EDGAR 10-K Filing

Company CIK: 855658
Filing Year: 2021
Filename: 855658_10-K_2021_0001437749-21-004238.json

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ITEM 1. BUSINESS
Item 1. Business
Overview
Lattice Semiconductor Corporation and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develop technologies that we monetize through differentiated programmable logic semiconductor products, system solutions, design services, and licenses. Lattice is the low power programmable leader. We solve customer problems across the network, from the Edge to the Cloud, in growing communications, computing, industrial, automotive, and consumer markets. Our technology, long-standing relationships, and commitment to world-class support enable our customers to create a smart, secure, and connected world.
Our field programmable gate array ("FPGA") devices enable us to provide our customers with a strong, growing base of control, connect, and compute technologies. We believe there are multiple growth areas that will allow us to increase our addressable market. In particular, we believe there are several emerging trends in servers, infrastructure, and smart devices that are opportunities for Lattice:
● With the growth of hyperscale data centers, our “processor agnostic” solutions are ideal for control and connect functions in enterprise and data center server applications.
● With the expected continued communications infrastructure build-out from 5G deployment, Lattice solutions are being adopted to control and connect a variety of functions in critical systems.
● With the increase in electrification and the proliferation of sensors in smart factories, smart homes, and automobiles, our low power, small form factor solutions are ideal for everything from battery powered systems and sensor applications to embedded vision.
● With the increase in artificial intelligence, machine learning, and a multitude of applications at the network edge, Lattice devices support applications that often act independently and need to make instantaneous decisions. Our solutions provide the computing and learning capabilities to perform functions like face detection, image recognition, and video analytics.
● With the demand for more hardware security in the communications, computing, industrial, automotive, and consumer markets, our hardware root of trust devices provide platform firmware resilience. This provides a secure boot for systems that are dependent on processors.
To serve these emerging needs, customer solutions require low power, memory bandwidth, processing power, and the ability to integrate complex functionality into a highly compact footprint. These requirements align to the capabilities of our FPGA devices. Our flexible, low power, small form factor, easy to use FPGAs put us in a unique position to meet these growing market needs.
Our Markets and Customers
We sell our products globally in three end market groups: Communications and Computing, Industrial and Automotive, and Consumer. We also provide Intellectual Property ("IP") licensing and services to these end markets.
In the Communications and Computing Market, our solutions play key roles in computing systems such as servers and clients, 5G wireless infrastructure, switches / routers, and other related applications.
Our Communications and Computing customers need to address a variety of challenges.
● As client compute devices become smaller and smarter, there is a need for small form factor devices with power efficiency to interface with a variety of sensors and add intelligence.
● As server architectures become increasingly complex, customers need simplified control logic, enhanced hardware platform security, system status monitoring, and rigorous power and thermal management.
● Networks typically require progressively higher bandwidth and increased reliability as more data is demanded by consumer and other connected devices. Bandwidth demands are also driven by the rapid transition to cloud-based infrastructure.
● As wireless cell sites become more compact without fans, there is a growing requirement for smaller form factors optimized for low power consumption.
Lattice FPGAs solve these customer problems. Our FPGAs are optimized for input/output ("I/O") expansion, low cost per look-up table, hardware acceleration, and hardware management. Our FPGAs consume power at very low rates, which reduces operating costs and supports the continued miniaturization of consumer devices. Their small form factor enables higher functional density in less space. Finally, our FPGAs are I/O rich, which allows for more connections with system application specific integrated circuits ("ASICs") and application specific standard products ("ASSPs").
Examples of where our products enable intelligent automation in the Industrial and Automotive Market include industrial Internet of Things ("IoT"), machine vision, robotics, factory automation, driver assistance, and automotive infotainment.
Our Industrial and Automotive customers face numerous challenges:
● As smart factories develop, sensors are proliferating and machine vision is becoming higher definition, in turn requiring increasing amounts of data to be gathered, connected, and processed.
● Cars, trucks, and trains are also becoming smarter and more connected. Drivers and passengers are demanding better in-cabin experiences including entertainment, diagnostics, and enhanced safety - often involving multiple displays, cameras, and sensors.
● As factories and automotive manufacturers continue their evolution of computerization, power reduction, faster time to design-in and market, lower costs are becoming increasingly normal.
● Mission-critical defense applications demand increasing reliability, while being optimized for size, weight, power, and cost ("SWaP-C").
Our product portfolio helps solve these challenges. Our small-sized, low-power FPGAs not only provide the I/O expansion, bridging, connectivity, and processing inherent in FPGAs, but they also form the backbone of several integrated solutions, including motor control, complete High Definition ("HD") camera and DVR solutions on a single FPGA device, and Human-Machine Interfaces ("HMI") on a chip.
In the Consumer Market, you can find our solutions making products smarter and thinner, including: smart home devices, prosumer devices, sound bars, high end projectors, Augmented Reality ("AR") / Virtual Reality ("VR"), and wearables.
Our Consumer customers are driven by the need to deliver richer and more responsive experiences. They typically require:
● More intelligence and computing power. Products need to be "always-on" and "always-aware."
● Longer battery lives for handheld devices and reduced energy consumption for plugged-in devices.
● Real-time transmission of higher resolution video content on larger screen sizes.
● Fast design cycles. Products must be quickly and easily differentiated.
● Smaller form factors. Products need to lay flatter on the wall or fit more easily in people’s pockets.
● Various levels of video processing and analytics.
Lattice FPGAs bring multiple benefits to these customers. An FPGA’s parallel architecture enables faster processing than competing devices, such as microcontrollers, allowing for a user experience with shorter pauses and fewer delays. Our FPGAs are among the lowest power consumption in the industry, enabling the application processor and other high-power components to remain dormant longer, resulting in longer battery life. Finally, with some of the industry’s smallest packages, we enable thinner end products.
Our proprietary solutions help our customers get their products to market faster than typical development cycles. With re-programmability and flexibility, our FPGAs inherently allow our customers to have quicker product development. The time-to-market advantages of Lattice's solutions are critical given the shorter product life cycles and higher competition in our customers’ end markets.
Our Products, Services, and Competition
We are focused on delivering FPGAs and related solutions to help solve our customers' problems. We also serve our customers with IP licensing and various other services.
Field Programmable Gate Arrays (“FPGAs”)
FPGAs are regular arrays of logic that can be custom-configured by the user through software. This programmability allows our customers flexibility and reduced time to market while allowing us to offer the chips to many different customers in many different markets. Four product families anchor our FPGA offerings:
● The Certus-NX and ECP families are our “General Purpose FPGAs” and address a broad range of applications across multiple markets. They offer customers the optimal cost per gate, Digital Signal Processing ("DSP") capability, and Serialize-Deserialize ("SerDes") connectivity. ECP devices are optimized for the Communications and Computing market but also find significant use in the Industrial, Automotive, and Consumer markets.
● The MachXO families are known as “Control & Security FPGAs” and are optimized for platform management and security applications. They are control oriented and offer the most optimized cost per I/O, along with the lowest cost per look-up table. MachXO families are widely used across our three end market groups: Communications and Computing, Industrial and Automotive, and Consumer. Our latest generation MachXO3D and Mach-NX FPGAs come with pre-verified cryptographic functions to enable Hardware Root-of-Trust functionality, which is needed for systems to have platform firmware resiliency, i.e. the ability to protect, detect, and recover from unauthorized firmware attacks.
● iCE40 families are known as “Ultra Low Power FPGAs.” Their small size and ultra-low power make them the optimal products for each of our core segments where small form factor and customizing is required. The latest member of the family, iCE40 UltraPlus, is focused on IoT edge devices with its Artificial Intelligence ("AI") capabilities, low power, and small form factor.
● Our CrossLink families are "Video Connectivity FPGAs" and are optimized for high speed video and sensor applications. CrossLink combines the power and speed benefits of hardened video camera and display bridging cores with the flexibility of FPGA fabric. CrossLinkPlus provides users with instant-on capabilities for video display. CrossLink-NX, built on the new Lattice Nexus platform, provides the lowest power in the smallest packages in its class, higher performance, and high reliability. These products are designed for computing, industrial, automotive, and consumer markets, but also find use in communications.
To enable our customers to get to market faster we support our FPGAs with intellectual property cores, reference designs, development kits, and design software. We are investing in our design software, such as Lattice Radiant, to deliver best-in-class tools that enable predictable design convergence, and Lattice Propel for unparalleled ease in creating embedded processor-based designs. Further, we have developed integrated system-level solution stacks, such as Lattice sensAI, as well as Lattice mVision for low power embedded vision, and Lattice Sentry for implementing hardware security. We combine all of these elements to solve specific customer problems such as the need to quickly implement low power AI inferencing in Edge applications.
Depending on the application, we may compete with other FPGAs vendors, as well as producers of ASICs, ASSPs, and microcontrollers. We believe that Lattice has developed products and solutions with differentiated advantages.
Legacy Semiconductor Products
We also sell Video Connectivity ASSPs, although we are not developing new products in this area and their support requirements are minimal.
Intellectual Property (IP) Licensing and Services
Lattice has a broad set of technological capabilities and many U.S. and international patents. We generate revenue from our technology portfolio via upfront fees and on-going royalty payments through the following activities:
● Standard IP Licensing - these activities include our participation in two consortia for the licensing of High-Definition Multimedia Interface ("HDMI") and Mobile High-Definition Link ("MHL") technologies to customers who adopt the technology into their products and voluntarily report their usage and royalties. The royalties are split among consortium members, including us.
● IP Core Licensing - some customers need Lattice’s technology for specific functions or features, but for various reasons are not able to use our silicon solutions. In those cases, we may license our IP cores, which they can integrate into their own ASICs. In contrast to the use of consortia, these licensing activities are generally performed internally.
● Patent Monetization - we sell certain patents from our portfolio generally for technology that we are no longer actively developing. The revenue from these sales generally consists of upfront payments and potential future royalties.
● IP Services - projects and design services for customers who wish to develop specific solutions that harness our proven technology and expertise.
Research and Development
We place a substantial emphasis on new product development, where return on investment is the key driver. We believe that continued investment in research and development is required to maintain and improve our competitive position. Our research and development activities are focused on new proprietary products, advanced packaging, existing product enhancements, software development tools, soft IP cores and application focused solutions. These research and development activities occur primarily at our sites in Hillsboro, Oregon; San Jose, California; Shanghai, China; and Muntinlupa City, Philippines.
We believe that a continued commitment to research and development is essential to maintaining product leadership and providing an increased cadence of innovative new product offerings and, therefore, we expect to continue to make significant future investments in research and development.
Operations
We do not manufacture our own silicon products. We maintain strategic relationships with large, established semiconductor foundries to source our finished silicon wafers. This strategy allows us to focus our internal resources on product and market development and eliminate the fixed cost of owning and operating semiconductor manufacturing facilities. We are able to take advantage of the ongoing advanced process technology development efforts of semiconductor foundries and apply those technologies when they become most economically beneficial to us and to our customers.
We rely on third party vendors to provide cost-effective and efficient supply chain services. Among other activities, these outsourced services relate to direct sales logistics, which include order fulfillment, inventory management and warehousing, and the shipment of inventory to third party distributors.
Wafer Fabrication
Lattice partners with Samsung Semiconductor ("Samsung") to develop and manufacture the first low-power FPGA on 28nm FDS technology, which is used in our latest Nexus FPGA platform of products. We partner with United Microelectronics Corporation ("UMC") and its subsidiary United Semiconductor Japan Corporation ("USJC") to manufacture our products on its 130nm, 90nm, 65nm & 40nm CMOS process technologies, as well as embedded flash memory in these process nodes. Taiwan Semiconductor Manufacturing Company Ltd. (“TSMC”) manufactures our 350nm, 130nm, 55nm and 40nm products. Seiko Epson ("Epson") manufactures our 500nm, 350nm, 250nm and 180nm products.
We source silicon wafers from our foundry partners, Samsung, UMC, USJC, TSMC, and Epson, pursuant to agreements with each company and their respective affiliates. We negotiate wafer volumes, prices and other terms with our foundry partners and their respective affiliates on a periodic basis.
Assembly
All of our assembly and test operations are performed by industry-leading outsourced assembly & test suppliers ("OSAT's") with our primary supplier being Advanced Semiconductor Engineering, Inc. ("ASE"). We perform certain test operations as well as reliability and quality assurance processes internally during the development process. We have achieved and maintained ISO9001:2015 Quality Management Systems Certification and released a line of products qualified to the AEC-Q100 Reliability Standard in support of Automotive product offerings in addition to ISO26262 certification on both automotive products and software.
After wafer fabrication and initial testing, we ship wafers to independent subcontractors for assembly. During assembly, wafers are separated into individual die and encapsulated in plastic packages. We have qualified two major assembly partners, ASE and Amkor Technology ("Amkor") and are second sourced where volume and customer requirements are necessary. All ASE and Amkor manufacturing of our products is in Asia. We negotiate assembly prices, volumes and other terms with our assembly partners and their respective affiliates on a periodic basis.
We currently offer an extensive list of standard products in lead (Pb) free packaging. Our lead-free products meet the European Parliament Directive entitled "Restrictions on the use of Hazardous Substances" ("RoHS"). A select and growing subset of our RoHS compliant products are also offered with a "Halogen Free" material set.
Testing (Sort and Final Test)
We electrically sort test the die on most wafers prior to shipment for assembly. Wafer sort testing is primarily performed by Amkor in Japan and our second source King Yuan Electronics Co. (“KYEC”) in Taiwan.
Following assembly, but prior to customer shipment, each product undergoes final testing and quality assurance procedures. Final testing is performed by ASE and Amkor.
Sales and Revenue
We generate revenue by monetizing our technology and patents through product and technology sales. This involves the channel and direct sales of silicon-based products, as well as the licensing or sale of intellectual property that we have developed or acquired, some of which we use in our products, and certain design services that we may provide.
Sales and Customers
We primarily sell our products to customers from Lattice Semiconductor Corporation or our wholly-owned subsidiary, Lattice SG Pte. Ltd. Independent distributors are significant customers, and a substantial portion of our sales are made to this channel. Additionally, we sell both directly and through a network of independent manufacturers' representatives. We also employ a direct sales management and field applications engineering organization to support our end customers and indirect sales resources. End customers for our products are primarily OEMs in the Communications and Computing, Industrial and Automotive, and Consumer end markets. Our sales team uses our position within these OEMs to drive multi-generation design wins and leverages our distribution partners to grow our broad customer base.
We provide global technical support to our end customers with engineering staff based at our headquarters, product development centers and selected field sales offices. We maintain numerous domestic and international field sales offices in major metropolitan areas.
In fiscal years 2020, 2019, and 2018, sales to distributors accounted for approximately 83%, 82%, and 83%, respectively, of our net revenue. We depend on our distributors to sell our products to end customers, complete order fulfillment, and maintain sufficient inventory of our products. Our distributors also provide technical support and other value-added services to our end customers. We have two global distributors. We also have regional distribution in Asia, Japan, and Israel, and we sell through three major on-line distributors. Revenue from foreign sales as a percentage of total revenue was 89%, 89%, and 90% for fiscal 2020, 2019, and 2018, respectively. We assign revenue to geographies based on ship-to location of our customers. Both foreign and domestic sales are denominated in U.S. dollars.
Backlog
Our backlog consists of orders from distributors and certain Original Equipment Manufacturers ("OEMs") that require delivery within the next year. Historically, our backlog has not been a predictor of future sales or customer demand for the following reasons:
● Purchase orders, consistent with common industry practices, can generally be revised or canceled up to 30 days before the scheduled delivery date without significant penalty.
● A sizable portion of our revenue comes from our "turns business," where the product is ordered and delivered within the same quarter.
Seasonality
We may periodically experience variability in our sales volumes and financial results due to seasonal trends in the end markets we serve, the cyclical nature of the semiconductor industry, and general economic conditions.
Intellectual Property, Patents, and Licensing
We seek to protect our products, technologies, and intellectual property primarily through patents, trade secrets, copyrights, trademark registrations, licensing restrictions, confidentiality agreements, and other approaches designed to protect proprietary information. We hold numerous United States and international patents and have patent applications pending in the United States and internationally. In addition to protecting innovations designed into our products, our ownership and maintenance of patents is an important factor in the determination of our share of the royalties for the HDMI standard. Our current patents will expire at various times between 2021 and 2039, subject to our payment of periodic maintenance fees. We believe that our patents have value, and we expect to file future patent applications in both the United States and abroad on significant inventions, as we deem appropriate. We have acquired various licenses from third parties to certain technologies that are implemented in IP cores or embedded in our products. These licenses support our continuing ability to make and sell these products to our customers. While our various IP rights are important to our success, we believe our business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses.
Human Capital Management
We provide a safe and positive work environment for our employees that emphasizes respect for individuals and ethical conduct, learning and development, facilitated by a direct employee engagement model. The health and safety of our employees is of utmost important to us. During the COVID-19 pandemic, we have taken actions to safeguard the health and well-being of our employees and our business. We implemented social distancing policies at our locations around the world including working from home and eliminating substantially all travel. Recognizing and respecting our global presence, we strive to maintain a diverse and inclusive workforce everywhere we operate. As of January 2, 2021, we had 746 employees worldwide.
We believe our employees are the foundation of our success and that our future growth depends, in part, on our ability to continue to attract and retain key technical, sales, and management personnel, particularly highly-skilled engineers involved in the design, development, and support of new and existing products and processes. In order for us to attract the best talent, we provide a collaborative, diverse, inclusive and innovative work environment, competitive compensation, and recognition to give our employees the opportunity to grow. We are focused on developing diverse teams and continuing to build an inclusive culture that inspires leadership, encourages innovative thinking, and supports the development and advancement of all.
Our human capital management objectives include identifying, recruiting, incentivizing, and integrating our existing and future employees. We strive to attract and retain talented employees by offering competitive compensation and benefits that support their health, financial and emotional well-being. Our compensation philosophy is based on rewarding each employee’s individual contributions and striving to achieve equal pay for equal work. We use a combination of fixed and variable pay including base salary, bonuses, performance awards and stock-based compensation. The principal purposes of our equity incentive plans are to attract, retain and motivate employees through the granting of stock-based compensation awards. We offer employees benefits that vary by country and are designed to address local laws and cultures and to be competitive in the marketplace.
Corporate Information and Public Information Availability
Our corporate headquarters are located at 5555 NE Moore Court, Hillsboro, Oregon 97124, and our website is www.latticesemi.com. Information contained or referenced on our website is not incorporated by reference into, and does not form a part of, this Annual Report on Form 10-K. Our common stock trades on the NASDAQ Global Select Market under the symbol LSCC.
We make available, free of charge through the Investor Relations section of our website at ir.latticesemi.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports and statements as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC. You may also obtain free copies of these materials by contacting our Investor Relations Department at 5555 NE Moore Court, Hillsboro, Oregon 97124, telephone (503) 268-8000. Our SEC filings are also available at the SEC's website at www.sec.gov.
Our investor relations website also provides notifications of news or announcements regarding our financial performance and other items that may be material or of interest to our investors, including SEC filings, press releases, earnings releases, and webcasts of our earnings calls. Further, corporate governance information, including our corporate governance policies, director code of ethics, code of conduct, board committee charters, conflict minerals report and conflict minerals policy, is also available on the investor relations section of our website.
The content on any website referred to in this filing is not incorporated by reference into this filing unless expressly noted otherwise.

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ITEM 1A. RISK FACTORS
ITEM 1A. Risk Factors
The following risk factors and other information included in this Annual Report should be carefully considered in their entirety before making an investment decision relating to our common stock. If any of the risks described below occur, our business, financial condition, operating results, and cash flows could be materially adversely affected, and the trading price of our common stock could decline. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition, and operating results, particularly in light of the rapidly changing nature of the COVID-19 pandemic containment measures and the related impacts to economic and operating conditions.
Risk Factor Summary
Factors Related to Economic, Legal, Regulatory & Political Business Conditions
● The impact of the COVID-19 pandemic on our business.
● Economic, legal, regulatory, political, and business conditions related to our global business.
● The impact of tariffs, trade sanctions or similar actions on our business.
Factors Related to Manufacturing our Products
● The concentration of subcontractors that we rely on to supply and fabricate silicon wafers for our semiconductor products.
● Our achievement of continued yield improvement.
● The impacts of shortages in, or increased costs of, wafers and other materials.
