Company Quick10K Filing
Quick10K
Lattice Semiconductor
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$7.80 129 $1,010
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-30 Annual: 2017-12-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-K 2016-01-02 Annual: 2016-01-02
8-K 2019-02-12 Earnings, Exhibits
8-K 2019-01-02 Officers, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-08-28 Officers
8-K 2018-08-21 Officers, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-07-18 Exit Costs, Impairments
8-K 2018-05-04 Officers, Shareholder Vote, Other Events
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-03-12 Officers, Exhibits
8-K 2018-03-07 Enter Agreement, Officers, Exhibits
8-K 2018-02-13 Earnings, Exhibits
8-K 2018-02-03 Other Events
TXN Texas Instruments
NXPI NXP Semiconductors
CY Cypress Semiconductor
SEDG Solaredge Technologies
AMKR Amkor Technology
SPWR Sunpower
CEVA CEVA
PXLW Pixelworks
EMKR Emcore
SQNS Sequans Communications
LSCC 2018-09-29
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation and Significant Accounting Policies
Note 2 - Revenue From Contracts with Customers
Note 3 - Net Income (Loss) per Share
Note 4 - Marketable Securities
Note 5 - Fair Value of Financial Instruments
Note 6 - Discontinuation of Business Unit
Note 7 - Inventories
Note 8 - Intangible Assets
Note 9 - Cost Method Investment and Collaborative Arrangement
Note 10 - Accounts Payable and Accrued Expenses
Note 11 - Changes in Stockholders' Equity and Accumulated Other Comprehensive Loss
Note 12 - Income Taxes
Note 13 - Restructuring
Note 14 - Long-Term Debt
Note 15 - Stock-Based Compensation
Note 16 - Contingencies
Note 17 - Segment and Geographic Information
Item 2. Management's Discussion and Analysis Of
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-10.2 lsccex-102201810xq.htm
EX-10.3 lsccex-103201810xq.htm
EX-31.1 lsccex-3112018q310xq.htm
EX-31.2 lsccex-3122018q310xq.htm
EX-32.1 lsccex-3212018q310xq.htm
EX-32.2 lsccex-3222018q310xq.htm

Lattice Semiconductor Earnings 2018-09-29

LSCC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 lscc2018q310-q.htm LATTICE 10-Q Q3 2018 Document

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2018
OR
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission file number 000-18032
latticelogocolorpmsa32.jpg
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of Registrant as specified in its charter)
State of Delaware
 
93-0835214
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer Identification No.)
 
 
 
111 SW Fifth Ave, Ste 700, Portland, OR
 
97204
(Address of principal executive offices)
 
(Zip Code)
(503) 268-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X] No [  ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period as the registrant was required to submit such files).   Yes [X] No  [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [X]
 
 
Non-accelerated filer [  ]
Smaller reporting company [  ]
 
 
 
Emerging growth company [  ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  [  ] No [X]
Number of shares of common stock outstanding as of October 22, 2018                     129,525,043
 
 
 
 
 



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

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


2


Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These involve estimates, assumptions, risks, and uncertainties. Any statements about our expectations, beliefs, plans, objectives, assumptions, or future events or performance are not historical facts and may be forward-looking. We use words or phrases such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “may,” “will,” “should,” “continue,” “ongoing,” “future,” “potential,” and similar words or phrases to identify forward-looking statements.

Examples of forward-looking statements include, but are not limited to, statements about: our transitions to newly adopted accounting standards; the effect of new accounting standards on our consolidated financial statements and financial results; the effects of sales mix on our gross margin in the future; our judgments involved in revenue recognition; our strategies and beliefs regarding the markets in which we compete or may compete; our future investments in research and development; our expectations regarding cash provided by or used in operating activities; our expectations regarding royalties under collaborative agreements; our expectations regarding our ability to service our debt obligations; our expectations regarding restructuring charges under and timing of restructuring plans; our expectation regarding payment of foreign and U.S. federal income taxes; the sufficiency of our financial resources to meet our operating and working capital needs through at least the next 12 months; our intention to continually introduce new products and enhancements and reduce manufacturing costs; our expectation of production volumes and the associated revenue streams for certain mobile handset providers; our continued participation in or sources of revenue from standard setting initiatives or consortia that develop and promote the High-Definition Multimedia Interface ("HDMI") and Mobile High-Definition Link ("MHL") specifications including our expectations regarding sharing of HDMI royalty revenues; our plans to continue to monetize our patent portfolio through sales of non-core patents; our ability to adequately remediate our material weakness; the adequacy of assembly and test capacity commitments; our expectations regarding taxes and tax adjustments, particularly with respect to the 2017 Tax Act; our expectations regarding the outcome of tax and other audits; our valuation allowance and uncertain tax positions; our beliefs regarding the adequacy of our liquidity, capital resources and facilities; our expectations regarding our implementation of a company-wide enterprise resource planning system; and our expectations regarding the impact of sanctions imposed by the United States Department of Commerce.

Forward-looking statements involve estimates, assumptions, risks, and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. The key factors, among others, that could cause our actual results to differ materially from the forward-looking statements included global economic conditions and uncertainty, including as a result of trade related restrictions or tariffs, the concentration of our sales in certain end markets, particularly as it relates to the concentration of our sales in the Asia Pacific region, market acceptance and demand for our existing and new products, our ability to license our intellectual property, any disruption of our distribution channels, the impact of competitive products and pricing, unexpected charges, delays or results relating to our restructuring plans, unexpected complications with our implementation of a company-wide enterprise resource planning system, the effect of any downturn in the economy on capital markets and credit markets, unanticipated taxation requirements or positions of the U.S. Internal Revenue Service or other taxing authority, unanticipated effects of tax reform, or unexpected impacts of accounting guidance. In addition, actual results are subject to other risks and uncertainties that relate more broadly to our overall business, including those more fully described herein and that are otherwise described from time to time in our filings with the Securities and Exchange Commission, including, but not limited to, the items discussed in “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q.

You should not unduly rely on forward-looking statements because our actual results could differ materially from those expressed in any forward-looking statements made by us. In addition, any forward-looking statement applies only as of the date on which it is made. We do not plan to, and undertake no obligation to, update any forward-looking statements to reflect events or circumstances that occur after the date on which such statements are made or to reflect the occurrence of unanticipated events.

3


PART I. FINANCIAL INFORMATION


ITEM 1.    FINANCIAL STATEMENTS

LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)


Three Months Ended
 
Nine Months Ended
 (In thousands, except per share data)
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Revenue:
 
 
 
 
 
 
 
Product
$
97,932

 
$
87,369

 
$
291,335

 
$
263,206

Licensing and services
3,552

 
4,602

 
11,487

 
27,489

Total revenue
101,484

 
91,971

 
302,822

 
290,695

Costs and expenses:
 
 
 
 
 
 
 
Cost of product revenue
43,120

 
38,032

 
137,430

 
120,395

Cost of licensing and services revenue

 
617

 
259

 
4,937

Research and development
19,131

 
25,648

 
63,153

 
79,857

Selling, general, and administrative
21,775

 
21,290

 
69,886

 
67,133

Amortization of acquired intangible assets
3,823

 
8,526

 
13,982

 
25,777

Restructuring charges
90

 
3,071

 
5,495

 
4,713

Acquisition related charges

 
681

 
1,531

 
3,208

Impairment of acquired intangible assets
586

 
36,198

 
12,486

 
36,198

Gain on sale of building

 
(4,624
)
 

 
(4,624
)
Total costs and expenses
88,525

 
129,439

 
304,222

 
337,594

Income (loss) from operations
12,959

 
(37,468
)
 
(1,400
)
 
(46,899
)
Interest expense
(5,500
)
 
(3,888
)
 
(15,582
)
 
(14,112
)
Other expense, net
(452
)
 
(2,027
)
 
(246
)
 
(2,104
)
Income (loss) before income taxes
7,007

 
(43,383
)
 
(17,228
)
 
(63,115
)
Income tax expense (benefit)
33

 
(331
)
 
1,973

 
234

Net income (loss)
$
6,974

 
$
(43,052
)
 
$
(19,201
)
 
$
(63,349
)
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.05

 
$
(0.35
)
 
$
(0.15
)
 
$
(0.52
)
Diluted
$
0.05

 
$
(0.35
)
 
$
(0.15
)
 
$
(0.52
)
 
 
 
 
 
 
 
 
Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
127,816

 
122,990

 
125,578

 
122,393

Diluted
129,474

 
122,990

 
125,578

 
122,393



See Accompanying Notes to Unaudited Consolidated Financial Statements.



4


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


 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net income (loss)
$
6,974

 
$
(43,052
)
 
$
(19,201
)
 
$
(63,349
)
Other comprehensive income (loss:)
 
 
 
 
 
 
 
Unrealized gain (loss) related to marketable securities, net of tax
14

 
(1
)
 
16

 
(72
)
Reclassification adjustment for (gains) losses related to marketable securities included in other expense, net of tax
(17
)
 
37

 
(18
)
 
237

Translation adjustment, net of tax
(584
)
 
431

 
(1,124
)
 
1,381

Change in actuarial valuation of defined benefit pension

 

 

 
(47
)
Comprehensive income (loss)
$
6,387

 
$
(42,585
)
 
$
(20,327
)
 
$
(61,850
)


See Accompanying Notes to Unaudited Consolidated Financial Statements.



5


LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)

(In thousands, except share and par value data)
September 29,
2018
 
December 30,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
107,893

 
$
106,815

Short-term marketable securities
9,600

 
4,982

Accounts receivable, net of allowance for doubtful accounts
75,648

 
55,104

Inventories
66,381

 
79,903

Prepaid expenses and other current assets
24,143

 
16,567

Total current assets
283,665

 
263,371

Property and equipment, less accumulated depreciation of
$139,310 at September 29, 2018 and $131,260 at December 30, 2017
35,724

 
40,423

Intangible assets, net
24,977

 
51,308

Goodwill
267,514

 
267,514

Deferred income taxes
188

 
198

Other long-term assets
20,259

 
13,147

Total assets
$
632,327

 
$
635,961

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses (includes restructuring)
$
46,929

 
$
54,405

Accrued payroll obligations
9,859

 
10,416

Current portion of long-term debt
14,104

 
1,508

Deferred income and allowances on sales to distributors

 
17,250

Deferred licensing and services revenue

 
68

Total current liabilities
70,892

 
83,647

Long-term debt
261,035

 
299,667

Other long-term liabilities
39,274

 
34,954

Total liabilities
371,201

 
418,268

Contingencies (Note 16)

 

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; 129,275,000 shares issued and outstanding as of September 29, 2018 and 123,895,000 shares issued and outstanding as of December 30, 2017
1,293

 
1,239

Additional paid-in capital
732,073

 
695,768

Accumulated deficit
(469,662
)
 
(477,862
)
Accumulated other comprehensive loss
(2,578
)
 
(1,452
)
Total stockholders' equity
261,126

 
217,693

Total liabilities and stockholders' equity
$
632,327

 
$
635,961

See Accompanying Notes to Unaudited Consolidated Financial Statements.

