loan. The revolving loan is payable at our discretion, with any remaining outstanding principal amount due and payable on the maturity date of the revolving loan.

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.


13


We account for the original issue discount and the debt issuance costs as a reduction to the carrying value of our long-term debt on our Consolidated Balance Sheets. We amortize the discount and costs to Interest expense in our Consolidated Statements of Operations over the contractual term using the effective interest method. We determine the Current portion of long-term debt as the sum of the required quarterly installments to be made over the next twelve months, reduced by the original issue discount and the debt issuance costs to be amortized over the next twelve months.

The fair value of our long-term debt approximates the carrying value, which is reflected in our Consolidated Balance Sheets as follows:
(In thousands)
September 28,
2019
 
December 29,
2018
Principal amount
$
158,125

 
$
263,033

Unamortized original issue discount and debt costs
(1,699
)
 
(3,386
)
Less: Current portion of long-term debt
(17,196
)
 
(8,290
)
Long-term debt, net of current portion and unamortized debt issue costs
$
139,230

 
$
251,357



Interest expense related to our long-term debt was included in Interest expense on our Consolidated Statements of Operations as follows:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Contractual interest
$
1,686

 
$
4,711

 
$
8,991

 
$
14,001

Amortization of debt issuance costs and discount
324

 
789

 
1,539

 
1,847

Total interest expense related to long-term debt
$
2,010

 
$
5,500

 
$
10,530

 
$
15,848



Expected future principal payments are based on the schedule of required quarterly installments, adjusted for known voluntary payments. As of September 28, 2019, expected future principal payments on our long-term debt was as follows:
Fiscal year
 
(in thousands)
 
 
 
2019 (remaining 3 months)
 
$
4,375

2020
 
17,500

2021
 
17,500

2022
 
17,500

2023
 
17,500

2024
 
83,750

 
 
$
158,125



Note 6 - Restructuring

In April 2019, our management approved and executed an internal restructuring plan (the “Q2 2019 Sales Plan”) which focused on a restructuring of the global sales organization through cancellation of certain contracts and a workforce reduction. Under this plan, we have incurred $2.3 million of restructuring expense during the first nine months of fiscal 2019. All actions planned under the Q2 2019 Sales Plan have been implemented.

In June 2018, our Board of Directors approved an internal restructuring plan (the "June 2018 Plan"), which included the discontinuation of our millimeter wave business and the use of certain assets related to our Wireless products, and a workforce reduction. Under this plan, we incurred approximately $4.1 million of restructuring expense during the first nine months of fiscal 2018. This plan is substantially complete.

In June 2017, our Board of Directors approved an internal restructuring plan (the "June 2017 Plan"), which included the sale of 100% of the equity of our Hyderabad, India subsidiary and the transfer of certain assets related to our Simplay Labs testing and certification business, a worldwide workforce reduction, and an initiative to reduce our infrastructure costs, including reconfiguring our use of certain leased properties. Under this initiative approved by the Board in 2017, we vacated 100% of our facility in Portland, Oregon in the first quarter of fiscal 2019. In the third quarter of fiscal 2019, we incurred approximately $0.3 million of incremental restructuring costs related to this vacated facility due to the timing of sublease transactions and to buyout the lease on the portion of the space that was not sublet. Under the June 2017 Plan, we incurred approximately $0.4 million and $0.1 million of expense during the third quarter of fiscal 2019 and fiscal 2018, respectively, and approximately $2.4 million and $1.4 million of expense during the nine months ended September 28, 2019 and September 29, 2018, respectively. We have incurred approximately $18.7 million of total expense through September 28, 2019 under the June 2017 Plan, and all planned actions have been implemented. We expect the total cost of the June 2017 Plan to be approximately $20.0 million to $21.5 million as expenses related to our partially vacated facility in San Jose, California will be incurred over the remaining lease term.


