NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation and Significant Accounting Policies
The accompanying Consolidated Financial Statements are unaudited and have been prepared by Lattice Semiconductor Corporation (“Lattice,” the “Company,” “we,” “us,” or “our”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in our opinion 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. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted as permitted by the SEC's rules and regulations. 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 fiscal year ended
December 29, 2018
.
Fiscal Reporting Period
We report based on a 52 or 53-week fiscal year ending on the Saturday closest to December 31. Our
first
quarter of fiscal
2019
and
first
quarter of fiscal
2018
ended on
March 30, 2019
and
March 31, 2018
, respectively. All references to quarterly financial results are references to the results for the relevant 13-week period.
Principles of Consolidation and Presentation
The accompanying Consolidated Financial Statements include the accounts of Lattice and its subsidiaries after the elimination of all intercompany balances and transactions.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and classification of assets, such as marketable securities, accounts receivable, contract assets and contract liabilities, inventory, depreciable lives of fixed assets, lease right-of-use assets and lease liabilities, goodwill (including the assessment of reporting units), intangible assets, current and deferred income taxes, accrued liabilities (including restructuring charges and bonus arrangements), disclosure of contingent assets and liabilities at the date of the financial statements, impairment assessments, the fair value of equity awards, and the reported amounts of product revenue, licensing and services revenue, and expenses during the fiscal periods presented. Actual results could differ from those estimates.
Cash Equivalents and Marketable Securities
We consider all investments that are readily convertible into cash and that have original maturities of
three months
or less to be cash equivalents. Cash equivalents consist primarily of highly liquid investments in time deposits or money market accounts and are carried at cost. We account for marketable securities as available-for-sale investments, as defined by U.S. GAAP, and record unrealized gains or losses to
Accumulated other comprehensive loss
on our
Consolidated Balance Sheets
, unless losses are considered other than temporary, in which case, those are recorded directly to the
Consolidated Statements of Operations
and
Consolidated Statements of Comprehensive Income (Loss)
. Deposits with financial institutions at times exceed Federal Deposit Insurance Corporation insurance limits.
Fair Value of Financial Instruments
From time to time, we invest in various financial instruments, which may include corporate and government bonds, notes, and commercial paper. We value these instruments at their fair value and monitor our portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other than temporary, we would record an impairment charge and establish a new carrying value. We assess other than temporary impairment of marketable securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “
Fair Value Measurements
.” The framework under the provisions of ASC 820 establishes three levels of inputs that may be used to measure fair value. Each level of input has different levels of subjectivity and difficulty involved in determining fair value.
Level 1
instruments generally represent quoted prices for identical assets or liabilities in active markets. Therefore, determining fair value for Level 1 instruments generally does not require significant management judgment, and the estimation is not difficult. Our Level 1 instruments consist of U.S. Government agency obligations, corporate notes and bonds, and commercial paper that are traded in active markets and are classified as
Short-term marketable securities
on our
Consolidated Balance Sheets
.
Level 2
instruments include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices for identical instruments in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 instruments consist of foreign currency exchange contracts entered into to hedge against fluctuation in the Japanese yen.
Level 3
instruments include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. As a result, the determination of fair value for Level 3 instruments requires significant management judgment and subjectivity. We did not have any Level 3 instruments during the periods presented.
Foreign Exchange and Translation of Foreign Currencies
While our revenues and the majority of our expenses are denominated in U.S. dollars, we have international subsidiaries and branch operations that conduct some transactions in foreign currencies, and we collect an annual Japanese consumption tax refund in yen. Gains or losses from foreign exchange rate fluctuations on balances denominated in foreign currencies are reflected in
Other income, net
in our
Consolidated Statements of Operations
. Realized gains or losses on foreign currency transactions were not significant for the periods presented.
We translate accounts denominated in foreign currencies in accordance with ASC 830, “
Foreign Currency Matters
,” using the current rate method under which asset and liability accounts are translated at the current rate, while stockholders' equity accounts are translated at the appropriate historical rates, and revenue and expense accounts are translated at average monthly exchange rates. Translation adjustments related to the consolidation of foreign subsidiary financial statements are reflected in
Accumulated other comprehensive loss
in Stockholders' equity (see "Note 11 - Changes in Stockholders' Equity and Accumulated Other Comprehensive Loss").
Derivative Financial Instruments
We mitigate foreign currency exchange rate risk by entering into foreign currency forward exchange contracts, details of which are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
March 30,
2019
|
|
December 29,
2018
|
Total cost of contracts for Japanese yen
(
in thousands
)
|
|
$
|
2,883
|
|
|
$
|
1,955
|
|
Number of contracts
|
|
3
|
|
|
2
|
|
Settlement month
|
|
June 2019
|
|
|
June 2019
|
|
Although these hedges mitigate our foreign currency exchange rate exposure from an economic perspective, they were not designated as "effective" hedges for accounting purposes and as such are adjusted to fair value through
Other income, net
, with gains of approximately
$0.1 million
for each of the fiscal quarters ended
March 30, 2019
and
December 29, 2018
. We do not hold or issue derivative financial instruments for trading or speculative purposes.
Concentration Risk
Potential exposure to concentration risk may impact revenue, accounts receivable, and supply of wafers for our products.
Customer and distributor concentration risk may impact revenue. In the periods covered by this report, no end customer accounted for more than 10% of total revenue.
Distributors have historically accounted for a significant portion of our total revenue. Revenue attributable to distributors as a percentage of total revenue was
79%
and
87%
for the three months ended March 30, 2019 and March 31, 2018, respectively.