● Potential warranty claims and other costs related to our products.
● Material change in the agreements governing encryption keys that could restrict product shipment or significantly increase the cost to track products throughout the distribution chain.
Factors Related to Intellectual Property and Litigation
● Fluctuations in our revenue and margins caused by the intellectual property licensing component of our business strategy.
● Material fluctuations in our revenue and gross margins caused by our sale of patents and intermittent significant licensing transactions.
● The impact of actual and potential litigation and unfavorable results of legal proceedings on our business.
● Variability in our share of adopter fees and royalties for the HDMI standard as a result of our evolving participation in the HDMI standard.
● Our ability to protect our new and existing intellectual property rights.
Factors Related to Overall General Business & Operations
● Proper functioning of our internal processes and information technology systems, including in response to data breaches, cyber-attacks, or cyber-fraud.
● Goodwill impairments and other impairments under U.S. GAAP that may impact our business.
● Changes to financial accounting standards applicable to us and any related changes to our business practices.
● Exposure to unanticipated tax consequences as a result of changes in effective tax rates, tax laws and our global organizational structure and operations.
● Weakness in our internal control over financial reporting.
● Our ability to compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel.
● Limitations to our flexibility caused by our outstanding indebtedness.
● Our failure to adequately foresee and insure against risks related to our business.
Factors Related to Our Markets and Product Development
● Cyclical market patterns and potential downturns in our industry or our end markets.
● Our ability to develop and introduce new products that achieve customer and market acceptance.
● Competition with companies that have significantly greater resources than us and numerous other product solutions.
● Our reliance on independent contractors and third parties to provide key services in our product development and operations.
Factors Related to Our Sales and Revenue
● Our dependence on our distributors and a concentrated group of end customers.
● Fluctuations in and the unpredictability of our business and our sales cycles.
● Accounting requirements related to sales through our distribution channel.
Factors Related to Strategic Transactions
● Disruption in and impacts of acquisitions, divestitures, strategic investments and strategic partnerships on our business.
Factors Related to Economic, Legal, Regulatory & Political Business Conditions
The COVID-19 pandemic could adversely affect our business, results of operations, and financial condition in a material way.
COVID-19 has spread internationally and been declared a pandemic, affecting the populations of the United States as well as many countries around the world. The outbreak has resulted in significant governmental measures being implemented to control the spread of COVID-19, including, among others, restrictions on travel, manufacturing and the movement of employees in many regions of the world, and the imposition of remote or work-from-home mandates in many of our offices, including in the United States, the Philippines and, for a time, China. The majority of our products are manufactured, assembled, and tested by third parties in Asia. In addition, we rely on third party vendors for certain logistics and shipping operations throughout the world, including in Malaysia, Singapore, South Korea, Japan, and Taiwan. We also have other operations in China, the Philippines, and the United States. If the remote or work-from-home conditions in any of our offices continue for an extended period of time, we may experience delays in product development, a decreased ability to support our customers, reduced design win activity, and overall lack of productivity.
Pandemics and epidemics such as the current COVID-19 outbreak or other widespread public health problems could negatively impact our business. If, for example, the COVID-19 pandemic continues to progress in ways that significantly disrupt the manufacture, shipment, and buying patterns of our products or the products of our customers, this may materially negatively impact our operating results, including revenue, gross margins, operating margins, cash flows and other operating results, and our overall business. Our customers may also experience closures of their manufacturing facilities or inability to obtain other components, either of which could negatively impact demand for our solutions. The COVID-19 pandemic has negatively impacted the overall economy and, as a result of the foregoing, could negatively impact our operating results and may do so in a material way. In particular, the COVID-19 pandemic may increase or change the severity of our other risks reported in this Annual Report on Form 10-K, including that:
● Our subcontractor suppliers who manufacture silicon wafers, packaging and testing to deliver our semiconductor products may be unable to meet delivery expectations to meet customer demand;
● Our distributors and customers may experience adverse performance and any reduction in the use of our products by our end customers could harm our sales and significantly decrease our revenue;
● The semiconductor industry could experience a cyclical downturn, which could cause a meaningful reduction in demand for our products and adversely affect our operating results;
● Countries may adopt tariffs and trade sanctions or similar actions;
● We may be delayed in our development and introduction of new products that achieve customer and market acceptance;
● Our operations may be disrupted if employees are unavailable due to illness, risk of illness, travel restrictions, work from home requirements, or other factors that may limit our access to key personnel or critical skills, or reduce productivity;
● Shortages in or increased costs for silicon wafers, packaging materials, testing and shipping could adversely impact our gross margin and lead to reduced revenue;
● We may experience difficulty in maintaining the uninterrupted operation of our information technology systems, or be exposed to increased risk of a cyber-security incident or fraud, due to an increased reliance on remote work;
● We may incur impairments of goodwill and otherwise as required under U.S. GAAP;
● Our outstanding indebtedness could reduce our strategic flexibility and liquidity and may have other adverse effects on our results of operations.
The impact of COVID-19 may exacerbate the risk factors listed in this Annual Report on Form 10-K, or cause them to change in importance. Developments related to the pandemic and to vaccine rollout have been rapidly changing, and additional impacts and risks may arise that we are not aware of or able to appropriately respond to currently. The ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not within our control, including, but not limited, to: governmental, business, and individuals’ actions that have been and continue to be taken in response to the pandemic; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides. As of the filing of this Annual Report, the extent to which the COVID-19 pandemic will affect our business is highly uncertain and dependent on future developments that are inherently unpredictable, which makes forecasting demand and providing guidance especially difficult. Accordingly, our expectations are subject to change without warning and investors are cautioned not to place undue reliance on them.
Our global business operations expose us to various economic, legal, regulatory, political, and business risks, which could impact our business, operating results and financial condition.
We have significant domestic and international operations. Our international operations include foreign sales offices to support our international customers and distributors, which account for the majority of our revenue, and operational and research and development sites in China, the Philippines, and other Asian locations. In addition, we purchase our wafers from foreign foundries; have our commercial products assembled, packaged, and tested by subcontractors located outside of the United States; and rely on an international service provider for inventory management, order fulfillment, and direct sales logistics.
Our domestic and international business activities are subject to economic, political and regulatory risks, including volatility in the financial markets; fluctuations in consumer liquidity; changes in interest rates; price increases for materials and components; trade barriers or changes in trade policies; political instability; acts of war or terrorism; natural disasters; economic sanctions; weak economic conditions, environmental regulations; labor regulations; import and export regulations; tax or freight rates; duties; trade restrictions; interruptions in transportation or infrastructure; anti-corruption laws; domestic and foreign governmental regulations; potential vulnerability of and reduced protection for intellectual property; disruptions or delays in production or shipments; and instability or fluctuations in currency exchange rates, any of which could lead to decreased demand for our products or a change in our results of operation. Uncertainty about future political and economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. Any or all of these factors could adversely affect our financial condition and results of operations in the future.
If we fail to comply with the many laws and regulations to which we are subject, both within the United States and internationally, we may be subject to significant fines, penalties or liabilities for noncompliance, which could harm our business and financial results. For example, effective May 2018, the European Union adopted the General Data Protection Regulation (“GDPR”), which established new requirements regarding the handling of personal data and non-compliance monetary penalties of up to the higher of 20 million Euros or 4% of worldwide revenue. California also recently adopted the California Consumer Privacy Act (“CCPA”), which imposes significant fines and penalties for violations. Any inability or perceived inability to adequately comply with applicable laws or regulations, including GDPR or CCPA, could result in additional cost and liability to our business and could adversely affect our financial condition and results of operations.
Since late 2019, COVID-19 has become a global pandemic, prompting precautionary government-imposed closures of certain travel and business. The operations of customers and the Company may be affected by this and similar public health matters. Although our supply chain does not appear to be affected by this epidemic, it may lead to events outside of our control which could have a material adverse impact on our business, operating results and financial condition.
Our business could suffer as a result of tariffs and trade sanctions or similar actions.
The imposition by the United States of tariffs, sanctions or other restrictions on goods imported from outside of the United States or countermeasures imposed in response to such government actions could adversely affect our operations or our ability to sell our products globally, which could adversely affect our operating results and financial condition. The materials subject to these tariffs may impact the cost of raw materials used by our suppliers or in our customers’ products. The imposition of further tariffs by the United States on a broader range of imports, or further retaliatory trade measures taken in response to additional tariffs, could increase costs in our supply chain or reduce demand of our customers’ products, either of which could adversely affect our results of operations.
Our customers or suppliers could also become subject to U.S. regulatory scrutiny or export restrictions. For example, in 2019 the U.S. Justice Department filed criminal charges against one of our customers in China and imposed a licensing requirement on this customer with a policy of denial for some items, which has limited our ability to do business with this customer. In 2020, the U.S. imposed additional regulatory restrictions on the sale of U.S. controlled technology to customers in China, including establishing additional licensing requirements for the sale of U.S.-originated technology for certain applications or to companies that participate in the Chinese national security supply chain and limiting the fabrication of devices for certain Chinese companies where U.S. technology is involved in the fabrication process. Furthermore, in August 2020 the U.S. established additional licensing requirements for one of our China customers and its affiliates that limit any sales of products to that customer or for that customer’s products absent a license. The U.S. government may add additional Chinese companies to its restricted entity list or impose additional licensing requirements that we may be unable to meet in a timely manner or at all. Where license requirements are imposed, there can be no assurance that the U.S. government will grant licenses to permit the continuation of business with these customers. Future sanctions similar to those imposed in the past and to those recently imposed could adversely affect our ability to earn revenue from these and similar customers. In addition, the imposition of sanctions on customers in China may cause those customers to seek domestic alternatives to our products and those of other United States semiconductor companies. Further, the Chinese government has indicated its intention to develop an unreliable entity list, which may limit the ability of companies on the list to engage in business with Chinese customers. We cannot predict what impact these and future actions, sanctions or criminal charges could have on our customers or suppliers, and therefore our business. If any of our other customers or suppliers become subject to sanctions or other regulatory scrutiny, if our customers are affected by tariffs or other government trade restrictions, or if we become subject to retaliatory regulatory measures, our business and financial condition could be adversely affected.
Factors Related to Manufacturing our Products
We rely on a concentrated number of subcontractors to supply and fabricate silicon wafers and to perform assembly and test operations for our semiconductor products. If they are unable to do so on a timely and cost-effective basis in sufficient quantities and using competitive technologies, we may incur significant costs or delays.
We rely on a concentrated number of independent foundries in Asia to supply and fabricate silicon wafers for our semiconductor products, including Samsung Semiconductor, United Microelectronics Corporation, Taiwan Semiconductor Manufacturing, and Seiko Epson. Our success is dependent upon our ability to successfully partner with our foundry and OSAT partners and their ability to produce wafers and finished semiconductor products with competitive prices and performance attributes, including smaller process geometries. Establishing, maintaining and managing multiple foundry and OSAT relationships requires the investment of management resources and costs.
If we fail to maintain our foundry and OSAT relationships, if these partners do not provide facilities and support for our development efforts, if they are insolvent or experience financial difficulty, or if we elect or are required to change foundries or OSATs, we may incur significant costs and delays. If our foundry or OSAT partners are unable to, or do not, manufacture sufficient quantities of our products at acceptable yields, we may be required to allocate the affected products among our customers, prematurely limit or discontinue the sales of certain products, or incur significant costs to transfer products to other foundries or OSATs, which could adversely affect our customer relationships and operating results.
Our margins are dependent on our achieving continued yield improvement.
We rely on obtaining yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products that incorporate advanced features and other price/performance factors that enable us to increase revenues while maintaining acceptable margins. To the extent such cost reductions and new product introductions do not occur in a timely manner, or that our products do not achieve market acceptance or market acceptance at acceptable pricing, our forecasts of future revenue, financial condition, and operating results could be materially adversely affected.
Shortages in, or increased costs of, wafers and materials could adversely impact our gross margins and lead to reduced revenues.
Worldwide manufacturing capacity for silicon wafers is relatively inelastic. If the demand for silicon wafers or assembly material exceeds market supply, our supply of silicon wafers or assembly material could quickly become limited or prohibitively expensive. We typically have short-term wafer supply agreements that do not ensure long-term supply or allocation commitments. A shortage in manufacturing capacity could hinder our ability to meet product demand and therefore reduce our revenue. In addition, silicon wafers constitute a material portion of our product cost. If we are unable to purchase wafers at favorable prices, our financial condition and results of operations will be adversely affected.
We may be subject to warranty claims and other costs related to our products.
In general, we warrant our products for varying lengths of time against non-conformance to our specifications and certain other defects. Because our products, including hardware, software, and intellectual property cores, are highly complex and increasingly incorporate advanced technology, our quality assurance programs may not detect all defects, whether these are specific manufacturing defects affecting individual products or these are systematic defects that could affect numerous shipments. Inability to detect a defect could result in a diversion of our engineering resources from product development efforts, increased engineering expenses to remediate the defect, and increased costs due to customer accommodation or inventory impairment charges. On occasion, we have also repaired or replaced certain components, made software fixes, or refunded the purchase price or license fee paid by our customers due to product or software defects. Our insurance may be unavailable or inadequate to protect against these issues. If there are significant product defects, the costs to remediate such defects, net of reimbursed amounts from our vendors, if any, or to resolve warranty claims may adversely affect our financial condition and results of operations and may harm our reputation.
A material change in the agreements governing encryption keys we use could place additional restrictions on us, or our distributors or contract manufacturers, which could restrict product shipment or significantly increase the cost to track products throughout the distribution chain.
Certain components in our products contain encryption keys used in connection with High Definition Content Protection ("HDCP"). The regulation and distribution of these encryption keys are controlled through license agreements with Digital Content Protection ("DCP"), a wholly owned subsidiary of Intel Corporation. These license agreements have been modified by DCP from time to time, and such changes could impact us, our distributors, and our customers. An important element of HDMI is the ability to implement link protection for HD, and more recently, 4K UltraHD, content. We implement various aspects of the HDCP link protection within certain parts we sell. We also, for the benefit of our customers, include the necessary HDCP encryption keys in parts we ship to customers. These encryption keys are provided to us from DCP. We have a specific process for tracking and handling these encryption keys. If DCP changes any of the tracking or handling requirements associated with HDCP encryption keys, we may be required to change our manufacturing and distribution processes, which could adversely affect our manufacturing and distribution costs associated with these products. If we cannot satisfy new requirements for the handling and tracking of encryption keys, we may have to cease shipping or manufacturing certain products.
Factors Related to Intellectual Property and Litigation
The intellectual property licensing component of our business strategy increases our business risk and fluctuation of our revenue and margins.
Our business strategy includes licensing our intellectual property to companies that incorporate it into their technologies that address multiple markets, including markets where we participate and compete. Our Licensing and services revenue may be impacted by the introduction of new technologies by customers in place of the technologies we license, changes in the law that may weaken our ability to prevent the use of our patented technology by others, the expiration of our patents, and changes of demand or selling prices for products using licensed patents. We cannot assure that our licensing customers will continue to license our technology on commercially favorable terms or at all, or that these customers will introduce and sell products incorporating our technology, accurately report royalties owed to us, pay agreed upon royalties, honor agreed upon market restrictions, or maintain the confidentiality of our proprietary information, or will not infringe upon or misappropriate our intellectual property. Our intellectual property licensing agreements are complex and may depend upon many factors that require significant judgments, including completion of milestones, allocation of values to delivered items and customer acceptance.
Our sale of patents and intermittent significant licensing transactions can cause material fluctuations in our revenue and gross margins.
We have generated revenue from the sale of certain patents from our portfolio in the past, generally for non-core technology that we are no longer actively developing. While we plan to continue to monetize our patent portfolio through sales of non-core patents, we may not be able to realize adequate interest or prices for those patents. Accordingly, we cannot provide assurance that we will continue to generate revenue from these sales. In addition, although we seek to be strategic in our decisions to sell patents, we might incur reputational harm if a purchaser of our patents sues one of our customers for infringement of the purchased patent, and we might later decide to enter a space that requires the use of one or more of the patents we sold. In addition, as we sell groups of patents, we no longer have the opportunity to further sell or to license those patents and receive a continuing royalty stream.
Our Licensing and services revenue fluctuates, sometimes significantly, from period to period because it is heavily dependent on a few key transactions being completed in a given period, the timing of which is difficult to predict and may not match our expectations. Licensing and services revenue may include revenue from the sales of patents, which sales may be difficult to complete and which may have complex terms for the payment which affects revenue recognition. Because of its high margin, the Licensing and services revenue portion of our overall revenue can have a disproportionate impact on gross profit and profitability. In addition, generating revenue from patent sales and intellectual property licenses is a lengthy and complex process that may last beyond the period in which our efforts begin, and the accounting rules governing the recognition of revenue from patent sales and intellectual property licensing transactions are increasingly complex and require significant judgment. As a result, the amount of license revenue recognized in any period may differ significantly from our expectations.
Litigation and unfavorable results of legal proceedings could adversely affect our financial condition and operating results.
From time to time we are subject to various legal proceedings and claims that arise out of the ordinary conduct of our business. Certain claims may not yet be resolved, including but not limited to any that are discussed under "Note 14 - Contingencies" contained in the Notes to Consolidated Financial Statements, and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of merit or outcome, claims or litigation may be both time-consuming and disruptive to our operations and cause significant expense and diversion of management attention and we may enter into material settlements to avoid these risks. Should we fail to prevail in certain matters or enter into a material settlement, we may be faced with significant monetary damages or injunctive relief against us that could materially and adversely affect our financial condition and operating results and certain portions of our business.
Our participation in the HDMI standard is evolving. We no longer act as agent for the HDMI standard, and our share of adopter fees and royalties for the HDMI standard is subject to variability.
We acted as agent of the HDMI consortium until December 31, 2016 and were responsible for promoting and administering the specification. We received all of the adopter fees paid by adopters of the HDMI specification in connection with our role as agent. In September 2016, the Founders of the HDMI consortium, of which we are a member, amended the Founders Agreement resulting in changes to our role as agent for the HDMI consortium and to the model for sharing adopter fee revenues. Under the terms of the agreement, our role as the agent was terminated effective January 1, 2017 and a new independent entity was appointed to act as the new HDMI licensing agent with responsibility for licensing and the distribution of royalties among Founders. As a result of the amended model for sharing adopter fee revenue, we are entitled to a share of the adopter fees paid by parties adopting the HDMI standard.
We share HDMI royalties with the other HDMI Founders based on an allocation formula, which is reviewed generally every three years. In the fourth quarter of fiscal 2019, the HDMI Founders adopted a new agreement covering the five-year period beginning January 1, 2018. The amount of our portion of the royalty allocation is dependent on the royalties generated by adopter sales of royalty-bearing HDMI technology, which are subject to variability in economic trends particularly in the market for consumer electronics.
If we are unable to adequately protect our new and existing intellectual property rights, our financial results and our ability to compete effectively may suffer.
Our success depends in part on our proprietary technology and we rely upon patent, copyright, trade secret, mask work, and trademark laws to protect our intellectual property. We intend to continue to protect our proprietary technology, however, we may be unsuccessful in asserting our intellectual property rights or such rights may be invalidated, violated, circumvented, or challenged. From time to time, third parties, including our competitors, have asserted against us patent, copyright, and other intellectual property rights to technologies that are important to us. Third parties may attempt to misappropriate our intellectual property through electronic or other means or assert infringement claims against us in the future. Such assertions by third parties may result in costly litigation, indemnity claims, or other legal actions, and we may not prevail in such matters or be able to license any valid and infringed patents from third parties on commercially reasonable terms. This could result in the loss of our ability to import and sell our products or require us to pay costly royalties to third parties in connection with sales of our products. Any infringement claim, indemnification claim, or impairment or loss of use of our intellectual property could materially adversely affect our financial condition and results of operations.
Factors Related to Overall General Business & Operations
Our business depends on the proper functioning of internal processes and information technology systems. A failure of these processes and systems, data breaches, cyber-attacks, or cyber-fraud may cause business disruptions, compromise our intellectual property or other sensitive information, or result in losses.