14


These expenses were recorded to Restructuring charges on our Consolidated Statements of Operations. The restructuring accrual balance is presented in Accounts payable and accrued expenses and in Other long-term liabilities on our Consolidated Balance Sheets. The following table displays the activity related to our restructuring plans:
(In thousands)
Severance & Related (1)
 
Lease Termination & Fixed Assets
 
Software Contracts & Engineering Tools (2)
 
Other (3)
 
Total
Accrued Restructuring at December 29, 2018
$
1,814

 
$
8,630

 
$
218

 
$
18

 
$
10,680

Restructuring charges
625

 
2,482

 

 
1,612

 
4,719

Costs paid or otherwise settled
(2,279
)
 
(3,714
)
 
(218
)
 
(96
)
 
(6,307
)
Accrued Restructuring at September 28, 2019
$
160

 
$
7,398

 
$

 
$
1,534

 
$
9,092

 
 
 
 
 
 
 
 
 
 
Accrued Restructuring at December 30, 2017
$
1,192

 
$
870

 
$
360

 
$
25

 
$
2,447

Restructuring charges
4,034

 
437

 
913

 
111

 
5,495

Costs paid or otherwise settled
(4,662
)
 
(667
)
 
(1,055
)
 
(113
)
 
(6,497
)
Accrued Restructuring at September 29, 2018
$
564

 
$
640

 
$
218

 
$
23

 
$
1,445

(1)
Includes employee relocation costs and accelerated stock compensation
(2)
Includes cancellation of contracts, asset impairments, and accelerated depreciation on certain enterprise resource planning and customer relationship management systems
(3)
Beginning in the second quarter of fiscal 2019, "Other" included termination fees on the cancellation of certain contracts under the Q2 2019 Sales Plan


Note 7 - Leases

We adopted ASC 842, "Leases," effective on December 30, 2018, the first day of our 2019 fiscal year, using the modified retrospective transition method. The new standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. We elected the "package of practical expedients" that would allow us to carryforward our historical lease classifications, not reassess historical contracts to determine if they contain leases, and not reassess the initial direct costs for any existing leases. We also elected the practical expedient to not separate lease and non-lease components. Concurrent with our adoption of Topic 842, we have early adopted ASU 2019-01, Leases (Topic 842): Codification Improvements, which grants disclosure relief for interim periods during the year in which a company adopted Topic 842.

Right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized on the commencement date of the lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments. At inception, we determine if an arrangement is a lease, if it includes options to extend or terminate the lease, and if it is reasonably certain that we will exercise the options. Lease cost, representing lease payments over the term of the lease and any capitalizable direct costs less any incentives received, is recognized on a straight-line basis over the lease term as lease expense. We have operating leases for corporate offices, sales offices, research and development facilities, storage facilities, and a data center.

Our leases have remaining lease terms of 1 to 8 years, some of which include options to extend for up to 5 years, and some of which include options to terminate within 1 year. The exercise of lease renewal options is at our sole discretion. When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term and lease payment obligation, respectively. For our leases that contain variable lease payments, residual value guarantees, or restrictive covenants, we have concluded that these inputs are not significant to the determination of the ROU asset and lease liability. For our operating leases, the weighted-average remaining lease term was 5.9 years and the weighted-average discount rate is 7.0% as of September 28, 2019.

Our adoption of Topic 842 resulted in the non-cash recognition of additional net ROU assets and lease liabilities of approximately $29.9 million and $32.3 million, respectively, as of December 30, 2018. The difference between these amounts resulted from an adjustment to the deferred rent balance existing under the prior guidance. Adoption of this standard did not materially affect our consolidated net earnings.

All of our facilities are leased under operating leases, which expire at various times through 2027. We recorded fixed operating lease expenses of $1.9 million and $5.8 million for the third quarter and first nine months of fiscal 2019, respectively.