Our two largest distributor groups, Arrow Electronics, Inc. ("Arrow") and the Weikeng Group ("Weikeng"), also account for a substantial portion of our net accounts receivable. At
March 30, 2019
and
December 29, 2018
, Arrow accounted for
34%
and
41%
, respectively, and Weikeng accounted for
32%
and
23%
, respectively, of net accounts receivable. A third distributor accounted for
12%
of net accounts receivable at
March 30, 2019
, but accounted for less than 10% of net accounts receivable at
December 29, 2018
. No other distributor group or end customer accounted for more than 10% of net accounts receivable at these dates.
Concentration of credit risk with respect to accounts receivable is mitigated by our credit and collection process, including active management of collections, credit limits, routine credit evaluations for essentially all customers, and secure transactions with letters of credit or advance payments where appropriate. We regularly review our allowance for doubtful accounts and the aging of our accounts receivable.
Accounts receivable do not bear interest and are shown net of allowances for doubtful accounts of
$0.2 million
at both
March 30, 2019
and
December 29, 2018
. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on assessment of known troubled accounts, analysis of the aging of our accounts receivable, historical experience, management judgment, and other currently available evidence. We write off accounts receivable against the allowance when we determine a balance is uncollectible and no longer actively pursue collection of the receivable.
We rely on a limited number of foundries for our wafer purchases, including Fujitsu Limited, Seiko Epson Corporation, Taiwan Semiconductor Manufacturing Company, Ltd, and United Microelectronics Corporation. We seek to mitigate the concentration of supply risk by establishing, maintaining and managing multiple foundry relationships; however, certain of our products are sourced from a single foundry and changing from one foundry to another can have a significant cost, among other factors.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method for financial reporting purposes over the estimated useful lives of the related assets, generally
three
to
five
years for equipment and software,
one
to
three
years for tooling, and
thirty
years for buildings and building space. Leasehold improvements are amortized over the shorter of the non-cancelable lease term or the estimated useful life of the assets. Upon disposal of property and equipment, the accounts are relieved of the costs and related accumulated depreciation and amortization, and resulting gains or losses are reflected in the
Consolidated Statements of Operations
for recognized gains and losses or in the
Consolidated Balance Sheets
for deferred gains and losses. Repair and maintenance costs are expensed as incurred.
Leases
On December 30, 2018, the first day of our 2019 fiscal year, we adopted Accounting Standards Update (“ASU”) No. 2016-02,
Leases
(Topic 842), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. See "Note 7 - Leases" for further information on our leases and our application of Topic 842.
Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is not amortized, but instead is tested for impairment annually or more frequently if certain indicators of impairment are present. We do not expect goodwill impairment to be tax deductible for income tax purposes.
New Accounting Pronouncements
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.
In March 2019, the FASB issued ASU 2019-01,
Leases (Topic 842): Codification Improvements
, which clarified the FASB’s original intent to grant disclosure relief for interim periods during the year in which a company adopts Topic 842. ASU 2019-01 accomplishes this by explicitly providing an exception to the paragraph 250-10-50-3 interim disclosure requirements in the Topic 842 transition disclosure requirements. Paragraph 250-10-50-3 requires entities to provide in the fiscal year in which a new accounting principle is adopted the identical disclosures for interim periods after the date of adoption. Thus, ASU 2019-01 exempts entities from such reporting in interim periods in the fiscal year in which the entities adopt Topic 842. The amendments set forth in ASC 2019-01 take effect in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. We will follow this exception for interim periods in the current fiscal year, concurrent with our adoption of Topic 842.
Note 2 - Revenue from Contracts with Customers
We adopted ASC 606,
"Revenue from Contracts with Customers
," effective on December 31, 2017, the first day of our 2018 fiscal year, using the modified retrospective method. As a result of this adoption, we revised our accounting policy for revenue recognition as detailed below.
We recognize revenue under the core principle of depicting the transfer of control to our customers in an amount reflecting the consideration we expect to be entitled. In order to achieve that core principle, we apply the following five step approach, as further described below: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to each performance obligation in the contract, and (5) recognize revenue when applicable performance obligations are satisfied.
Product Revenue
Identify the contract with a customer
- Our product revenues consist of sales to original equipment manufacturers ("OEMs") and to distributors. We consider customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. In certain cases we consider firm forecasts that are agreed to by both us and the customer to be contracts. For sales to distributors, we have concluded that our contracts are with the distributor, rather than with the distributor’s end customer, as we hold a contract bearing enforceable rights and obligations only with the distributor. As part of our consideration of the contract, we evaluate certain factors including the customer’s ability to pay (or credit risk).
Identify the performance obligations in the contract -
For each contract, we consider our promise to transfer each distinct product to be the identified performance obligations.
Determine the transaction price
- In determining the transaction price, we evaluate whether the set contract price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. As our standard payment terms are less than one year, we have elected to apply the practical expedient to not assess whether a contract has a significant financing component.
Sales to most distributors are made under terms allowing certain price adjustments and limited rights of return of our products held in their inventory or upon sale to their end customers. Revenue from sales to distributors is recognized upon the transfer of control to the distributor, which generally occurs upon shipment of product to the distributor. Frequently, distributors need to sell at a price lower than the standard distribution price in order to win business. At the time the distributor invoices its customer or soon thereafter, the distributor submits a “ship and debit” price adjustment claim to us to adjust the distributor’s cost from the standard price to the pre-approved lower price. After we verify that the claim was pre-approved, we issue a credit memo to the distributor for the ship and debit claim. In determining the transaction price, we consider ship and debit price adjustments to be variable consideration. Such price adjustments are estimated using the expected value method based on an analysis of historical ship and debit claims, at the distributor and product level, over a period of time considered adequate to account for current pricing and business trends. Any differences between the estimated consideration and the actual amount received from the customer is recorded in the period that the actual consideration becomes known. Most of our distributors are entitled to limited rights of return, referred to as stock rotation, not to exceed
5%
of billings, net of returns and ship and debit price adjustments. Stock rotation reserves are based on historical return rates and recorded as a reduction to revenue with a corresponding reduction to cost of goods sold for the estimated cost of inventory that we expect to be returned.