We rely on various information technology ("IT") networks and systems to manage our operations, including financial reporting, and we regularly make changes to improve them as necessary by periodically implementing new, or upgrading or enhancing existing, operational and IT systems, procedures, and controls. These systems are supported by subcontractors, and they may also be subject to power and telecommunication outages or other general system failures. The legal, regulatory and contractual environment surrounding information security and data privacy is complex and evolving. We continue to commit significant resources to implementing new systems to standardize our processes worldwide and adopt best-in-class capabilities. We are focused on realizing the full analytical functionality of these conversions, which can be extremely complex, in part, because of the wide range of legacy systems and processes that must be integrated.
In the normal course of business, we may implement new or updated IT systems and, as a result, we may experience delays or disruptions in the integration of these systems, or the related procedures or controls. The policies and security measures established with our IT systems may be vulnerable to data breaches, cyber-attacks or fraud. We may also encounter errors in data, an inability to accurately process or record transactions, and security or technical reliability issues. All of these could harm our ability to conduct core operating functions such as processing invoices, shipping and receiving, recording and reporting financial and management information on a timely and accurate basis, and could impact our internal control compliance efforts. If the technical solution or end user training are inadequate, it could limit our ability to manufacture and ship products as planned. We have various systems that remain that may be nearing the end of their useful life or vendor support, which will ultimately need to be replaced.
We maintain sensitive data on our networks and the networks of our business partners and third-party providers, including proprietary and confidential information relating to our intellectual property, personnel, and business, and that of our customers and third-party providers. Companies have been increasingly subject to a wide variety of security incidents, cyber-attacks, hacking, phishing, and other attempts to gain unauthorized access or engage in fraudulent behavior. Cyber-attacks have become more prevalent, sophisticated and much harder to detect and defend against and it is often difficult to anticipate or detect such incidents and to assess the damage caused by them. Our policies and security measures cannot guarantee security, and our information technology infrastructure, including our networks and systems, may be vulnerable to data breaches, cyber-attacks or fraud. In the past, third parties have attempted to penetrate and/or infect our network and systems with malicious software and phishing attacks in an effort to gain access to our network and systems. In addition, we are subject to the risk of third parties falsifying invoices and similar fraud, frequently by obtaining unauthorized access to our vendors’ and business partners’ networks.
In some circumstances, we may partner with third-party providers and provide them with certain sensitive data. If these third parties fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, this sensitive data may be improperly accessed, used or disclosed. These data breaches and any unauthorized access or disclosure of sensitive data could compromise our intellectual property, expose sensitive business information and subject us to third party claims.
The increase in cyber-attacks has resulted in an increased focus on cybersecurity by certain government agencies. Cyber-attacks or any investigation or enforcement action related to cybersecurity could cause us to incur significant remediation costs, result in product development delays, disrupt key business operations, and divert attention of management and key information technology resources. In addition, we may incur loss as a result of cyber-fraud, such as those experienced by other companies by making unauthorized payments irrespective of robust internal controls.
Failure of our IT systems or difficulties or delays in maintaining, managing, and integrating them could adversely affect the Company’s controls and procedures and could impact the Company's ability to perform necessary operations, which could materially adversely affect our business. Furthermore, our reputation, brand, and business could be significantly harmed, and we could be subject to third-party claims or governmental penalties in the event of a security breach.
We regularly test for goodwill and other impairments as required under U.S. GAAP, and we may incur future impairments.
We are required under U.S. GAAP to test goodwill for possible impairment on an annual basis and to test goodwill and long-lived assets, including amortizable intangible assets, for impairment at any other time that circumstances arise indicating the carrying value may not be recoverable. For purposes of testing goodwill for impairment, the Company currently operates as one reporting unit: the core Lattice ("Core") business, which includes intellectual property and semiconductor devices. We had no impairment charges in either fiscal 2020 or 2019. Impairment charges related to amortizable intangible assets from the Silicon Image acquisition totaled approximately $12.5 million in fiscal 2018. There is no certainty that future impairment tests will indicate that goodwill or amortizable intangible assets will be deemed recoverable. As we continue to review our business operations and test for impairment or in connection with possible sales of assets, we may have impairment charges in the future, which may be material.
Changes to financial accounting standards may affect our results of operations and could cause us to change our business practices.
We prepare our consolidated financial statements to conform to generally accepted accounting principles in the United States. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create accounting rules and regulations. Changes in these rules, such as the adoption of ASC 606 - Revenue from Contracts with Customers in fiscal 2018 or ASC 842 - Leases in fiscal 2019, has had a material effect on our financial results and affected portions of our business differently. Future changes to these rules, or in the guidance relating to interpretation and adoption of the rules, could have a significant effect on our financial results and could affect portions of our business differently.
Changes in effective tax rates, tax laws and our global organizational structure and operations could expose us to unanticipated tax consequences.
We are subject to taxation in the United States and other countries. We have a global tax structure that aligns our corporate structure with our global business operations, and we currently operate legal entities in multiple countries. In some countries, we maintain multiple entities for tax or other purposes. We may choose to consolidate or integrate certain of these entities, and these integration activities, changes in tax laws, rates, regulations, future jurisdictional profitability of the Company, and related regulatory interpretations in the countries in which we operate may impact the taxes we pay or tax provision we record, which could adversely affect our results of operations. In addition, future effective tax rates could be affected by changes in the composition of our earnings in countries with differing tax rates, and by changes in the valuation of deferred tax assets and liabilities. We make no assurance as to what taxes we pay or the ability to estimate our future effective tax rate because of, among other things, uncertainty regarding the tax policies of the jurisdictions where we operate, or the potential impact of releasing our valuation allowance.
Weakness in our internal control over financial reporting could adversely affect our business and financial results.
We are required to maintain internal controls over financial reporting. We review these controls regularly and deficiencies may be identified from time to time. During the quarter ended December 28, 2019, we evaluated and remediated certain deficiencies in our information technology controls over system access and no material weakness existed at the end of the period. We previously disclosed a material weakness in 2017 related to our risk assessment involving significant unusual transactions that was remediated in 2018. In the future, we may identify material weaknesses in our internal controls over financial reporting. Any failure to maintain an effective system of internal controls over financial reporting could limit our ability to report our financial results accurately and timely, which could adversely affect our business, financial results, and stock price.
We compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel could adversely affect our ability to compete effectively.
We depend on the efforts and abilities of certain key members of management and other technical personnel. Our future success depends, in part, upon our ability to retain such personnel and attract and retain other highly qualified personnel, particularly product engineers who can respond to market demands and required product innovation. Competition for such personnel is intense and we may not be successful in hiring or retaining new or existing qualified personnel. If we lose existing qualified personnel or are unable to hire new qualified personnel, as needed, we could have difficulty competing in our highly competitive and innovative environment.
Our outstanding indebtedness could reduce our strategic flexibility and liquidity and may have other adverse effects on our results of operations.
As of January 2, 2021, we had approximately $171.9 million outstanding under a credit agreement, dated May 17, 2019 (the “Current Credit Agreement”). Our obligations under the Current Credit Agreement are guaranteed by our U.S. subsidiaries, and include a requirement to pay quarterly installments of approximately $4.4 million with the remaining balance due upon maturity in May 2024. Our ability to meet our debt service obligations depends upon our operating and financial performance, which is subject to general economic and competitive conditions and to financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to service our debt, we may need to sell material assets, restructure or refinance our debt, or seek additional equity capital. Prevailing economic conditions and global credit markets could adversely impact our ability to sell material assets, restructure or refinance our debt on terms acceptable to us, or at all, or we may not be able to restructure or refinance our debt without incurring significant additional fees and expenses.
The Current Credit Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company to, among other things, incur debt, grant liens, undergo certain fundamental changes, make investments, make certain restricted payments, dispose of assets, enter into transactions with affiliates, and enter into burdensome agreements, in each case, subject to limitations and exceptions set forth in the Current Credit Agreement. We are also required to maintain compliance with a total leverage ratio and an interest coverage ratio, in each case, determined in accordance with the terms of the Current Credit Agreement.
The amount and terms of our indebtedness, as well as our credit rating, could have important consequences, including the following:
● we may be more vulnerable to economic downturns, less able to withstand competitive pressures, and less flexible in responding to changing business and economic conditions;
● our cash flow from operations may be allocated to the payment of outstanding indebtedness, and not to research and development, operations or business growth;
● we might not generate sufficient cash flow from operations or other sources to enable us to meet our payment obligations under the facility and to fund other liquidity needs;
● our ability to make distributions to our stockholders in a sale or liquidation may be limited until any balance on the facility is repaid in full; and
● our ability to incur additional debt, including for working capital, acquisitions, or other needs, is more limited.
If we breach a loan covenant, the lenders could accelerate the repayment of the facility. We might not have sufficient assets to repay our indebtedness upon acceleration. If we are unable to repay or refinance the indebtedness upon acceleration or at maturity, the lenders could initiate a bankruptcy proceeding against us or collection proceedings with respect to our assets and subsidiaries securing the facility, which could materially decrease the value of our common stock.
We may have failed to adequately insure against certain risks, and, as a result, our financial condition and results may be adversely affected.
We carry insurance customary for companies in our industry, including, but not limited to, liability, property, and casualty; workers' compensation; and business interruption insurance. We also insure our employees for basic medical expenses. In addition, we have insurance contracts that provide director and officer liability coverage for our directors and officers. Other than the specific areas mentioned above, we are self-insured with respect to most other risks and exposures, and the insurance we carry in many cases is subject to a significant policy deductible or other limitation before coverage applies. Based on management's assessment and judgment, we have determined that it is more cost effective to self-insure against certain risks than to incur the insurance premium costs. The risks and exposures for which we self-insure include, but are not limited to, certain natural disasters, certain product defects, certain matters for which we indemnify third parties, political risk, certain theft, patent infringement, and employment practice matters. Should there be a catastrophic loss due to an uninsured event (such as an earthquake) or a loss due to adverse occurrences in any area in which we are self-insured, our financial condition or operating results could be adversely affected.
Factors Related to Our Markets and Product Development
The semiconductor industry routinely experiences cyclical market patterns and our products are used across different end markets. A significant downturn in the industry or in any of these end markets could cause a meaningful reduction in demand for our products and adversely affect our operating results.
Our revenue and gross margin can fluctuate significantly due to downturns in the highly cyclical semiconductor industry. These downturns can be severe and prolonged and can result in price erosion and weak demand for our products. Weak demand for our products resulting from general economic conditions affecting the end markets we serve or the semiconductor industry specifically and reduced spending by our customers can result, and in the past has resulted, in diminished product demand, high inventory levels, erosion of average prices, excess and obsolete inventories and corresponding inventory write-downs. Our expense levels are based, in part, on our expectations of future sales. Many of our expenses, particularly those relating to facilities, capital equipment, and other overhead, are relatively fixed. We might be unable to reduce spending quickly enough to compensate for reductions in sales. Accordingly, shortfalls in sales could adversely affect our operating results. Furthermore, any significant upturn in the semiconductor industry could result in increased competition for access to raw materials and third-party service providers.
Additionally, our products are used across different end markets, and demand for our products is difficult to predict and may vary within or among our Industrial and Automotive, Communications and Computing, and Consumer end markets. Our target markets may not grow or develop as we currently expect, and demand may increase or change in one or more of our end markets, and changes in demand may reduce our revenue, lower our gross margin and effect our operating results. We have experienced concentrations of revenue at certain customers and within certain end markets, and we regularly compete for design opportunities at these customers and within these markets. Any deterioration in these end markets, reductions in the magnitude of revenue streams, our inability to meet design and pricing requirements, or volatility in demand for our products could lead to a reduction in our revenue and adversely affect our operating results. Our success in our end markets depends on many factors, including the strength or financial performance of the customers in our end markets, our ability to timely meet rapidly changing product requirements, market needs, and our ability to maintain design wins across different markets and customers to dampen the effects of market volatility. The dynamics of the markets in which we operate make prediction of and timely reaction to such events difficult.
Due to these and other factors, our past results may not be reliable predictors of our future results. If we are unable to accomplish any of the foregoing, or to offset the volatility of cyclical changes in the semiconductor industry or our end markets through diversification into other markets, could materially and adversely affect our business, financial condition, and operating results.
Our success and future revenue depend on our ability to develop and introduce new products that achieve customer and market acceptance.
We compete in a dynamic environment characterized by rapid technology and product evolution, generally followed by a relatively longer process of ramping up to volume production on advanced technologies. Our end customers’ continued use of our products is frequently reevaluated, as certain of our customers' product life cycles are relatively short and they continually develop new products. The selection process for our products to be included in our customers' new products is highly competitive. There are no guarantees that our products will be included in the next generation of products introduced by these customers. Additionally, our markets are also characterized by evolving industry standards and increased demand for higher levels of integration and smaller process geometry. Our competitive position and success depend on our ability to innovate, develop, and introduce new products that compete effectively on the basis of price, density, functionality, power consumption, form factor, and performance, and our addressing the evolving needs of the markets we serve, among other things. With increased introduction of new products, we expect revenue related to mature products to decline over time in a normal product life cycle. As a result, we may be increasingly dependent on revenue derived from our newer products.
Our future growth and the success of new product introductions depend upon numerous factors, including:
● timely completion and introduction of new product designs;
● ability to generate new design opportunities and design wins, including those which result in sales of significant volume;
● achievement of necessary volume of production to achieve acceptable cost;
● availability of specialized field application engineering resources supporting demand creation and customer adoption of new products;
● ability to utilize advanced manufacturing process technologies;
● achieving acceptable yields and obtaining adequate production capacity from our wafer foundries and assembly and test subcontractors;
● ability to obtain advanced packaging;
● availability of supporting software design tools;
● utilization of predefined IP logic;
● customer acceptance of advanced features in our new products; and
● market acceptance of our customers' products.
The failure of any of these factors, among others, could adversely affect our product innovation, development and introduction efforts and our financial condition and results of operations.
We compete against companies that have significantly greater resources than us and numerous other product solutions.
The semiconductor industry is highly competitive and many of our direct and indirect competitors have substantially greater financial, technological, manufacturing, marketing, and sales resources. Consolidation in our industry may increasingly mean that our competitors have greater consolidated resources, or other synergies, that could put us at a competitive disadvantage. We currently compete directly with companies that have licensed our technology or have developed similar products, as well as numerous semiconductor companies that offer products based on alternative solutions, such as applications processor, application specific standard product, microcontroller, analog, and digital signal processing technologies. Competition from these semiconductor companies may intensify as we offer more products in any of our end markets. These competitors include established, multinational semiconductor companies, as well as emerging companies.
We depend on independent contractors and third parties to provide key services in our product development and operations, and any disruption of their services, or an increase in cost of these services, could negatively impact our financial condition and results of operations.
We depend on subcontractors to provide cost effective and efficient services in our product development and supply chain functions, including test and assembly services, software and hardware development, support of intellectual property cores, inventory management, order fulfillment and direct sales logistics.
Our operations and operating results may be adversely affected if we experience problems with our subcontractors that impact the delivery of product to our customers. These problems may include: delays in software or hardware development timelines, prolonged inability to obtain wafers or packaging materials with competitive performance and cost attributes; inability to achieve adequate yields or timely delivery; inability to meet customer timelines or demands, disruption or defects in assembly, test, or shipping services; or delays in stabilizing manufacturing processes or ramping up volume for new products. If our third-party supply chain providers were to reduce or discontinue services for us or their operations are disrupted as a result of a fire, earthquake, act of terrorism, political unrest, governmental uncertainty, war, disease, or other natural disaster or catastrophic event, weak economic conditions, or any other reason, our financial condition and results of operations could be adversely affected.
Factors Related to Our Sales and Revenue
Our revenues depend on our relationships with our distributors and on a concentrated group of end customers. An adverse change in the relationships with, or performance of, our distributors, or any reduction in the use of our products by our end customers, could harm our sales and significantly decrease our revenue.
We depend on a concentrated group of distributors to sell our products to end customers, complete order fulfillment, maintain sufficient inventory of our products and provide services to our end customers. In fiscal 2020, revenue attributable to sales to distributors accounted for 83% of our total revenue, with two distributors accounting for 60% of total revenue. We have significant outstanding receivables with our top distributors, and expect our distributors to generate a significant portion of our revenue in the future. Any adverse change to our relationships or agreements with our distributors or a failure by one or more of our distributors to perform its obligations to us could have a material impact on our business, including a reduction in our access to certain end customers or our ability to sell our products.
If our relationships with any material customers were to diminish, if these customers were to develop their own solutions or adopt alternative solutions or competitors' solutions, if any one or more of our concentrated groups of customers were to experience significantly adverse financial conditions, or if as a result of trade disputes or sanctions these customers were restricted from purchasing our products, our results could be adversely affected.
In addition, the inability of customers to obtain credit, the insolvency of one or more customers, or tariffs applicable to our customers’ products, could impact our sales. Any of these effects could impact our ability to effectively manage inventory levels and collect receivables, require additional restructuring actions, and decrease our revenue and profitability.
The nature of our business and length of our sales cycle makes our revenue, gross margin and net income subject to fluctuation and difficult to accurately predict.
A number of factors, including how products are manufactured to support end markets, yield, wafer pricing, cost of packaging raw materials, product mix, market acceptance of our new products, competitive pricing dynamics, product quality, geographic and/or end market mix, and pricing strategies, can cause our revenue, gross margins and net income to fluctuate significantly either positively or negatively from period to period.
We have limited visibility into the demand for our products, particularly new products, because demand for our products depends upon our products being designed into our end customers' products and those products achieving market acceptance. During our sales cycle, our customers typically test and evaluate our products prior to deciding to include our products into the design of their own products, and then require additional time to begin volume production of their products. This lengthy sales cycle may cause us to incur significant expenses, experience significant production delays and to incur additional inventory costs before we receive a customer order that may be delayed or never get placed. A key strategic customer may demand certain design or production resources to meet their requirements or work on a specific solution, which could cause delays in our normal development schedule and result in significant investment of our resources or missed opportunities with other potential customers. We may incur these expenses without generating revenue from our products to offset the expenses.
While our sales cycles are typically long, our average product life cycles tend to be short as a result of the rapidly changing technology environment in which we operate. Our inventory levels may be higher than historical norms, from time to time, due to inventory build decisions aimed at meeting expected demand from a single large customer, reducing direct material cost or enabling responsiveness to expected demand. In the event the expected demand does not materialize, or if our short sales cycle does not generate sufficient revenue, we may be subject to incremental excess and obsolescence costs.
These factors make it difficult for us to accurately forecast future sales and project quarterly revenues. The difficulty in forecasting future sales weakens our ability to project our inventory requirements, which could result, and in the past has resulted, in inventory write-downs or failure to meet customer product demands in a timely manner. While we may give guidance, the difficulty in forecasting revenues as well as the relative customer and product mix of those revenues limits our ability to provide accurate forward-looking revenue and gross margin guidance.
Accounting requirements related to sales through our distribution channel could result in our reporting revenue in excess of demand.
Revenue recognition standards require recognition of revenue based on estimates and may require us to record revenue from distributors that is in excess of actual end customer demand. Since we have limited ability to forecast inventory levels of our end customers, we depend on the timeliness and accuracy of resale reports from our distributors. Late or inaccurate resale reports could mask significant build-up of inventories in our distribution channel, have a detrimental effect on our ability to properly recognize revenue, and impact our ability to forecast future sales. An inventory build-up in our distribution channel could result in a slowdown in orders, requests for returns from customers, or requests to move out planned shipments. If our distributors do not ultimately sell the inventory and our estimates change, we could be required to materially correct our recognized revenue in a future period, depending on actual results. Any failure to manage these challenges could disrupt or reduce sales of our products and unfavorably impact our financial results.
Factors Related to Strategic Transactions
Acquisitions, divestitures, strategic investments and strategic partnerships could disrupt our business and adversely affect our financial condition and operating results.