15


The following table presents the lease balance classifications within the Consolidated Balance Sheets and summarizes their activity during the first nine months of fiscal 2019:
Operating lease right-of-use assets
 
(in thousands)
Balance as of December 29, 2018
 
$

Right-of-use assets recorded from adoption of ASC 842
 
29,893

Right-of-use assets obtained in exchange for new lease obligations during the period
 
404

Amortization of right-of-use asset during the period
 
(4,372
)
Impairment of right-of-use asset on Portland, Oregon office (recorded in Restructuring charges)
 
(977
)
Adjustments for present value and foreign currency effects
 
(385
)
Balance as of September 28, 2019
 
$
24,563

 
 
 
Operating lease liabilities
 
(in thousands)
Balance as of December 29, 2018
 
$

Lease liabilities recorded from adoption of ASC 842
 
32,273

Lease liabilities incurred for new lease obligations during the period
 
404

Accretion of lease liabilities
 
1,467

Operating cash used by payments on lease liabilities
 
(6,540
)
Adjustments for present value, foreign currency, and restructuring liability effects
 
(497
)
Balance as of September 28, 2019
 
27,107

Less: Current portion of operating lease liabilities
 
(4,623
)
Long-term operating lease liabilities, net of current portion
 
$
22,484


Maturities of operating lease liabilities as of September 28, 2019 are as follows:
Fiscal year
 
(in thousands)
 
 
 
2019 (remaining 3 months)
 
$
1,051

2020
 
7,039

2021
 
5,294

2022
 
4,446

2023
 
4,574

Thereafter
 
11,388

Total lease payments
 
33,792

Less: amount representing interest
 
(6,553
)
Less: amount representing restructuring liability adjustments
 
(132
)
Total lease liabilities
 
$
27,107


Prior to 2019, the reporting of future minimum lease commitments included the lease obligations associated with previously restructured facilities. Lease obligations for facilities restructured prior to the adoption of Topic 842 totaled approximately $7.4 million at September 28, 2019 and continued to be recorded in Other long-term liabilities on our Consolidated Balance Sheets.



16


Note 8 - Intangible Assets

On our Consolidated Balance Sheets at September 28, 2019 and December 29, 2018, Intangible assets, net are shown net of accumulated amortization of $124.0 million and $114.5 million, respectively.

We recorded amortization expense related to intangible assets on the Consolidated Statements of Operations as presented in the following table:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Research and development
$
14

 
$
14

 
$
41

 
$
264

Amortization of acquired intangible assets
3,389

 
3,823

 
10,168

 
13,982

 
$
3,403

 
$
3,837

 
$
10,209

 
$
14,246


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, and we recorded an impairment charge of $0.6 million to the intangible asset associated with that product. During the second quarter of fiscal 2018, in addition to recurring amortization expense, we recorded an impairment charge relating to intangible assets of $11.9 million in the Consolidated Statements of Operations as a result of the strategic decision to discontinue our millimeter wave business.


Note 9 - Stock-Based Compensation

Total stock-based compensation expense included in our Consolidated Statements of Operations is presented in the following table:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Cost of products sold
$
453

 
$
219

 
$
982

 
$
652

Research and development
1,658

 
926

 
4,029

 
2,970

Selling, general, and administrative
3,569

 
1,563

 
8,324

 
6,286

Total stock-based compensation
$
5,680

 
$
2,708

 
$
13,335

 
$
9,908



Market-Based and Performance-Based Stock Compensation

In fiscal years 2019 and 2018, we granted various awards of RSUs with either a market condition or a performance condition to certain executives. During the third quarter of fiscal 2019, we granted approximately 0.3 million additional awards of RSUs with a market condition to certain executives. Under the terms of these grants, vesting of the market condition RSUs will not occur unless the Company achieves total shareholder return at least equivalent to the 25th percentile of semiconductors on the Philadelphia Stock Exchange, which condition is tested for one-third of the grants on the first, second and third anniversary of grants. If the 75th percentile of the market condition is achieved the awards may vest at 250% or 200% for the executives. Also during the third quarter of fiscal 2019, the market condition for awards granted in the previous year achieved the 75th percentile of the condition, and the first tranche of these awards vested at 250% or 200% of the RSUs, as applicable for the respective executive. For these awards, we incurred stock compensation expense of approximately $0.9 million and $0.1 million in the third quarter of fiscal 2019 and fiscal 2018, respectively, and approximately $2.9 million and $0.6 million in the first nine months of fiscal 2019 and fiscal 2018, respectively, which is recorded as a component of total stock-based compensation expense.