Sales to OEMs and certain distributors are made under terms that do not include rights of return or price concessions after we ship the product. Accordingly, the transaction price equals the invoice price and there is no variable consideration.
Allocate the transaction price to each performance obligation in the contract
- Because our product revenue contracts generally include the delivery of a certain quantity of semiconductors as the single performance obligation, we do not allocate revenue across distinct performance obligations. However, we frequently receive orders for products to be delivered over multiple dates that may extend across several reporting periods. We invoice for each delivery upon shipment and recognize revenues for each distinct product delivered, assuming transfer of control has occurred. Payment term for invoices are generally
30
to
60
days.
Recognize revenue when applicable performance obligations are satisfied -
Revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which typically occurs at shipment. In determining whether control has transferred, we also consider if there is a present right to payment and legal title, along with whether the risks and rewards of ownership have transferred to the customer. We have certain vendor-managed inventory arrangements with certain OEM customers whereby we ship product into an inventory hub location but for which control does not transfer until the customer consumes the inventory. In such cases, we recognize revenue upon customer consumption.
Licensing and Services Revenue
Identify the contract with a customer
- Our Licensing and services revenue is comprised of revenue from our intellectual property ("IP") core licensing activity, patent monetization activities, and royalty and adopter fee revenue from our standards activities. These activities are complementary to our product sales and help us to monetize our IP associated with our technology and standards. We consider licensing arrangements with our customers to be the contract.
Identify the performance obligations in the contract
- For each contract, we consider the promise to deliver a license that grants the customer the right to use the IP, as well as any professional services provided under the contract, as distinct performance obligations.
Determine the transaction price
- Our HDMI and MHL standards revenue, as well as certain IP licenses, include variable consideration in the form of usage-based royalties. We apply the provisions of ASC 606 in accounting for these types of arrangements, whereby we do not include estimated royalties in the transaction price at the origination of the contract but rather recognize royalty revenue as usage occurs.
HDMI royalty revenue is determined by a contractual allocation formula agreed to by the Founders of the HDMI consortium. The contractual allocation formula is subject to periodic adjustment, generally every
three
years. The most recent royalty sharing formula covered the period from January 1, 2014 through December 31, 2016, and an interim agreement covering the period from January 1, 2017 through December 31, 2017 was signed in the second quarter of fiscal 2018. 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, the HDMI agent is unable to distribute the majority of the royalties collected to the Founders. We are recording revenue based on our estimated share of the royalties, which we determine using an analytical model that combines historical and forecasted collection trends with our expected share of those collections. This estimate will be adjusted once the Founders finalize the agreement for the period beginning January 1, 2018.
Allocate the transaction price to each performance obligation in the contract
- For contracts that include multiple performance obligations (most commonly those that include licenses and professional services, but which also may include inventory), we allocate revenue to each performance obligation based on the best estimate of the standalone selling price of each obligation. When available, we use the observable standalone selling price of the performance obligations. When the standalone selling price is not directly observable, we use an adjusted market assessment approach or the expected cost plus margin approach to estimate standalone selling price.
Recognize revenue when applicable performance obligations are satisfied
- We recognize license revenue at the point in time that control of the license transfers to the customer, which is generally upon delivery. We recognize professional service revenue as we perform the services. Royalty revenues are recognized as customers sell products that include our IP and are legally obligated to remit royalties to us. We receive payments from customers based on contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Payment terms on invoiced amounts are typically
30
days.
Other matters
We generally provide an assurance warranty that our products will substantially conform to the published specifications for twelve months from the date of shipment. In some case the warranty period may be longer than twelve months. We do not separately price or sell the assurance warranty. Our liability is limited to either a credit equal to the purchase price or replacement of the defective part. Returns under warranty have historically been immaterial. As such, we do not record a specific warranty reserve or consider activities related to such warranty, if any, to be a separate performance obligation.
Under the practical expedient provided by ASC 340, "
Other Assets and Deferred Costs
," we generally expense sales commissions when incurred because the amortization period would have been less than one year. We record these costs within Selling, general, and administrative expenses.
Substantially all of our performance obligations are satisfied within twelve months. Accordingly, under the optional exemption provided by ASC 606, we do not disclose revenues allocated to future performance obligations of partially completed contracts.
As of
March 30, 2019
, we have contract liabilities totaling approximately
$3.9 million
, which is comprised of approximately
$3.2 million
accrued for estimated future stock rotation and scrap returns. We also have a contract liability of approximately
$0.7 million
related to a prepayment for products to be manufactured and delivered to the customer within six months. We will recognize the revenue related to the contract liability when control of the product is transferred to the end customer.
Contract assets relate to our rights to consideration for licenses and royalties due to us as a member of the HDMI consortium, with collection dependent on events other than the passage of time, such as collection of licenses and royalties from customers by the HDMI licensing agent and the finalization of a new royalty sharing agreement. The contract assets are recorded in Prepaid expenses and other current assets in our Consolidated Balance Sheets, and they are transferred to Accounts receivable when the rights become unconditional.