We may pursue growth opportunities by acquiring complementary businesses, solutions or technologies through strategic transactions, investments or partnerships. The identification of suitable acquisition, strategic investment or strategic partnership candidates can be costly and time consuming and can distract our management team from our current operations. If such strategic transactions require us to seek additional debt or equity financing, we may not be able to obtain such financing on terms favorable to us or at all, and such transaction may adversely affect our liquidity and capital structure. We may also choose to divest certain non-core assets, which divestitures could lead to charges against earnings and may expose us to additional liabilities and risks. Any strategic transaction might not strengthen our competitive position, may increase some of our risks, and may be viewed negatively by our customers, partners or investors. Even if we successfully complete a strategic transaction, we may not be able to effectively integrate the acquired business, technology, systems, control environment, solutions, personnel or operations into our business or global tax structure. We may experience unexpected changes in how we are required to account for strategic transactions pursuant to U.S. GAAP and may not achieve the anticipated benefits of any strategic transaction. We may incur unexpected costs, claims or liabilities that we incur during the strategic transaction or that we assume from the acquired company, or we may discover adverse conditions post acquisition for which we have limited or no recourse.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
We lease a 47,800 square foot of space in Hillsboro, Oregon as our corporate headquarters and a research and development facility through November 2022. In San Jose, California, we have 98,874 square feet under lease through September 2026, of which we use 49,579 square feet as a research and development facility, while we vacated 49,295 square feet during the fourth quarter of 2018 and intend to sublease the vacated space. During 2019, we vacated a 23,680 square foot office space in Portland, Oregon, which we have subleased through the end of the lease in March 2025.
In Muntinlupa City, Philippines, we lease a total of 48,565 square feet through May 2025 and 1,938 square feet through June 2025 for research and development and operations facilities.
In Shanghai, China, we lease 68,027 square feet through May 2021 for research and development operations.
We also lease office facilities in multiple other metropolitan locations for our domestic and international sales staff. We believe that our existing facilities are suitable and adequate for our current and foreseeable future needs.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
The information contained under the heading "Legal Matters" in Note 14 - Contingencies to our Consolidated Financial Statements in Part II, Item 8 is incorporated by reference into this Part I, Item 3. Also, see “Litigation and unfavorable results of legal proceedings could adversely affect our financial condition and operating results” in “Risk Factors” in Item 1A of Part I of this Annual Report on Form 10-K.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol "LSCC".
Holders
As of February 19, 2021, we had approximately 203 stockholders of record.
Dividends
The payment of dividends on our common stock is within the discretion of our Board of Directors. We intend to retain earnings to finance our business. We have never paid cash dividends.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
On February 24, 2020, we announced that our Board of Directors had approved a stock repurchase program with a duration of twelve months. Under this program during the fourth quarter of fiscal 2020, we made open market purchases funded from available working capital totaling approximately $15.0 million. All repurchased shares were retired by the end of the 2020 fiscal year.
The following table contains information regarding our purchases of our common stock during the fourth quarter of fiscal 2020:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a)
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs as of Report Filing Date (b)
November 1, 2020 through November 30, 2020
384,538
$ 38.98
384,538
$ -
Total
384,538
$ 38.98
384,538
$ -
(a)
All open-market purchases during the quarter were made under the authorization from our board of directors to purchase up to $40.0 million of LSCC common stock announced February 24, 2020.
(b)
The twelve-month 2020 program expired during the first quarter of fiscal 2021, during which no additional shares were repurchased.
Comparison of Total Cumulative Stockholder Return
The following graph shows the five-year comparison of cumulative stockholder return on our common stock, the Standard and Poor's (“S&P”) 500 Index and the Philadelphia Semiconductor Index (“PHLX”) from December 2015 through December 2020. Cumulative stockholder return assumes $100 invested at the beginning of the period in our common stock, the S&P and PHLX. Historical stock price performance is not necessarily indicative of future stock price performance.
Lattice Cumulative Stockholder Return

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
Year Ended *
STATEMENT OF OPERATIONS:
January 2,
December 28,
December 29,
December 30,
December 31,
(In thousands, except per share data)
2021 **
Revenue
$ 408,120
$ 404,093
$ 398,799
$ 385,961
$ 427,054
Cost of revenue
162,814
165,671
179,360
169,382
180,620
Gross margin
245,306
238,422
219,439
216,579
246,434
Operating expenses:
Research and development
89,223
78,617
82,449
103,357
117,518
Selling, general, and administrative
95,331
82,542
91,054
90,718
98,602
Amortization of acquired intangible assets
4,449
13,558
17,690
31,340
33,575
Restructuring charges
3,937
4,664
17,349
7,196
9,267
Impairment of acquired intangible assets and goodwill
-
-
12,486
32,431
7,866
Acquisition related charges
-
-
1,531
3,781
6,305
Gain on sale of building
-
-
-
(4,624 )
-
Total operating expenses
192,940
179,381
222,559
264,199
273,133
Income (loss) from operations
52,366
59,041
(3,120 )
(47,620 )
(26,699 )
Interest expense
(3,702 )
(11,731 )
(20,600 )
(18,807 )
(20,327 )
Other (expense) income, net
(208 )
(2,245 )
(249 )
(3,286 )
2,844
Income (loss) before income taxes
48,456
45,065
(23,969 )
(69,713 )
(44,182 )
Income tax expense
1,064
1,572
2,353
9,917
Net income (loss)
$ 47,392
$ 43,493
$ (26,322 )
$ (70,562 )
$ (54,099 )
Net income (loss) per share:
Basic
$ 0.35
$ 0.33
$ (0.21 )
$ (0.58 )
$ (0.45 )
Diluted
$ 0.34
$ 0.32
$ (0.21 )
$ (0.58 )
$ (0.45 )
Shares used in per share calculations:
Basic
135,220
132,471
126,564
122,677
119,994
Diluted
141,276
137,274
126,564
122,677
119,994
BALANCE SHEET:
January 2,
December 28,
December 29,
December 30,
December 31,
(In thousands)
Cash, cash equivalents, and short-term marketable securities
$ 182,332
$ 118,081
$ 128,675
$ 111,797
$ 116,860
Total assets
$ 680,067
$ 612,016
$ 623,687
$ 635,961
$ 766,883
Long term liabilities
$ 215,909
$ 184,538
$ 295,812
$ 334,621
$ 338,903
Total liabilities
$ 295,640
$ 284,357
$ 365,230
$ 418,268
$ 496,453
Total stockholders' equity
$ 384,427
$ 327,659
$ 258,457
$ 217,693
$ 270,430
*
Results for periods prior to 2018 are presented in accordance with ASC 605, which was in effect during those fiscal years.
**
The year ended January 2, 2021 was a 53-week year as compared to the other years presented, which were based on our standard 52-week year

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Lattice Semiconductor Corporation and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develop technologies that we monetize through differentiated programmable logic semiconductor products, system solutions, design services, and licenses. 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 lets our customers quickly and easily unleash their innovation to create a smart, secure, and connected world.
Lattice has focused its strategy on delivering programmable logic products and related solutions based on low power, small size, and ease of use. We also serve our customers with IP licensing and various other services. Our product development activities include new proprietary products, advanced packaging, existing product enhancements, software development tools, soft IP, and system solutions for high-growth applications such as Edge Artificial Intelligence, 5G infrastructure, platform security, and factory automation.
This discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes included in Item 8. "Financial Statements and Supplementary Data" of this report. Discussions of results for prior periods (fiscal 2019 compared to fiscal 2018) are incorporated by reference from our Annual Report on Form 10-K for the year ended December 28, 2019.
Impact of the COVID-19 pandemic on our Business
The COVID-19 pandemic has caused, and is expected to continue to cause, the global slowdown of economic activity (including the decrease in demand for goods and services), and significant volatility in and disruption to financial markets. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing, and difficult to predict, the pandemic’s impact on our operations and financial performance, as well as its impact on our ability to successfully execute our business strategy and initiatives, remains uncertain. We continue to take actions to safeguard the health and well-being of our employees and our business. We implemented social distancing policies at our locations around the world including working from home and eliminating virtually all travel. Furthermore, we continue to manage our cash position and liquidity needs in light of the rapidly changing environment, and we have additional resources available under our Current Credit Agreement, if needed. As a result of the accelerated debt payments we made during the second quarter of fiscal 2020 to reduce our future interest rate expense, we do not have any required debt payments until June 30, 2021.
As COVID-19 has spread globally and been declared a pandemic, the full extent of this outbreak, the related governmental, business and travel restrictions in order to contain this virus are continuing to evolve globally. We anticipate that these actions and the global health crisis caused by the COVID-19 pandemic will negatively impact business activity across the globe. We expect our demand to be impacted in Q1 and potentially beyond Q1 given the global reach and economic impact of the virus. For example, governmental actions or policies or other initiatives to contain the virus, could lead to reductions in our end customers’ demand under which we would expect to lose revenue. We have previously seen and could again see delays or disruptions in our supply chain due to governmental restrictions. If our suppliers experience similar impacts, we may have difficulty sourcing materials necessary to fulfill customer production requirements and transporting completed products to our end customers.
We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects of any such alterations or modifications may have on our business, including the effects on our customers, employees, and prospects, or on our financial results. The full extent of the impact of the COVID-19 pandemic on our business, results of operations and financial position is currently uncertain and will depend on many factors that are not within our control, including, but not limited to: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides. See the section entitled “Risk Factors” in Item 1A of Part I of this report for further information about related risks and uncertainties.
Critical Accounting Policies and Use of Estimates
Critical accounting policies are those that are both most important to the portrayal of a company's financial condition and results, and that require management's most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments affecting the amounts reported in our consolidated condensed financial statements and the accompanying notes. We base our estimates and judgments on historical experience, knowledge of current conditions, and our beliefs of what could occur in the future considering available information. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when made, and because of the uncertainty inherent in these matters, actual results may differ from these estimates under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis.
We believe the following accounting policies and the related estimates are critical in the portrayal of our financial condition and results of operations, and require management's most difficult, subjective, or complex judgments. See "Note 1 - Nature of Operations and Significant Accounting Policies" under Part II, Item 8 of this report for further information on the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Revenue from Contracts with Customers
We recognize revenue upon satisfaction of performance obligations when control of promised goods or services has been transferred to our customers. We measure revenue based on the amount of consideration we expect to be entitled to in exchange for products or services. For revenue recognized on both sales to distributors and related to HDMI royalties, the amount of consideration we expect to be entitled to receive is based on estimates that require assumptions and judgments relating to trends in recent and historical activity. See "Note 1 - Basis of Presentation and Significant Accounting Policies" under Part II, Item 8 of this report for further information on our recognition of revenue. Sales to most distributors are made under terms allowing certain price adjustments upon sale to their end customers and limited rights of return of our products held in their inventory. The revenue recognized based on estimated price adjustments and stock rotation reserves may be materially different from the actual consideration received if the actual distributor price adjustments and stock rotation returns differ significantly from the historical trends used in the estimates.
Inventories and Cost of Revenue
Inventories are stated at the lower of actual cost (determined using the first-in, first-out method) or net realizable value. We review and set standard costs quarterly to approximate current actual manufacturing costs. Our manufacturing overhead standards for product costs are calculated assuming full absorption of actual spending over actual costs. The valuation of inventory requires us to estimate excess or obsolete inventory. Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on specific facts and circumstances. In determining provisions for excess or obsolete products, we consider assumptions such as changes in business and economic conditions, projected customer demand for our products, and changes in technology or customer requirements. The creation of such provisions results in a write-down of inventory to net realizable value and a charge to Cost of revenue. If in any period we anticipate a change in assumptions such as future market or economic conditions to be less favorable than our previous estimates, additional inventory write-downs may be required and would be reflected in Cost of revenue, resulting in a negative impact to our gross margin in that period. If in any period we are able to sell inventories that had been written down to a level below the ultimate realized selling price in a previous period, related revenue would be recorded with a lower or no offsetting charge to Cost of revenue resulting in a net benefit to our gross margin in that period.
Accounting for Income Taxes
Our provision for income tax is comprised of our current tax liability and changes in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that in management’s judgment is more-likely-than-not to be recoverable against future taxable income. The determination of a valuation allowance and when it should be released requires complex judgment. In assessing the ability to realize deferred tax assets, we regularly evaluate both positive and negative evidence that may exist and consider whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
As part of our regular financial review process, we also assess the likelihood that our tax reporting positions will ultimately be sustained. To the extent it is determined it is more likely than not (a likelihood of more than 50 percent) that some portion or all of a tax reporting position will ultimately not be recognized and sustained, a provision for unrecognized tax benefit is provided by either reducing the applicable deferred tax asset or accruing an income tax liability. Our judgment regarding the sustainability of our tax reporting positions may change in the future due to changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to the related deferred tax assets or accrued income tax liabilities and an accompanying reduction or increase in income tax expense which may result in a corresponding increase or decrease in net income in the period when such determinations are made.
Results of Operations
Key elements of our Consolidated Statements of Operations, including as a percentage of revenue, are presented in the following table:
Year Ended *
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Revenue
$ 408,120
100.0 %
$ 404,093
100.0 %
$ 398,799
100.0 %
Gross margin
245,306
60.1
238,422
59.0
219,439
55.0
Research and development
89,223
21.9
78,617
19.5
82,449
20.7
Selling, general and, administrative
95,331
23.4
82,542
20.4
91,054
22.8
Amortization of acquired intangible assets
4,449
1.1
13,558
3.4
17,690
4.4
Restructuring charges
3,937
1.0
4,664
1.2
17,349
4.4
Impairment of acquired intangible assets
-
-
-
-
12,486
3.1
Acquisition related charges
-
-
-
-
1,531
0.4
Income from operations
$ 52,366
12.8 %
$ 59,041
14.6 %
$ (3,120 )
(0.8 )%
* The year ended January 2, 2021 was a 53-week year as compared to the other years presented, which were based on our standard 52-week year
Revenue
Year Ended
% Change in
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Revenue
$ 408,120
$ 404,093
$ 398,799
1.0 %
1.3 %
Revenue increased $4.0 million, or 1%, in fiscal 2020 compared to fiscal 2019, primarily driven by increased demand for products used in computing solutions, 5G wireless infrastructure, and industrial applications, offset by broad market weakness and decreases in IP revenue.
Revenue by End Market
We sell our products globally to a broad base of customers in three primary end markets groups: Communications and Computing, Industrial and Automotive, and Consumer. We also provide Intellectual Property licensing and services to these end markets.
Within these end markets, there are multiple segment drivers, including:
•
Communications and computing: 5G infrastructure deployments, client computing platforms, and cloud and enterprise servers,
•
Industrial and automotive: industrial IoT, factory automation, and automotive electronics,
•
Consumer: smart home, and prosumer.
We also generate revenue from the licensing of our IP, the collection of certain royalties, patent sales, the revenue related to our participation in consortia and standard-setting activities, and services. While these activities may be associated with multiple markets, Licensing and services revenue is reported as a separate end market as it has characteristics that differ from other categories, most notably a higher gross margin.
The end market data below is derived from data provided to us by our customers. With a diverse base of customers who may manufacture end products spanning multiple end markets, the assignment of revenue to a specific end market requires the use of judgment. We also recognize certain revenue for which end customers and end markets are not yet known. We assign this revenue first to a specific end market using historical and anticipated usage of the specific products, if possible, and allocate the remainder to the end markets based on either historical usage for each product family or industry application data for certain product types.
The following are examples of end market applications for the fiscal years presented:
Communications and Computing
Industrial and Automotive
Consumer
Licensing and Services
Wireless
Security and Surveillance
Cameras
IP Royalties
Wireline
Machine Vision
Displays
Adopter Fees
Data Backhaul
Industrial Automation
Wearables
IP Licenses
Server Computing
Robotics
Televisions
Patent Sales
Client Computing
Automotive
Home Theater
Data Storage
Drones
The composition of our revenue by end market is presented in the following table:
Year Ended
% Change in
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Communications and Computing
$ 174,656
42.8 %
$ 155,821
38.6 %
$ 123,195
30.9 %
12.1 %
26.4 %
Industrial and Automotive
168,323
41.2
151,607
37.5
157,979
39.6
11.0
(4.0 )
Consumer
45,523
11.2
75,120
18.6
99,294
24.9
(39.4 )
(24.3 )
Licensing and Services
19,618
4.8
21,545
5.3
18,331
4.6
(8.9 )
17.5
Total revenue
$ 408,120
100.0 %
$ 404,093
100.0 %
$ 398,799
100.0 %
1.0 %
1.3 %
Revenue from the Communications and Computing end market increased by 12% in fiscal 2020 compared to fiscal 2019 primarily due to the continued adoption of our products used in servers and client computing platforms, as well as ongoing 5G infrastructure deployments.
Revenue from the Industrial and Automotive end market increased by 11% in fiscal 2020 compared to fiscal 2019, primarily to increased demand for our products used in a broad range of applications including industrial automation and safety, robotics, embedded vision, and automotive electronics.
Revenue from the Consumer end market decreased by 39% in fiscal 2020 compared to fiscal 2019. This segment has been impacted by lower end market demand due to the COVID-19 pandemic, as well as the expected shift in the mix of revenue towards our other market segments.
Revenue from the Licensing and Services end market decreased by 9% in fiscal 2020 compared to fiscal 2019 primarily due to lower HDMI revenue.
Revenue by Geography
We assign revenue to geographies based on ship-to location of the customer.
The composition of our revenue by geography is presented in the following table:
Year Ended
% Change in
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Asia
$ 305,183
74.8 %
$ 298,765
73.9 %
$ 298,119
74.8 %
2.1 %
0.2 %
Americas
62,137
15.2
57,936
14.4
55,134
13.8
7.3
5.1
Europe
40,800
10.0
47,392
11.7
45,546
11.4
(13.9 )
4.1
Total revenue
$ 408,120
100.0 %
$ 404,093
100.0 %
$ 398,799
100.0 %
1.0 %
1.3 %
Revenue from Customers
We sell our products to independent distributors and directly to customers. Distributors have historically accounted for a significant portion of our total revenue, and the two distributors groups noted below accounted for more than 10% of our total revenue in the periods covered by this report.
The composition of our revenue by customer is presented in the following table:
% of Total Revenue
Year Ended
January 2, 2021
December 28, 2019
December 29, 2018
Weikeng Group
34.8 %
29.8 %
25.4 %
Arrow Electronics Inc.
25.1
25.4
28.7
Other distributors
23.2
26.9
28.8
All distributors
83.1 %
82.1 %
82.9 %
Direct customers
12.1
12.6
12.5
Licensing and services revenue
4.8
5.3
4.6
Total revenue
100.0 %
100.0 %
100.0 %
Gross margin
The composition of our gross margin, including as a percentage of revenue, is presented in the following table:
Year Ended
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Gross margin
$ 245,306
$ 238,422
$ 219,439
Gross margin percentage
60.1 %
59.0 %
55.0 %
Product gross margin %
58.1 %
56.7 %
52.9 %
Licensing and services gross margin %
100.0 %
100.0 %
98.6 %
Gross margin percentage increased 110 basis points from fiscal 2019 to fiscal 2020. Improved margins were driven by benefits from pricing optimization programs, product cost reductions, and product mix.
Because of its higher margin, the licensing and services portion of our overall revenue can have a disproportionate impact on Gross Margin.
Operating Expenses
Research and development expense
The composition of our Research and development expense, including as a percentage of revenue, is presented in the following table:
Year Ended
% Change in
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Research and development
$ 89,223
$ 78,617
$ 82,449
13.5 %
(4.6 )%
Percentage of revenue
21.9 %
19.5 %
20.7 %
Research and development expense includes costs for compensation and benefits, stock compensation, engineering wafers, depreciation, licenses, and outside engineering services. These expenditures are for the design of new products, IP cores, processes, packaging, and software solutions.
The increase in Research and development expense for fiscal 2020 compared to fiscal 2019 was due primarily to increased expenses for stock compensation and increased headcount to support the expansion of our programmable logic product portfolio and acceleration of our new product introduction cadence.
We believe that a continued commitment to Research and development is essential to maintaining product leadership and providing innovative new product offerings and, therefore, we expect to continue to increase our investment in Research and development, particularly with expanded investment in the development of software solutions.
Selling, general, and administrative expense
The composition of our Selling, general, and administrative expense, including as a percentage of revenue, is presented in the following table:
Year Ended
% Change in
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Selling, general, and administrative
$ 95,331
$ 82,542
$ 91,054
15.5 %
(9.3 )%
Percentage of revenue
23.4 %
20.4 %
22.8 %
Selling, general, and administrative expense includes costs for compensation and benefits related to selling, general, and administrative employees, commissions, depreciation, professional and outside services, trade show, and travel expenses.
The increase in Selling, general, and administrative expense for fiscal 2020 compared to fiscal 2019 was due primarily to increased expenses for stock compensation and salaries, partially offset by reduced commissions resulting from our restructuring under the Q2 2019 Sales Plan, as discussed in "Note 7 - Restructuring" to our Consolidated Financial Statements in Part II, Item 8 of this report.