The following table summarizes the activity for our awards with a market or performance condition during the first nine months of fiscal 2019:
(Shares in thousands)
 
Total
Balance, December 29, 2018
 
909

Granted
 
584

Effect of vesting multiplier
 
187

Vested
 
(338
)
Canceled
 
(106
)
Balance, September 28, 2019
 
1,236




17


Note 10 - Income Taxes

We are subject to federal and state income tax as well as income tax in the foreign jurisdictions in which we operate. For the third quarter of fiscal 2019 and fiscal 2018, we recorded income tax expense of approximately $1.1 million and $0.1 million, respectively, and for the first nine months of fiscal 2019 and fiscal 2018, we recorded income tax expense of approximately $1.5 million and $2.0 million, respectively. Income taxes for the three and nine month periods ended September 28, 2019 and September 29, 2018 represent tax at the federal, state, and foreign statutory tax rates adjusted for withholding taxes, changes in uncertain tax positions, changes in the U.S. valuation allowance, as well as other non-deductible items in the United States and foreign jurisdictions. The difference between the U.S. federal statutory tax rate of 21% and our effective tax rate for the three and nine months ended September 28, 2019 resulted primarily from a decrease in the valuation allowance that offset expected tax expense in the United States, foreign withholding tax expense, discrete impact from uncertain tax positions, and foreign rate differential primarily due to zero tax rate in Bermuda. For the three and nine months ended September 29, 2018, the difference resulted from an increase in the valuation allowance that offset expected tax benefit in the United States, foreign rate differential and withholding taxes, zero tax rate in Bermuda which resulted in no tax benefit for the pretax loss in Bermuda, and a benefit from the release of uncertain tax positions.

Through September 28, 2019, we continued to evaluate the valuation allowance position in the United States and concluded that we should maintain a full valuation allowance against the net federal and state deferred tax assets. In making this evaluation, we exercised significant judgment and considered estimates about our ability to generate revenue and taxable profits sufficient to offset expenditures in future periods within the U.S. It is reasonably possible that during the next nine to twelve months, we will establish a sustained level of profitability in the U.S. As a result, we may reverse a significant portion of the valuation allowance recorded against our U.S. deferred tax assets. The reversal would result in an income tax benefit for the quarterly and annual fiscal period in which we release the valuation allowance. We will continue to evaluate both positive and negative evidence in future periods to determine if we should recognize more deferred tax assets. We do not have a valuation allowance in any foreign jurisdictions as we have concluded it is more likely than not we will realize the net deferred tax assets in future periods.

At September 28, 2019, it is reasonably possible that $1.3 million of unrecognized tax benefits and $0.2 million of associated interest and penalties could be recognized during the next twelve months. The $1.5 million potential change would represent a decrease in unrecognized tax benefits, comprised of items related to tax filings for years that will no longer be subject to examination under expiring statutes of limitations.

Our liability for uncertain tax positions (including penalties and interest) was $25.9 million and $26.3 million at September 28, 2019 and December 29, 2018, respectively, and is recorded as a component of Other long-term liabilities on our Consolidated Balance Sheets. The remainder of our uncertain tax position exposure of $24.5 million is netted against deferred tax assets.

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


Note 11 - Contingencies

Legal Matters

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

From time to time, we are exposed to certain 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.



18


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 enable 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, 5G infrastructure, platform security, and factory automation. Our sales team is using our position in top Original Equipment Manufacturers 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
 
Nine Months Ended
(In thousands)
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Revenue
$
103,469

 
100.0
%
 
$
101,484

 
100.0
%
 
$
303,856

 
100.0
%
 
$
302,822

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
61,439

 
59.4

 
58,364

 
57.5

 
179,129

 
59.0

 
165,133

 
54.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
20,032

 
19.4

 
19,131

 
18.9

 
59,074

 
19.4

 
63,153

 
20.9

Selling, general and, administrative
21,078

 
20.4

 
21,775

 
21.5

 
61,618

 
20.3

 
69,886

 
23.1

Amortization of acquired intangible assets
3,389

 
3.3

 
3,823

 
3.8

 
10,168

 
3.3

 
13,982

 
4.6

Restructuring charges
252

 
0.2

 
90

 
0.1

 
4,719

 
1.6

 
5,495

 
1.8

Impairment of intangible assets

 

 
586

 
0.6

 

 

 
12,486

 
4.1

Acquisition related charges

 

 

 

 

 

 
1,531

 
0.5

Income (loss) from operations
$
16,688

 
16.1
%
 
$
12,959

 
12.8
%
 
$
43,550

 
14.3
%
 
$
(1,400
)
 
(0.5
)%




19


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 a higher gross margin.