The following table summarizes the activity for our contract assets during the first three months of fiscal 2019:
|
|
|
|
|
(In thousands)
|
|
Balance as of December 29, 2018
|
$
|
9,143
|
|
Revenues recorded during the period
|
2,947
|
|
Transferred to accounts receivable or collected
|
(1,118
|
)
|
Balance as of March 30, 2019
|
$
|
10,972
|
|
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
|
|
(In thousands)
|
|
March 30,
2019
|
|
March 31,
2018
|
|
Product revenue - Distributors
|
|
77,472
|
|
|
85,957
|
|
|
Product revenue - Direct
|
|
14,140
|
|
|
9,152
|
|
|
Licensing and services revenue
|
|
6,479
|
|
|
3,514
|
|
|
Total revenue
|
|
98,091
|
|
|
98,623
|
|
|
|
|
|
|
|
|
Revenue by Geographical Market
|
|
Three Months Ended
|
|
(In thousands)
|
|
March 30,
2019
|
|
March 31,
2018
|
|
Asia
|
|
69,011
|
|
|
71,921
|
|
|
Europe
|
|
12,210
|
|
|
12,142
|
|
|
Americas
|
|
16,870
|
|
|
14,560
|
|
|
Total revenue
|
|
98,091
|
|
|
98,623
|
|
Note 3 - Net Income (Loss) per Share
We compute basic Net income (loss) per share by dividing Net income (loss) by the weighted average number of common shares outstanding during the period. To determine diluted share count, we apply the treasury stock method to determine the dilutive effect of outstanding stock option shares, restricted stock units ("RSUs"), and Employee Stock Purchase Plan ("ESPP") shares. Our application of the treasury stock method includes, as assumed proceeds, the average unamortized stock-based compensation expense for the period. When we are in a net loss position, we do not include dilutive securities as their inclusion would reduce the net loss per share.
The number of shares from our equity awards with market conditions or performance conditions that are included in the diluted share count is based on the number of shares, if any, that would be issuable under the terms of such awards at the end of the reporting period. Under these terms, the maximum number of shares issuable from the equity awards with a market condition are included in the diluted share count as of March 30, 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. No shares related to the performance conditions are included in the diluted share count as of March 30, 2019, as vesting of these awards is contingent upon evaluation of the performance condition over two consecutive trailing four-quarter periods, which have not yet elapsed. See "Note 15 - 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
|
(in thousands, except per share data)
|
March 30,
2019
|
|
March 31,
2018
|
Net income (loss)
|
$
|
7,408
|
|
|
$
|
(5,952
|
)
|
|
|
|
|
Shares used in basic Net income (loss) per share
|
130,992
|
|
|
124,076
|
|
Dilutive effect of stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition
|
3,818
|
|
|
—
|
|
Shares used in diluted Net income (loss) per share
|
134,810
|
|
|
124,076
|
|
|
|
|
|
Basic Net income (loss) per share
|
$
|
0.06
|
|
|
$
|
(0.05
|
)
|
Diluted Net income (loss) per share
|
$
|
0.05
|
|
|
$
|
(0.05
|
)
|
The computation of diluted Net income (loss) per share excludes the effects of stock options, RSUs, 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
|
(in thousands)
|
March 30,
2019
|
|
March 31,
2018
|
Stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition excluded as they are antidilutive
|
812
|
|
|
9,424
|
|
Stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition are considered antidilutive when the aggregate of exercise price and unrecognized stock-based compensation expense are greater than the average market price for our common stock during the period or when we are in a net loss position, as the effects would reduce the loss per share. Stock options, RSUs, and ESPP shares that are antidilutive at
March 30, 2019
could become dilutive in the future.
Note 4 - Marketable Securities
We classify our marketable securities as short-term based on their nature and availability for use in current operations. During the periods presented, our
Short-term marketable securities
consisted of U.S. government agency obligations with contractual maturities of up to
two
years. We liquidated our
Short-term marketable securities
during the first quarter of fiscal 2019. The following table summarizes the remaining maturities of our
Short-term marketable securities
at fair value:
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 30,
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
|
|
Note 5 - Fair Value of Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as of
|
|
Fair value measurements as of
|
|
March 30, 2019
|
|
December 29, 2018
|
(In thousands)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Short-term marketable securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,624
|
|
|
$
|
9,624
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward exchange contracts, net
|
84
|
|
|
—
|
|
|
84
|
|
|
—
|
|
|
53
|
|
|
—
|
|
|
53
|
|
|
—
|
|
Total fair value of financial instruments
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
9,677
|
|
|
$
|
9,624
|
|
|
$
|
53
|
|
|
$
|
—
|
|
In the periods presented, we were invested in U.S. Government agency obligations, which we liquidated during the first quarter of fiscal 2019. In addition, we enter into foreign currency forward exchange contracts to mitigate our foreign currency exchange rate exposure. We carry these instruments at their fair value in accordance with ASC 820, "
Fair Value Measurements
." The framework under the provisions of ASC 820 establishes three levels of inputs that may be used to measure fair value. Each level of input has different levels of subjectivity and difficulty involved in determining fair value, as summarized in "Note 1 - Basis of Presentation and Significant Accounting Policies." There were no transfers between any of the levels during the first
three
months of fiscal
2019
or
2018
.
In accordance with ASC 320, “
Investments-Debt and Equity Securities
,” we recorded an unrealized gain of less than
$0.1 million
during the
three
months ended
March 30, 2019
and an unrealized loss of less than
$0.1 million
during the
three
months ended
March 31, 2018
on certain
Short-term marketable securities
(Level 1 instruments), which have been recorded in
Accumulated other comprehensive loss
.
Note 6 - Inventories
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 30,
2019
|
|
December 29,
2018
|
Work in progress
|
$
|
49,096
|
|
|
$
|
47,224
|
|
Finished goods
|
17,677
|
|
|
19,872
|
|
Total inventories
|
$
|
66,773
|
|
|
$
|
67,096
|
|
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. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations.
We evaluated the transition and presentation approaches available as well as the impact of the new guidance on our consolidated financial statements and related disclosures, including the increase in the assets and liabilities on our balance sheet, and the impact on our current lease portfolio from both a lessor and lessee perspective. To facilitate this, we utilized a comprehensive approach to review our lease portfolio, as well as assessed system requirements and control implications. 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.