6


LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Nine Months Ended
(In thousands)
September 29, 2018
 
September 30, 2017
Cash flows from operating activities:
 
 
 
Net loss
$
(19,201
)
 
$
(63,349
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
30,740

 
45,591

Impairment of acquired intangible assets
12,486

 
36,198

Amortization of debt issuance costs and discount
1,847

 
1,680

(Gain) loss on sale or maturity of marketable securities
(18
)
 
237

Gain on forward contracts
(105
)
 
(72
)
Stock-based compensation expense
9,908

 
9,286

Gain on disposal of fixed assets
(135
)
 
(197
)
Gain on sale of building

 
(4,624
)
Loss on sale of assets and business units

 
1,496

Impairment of cost-method investment
266

 
692

Changes in assets and liabilities:
 
 
 
Accounts receivable, net
(18,736
)
 
20,687

Inventories
13,892

 
1,519

Prepaid expenses and other assets
(11,729
)
 
3,839

Accounts payable and accrued expenses (includes restructuring)
1,661

 
(17,901
)
Accrued payroll obligations
(557
)
 
(2,002
)
Income taxes payable
309

 
(711
)
Deferred income and allowances on sales to distributors

 
3,862

Deferred licensing and services revenue
(68
)
 
(485
)
Net cash provided by operating activities
20,560

 
35,746

Cash flows from investing activities:
 
 
 
Proceeds from sales of and maturities of short-term marketable securities
5,000

 
9,689

Purchases of marketable securities
(9,603
)
 
(7,420
)
Proceeds from sale of building

 
7,895

Cash paid for costs of sale of building

 
(1,004
)
Capital expenditures
(6,178
)
 
(12,325
)
Proceeds from sale of assets and business units

 
967

Short-term loan to cost-method investee

 
(2,000
)
Cash paid for software licenses
(6,144
)
 
(6,472
)
Net cash used in investing activities
(16,925
)
 
(10,670
)
Cash flows from financing activities:
 
 
 
Restricted stock unit tax withholdings
(1,600
)
 
(2,787
)
Proceeds from issuance of common stock
28,051

 
3,452

Repayment of debt
(27,884
)
 
(33,679
)
Net cash used in financing activities
(1,433
)
 
(33,014
)
 
 
 
 
See Accompanying Notes to Unaudited Consolidated Financial Statements.

7


LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
 
 
 
 
 
 
 
 
Nine Months Ended
(In thousands)
September 29, 2018
 
September 30, 2017
Effect of exchange rate change on cash
(1,124
)
 
1,381

Net increase (decrease) in cash and cash equivalents
1,078

 
(6,557
)
Beginning cash and cash equivalents
106,815

 
106,552

Ending cash and cash equivalents
$
107,893

 
$
99,995

 
 
 
 
Supplemental cash flow information:
 
 
 
Change in unrealized (gain) loss related to marketable securities, net of tax, included in Accumulated other comprehensive loss
$
(16
)
 
$
72

Income taxes paid, net of refunds
$
2,716

 
$
2,308

Interest paid
$
13,976

 
$
16,379

Accrued purchases of plant and equipment
$
332

 
$
51

Note receivable resulting from sale of assets and business units
$

 
$
3,050

See Accompanying Notes to Unaudited Consolidated Financial Statements.

8


LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation and Significant Accounting Policies

The accompanying Consolidated Financial Statements are unaudited and have been prepared by Lattice Semiconductor Corporation (“Lattice,” the “Company,” “we,” “us,” or “our”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in our opinion include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted as permitted by the SEC's rules and regulations. These Consolidated Financial Statements should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017.

Fiscal Reporting Period

We report based on a 52 or 53-week fiscal year ending on the Saturday closest to December 31. Our third quarter of fiscal 2018 and third quarter of fiscal 2017 ended on September 29, 2018 and September 30, 2017, respectively. All references to quarterly or nine months ended financial results are references to the results for the relevant 13-week or 39-week fiscal period, respectively.

Principles of Consolidation and Presentation

The accompanying Consolidated Financial Statements include the accounts of Lattice and its subsidiaries after the elimination of all intercompany balances and transactions.

Reclassifications

Certain amounts in the prior fiscal year in the accompanying consolidated financial statements and notes thereto have been reclassified to conform to the presentation adopted in the current fiscal year. These reclassifications had no material effect on the results of operations or financial position for any period presented. We had previously treated an investment as an equity-method investment and reported equity in net loss of an unconsolidated affiliate separately, amounting to approximately $0.2 million and $0.7 million for the third quarter and first nine months, respectively, of fiscal 2017. We have reclassified the prior year loss to Other expense, net on our Consolidated Statements of Operations to be consistent with the current year treatment of the investment as a cost-method investment.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and classification of assets, such as marketable securities, accounts receivable, contract assets (included in prepaid expenses and other current assets), inventory, goodwill (including the assessment of reporting units), intangible assets, current and deferred income taxes, accrued liabilities (including restructuring charges and bonus arrangements), disclosure of contingent assets and liabilities at the date of the financial statements, amounts used in acquisition valuations and purchase accounting, impairment assessments, the fair value of equity awards, and the reported amounts of product revenue, licensing and services revenue, and expenses during the fiscal periods presented. Actual results could differ from those estimates.

Cash Equivalents and Marketable Securities

We consider all investments that are readily convertible into cash and that have original maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of highly liquid investments in time deposits or money market accounts and are carried at cost. We account for marketable securities as available-for-sale investments, as defined by U.S. GAAP, and record unrealized gains or losses to Accumulated other comprehensive loss on our Consolidated Balance Sheets, unless losses are considered other than temporary, in which case, those are recorded directly to the Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income (Loss). Deposits with financial institutions at times exceed Federal Deposit Insurance Corporation insurance limits.


9


Fair Value of Financial Instruments

We invest in various financial instruments, which may include corporate and government bonds, notes, and commercial paper. We value these instruments at their fair value and monitor our portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other than temporary, we would record an impairment charge and establish a new carrying value. We assess other than temporary impairment of marketable securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements.” The framework under the provisions of ASC 820 establishes three levels of inputs that may be used to measure fair value. Each level of input has different levels of subjectivity and difficulty involved in determining fair value.

Level 1 instruments generally represent quoted prices for identical assets or liabilities in active markets. Therefore, determining fair value for Level 1 instruments generally does not require significant management judgment, and the estimation is not difficult. Our Level 1 instruments consist of U.S. Government agency obligations, corporate notes and bonds, and commercial paper that are traded in active markets and are classified as Short-term marketable securities on our Consolidated Balance Sheets.

Level 2 instruments include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices for identical instruments in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 instruments consist of foreign currency exchange contracts entered into to hedge against fluctuation in the Japanese yen.

Level 3 instruments include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. As a result, the determination of fair value for Level 3 instruments requires significant management judgment and subjectivity. We did not have any Level 3 instruments during the periods presented.

Foreign Exchange and Translation of Foreign Currencies

While our revenues and the majority of our expenses are denominated in U.S. dollars, we have international subsidiaries and branch operations that conduct some transactions in foreign currencies, and we collect an annual Japanese consumption tax refund in yen. Gains or losses from foreign exchange rate fluctuations on balances denominated in foreign currencies are reflected in Other expense, net. Realized gains or losses on foreign currency transactions were not significant for the periods presented.

We translate accounts denominated in foreign currencies in accordance with ASC 830, “Foreign Currency Matters,” using the current rate method under which asset and liability accounts are translated at the current rate, while stockholders' equity accounts are translated at the appropriate historical rates, and revenue and expense accounts are translated at average monthly exchange rates. Translation adjustments related to the consolidation of foreign subsidiary financial statements are reflected in Accumulated other comprehensive loss in Stockholders' equity (see "Note 11 - Changes in Stockholders' Equity and Accumulated Other Comprehensive Loss").

Derivative Financial Instruments

We mitigate foreign currency exchange rate risk by entering into foreign currency forward exchange contracts, details of which are presented in the following table:
 
 
September 29,
2018
 
December 30,
2017
Total cost of contracts for Japanese yen (in thousands)
 
$
1,955

 
$
2,204

Number of contracts
 
2

 
2

Settlement month
 
June 2019

 
June 2018


Although these hedges mitigate our foreign currency exchange rate exposure from an economic perspective, they were not designated as "effective" hedges for accounting purposes and as such are adjusted to fair value through Other expense, net, with a gain of approximately $0.1 million for the fiscal quarter ended September 29, 2018 and a gain of approximately $0.1 million for the fiscal quarter ended December 30, 2017. We do not hold or issue derivative financial instruments for trading or speculative purposes.


10


Concentration Risk

Potential exposure to concentration risk may impact revenue, trade receivables, marketable securities, and supply of wafers for our products.

Customer concentration risk may impact revenue. The percentage of total revenue attributable to our top five identified end customers and largest identified end customer is presented in the following table:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Revenue attributable to top five end customers
20
%
 
23
%
 
17
%
 
28
%
Revenue attributable to largest end customer
6
%
 
5
%
 
5
%
 
9
%

No end customer accounted for more than 10% of total revenue during these periods. We did not have enough information to assign end customers to approximately $1.3 million and $13.7 million of revenue recognized for the third quarter and first nine months, respectively, of fiscal 2018 on shipments to distributors that have not sold through to end customers.

Distributors have historically accounted for a significant portion of our total revenue. Revenue attributable to distributors as a percentage of total revenue is presented in the following table:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Revenue attributable to distributors*
82
%
 
80
%
 
85
%
 
75
%
*
During the first quarter of 2018, we updated our channel categories to group all forms of distribution into a single channel. Prior periods have been reclassified to match the current period presentation.