The end market data below is derived from data provided to us by our distributors and end customers. With a diverse base of customers who may manufacture end products spanning multiple end markets, the assignment of revenue to a specific end market requires the use of estimates and judgment. Therefore, actual results may differ from those reported. 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.

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
 
Nine Months Ended
(In thousands)
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Communications and Computing
$
41,891

 
40
%
 
$
32,883

 
32
%
 
$
117,320

 
39
%
 
$
90,536

 
30
%
Industrial and Automotive
37,102

 
36

 
38,075

 
37

 
112,276

 
37

 
122,819

 
40

Consumer
18,484

 
18

 
26,974

 
27

 
57,589

 
19

 
77,980

 
26

Licensing and Services
5,992

 
6

 
3,552

 
4

 
16,671

 
5

 
11,487

 
4

Total revenue
$
103,469

 
100
%
 
$
101,484

 
100
%
 
$
303,856

 
100
%
 
$
302,822

 
100
%

Revenue from the Communications and Computing end market increased by 27% for the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 and increased by 30% for the first nine months of fiscal 2019 compared to the first nine 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 3% for the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 and decreased by 9% for the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018 due to broad market decreases, primarily in Asia and Europe.

Revenue from the Consumer end market decreased by 31% for the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 and decreased by 26% for the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018 primarily due to decreased demand for mobile phone related products, and broad market weakness.

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 increased by 69% for the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 and increased by 45% for the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018 due primarily to variability in HDMI royalty revenue and certain one-time patent and asset sales recognized 2019.

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.


20


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
 
Nine Months Ended
(In thousands)
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Asia
$
79,644

 
77
%
 
$
76,927

 
76
%
 
$
225,500

 
74
%
 
$
226,747

 
75
%
Europe
11,691

 
11

 
11,873

 
12

 
36,486

 
12

 
36,177

 
12

Americas
12,134

 
12

 
12,684

 
12

 
41,870

 
14

 
39,898

 
13

Total revenue
$
103,469

 
100
%
 
$
101,484

 
100
%
 
$
303,856

 
100
%
 
$
302,822

 
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
 
Nine Months Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Arrow Electronics Inc.
24
%
 
24
%
 
25
%
 
30
%
Weikeng Group
31

 
27

 
30

 
26

All others
26

 
31

 
27

 
29

All distributors
81
%
 
82
%
 
82
%
 
85
%

Revenue attributable to distributors was essentially flat for the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018, while revenue attributable to distributors decreased in the first nine months of fiscal 2019 compared to the first nine 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
 
Nine Months Ended
(In thousands)
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Gross margin
$
61,439

 
$
58,364

 
$
179,129

 
$
165,133

Percentage of net revenue
59.4
%
 
57.5
%
 
59.0
%
 
54.5
%
Product gross margin %
56.9
%
 
56.0
%
 
56.6
%
 
52.8
%
Licensing and services gross margin %
100.0
%
 
100.0
%
 
100.0
%
 
97.7
%

For the third quarter and first nine months of fiscal 2019 compared to the third quarter and first nine months of fiscal 2018, Gross margin as a percentage of net revenue increased by 190 and 450 basis points, respectively.

Gross margin increased in the third quarter of fiscal 2019 compared to the third quarter of fiscal 2018 due to product cost reductions, benefits from pricing optimization, as well as overall mix. For the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018, the increase in gross margin was also attributable to the non-recurrence in 2019 of the $8.3 million in specific inventory reserves 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 5.8% and 5.5% of total revenue in the third quarter and first nine months of fiscal 2019, respectively, compared to 3.5% and 3.8% of total revenue in the third quarter and first nine months of fiscal 2018, respectively. Because of its higher margin, the licensing and services portion of our overall revenue can have a disproportionate impact on Gross margin.



21


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