Our leases are recognized in our Consolidated Balance Sheets as Operating lease right-of-use assets, and as lease liabilities, with the current portion presented in Current portion of operating lease liabilities and with the long-term portion presented in Long-term operating lease liabilities, net of current portion.
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. Lattice has 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 year
to
8 years
, some of which include options to extend the leases for up to
5 years
, and some of which include options to terminate the leases 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. We have no finance leases as of March 30, 2019.
Our adoption of the standard 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. For the first quarter of fiscal 2019, we recorded the following for lease expense and cash paid for lease liabilities:
|
|
|
|
|
|
|
|
Three Months Ended
|
(In thousands)
|
|
March 30,
2019
|
|
|
|
Fixed operating lease expense
|
|
$
|
1,995
|
|
Variable operating lease expense
|
|
—
|
|
Total operating lease expense
|
|
$
|
1,995
|
|
The following table presents the lease balance classifications within the Consolidated Balance Sheets and summarizes their activity during the first three 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
|
|
219
|
|
Amortization of right-of-use asset during the period
|
|
(1,487
|
)
|
Impairment of right-of-use asset on Portland, Oregon office (recorded in Restructuring charges)
|
|
(757
|
)
|
Balance as of March 30, 2019
|
|
27,868
|
|
|
|
|
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
|
|
219
|
|
Accretion of lease liabilities
|
|
508
|
|
Operating cash used by payments on lease liabilities
|
|
(2,597
|
)
|
Balance as of March 30, 2019
|
|
30,403
|
|
Less: Current portion of operating lease liabilities
|
|
(5,027
|
)
|
Long-term operating lease liabilities, net of current portion
|
|
25,376
|
|
For our operating leases, the weighted-average remaining lease term is
6.5 years
and the weighted-average discount rate is
7.0%
as of March 30, 2019.
Maturities of operating lease liabilities as of March 30, 2019 are as follows:
|
|
|
|
|
|
Fiscal year
|
|
(in thousands)
|
|
|
|
2019 (remaining 9 months)
|
|
$
|
4,974
|
|
2020
|
|
7,053
|
|
2021
|
|
5,288
|
|
2022
|
|
4,436
|
|
2023
|
|
4,563
|
|
Thereafter
|
|
11,369
|
|
Total lease payments
|
|
37,683
|
|
Less: amount representing interest
|
|
(7,280
|
)
|
Total lease liabilities
|
|
$
|
30,403
|
|
Future minimum lease commitments at
December 29, 2018
, under the previous lease guidance (ASC 840), were as follows:
|
|
|
|
|
|
Fiscal year
|
|
(in thousands)
|
|
|
|
2019
|
|
$
|
7,090
|
|
2020
|
|
6,893
|
|
2021
|
|
5,452
|
|
2022
|
|
4,658
|
|
2023
|
|
4,229
|
|
Thereafter
|
|
9,930
|
|
|
|
$
|
38,252
|
|
Prior to 2019, the reporting of future minimum lease commitments included the lease obligations associated with previously restructured facilities. After adoption of Topic 842 for the first quarter of 2019, the lease obligations for previously restructured facilities were
$8.1 million
and continued to be recorded in Other long-term liabilities on our Consolidated Balance Sheets. The difference between the future minimum lease payments reported at December 29, 2018 and the total maturity of operating lease liabilities as of March 30, 2019 is primarily due to new leases executed in the first quarter of fiscal 2019 and to the reasonable certainty of extending the lease of an existing facility. Rental expense under operating leases was
$8.3 million
for fiscal
2018
and
$8.9 million
for fiscal
2017
.
Note 8 - Intangible Assets
In connection with our acquisitions of Silicon Image, Inc. in
March 2015
and SiliconBlue Technologies, Inc. in
December 2011
, we recorded identifiable intangible assets related to developed technology, customer relationships, licensed technology, patents, and in-process research and development based on guidance for determining fair value under the provisions of ASC 820, "
Fair Value Measurements
." We are amortizing the intangible assets using the straight-line method over their estimated useful lives.
We monitor the carrying value of our intangible assets for potential impairment and test the recoverability of such assets annually during the fourth quarter and whenever triggering events or changes in circumstances indicate that their carrying amounts may not be recoverable.
No
impairment charges relating to intangible assets were recorded for the first
three
months of either fiscal
2019
or fiscal
2018
as no indicators of impairment were present.
On our
Consolidated Balance Sheets
at
March 30, 2019
and
December 29, 2018
,
Intangible assets, net
are shown net of accumulated amortization of
$117.2 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
|
(In thousands)
|
March 30,
2019
|
|
March 31,
2018
|
Research and development
|
$
|
14
|
|
|
$
|
127
|
|
Amortization of acquired intangible assets
|
3,389
|
|
|
5,636
|
|
|
$
|
3,403
|
|
|
$
|
5,763
|
|
Note 9 - Cost Method Investment and Collaborative Arrangement
During fiscal
2015
, we purchased a series of preferred stock ownership interests in a privately-held company that designs human-computer interaction technology for total consideration of
$5.0 million
. This gross investment constituted a
22.7%
ownership interest. In the
third
quarter of fiscal
2016
, we made an additional investment of
$1.0 million
via a convertible debt instrument, bringing our gross investment in the investee to
$6.0 million
.
In 2017, we signed new development and licensing contracts with the investee, and the investee incurred preferred debt that effectively subordinates our ownership position between their debt and common shareholders. After evaluating these events and our investment position, we concluded that we have a variable interest in the privately-held company. However, we are not the primary beneficiary of the investee, are not holding in-substance common stock, and do not have a significant amount of influence to direct the activities that most significantly impact the investee’s economic performance. Accordingly, we accounted for our investment in this company under the cost method.
