LATTICE SEMICONDUCTOR CORPORATION The following discussion should be read along with the unaudited consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2020 10-K. OverviewLattice 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.
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. Management believes that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2020 10-K. The preparation of financial statements in conformity withU.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 materially from these estimates under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis.
Impact of COVID-19 on our Business
The COVID-19 pandemic has caused, and may continue to cause, a global slowdown
of economic activity (including a decrease in demand for certain goods and
services), and volatility in and disruption to financial markets. The severity,
magnitude and duration of the COVID-19 pandemic and its economic consequences
are uncertain, rapidly changing and difficult to predict, and 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.
The full extent of the COVID-19 pandemic, the related governmental, business and
travel restrictions in order to contain this virus are continuing to evolve
globally even with the rollout of vaccination programs. We anticipate that these
actions and the global health crisis caused by the COVID-19 pandemic will
negatively impact business activity across the globe. Demand for our products
may be impacted in Q3 and potentially beyond Q3 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.
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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 potential 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 our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2021 for further information about related risks and uncertainties. Results of Operations
Key elements of our Consolidated Statements of Operations, including as a percentage of revenue, are presented in the following table:
Three Months Ended Six Months Ended *
(In thousands) July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020
Revenue $ 125,905 100.0 % $ 100,589 100.0 % $ 241,621 100.0 % $ 197,905 100.0 %
Gross margin 77,184 61.3 60,577 60.2 147,770 61.2 118,139 59.7
Research and
development 27,454 21.8 22,458 22.3 51,520 21.3 44,151 22.3
Selling, general and,
administrative 25,607 20.3 24,488 24.3 50,699 21.0 47,039 23.8
Amortization of
acquired intangible
assets 603 0.5 603 0.6 1,206 0.5 3,243 1.6
Restructuring charges 204 0.2 546 0.5 380 0.2 1,486 0.8
Income from operations $ 23,316 18.5 % $ 12,482 12.4 % $ 43,965 18.2 % $ 22,220 11.2 %
Revenue by End Market
We sell our products globally to a broad base of customers in three primary end
market groups: Communications and Computing, Industrial and Automotive, and
Consumer. We also provide intellectual property ("IP") 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 Internet of Things ("IoT"), factory
automation, robotics, 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 periods presented:
Communications and Industrial and
Computing Automotive Consumer Licensing and Services
Security and
Wireless Surveillance Cameras IP Royalties
Wireline Machine Vision Displays Adopter Fees
Industrial
Data Backhaul Automation Wearables IP Licenses
Server Computing Robotics Televisions Patent Sales
Client Computing Automotive Home Theater
Data Storage Drones
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The composition of our revenue by end market is presented in the following
table:
Three Months Ended Six Months Ended
(In thousands) July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020
Communications and Computing $ 52,577 41.8 % $ 45,883 45.6 % $ 101,905 42.2 % $ 84,335 42.6 %
Industrial and Automotive 57,439 45.6 39,078 38.8 107,184 44.4 80,518 40.7
Consumer 12,520 9.9 11,035 11.0 25,039 10.4 24,368 12.3
Licensing and Services 3,369 2.7 4,593 4.6 7,493 3.1 8,684 4.4
Total revenue $ 125,905 100.0 % $ 100,589 100.0 % $ 241,621 100.0 % $ 197,905 100.0 %
Revenue from the Communications and Computing end market increased by 15% for
the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020
and increased by 21% for the first six months of fiscal 2021 compared to the
first six months of fiscal 2020 primarily due to increased demand for
applications in servers, client computing platforms, and 5G infrastructure.
Revenue from the Industrial and Automotive end market increased by 47% for the
second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 and
increased by 33% for the first six months of fiscal 2021 compared to the first
six months of fiscal 2020 primarily due to increased demand for our products
across multiple applications, such as industrial automation and robotics.
Revenue from the Consumer end market increased by 13% for the second quarter of
fiscal 2021 compared to the second quarter of fiscal 2020 and increased by 3%
for the first six months of fiscal 2021 compared to the first six months of
fiscal 2020 primarily due to increased demand for our products in Consumer end
market applications.
Revenue from the Licensing and services end market decreased by 27% for the
second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 and
decreased by 14% for the first six months of fiscal 2021 compared to the first
six months of fiscal 2020 primarily due to a decrease in royalties.