Our two largest distributor groups, Arrow Electronics, Inc. ("Arrow") and the Weikeng Group ("Weikeng"), also account for a substantial portion of our net trade receivables. At September 29, 2018 and December 30, 2017, Arrow accounted for 46% and 66%, respectively, and Weikeng accounted for 31% and 0%, respectively, of net trade receivables. No other distributor group or end customer accounted for more than 10% of net trade receivables at these dates.

Concentration of credit risk with respect to trade receivables is mitigated by our credit and collection process, including active management of collections, credit limits, routine credit evaluations for essentially all customers, and secure transactions with letters of credit or advance payments where appropriate. We regularly review our allowance for doubtful accounts and the aging of our accounts receivable.

Accounts receivable do not bear interest and are shown net of allowances for doubtful accounts of $0.4 million and $9.4 million at September 29, 2018 and December 30, 2017, respectively. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on assessment of known troubled accounts, analysis of the aging of our accounts receivable, historical experience, management judgment, and other currently available evidence. We write off accounts receivable against the allowance when we determine a balance is uncollectible and no longer actively pursue collection of the receivable. During the third quarter of fiscal 2018, we wrote off $9.0 million of accounts receivable from a bankrupt distributor group. We had recorded a full allowance on this amount in the third quarter of fiscal 2016, so there was no impact on Accounts Receivable, net in the current period. Bad debt expense was negligible for all periods presented.

We place our investments primarily through one financial institution and mitigate the concentration of credit risk by limiting the maximum portion of the investment portfolio which may be invested in any one instrument. Our investment policy defines approved credit ratings for investment securities. Investments on-hand in marketable securities consisted primarily of money market instruments, “AA” or better corporate notes and bonds and commercial paper, and U.S. government agency obligations. See "Note 4 - Marketable Securities" for a discussion of the liquidity attributes of our marketable securities.

We rely on a limited number of foundries for our wafer purchases, including Fujitsu Limited, Seiko Epson Corporation, Taiwan Semiconductor Manufacturing Company, Ltd, and United Microelectronics Corporation. We seek to mitigate the concentration of supply risk by establishing, maintaining and managing multiple foundry relationships; however, certain of our products are sourced from a single foundry and changing from one foundry to another can have a significant cost, among other factors.


11


Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method for financial reporting purposes over the estimated useful lives of the related assets, generally three to five years for equipment and software, one to three years for tooling, and thirty years for buildings and building space. Leasehold improvements are amortized over the shorter of the non-cancelable lease term or the estimated useful life of the assets. Upon disposal of property and equipment, the accounts are relieved of the costs and related accumulated depreciation and amortization, and resulting gains or losses are reflected in the Consolidated Statements of Operations for recognized gains and losses or in the Consolidated Balance Sheets for deferred gains and losses. Repair and maintenance costs are expensed as incurred.

In August 2017, we sold building space which we owned in Shanghai, China for gross proceeds of approximately $7.9 million. The building space was vacated in fiscal 2015, upon consolidation of facilities to a single site in Shanghai following our acquisition of Silicon Image. As of the sale date, the building had a historical cost of $3.6 million, accumulated depreciation of $1.4 million and we incurred $1.1 million of direct selling costs, resulting in a net gain on sale of $4.6 million in the third quarter of fiscal 2017, which is presented as Gain on sale of building in our Consolidated Statements of Operations.

Sales of Assets and Business Units

On September 30, 2017, in conjunction with our June 2017 restructuring plan (see "Note 13 - Restructuring"), we sold 100% of the equity of our Hyderabad, India subsidiary and certain assets related to our Simplay Labs testing and certification business to an unrelated third party. The fair value of purchase price consideration was $5.3 million, which was comprised of $2.3 million of cash and a $3.0 million note receivable. In the third quarter of fiscal 2017, we recorded a $1.8 million loss on the sale, including a $2.2 million disposal of a relative fair value share of our goodwill, which is included in Other expense, net in the Consolidated Statements of Operations.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. Goodwill is not amortized, but instead is tested for impairment annually or more frequently if certain indicators of impairment are present. We do not expect goodwill impairment to be tax deductible for income tax purposes.

In the second quarter of 2018, we made the strategic decision to discontinue our millimeter wave business. We determined that this action 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 the first nine months of fiscal 2018. See Notes 6, 7, 8 and 13 regarding charges and costs related to the discontinuation of our millimeter wave business. No impairment charges relating to goodwill were recorded for the first nine months of fiscal 2017.

During the third quarter and first nine months of fiscal 2018, there have been no changes to the Goodwill balance of $267.5 million presented in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017.

Variable Interest Entities and Equity Investments in Privately Held Companies

We have an interest in an entity that is a Variable Interest Entity ("VIE"). If we are the primary beneficiary of a VIE, we are required to consolidate it. To determine if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding, financing, and other applicable agreements and circumstances. Our assessments of whether we are the primary beneficiary of our VIE requires significant assumptions and judgments. We have concluded that we are not the primary beneficiary of this VIE as we do not have the power to direct the activities that most significantly impact the VIE's economic performance.

Our equity investments in privately held companies, considered VIE's, that we are not required to consolidate are accounted for under the cost method, as assessed under ASC 325-20, "Cost Method Investments." These investments are reviewed on a quarterly basis to determine if their values have been impaired and adjustments are recorded as necessary. We assess the potential impairment of these investments by applying a fair value analysis using a revenue multiple approach. Declines in value that are judged to be other-than-temporary are reported in Other expense, net in the accompanying Consolidated Statements of Operations with a commensurate decrease in the carrying value of the investment (see "Note 9 - Cost Method Investment and Collaborative Arrangement"). Upon disposition of these investments, the specific identification method is used to determine the cost basis in computing realized gains or losses.


12


New Accounting Pronouncements

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and will also require significant additional disclosures about the amount, timing, and uncertainty of cash flows from leases. Substantially all leases, including current operating leases, will be recognized by lessees on their balance sheet as a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. For public business entities, the standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 initially required entities to adopt the standard using a modified retrospective transition method. In July 2018, the FASB issued certain updates including ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provide transition practical expedients allowing companies to adopt the new standard with a cumulative effect adjustment as of the beginning of the year of adoption with prior year comparative financial information and disclosures remaining as previously reported. We are currently evaluating the optional transition practical expedients, as well as the impact of the new guidance on our consolidated financial statements and related disclosures, including the increase in the assets and liabilities on our balance sheet, and the impact on our current lease portfolio from both a lessor and lessee perspective. To facilitate this, we are utilizing a comprehensive approach to review our lease portfolio, as well as assessing system requirements and control implications. We believe that we have sufficient time and resources to complete our implementation efforts no later than the first quarter of fiscal 2019.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplifies the application of the hedge accounting guidance. This standard is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact of ASU 2017-12 on our consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance allows an entity to reclassify the income tax effects of the Public Law 115-97 "An Act to Provide Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018", commonly known as the Tax Cuts and Job Act of 2017 (the "2017 Tax Act") on items within accumulated other comprehensive income/(loss) to retained earnings. This new guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The new standard must be adopted retrospectively to each period in which a taxpayer recognizes the effect of the change in the U.S. federal corporate income tax rate from the 2017 Tax Act. We are currently assessing the impact of ASU 2018-02 on our consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which largely aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees. The ASU also clarifies that any share-based payment issued to a customer should be evaluated under ASC 606, Revenue from Contracts with Customers. The ASU requires a modified retrospective transition approach. This new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We do not expect the adoption of this accounting standard update to have a material impact on our consolidated financial statements and related disclosures.

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


Note 2 - Revenue from Contracts with Customers

We adopted ASC 606 effective on December 31, 2017, the first day of our 2018 fiscal year, using the modified retrospective method. Under the guidance in effect prior to the adoption of ASC 606, we deferred the recognition of revenue and the cost of revenue from certain sales until the distributors of our products reported that they had sold the products to their customers (known as “sell-through” revenue recognition). Under ASC 606, we recognize revenue on sales to all distributors upon shipment and transfer of control. Under ASC 606, we will also recognize certain licensing revenues that were not recognizable under previous GAAP due to the fixed and determinable revenue recognition criteria not being met. As a result of this adoption, we revised our accounting policy for revenue recognition as detailed below.


13


We recognize revenue under the core principle of depicting the transfer of control to our customers in an amount reflecting the consideration we expect to be entitled. In order to achieve that core principle, we apply the following five step approach, as further described below: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to each performance obligation in the contract, and (5) recognize revenue when applicable performance obligations are satisfied.

Product Revenue

Identify the contract with a customer - Our product revenues consist of sales to original equipment manufacturers, or OEMs, and distributors. We consider customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. In certain cases we consider firm forecasts that are agreed to by both us and the customer to be contracts. For sales to distributors, we have concluded that our contracts are with the distributor, rather than with the distributor’s end customer, as we hold a contract bearing enforceable rights and obligations only with the distributor. As part of our consideration of the contract, we evaluate certain factors including the customer’s ability to pay (or credit risk).

Identify the performance obligations in the contract - For each contract, we consider our promise to transfer each distinct product to be the identified performance obligations.

Determine the transaction price - In determining the transaction price, we evaluate whether the set contract price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. As our standard payment terms are less than one year, we have elected to apply the practical expedient to not assess whether a contract has a significant financing component.

Sales to most distributors are made under terms allowing certain price adjustments and limited rights of return of our products held in their inventory or upon sale to their end customers. Revenue from sales to distributors is recognized upon the transfer of control to the distributor, which generally occurs upon shipment of product to the distributor. Frequently, distributors need to sell at a price lower than the standard distribution price in order to win business. At the time the distributor invoices its customer or soon thereafter, the distributor submits a “ship and debit” price adjustment claim to us to adjust the distributor’s cost from the standard price to the pre-approved lower price. After we verify that the claim was pre-approved, we issue a credit memo to the distributor for the ship and debit claim. In determining the transaction price, we consider ship and debit price adjustments to be variable consideration. Such price adjustments are estimated using the expected value method based on an analysis of historical ship and debit claims, at the distributor and product level, over a period of time considered adequate to account for current pricing and business trends. Any differences between the estimated consideration and the actual amount received from the customer is recorded in the period that the actual consideration becomes known. Most of our distributors are entitled to limited rights of return, referred to as stock rotation, not to exceed 5% of billings, net of returns and ship and debit price adjustments. Stock rotation reserves are based on historical return rates and recorded as a reduction to revenue with a corresponding reduction to cost of goods sold for the estimated cost of inventory that we expect to be returned.

