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OFFON

LATTICE SEMICONDUCTOR CORPORATION

(LSCC)
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LATTICE SEMICONDUCTOR : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/06/2021 | 03:21pm EDT
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.



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.



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 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
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. 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.



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 Q2 and potentially beyond Q2 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 ended January 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
(In thousands)                                   April 3, 2021            March 28, 2020
Revenue                                      $ 115,716       100.0 %   $ 97,316       100.0 %

Gross margin                                    70,586        61.0       57,562        59.1

Research and development                        24,066        20.8       21,693        22.3
Selling, general and, administrative            25,092        21.7       22,551        23.2
Amortization of acquired intangible assets         603         0.5        2,640         2.7
Restructuring charges                              176         0.2          940         1.0
Income from operations                       $  20,649        17.8 %   $  9,738        10.0 %




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
(In thousands)                     April 3, 2021            March 28, 2020
Communications and Computing   $  49,328        42.6 %   $ 38,452        39.5 %
Industrial and Automotive         49,745        43.0       41,440        42.6
Consumer                          12,519        10.8       13,333        13.7
Licensing and Services             4,124         3.6        4,091         4.2
Total revenue                  $ 115,716       100.0 %   $ 97,316       100.0 %




Revenue from the Communications and Computing end market increased by 28% for
the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020
primarily due to the accelerated growth in servers and client computing
platforms, as well as ongoing 5G infrastructure deployments.



Revenue from the Industrial and Automotive end market increased by 20% for the
first quarter of fiscal 2021 compared to the first quarter of fiscal 2020
primarily due to increased demand for our products used in a broad range of
applications including industrial automation and safety, robotics, and embedded
vision.



Revenue from the Consumer end market decreased by 6% for the first quarter of
fiscal 2021 compared to the first quarter of fiscal 2020. 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 increased by 1% for the first
quarter of fiscal 2021 compared to the first quarter of fiscal 2020 due to a
slight increase 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
(In thousands)       April 3, 2021            March 28, 2020
Asia             $  88,390        76.4 %   $ 68,693        70.6 %
Americas            15,843        13.7       16,587        17.0
Europe              11,483         9.8       12,036        12.4
Total revenue    $ 115,716       100.0 %   $ 97,316       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
                                           Three Months Ended
                                  April 3, 2021         March 28, 2020
Weikeng Group                               38.9 %                 25.1 %
Arrow Electronics Inc.                      26.1                   23.1
Other distributors                          20.4                   29.3
All distributors                            85.4                   77.5
Direct customers                            11.0                   18.3
Licensing and services revenue               3.6                    4.2
Total revenue                              100.0 %                100.0 %




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Gross Margin


The composition of our Gross margin, including as a percentage of revenue, is presented in the following table:



                                                Three Months Ended
(In thousands)                           April 3, 2021      March 28, 2020
Gross margin                            $        70,586     $        57,562
Gross margin percentage                            61.0 %              59.1 %
Product gross margin %                             59.6 %              57.4 %
Licensing and services gross margin %             100.0 %             100.0 %



Gross margin, as a percentage of revenue, increased 190 basis points in the first quarter of fiscal 2021 compared to the first quarter 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
(In thousands)              April 3, 2021      March 28, 2020       % change
Research and development   $        24,066     $        21,693           10.9 %
Percentage of revenue                 20.8 %              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 first quarter of fiscal 2021 compared to the
first quarter of fiscal 2020 was due primarily to 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:



                                               Three Months Ended
(In thousands)                          April 3, 2021      March 28, 2020       % change
Selling, general, and administrative   $        25,092     $        22,551           11.3 %
Percentage of revenue                             21.7 %              23.2 %




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
first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 was
due primarily to increased expenses for stock compensation and commissions.



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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
(In thousands)                                 April 3, 2021        March 28, 2020       % change
Amortization of acquired intangible assets    $           603       $         2,640           (77.2 )%
Percentage of revenue                                     0.5 %                 2.7 %




The decrease in Amortization of acquired intangible assets for the first quarter
of fiscal 2021 compared to the first quarter 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
(In thousands)           April 3, 2021         March 28, 2020       % change
Restructuring charges   $           176       $            940          (81.3 )%
Percentage of revenue               0.2 %                  1.0 %




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 first quarter of fiscal 2021 compared to the
first quarter 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
(In thousands)           April 3, 2021        March 28, 2020        % change
Interest expense        $          (718 )     $        (1,077 )         (33.3 )%
Percentage of revenue              (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 first quarter of fiscal 2021 compared
to the first quarter of fiscal 2020 was driven by the reduction in the principal
balance of our long-term debt due to the additional principal payments made in
previous periods.