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:
Three Months Ended Six Months Ended
(In thousands) July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020
Asia $ 96,455 76.6 % $ 74,560 74.1 % $ 184,845 76.5 % $ 143,253 72.4 %
Americas 17,826 14.2 14,507 14.4 33,669 13.9 31,094 15.7
Europe 11,624 9.2 11,522 11.5 23,107 9.6 23,558 11.9
Total revenue $ 125,905 100.0 % $ 100,589 100.0 % $ 241,621 100.0 % $ 197,905 100.0 %
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 distributor 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 % of Total Revenue
Three Months Ended Six Months Ended
July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020
Weikeng Group 34.1 % 37.1 % 36.4 % 30.2 %
Arrow Electronics Inc. 24.3 25.0 25.1 25.1
Other distributors 29.9 22.6 25.4 25.9
All distributors 88.3 84.7 86.9 81.2
Direct customers 9.0 10.7 10.0 14.4
Licensing and services revenue 2.7 4.6 3.1 4.4
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
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Table of Contents Gross Margin
The composition of our Gross margin, including as a percentage of revenue, is presented in the following table:
Three Months Ended Six Months Ended
(In thousands) July 3, 2021 June 27, 2020 July 3, 2021 June 27, 2020
Gross margin $ 77,184 $ 60,577 $ 147,770 $ 118,139
Gross margin percentage 61.3 % 60.2 % 61.2 % 59.7 %
Product gross margin % 60.2 % 58.3 % 59.9 % 57.8 %
Licensing and services gross margin % 100.0 % 100.0 % 100.0 % 100.0 %
Gross margin, as a percentage of revenue, increased 110 basis points in the
second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 and
increased by 150 basis points in the first six months of fiscal 2021 compared to
the first six months of 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:
Three Months Ended Six Months Ended
(In thousands) July 3, 2021 June 27, 2020 % change July 3, 2021 June 27, 2020 % change
Research and development $ 27,454 $ 22,458 22.2 % $ 51,520 $ 44,151 16.7 %
Percentage of revenue 21.8 % 22.3 % 21.3 % 22.3 %
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 the second quarter and first six months of fiscal
2021 compared to the second quarter and first six months of fiscal 2020 was due
primarily to increased headcount-related costs as we continue to invest in the
expansion of our product portfolio and the 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:
Three Months Ended Six Months Ended
(In thousands) July 3, 2021 June 27, 2020 % change July 3, 2021 June 27, 2020 % change
Selling, general, and
administrative $ 25,607 $ 24,488 4.6 % $ 50,699 $ 47,039 7.8 %
Percentage of revenue 20.3 % 24.3 % 21.0 % 23.8 %
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 the
second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 was
due primarily to increased expenses for bonus, commissions, and outside
services, partially offset by lower stock compensation. The increase in Selling,
general, and administrative expense for the first six months of fiscal 2021
compared to the first six months of fiscal 2020 was due primarily to increased
expenses for bonus, commissions, wages, outside services, and stock
compensation.
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Amortization of Acquired Intangible Assets
The composition of our Amortization of acquired intangible assets, including as a percentage of revenue, is presented in the following table:
Three Months Ended Six Months Ended
(In thousands) July 3, 2021 June 27, 2020 % change July 3, 2021 June 27, 2020 % change
Amortization of
acquired intangible
assets $ 603 $ 603 0.0
%
0.5 % 0.6 % 0.5 % 1.6 %
The decrease in Amortization of acquired intangible assets for the first six
months of fiscal 2021 compared to the first six months of fiscal 2020 is 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:
Three Months Ended Six Months Ended
(In thousands)
July 3, 2021 June 27, 2020 % change
Restructuring charges $ 204 $ 546 (62.6 )% $ 380 $ 1,486 (74.4 )%
Percentage of revenue 0.2 % 0.5 % 0.2 % 0.8 %
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 6 - Restructuring" to our Consolidated Financial
Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. The decrease
in Restructuring charges in the second quarter and first six months of fiscal
2021 compared to the second quarter and first six months of fiscal 2020 was
driven primarily by the non-recurrence of prior year charges for severance under
the Q1 2020 Plan.
Interest Expense
The composition of our Interest expense, including as a percentage of revenue, is presented in the following table:
Three Months Ended Six Months Ended
(In thousands) July 3, 2021 June 27, 2020 % change July 3, 2021 June 27, 2020 % change
Interest expense $ (702 ) $ (1,045 ) (32.8 )% $ (1,420 ) $ (2,122 ) (33.1 )%
Percentage of revenue (0.6 )% (1.0 )% (0.6 )% (1.1 )%
Interest expense is primarily related to our long-term debt, which is further
discussed under the "Credit Arrangements" heading in the Liquidity and Capital
Resources section, below. This interest expense is comprised of contractual
interest and amortization of original issue discount and debt issuance costs
based on the effective interest method. The decrease in Interest expense for the
second quarter and first six months of fiscal 2021 compared to the second
quarter and first six months of fiscal 2020 was driven by the reduction in the
principal balance of our long-term debt due to principal payments made in
previous periods.