Sales to OEMs and certain distributors are made under terms that do not include rights of return or price concessions after we ship the product. Accordingly, the transaction price equals the invoice price and there is no variable consideration.

Allocate the transaction price to each performance obligation in the contract - Because our product revenue contracts generally include the delivery of a certain quantity of semiconductors as the single performance obligation, we do not allocate revenue across distinct performance obligations. However, we frequently receive orders for products to be delivered over multiple dates that may extend across several reporting periods. We invoice for each delivery upon shipment and recognize revenues for each distinct product delivered, assuming transfer of control has occurred. Payment term for invoices are generally 30 to 60 days.

Recognize revenue when applicable performance obligations are satisfied - Revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which typically occurs at shipment. In determining whether control has transferred, we also consider if there is a present right to payment and legal title, along with whether the risks and rewards of ownership have transferred to the customer. We have certain vendor-managed inventory arrangements with certain OEM customers whereby we ship product into an inventory hub location but for which control does not transfer until the customer consumes the inventory. In such cases, we recognize revenue upon customer consumption.

Licensing and Services Revenue

Identify the contract with a customer - Our licensing and services revenue is comprised of revenue from our intellectual property ("IP") core licensing activity, patent monetization activities, and royalty and adopter fee revenue from our standards activities. These activities are complementary to our product sales and help us monetize our IP and accelerate marketing adoption curves associated with our technology and standards. We consider licensing arrangements with our customers to be the contract.

Identify the performance obligations in the contract - For each contract, we consider the promise to deliver a license that grants the customer the right to use the IP, as well as any professional services provided under the contract, as distinct performance obligations.


14


Determine the transaction price - Our HDMI and MHL standards revenue, as well as certain IP licenses, include variable consideration in the form of usage-based royalties. We apply the provisions of ASC 606 in accounting for these types of arrangements, whereby we do not include estimated royalties in the transaction price at the origination of the contract but rather recognize royalty revenue as usage occurs.

HDMI royalty revenue is determined by a contractual allocation formula agreed to by the Founders of the HDMI consortium. The contractual allocation formula is subject to periodic adjustment, generally every three years. The most recent royalty sharing formula covered the period from January 1, 2014 through December 31, 2016, and an interim agreement covering the period from January 1, 2017 through December 31, 2017 was signed in the second quarter of fiscal 2018. However, a new agreement covering the period beginning January 1, 2018 is yet to be signed. While a new royalty sharing agreement is being negotiated with the other Founders of the HDMI consortium, the HDMI agent is unable to distribute the majority of the royalties collected to the Founders. We are recording revenue based on our estimated share of the royalties, which we determine using an analytical model that combines historical and forecasted collection trends with our expected share of those collections. This estimate will be adjusted once the Founders finalize the agreement for the period beginning January 1, 2018.

Allocate the transaction price to each performance obligation in the contract - For contracts that include multiple performance obligations (most commonly those that include licenses and professional services), we allocate revenue to each performance obligation based on the best estimate of the standalone selling price of each obligation. We do not believe that the judgments regarding the allocation of revenue on licensing arrangements are material to our financial statements.

Recognize revenue when applicable performance obligations are satisfied - We recognize license revenue at the point in time that control of the license transfers to the customer, which is generally upon delivery. We recognize professional service revenue as we perform the services. Royalty revenues are recognized as customers sell products that include our IP and are legally obligated to remit royalties to us. We receive payments from customers based on contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Payment terms on invoiced amounts are typically 30 days.

Impact on Financial Statements

We adopted ASC 606 on December 31, 2017 using the modified retrospective method. Under this transition method, we applied the provisions of the new standard to all open customer contracts as of the date of adoption and recorded the cumulative effect of adoption to Accumulated deficit on December 31, 2017. We have not restated any prior financial statements presented. ASC 606 requires us to disclose the effect of adoption on each financial statement line item in the current reporting period during 2018 as compared to the guidance that was in effect in 2017, and an explanation of the reasons for significant changes. Such information is as follows:

Condensed Consolidated Statement of Operations
 
 
Three months ended September 29, 2018
 
Nine months ended September 29, 2018
 (In thousands, except per share data)
 
As reported under new standard
 
Adjustments
 
Pro forma as if previous standard was in effect
 
As reported under new standard
 
Adjustments
 
Pro forma as if previous standard was in effect
Product revenue
 
97,932

 
(1,302
)
 
96,630

 
291,335

 
(13,651
)
 
277,684

Licensing and services revenue
 
3,552

 
(1,525
)
 
2,027

 
11,487

 
1,662

 
13,149

Cost of product revenue
 
43,120

 
144

 
43,264

 
137,430

 
(5,400
)
 
132,030

Net income (loss)
 
6,974

 
(2,971
)
 
4,003

 
(19,201
)
 
(6,589
)
 
(25,790
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share, basic and diluted
 
0.05

 
(0.02
)
 
0.03

 
(0.15
)
 
(0.06
)
 
(0.21
)


15


Condensed Consolidated Balance Sheets
 
 
As of September 29, 2018
 (In thousands)
 
As reported under new standard
 
Adjustments
 
Pro forma as if previous standard was in effect
Accounts receivable, net of allowance for doubtful accounts
 
75,648

 
7,091

 
82,739

Inventories
 
66,381

 
25

 
66,406

Prepaid expenses and other current assets
 
24,143

 
(6,568
)
 
17,575

Total assets
 
632,327

 
548

 
632,875

 
 
 
 
 
 
 
Accounts payable and accrued expenses (includes restructuring)
 
46,929

 
(887
)
 
46,042

Deferred income and allowances on sales to distributors
 

 
35,425

 
35,425

Accumulated deficit
 
(469,662
)
 
(33,990
)
 
(503,652
)
Total liabilities and stockholders' equity
 
632,327

 
548

 
632,875


Condensed Consolidated Statement of Cash Flows
 
 
Nine months ended September 29, 2018
 (In thousands)
 
As reported under new standard
 
Adjustments
 
Pro forma as if previous standard was in effect
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 
(19,201
)
 
(6,589
)
 
(25,790
)
Accounts receivable, net
 
(18,736
)
 
(8,899
)
 
(27,635
)
Inventories
 
13,892

 
(395
)
 
13,497

Prepaid expenses and other assets
 
(11,729
)
 
(947
)
 
(12,676
)
Accounts payable and accrued expenses (includes restructuring)
 
1,661

 
(1,345
)
 
316

Deferred income and allowances on sales to distributors
 

 
18,175

 
18,175


The significant impacts of the new standard were to accelerate the recognition of revenues on both sales to certain distributors and certain licensing activities. As a result of adopting this standard, we recorded a cumulative effect adjustment of $27.4 million as a reduction to Accumulated deficit on December 31, 2017, resulting primarily from a net $20.2 million of previously deferred distributor revenues and costs and $6.6 million of previously unrecognized licensing revenues.

Other matters

We generally provide an assurance warranty that our products will substantially conform to the published specifications for twelve months from the date of shipment. In some case the warranty period may be longer than twelve months. We do not separately price or sell the assurance warranty. Our liability is limited to either a credit equal to the purchase price or replacement of the defective part. Returns under warranty have historically been immaterial. As such, we do not record a specific warranty reserve or consider activities related to such warranty, if any, to be a separate performance obligation.

Under the practical expedient provided by ASC 340, we generally expense sales commissions when incurred because the amortization period would have been less than one year. We record these costs within Selling, general and administrative expenses.

Substantially all of our performance obligations are satisfied within twelve months. Accordingly, under the optional exemption provided by ASC 606, we do not disclose revenues allocated to future performance obligations of partially completed contracts.

We do not have any material contract liabilities recorded as of September 29, 2018.


16


Contract assets relate to our rights to consideration for licenses and royalties due to us as a member of the HDMI consortium, with collection dependent on events other than the passage of time, such as collection of licenses and royalties from customers by the HDMI licensing agent and the finalization of a new royalty sharing agreement. The contract assets are recorded in Prepaid expenses and other current assets in our Consolidated Balance Sheets, and they are transferred to Accounts receivable when the rights become unconditional. In addition to collections related to current year revenue, we received $6.4 million in cash during the second quarter of fiscal 2018 for fiscal 2017 HDMI royalties as a result of the signing of the HDMI Founders royalty sharing agreement for 2017. Collection of this amount had no impact on our reported revenues as it had been accrued to our cumulative effect adjustment, and it was recorded as a reduction to the contract asset during the quarter received.

The following table summarizes the activity for our contract assets during the first nine months of fiscal 2018:
 (In thousands)
 
Balance as of December 31, 2017
$
7,515

Revenues recorded during the period
7,338

Transferred to accounts receivable or collected
(8,848
)
Balance as of September 29, 2018
$
6,005


Disaggregation of revenue

The following tables provide information about revenue from contracts with customers disaggregated by major class of revenue and by geographical market, based on ship-to location of the end customer, where available, and ship-to location of distributor otherwise:
 
Major Class of Revenue
 
Three Months Ended
 
Nine Months Ended
 
 (In thousands)
 
September 29,
2018
 
September 30,
2017 *
 
September 29,
2018
 
September 30,
2017 *
 
Product revenue - Distributors
 
82,969

 
73,273

 
257,716

 
218,923

 
Product revenue - Direct
 
14,963

 
14,096

 
33,619

 
44,283

 
Licensing and services revenue
 
3,552

 
4,602

 
11,487

 
27,489

 
Total revenue
 
101,484

 
91,971

 
302,822

 
290,695

 
 
 
 
 
 
 
 
 
 
 
Revenue by Geographical Market
 
Three Months Ended
 
Nine Months Ended
 
 (In thousands)
 
September 29,
2018
 
September 30,
2017 *
 
September 29,
2018
 
September 30,
2017 *
 
Asia
 
76,927

 
68,677

 
226,747

 
207,081

 
Europe
 
11,873

 
10,972

 
36,177

 
32,631

 
Americas
 
12,684

 
12,322

 
39,898

 
50,983

 
Total revenue
 
101,484

 
91,971

 
302,822

 
290,695

 
 
 
 
 
 
 
 
 
 
*
As noted above, prior period amounts have not been adjusted under the modified retrospective method of adopting ASC 606 and, therefore, are presented under GAAP in effect during that period.