In the fourth quarter of fiscal 2018, we restructured our relationship such that we now own only preferred shares and the prior agreements were canceled, thereby eliminating the variable interest in the investee. We assess this investment for impairment on a quarterly basis. Prior to the fourth quarter of fiscal 2018,
we assessed this investment for impairment by applying a fair value analysis using a revenue multiple approach. After the variable interest in the investee was eliminated, the investment was assessed for indicators of impairment utilizing the qualitative approach as prescribed by ASC 321-10-35,
"Impairment of Equity Securities without Readily Determinable Fair Values
." A decline in value that is judged to be other-than temporary is reported in
Other income, net
in the accompanying Consolidated Statements of Operations with a commensurate decrease in the carrying value of the investment. Under these approaches, we have concluded that
no
impairment adjustment was necessary in the first quarter of either fiscal 2019 or fiscal 2018. Through
March 30, 2019
, we have reduced the value of our investment by approximately
$4.0 million
. The net balance of our investment included in
Other long-term assets
in the
Consolidated Balance Sheets
is approximately
$2.0 million
.
Note 10 - Accounts Payable and Accrued Expenses
Included in
Accounts payable and accrued expenses
in the Consolidated Balance Sheets are the following balances:
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 30,
2019
|
|
December 29,
2018
|
Trade accounts payable
|
$
|
33,414
|
|
|
$
|
31,880
|
|
Liability for non-cancelable contracts
|
5,681
|
|
|
6,078
|
|
Contract liability under ASC 606
|
3,917
|
|
|
1,614
|
|
Restructuring
|
2,525
|
|
|
4,220
|
|
Other accrued expenses
|
5,252
|
|
|
7,971
|
|
Total accounts payable and accrued expenses
|
$
|
50,789
|
|
|
$
|
51,763
|
|
Note 11 - Changes in Stockholders' Equity and Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the changes in total equity for the three month period ended March 30, 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 three months ended March 30, 2019
|
—
|
|
|
—
|
|
|
—
|
|
|
7,408
|
|
|
—
|
|
|
7,408
|
|
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
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47
|
|
|
47
|
|
Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of tax
|
2,177
|
|
|
22
|
|
|
11,546
|
|
|
—
|
|
|
—
|
|
|
11,568
|
|
Stock-based compensation related to stock options, ESPP and RSUs
|
—
|
|
|
—
|
|
|
3,686
|
|
|
—
|
|
|
—
|
|
|
3,686
|
|
Balances, March 30, 2019
|
131,905
|
|
|
$
|
1,319
|
|
|
$
|
751,506
|
|
|
$
|
(469,375
|
)
|
|
$
|
(2,295
|
)
|
|
$
|
281,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the changes in total equity for the three month period ended March 31, 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 three months ended March 31, 2018
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,952
|
)
|
|
—
|
|
|
(5,952
|
)
|
Unrealized loss related to marketable securities, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
Recognized gain on redemption of marketable securities, previously unrealized
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Translation adjustments, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
589
|
|
|
589
|
|
Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of tax
|
416
|
|
|
4
|
|
|
1,145
|
|
|
—
|
|
|
—
|
|
|
1,149
|
|
Stock-based compensation related to stock options, ESPP and RSUs
|
—
|
|
|
—
|
|
|
4,800
|
|
|
—
|
|
|
—
|
|
|
4,800
|
|
Accounting method transition adjustment (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
27,401
|
|
|
—
|
|
|
27,401
|
|
Balances, March 31, 2018
|
124,311
|
|
|
$
|
1,243
|
|
|
$
|
701,713
|
|
|
$
|
(456,413
|
)
|
|
$
|
(871
|
)
|
|
$
|
245,672
|
|
|
|
|
(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.
|
Note 12 - Income Taxes
We are subject to federal and state income tax as well as income tax in the various foreign jurisdictions in which we operate. For the
three
months ended
March 30, 2019
, we recorded an income tax expense of approximately
$0.2 million
, and for the three months ended
March 31, 2018
, we recorded an income tax expense of approximately
$0.6 million
. Income taxes for the
three
month periods ended
March 30, 2019
and
March 31, 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
months ended
March 30, 2019
results from
foreign income and withholding taxes offset with release of uncertain tax positions due to lapsing of the statute of limitations
.
Through
March 30, 2019
, we continued to evaluate the valuation allowance position in the United States and concluded we should maintain a 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 gross profits sufficient to offset expenditures in future periods within the United States. 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 that we will realize the net deferred tax assets in future periods.
We believe that the years that our tax returns remain subject to examination by taxing authorities are 2015 for federal income taxes, 2014 for state income taxes, and 2012 for foreign income taxes, including years ending thereafter. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carryforward amount. Our income tax returns are under examination in the Philippines for fiscal years
2016
and
2017
.
At
March 30, 2019
, it is reasonably possible that
$1.2 million
of unrecognized tax benefits and
$0.1 million
of associated interest and penalties could be recognized during the next twelve months. The
$1.3 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.
At December 29, 2018, we had U.S. federal net operating loss ("NOL") carryforwards (pretax) of approximately
$365.3 million
that expire at various dates between
2019
and
2037
. We had state NOL carryforwards (pretax) of approximately
$147.6 million
that expire at various dates from
2019
through
2037
. We also had federal and state credit carryforwards of
$51.5 million
and
$61.2 million
, respectively. Of the total
$61.2 million
state credit carryforwards,
$60.2 million
do not expire. The remaining credits expire at various dates from
2019
through
2037
.
Our liability for uncertain tax positions (including penalties and interest) was
$25.9 million
and
$26.3 million
at
March 30, 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
$24.9 million
is netted against deferred tax assets.