Amortization of acquired intangible assets
The composition of our Amortization of acquired intangible assets, including as a percentage of revenue, is presented in the following table:
Year Ended
% Change in
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Amortization of acquired intangible assets
$ 4,449
$ 13,558
$ 17,690
(67.2 )%
(23.4 )%
Percentage of revenue
1.1 %
3.4 %
4.4 %
The decrease in Amortization of acquired intangible assets for fiscal 2020 compared to fiscal 2019 was due to the end of the amortization period for the majority of our acquired intangible assets during the first quarter of fiscal 2020.
Restructuring charges
The composition of our Restructuring charges, including as a percentage of revenue, is presented in the following table:
Year Ended
% Change in
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Restructuring charges
$ 3,937
$ 4,664
$ 17,349
(15.6 )%
(73.1 )%
Percentage of revenue
1.0 %
1.2 %
4.4 %
Restructuring charges are comprised of expenses resulting from reductions in our worldwide workforce, consolidation of our facilities, removal of fixed assets from service, and cancellation of software contracts and engineering tools. Details of our restructuring plans and expenses incurred under them are discussed in "Note 7 - Restructuring" to our Consolidated Financial Statements in Part II, Item 8 of this report.
The decrease in Restructuring charges in fiscal 2020 compared to fiscal 2019 was driven was driven by lower charges in the current year for facility closures implemented under an earlier restructuring plan adopted in June 2017, and by lower charges in the current year for severance under the Q1 2020 Plan compared to charges in the prior year period resulting from contract cancellations under the Q2 2019 Sales Plan.
Impairment of acquired intangible assets
The composition of our Impairment of acquired intangible assets, including as a percentage of revenue, is presented in the following table:
Year Ended
% Change in
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Impairment of acquired intangible assets
$ -
$ -
$ 12,486
- %
(100.0 )%
Percentage of revenue
- %
- %
3.1 %
We had no Impairments of acquired intangible assets in fiscal 2020 or 2019.
Acquisition related charges
The composition of our Acquisition related charges, including as a percentage of revenue, is presented in the following table:
Year Ended
% Change in
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Acquisition related charges
$ -
$ -
$ 1,531
- %
(100.0 )%
Percentage of revenue
- %
- %
0.4 %
Acquisition related charges include legal and professional fees directly related to acquisitions. We incurred no Acquisition related charges in fiscal 2020 or 2019.
Interest Expense
The composition of our Interest expense, including as a percentage of revenue, is presented in the following table:
Year Ended
% Change in
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Interest expense
$ (3,702 )
$ (11,731 )
$ (20,600 )
(68.4 )%
(43.1 )%
Percentage of revenue
(0.9 )%
(2.9 )%
(5.2 )%
Interest expense is primarily related to our long-term debt, which is further discussed under the Credit Arrangements heading in the Liquidity and Capital Resources section, below. This interest expense is comprised of contractual interest and amortization of original issue discount and debt issuance costs based on the effective interest method.
The decrease in Interest expense for fiscal 2020 compared to fiscal 2019 was largely driven by the significant reduction in the effective interest rate on our long-term debt, coupled with the reduction in the principal balance of our long-term debt due to the additional principal payments made in the current and previous periods.
Other expense, net
The composition of our Other expense, net, including as a percentage of revenue, is presented in the following table:
Year Ended
% Change in
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Other expense, net
$ (208 )
$ (2,245 )
$ (249 )
(90.7 )%
100+%
Percentage of revenue
(0.1 )%
(0.6 )%
(0.1 )%
For fiscal 2020 compared to fiscal 2019, Other expense, net decreased primarily due to the non-recurrence of the $2.2 million loss on refinancing charge taken to write off the remaining unamortized balance of debt costs and original issue discount related to the long-term debt refinanced during the prior year.
Income taxes
The composition of our Income tax expense is presented in the following table:
Year Ended
% Change in
(In thousands)
January 2, 2021
December 28, 2019
December 29, 2018
Income tax expense
$ 1,064
$ 1,572
$ 2,353
(32.3 )%
(33.2 )%
Our Income tax expense is composed primarily of foreign income and withholding taxes, partially offset by benefits resulting from the release of uncertain tax positions ("UTP") due to statute of limitation expirations that occurred in the respective periods. The decrease in expense in fiscal 2020 as compared to fiscal 2019 is primarily due to the release of uncertain tax positions due to statute of limitations expirations.
We are not currently paying U.S. federal income taxes and do not expect to pay such taxes until we fully utilize our tax net operating loss and credit carryforwards. We expect to pay a nominal amount of state income tax. We are paying foreign income taxes, which are primarily related to withholding taxes on income from foreign royalties, foreign sales, and the cost of operating offshore research and development, marketing, and sales subsidiaries. We updated our evaluation of the valuation allowance position in the United States through January 2, 2021 and concluded that we should continue to maintain a full valuation allowance against the net federal and state deferred tax assets. We will continue to evaluate both positive and negative evidence in future periods to determine if we will realize the deferred tax assets. We accrue interest and penalties related to uncertain tax positions in income tax expense on our Consolidated Statements of Operations. The inherent uncertainties related to the geographical distribution and relative level of profitability among various high and low tax jurisdictions make it difficult to estimate the impact of the global tax structure on our future effective tax rate.
Liquidity and Capital Resources
The following sections discuss material changes in our financial condition from the end of fiscal 2019, including the effects of changes in our Consolidated Balance Sheets, and the effects of our credit arrangements and contractual obligations on our liquidity and capital resources.
We have historically financed our operating and capital resource requirements through cash flows from operations, and from the issuance of long-term debt to fund acquisitions. Cash provided by or used in operating activities will fluctuate from period to period due to fluctuations in operating results, the timing and collection of accounts receivable, and required inventory levels, among other things.
There is significant uncertaintyaround the extent and duration of the disruption to our business from the COVID-19 pandemic, and our liquidity and working capital needs may be impacted in future periods.
We believe that our financial resources, including current cash and cash equivalents, cash flow from operating activities, and our credit facilities, will be sufficient to meet our liquidity and working capital needs through at least the next 12 months. As of January 2, 2021, we did not have significant long-term commitments for capital expenditures. In the future, we may continue to consider acquisition opportunities to further extend our product or technology portfolios and further expand our product offerings. In connection with funding capital expenditures, acquisitions, securing additional wafer supply, increasing our working capital, or other operations, we may seek to obtain equity or additional debt financing, or advance purchase payments or similar arrangements with wafer manufacturers. We may also seek to obtain equity or additional debt financing if we experience downturns or cyclical fluctuations in our business that are more severe or longer than we anticipated when determining our current working capital needs. On May 17, 2019, we entered into a Credit Agreement with Wells Fargo Bank, National Association, as administrative agent, and other lenders (our “Current Credit Agreement”) that is discussed under the "Credit Arrangements" heading, below.
Liquidity
Cash and cash equivalents
(In thousands)
January 2, 2021
December 28, 2019
$ Change
% Change
Cash and cash equivalents
$ 182,332
$ 118,081
$ 64,251
54.4 %
As of January 2, 2021, we had Cash and cash equivalents of $182.3 million, of which approximately $121.8 million in Cash and cash equivalents was held by our foreign subsidiaries.
We manage our global cash requirements considering, among other things, (i) available funds among our subsidiaries through which we conduct business, (ii) the geographic location of our liquidity needs, and (iii) the cost to access international cash balances. The repatriation of non-US earnings may require us to withhold and pay foreign income tax on dividends. This should not result in our recording significant additional tax expense as we have accrued expense based on current withholding rates. As of January 2, 2021, we could access all cash held by our foreign subsidiaries without incurring significant additional expense.
The net increase in Cash and cash equivalents of $64.3 million between December 28, 2019 and January 2, 2021 was primarily driven by cash flows from the following activities:
Operating activities - Cash provided by operating activities results from net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was $91.7 million in fiscal 2020 compared to $124.1 million in fiscal 2019. This $32.4 million decrease was driven by $45.7 million in changes in working capital, primarily the increase in cash used for inventories, prepaid expenses and other current assets, and accounts payable, partially offset by the cash provided by accrued expenses and accounts receivable. This was partially offset by an increase of $13.3 million provided by improved operating performance. We are using cash provided by operating activities to fund our operations.
Investing activities - Investing cash flows consist primarily of transactions related to capital expenditures and payments for software licenses, and, in the prior year, short-term marketable securities. Net cash used by investing activities in fiscal 2020 was $20.9 million compared to $15.5 million in fiscal 2019. This $5.4 million increase was primarily due to the non-recurrence of the $9.7 million provided by our liquidation of all short-term investments in the first quarter of fiscal 2019. Total cash used for capital expenditures and payments for software licenses decreased $4.3 million to $20.9 million in fiscal 2020 from $25.2 million in fiscal 2019 primarily due to lower expenditures for software enhancements, office consolidation, and test equipment.
Financing activities - Financing cash flows consist primarily of activity on our long-term debt, proceeds from the exercise of options to acquire common stock, tax payments related to the net share settlement of restricted stock units, and purchases of treasury stock. During fiscal 2020, we drew $50.0 million on our revolving loan facility to further strengthen our liquidity position, and we paid quarterly installments totaling $26.3 million on our long-term debt, which fulfilled the required quarterly installments through the first quarter of fiscal 2021. During fiscal 2019, we made a total of $117.0 million in principal payments in addition to the cash flows related to refinancing our long-term debt. Payments for tax withholdings on vesting of RSUs partially offset by employee exercises of stock options used net cash flows of $16.9 million in fiscal 2020, which is a change of approximately $24.0 million from the $7.1 million provided in fiscal 2019. During fiscal 2020, we also purchased $15.0 million of treasury stock, as further discussed below under "Share Repurchase Program."
Accounts receivable, net
(In thousands)
January 2, 2021
December 28, 2019
$ Change
% Change
Accounts receivable, net
$ 64,581
$ 64,917
$ (336 )
(0.5 )%
Days sales outstanding - Overall
(4 )
Accounts receivable, net as of January 2, 2021 decreased by approximately $0.3 million, or approximately 1%, compared to December 28, 2019. This resulted primarily from the timing of shipments in December 2020 compared to December 2019. We calculate Days sales outstanding on the basis of a 365-day year as Accounts receivable, net at the end of the quarter divided by sales during the quarter annualized and then multiplied by 365.
Inventories
(In thousands)
January 2, 2021
December 28, 2019
$ Change
% Change
Inventories
$ 64,599
$ 54,980
$ 9,619
17.5 %
Days of inventory on hand
Inventories as of January 2, 2021 increased $9.6 million, or approximately 18%, compared to December 28, 2019 primarily to meet the increased demands of our customers.
The Days of inventory on hand ratio compares the inventory balance at the end of a quarter to the cost of sales in that quarter. We calculate Days of inventory on hand on the basis of a 365-day year as Inventories at the end of the quarter divided by Cost of sales during the quarter annualized and then multiplied by 365. Our Days of inventory on hand increased to 139 days at January 2, 2021 from 123 days at December 28, 2019. This increase resulted from inventory increases to meet the increased demands of our customers.
Credit Arrangements
On May 17, 2019, we entered into our Current Credit Agreement. The details of this arrangement are described in "Note 6 - Long-Term Debt" in the accompanying Notes to Consolidated Financial Statements.
As of January 2, 2021, we had no significant long-term purchase commitments for capital expenditures or existing used or unused credit arrangements beyond the secured revolving loan facility described above.
Share Repurchase Program
On February 14, 2020, our Board of Directors approved a stock repurchase program pursuant to which up to $40.0 million of outstanding common stock could be repurchased from time to time. The duration of the repurchase program was twelve months. Under this program during the fourth quarter of fiscal 2020, approximately 0.4 million shares were repurchased for $15.0 million, or an average price paid per share of $38.98. All repurchased shares were retired by the end of the 2020 fiscal year. All repurchases were open market transactions funded from available working capital. The twelve-month 2020 program expired during the first quarter of fiscal 2021, during which no additional shares were repurchased.
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at January 2, 2021:
Fiscal year
(In thousands)
Operating leases (1)
Long-term Debt (2)
$ 5,615
$ 15,512
5,378
19,648
5,057
19,402
4,861
124,414
3,552
-
Thereafter
3,229
-
$ 27,692
$ 178,976
(1)
Certain of our facilities and equipment are leased under operating leases, which expire at various times through 2027.
(2)
Cash payments due for long-term debt include estimated interest payments, which are based on outstanding principal amounts, currently effective interest rates as of January 2, 2021, timing of scheduled payments, and the debt term. See Liquidity section of Item 7 for further discussion pertaining to our Credit Arrangements.
The table above does not include amounts related to uncertain tax positions because we cannot reliably estimate the timing of the settlement of such liabilities.
Our significant operating leases are for our facilities in Hillsboro and Portland, Oregon; San Jose, California; Muntinlupa City, Philippines; and Shanghai, China.
Our corporate headquarters is located in our facility in Hillsboro, Oregon, which is leased until November 2022. Annual rental costs are estimated at $0.6 million with 3% annual increases.
The lease for our former office space in Portland, Oregon expires in March 2025. Annual rental costs are estimated at $0.7 million with average annual increases of approximately 5%. Under a previously approved restructuring plan, we fully vacated the space in Portland, Oregon in early 2019 and subleased the vacated space.
Our lease in San Jose, California expires September 2026 with total annual rental costs estimated to be $2.4 million and annual increases of approximately 3%. Under a previously approved restructuring plan, we vacated approximately 50% or our facility in San Jose, California in the fourth quarter of fiscal 2018 and intend to sublease the vacated space.
Two of our leases in Muntinlupa City, Philippines expire in May 2025 and June 2025, with total annual rental costs estimated to be $0.7 million and annual increases of approximately 5%. Our lease in Shanghai expires in May 2021, with total annual rental costs estimated to be $1.8 million.
New Accounting Pronouncements
The information contained under the heading "New Accounting Pronouncements" in Note 1 - Nature of Operations and Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 is incorporated by reference into this Part II, Item 7.
Off-Balance Sheet Arrangements
As of January 2, 2021, we did not have any off-balance sheet arrangements of the type described by Item 303(a)(4) of SEC Regulation S-K.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We assess these risks on a regular basis and have established policies that are designed to protect against the adverse effects of these and other potential exposures.
Foreign Currency Exchange Rate Risk
While our revenues and the majority of our expenses are denominated in U.S. dollars, our financial position and results of operations are subject to foreign currency exchange rate risk as a result of having various international subsidiary and branch operations. Historically, exposure to foreign currency exchange rate risk has not had a material impact on our results from operations. At times in the past we have entered into foreign currency forward exchange contracts in relation to certain activities, which mitigated the foreign currency exchange rate exposure from an economic perspective, but these were not designated as "effective" hedges under U.S. GAAP. The two foreign currency forward exchange contracts that we held at December 28, 2019 matured in June 2020, and we did not enter into any new contracts during fiscal 2020. As of January 2, 2021, we had no foreign currency foreign exchange contracts.
Interest Rate Risk
We are exposed to interest rate risk related to our indebtedness. At January 2, 2021, we had $171.9 million outstanding under our Current Credit Agreement. A hypothetical increase in the one-month LIBOR by 1% (100 basis points) would increase our future interest expense by approximately $0.4 million per quarter.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements:
Page
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm (Ernst & Young LLP)
Report of Independent Registered Public Accounting Firm (KPMG LLP)
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
January 2,
December 28,
December 29,
(In thousands, except per share data)
Revenue
$ 408,120 $ 404,093 $ 398,799
Cost of revenue
162,814 165,671 179,360
Gross margin
245,306 238,422 219,439
Operating expenses:
Research and development
89,223 78,617 82,449
Selling, general, and administrative
95,331 82,542 91,054
Amortization of acquired intangible assets
4,449 13,558 17,690
Restructuring charges
3,937 4,664 17,349
Impairment of acquired intangible assets - - 12,486
Acquisition related charges - - 1,531
Total operating expenses
192,940 179,381 222,559
Income (loss) from operations
52,366 59,041 (3,120 )
Interest expense
(3,702 ) (11,731 ) (20,600 )
Other expense, net
(208 ) (2,245 ) (249 )
Income (loss) before income taxes
48,456 45,065 (23,969 )
Income tax expense
1,064 1,572 2,353
Net income (loss)
$ 47,392 $ 43,493 $ (26,322 )
Net income (loss) per share:
Basic
$ 0.35 $ 0.33 $ (0.21 )
Diluted
$ 0.34 $ 0.32 $ (0.21 )
Shares used in per share calculations:
Basic
135,220 132,471 126,564
Diluted
141,276 137,274 126,564
The accompanying notes are an integral part of these Consolidated Financial Statements
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended
January 2,
December 28,
December 29,
(In thousands)
Net income (loss)
$ 47,392
$ 43,493
$ (26,322 )
Other comprehensive income (loss):
Translation adjustment, net of tax
1,533
(1,271 )
Change in actuarial valuation of defined benefit pension
(678 )
(602 )
Unrealized gain related to marketable securities, net of tax
-
Reclassification adjustment for gains related to marketable securities included in Other expense, net of tax
-
(53 )
(18 )
Comprehensive income (loss)
$ 48,247
$ 43,221
$ (27,201 )
The accompanying notes are an integral part of these Consolidated Financial Statements
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
January 2,
December 28,
(In thousands, except share and par value data)
ASSETS
Current assets:
Cash and cash equivalents
$ 182,332 $ 118,081
Accounts receivable, net of allowance for credit losses
64,581 64,917
Inventories, net
64,599 54,980
Prepaid expenses and other current assets
22,331 24,452
Total current assets
333,843 262,430
Property and equipment, net
39,666 39,230
Operating lease right-of-use assets
22,178 23,591
Intangible assets, net
6,321 6,977
Goodwill
267,514 267,514
Deferred income taxes
577 478
Other long-term assets
9,968 11,796
Total assets
$ 680,067 $ 612,016
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$ 27,530 $ 44,350
Accrued expenses
21,411 20,591
Accrued payroll obligations
18,028 13,404
Current portion of long-term debt
12,762 21,474
Total current liabilities
79,731 99,819
Long-term debt, net of current portion
157,934 125,072
Long-term operating lease liabilities, net of current portion
18,906 21,438
Other long-term liabilities
39,069 38,028
Total liabilities
295,640 284,357
Contingencies (Note 14)
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; 136,236,000 shares issued and outstanding as of January 2, 2021 and 133,883,000 shares issued and outstanding as of December 28, 2019
1,362 1,339
Additional paid-in capital
770,711 762,213
Accumulated deficit
(385,898 ) (433,290 )
Accumulated other comprehensive loss
(1,748 ) (2,603 )
Total stockholders' equity
384,427 327,659
Total liabilities and stockholders' equity
$ 680,067 $ 612,016
The accompanying notes are an integral part of these Consolidated Financial Statements
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
January 2,
December 28,
December 29,
(In thousands)
Cash flows from operating activities:
Net income (loss)
$ 47,392 $ 43,493 $ (26,322 )
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
25,140 33,056 39,261
Stock-based compensation expense
40,372 18,899 13,646
Amortization of right-of-use assets
5,960 5,797 -
Amortization of debt issuance costs and discount
400 1,659 2,230
Loss on refinancing of long-term debt
- 2,235 -
Impairment of operating lease right-of-use asset
- 977 -
Impairment of acquired intangible assets - - 12,486
Other non-cash adjustments
(256 ) (374 ) (79 )
Changes in assets and liabilities:
Accounts receivable, net
336 (4,027 ) (3,978 )
Inventories, net
(9,619 ) 12,116 13,177
Prepaid expenses and other assets
(6,441 ) 3,740 (11,667 )
Accounts payable
(16,820 ) 12,470 (3,470 )
Accrued expenses 5,715 (3,209 ) 16,795
Accrued payroll obligations
4,624 4,039 (1,051 )
Operating lease liabilities, current and long-term portions
(5,715 ) (6,896 ) -
Income taxes payable
599 162 498
Deferred licensing and services revenue - - (68 )
Net cash provided by operating activities
91,687 124,137 51,458
Cash flows from investing activities:
Capital expenditures
(12,121 ) (15,590 ) (8,384 )
Cash paid for software licenses
(8,747 ) (9,601 ) (8,123 )
Proceeds from sales of and maturities of short-term marketable securities
- 9,655 5,000
Purchases of marketable securities - - (9,603 )
Net cash used in investing activities
(20,868 ) (15,536 ) (21,110 )
Cash flows from financing activities:
Restricted stock unit tax withholdings
(26,965 ) (10,084 ) (2,370 )
Proceeds from issuance of common stock
10,103 17,166 29,288
Purchases of treasury stock (14,989 ) - -
Proceeds from long-term debt
50,000 206,500 -
Original issue discount and debt issuance costs
- (2,086 ) -
Repayment of long-term debt
(26,250 ) (321,408 ) (43,759 )
Net cash used in financing activities
(8,101 ) (109,912 ) (16,841 )
Effect of exchange rate change on cash
1,533 341 (1,271 )
Net increase (decrease) in cash and cash equivalents
64,251 (970 ) 12,236
Beginning cash and cash equivalents
118,081 119,051 106,815
Ending cash and cash equivalents
$ 182,332 $ 118,081 $ 119,051
Supplemental disclosure of cash flow information and non-cash investing and financing activities:
Interest paid
$ 3,700 $ 10,995 $ 18,607
Operating lease payments
$ 7,713 $ 8,425 $ -
Income taxes paid, net of refunds
$ 1,868 $ 3,393 $ 3,054
Accrued purchases of plant and equipment
$ 975 $ 826 $ 110
Operating lease right-of-use assets obtained in exchange for lease obligations
$ 2,645 $ 747 $ -
The accompanying notes are an integral part of these Consolidated Financial Statements
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock
Additional
Other
($.01 par value)
Paid-in
Treasury
Accumulated
Comprehensive
(In thousands, except par value data)
Shares
Amount
Capital
Stock
Deficit
Income (Loss)
Total
Balances, December 30, 2017 (1)
123,895 $ 1,239 $ 695,768 $ - $ (450,461 ) $ (1,452 ) $ 245,094
Components of comprehensive income, net of tax:
Net loss
- - - - (26,322 ) - (26,322 )
Other comprehensive income (loss) - - - - - (879 ) (879 )
Total comprehensive loss
(27,201 )
Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes
5,833 58 26,860 - - - 26,918
Stock-based compensation expense
- - 13,646 - - - 13,646
Balances, December 29, 2018
129,728 $ 1,297 $ 736,274 $ - $ (476,783 ) $ (2,331 ) $ 258,457
Components of comprehensive income, net of tax:
Net income
- - - - 43,493 - 43,493
Other comprehensive income (loss) - - - - - (272 ) (272 )
Total comprehensive income
43,221
Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes
4,155 42 7,040 - - - 7,082
Stock-based compensation expense
- - 18,899 - - - 18,899
Balances, December 28, 2019
133,883 $ 1,339 $ 762,213 $ - $ (433,290 ) $ (2,603 ) $ 327,659
Components of comprehensive income, net of tax:
Net income
- - - - 47,392 - 47,392
Other comprehensive income (loss) - - - - - 855 855
Total comprehensive income
48,247
Common stock issued in connection with employee equity incentive plans, net of shares withheld for employee taxes
2,738 27 (16,889 ) - - - (16,862 )
Stock-based compensation expense
- - 40,372 - - - 40,372
Stock repurchase
- - - (14,989 ) - - (14,989 )
Retirement of treasury stock
(385 ) (4 ) (14,985 ) 14,989 - - -
Balances, January 2, 2021
136,236 $ 1,362 $ 770,711 $ - $ (385,898 ) $ (1,748 ) $ 384,427
(1) Balances as of December 30, 2017 include opening balance adjustments to Accumulated deficit made as a result of changes in accounting principle due to the adoption of ASC 606, Revenue from Contracts With Customers, which we adopted as of the beginning of fiscal 2018 using the modified retrospective transition method.