17


Note 3 - Net Income (Loss) per Share

We compute basic Net income (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding during the period. To determine diluted share count, we apply the treasury stock method to determine the dilutive effect of outstanding stock option shares, restricted stock units ("RSUs"), and Employee Stock Purchase Plan ("ESPP") shares. Our application of the treasury stock method includes, as assumed proceeds, the average unamortized stock-based compensation expense for the period. When we are in a net loss position, we do not include dilutive securities as their inclusion would reduce the net loss per share.

A summary of basic and diluted Net income (loss) per share is presented in the following table:
 
Three Months Ended
 
Nine Months Ended
(in thousands, except per share data)
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net income (loss)
$
6,974

 
$
(43,052
)
 
$
(19,201
)
 
$
(63,349
)
 
 
 
 
 
 
 
 
Shares used in basic Net income (loss) per share
127,816

 
122,990

 
125,578

 
122,393

Dilutive effect of stock options, RSUs and ESPP shares
1,658

 

 

 

Shares used in diluted Net income (loss) per share
129,474

 
122,990

 
125,578

 
122,393

 
 
 
 
 
 
 
 
Basic Net income (loss) per share
$
0.05

 
$
(0.35
)
 
$
(0.15
)
 
$
(0.52
)
Diluted Net income (loss) per share
$
0.05

 
$
(0.35
)
 
$
(0.15
)
 
$
(0.52
)

The computation of diluted Net income (loss) per share excludes the effects of stock options, RSUs, and ESPP shares that are antidilutive, aggregating approximately the following number of shares:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Stock options, RSUs, and ESPP shares excluded as they are antidilutive
2,299

 
7,221

 
8,284

 
6,018


Stock options, RSUs, and ESPP shares are considered antidilutive when the aggregate of exercise price and unrecognized stock-based compensation expense are greater than the average market price for our common stock during the period or when we are in a net loss position, as the effects would reduce the loss per share. Stock options, RSUs, and ESPP shares that are antidilutive at September 29, 2018 could become dilutive in the future.


Note 4 - Marketable Securities

We classify our marketable securities as short-term based on their nature and availability for use in current operations. In the periods presented, our Short-term marketable securities consisted of government bonds with contractual maturities of up to two years. The following table summarizes the remaining maturities of our Short-term marketable securities at fair value: 
(In thousands)
September 29,
2018
 
December 30,
2017
Short-term marketable securities:
 
 
 
Maturing within one year
$
7,435

 
$
4,982

Maturing between one and two years
2,165

 

Total marketable securities
$
9,600

 
$
4,982




18


Note 5 - Fair Value of Financial Instruments

 
Fair value measurements as of
 
Fair value measurements as of
 
September 29, 2018
 
December 30, 2017
(In thousands)
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Short-term marketable securities
$
9,600

 
$
9,600

 
$

 
$

 
$
4,982

 
$
4,982

 
$

 
$

Foreign currency forward exchange contracts, net
105

 

 
105

 

 
77

 

 
77

 

Total fair value of financial instruments
$
9,705

 
$
9,600

 
$
105

 
$

 
$
5,059

 
$
4,982

 
$
77

 
$


We invest in various financial instruments that may include corporate and government bonds and notes, commercial paper, and certificates of deposit. In addition, we enter into foreign currency forward exchange contracts to mitigate our foreign currency exchange rate exposure. We carry these instruments at their fair value in accordance with ASC 820, "Fair Value Measurements." The framework under the provisions of ASC 820 establishes three levels of inputs that may be used to measure fair value. Each level of input has different levels of subjectivity and difficulty involved in determining fair value, as summarized in "Note 1 - Basis of Presentation and Significant Accounting Policies." There were no transfers between any of the levels during the first nine months of fiscal 2018 or 2017.

In accordance with ASC 320, “Investments-Debt and Equity Securities,” we recorded an unrealized gain of less than $0.1 million during the nine months ended September 29, 2018 and an unrealized loss of approximately $0.1 million during the nine months ended September 30, 2017 on certain Short-term marketable securities (Level 1 instruments), which have been recorded in Accumulated other comprehensive loss. Future fluctuations in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to Accumulated other comprehensive loss. If we were to determine in the future that any further decline in fair value is other-than-temporary, we would record an impairment charge, which could have a material adverse effect on our operating results. If we were to liquidate our position in these securities, it is likely that the amount of any future realized gain or loss would be different from the unrealized gain or loss reported in Accumulated other comprehensive loss.


Note 6 - Discontinuation of Business Unit

In the second quarter of 2018, we made the strategic decision to discontinue our millimeter wave business, which included certain assets related to our Wireless products, and our Board of Directors approved a related internal restructuring plan. This action was designed to improve profitability, reduce our infrastructure costs, and refocus on our core business activities. Approximately $24.0 million of total expense was recorded in our Consolidated Statements of Operations through the first nine months of fiscal 2018, including $11.9 million charged to Impairment of acquired intangible assets, $8.0 million charged to Cost of product revenue for inventory reserves, and $4.1 million charged to Restructuring charges for severance and other personnel costs, and for other asset restructuring. Notes 7, 8 and 13 provide further details on these charges and costs.


Note 7 - Inventories

(In thousands)
September 29,
2018
 
December 30,
2017
Work in progress
$
47,122

 
$
49,642

Finished goods
19,259

 
30,261

Total inventories
$
66,381

 
$
79,903


In the second quarter of 2018, we made the strategic decision to discontinue our millimeter wave business, which included certain wireless technology inventory items. As such, specific inventory reserves of $8.3 million were taken in that quarter on product lines that were eliminated with the discontinuation of our millimeter wave business and were charged to Cost of product revenue in the Consolidated Statements of Operations. In the third quarter of 2018, an adjustment of approximately $0.3 million was credited to Cost of product revenue, for a net charge of $8.0 million in the first nine months of fiscal 2018.



19


Note 8 - Intangible Assets

In connection with our acquisitions of Silicon Image, Inc. in March 2015 and SiliconBlue Technologies, Inc. in December 2011, we recorded identifiable intangible assets related to developed technology, customer relationships, licensed technology, patents, and in-process research and development based on guidance for determining fair value under the provisions of ASC 820, "Fair Value Measurements." Additionally, during fiscal 2015, we licensed additional third-party technology.

We monitor the carrying value of our intangible assets for potential impairment and test the recoverability of such assets whenever triggering events or changes in circumstances indicate that their carrying amounts may not be recoverable. When we are required to determine the fair value of intangible assets other than goodwill, we use the income approach. We start with a forecast of all expected net cash flows associated with the asset and then apply a discount rate to arrive at fair value.

During our review of our strategic long-range plan completed at the end of the third quarter of fiscal 2018, we concluded that a certain product line had limited future revenue potential due to a decline in customer demand for that product. We determined that this conclusion constituted an impairment indicator to the related specific developed technology intangible asset acquired in our acquisition of Silicon Image. Our assessment of the fair value of this intangible asset concluded that it had been fully impaired as of September 29, 2018, and we recorded an impairment charge of $0.6 million in the Consolidated Statements of Operations.

In the second quarter of 2018, we made the strategic decision to discontinue our millimeter wave business, which included certain wireless technology intangible assets. We determined that this action constituted an impairment indicator related to certain of the developed technology intangible assets acquired in our acquisition of Silicon Image. Our assessment of the fair value of these intangible assets concluded that they had been fully impaired as of June 30, 2018, and we recorded an impairment charge of $11.9 million in the Consolidated Statements of Operations.

In the third quarter of 2017, we updated our annual strategic long-range plan, which resulted in revised forecasts, and we also sold 100% of the equity of our Hyderabad, India subsidiary and certain assets related to our Simplay Labs testing and certification business to an unrelated third party. We determined that these activities constituted impairment indicators related to the developed technology intangible assets acquired in our acquisition of Silicon Image. Our assessment of the fair value of these intangible assets concluded that they had been impaired as of September 30, 2017, and we recorded a preliminary impairment charge of $36.2 million in the Consolidated Statements of Operations. The impairment charge recorded in the third quarter of 2017 was based on our best valuation estimate as of that period, and was revised during the fourth quarter of 2017 upon completion of a more detailed analysis of the fair value of these intangible assets. 

In the first quarter of fiscal 2017, we sold a portfolio of patents that had been acquired in our acquisition of Silicon Image for $18.0 million. This amount was received in two installments over the first and second quarters of fiscal 2017, and was recognized as Licensing and services revenue in our Consolidated Statements of Operations during the respective periods in which the installment payments were received. As a result of this transaction, Intangible assets, net was reduced by approximately $3.5 million on our Consolidated Balance Sheets.

On our Consolidated Balance Sheets at September 29, 2018 and December 30, 2017, Intangible assets, net are shown net of accumulated amortization of $98.9 million and $100.3 million, respectively.

We recorded amortization expense related to intangible assets on the Consolidated Statements of Operations as presented in the following table:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Research and development
$
14

 
$
128

 
$
264

 
$
442

Amortization of acquired intangible assets
3,823

 
8,526

 
13,982

 
25,777

 
$
3,837

 
$
8,654

 
$
14,246

 
$
26,219




20


Note 9 - Cost Method Investment and Collaborative Arrangement

During fiscal 2015, we purchased a series of preferred stock ownership interests in a privately-held company that designs human-computer interaction technology for total consideration of $5.0 million. This gross investment constituted a 22.7% ownership interest. In the third quarter of fiscal 2016, we made an additional investment of $1.0 million via a convertible debt instrument, bringing our gross investment in the investee to $6.0 million.

In 2017, we signed new development and licensing contracts with the investee, and the investee incurred preferred debt that effectively subordinates our ownership position between their debt and common shareholders. After evaluating these events and our investment position, we concluded that we have a variable interest in the privately-held company. However, we are not the primary beneficiary of the investee, are not holding in-substance common stock, and do not have a significant amount of influence to direct the activities that most significantly impact the investee’s economic performance. Accordingly, we account for our investment in this company under the cost method.