The Tax Cuts and Jobs Act, enacted December 22, 2017, required a deemed repatriation of deferred foreign earnings as of December 30, 2017 and, as a result, no future U.S. taxes should be due on these earnings because of enactment of a 100% dividends received deduction. We had no impact from this transition tax due to utilization of NOL carryforwards. Foreign earnings may be subject to withholding taxes in local jurisdictions if they are distributed and repatriated in the United States.
We are not currently paying U.S. federal income taxes and do not expect to pay such taxes until we fully utilize our tax 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 13 - Restructuring
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, and recorded approximately
$1.3 million
of Restructuring charges from ceasing use of this space, which includes approximately
$0.8 million
of impairment of the operating lease right-of-use asset for this property. These actions are part of an overall plan to achieve financial targets and to enhance our financial and competitive position by better aligning our revenue and operating expenses. Under this plan, approximately
$1.3 million
and
$1.0 million
of expense was incurred during the
three
months ended
March 30, 2019
and
March 31, 2018
, respectively. Approximately
$17.7 million
of total expense has been incurred through
March 30, 2019
under the June 2017 Plan. We expect the total cost of the June 2017 Plan to be approximately
$21.5 million
to
$23.0 million
and that it will be substantially completed by the end of fiscal 2019.
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 (includes restructuring)
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
|
|
Total
|
Balance at December 30, 2017
|
$
|
1,192
|
|
|
$
|
870
|
|
|
$
|
360
|
|
|
$
|
25
|
|
|
$
|
2,447
|
|
Restructuring charges
|
241
|
|
|
13
|
|
|
738
|
|
|
37
|
|
|
1,029
|
|
Costs paid or otherwise settled
|
(908
|
)
|
|
(85
|
)
|
|
(700
|
)
|
|
(31
|
)
|
|
(1,724
|
)
|
Balance at March 31, 2018
|
$
|
525
|
|
|
$
|
798
|
|
|
$
|
398
|
|
|
$
|
31
|
|
|
$
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2018
|
$
|
1,814
|
|
|
$
|
8,630
|
|
|
$
|
218
|
|
|
$
|
18
|
|
|
$
|
10,680
|
|
Restructuring charges
|
(60
|
)
|
|
1,409
|
|
|
—
|
|
|
(8
|
)
|
|
1,341
|
|
Costs paid or otherwise settled
|
(1,540
|
)
|
|
(1,875
|
)
|
|
(83
|
)
|
|
(10
|
)
|
|
(3,508
|
)
|
Balance at March 30, 2019
|
$
|
214
|
|
|
$
|
8,164
|
|
|
$
|
135
|
|
|
$
|
—
|
|
|
$
|
8,513
|
|
|
|
|
(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
|
Note 14 - Long-Term Debt
On March 10, 2015, we entered into a secured credit agreement (the "Credit Agreement") with Jefferies Finance, LLC and certain other lenders for purposes of funding, in part, our acquisition of Silicon Image, Inc. The Credit Agreement provided for a
$350 million
term loan (the "Term Loan") maturing on March 10, 2021 (the "Term Loan Maturity Date"). We received
$346.5 million
net of an original issue discount of
$3.5 million
and we paid debt issuance costs of
$8.3 million
. The Term Loan bears variable interest equal to the one-month LIBOR, subject to a
1.00%
floor, plus a spread of
4.25%
. The current effective interest rate on the Term Loan is
7.42%
.
The Term Loan is payable through a combination of (i) quarterly installments of approximately
$0.9 million
, (ii) annual excess cash flow payments as defined in the Credit Agreement, which are due 95 days after the last day of our fiscal year, and (iii) any payments due upon certain issuances of additional indebtedness and certain asset dispositions, with any remaining outstanding principal amount due and payable on the Term Loan Maturity Date. The percentage of excess cash flow we are required to pay ranges from
0%
to
75%
, depending on our leverage and other factors as defined in the Credit Agreement. As of
March 30, 2019
, the Credit Agreement would require a
75%
excess cash flow payment.
In the
first
quarter of fiscal
2019
, we made a total of
$26.9 million
in payments on the Term Loan, including
$25.0 million
in voluntary principal payments, a
$1.0 million
mandatory payment from the proceeds of an asset sale in the fourth quarter of fiscal 2018, and a required quarterly installment payment of
$0.9 million
. As of
March 30, 2019
, we had approximately
$236.2 million
outstanding under the Credit Agreement.
While the Credit Agreement does not contain financial covenants, it does contain informational covenants and certain restrictive covenants, including limitations on liens, mergers and consolidations, sales of assets, payment of dividends, and indebtedness. We were in compliance with all such covenants in all material respects at
March 30, 2019
.
The original issue discount and the debt issuance costs have been accounted for as a reduction to the carrying value of the Term Loan on our
Consolidated Balance Sheets
and are being amortized to
Interest expense
in our
Consolidated Statements of Operations
over the contractual term, using the effective interest method.