The accompanying notes are an integral part of these Consolidated Financial Statements
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation and Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"). They include the accounts of Lattice and its subsidiaries after the elimination of all intercompany balances and transactions.
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.
Certain prior year balances have been reclassified to conform to the current year’s presentation.
Fiscal Reporting Periods
We report based on a 52 or 53-week fiscal year ending on the Saturday closest to December 31. Our fiscal 2020 was a 53-week year that ended on January 2, 2021. Our fiscal 2019, and 2018 were 52-week years that ended on December 28, 2019 and December 29, 2018, respectively. All references to quarterly or annual financial results are references to the results for the relevant fiscal period.
Concentrations of Risk
Potential exposure to concentrations of risk may impact revenue, accounts receivable, and supply of wafers for our new products.
Distributors have historically accounted for a significant portion of our total revenue. Our two largest distributor groups, the Weikeng Group ("Weikeng") and Arrow Electronics, Inc. ("Arrow"), each account for more than 10% of our total revenue and our net accounts receivable. Revenue attributable to distributors as a percentage of total revenue is presented in the following table:
Year Ended
January 2, 2021 December 28, 2019 December 29, 2018
Weikeng Group
35 % 30 % 25 %
Arrow Electronics Inc.
25 25 29
Other distributors
23 27 29
Revenue attributable to distributors
83 % 82 % 83 %
At January 2, 2021 and December 28, 2019, Weikeng accounted for 47% and 38%, respectively, and Arrow accounted for 45% and 40%, respectively, of net accounts receivable.
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.
We rely on a limited number of foundries for our wafer purchases. 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, or create delays in production or shipments, among other factors.
Cash and Cash Equivalents
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, which approximates fair value. Deposits with financial institutions at times exceed Federal Deposit Insurance Corporation insurance limits.
Foreign Exchange and Translation of Foreign Currencies
While our revenues and the majority of our expenses are denominated in U.S. dollars, we also have international subsidiaries and branch operations that conduct some transactions in currencies that differ from the functional currency of that entity. Gains or losses from foreign exchange rate fluctuations on balances denominated in currencies that differ from the functional currencies are reflected in Other expense, net.
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 our Consolidated Statements of Stockholders' Equity).
Revenue Recognition
Under the terms of ASC 606, "Revenue from Contracts with Customers", we recognize revenue when we satisfy performance obligations as evidenced by the transfer of control of our products or services to customers. 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. The majority of our revenue is derived from product sales. We consider customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, we consider our promise to transfer each distinct product to be the identified performance obligations. Revenue for product sales is recognized at the time of product shipment, as determined by the agreed upon contract shipping terms.
Our Licensing and services revenue is comprised of revenue from our intellectual property ("IP") core licensing activity, patent monetization activities, design services, 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 and agreements with the standards consortia of which we are a member to be 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. We recognize license revenue at the point in time that control of the license transfers to the customer, which is generally upon delivery, or as usage occurs.
We measure revenue based on the amount of consideration we expect to be entitled to in exchange for products or services. Variable consideration is estimated and reflected as an adjustment to the transaction price. We determine variable consideration, which consists primarily of various sales price concessions, by estimating the most likely amount of consideration we expect to receive from the customer based on an analysis of historical rebate claims over a period of time considered adequate to account for current pricing and business trends. Sales rebates earned by customers are offset against their receivable balances. Rebates earned by customers when they do not have outstanding receivable balances are recorded within Accrued expenses. Licensing and services revenue includes HDMI and MHL standards revenue, as well as certain IP licenses, include variable consideration in the form of usage-based royalties.
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 cases, 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. Under the practical expedient provided by ASC 340, we generally expense sales commissions when incurred because the amortization period would be 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.
Inventories and Cost of Revenue
Inventories are stated at the lower of actual cost (determined using the first-in, first-out method) or net realizable value. We review and set standard costs quarterly to approximate current actual manufacturing costs. Our manufacturing overhead standards for product costs are calculated assuming full absorption of actual spending over actual costs. The valuation of inventory requires us to estimate excess or obsolete inventory. Material assumptions we use to estimate necessary inventory carrying value adjustments can be unique to each product and are based on specific facts and circumstances. In determining provisions for excess or obsolete products, we consider assumptions such as changes in business and economic conditions, projected customer demand for our products, and changes in technology or customer requirements. The creation of such provisions results in a write-down of inventory to net realizable value and a charge to Cost of revenue. Lower of cost or net realizable value is based on assumptions such as recent historical sales activity and selling prices, as well as estimates of future selling prices. Shipping and handling costs are included in Cost of revenue in our Consolidated Statements of Operations.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, generally three to five years for equipment and software, and one to three years for tooling. Leasehold improvements are amortized over the shorter of the non-cancelable lease term or the estimated useful life of the assets. We capitalize costs for the fabrication of masks used by our foundry partners to manufacture our products. The capitalized mask costs begin depreciating to Cost of revenue once the products go into production, and depreciation is straight-lined over a three-year period, which is the expected useful life of the mask. 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. Repair and maintenance costs are expensed as incurred.
Impairment of Long-Lived Assets
Long-lived assets, which consist primarily of property and equipment, amortizable intangible assets, and right-of-use assets, are carried on our financial statements based on their cost less accumulated depreciation or amortization. We monitor the carrying value of our long-lived assets for potential impairment and test the recoverability of such assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. These events or changes in circumstances, including management decisions pertaining to such assets, are referred to as impairment indicators. If an impairment indicator occurs, we perform a test of recoverability by comparing the carrying value of the asset group to its undiscounted expected future cash flows. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset group to its carrying value. Fair value is generally determined by considering (i) internally developed discounted projected cash flow analysis of the asset group; (ii) actual third-party valuations; and/or (iii) information available regarding the current market for similar asset groups. If the fair value of the asset group is determined to be less than the carrying amount of the asset group, an impairment in the amount of the difference is recorded in the period that the impairment indicator occurs and is included in our Consolidated Statements of Operations. Estimating future cash flows requires significant judgment and projections may vary from the cash flows eventually realized, which could impact our ability to accurately assess whether an asset has been impaired. There has been no occurrence of events to date that would trigger an impairment analysis of property and equipment. The results of our assessments of amortizable intangible assets are detailed in "Note 9 - Intangible Assets."
Valuation of 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 is instead tested for impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. When evaluating whether goodwill is impaired, we make a qualitative assessment to determine if it is more likely than not that the reporting unit's fair value is less than the carrying amount. If the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, then goodwill impairment exists for the reporting unit. The impairment loss, if any, is recognized for the amount by which the carrying value exceeds the fair value. If the fair value of the reporting unit exceeds its carrying value, no further impairment analysis is needed. For purposes of testing goodwill for impairment, we currently operate as a single reporting unit.
No impairment charges relating to goodwill were recorded for either fiscal 2020 or 2019, as no indicators of impairment were present. We determined that the strategic decision to discontinue our millimeter wave business in the second quarter of 2018 constituted a triggering event related to goodwill, and we evaluated our goodwill balance as of June 30, 2018. We concluded that goodwill was not impaired, and no impairment charges relating to goodwill were recorded for fiscal 2018.
Leases
We account for leases under the terms of ASC 842, "Leases," which requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. Upon adoption, 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, which we applied to all asset classes. Concurrent with our adoption of Topic 842, we early adopted ASU 2019-01, Leases (Topic 842): Codification Improvements, which granted 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 determine the present value of lease payments using an incremental borrowing rate based on information from our commercial bank for an equivalent borrowing and term in the respective region as of the lease commencement date. 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.
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.
Research and Development
Research and development expenses include costs for compensation and benefits, engineering wafers, depreciation, licenses, and outside engineering services. These expenditures are for the design of new products, intellectual property cores, processes, packaging, and software solutions. Research and development costs are generally expensed as incurred, with certain licensed technology agreements capitalized as intangible assets and amortized to Research and development expense over their estimated useful lives.
Restructuring Charges
Expenses associated with exit or disposal activities are recognized when incurred under ASC 420, “Exit or Disposal Cost Obligations,” for everything except severance expenses and vacated leased facilities. Because we have a history of paying severance benefits, the cost of severance benefits associated with a restructuring plan is recorded when such costs are probable and the amount can be reasonably estimated in accordance with ASC 712, “Compensation - Nonretirement Postemployment Benefits.” When leased facilities are vacated, the amount of any ROU asset impairment is calculated in accordance with ASC 360, "Property, Plant, and Equipment" and recorded as a part of restructuring charges. Expenses from other exit or disposal activities, including the cancellation of software contracts and engineering tools or the abandonment of long-lived assets, is recorded as a part of restructuring charges.
Accounting for Income Taxes
Our provision for income tax is comprised of our current tax liability and changes in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that in management’s judgment is more-likely-than-not to be recoverable against future taxable income. The determination of a valuation allowance and when it should be released requires complex judgment.
In assessing the ability to realize deferred tax assets, we evaluate both positive and negative evidence that may exist and consider whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Any adjustment to the net deferred tax asset valuation allowance is recorded in the Consolidated Statements of Operations for the period that the adjustment is determined to be required.
Our income tax calculations are based on application of the respective U.S. federal, state or foreign tax law. Our tax filings, however, are subject to audit by the relevant tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases as well as any interest or penalties are recorded as income tax expense or benefit in the Consolidated Statements of Operations.
Stock-Based Compensation
We estimate the fair value of share-based awards consistent with the provisions of ASC 718, “Compensation - Stock Compensation.” We value RSUs using the closing market price on the date of grant, and we value stock options using the Black-Scholes option pricing model. We have also granted RSUs with a market condition to certain executives. The awards with a market condition have a three-year vesting period and vest between 0% and 250% of the target amount, based on the Company's relative Total Shareholder Return ("TSR") over the measurement period compared to the TSR of a component of companies of the PHLX Semiconductor Sector Index for awards granted in fiscal 2018 and 2019 or the Russell 2000 index for awards granted in 2020. TSR is measured as stock price appreciation in the performance period. We have also granted RSUs with a performance condition to our President and Chief Executive Officer, which 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 assess the probability of achieving the performance condition on a quarterly basis. We valued the RSUs with a performance condition using the market price on the date of grant.
Segment Information
As of January 2, 2021, we had one operating segment: the core Lattice business, which includes semiconductor devices, evaluation boards, development hardware, and related intellectual property licensing, services, and sales. Our chief operating decision maker is the Chief Executive Officer, who reviews operating results and financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance.
New Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which adds new guidance for accounting for tax law changes, year-to-date losses in interim periods, and determining how to apply the income tax guidance to franchise taxes that are partially based on income, as well as other changes to simplify accounting for income taxes. The ASU is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Entities may early adopt the ASU in any interim period for which financial statements have not yet been issued (or made available for issuance). We are currently assessing the impact of ASU 2019-12 on our consolidated financial statements and related disclosures.
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 January 2, 2021, 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 January 2, 2021, as vesting of future tranches of these awards is contingent upon achievement of the performance condition over two consecutive trailing four-quarter periods, which has not yet been achieved. See "Note 10 - Stock-Based Compensation Plans" to our consolidated financial statements for further discussion of our equity awards with market or performance conditions.
A summary of basic and diluted Net income (loss) per share is presented in the following table:
Year Ended
January 2,
December 28,
December 29,
(in thousands, except per share data)
Net income (loss)
$ 47,392 $ 43,493 $ (26,322 )
Shares used in basic Net income (loss) per share
135,220 132,471 126,564
Dilutive effect of stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition
6,056 4,803 -
Shares used in diluted Net income (loss) per share
141,276 137,274 126,564
Basic Net income (loss) per share
$ 0.35 $ 0.33 $ (0.21 )
Diluted Net income (loss) per share
$ 0.34 $ 0.32 $ (0.21 )
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:
Year Ended
January 2,
December 28,
December 29,
(in thousands)
Stock options, RSUs, ESPP shares, and equity awards with a market condition or performance condition excluded as they are antidilutive
316 890 7,567
Note 3 - Revenue from Contracts with Customers
Disaggregation of Revenue
The following tables provide information about revenue from contracts with customers disaggregated by major class of revenue, revenue by channel, and by geographical market, based on ship-to location of the customer:
Major Class of Revenue
Year Ended
January 2,
December 28,
December 29,
(In thousands)
Product
$ 388,502 95 % $ 382,548 95 % $ 380,468 95 %
Licensing and services
19,618 5 % 21,545 5 % 18,331 5 %
Total revenue
$ 408,120 100 % $ 404,093 100 % $ 398,799 100 %
Revenue by Channel
Year Ended
January 2,
December 28,
December 29,
(In thousands)
Product revenue - Distributors
$ 339,100 83 % $ 331,941 82 % $ 330,719 83 %
Product revenue - Direct
49,402 12 % 50,607 13 % 49,749 12 %
Licensing and services revenue
19,618 5 % 21,545 5 % 18,331 5 %
Total revenue
$ 408,120 100 % $ 404,093 100 % $ 398,799 100 %
Revenue by Geographical Market
Year Ended
January 2,
December 28,
December 29,
(In thousands)
United States $ 43,945 11 % $ 44,330 11 % $ 38,585 10 %
Other Americas 18,192 4 % 13,606 3 % 16,549 4 %
Americas 62,137 15 % 57,936 14 % 55,134 14 %
China 213,714 52 % 206,107 51 % 202,983 51 %
Taiwan 30,972 8 % 19,746 5 % 16,124 4 %
Japan 25,435 6 % 42,658 11 % 44,033 11 %
Other Asia 35,062 9 % 30,254 7 % 34,979 9 %
Asia 305,183 75 % 298,765 74 % 298,119 75 %
Europe 40,800 10 % 47,392 12 % 45,546 11 %
Total revenue
$ 408,120 100 % $ 404,093 100 % $ 398,799 100 %
Contract balances
Our contract assets relate to our rights to consideration for licenses and royalties due to us as a member of the HDMI 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. The balance results primarily from the amount of estimated revenue related to HDMI that we have recognized to date, but which has not yet been collected by the agent. Contract assets are recorded in Prepaid expenses and other current assets in our Consolidated Balance Sheets.
The following table summarizes activity during the periods presented:
(In thousands)
Contract assets as of December 29, 2018
$ 9,143
Revenues recorded during the period
17,356
Transferred to Accounts receivable or collected
(20,930 )
Contract assets as of December 28, 2019
$ 5,569
Revenues recorded during the period
15,860
Transferred to Accounts receivable or collected
(15,818 )
Contract assets as of January 2, 2021
$ 5,611
Contract liabilities are included in Accrued expenses on our Consolidated Balance Sheets. The following table summarizes activity during the periods presented:
(In thousands)
Contract liabilities as of December 29, 2018
$ 1,614
Accruals for estimated future stock rotation and scrap returns
5,763
Less: Release of accruals for recognized stock rotation and scrap returns
(5,064 )
Contract liabilities as of December 28, 2019
$ 2,313
Accruals for estimated future stock rotation and scrap returns
5,976
Less: Release of accruals for recognized stock rotation and scrap returns
(5,221 )
Contract liabilities as of January 2, 2021
$ 3,068
The impact to revenue in fiscal years 2020 and 2019 from the release of accruals for recognized stock rotation and scrap returns was offset by the processing of return merchandise authorizations totaling $6.1 million and $5.0 million, respectively, yielding a net revenue decrease of approximately $0.9 million and a net revenue increase of approximately $0.1 million, respectively.
Note 4 - Balance Sheet Components
Accounts Receivable
Accounts receivable do not bear interest and are shown net of an allowance for expected lifetime credit losses, which reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine this allowance through an assessment of known troubled accounts, analysis of our accounts receivable aging, historical experience, expectations for future economic conditions, management judgment, and other available evidence.
January 2,
December 28,
(In thousands)
Accounts receivable
$ 64,635 $ 65,023
Less: Allowance for credit losses
(54 ) (106 )
Accounts receivable, net of allowance for credit losses
$ 64,581 $ 64,917
We had no material bad debt expense in fiscal 2020, 2019, or 2018.