We assessed this investment for impairment as of September 29, 2018 by applying a fair value analysis using a revenue multiple approach and concluded that a $0.3 million impairment adjustment was necessary during the third quarter of fiscal 2018, which is the only impairment adjustment in the first nine months of fiscal 2018. For the third quarter and first nine months of fiscal 2017, we recorded impairment adjustments of approximately $0.2 million and $0.7 million, respectively. These impairment adjustments of a cost method investment are included in Other expense, net on our Consolidated Statements of Operations.

Through September 29, 2018, we have reduced the value of our investment by approximately $4.0 million. The net balance of our investment included in Other long-term assets in the Consolidated Balance Sheets is approximately $2.0 million.

At September 29, 2018, our maximum exposure to loss as a result of involvement with this VIE totals $5.3 million, which is comprised of the $2.0 million carrying value of our investment plus $3.3 million of prepaid royalties further described in the section below on the related collaborative arrangement.

Collaborative Arrangement

Concurrent with the initiation of the investment discussed above, we entered into a collaborative arrangement with the investee during fiscal 2015. Under this arrangement, the parties undertook the development of certain fast, multi-touch sensing devices for touch screen controller applications. This arrangement was modified in 2017, and we entered into new service and licensing agreements that provided for: (i) the assignment of certain Intellectual Property ("IP") from the investee to us, (ii) a license of certain IP from the investee to us, (iii) payment of royalties between the parties for future sales of co-developed products, (iv) the performance of certain services for each other at no additional charge. We have agreed to make quarterly minimum payments to the investee, which will be automatically credited against any future revenue share amount owed to investee under the agreements and will be accounted for as prepaid royalties under ASC 340. In each of the first three quarters of fiscal 2018, we made quarterly payments of $0.9 million. As of September 29, 2018, expected future royalty prepayments are as follows:
Fiscal year
 
(in thousands)
 
 
 
2018 (remaining 3 months)
 
$
875

2019
 
$
5,000


At September, 2018, royalties prepaid to the investee total $3.3 million, which is included in Other long-term assets in our Consolidated Balance Sheets. We have not recorded a liability related to the future payments, as the agreement is cancelable.


Note 10 - Accounts Payable and Accrued Expenses

Included in Accounts payable and accrued expenses are the following balances:
(In thousands)
September 29,
2018
 
December 30,
2017
Trade accounts payable
$
26,150

 
$
35,350

Liability for non-cancelable contracts
7,471

 
7,232

Deferred rent
3,809

 
3,834

Other accrued expenses (includes restructuring)
9,499

 
7,989

Total accounts payable and accrued expenses
$
46,929

 
$
54,405




21


Note 11 - Changes in Stockholders' Equity and Accumulated Other Comprehensive Loss
 
Common Stock
($.01 par value)
 
Additional Paid-in
 capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Total
(In thousands, except par value data)
Shares
 
Amount
 
 
 
 
Balances, December 30, 2017
123,895

 
$
1,239

 
$
695,768

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

Net loss for the nine months ended September 29, 2018

 

 

 
(19,201
)
 

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

 

 

 

 
16

 
16

Recognized gain on redemption of marketable securities, previously unrealized

 

 

 

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

 

 

 

 
(1,124
)
 
(1,124
)
Common stock issued in connection with the exercise of stock options, ESPP and vested RSUs, net of tax
5,380

 
54

 
26,397

 

 

 
26,451

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

 

 
9,908

 

 

 
9,908

Accounting method transition adjustment (1)

 

 

 
27,401

 

 
27,401

Balances, September 29, 2018
129,275

 
$
1,293

 
$
732,073

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

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


Note 12 - Income Taxes

For the three months ended September 29, 2018, we recorded an income tax expense of less than $0.1 million, and for the three months ended September 30, 2017, we recorded an income tax benefit of approximately $0.3 million. For the nine months ended September 29, 2018 and September 30, 2017, we recorded an income tax expense of approximately $2.0 million and $0.2 million, respectively. Income taxes for the three and nine month periods ended September 29, 2018 and September 30, 2017 represent tax at the federal, state, and foreign statutory tax rates adjusted for withholding taxes, changes in uncertain tax positions, changes in the U.S. valuation allowance, as well as other non-deductible items in the United States and foreign jurisdictions. The difference between the U.S. federal statutory tax rate of 21% and our effective tax rate for the three and nine months ended September 29, 2018 results from (a) an increase in the valuation allowance that offsets expected tax benefit in the United States, (b) foreign rate differential and withholding taxes, (c) zero tax rate in Bermuda (which results in no tax benefit for the pretax loss in Bermuda), and (d) a discrete benefit from the release of uncertain tax positions.

Through September 29, 2018, we continued to evaluate the valuation allowance position in the United States and concluded we should maintain a valuation allowance against the net federal and state deferred tax assets. We will continue to evaluate both positive and negative evidence in future periods to determine if we should recognize more 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.

We are subject to federal and state income tax as well as income tax in the various foreign jurisdictions in which we operate. Additionally, the years that remain subject to examination are 2015 for federal income taxes, 2013 for state income taxes, and 2011 for foreign income taxes, including years ending thereafter. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carryforward amount. Our income tax returns are under examination in China for 2016 through 2018, and in the Philippines for 2016.

We believe that it is reasonably possible that $1.6 million of unrecognized tax benefits and $0.1 million of associated interest and penalties could be recognized during the next twelve months. The $1.7 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.


22


At December 30, 2017, we had U.S. federal net operating loss ("NOL") carryforwards (pretax) of approximately $351.4 million that expire at various dates between 2018 and 2037. We had state NOL carryforwards (pretax) of approximately $162.9 million that expire at various dates from 2018 through 2037. We also had federal and state credit carryforwards of $50.2 million and $59.2 million, respectively. Of the total $59.2 million state credit carryforwards, $57.9 million do not expire. The remaining credits expire at various dates from 2018 through 2037.

Our liability for uncertain tax positions (including penalties and interest) was $26.4 million and $26.9 million at September 29, 2018 and December 30, 2017, 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 $25.9 million is netted against deferred tax assets.

The Tax Cuts and Jobs Act (the "2017 Tax Act"), enacted December 22, 2017, contains provisions that affect us, but the impact will be absorbed by utilizing NOL carryforwards. Reduction of the corporate tax rate from 35% to 21% reduced the value of our domestic deferred tax assets and reduced our associated full valuation allowance on those assets, resulting in no net impact on our Consolidated Statements of Operation.

U.S. tax reform required a deemed repatriation of deferred foreign earnings as of December 30, 2017 and no future U.S. taxes should be due on these earnings because of enactment of a 100% dividends received deduction. At December 30, 2017, we had no impact from this transition tax due to utilization of NOL carryforwards. Foreign earnings may be subject to withholding taxes if they are distributed and repatriated in the United States.

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("SAB 118"). The SEC issued SAB 118 on December 22, 2017 to address the situation where an SEC reporting company did not have all the necessary information available or analyzed to complete their accounting for the income tax effects of the 2017 Tax Act in the period of enactment. Due to the lack of authoritative guidance issued, complexity, and enactment timing of the 2017 Tax Act, we made a reasonable estimate of the income tax effect of the deemed repatriation of deferred foreign earnings. We may refine this as additional guidance, clarification, and analysis is available. Any changes to our estimate will be reflected in continuing operations in the period the amounts are determined and within the “measurement period” not-to-exceed one year allowed under SAB 118. As of September 29, 2018, we have not completed our accounting for the tax effect of the 2017 Tax Act, and we have made no change to the provisional amounts recorded at December 30, 2017.

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 (benefit) 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 (benefit).


Note 13 - Restructuring

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. The June 2018 Plan is designed to reduce our infrastructure costs and refocus on our core business activities. Approximately $4.1 million of restructuring expense has been incurred through September 29, 2018 under the June 2018 Plan, and we believe this amount approximates the total costs under the plan and that this plan is substantially complete.

In June 2017, our Board of Directors approved an internal restructuring plan (the "June 2017 Plan"), which included the sale of 100% of the equity of our Hyderabad, India subsidiary and certain assets related to our Simplay Labs testing and certification business, a worldwide workforce reduction, and an initiative to reduce our infrastructure costs. These actions are part of an overall plan to achieve financial targets and to enhance our financial and competitive position by better aligning our revenue and operating expenses. Under this plan, approximately $0.1 million and $3.1 million of expense was incurred during the three months ended September 29, 2018 and September 30, 2017, respectively, and approximately $1.4 million and $5.5 million of expense was incurred during the nine months ended September 29, 2018 and September 30, 2017, respectively. Approximately $9.4 million of total expense has been incurred through September 29, 2018 under the June 2017 Plan. We expect the total cost to be approximately $21.5 million to $23.0 million and that it will be substantially completed by the end of the first quarter of fiscal 2019.

In September 2015, we implemented a reduction of our worldwide workforce (the "September 2015 Reduction") separate from the March 2015 Plan described below. The September 2015 Reduction was designed to resize the company in line with the market environment and to better balance our workforce with the long-term strategic needs of our business. The September 2015 Reduction is substantially complete subject to certain remaining expected costs that we do not expect to be material, which we will expense as incurred. Under this reduction, no expense was incurred during either of the three month periods ended September 29, 2018 and September 30, 2017, and no expense and approximately $0.7 million of credit was incurred during the nine months ended September 29, 2018 and September 30, 2017, respectively. Approximately $7.2 million of total expense has been incurred through September 29, 2018 under the September 2015 Reduction, and we believe this amount approximates the total costs under the plan.

23



In March 2015, our Board of Directors approved an internal restructuring plan (the "March 2015 Plan"), in connection with our acquisition of Silicon Image. The March 2015 Plan was designed to realize synergies from the acquisition by eliminating redundancies created as a result of combining the two companies. This included reductions in our worldwide workforce, consolidation of facilities, and cancellation of software contracts and engineering tools. The March 2015 Plan is substantially complete subject to certain remaining expected costs that we do not expect to be material and any changes in sublease assumptions should they occur, which we will expense as incurred. Under this plan, no expense was incurred during either of the three month periods ended September 29, 2018 and September 30, 2017, respectively, and no expense and approximately $0.1 million of credit was incurred during the nine months ended September 29, 2018 and September 30, 2017, respectively. Approximately $20.5 million of total expense has been incurred through September 29, 2018 under the March 2015 Plan, and we believe this amount approximates the total costs under the plan.