The fair value of the Term Loan approximates the carrying value, which is reflected in our
Consolidated Balance Sheets
as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 30,
2019
|
|
December 29,
2018
|
Principal amount
|
$
|
236,158
|
|
|
$
|
263,033
|
|
Unamortized original issue discount and debt costs
|
(2,700
|
)
|
|
(3,386
|
)
|
Less: Current portion of long-term debt
|
(7,796
|
)
|
|
(8,290
|
)
|
Long-term debt, net of current portion
|
$
|
225,662
|
|
|
$
|
251,357
|
|
Interest expense related to the Term Loan was included in
Interest expense
on our
Consolidated Statements of Operations
as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(In thousands)
|
March 30,
2019
|
|
March 31,
2018
|
Contractual interest
|
$
|
4,316
|
|
|
$
|
4,528
|
|
Amortization of debt issuance costs and discount
|
687
|
|
|
507
|
|
Total interest expense related to the Term Loan
|
$
|
5,003
|
|
|
$
|
5,035
|
|
As of
March 30, 2019
, expected future principal payments on the Term Loan were as follows:
|
|
|
|
|
|
Fiscal year
|
|
(in thousands)
|
|
|
|
2019
|
|
9,388
|
|
2020
|
|
59,291
|
|
2021
|
|
167,479
|
|
|
|
$
|
236,158
|
|
Note 15 - Stock-Based Compensation
Total stock-based compensation expense included in our
Consolidated Statements of Operations
is presented in the following table:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(In thousands)
|
March 30,
2019
|
|
March 31,
2018
|
Cost of products sold
|
$
|
202
|
|
|
$
|
237
|
|
Research and development
|
1,125
|
|
|
1,207
|
|
Selling, general, and administrative
|
2,359
|
|
|
3,356
|
|
Total stock-based compensation
|
$
|
3,686
|
|
|
$
|
4,800
|
|
Market-Based and Performance-Based Stock Compensation
In fiscal years 2018 and 2019, we granted RSUs with a market condition to certain executives. The market condition is a comparison of the Company's relative Total Shareholder Return ("TSR") when compared to the TSR of a component of companies of the PHLX Semiconductor Sector Index over a measurement period. TSR is a measure of stock price appreciation plus dividends paid, if any, in the performance period. We determined and fixed the fair value of the awards with a market condition on the date of grant using a lattice-based option-pricing model. The valuation of these awards incorporated a Monte-Carlo simulation, and considered the likelihood that we would achieve the market condition.
In September 2018, we granted inducement awards outside of, but subject to the terms and conditions of the 2013 Incentive Plan to our incoming President and Chief Executive Officer. These awards included restricted stock units that vest and become payable upon satisfaction of certain market and performance conditions. The market and performance conditions include TSR and Adjusted EBITDA targets, respectively. The TSR-based awards vest and become payable over a
three
-year period based on the Company’s TSR relative to the PHLX Semiconductor Sector Index, with
100%
of the units vesting at the 50th percentile,
250%
of the units vesting at the 75th percentile achievement,
zero
vesting if relative TSR is below the 25th percentile, and vesting scaling linearly for achievement between the 25th and 75th percentile. The Adjusted EBITDA-based awards will vest and become payable based upon the Company’s generating specified “adjusted” EBITDA levels on a trailing four quarter basis in any
two
consecutive trailing four-quarter periods. We valued the RSUs with a performance condition using the market price on the day of grant.
In September 2018, we granted inducement awards outside of, but subject to the terms and conditions of the 2013 Incentive Plan to our incoming Corporate Vice President of Research and Development, and in September 2018 and January 2019, we granted awards from the 2013 Incentive Plan to certain executives. These awards included restricted stock units that would vest and become payable upon achievement of a target TSR. The awards vest and become payable over a
three
-year period based on the Company’s TSR relative to the PHLX Semiconductor Sector Index, with
100%
of the units vesting at the 50th percentile,
200%
of the units vesting at the 75th percentile achievement,
zero
vesting if relative TSR is below the 25th percentile, and vesting scaling linearly for achievement between the 25th and 75th percentile.
We recognize expense related to these stock option and RSU awards with a market or performance condition based on our estimate of the probability of the respective conditions being achieved. For these awards, we incurred stock compensation expense of approximately
$0.9 million
in the
first
quarter of fiscal
2019
and of approximately
$0.3 million
in the
first
quarter of fiscal
2018
, which is recorded as a component of total stock-based compensation expense.
The following table summarizes the activity for our stock options and RSUs with a market or performance condition during the first three months of fiscal 2019:
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Unvested
|
|
Vested
|
|
Total
|
Balance, December 29, 2018
|
|
909
|
|
|
—
|
|
|
909
|
|
Granted
|
|
265
|
|
|
—
|
|
|
265
|
|
Canceled
|
|
(98
|
)
|
|
—
|
|
|
(98
|
)
|
Balance, March 30, 2019
|
|
1,076
|
|
|
—
|
|
|
1,076
|
|
Note 16 - 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 the Company 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, the Company removed the action to the United States District Court for the District of Oregon. At this stage of the proceedings, the Company does not have an estimate of the likelihood or the amount of any potential exposure to the Company; however, the Company believes that these claims are without merit and intends 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.
Note 17 - Segment and Geographic Information
Segment Information
In the three-month periods ended
March 30, 2019
and
March 31, 2018
, respectively, Lattice had
one
operating segment: the core Lattice business, which includes semiconductor devices, evaluation boards, development hardware, and related intellectual property licensing, services, and sales.
Geographic Information
Our revenue by major geographic area is presented in "Note 2 - Revenue from Contracts with Customers".
Our
Property and equipment, net
by country at the end of each period was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
March 30,
2019
|
|
December 29,
2018
|
United States
|
$
|
29,965
|
|
82
|
%
|
|
$
|
27,353
|
|
78
|
%
|
|
|
|
|
|
|
China
|
2,088
|
|
6
|
|
|
2,360
|
|
7
|
|
Philippines
|
3,142
|
|
8
|
|
|
3,319
|
|
9
|
|
Taiwan
|
802
|
|
2
|
|
|
949
|
|
3
|
|
Japan
|
280
|
|
1
|
|
|
324
|
|
1
|
|
Other
|
481
|
|
1
|
|
|
578
|
|
2
|
|
Total foreign property and equipment, net
|
6,793
|
|
18
|
|
|
7,530
|
|
22
|
|
Total property and equipment, net
|
$
|
36,758
|
|
100
|
%
|
|
$
|
34,883
|
|
100
|
%
|