Inventories
January 2,
December 28,
(In thousands)
Work in progress
$ 34,724 $ 39,855
Finished goods
29,875 15,125
Total inventories, net
$ 64,599 $ 54,980
Accrued Expenses
Included in Accrued expenses in the Consolidated Balance Sheets are the following balances:
January 2,
December 28,
(In thousands)
Liability for non-cancelable contracts
$ 8,492 $ 6,964
Current portion of operating lease liabilities
4,149 4,686
Other accrued expenses
8,770 8,941
Total accrued expenses
$ 21,411 $ 20,591
Cloud Based Computing Implementation Costs
Under the guidance in ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), we are capitalizing the implementation costs for cloud computing arrangements, mainly for our integrated distributor accounting management systems. These cloud-based computing implementation costs are recorded in Prepaid expenses and other current assets and Other long-term assets on our Consolidated Balance Sheets. The following table summarizes activity during fiscal 2020:
(In thousands)
Cloud based computing implementation costs as of December 28, 2019
$ 2,543
Costs capitalized
Amortization
(695 )
Cloud based computing implementation costs as of January 2, 2021
$ 2,831
Note 5 - Property and Equipment
January 2, December 28,
(In thousands)
2021 2019
Production equipment and software
$ 135,774 $ 150,591
Leasehold improvements
12,913 12,517
Office furniture and equipment
2,161 2,112
150,848 165,220
Accumulated depreciation and amortization
(111,182 ) (125,990 )
$ 39,666 $ 39,230
For fiscal year 2020, depreciation and amortization expense for property and equipment was $11.8 million. For fiscal year 2019, depreciation and amortization expense for property and equipment was $11.6 million, including $0.4 million of restructuring expense. For fiscal year 2018, depreciation and amortization expense for property and equipment was $13.4 million, including $0.6 million of restructuring expense.
Property and Equipment - Geographic Information
Our Property and equipment, net by country at the end of each period was as follows:
January 2, December 28,
(In thousands)
2021 2019
United States
$ 29,440 $ 32,313
China
1,537 1,683
Philippines
2,912 2,683
Taiwan
5,171 1,885
Japan
476 283
Other
130 383
Total foreign property and equipment, net
10,226 6,917
Total property and equipment, net
$ 39,666 $ 39,230
Note 6 - Long-Term Debt
On May 17, 2019, we entered into a credit agreement (the “Current Credit Agreement”), which provides for a five-year secured term loan facility in an aggregate principal amount of $175.0 million and a five-year secured revolving loan facility in an aggregate principal amount of up to $75.0 million, 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 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”), 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 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 January 2, 2021, the effective interest rate on the term loan was 1.61%, and the effective interest rate on the revolving loan was 1.40%. 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.
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.
During fiscal 2020, we made principal payments totaling $26.3 million, including $13.1 million in accelerated principal payments made during the second quarter of fiscal 2020 that fulfilled the required quarterly installments through the first quarter of fiscal 2021. We drew $50.0 million on our revolving loan facility during the first quarter of fiscal 2020. The fair value of our long-term debt approximates the carrying value, which is reflected in our Consolidated Balance Sheets as follows:
January 2,
December 28,
(In thousands)
Principal amount
$ 171,875 $ 148,125
Unamortized original issuance discount and debt costs
(1,179 ) (1,579 )
Less: Current portion of long-term debt
(12,762 ) (21,474 )
Long-term debt, net of current portion and unamortized debt issue costs
$ 157,934 $ 125,072
Interest expense related to our long-term debt is included in Interest expense on our Consolidated Statements of Operations as follows:
Year Ended
January 2,
December 28,
December 29,
(In thousands)
Contractual interest
$ 3,319 $ 10,278 $ 18,600
Amortization of original issuance discount and debt costs
400 1,659 2,230
Total interest expense related to long-term debt
$ 3,719 $ 11,937 $ 20,830
Expected future principal payments are based on the schedule of required quarterly installments. With the accelerated principal payments we made during the second quarter of fiscal 2020, our next required quarterly installment is due in the second quarter of fiscal 2021. As of January 2, 2021, expected future principal payments on our long-term debt were as follows:
Fiscal year
(in thousands)
$ 13,125
17,500
17,500
123,750
$ 171,875
Note 7 - Restructuring
In March 2020, our management approved and executed an internal restructuring plan (the “Q1 2020 Plan”), which included a workforce reduction in order to reduce our operating cost structure by leveraging our low-cost regions as well as enhancing efficiency. Under this plan, we incurred restructuring expense of approximately $2.0 million during fiscal 2020. Substantially all actions planned under this plan have been implemented.
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 incurred restructuring expense of approximately $0.1 million and $2.0 million, respectively, during fiscal 2020 and 2019. Approximately $2.1 million of total expense has been incurred through January 2, 2021 under the Q2 2019 Sales Plan. All actions planned under this plan have been implemented.
In December 2018, our management approved and executed an internal restructuring plan (the “December 2018 Plan”), which included a global workforce reduction. This plan also included the abandonment of long-lived assets related to the restructuring of our agreements with a privately-held investee. Under this plan, no restructuring expense was incurred during either fiscal 2020 or 2019, and approximately $4.8 million of restructuring expense was incurred during fiscal 2018. Approximately $4.8 million of total expense has been incurred through January 2, 2021 under the December 2018 Plan. All actions planned under this 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, no restructuring expense was incurred during fiscal 2020. We recorded a total credit adjustment of approximately $0.1 million during fiscal 2019 due to the final reconciliation of expenses incurred, and we incurred approximately $4.2 million of restructuring expense during fiscal 2018. Approximately $4.1 million of total expense has been incurred through January 2, 2021 under the June 2018 Plan. All actions planned under this plan have been implemented.
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 plan, we incurred restructuring expense of approximately $1.9 million, $2.7 million, and $8.4 million, respectively, during fiscal 2020, 2019, and 2018. Approximately $21.0 million of total expense has been incurred through January 2, 2021 under the June 2017 Plan, and all planned actions have been implemented. We expect the total cost of the June 2017 Plan to be approximately $21.5 million to $23.5 million as ROU asset amortization expenses related to our partially vacated facility in San Jose, California will be incurred over the remaining lease term.
These expenses and credits were recorded to Restructuring charges on our Consolidated Statements of Operations. The restructuring accrual balance is presented in Accrued expenses and Other long-term liabilities on our Consolidated Balance Sheets.
The following table displays the activity related to the restructuring plans described above:
(In thousands)
Severance & Related (1)
Lease Termination & Fixed Assets
Software Contracts & Engineering Tools (2)
Other (3)
Total
Accrued Restructuring at December 30, 2017
$ 1,192 $ 870 $ 360 $ 25 $ 2,447
Restructuring charges
5,696 7,379 913 3,361 17,349
Costs paid or otherwise settled
(5,074 ) 381 (1,055 ) (3,368 ) (9,116 )
Accrued Restructuring at December 29, 2018
$ 1,814 $ 8,630 $ 218 $ 18 $ 10,680
Restructuring charges 625 2,716 - 1,323 4,664
Costs paid or otherwise settled (2,279 ) (4,761 ) (218 ) (476 ) (7,734 )
Accrued Restructuring at December 28, 2019
$ 160 $ 6,585 $ - $ 865 $ 7,610
Restructuring charges
1,669 1,896 - 372 3,937
Costs paid or otherwise settled
(1,583 ) (248 ) - (573 ) (2,404 )
Accrued Restructuring at January 2, 2021
$ 246 $ 8,233 $ - $ 664 $ 9,143
(1)
Includes employee relocation costs and outplacement 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)
In fiscal 2018, "Other" includes the abandonment of long-lived assets related to the restructuring of our agreements with a privately-held investee. In fiscal and 2019 and 2020, "Other" included termination fees on the cancellation of certain contracts under the Q2 2019 Sales Plan
Note 8 - Leases
Our facilities for corporate offices, sales offices, research and development facilities, storage facilities, and a data center, are all leased under operating leases, which expire at various times through 2027. 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 weighted-average remaining lease term was 4.6 years and the weighted-average discount rate is 6.5% as of January 2, 2021. We recorded fixed operating lease expense of $7.6 million and $7.7 million, respectively, for fiscal 2020 and 2019. Rental expense under the previous guidance for operating leases was $8.3 million for fiscal 2018.
The following table presents the lease balance classifications within the Consolidated Balance Sheets and summarizes their activity during fiscal 2020:
Operating lease right-of-use assets
(in thousands)
Balance as of December 28, 2019
$ 23,591
Right-of-use assets obtained for new and modified lease contracts during the period
4,297
Amortization of right-of-use assets during the period
(5,960 )
Adjustments for present value and foreign currency effects
Balance as of January 2, 2021
$ 22,178
Operating lease liabilities
(in thousands)
Balance as of December 28, 2019
$ 26,124
Lease liabilities incurred for new lease contracts during the period
2,646
Accretion of lease liabilities
1,629
Operating cash used by payments on lease liabilities
(7,713 )
Adjustments for present value and foreign currency effects
Balance as of January 2, 2021
23,055
Less: Current portion of operating lease liabilities (included in Accrued expenses)
(4,149 )
Long-term operating lease liabilities, net of current portion
$ 18,906
Lease obligations for facilities restructured prior to the adoption of Topic 842 totaled approximately $8.2 million at January 2, 2021 and continued to be recorded in Other long-term liabilities on our Consolidated Balance Sheets.
Maturities of operating lease liabilities as of January 2, 2021 are as follows:
Fiscal year
(in thousands)
$ 5,615
5,378
5,057
4,861
3,552
Thereafter
3,229
Total lease payments
27,692
Less: amount representing interest
(4,637 )
Total lease liabilities
$ 23,055
Note 9 - 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. Additionally, we have entered into license agreements for third-party technology and recorded them as intangible assets. These licenses are being amortized to Research and development expense over their estimated useful lives.
The following tables summarize the details of our Intangible assets, net as of January 2, 2021 and December 28, 2019:
January 2, 2021
(In thousands)
Weighted Average Amortization Period (in years)
Gross
Accumulated Amortization
Intangible assets, net
Developed technology
5.0 $ 110,987 $ (109,162 ) $ 1,825
Customer relationships
5.8 22,934 (22,281 ) 653
Licensed technology
6.6 4,376 (533 ) 3,843
Total identified intangible assets
$ 138,297 $ (131,976 ) $ 6,321
December 28, 2019
(In thousands)
Weighted Average Amortization Period (in years)
Gross
Accumulated Amortization
Intangible assets, net
Developed technology
5.0 $ 110,987 $ (105,594 ) $ 5,393
Customer relationships
5.8 22,934 (21,400 ) 1,534
Licensed technology
5.0 459 (409 ) 50
Total identified intangible assets
$ 134,380 $ (127,403 ) $ 6,977
We recorded amortization expense related to intangible assets on the Consolidated Statements of Operations as presented in the following table:
Year Ended
January 2,
December 28,
December 29,
(In thousands)
Research and development
$ 124 $ 55 $ 277
Amortization of acquired intangible assets
4,449 13,558 17,690
$ 4,573 $ 13,613 $ 17,967
The annual expected amortization expense of acquired intangible assets is as follows:
Fiscal year
(in thousands)
$ 2,877
2024 501
2025 501
Thereafter 966
Total
$ 6,321
No impairment charges relating to acquired intangible assets were recorded for either fiscal 2020 or 2019, as no indicators of impairment were present. During fiscal 2018, we recorded an impairment charge of $11.9 million relating to intangible assets as a result of the strategic decision to discontinue our millimeter wave business, and we recorded an impairment charge of $0.6 million to an intangible asset associated with a certain product line that we concluded had limited future revenue potential due to a decline in customer demand for that product. These charges were recorded to Impairment of acquired intangible assets in the Consolidated Statements of Operations.
Note 10 - Stock-Based Compensation Plans
Employee and Director Stock Options, Restricted Stock, and ESPP Plans
We have two active equity incentive plans, the "2013 Incentive Plan and the "2011 Non-Employee Director Equity Incentive Plan", under which shares remain available for grants to employees and non-employee directors, respectively. In addition, we have made grants of inducement awards to certain executives and employees that are granted outside of, but governed by, the 2013 Incentive Plan. "Incentive stock options" under Section 422 of the U.S. Internal Revenue Code and restricted stock unit ("RSU") grants are part of our equity compensation practices for employees who receive equity grants. Options and RSUs generally vest quarterly over a four-year period beginning on the grant date. The contractual terms of options granted do not exceed ten years.
In May 2012, the Company's stockholders approved the 2012 Employee Stock Purchase Plan ("2012 ESPP"), which authorizes the issuance of 3.0 million shares of common stock to eligible employees to purchase shares of common stock through payroll deductions, which cannot exceed 10% of an employee's compensation. The purchase price of the shares is the lower of 85% of the fair market value of the stock at the beginning of each six-month offering period or 85% of the fair market value at the end of such period. We have treated the 2012 ESPP as a compensatory plan. At January 2, 2021, a total of 1.2 million shares of our common stock were available for future purchases under the 2012 ESPP.
At January 2, 2021, a total of 11.6 million shares of our common stock were available for future grants under the 2013 Incentive Plan, and the 2011 Non-Employee Director Equity Incentive Plan. Following our 2018 Shareholder meeting, a share ratio of 2.2:1 was applied to the 2013 Incentive Plan. This ratio takes two and two-tenths shares out of the 2013 Plan for every one full value share granted. During fiscal 2020, a total of 2.0 million shares were adjusted out of the 2013 Plan. Shares subject to stock option grants that expire or are canceled, without delivery of such shares, generally become available for re-issuance under equity incentive plans.
Stock-Based Compensation Expense
Total stock-based compensation expense included in our Consolidated Statements of Operations is presented in the following table:
Year Ended
January 2,
December 28,
December 29,
(In thousands)
Cost of revenue
$ 3,179 $ 1,422 $ 940
Research and development
10,124 5,640 4,357
Selling, general, and administrative
27,069 11,837 8,349
Total stock-based compensation
$ 40,372 $ 18,899 $ 13,646
The stock-based compensation expense included in Selling, general, and administrative expense for fiscal 2018 includes approximately $1.4 million of additional one-time expense for acceleration of stock compensation under the CEO separation agreement executed with our former CEO during the first quarter of fiscal 2018.
Stock Options and ESPP
The fair values of each option award on the date of grant and of the shares expected to be issued under the employee stock purchase plan were estimated using the Black-Scholes valuation model and the assumptions noted in the following table. The expected term is based on historical vested option exercises and includes an estimate of the expected term for options that are fully vested and outstanding. The expected volatility of both stock options and ESPP shares is based on the daily historical volatility of our stock price, measured over the expected term of the option or the ESPP purchase period. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term closest to the expected term of the option. Dividend yield has no valuation impact, as we have not paid any cash dividends since inception and do not intend to pay any cash dividends in the foreseeable future.
The following table summarizes the assumptions used in the valuation of stock option and ESPP compensation:
Year Ended
January 2, 2021 December 28, 2019 December 29, 2018
Employee and Director Stock Options *
Expected volatility
n/a n/a 39.87% to 41.11%
Risk-free interest rate
n/a n/a 2.29% to 2.78%
Expected term (years)
n/a n/a 4.08 to 4.25
Employee Stock Purchase Plan
Weighted average expected volatility
48.2% 31.6% 36.4%
Weighted average risk-free interest rate
0.89% 2.51% 1.61%
Expected term (in months)
6 6 6
* No stock options granted during fiscal 2020 or 2019
At January 2, 2021, there was $1.0 million of total unrecognized compensation cost related to unvested employee and director stock options, which is expected to be recognized over a weighted average period of 0.7 years. Our current practice is to issue new shares to satisfy option exercises. Compensation expense for all stock-based compensation awards is recognized using the straight-line method. In fiscal 2020, 2019, and 2018, we recorded stock compensation expense of approximately $2.0 million, $2.4 million, and $4.1 million, respectively, related to stock options and approximately $1.0 million, $0.5 million, and $0.6 million, respectively, related to the ESPP.
The following table summarizes our stock option activity and related information for the year ended January 2, 2021:
(Shares and aggregate intrinsic value in thousands)
Shares
Weighted average exercise price
Weighted average remaining contractual term (years)
Aggregate Intrinsic Value
Balance, December 28, 2019
3,332 $ 6.16
Granted
- -
Exercised
(1,057 ) 5.70
Forfeited or expired
(75 ) 5.69
Balance, January 2, 2021
2,200 $ 6.39
Vested and expected to vest at January 2, 2021
2,200 $ 6.39 3.86 $ 86,739
Exercisable, January 2, 2021
1,589 $ 6.40 3.66 $ 62,661
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that day. This amount changes based on the fair market value of the Company's stock. Total intrinsic value of options exercised for fiscal 2020, 2019, and 2018 was $21.5 million, $17.8 million, and $6.5 million, respectively.
No stock options were granted during fiscal 2020 or 2019. For fiscal 2018, the grant date weighted-average fair value for stock options granted, calculated using the Black-Scholes option pricing model with the noted assumptions for stock options, was $2.73. The weighted average fair values for the ESPP, calculated using the Black-Scholes option pricing model with the noted assumptions for the ESPP, were $6.62, $1.69, and $1.50 for fiscal years 2020, 2019, and 2018, respectively.
Time-Based Restricted Stock Unit Awards
The following table summarizes the activity for our time-based RSUs for the year ended January 2, 2021:
(Shares in thousands)
Shares
Weighted average grant date fair value
Balance, December 28, 2019
3,611 $ 11.50
Granted
984 26.48
Vested
(1,424 ) 10.72
Forfeited or expired
(173 ) 12.03
Balance, January 2, 2021
2,998 $ 16.76
At January 2, 2021, there was $44.3 million of unrecognized compensation expense related to unvested time-based RSUs. Our current practice is to issue new shares when RSUs vest. Compensation expense for RSUs is recognized using the straight-line method over the related vesting period. In fiscal 2020, 2019, and 2018, we recorded stock compensation expense related to time-based RSUs of approximately $16.6 million, $10.3 million, and $8.0 million, respectively.
Market-Based and Performance-Based Awards
In 2018 through 2020, we granted awards of RSUs with either a market condition or a performance condition to certain executives.
In the first quarter of fiscal 2020, we granted awards of RSUs with a market condition to certain executives. Under the terms of these grants, the RSUs with a market condition vest and become payable over a three-year period based on the Company’s total shareholder return ("TSR") relative to the Russell 2000 index, which condition is tested for one-half of the grants on the second and third anniversary of the grant date. The awards may vest at 250% or 200%, depending upon the executive, if the 75th percentile of the market condition is achieved, with 100% of the units vesting at the 55th percentile, zero vesting if relative TSR is below the 25th percentile, and vesting scaling for achievement between the 25th and 75th percentile.
In fiscal years 2018 and 2019, we granted inducement awards outside of, but subject to the terms and conditions of the 2013 Incentive Plan to certain executives. These awards consisted of RSUs with either a market condition or a performance condition that vest and become payable upon achievement of TSR or Adjusted EBITDA targets, respectively. These 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 either 250% or 200% of the units vesting at the 75th percentile, depending upon the executive, 100% of the units vesting at the 50th percentile and 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. During the first quarter of fiscal 2020, the Board of Directors approved a modification to the market condition measurement periods associated with the unvested portions of certain of the Company’s awards with a market condition that were granted prior to fiscal 2020. The modification extended the duration of the measurement period by adjusting the beginning date of each measurement period to the original grant date, resulting in approximately $1.8 million additional stock compensation expense during the first quarter of fiscal 2020.
During the first quarter of fiscal 2020, the market condition for awards granted to certain executives in the first quarter of fiscal 2019 exceeded the 75th percentile of the condition, and the first tranche of these awards vested at 200%. During the second quarter of fiscal 2020, the first tranche of 33.3% of the base number of the awards with an EBITDA performance condition vested, as the Company had generated the specified "adjusted" EBITDA levels on a trailing four quarter basis for two consecutive trailing four-quarter periods as of the end of the first quarter of fiscal 2020. During the third and fourth quarters of fiscal 2020, the market condition for awards granted in previous years exceeded the 75th percentile of the condition, and one-third of these awards vested at 250% or 200%, as applicable for the respective executive.
For our awards with a market condition or a performance condition, we incurred stock compensation expense, including the effect of the modification in the first quarter of fiscal 2020, of approximately $20.8 million, $5.7 million, and $0.9 million in fiscal years 2020, 2019, and 2018, respectively. At January 2, 2021, there was $14.8 million of unrecognized compensation expense related to unvested RSUs with a market condition or a performance condition.