Substantially all of the expenses recorded in the periods presented were under the June 2017 and June 2018 Plans. These expenses were recorded to Restructuring charges on our Consolidated Statements of Operations.

The restructuring accrual balance is presented in Accounts payable and accrued expenses (includes restructuring) on our Consolidated Balance Sheets. The following table displays the combined activity related to the restructuring actions described above:
(In thousands)
Severance & related *
 
Lease Termination & Fixed Assets
 
Software Contracts & Engineering Tools **
 
Other
 
Total
Balance at December 31, 2016
$
801

 
$
1,036

 
$
25

 
$
12

 
$
1,874

Restructuring charges
2,433

 
816

 
686

 
778

 
4,713

Costs paid or otherwise settled
(1,707
)
 
(897
)
 
(711
)
 
(771
)
 
(4,086
)
Balance at September 30, 2017
$
1,527

 
$
955

 
$

 
$
19

 
$
2,501

 
 
 
 
 
 
 
 
 
 
Balance at December 30, 2017
$
1,192

 
$
870

 
$
360

 
$
25

 
$
2,447

Restructuring charges
4,034

 
437

 
913

 
111

 
5,495

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

 
$
640

 
$
218

 
$
23

 
$
1,445

*
Includes employee relocation costs and retention bonuses
**
Includes cancellation of contracts


Note 14 - Long-Term Debt

On March 10, 2015, we entered into a secured credit agreement (the "Credit Agreement") with Jefferies Finance, LLC and certain other lenders for purposes of funding, in part, our acquisition of Silicon Image. The Credit Agreement provided for a $350 million term loan (the "Term Loan") maturing on March 10, 2021 (the "Term Loan Maturity Date"). We received $346.5 million net of an original issue discount of $3.5 million and we paid debt issuance costs of $8.3 million. The Term Loan bears variable interest equal to the one-month LIBOR, subject to a 1.00% floor, plus a spread of 4.25%. The current effective interest rate on the Term Loan is 7.03%.

The Term Loan is payable through a combination of (i) quarterly installments of approximately $0.9 million, (ii) annual excess cash flow payments as defined in the Credit Agreement, which are due 95 days after the last day of our fiscal year, and (iii) any payments due upon certain issuances of additional indebtedness and certain asset dispositions, with any remaining outstanding principal amount due and payable on the Term Loan Maturity Date. The percentage of excess cash flow we are required to pay ranges from 0% to 75%, depending on our leverage and other factors as defined in the Credit Agreement. Currently, the Credit Agreement would require a 75% excess cash flow payment.

In the first quarter of fiscal 2018, we made a required quarterly installment payment of $0.9 million. In the second quarter of fiscal 2018, we made a required excess cash flow payment of $0.2 million, a required quarterly installment payment of $0.9 million, and an additional $10.0 million principal payment. In the third quarter of fiscal 2018, we made a required quarterly installment payment of $0.9 million, and an additional $15.0 million principal payment. Over the next twelve months, our principal payments will be comprised mainly of regular quarterly installments, a required annual excess cash flow payment, and we could make any discretionary payments we deem appropriate.


24


While the Credit Agreement does not contain financial covenants, it does contain informational covenants and certain restrictive covenants, including limitations on liens, mergers and consolidations, sales of assets, payment of dividends, and indebtedness. We were in compliance with all such covenants in all material respects at September 29, 2018.

The original issue discount and the debt issuance costs have been accounted for as a reduction to the carrying value of the Term Loan on our Consolidated Balance Sheets and are being amortized to Interest expense in our Consolidated Statements of Operations over the contractual term, using the effective interest method.

The fair value of the Term Loan approximates the carrying value, which is reflected in our Consolidated Balance Sheets as follows:
(In thousands)
September 29,
2018
 
December 30,
2017
Principal amount
$
278,908

 
$
306,791

Unamortized original issue discount and debt costs
(3,769
)
 
(5,616
)
Less: Current portion of long-term debt
(14,104
)
 
(1,508
)
Long-term debt
$
261,035

 
$
299,667


Interest expense related to the Term Loan was included in Interest expense on our Consolidated Statements of Operations as follows:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Contractual interest
$
4,711

 
$
3,492

 
$
14,001

 
$
12,202

Amortization of debt issuance costs and discount
789

 
326

 
1,847

 
1,680

Total interest expense related to the Term Loan
$
5,500

 
$
3,818

 
$
15,848

 
$
13,882


As of September 29, 2018, expected future principal payments on the Term Loan were as follows:
Fiscal year
 
(in thousands)
 
 
 
2018 (remaining 3 months)
 
$
875

2019
 
15,914

2020
 
56,175

2021
 
205,944

 
 
$
278,908



Note 15 - Stock-Based Compensation

Total stock-based compensation expense included in our Consolidated Statements of Operations is presented in the following table:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Cost of products sold
$
219

 
$
154

 
$
652

 
$
562

Research and development
926

 
980

 
2,970

 
4,129

Selling, general, and administrative
1,563

 
1,380

 
6,286

 
4,595

Total stock-based compensation
$
2,708

 
$
2,514

 
$
9,908

 
$
9,286


The stock-based compensation expense included in Selling, general, and administrative expense for the first nine months of 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.


25


Performance-Based Stock Compensation

In fiscal years 2015 through 2017, we granted stock options and RSUs with a market condition to certain executives. The options have a two year vesting period and can vest between 0% and 200% of the target amount, based on the Company's relative Total Shareholder Return ("TSR") when compared to the TSR of a component of companies in the PHLX Semiconductor Sector Index over a two year period. Under the terms of the grants, executives will receive the target amount if the Company’s TSR relative to that of the Index achieves or exceeds the 50th percentile. Executives may receive 200% if the Company’s TSR exceeds the 75th percentile. No vesting occurs if the Company’s TSR does not exceed the 25th percentile. TSR is a measure of stock price appreciation plus dividends paid, if any, in the performance period. The fair values of the options and RSUs were determined and fixed on the date of grant using a lattice-based option-pricing valuation model incorporating a Monte-Carlo simulation and a consideration of the likelihood that we would achieve the market condition.

In September 2018, we granted inducement awards outside of, but subject to the terms and conditions of the Company’s stockholder approved equity compensation plan to our incoming President and Chief Executive Officer. The inducement awards included market and performance based restricted stock that vest and become payable upon satisfaction of certain market and performance conditions. The market and performance conditions include TSR and Adjusted EBITDA targets, respectively. The TSR based awards vest and become payable over a three-year period based on the Company’s TSR relative to the PHLX Semiconductor Sector Index, with 100% of the units vesting at the 50th percentile and a multiplier to 250% of the units vesting at the 75th percentile achievement, zero vesting if relative TSR is below the 25th percentile, and vesting scaling linearly for achievement between the 25th and 75th percentile. The Adjusted EBITDA based awards will vest and become payable based upon the Company’s generating specified “adjusted” EBITDA levels on a trailing four quarter basis in any two consecutive trailing four-quarter periods.

In September 2018, we granted inducement awards outside of, but subject to the terms and conditions of the Company’s stockholder approved equity compensation plan to our incoming Corporate Vice President of Research and Development. The inducement awards included performance based restricted stock that would vest and become payable upon achievement of a target TSR. The awards vest and become payable over a three-year period based on the Company’s TSR relative to the PHLX Semiconductor Sector Index, with 100% of the units vesting at the 50th percentile and a multiplier to 200% of the units vesting at the 75th percentile achievement, zero vesting if relative TSR is below the 25th percentile, and vesting scaling linearly for achievement between the 25th and 75th percentile.

The following table summarizes the activity for our stock options and RSUs with a performance condition during the first nine months of fiscal 2018:
(Shares in thousands)
 
Unvested
 
Vested
 
Total
Balance, December 30, 2017
 
707

 
83

 
790

Granted
 
573

 

 
573

Vested
 
(31
)
 
31

 

Exercised
 

 
(78
)
 
(78
)
Canceled
 
(429
)
 
(10
)
 
(439
)
Balance, September 29, 2018
 
820

 
26

 
846


We incurred stock compensation expense related to these market condition awards of approximately $0.1 million and $0.6 million in the third quarter and first nine months, respectively, of fiscal 2018 and of approximately $0.1 million and $0.4 million in the third quarter and first nine months, respectively, of fiscal 2017, which is recorded as a component of total stock-based compensation expense.


Note 16 - Contingencies

Legal Matters

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.


26


Other Matters

We maintain certain Value-Added Tax ("VAT") benefits derived from our research and development operations that require filing tax exempt status documentation with local taxing authorities. In relation to one of our Chinese legal entities, we are undergoing an audit of this documentation as of September 29, 2018. Due to the uncertainty in both the outcome and the estimated range of any findings, no liability has been accrued as of September 29, 2018. We believe the findings would not have a material impact on our Consolidated Financial Statements and could be in a range from $0 to less than $2 million.


Note 17 - Segment and Geographic Information

Segment Information

In the three and nine month periods ended September 29, 2018 and September 30, 2017, respectively, Lattice had one operating segment: the core Lattice business, which includes semiconductor devices, evaluation boards, development hardware, and related intellectual property licensing and sales.

Geographic Information

Our revenue by major geographic area is presented in "Note 2 - Revenue from Contracts with Customers".

Our Property and equipment, net by country at the end of each period was as follows:
(In thousands)
September 29, 2018
 
December 30, 2017
United States
$
27,893

 
$
30,338

 
 
 
 
China
2,357

 
4,632

Philippines
3,472

 
3,883

Taiwan
1,062

 
958

Japan
319

 
313

Other
621

 
299

Total foreign property and equipment, net
7,831

 
10,085

Total property and equipment, net
$
35,724

 
$
40,423




ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Lattice Semiconductor and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develops semiconductor technologies that we monetize through products, solutions, and licenses. We engage in smart connectivity solutions, providing intellectual property ("IP") and low-power, small form-factor devices that enable global customers to quickly and easily develop innovative, smart, and connected products. We help their products become more aware, interact more intelligently, and make better and faster connections. In an increasingly intense global technology market, we help our customers get their products to market faster than their competitors. Our broad end-market exposure extends from mobile devices and consumer electronics to industrial and automotive equipment, communications and computing infrastructure, and licensing. Lattice was founded in 1983 and is headquartered in Portland, Oregon.