Other Expense, net


The composition of our Other expense, net, including as a percentage of revenue, is presented in the following table:



                                  Three Months Ended
(In thousands)           April 3, 2021          March 28, 2020        % change
Other expense, net      $          (162 )      $            (50 )         224.0 %
Percentage of revenue              (0.1 )%                 (0.1 )%



The increase in Other expense, net for the first quarter of fiscal 2021 compared to the first quarter 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
(In thousands)        April 3, 2021         March 28, 2020       % change
Income tax expense   $           956       $            444          115.3 %




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 increase in expense in the first quarter of fiscal 2021
as compared to the first quarter 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 of April 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. On May 17, 2019, we entered into
our Current Credit Agreement that is discussed under the "Credit Arrangements"
heading, below.



Cash and cash equivalents



(In thousands)                  April 3, 2021       January 2, 2021       $ Change        % Change
Cash and cash equivalents      $       185,268     $         182,332     $     2,936             1.6 %




As of April 3, 2021, we had Cash and cash equivalents of $185.3 million, of
which approximately $116.1 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 of April 3, 2021, we could access all
cash held by our foreign subsidiaries without incurring significant additional
expense.



                                     - 22 -

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The net increase in Cash and cash equivalents of $2.9 million between January 2,
2021 and April 3, 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 for the first three months of
fiscal 2021 was $29.4 million compared to $21.1 million for the first three
months of fiscal 2020. This increase of $8.3 million was primarily driven by an
increase of $10.6 million provided by improved operating performance, which was
partially offset by $2.3 million of net changes in working capital, primarily
the increase in accounts receivable in the first quarter of fiscal 2021 compared
to the first quarter of fiscal 2020. 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 three
months of fiscal 2021 was $4.3 million compared to $6.6 million in the first
three months of fiscal 2020. This $2.3 million change 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. We had no principal activity on our long-term debt
in the first quarter of fiscal 2021, as we made accelerated principal payments
during the second quarter of fiscal 2020 that fulfilled the required quarterly
installments through the first quarter of fiscal 2021. During the first three
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 $4.4 million on 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 $6.9 million in the first three months of fiscal 2021, an increase
of approximately $5.4 million from the net $1.5 million used in the first three
months of fiscal 2020. During the first quarter of fiscal 2021, we also
purchased $15.0 million of treasury stock, as further discussed below under
"Share Repurchase Program."



Accounts receivable, net



(In thousands)                      April 3, 2021       January 2, 2021        Change        % Change
Accounts receivable, net           $        71,090     $          64,581     $    6,509            10.1 %
Days sales outstanding - Overall                56                    55              1




Accounts receivable, net as of April 3, 2021 increased by approximately $6.5
million, or 10%, compared to January 2, 2020. This increase resulted primarily
from higher revenue shipments in the first quarter of fiscal 2021 compared to
the prior year 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)                  April 3, 2021       January 2, 2021        Change        % Change
Inventories                    $        59,456     $          64,599     $   (5,143 )          (8.0 )%
Days of inventory on hand                  120                   139            (19 )




Inventories as of April 3, 2021 decreased $5.1 million, or approximately 8%,
compared to January 2, 2020 primarily as a result of increased product shipments
to meet customer demand.



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 120 days at April 3, 2021 from
139 days at January 2, 2020. This decrease resulted from increased product
shipments to meet customer demand.



Credit Arrangements



On May 17, 2019, we entered into our Current Credit Agreement with Wells 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 of April 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.



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Share Repurchase Program


See Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds," of this Quarterly Report on Form 10-Q for more information about the share repurchase program.




Contractual Cash Obligations



There have been no material changes to our contractual cash obligations outside
of the ordinary course of business in the first three 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
ended January 2, 2021.


Off-Balance Sheet Arrangements

As of April 3, 2021, we did not have any off-balance sheet arrangements of the type described by Item 303(a)(4) of SEC Regulation S-K.

© Edgar Online, source Glimpses

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