The following table summarizes the assumptions used at the grant date in the valuation of RSUs with a market or performance condition:
Year Ended
January 2, 2021 December 28, 2019 December 29, 2018
Executive RSUs with a market condition or performance condition
Weighted average expected volatility 42.38% 40.15% to 41.10% 41.06% to 41.74%
Weighted average risk-free interest rate
1.40% 1.66% to 2.55% 2.71% to 2.87%
Expected term (years)
3.00 3.00 3.00 to 3.16
The following table summarizes the activity for our awards with a market condition or performance condition:
(Shares in thousands)
Shares
Weighted average grant date fair value
Balance, December 28, 2019
1,163 $ 14.49
Granted
349 32.23
Effect of vesting multiplier
472 -
Vested
(963 ) 15.63
Canceled
- -
Balance, January 2, 2021
1,021 $ 20.42
Note 11 - Common Stock Repurchase Program
On February 14, 2020, our Board of Directors approved a stock repurchase program pursuant to which up to $40.0 million of outstanding common stock could be repurchased from time to time. The duration of the repurchase program was twelve months. Under this program during the fourth quarter of fiscal 2020, approximately 0.4 million shares were repurchased for $15.0 million, or an average price paid per share of $38.98. All repurchased shares were retired by the end of the 2020 fiscal year. All repurchases were open market transactions funded from available working capital. The twelve-month 2020 program expired during the first quarter of fiscal 2021, during which no additional shares were repurchased.
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.
The domestic and foreign components of Income (loss) before income taxes were as follows:
Year Ended
(In thousands)
January 2, 2021 December 28, 2019 December 29, 2018
Domestic
$ 11,772 $ 33,417 $ (8,274 )
Foreign
36,684 11,648 (15,695 )
Income (loss) before taxes
$ 48,456 $ 45,065 $ (23,969 )
The components of Income tax expense are as follows:
Year Ended
(In thousands)
January 2, 2021 December 28, 2019 December 29, 2018
Current:
Federal
$ 54 $ 499 $ 536
State
68 45 38
Foreign
1,025 1,345 1,869
1,147 1,889 2,443
Deferred:
Federal
- - -
State
- - -
Foreign
(83 ) (317 ) (90 )
(83 ) (317 ) (90 )
Income tax expense
$ 1,064 $ 1,572 $ 2,353
Income tax expense differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:
Year Ended
January 2, 2021 December 28, 2019 December 29, 2018
%
%
%
Statutory federal rate
21 21 (21)
Adjustments for tax effects of:
State taxes, net
(4) 3 (6)
Research and development credits
(3) 3 (5)
Stock compensation
(23) (11) 8
Foreign rate differential
(12) (2) 20
Foreign dividends
15 - -
Foreign withholding taxes
3 3 5
162(m) executive compensation limitation
13 5 2
Other deferred tax asset adjustment
3 - 13
Valuation allowance
(13) (19) (11)
Change in uncertain tax benefit accrual
2 - 2
Other
- 1 3
Effective income tax rate
2 4 10
ASC 740, “Income Taxes”, provides for the recognition of deferred tax assets if realization of these assets is more-likely-than-not. We evaluate both positive and negative evidence to determine if some or all of our deferred tax assets should be recognized on a quarterly basis.
Through January 2, 2021, 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 United States. We will continue to evaluate both positive and negative evidence in future periods to determine if we will realize the net deferred tax assets. We don't 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.
The components of our net deferred tax assets are as follows:
(In thousands)
January 2, 2021 December 28, 2019
Deferred tax assets:
Accrued expenses and reserves
$ 5,464 $ 3,527
Stock-based and deferred compensation
3,851 2,812
Lease liability
4,190 4,369
Intangible assets
10,082 12,294
Fixed assets
351 256
Net operating loss carry forwards
87,443 86,899
Tax credit carry forwards
83,534 90,339
Capital loss carry forwards
4,018 4,235
Other
934 1,059
Total deferred tax assets
199,867 205,790
Less: valuation allowance
(192,478 ) (198,499 )
Net deferred tax assets
7,389 7,291
Deferred tax liabilities:
Fixed assets
2,809 2,620
Unremitted earnings 1,746 -
Deferred revenue
64 434
Right-of-use asset
3,939 3,759
Total deferred tax liabilities
8,558 6,813
Net deferred taxes (1,169 ) 478
The following table displays the activity related to changes in our valuation allowance for deferred tax assets:
Fiscal Years Ended
Balance at beginning
Charged (Credit) to costs and
Charged (credit) to other
Balance at end of
(in thousands) of period expenses accounts period
January 2, 2021
$ 198,499 $ (6,021 ) $ - $ 192,478
December 28, 2019
$ 207,108 $ (8,609 ) $ - $ 198,499
December 29, 2018
$ 209,691 $ (2,583 ) $ - $ 207,108
At January 2, 2021, we had U.S. federal net operating loss ("NOL") carryforwards (pretax) of approximately $359.5 million that expire at various dates between 2021 and 2037. We had state NOL carryforwards (pretax) of approximately $147.6 million that expire at various dates from 2021 through 2037. We also had federal and state credit carryforwards of $51.7 million and $64.9 million, respectively. Of the $64.9 million state credit carryforwards, $64.5 million do not expire. The federal and remaining state credits expire at various dates from 2021 through 2040.
Future utilization of federal and state net operating losses and tax credit carry forwards may be limited if cumulative changes to ownership exceed 50% within any three-year period. If there is a significant change in ownership, future tax attribute utilization may be restricted and an allowance will be recorded against NOL carryforwards and/or R&D credits to reflect the limitation.
Foreign earnings may be subject to withholding taxes in local jurisdictions if they are distributed and repatriated in the United States. At January 2, 2021, U.S. income taxes and foreign withholding taxes were not provided for on a cumulative total of approximately $3.1 million of the undistributed earnings of our Chinese subsidiary. We intend to reinvest these earnings indefinitely.
At January 2, 2021, our unrecognized tax benefits associated with uncertain tax positions were $55.7 million, of which $53.6 million, if recognized, would affect the effective tax rate, subject to valuation allowance. As of January 2, 2021, interest and penalties associated with unrecognized tax benefits were $9.1 million, which are not reflected in the table below.
The following table summarizes the changes to unrecognized tax benefits for the fiscal years presented:
(in thousands)
Balance at December 30, 2017
$ 58,377
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
Reduction for tax positions of prior years
(5 )
Reduction as a result of lapse of applicable statute of limitations
(1,235 )
Balance at December 29, 2018
58,285
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
1,084
Reductions for tax positions of prior years
(213 )
Reduction as a result of lapse of applicable statute of limitations
(2,432 )
Balance at December 28, 2019
56,962
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
Reductions for tax positions of prior years
-
Reduction as a result of lapse of applicable statute of limitations
(2,401 )
Balance at January 2, 2021
$ 55,737
The balance of the unrecognized tax benefit at December 30, 2017 included in the table above summarizing the changes to the unrecognized tax benefit has been updated from $44,832 thousand to $58,377 thousand. Additionally, the amounts in this table for Additions based on tax positions of prior years during 2018 and 2019 have been updated from $19 thousand and $334 thousand to $759 thousand and $1,084 thousand, respectively.
Our liability for uncertain tax positions (including penalties and interest) was $22.3 million and $24.6 million at January 2, 2021 and December 28, 2019, 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 $42.5 million is netted against deferred tax assets.
At January 2, 2021, it is reasonably possible that $2.7 million of unrecognized tax benefits and $0.4 million of associated interest and penalties could be recognized during the next twelve months. The $3.1 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.
The years that remain subject to examination are 2017 for federal income taxes, 2016 for state income taxes, and 2013 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 Philippines 2016 and 2017 and Israeli 2013 through 2017 income tax returns are currently under examination. We are not under examination in any other jurisdiction.
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.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). The CARES Act eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. In addition, the CARES Act allows companies to defer making certain payroll tax payments until future years. With the enactment of the CARES Act, the Company does not expect a financial statement impact from income taxes. The Company has not recorded any income tax expense or benefit relate to the Act for the year ended January 2, 2021.
Note 13 - Employee Benefit Plans
Qualified Investment Plan
In 1990, we adopted a 401(k) tax-deferred savings plan, which provides all employees in the United States who meet certain eligibility requirements with an opportunity to accumulate funds for retirement. Participants may contribute up to the amount allowable as a deduction for federal income tax purposes. The plan does not allow investments in the Company's common stock. The plan allows for the Company to make discretionary matching contributions in cash. We recorded matching contributions of approximately $2.4 million, $0.8 million, and $0.6 million in fiscal years 2020, 2019, and 2018, respectively.
Cash Incentive Plans
For 2020, 2019, and 2018, the Board of Directors of the Company, upon the recommendation of the Compensation Committee, approved the Cash Incentive Plan (the “Cash Plans”) for the respective fiscal year. The chief executive officer, other executive officers, and other members of senior management, including vice presidents and director-level employees, together with all other employees of the Company not on the Company's sales incentive plan are eligible to participate in the Cash Plans. Under the Cash Plans, individual cash incentive payments for the eligible employees will be based both on Company financial performance, as measured by achievement of operating income (before incentive plan accruals) and revenue goals within specified ranges established by the Compensation Committee, and Company performance, as measured by the achievement of personal management objectives. The Compensation Committee determines the performance of the chief executive officer, the chief financial officer and other participants based on the achievement of the management objectives established by the Compensation Committee during the first quarter of the respective fiscal year. We recorded approximately $7.9 million, $5.8 million, and $5.9 million of expense under the Cash Plans in fiscal 2020, 2019, and 2018, respectively.
Note 14 - 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.
Note 15 - Quarterly Financial Data (Unaudited)
A summary of the Company's consolidated quarterly results of operations is as follows:
(In thousands, except per share data)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Revenue
$ 107,173 $ 103,042 $ 100,589 $ 97,316 $ 100,237 $ 103,469 $ 102,296 $ 98,091
Gross margin
64,861 62,306 60,577 57,562 59,293 61,439 60,038 57,652
Restructuring charges
(241 ) 2,692 546 940 (55 ) 252 3,126 1,341
Net income
$ 15,989 $ 12,607 $ 10,629 $ 8,167 $ 13,987 $ 13,539 $ 8,559 $ 7,408
Net income per share - basic
$ 0.12 $ 0.09 $ 0.08 $ 0.06 $ 0.10 $ 0.10 $ 0.06 $ 0.06
Net income per share - diluted
$ 0.11 $ 0.09 $ 0.08 $ 0.06 $ 0.10 $ 0.10 $ 0.06 $ 0.05
Note 16 - Subsequent Event
Subsequent to January 2, 2021, the Company's Board of Directors approved a stock repurchase program pursuant to which up to $60.0 million of outstanding common stock may be repurchased from time to time. The duration of the repurchase program is twelve months. All repurchases will be open market transactions and funded from available working capital.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Lattice Semiconductor Corporation
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Lattice Semiconductor Corporation (the Company) as of January 2, 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the year ended January 2, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 2, 2021, and the results of its operations and its cash flows for the year ended January 2, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 2, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Inventory Valuation
Description of the Matter
The Company’s net inventory totaled $64.6 million as of January 2, 2021. As explained in “Note 1 - Basis of Presentation and Significant Accounting Policies” within the consolidated financial statements, the Company records inventory at the lower of cost or net realizable value, and writes down inventories to net realizable value if it is obsolete or if quantities are in excess of projected customer demand.
Auditing management’s estimates of excess and obsolete inventory was challenging because the estimate is judgmental and considers a number of factors that are affected by market and economic conditions that are outside of the Company’s control. In particular, excess and obsolete inventory calculations are sensitive to significant assumptions that relate to projected customer demand for the Company’s products.
How We Addressed the Matter in Our Audit
We evaluated and tested the design and operating effectiveness of the Company’s internal controls over the calculation of excess and obsolete inventory, including the determination of projected customer demand and related application against on-hand inventory.
Our audit procedures included, among others, evaluating the significant assumptions stated above and the underlying data used in management’s excess and obsolete inventory assessment. We evaluated inventory levels compared to projected customer demand, historical sales, and specific product considerations. We also assessed the historical accuracy of management's estimates and performed sensitivity analyses to evaluate the changes in inventory valuation that would result from changes in significant assumptions.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2020.
San Jose, California
February 26, 2021
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Lattice Semiconductor Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Lattice Semiconductor Corporation’s internal control over financial reporting as of January 2, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Lattice Semiconductor Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 2, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of January 2, 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the year ended January 2, 2021, and the related notes and our report dated February 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
February 26, 2021
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Lattice Semiconductor Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Lattice Semiconductor Corporation and subsidiaries (the Company) as of December 28, 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two-year period ended December 28, 2019 and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 28, 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 28, 2019, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of December 30, 2018, due to the adoption of ASC 842, Leases, and related amendment ASU 2019-01, Leases (Topic 842): Codification Improvements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2007 to 2020.
Portland, Oregon
February 24. 2020 except for Note 12, as to which the date is February 26, 2021

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
In connection with the filing of this Form 10-K, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of January 2, 2021. These disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that we accumulate and communicate correct information to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls are effective as of January 2, 2021.
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding reliability of financial reporting and the preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
(i)
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
We do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met, and may not prevent or detect misstatements. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's internal control over financial reporting as of January 2, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this assessment, management concluded that, as of January 2, 2021, the Company's internal control over financial reporting was effective.
Ernst & Young LLP, our independent registered public accounting firm, has audited the Company's internal control over financial reporting and has issued its opinion on the effectiveness of the Company's internal control over financial reporting, which appears on page 63 in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during the fourth quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We do not believe there has been any material impact to our internal controls over financial reporting notwithstanding that most of our employees are working remotely due to the COVID-19 pandemic. We continue to monitor and assess the COVID-19 situation on our internal controls to address any potential impact on their design and operating effectiveness.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III
Certain information required by Part III is incorporated by reference from our definitive proxy statement (the “Proxy Statement”) for the 2020 Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, which we will file not later than 120 days after the end of the fiscal year covered by this report. With the exception of the information expressly incorporated by reference from the Proxy Statement, the Proxy Statement is not to be deemed filed as a part of this report.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding our directors that is required by this item is incorporated by reference from the information contained under the captions “Proposal 1: Election of Directors” and “Corporate Governance and Other Matters--Board Meetings and Committees” in the Proxy Statement. Information regarding our executive officers that is required by this item is incorporated by reference from the information contained under the caption "Executive Compensation--The Executive Officers of the Company” in the Proxy Statement.
Information regarding Section 16(a) reporting compliance that is required by this item is incorporated by reference from the information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
We have adopted a Code of Conduct that applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions. The Code of Conduct is posted on our website at www.latticesemi.com. There were no changes to our Code of Conduct during fiscal 2020. Amendments to the Code of Conduct or any grant of a waiver from a provision of the Code of Conduct requiring disclosure under applicable SEC rules, if any, will be disclosed on our website at www.latticesemi.com.
Information about our Corporate Governance Policies, our “Director Code of Ethics” and written committee charters for our Audit Committee, Compensation Committee, and Nominating and Governance Committee are available free of charge on the Company's website at www.latticesemi.com and are available in print to any shareholder upon request.
Information regarding our Audit Committee that is required by this Item is incorporated by reference from the information concerning our Audit Committee contained under the caption “Corporate Governance and Other Matters--Board Meetings and Committees” in the Proxy Statement.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information contained under the captions “Executive Compensation,” "Director Compensation," “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the Proxy Statement is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information contained under the captions “Security Ownership of Certain Beneficial Owners and Management” and "Equity Compensation Plan Information" in the Proxy Statement is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information contained under the captions entitled “Certain Relationships and Related Transactions” and “Corporate Governance and Other Matters--Director Independence” in the Proxy Statement is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information contained under the caption entitled “Proposal 5: Ratification of Appointment of Independent Registered Public Accounting Firm--Audit and Related Fees” in the Proxy Statement is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits
(a) List of Documents Filed as Part of this Report
(1) All financial statements
The following financial statements are filed as part of this report under Item 8.
Consolidated Financial Statements:
Page
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
All other schedules have been omitted because the required information is included in the Consolidated Financial Statements or the notes thereto, or is not applicable or required.
(2) Exhibits
Exhibit Number
Description
3.1
The Company’s Restated Certificate of Incorporation, as amended on June 4, 2009 (Incorporated by reference to Exhibit 3.1 filed with the Company's Current Report on Form 8-K filed June 4, 2009).
3.2
The Company’s Bylaws, as amended as of November 3, 2016 (Incorporated by reference to Exhibit 3.2 filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016).
4.1
Description of Securities (Incorporated by reference to Exhibit 4.1 filed with the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019).
10.1*
Form of Indemnification Agreement executed by each director and executive officer of the Company and certain other officers and employees of the Company and its subsidiaries (Incorporated by reference to Exhibit 10.41 filed with the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004).
10.2*
Form of Notice of Grant of Restricted Stock Units to Executive Officer (Incorporated by reference to Exhibit 99.1 filed with the Company’s Current Report on Form 8-K filed on February 8, 2007).
10.3*
Lattice Semiconductor Corporation 2012 Employee Stock Purchase Plan (incorporated by reference to Annex 1 to the Company's Definitive Proxy Statement on Schedule 14A for the 2012 Annual Meeting of Stockholders filed on April 12, 2012).
10.4*
Lattice Semiconductor Corporation 2011 Non-Employee Director Equity Incentive Plan. (Incorporated by reference to Exhibit 99.2 filed with the Company’s Registration Statement on Form S-8 filed June 25, 2019).
10.5*
Lattice Semiconductor Corporation 2013 Incentive Plan, as amended and restated.
10.6
Credit Agreement by and among Lattice Semiconductor Corporation, as borrower, the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent. (Incorporated by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K filed May 20, 2019).
* Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) thereof.
Exhibit Number
Description
10.7*
Lattice Semiconductor Corporation 2018 Cash Incentive Plan (Incorporated by reference to Exhibit 10.13 filed with the Company’s Annual Report on Form 10-K filed on February 26, 2019).
10.8*
Lattice Semiconductor Corporation 2019 Cash Incentive Plan (incorporated by reference to Exhibit 10.14 filed with the Company’s Annual Report on Form 10-K filed on February 24, 2020).
10.9*
Lattice Semiconductor Corporation 2020 Cash Incentive Plan.
10.10*
Amended Employment Agreement, by and between Lattice Semiconductor Corporation and James R. Anderson, effective February 21, 2020. (Incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K filed on February 24, 2020).
10.11*
Form of Amended Employment Agreement (Incorporated by reference to Exhibit 10.24 of the Company’s Annual Report on Form 10-K filed on February 24, 2020).
10.12*
Employment Agreement between Lattice Semiconductor Corporation and Byron Milstead effective as of December 30, 2008 (Incorporated by reference to Exhibit 10.66 filed with the Company's Annual Report on Form 10-K filed for the fiscal year ended January 3, 2009).
10.13*
Employment Agreement, by and between Lattice Semiconductor Corporation and Stephen Douglass, effective September 4, 2018 (Incorporated by reference to Exhibit 10.2 filed with the Company’s Quarterly Report on Form 10-Q filed on October 29, 2018).
10.14*
Employment Agreement, by and between Lattice Semiconductor Corporation and Sherri Luther, effective January 2, 2019 (Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed on January 2, 2019).
10.15*
Employment Agreement, by and between Lattice Semiconductor Corporation and Esam Elashmawi, dated September 24, 2018 (Incorporated by reference to Exhibit 10.20 filed with the Company’s Annual Report on Form 10-K filed on February 26, 2019.).
10.16
Credit Agreement among Lattice Semiconductor Corporation, the Subsidiary Guarantors from time to time party thereto, the various Lenders from time to time party thereto, Jefferies Finance LLC as Administrative Agent, Jefferies Finance LLC and HSBC Securities (USA) Inc. as lead arrangers and book runners, Jefferies Finance LLC as syndication agent and HSBC Securities (USA) Inc. and ING Capital LLC as co-documentation agents (Incorporated by reference to Exhibit 10.1 filed with the Company's Current Report on Form 8-K filed March 11, 2015).
10.17
Office Lease, effective as of October 21, 2014, between 555 SW Oak, LLC and Lattice Semiconductor Corporation (Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed October 27, 2014).
16.1
Letter from KPMG LLP dated May 8, 2020 (Incorporated by reference to Exhibit 16.1 of the Company’s Current Report on Form 8-K filed on May 8, 2020).
21.1
Subsidiaries of the Registrant.
23.1
Consent of Independent Registered Public Accounting Firm (Ernst & Young LLP).
23.2
Consent of Independent Registered Public Accounting Firm (KPMG LLP)
* Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) thereof.
Exhibit Number
Description
31.1
Certification of Chief Executive Officer pursuant to the Securities Exchange Act of 1934 Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to the Securities Exchange Act of 1934 Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File - formatted in Inline XBRL and included in Exhibit 101