27


Discontinuation of millimeter wave business

In the second quarter of 2018, we made the strategic decision to discontinue our millimeter wave business, which included certain assets related to our Wireless products, and our Board of Directors approved a related internal restructuring plan. This action was designed to improve profitability, reduce our infrastructure costs, and refocus on our core business activities. Approximately $24.0 million of total expense was recorded in our Consolidated Statements of Operations through the first nine months of fiscal 2018, including $11.9 million charged to Impairment of acquired intangible assets, $8.0 million charged to Cost of product revenue for inventory reserves, and $4.1 million charged to Restructuring charges for severance and other personnel costs, and for other asset restructuring. See Notes 6, 7, 8 and 13 to our consolidated financial statements presented in Part 1, Item 1 of this Report for additional details.

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 require management's most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Other than our updated policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract (further discussed in "Note 2 - Revenue from Contracts with Customers" under Part 1, Item 1 of this Report), management believes that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on form 10-K for the fiscal year ended December 30, 2017.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts and classification of assets, such as marketable securities, accounts receivable, contract assets included in prepaid expenses and other current assets, inventory, goodwill (including the assessment of reporting unit), intangible assets, current and deferred income taxes, accrued liabilities (including restructuring charges and bonus arrangements), disclosure of contingent assets and liabilities at the date of the financial statements, amounts used in acquisition valuations and purchase accounting, impairment assessments, the fair value of equity awards, and the reported amounts of product revenue, licensing and services revenue, and expenses during the fiscal periods presented. Actual results could differ from those estimates.


Results of Operations

Key elements of our Consolidated Statements of Operations are presented in the following table:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29,
2018
 
September 30,
2017 *
 
September 29,
2018
 
September 30,
2017 *
Revenue
$
101,484

 
100.0
%
 
$
91,971

 
100.0
 %
 
$
302,822

 
100.0
 %
 
$
290,695

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
58,364

 
57.5

 
53,322

 
58.0

 
165,133

 
54.5

 
165,363

 
56.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
19,131

 
18.9

 
25,648

 
27.9

 
63,153

 
20.9

 
79,857

 
27.5

Selling, general and administrative
21,775

 
21.5

 
21,290

 
23.1

 
69,886

 
23.1

 
67,133

 
23.1

Amortization of acquired intangible assets
3,823

 
3.8

 
8,526

 
9.3

 
13,982

 
4.6

 
25,777

 
8.8

Restructuring charges
90

 
0.1

 
3,071

 
3.3

 
5,495

 
1.8

 
4,713

 
1.6

Acquisition related charges

 

 
681

 
0.7

 
1,531

 
0.5

 
3,208

 
1.1

Impairment of intangible assets
586

 
0.6

 
36,198

 
39.4

 
12,486

 
4.1

 
36,198

 
12.5

Gain on sale of building

 

 
(4,624
)
 
(5.0
)
 

 

 
(4,624
)
 
(1.6
)
Income (loss) from operations
$
12,959

 
12.8
%
 
$
(37,468
)
 
(40.7
)%
 
$
(1,400
)
 
(0.5
)%
 
$
(46,899
)
 
(16.1
)%

* Results for periods in 2017 are presented in accordance with ASC 605, which was in effect during that fiscal year.

We adopted ASC 606, Revenue from Contracts with Customers, on December 31, 2017 using the modified retrospective method. We have not restated any prior financial statements presented. See "Note 2 - Revenue from Contracts with Customers" to our consolidated financial statements and the Revenue discussions, below, for the impact of the adoption of ASC 606.

28


Effective April 17, 2018, we were restricted from selling to ZTE Kangzun Telecom Co. Ltd. (“ZTE”) due to sanctions imposed by the United States Department of Commerce. We believe that this will not have a material effect on either our total revenue or our revenue in Asia, as revenue from ZTE accounted for less than 3% of our total revenue in the first quarter of fiscal 2018. In July 2018, the Department of Commerce lifted the sanctions, subject to ZTE meeting certain requirements. We anticipate that we will continue sales to ZTE after it has done so, though we cannot predict whether the financial and other penalties imposed on ZTE will have a negative impact on future orders.

Revenue by End Market

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

Under ASC 606, we 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 proportionally to the end markets if we cannot identify a specific end market.

Our Licensing and services end market includes 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 Licensing products are primarily sold into the Mobile and Consumer market, Licensing and services revenue is reported as a separate end market as it has characteristics that differ from other categories, most notably its higher gross margin.

The following are examples of end market applications:
Communications and Computing
Mobile and Consumer
Industrial and Automotive
Licensing and Services
Wireless
Smartphones
Security and Surveillance
IP Royalties
Wireline
Cameras
Machine Vision
Adopter Fees
Data Backhaul
Displays
Industrial Automation
IP Licenses
Computing
Tablets
Human Computer Interaction
Patent Sales
Servers
Wearables
Automotive
Testing Services
Data Storage
Televisions and Home Theater
Drones
 

The composition of our revenue by end market is presented in the following table:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29,
2018
 
September 30,
2017 *
 
September 29,
2018
 
September 30,
2017 *
Communications and Computing
$
32,883

 
32
%
 
$
27,545

 
30
%
 
$
90,536

 
30
%
 
$
84,594

 
29
%
Mobile and Consumer
26,974

 
27

 
25,901

 
28

 
77,980

 
26

 
82,819

 
29

Industrial and Automotive
38,075

 
37

 
33,923

 
37

 
122,819

 
40

 
95,793

 
33

Licensing and Services
3,552

 
4

 
4,602

 
5

 
11,487

 
4

 
27,489

 
9

Total revenue
$
101,484

 
100
%
 
$
91,971

 
100
%
 
$
302,822

 
100
%
 
$
290,695

 
100
%

* Results for periods in 2017 are presented in accordance with ASC 605, which was in effect during that fiscal year.

Revenue from the Communications and Computing end market increased by 19% for the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017 and by 7% for the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017 due to continued demand increases for server reference design products, partially offset by the discontinuation of our millimeter wave business.

Revenue from the Mobile and Consumer end market increased by 4% for the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017 due to increased demand for home automation and handset screen replacement products. Revenue from the Mobile and Consumer end market decreased by 6% for the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017 due to a decline in demand for products supporting a major handset manufacturer, partially offset by increased demand for home automation and handset screen replacement products.


29


Revenue from the Industrial and Automotive end market increased by 12% for the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017 and by 28% for the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017 due to broad market increases in the Industrial end market as well as growth from the products supporting industrial video applications and factory automation robotics applications.

Revenue from the Licensing and Services end market decreased by 23% for the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017 primarily due to the absence of revenue from Simplay Labs testing activities after the sale of certain assets related to that business unit at the end of the third quarter of fiscal 2017. Revenue from the Licensing and Services end market decreased by 58% for the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017 predominantly due to revenue from a patent sale in the first half of fiscal 2017 that did not recur in the current period, and by the absence of revenue from Simplay Labs testing activities after the sale of certain assets related to that business unit at the end of the third quarter of fiscal 2017. These decreases are partially offset by HDMI royalties that we recognized as revenue in the third quarter and first nine months of fiscal 2018 under ASC 606 but were not able to recognize in the comparable periods of fiscal 2017 under the previous guidance.

We share HDMI royalties with the other HDMI Founders based on an allocation formula, which is reviewed every three years. The most recent royalty sharing formula covered the period from January 1, 2014 through December 31, 2016, and an interim agreement covering the period from January 1, 2017 through December 31, 2017 was signed in the second quarter of fiscal 2018. However, a new agreement covering the period beginning January 1, 2018 is yet to be signed. As a result of the signing of the HDMI Founders royalty sharing agreement for 2017, we received $6.4 million in cash during the second quarter of fiscal 2018 for fiscal 2017 HDMI royalties. Collection of this amount had no impact on our reported revenues and was recorded as a reduction to the contract asset recorded in Prepaid expenses and other current assets in our Consolidated Balance Sheets. This contract asset was recorded in the first quarter of fiscal 2018 with an offset to Accumulated deficit as a cumulative effect adjustment for the adoption of ASC 606.

HDMI royalties are considered variable consideration under the new revenue standard and recognized as royalty revenue as usage occurs. While a new royalty sharing agreement is being negotiated with the other Founders of the HDMI consortium for fiscal 2018, we are estimating our share of royalty revenues under an anticipated new agreement. Before the HDMI royalty sharing agreement is signed, we estimate that we will recognize $1 million to $2 million of additional licensing and services revenue every quarter under ASC 606 that we would not have recognized under previous guidance. Once the HDMI royalty sharing agreement is signed, ongoing fiscal 2018 HDMI royalty revenue recognition under both ASC 606 and previous guidance will be consistent.

For the third quarter of fiscal 2018, adoption of ASC 606 increased our revenues by $2.8 million compared to revenue that would have been recognized under previous guidance. This was comprised of a $1.3 million increase due to the acceleration of revenue recognition on sales to certain distributors, with $0.2 million attributed to Communications and Computing, $0.7 million attributed to Mobile and Consumer, and $0.4 million attributed to Industrial and Automotive. An additional $1.5 million was due to increases in licensing and services revenue, mainly in HDMI royalties and audit settlements for the third quarter of fiscal 2018.

For the first nine months of fiscal 2018, adoption of ASC 606 increased our revenues by $12.0 million compared to revenue that would have been recognized under previous guidance. Of this amount, $13.7 million was due to the acceleration of revenue recognition on sales to certain distributors, with $3.5 million attributed to Communications and Computing, $5.9 million attributed to Mobile and Consumer, and $4.3 million attributed to Industrial and Automotive. This was offset by a $1.7 million decrease in licensing and services revenue comprised of $6.4 million in 2017 HDMI royalties collected that are not recorded as revenue in fiscal 2018 under ASC 606, and an increase of $4.7 million, mainly in HDMI royalties and audit settlements for the first nine months of fiscal 2018.

Revenue by Geography

We assign revenue to geographies based on ship-to location of the end customer, where available, and based upon the location of the distributor to which the product was shipped otherwise.

The composition of our revenue by geography is presented in the following table:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 29,
2018
 
September 30,
2017 *
 
September 29,
2018
 
September 30,
2017 *
Asia
$
76,927

 
76
%
 
$
68,677

 
75
%
 
$
226,747

 
75
%
 
$
207,081

 
71
%
Europe
11,873

 
12

 
10,972

 
12

 
36,177

 
12

 
32,631