Other (Expense) Income, net
The composition of our Other (expense) income, net, including as a percentage of revenue, is presented in the following table:
Three Months Ended Six Months Ended
(In thousands) July 3, 2021 June 27, 2020 % change July 3, 2021 June 27, 2020 % change
Other (expense)
income, net $ (135 ) $ 37 (100+)% $ (297 ) $ (13 ) 100+%
Percentage of revenue (0.1 )% - (0.1 )% -
The increase in Other (expense) income, net for the second quarter and first six
months of fiscal 2021 compared to the second quarter and first six months of
fiscal 2020 was largely driven by higher foreign currency exchange losses.
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Income Taxes
The composition of our Income tax expense is presented in the following table:
Three Months Ended Six Months Ended(In thousands) July 3, 2021 June 27, 2020 % change July 3, 2021 June 27, 2020 % change Income tax expense $ 641 $ 845 (24.1 )%$ 1,597 $ 1,289 23.9 % Our Income tax expense is composed primarily of foreign income and withholding taxes, partially offset by benefits resulting from the release of uncertain tax positions due to statute of limitation expirations that occurred in the respective periods. The decrease in expense in the second quarter of fiscal 2021 as compared to the second quarter of fiscal 2020 is primarily due to decreases in foreign withholding taxes and changes in uncertain tax positions. The increase in expense in the first six month of fiscal 2021 as compared to the first six months of fiscal 2020 is primarily due to increases in worldwide income and changes in uncertain tax positions.
Liquidity and Capital Resources
The following sections discuss material changes in our financial condition from the end of fiscal 2020, 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 uncertainty around 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 the 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 ofJuly 3, 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. OnMay 17, 2019 , we entered into our Current Credit Agreement that is discussed under the "Credit Arrangements" heading below. Cash and cash equivalents (In thousands) July 3, 2021 January 2, 2021 $ Change % Change Cash and cash equivalents$ 187,734 $ 182,332$ 5,402 3.0 % As ofJuly 3, 2021 , we had Cash and cash equivalents of$187.7 million , of which approximately$61.3 million 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 ofJuly 3, 2021 , we could access all cash held by our foreign subsidiaries without incurring significant additional expense. - 23 -
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The net increase in Cash and cash equivalents of
Operating activities - Cash provided by operating activities results from net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities for the first six months of fiscal 2021 was$70.7 million compared to$36.9 million for the first six months of fiscal 2020. This increase of$33.8 million was primarily driven by an increase of$23.1 million provided by improved operating performance, coupled with$10.7 million of net changes in working capital, primarily from cash provided by accounts receivable activity, partially offset by cash used by changes in accrued payroll obligations. 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 and intellectual property licenses. Net cash used by investing activities in the first six months of fiscal 2021 was$10.8 million compared to$11.5 million in the first six months of fiscal 2020. This$0.7 million reduction was primarily due to lower expenditures for test equipment and software enhancements. 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 the first six months of fiscal 2021, we paid the required quarterly installment of$4.4 million for the second quarter of fiscal 2021. During the first six months of 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. Payments for tax withholdings on vesting of RSUs partially offset by employee exercises of stock options used net cash flows of$10.0 million in the first six months of fiscal 2021, an increase of approximately$7.9 million from the net$2.1 million used in the first six months of fiscal 2020. During the first six months of fiscal 2021, we also purchased$40.1 million of treasury stock, as further discussed below under "Share Repurchase Program." Accounts receivable, net (In thousands) July 3, 2021 January 2, 2021 Change % Change Accounts receivable, net$ 71,219 $ 64,581$ 6,638 10.3 % Days sales outstanding - Overall 52 55 (3 ) Accounts receivable, net as ofJuly 3, 2021 increased by approximately$6.6 million , or 10%, compared toJanuary 2, 2021 . This increase resulted primarily from higher revenue shipments in the second quarter of fiscal 2021 compared to the year-end period. We calculate Days sales outstanding on the basis of a 365-day year as Accounts receivable, net at the end of the quarter divided by sales during the quarter annualized and then multiplied by 365. Inventories (In thousands) July 3, 2021 January 2, 2021 Change % Change Inventories$ 65,584 $ 64,599$ 985 1.5 % Days of inventory on hand 123 139 (16 )
Inventories as of
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 decreased to 123 days atJuly 3, 2021 from 139 days atJanuary 2, 2021 . This decrease resulted from increased product shipments to meet customer demand. Credit Arrangements OnMay 17, 2019 , we entered into our Current Credit Agreement withWells Fargo Bank, National Association , as administrative agent, and other lenders. The details of this arrangement are described in "Note 6 - Long-Term Debt" in the Notes to Consolidated Financial Statements of our 2020 10-K. As ofJuly 3, 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. - 24 -
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Table of Contents Share Repurchase Program
See Part II, Item 2, "Unregistered Sales of
Contractual Cash Obligations There have been no material changes to our contractual cash obligations outside of the ordinary course of business in the first six months of fiscal 2021, as summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year endedJanuary 2, 2021 .
Off-Balance Sheet Arrangements
As of
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